<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 2000.
REGISTRATION NO. 333-46156
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ZORAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3674 94-2794449
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
</TABLE>
------------------------
3112 SCOTT BOULEVARD
SANTA CLARA, CA 95054
(408) 919-4111
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
LEVY GERZBERG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
3112 SCOTT BOULEVARD
SANTA CLARA, CA 95054
(408) 919-4111
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
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<S> <C>
DENNIS C. SULLIVAN DAVID FOX
LISA A. MONDORI SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
GRAY CARY WARE & FREIDENRICH LLP FOUR TIMES SQUARE
400 HAMILTON AVENUE NEW YORK, NY 10036-6522
PALO ALTO, CA 94301 (212) 735-3000
(650) 833-2000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
[LOGO]
Dear Stockholder:
As you may be aware, Nogatech, Inc. has entered into an agreement to combine
with Zoran Corporation, a Delaware corporation. At a special meeting of
stockholders to be held at Four Times Square, 38th Floor, New York, New York
10036, on October 23, 2000, at 10:00 a.m. Eastern Daylight Time, you will be
asked to consider and approve a proposal to adopt and approve the merger and the
Agreement and Plan of Merger among Zoran, Nogatech and Zoom Acquisition
Corporation, a Delaware corporation and wholly-owned subsidiary of Zoran.
Your board of directors has unanimously approved the merger and the merger
agreement and recommends that you vote FOR approval of the merger and the merger
agreement.
Details of the proposed merger and other important information concerning
Nogatech and Zoran appear in the accompanying proxy statement/prospectus. I urge
you to give this material your careful consideration.
All stockholders are cordially invited to attend the special meeting in
person. However, whether or not you plan to attend the special meeting, please
complete, sign and date the accompanying proxy card and return it promptly in
the enclosed postage-prepaid envelope. If you attend the special meeting, you
may vote in person if you wish, even though you have previously returned your
proxy. It is very important that your shares be represented and voted at the
special meeting. Your prompt cooperation will be greatly appreciated.
Sincerely,
/s/ Nathan Hod
Nathan Hod,
CHAIRMAN OF THE BOARD,
NOGATECH, INC.
NOGATECH, INC.
5201 Great America Parkway
Santa Clara, California 95054
<PAGE>
[LOGO]
NOGATECH, INC.
5201 Great America Parkway
Santa Clara, California 95054
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
------------------------
To Our Stockholders:
We will hold a special meeting of stockholders of Nogatech, Inc. at
10:00 a.m., Eastern Daylight Time, on October 23, 2000 at Four Times Square,
38th Floor, New York, New York 10036. At the special meeting, we will ask you to
vote on:
- a proposal to approve and adopt the merger and the Agreement and Plan of
Merger pursuant to which Nogatech will merge with a subsidiary of Zoran
Corporation, after which Nogatech will become a wholly-owned subsidiary of
Zoran; and
- such other business as may properly come before the special meeting.
We have fixed the close of business on September 28, 2000, as the record
date for the determination of our stockholders entitled to vote at this special
meeting (including any adjournment). A list of such stockholders will be
available at the special meeting and will also be available for inspection by
stockholders of record during normal business hours at our corporate
headquarters, for 10 days prior to the special meeting.
After careful consideration, your board of directors is excited to present
this opportunity to you. YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU
VOTE IN FAVOR OF THIS PROPOSAL SO THAT WE MAY COMPLETE THE MERGER.
Approval of this proposal requires the affirmative vote of a majority of the
voting power of Nogatech common stock entitled to vote at the special meeting.
Please sign and promptly return the proxy card in the enclosed prepaid envelope
marked "Proxy," WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING. You can
revoke your proxy at any time before its exercise. Returning your proxy card
will not affect your right to vote in person, if you choose to attend the
special meeting. Failure to return a properly executed proxy card or to vote at
the special meeting will have the same effect as a vote against the proposal.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Yaron Garmazi
Yaron Garmazi,
CHIEF FINANCIAL OFFICER AND SECRETARY,
NOGATECH, INC.
Santa Clara, California
October 2, 2000
<PAGE>
PROXY STATEMENT OCTOBER 2, 2000
[LOGO]
THE PROPOSED ZORAN/NOGATECH MERGER
The boards of directors of Zoran Corporation and Nogatech, Inc. have agreed
on a combination of their businesses designed to create a leading supplier of
digital streaming technology. The merger is structured so that Zoran will be the
surviving publicly-traded company and Nogatech will become a wholly-owned
subsidiary of Zoran. Nogatech stockholders will receive 0.166 of a share of
Zoran common stock for each share of Nogatech common stock that they own, and
Zoran stockholders will continue to own their existing shares. We estimate that
the shares of Zoran common stock to be issued to Nogatech stockholders will
represent approximately 14.1% of the outstanding common stock of Zoran after the
merger.
The merger cannot be completed unless our stockholders approve it. We have
scheduled a special meeting for our stockholders to vote on the merger. YOUR
VOTE IS VERY IMPORTANT.
Whether or not you plan to attend the special meeting, please take the time
to vote by completing and mailing the enclosed proxy card to us. If you sign,
date and mail your proxy card without indicating how you cast your vote, your
proxy will be counted as a vote in favor of the merger and any other proposal
submitted to stockholders at the meeting. If you fail to return your proxy card,
the effect in most cases will be a vote against the merger. Returning your proxy
card will not affect your right to vote in person, should you choose to attend
the meeting.
Only Nogatech stockholders of record as of September 28, 2000 are entitled
to attend and vote at the meeting. The date, time and place of the meeting is as
follows:
October 23, 2000
10:00 a.m., Eastern Daylight Time
Four Times Square, 38th Floor
New York, New York 10036
This proxy statement/prospectus provides you with detailed information about
the proposed merger. We encourage you to read this entire document carefully,
including the "RISK FACTORS" section beginning on page 11. In addition, you may
obtain information about us and Zoran from documents that we have filed with the
Securities and Exchange Commission.
/s/ Nathan Hod
Nathan Hod,
CHAIRMAN OF THE BOARD,
NOGATECH, INC.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE ZORAN COMMON STOCK TO BE ISSUED UNDER THIS PROXY
STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE ZORAN/NOGATECH MERGER....... iii
SUMMARY..................................................... 1
The Companies............................................. 1
Zoran's and Nogatech's Reasons for the Merger............. 1
Recommendation to Nogatech Stockholders................... 2
Opinion of Financial Advisor to Nogatech.................. 2
The Merger................................................ 2
The Nogatech Special Meeting.............................. 4
Risk Factors.............................................. 4
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL
INFORMATION............................................... 5
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF ZORAN.... 6
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF
NOGATECH.................................................. 7
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF
ZORAN, PIXELCAM AND NOGATECH.............................. 8
COMPARATIVE PER SHARE DATA.................................. 9
MARKET PRICE INFORMATION.................................... 10
RISK FACTORS................................................ 11
Risks Relating to the Merger.............................. 11
Risks Relating to Zoran................................... 14
Risks Relating to Nogatech................................ 25
THE NOGATECH SPECIAL MEETING................................ 30
General................................................... 30
Time and Place............................................ 30
Matters to be Considered at the Meeting................... 30
Record Date............................................... 30
Quorum.................................................... 30
Vote Required............................................. 30
Adjournment............................................... 31
Proxies................................................... 31
THE MERGER.................................................. 32
Structure of the Merger................................... 32
Exchange of Nogatech Stock Certificates for Zoran Stock
Certificates............................................ 32
Background of the Merger.................................. 33
Zoran's Reasons for the Merger............................ 34
Nogatech's Board of Directors' Reasons for the Merger and
Consideration and Approval of the Transaction........... 35
Opinion of Financial Advisor to Nogatech.................. 36
Interests of Certain Persons in the Merger................ 40
Employment Agreement...................................... 40
Nogatech Voting Agreement................................. 41
U.S. Federal Income Tax Considerations.................... 41
No Appraisal Rights....................................... 42
U.S. Regulatory Requirements.............................. 43
Non-U.S. Regulatory Requirements.......................... 43
Federal Securities Law Compliance......................... 44
Nasdaq National Market Quotation.......................... 44
THE MERGER AGREEMENT........................................ 45
The Merger................................................ 45
Certificate of Incorporation and Bylaws................... 45
Directors and Officers.................................... 45
Conversion of Securities.................................. 45
Exchange of Certificates.................................. 46
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Representations and Warranties............................ 46
Selected Covenants and Agreements......................... 47
No Solicitation........................................... 49
Indemnification........................................... 50
Conditions................................................ 50
Stock Purchase Plan and Option Plans...................... 51
Termination; Termination Fees and Expenses................ 52
Amendment and Waiver...................................... 53
UNCERTAINTIES RELATING TO FORWARD-LOOKING STATEMENTS........ 54
INFORMATION CONCERNING ZORAN................................ 54
Business.................................................. 54
Zoran Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 71
Zoran Management.......................................... 78
Information Regarding Zoran Executive Compensation........ 82
INFORMATION CONCERNING NOGATECH............................. 85
Business.................................................. 85
Nogatech Management's Discussion and Analysis of Financial
Condition Results of Operation.......................... 96
Nogatech Management....................................... 103
Information Regarding Nogatech Executive Officer
Compensation............................................ 107
WHERE YOU CAN FIND MORE INFORMATION......................... 109
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS........... 110
COMPARISON OF RIGHTS OF ZORAN STOCKHOLDERS AND NOGATECH
STOCKHOLDERS.............................................. 116
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES............................................... 118
DESCRIPTION OF ZORAN CAPITAL STOCK.......................... 119
LEGAL MATTERS............................................... 120
EXPERTS..................................................... 120
INDEX TO FINANCIAL STATEMENTS............................... F-1
Annex A--Agreement and Plan of Merger..................... A-1
Annex B--Voting Agreement................................. B-1
Annex C--Opinion of Nogatech's Financial Advisor.......... C-1
</TABLE>
ii
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE ZORAN/NOGATECH MERGER
Q: WHAT IS THE PROPOSED TRANSACTION?
A: A wholly-owned subsidiary of Zoran will merge into Nogatech. As a result,
Nogatech will become a wholly-owned subsidiary of Zoran.
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
A: Our products generally are complementary, and the merger will enable our
combined enterprise to offer a more comprehensive array of digital streaming
technology. This merger will afford each of us the complementary strengths
of the other, providing our combined enterprise significant potential
advantages and resources. We believe that this merger will allow us to
accelerate long-term growth and provide added stockholder value. We note
that achieving these anticipated benefits is subject to certain risks
discussed on pages 11 to 29. To review the reasons for the merger in greater
detail, see pages 34 to 36.
Q: HOW WILL I BENEFIT?
A: We believe that stockholders of Nogatech will benefit by being owners of a
company that is better able to compete effectively in its industry than
either Zoran or Nogatech individually.
Q: WHAT DO I NEED TO DO NOW?
A: Just sign your proxy card and mail it to us in the enclosed return envelope
as soon as possible, so that your shares may be represented at the Nogatech
special meeting. The Nogatech special meeting will take place on
October 23, 2000. The board of directors of Nogatech unanimously recommends
voting in favor of the proposed merger.
Q: SHOULD I SEND IN MY STOCK CERTIFICATE NOW?
A: No. After the merger is completed, we will send Nogatech stockholders
written instructions for exchanging their stock certificates.
Q: CAN YOU EXPLAIN THE EXCHANGE RATIO?
A: Nogatech stockholders will receive 0.166 of a share of Zoran common stock in
exchange for each share of Nogatech common stock. We will not issue
fractional shares. Nogatech stockholders who would otherwise be entitled to
receive a fractional share will instead receive cash based on the market
value of the fractional share of Zoran common stock.
EXAMPLE: IF YOU CURRENTLY OWN 100 SHARES OF NOGATECH COMMON STOCK, THEN
AFTER THE MERGER YOU WILL BE ENTITLED TO RECEIVE 16 SHARES OF ZORAN COMMON
STOCK AND A CHECK FOR THE MARKET VALUE OF THE 0.6 FRACTIONAL SHARE.
Q: WHAT ABOUT FUTURE DIVIDENDS?
A: Historically, neither Zoran nor Nogatech has paid dividends. We do not
expect that our combined enterprise will pay any dividends in the
foreseeable future.
Q: AM I ENTITLED TO APPRAISAL RIGHTS?
A: No. You will not be entitled to appraisal rights in connection with the
merger.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working toward completing the merger as quickly as possible, if
possible on the date of the Nogatech special meeting.
Q: WHAT ARE THE U.S. TAX CONSEQUENCES OF THE MERGER?
A: The exchange of shares by Nogatech stockholders generally will be tax-free
to Nogatech stockholders for U.S. federal income tax purposes, except for
taxes on cash received for a fractional share. The merger will be tax-free
to Zoran stockholders for U.S. federal income tax purposes. To review the
tax consequences to stockholders in greater detail, see pages 41 and 42.
Q: WHOM CAN I CALL WITH QUESTIONS?
A: If you have any questions about the merger, please call Liat Hod of Nogatech
at (408) 562-6200 or Kristyn Hutzell of Zoran at (415) 617-2543. If you need
assistance in voting your shares, please call Innisfree M&A Incorporated,
who is assisting us in the solicitation of proxies, toll-free at
1-888-750-5834, or collect at 212-750-5833
iii
<PAGE>
SUMMARY
FOR YOUR CONVENIENCE, WE HAVE PROVIDED A BRIEF SUMMARY OF INFORMATION
CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS. THIS SUMMARY HIGHLIGHTS SELECTED
INFORMATION FROM THIS DOCUMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT
IS IMPORTANT TO YOU. TO UNDERSTAND THE MERGER FULLY AND FOR A MORE COMPLETE
DESCRIPTION OF THE LEGAL TERMS OF THE MERGER, YOU SHOULD READ CAREFULLY THIS
ENTIRE DOCUMENT AND THE DOCUMENTS TO WHICH WE HAVE REFERRED YOU. SEE "WHERE YOU
CAN FIND MORE INFORMATION" ON PAGE 109.
THE COMPANIES
ZORAN CORPORATION
3112 Scott Boulevard
Santa Clara, California 95054
(408) 919-4111
Zoran develops and markets integrated circuits, integrated circuit cores and
embedded software used by original equipment manufacturers, or OEMs, in digital
audio and video products for commercial and consumer markets. Zoran also
provides complete, copy-ready system reference designs based on its proprietary
technology to help its customers produce commercial and consumer products more
quickly and cost-effectively. Zoran's integrated circuits are used in a variety
of products, including digital versatile disc, or DVD, players, Super Video CD
players, digital speakers and audio systems, filmless digital cameras, and
professional and consumer video editing systems.
NOGATECH, INC.
5201 Great America Parkway
Santa Clara, California 95054
(408) 562-6200
Nogatech designs and sells computer chips that establish connections between
video devices and computers, as well as connections between video devices across
a variety of networks. Nogatech's chips and related decompression software use
proprietary mathematical procedures known as algorithms and are designed to
provide high quality video, low power consumption and advanced capabilities.
Nogatech's products simultaneously compress digital video signals and process
audio and data, enabling real-time transmission of signals from video sources
into personal computers and hand-held personal computing devices known as
personal digital assistants through the Universal Serial Bus, or USB, interface
standard. The USB is a widely accepted interface standard for simplified
plug-and-play connections between a PC and its accessories. Nogatech's chips are
integrated into PC digital video cameras, video capture devices and PC-TVs.
ZORAN'S AND NOGATECH'S REASONS FOR THE MERGER
Nogatech's board of directors believes that the terms of the merger are fair
to, and in the best interest of, Nogatech and its stockholders. Nogatech's board
of directors consulted with its financial and legal advisors and considered a
wide variety of information and a number of factors in connection with its
evaluation of the proposed merger. Nogatech's board of directors determined that
the merger provides an opportunity that serves the best interests of Nogatech
and its stockholders and an opportunity for Nogatech stockholders, if they so
choose, to share in the potential long-term growth of the combined company.
Zoran's board of directors considered a wide variety of information and a
number of factors in connection with its evaluation of the proposed merger, and
determined that the merger provides an opportunity that serves the best
interests of Zoran and its stockholders.
1
<PAGE>
To review the reasons for the merger in greater detail, as well as related
uncertainties, see pages 34 through 36.
RECOMMENDATION TO NOGATECH STOCKHOLDERS
Nogatech's board of directors believes that the merger is in your best
interests and unanimously recommends that you vote FOR the proposal to approve
and adopt the merger agreement and the merger.
OPINION OF FINANCIAL ADVISOR TO NOGATECH
WR Hambrecht + Co., LLC delivered its opinion to Nogatech's board of
directors on August 23, 2000, that the aggregate consideration to be paid by
Zoran under the merger agreement is fair from a financial point of view to the
Nogatech stockholders. The full text of the opinion is attached as Annex C to
this proxy statement/prospectus. We urge Nogatech stockholders to read this
opinion in its entirety to understand the procedures followed, assumptions made,
matters considered and limitations on the review undertaken by WR Hambrecht in
providing its opinion.
THE MERGER
The merger agreement is attached as Annex A to this proxy
statement/prospectus. We encourage you to read the merger agreement, as it is
the legal document that governs the merger.
CONVERSION OF SECURITIES (see page 45). Upon completion of the merger and
pursuant to the terms of the merger agreement, each share of Nogatech common
stock outstanding at the completion of the merger will be automatically
converted into the right to receive 0.166 of a share of Zoran common stock,
subject to the payment of cash for fractional shares.
ZORAN COMMON STOCK (see page 44). The Zoran common stock that you will
receive as a result of the merger is traded and quoted on The Nasdaq National
Market.
STOCK PURCHASE PLAN AND OPTION PLANS (see page 51). The merger agreement
provides that all outstanding options to purchase Nogatech common stock under
Nogatech's stock option plans will be assumed by Zoran and converted into
options to purchase Zoran common stock based on the exchange ratio of 0.166 of a
share of Zoran common stock for each share of Nogatech common stock. Immediately
prior to completion of the merger, Nogatech shall use all funds held pursuant to
its employee stock purchase plan to purchase Nogatech common stock for the
benefit of the participants in the plan, which will be converted to Zoran common
stock in the merger based on the exchange ratio.
STOCK OWNERSHIP FOLLOWING THE MERGER (see page 45). Based upon 15,095,896
shares of Nogatech common stock issued and outstanding as of August 23, 2000, an
aggregate of approximately 2,505,923 shares of Zoran common stock will be issued
to holders of Nogatech's common stock, and the existing holders of Nogatech
common stock will hold approximately 14.1% of Zoran's outstanding common stock
issued and outstanding after the merger.
CONDITIONS TO THE MERGER (see pages 50 and 51). The completion of the
merger depends upon meeting a number of conditions, including:
- the Nogatech stockholders must approve and adopt the merger agreement and
the merger;
- the waiting period applicable to the completion of the merger under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or HSR
Act, must expire or be terminated;
- the shares of Zoran common stock to be issued in the merger must have been
approved for quotation on The Nasdaq National Market;
2
<PAGE>
- Zoran and Nogatech must each have received an opinion of its counsel, to
the effect that the merger will be treated as a tax-free reorganization
under Section 368(a) of the Internal Revenue Code; and
- the Israel Tax Commission must have ruled that Israeli holders of Nogatech
common stock and options to acquire Nogatech common stock may defer
Israeli capital gains tax arising from the merger.
NO SOLICITATION (see pages 49 and 50). Nogatech may not, directly or
indirectly, solicit or support any proposal for a merger or similar transaction
involving Nogatech and any party other than Zoran, participate in negotiations
or discussions concerning any proposed acquisition, provide any non-public
information to any third party relating to any proposed acquisition, or approve
or recommend any proposed acquisition. However, Nogatech may provide non-public
information to, or engage in negotiations or discussions with, a third party in
response to an unsolicited bona fide written acquisition proposal or recommend
an unsolicited bona fide written acquisition proposal to the stockholders of
Nogatech, if:
- the Nogatech board determines in good faith based upon the advice of its
financial advisor that the proposed acquisition is more favorable to
Nogatech's stockholders from a financial point of view than the merger;
- the Nogatech board determines in good faith after consultation with its
outside legal counsel that the failure to do so would create a substantial
risk of liability for breach of its fiduciary duties to the Nogatech
stockholders under applicable law; and
- an appropriate confidentiality agreement with the third party making the
proposal is in place.
Nogatech must notify Zoran within 24 hours after receipt by Nogatech or its
advisors of any acquisition proposal by a third party or any request for
non-public information in connection with an acquisition proposal by a third
party.
TERMINATION (see pages 52 and 53). Either of us can terminate the merger
agreement if the merger is not completed by February 28, 2001, and in various
other circumstances.
EXPENSES AND TERMINATION FEE (see pages 52 and 53). In general, all fees
and expenses incurred in connection with the merger agreement and the
transactions it contemplates shall be paid by the party incurring such expenses,
whether or not the merger is completed.
Nogatech has agreed that if the merger agreement is terminated under certain
circumstances, it will pay to Zoran a termination fee of either $3.0 million or
$6.0 million.
INTERESTS OF PERSONS IN THE MERGER (see pages 12 to 13 and 40 to 41). Some
members of Nogatech's management and board of directors have interests in the
merger that are in addition to their interests as stockholders of Nogatech
generally.
The merger agreement provides that all rights to indemnification benefiting
Nogatech's directors and officers as of the date of the merger agreement will
survive the merger. Zoran has also agreed to maintain, for six years, a policy
of directors' and officers' liability insurance, as it existed at the date of
the merger agreement, for the benefit of Nogatech's directors and officers,
except that Zoran is required to spend no more than 150% of Nogatech's current
annual premium to maintain such insurance.
U.S. FEDERAL INCOME TAX CONSEQUENCES (see pages 41 and 42). We have
structured the merger to be a tax-free reorganization for U.S. federal income
tax purposes, so that no gain or loss will be recognized by the Nogatech
stockholders on the exchange of Nogatech common stock for Zoran common stock,
except to the extent that Nogatech stockholders receive cash in lieu of
fractional shares.
3
<PAGE>
We have conditioned the merger on receiving legal opinions that such is the
case. The merger agreement does not require that we obtain a ruling from the IRS
as to the tax consequences of the merger and we will not request such a ruling.
RIGHTS OF DISSENTING STOCKHOLDERS (see pages 42 and 43). Neither Zoran
stockholders nor Nogatech stockholders are entitled to appraisal rights under
Delaware law because:
- with respect to Zoran, Zoran is not a constituent corporation to the
merger under the Delaware General Corporation Law; and
- with respect to Nogatech, Nogatech's common stock is traded on The Nasdaq
National Market, and Nogatech stockholders are being issued Zoran common
stock, which is also traded on The Nasdaq National Market.
THE NOGATECH SPECIAL MEETING
MATTERS TO BE CONSIDERED (see page 30). The purpose of the Nogatech special
meeting is to vote upon a proposal to approve the merger. Nogatech stockholders
may also vote upon such other matters as may be properly brought before the
Nogatech special meeting.
RECORD DATE AND VOTE REQUIRED (see page 30). Only Nogatech stockholders of
record at the close of business on September 28, 2000 are entitled to vote at
the Nogatech special meeting. The affirmative vote of the holders of a majority
of the outstanding shares of Nogatech common stock is required to approve the
proposal. At the close of business on the Nogatech record date, there were
15,095,896 shares of Nogatech common stock outstanding and entitled to vote at
the Nogatech special meeting.
VOTING AGREEMENT (see page 41). Zoran has entered into an agreement with
two directors and one stockholder of Nogatech requiring these individuals to
vote all shares of Nogatech common stock beneficially owned by them in favor of
the merger. The directors are Arie Heiman, President and Chief Executive Officer
of Nogatech, and Nathan Hod, Chairman of the Board of Nogatech, and the
stockholder is Ophir Holdings Ltd., an Israeli company of which Yirmiyahu
Kaplan, a director of Nogatech, is managing director. In total, these shares
represent approximately 13.8% of the Nogatech common stock entitled to vote at
the Nogatech special meeting.
This proxy statement/prospectus and the accompanying Notice of Special
Meeting of Stockholders were mailed to all Nogatech stockholders of record as of
the Nogatech record date and constitute notice of the Nogatech special meeting
in conformity with the requirements of the Delaware General Corporation Law.
RISK FACTORS
This merger and an investment in securities of Zoran by the Nogatech
stockholders involve certain risks and uncertainties, including risks related to
the integration of the companies, risks associated with a fixed exchange ratio
and risks relating to our respective businesses. To review these and other risks
and uncertainties in greater detail, see pages 11 through 29.
4
<PAGE>
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL INFORMATION
The following selected historical financial information of Zoran and
Nogatech has been derived from their respective historical consolidated
financial statements, and should be read in conjunction with such consolidated
financial statements and the notes thereto, included elsewhere in this proxy
statement/prospectus. The Zoran and Nogatech historical financial statement data
as of and for the six month periods ended June 30, 2000 and 1999 has been
prepared on the same basis as the historical information in the audited
financial statements and, in the opinion of management, contains all
adjustments, consisting only of normal, recurring adjustments, necessary for the
fair presentation of the results of operations for such periods. The selected
unaudited pro forma combined condensed financial information of Zoran, PixelCam
and Nogatech is derived from the unaudited pro forma combined condensed
financial statements and should be read in conjunction with such pro forma
statements and the notes thereto, which are included elsewhere in this proxy
statement/prospectus. For pro forma purposes, Zoran's and Nogatech's
consolidated balance sheets as of June 30, 2000 and Zoran's, PixelCam's and
Nogatech's consolidated statement of operations for the six months ended
June 30, 2000 and the year ended December 31, 1999, have been combined. Zoran's
balance sheet at June 30, 2000 includes the net assets acquired from PixelCam.
No dividends have been declared or paid on either Zoran or Nogatech common
stock.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the merger had been consummated, nor is it necessarily
indicative of future operating results or financial position. See "Unaudited Pro
Forma Combined Financial Statements" beginning on page 111.
5
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF ZORAN
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Product sales..................... $ 30,611 $ 20,209 $52,887 $33,465 $32,717 $35,503 $18,086
Software, licensing and
development..................... 5,892 5,314 8,787 10,760 12,210 8,606 5,378
-------- -------- ------- ------- ------- ------- -------
Total revenues.................. 36,503 25,523 61,674 44,225 44,927 44,109 23,464
-------- -------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of product sales............. 17,205 10,777 28,523 19,036 16,032 20,262 9,306
Research and development.......... 7,245 7,515 12,651 13,548 13,787 8,954 5,916
Selling, general and
administrative.................. 8,580 6,549 14,251 11,551 11,209 10,739 6,748
Merger and related................ 6,769 -- -- -- -- 2,153 --
-------- -------- ------- ------- ------- ------- -------
Total costs and expenses........ 39,799 24,841 55,425 44,135 41,028 42,108 21,970
-------- -------- ------- ------- ------- ------- -------
Operating income.................... (3,296) 682 6,249 90 3,899 2,001 1,494
Interest and other income (expense),
net............................... 4,214 977 1,585 1,071 1,258 1,027 (147)
-------- -------- ------- ------- ------- ------- -------
Income before income taxes.......... 918 1,659 7,834 1,161 5,157 3,028 1,347
Provision for income taxes.......... 1,153 332 1,175 232 928 665 399
-------- -------- ------- ------- ------- ------- -------
Net income.......................... $ (235) $ 1,327 $ 6,659 $ 929 $ 4,229 $ 2,363 $ 948
======== ======== ======= ======= ======= ======= =======
Basic net income (loss) per share... $ (0.02) $ 0.13 $ 0.61 $ 0.09 $ 0.45 $ 0.27 $ 0.35
======== ======== ======= ======= ======= ======= =======
Diluted net income (loss) per
share............................. $ (0.02) $ 0.11 $ 0.54 $ 0.08 $ 0.38 $ 0.22 $ 0.11
======== ======== ======= ======= ======= ======= =======
Shares used to compute basic net
income per share.................. 14,072 10,441 10,844 10,042 9,412 8,802 2,391
======== ======== ======= ======= ======= ======= =======
Shares used to compute diluted net
income per share.................. 14,072 11,735 12,249 11,119 11,072 10,661 8,397
======== ======== ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, DECEMBER 31,
----------- ----------------------------------------------------
2000 1999 1998 1997 1996 1995
----------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-
term investments............... $108,618 $145,632 $ 19,175 $ 22,376 $ 23,419 $ 21,438
Working capital.................. 122,527 157,583 30,830 28,582 24,673 19,753
Total assets..................... 210,241 182,468 49,170 50,944 41,382 31,264
Long-term debt, less current
portion........................ -- -- -- -- -- 601
Accumulated deficit.............. (37,752) (37,517) (44,176) (45,105) (49,334) (51,697)
Total stockholders' equity....... 187,865 163,445 36,186 34,286 28,530 20,917
</TABLE>
6
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF NOGATECH
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales........................ $ 5,998 $ 2,823 $ 8,856 $ 3,205 $ 2,551 $ 2,630 $ 931
Cost of sales................ 3,407 1,685 5,111 2,038 1,699 1,855 777
---------- -------- -------- -------- -------- -------- --------
Gross profit................. 2,581 1,138 3,745 1,167 852 775 154
Operating expenses:
Research and development... 1,322 1,108 2,283 1,451 1,266 997 1,314
Sales and marketing........ 665 894 1,689 1,020 695 898 491
General and
administrative........... 590 378 880 609 321 473 258
---------- -------- -------- -------- -------- -------- --------
Total operating expenses..... 2,577 2,380 4,852 3,080 2,282 2,368 2,063
---------- -------- -------- -------- -------- -------- --------
Operating income (loss)...... 4 (1,242) (1,107) (1,913) (1,430) (1,593) (1,909)
Other income (expense),
net........................ 330 6 11 90 (32) (21) (288)
---------- -------- -------- -------- -------- -------- --------
Net income (loss)............ 334 (1,236) (1,096) (1,823) (1,462) (1,614) (2,197)
Charge for beneficial
conversion feature of
Series B redeemable
preferred stock............ (4,570) -- -- -- -- -- --
Accretion of redemption value
of Series A redeemable
convertible preferred
stock...................... (252) (214) (427) (383) (300) (173) (120)
---------- -------- -------- -------- -------- -------- --------
Net loss applicable to common
stock...................... $ (4,488) $ (1,450) $ (1,523) $ (2,206) $ (1,762) $ (1,787) $ (2,317)
========== ======== ======== ======== ======== ======== ========
Net loss per share of common
stock, basic and diluted... $ (1.13) $ (4.66) $ (4.50) $ (7.13) $ (5.86) $ (6.23) $ (8.08)
========== ======== ======== ======== ======== ======== ========
Weighted average number of
shares of common stock
outstanding................ 3,974,443 310,995 338,295 309,536 300,709 286,625 286,625
========== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
JUNE 30, ----------------------------------------------------
2000 1999 1998 1997 1996 1995
----------- -------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $46,521 $ 2,475 $ 3,791 $ 271 $ 95 $ 1,114
Working capital.............................. 48,207 3,111 4,171 223 (96) 915
Total assets................................. 51,597 6,577 5,769 1,568 1,368 2,235
Series A redeemable convertible preferred
stock...................................... -- 8,243 7,816 4,954 4,147 3,783
Series B redeemable convertible preferred
stock...................................... -- -- -- -- -- --
Stockholders' equity (capital deficiency).... 48,459 (4,886) (3,517) (4,524) (4,047) (2,519)
</TABLE>
7
<PAGE>
SELECTED UNAUDITED PRO FORMA
COMBINED FINANCIAL DATA
OF ZORAN, PIXELCAM AND NOGATECH
The pro forma information is based on management's estimates. Based on the
timing of the closing of the transaction, the finalization of the third-party
valuation, and other factors, the pro forma adjustments may differ materially
from those presented in this pro forma financial data. See also "Risk
Factors--Risks Related to the Merger" beginning on page 11 for a fuller
discussion of factors that may affect the pro forma adjustments. A change in the
pro forma adjustments could result in a reallocation of the purchase price
affecting the value assigned to long-term tangible and intangible assets. The
statement of operations effect of these changes will depend on the nature and
amount of the assets or liabilities adjusted. See "Unaudited Pro Forma Combined
Financial Statements" beginning on page 111 for a further description of the pro
forma adjustments.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-------------- ------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
PRO FORMA PRO FORMA
-------------- ------------------
<S> <C> <C>
Revenues:
Product sales............................................. $ 36,912 $ 61,993
Software, licensing and development....................... 5,892 8,787
-------- --------
Total revenues.......................................... 42,804 70,780
-------- --------
Operating expenses:
Cost of sales............................................. 20,925 33,923
Research and development.................................. 9,819 16,451
Sales and marketing, general and administrative........... 10,705 17,639
Amortization of goodwill and other intangibles............ 19,948 39,896
Stock based compensation.................................. 485 229
-------- --------
Total operating expenses................................ 61,882 108,138
-------- --------
Loss from operations........................................ (19,078) (37,358)
Interest and other income................................... 4,560 1,601
Interest expense............................................ (45) (109)
-------- --------
Loss before income taxes.................................... (14,563) (35,866)
Provision for income tax.................................... 706 665
-------- --------
Net loss.................................................... (15,269) (36,531)
Charge for beneficial conversion feature of Series B
preferred stock........................................... (4,570) --
Accretion of Series A redeemable convertible preferred stock
to redemption value....................................... (252) (427)
-------- --------
Net loss attributable to common stockholders................ $(20,091) $(36,958)
======== ========
Basic net loss per share.................................... $ (1.19) $ (2.72)
======== ========
Diluted net loss per share.................................. $ (1.19) $ (2.72)
======== ========
Shares used to compute basic net income per share........... 16,828 13,600
======== ========
Shares used to compute diluted net income per share......... 16,828 13,600
======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 2000
--------------
<S> <C>
BALANCE SHEET
Cash, cash equivalents and short-term investments........... $155,139
Working capital............................................. 166,772
Total assets................................................ 363,490
Accumulated deficit......................................... (47,752)
Total stockholders' equity.................................. 334,476
</TABLE>
8
<PAGE>
COMPARATIVE PER SHARE DATA
The following table contains certain historical per share data of Zoran and
Nogatech and combined per share data on an unaudited pro forma basis after
giving effect to the merger assuming that 0.166 shares of Zoran common stock are
issued in exchange for each share of Nogatech common stock in the merger. This
data should be read in conjunction with the selected historical consolidated
financial information, the pro forma unaudited combined condensed financial
information and the separate historical consolidated financial statements of
Zoran and Nogatech and notes thereto, included elsewhere in this proxy
statement/prospectus. The pro forma unaudited combined condensed financial
information is not necessarily indicative of the operating results that would
have been achieved had the transaction been in effect as of the beginning of the
periods presented and should not be construed as representative of future
operating results.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-------------- ------------------
(UNAUDITED)
<S> <C> <C>
HISTORICAL--ZORAN:
Basic net income (loss) per share......................... (0.02) 0.61
Dilutive net income (loss) per share...................... (0.02) 0.54
Book value per share...................................... 12.92 --
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-------------- ------------------
(UNAUDITED)
<S> <C> <C>
HISTORICAL--NOGATECH:
Basic and diluted net loss per share...................... (1.13) (4.50)
Book value per share...................................... 3.21 --
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
--------------- -------------
2000 1999
--------------- -------------
<S> <C> <C>
UNAUDITED PRO FORMA COMBINED:
Basic net loss per share.................................. (1.19) (2.72)
Diluted net loss per share................................ (1.19) (2.72)
Book value per share...................................... 19.34 --
EQUIVALENT PRO FORMA PER NOGATECH SHARE(1):
Basic net loss per share.................................. (7.17) (16.39)
Diluted net loss per share................................ (7.17) (16.39)
Book value per share...................................... 116.51 --
</TABLE>
------------------------
(1) Equivalent pro forma share amounts are calculated by dividing the pro forma
basic and diluted net loss per share and the book value per share by the
exchange ratio of 0.166. The per share amounts are equated to the respective
values for one share of Nogatech.
9
<PAGE>
MARKET PRICE INFORMATION
Zoran common stock and Nogatech common stock are quoted on The Nasdaq
National Market under the symbols "ZRAN" and "NGTC," respectively.
The table below contains, for the calendar quarters indicated, the reported
high and low sale prices of Zoran common stock and Nogatech common stock as
reported on The Nasdaq National Market. Nogatech common stock began trading on
The Nasdaq National Market on May 18, 2000.
<TABLE>
<CAPTION>
ZORAN COMMON NOGATECH
STOCK COMMON STOCK
------------------- -------------------
CALENDAR YEAR HIGH LOW HIGH LOW
------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
1998
First Quarter............................................. $18.25 $12.50 -- --
Second Quarter............................................ 14.75 9.50 -- --
Third Quarter............................................. 12.06 5.88 -- --
Fourth Quarter............................................ 18.00 5.19 -- --
1999
First Quarter............................................. 20.13 11.50 -- --
Second Quarter............................................ 17.75 8.50 -- --
Third Quarter............................................. 36.00 16.38 -- --
Fourth Quarter............................................ 56.35 20.44 -- --
2000
First Quarter............................................. 74.31 45.19 -- --
Second Quarter............................................ 68.50 33.50 $ 9.50 $6.31
Third Quarter (through September 28, 2000)................ 70.06 39.69 10.06 4.69
</TABLE>
The following table sets forth the closing sales prices per share of Zoran
common stock and Nogatech common stock as reported on The Nasdaq National Market
on August 23, 2000, the last full trading day prior to the public announcement
of the signing of the merger agreement, and on the last practicable trading day
for which information is available before the printing of this proxy statement/
prospectus; and the equivalent per share prices for Nogatech common stock based
on the Zoran common stock prices multiplied by the exchange ratio of 0.166:
<TABLE>
<CAPTION>
ZORAN NOGATECH NOGATECH
COMMON STOCK COMMON STOCK EQUIVALENT
------------ ------------ ----------
<S> <C> <C> <C>
August 23, 2000......................................... $63.00 $6.50 $10.46
September 28, 2000...................................... 51.31 8.25 8.52
</TABLE>
As of June 30, 2000, there were approximately 276 holders of record of Zoran
common stock, and approximately 55 holders of record of Nogatech common stock.
We believe that Nogatech common stock presently trades on the basis of the
value of the Zoran common stock expected to be issued in exchange for Nogatech
common stock in the merger, discounted for the uncertainties associated with
such transaction.
We urge you to obtain current market quotations for Zoran common stock and
Nogatech common stock. We cannot assure you as to the market prices of Zoran
common stock or Nogatech common stock at any time before the effective time of
the merger or as to the market price of Zoran common stock at any time
thereafter.
Following the merger, all Nogatech common stock will be owned by Zoran, and
as a result, Nogatech common stock will no longer be listed on The Nasdaq
National Market.
Neither Zoran nor Nogatech has paid any cash dividends on its common stock.
Following the merger, Zoran intends to retain any future earnings for use in its
business and does not anticipate paying cash dividends in the foreseeable
future.
10
<PAGE>
RISK FACTORS
By voting in favor of the approval and adoption of the merger agreement, you
will be choosing to exchange your current investment in Nogatech common stock
for an investment in Zoran common stock. An investment in Zoran common stock
involves a high degree of risk. In addition to the other information contained
in or annexed to this proxy statement/prospectus, you should carefully consider
the following risk factors in deciding whether to vote for the merger.
RISKS RELATING TO THE MERGER
YOU WILL RECEIVE 0.166 SHARES OF ZORAN COMMON STOCK FOR EACH SHARE OF NOGATECH
COMMON STOCK DESPITE CHANGES IN MARKET VALUE OF NOGATECH COMMON STOCK OR ZORAN
COMMON STOCK.
Upon completion of the merger, each share of Nogatech common stock will be
converted into 0.166 shares of Zoran common stock. The exchange ratio is fixed
and will not be adjusted in the event of any increase or decrease in the market
price of either Nogatech common stock or Zoran common stock. Neither Zoran nor
Nogatech is permitted to abandon the merger nor is Nogatech permitted to
resolicit the vote of its stockholders solely because of changes in the market
price of either Zoran common stock or Nogatech common stock. Therefore, because
the market price of Zoran's common stock is subject to fluctuation, the value at
the time of the merger of the Zoran shares to be received by Nogatech
stockholders will depend on the market price of Zoran shares at that time. We
cannot assure you as to the value of Zoran shares at that time. We urge you to
obtain current market quotations for Nogatech shares and Zoran shares.
The merger may occur at a date later than the date of the special meeting,
and we cannot assure you that the market price of Zoran shares on the date of
the special meeting will reflect the market price of Zoran shares at the time of
the merger. The market price of Zoran shares has been, and may continue to be,
volatile. In addition to conditions that affect the market for stocks of
technology companies generally, factors such as new product announcements by
Zoran or its competitors, quarterly fluctuations in Zoran's operating results
and challenges associated with the integration of Nogatech's business may have a
significant impact on the market price of Zoran shares. These conditions could
cause the price of Zoran shares to fluctuate substantially over short periods.
WE MAY NOT ACHIEVE STRATEGIC OBJECTIVES, COST SAVINGS AND OTHER BENEFITS.
We expect to realize strategic and other financial and operating benefits as
a result of the merger, including, among other things, significant cost savings.
However, we cannot predict with certainty whether these benefits will occur, the
extent to which they actually will be achieved or the timing of any such
benefits. The following are factors that may prevent the combined company from
realizing these benefits:
- the inability of the combined company to increase product sales;
- the inability of the combined company to operate efficiently and achieve
cost savings;
- unfavorable changes in customer reaction to the combined company's
significant products;
- competitive factors, including technological advances attained by
competitors and patents granted to or contested by competitors, which
would enhance their ability to compete against the combined company;
- the failure of a substantial demand for digital streaming technology to
continue to develop to the extent or as rapidly as we expect;
- changes in technology that increase the number of competitors that Zoran
faces after the merger or require Zoran to make significant capital
expenditures to develop competitive products;
11
<PAGE>
- manufacturers that compete with Zoran currently market products using
Nogatech technology who may not continue to do so; and
- an increase in the number of competitors serving the digital streaming
technology market that may make it more difficult to attract and retain
necessary personnel or to obtain and retain customers.
Failure to achieve the strategic objectives of the merger could have a material
adverse effect on the revenues, the levels of expenses and the operating results
of Zoran after the merger and the value of Zoran shares and could result in
Zoran and Nogatech not achieving the anticipated potential benefits of the
merger. In addition, neither Zoran nor Nogatech can assure you that the growth
rate of the combined company will equal the historical growth rate experienced
by either Zoran or Nogatech.
WE MAY NOT SUCCESSFULLY INTEGRATE OUR BUSINESSES AND MAY NOT REALIZE THE
ANTICIPATED BENEFITS OF THE MERGER.
Achieving the benefits of the merger will depend in substantial part on the
successful integration of the two companies' technology, operations and
personnel. Zoran and Nogatech will, however, face significant challenges in
integrating their organizations and operations in a timely and efficient manner.
A large number of systems must be integrated, including management information,
purchasing, accounting and finance, sales, billing, payroll and benefits and
regulatory compliance systems. The integration of Zoran and Nogatech will be a
complex, time consuming and expensive process and will require significant
attention from management and other personnel resources, which may distract
attention from the day-to-day business of the combined company. The diversion of
management's attention and any difficulties associated with integrating Nogatech
into Zoran could have a material adverse effect on the revenues, the levels of
expenses and the operating results of Zoran after the merger and the value of
Zoran shares and could result in Zoran and Nogatech not achieving the
anticipated potential benefits of the merger. Some of the challenges involved in
this integration include:
- integrating sales efforts so that customers can easily do business with
the combined company;
- bringing together the companies' marketing efforts so that the industry
receives useful information about the merger;
- coordinating research and development activities to enhance introduction
of new products and technologies;
- combining the two companies' product offerings and product lines
effectively and quickly; and
- demonstrating to employees of both companies that the business cultures of
Zoran and Nogatech are compatible.
It is not certain that Zoran and Nogatech can be successfully integrated in
a timely manner or at all or that any of the anticipated benefits will be
realized. Failure to do so could have a material adverse effect on the revenues,
business and operating results of the combined company.
NOGATECH EXECUTIVE OFFICERS AND DIRECTORS HAVE INTERESTS THAT MAY INFLUENCE THEM
TO SUPPORT AND APPROVE THE MERGER.
Some of the executive officers and directors of Nogatech have interests in
the merger that are not identical to the interests of other Nogatech
stockholders. For example, Arie Heiman, Nogatech's President and Chief Executive
Officer, has entered into an employment agreement with a wholly-owned subsidiary
of Zoran which will include a grant of options to purchase shares of Zoran
common stock which will be subject to meeting performance metrics to be
established by Zoran and Mr. Heiman and an annual salary to be paid in New
Israeli Shekels in an amount substantially similar to his current salary with
Nogatech, together with benefits generally comparable to those available to
Zoran's other
12
<PAGE>
senior executives. Mr. Heiman will also be eligible to participate in Zoran's
executive bonus program. This agreement, when executed, will provide
compensation and other benefits not currently provided to Mr. Heiman by
Nogatech. As a result, these officers and directors could be more likely to vote
for the proposal to approve and adopt the merger agreement and the merger than
if they did not have these interests. Nogatech's officers, directors and
principal stockholders, each of whom are affiliates of Nogatech, together own
approximately 8,461,057 shares of Nogatech common stock, which represents
approximately 56.0% of all outstanding shares of Nogatech common stock entitled
to vote at the special meeting of Nogatech stockholders as of August 23, 2000.
Mr. Heiman, together with Nathan Hod, Chairman of the Board of Nogatech, and
Ophir Holdings Ltd., an Israeli company of which Yirmiyahu Kaplan, a director of
Nogatech, is managing director, have already agreed to vote in favor of the
merger pursuant to a voting agreement with Zoran.
THE MERGER MAY CAUSE CUSTOMER UNCERTAINTY AND COULD HARM THE COMBINED COMPANY.
Uncertainty regarding the merger may cause customers of Nogatech and Zoran
to delay purchasing decisions. We cannot assure you that the customers of
Nogatech and Zoran will continue their current buying patterns without regard to
the proposed merger. Our customers may, in response to the announcement of the
merger, delay or defer purchasing decisions, and as a result, the combined
company's revenues could materially decline. In addition, any delay or deferral
in purchasing decisions by our respective customers could have a material
adverse effect on Nogatech's business or Zoran's business, regardless of whether
or not the merger is ultimately completed.
THE MERGER MAY CAUSE EMPLOYEE UNCERTAINTY RELATED TO THE MERGER COULD HARM THE
COMBINED COMPANY.
Current and prospective employees of Nogatech may experience uncertainty
about their future roles with Nogatech or Zoran until Zoran's strategies with
regard to Nogatech are announced or executed. This may adversely affect
Nogatech's ability to retain and attract key management, marketing and technical
personnel.
THE PRICE OF ZORAN COMMON STOCK MAY BE AFFECTED BY FACTORS DIFFERENT FROM THOSE
AFFECTING THE PRICE OF NOGATECH COMMON STOCK.
Upon completion of the merger, holders of Nogatech common stock will become
holders of Zoran common stock. Zoran's business differs from that of Nogatech,
and Zoran's results of operations, as well as the price of Zoran common stock,
may be affected by factors different from those affecting Nogatech's results of
operations and the price of Nogatech common stock.
ZORAN'S OPERATING RESULTS WILL SUFFER AS A RESULT OF PURCHASE ACCOUNTING
TREATMENT, THE IMPACT OF AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES RELATING
TO ITS PROPOSED COMBINATION WITH NOGATECH.
Under United States generally accepted accounting principles, Zoran will
account for the merger using the purchase method of accounting. Under purchase
accounting, Zoran will record the market value of its common stock issued in
connection with the merger, the fair value of the options to purchase Nogatech
common stock, which will become options to purchase Zoran common stock, and the
amount of direct transaction costs as the cost of acquiring the business of
Nogatech. Zoran will allocate that cost to the individual assets acquired and
liabilities assumed, including various identifiable intangible assets such as
acquired technology, acquired trademarks and trade names and acquired workforce,
and to in-process research and development based on their respective fair
values. The initial allocation will be based on Zoran Management's estimates.
This initial allocation will be adjusted based upon a final, third party
valuation, which may differ materially from the allocation presented in the pro
forma financial statements presented in this proxy statement/prospectus.
In-process research and development, which is currently estimated at
$10.0 million, will be expensed in the quarter when the merger closes.
Intangible assets including goodwill will be generally amortized over a period
of three
13
<PAGE>
years. As described in the section titled "Selected Unaudited Pro Forma Combined
Financial Data of Zoran and Nogatech" on page 8, the amount of purchase cost
allocated to goodwill and other intangibles is estimated to be approximately
$101.7 million. If goodwill and other intangible assets were amortized in equal
quarterly amounts over a period of three years following completion of the
merger, the accounting charge attributable to these items would be approximately
$8.5 million per quarter and $33.9 million per fiscal year. As a result,
purchase accounting treatment of the merger will decrease the net profit or
increase the net loss for Zoran in the foreseeable future, which could have a
materially adverse effect on the market value of Zoran common stock following
completion of the merger.
RISKS RELATING TO ZORAN
ZORAN'S QUARTERLY REVENUES AND OPERATING RESULTS FLUCTUATE DUE TO A VARIETY OF
FACTORS, WHICH MAY RESULT IN VOLATILITY OR A DECLINE IN THE PRICE OF ITS STOCK.
Zoran's quarterly operating results have varied significantly due to a
number of factors, including:
- fluctuation in demand for its products;
- the timing of new product introductions by Zoran and its competitors;
- the level of market acceptance of new and enhanced versions of its
products and its customers' products;
- the timing of large customer orders;
- the length and variability of the sales cycle for its 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 its products;
- competitive pricing pressures; and
- the evolving and unpredictable nature of the markets for products
incorporating Zoran's integrated circuits and embedded software.
Zoran expects that its operating results will continue to fluctuate in the
future as a result of these factors and a variety of other factors, including:
- the cost and availability of adequate foundry capacity;
- fluctuations in manufacturing yields;
- the emergence of new industry standards;
- product obsolescence; and
- the amount of research and development expenses associated with new
product introductions.
Zoran's operating results could also be harmed by:
- economic conditions generally or in various geographic areas where it or
its customers do business;
- other conditions affecting the timing of customer orders; or
- a downturn in the markets for its customers' products, particularly the
consumer electronics market.
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These factors are difficult or impossible to forecast. Zoran 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 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
Zoran's expenses are relatively fixed, and the timing of increases in expenses
is based in large part on its forecast of future revenues. As a result, if
revenues do not meet Zoran's expectations it may be unable to quickly adjust
expenses to levels appropriate to actual revenues, which could harm its
operating results.
As a result of these factors, Zoran's operating results may vary
significantly from quarter to quarter. Any shortfall in revenues or net income
from levels expected by the investment community could cause a decline in the
trading price of Zoran's stock.
ZORAN'S 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
ZORAN'S ABILITY TO MARKET AND SELL ITS PRODUCTS TO MANUFACTURERS WHO INCORPORATE
THOSE TYPES OF INTEGRATED CIRCUITS INTO THEIR PRODUCTS.
In 1999 and the six months ended June 30, 2000, Zoran derived a majority of
its product revenues from the sale of integrated circuits for DVD and Super
Video CD applications. Zoran expects that sales of its products for DVD and
Super Video CD applications, digital audio applications and video editing
applications will continue to account for a significant portion of its revenues
for the near future. Zoran's ability to sell its recently introduced products
for filmless digital camera applications will also have a significant impact on
its financial performance for the foreseeable future. If the markets for these
products and applications decline or fail to develop as expected, or if Zoran is
not successful in its efforts to market and sell its products to manufacturers
who incorporate integrated circuits into these products, Zoran's financial
results will be harmed.
ZORAN'S CUSTOMERS EXPERIENCE FLUCTUATING PRODUCT CYCLES AND SEASONALITY, WHICH
CAUSES ZORAN'S SALES TO FLUCTUATE.
Because the markets that Zoran's customers serve are characterized by
numerous new product introductions and rapid product enhancements, Zoran's
operating results may vary significantly from quarter to quarter. During the
final production of a mature product, Zoran's customers typically exhaust their
existing inventory of Zoran's products. Consequently, orders for Zoran's
products may decline in those circumstances, even if its 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 Zoran's ability to recover the lost sales from the discontinuation of the
related mature product. Zoran's customers also experience significant
seasonality in the sales of their consumer products, which affects their orders
of Zoran's products. Typically, the fourth calendar quarter represents a
disproportionate percentage of sales for Zoran's customers due to the holiday
period, and therefore a disproportionate percentage of Zoran's sales. Zoran
expects these sales fluctuations to continue for the foreseeable future.
PRODUCT SUPPLY AND DEMAND IN THE SEMICONDUCTOR INDUSTRY IS SUBJECT TO CYCLICAL
VARIATIONS.
The semiconductor industry is subject to cyclical variations in product
supply and demand. Downturns in the industry often occur in connection with, or
anticipation of, maturing product cycles for both semiconductor companies and
their customers and declines in general economic conditions. These downturns
have been characterized by abrupt fluctuations in product demand, production
over-capacity and accelerated decline of average selling prices. In some cases,
these downturns have
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lasted more than one year. A downturn in the semiconductor industry could harm
Zoran's sales and revenues if demand drops or its gross margins if average
selling prices decline.
THE DEVELOPMENT AND EVOLUTION OF MARKETS FOR ZORAN'S INTEGRATED CIRCUITS IS
DEPENDENT ON FACTORS SUCH AS INDUSTRY STANDARDS, OVER WHICH ZORAN HAS NO
CONTROL; FOR EXAMPLE, IF MANUFACTURERS ADOPT NEW OR COMPETING INDUSTRY STANDARDS
WITH WHICH ZORAN'S PRODUCTS ARE NOT COMPATIBLE, ITS EXISTING PRODUCTS WOULD
BECOME LESS DESIRABLE TO THE MANUFACTURERS AND ITS SALES WOULD SUFFER.
The emergence of markets for Zoran's products is affected by a variety of
factors beyond Zoran's control. In particular, its products are designed to
conform to current specific industry standards. Manufacturers may not continue
to follow these standards, which would make Zoran's products less desirable to
manufacturers and reduce Zoran's sales. Also, competing standards may emerge
that are preferred by manufacturers, which could also reduce Zoran's sales and
require Zoran to make significant expenditures to develop new products. The
emergence of new markets for Zoran's products is also dependent in part upon
third parties developing and marketing content in a format compatible with
commercial and consumer products that incorporate Zoran's products. If content
compatible with commercial and consumer products that incorporate Zoran's
products is not available, manufacturers may not be able to sell products
incorporating Zoran's integrated circuits, and Zoran's sales to manufacturers
would suffer.
ZORAN RELIES ON INDEPENDENT FOUNDRIES AND CONTRACTORS FOR THE MANUFACTURE,
ASSEMBLY AND TESTING OF ITS INTEGRATED CIRCUITS, AND THE FAILURE OF ANY OF THESE
THIRD PARTIES TO DELIVER PRODUCTS OR OTHERWISE PERFORM AS REQUESTED COULD DAMAGE
ZORAN'S RELATIONSHIPS WITH ITS CUSTOMERS AND HARM ITS SALES AND FINANCIAL
RESULTS.
Zoran does not operate any manufacturing facilities, and it relies on
independent foundries to manufacture substantially all of its 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. Zoran does not have long-term
supply contracts with any of its suppliers, including its principal supplier,
Taiwan Semiconductor Manufacturing Company, or TSMC. Therefore, TSMC is not
obligated to manufacture products for Zoran for any specific period, in any
specific quantity or at any specified price, except as may be provided in a
particular purchase order.
Zoran's 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 Zoran's products;
- reduced control over delivery schedules;
- reduced control over quality assurance;
- reduced control over manufacturing yields and cost; and
- potential misappropriation of Zoran's intellectual property.
In addition, TSMC and some of Zoran's other foundries are located in areas
of the world that are subject to natural disasters such as earthquakes. While
the recent earthquake in Taiwan did not have a material impact on Zoran's
independent foundries, a similar event centered near TSMC's facility could
severely reduce TSMC's ability to manufacture Zoran's integrated circuits. The
loss of any of Zoran's manufacturers as a supplier, Zoran's inability to expand
the supply of its products in response to increased demand, or Zoran's inability
to obtain timely and adequate deliveries from its current or future suppliers
due to a natural disaster or any other reason could delay or reduce shipments of
its
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products. Any of these circumstances could damage Zoran's relationships with
current and prospective customers and harm its sales and financial results.
Zoran also relies on independent contractors for the assembly and testing of
its products. At present, all of Zoran's semiconductor products are assembled by
one of three independent contractors: ASE, Amkor or ASAT. Zoran's semiconductor
products are tested by these contractors or other independent contractors.
Zoran's reliance on independent assembly and testing houses limits its control
over delivery schedules, quality assurance and product cost. Disruptions in the
services provided by Zoran's assembly or testing houses or other circumstances
that would require Zoran to seek alternative sources of assembly or testing
could lead to supply constraints or delays in the delivery of its products.
These constraints or delays could damage its relationships with current and
prospective customers and harm Zoran's sales and financial results.
IF ZORAN'S INDEPENDENT FOUNDRIES DO NOT ACHIEVE SATISFACTORY YIELDS, ZORAN'S
RELATIONSHIPS WITH ITS 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 Zoran's independent foundries would reduce Zoran's ability to
deliver its products to customers, harm its relationships with customers and
harm its business.
TO BE SUCCESSFUL, ZORAN MUST EFFICIENTLY DEVELOP NEW AND ENHANCED PRODUCTS TO
MEET RAPIDLY CHANGING CUSTOMER REQUIREMENTS AND INDUSTRY STANDARDS.
The markets for Zoran's products are characterized by:
- rapidly changing technologies;
- evolving industry standards;
- frequent new product introductions; and
- short product life cycles.
Zoran expects to increase its product development expenses, and Zoran's
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 rapidly changing customer requirements and industry standards. Zoran
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 Zoran's sales and financial results.
ZORAN FACES COMPETITION OR POTENTIAL COMPETITION FROM COMPANIES WITH GREATER
RESOURCES, AND IF ZORAN IS UNABLE TO COMPETE EFFECTIVELY WITH THESE COMPANIES,
ZORAN'S MARKET SHARE MAY DECLINE AND ITS 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
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circuits, such as Sony. As this market continues to develop, Zoran faces
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. Zoran also faces competition from internally-developed
solutions developed and used by major Japanese original equipment manufacturers,
who may also be Zoran's customers.
Many of Zoran's existing and potential competitors have substantially
greater resources in many areas, including:
- finances;
- manufacturing;
- technology;
- marketing; and
- distribution.
Many of Zoran's competitors have broader product lines and longer standing
relationships with customers than Zoran does. Moreover, Zoran's competitors may
foresee the course of market developments more accurately than Zoran does and
could in the future develop new technologies that compete with Zoran's products
or even render Zoran's products obsolete. In addition, a number of private
companies have announced plans for new products to address the same digital
multimedia compression problems that Zoran's products address. If Zoran is
unable to compete successfully against its current and future competitors, Zoran
could experience price reductions, order cancellations and reduced gross
margins, any one of which could harm its business.
The DVD market is just emerging, and additional competitors are expected to
enter the market for DVD players and software. Zoran believes 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 Zoran's products. Some of these potential competitors may
develop captive implementations for use only with their own PC and consumer
electronics products. It is also possible that application software vendors,
such as Microsoft, may attempt to enter the DVD application market in the
future. This increased competition may result in price reductions, reduced
profit margins and loss of market share.
ZORAN'S PRODUCTS ARE CHARACTERIZED BY AVERAGE SELLING PRICES THAT DECLINE OVER
RELATIVELY SHORT TIME PERIODS; IF ZORAN IS UNABLE TO REDUCE ITS COSTS OR
INTRODUCE NEW PRODUCTS WITH HIGHER AVERAGE SELLING PRICES, ZORAN'S FINANCIAL
REULTS WOULD SUFFER.
Average selling prices for Zoran's products decline over relatively short
time periods. Many of Zoran's manufacturing costs are fixed. When Zoran's
average selling prices decline, its revenues decline unless it sells more units,
and its gross margins decline unless it is able to reduce its manufacturing
costs by a commensurate amount. Zoran's operating results suffer when gross
margins decline. Zoran may experience these problems in the future and cannot
predict when they may occur or their severity.
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ZORAN DERIVES MOST OF ITS REVENUE FROM SALES TO A SMALL NUMBER OF LARGE
CUSTOMERS, AND IF ZORAN IS NOT ABLE TO RETAIN THESE CUSTOMERS, OR THEY
RESCHEDULE, REDUCE OR CANCEL ORDERS, ZORAN'S REVENUES WOULD BE REDUCED AND ITS
FINANCIAL RESULTS WOULD SUFFER.
Zoran's largest customers account for a substantial percentage of its
revenues. During the six months ended June 30, 2000, sales to Fujifilm accounted
for 30.2% of Zoran's total revenues and 33.6% of its product sales. In 1999,
sales to Fujifilm accounted for 37.3% of Zoran's total revenues and 41.0% of its
product sales. During 1999, Zoran's four largest customers accounted for
approximately 56.9% of its total revenues. Sales to these large customers have
varied significantly from year to year and will continue to fluctuate in the
future. These sales also may fluctuate significantly from quarter to quarter.
Zoran may not be able to retain its key customers or these customers may cancel
purchase orders or reschedule or decrease their level of purchases from Zoran.
Any substantial decrease or delay in sales to one or more of Zoran's key
customers could harm its sales and financial results. In addition, any
difficulty in collecting amounts due from one or more key customers could harm
Zoran's financial results.
ZORAN IS DEPENDENT ON ITS RELATIONSHIP WITH FUJIFILM FOR A SIGNIFICANT
PERCENTAGE OF ITS PRODUCT SALES, AND IF THIS RELATIONSHIP WERE TERMINATED,
ZORAN'S BUSINESS WOULD BE HARMED.
Fujifilm has been Zoran's largest customer in three of the last five years.
Fujifilm purchases Zoran's products primarily as a distributor. Under Zoran's
arrangement with Fujifilm, Fujifilm acts as the primary distributor in Japan of
products developed by Zoran under development contracts with Fujifilm. Fujifilm
also sells some of these products in Japan under its own name. Zoran 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 Zoran's other distributors. Fujifilm also has a nonexclusive license to
distribute most of Zoran's products outside of Japan. Fujifilm has provided
wafer manufacturing services on a most-favored terms basis to Zoran since 1993
and has also provided funding to support Zoran's development efforts. If Zoran's
relationship with Fujifilm were terminated, Zoran's business would be harmed.
ZORAN'S PRODUCTS GENERALLY HAVE LONG SALES CYCLES AND IMPLEMENTATION PERIODS,
WHICH INCREASES ITS COSTS IN OBTAINING ORDERS AND REDUCES THE PREDICTABILITY OF
ITS EARNINGS.
Zoran's products are technologically complex. Prospective customers
generally must make a significant commitment of resources to test and evaluate
Zoran's products and to integrate them into larger systems. As a result, Zoran's
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 Zoran's products often last for many months or even years.
Longer sales cycles require Zoran to invest significant resources in attempting
to make sales and delay the generation of revenue.
Long sales cycles also subject Zoran 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 Zoran's customers
to incorporate Zoran's products into their own can vary significantly with the
needs of customers and generally exceeds several months, which further
complicates Zoran's planning processes and reduces the predictability of its
operating results.
ZORAN IS NOT PROTECTED BY LONG-TERM CONTRACTS WITH ITS CUSTOMERS.
Zoran generally does not enter into long-term purchase contracts with
customers, and Zoran cannot be certain as to future order levels from customers.
When Zoran does enter into a long-term contract, the contract is generally
terminable at the convenience of the customer. In the event of an
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early termination by one of Zoran's major customers, it is unlikely that Zoran
will be able to rapidly replace that revenue source, which would harm its
financial results.
ZORAN IS DEPENDENT UPON ITS INTERNATIONAL SALES AND OPERATIONS; ECONOMIC,
POLITICAL OR MILITARY EVENTS IN A COUNTRY WHERE ZORAN MAKES SIGNIFICANT SALES OR
HAS SIGNIFICANT OPERATIONS COULD INTERFERE WITH ITS SUCCESS OR OPERATIONS THERE
AND HARM ITS BUSINESS.
During the six months ended June 30, 2000, 84.4% of Zoran's total revenues
were derived from international sales. During 1999, 79.5% of Zoran's total
revenues were derived from international sales. Zoran anticipates that
international sales will continue to represent a significant portion of its
total revenues for the foreseeable future. In addition, substantially all of
Zoran's semiconductor products are manufactured, assembled and tested outside of
the United States by independent foundries and subcontractors.
Zoran is 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 Zoran's research and development personnel and facilities
and a significant portion of its sales personnel are located in Israel.
Political, economic and military conditions in Israel directly affect Zoran's
operations. Some of Zoran's 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 Zoran to
operate inefficiently during these periods.
During 1998, Zoran opened an office in Shenzhen, China. Zoran's 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 Zoran's 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 Zoran's
sales to the Chinese market.
THE PRICES OF ZORAN'S PRODUCTS MAY BECOME LESS COMPETITIVE DUE TO FOREIGN
EXCHANGE FLUCTUATIONS.
Foreign currency fluctuations may affect the prices of Zoran's products.
Prices for Zoran's products are currently denominated in U.S. dollars for sales
to its 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.
ZORAN'S ABILITY TO COMPETE COULD BE JEOPARDIZED IF IT IS UNABLE TO PROTECT ITS
INTELLECTUAL PROPERTY RIGHTS FROM CHALLENGES BY THIRD PARTIES.
Zoran's success and ability to compete depend in large part upon protecting
its proprietary technology. Zoran relies on a combination of patent, trade
secret, copyright and trademark laws, non-disclosure and other contractual
agreements and technical measures to protect its proprietary
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rights. These agreements and measures may not be sufficient to protect Zoran's
technology from third-party infringement, or to protect Zoran from the claims of
others. Monitoring unauthorized use of Zoran's products is difficult and Zoran
cannot be certain that the steps it has taken will prevent unauthorized use of
its technology, particularly in foreign countries where the laws may not protect
its proprietary rights as fully as in the United States. The laws of certain
foreign countries in which Zoran's products are or may be developed,
manufactured or sold, including various countries in Asia, may not protect its
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 its technology and
products more likely in these countries. If competitors are able to use Zoran's
technology, Zoran's ability to compete effectively could be harmed.
ZORAN COULD BECOME SUBJECT TO CLAIMS AND LITIGATION REGARDING INTELLECTUAL
PROPERTY RIGHTS, WHICH COULD SERIOUSLY HARM ITS BUSINESS AND REQUIRE IT 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, Zoran has
been subject to claims and litigation regarding alleged infringement of other
parties' intellectual property rights. Zoran could become subject to litigation
in the future either to protect its intellectual property or as a result of
allegations that Zoran infringes others' intellectual property rights. Claims
that Zoran's products infringe proprietary rights would force Zoran to defend
itself and possibly its customers or manufacturers against the alleged
infringement. These claims and any resulting lawsuit, if successful, could
subject Zoran to significant liability for damages and invalidation of its
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 Zoran to
do one or more of the following:
- stop selling 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 Zoran is forced to take any of the foregoing actions, its business could
be severely harmed.
IF NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY ARE NOT AVAILABLE TO ZORAN OR
ARE VERY EXPENSIVE, ITS PRODUCTS COULD BECOME OBSOLETE.
From time to time Zoran may be required to license technology from third
parties to develop new products or product enhancements. Third party licenses
may not be available to Zoran on commercially reasonable terms, if at all. If
Zoran is unable to obtain any third-party license required to develop new
products and product enhancements, it 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 its products.
ANY ACQUISITIONS ZORAN MAKES COULD DISRUPT ITS BUSINESS AND SEVERELY HARM ITS
FINANCIAL CONDITION.
Zoran has made investments in, and acquisitions of, other complementary
companies, products and technologies. In addition to Zoran's recent acquisition
of PixelCam and the proposed acquisition of Nogatech, Zoran may acquire
additional businesses, products or technologies in the future. In the event of
any future acquisitions, Zoran could:
- issue stock that would dilute its current stockholders' percentage
ownership;
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- incur debt;
- assume liabilities;
- incur amortization expenses related to goodwill and other intangible
assets; or
- incur large and immediate write-offs.
Zoran's operation of any other acquired business will also involve numerous
risks, including:
- problems combining the purchased operations, technologies or products;
- unanticipated costs;
- diversion of management's attention from Zoran's core business;
- adverse effects on existing business relationships with customers;
- risks associated with entering markets in which Zoran has no or limited
prior experience; and
- potential loss of key employees, particularly those of the purchased
organizations.
Zoran may not be able to successfully complete the integration of the
business, products and technologies of PixelCam or to integrate any other
businesses, products or technologies that it might acquire in the future, and
any failure to do so could disrupt Zoran's business and seriously harm its
financial condition.
ZORAN'S PRODUCTS COULD CONTAIN DEFECTS, WHICH COULD REDUCE SALES OF THOSE
PRODUCTS OR RESULT IN CLAIMS AGAINST ZORAN.
Zoran develops complex and evolving products. Despite testing by Zoran and
its 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
Zoran to incur significant warranty, support and repair costs, divert the
attention of Zoran's engineering personnel from its product development efforts
and harm its relationships with customers. The occurrence of these problems
could result in the delay or loss of market acceptance of Zoran's products and
would likely harm its business. Defects, integration issues or other performance
problems in Zoran's products could result in financial or other damages to
customers or could damage market acceptance of Zoran's products. Zoran's
customers could also seek damages from Zoran for their losses. A product
liability claim brought against Zoran, even if unsuccessful, would likely be
time consuming and costly to defend.
IF ZORAN DOES NOT MAINTAIN CURRENT DEVELOPMENT CONTRACTS OR IS UNABLE TO ENTER
INTO NEW DEVELOPMENT CONTRACTS, ITS BUSINESS COULD BE HARMED.
Zoran historically has generated a significant percentage of its total
revenues from development contracts, primarily with key customers. These
development contracts have provided Zoran with partial funding for the
development of some of its products. Under these contracts, Zoran receives
payments upon reaching certain development milestones. If Zoran fails to achieve
the milestones specified in its existing development contracts, if its existing
contracts are terminated or if Zoran is unable to secure future development
contracts, Zoran's ability to cost-effectively develop new products would be
reduced and its business would be harmed.
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ZORAN MAY NEED ADDITIONAL FUNDS TO EXECUTE ITS BUSINESS PLAN, AND IF ZORAN IS
UNABLE TO OBTAIN SUCH FUNDS, IT WILL NOT BE ABLE TO EXPAND ITS BUSINESS AS
PLANNED.
Zoran may require substantial additional capital to finance its future
growth, secure additional foundry capacity and fund its ongoing research and
development activities beyond 2000. Zoran's capital requirements will depend on
many factors, including:
- acceptance of and demand for its products;
- the types of arrangements that it may enter into with its independent
foundries; and
- the extent to which it invests in new technology and research and
development projects.
To the extent that Zoran's existing sources of liquidity and cash flow from
operations are insufficient to fund its activities, Zoran may need to raise
additional funds. If Zoran raises additional funds through the issuance of
equity securities, the percentage ownership of Zoran's existing stockholders
would be reduced. Further, such equity securities may have rights, preferences
or privileges senior to those of Zoran's common stock. Additional financing may
not be available to Zoran when needed or, if available, it may not be available
on terms favorable to Zoran.
IF ZORAN FAILS TO MANAGE ITS FUTURE GROWTH, IF ANY, ITS BUSINESS WOULD BE
HARMED.
Zoran anticipates that its future growth, if any, will require it to recruit
and hire a substantial number of new engineering, managerial, sales and
marketing personnel. Zoran's ability to manage growth successfully will also
require it to expand and improve administrative, operational, management and
financial systems and controls. Many of Zoran's key operations, including the
major portion of its research and development operations and a significant
portion of its sales and administrative operations, are located in Israel. A
majority of Zoran's sales and marketing and some 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 Zoran's resources and
its ability to manage growth effectively. If Zoran is unable to manage growth
effectively, its business would be harmed.
ZORAN RELIES ON THE SERVICES OF ITS EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL,
WHOSE KNOWLEDGE OF ZORAN'S BUSINESS AND INDUSTRY WOULD BE EXTREMELY DIFFICULT TO
REPLACE.
Zoran'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 harm Zoran's business. Zoran
may not be able to retain the services of any of its key employees. Zoran
believes that its future success will also depend in large part on its 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 Zoran may not be successful in attracting,
integrating and retaining such personnel. Failure to attract, integrate and
retain key personnel could harm Zoran's ability to carry out its business
strategy and compete with other companies.
THE ISRAELI RATE OF INFLATION MAY NEGATIVELY IMPACT ZORAN'S COSTS IF IT EXCEEDS
THE RATE OF DEVALUATION OF THE NEW ISRAELI SHEKEL AGAINST THE UNITED STATES
DOLLAR.
A portion of the cost of Zoran's operations, relating mainly to its
personnel and facilities in Israel, is incurred in New Israeli Shekels. As a
result, Zoran bears the risk that the rate of inflation in Israel will exceed
the rate of devaluation of the New Israeli Shekel in relation to the United
States dollar, which will increase Zoran's costs as expressed in United States
dollars. To date, Zoran has not engaged in hedging transactions. In the future,
Zoran may enter into currency hedging transactions to decrease the risk of
financial exposure from fluctuations in the exchange rate of the United States
dollar against
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the New Israeli Shekel. These measures may not adequately protect Zoran from the
impact of inflation in Israel.
THE GOVERNMENT PROGRAMS ZORAN PARTICIPATES IN AND TAX BENEFITS ZORAN RECEIVES
REQUIRE ZORAN TO MEET SEVERAL CONDITIONS AND MAY BE TERMINATED OR REDUCED IN THE
FUTURE, WHICH WOULD INCREASE ZORAN'S COSTS.
In the year ended December 31, 1999 and the six months ended June 30, 2000,
Zoran received an aggregate of $484,000 and $158,000, respectively, 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, Zoran's
development projects must be approved by the Chief Scientist on a case-by-case
basis. If Zoran's development projects are not approved by the Chief Scientist,
Zoran will not receive grants to fund these projects, which would increase
Zoran's research and development costs. Zoran also receives tax benefits, in
particular exemptions and reductions as a result of the "approved enterprise"
status of Zoran's existing operations in Israel. To be eligible for these tax
benefits, Zoran must maintain its approved enterprise status by meeting
conditions, including making specified investments in fixed assets located in
Israel and investing additional equity in its Israeli subsidiary. If Zoran fails
to meet these conditions in the future, the tax benefits would be canceled and
Zoran 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 Zoran's
business.
PROVISIONS IN ZORAN'S CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY
A CHANGE IN CONTROL OF ZORAN.
Zoran's certificate of incorporation and bylaws and Delaware law contain
provisions that could make it more difficult for a third party to acquire Zoran,
even if doing so would be beneficial to its stockholders, such as:
- prohibiting a merger with a party that has acquired control of 15% or more
of Zoran's 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 Zoran's 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 Zoran's board of directors.
ZORAN'S STOCK PRICE HAS FLUCTUATED AND MAY CONTINUE TO FLUCTUATE WIDELY.
The market price of Zoran's common stock has fluctuated significantly since
Zoran's initial public offering in 1995 and is subject to significant
fluctuations in the future in response to a variety of factors, including:
- announcements concerning the business of Zoran or of 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
Zoran or its competitors;
- proprietary rights or other litigation;
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- 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 Zoran's common
stock.
RISKS RELATING TO NOGATECH
In addition to the risks described above, you should also consider the
following risks, which relate specifically to Nogatech, in determining whether
to approve the merger agreement and exchange your investment in Nogatech for an
investment in Zoran. The following risks should be considered together with the
information about Nogatech's business, financial condition and results of
operations provided elsewhere in this proxy statement/prospectus. If the merger
is not completed, these risks will continue to apply to your interest in
Nogatech. If the merger is completed, these risks will continue to apply to your
investment in Zoran, although to a lesser degree because Nogatech's business
following the merger will represent a small portion of the combined company's
business.
NOGATECH'S BUSINESS MAY EXPERIENCE FLUCTUATIONS IN ITS FUTURE OPERATING RESULTS,
WHICH WILL MAKE PREDICTING ITS FUTURE OPERATING RESULTS DIFFICULT.
Historically, Nogatech's quarterly operating results have varied
significantly from period to period, and Nogatech expects that they will
continue to do so. These fluctuations result from a variety of factors,
including:
- market acceptance of Nogatech's products, including changes in order flow
from its largest customers, and its customers' ability to forecast their
needs;
- the timing of new product announcements by Nogatech and its competitors,
such as chips that are compatible with the MPEG 4 standard;
- the lengthy sales cycle of Nogatech's products;
- increased competition between chip manufacturers, including changes in
pricing by Nogatech or its competitors; and
- delays in deliveries by Nogatech's limited number of suppliers and
subcontractors.
NOGATECH'S SALES WILL BE REDUCED IF IT IS UNABLE TO KEEP PACE WITH TECHNOLOGICAL
CHANGES.
The emerging video compression and video image processing industry is
characterized by:
- rapidly changing technologies;
- frequent new product introductions; and
- rapid changes in customer requirements.
Video compression and video image processing technologies have reached
commercially acceptable levels only in the last several years and continue to
experience numerous changes. As a result, Nogatech must be able to sell products
that incorporate the technological advances in its industry in order to ensure
that its products remain commercially viable.
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Nogatech's future success will depend on its ability to enhance existing
products and to develop and introduce new products and product features. These
products and features must be cost-effective and keep pace with technological
developments and address the increasingly sophisticated needs of Nogatech's
customers. Nogatech may not be successful at these tasks. Nogatech may also
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these new products and features. In either case,
Nogatech's sales would be reduced.
NOGATECH MAY NOT BE ABLE TO TIMELY ADOPT EMERGING INDUSTRY STANDARDS, WHICH MAY
MAKE ITS PRODUCTS UNACCEPTABLE TO POTENTIAL CUSTOMERS, DELAY PRODUCT
INTRODUCTIONS OR INCREASE COSTS.
Nogatech's products must comply with a number of current industry standards
and practices established by various international bodies. Nogatech's failure to
comply with evolving standards, including video compression and computer
interface standards, will limit acceptance of its products by market
participants. In particular, the MPEG 4 standard is becoming the primary
standard for PC applications requiring video compression, but Nogatech has not
yet completed development of any products that are based upon MPEG 4. Although
Nogatech expects to introduce products based upon MPEG 4 during the second half
of 2001, Nogatech may not succeed in doing so either within that time frame, or
at all. If new standards are adopted in Nogatech's industry, Nogatech may be
required to adopt those standards in its products. It may take Nogatech a
significant amount of time to develop and design products incorporating these
new standards, and Nogatech may not succeed in doing so. Nogatech may also
become dependent upon products developed by third parties and have to pay
royalty fees, which may be substantial, to the developers of the technology that
constitutes the newly adopted standards.
IF VIDEO COMPRESSION TECHNOLOGY OR NOGATECH'S IMPLEMENTATION OF THIS TECHNOLOGY
IS NOT ACCEPTED, NOGATECH WILL NOT BE ABLE TO SUSTAIN OR EXPAND ITS BUSINESS.
Nogatech's future success depends on the growing use and acceptance of video
applications for PCs, including the growth of video on the Internet. The market
for these applications is new and is still evolving, and may not develop to the
extent necessary to enable Nogatech to expand its business. Nogatech has
recently invested and expects to continue to invest significant time and
resources in the development of new products for this market. Nogatech's
dependence on sales of chips and lack of product diversification exposes it to a
substantial risk of loss in the event that the video compression market does not
develop or if a competing technology replaces its chips. If the target market
for Nogatech's products does not grow, Nogatech may not obtain any benefits from
these investments.
NOGATECH BEGAN SELLING ITS CURRENT PRODUCT LINE OF CHIPS ONLY RECENTLY AND, AS A
RESULT, YOUR ABILITY TO EVALUATE NOGATECH'S PRODUCTS MAY BE LIMITED.
Although Nogatech has been operating since 1993, it did not begin commercial
shipments of its present product line of video compression chips until 1998.
Prior to that time, Nogatech sold different products, which it does not
anticipate selling after 2000. As a result, Nogatech's future success will
depend primarily upon the sales of its chips. Nogatech's limited operating
history with respect to its chips may limit your ability to evaluate Nogatech's
prospects because of its:
- limited historical financial data relating to sales of chips;
- unproven potential to generate profits from sales of chips; and
- limited experience in addressing emerging trends that may affect its chip
business.
As a young business that recently commenced a new product line, Nogatech
faces risks and uncertainties relating to its ability to implement its business
plan successfully. You should consider Nogatech's prospects in light of the
risks, expenses and difficulties it may encounter.
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NOGATECH HAS ONLY RECORDED NET INCOME DURING THE FOUR LAST QUARTERS, AND MAY NOT
BE PROFITABLE IN THE FUTURE.
As of June 30, 2000, Nogatech had an accumulated deficit of $15.1 million.
Nogatech's sales may not grow or even continue at their current level. Although
Nogatech has recorded net income for the last four quarters, if Nogatech's sales
do not increase or if its expenses increase at a greater pace than its sales,
Nogatech will not remain profitable. In addition, Nogatech recognized a
beneficial conversion charge of $4.6 million in the first quarter of 2000 on
account of its issuance of Series B preferred stock, which increased Nogatech's
net loss applicable to its common stock in that period, and which will adversely
affect Nogatech's operating results during the fiscal year ending December 31,
2000. Any losses that Nogatech incurs could be substantial.
IF NOGATECH DOES NOT DEVELOP NEW PRODUCTS OR NEW PRODUCT FEATURES IN RESPONSE TO
CUSTOMER REQUIREMENTS OR IN A TIMELY WAY, CUSTOMERS MAY NOT BUY ITS PRODUCTS.
Nogatech's customers' products tend to have short life cycles, which require
both those customers and Nogatech to design and introduce new products within a
relatively limited period of time. Nogatech must, therefore, coordinate its
sales cycle with the sales and development cycles of its customers. If Nogatech
experiences development, design or manufacturing difficulties that delay or
prevent our timely introduction or marketing of a new chip, Nogatech would miss
the opportunity to have the chip incorporated into a customer's new product,
which would cause it to lose sales.
NOGATECH RELIES UPON ITS SALES OF A SMALL NUMBER OF PRODUCTS, AND THE FAILURE OF
ANY ONE PRODUCT TO BE SUCCESSFUL IN THE MARKET COULD SUBSTANTIALLY REDUCE
NOGATECH'S SALES.
Nogatech currently relies upon sales from two products, the NT1003 and
NT1004 chips, to generate most of its sales. Sales of these products amounted to
41% of Nogatech's sales in 1999, and 54% of its sales in the six months ended
June 30, 2000. Nogatech is developing additional chips, but may not be
successful in doing so. Consequently, if Nogatech's existing products are not
successful, Nogatech's sales could decline substantially, which would adversely
affect its financial performance, and could cause Nogatech to incur significant
losses.
THE LOSS OF ANY OF NOGATECH'S LARGE CUSTOMERS, OR THE FAILURE OF ONE OF THESE
CUSTOMERS TO SELL A SUBSTANTIAL AMOUNT OF ITS PRODUCTS INCORPORATING NOGATECH'S
CHIPS, COULD SUBSTANTIALLY REDUCE NOGATECH'S SALES.
Historically, a substantial portion of Nogatech's sales has come from
purchases by a few large customers. Nogatech expects this trend to continue. For
example, the top three customers accounted for approximately 51% of Nogatech's
sales in 1999, and 53% of its sales in the six months ended June 30, 2000.
Accordingly, Nogatech's future operating results depend on the ability of its
largest customers to sell products incorporating Nogatech's chips and on its
success in selling large quantities of its products to them. Nogatech has not
entered into long-term agreements with any of its customers, nor has it obtained
their commitment to purchase any specific quantities of its products. Nogatech's
customers may cancel or reschedule orders on short notice or may discontinue
using its products at any time. If Nogatech loses a large customer and fails to
add new customers to replace lost sales, its operating results may not recover.
The concentration of Nogatech's sales with a few customers makes it
particularly dependent on commercial factors affecting those customers. For
example, if demand for their products decreases, or if they identify alternative
sources for Nogatech's chips, they may stop purchasing Nogatech's products and
Nogatech's operating results will suffer. These customers often have the
resources to design and/or manufacture products like Nogatech's internally, and
if they elect to do so, they may cease to do
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business with Nogatech. Additionally, if Nogatech's target markets undergo a
consolidation, it may lose existing customers or have difficulties in obtaining
new ones.
NOGATECH RELIES ON OTHERS TO MANUFACTURE ITS CHIPS AND THEREFORE HAS ONLY A
LIMITED ABILITY TO CONTROL MANUFACTURING COSTS, CHIP DELIVERY SCHEDULES OR
MANUFACTURING QUALITY.
Nogatech's chips are manufactured and tested by subcontractors located in
Korea and Japan, each of which provides a single type of chip. An affiliate of
Hyundai in Korea manufactures Nogatech's NT1003 chip, and an affiliate of
Fujitsu in Japan manufactures its NT1004 chip. As a result of Nogatech's
reliance on subcontractors, it cannot directly control chip delivery schedules.
Recently, chip fabricating subcontractors have not had sufficient capacity to
keep up with chip fabrication demand. This has lead to longer chip manufacturing
cycles and long lead times on orders. Any problems that occur and persist in
connection with the delivery, quality or costs of assembly of Nogatech's chips
could cause it to lose customers or increase the expenses that it incurs.
Nogatech's reliance on subcontractors could lead to product shortages or quality
assurance problems. In addition, these manufacturers could significantly
increase the prices that they charge Nogatech, and it may be unable to obtain
alternative sources of supplies. Nogatech may need to hold more inventory than
is immediately required to compensate for potential component shortages or
discontinuation. These factors could lead to an increase in the costs of
manufacturing or assembling Nogatech's chips.
Nogatech is in the process of qualifying additional subcontractors in order
to satisfy the demand for its products. However, qualification of new
subcontractors will require a significant period of time. Therefore, Nogatech
may not be able to obtain new subcontractors within a period of time that is
sufficient to respond to the needs of its customers.
IF NOGATECH FAILS TO ADEQUATELY PROTECT ITS PROPRIETARY TECHNOLOGY, IT MAY BE
MISAPPROPRIATED BY OTHERS, INVALIDATED OR CHALLENGED, WHICH WOULD MATERIALLY
HARM NOGATECH'S ABILITY TO SELL ITS PRODUCTS.
Nogatech's success and ability to compete depends primarily upon its
proprietary technology. Nogatech relies on a combination of trade secrets,
copyright and trademark laws, nondisclosure and other contractual agreements and
technical measures to protect its proprietary rights. Currently, Nogatech has
three U.S. patents pending that relate to its video technology. However,
Nogatech has not obtained patent protection for its proprietary algorithms, and
the absence of patent protection may increase the risk that those algorithms
will be misappropriated.
Nogatech is subject to a number of risks relating to intellectual property
rights, including the following:
- the means by which Nogatech seeks to protect its proprietary rights may
not be adequate to prevent others from misappropriating its technology or
from independently developing or selling technology or products with
features based on or similar to Nogatech's;
- Nogatech's products may be sold in foreign countries that provide less
protection to intellectual property than is provided under U.S., Japanese
or Israeli laws;
- Nogatech's intellectual property rights may be challenged, invalidated,
violated or circumvented and may not provide it with any competitive
advantage; and
- Nogatech's patents pending may not be approved or may be only partially
approved.
IF NOGATECH'S PROPRIETARY TECHNOLOGY INFRINGES UPON THE INTELLECTUAL PROPERTY
RIGHTS OF OTHERS, ITS COSTS COULD INCREASE AND ITS ABILITY TO SELL ITS PRODUCTS
COULD BE LIMITED.
Other companies may hold or obtain patents or may otherwise claim
proprietary rights to technology that is necessary to Nogatech's business.
Particular aspects of Nogatech's technology could
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be found to violate the intellectual property rights of other parties. The
resulting risks include the following:
- if Nogatech violates the intellectual property rights of other parties, it
may be required to modify its products or intellectual property or to
obtain a license to permit their continues use; and
- any future litigation to defend Nogatech against allegations that it has
infringed upon the rights of others could result in substantial costs to
Nogatech, even if Nogatech ultimately prevails.
There are a number of companies that hold patents for various aspects of the
technology incorporated in Nogatech's industry's standards. Nogatech expects
that companies seeking to gain competitive advantages will increase their
efforts to enforce any patent rights that they may have. The holders of patents
from which Nogatech has not obtained licenses may take the position that it is
required to obtain a license from them. Nogatech cannot be certain that it would
be able to negotiate any licenses at an acceptable price. Nogatech's inability
to do so could substantially increase its operating expenses or require it to
seek and obtain alternative sources of technology necessary to produce its
products.
NOGATECH'S PRODUCTS COULD CONTAIN DEFECTS, WHICH COULD RESULT IN DELAYS IN
RECOGNITION OR LOSS OF SALES, LOSS OF MARKET SHARE OR MARKET ACCEPTANCE, OR
CLAIMS AGAINST IT.
Nogatech develops complex chips and related software for video compression
and video image processing. Despite testing by its subcontractors and its
customer, errors may be found in Nogatech's existing or future products. This
could result in, among other things, a delay in recognition or loss of sales,
loss of market shares, failure to achieve market acceptance or substantial
damage to its reputation. Nogatech could be subject to material claims by
customers, and it may need to incur substantial expenses to correct any product
defects. Nogatech does not have product liability insurance to protect it
against losses caused by defects in its products, and it does not have "errors
and omissions" insurance. As a result, any payments that it may need to make to
satisfy its customers may be substantial.
NOGATECH ACCUMULATES INVENTORY TO MINIMIZE THE IMPACT OF SHORTAGES FROM
MANUFACTURERS, AND MAY HAVE OBSOLETE INVENTORY THAT IT MUST WRITE OFF AND SUFFER
RESULTING LOSSES.
Management of Nogatech's inventory is complicated by fluctuations in the
demand for its products; however, Nogatech must have sufficient quantities of
products available to satisfy customers' demand. As a result, Nogatech generally
accumulates inventory for a period of time to minimize the impact of
undercapacity at suppliers' plants. Although Nogatech expects to sell the
inventory within a short period of time, products may remain in inventory for
extended periods of time and may become obsolete because of the passage of time
and the introduction of new products. In these situations, Nogatech would be
required to write off obsolete inventory and would suffer losses accordingly.
NOGATECH RELIES ON A SINGLE DISTRIBUTOR FOR MOST OF ITS SALES IN JAPAN, AND THE
LOSS OF THIS DISTRIBUTOR COULD SUBSTANTIALLY REDUCE ITS SALES.
Nogatech's future performance depends on its ability to compete successfully
in Japan, where all of its sales to date have been made through a single
distributor, Tomen Electronics Corporation. Nogatech does not have a
distribution agreement with Tomen, and Tomen could terminate its relationship
with Nogatech as a result of the merger or at any time. In addition, Tomen is
free to distribute the products of Nogatech's competitors as well as Nogatech's
products, and it is not required to maintain any minimum sales levels. The loss
of Nogatech's relationship with Tomen, or any inability or failure by Tomen to
sell Nogatech's products, could substantially reduce Nogatech's sales. In
addition, Nogatech may not succeed in attracting new distributors for the
Japanese market or in replacing Tomen in the event that Nogatech and Tomen do
not continue their relationship.
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THE NOGATECH SPECIAL MEETING
GENERAL
This proxy statement/prospectus is furnished in connection with the
solicitation of proxies from Nogatech stockholders for use at the Nogatech
special meeting in connection with the proposed merger. This proxy
statement/prospectus is also furnished to Nogatech stockholders as a prospectus
in connection with the issuance of Zoran shares in the merger.
This proxy statement/prospectus and the accompanying form of proxy are first
being mailed to stockholders of Nogatech on or about October 2, 2000.
TIME AND PLACE
The special meeting will be held on October 23, 2000 at Four Times Square,
38th Floor, New York, New York 10036, commencing at 10:00 a.m. Eastern Daylight
Time, and at any adjournment or postponement thereof.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Nogatech special meeting, holders of Nogatech common stock will
consider and vote upon:
- a proposal to approve and adopt the merger agreement and approve the
merger; and
- such other matters as may properly be brought before the Nogatech special
meeting, or any adjournment or postponement thereof, including any motion
to adjourn the Nogatech meeting to a later date to permit further
solicitation of proxies if necessary to establish a quorum or to obtain
additional votes.
RECORD DATE
Nogatech has established the close of business on September 28, 2000, as the
record date to determine Nogatech stockholders entitled to receive notice of and
to vote at the special meeting. At the close of business on the record date,
15,095,896 Nogatech shares were outstanding and entitled to vote at the special
meeting, and were held by approximately 43 record holders. The Nogatech shares
constitute the only outstanding class of Nogatech voting securities. Each holder
of record of Nogatech common stock outstanding on the record date is entitled to
one vote, whether in person or by a properly executed proxy, on each proposal
submitted for vote of the Nogatech stockholders at the Nogatech special meeting.
QUORUM
The presence, in person or by a properly executed proxy, at the special
meeting of a majority of the Nogatech shares outstanding on the record date is
necessary to constitute a quorum to transact business at that meeting. If a
quorum is not present, it is expected that the special meeting will be adjourned
or postponed in order to solicit additional proxies.
At the Nogatech special meeting, in determining whether the proposal to
approve and adopt the merger agreement and approve the merger has received the
requisite number of affirmative votes, abstentions and broker non-votes will
have the same effect as a vote against such proposal. Abstentions and broker
non-votes will be counted for purposes of determining the presence of a quorum.
A "broker non-vote" occurs when a nominee holding shares for a beneficial owner
does not vote on a proposal because, for such proposal, the nominee does not
have discretionary voting power and has not received instructions from such
beneficial owner.
VOTE REQUIRED
The approval and adoption of the merger agreement and the approval of the
merger by Nogatech stockholders will require the affirmative vote of a majority
of the outstanding shares of Nogatech common stock entitled to vote at the
Nogatech special meeting.
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ADJOURNMENT
In the event that there are not sufficient votes to approve and adopt the
merger agreement and approve the merger at the time of the Nogatech special
meeting, such proposal may not be approved unless the Nogatech special meeting
is adjourned in order to permit further solicitation of proxies from Nogatech
stockholders. Proxies that are being solicited by Nogatech's board of directors
grant the discretionary authority to vote for any such adjournment. If it is
necessary to adjourn the Nogatech special meeting, and such adjournment is for a
period of less than 30 days, no notice of the time and place of the adjourned
meeting is required to be given to Nogatech stockholders other than an
announcement of such time and place at the Nogatech special meeting. A majority
of the voting power represented and voting at the Nogatech special meeting is
required to approve any such adjournment whether or not a quorum is present at
the Nogatech special meeting.
PROXIES
All shares of Nogatech common stock that are entitled to vote and are
represented at the Nogatech special meeting, by properly executed proxies
received prior to or at the special meeting and before the occurrence of the
vote, and not revoked, will be voted at the Nogatech special meeting in
accordance with the instructions indicated on such proxies. If no instructions
are indicated, such proxies will be voted FOR approval and adoption of the
merger agreement and approval of the merger.
If any other matters are properly presented for consideration at the special
meeting, including, among other things, consideration of a motion to adjourn the
special meeting (including, without limitation, for purposes of soliciting
additional proxies) to another time and/or place, the persons named in the
enclosed form of proxy and acting thereunder will have discretion to vote on
such matters in accordance with their best judgment.
The persons named as proxies in the accompanying form of proxy are officers
of Nogatech. Any proxy given pursuant to this proxy statement/prospectus may be
revoked by the person giving it at any time before it is voted. Proxies may be
revoked by:
- filing with the Secretary of Nogatech, at or before the taking of the vote
at the Nogatech special meeting, a written notice of revocation bearing a
later date than the proxy;
- duly executing a later dated proxy relating to the same shares and
delivering it to the Secretary of Nogatech, before the taking of the vote
at the special meeting; or
- attending the Nogatech special meeting and voting in person.
All expenses relating to this proxy statement/prospectus, including the cost
of preparing and mailing this proxy statement/prospectus, will be borne equally
by Zoran and Nogatech. In addition to solicitation by use of the mails, proxies
may be solicited by directors, officers and employees of Nogatech, in person or
by telephone, telegram or other means of communication. Such directors, officers
and employees will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses in connection with such solicitation. Nogatech
has retained Innisfree M&A Incorporated, for assistance in connection with the
solicitation of proxies for the Nogatech special meeting at a cost of
approximately $7,000, plus reasonable out-of-pocket expenses. Arrangements also
will be made with custodians, nominees and fiduciaries for forwarding of proxy
solicitation materials to beneficial owners of shares held of record by such
custodians, nominees and fiduciaries, and Nogatech will reimburse such
custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith.
NOGATECH STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS.
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THE MERGER
This section describes material aspects of the proposed merger, including
the merger agreement. While we believe that the description covers the material
terms of the merger and the merger agreement, this summary may not contain all
of the information that is important to you. You should read carefully this
entire document and the other documents to which we refer for a more complete
understanding of the merger and the merger agreement.
STRUCTURE OF THE MERGER
In accordance with the merger agreement and Delaware law, Zoom Acquisition
Corporation, a wholly-owned subsidiary of Zoran, was formed for the purpose of
the merger and will merge with and into Nogatech. Nogatech will be the surviving
corporation in the merger and will become a wholly-owned subsidiary of Zoran. In
the merger, each share of Nogatech common stock, par value $0.001 per share,
outstanding will be converted into the right to receive 0.166 shares of Zoran
common stock. No fractional shares of Zoran common stock will be issued in the
merger, and cash equal to the value of any fraction of a share will be paid in
place thereof. All shares of Nogatech common stock held in the treasury of
Nogatech or by Zoran or Zoom will be canceled.
The merger will become effective when a certificate of merger is filed with
the Secretary of State of Delaware or at such other time as will be specified in
the certificate of merger. The effective time of the merger will occur as soon
as practicable after the last of the conditions in the merger agreement has been
satisfied or waived. We expect the merger to become effective in the fourth
quarter of 2000.
EXCHANGE OF NOGATECH STOCK CERTIFICATES FOR ZORAN STOCK CERTIFICATES
Promptly after the merger is completed the exchange agent will mail
transmittal forms and exchange instructions to you to be used to surrender and
exchange certificates evidencing shares of Nogatech common stock for
certificates evidencing the shares of Zoran common stock, and cash in lieu of
any fractional share, to which you have become entitled. When you deliver your
Nogatech stock certificates to the exchange agent along with a properly executed
letter of transmittal and any other required documents, your Nogatech stock
certificates will be canceled and you will receive Zoran stock certificates
representing the number of full shares of Zoran common stock to which you are
entitled under the Merger Agreement.
You will receive payment in cash, without interest, in place of any
fractional shares of Zoran common stock which otherwise would have been issuable
to you as a result of the merger.
Please do not submit your Nogatech stock certificates for exchange unless
and until you receive the transmittal instructions and a form of letter of
transmittal from the exchange agent.
You are not entitled to receive any dividends or other distributions on
Nogatech common stock after the merger is completed.
If there is any dividend or other distribution on Zoran common stock with a
record date after the merger and a payment date prior to the date you surrender
your Nogatech stock certificates in exchange for Zoran stock certificates, you
will receive such dividend or distribution with respect to the whole shares of
Zoran common stock issued to you promoptly after such shares are issued.
Zoran will issue a Zoran stock certificate or a check in place of a
fractional share in a name other than that in which a surrendered Nogatech stock
certificate is registered only if you present the exchange agent with all
documents required to show and effect the unrecorded transfer of ownership, and
show that you paid any applicable stock transfer taxes or that such transfer
taxes were not applicable.
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BACKGROUND OF THE MERGER
During early July 2000, Messrs. Levy Gerzberg, Zoran's President and Chief
Executive Officer and a member of its board of directors, and Isaac Shenberg,
Zoran's Senior Vice President, Business Development, discussed the possibility
of strategic collaboration and potential acquisition with Nogatech. During the
week of July 10, 2000, Messrs. Arie Kahana, Zoran's Strategic Consultant, Nathan
Hod, Nogatech's Chairman of the Board and Avraham Fischer, a member of
Nogatech's board of directors, met to discuss in principle the potential
business combination between Nogatech and Zoran.
On July 16, 2000, based on Nogatech's positive response to such discussion,
Messrs. Shenberg and Kahana met with Mr. Hod to discuss the merits and
feasibility of strategic collaboration and the possibility of a merger between
the companies. The discussion explored possible synergies between the current
and future plans of both companies, economy-of-scale advantages in unifying the
operations of both companies (including sales and manufacturing) and
acceleration of the development efforts of both companies. Both parties
expressed strong interest in pursuing the discussions.
Between July 17 and July 18, 2000, Messrs. Gerzberg, Shenberg, Aharon
Aharon, Zoran's Senior Vice President and Chief Operating Officer, and Karl
Schneider, Zoran's Vice President, Finance and Chief Financial Officer,
discussed the merits of entering into a strategic relationship with or merger
transaction with Nogatech. The summary of this discussion was presented and
discussed at a meeting of Zoran's board of directors on July 19, 2000.
Zoran's board of directors accepted the recommendation of Zoran's management
to continue pursuing in detail a combination with Nogatech.
Between July 17 and July 31, 2000, Mr. Kahana met with Mr. Hod and received
additional information from Nogatech required to assess Nogatech's products,
customers and organization.
On August 7, 2000, Messrs. Gerzberg, Shenberg and Kahana met with Mr. Hod
and began detailed discussion of the terms and conditions of the potential
business combination. At this meeting the parties also signed a confidentiality
agreement and began the mutual disclosure of confidential information.
Between August 7 and August 11, 2000, Zoran began its detailed technical due
diligence process. Messrs. Aharon, Alon Ironi, Zoran's Vice President
Engineering, Shmuel Farkash, Zoran's Vice President for Business Development,
Kahana and Shenberg met with Messrs. Arie Heiman, Nogatech's President, Chief
Executive Officer and Director and Yaron Garmazi, Nogatech's Chief Financial
Officer, for several days of meetings. During the meetings and subsequent
information exchange, details of Nogatech's technology, customers, forecasts and
organization were presented and reviewed.
Between August 7 and August 11, 2000, Nogatech began its financial due
diligence. Messrs. Hod and Garmazi received financial information from Zoran.
On August 9, 2000, Nogatech contacted WR Hambrecht + Co., LLC to advise the
Nogatech board of directors on the fairness from a financial point of view of
the aggregate merger consideration to be received by the Nogatech stockholders
in connection with the proposed transaction.
On August 10, 2000, Zoran transmitted an initial term sheet to Nogatech.
This term sheet was discussed in general terms during the following week between
Messrs. Shenberg and Hod.
On August 15, 2000, Nogatech's board of directors met to hear a presentation
by Zoran's officers concerning Zoran's business and the proposed combination
with Nogatech. Nogatech's board of directors discussed the merits of the
proposed transaction and authorized Mr. Hod to continue negotiating Zoran's
proposal, including the negotiation of the terms of a possible transaction, and
to continue with the conduct of due diligence.
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At various times between August 10 and August 21, 2000, Zoran's Japan Office
Manager and three other Zoran sales managers obtained information about
Nogatech's products, customers and market position. Mr. Kahana, on behalf of
Zoran, contacted Nogatech's key customers to obtain feedback about Nogatech's
technology, support and prospects. The results of Zoran's due diligence
investigation were summarized in a due diligence report that was updated during
this period.
From August 19 though August 23, 2000, the parties conducted formal
negotiation of the merger agreement.
On August 22, 2000, Nogatech's board of directors met to receive an update
on the progress of negotiations of the merger agreement and to consider further
the terms of the transaction.
On August 23, 2000, Messrs. Aharon and Shenberg met with Messrs. Heiman,
Arie Haiut, Nogatech's Chief Technical Officer, and Arie Gavriely, Nogatech's
Vice President Engineering, to discuss the merger.
On August 23, 2000, Nogatech's board of directors met and reviewed the
proposed transaction terms. At that meeting, WR Hambrecht rendered its oral
opinion, subsequently confirmed in writing, that the aggregate merger
consideration to be received by the Nogatech stockholders was fair from a
financial point of view to the Nogatech stockholders. Nogatech's board of
directors unanimously approved the proposed merger agreement.
On August 23, 2000, Zoran's board of directors met and reviewed the proposed
transaction terms and unanimously approved the proposed merger agreement.
On August 23, 2000, Zoran and Nogatech signed the definitive merger
agreement and issued a press release announcing the transaction.
ZORAN'S REASONS FOR THE MERGER
Zoran is proposing to acquire Nogatech in order to accelerate Zoran's
penetration into the existing markets and open new markets in video streaming.
Both Zoran and Nogatech are developing MPEG 4 streaming technology for
applications that include mobile appliances such as digital cameras, digital
camcorders and mobile phones, and home entertainment devices such as digital
video disc players and set top boxes.
Zoran believes that the combined company will be able to serve customers
more effectively. Specifically, Zoran believes that the merger would have the
following benefits:
- Zoran could leverage Nogatech's engineering resources and advanced MPEG 4
algorithm compression technology with Zoran's existing digital video and
imaging platforms;
- Zoran would be able to develop a downstream product price point strategy
with expanded product offerings, combining Zoran's more complex products
with Nogatech's consumer-based products;
- a broader offering of products would enable the combined company to
respond more quickly to its customers' specifications and to reduce
product design cycle times;
- Zoran could use Nogatech's technology to initiate and expand its presence
in key compression and decompression markets, including video capture
devices, PC-TV and security systems;
- the combined company will be able to eliminate a significant level of
selling, general and administrative costs;
- Zoran will be able to broaden its geographical presence in Israel to
attract qualified engineering personnel;
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- the combined company could share intellectual property and focus
additional resources on new products and technology solutions for
customers; and
- the combined company will be better able to respond quickly to
technological change, increased competition and market demands in an
industry undergoing rapid innovation and change.
Although Zoran believes the merger could have the benefits described above,
there can be no assurance that any of these benefits will be achieved and the
failure to achieve one or more of these benefits may have a material adverse
effect on the combined company's business, results of operations and financial
condition.
NOGATECH'S BOARD OF DIRECTORS' REASONS FOR THE MERGER AND CONSIDERATION AND
APPROVAL OF THE TRANSACTION
Nogatech's board of directors believes the merger is fair and in the best
interests of Nogatech and its stockholders and recommends to the stockholders of
Nogatech that they vote FOR the proposed merger.
In reaching its decision, Nogatech's board of directors consulted with its
financial and legal advisors, and considered a variety of factors, including the
following:
- The opinion of WR Hambrecht that the aggregate merger consideration to be
received by Nogatech stockholders pursuant to the merger agreement is
fair, from a financial point of view, to the Nogatech stockholders.
- That the merger is expected to qualify as a reorganization for purposes of
the U.S. Internal Revenue Code and that as such, pursuant to the U.S.
Internal Revenue Code, a stockholder of Nogatech who exchanges all of such
stockholder's Nogatech common stock for Zoran common stock in the merger
will not recognize any gain or loss as a result of the exchange.
- That the merger is conditioned on the receipt of a tax pre-ruling by the
Israel Tax Commission that will defer the obligation of Israeli holders of
Nogatech common stock and options to acquire Nogatech common stock to pay
Israeli capital gains tax on the transaction contemplated by the merger
agreement.
- Information concerning the financial performance and condition, prospects
and business operations of Nogatech and Zoran.
- The fact that Zoran intends to maintain Nogatech's business operations and
facilities in Israel and to continue to employ Nogatech's employees.
- The opportunity for Nogatech's stockholders to participate, as
stockholders of Zoran, in a larger company, including the opportunity to
participate in the value that may be created through the possible
synergies involved in combining the existing engineering resources and
research and development centers of Nogatech and Zoran in the fields of
video compression design and chip technology.
- The value of the Zoran shares to be received by Nogatech's stockholders
may increase or decrease as a result of fluctuations in the price of the
Zoran shares and that any such increase or decrease in value will not be
limited by any "collar" arrangements, and as such, the value of the
transaction to Nogatech's stockholders will depend on the price of Zoran
common stock on the closing date.
- The fact that the price per share to be paid for Nogatech common stock,
based on the exchange ratio and the closing price of Zoran common stock on
August 23, 2000, the date of the merger agreement, was below the initial
public offering price of the Nogatech common stock, although
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it was higher than the price at which the Nogatech common stock has traded
at any time since the date of the pricing of the initial public offering.
- The fact that the merger must be approved by the affirmative vote of the
holders of at least a majority of the issued and outstanding shares of
Nogatech common stock.
- The fact that Nogatech and Zoran are both working on the next generation
video compression chip technology, based on the MPEG 4 standard, which is
projected to have large growth prospects in the digital camera, third
generation cellular, and other markets. The combined company may be able
to introduce MPEG 4 based video compression chips to market on a more
timely basis than either Nogatech or Zoran independently.
- The long-term as well as the short-term interests of Nogatech, as well as
the interests of Nogatech's employees, customers, creditors and suppliers.
- The provisions of the merger agreement that limit Nogatech's ability to
solicit other offers for Nogatech or negotiate or exchange information
with potential bidders and the requirement that Nogatech pay Zoran a
termination fee of up to $6 million if the merger were terminated for a
superior proposal.
The foregoing list of factors considered by Nogatech's board of directors is
not exhaustive but does include substantially all material factors considered by
Nogatech's board of directors. Nogatech's board of directors did not quantify or
attach any particular relative or specific weight to the various factors it
considered in reaching its determination that the proposed merger is fair to and
in the best interests of Nogatech and its stockholders. Rather, Nogatech's board
of directors viewed its position and recommendation as being based on the
totality of the information presented to and considered by it. In addition,
individual members of Nogatech's board of directors may have assigned different
weights to different factors.
OPINION OF FINANCIAL ADVISOR TO NOGATECH
Pursuant to an engagement letter dated August 9, 2000, Nogatech engaged
WR Hambrecht to act as financial advisor to Nogatech and to render an opinion to
Nogatech's board of directors as to whether the aggregate merger consideration
to be received by the stockholders of Nogatech pursuant to the merger is fair to
such stockholders from a financial point of view as of the date of the merger
agreement. At the August 23, 2000 meeting of Nogatech's board of directors, WR
Hambrecht delivered its oral opinion, subsequently confirmed in a written
opinion also dated August 23, 2000, to the effect that, as of August 23, 2000,
based on and subject to the assumptions, limitations and qualifications set
forth in its written opinion, the "consideration," as defined in the WR
Hambrecht opinion, to be received by the stockholders of Nogatech pursuant to
the merger was fair to such stockholders from a financial point of view.
The full text of the WR Hambrecht opinion, which sets forth assumptions
made, procedures followed, matters considered, limitations on and scope of the
review by WR Hambrecht in rendering its opinion, is attached to this proxy
statement/prospectus as Annex C. The WR Hambrecht opinion is directed only to
the fairness of the consideration to be received by Nogatech stockholders from a
financial point of view, has been provided to Nogatech's board of directors in
connection with its evaluation of the merger, does not address any other aspect
of the merger and does not constitute a recommendation to any holder of Nogatech
common stock as to how a stockholder should vote on the merger. The summary of
the WR Hambrecht opinion set forth in this proxy statement/prospectus is
qualified in its entirety by reference to the full text of such opinion. Holders
of Nogatech's common stock are urged to read the WR Hambrecht opinion carefully
and in its entirety.
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In conducting its investigation and analysis and in arriving at the WR
Hambrecht opinion, WR Hambrecht reviewed information and took into account
financial and economic factors as it deemed relevant under the circumstances. In
that connection, WR Hambrecht, among other things:
- reviewed publicly available information and certain internal information,
primarily financial in nature, including but not limited to projections,
concerning the business and operations of Nogatech and Zoran, furnished to
it for purposes of its analysis;
- reviewed the financial terms and conditions of the draft merger agreement,
dated August 23, 2000, in the form presented to Nogatech's board of
directors;
- reviewed certain publicly available information concerning the trading of,
and the trading market for, Nogatech common stock and Zoran common stock;
- compared the historical market prices and trading activity of Nogatech's
and Zoran's common stock with those of other publicly traded companies
that WR Hambrecht deemed relevant;
- compared the financial position and operating results of Nogatech and
Zoran with those of other publicly traded companies that WR Hambrecht
deemed relevant;
- compared the proposed financial terms of the merger, including prices and
premiums, with the financial terms of certain other recent and comparable
business combinations that WR Hambrecht deemed relevant;
- discussed with representatives of management of Nogatech and Zoran certain
information of a business and financial nature regarding Nogatech and
Zoran, including their respective historical and current financial
condition and operating results, as well as their future prospects;
- made inquiries regarding and discussed the merger and merger agreement and
other matters related to the merger with Nogatech's legal counsel; and
- conducted such other financial studies, analysis and investigations as WR
Hambrecht deemed appropriate for purposes of rendering its opinion.
In rendering its opinion, WR Hambrecht has not assumed any obligation
independently to verify the foregoing information and has relied upon and
assumed the accuracy and completeness in all material respects of all of the
financial and other information that was available to it from public sources and
that was provided to it by Nogatech and Zoran or their respective
representatives. With respect to the financial projections for Nogatech and
Zoran provided to WR Hambrecht by their respective managements, WR Hambrecht
relied on representations that the projections were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
management of Nogatech and Zoran as to the future operating and financial
performance of Nogatech and Zoran, respectively. WR Hambrecht expressed no
opinion with respect to these projections or the assumptions upon which they
were based.
WR Hambrecht assumed that there have been no material changes in Nogatech's
or Zoran's assets, financial condition, results of operations, business or
prospects since the respective dates of their last financial statements made
available to WR Hambrecht. WR Hambrecht relied on advice of counsel to Nogatech
as to all legal matters with respect to Nogatech, the merger and the merger
agreement.
WR Hambrecht assumed that the merger would be consummated in a manner that
complies in all respects with the applicable provisions of the Securities Act
and the Exchange Act and all other applicable federal and state statutes, rules
and regulations. In addition, WR Hambrecht was informed by Nogatech, and
assumed, that the merger will be recorded as a purchase under generally accepted
accounting principles.
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WR Hambrecht did not assume any responsibility for reviewing patent
applications, technology license agreements, individual credit files, etc. or
for making an independent evaluation, appraisal or physical inspection of any
assets or liabilities (contingent or otherwise) of Nogatech or Zoran, nor has WR
Hambrecht been furnished with any such appraisals.
WR Hambrecht necessarily based its opinion on economic, market and other
conditions as they existed on, and on the information made available to WR
Hambrecht as of August 23, 2000. WR Hambrecht states in its opinion that
although subsequent developments may affect the conclusions reached in its
opinion, WR Hambrecht does not have any obligation to update, revise or reaffirm
the WR Hambrecht opinion.
WR Hambrecht further assumed that the merger will be consummated in
accordance with the terms described in the merger agreement, without any further
amendments thereto, and without any waiver if any of the conditions to its
obligations thereunder. WR Hambrecht also assumed that in the course of
obtaining the necessary regulatory approval for the merger, no restrictions will
be imposed that could have a material adverse effect on the contemplated
benefits of the merger.
SUMMARY OF FINANCIAL ANALYSES PERFORMED BY WR HAMBRECHT. The following is a
summary of the financial analyses WR Hambrecht presented to Nogatech's board of
directors on August 23, 2000 in connection with the preparation of WR
Hambrecht's opinion. No company or transaction WR Hambrecht used in the analyses
described below is directly comparable to Nogatech or Zoran or the contemplated
transaction. In addition, the matters considered by WR Hambrecht in arriving at
its opinion are based on numerous macroeconomic, operating and financial
assumptions with respect to industry performance, general business and economic
conditions, many of which are beyond the control of Nogatech and Zoran, and
involve application of complex methodologies and educated judgment. Any
estimates incorporated in the analyses performed by WR Hambrecht are not
necessarily indicative of actual past or future results or values, which may be
significantly more or less favorable than these estimates. Estimated values do
not purport to be appraisals and do not necessarily reflect the prices at which
businesses or companies may be sold in the future.
CONTROL PREMIUM ANALYSIS. According to WR Hambrecht, the Zoran offer price
of $10.458 per Nogatech share implied by the negotiated exchange ratio of 0.166x
and the closing price of Zoran stock on August 23, 2000 of $63.000 per share
represents a 60.9% premium to Nogatech's closing stock price of $6.500 per share
on August 23, 2000. Using the last ten days trading average price of Zoran's
stock from August 23, 2000 of $51.872 per share and the exchange ratio of
0.166x, the Zoran offer represents a 32.5% premium to the August 23, 2000
closing price of $6.500 per share of Nogatech common stock. Using the last
30 days trading average price of Zoran's stock from August 23, 2000 of $50.260
per share and the exchange ratio of .166x, the Zoran offer represents a 28.4%
premium to the August 23, 2000 closing price of $6.500 per share of Nogatech
common stock. WR Hambrecht analyzed the average control premium paid in
comparable merger transactions and determined that the average control premium
paid in comparable merger transactions is 22.7%.
COMPARABLE COMPANY ANALYSIS. To provide contextual data and comparative
market information. WR Hambrecht compared selected financial data of Nogatech
with similar data of selected publicly traded digital media consumer integrated
circuit vendors. These companies were:
- C-Cube Microsystems, Inc.;
- DSP Group, Inc.;
- Genesis Microchip, Inc.;
- Sage, Inc.; and
- Zoran Corporation.
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WR Hambrecht compared the ratio of enterprise values of these companies to
their latest twelve months revenues, and projected revenues for calendar year
2000 and 2001. The enterprise value of a company is equal to the value of its
fully diluted equity value plus debt, plus minority interests, plus preferred
stock, less cash and cash equivalents. "Latest twelve months" means the latest
twelve months for which financial data for the company at issue has been
reported. Projections for Nogatech were based upon estimates provided to WR
Hambrecht by the management of Nogatech. Projections for the comparable
companies were based upon FactSet consensus estimates that are comprised of
publicly available equity analyst research estimates.
Zoran's closing price of $63.00 per share (as of August 23, 2000) and the
exchange ratio of 0.166x, implies an enterprise value for Nogatech of
$121.7 million and multiples of 10.1x for the ratio of enterprise value to
latest twelve months revenues ending June 30, 2000, 8.3x for the ratio of
enterprise value to the calendar year 2000 estimated revenue and 5.0x for the
ratio of enterprise value to calendar 2001 estimated revenue. Those multiples
were compared to those of the publicly traded companies listed above, such
companies having average multiples of 8.1x for the ratio of enterprise value to
latest twelve month revenue, 6.8x for the ratio of enterprise value to calendar
year 2000 estimated revenue and 4.7x for the ratio of enterprise value to
calendar year 2001 estimated revenue.
SELECTED MERGER AND ACQUISITION TRANSACTIONS. The comparable transactions
analysis provides a market benchmark based on the consideration paid in selected
comparable digital media consumer technology merger and acquisition
transactions. For this analysis, WR Hambrecht reviewed publicly available
information to determine the multiples paid in certain transactions that were
publicly announced between October 21, 1996 and May 16, 2000. These transactions
and the months in which they were announced were:
- Zoran Corporation's acquisition of CompCore Multimedia, Inc.
(October 1996);
- Winbond Electronic Corporation's acquisition of the remaining 85.8%
interest of Information Storage Devices Inc. that it did not already own.
(September 1998);
- Genesis Microchip, Inc.'s acquisition of Paradise Electronics, Inc.
(January 1999);
- ATI Technologies, Inc.'s acquisition of ArtX Inc. (February 2000);
- Sage, Inc.'s acquisition of Faroudja, Inc. (February 2000);
- Silicon Image, Inc.'s acquisiton of DVDO, Inc. (March 2000); and
- Globespan, Inc.'s acquisition of iCompression, Inc. (May 2000).
WR Hambrecht calculated the consideration paid of the relevant transactions
in relation to certain historical financial criteria (including revenues, EBITDA
and EBIT) of the acquired business for the last twelve-month periods prior to
the announcement of their respective acquisitions. WR Hambrecht then determined
the implied acquisition multiple for the Nogatech transaction as 10.0x
consideration paid to latest twelve month revenues.
CONTRIBUTION ANALYSIS. Based on information furnished by Nogatech, public
filings, press releases and other publicly available information of both
companies, WR Hambrecht calculated the relative conributions of each of Nogatech
and Zoran to the combined company's revenue. WR Hambrecht determined that
Nogatech would have contributed 12.6% of the revenue for the combined company in
1999. Nogatech is expected to contribute 13.6% of the total combined company's
estimated revenue and 9.0% of the total combined company's estimated pre-tax
income for the calendar year 2000. Nogatech is expected to contribute 14.4% of
the total combined company's estimated pre-tax income for the calendar year
2001. Nogatech stockholders will own approximately 14.1% of the combined
company.
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ENGAGEMENT LETTER. Pursuant to the terms of the WR Hambrecht engagement
letter, WR Hambrecht was retained by Nogatech to render a fairness opinion to
Nogatech's board of directors with respect to the merger. Under the WR Hambrecht
engagement letter, Nogatech has agreed to pay WR Hambrecht a fee of $400,000, of
which $200,000 was due upon delivery of the WR Hambrecht opinion and the
remaining $200,000 will be due upon the release of this proxy
statement/prospectus, but no later than November 1, 2000. In addition to the WR
Hambrecht opinion, Nogatech agreed to reimburse WR Hambrecht, upon WR
Hambrecht's request from time to time, for all reasonable out-of-pocket expenses
(including the reasonable fees and disbursements of WR Hambrecht's counsel) that
WR Hambrecht incurred in connection with its engagement thereunder. Nogatech
also agreed to indemnify and hold harmless WR Hambrecht, its affiliates, and
each of their directors, officers, agents, advisors, consultants, employees and
controlling persons in connection with their engagement, including liaiblities
under U.S. federal securities laws.
As part of its investment banking activities, WR Hambrecht is regularly
engaged in the evaluation of businesses and their securities in connection with
mergers and acquisitions, restructuring and valuations for coroprate or other
purposes. WR Hambrecht was not retained as an advisor or agent to the
stockholders of Nogatech or any other person. Nogatech did not impose any
restrictions or limitations upon WR Hambrecht with respect to the investigations
made or the procedures followed by WR Hambrecht in rendering its opinion.
OTHER RELATIONSHIPS. WR Hambrecht has performed investment banking and
other services for Nogatech in the past and has been compensated for such
services. Most recently, WR Hambrecht served as lead manager of Nogatech's
$42 million initial public offering of common stock in May 2000. WR Hambrecht
has advised Nogatech that, in the ordinary course of business, WR Hambrecht and
its affiliates may actively trade or hold the debt and equity securities of
Nogatech and Zoran for their own account and for the account of their customers
and, accordingly, may at any time hold a long or short position in these
securities.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of the date of the merger agreement, directors and executive officers of
Nogatech and their affiliates beneficially owned an aggregate of 2,855,010
shares of Nogatech common stock (including 637,264 shares of Nogatech common
stock subject to Nogatech options). Based upon the last reported sale price of
Zoran common stock on September 28, 2000 of $51.31, the aggregate dollar value
of the shares of Zoran common stock to be received in the merger by the
executive officers and directors of Nogatech is approximately $24.3 million.
Messrs. Arie Heiman and Nathan Hod, who hold in the aggregate approximately
10.5% of the shares of Nogatech common stock outstanding as of the Nogatech
record date, have entered into a voting agreement with Zoran pursuant to which
each has agreed to vote in favor of the merger. In addition, as a result of
completion of the merger, unvested options held by two Nogatech officers will
immediately vest, and these officers, if terminated, will also be entitled to
severance compensation.
As a result of the foregoing transactions and agreements, the directors and
executive officers of Nogatech have personal interests in the merger that are
not identical to the interests of other Nogatech stockholders.
EMPLOYMENT AGREEMENT
Mr. Heiman, President and Chief Executive Officer of Nogatech, has entered
into an employment agreement with a wholly-owned subsidiary of Zoran which will
become effective upon completion of the merger. Under this agreement,
Mr. Heiman will become a senior vice president of a wholly-owned subsidiary of
Zoran and will receive an annual salary to be paid in New Israeli Shekels in an
amount substantially similar to his current salary with Nogatech, stock options
exercisable for shares of Zoran
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common stock which will be subject to meeting performance metrics to be
established by Zoran and Mr. Heiman and be eligible to participate in Zoran's
executive bonus program. Under his agreement, Mr. Heiman may continue to
participate in certain other business activities. This agreement will include
non-compete and non-solicitation provisions that will require that for some
period following termination of Mr. Heiman's employment with Zoran, he will not
directly or indirectly engage or participate in the ownership, management,
operation, sales, control or other activities of any business competitive with
the business of Zoran. In addition, for some period following the termination of
his employment with Zoran, Mr. Heiman will not be permitted directly or
indirectly to recruit, induce or attempt to persuade any person who is an
employee, sales representative or consultant of Zoran to terminate his
relationship with Zoran.
NOGATECH VOTING AGREEMENT
Pursuant to a voting agreement, Mr. Heiman, a director and the President and
Chief Executive Officer of Nogatech, Nathan Hod, Chairman of the Board of
Nogatech and a stockholder of Nogatech, Ophir Holdings Ltd., an Israeli company
of which Yirmiyahu Kaplan, a director of Nogatech, is managing director, who own
an aggregate of 2,087,257 outstanding shares of Nogatech common stock,
representing approximately 13.8% of the shares of Nogatech common stock based
upon 15,095,291 shares outstanding as of August 23, 2000, have agreed that,
prior to the expiration date of the voting agreement, they will vote their
shares of Nogatech common stock:
- for approval of the merger agreement and any actions required to
facilitate its completion;
- against any action or agreement that would in any way hinder or violate
the merger agreement; and
- against extraordinary corporate transactions such as business
combinations, asset sales or transfers, and changes to Nogatech's
corporate structure.
The voting agreement also prohibits the stockholders from transferring any
securities of Nogatech owned by them prior to the expiration date of the voting
agreement. The form of the voting agreement is attached to this proxy
statement/prospectus as Annex B.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion addresses certain material U.S. federal income tax
considerations of the merger that are generally applicable to holders of
Nogatech common stock. Nogatech stockholders should be aware that the following
discussion does not deal with all U.S. federal income tax considerations that
may be relevant to particular Nogatech stockholders in light of their particular
circumstances, such as stockholders who are dealers in securities, are non-U.S.
persons, acquired their Nogatech common stock through stock option or stock
purchase programs or in other compensatory transactions or hold their shares as
part of a straddle, hedge or other risk reduction strategy. In addition, the
following discussion does not address the tax consequences of transactions
effectuated prior to or after the merger (whether or not such transactions are
in connection with the merger) including, without limitation, the exercise of
options or warrants to purchase Nogatech common stock in anticipation of the
merger. Finally, no foreign, state or local tax considerations are addressed
herein. ACCORDINGLY, NOGATECH STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER AND RELATED
TRANSACTIONS, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE MERGER AND SUCH RELATED TRANSACTIONS.
The following discussion is based upon the Internal Revenue Code of 1986, as
amended, applicable Treasury Regulations, judicial authority and administrative
rulings and practice, all as of the date
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hereof. The Internal Revenue Service is not precluded from adopting a contrary
position. In addition, there can be no assurance that future legislative,
judicial or administrative changes or interpretations will not adversely affect
the accuracy of the statements and conclusions set forth herein. Any such
changes or interpretations could be applied retroactively and could affect the
tax consequences of the merger to Zoran, Nogatech and/or their respective
stockholders.
Neither Zoran nor Nogatech has requested a ruling from the IRS in connection
with the merger. However, it is a condition of the respective obligations of
Zoran and Nogatech to consummate the merger that Zoran and Nogatech receive
confirming tax opinions from their respective legal counsel to the effect that
for federal income tax purposes, the merger will constitute a reorganization.
These closing opinions, which are collectively referred to herein as the "Tax
Opinions," neither bind the IRS nor preclude the IRS from adopting a contrary
position. The Tax Opinions will be subject to certain assumptions, exceptions
and qualifications and will be based on the truth and accuracy of certain
representations of Zoran, Nogatech, and certain Nogatech stockholders, including
representations contained in certain certificates of the respective managements
of Zoran, Nogatech and Zoom Acquisition Corporation.
Assuming that the merger does qualify as a reorganization within the meaning
of Section 368(a) of the Code, the following tax consequences should generally
result:
- No gain or loss will be recognized by the holders of Nogatech common stock
upon the receipt of Zoran common stock solely in exchange for Nogatech
common stock in the merger (except to the extent of cash received in lieu
of fractional shares);
- The aggregate tax basis of the Zoran common stock to be received by the
Nogatech stockholders in the merger (including any fractional shares of
Zoran common stock not actually received) will be the same as the
aggregate tax basis of the Nogatech common stock surrendered in exchange
therefor;
- The holding period of the Zoran common stock received by each Nogatech
stockholder in the merger will include the period during which the
Nogatech common stock surrendered in exchange therefor was held, provided
that the Nogatech common stock so surrendered is held as a capital asset
at the effective time;
- Cash payments received by Nogatech stockholders in lieu of receipt of a
fractional share of Zoran common stock will be treated as if such
fractional share had been issued in the merger and then redeemed by Zoran
for cash with the recipient generally recognizing capital gain or loss
equal to the difference between the cash payment received and the Nogatech
stockholders' basis in such fractional share; and
- None of Zoran, Zoom Acquisition Corporation or Nogatech will recognize
gain or loss solely as a result of the merger.
Nogatech stockholders will be required to attach a statement to their tax
returns for the year of the merger that contains the information listed in
Treasury Regulations Section 1.368-3(b). Such statement must include the
stockholder's tax basis in the stockholder's Nogatech common stock and a
description of the Zoran common stock received.
NO APPRAISAL RIGHTS
Section 262 of the Delaware General Corporation Law, or DGCL, provides
appraisal rights, sometimes referred to as "dissenters' rights," to stockholders
of Delaware corporations in certain
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situations. However, Section 262 appraisal rights are not available to
stockholders of a corporation, such as Nogatech:
- whose securities are listed on a national securities exchange or are
designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.,
or NASD; and
- whose stockholders are not required to accept in exchange for their stock
anything other than stock of another corporation listed on a national
securities exchange or an interdealer quotation system by the NASD and
cash in lieu of fractional shares.
Because Nogatech common stock is traded on such a system, The Nasdaq
National Market, and because the Nogatech stockholders are being issued Zoran
common stock, which is also traded on The Nasdaq National Market, stockholders
of Nogatech will not have appraisal rights with respect to the merger. The DGCL
does not provide appraisal rights to stockholders of a corporation, such as
Zoran, which issues shares in connection with a merger but is not itself a
constituent corporation in the merger.
U.S. REGULATORY REQUIREMENTS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
or HSR Act, and the rules promulgated thereunder by the Federal Trade
Commission, or FTC, the merger may not be completed until notifications have
been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice, or Antitrust Division, and
specified waiting period requirements have been satisfied. Zoran and Nogatech
filed notification and report forms under the HSR Act with the FTC and the
Antitrust Division on September 13, 2000, together with a request for early
termination of the applicable 30-day waiting period. On September 26, 2000,
Zoran and Nogatech received notification that the FTC granted early termination
of the waiting period under the HSR Act. At any time before or after completion
of the merger, notwithstanding the expiration or early termination of the HSR
Act waiting period, the Antitrust Division or the FTC could take such action
under the antitrust laws as it deems necessary or desirable in the public
interest, including seeking to enjoin the consummation of the merger or seeking
divestiture of substantial assets of Zoran or Nogatech. In addition, at any time
before or after the completion of the merger, and notwithstanding the expiration
or early termination of the HSR Act waiting period, any state could take such
action under the antitrust laws as it deems necessary or desirable in the public
interest. Such action could include seeking to enjoin the consummation of the
merger or seeking divestiture of Nogatech or businesses of Zoran or Nogatech.
Private parties may also seek to take legal action under the antitrust laws
under certain circumstances.
NON-U.S. REGULATORY REQUIREMENTS
The consummation of the merger, and the exchange of shares, is subject to
all necessary approvals from the Investment Center of the Ministry of Trade and
Industry of the State of Israel, the Office of the Chief Scientist of the
Ministry of Trade and Industry of the State of Israel and the Israel Tax
Commission.
Zoran and Nogatech intend to seek the approval of the Investment Center
pursuant to the "approved enterprise" programs in which Nogatech participates
and pursuant to which Nogatech receives certain tax benefits. The entitlement to
these benefits is conditional upon Nogatech fulfilling the conditions stipulated
by the regulations published under the Israeli Law for the Encouragement of
Capital Investments, 1959 and the instruments of approval for the specific
investment in approved enterprises. One such condition is that the transaction
contemplated by the Merger Agreement requires the approval of the Investment
Center.
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Zoran and Nogatech have obtained the approval of the Office of the Chief
Scientist in accordance with certain royalty-bearing grants which Nogatech has
received prior to 1995 from the Office of the Chief Scientist in order to fund
certain research and development programs. On September 11, 2000, Nogatech
received all necessary approvals from the Office of the Chief Scientist in order
to consummate the merger. The approval of the Chief Scientist is subject to
Zoran's continuing obligations under the terms of the Israeli Law for the
Encouragement of Research and Development in Industry, 1984. The terms of the
grants from the Chief Scientist prohibit the transfer of technology developed
under these grants to any person without the prior consent of the Office of the
Chief Scientist.
Israeli law imposes a capital gains tax on the sale of capital assets.
Nogatech has applied to the Israel Tax Commission for a pre-ruling that will
defer the obligation of Israeli holders of Nogatech common stock and options to
acquire Nogatech common stock to pay Israeli capital gains tax with respect to
the exchange of Nogatech common stock for Zoran common stock in the merger.
FEDERAL SECURITIES LAW COMPLIANCE
All shares of Zoran common stock received by Nogatech stockholders in the
merger will be freely transferable, except that shares of Zoran common stock
received by persons who are deemed to be affiliates of Nogatech for purposes of
Rule 145 under the Securities Act may be resold by them only in transactions
permitted by the resale provisions of Rule 145, or Rule 144 in the case of such
persons who become affiliates of Zoran, or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of Nogatech or Zoran
generally include individuals or entities that control, are controlled by, or
are under common control with, such party and may include certain officers and
directors of such party as well as principal stockholders or stockholders of
such party. The Merger Agreement requires Nogatech to use its best efforts to
cause each of its affiliates to execute a written agreement to the effect that
such person will not offer or sell or otherwise dispose of any of the shares of
Zoran common stock issued to such person in or pursuant to the merger in
violation of the Securities Act or the rules and regulations promulgated by the
Commission thereunder.
NASDAQ NATIONAL MARKET QUOTATION
It is a condition to the merger that the shares of Zoran common stock to be
issued pursuant to the merger agreement and required to be reserved for issuance
in connection with the merger be approved for quotation on The Nasdaq National
Market. Zoran has begun preparation of a notification for listing of such shares
of Zoran common stock on The Nasdaq National Market.
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THE MERGER AGREEMENT
THE FOLLOWING IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE MERGER
AGREEMENT BUT DOES NOT PURPORT TO DESCRIBE ALL THE TERMS OF THE MERGER
AGREEMENT. THE FULL TEXT OF THE MERGER AGREEMENT IS ATTACHED AS ANNEX A TO THIS
PROXY STATEMENT/PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE. THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT. YOU ARE URGED TO
READ THE MERGER AGREEMENT IN ITS ENTIRETY.
THE MERGER
The merger agreement provides that, following the approval and adoption of
the merger agreement and the approval of the merger by Nogatech's stockholders
and the satisfaction or waiver of the other conditions to the merger:
- Zoom Acquisition Corporation, a wholly-owned subsidiary of Zoran will be
merged with and into Nogatech; and
- the subsidiary will cease to exist, and Nogatech will continue as the
surviving corporation and a wholly-owned subsidiary of Zoran.
If all such conditions to the merger are satisfied or waived, the merger
will become effective upon the filing of a certificate of merger with the
Secretary of State of Delaware.
CERTIFICATE OF INCORPORATION AND BYLAWS
The merger agreement provides that at the effective time of the merger the
restated certificate of incorporation of Nogatech will be the restated
certificate of incorporation of the surviving corporation, and the bylaws of
Zoom Acquisition Corporation will be the bylaws of the surviving corporation.
DIRECTORS AND OFFICERS
The merger agreement provides that the directors and officers of Zoom
Acquisition Corporation immediately prior to the effective time of the merger
will be the initial directors and officers of the surviving corporation, each of
whom will hold office in accordance with the restated certificate of
incorporation and the bylaws of the surviving corporation, in each case until
their respective successors are duly elected or appointed.
CONVERSION OF SECURITIES
Upon completion of the merger and pursuant to the merger agreement, each
issued and outstanding share of Nogatech common stock will be converted into the
right to receive 0.166 of a share of Zoran common stock.
If any holder of shares of Nogatech common stock would be entitled to
receive a number of shares of Zoran common stock that includes a fraction, then,
in lieu of a fractional share, such holder will be entitled to receive cash in
an amount equal to such fractional part of a share of Zoran common stock
multiplied by the last reported sale price of Zoran common stock, as reported on
The Nasdaq National Market, on the trading day immediately preceding the
effective date of the merger. Each share of Zoom Acquisition Corporation common
stock issued and outstanding immediately prior to the effective time will be
converted into one share of common stock of the surviving corporation.
Based upon the capitalization of Nogatech and Zoran as of August 23, 2000,
the stockholders of Nogatech immediately prior to the consummation of the merger
will own approximately 14.1% of the outstanding shares of Zoran common stock
immediately following completion of the merger.
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EXCHANGE OF CERTIFICATES
Promptly after the completion of the merger, the exchange agent will mail
transmittal forms and exchange instructions to each holder of record of Nogatech
common stock to be used to surrender and exchange certificates evidencing shares
of Nogatech common stock for certificates evidencing the shares of Zoran common
stock (and cash in lieu of any fractional share) to which such holder has become
entitled. After receipt of such transmittal forms, each holder of certificates
formerly representing Nogatech common stock will be able to surrender such
certificates to the exchange agent, and each such holder will receive in
exchange therefor:
- a certificate or certificates evidencing the number of whole shares of
Zoran common stock to which such holder is entitled; and
- any cash which may be payable in lieu of a fractional share of Zoran
common stock.
Such transmittal forms will be accompanied by instructions specifying other
details of the exchange. NOGATECH STOCKHOLDERS SHOULD NOT SEND IN THEIR
CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL AND OTHER TRANSMITTAL
FORMS.
After the completion of the merger, each certificate evidencing Nogatech
common stock, until so surrendered and exchanged, will be deemed, for all
purposes, to evidence only the right to receive:
- the number of whole shares of Zoran common stock which the holder of such
certificate is entitled to receive; and
- any cash payment in lieu of a fractional share of Zoran common stock.
The holder of such unexchanged certificate will not be entitled to receive
any dividends or other distributions payable by Zoran until the certificate has
been exchanged. Subject to applicable laws, such dividends and distributions,
together with any cash payment in lieu of a fractional share of Zoran common
stock, will be paid without interest.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties,
relating to such matters as:
- the due organization, valid existence and good standing of each of Zoran,
Nogatech and their respective subsidiaries and certain similar corporate
matters;
- the capital structure of each of Zoran and Nogatech;
- the authorization, execution, delivery and enforceability of the merger
agreement;
- the absence of conflicts under charters or bylaws, required consents or
approvals and violations of any instruments or law;
- documents and financial statements filed by each of Zoran and Nogatech
with the Commission and the accuracy of information contained therein;
- the absence of undisclosed liabilities which in the aggregate would be
material;
- the absence of certain material adverse changes or events;
- taxes, tax returns and audits;
- tangible assets and real property of Nogatech;
- intellectual property;
- agreements, contracts and commitments of Nogatech;
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- litigation;
- environmental matters concerning Nogatech, including hazardous materials
and hazardous materials activities;
- employee benefit plans of Nogatech;
- compliance with laws;
- interested party transactions;
- the accuracy of information supplied by each of Zoran and Nogatech in
connection with this proxy statement/prospectus;
- opinions of financial advisors;
- the interim operations of Zoom Acquisition Corporation; and
- ownership of Nogatech common stock by Zoran.
SELECTED COVENANTS AND AGREEMENTS
Pursuant to the merger agreement, Nogatech has agreed that, during the
period from the date of the merger agreement until the completion of the merger,
except as otherwise consented to in writing by Zoran or as contemplated by the
merger agreement, Nogatech and its subsidiaries will:
- carry on its business in the ordinary course in substantially the same
manner as previously conducted;
- pay its debts and taxes when due, subject to good faith disputes over such
debts or taxes, and pay or perform its other obligations when due;
- use all reasonable efforts to preserve intact its present business
organization;
- use all reasonable efforts to keep available the services of its officers
and key employees;
- use all reasonable efforts to preserve its relationship with customers and
vendors;
- not waive any stock repurchase rights, or accelerate, amend or change the
period of exercisability of options granted under any employee stock plan,
except as required pursuant to such plans or any related agreements;
- not transfer or license or otherwise extend, amend or modify any rights to
its intellectual property rights, other than in the ordinary course of
business consistent with past practices;
- not declare or pay any dividends on or make other distributions in respect
of any of its capital stock, or effect certain other changes in its
capitalization;
- not purchase, redeem or otherwise acquire, directly or indirectly, any
shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of
shares in connection with the termination of service;
- not issue, or authorize or propose the issuance of, any shares of its
capital stock or securities convertible into shares of its capital stock,
or any subscriptions, rights, warrants, or options to acquire, or other
agreements obligating it to issue any such shares or other convertible
securities, subject to certain exceptions including the grant of options
to new employees to purchase up to an aggregate of 60,000 shares of
Nogatech common stock;
- not engage in material acquisitions;
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- not sell, lease, license or otherwise dispose of material properties or
assets except in the ordinary course of business;
- subject to exceptions for two executive officers, not increase the
compensation payable to its officers or employees (except for increases
consistent with past practices), grant additional severance or termination
pay or enter into employment agreements with officers or any non-officer
employee except in accordance with past practices enter into any
collective bargaining agreement or establish, adopt, enter into or amend
any plan for the benefit of its directors, officers, or employees;
- not revalue any material amount of its assets, including writing down the
value of inventory or writing off notes or accounts receivable other than
in the ordinary course of business;
- not incur any material indebtedness for money borrowed (or guarantees
thereof) other than indebtedness incurred under existing lines of credit;
- not amend its restated certificate of incorporation or bylaws, except as
contemplated by the merger agreement;
- not incur any individual capital expenditure in excess of $50,000 or
aggregate capital expenditures in excess of $200,000;
- not enter into or amend any agreements pursuant to which any third party
is granted exclusive marketing or manufacturing rights with respect to any
Nogatech product;
- not amend or terminate any material contract, agreement or license to
which it is a party except in the ordinary course of business;
- not waive or release any material right or claim, except in the ordinary
course of business;
- not take any action that would require stockholder approval or result in a
delay in the preparation of this proxy statement/prospectus; and
- not make or change any tax election or change any accounting method.
Pursuant to the merger agreement, Zoran has agreed that, during the period
from the date of the merger agreement until the completion of the merger, except
as otherwise consented to in writing by Nogatech or as contemplated by the
merger agreement, Zoran and its subsidiaries will:
- carry on its business in the ordinary course in substantially the same
manner as previously conducted;
- pay its debts and taxes when due subject to good faith disputes over such
debts or taxes, and pay or perform its other obligations when due;
- use all reasonable efforts to preserve intact its present business
organization;
- use all reasonable efforts to keep available the services of its officers
and key employees;
- use all reasonable efforts to preserve its relationship with customers,
vendors and others;
- not declare or pay any dividends on or make any other distributions in
respect of any of its capital stock, or effect certain other changes in
their capitalization;
- not purchase, redeem or otherwise acquire directly or indirectly any
shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of
shares in connection with any termination of service;
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- not sell, lease, license or otherwise dispose of any of its properties or
assets which are material, individually or in the aggregate, to the
business of Zoran and its subsidiaries, taken as a whole, except in the
ordinary course of business;
- not amend or propose to amend their certificates of incorporation or
bylaws, except as contemplated by the merger agreement; and
- take any action that would require stockholder approval or result in a
delay in the preparation of this proxy statement/prospectus.
NO SOLICITATION
The merger agreement provides that Nogatech will not, directly or
indirectly, through any officer, director, employee, representative or agent of
Nogatech:
- solicit, initiate, seek, entertain or knowingly encourage or support any
inquiries or proposals that constitute, or could reasonably be expected to
lead to, a proposal or offer for a merger, consolidation, business
combination, sale of any material portion of assets, sale of a substantial
portion of the shares of capital stock of Nogatech (including without
limitation by way of a tender offer), other than the transactions
contemplated by the merger agreement, any of the foregoing inquiries or
proposals being referred to in the merger agreement as an "acquisition
proposal";
- engage or participate in negotiations or discussions concerning, or
provide any nonpublic information to any person or entity relating to, any
acquisition proposal; or
- agree to, approve or recommend any acquisition proposal;
However, nothing contained in the merger agreement shall prevent Nogatech or
its board of directors from:
- providing non-public information to, or engaging or participating in
discussions or negotiations with, any person or entity in connection with
an unsolicited bona fide written acquisition proposal by such person or
entity or recommending such an unsolicited bona fide written acquisition
proposal to the stockholders of Nogatech, if and only to the extent that:
-- Nogatech's board of directors determines in good faith (after
consultation with and based upon the advice of its financial advisor)
that such acquisition proposal would, if consummated, result in a
transaction more favorable to Nogatech's stockholders from a
financial point of view than the transaction contemplated by the
merger agreement, such more favorable acquisition proposal being
referred to as a "superior proposal", and that the party making the
superior proposal has the financial means, or the ability to obtain
the necessary financing, to conclude the transaction;
-- Nogatech's board of directors determines in good faith (after
consultation with outside legal counsel) that the failure to take
such action would create a substantial risk of liability for breach
of its fiduciary duties to Nogatech's stockholders under applicable
law; and
-- prior to furnishing such non-public information to such person or
entity, Nogatech's board of directors receives from such person or
entity an executed confidentiality agreement with terms no more
favorable to such party than those contained in the non-disclosure
agreement between Zoran and Nogatech; or
- complying with Rule 14d-9 or Rule 14e-2 promulgated under the Exchange Act
with regard to an acquisition proposal.
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Nogatech is required to notify Zoran, orally and in writing, within
24 hours after receipt of any acquisition proposal or request for non-public
information or access to its properties, books or records in connection with an
acquisition proposal.
INDEMNIFICATION
The merger agreement provides that from and after the completion of the
merger, Zoran and the surviving corporation shall indemnify, defend and hold
harmless each person who was as of the date of the merger agreement or had been
at any time prior to the date thereof, or who becomes prior to the completion of
the merger, an officer or director of Nogatech or any of its subsidiaries
against all losses, claims, damages, costs, expenses, liabilities or judgments
or amounts that are paid in settlement with the approval of the indemnifying
party, which approval shall not be unreasonably withheld, of or in connection
with any claim, action, suit, proceeding or investigation based in whole or in
part on, or arising in whole or in part out of, the fact that such person is or
was a director or officer of Nogatech or any subsidiary, whether pertaining to
any matter existing or occurring prior to or after the effective time and
whether asserted or claimed prior to, or at or after, the effective time. After
the completion of the merger, Zoran and the surviving corporation will fulfill
and honor in all respects the obligations of Nogatech pursuant to Nogatech's
Bylaws and any indemnification agreements with Nogatech directors and officers
existing as of the date of the merger agreement.
In addition, Zoran has agreed to maintain, or cause the surviving
corporation to maintain, in effect a policy or policies of directors and
officers liability insurance with coverage substantially comparable to policies
in force as of the date of the merger agreement covering the present directors
and officers of Nogatech as of the date of the merger agreement for a period of
not less than six years following the effective time; provided, however, that in
no event shall Zoran or the surviving corporation be required to expend in any
one year an amount in excess of 150% of the annual premiums currently paid by
Nogatech for such insurance; and, provided, however, that if during such period
the annual premiums for such comparable insurance coverage exceed such amount,
Zoran or the surviving corporation shall be obligated to obtain a policy which,
in the reasonable judgment of Zoran, provides the best coverage available for a
cost not exceeding such amount.
CONDITIONS
The respective obligations of Zoran and Nogatech to effect the merger are
subject to a number of conditions including the following:
- the merger agreement shall have been approved and adopted by the
stockholders of Nogatech;
- all material governmental authorizations, consents, orders or approvals
shall have been obtained;
- the registration statement shall have become effective and shall not be
the subject of a stop order or proceedings seeking a stop order;
- no temporary restraining order, preliminary or permanent injunction or
other order shall be in effect nor shall there be any proceeding seeking
any of the foregoing that prevents, or seeks to prevent, the consummation
of the merger;
- the shares of Zoran common stock to be issued in the merger shall have
been approved for quotation on The Nasdaq National Market;
- Zoran shall have received a written opinion from Gray Cary Ware &
Friedenrich LLP, counsel to Zoran, and Nogatech shall have received an
opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to
Nogatech, both to the effect that the merger will be treated for U.S.
federal income tax purposes as a tax-free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code;
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- subject to certain exceptions, the accuracy of the representations and
warranties of the other party set forth in the merger agreement;
- the Israeli Tax Commission shall have ruled that Israeli holders of
Nogatech common stock and options to acquire Nogatech common stock may
defer Israel capital gains tax with regard to the merger;
- subject to certain exceptions, the performance of all obligations of the
other party required to be performed under the merger agreement.
Any of the conditions in the merger agreement may be waived by the party
benefited thereby, except those conditions imposed by law.
STOCK PURCHASE PLAN AND OPTION PLANS
At the effective time of the merger, each outstanding option to purchase
shares of Nogatech common stock under Nogatech's 1999 Stock Option Plan, as
amended, and 2000 Equity Incentive Plan shall be deemed to constitute an option
to acquire, on the same terms and conditions as were applicable under these
Nogatech options, the number of shares of Zoran common stock, rounded to the
nearest whole number, as the holder of the Nogatech options would have been
entitled to receive pursuant to the merger had such holder exercised such option
in full immediately prior to the effective time, at a price per share (rounded
to the nearest whole cent) equal to the aggregate exercise price for the shares
of Nogatech common stock otherwise purchasable pursuant to such Nogatech
options, divided by the number of whole shares of Zoran common stock deemed
purchasable pursuant to these Nogatech options as determined above as of the
effective time. As of August 23, 2000, Nogatech options to acquire an aggregate
of 1,192,765 shares of Nogatech common stock were outstanding.
Zoran has agreed to reserve for issuance a sufficient number of shares of
Zoran common stock for delivery upon exercise of the Nogatech options assumed as
described above. Promptly after the date the merger is completed, Zoran shall
file a registration statement on Form S-8 with respect to the shares of Zoran
common stock subject to such options and shall use its best efforts to maintain
the effectiveness of such registration statement(s) and the current status of
the prospectus(es) contained therein for so long as such options remain
outstanding. With respect to individuals, if any, who will be subject to the
reporting requirements under Section 16(a) of the Exchange Act after the merger,
Zoran has agreed to administer the options under the Nogatech option plans
assumed in the merger in a manner that complies with Rule 16b-3 promulgated
under the Exchange Act.
Nogatech has agreed to take all necessary actions to cause the ending date
of the then-current purchase period of its 2000 Employee Stock Purchase Plan to
be the last trading day on which the Nogatech common stock is traded on The
Nasdaq National Market immediately prior to the completion of the merger. This
change in the then-current purchase period will be conditioned upon the
completion of the merger. On the final Nogatech purchase date, Nogatech will
apply the funds credited as of such date within each participant's payroll
withholding account to the purchase of whole shares of its common stock in
accordance with the terms of the Nogatech stock purchase plan.
Employees of Nogatech shall be permitted to participate in the Zoran
Employee Stock Purchase Plan commencing on the first enrollment date following
the completion of the merger, subject to compliance with the eligibility
provisions of the plan. Employees of Nogatech will each receive credit, for
purposes of such eligibility provisions, for prior service with Nogatech or
Zoran.
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TERMINATION; TERMINATION FEES AND EXPENSES
The merger agreement may be terminated at any time prior to the completion
of the merger, whether before or after approval of the matters presented in
connection with the merger by the stockholders of Nogatech or Zoran:
- by the mutual written consent of Zoran and Nogatech;
- by either Zoran or Nogatech if the merger shall not have been consummated
by February 28, 2001, provided that the right to terminate the merger
agreement under this clause is not available to any party whose failure to
fulfill any obligation under the merger agreement has been the cause of or
resulted in the failure of the merger to occur on or before such date;
- by either Zoran or Nogatech if a court of competent jurisdiction or other
governmental entity, shall have issued a nonappealable final order, decree
or ruling or taken any other action, in each case having the effect of
permanently restraining, enjoining or otherwise prohibiting the merger,
except, if the party relying on such order, decree or ruling or other
action has failed to comply in any material respect with certain specified
obligations under merger agreement;
- by Zoran, if at the Nogatech stockholders' meeting, the requisite vote of
Nogatech's stockholders in favor of the merger agreement and the merger is
not obtained;
- by Zoran if:
-- Nogatech's board of directors has withdrawn or modified its
recommendation of the merger agreement or the merger in a manner
adverse to Zoran or has resolved or publicly announced its intention
to do so;
-- an alternative transaction is completed or Nogatech's board of
directors has recommended to Nogatech's stockholders an alternative
transaction or has resolved or publicly announced its intention to
recommend or engage in such an alternative transaction;
-- a tender offer or exchange offer for more than 50% of the outstanding
shares of Nogatech common stock is commenced, other than by Zoran or
an affiliate of Zoran, and Nogatech's board of directors has:
-- recommended that Nogatech's stockholders tender their shares in
such tender or exchange offer; or
-- resolved or publicly announced its intention to take no position
with respect to such tender or exchange offer;
- by Zoran or Nogatech, if there has been a breach of any representation,
warranty, covenant or agreement on the part of the other party set forth
in the merger agreement, which breach:
-- causes the conditions of the merger agreement relating to the
accuracy of representations and warranties of the other party and
performance by the other party of certain obligations not to be
satisfied; and
-- has not been cured within 10 business days following receipt by the
breaching party of written notice of the breach from the other party.
The merger agreement does not include any provision for termination based on
fluctuations in the price of Zoran common stock or Nogatech common stock.
In the event of any termination of the merger agreement by either Zoran or
Nogatech as provided above, there will be no liability or obligation on the part
of Zoran, Nogatech, Zoom Acquisition Corporation or their respective officers,
directors, stockholders or affiliates, except to the extent that the termination
results from the willful breach by a party of any of its representations,
warranties,
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covenants or agreements set forth in the merger agreement, provided that the
provisions described below relating to the payment of fees and expenses shall
survive the termination.
Except as described below, whether or not the merger is consummated, all
fees, costs and expenses incurred in connection with the merger agreement and
the transactions contemplated thereby shall be paid by the party incurring such
expenses, except that all fees and expenses, other than attorneys' fees,
incurred in connection with the printing and filing of this proxy
statement/prospectus shall be shared equally by Zoran and Nogatech.
If the merger agreement is terminated by Zoran because:
- Nogatech's board of directors has withdrawn or modified its recommendation
or resolved or publicly announced its intention to do so; or
- an alternative transaction has been completed or Nogatech's board of
directors shall have recommended to the Nogatech stockholders an
alternative transaction or shall have resolved or publicly announced its
intention to do so; or
- a tender offer or exchange offer for more than 50% of the outstanding
shares of Nogatech is commenced and Nogatech's board of directors shall
have recommended, or resolved or publicly announced its intention to
recommend, that the Nogatech stockholders tender their shares in such
tender offer or exchange offer, or resolved or publicly announced its
intention to take no position with respect to such tender offer or
exchange offer,
then Nogatech is required to pay Zoran a termination fee of $3.0 million within
one business day after the termination.
If the merger agreement is terminated by Zoran under the circumstances
described above and an alternative transaction is consummated within 12 months
after the termination of the merger agreement, Nogatech is required to pay Zoran
an additional $3.0 million, for a total termination fee of $6.0 million.
If the merger agreement is terminated by Zoran because at the Nogatech
stockholders' meeting the requisite vote of the stockholders in favor of the
merger is not obtained, and:
- at the time of the Nogatech stockholders' meeting there is pending a
publicly announced offer or proposal to effect an alternative transaction;
and
- an alternative transaction is consummated within 12 months after the
termination,
then Nogatech is required to pay Zoran a termination fee of $3.0 million.
AMENDMENT AND WAIVER
The merger agreement may be amended at any time by action taken or
authorized by the respective boards of directors of Zoran and Nogatech, but
after approval by the stockholders of Nogatech of the matters presented in
connection with the merger to them, no amendment shall be made which by law
requires further approval by such stockholders, without such further approval.
Zoran and Nogatech, by action taken or authorized by their respective boards of
directors, may extend the time for performance of the obligations or other acts
of the other parties to the merger agreement, may waive inaccuracies in the
representations or warranties contained in the merger agreement or may waive
compliance with any agreements or conditions for the benefit of each party
contained in the merger agreement.
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UNCERTAINTIES RELATING TO FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. All
forward-looking statements involve risk and uncertainty, and actual results
could differ materially from those set forth in the forward-looking statements
contained herein for a variety of reasons including, without limitation, the
risks outlined under the caption "Risk Factors" on pages 11 to 29, as well as
those discussed elsewhere in this proxy statement/prospectus and in the
documents incorporated herein by reference.
INFORMATION CONCERNING ZORAN
BUSINESS
INTRODUCTION
Zoran develops and markets integrated circuits, integrated circuit cores and
embedded software used by original equipment manufacturers, or OEMs, in digital
audio and video products for commercial and consumer markets. Zoran also
provides complete, copy-ready system reference designs based on our technology
that help its customers produce commercial and consumer products more quickly
and cost-effectively. Zoran's integrated circuits are used in a variety of
products, including digital versatile disc, or DVD, players, Super Video CD
players, digital speakers and audio systems, filmless digital cameras, and
professional and consumer video editing systems.
INDUSTRY BACKGROUND
Historically, video images and audio soundtracks have been transmitted,
edited and stored almost exclusively using analog formats. More recently,
however, advances in technology have allowed audio and video to be processed and
stored in digital form. Unlike analog formats, which are inherently unstable and
difficult to edit and enhance, digital formats permit the manipulation of audio
and video signals through digital signal processing and offer a number of
fundamental advantages over analog technologies. Through complex digital signal
processing operations, digital audio and video signals may be compressed,
providing significant storage and transmission efficiencies. They also may be
filtered, allowing for noise reduction, and they may be transmitted and
reproduced without perceptible image or sound degradation. Digital formats also
provide users with additional benefits, including random access to data,
superior editing capabilities and enhanced security features such as protection
against unauthorized copying and controlled and secure access.
One of the most significant barriers to the widespread adoption of digital
technology has been the huge amount of data required to represent images and
sounds in a digital format, making cost-effective storage or transmission
impractical. For example, storage of a two-hour movie in uncompressed digital
form would require approximately 200 video CDs. Through digital compression
techniques a substantial number of the redundancies inherent in audio and video
data can be identified and eliminated, significantly reducing the overall amount
of data which needs to be retained. Compression techniques introduced in the
early 1990s allowed the same two-hour movie which required 200 video CDs to be
compressed and stored on only two video CDs with video resolution comparable to
that of a standard VHS tape. More recent techniques allow the storage of a
full-length movie of more than three hours on a single DVD, with substantially
improved audio and video quality and the incorporation of additional data, such
as additional languages, scenes and director and actor commentary. Additionally,
digital compression of video data allows previously unmanageable amounts of data
to be stored in the memory of a standard personal computer, thereby permitting
the data to be accessed and edited easily. Digital audio compression allows
efficient storage and delivery of multi-channel audio, making possible
high-quality special effects such as multi-channel surround sound, virtual
surround sound and wireless audio delivery via two speakers or headphones. In
the field of still photography, digital compression
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allows dozens or hundreds of digital pictures to be stored on a single memory
card, depending on the resolution desired.
To drive the implementation and speed the adoption of products based on
digital formats, industry participants organized committees to define
international compression standards. The principal standards in use today
include:
- the Joint Photographic Experts Group, or JPEG, standard for the high
compression and decompression of moving images;
- the MPEG 1 standard, adopted by the Moving Pictures Experts Group, or
MPEG, for the compression of both audio and video data at the high
compression ratios necessary for the limited storage capacity of the
CD-ROM format;
- the MPEG 2 standard, subsequently adopted by the Moving Pictures Expert
Group, for the compression of both audio and video data, designed to
provide improved quality in broadcast and video playback applications; and
- Dolby AC-3, also known as Dolby Digital, developed by Dolby Laboratories,
an industry standard for the compression of audio for use in multi-channel
digital surround sound systems.
These industry standard techniques have enabled the dramatic growth in a
variety of digital multimedia markets, including:
- DVD PLAYERS. DVD players use MPEG 2 video compression and Dolby Digital
audio technology to provide significantly higher quality playback than is
possible with VCR or video CD technology. According to Cahners
In-Stat Group, a market research firm, worldwide sales of DVD players are
expected to grow from 2.4 million units in 1998 to 54.3 million units in
2004, a compounded annual growth rate of 68.2%.
- DIGITAL AUDIO SYSTEMS. Dolby Digital and other audio compression
techniques are used in multi-channel surround sound products including
movie theater sound systems, audio/video receivers and digital speakers.
According to several market research firms, including Forward Concepts,
Consumer Electronics Association and Intelect, the demand for digital
audio systems is expected to grow from 2.2 million units in 1998 to
85.4 million units in 2004, a compounded annual growth rate of 84.0%.
- FILMLESS DIGITAL CAMERAS. Filmless digital cameras use JPEG compression
technology to capture high resolution images that can be viewed, edited
and stored on a computer system and transmitted over telephone lines and
computer networks. According to Cahners In-Stat Group, a market research
firm, sales of megapixel digital cameras are expected to grow from
3.6 million units in 1998 to 40.8 million units in 2004, a compounded
annual growth rate of 49.9%.
- PC VIDEO SYSTEMS. JPEG-based PC video systems are used to capture and "cut
and paste" video sequences and add special audio and video effects.
According to International Data Corporation, sales of video editing
systems are expected to grow from 964,000 units in 1998 to 9.2 million
units in 2002, a compounded annual growth rate of 75.8%.
Additional products and markets are developing based on these established
compression standards as well as emerging compression technologies such as MLP,
a new standard for DVD audio, and MP3, a compression standard for the download
of audio recordings from the Internet.
These established and emerging compression standards specify data formats in
which compressed data must be presented in order to enable products from
different vendors to interact and permit the capture, transmission, storage and
display of audio and video data in digital format. These standards do not
specify the compression methodologies to be employed or additional functionality
which may be used to enhance or manipulate digital signals. These standards,
therefore, do not determine image or
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sound quality or compression efficiency. For example, data compression may
comply with relevant standards despite being poorly processed and containing
artifacts which result in image degradation in video applications or poor sound
quality in audio applications. As a result there can be significant differences
in overall image or sound quality between two solutions based on the same
standard. Therefore, integrated circuit manufacturers can differentiate their
products on the basis of the quality of their compression solution.
Historically, as system vendors sought compression solutions, the cost,
complexity and time required to compress and decompress data have imposed
significant limitations on the use of digital compression. Over the last several
years, as cost-effective compression solutions have emerged, product
manufacturers have increasingly sought to design and market lower-cost digital
audio and video systems and products to address high volume consumer
applications. In addition, product manufacturers are facing competitive pressure
to introduce their products more rapidly. To address these issues, OEMs seek to
integrate multiple functions on individual chips in order to reduce their costs,
speed time-to-market and produce smaller products with reduced power
consumption. They also seek solutions that can be easily integrated into their
commercial and consumer products. The current challenge to manufacturers of
compression integrated circuits is, therefore, to provide product manufacturers
with high-quality, cost-effective, standards-based solutions that deliver
flexible control, image enhancement, audio effects and other functions in
addition to high quality compression solutions.
THE ZORAN SOLUTION
Zoran provides feature-rich, cost-effective, standards-based solutions for a
broad range of digital audio and video applications. Zoran was a pioneer in the
development of high performance digital signal processor products, and has
developed expertise in digital signal processing, integrated circuit design,
mathematical algorithms and software development, as well as proprietary digital
signal processing, audio and video compression technologies. Zoran applies its
multi-disciplinary expertise and proprietary technologies to the development of
fully-integrated solutions for high-growth multimedia markets. The key elements
of the Zoran solution are:
STANDARDS-PLUS METHODOLOGY. Zoran has leveraged its broad
multi-disciplinary expertise and proprietary digital signal processing and
compression technologies to develop what it refers to as "standards-plus"
solutions. Zoran has enabled OEMs to improve image and sound quality and deliver
superior products to end users by adding more features around compression
standards, such as more efficient use of memory, processing and communication
resources, as well as audio and image enhancement algorithms. Zoran has also
provided OEMs the ability to include OEM-programmable effects, as well as
variable compression ratios for video. These "standards-plus" features allow
Zoran's customers to differentiate their products from those of their
competitors.
EXPANDABLE AND PROGRAMMABLE ARCHITECTURE. Zoran designs its integrated
circuits to enable easy adaptation for a broad range of specific applications.
Zoran can vary the architecture of its chips by adding or deleting modules, and
can also modify the software embedded in the chips themselves to address
specific applications. Zoran also licenses ready-to manufacture
"cores"--building blocks of integrated circuits--that can be integrated into its
customers' chips. Combined with the enhanced functionality of Zoran's
"standards-plus" technology, Zoran's expandable and programmable architecture
facilitates product design, upgrades and customization, substantially
accelerating our customers' time to market with differentiated products.
INTEGRATED SYSTEM SOLUTIONS. Zoran helps its customers meet their total
system requirements by providing integrated products that combine hardware and
software to address required system functions and features on a single
integrated circuit or chip set, reducing the number of integrated circuits, and
in some cases providing a complete solution on a single chip. As a result,
Zoran's customers' total system cost can be reduced and they can concentrate on
differentiating their products from those of
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their competitors. For example, Zoran offers the Camera On A CHip device, or
COACH, which includes most of the electronics of a filmless digital camera.
Zoran also recently acquired PixelCam, Inc. a high-quality provider of
megapixel, CMOS image sources and integrated lens/sensor modules which are also
integral sub-systems in digital cameras. By delivering a camera on a chip, and
the lens/sensor sub-system Zoran enables its customers to reduce the costs of
their products and focus on providing products that meet the needs of their end
users.
COST-EFFECTIVE PRODUCTS. Zoran focuses on reducing the feature size, power
requirements and number of integrated circuits necessary to perform required
system functions, including compression functions. This reduces Zoran's
customers' manufacturing costs for their products which incorporate its
integrated circuits, and also reduces the operating costs for these products,
enabling the use of Zoran products in a broader range of high volume
applications. The modular nature of Zoran's architecture reduces its new product
development costs, and enables Zoran design engineers to meet its customers' new
product specification and cost parameters.
COPY-READY SYSTEM REFERENCE DESIGNS. Zoran provides its customers with a
broad range of engineering reference boards and products complete with device
driver software, embedded software and detailed schematics. These products
substantially shorten its customers' product design time.
STRATEGY
Zoran provides cost-effective, high-performance digital audio and video
solutions addressing selected high-growth applications enabled by compression in
evolving multimedia markets. Key elements of Zoran's strategy include:
FOCUS ON HIGH--GROWTH APPLICATIONS. Zoran's strategy is to focus on
providing digital audio and video solutions for emerging high-growth consumer
electronics, PC and communications applications. Zoran's current focus markets
include DVD players and Super Video CD players, digital speakers and audio
systems, filmless digital cameras and professional and consumer video editing
systems.
LEVERAGE EXISTING TECHNOLOGY AND EXPERTISE. Zoran intends to continue to
identify those markets that it believes have the highest growth potential for
its products and to actively pursue those markets. Zoran's proprietary digital
signal processing and compression technologies can be used to serve emerging
markets for digital audio and video. Potential markets include Internet audio
and video appliances, digital television and television set-top boxes, as well
as personal digital audio and video devices.
FURTHER PENETRATE KEY INTERNATIONAL MARKETS. During 1998, Zoran opened an
office in Shenzhen, China, and Zoran now makes volume shipments of its
integrated circuits to that market. Zoran believes that emerging markets, such
as China, Taiwan and Korea present significant market opportunities for consumer
electronic products and intends to further extend its international operations
to address these emerging markets.
EXTEND TECHNOLOGICAL LEADERSHIP. Zoran's years of experience in the fields
of digital signal processing, integrated circuit design, algorithms and software
development have enabled Zoran to become a leader in the development of digital
audio and video solutions enabled by compression. Using its multi-disciplinary
expertise, Zoran has developed new technologies for compression of digital audio
and video. For example, its proprietary bit rate control technology has helped
it provide reliable and inexpensive JPEG-based video compression and our
proprietary Virtual Multi-Channel Digital, or VMD, technology enables
high-quality surround-sound effects from two low-cost audio speakers, rather
than the four or five speakers required by other technologies. Zoran intends to
continue to invest in research and development in order to maintain its
technological leadership.
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EXPAND STRATEGIC PARTNERSHIPS. Zoran works closely in the product
development process with leading manufacturers of products that incorporate its
integrated circuits. Zoran also works closely with key customers and provides
them early access to its technologies. Potential products are designed to meet
customer-driven product requirements defined jointly by Zoran and its partners
with the partner providing technological input and, in selected cases, a portion
of the development funding. This strategy has enabled Zoran to develop products
with substantial financial and other assistance while retaining ownership of the
technology and ensuring an established customer for the product once development
is completed. In some cases, Zoran's strategic partners also provide sales and
marketing support. Zoran has also established long-term relationships with
strategic partners that provide manufacturing capacity and will seek to develop
additional strategic relationships with manufacturers.
MARKETS AND APPLICATIONS
Zoran's products are currently used in a variety of consumer multimedia and
PC applications.
VIDEO PLAYBACK SYSTEMS
Currently, three types of digital video playback systems are available for
consumer video applications: video CD players, Super Video CD players and DVD
players.
Video CD players are essentially CD audio players with MPEG 1 decoders and a
video output. Video CD players offer video playback of near-VCR quality and
two-channel stereo audio playback. Compression enables 60 to 70 minutes of video
to be stored on a single CD. Video CD players can also play karaoke titles and
are particularly popular in China, which we believe will continue to be the
primary market for these products. We formerly sold MPEG 1-based products to
manufacturers of stand-alone video CD players but are no longer selling these
products for this market.
In 1998, the Chinese government adopted the Super Video CD standard. By
utilizing MPEG 2 compression technology as well as graphics, Super Video CD
offers substantially higher audio and video quality than is possible with a
Video CD player. The Super Video CD standard is replacing Video CD in China.
DVD players, the latest generation of video playback systems, use MPEG 2
video compression and Dolby Digital or similar audio technology to provide
significantly higher quality playback than is possible with VCRs, Video CD or
Super Video CD players. DVD players are sold as stand-alone products and are
also included in place of CD-ROM drives in some newer PCs, where they are
referred to as DVD-ROMs. DVD-ROMs are also sold as upgrade products. The recent
growth in the DVD market is demonstrated by the rapidly growing sales of DVD
players, the increasing number of models and manufacturers, and the increasing
number of DVD titles available for purchase and rent.
DIGITAL AUDIO SYSTEMS
Digital audio facilitates enhanced audio playback with features such as
multi-channel surround sound and virtual surround sound utilizing two channel
technology. Many standards have emerged for the digital compression of audio.
Current digital audio compression standards in use include Dolby Digital, DTS,
MLP and MP3. Dolby Digital and DTS are competing standards of audio compression
for use in multi-channel digital surround sound systems in movie theaters and at
home. MLP was developed for audio compression in DVD audio. MP3 is one of the
compression standards recognized for the download of audio recordings over the
Internet. Zoran's audio integrated circuits incorporate all of these standards.
The principal products using compressed digital audio in the consumer market are
DVD players, PCs incorporating DVD-ROMs, digital speakers and portable MP3
players.
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FILMLESS DIGITAL CAMERAS
Filmless digital cameras allow the capture of high resolution images, the
viewing, editing and storage of such images on a computer system and their
transmission over telephone lines and computer networks. High quality copies of
these images can be printed using color printers. In addition, digital cameras
can be connected directly to a PC for downloading of pictures and to a
television for displaying pictures. The original digital cameras were developed
for the professional market and currently sell at prices of $3,000 to $10,000.
As technology has advanced and manufacturing costs have decreased, digital
cameras for the consumer market have been introduced in the $100 to $1,000 price
range. Compression technology has also enabled the development of digital video
security cameras and low cost digital video cameras for use with PCs.
PC VIDEO SYSTEMS
Historically, professional video editing systems have been comprised of
expensive pieces of analog audio and video equipment. Compression technology
allows video images to be stored in a computer's memory in sufficient volume to
enable capture and "cut and paste" editing to be performed through random access
to stored images. As the cost of compression technology has declined, a number
of manufacturers have designed low cost digital video capture and editing
systems that run on PCs, creating a new category of users in the corporate,
education and government markets.
The availability of universal serial bus, or USB, connectors on most PCs
currently being manufactured creates an opportunity for the development of
low-cost external video capture and editing accessories that can be easily
installed by consumers. We believe that enhanced support of the USB port by the
Windows98 operating system and the success of the USB equipped Apple iMac
computer will encourage the development of products of this type.
OTHER APPLICATIONS
Other existing and potential applications for our audio and video
compression technologies include Internet audio and video appliances, digital
television and television set-top boxes, as well as personal digital audio and
video devices.
TECHNOLOGY
IMAGE AND VIDEO TECHNOLOGY
THE JPEG STANDARD. In 1991, the Joint Photographic Experts Group, or JPEG,
Committee of the International Standards Organization completed a technical
specification for a standard to compress individual digitized images which may
consist of still images or consecutive frames of video data. JPEG has been
widely adopted for video editing applications, since each frame in the video is
individually compressed, allowing cutting and pasting of sequences as well as
modification of individual frames. Images are compressed through elimination of
spatial redundancies within an image and the filtering of high frequency areas
to which the eye is less sensitive. Using these techniques, the JPEG compression
standard is able to reduce the data necessary to represent an image without
significant degradation of image quality. Still images or motion video can be
compressed to varying degrees using JPEG, with greater compression resulting in
lower quality. Typically, four-to-one or five-to-one compression yields
broadcast image quality while 20-to-1 compression is similar to VHS quality.
ZORAN JPEG TECHNOLOGY. Zoran's JPEG technology incorporates a proprietary
bit rate control algorithm that enables our JPEG-based products to compress any
image to a predetermined size while optimizing video quality using pre-selected
parameters. Without this feature, the JPEG compression process results in
compressed data files of various sizes based on the actual content of the
original image given a constant degree of compression. An image with large
amounts of visual detail will
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generate a larger data file than that generated from an image with less detail.
Performance of many video applications is hampered by variability in the size of
the compressed images in a video sequence, which can result in inefficient use
of available memory, bus speed or communication channel capacity or even the
loss of images. Zoran's bit rate control is a "standards-plus" solution that
uses real-time digital signal processing algorithms to optimize video quality
based on pre-selected parameters, which can be programmed by OEMs, without the
loss of any image or video frame. Zoran's bit rate control has been incorporated
in our JPEG-based devices that are used in video editing systems, filmless and
tapeless digital cameras, color scanners, PC-based security systems, video
conferencing and other applications. Other features of Zoran's JPEG-based
products include their ability to handle a wide range of compression ratios, to
perform a "lossless" compression algorithm in the same JPEG device and to
rapidly scan or browse a large number of images. Zoran implements these
functions in a single integrated circuit while we believe most other
manufacturers either offer fewer functions or require multiple chips, resulting
in higher manufacturing costs and greater power consumption.
THE MPEG STANDARDS. In 1991, the Moving Pictures Expert Group, or MPEG,
Committee of the International Standards Organization completed a technical
specification for a standard to compress moving audio and video into a single
data stream. Like JPEG, MPEG 1 removes spatial redundancies from single frames
of video data. MPEG 1 improves on JPEG by also removing redundancies that occur
between consecutive video frames. Because video represents movement, it is
possible to detect and estimate the movement of similar picture elements between
video frames, a process called motion estimation. MPEG motion estimation uses
the content of previous and future frames to predict the content of the current
frame without using its full content. MPEG 1 implements audio compression by
exploiting psycho-acoustic masking, taking advantage of the fact that the ear is
less sensitive to a quiet note at one frequency when a much louder note is
present at a nearby frequency. MPEG 1 often achieves audio compression ratios of
six-to-one and video compression ratios of over 100-to-1. MPEG 1 is particularly
suitable for low-cost CD-ROM applications due to its low-cost implementation.
In 1993, the MPEG 2 video committee completed a technical specification to
address the more stringent requirements of the broadcast industry. MPEG 2
provides more sophisticated prediction techniques, enabling a compression
solution to comprehend video as interlaced fields of data, rather than
individual frames. MPEG 2 also allows for operation at higher resolution and at
higher bit rates than MPEG 1, resulting in improved image quality for high
motion, high detail video. MPEG 2 typically achieves compression ratios of
50-to-1. Because of its higher bit rate, MPEG 2 technology cannot be used in
standard CD-ROM applications, but can be used in DVD players.
ZORAN MPEG TECHNOLOGY. Beginning in 1997, Zoran established itself as a
leading provider of MPEG 2 technology for DVD and Super Video CD applications.
Zoran introduced the first DVD decoder device integrating digital video with
multi-channel digital audio and programmable audio effects for use in DVD
players. Zoran also introduced new MPEG compression chip cores that can be
integrated into chips manufactured by OEM customers, enabling these customers to
reduce the cost of custom chip design and accelerate the time-to-market of their
products.
CMOS TECHNOLOGY. With the widespread availability of inexpensive
complementary metal oxide semiconductor, or CMOS, fabrication facilities, image
sensor designers are now able to offer a single chip solution to perform the
"light-to-bytes" function at a quality level that is competitive with the long
established charge coupled device, or CCD, sensor technology, but with far
greater operational flexibility and at much lower power consumption. CMOS
sensors can scan in a variety of modes and directions and perform analog-domain
pre-processing of the signal which may be advantageous from a system
perspective. Although the greater pixel circuit complexity results in a larger
imager today, progress is being made to both reduce the geometry of the pixel
and use more aggressive design rules. The result will be a sensor which provides
both cost reduction and performance enhancement paths to the system designer
over the traditional CCD-based solution.
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ZORAN'S CMOS TECHNOLOGY. The PixelCam ZR32112 is a high performance 1.3
megapixel CMOS image sensor that is ideal for digital still and video imaging
products. With its proprietary Distributed-Pixel Amplifier design, the pixel
response is independent of its distance from each column's CDS circuitry. This
unique architecture results in an extremely uniform pixel array with low
fixed-pattern noise without the need for off-chip background frame subtraction
circuitry. The bank of analog front-end circuits quantizes each pixel to 10 bit
resolution. This highly parallel approach eases speed requirements on individual
analog circuits and reduces overall power consumption. Separate programmable
red, green and blue PGA circuits enable analog-domain color balance. The
flexibility of the ZR32112 output image format permits the tradeoff between
resolution and frame rate. The image output may also be horizontally "mirrored"
and vertically "flipped".
AUDIO TECHNOLOGY
THE DOLBY DIGITAL STANDARD. In 1992, Dolby Laboratories launched Dolby
Digital, an audio compression technique which has emerged as an industry
standard. Dolby Digital was developed as a successor to Dolby's Pro-Logic analog
technique for use in multi-channel digital surround sound systems. It is
currently used in movie theaters comprising over 24,000 screens worldwide and is
also used in home theater and computer multimedia applications. Digital
compression of audio data allows the storage of full quality multi-channel audio
playback in the limited space allocated for audio in video-oriented formats. It
also facilitates the seamless integration of sound with compressed video. The
Dolby Digital audio compression standard is currently the principal audio
compression technique used in DVD players. Dolby Digital has also been adopted
as a standard for use in high-definition television and digital cable systems.
OTHER AUDIO STANDARDS. Other digital audio compression standards currently
in use include DTS, an audio compression standard that competes with Dolby
Digital, MLP, a compression standard for DVD audio, and MP3, used for the
download of audio recordings from the Internet.
ZORAN AUDIO TECHNOLOGY. Working closely with Dolby Laboratories, Zoran has
developed a programmable audio digital signal processing engine with an
architecture optimized for Dolby Digital and other demanding audio applications
and Zoran was the first to develop a single-chip solution for Dolby Digital
decoding. Zoran's Vaddis DVD decoders and audio processors now incorporate this
engine to allow systems manufacturers to replace system components with software
modules, differentiate their products from their competition, use Zoran's
Silicon Software library of advanced audio algorithms, and reduce system costs
and time to market. In addition to Dolby Digital, Zoran's DVD decoders and audio
processors implement all principal audio compression standards, including DTS,
MLP and MP3. Zoran's integrated circuits also include additional functions such
as Virtual Multi-Channel Digital, surround sound for headphones, High-Definition
CD, karaoke processing and speaker equalization.
PRODUCTS
Zoran's multimedia product line consists of four principal product families:
- DVD/Super Video CD--audio and video decompression products based on MPEG,
Dolby Digital and DTS;
- Digital Audio--audio decompression products for use in products using
MPEG, Dolby Digital, DTS, MLP, MP3 and other audio technologies;
- Filmless Digital Cameras--video compression and decompression products
based on JPEG technology CMOS sensors; and
- PC Video--video compression and decompression products based on JPEG
technology.
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The following table lists Zoran's principal multimedia integrated circuits
currently in production, including the months in which initial production units
were first made available to customers:
<TABLE>
INITIAL
PRODUCT FAMILY PRODUCTS COMMERCIAL SHIPMENT PRINCIPAL APPLICATIONS
<S> <C> <C> <C>
DVD and Super Video CD Vaddis DVD decoder December 1997 DVD players
Super Video CD (ZR36700)
Vaddis III Integrated August 1998
DVD decoder (ZR36710)
Vaddis IV Integrated June 1999
DVD decoder (ZR36730)
SupraAV I Super Video August 1998 Super Video CD players
CD decoder (ZR36205)
SupraAV II Super Video September 1998
CD decoder (ZR36215)
Digital Audio 6-channel Dolby Digital December 1994 Home theater
decoder (ZR38500)
Programmable Digital audio December 1998 Digital speakers for home
processor (ZR38601) theater, computers and
gaming consoles
Multi-standard Programmable December 1998 Audio/video receivers, 3D
Digital audio processor headphones
(ZR38650)
Filmless Digital Cameras Filmless digital camera February 1999 Filmless digital camera,
processor--COACH (ZR36400) security
Filmless digital camera September 1999
processor--COACH-XL
(AR36410)
CMOS Sensor (ZR32112) November 1999
PC Video JPEG codes (ZR36050) April 1993 PC video editing, office
automation
Integrated converter February 1995 Color scanners and printers
(ZR36016)*
JPEG PCI multimedia February 1997 PC video editing, security
controller (ZR36067)
PCI multimedia controller March 1997 PC video capture
(ZR36125)
</TABLE>
* Designed and manufactured by a third party and sold by Zoran under its name
pursuant to a non-exclusive license. See "Proprietary Rights and Licenses."
DVD/SUPER VIDEO CD PRODUCTS. In 1997, Zoran introduced the first member of
its Vaddis line of DVD decoders, the Vaddis I. During 1998, Zoran introduced the
Vaddis II and Vaddis III, and in 1999 Zoran introduced the Vaddis IV. Zoran's
Vaddis decoders perform all the audio and video decoding and display
requirements of the DVD specification, including MPEG 2 audio and video
decoding, Dolby Digital, DTS and MLP audio decoding, on-screen display,
decryption required for copyright protection and presentation of graphic
information. The Vaddis has additional computation power that can be utilized
for customer differentiation features. For example, it can incorporate virtual
surround sound algorithms without the addition of hardware. This allows the user
to enjoy the theater-like sound obtained from six speakers using a system that
includes only two speakers and the Vaddis. The Vaddis IV incorporates a more
powerful audio digital signal processor that enables the support of advanced
audio algorithms like MPEG 5.1, DTS and audio DVD, which are needed in today's
DVD player
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systems. Vaddis decoders are being used in DVD players manufactured by Sharp,
Toshiba and others. The SupraAV is Zoran's single chip solution for the Super
Video CD market. This single chip performs all of the audio and video decoding
required by the Super Video CD standard and also allows additional features,
like karaoke, to be implemented without any additional hardware. Zoran provides
a full reference design of a Super Video CD player, based on the SupraAV
ZR36215, that helps its customers accelerate their time to market for their
players.
DIGITAL AUDIO PRODUCTS. The ZR38601, a single-chip digital audio processor
designed to support the growing PC and home theater digital speaker market,
takes advantage of most of the advanced audio algorithms included in Zoran's
Silicon Software library. Its eight channel output architecture supports the
latest home theater applications, including Dolby Surround EX 6.1 channel sound.
The ZR38601's ability to accept six individual channels of audio input also
makes it the ideal processor for today's four channel Direct Sound computer
games. The ZR38650, a true multi-standard digital audio processor, takes
advantage of Zoran's complete Silicon Software library. It is designed to
support the large mid and low range audio/video receiver market, while providing
features previously available only on more expensive models.
FILMLESS DIGITAL CAMERA PRODUCTS. Zoran's JPEG technology is used in
filmless digital cameras. In September 1999, Zoran introduced the Camera On A
CHip, or COACH--an integrated system on a chip solution that includes most of
the electronics of a filmless digital camera. The COACH can be connected
directly to a high-resolution (up to 4 mega pixel) CCD or CMOS sensor, process
the video information in real time, compress the captured image in real time to
a Flash memory, interface an LCD or micro display and interface to all types of
flash memory. Among the unique capabilities of the COACH is the ability to
transfer in real-time, over a USB bus, high quality video to the PC and thus
serve also as a PC video camera. The COACH also allows for direct connection to
a printer, including color correction and special effects, for the non-PC
consumer environment. The COACH is supplemented by a full filmless digital
camera reference design, "Cam ON," shortening the time to market for COACH
customers. In June 2000, Zoran acquired PixelCam, Inc., a provider of high
quality megapixel CMOS image sensors and integrated lens/sensor modules. The
PixelCam CMOS sensor products currently deliver CCD image quality with 1.3
megapixel resolution at one-quarter the power dissipation and twice the
integration level of CCD sensors. The sensor's architecture is scalable, which
will enable higher resolution product offerings as the digital camera OEM's
needs change. These products also offer the digital camera manufacturer longer
battery life and reduced "time to next shot".
PC VIDEO PRODUCTS. Zoran's ZR36050 and ZR36060 codecs are
compression/decompression devices used for real time encoding and decoding of
JPEG video for editing applications. They are fully compliant with JPEG
standards. The ZR36050 and ZR36060 utilize Zoran's proprietary bit rate control
technology for high quality video capture. The ZR36050 also features a unique,
embedded, "lossless" mode that allows customers to elect to use low compression
ratio techniques that result in no data loss for applications where quality is
the primary consideration. The ZR36050 and ZR36060 can be installed in a chipset
that includes the ZR36067 motion controller for PCI board implementation or pre/
post-processing devices such as the ZR36016 integrated color
space/raster-to-block converter. The ZR36060 integrates the functions of the
ZR36050, ZR36015 and an additional SRAM device in a single chip. The ZR36067 is
a PCI motion JPEG controller targeting consumer-priced but professional quality
desktop PCI video editing systems.
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INTEGRATED CIRCUIT CORES. Zoran offers multimedia integrated circuit cores
which can be incorporated into Zoran's customers' chips. For example, Zoran's
latest generation programmable audio digital signal processor engine, the
ZR39000, offers extended processing power and software compatibility with all
previous generations of our digital audio processors, thus allowing it to use
our extensive Silicon Software library. The ZR39000 is designed to be integrated
into DVD, television set-top box, home network, and Internet appliance
system-on-a-chip applications. Zoran's video decoder core, the ZR4VD1, can be
used to reformat and process video from television-type analog format to digital
format, enabling video processing by PCs, digital televisions and other video
systems. Zoran's video encoder core, the ZR4VE2, enables the conversion of
various digital video formats for display on televisions and PC monitors, and
can be integrated into graphics integrated circuits, digital televisions,
television set-top boxes and digital cameras.
CUSTOMERS
The following table lists representative customers, as well as other
OEMs who purchase Zoran's products through its distributors. Each of these
customers and OEMs purchased, directly or indirectly, at least $100,000 of
Zoran's products from January 1, 1999 through December 31, 1999:
<TABLE>
<S> <C> <C> <C>
PRODUCT FAMILY CUSTOMERS OTHER OEMS
DVD/Super Video CD Cet Optibase Quisheng
Fly Ring Marketa Semiconductor Sharp
Digital Technology Newell Hong Kong Toshiba
Fujifilm Xiaxin
Holy Stone Enterprise
Digital Audio Acoustic Accessories Dolby Laboratories Denon
Altec Lansing Fujifilm Hitachi
Amega Technology Gallant Computer
Antex Minto Optical Industry
Boston Acoustics Vtech Communications
Creative Technology Xiaxin
PC Video Alcom Electronics Matrox Avid
Avermedia Technologies Newer Technology Lucent Technologies
Avex Electronics Optibase Silicon Graphics
Edge Electronics Pinnacle Systems Sony
Electronics for Imaging SCI Manufacturing Inc.
Flash Electronics Topas Electronic
Fujifilm Unique Technologies
Leadtek Research Inc.
Filmless Digital Camera Kinpo Electronics Ltd. Primax Electronics Ltd.
</TABLE>
Fujifilm purchases Zoran's products primarily as a distributor and resells
these products, in many cases under Zoran's own trade name. Fujifilm acts as
Zoran's primary distributor in Japan and accounts for most of its product sales
in Japan.
During 1998, sales to Fujifilm accounted for 22.7% of Zoran's total
revenues, including 26.5% of product sales, and sales to Pinnacle accounted for
14.3% of revenues, including 18.8% of product sales. During 1999, sales to
Fujifilm accounted for 37.3% of Zoran's total revenues, including 41.0% of
product sales. During 1998, Zoran's four largest customers accounted for 45.7%
of Zoran's revenues, and during 1999, Zoran's four largest customers accounted
for approximately 56.9% of our revenues.
RESEARCH AND DEVELOPMENT
Zoran believes that its future success depends on our ability to continue to
enhance its existing products and to develop new products that maintain
technological competitiveness and compliance with new standards in rapidly
evolving consumer-oriented digital audio and video markets. Zoran attempts to
leverage its expertise in the fields of digital signal processing, integrated
circuit design, algorithms
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and software development to maintain our position as a leader in the development
of digital audio and video solutions enabled by compression. Accordingly, Zoran
devotes a significant portion of its resources to maintaining and upgrading its
products to reduce integrated circuit cost, feature size, power consumption and
the number of integrated circuits required to perform compression and other
functions necessary for the evolving digital audio and video application
markets. In addition, Zoran seeks to design integrated circuits and cores, as
well as copy-ready reference designs which can reduce the time needed by
manufacturers to integrate Zoran's products into their own products.
Zoran has historically generated a significant percentage of its total
revenues from development contracts with its strategic partners. These
development contracts provide that Zoran will receive payments upon reaching
certain development milestones and that it will retain ownership of the
intellectual property developed. Development contracts have enabled Zoran to
fund portions of its product development efforts, to respond to the feature
requirements of its customers, to accelerate the incorporation of its products
into its customers' products and to accelerate the time-to-market of its
customers' products. Zoran is currently developing new integrated circuits based
on MPEG and Dolby Digital compression standards pursuant to a development
contract with Fujifilm, under which Fujifilm is providing a portion of the
development funding. Fujifilm has participated directly in product definition
for these development programs and has the right to sell resulting products in
Japan under its distribution agreement with Zoran. Fujifilm also has the right
to manufacture a portion of Zoran's requirements for which it has contributed
significant funding.
Zoran is a party to research and development agreements with the Chief
Scientist in Israel's Ministry of Industry and Trade and the Israel-United
States Binational Industrial Research and Development Foundation. These
organizations fund up to 50% of incurred project costs for approved projects up
to contract maximums. The agreements require Zoran to use its best efforts to
achieve specified results and to pay royalties at rates of 3% to 5% of resulting
product sales and up to 30% of resulting license revenues, up to a maximum of
100% to 150% of the total funding received. Reported research and development
expenses are net of these grants, which fluctuate from period to period. Total
grants earned in 1998, 1999 and the six months ended June 30, 2000 were
$851,000, $484,000 and $158,000, respectively. The terms of Israeli Government
participation also contain restrictions on the location of research and
development activities, and the terms of the grants from the Chief Scientist
prohibit the transfer of technology developed pursuant to these grants to any
person without the prior written consent of the Chief Scientist. Zoran is
currently engaged in the development of improvements to its Camera On A CHip, or
COACH, technology under grant from the Chief Scientist. Although Zoran has
received grants from the Chief Scientist and the Foundation in the past, Zoran
intends to fund future research and development efforts for new products
primarily from its own funds and through research and development arrangements
with Zoran's major OEM customers.
As of June 30, 2000, Zoran had a staff of 102 full-time and 35 part-time
research and development personnel, 93 of whom are based in Israel.
SALES AND MARKETING
Zoran's sales and marketing strategy is to focus on providing compression
solutions for manufacturers seeking to design audio and video products for
emerging high volume consumer applications. In cooperation with leading
manufacturers of audio and video equipment in the commercial and consumer
markets, Zoran attempts to identify market segments which have the potential for
substantial growth. To implement its strategy, Zoran has established a direct
sales force located at several sales and marketing offices, and a worldwide
network of independent sales representatives and distributors. In some cases,
Zoran's strategic partners also provide sales and marketing support.
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Zoran works closely in the product development process with strategic
partners to incorporate our integrated circuits and software into products.
Potential products are designed to meet customer-specific product requirements
defined jointly by Zoran and its strategic partners with its partners providing
technological input, and in some cases, a portion of the development funding.
This strategy has permitted Zoran to develop products with substantial financial
and other assistance, while retaining ownership of the technology and ensuring
an established customer for the product once development is completed. In
addition, Zoran's application engineers assist customers in designing their
products to incorporate its integrated circuits.
Zoran's sales are generally made pursuant to purchase orders received
between one and six months prior to the scheduled delivery date. Zoran sells its
products primarily through its nine-person direct sales staff, of whom four are
located in the United States and five are located internationally. Zoran's
United States sales staff is primarily responsible for sales in North America,
South America and Asia, and its Israeli sales staff is primarily responsible for
sales in Europe and the Middle East. In addition, Zoran sells its products
indirectly through commissioned sales representatives as well as selected
distributors. Zoran typically warrant its products for a 12-month period. To
date, Zoran has not experienced material product returns or warranty expense.
During 1998, Zoran opened an office in Shenzhen, China as part of its effort
to capture a leadership position in the Chinese digital audio and video markets.
As of June 30, 2000, Zoran had a staff of 22 employees in its China office,
including sales, applications and customer support employees.
Zoran distributes its integrated circuit products in Japan primarily under
an agreement with Fujifilm. Under this agreement, Fujifilm acts as the primary
distributor in Japan of products developed by Zoran under development contracts
with Fujifilm. Fujifilm also sells some of these products in Japan under its own
name. Zoran may sell these products directly in Japan only to specified
customers and must first buy the products from Fujifilm. Fujifilm also has a
nonexclusive license to distribute most of Zoran's products outside of Japan.
During 1997, Zoran opened a representative office in Tokyo to help promote its
products in Japan and to manage the sale of products not sold through Fujifilm,
such as integrated circuit cores and certain JPEG products.
Zoran sells its Dolby Digital-based products under a perpetual,
non-exclusive license from Dolby to sell products that incorporate the Dolby
Digital algorithm. Zoran is not required to pay license fees or royalties to
Dolby under this agreement. Zoran's customers enter into license agreements
directly with Dolby, pursuant to which they pay royalties to Dolby. Under
Zoran's agreement with Dolby, Zoran may sell its Dolby Digital-based products
only to customers who are licensees of Dolby. To date, most potential customers
for Zoran's Dolby Digital-based products are licensees of Dolby. However, the
failure or refusal of potential customers to enter into license agreements with
Dolby in the future could harm Zorans's sales.
BACKLOG
Sales of Zoran's products are made pursuant to firm purchase orders.
However, sometimes Zoran allows customers to cancel or reschedule deliveries. In
addition, purchase orders are subject to price renegotiations and to changes in
quantities of products ordered as a result of changes in customers' requirements
and manufacturing availability. Zoran's business is characterized by short lead
times and quick delivery schedules. As a result of these factors, Zoran does not
believe that backlog at any given time is a meaningful indicator of future
sales.
MANUFACTURING
Zoran contracts its wafer fabrication, assembly and testing to independent
foundries and contractors, which enables Zoran to focus on its design strengths,
minimize fixed costs and capital
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expenditures and gain access to advanced manufacturing facilities. Zoran's
engineers work closely with its foundry partners and subcontractors to increase
yields, lower manufacturing costs and assure quality.
Zoran's primary foundry is Taiwan Semiconductor Manufacturing Company, or
TSMC, which has manufactured integrated circuits for Zoran since 1987. TSMC is
currently manufacturing Zoran's DVD, audio and JPEG products. In addition,
Fujifilm and Samsung manufacture some integrated circuit products for Zoran.
Fujifilm is currently manufacturing Zoran's JPEG codec, its JPEG-based converter
products and its MPEG 1 decoder. Samsung is currently manufacturing Zoran's
COACH products. Zoran's independent foundries fabricate products for other
companies and may also produce products of their own design.
All of Zoran's devices are currently fabricated using standard complementary
metal oxide semiconductor process technology with 0.25 micron to 0.8 micron
feature sizes. All of Zoran's semiconductor products are currently being
assembled by one of three independent contractors, ASE, Amkor or ASAT, and
tested by those contractors or other independent contractors.
Zoran's ZR36050 JPEG codec was developed jointly with Fujifilm and is
currently manufactured by Fujifilm pursuant to an agreement that grants Fujifilm
the right to manufacture up to 80% of Zoran's requirements for this product,
subject to Fujifilm's ability to manufacture the product on substantially the
same or better terms and conditions as Zoran could obtain from a third party.
This agreement also grants Fujifilm marketing rights in Japan with respect to
these products.
Zoran currently purchases products from all of its foundries under
individually negotiated purchase orders. Zoran's agreement with Fujifilm
entitles it to obtain wafer foundry services from Fujifilm on most favored
pricing and availability terms, subject to Fujifilm's technological capabilities
and reasonable limitations as to quality and delivery terms requested by Zoran.
Zoran does not currently have a long-term supply contract with TSMC or
Samsung, and therefore neither TSMC nor Samsung is obligated to manufacture
products for Zoran for any specific period, in any specific quantity or at any
specified price, except as may be provided in a particular purchase order.
COMPETITION
Zoran's existing and potential competitors include many large domestic and
international companies that have substantially greater resources in the areas
of:
- finance;
- manufacturing;
- technology;
- marketing; and
- distribution.
These competitors also have broader product lines and longer standing
relationships with customers than Zoran does. Some of Zoran's principal
competitors maintain their own semiconductor foundries and may therefore benefit
from capacity, cost and technical advantages. In the market for JPEG-based
products for desktop video editing applications, Zoran's principal competitors
are C-Cube Microsystems and LSI Logic. Cirrus Logic (Crystal Semiconductor),
Fujitsu, Motorola, STMicroelectronics and Yamaha are currently shipping Dolby
Digital-based audio compression products. C-Cube, ESS, LSI Logic, LuxSonor,
Matsushita, National Semiconductor, Oak Technology, STMicroelectronics, Sony and
Winbond have introduced integrated audio and video devices for DVD and Super
video CD applications. These manufacturers, as well as others, are licensed by
Dolby to incorporate Dolby Digital technology in their products. In addition,
some manufacturers, including
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Sony, incorporate compression technologies other than Dolby Digital in audio
products that compete with products using our integrated circuits. In the
markets for JPEG-based products for use in filmless digital cameras, Zoran's
principal competitors are in-house solutions developed and used by major
Japanese OEMs. Texas Instruments and Conexant are providing system-on-a-chip
solutions for filmless digital cameras to third parties. In the market for
MPEG-based chip core products, Zoran's principal competitors are David Sarnoff
Research Center and SICAN Microelectronics.
Zoran believes that its ability to compete successfully in the rapidly
evolving markets for high performance audio and video compression technology
depends on a number of factors, including:
- price, quality, performance and features of Zoran's products;
- the timing and success of new product introductions by Zoran, its
customers and its competitors;
- the emergence of new industry standards;
- Zoran's ability to obtain adequate foundry capacity;
- the number and nature of our competitors in a given market; and
- general market and economic conditions.
The markets in which Zoran competes are intensely competitive and are
characterized by rapid technological change, declining average unit selling
prices and rapid product obsolescence. Zoran expects competition to increase in
the future from existing competitors and from other companies that may enter
Zoran's existing or future markets with solutions which may be less costly or
provide higher performance or more desirable features than Zoran's products.
The DVD market is just emerging, and additional competitors are expected to
enter the market for integrated circuits used in DVD players. Zoran believes
that several large Japanese consumer electronics companies may be planning to
enter this market and may attempt to develop MPEG 2 hardware or software to
compete with Zoran's products. Some of these potential competitors may develop
captive implementations for use only with their own PC and commercial and
consumer electronics products. This increased competition may result in price
reductions, reduced profit margins and loss of market share.
Historically, average unit selling prices in the semiconductor industry in
general, and for Zoran's products in particular, have decreased over the life of
a particular product. Zoran expects that the average unit selling prices of its
products will continue to be subject to significant pricing pressures. In order
to offset expected declines in the average unit selling prices of its products,
Zoran will likely need to reduce the cost of its products. Zoran intends to
accomplish this by implementing design changes that lower the cost of
manufacture, assembly and testing, by negotiating reduced charges by its
foundries as and if volumes increase, and by successfully managing our
manufacturing and subcontracting relationships. Since Zoran does not operate our
own manufacturing, assembly or testing facilities, it may not be able to reduce
its costs as rapidly as companies that operate their own facilities. If Zoran
fails to introduce lower cost versions of our products in a timely manner or to
successfully manage its manufacturing, assembly and testing relationships its
business would be harmed.
PROPRIETARY RIGHTS AND LICENSES
Zoran's ability to compete successfully is dependent in part upon its
ability to protect its proprietary technology and information. Although Zoran
relies on a combination of patents, copyrights, trademarks, trade secret laws
and licensing arrangements to protect some of its intellectual property, Zoran
believes that factors such as the technological and creative skills of its
personnel and the success of its ongoing product development efforts are more
important in maintaining its competitive position. Zoran generally enters into
confidentiality or license agreements with its employees, distributors,
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customers and potential customers and limit access to its proprietary
information. Zoran currently holds several U.S. patents, and has additional
patent applications pending, that pertain to technologies and processes relating
to its current business. Zoran's intellectual property rights, if challenged,
may not be upheld as valid, may not be adequate to prevent misappropriation of
its technology or may not prevent the development of competitive products.
Additionally, Zoran may not be able to obtain patents or other intellectual
property protection in the future. In particular, the existence of several
consortiums that license patents relating to the MPEG standard has created
uncertainty with respect to the use and enforceability of patents implementing
that standard. Furthermore, the laws of certain foreign countries in which
Zoran's products are or may be developed, manufactured or sold, including
various countries in Asia, may not protect Zoran's 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 Zoran's technology and products more likely in
these countries.
Zoran sells its Dolby Digital-based products under a perpetual non-exclusive
license from Dolby which permits Zoran to incorporate the Dolby Digital
algorithm into its products. Zoran's customers enter into license agreements
with Dolby pursuant to which they pay royalties directly to Dolby. Under Zoran's
agreement with Dolby, Zoran may sell its Dolby Digital-based products only to
customers who are licensees of Dolby. To date, most potential customers for
Zoran's Dolby Digital-based products are licensees of Dolby. However, the
failure or refusal of potential customers to enter into license agreements with
Dolby in the future could harm Zoran's business.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights, which have resulted in significant and
often protracted and expensive litigation. Zoran or its foundries from time to
time are notified of claims that we may be infringing patents or other
intellectual property rights owned by third parties. Zoran has been subject to
intellectual property claims and litigation in the past and it may be subject to
additional claims in the future. In particular, given the uncertainty discussed
above regarding patents relating to the MPEG standard, it is difficult for Zoran
to assess the possibility that its activities in the MPEG field may give rise to
future patent infringement claims. Litigation by or against Zoran relating to
patent infringement or other intellectual property matters could result in
significant expense to Zoran and divert the efforts of its technical and
management personnel, whether or not such litigation results in a determination
favorable to it. In the event of an adverse result in any such litigation, Zoran
could be required to pay substantial damages, cease the manufacture, use and
sale of infringing products, expend significant resources to develop
non-infringing technology, discontinue the use of certain processes or obtain
licenses to the infringing technology. Licenses may not be offered or the terms
of any offered licenses may not be acceptable to Zoran. If Zoran fails to obtain
a license from a third party for technology used by it, it could incur
substantial liabilities and to suspend the manufacture of products, or the use
by Zoran's foundries of certain processes.
EMPLOYEES
As of June 30, 2000, Zoran had 200 full-time and 38 part-time and contract
employees, including 102 full-time and 35 part-time and contract employees
primarily involved in research and development activities, 68 in marketing and
sales, 22 in finance and administration and 8 in manufacturing control and
quality assurance. Zoran has 111 full-time employees and 35 part-time and
contract employees based in Israel, including 93 employees who are primarily
involved in engineering and research and development. There are 51 individuals
at Zoran's facilities in Santa Clara, California. The remaining employees are
located in Zoran's international offices in Canada, Japan, Taiwan and China.
Zoran believes that its future success will depend in large part on its ability
to attract and retain highly-skilled, engineering, managerial, sales and
marketing personnel. Competition for such personnel is intense. Zoran's
employees are not represented by any collective bargaining unit, and it has
never experienced a work stoppage. Zoran believes that its employee relations
are good.
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PROPERTIES
Zoran's executive offices, its principal administration, marketing and sales
operations and a portion of its research and development operations are located
in approximately 24,000 square feet of leased space in Santa Clara, California
under a lease expiring in March 2003. Zoran's principal research and development
and engineering facilities and the balance of its administration, marketing and
sales operations are located in approximately 20,000 square feet of leased space
in an industrial park in Haifa, Israel under a lease expiring in 2004. The
aggregate annual gross rent for our facilities was approximately $1,010,000 in
1999. Zoran also leases sales offices in Tokyo, Japan and Shenzhen, China. Zoran
believes that its current facilities are adequate for its needs for the
foreseeable future and that, should it be needed, suitable additional space will
be available to accommodate expansion of its operations on commercially
reasonable terms.
LEGAL PROCEEDINGS
Zoran is not a party to any pending legal proceedings which it believes will
materially affect its financial condition or results of operations.
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ZORAN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
From Zoran's inception in 1981 through 1991, it derived the substantial
majority of its revenue from digital filter processors and vector signal
processors used principally in military, industrial and medical applications. In
1989, Zoran repositioned its 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, Zoran
discontinued production of these products. Zoran's 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.
Zoran derives most of its revenues from the sale of its integrated circuit
products. Historically, average selling prices in the semiconductor industry in
general, and for its products in particular, have decreased over the life of a
particular product. Average selling prices for its hardware products have
fluctuated substantially from period to period, primarily as a result of changes
in its 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, Zoran reduced the prices of some of its products in
order to better penetrate the consumer market. Zoran believes that, as its
product lines continue to mature and competitive markets evolve, it is likely to
experience further declines in the average selling prices of its products,
although it cannot predict the timing and amount of such future changes with any
certainty.
Zoran's cost of product sales consists primarily of fabrication costs,
assembly and test costs, and the cost of materials and overhead from operations.
If Zoran is unable to reduce its cost of product sales to offset anticipated
decreases in average selling prices, its product gross margins will decrease.
Zoran's product gross margin is also dependent on product mix and on the
percentage of products sold directly to its OEM customers versus indirectly
through its marketing partners who purchase its 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, Zoran's strategic partner and distributor in Japan. Fujifilm
provides more sales and marketing support than Zoran's other distributors. Zoran
expects both product and customer mix to continue to fluctuate in future
periods, causing further fluctuations in margins.
Zoran also derives revenue from licensing its 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,
Zoran has historically generated a significant percentage of its 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 Zoran with partial funding for
the development of some of its products. These development contracts provide for
license and milestone payments which are recorded as development revenue. Zoran
classifies all development costs, including costs related to these development
contracts, as research and development expenses. Zoran retains ownership of the
intellectual property developed by it under these development contracts. While
Zoran intends to continue to enter into development contracts with certain
strategic partners, it expects development revenue to continue to decline as a
percentage of total revenues.
Zoran 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. Zoran is also a
party to research and development agreements with the Chief Scientist in
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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 Zoran to use its best efforts to achieve specified results
and require Zoran 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. Zoran believes that
significant investments in research and development are required for it 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.
Zoran's selling, general and administrative expenses consist primarily of
employee-related expenses, royalties, sales commissions, product promotion and
other professional services. Zoran expects that selling, general and
administrative expenses will continue to increase to support its anticipated
growth.
Zoran conducts a substantial portion of its research and development and
certain sales and marketing and administrative operations in Israel through its
wholly-owned Israeli subsidiary. As a result, some of Zoran's expenses are
incurred in New Israeli Shekels. To date, substantially all of Zoran's product
sales and its development and licensing revenue have been denominated in U.S.
dollars and most costs of product sales have been incurred in U.S. dollars.
Zoran expects that most of its sales and costs of sales will continue to be
denominated and incurred in U.S. dollars for the foreseeable future. Zoran has
not experienced material losses or gains as a result of currency exchange rate
fluctuations and has not engaged in hedging transactions to reduce its exposure
to such fluctuations. Zoran may in the future elect to take appropriate action
to reduce its foreign exchange risk.
Zoran's effective income tax rate has benefited from the availability of net
operating losses which it has utilized to reduce taxable income for U.S. federal
income tax purposes and by its 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 its operations in Israel. Zoran's U.S. federal net
operating losses expire at various times between 2000 and 2009, and the benefits
from its subsidiary's approved enterprise status expire at various times
beginning in 2003.
In June 1999, Zoran sold to MGI Software of Canada 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. Zoran'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,
Zoran 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 its operating results was an after-tax gain of $172,000, or $0.01 per share
on a diluted basis. This gain does not reflect the potential future economic
benefit that may be derived from this transaction and realized in future periods
in the form of royalties. Zoran does not currently expect, however, that these
royalties will have a material impact on quarterly revenues for the foreseeable
future. In addition, the shares of MGI stock received by Zoran as part of this
transaction are subject to future appreciation or depreciation. Zoran's software
revenues have declined significantly as a result of the sale of the SoftDVD
product line.
On June 29, 2000, Zoran acquired PixelCam, Inc., a manufacturer of megapixel
CMOS image sensors and integrated lens/sensor modules, in exchange for 370,832
shares of Zoran common stock and options to purchase 4,168 shares of Zoran
common stock with an aggregate value of $24.6 million. Of the Zoran common stock
issued in the acquisition, 123,612 shares are subject to repurchase by Zoran
until the satisfaction of vesting periods applicable to the PixelCam shares for
which they were exchanged. Additional shares of Zoran common stock are
contingently issuable to former PixelCam
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stockholders upon achievement of certain milestones. Any contingent
consideration will be valued and recorded as of the date the satisfaction of the
applicable milestones becomes probable. The acquisition was accounted for under
the purchase method of accounting. In connection with the acquisition, Zoran
recorded a one-time charge of $6.8 million as a write-off of purchasers in
process research and development and recorded goodwill and other intangible
assets of $18.0 million.
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data as
a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales...................................... 72.8% 75.7% 85.8% 79.2% 83.9%
Software, licensing and development................ 27.2 24.3 14.2 20.8 16.1
----- ----- ----- ----- -----
Total revenues................................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Costs and expenses:
Cost of product sales.............................. 35.7 43.1 46.3 42.2 47.1
Research and development........................... 30.7 30.6 20.5 29.4 19.8
Selling, general and administrative................ 24.9 26.1 23.1 25.7 23.5
----- ----- ----- ----- -----
Total costs and expenses......................... 91.3 99.8 89.9 97.3 109.0
----- ----- ----- ----- -----
Operating income (loss).............................. 8.7 0.2 10.1 2.7 (9.0)
Interest and other income, net....................... 2.8 2.4 2.6 3.8 11.5
Income before income taxes........................... 11.5 2.6 12.7 6.5 2.5
Provision for income taxes........................... 2.1 0.5 1.9 1.3 3.2
----- ----- ----- ----- -----
Net income (loss).................................... 9.4% 2.1% 10.8% 5.2% (0.6)%
----- ----- ----- ----- -----
</TABLE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES. Total revenues increased by 43.0% to $36.5 million in the six
months ended June 30, 2000 from $25.5 million for the same period in 1999. For
the six months ended June 30, 2000, product revenues were $30.6 million,
compared to $20.2 million for the same period in 1999, an increase of 51.5%.
Fueling the growth in product revenue were the DVD and audio product lines.
Software, licensing and development revenue were $5.9 million for the six months
ended June 30, 2000, compared to $5.3 million for the same period in 1999,
representing an increase of 10.9%. These changes were primarily due to the
timing of significant new licensing contracts, as well as the timing of revenue
recognition on development contracts.
PRODUCT GROSS MARGIN. Product gross margins declined to 43.8% of product
revenues in the six months ended June 30, 2000, compared to 46.7% for the same
period in 1999. The decrease was due to a product sales mix that included a
decreased percentage of higher-margin products and a lower percentage of
products sold directly to OEM customers.
RESEARCH AND DEVELOPMENT. Research and development expenses declined by
4.0% to $7.2 million in the six months ended June 30, 2000, from $7.5 million in
the same period in 1999. As a percentage of revenues, research and development
expenses decreased to 19.8% for the six months ended June 30, 2000, compared to
29.4% for the same period of 1999.
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SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $8.6 million for the six months ended June 30, 2000, compared to
$6.5 million for the same period of 1999. The increase 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, selling,
general and administrative expenses were 23.5% for the six months ended
June 30, 2000, compared to 25.7% for the same period of 1999. This decrease as a
percent of revenues was due to the increase in revenues in 2000.
INTEREST AND OTHER INCOME (EXPENSE), NET. Net interest and other income for
the six months ended June 30, 2000 was $4.2 million, an increase of 331.3%
compared to the same period in 1999. The increase resulted primarily from
increased interest income on higher cash balances following a follow-on public
offering of common stock in December 1999.
PROVISION FOR INCOME TAXES. Zoran's estimated effective tax rate remained
at 15% for the six months ended June 30, 2000, the same as 1999's effective tax
rate.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Total revenues increased by 39.5% to $61.7 million in 1999 from
$44.2 million in 1998. Product sales increased by 58.0% to $52.9 million in 1999
from $33.5 million in 1998. The increase in product sales resulted primarily
from increased unit sales of DVD and Super Video CD products. Software,
licensing and development revenue decreased by 18.3% to $8.8 million in 1999
from $10.8 million in 1998. This decrease was principally due to a decline in
software licensing revenue following the sale of our SoftDVD product line in
June 1999 and, to a lesser degree, a decline in development revenue. These
decreases were partially offset by increased revenue from licenses of our
integrated circuit cores.
PRODUCT GROSS MARGIN. Product gross margin increased to 46.1% for 1999
compared to 43.1% for 1998. The increase was due to a shift in product mix to a
higher percentage of higher-margin products, a shift in customer mix to a
greater percentage of direct sales to OEM customers and lower per-unit
manufacturing costs as a result of increased unit sales.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased by
6.6% to $12.7 million in 1999 from $13.5 million in 1998. Research and
development expenses in 1999 were net of reimbursements in the amounts of
$484,000 under product development agreements with the Chief Scientist. For
1998, Chief Scientist reimbursements were $851,000. Gross research and
development expenses decreased as a result of a decline in software development
activities in the second half of 1999 following the sale of our SoftDVD product
line in June 1999. Research and development expenses decreased as a percentage
of total revenues to 20.5% in 1999, compared to 30.6% in 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by 23.4% to $14.3 million in 1999 from $11.5 million in 1998.
The increase was primarily due to increased sales and marketing expenses related
to product market development and to support planned revenue growth in China.
INTEREST AND OTHER INCOME (EXPENSE), NET. Net interest and other income
increased by 48.0% to $1.6 million in 1999 from $1.1 million in 1998. The
increase resulted primarily from a $732,000 gain realized from the sale of our
SoftDVD product line in the second quarter of 1999.
PROVISION FOR INCOME TAXES. Zoran's estimated effective tax rate decreased
to 15.0% for 1999 from 20.0% in 1998, as a result of increasing foreign
operations taxed at lower rates.
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YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Total revenues decreased by 1.6% to $44.2 million in 1998 from
$44.9 million in 1997. Product sales increased by 2.3% to $33.5 million in 1998
from $32.7 million in 1997. The increase in product sales resulted primarily
from increased unit sales of DVD and Super Video CD products. Software,
licensing and development revenues decreased by 11.9% to $10.8 million in 1998
from $12.2 million in 1997. This decrease was due to a reduction in royalties
from our SoftPEG product.
PRODUCT GROSS MARGIN. Product gross margin decreased by 15.5% to 43.1% in
1998, compared to 51.0% in 1997. The decrease was due to a product sales mix
that included an increased percentage of lower margin products, and higher
manufacturing costs during 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased by
1.7% to $13.5 million in 1998 from $13.8 million in 1997. Research and
development expenses in 1998 were net of reimbursements in the amounts of
$851,000 under product development agreements with the Chief Scientist. There
were no such reimbursements during 1997. Gross research and development expenses
increased as a result of our planned enhancement to our technology and
development capabilities. Research and development expenses decreased as a
percentage of total revenues to 30.6% in 1998, compared to 30.7% in 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by 3.1% to $11.5 million in 1998 from $11.2 million in 1997.
The increase was primarily due to increased sales and marketing expenses related
to product market development and to support planned revenue growth in China.
INTEREST AND OTHER INCOME (EXPENSE), NET. Net interest and other income
decreased by 14.9% to $1.1 million in 1998 from $1.3 million in 1997. The
decrease resulted primarily from decreased interest income as a result of lower
balances of cash, cash equivalents and short-term investments.
PROVISION FOR INCOME TAXES. Our estimated effective tax rate increased to
20.0% for 1998 from 18.0% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
During 1999 and the first six months of 2000, Zoran's capital requirements
were satisfied primarily by cash flows from operations. In December 1999, Zoran
received net proceeds of $112.9 million from a public offering of its common
stock. At June 30, 2000, Zoran had $15.4 million of cash and cash equivalents,
$93.2 million of short-term investments and $122.5 million of working capital.
Zoran's operating activities provided cash of $7.0 million in 1999, and
$5.6 million in the six months ended June 30, 2000, primarily due to net income,
adjusted for the non-cash impact of depreciation and amortization. An increase
in accounts receivable, due to the increase in revenues during 1999, was offset
by increases in accrued expenses, accounts payable and by the non-cash impact of
depreciation and amortization. In the six months ended June 30, 2000, a one-time
charge of $6.8 million for the write off of purchased in-process research and
development contributed to cash flow. Increases in inventory and prepaid
expenses were partially offset by an increase in accounts payable and accrued
expenses.
Cash used in investing activities was $118.2 million during 1999. In 1999,
capital equipment expenditures accounted for $2.8 million of the cash used while
the purchase of short-term investments used $115.4 million. Cash used in the six
months ended June 30, 2000 principally reflected purchases of long-term equity
investments and capital equipment.
Cash provided by financing activities was $115.6 million in 1999 and
$1.5 million in the six months ended June 30, 2000. Cash provided in 1999
primarily consisted of net proceeds of $112.9 million from
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our public offering of common stock in December 1999, with the remainder
consisting of proceeds from the issuance of common stock under our employee
stock option and stock purchase plans. Cash provided in the six months ended
June 30, 2000 consisted principally of proceeds from the issuance of common
stock under Zoran's employee stock option and stock purchase plans.
Zoran believes that its current balances of cash, cash equivalents and
short-term investments, and anticipated cash flow from operations, will satisfy
its anticipated working capital and capital expenditure requirements at least
through the next twelve months. Nonetheless, Zoran's future capital requirements
may vary materially from those now planned and will depend on many factors, such
as:
- the levels at which Zoran maintains inventory and accounts receivable;
- the market acceptance of Zoran's products;
- the levels of promotion and advertising required to launch Zoran's new
products or to enter markets and attain a competitive position in the
marketplace;
- Zoran's 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 Zoran's products; and
- Zoran's relationships with its suppliers and customers.
In addition, Zoran 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 any acquisitions of businesses, products or
technologies.
To the extent that Zoran's existing resources and cash generated from
operations, are insufficient to fund its future activities, it 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 Zoran's
operations. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders. Zoran cannot be certain that
additional financing will be available in amounts or on terms acceptable to it,
if at all. If Zoran is unable to obtain this additional financing, it may be
required to reduce the scope of its planned product development and sales and
marketing efforts, which could harm its business, financial condition and
operating results.
STOCK OPTION REPRICING
In August 1998, Zoran's employees were offered the opportunity to reprice
their options. Repricing was conditional on employees accepting the restart of
their vesting schedule. The vesting schedule would however, revert back to the
original schedule if Zoran meets significant performance goals. At the end of
1999, Zoran did, in fact, meet these performance goals and vesting schedules of
the repriced stock options reverted to their original vesting timetable.
Substantially all options with an exercise price in excess of $5.94 were
cancelled and replaced with new options having an exercise price of $5.94, the
market price on the date that the employees accepted the repricing. A total of
924,164 shares were repriced.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Zoran is exposed to financial market risks including changes in interest
rates and foreign currency exchange rates.
The fair value of Zoran's 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 its investment
portfolio.
A majority of Zoran's revenue and capital spending is transacted in U.S.
dollars, although a portion of the cost of its operations, relating mainly to
its personnel and facilities in Israel, is incurred in New Israeli Shekels.
Zoran has not engaged in hedging transactions to reduce its exposure to
fluctuations that may arise from changes in foreign exchange rates. Based on
Zoran's overall currency rate exposure at June 30, 2000, a near-term 10%
appreciation or depreciation of the New Israeli Shekel would have an immaterial
affect on its financial condition.
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ZORAN MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names of Zoran's executive officers and directors and their ages as of
August 31, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------------------------------------------------------
<S> <C> <C>
Levy Gerzberg, Ph.D......... 55 President, Chief Executive Officer and Director
Uzia Galil.................. 75 Chairman of the Board of Directors
Aharon Aharon............... 46 Senior Vice President and Chief Operating Officer
Senior Vice President, Business and Strategic
Isaac Shenberg, Ph.D........ 49 Development
Bruce Renouard.............. 39 Vice President, Worldwide Sales
Vice President, Audio Products and Intellectual
Paul R. Goldberg............ 55 Properties
Karl Schneider.............. 45 Vice President, Finance and Chief Financial Officer
Shmuel Farkash, Ph.D........ 43 Vice President, Video Products
Alon Ironi.................. 36 Vice President, Engineering, General Manager, Israel
James D. Meindl............. 67 Director
Arthur B. Stabenow.......... 61 Director
Philip M. Young............. 60 Director
</TABLE>
LEVY GERZBERG was a co-founder of Zoran in 1981 and has served as its
President and Chief Executive Officer since December 1988 and as a director
since 1981. Dr. Gerzberg also served as Zoran's President from 1981 to 1984 and
as its Executive Vice President and Chief Technical Officer from 1985 to 1988.
Prior to co-founding Zoran, Dr. Gerzberg was Associate Director of Stanford
University's Electronics Laboratory. Dr. Gerzberg holds a Ph.D. in Electrical
Engineering from Stanford University and an M.S. in Medical Electronics and a
B.S. in Electrical Engineering from the Technion-Israel Institute of Technology
in Haifa, Israel.
AHARON AHARON joined Zoran as Vice President, Engineering--Haifa Operations
in February 1997 and was elected Vice President, Engineering in August 1997 and
Senior Vice President and Chief Operating Officer in October 1998. From 1983 to
February 1997, Mr. Aharon was employed by IBM in a variety of engineering and
management positions, including Senior Manager of VLSI Design Tools from 1993 to
February 1997 and Design Automation Manager from 1989 to 1993. Mr. Aharon holds
a B.S. and M.S. in Electrical Engineering from the Technion-Israel Institute of
Technology.
ISAAC SHENBERG has served as Vice President, Sales and Marketing of Zoran
since January 1995 and as Senior Vice President, Business and Strategic
Development since October 1998. From August 1990 to January 1995, Dr. Shenberg
served as Zoran's Product Line Business Manager. Dr. Shenberg holds a Ph.D. in
Electrical Engineering from Stanford University and a B.S. and M.S. in
Electrical Engineering from the Technion-Israel Institute of Technology.
BRUCE RENOUARD joined Zoran as Vice President, Worldwide Sales in
September 1999. From August 1997 to September 1999, Mr. Renouard served as
Director of Worldwide Market Development for IDT/Centour, a semiconductor
company. From December 1995 to August 1997, Mr. Renouard served as National
Distribution Sales Manager of Cyrix Corporation, a semiconductor company. From
April 1993 to December 1995, Mr. Renouard served as District Sales Manager for
Cyrix. Mr. Renouard holds a B.S.E.E. in Electrical Engineering from Southern
Methodist University.
PAUL R. GOLDBERG joined Zoran as Vice President, Systems Solutions in
June 1996 and was elected Vice President, Audio Products in October 1998. From
April 1991 to June 1996, Mr. Goldberg was employed as film products group leader
at Dolby Laboratories, Inc. From 1988 to 1990, Mr. Goldberg was Director of the
Tandy Electronic Research Center. From 1979 to 1988, Mr. Goldberg was
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employed by Wavetek Incorporated and its spin-off, Advanced Image Data, most
recently as Vice President of Research and Development and Market Development of
AID. Prior thereto, Mr. Goldberg was employed by Smith Kline Instruments, most
recently as Director of Biomedical Research and Development. Mr. Goldberg holds
a B.S. in Electrical Engineering from the University of Minnesota.
KARL SCHNEIDER joined Zoran as Corporate Controller in January 1998 and was
elected Vice President, Finance and Chief Financial Officer in July 1998. From
September 1996 through 1997, Mr. Schneider served as Controller for the Film
Measurement and Robotics and Integrated Technologies divisions of KLA-Tencor, a
semiconductor equipment company. Mr. Schneider served as the Corporate
Controller for SCM Microsystems, Inc. from October 1995 to September 1996,
Controller for Reply Corporation from January 1994 to September 1995, Director
of Finance for Digital F/X from October 1992 to January 1994 and Controller for
Flextronics from September 1987 through June 1991. Mr. Schneider holds a B.S. in
Business Administration from San Diego State University.
SHMUEL FARKASH joined Zoran in March 1992 as a senior research and
development engineer. In February 1994 Dr. Farkash became our marketing and
sales manager for Europe. In June 1996 Dr. Farkash became Director of Marketing
for the JPEG product line. In July 1998, Dr. Farkash was elected Vice President,
Video Products, with responsibilities for the JPEG and DVD product lines.
Dr. Farkash holds a Ph.D., M.S., and a B.S. in Electrical Engineering from the
Technion.
ALON IRONI joined Zoran as a system engineer in March 1993. Mr. Ironi
subsequently served as our Manager, System Engineering and Manager, Architecture
and Algorithms. Mr. Ironi was elected Vice President, Engineering, Israel in
January 1999. From March 1990 to March 1993, Mr. Ironi served as a DSP software
engineer for the DSP Group. Mr. Ironi holds a B.S. in Electrical Engineering
from the Technion-Israel Institute of Technology.
UZIA GALIL has been a director of Zoran since 1983 and has served as
Chairman of the Board of Directors since October 1993. Mr. Galil currently
serves as President and Chief Executive Officer of Uzia Initiative and
Management Ltd., a company specializing in the promotion and nurturing of new
businesses associated with electronic commerce and medical information media,
which he founded in November 1999. From 1962 until November 1999, Mr. Galil
served as President and Chief Executive Officer of Elron Electronic
Industries Ltd., an Israeli high technology holding company, where he also
served as Chairman of the Board. From January 1981 until leaving Elron,
Mr. Galil also served as Chairman of the board of directors of Elbit Ltd., an
electronic communication affiliate of Elron, and as a member of the boards of
directors of Elbit Systems Ltd., a defense electronics affiliate of Elron, and
all other private companies held in the Elron portfolio. Mr. Galil currently
serves as a member of the boards of directors of Orobotech Ltd., NetManage Inc.
and Partner Communications Ltd. From 1980 to 1990, Mr. Galil served as Chairman
of the International Board of Governors of the Technion. Mr. Galil holds an M.S.
in Electrical Engineering from Purdue University and a B.S. from the
Technion-Israel Institute of Technology. Mr. Galil has also been awarded an
honorary doctorate in technical sciences by the Technion in recognition of his
contribution to the development of science-based industries in Israel, an
honorary doctorate in philosophy by the Weizmann Institute of Science, an
honorary doctorate in engineering by Polytechnic University, New York, and an
honorary doctorate from the Ben-Gurion University of the Negev in Israel.
Mr. Galil is also a recipient of the Israel Prize.
JAMES D. MEINDL has been a director of Zoran since March 1986. Dr. Meindl
has been a professor of microelectronics at Georgia Institute of Technology
since November 1993. From September 1986 to November 1993, Dr. Meindl served as
Provost and Senior Vice President of Academic Affairs at Renssalaer Polytechnic
Institute. Prior thereto, Dr. Meindl was a professor of electrical engineering
and Director of the Stanford Electronics Laboratory and Center for Integrated
Systems at Stanford University. Dr. Meindl is also a director of SanDisk, Inc.
and Digital Microwave Corporation.
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ARTHUR B. STABENOW has been a director of Zoran since November 1990.
Mr. Stabenow has been principally engaged as a private investor since
January 1999. From March 1986 to January 1999 Mr. Stabenow was employed as Chief
Executive Officer of Micro Linear Corporation, a semiconductor company.
Mr. Stabenow also serves as a director of Applied Micro Circuits Corporation.
PHILIP M. YOUNG has been a director of Zoran since January 1986. Mr. Young
has been a general partner of U.S. Venture Partners, a venture capital
partnership, since April 1990. Mr. Young is also a director of The Immune
Response Corporation, Vical Incorporated and 3Dfx Interactive, Inc.
SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS, MANAGEMENT AND DIRECTORS OF ZORAN
The following table sets forth information concerning the beneficial
ownership of common stock of Zoran as of June 30, 2000 by the following:
- each person or entity who is known by Zoran to own beneficially more than
5% of the outstanding shares of Zoran common stock;
- each of Zoran's current directors;
- Zoran's chief executive officer and its four other most highly compensated
officers; and
- all directors and executive officers of Zoran as a group.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
COMMON STOCK COMMON STOCK
NUMBER OF OUTSTANDING OUTSTANDING AFTER
NAME SHARES(1) BEFORE THE MERGER THE MERGER
---- --------- ----------------- -----------------
<S> <C> <C> <C>
5% STOCKHOLDERS:
Elron Electronic Industries Ltd.................... 493,965 3.4% 2.9%
Advanced Technology Center
P.O. Box 1513
Haifa 31015, Israel
EXECUTIVE OFFICERS AND DIRECTORS:
Levy Gerzberg, Ph.D. (2)........................... 369,284 2.5 2.1
Isaac Shenberg, Ph.D. (3).......................... 95,978 * *
Aharon Aharon (4).................................. 90,628 * *
Karl Schneider (5)................................. 53,733 * *
Uzia Galil (6)..................................... 50,649 * *
James D. Meindl, Ph.D. (7)......................... 40,547 * *
Philip M. Young (8)................................ 40,495 * *
Arthur B. Stabenow (9)............................. 29,781 * *
Paul R. Goldberg (10).............................. 29,724 * *
All directors and executive officers as a group (14
persons) (10).................................... 997,779 6.5% 5.5%
</TABLE>
------------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person
that are currently exercisable, or will become exercisable within 60 days
after June 30, 2000, are deemed outstanding. Such shares, however, are not
deemed outstanding for purposes of computing the percentage ownership of any
other person. In general, options granted under the 1993 Stock Option Plan
are fully exercisable from the date of grant, subject to the Company's right
to repurchase any unvested shares at the original exercise price in the
event of
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termination of the optionee's employment. Unless otherwise indicated in the
footnotes to this table, the persons and entities named in the table have
sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
(2) Includes 341,323 shares subject to stock options that are currently
exercisable.
(3) Includes 93,785 shares subject to stock options that are currently
exercisable.
(4) Includes 88,500 shares subject to stock options that are currently
exercisable.
(5) Includes 51,800 shares subject to stock options that are currently
exercisable.
(6) Includes 3,008 shares held by Mr. Galil's spouse. Mr. Galil may be deemed
to be a beneficial owner of these shares, although Mr. Galil disclaims such
beneficial ownership. Also includes 34,400 shares subject to stock options
that are currently exercisable.
(7) Includes 222 shares held jointly with Dr. Meindl's spouse and 1,125 shares
held by James and Frederica Meindl as trustees of the Meindl Trust dated
February 4, 1972. Also includes 34,400 shares subject to stock options that
are currently exercisable.
(8) Includes 35,666 shares subject to stock options that are currently
exercisable.
(9) Includes 14,400 shares subject to stock options that are currently
exercisable.
(10) Includes 27,188 shares subject to stock options that are currently
exercisable.
(11) Includes 914,049 shares subject to stock options that are currently
exercisable.
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INFORMATION REGARDING ZORAN EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table contains information concerning the compensation
received for services rendered to Zoran during the years ended December 31,
1997, 1998 and 1999 by the Chief Executive Officer of Zoran and the four other
most highly compensated executive officers of Zoran whose total salary and bonus
for such fiscal year exceeded $100,000, collectively, the "named executive
officers":
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL OPTIONS
COMPENSATION GRANTED ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (1) BONUS (SHARES) COMPENSATION
--------------------------- -------- ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Levy Gerzberg, Ph.D........................... 1999 $300,011 $225,000 55,000 $ 237(2)
President and Chief Executive Officer 1998 $294,270 -- 231,666 $ 154(2)
1997 $270,095 $100,000 75,000 $ 538(2)
Paul R. Goldberg.............................. 1999 $159,723 $ 24,000 15,000 $ 157(2)
Vice President, Audio Products and 1998 $149,209 -- 55,000 $ 120(2)
Intellectual Property 1997 $136,166 $ 58,750 10,000 $ 518(2)
Isaac Shenberg, Ph.D.......................... 1999 $155,167 $ 55,000 20,000 $36,117(3)
Senior Vice President, Business and Strategic 1998 $152,574 -- 55,000 $24,430(3)
Development 1997 $120,542 $ 50,000 40,000 $44,169(3)
Aharon Aharon (4)............................. 1999 $205,584 $ 72,000 30,000 $28,238(2)(3)
Senior Vice President and Chief Operating 1998 $161,582 -- 110,000 $28,652(3)
Officer 1997 $122,653 $ 45,000 60,000 $34,053(3)
Karl Schneider (5)............................ 1999 $158,653 $ 50,000 15,000 $ 153(2)
Vice President, Finance and Chief Financial 1998 $122,152 -- 50,000 $ 125(2)
Officer
</TABLE>
------------------------
(1) Includes amounts (if any) deferred under Zoran's 401(k) Plan.
(2) Represents or includes premiums paid by Zoran with respect to term life
insurance for the benefit of Dr. Gerzberg and Messrs. Goldberg, Aharon and
Schneider.
(3) Consists of (i) premiums paid by Zoran under an insurance policy that covers
certain severance and other benefits that may be payable to the Named
Executive Officer and (ii) contributions by Zoran toward a continuing
education fund for his benefit. Zoran paid insurance premiums for the
benefit of Dr. Shenberg and Mr. Aharon in the amounts of $24,507 and
$24,695, respectively, in 1999, $21,080 and $25,300, respectively, in 1998
and $19,086 and $17,580, respectively, in 1997. In addition, Zoran made
continuing education contributions for the benefit of Dr. Shenberg and
Mr. Aharon in the amounts of $11,610 and $3,373, respectively, in 1999,
$3,350 and $3,352, respectively, in 1998 and $9,041 and $9,200,
respectively, in 1997.
(4) Mr. Aharon joined Zoran as an officer in February 1997.
(5) Mr. Schneider joined Zoran as an employee in January 1998 and became an
executive officer in July 1998. The reported compensation for 1998 includes
compensation earned by Mr. Schneider during the full fiscal year.
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OPTION GRANTS
The following table sets forth information concerning grants of options to
purchase Zoran's common stock made during the year ended December 31, 1999 to
the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS IN FISCAL 1999 VALUE AT ASSUMED
----------------------------------------------------------------- ANNUAL RATES OF STOCK
NUMBER OF % OF TOTAL PRICE APPRECIATION FOR
SECURITIES OPTIONS GRANTED OPTION TERM (1)
UNDERLYING TO EMPLOYEES IN EXERCISE OR EXPIRATION -----------------------
NAME OPTIONS GRANTED FISCAL YEAR (2) BASE PRICE (3) DATE 5% 10%
---- --------------- ---------------- --------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Levy Gerzberg, Ph.D....... 55,000(4) 7.9% $20.375 8/4/09 $704,755 $1,785,988
Paul R. Goldberg.......... 15,000(4) 2.1% $20.375 8/4/09 $192,206 $ 487,087
Isaac Shenberg, Ph.D...... 20,000(4) 2.9% $20.375 8/4/09 $256,274 $ 649,450
Aharon Aharon............. 30,000(4) 4.3% $20.375 8/4/09 $384,412 $ 974,175
Karl Schneider............ 15,000(4) 2.1% $20.375 8/4/09 $192,206 $ 487,087
</TABLE>
------------------------
(1) Potential gains are net of exercise price, but before taxes associated with
the exercise. These amounts represent certain hypothetical gains based on
assumed rates of appreciation, based on the Securities and Exchange
Commission's rules, and do not represent Zoran's estimate or projection of
future Zoran common stock prices. Actual gains, if any, on stock option
exercises are dependent on the future performance of Zoran, overall market
conditions and the optionees' continued employment through the vesting
period. The amounts reflected in this table may not be achieved.
(2) Zoran granted options to purchase an aggregate of 698,803 shares of Zoran
common stock during the year.
(3) All options were granted at an exercise price equal to the fair market value
of the Zoran common stock on the date of grant.
(4) The option is fully exercisable from the date of grant, subject to Zoran's
right to repurchase any unvested shares at the original purchase price upon
the optionee's termination as an employee. The shares vests in 48 equal
monthly installments from the date of grant.
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<PAGE>
OPTION EXERCISES AND YEAR-END HOLDINGS
The following table sets forth information concerning the stock options held
as of December 31, 1999 by the named executive officers:
OPTION EXERCISES AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AS OF AS OF
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999(1)
ACQUIRED ON VALUE ------------------------------ ------------------------------
NAME EXERCISE REALIZED EXERCISABLE(2) UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE
---- ----------- ---------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Levy Gerzberg............... 145,000 $3,650,850 361,323 -- $17,635,838 --
Paul R. Goldberg............ 10,312 $ 156,882 56,250 -- 2,585,287 --
Isaac Shenberg.............. 27,000 $ 806,638 95,785 -- 4,602,696 --
Aharon Aharon............... 33,500 $ 693,694 106,500 -- 4,871,715 --
Karl Schneider.............. 8,000 $ 206,032 57,000 -- 2,622,695 --
</TABLE>
------------------------
(1) Based on the closing price of $55.75, as reported on the Nasdaq National
Market on December 31, 1999, less the exercise price.
(2) All options are fully exercisable, subject to Zoran's right to repurchase
any unvested shares at the original exercise price in the event of the
optionee's termination. Options (or shares issued upon exercise thereof)
vest over a period of four years from the date of grant.
COMPENSATION OF DIRECTORS
Directors receive quarterly fees of $3,000 as compensation for their
services as members of the Board of Directors. In addition, directors receive
fees of $500 for each Board or committee meeting attended.
Zoran's 1995 Outside Directors Stock Option Plan, or Directors Plan,
provides for formula-based grants of options to non-employee directors. Under
the Directors Plan, each non-employee director of Zoran is automatically granted
a nonstatutory stock option to purchase 20,000 shares of common stock (an
"Initial Option") on the date on which such person first becomes a non-employee
director of Zoran. Thereafter, on the date immediately following each annual
stockholders' meeting, each non-employee director who is reelected at the
meeting to an additional term is granted an additional option to purchase 4,800
shares of common stock, or Annual Option, if, on such date, he has served on the
Board of Directors for at least six months. The Directors Plan provides that
each Initial Option shall become exercisable in installments as to one-fourth of
the total number shares subject to the option on each of the first, second,
third and fourth anniversaries of the date of grant, and each Annual Option
shall become exercisable in full one year after the date of grant, subject to
the director's continuous service. The exercise price per share of all options
granted under the Directors Plan shall be equal to the fair market value of a
share of Zoran's common stock on the date of grant. Options granted under the
Directors Plan have a term of ten years.
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INFORMATION CONCERNING NOGATECH
BUSINESS
OVERVIEW
Nogatech designs and sells computer chips that establish connections between
video devices and computers, as well as connections between video devices across
a variety of networks. Nogatech's chips and related decompression software use
proprietary mathematical procedures known as algorithms and are designed to
provide high quality video, low power consumption and advanced capabilities.
Nogatech's products simultaneously compress digital video signals and
process audio and data, enabling real-time transmission of signals from video
sources into personal computers and hand-held personal computing devices known
as personal digital assistants through the USB interface standard. The USB is a
widely accepted interface standard for simplified plug-and-play connections
between a PC and its accessories. Nogatech's chips are integrated into PC
digital video cameras, video capture devices and PC-TVs.
Nogatech's products are compatible with the Windows 95, Windows 98, Windows
2000, Windows Millenium, Mac OS and Windows CE operating systems. In addition to
Nogatech's chips, Nogatech also sells its own video devices that incorporate its
chips.
Demand for video over the Internet and over other communication networks,
for convenient connectivity solutions and for low-cost video-enabled consumer
products is currently undergoing substantial growth. In order to meet this
demand, the Moving Picture Experts Group, an industry committee commonly known
as MPEG, has developed a new standard for video compression known as MPEG 4.
MPEG 4 has been adopted by Microsoft in its new operating system, Windows
Millennium, and it has also been adopted as the standard for the transmission of
video in many new models of mobile telephones. Nogatech expects that MPEG 4 will
be the primary standard for integrating and standardizing a wide range of video
applications. Nogatech is currently in the early stages of developing its next
generation of chips to be compatible with the MPEG 4 compression standard.
Nogatech expects to release these chips in the second half of 2001 and believes
that compatibility with the MPEG 4 standard will enhance the market for its
chips.
In 1999, purchasers of Nogatech's products included AME Group, Camtel
Technology, Fujitsu General, Hauppauge Computer Works, Interex, IO Data,
Pinnacle Systems, Sharp Electronics and X-10.com.
INDUSTRY BACKGROUND
RECENT MARKET TRENDS. The markets for products that incorporate Nogatech's
chips are growing rapidly. The primary factors driving this growth include the
following:
- IMPLEMENTATION OF PLUG-AND-PLAY CONNECTIONS: New PC systems today are
generally being developed and shipped to the market with standard
plug-and-play interface ports. The USB is a widely accepted standard
interface between PCs and computer accessories. International Data
Corporation, or IDC, estimated that the USB would be available on 92.2% of
all desktop PC shipments in the U.S. in 1999 and would reach 100% by the
year 2001. As a result, Nogatech expects that the demand for plug-and-play
computer accessories, especially in the video area, will increase.
- CONVERGENCE OF TV AND PC: In recent years, there has been substantial
convergence of applications designed for television sets and PCs,
including the capacity to watch television broadcasts on a PC. This
development has resulted in the introduction of new services and products,
such as targeted interactive Internet and TV advertising, video streaming
and digital TV and set top boxes.
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- ESTABLISHMENT OF BROADBAND COMMUNICATION NETWORKS: Broadband communication
networks based on cable and wide-band digital subscriber line, or DSL,
modems enable the use of digital video applications for high speed
Internet access and voice, data and video communications. Nogatech
believes that broadband communication networks will increase the
popularity of applications such as video conferencing and video streaming,
or the transmission of video data in real time. These networks may also
lead to the development of future applications, such as video cellular
phones, that will require advanced video compression and capture
technology. According to a November 1999 IDC study, the number of U.S.
households using cable modems was expected to grow to 1.3 million in 1999
and to reach 9.0 million by 2003.
- DRAMATIC GROWTH OF INTERNET COMMUNICATION: According to IDC, there were an
estimated 144 million users of the Internet in 1998 and the number of
users is expected to grow to over 600 million by the end of 2003. The
dramatic growth of the Internet has led to substantial increases in the
amount of video, audio and other data that is transferred between
computers. In addition, Internet communication increasingly involves video
and audio streaming. As a result, there has been substantial growth in the
use of digital cameras for video e-mail, webcams, video conferencing and
website development, driving demand for products that can input video
images into computers.
- STANDARDIZATION OF DIGITAL VIDEO COMPRESSION: The sharp increase in demand
for video compression for the Internet, for convenient connections between
computers and for video-enabled consumer products has fueled the computer
industry's search for a compression standard. Nogatech expects that MPEG 4
will become the primary standard for integrating and standardizing a wide
range of video compression applications, including video streaming,
digital television broadcasting, home video archiving, interactive local
multimedia and other modes of video communication across the Internet and
third generation mobile phone and broadcast networks. Nogatech believes
that the standardization of video compression through the growing
acceptance of MPEG 4 will significantly expand the range of products and
devices that use the next generation of its chips.
THE CHALLENGES. The technologies involved in video compression and its
integration into computer products pose unique challenges:
- TIME TO MARKET: In the computer industry, the average product life cycle
is short, making time to market critical. As a result, manufacturers must
continuously, effectively and rapidly offer new products.
- CPU EFFICIENCY: Video applications, such as video conferencing, video
e-mail and other related video capture software programs, use significant
power and memory of the CPU to compress and decompress video data.
Typically, the more complex the video application, the greater the
utilization of the CPU. The continued expansion of video applications
requires improvements in CPU speed and efficiency and, in particular,
requires an efficient balance between video compression and decompression
in order to minimize CPU usage.
- FLEXIBLE ADAPTATION TO CHANGING COMPUTER INTERFACES AND MULTIPLE OPERATING
SYSTEMS: The USB is currently the most popular standard for connecting PCs
and video-based computer accessories. In the future, however,
manufacturers may introduce interfaces based on new standards. In
addition, OEMs offer their products for use on a wide range of operating
systems. As a result, the chips used for video devices must operate with
major operating systems for PCs and personal digital assistants, including
Windows and Mac.
- QUALITY OF VIDEO IMAGE: Efficient video compression algorithms are
essential for high quality video imaging. Without seamless migration of
the video image from the camera to the ultimate display on the screen,
poor quality video images will occur. As a result, the efficiency of
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algorithms must continue to develop in a manner consistent with the
complexity of the video data that is being transmitted.
- DEMAND FOR STANDARD VIDEO COMPRESSION: The proliferation of video
communication applications has fueled the demand for standard video
compression for wide and narrow band video communication across the
Internet and mobile and broadcast networks. Video compression chips and
the algorithms on which those chips are based must enable video
compression and archiving for a broad range of applications in the
environment that Nogatech expects will be governed by the MPEG 4 video
compression standard.
THE NOGATECH SOLUTION. Nogatech's products are designed to address the
substantial need for video connections for computers. Nogatech's video
compression chips, which are based upon its algorithms, are incorporated into
new video-to-PC solutions for consumer electronics products, such as PC-TVs and
PC digital video cameras. Nogatech expects to develop new algorithms and chips
that will respond to the growing demands for connections between video devices
across a variety of networks resulting from increasing Internet video use and
plug-and-play applications.
Nogatech believes that it was the first company to introduce a single chip
that enabled the streaming of video, audio and data through the USB interface
for a variety of PC video products and applications. Nogatech's chips operate on
all major operating systems for PCs and personal digital assistants and are
compatible with a wide variety of video applications.
Nogatech believes that its technology and expertise will enable it to
develop future products that will comply with the evolving standardization of
video compression reflected in MPEG 4. It anticipates that its chips will have
wide applications for the broadband communication networks that are being
established and will ensure high video quality for the advanced video
communication that those networks will facilitate.
Nogatech believes that its products have successfully addressed the market's
challenges as follows:
- TIME TO MARKET: Nogatech designs its chips to be compatible with products
of leading OEMs and consumer electronics companies. Nogatech supports its
customers with reference designs that facilitate their ability to respond
quickly and efficiently to market demands. In addition, Nogatech works
closely with its customers to tailor its products to meet their specific
needs. Nogatech assists its customers in integrating its chips into their
products and to help them bring their new products to market on a
cost-effective and timely basis.
- CPU EFFICIENCY: Nogatech's chips require low usage of CPU processing time,
memory and power. This is achieved through the combination of advanced
compression algorithms and efficient decompression software tailored
specifically to transferring video into the computer through the USB
interface.
- FLEXIBLE ADAPTATION TO CHANGING COMPUTER INTERFACES AND MULTIPLE OPERATING
SYSTEMS: Nogatech has developed compression algorithms that respond to the
changing requirements of a wide variety of computer interfaces. As the
interfaces have changed and advanced, it has adapted its technology to the
new interfaces. In addition, Nogatech's products are used on a variety of
operating systems. Nogatech believes that it can rapidly adapt its
software to other operating systems. Its design also offers its customers
additional versatility in that its chips can be incorporated into
different video-based accessories, which reduces the customers' time to
market, support costs and overall chip costs.
- QUALITY OF VIDEO IMAGE: Nogatech's compression algorithms are designed to
minimize noticeable degradation in video images.
- DEMAND FOR STANDARD VIDEO COMPRESSION: Nogatech has developed substantial
knowledge and experience in developing video compression algorithms in
order to develop algorithms and chips
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that can implement the broad range of video applications that will be
possible in the standardized MPEG 4 environment.
BUSINESS STRATEGY
Nogatech's goal is to be the leading provider of video connection solutions
using enhanced video compression technology and plug-and-play interfaces.
The following are the key elements of Nogatech's strategy:
- MAINTAIN EXPERTISE IN VIDEO COMPRESSION TECHNOLOGY: Nogatech uses its
expertise in developing and implementing algorithms and software to
develop chips that establish connections between video devices and
computers, as well as connections between video devices across a variety
of networks and media. Nogatech believes that its expertise in all aspects
of video compression technology and its focus on emerging industry
standards enable it to design chips that are attractive to a broad range
of customers because they incorporate several different operating
functions on a single chip. As a result, Nogatech's products are referred
to as "systems-on-chips." In addition, Nogatech's engineering team of
mathematicians and chip designers, of which a significant number hold
Ph.D. and M.S.E.E. degrees, is experienced in all aspects of algorithm
development. For over 15 years, Nogatech's key development personnel have
been developing video compression technology and video connectivity
products. Nogatech is an active committee member in the Video Class USB
Implementers Forum, an industry organization founded by the companies that
developed the USB standard.
- FOCUS ON HIGH VOLUME APPLICATIONS: Nogatech focuses on designing chips for
manufacturers of video products for emerging high volume PC business and
consumer applications, such as video streaming, interactive multimedia on
mobile networks and digital multimedia broadcasting. Nogatech attempts to
identify market segments that have the potential for substantial growth
and to tailor its products for these markets. By focusing its marketing
efforts on leading OEMs with large volume potential, Nogatech believes
that it will reach a substantial segment of its potential customer base
while minimizing the cost and complexity of its marketing efforts.
- CREATE AND STRENGTHEN OUR RELATIONSHIPS WITH KEY CUSTOMERS: Nogatech's
goal is to sell its products to leading OEMs in the consumer electronics
market and to develop long-term working relationships with them.
Nogatech's engineers work closely with its current and potential customers
both before and after Nogatech introduces its chips to develop and modify
its designs to meet their particular needs and to support their future
products. Based upon Nogatech's experience with its customers' projects,
Nogatech typically is involved from the design stage to the product launch
stage.
- BUILD EXISTING TECHNOLOGIES TO PENETRATE NEW MARKETS: Nogatech plans to
use the algorithms that it developed in connection with the current
video-based USB market to develop new chips for future products.
Nogatech's new products use many of the same design features that it has
previously developed. Nogatech believes that these factors will enable it
to quickly establish new reference designs for emerging new market
opportunities for its existing and potential original equipment
manufacturer customers.
PRODUCTS
Nogatech designs, develops and markets chips for video connectivity that
enable video-to-PC connections and high quality video on PCs. Nogatech's chips
are "system-on-chip" products that process and compress video images and handle
the transfer of data through the USB interface. Nogatech's chips work in tandem
with its PC-based software, which decompresses and processes the video. Nogatech
believes that its chips, which are small, power-efficient and compatible with a
variety
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of operating systems, are effective PC interface solutions for manufacturers of
USB-based digital video cameras, PC-TVs and video capture devices. Nogatech also
provides its customers with comprehensive reference designs for its chips. These
reference designs enable its customers to design and build new products rapidly
and to reduce significantly the amount of time that they need to introduce new
products.
Each of Nogatech's chips incorporates its own related software. Nogatech's
software is the interface between the chips and PCs and can be installed and
used rapidly, enabling plug-and-play connectivity. Nogatech's software enables
video decompression, USB protocol implementation and video device control, such
as brightness, hue and zoom control. The key feature of Nogatech's software is
its ability to maintain high video quality while using the CPU's resources
efficiently.
In 1995 and 1996, Nogatech introduced its NT1001 video chip and NT1002 sound
chip for connecting video sources to laptop computers. Nogatech sold both of
these chips embedded in PCMCIA cards. In 1998, Nogatech introduced its NT1003
chip which compresses video for transfer through the USB interface to computers.
Nogatech sold the NT1003 chip on both a stand-alone basis to OEMs for
integration into their video products and also incorporated the NT1003 into its
own video devices.
The following table describes Nogatech's current and anticipated future
chips and the products in which they are or are expected to be used:
<TABLE>
<CAPTION>
CHIP DATE INTRODUCED DESCRIPTION OEM PRODUCTS
------------------- ------------------------ -------------------------- --------------------------
<S> <C> <C> <C>
NT1003 Second quarter 1998 - video compression across - PC TV's
USB interface - Video capture devices
- Plug-and-play - PC digital video cameras
- Low power consumption
NT1004 Fourth quarter 1999 - Video compression, audio - PC TV's
and data streaming - PC digital video cameras
across USB interface - Video capture devices
- Plug-and-play
- Low power consumption
NT1005 Second quarter 2000 - Companion chip for - PC TV's with Vertical
NT1004 chip Blank Interval
- Data streaming
enhancements:
- Vertical Blank Interval
NT1006 Third quarter 2000 - chip that allows cameras - PC Digital video
to take digital still cameras, with possible
pictures when detached dual mode for digital
from computer and live still pictures
video when connected to - Webcams
computer
- For USB and wireless
Bluetooth interfaces
</TABLE>
NT1003. The NT1003 is a video chip for video communication across the USB
channel to the PC. The NT1003 chip is incorporated into a variety of video
products, including PC-TVs, PC digital cameras and video capture devices.
Nogatech also sells its own video devices that incorporate the NT1003 chip.
These devices include its PC-TV device, which enables users to watch television
on a PC, video cable adapters and PC digital video cameras.
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NT1004. The NT1004 chip incorporates video, audio and data streaming into a
single chip for video, audio and data transfer across the USB channel to the PC.
In addition to its use with PC cameras and PC-TVs, the NT1004 can be
incorporated into PC set-top boxes, cable modems and computer displays.
NT1005. The NT1005 is a companion chip to the NT1004. It enhances the
NT1004 chip by offering additional features such as data streaming for vertical
blank interval, which is a standard technique enabling transmission of digital
data simultaneously with standard analog video in connection with PC-TV
applications. Nogatech introduced this chip in April 2000 but has not yet made
substantial sales.
NT1006. The NT1006 chip was introduced in the third quarter of 2000. It is
designed to enable larger video images than the NT1004 chip and has additional
features, such as permitting PC digital cameras to take both still and video
images. It also enables the transmission of live video through the Bluetooth
interface, a standard for short range wireless transmissions.
NEXT GENERATION. Nogatech is designing its next generation chips to be
compatible with the MPEG 4 standard. These chips will be designed to provide
video streaming through the Internet and video archiving for personal computers,
personal digital assistants, PC digital video cameras, video capture devices and
PC-TVs.
SALES AND MARKETING
The majority of Nogatech's customers are OEMs that buy its chips and
incorporate the Nogatech chips into their products. Nogatech works closely with
existing and potential customers to assist them in integrating Nogatech's chips
into their products by offering reference designs and close collaboration with
its application engineers. In some cases, Nogatech collaborates with
manufacturers whose products work together with its chips to create and market
reference designs for OEM customers. This approach encourages these
manufacturers to market Nogatech's chips with their products, increasing
Nogatech's market reach and visibility.
Nogatech markets its products worldwide from its direct sales offices in the
U.S. and Israel. Nogatech depends solely upon Tomen Electronics for distribution
of its products in Japan, which it views as a critical market for its success.
Nogatech provides marketing and customer support services from its U.S. office.
The following table sets forth original equipment manufacturers that
purchased products in 1999 and their products which incorporate Nogatech's
chips:
<TABLE>
<CAPTION>
PURCHASER PRODUCTS
--------------------------------------------- ---------------------------------------------
<S> <C>
AME Group Video capture devices, PC digital video
cameras, PC-TVs
Camtel Technology Video capture devices, PC digital video
cameras, PC-TVs
Fujitsu General PC digital video cameras
Hauppauge Computer Works Video capture devices, PC-TVs
Interex Video capture devices
IO Data Video capture devices
Pinnacle Systems PC-TVs
Sharp Electronics Video capture devices
X-10.com Video capture devices
</TABLE>
Nogatech does not have long-term contracts with any of its customers. Sales
of its products are made under firm purchase orders. However, Nogatech does at
times allow customers to reschedule
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deliveries. Nogatech's business is characterized by short lead times and quick
delivery schedules. Nogatech's backlog fluctuates substantially from period to
period. As a result, Nogatech does not believe that backlog at any given time is
a meaningful indicator of future sales.
CORE TECHNOLOGY
Nogatech believes that one of its key competitive advantages is its unique
core technologies. These range from advanced video compression and image
processing algorithms to the design of its system architecture, efficient
software implementation, cost-effective design of high-performance video
processing chips and the integration of these core technologies into Nogatech's
chips. Nogatech has developed and continues to build on the following key
technology areas:
- standard and proprietary high quality video compression algorithms;
- advanced image processing algorithms that enable Nogatech's bit rate
control of USB data, vertical blank interval detection, infrared remote
control detection and scene analysis for computer control applications;
- multiple-platform video streaming software for Windows 95, 98, 2000,
Millenium, CE and Mac operating systems; and
- implementation of "system-on-chip" architecture for multiple video
applications.
Each of these technologies is described in further detail below:
STANDARD AND PROPRIETARY HIGH QUALITY VIDEO COMPRESSION ALGORITHMS. Video
compression techniques exploit unchanged parts of a video image and identical
images in consecutive video frames. These redundancies are used to reduce the
data required for representing video on the computer while maintaining
acceptable video quality. In "closed loop systems," such as video data
transmitted through the USB interface, no industry standard is required.
However, in open systems such as the Internet, standard protocols must be used
to facilitate communications between different systems. As a result, Nogatech's
technology addresses standard as well as proprietary video compression
techniques.
Nogatech's compression technology provides the following features:
- high quality image with minimal and imperceptible degradation of the
picture;
- high frequency details of the image, including edges;
- efficient use of CPU resources;
- use of minimal silicon area on the chip;
- ability to compress images and display them in real time; and
- highly efficient cost and performance.
Nogatech is developing advanced video processing technology for
implementation and enhancement of the MPEG 4 video compression standard for PC
video accessories and for communication across networks. MPEG 4 builds on the
experience of the MPEG 1 and MPEG 2 standards, which are currently used in
digital video applications. MPEG 4 is rich in features, and can be customized to
serve the needs of specific industries while preserving a high level of
interoperability across a variety of applications. It allows a new level of
interaction with visual content, providing the ability to view, access and
manipulate objects rather than pixels. MPEG 4's impact is especially significant
in video streaming, digital television, mobile multimedia and game applications.
Nogatech is adapting and enhancing its existing core technologies in order to
develop algorithms and chips that will be compatible with the variety of
Internet video, plug-and-play and other applications based upon MPEG 4.
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IMAGE PROCESSING ALGORITHMS. Nogatech has developed a library of digital
signal, image and video processing algorithms that provide video image
processing solutions for different video applications. These algorithms enable
the delivery of additional functionality, such as segmentation of objects by
motion, bit rate control, vertical blank interval detection and camera-aided
touch-screen, as described below. The segmentation of objects by motion involves
the separation of images into distinct visual objects and is an important
feature of the MPEG 4 standard. As a result, the MPEG 4 standard supports higher
quality video images, especially for mobile applications. Nogatech uses bit rate
control, vertical blank interval detection, multiple-platform video streaming
software and "system-on-chip" architecture in its products, and Nogatech expects
to include camera-aided touch screen in its future products. These additional
functions are described below:
- BIT RATE CONTROL--In the USB interface, the available channel bandwidth
between the PC and its accessories varies. Consequently, when only a
single accessory is connected to the PC, available bandwidth may be fairly
broad, while in cases where multiple accessories are connected, the
available bandwidth per accessory will be narrower. Nogatech's flexible
image processing algorithms allow the PC to choose any bandwidth per
accessory at variable rates. This technology, which is known as bit rate
control, can be modified to comply with restrictions imposed by the MPEG 4
standard and for other computer interfaces.
- VERTICAL BLANK INTERVAL DETECTION--Vertical blank interval, or VBI, is a
standard technique that enables transmission of digital data
simultaneously with standard analog video. This technique is used by most
cable, over-the-air and satellite television companies and involves the
insertion of information such as closed-captions into the blank vertical
lines in the broadcast video data stream. Nogatech has developed an
algorithm that allows detection of the VBI information. In addition,
Nogatech has developed technology that allows its chips to use the VBI
information to integrate television, VBI and Internet capabilities.
- MULTIPLE-OPERATING SYSTEM VIDEO STREAMING SOFTWARE--Nogatech has developed
software that can be implemented on various operating systems while
maintaining an efficient decompression algorithm and bit rate control.
Nogatech's software maintains system stability, plug-and-play and ease of
use while achieving high performance on the target operating system. The
software, when used together with Nogatech's chips, provides a complete
system solution. Nogatech works with Microsoft Corporation and Apple
Corporation to ensure that its software works properly on their operating
systems.
- "SYSTEM-ON-CHIP" ARCHITECTURE--Nogatech chips are "system-on-chip"
solutions, consisting of an image processing unit, image compression unit
and an interface protocol unit. The image processing unit is designed to
comply with as many available digital video sources as possible. Nogatech
chips can process images from most video sources without additional
hardware changes. Using Nogatech chips, systems designers are able to
develop many cost-effective applications for camera sensors, tuners or
video decoders without any restrictions. The image compression unit
compresses the video signal to the desired bit rate. The interface
protocol unit handles the data transfer over the USB interface while
optimizing overall system performance, reliability, flexibility, image
quality, size, cost and power consumption.
- CAMERA-AIDED TOUCH-SCREEN--Nogatech developed its camera-aided
touch-screen technology to provide touch-screen pointing and selecting
functionality using a conventional low cost video camera together with
image processing software running on the PC. The video camera is used to
obtain a video image of a finger or a pointing device, pointing at an icon
on the screen. The image processing algorithm analyzes the video image and
determines whether the icon is being touched. In response, the computer
performs the required operation of the icon. Nogatech has applied for a
patent relating to this technology, which it plans to incorporate into its
software.
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RESEARCH AND DEVELOPMENT
In order to accommodate the rapidly changing needs of the markets that
Nogatech serves, Nogatech places a major emphasis on research projects designed
to improve its existing chips, software and reference designs. Nogatech is
developing more advanced video compression and video connectivity technology to
meet the new standards that are currently evolving. These new products will
enable its customers to operate their video-enhanced devices with the interfaces
that will be used on future PC platforms. From time to time, Nogatech engages in
research and development projects with its customers to develop special devices
for their specific product designs.
Nogatech is designing the NT1006 chip to support multiple applications,
including digital still camera mode as well as live video camera mode and the
transmission of live video for wireless applications. In 2000, a significant
part of Nogatech's development efforts have concentrated on developing
technology that is compatible with the MPEG 4 video compression standard. As of
June 30, 2000, 21 employees were engaged in research and development.
Prior to 1995, Nogatech participated in two Israeli government research and
development incentive programs, under which it received research and development
participation of approximately $263,000. Because Nogatech no longer intends to
manufacture and sell products developed under the projects funded by the Office
of the Chief Scientist, Nogatech believes that it no longer has any royalty
liabilities. The Office of the Chief Scientist is of the opinion that revenues
already received by it involved products developed by Nogatech under projects
funded by the Office of the Chief Scientist. Nogatech and the Chief Scientist
have reached an agreement with respect to one incentive program. Based on the
agreement with the Chief Scientist, Nogatech will be exempted from submitting
reports and making periodic payments to the Chief Scientist in connection with
the research and development incentive program upon payment to the Chief
Scientist of $30,000 prior to August 31, 2000 (which payment was timely made)
and one percent of Nogatech's quarterly sales revenues, up to an aggregate of
$95,408. These payments will not exempt Nogatech from its continuing obligations
under the terms of the Israeli Law for the Encouragement of Research and
Development in Industry, 1984.
DESIGN AND MANUFACTURING
Nogatech's manufacturing process consists primarily of the production of
chips, test engineering, assembly of chips and OEM products and quality control.
In 1998 and 1999, Fujitsu Microelectronics Europe and Hyundai Electronics
manufactured all of Nogatech's chips, which it purchased from Supertec
Electronics, an independent distributor based in Israel. Nogatech purchases
these chips under development agreements in which Supertec provides it with
development services and sells Nogatech the chips manufactured by Fujitsu and
Hyundai. Nogatech may use additional manufacturing sources in the future.
Nogatech's manufacturers use a range of manufacturing technology, known as
process technology. Nogatech's NT1003 chip is based on 0.60-micron process
technology. Nogatech's NT1004 and NT1005 chips are based on the more advanced
0.35-micron process technology, which enables it to produce a smaller and less
expensive chip than the 0.60 micron process technology used in the NT1003 chip.
Nogatech believes that other components are generic in nature and can be
obtained from a variety of suppliers. Nogatech's USB video devices are assembled
by subcontractors in Israel.
COMPETITION
Nogatech's industry is characterized by intense competition. The markets in
which Nogatech operates are characterized by rapid technological change,
evolving industry standards and declining average selling prices, and Nogatech
expects them to become increasingly competitive. Nogatech believes that the key
competitive factors in its markets are product design, performance, price,
features, size, reliability, time to market and customer support. In particular,
Nogatech believes that its ability to
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offer chips that have the flexibility to be used in a variety of products and on
a variety of operating systems will be critical to the competitiveness of its
products.
Nogatech's principal competitors in the sale of USB-compliant chip solutions
for video applications include Divio, SunPlus Technology and Winbond
ElectroNics, each of which supplies these chips to original equipment
manufacturers for use in consumer electronics products. Nogatech expects that
large manufacturers of generic chips or manufacturers of chips in the video
compression arena, such as C-Cube Microsystems, may begin marketing competing
chips and become more active in its target markets. Additionally, in the future,
some of Nogatech's customers may internally develop products that Nogatech
currently sells to them.
Some of Nogatech's competitors have greater financial, personnel and other
resources or offer a broader range of products and services than it does, and
may be able to respond more quickly to new or emerging technologies or changes
in customer requirements, benefit from greater purchasing economies, offer more
aggressive pricing or devote greater resources to the promotion of their
products. In addition, one or more of Nogatech's competitors may develop
products that are superior to Nogatech's or that will achieve greater market
acceptance than its products.
Nogatech believes that its success will depend primarily on its ability to
provide technologically advanced and cost-effective video connectivity solutions
for consumer electronics products. Additionally, it will have to provide its
customers with a short time to market for their products and responsive customer
support.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Nogatech's success is largely dependent upon proprietary technology. It
relies primarily on a combination of copyright and trade secret laws, as well as
confidentiality procedures and contractual provisions, to protect its
proprietary rights. It also relies to a lesser extent on trademark protection
concerning various names and marks that serve to identify its products.
Nogatech has applied for three U.S. patents that relate to its video
technology. These patent applications do not cover its proprietary algorithms,
for which it has not applied for patents to date. While Nogatech does not
currently intend to seek patent protection for its algorithms, it may do so in
the future. Nogatech also seeks to protect its proprietary rights through
copyright protection and through restrictions on access to its trade secrets and
other proprietary information contained in confidentiality agreements with its
customers, suppliers, employees and consultants. While its ability to compete
may be affected by its ability to protect our intellectual property, it believes
that, because of the rapid pace of technological change in its industry,
maintaining its technological leadership and its comprehensive familiarity with
all aspects of the technology contained in its chips and associated software is
of great importance in addition to patent protection.
EMPLOYEES
As of June 30, 2000, Nogatech employed a total of 41 persons worldwide,
including 21 in research and development, 10 in technical service support and
sales and marketing, 7 in management and administration and 3 in operations. 37
of Nogatech's employees are based in Israel and 4 of its employees are based in
Santa Clara, California. None of Nogatech's employees are subject to a
collective bargaining agreement, and Nogatech considers its relations with its
employees to be good.
Israeli labor laws and regulations are applicable to Nogatech's employees in
Israel. These laws principally concern matters such as paid annual vacation,
paid sick days, length of the workday, pay for overtime, insurance for
work-related accidents, severance pay and other conditions of employment.
Israeli law generally requires severance pay, which may be funded by Manager's
Insurance, described below, upon the retirement or death of an employee or
termination of employment without cause. This
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insurance policy provides a combination of savings plans, insurance and
severance pay, if the employee is legally entitled upon termination of
employment. Furthermore, Israeli employees and employers are required to pay
specified sums to the National Insurance Institute. Since January 1, 1995, these
amounts also include payments for national health insurance. The payments to the
National Insurance Institute are approximately 14% of wages, up to a specified
amount. The employee contributes approximately 66% and the employer contributes
approximately 34% of these amounts. Although not legally required, Nogatech
regularly contributes to a "Manager's Insurance" fund or to a privately managed
pension fund on behalf of Nogatech's employees located in Israel.
LEGAL PROCEEDINGS
Nogatech is not a party to any pending legal proceedings which it believes
will materially affect its financial condition or results of operations.
FACILITIES
Nogatech leases a 1,800 square foot facility in Santa Clara, California at
an annual rental of approximately $60,000. This lease expires in
September 2002. Nogatech's main office and research and development facilities,
located in Kfar Saba, Israel, occupy approximately 9,000 square feet, which it
leases at an annual rental of approximately $95,000. This lease expires in
March 2003, with an option to extend until February 2008, subject to an increase
in Nogatech's annual rental payments to a range of $100,000 to $160,000.
Nogatech believes that its properties are adequate to meet its current needs and
that any additional space that it may need in the future will be available on
commercially reasonable terms.
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NOGATECH MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
OVERVIEW
Nogatech designs and sells chips that establish connections between video
devices and computers, as well as connections between video devices across a
variety of networks. Nogatech chips and related decompression software use
proprietary algorithms designed to provide high quality video, low power
consumption and advanced capabilities. These features enable cost-effective
plug-and-play video connections.
In 1995 and 1996, Nogatech introduced its NT1001 video chip and NT1002 sound
chip for connecting video sources to laptop computers. Nogatech sold both of
these chips embedded in PCMCIA cards, which are connectors that allow accessory
equipment, such as modems, CD-ROM drives and video cameras, to be connected to
personal computers. In 1998, Nogatech introduced its NT1003 chip, which
compresses video for transfer through the USB interface between computer
accessories and computers. The USB is an interface standard for connections
between a computer and its accessories using a standard cable. Nogatech sold the
NT1003 chip on a stand-alone basis to original equipment manufacturers for
integration into their video products and also incorporated into its own video
devices.
With the introduction of its NT1003 chip, Nogatech began to reduce its sales
of NT1001 and NT1002 chips embedded in PCMCIA cards. In addition, Nogatech began
to increase its sales of NT1003 chips on a stand-alone basis. Nogatech's
strategy is to continue increasing its sales of chips on a stand-alone basis
rather than incorporated into its own video devices. In 1999, Nogatech
introduced its NT10004 chip for video compression and audio and data streaming
across an USB interface. Sales related to the NT10004 continued Nogatech's
strategy of selling its chips on a stand-alone basis. Nogatech anticipates that
these sales will constitute the primary portion of its future sales.
Nogatech primarily sells its chips to original equipment manufacturers that
incorporate its chips into video applications and products. Purchasers of its
chips in 1999 were AME Group, Camtel Technology, Fujitsu General, Hauppauge
Computer Works, Ingram Micro, Interex, IO Data, Pinnacle Systems, Sharp
Electronics and X-10.com. In the six months ended June 30, 2000, approximately
36% of Nogatech's sales were derived from customers in North America, 49% from
customers in Asia 15% from customers in Europe and other regions. In 1999,
approximately 61% of its sales were derived from customers in North America, 31%
from customers in Asia, and 8% from customers in Europe and other regions.
Nogatech's sales are concentrated among relatively few customers. In the six
months ended June 30, 2000, sales to Tomen Electronics, Nogatech's Japanese
distributor, represented approximately 26% of sales, sales to Hauppauge Computer
Works represented approximately 16% of sales, and sales to Camtel represented
approximately 11% of sales. In 1999, sales to Hauppauge represented
approximately 24% of sales, sales to Tomen Electronics, represented
approximately 14% of sales, and sales to Interex represented approximately 13%
of sales. Tomen Electronics accounted for approximately 41% of sales in 1998 and
17% of sales in 1997. Although Nogatech's principal customers are likely to vary
on a quarterly basis, Nogatech anticipates that its sales will remain
concentrated among a few customers for the foreseeable future.
The sales prices of Nogatech chips decreased in 1999 and in the six months
ended June 30, 2000, primarily as a result of increased volume and competition,
and it may need to reduce prices further in order to remain competitive.
Nogatech has offset decreased chip prices by reducing the prices it pays to its
chip suppliers due to increased volume. In addition, Nogatech designs each
generation of its chips to use more advanced micron process technology, which
determines the relative size of its chips. For example, Nogatech's NT1003 chip
uses 0.60-micron process technology while Nogatech's NT1004 chip
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uses 0.35-micron process technology. Nogatech's use of smaller micron process
technology allows it to reduce the size of its chips and results in lower costs
per chip. Nogatech is designing its next generation of chips to be manufactured
using smaller micron process technology, which Nogatech believes will enable it
to reduce manufacturing costs further.
Nogatech has incurred significant net losses since its inception. Nogatech
incurred net losses of $1.8 million in 1998 and $1.1 million in 1999. Nogatech's
accumulated deficit was $10.6 million as of December 31, 1999 and $15.1 million
as of June 30, 2000.
Nogatech's results of operations include its subsidiaries, Nogatech Ltd., an
Israeli company, and Nogatech California, Inc., unless the context requires
otherwise.
RESULTS OF OPERATIONS
The following table sets forth selected data from Nogatech's consolidated
statement of operations as a percentage of sales for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(AS A PERCENTAGE OF SALES)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATION DATA:
Sales.................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................ 66.6 63.6 57.7 59.7 56.9
----- ----- ----- ----- -----
Gross Profit............................................. 33.4 36.4 42.3 40.3 43.1
Operating expenses:
Research and development............................... 49.6 45.3 25.8 39.2 22.1
Sales and marketing.................................... 27.2 31.8 19.1 31.7 11.1
General and administrative............................. 12.6 19.0 9.9 13.4 9.9
----- ----- ----- ----- -----
Total operating expenses................................. 89.4 96.1 54.8 84.3 43.1
----- ----- ----- ----- -----
Operating income (loss).................................. (56.0) (59.7) (12.5) (44.0) 0.0
Other income (expense), net.............................. (1.3) 2.8 0.1 0.2 5.5
----- ----- ----- ----- -----
Net income (loss)........................................ (57.3)% (56.9)% (12.4)% (43.8)% 5.5%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000
SALES. Sales to OEMs are recorded when Nogatech ships its products.
Nogatech recognizes sales to distributors when it ships its products to its
customers. Nogatech accrues for estimated product warranty and liability costs
upon recognition of product sales. Nogatech's sales increased approximately
112%, from $2.8 million in the six months ended June 30, 1999 to $6.0 million in
the six months ended June 30, 2000. This increase primarily reflects the
increase in unit sales of Nogatech's NT1003 chip, on both a stand-alone basis
and as incorporated in its video devices.
COST OF SALES. Nogatech's cost of sales consists of component costs,
warranty costs, royalties and overhead related to manufacturing Nogatech's
products. Cost of sales increased from $1.7 million in the six months ended
June 30, 1999 to $3.4 million in the six months ended June 30, 2000. This
increase was primarily due to increased shipments of Nogatech's products. Gross
margins were 43% in the six months ended June 30, 2000 and 40% in the six months
ended June 30, 1999. The increase was primarily due to Nogatech's higher margin
video compression chip business and to Nogatech's technology development.
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RESEARCH AND DEVELOPMENT EXPENSES. Nogatech's research and development
expenses consist of personnel, equipment, software tools and supplies for its
research and development activities. Substantially all of Nogatech's research
and development activities occur in its facility in Israel. These expenses are
charged to operations as incurred. Nogatech's research and development expenses
increased from $1.1 million in the six months ended June 30, 1999 to
$1.3 million in the six months ended June 30, 2000. The increase was primarily
due to increased levels of research and development activities and related cost
of personnel.
Research and development expenses as a percentage of sales were 22% for the
six months ended June 30, 2000 and 39% for the six months ended June 30, 1999.
The decrease as a percentage of sales was due to a substantial increase in sales
in the six months ended June 30, 2000 compared to the six months ended June 30,
1999. Nogatech believes that significant investment in research and development
is essential to its future success. Nogatech plans to increase its research and
development activities, including recruiting and hiring additional personnel,
and it expects to incur non-recurring engineering expenses associated with the
manufacture of its next generation chips, which will result in increased
expenses in absolute dollars.
SALES AND MARKETING EXPENSES. Nogatech's sales and marketing expenses
consist of salaries and related costs of sales and marketing, employees,
consulting fees, and expenses for travel and promotional activities. Sales and
marketing expenses decreased from $894,000 in the six months ended June 30, 1999
to $665,000 in the six months ended June 30, 2000. The decrease was attributable
to Nogatech's transition to an OEM business in the six months ended June 30,
2000. Sales and marketing expenses as a percentage of sales decreased from 32%
in the six months ended June 30, 1999 to 11% in the six months ended June 30,
2000. The decrease as a percentage of sales was also due to the transition into
the OEM business, which involves lower advertising expenses and fewer sales
people, as well as the substantial increase in sales in the six months ended
June 30, 2000 compared to the six months ended June 30, 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. Nogatech's general and administrative
expenses consist primarily of personnel and related costs for general corporate
functions, including finance, accounting, strategic and business development,
human resources, investor relations, director and officer insurance and legal
expenses. General and administrative expenses increased from $378,000 in the six
months ended June 30, 1999 to $590,000 in the six months ended June 30, 2000.
The increase was primarily due to expenses related to its operations as a public
company and amortization of deferred compensation related to stock options.
General and administrative expenses as a percentage of sales decreased from 13%
in the six months ended June 30, 1999 to 10% in the six months ended June 30,
2000.
OTHER INCOME. Other income consists of interest earned on cash and cash
equivalents. Net interest income was $6,000 in the six months ended June 30,
1999 and $330,000 in the six months ended June 30, 2000. The increase was mainly
due to interest earned on the net proceeds of approximately $37.5 million raised
in its May 2000 initial public offering.
INCOME TAXES. As of June 30, 2000, Nogatech had approximately $2.1 million
(unaudited) of Israeli net operating loss carryforwards, approximately
$4.8 million (unaudited) of U.S. federal tax net operating loss carryforwards
and approximately $1.3 million (unaudited) of state net operating loss
carryforwards. The Israeli net operating loss carryforwards have no expiration
date. The U.S. net operating loss carryforwards expire in various amounts
between the years 2004 and 2019.
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
SALES. Sales increased approximately 26% from $2.6 million in 1997 to
$3.2 million in 1998 and 176% to $8.9 million in 1999. These increases primarily
reflect the increase in unit sales of Nogatech's
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products. Sales increased from 1998 to 1999 primarily as a result of increased
sales of Nogatech's NT1003 chip, on both a stand-alone basis and incorporated
into its video devices. Nogatech's sales in 1997 and 1998 were primarily derived
from sales of PCMCIA cards, which it is no longer selling.
COST OF SALES. Cost of sales consists of component costs, warranty costs,
royalties and overhead related to manufacturing Nogatech's products. Cost of
sales increased from $1.7 million in 1997 to $2.0 million in 1998 and to
$5.1 million in 1999. These increases were primarily due to increased shipments
of Nogatech's products. Gross margins were 33.4% in 1997, 36.4% in 1998 and
42.3% in 1999. The increase from 1997 to 1998 was primarily due to cost
reductions that Nogatech implemented in its PCMCIA cards, and the increases from
1998 to 1999 were primarily due to the transition to its higher margin video
compression chip business.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of personnel, equipment, software tools and supplies for
Nogatech's research and development activities. Substantially all of Nogatech's
research and development activities occur in its facility in Israel. These
expenses are charged to operations as incurred. Nogatech's research and
development expenses increased from $1.3 million in 1997 to $1.5 million in 1998
and to $2.3 million in 1999. These increases were primarily due to increased
levels of research and development activities and related costs of personnel.
Research and development expenses as a percentage of sales were 49.6% in 1997,
45.3% in 1998 and 25.8% in 1999. The decreases as a percentage of sales from
1998 to 1999 were due to Nogatech's substantial increase in sales in 1999.
Nogatech believes significant investment in research and development is
essential to its future success. Nogatech plans to increase its research and
development activities, including recruiting and hiring additional personnel,
and to incur non-recurring engineering expenses associated with the manufacture
of its next generation chips, which will result in increased expenses in
absolute dollars.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist of
salaries and related costs of sales and marketing employees, consulting fees,
and expenses for travel, trade shows and promotional activities. Sales and
marketing expenses increased from $0.7 million in 1997 to $1.0 million in 1998
and to $1.7 million in 1999. These increases were primarily due to increases in
the number of Nogatech sales and marketing personnel. Sales and marketing
expenses as a percentage of sales were 27.2% in 1997, 31.8% in 1998 and 19.1% in
1999. The decreases as a percentage of sales from 1998 to 1999 were due to
Nogatech's substantial increase in sales in 1999. Nogatech plans to increase its
sales and marketing activities, including recruiting and hiring additional
senior personnel, which will result in increased expenses in absolute dollars.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of personnel and related costs for general corporate
functions, including finance, accounting, strategic and business development,
human resources and legal. General and administrative expenses increased from
$321,000 in 1997 to $609,000 in 1998 and to $880,000 in 1999. General and
administrative expenses as a percentage of sales were 12.6% in 1997, 19.0% in
1998 and 9.9% in 1999. In 1999, Nogatech recorded a $126,000 allowance for
doubtful accounts to reflect a past due receivable from a single customer. As of
June 30, 2000, this receivable was $192,000. Nogatech believes that the
allowance is sufficient to reflect the potential loss related to this
receivable. Nogatech expects general and administrative expenses to increase in
absolute dollars as a result of its growing operational and corporate
activities.
OTHER INCOME (EXPENSE), NET. Other income (expense) consists of interest
earned on cash and cash equivalents offset by interest expense related to bank
loans. Net interest income (expense) was an expense of $32,000 in 1997, income
of $90,000 in 1998 and income of $11,000 in 1999.
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<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The tables below set forth Nogatech's unaudited statement of operations data
for each of the eight consecutive quarters ended June 30, 2000. This information
has been prepared on the same basis as Nogatech's audited consolidated financial
statements. The information should be read in conjunction with Nogatech's
consolidated financial statements and notes thereto appearing elsewhere in this
Proxy Statement/Prospectus and, in the opinion of Nogatech's management,
includes all adjustments, consisting only of normal recurring adjustments, that
Nogatech believes are necessary to present fairly the unaudited quarterly
results. Nogatech's limited operating history with respect to its current chips
makes the prediction of future operating results difficult or impossible.
Nogatech believes that period-to-period comparisons of its financial results are
not necessarily meaningful and should not be relied upon as an indication of
future performance.
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1998 1998 1999 1999 1999 1999 2000 2000
--------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................................... $ 873 $1,073 $ 870 $1,953 $2,947 $3,086 $2,945 $3,043
Cost of sales........................... 529 648 518 1,167 1,678 1,748 1,661 1,746
----- ------ ------ ------ ------ ------ ------ ------
Gross profit............................ 344 425 352 786 1,269 1,338 1,284 1,297
Operating expenses:
Research and development.............. 369 370 588 520 622 554 685 637
Sales and marketing................... 244 329 383 511 413 382 290 375
General and administrative............ 153 207 195 183 215 286 204 386
----- ------ ------ ------ ------ ------ ------ ------
Total operating expenses................ 766 906 1,166 1,214 1,250 1,222 1,179 1,398
===== ====== ====== ====== ====== ====== ====== ======
Operating income (loss)................. (422) (481) (814) (428) 19 116 105 (101)
Other income (expenses), net............ 64 55 (3) 9 59 (54) (12) 342
----- ------ ------ ------ ------ ------ ------ ------
Net income (loss)....................... $(358) $ (426) $ (817) $ (419) $ 78 $ 62 $ 93 $ 241
===== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1998 1998 1999 1999 1999 1999 2000 2000
--------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 60.6 60.4 59.5 59.8 56.9 56.6 56.4 57.4
----- ------ ------ ------ ------ ------ ------ ------
Gross profit............................ 39.4 39.6 40.5 40.2 43.1 43.4 43.6 42.6
Operating expenses:
Research and development.............. 42.3 34.5 67.6 26.6 21.1 18.0 23.3 20.9
Sales and marketing................... 27.9 30.7 44.0 26.2 14.0 12.4 9.9 12.3
General and administrative............ 17.5 19.3 22.4 9.4 7.3 9.2 6.9 12.7
----- ------ ------ ------ ------ ------ ------ ------
Total operating expenses................ 87.7 84.5 134.0 62.2 42.4 39.6 40.1 45.9
----- ------ ------ ------ ------ ------ ------ ------
Operating income (loss)................. (48.3) (44.9) (93.5) (22.0) 0.7 3.8 3.5 (3.3)
Other income (expenses), net............ 7.3 5.1 (0.3) 0.5 2.0 (1.7) (0.4) 11.2
----- ------ ------ ------ ------ ------ ------ ------
Net income (loss)....................... (41.0)% (39.8)% (93.8)% (21.5)% 2.7% 2.1% 3.1% 7.9%
===== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Nogatech's quarterly results tend to fluctuate significantly. Sales
decreased from the fourth quarter of 1998 to the first quarter of 1999 because
of Nogatech's shift in product mix from selling chips embedded in PCMCIA cards
to selling its chips and video devices to original equipment manufacturers and
the associated time required to ramp-up sales of those products. Sales increased
on a quarterly basis in each year as a result of increased unit shipments of
Nogatech's NT1003 chip, which was introduced in the second quarter of 1998.
Gross margins have generally increased due to the transition to Nogatech's
higher margin video compression chip business.
Nogatech has experienced seasonal sales patterns in the past and Nogatech
expects to continue to experience seasonal sales patterns in the future.
Specifically, Nogatech expects to experience stronger demand for its chips
during the last two quarters of each year and weaker demand in the first quarter
of each year because the purchasing cycles of many of its customers,
particularly those in the consumer
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<PAGE>
electronics industry, generally result in their purchasing more chips in the
last quarter and less in the first quarter of the year.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES. Since its inception, Nogatech has funded operations
primarily through the private placement of its preferred stock and bank loans.
Nogatech raised proceeds of approximately $1.8 million in 1997, $5.6 million in
1998 and $4.7 million in January 2000 from private placements of its securities,
net of issuance costs. In May 2000, Nogatech closed its initial public offering
of 3.5 million shares. Net proceeds from the sale of the shares were
approximately $37.5 million. As of June 30, 2000, Nogatech had cash and cash
equivalents of $46.5 million.
OPERATING ACTIVITIES. Cash used in operations include expenditures
associated with development activities and marketing efforts related to
commercialization and improvement of Nogatech's current products, as well as the
development of its future products. Cash used in operations was $1.1 million in
1997, $1.8 million in 1998, $1.1 million in 1999 and $382,000 in the six months
ended June 30, 2000. Nogatech made investments in fixed assets of approximately
$633,000 between January 1, 1997 and June 30, 2000.
INVESTING ACTIVITIES. Nogatech invests excess cash in short-term cash
deposits of varying maturity, depending on its projected cash needs. Nogatech's
capital equipment purchases in the six months ended June 30, 2000, consisting
primarily of research and development software and computers, totaled $146,000.
Nogatech's capital requirements depend on numerous factors, including market
acceptance of its products, the resources it devotes to developing, marketing,
selling and supporting its products, the timing and extent of establishing
additional international operations and other factors. Nogatech expects to
devote substantial capital resources to expand its research and development and
its sales and marketing activities, and to other general corporate activities.
Nogatech expects that the net proceeds from its May 2000 offering, its cash on
hand and expected future cash from operations will be sufficient to meet its
working capital and capital expenditure needs for at least the next twelve
months.
BENEFICIAL CONVERSION CHARGE
In January 2000, Nogatech issued 1,196,172 shares of its Series B preferred
stock to a financial investor, which were converted into shares of its common
stock upon the closing of Nogatech's initial public offering. In connection with
this issuance, Nogatech recorded a beneficial conversion charge of $4.6 million
in the three months ended March 31, 2000. This charge is calculated as the
difference between the estimated fair value of one share of Nogatech's common
stock on the date of issuance and the per share conversion price applicable to
the Series B preferred stock, multiplied by the number of shares of common stock
into which the shares of Series B preferred stock were convertible. This
nonrecurring charge has been reflected as a decrease of the net income that
Nogatech recorded as applicable to common stock during this period, against a
corresponding credit to additional paid-in capital.
EFFECTIVE CORPORATE TAX RATES
Nogatech's tax rate reflects a mix of the U.S. federal and state tax on its
U.S. income and Israeli tax on non-exempt income. The majority of Nogatech's
Israeli subsidiary's income is derived from its capital investment program with
"approved enterprise" status under the Israeli Law for the Encouragement of
Capital Investments, 1959, and therefore is eligible for tax benefits. Under
these benefits, Nogatech will enjoy a tax exemption on income derived during the
first four years in which this investment program produces taxable income,
provided that its Israeli subsidiary does not distribute this income to us as a
dividend, and a reduced tax rate of 10% to 15% for the remaining term of the
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<PAGE>
program. All of these tax benefits are subject to various conditions and
restrictions. Since Nogatech has incurred tax losses through June 30, 2000,
Nogatech has not yet used the tax benefits for which it is eligible.
In May 2000, a special committee appointed by the Israeli Minister of
Finance issued a report relating in part to taxes to which Nogatech is subject.
Although the recommendations set forth in the report have been accepted by the
Israeli government, they will not be binding unless and until they are adopted
by the Israeli parliament. As a result, any legislation that is enacted as a
result of this report is not expected to take effect at least until January 1,
2001. In addition, substantial changes, which may be beneficial or adverse to
Nogatech, may be made to the recommendations set forth in the report before
these recommendations are enacted into law. However, if the recommendations in
the report are adopted without further modifications, there would be two primary
effects upon the tax laws to which Nogatech is subject:
- the exemption that Nogatech enjoys for income from its Israeli subsidiary
that is not distributed as a dividend would be revoked, and this
undistributed income would initially be taxed at the reduced rate of 10%;
and
- after the initial period of reduced taxation, the income of Nogatech's
Israeli subsidiary would generally be subject to a standard rate of income
tax applicable to approved enterprise companies of 25%.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133 requires recognition of all derivatives at fair value
in the financial statements. Nogatech believes that, upon implementation, the
standard will not have a significant effect on its financial statements.
In December 1999, the Commission issued SAB 101, "Revenue Recognition in
Financial Statements," which summarizes some of the Commission's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. Nogatech's adoption of SAB 101 has not had a material
impact on its financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Nogatech is exposed to financial market risks including changes in interest
rates and foreign currency exchange rates. Substantially all of Nogatech's cash
and cash equivalents consisted of short-term deposits and therefore are not
subject to significant interest rate risk. Substantially all of Nogatech's sales
and capital spending is transacted in U.S. dollars, although approximately 28.2%
of the cost its operations, relating mainly to its personnel and facilities in
Israel, was incurred in New Israeli Shekels, or NIS, in the six months ended
June 30, 2000. Nogatech has not engaged in hedging transactions to reduce its
exposure to fluctuations that may arise from changes in foreign exchange rates.
In the event of an increase in inflation rates in Israel, or if appreciation of
the NIS occurs without a corresponding adjustment in Nogatech's
dollar-denominated sales, Nogatech's results of operations could be materially
harmed.
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<PAGE>
NOGATECH MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names of Nogatech's executive officers and directors and their ages as
of August 23, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------------------------------------------------
<S> <C> <C>
Nathan Hod............................. 54 Chairman of the Board
Arie Heiman............................ 53 President and Chief Executive Officer and Director
Yaron Garmazi.......................... 35 Chief Financial Officer and Secretary
Arie Gavriely.......................... 38 Vice President of Engineering
Liat Hod............................... 26 Vice President of Business Development
Gerald Dogon........................... 60 Director
Avraham Fischer........................ 43 Director
Moshe Harel............................ 59 Director
Yirmiyahu Kaplan....................... 64 Director
Andrew Schonzeit....................... 43 Director
Yossi Vinitski......................... 33 Director
</TABLE>
NATHAN HOD co-founded Nogatech in 1993. Mr. Hod has served as Nogatech's
Chairman since August 1995 and does not currently hold any other position with
Nogatech. From August 1995 though November 1995, Mr. Hod also served as
Nogatech's Chief Executive Officer, Treasurer and Chief Financial Officer. From
March 1994 until July 1998, Mr. Hod also served as Chief Executive Officer and
President of DSP Communications, a manufacturer of digital wireless technology
that was acquired by Intel in 1999. From November 1997 until October 1998,
Mr. Hod also served as Chairman of the Board of DSP Communications. Mr. Hod also
served as General Manager of Scitex Japan, a subsidiary of Scitex Corporation, a
developer of imaging and publishing systems, from 1986 until 1992. Mr. Hod has a
Masters degree in Business Administration from the University of Massachusetts,
Amherst.
ARIE HEIMAN, PH.D., co-founded Nogatech in 1993. Dr. Heiman has served as a
director of Nogatech and as its Chief Executive Officer since November 1995, and
served as its Chief Financial Officer between November 1995 and February 1999.
In addition, from January 1993 to November 1995, Dr. Heiman served as Nogatech's
Vice President of Engineering and Technology. From 1990 to 1993, Dr. Heiman
served as Vice President, Image Activity for DSP Group, a computer technology
company. From 1978 to 1990, Dr. Heiman was Head of Digital Signal Processing
Activities for Tadiran Communications Group, an electronics/communications
manufacturing company. Dr. Heiman has a Ph.D. degree in Electrical Engineering
from Tel Aviv University.
YARON GARMAZI has served as Nogatech's Chief Financial Officer since
February 1999. From 1995 until that time, he served as Controller for DSP
Communications, where he was responsible for the company's financial reporting
system. Prior to that time he was an auditor with Doron & Co., an Israeli
accounting firm. Mr. Garmazi has a Bachelors degree from Tel Aviv Management
College. Mr. Garmazi is an Israeli certified public accountant.
ARIE GAVRIELY has served as Nogatech's Vice President of Engineering since
January 1998. From January 1997 to December 1997, Mr. Gavriely served as
Nogatech's Vice President of Mobile Video Conference Products. From 1993 to
December 1996 he held various engineering positions with Nogatech. Mr. Gavriely
was with the image processing group at DSP Group from 1991 to 1993. He was with
the Israeli Defense Forces from 1985 to 1991. Mr. Gavriely has a Masters of
Science degree in Electrical Engineering from the Technion Israel Institute of
Technology.
LIAT HOD has served as Nogatech's Vice President of Business Development
since August 1996. Between January 1996 and July 1996, she was Nogatech's U.S.
Marketing Manager. Ms. Hod received
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<PAGE>
her Masters degree in Business Administration from San Francisco State
University in June 1996. Ms. Hod is the daughter of Nathan Hod, Nogatech's
Chairman of the Board.
GERALD DOGON has served as a director of Nogatech since August 1999.
Mr. Dogon served as a director of DSP Communications from November 1997 through
January 1999, as Chief Financial Officer of DSP Communications from August 1994
through October 1998, as Executive Vice President of DSP Communications from
July 1996 through October 1998 and as Senior Vice President of DSP
Communications from August 1994 through July 1996. Between April 1992 and
August 1994, Mr. Dogon served as Director of Finance of Nilit, an Israeli
manufacturer of nylon fibers. From March 1991 to March 1992, Mr. Dogon served as
Vice President of Finance of Mul-T-Lock, an Israeli manufacturer of security
devices. Between March 1989 and March 1991, he served as Manager of the
International Division of the Israel General Bank. From December 1987 to
March 1989, he served as Chief Financial Officer of Indigo, an Israeli developer
of imaging systems. Prior to December 1987, he was employed for 17 years by
Scitex, where he last served as Executive Vice President and Chief Financial
Officer. Mr. Dogon has a Bachelors degree in Economics and Commerce from the
University of Cape Town, South Africa.
AVRAHAM FISCHER has served as a director of Nogatech since January 1995.
Mr. Fischer is a managing partner of the law firm Fischer, Behar, Chen & Co., of
Tel Aviv, Israel, where he has practiced since 1982. Mr. Fischer has also served
as a director of DSP Group from 1989 through 1997, of DSP Communications from
1996 through 1999, and of Vyyo, a developer of wireless broadband technologies,
since April 1996. Since January 1998, Mr. Fischer has served as co-Chairman of
the Board of Israir Aviation and Tourism and since January 1997, he has been
co-Chairman of the Board of Ganden Investment, which has holdings in a group of
Israeli tourism and aviation companies. Mr. Fischer has a law degree from the
Tel Aviv University Law School and was a lecturer at the school from 1982 to
1987.
MOSHE HAREL has served as a director of Nogatech since July 1998. Mr. Harel
joined the Van Leer Group Foundation in 1991 as the General Manager of Sor-Van
Radiation. He is currently responsible for the business activities of the Van
Leer Group Foundation in Israel. Since 1994, Mr. Harel has served as a director
and member of the executive board of Inventech, Mercator Management and several
companies in which Inventech has invested. From 1980 to 1991, Mr. Harel served
in management positions at several Israeli and U.S. companies. In 1964,
Mr. Harel joined the Israeli Air Force and served as a research and development
engineer and a fighter pilot. He retired in 1980 after commanding the air force
flight test center. Mr. Harel has a Bachelors of Science degree in Aeronautical
Engineering from the Technion Israel Institute of Technology and a Masters of
Science degree in Data Management and Automation from Princeton University.
YIRMIYAHU KAPLAN has served as a director of Nogatech since July 1998. Since
1993, Mr. Kaplan has been Managing Director of Ophir Holdings. From 1986 to
1993, Mr. Kaplan managed various projects and activities for the Investment
Company of Bank Hapoalim. Mr. Kaplan is a director of a number of private
companies in which Ophir Holdings is a stockholder, including Memco Software.
Mr. Kaplan has a Bachelor of Arts degree in Economics and a Masters degree in
Business Administration from the Hebrew University.
ANDREW SCHONZEIT has served as a director of Nogatech since January 1996.
Since 1984 Mr. Schonzeit has served as the President of Idesco, a manufacturer
and distributor of identification, security and safety products, and as its
Chairman of the board since 1989. Mr. Schonzeit served as a director of DSP
Communications from 1992 to 1999. Mr. Schonzeit has a bachelors degree in
Economics from New York University.
YOSSI VINITSKI was appointed a director of Nogatech in December 1999.
Mr. Vinitski is a Vice President and investment committee member at Challenge
Fund-Etgar, a venture capital fund. From 1995 to 1999, Mr. Vinitski was a Senior
Investment Manager at Yozma Management and
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<PAGE>
Investment Ltd., an Israeli venture capital fund. From 1993 to 1995,
Mr. Vinitski served as a development engineer for several high-tech companies.
Mr. Vinitski has a Bachelors of Science degree, cum laude, in Mechanical
Engineering and a Masters degree in Business Administration from Tel Aviv
University.
SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS, MANAGEMENT AND DIRECTORS OF NOGATECH
The following table contains information concerning the beneficial ownership
of common stock of Nogatech as of June 30, 2000 by the following:
- each person or entity who is known by Nogatech to own beneficially more
than 5% of the outstanding shares of Nogatech common stock;
- each of Nogatech's current directors;
- Nogatech's chief executive officer; and
- all directors and executive officers of Nogatech as a group.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act and the information is
not necessarily indicative of beneficial ownership for any other purpose. Under
such rule, beneficial ownership includes any shares as to which the individual
or entity has voting power or investment power and any shares that the
individual has the right to acquire within 60 days of June 30, 2000 through the
exercise of any stock option or other right. Unless otherwise indicated in the
footnotes or table, each person or entity has sole voting and investment power,
or shares such powers with his or her spouse, with respect to the
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<PAGE>
shares shown as beneficially owned and has an address of c/o Nogatech, Inc.,
5201 Great America Parkway, Santa Clara, CA 95054.
<TABLE>
<CAPTION>
NOGATECH COMMON STOCK ZORAN COMMON STOCK
-------------------------------------- -------------------------------------
NUMBER OF PERCENTAGE OF NUMBER OF PERCENTAGE OF
SHARES OWNED SHARES OUTSTANDING SHARES OWNED SHARES OUTSTANDING
NAME BEFORE THE MERGER BEFORE THE MERGER AFTER THE MERGER AFTER THE MERGER
---- ----------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
5% STOCKHOLDERS:
Kenwood Corporation............... 1,255,496 8.3% 208,412 1.2%
Alive Mitake
2-5, Shibuya 1-chome
Tokyo, 150 Japan
Tomen Electronics Corporation..... 1,255,496 8.3 208,412 1.2
1-1, Uchisaiwai-cho
2-Chome, Chiyoda-ku
Tokyo 100, Japan
Holland Ventures B.V.............. 1,104,958 7.3 183,423 1.1
Dreeftoren-Etagel 14
Haaksbergweg 55
1101 BR Amsterdam Z.O.
Netherlands
Les Fils Dreyfus & Cie S.A........ 838,876 5.6 139,253 *
c/o Ajax Trading Co.
2525 Davie Rd. Extension, Suite
320
Davie, FL 3317
Ophir Holdings Ltd................ 828,719 5.5 137,567 *
Amot Mishpat Bldg, 10th Floor
8 Shaul Hamelech Boulevard
Tel Aviv 64733, Israel
Nomura International plc.......... 683,527 4.5 113,465 *
Nomura House
1 St. Martins-le-Grand
Lond EC1A 4NP, United Kingdom
Docor International B.V........... 552,479 3.7 91,711 *
P.O. Box 448
Kiryat Weizman
Rehovot, 76100 Israel
Inventech Ltd..................... 552,479 3.7 91,711 *
Shalom Tower
Echad Ha'am 9
P.O. Box 29076
Tel Aviv 65251, Israel
NAMED EXECUTIVE OFFICERS AND
DIRECTORS:
Nathan Hod (1).................... 1,119,205 7.4% 185,788 1.1%
Yirmiyahu Kaplan (2).............. 828,719 5.5 137,567 *
Arie Heiman (3)................... 517,347 3.3 85,880 *
Andrew Schonzeit (4).............. 145,489 1.0 24,151 *
Avraham Fischer (5)............... 85,000 * 14,110 *
Gerald Dogon (6).................. 40,000 * 6,640 *
Arie Gavriely..................... 28,750 * 4,772 *
Moshe Harel (7)................... 12,500 * 2,075 *
Yossi Vinitski.................... -- * -- *
All directors and executive
officers as a group (12 persons)
(8)............................. 2,855,010 18.1% 473,932 2.7%
</TABLE>
--------------------------
* represents less than 1%
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<PAGE>
(1) Includes outstanding options to purchase 25,000 shares of Nogatech common
stock that are exercisable on or prior to August 29, 2000.
(2) Mr. Kaplan is the managing director of Ophir Holdings Ltd. and may be deemed
to share voting and investment power with respect to the shares held by
Ophir Holdings Ltd. Mr. Kaplan disclaims beneficial ownership of these
shares.
(3) Includes outstanding options to purchase 353,014 shares of Nogatech common
stock that are exercisable on or prior to August 29, 2000.
(4) Includes outstanding options to purchase 50,000 shares of Nogatech common
stock that are exercisable on or prior to August 29, 2000. Excludes 13,176
shares of common stock held in four trusts for the benefit of
Mr. Schonzeit's children, as to which Mr. Schonzeit has no voting or
investment power. Mr. Schonzeit disclaims beneficial ownership of these
shares.
(5) Includes outstanding options to purchase 50,000 shares of Nogatech common
stock that are exercisable on or prior to August 29, 2000.
(6) Consists of outstanding options to purchase 40,000 shares of Nogatech common
stock that are exercisable on or prior to August 29, 2000.
(7) Consists of outstanding options to purchase 12,500 shares of Nogatech common
stock that are exercisable on or prior to August 29, 2000.
(8) Includes outstanding options or warrants to purchase 637,264 shares of
Nogatech common stock that are exercisable on or prior to August 29, 2000.
INFORMATION REGARDING NOGATECH EXECUTIVE OFFICER COMPENSATION
SUMMARY OF CASH AND OTHER EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation received
for services rendered to Nogatech during the year ended December 31, 1999 by
Arie Heiman, Nogatech's Chief Executive Officer. Mr. Heiman is the only
executive officer of Nogatech who will continue to serve as an executive officer
of Zoran if the merger is completed.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION OPTIONS GRANTED ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (SHARES) COMPENSATION(1)
--------------------------- -------- ------------ -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Arie Heiman................................. 1999 $168,500 -- 37,500 $34,621
President and Chief Executive Officer
</TABLE>
------------------------
(1) On behalf of Mr. Heiman, Nogatech makes monthly payments to a severance
fund, a pension fund and a risk/disability fund. The amounts held in such
funds on Mr. Heiman's behalf are payable to him upon termination of his
employment.
OPTION GRANTS
The following table sets forth information concerning grants of options to
purchase Nogatech's common stock made during the year ended December 31, 1999 to
the Chief Executive Officer.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
--------------------------------------------------------- AT ASSUMED ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE APPRECIATION
SECURITIES OPTIONS GRANTED FOR OPTION TERM(1)
UNDERLYING TO EMPLOYEES IN EXERCISE EXPIRATION ---------------------------
NAME OPTIONS GRANTED FISCAL YEAR(2) PRICE(3) DATE(4) 5% 10%
---- --------------- --------------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Arie Heiman.................... 37,500 14.1% $3.00 8/06 $45,798 $106,731
</TABLE>
--------------------------
(1) Potential gains are net of exercise price, but before taxes associated with
the exercise. These amounts represent certain hypothetical gains based on
assumed rates of appreciation, based on the Commission's rules, and do not
represent Zoran's estimate or projection of future Zoran common stock
prices. Actual gains, if any, on stock option exercises are dependent on the
future performance of Zoran, overall market conditions and the optionees'
continued employment through the vesting period. The amounts reflected in
this table may not be achieved.
(2) Nogatech granted options to purchase aggregate of 266,000 shares of common
stock during 1999.
(3) All options were granted at an exercise price equal to the fair market value
of Nogatech common stock on the date of grant.
(4) These options will vest immediately if a change of control of Nogatech
occurs or if Nogatech is merged into another company, unless these options
are assumed by Nogatech's successor.
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth information concerning the stock options held
as of December 31, 1999, by the Chief Executive Officer, who did not exercise
any stock options in 1999.
OPTION EXERCISES AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AS OF IN-THE-MONEY OPTIONS AS OF
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999(1)
ACQUIRED ON VALUE --------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Arie Heiman....................... -- -- 364,473 134,791 $4,311,058 $1,492,109
</TABLE>
------------------------
(1) Based on the price of $12.00, the initial public offering price of
Nogatech's common stock, less the exercise price.
108
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Zoran and Nogatech each file reports, proxy statements and other information
with the Commission. You may read and copy any reports, statements and other
information we file at the Commission's public reference room at 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as the Commission's regional
offices at 7 World Trade Center, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60611. Copies of these materials also can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, Washington, D.C. 20549 at prescribed rates. Zoran's and Nogatech's
filings are also available to you from commercial document retrieval services
and at the Commission's a website at http://www.sec.gov.
Zoran common stock and Nogatech common stock are quoted on The Nasdaq
National Market. Reports and other information concerning Zoran and Nogatech can
also be inspected at the offices of the National Association of Securities
Dealers, Inc., Market Listing Section, 1735 K Street, N.W., Washington, D.C.
20006.
Zoran has filed with the Commission a registration statement on Form S-4
with respect to the shares of Zoran common stock to be issued pursuant to the
merger agreement. This proxy statement/ prospectus constitutes the prospectus of
Zoran that is filed as part of the registration statement. Copies of the
registration statement, including exhibits, may be obtained from the
Commission's principal office in Washington, D.C. or on the Commission's
website.
This proxy statement/prospectus includes trademarks and trade names of
companies other than Zoran and Nogatech, which are the property of their
respective owners. You may obtain documents described in this proxy
statement/prospectus by requesting them in writing or by telephone from the
appropriate party at the following address:
<TABLE>
<S> <C>
NOGATECH, INC. ZORAN CORPORATION
5201 Great America Parkway 3112 Scott Boulevard
Santa Clara, California 95054 Santa Clara, California 95054
Attn: Investor Relations Attn: Investor Relations
Tel: (408) 562-6200 Tel: (415) 617-2543
</TABLE>
If you would like to request documents from Zoran or Nogatech, please do so
by October 16, 2000 to receive them before the Nogatech special meeting.
You should rely only on the information contained in this proxy
statement/prospectus to vote on the Nogatech proposal. Neither Zoran nor
Nogatech has not authorized anyone to provide you with information that is
different from what is contained in this proxy statement/prospectus. This proxy
statement/prospectus is dated September 29, 2000. You should not assume that the
information contained in this proxy statement/prospectus is accurate as of any
date other than such date, and neither the mailing of this proxy
statement/prospectus to you nor the issuance of Zoran common stock in the merger
shall create any implication to the contrary.
This proxy statement/prospectus is being furnished:
- to Nogatech's stockholders in connection with the solicitation of proxies
by Nogatech's board of directors for use at the Nogatech special meeting.
Each copy of this proxy statement/prospectus mailed to the Nogatech
stockholders is accompanied by a form of proxy for use at the Nogatech
special meeting; and
- by Zoran to holders of Nogatech common stock as a prospectus in connection
with the Zoran common stock to be issued upon consummation of the merger.
Zoran has supplied all information contained or incorporated by reference in
this proxy statement/ prospectus relating to Zoran, and Nogatech has supplied
all such information relating to Nogatech. Neither Zoran nor Nogatech has
independently investigated or verified the information provided by the other.
109
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the combined financial position or results of operations of future periods or
the results that actually would have been realized had Zoran, PixelCam and
Nogatech been combined during the specified periods. The pro forma combined
financial statements, including the notes thereto, are qualified in their
entirety by reference to, and should be read in conjuction with, the historical
consolidated financial statements, including the notes thereto, of Zoran,
PixelCam and Nogatech included elsewhere in this document.
The following pro forma combined financial statements give effect to the
proposed merger of Zoran and Nogatech using the purchase method of accounting as
well as the merger of Zoran and PixelCam, which was completed on June 29, 2000,
using the purchase method of accounting. The pro forma adjustments related to
the merger of Zoran and Nogatech are preliminary and based on management's
estimates. The pro forma adjustments related to the merger of Zoran and PixelCam
are final and based on a third party valuation of the intangible assets acquired
and management's estimates.
Based on the timing of the closing of the transaction, the finalization of
the third-party valuation, the pro forma adjustments may differ materially from
those presented in these pro forma financial statements. A change in the pro
forma adjustments would result in a reallocation of the purchase price affecting
the value assigned to the long-term tangible and intangible assets. The
statement of operations effect of these changes will depend on the nature and
amount of the assets or liabilities adjusted (see Note 2 to the unaudited pro
forma combined financial statements).
110
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ZORAN NOGATECH ADJUSTMENTS PRO FORMA
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 15,418 $ 46,521 $ -- $ 61,939
Short-term investments.......................... 93,200 -- -- 93,200
Accounts receivable, net........................ 21,734 2,132 -- 23,866
Inventory....................................... 11,380 1,805 -- 13,185
Prepaid expenses and other current assets....... 3,171 425 -- 3,596
-------- -------- -------- --------
Total current assets.......................... 144,903 50,883 -- 195,786
Property and equipment, net....................... 6,061 422 -- 6,483
Goodwill and other intangibles.................... 18,036 -- 101,652 (1) 119,688
Other assets...................................... 41,241 292 -- 41,533
-------- -------- -------- --------
$210,241 $ 51,597 $101,652 $363,490
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Convertible notes payable, current.............. $ -- $ -- $ -- --
Accounts payable................................ 9,711 2,676 -- 12,387
Accrued liabilities............................. 12,665 462 3,500 (2) 16,627
-------- -------- -------- --------
Total current liabilities..................... 22,376 3,138 3,500 29,014
-------- -------- -------- --------
22,376 3,138 3,500 29,014
-------- -------- -------- --------
Stockholders' equity:
Common stock.................................... 14 16 (13)(3) 17
Additional paid-in capital...................... 221,408 63,719 94,654 (3) 379,781
Warrants........................................ 717 -- -- 717
Unearned stock-based compensation............... -- (193) (1,572)(4) (1,765)
Accumulated other comprehensive income.......... 3,478 -- -- 3,478
Retained earnings (accumulated deficit)......... (37,752) (15,083) 5,083 (5) (47,752)
-------- -------- -------- --------
Total stockholders' equity.................... 187,865 48,459 98,152 334,476
-------- -------- -------- --------
Total liabilities and stockholders'
equity.................................... $210,241 $ 51,597 $101,652 $363,490
======== ======== ======== ========
</TABLE>
111
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ZORAN PIXELCAM NOGATECH ADJUSTMENTS PRO FORMA
-------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales............................. $30,611 $ 313 $ 5,988 $ -- $ 36,912
Software, licensing and development....... 5,892 -- -- -- 5,892
------- ------- ------- -------- --------
Total revenues.......................... 36,503 313 5,988 -- 42,804
------- ------- ------- -------- --------
Operating expenses:
Cost of sales............................. 17,205 313 3,407 -- 20,925
Research and development.................. 7,245 1,252 1,322 -- 9,819
Sales and marketing, general and
administrative.......................... 8,580 870 1,255 -- 10,705
Stock based compensation.................. -- 485 -- -- 485
Amortization of goodwill and other
intangibles............................. -- -- -- 19,948(6) 19,948
Write-off of acquired in-process research
and development......................... 6,769 -- -- (6,769)(7) --
------- ------- ------- -------- --------
Total operating expenses................ 39,799 2,920 5,984 13,179 61,882
------- ------- ------- -------- --------
Income (loss) from operations............... (3,296) (2,607) 4 (13,179) (19,078)
Interest and other income................... 4,214 16 330 -- 4,560
Interest expense............................ -- (45) -- -- (45)
------- ------- ------- -------- --------
Income (loss) before income taxes........... 918 (2,636) 334 (13,179) (14,563)
Provision for income tax.................... 1,153 2 -- (449)(8) 706
------- ------- ------- -------- --------
Net income (loss)........................... (235) (2,638) 334 (12,730) (15,269)
Charge for beneficial conversion feature of
series
B Preferred Stock........................... -- -- (4,570) -- (4,570)
Accretion of series A redeemable convertible
preferred stock to redemption value....... -- -- (252) -- (252)
------- ------- ------- -------- --------
Net loss attributable to common
stockholders.............................. $ (235) $(2,638) $(4,488) $(12,730) $(20,091)
======= ======= ======= ======== ========
Basic net loss per share.................... $ (0.02) $ (1.19)(9)
======= ========
Diluted net loss per share.................. $ (0.02) $ (1.19)(9)
======= ========
Shares used to compute basic net loss per
share 14,072 2,756 16,828
======= ======== ========
Shares used to compute diluted net loss per
share..................................... 14,072 2,756 16,828
======= ======== ========
</TABLE>
112
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ZORAN PIXELCAM NOGATECH ADJUSTMENTS PRO FORMA
-------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales............................. $52,887 $ 250 8,856 $ -- $ 61,993
Software, licensing and development....... 8,787 -- $ -- -- 8,787
------- ------- ------- -------- --------
Total revenues.......................... 61,674 250 8,856 -- 70,780
------- ------- ------- -------- --------
Operating expenses:
Cost of sales............................. 28,523 289 5,111 -- 33,923
Research and development.................. 12,651 1,517 2,283 -- 16,451
Sales and marketing, general and
administrative.......................... 14,251 819 2,569 -- 17,639
Amortization of goodwill and other
intangibles............................. -- -- -- 39,896(6) 39,896
Stock based compensation.................. -- 229 -- -- 229
------- ------- ------- -------- --------
Total operating expenses................ 55,425 2,854 9,963 39,896 108,138
------- ------- ------- -------- --------
Income (loss) from operations............... 6,249 (2,604) (1,107) (39,896) (37,358)
Interest and other income................... 1,585 5 11 -- 1,601
Interest expense............................ -- (109) -- -- (109)
------- ------- ------- -------- --------
Income (loss) before income taxes........... 7,834 (2,708) (1,096) (39,896) (35,866)
Provision (benefit) for income tax.......... 1,175 -- -- (510)(8) 665
------- ------- ------- -------- --------
Net income (loss)........................... 6,659 (2,708) (1,096) (39,386) (36,531)
Accretion of series A redeemable convertible
preferred stock to redemption value....... -- -- (427) -- (427)
------- ------- ------- -------- --------
Net income (loss) attributable to common
stockholders.............................. $ 6,659 $(2,708) $(1,523) $(39,386) $(36,958)
======= ======= ======= ======== ========
Basic net income (loss) per share........... $ 0.61 $ (2.72)(9)
======= ========
Diluted net income (loss) per share......... $ 0.54 $ (2.72)(9)
======= ========
Shares used to compute basic net income
(loss) per share.......................... 10,844 2,756 13,600
======= ======== ========
Shares used to compute diluted net income
(loss) per share.......................... 12,249 1,351 13,600
======= ======== ========
</TABLE>
113
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The pro forma combined balance sheet assumes that the merger between Zoran
and Nogatech took place on June 30, 2000 and combines Zoran's June 30, 2000
unaudited consolidated balance sheet (which reflects the PixelCam merger of
June 29, 2000) and Nogatech's June 30, 2000 unaudited consolidated balance
sheet. The pro forma combined statements of operations assume the mergers of
Zoran and Nogatech and Zoran and PixelCam took place as of the beginning of
1999.
The pro forma combined statements of operations for the year ended December
31, 1999 combines Zoran's and Nogatech's consolidated statements of operations
for the year ended December 31, 1999 and PixelCam's statements of operations for
the year ended March 31, 2000.
The pro forma combined statements of operations for the six month period
ended June 30, 2000 combines Zoran's and Nogatech's consolidated statements of
operations for the six month period ended June 30, 2000 and PixelCam's statement
of operations for the period January 1, 2000 thru June 29, 2000 (the date of the
Zoran merger with PixelCam).
Revenues of approximately $160,000 and net loss of approximately $1,835,000
of PixelCam for the period from January 1, 2000 through March 31, 2000 were
included in both the unaudited pro forma combined statements of operations for
the year ended December 31, 1999 and the six months ended June 30, 2000.
On a combined basis, there were no material transactions between Zoran and
Nogatech or PixelCam during the periods presented.
There are no material differences between the accounting policies of Zoran,
Nogatech and PixelCam.
The pro forma combined provision for income taxes may not represent the
amounts that would have resulted had Zoran, Nogatech and PixelCam filed
consolidated income tax returns during the periods presented.
NOTE 2--PRO FORMA ADJUSTMENTS
NOGATECH MERGER
The purchase price for Nogatech of $162.0 million, which consists of
2,705,549 shares, includes 2,507,810 shares with a fair value of $152.5 million
(fair value being determined as the average price of the Zoran stock for a
period three days before and after the date of the definitive agreement),
197,739 shares with a fair value of $6.0 million for Zoran stock options
(computed under the Black Scholes method) and $3.5 million in estimated expenses
of the transaction. The purchase price was allocated on a pro forma basis:
$48.5 million to the estimated fair value of Nogatech net tangible assets,
$10.0 million to purchased in-process research and development, $1.8 million to
deferred compensation for the intrinsic value of the unvested stock options
assumed and $101.7 million to goodwill and other intangibles. The allocation of
the purchase price to intangibles is based upon management's estimates and are
preliminary. The purchase price allocation will be adjusted upon the
finalization of a third-party valuation and may differ materially from those
presented in these pro forma financial statements.
PIXELCAM MERGER
The purchase price for PixelCam of $25.2 million includes the fair value of
stock and options issued by Zoran of $24.6 million and $0.6 million of expenses
of the transaction. The purchase price
114
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--PRO FORMA ADJUSTMENTS (CONTINUED)
was allocated on the basis of an independent appraisal and management's
estimates: $0.4 million to the estimated fair value of PixelCam net tangible
assets, $6.8 million to purchased in-process research and development and
$18.0 million to goodwill and other intangibles.
(1) The adjustment to Goodwill and other intangibles reflects the goodwill
created in the acquisition of Nogatech. The goodwill and other
intangibles created in the acquisition of PixelCam are included in
Zoran's June 30, 2000 consolidated balance sheet.
(2) The adjustment to Accrued liabilities reflects the accrual of costs
expected to be incurred in connection with the acquisition of Nogatech.
(3) The adjustment to Common stock and Additional paid-in capital reflects
the fair market value of shares issued in connection with the acquisition
of Nogatech offset by the elimination of Nogatech's Common stock and
Additional paid-in capital.
(4) The adjustment to Unearned stock-based compensation reflects the
unearned stock-based compensation computed for Zoran's assumption of
Nogatech's unvested options outstanding.
(5) The adjustment to Retained earnings (accumulated deficit) reflects the
Write-off of acquired in-process research and development to be recorded
by Zoran in connection with the acquisition of Nogatech offset by the
elimination of Nogatech's Retained earnings (accumulated deficit).
(6) The adjustment to Amortization of goodwill and other intangibles
represents the following:
<TABLE>
<CAPTION>
SIX MONTHS TWELVE MONTHS
ENDED ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-------------- ------------------
<S> <C> <C>
Amortization of goodwill from the acquisition of
PixelCam.............................................. $ 3,006 $ 6,012
Amortization of goodwill from the acquisition of
Nogatech.............................................. $16,942 $33,884
</TABLE>
(7) The adjustment to Write-off of acquired in-process research and
development, made in accordance with SEC rules for filing pro forma
financial statements, is to eliminate the one-time write-off of acquired
in-process technology recorded by Zoran in connection with the
acquisition of PixelCam.
(8) The adjustment to Provision for income tax is to adjust the tax
provision for additional benefit related to certain of the adjustments
for the PixelCam merger. No tax adjustments have been made for the
Nogatech merger based on management's assumption that most, if not all,
of the intangibles will represent non-deductible goodwill.
(9) Basic and Diluted unaudited pro forma net loss per share is computed
using the weighted average number of shares outstanding after the
issuance of 247,220 shares related to the PixelCam acquisition and
2,507,549 shares related to the Nogatech acquisition. It excludes any
options of Zoran and any options issued in conjunction with either the
Nogatech or PixelCam acquisitions since such options are antidilutive.
115
<PAGE>
COMPARISON OF RIGHTS OF ZORAN STOCKHOLDERS AND NOGATECH STOCKHOLDERS
Zoran and Nogatech are incorporated under the laws of the State of Delaware.
The rights of their stockholders are governed by Delaware law and by their
respective certificates of incorporation and bylaws. Upon consummation of the
merger, stockholders of Nogatech will become stockholders of Zoran. The rights
of former Nogatech stockholders will continue to be governed by Delaware law,
and by the certificate of incorporation and bylaws of Zoran. The following is a
summary of the material differences between the Zoran certificate of
incorporation and Zoran bylaws, on the one hand, and the certificate of
incorporation and bylaws of Nogatech, on the other hand, that may affect the
rights of Nogatech's stockholders who become holders of Zoran common stock.
SPECIAL MEETINGS
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in the
corporation's certificate of incorporation or the bylaws. The Zoran bylaws
provide that special meetings of the stockholders may only be called by the
Zoran board of directors, the Chairman of the Board or the President. The
Nogatech bylaws and Nogatech certificate of incorporation provide that special
meetings may only be called by the Nogatech board of directors, the Chairman of
the Board, the President or the Chief Executive Officer.
SIZE OF THE BOARD OF DIRECTORS; CLASSIFICATION OF THE BOARD
The Zoran bylaws set the authorized number of directors at six. Zoran's
board of directors or stockholders can change such number by amending the
bylaws. The Nogatech certificate of incorporation provides that the number of
directors constituting the Nogatech board of directors shall be fixed
exclusively by the Nogatech bylaws. The Nogatech bylaws set the authorized
number of directors at nine. The Nogatech certificate of incorporation provides
for the division of the Nogatech board of directors into three classes with
staggered three year terms, with each class consisting of three directors.
REMOVAL OF DIRECTORS
Under Delaware law, unless otherwise restricted by the certificate of
incorporation or by the corporation's bylaws, any director or the entire board
of directors may be removed with or without cause by the holders of a majority
of the shares then entitled to vote at an election of directors; provided,
however, that so long as stockholders of the corporation are entitled to
cumulative voting, no individual director may be removed without cause, unless
the entire board is removed, if the number of votes cast against such removal
would be sufficient to elect the director if then cumulatively voted at an
election of the class of directors of which the director is a part. Whenever the
holders of any class or series are entitled to elect one or more directors by
the certificate of incorporation, the director or directors may be removed
without cause only if there are sufficient votes by the holders of the
outstanding shares of that class or series. A vacancy created by the removal of
a director may be filled only by the approval of the stockholders.
The Zoran bylaws provide that any director or the entire Zoran board of
directors may be removed, with or without cause, at a special meeting of the
stockholders called for such purpose, by a vote of the holders of at least a
majority of the voting power of the then outstanding shares of capital stock of
Zoran entitled to vote generally in the election of directors.
116
<PAGE>
The Nogatech certificate of incorporation provides that any director or the
entire Nogatech board of directors may be removed from office at any time:
- with cause by the affirmative vote of the holders of at least a majority
of the voting power of all of the then-outstanding shares of the voting
stock, voting together as a single class; or
- without cause by the affirmative vote of the holders of at least 66 2/3%
of the voting power of all of the then-outstanding shares of the voting
stock.
Under Delaware law, no reduction of the authorized number of directors shall
have the effect of removing any director prior to the expiration of the
director's term of office.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
The Nogatech certificate of incorporation provides that any vacancy on
Nogatech's board of directors may be filled by the affirmative vote of the
holders of a majority of the outstanding shares of common stock or by the
affirmative vote of a majority of the remaining directors in office, even though
less than a quorum. Newly created directorships resulting from an increase in
the number of directors will be filled only by the vote of the directors. The
Zoran bylaws provide that a majority of the directors, including those who have
resigned, have the power to fill vacancies.
LIMITATION ON BUSINESS TRANSACTED AT SPECIAL MEETINGS
The Nogatech bylaws provide that business transacted at a special meeting
shall be limited to the purposes stated in the notice of meeting. The Zoran
bylaws provide that business transacted at a special meeting shall be specified
in the notice of meeting, but the agenda of the meeting may, at the discretion
of the chairman of the meeting, be conducted otherwise in accordance with the
wishes of the stockholders in attendance.
LIMITATION ON STOCKHOLDERS ACTION BY WRITTEN CONSENT
The Nogatech certificate of incorporation provides that stockholders shall
not take any action by written consent. The Zoran bylaws provide that any action
required to be taken or which may be taken at any annual or special meeting of
the stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by a number of the holders of outstanding stock having not less
than the minimum number of votes that wold be necessary to authorize such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
AMENDMENT OF BYLAWS AND CERTIFICATE
Generally, under Delaware law, an amendment to a corpration's certificate of
incorporation requires the approval of the board of directors and the approval
of holders of a majority of the outstanding stock entitled to vote on the
amendment. The holders of the outstanding shares of a class are entitled to vote
as a separate class on a proposed amendment that would increase or decrease the
aggregate number of authorized shares of their class, increase or decrease the
par value of the shares of their class, or alter or change the powers,
preferences or special rights of the shares of their class in a way that affects
them adversely.
The Zoran bylaws may be repealed, altered or amended by the stockholders.
The Zoran board of directors may also amend the Zoran bylaws, subject to the
power of the stockholders to change or repeal such bylaws and provided that the
board of directors shall not make or alter any bylaws fixing the qualifications,
classifications, term of office or compensation of directors.
117
<PAGE>
The Nogatech certificate of incorporation provides that, notwithstanding any
provision of law which may permit a lesser vote, the Nogatech certificate of
incorporation may only be amended by 66 2/3% of voting power of the then
outstanding shares of capital stock of Nogatech. The Nogatech bylaws may be
amended, altered or repealed by:
- the Nogatech board of directors, by approval of a majority of the total
number of authorized directors; or
- the affirmative vote of a majority of the voting power of outstanding
shares of capital stock of Nogatech.
The foregoing summary does not purport to be a complete statement of the
rights of holders of Zoran common stock and Nogatech common stock under Delaware
law, and the summary is qualified in its entirety by reference to Delaware law,
the Zoran certificate of incorporation and Zoran bylaws, and the Nogatech
certificate of incorporation and Nogatech bylaws. See "Description of Zoran
Capital Stock" for a summary of certain other rights relating to the Zoran
common stock.
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
To the extent that indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of either Nogatech or Zoran under the above provisions, we have been advised
that in the opinion of the Commission this indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
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<PAGE>
DESCRIPTION OF ZORAN CAPITAL STOCK
The authorized capital stock of Zoran consists of 20,000,000 shares of
common stock, $.001 par value per share, and 3,000,000 shares of preferred
stock, $.001 par value per share.
COMMON STOCK
As of August 23, 2000, there were approximately 14,656,945 shares of Zoran
common stock outstanding.
The holders of Zoran common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may be
declared by Zoran's board of directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of Zoran, holders of
Zoran common stock are entitled to share ratably in the assets remaining after
payment of liabilities and the liquidation preference of any outstanding
preferred stock. Holders of Zoran common stock have no preemptive, conversion or
redemption rights. All of the outstanding shares of Zoran common stock are fully
paid and non-assessable.
The transfer agent for Zoran common stock is American Stock Transfer & Trust
Company.
PREFERRED STOCK
Up to 3,000,000 shares of Zoran preferred stock are authorized for issuance.
Zoran's board of directors has the authority, without further action by the
stockholders, to issue the undesignated preferred stock in one or more series
and to fix the designations, powers, preferences, privileges and relative
participating, optional or special rights and the qualifications, limitations or
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences, any or all of which may
be greater than the rights of the common stock. Zoran's board of directors,
without stockholder approval, can issue preferred stock with voting, conversion
or other rights that could adversely affect the voting power and other rights of
the holders of common stock. Preferred stock could thus be issued quickly with
terms calculated to delay or prevent a change in control of Zoran or make
removal of management more difficult. Additionally, the issuance of preferred
stock may have the effect of decreasing the market price of the common stock.
119
<PAGE>
LEGAL MATTERS
The validity of the shares of Zoran common stock to be issued pursuant to
the Merger Agreement and certain legal matters relating to the federal income
tax consequences of the merger will be passed upon for Zoran by Gray Cary
Ware & Freidenrich LLP, Palo Alto, California. Certain legal matters relating to
the federal income tax consequences of the merger will be passed upon for
Nogatech by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. As of
the date of this proxy statement/prospectus, partners of Gray Cary Ware &
Freidenrich LLP beneficially own an aggregate of 1,100 shares of Zoran common
stock.
EXPERTS
The consolidated financial statements of Zoran as of December 31, 1999 and
1998 and for each of the three years in the period ended December 31, 1999
included in this proxy statement/prospectus have been so included in reliance on
the reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Nogatech as of December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999
included in this proxy statement/prospectus have been so included in reliance on
the report of Kesselman & Kesselman, a member firm of PricewaterhouseCoopers
International Limited, independent certified public accountants in Israel, given
on the authority of said firm as experts in auditing and accounting.
120
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Zoran Corporation:
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999 and June 30, 2000 (unaudited)...................... F-3
Consolidated Statements of Operations for the three years
ended December 31, 1999 and the six month periods ended
June 30, 1999 (unaudited) and 2000 (unaudited).......... F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1999..................... F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1999 and the six month periods ended
June 30, 1999 (unaudited) and 2000 (unaudited).......... F-6
Notes to Consolidated Financial Statements................ F-7
PixelCam, Inc.:
Report of Independent Accountants......................... F-25
Balance Sheet as of March 31, 2000 and 1999 (unaudited)
and June 30, 2000 (unaudited)........................... F-26
Statement of Operations for the fiscal year ended
March 31, 2000, the periods from inception to March 31,
1999 (unaudited) and 2000 (unaudited), and the three
month periods ended June 30, 2000 (unaudited) and 1999
(unaudited)............................................. F-27
Statement of Shareholder's Deficit for the period from
inception to March 31, 1999 and the fiscal year ended
March 31, 2000.......................................... F-28
Statement of Cash Flows for the fiscal year ended
March 31, 2000, the periods from inception to March 31,
1999 (unaudited) and 2000 (unaudited), and the three
months ended June 30, 2000 (unaudited) and 1999
(unaudited)............................................. F-29
Notes to Financial Statements............................. F-30
Nogatech, Inc.:
Report of Independent Accountants......................... F-40
Consolidated Balance Sheets as of December 31, 1998 and
1999 and June 30, 2000 (unaudited)...................... F-41
Consolidated Statements of Operations for the three years
ended December 31, 1999 and the six month periods ended
June 30, 1999 (unaudited) and 2000 (unaudited).......... F-42
Consolidated Statements of Stockholders' Equity (Capital
Deficiency) for the three years ended December 31, 1999
and the six month period ended June 30, 2000
(unaudited)............................................. F-43
Consolidated Statements of Cash Flows for the three years
ended December 31, 1999 and the six month periods ended
June 30, 1999 (unaudited) and 2000 (unaudited).......... F-46
Notes to Consolidated Financial Statements................ F-47
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Zoran Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Zoran
Corporation and its subsidiaries at December 31, 1999 and 1998, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 25, 2000
F-2
<PAGE>
ZORAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1999 1998 2000
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $ 12,665 $ 8,221 $ 15,418
Short-term investments................................... 132,967 10,954 93,200
Accounts receivable, net................................. 21,869 15,558 21,734
Inventory................................................ 7,159 7,063 11,380
Prepaid expenses and other current assets................ 1,946 2,018 3,171
--------- --------- ---------
Total current assets................................. 176,606 43,814 144,903
Property and equipment, net................................ 5,662 5,356 6,061
Other investments.......................................... 200 -- 41,241
Goodwill and other intangibles............................. -- -- 18,036
--------- --------- ---------
$ 182,468 $ 49,170 $ 210,241
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable......................................... $ 7,987 $ 6,530 $ 9,711
Accrued expenses and other liabilities................... 11,036 6,454 12,665
--------- --------- ---------
Total current liabilities............................ 19,023 12,984 22,376
--------- --------- ---------
Commitments and Contingencies (Note 6)
Stockholders' Equity:
Common Stock: $0.001 par value; 20,000,000 shares
authorized; 13,919,270 and 10,213,394 shares issued and
outstanding............................................ 14 10 14
Additional paid-in capital............................... 195,269 79,635 221,408
Warrants................................................. 717 717 717
Accumulated other comprehensive income................... 4,962 -- 3,478
Accumulated deficit...................................... (37,517) (44,176) (37,752)
--------- --------- ---------
Total stockholders' equity........................... 163,445 36,186 187,865
--------- --------- ---------
$ 182,468 $ 49,170 $ 210,241
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ZORAN COPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1999 1998 1997 2000 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales................................ $52,887 $33,465 $32,717 $30,611 $20,209
Software, licensing and development.......... 8,787 10,760 12,210 5,892 5,314
------- ------- ------- ------- -------
Total revenues........................... 61,674 44,225 44,927 36,503 25,523
------- ------- ------- ------- -------
Costs and expenses:
Cost of product sales........................ 28,523 19,036 16,032 17,205 10,777
Research and development..................... 12,651 13,548 13,787 7,245 7,515
Selling, general and administrative.......... 14,251 11,551 11,209 8,580 6,549
Write-off of acquired in-process research and
development................................ -- -- -- 6,769 --
------- ------- ------- ------- -------
Total costs and expenses................. 55,425 44,135 41,028 39,799 24,841
------- ------- ------- ------- -------
Operating income............................... 6,249 90 3,899 (3,296) 682
Interest and other income, net................. 1,585 1,071 1,258 4,214 977
------- ------- ------- ------- -------
Income before income taxes..................... 7,834 1,161 5,157 918 1,659
Provision for income taxes..................... 1,175 232 928 1,153 332
------- ------- ------- ------- -------
Net income (loss).............................. $ 6,659 $ 929 $ 4,229 $ (235) $ 1,327
======= ======= ======= ======= =======
Basic net income (loss) per share.............. $ 0.61 $ 0.09 $ 0.45 $ (0.02) $ 0.13
======= ======= ======= ======= =======
Diluted net income (loss) per share............ $ 0.54 $ 0.08 $ 0.38 $ (0.02) $ 0.11
======= ======= ======= ======= =======
Shares used to compute basic net income (loss)
per
share........................................ 10,844 10,042 9,412 14,072 10,441
======= ======= ======= ======= =======
Shares used to compute diluted net income
(loss) per share............................. 12,249 11,119 11,072 14,072 11,735
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ZORAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------- PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL WARRANTS INCOME DEFICIT TOTAL
-------- -------- ---------- -------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996........................ 9,029 $ 9 $ 77,855 $ -- $ -- $ (49,334) $ 28,530
Issuance of Common Stock,
net......................... 772 1 769 -- -- -- 770
Issuance of Warrant........... -- -- -- 717 -- -- 717
Amortization of deferred
compensation................ -- -- 40 -- -- -- 40
Net income.................... -- -- -- -- -- 4,229 4,229
------ --- -------- ---- ------ --------- --------
Balance at December 31,
1997........................ 9,801 10 78,664 717 -- (45,105) 34,286
Issuance of Common Stock,
net......................... 412 -- 971 -- -- -- 971
Net income.................... -- -- -- -- -- 929 929
------ --- -------- ---- ------ --------- --------
Balance at December 31,
1998........................ 10,213 10 79,635 717 -- (44,176) 36,186
Issuance of Common Stock,
net......................... 3,706 4 115,634 -- -- -- 115,638
Unrealized gain on securities
available for sale.......... -- -- -- -- 4,962 -- 4,962
Net income.................... -- -- -- -- -- 6,659 6,659
------ --- -------- ---- ------ --------- --------
Balance at December 31,
1999........................ 13,919 $14 $195,269 $717 $4,962 $ (37,517) $163,445
====== === ======== ==== ====== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ZORAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1999 1998 1997 2000 1999
--------- -------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ 6,659 $ 929 $ 4,229 $ (235) $ 1,327
Adjustments:
Depreciation, amortization and other.... 2,166 2,306 1,862 1,395 1,213
Amortization of deferred compensation... -- -- 40 6,769 --
Changes in current assets and
liabilities:
Accounts receivable................... (6,828) 951 (5,421) 222 (2,173)
Deferred revenue...................... 699 (112) 121
Inventory............................. (96) (2,940) (2,324) (4,100) (4,670)
Prepaid expenses and other current
assets.............................. (108) 214 (356) (1,260) (548)
Accounts payable...................... 1,457 (3,042) 3,151 1,650 2,869
Accrued expenses and other
liabilities......................... 3,007 (700) 534 1,147 (138)
--------- ------- ------- --------- --------
Net cash provided by (used in)
operating activities.............. 6,956 (2,394) 1,836 5,588 (2,120)
--------- ------- ------- --------- --------
Cash flows from investing activities:
Capital expenditures for property and
equipment............................... (2,775) (1,778) (3,649) (1,308) (794)
Sales (purchases) of short-term
investments, net........................ (115,175) 1,519 (230) (755) (86)
PixelCam, Inc. acquisition costs net of
cash
acquired................................ -- -- -- (12) --
Purchases of long-term investments........ (200) -- -- (2,250) --
--------- ------- ------- --------- --------
Net cash used in investing
activities........................ (118,150) (259) (3,879) (4,325) (880)
--------- ------- ------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock,
net..................................... 115,638 971 770 1,490 882
--------- ------- ------- --------- --------
Net cash provided by financing
activities........................ 115,638 971 770 1,490 882
--------- ------- ------- --------- --------
Net increase (decrease) in cash and cash
equivalents............................... 4,444 (1,682) (1,273) 2,753 (2,118)
Cash and cash equivalents at beginning of
period.................................... 8,221 9,903 11,176 12,665 8,221
--------- ------- ------- --------- --------
Cash and cash equivalents at end of
period.................................... $ 12,665 $ 8,221 $ 9,903 $ 15,418 $ 6,103
========= ======= ======= ========= ========
Supplemental disclosures:
Income taxes paid......................... $ 506 $ -- $ 368 $ -- $ --
========= ======= ======= ========= ========
Non-cash disclosures of investing
activities:
Issuance of common stock in exchange for
the net assets of PixelCam, Inc......... $ -- $ -- $ -- $ 24,649 $ --
========= ======= ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY:
Zoran Corporation ("Zoran" or the "Company") was incorporated in California
in December 1981 and reincorporated in Delaware in November 1986. Zoran develops
and markets integrated circuits and software products for digital video and
audio applications enabled by compression. The Company's integrated circuits and
software products are used in a variety of video and audio products addressing
PC and consumer multimedia markets. Current applications incorporating Zoran's
products and IP include professional and consumer video editing systems,
filmless digital cameras, standalone and PC-based DVD players, Super VCD
players, digital speakers and audio systems. The Company operates predominantly
in one industry segment.
The Company performs research and development and generates a substantial
portion of its sales from its operations located in the State of Israel. A
significant number of the Company's full-time employees are located in Israel,
including a majority of the Company's research and development personnel.
Therefore, the Company is directly affected by the political, economic and
military conditions to which that country is subject.
The semiconductor business is highly cyclical and has been subject to
significant downturns at various times that have been characterized by
diminished product demand, production, overcapacity, and accelerated erosion of
average selling prices. As such, the selling price that the Company is able to
command for its products is highly dependent on industry-wide production
capacity and demand. Both of these factors could result in rapid deviations in
product pricing and therefore could adversely effect the Company's operating
results.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Zoran and all
of its subsidiaries. Intercompany transactions and balances have been eliminated
in consolidation.
INTERIM INFORMATION (UNAUDITED)
The financial information at June 30, 2000 and for the six month periods
ended June 30, 2000 and 1999 is unaudited but, in the opinion of management, has
been prepared on the same basis as the annual financial statements and includes
all adjustments (consisting of normal recurring adjustments) that the Company
considers necessary for a fair presentation of the financial position at such
date and the operating results and cash flows for such periods. Results for the
six month period ended June 30, 2000 are not necessarily indicative of the
results to be expected for any subsequent period or for the full year.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
Zoran has adopted accounting policies which are generally accepted in the
industry in which it operates. The following is a summary of the Company's
significant accounting policies.
USE OF ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, although
such differences are not expected to be material to the consolidated financial
statements.
F-7
<PAGE>
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
TRANSLATION OF FOREIGN CURRENCIES
ZML, an Israeli subsidiary, treats the U.S. dollar as its functional
currency. In accordance with Statement of Financial Accounting Standards No. 52
("SFAS 52"), gains and losses resulting from translation of accounts designated
in other than the functional currency are reflected in results of operations and
to date have been insignificant.
To date, substantially all of the Company's product sales have been
denominated in U.S. dollars and most costs of product sales have been incurred
in U.S. dollars. The Company has not experienced material losses or gains as a
result of currency exchange rate fluctuations and has not engaged in hedging
transactions to reduce its exposure to such fluctuations. The Company may take
action in the future to reduce its foreign exchange risk.
REVENUE RECOGNITION
Revenue from product sales is generally recognized upon shipment. A
provision for estimated future returns and potential warranty liability is
recorded at the time revenue is recognized. Development revenue under
development contracts is recognized on the percentage-of-completion method.
Under the percentage-of-completion method, revenue recognized is that portion of
the total contract price equal to the ratio of costs expended to date to the
anticipated final total costs, based on current estimates of the costs to
complete the project. Amounts received in advance of performance under contracts
are recorded as deferred revenue and are generally recognized within one year
from receipt. Estimates are reviewed and revised periodically throughout the
lives of the contracts. Any revisions are recorded in the accounting period in
which the revisions are made. Costs associated with development revenues are
included primarily in research and development expenses. Revenue resulting from
the licensing of the Company's technology is recognized when significant
contractual obligations have been fulfilled and the customer has indicated
acceptance. The Company does not provide customers with product return or
exchange rights in connection with the sale of software licenses. Periodic
service and maintenance fees provide customers access to technical support and
minor enhancements to licensed releases are recognized ratably over the service
or maintenance period. Royalty revenue is recognized in the period licensed
sales are reported to the Company.
RESEARCH AND DEVELOPMENT COSTS
Costs related to the conceptual formation and design of internally developed
software are expensed as research and development as incurred. It is the
Company's policy that certain internal software development costs incurred after
technological feasibility has been demonstrated and which meet recoverability
tests are capitalized and amortized over the estimated economic life of the
product. To date, the Company has incurred no significant internal software
development costs which meet the criteria for capitalization.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of Zoran's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses and other
current liabilities, the carrying values approximate their fair values due to
the relatively short maturity of these items.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments purchased with an original maturity of 90 days
or less are considered to be cash and cash equivalents.
F-8
<PAGE>
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
All of Zoran's investment portfolio is classified as available-for-sale and,
therefore, is reported at fair value with unrealized gains and losses, net of
related tax, if any, included as other comprehensive income, a component of
stockholders' equity. Gains and losses on realized upon sales of all such
securities are reported in interest and other income and have not been
significant to date.
At December 31, 1999, the Company's investment portfolio consisted primarily
of commercial paper with maturities of less than one year and the stock acquired
as a result of the MGI transaction (see Note 12). The unrealized gain on
securities available for sale of $4,962,000 included in comprehensive income
represents the unrealized gain on the stock at December 31, 1999.
CONCENTRATION OF CREDIT RISK OF FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments and trade accounts receivable. The Company places its
cash in banks and cash equivalents primarily in auction rate preferred,
certificates of deposit and commercial paper. The Company, by policy, limits the
amount of credit exposure through diversification and highly-rated securities.
The Company has not experienced any significant losses on its cash
equivalents or short-term investments.
The Company markets integrated circuits and technology to manufacturers and
distributors of electronic equipment primarily in North America, Europe and the
Pacific Rim. The Company performs ongoing credit evaluations of its customers'
financial condition and limits the amount of credit extended when deemed
necessary, but generally does not require collateral. Management believes that
any risk of loss is significantly reduced due to the diversity of its customers
and geographic sales areas. The Company maintains a provision for potential
credit losses, and write-offs of accounts receivable were insignificant in each
of the three years in the period ended December 31, 1999. As of December 31,
1999, three customers accounted for approximately 33%, 12%, and 9% of the
accounts receivable balance. As of December 31, 1998, five customers accounted
for approximately 20%, 14%, 7%, 7%, and 5% of the accounts receivable balance.
INVENTORY
Inventories are stated at the lower of standard cost (which approximates
actual cost on a first-in, first-out basis) or market. Market is based on
estimated net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of three to five years.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the estimated useful lives of the assets or the remaining term of the lease.
INCOME TAXES
The Company follows the liability method of accounting for income taxes
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequence of temporary differences between the financial
statement carrying amounts and the tax bases of assets and liabilities.
For the twelve month periods ended December 31, 1999 and 1998 the provision
for income taxes reflects the estimated annualized effective tax rate applied to
earnings for the periods. The effective tax
F-9
<PAGE>
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
rate differs from the U.S. statutory rate due to utilization of net operating
losses and State of Israel tax benefits on foreign earnings. The provision
includes primarily taxes on income in excess of net operating loss carryover
limitations and foreign withholding taxes.
EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128
("SFAS 128") Zoran reports Earnings per Share ("EPS"), both basic and diluted,
on the statement of operations. Basic EPS is based upon the weighted average
number of common shares outstanding. Diluted EPS is computed using the weighted
average common shares outstanding plus any potential common stock, except when
their effect is anti-dilutive. Potential common stock includes stock options and
warrants. See Note 8.
STOCK COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees" and related interpretations. Under
APB No.25, compensation expense is recognized based on the difference, if any,
on the date of grant between the fair value of the Company's stock and the
amount an employee must pay to acquire the stock. The compensation expense is
recognized over the periods the employee performs the related services,
generally the vesting period of four years, consistent with the multiple option
method described in FASB Interpretation No. 28 ("FIN28"). The Company provides
additional pro forma disclosures as required under Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." See Note 7.
SEGMENT REPORTING
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 supersedes SFAS 14 "Financial Reporting for Segments of a
Business Enterprise," replacing the "Industry Segment" approach with the
"Management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas, and
major customers. The Company operates in one industry segment comprising the
development and marketing of integrated circuits and software products for use
in a variety of video and audio products addressing PC and consumer multimedia
markets.
COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130 ("SFAS 130"), "Reporting Comprehensive Income." The following are the
components of comprehensive income (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1999 1998 1997 2000 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income......................................... $ 6,659 $929 $4,229 $ (235) $ 1,327
Unrealized gain on short-term investment........... 4,962 -- -- (1,484) --
------- ---- ------ ------- -------
Comprehensive income............................... $11,621 $929 $4,229 $(1,719) $(1,327)
======= ==== ====== ======= =======
</TABLE>
F-10
<PAGE>
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The components of accumulated other comprehensive income are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------ -------------------
1999 1998 1997 2000 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Unrealized gain on short term-investment................. $4,962 -- -- $1,484 $ --
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supercedes and amends a
number of existing accounting standards. SFAS 133 requires that all derivatives
be recognized in the balance sheet at their fair market value, and the
corresponding derivative gains or losses be either reported in the statement of
operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. Adopting the provisions of SFAS
133, which will be effective for the Company's fiscal year 2000, are not
expected to have a material effect on the Company's consolidated financial
statements.
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.
In June 2000 the SEC issued SAB No. 101B to defer the effective date of the
implementation of SAB No. 101 until the fourth quarter of fiscal 2000. The
Company does not expect the adoption of SAB 101 to have a material effect on its
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.
The adoption of FIN 44 has not had a material effect.
F-11
<PAGE>
NOTE 3--BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ACCOUNTS RECEIVABLE, NET:
Trade..................................................... $22,367 $14,486
Unbilled.................................................. 550 1,871
------- -------
22,917 16,357
Less: allowance........................................... (1,048) (799)
------- -------
$21,869 $15,558
======= =======
</TABLE>
Unbilled accounts receivable consists of both development revenue
recognized, but not yet billed and research and development funding not yet
received. Unbilled development revenue represents revenue recognized under the
percentage-of-completion method prior to achievement of the related contract
milestones. The Company bills development revenue when contract milestones are
achieved. The Company recognizes research and development funding as
reimbursable expenses, under research and development agreements, as incurred.
This funding is offset against research and development expenses.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- -----------
1999 1998 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
INVENTORY:
Work-in-process........................................... $ 1,135 $ 1,781 $ 4,017
Finished goods............................................ 6,024 5,282 7,363
------- -------- --------
$ 7,159 $ 7,063 $ 11,380
======= ======== ========
PROPERTY AND EQUIPMENT:
Computer equipment........................................ $10,265 $ 9,573
Office equipment and furniture............................ 729 706
Machinery and equipment................................... 1,391 860
Leasehold improvements.................................... 567 544
------- --------
12,952 11,683
Less: accumulated depreciation and amortization........... (7,290) (6,327)
------- --------
$ 5,662 $ 5,356
======= ========
ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued payroll and related expenses...................... $ 2,880 $ 1,910
Accrued royalties......................................... 673 808
Taxes payable............................................. 3,682 1,592
Deferred revenue.......................................... 1,051 352
Other accrued liabilities................................. 2,750 1,792
------- --------
$11,036 $ 6,454
======= ========
</TABLE>
F-12
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--RESEARCH AND DEVELOPMENT ARRANGEMENTS:
The Company is a party to certain research and development agreements with
the Chief Scientist in Israel's Ministry of Industry and Trade Department (the
"Chief Scientist") and the Israel-United States Binational Industrial Research
and Development Foundation ("BIRDF"), which fund up to 50% of incurred project
costs for approved products up to specified contract maximums. The Company is
not obligated to repay funding regardless of the outcome of its development
efforts; however, these agreements require the Company to use its best efforts
to achieve specified results and require the Company to pay royalties at rates
of 3% to 5% of resulting products sales, and up to 30% of resulting license
revenues, up to a maximum of 100% to 150% of the total funding received.
Reported research and development expenses are net of these grants, which
fluctuate from period to period.
Gross research and development expenses and the related grants are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Research and development expenses:
Gross research and development expenses........ $13,135 $14,399 $13,787
Less: grants earned............................ (484) (851) --
------- ------- -------
$12,651 $13,548 $13,787
======= ======= =======
</TABLE>
Royalty expenses related to these grants were $5,000, $196,000, and $301,000
in 1999, 1998 and 1997, respectively.
NOTE 5--DEVELOPMENT CONTRACTS:
The Company has generated a portion of its total revenues from development
contracts, primarily with key customers. These development contracts have
provided the Company with partial funding for the development of certain of its
products. The Company classifies costs related to these development contracts as
research and development expenses. The Company is not obligated to repay funding
regardless of the outcome of its development efforts; however, the agreements
require the Company to use its best efforts to achieve specified results as per
the agreements. The Company retains ownership of the intellectual property
developed under the contracts; however, some contracts limit the product markets
in which the Company may directly sell the developed product. Revenues generated
under these contracts were $1,185,000, $2,960,000 and $1,752,000 in 1999, 1998
and 1997, respectively.
NOTE 6--COMMITMENTS AND CONTINGENCIES:
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
contingent liabilities when it is probable that future expenditures will be made
and such expenditures ca be reasonably estimated. In the opinion of management,
there are no pending claims of which the outcome is expected to result in a
material adverse effect in the financial position or results of operations of
the Company.
LEASE COMMITMENTS
The Company rents facilities and equipment under various lease agreements
expiring through 2004. Rent expense for 1999, 1998 and 1997 totaled
approximately $1,010,000, $887,000 and $748,000
F-13
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--COMMITMENTS AND CONTINGENCIES: (CONTINUED)
respectively. Future minimum lease payments required under noncancelable leases
at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000.................................................... $1,010,000
2001.................................................... 1,018,000
2002.................................................... 1,042,000
2003.................................................... 570,000
2004.................................................... 410,000
----------
Total minimum lease payments............................ $4,050,000
==========
</TABLE>
NOTE 7--STOCKHOLDERS' EQUITY:
COMMON STOCK
In December 1995, the Company issued shares of Common Stock in conjunction
with the Company's initial public offering ("IPO"). In January 1996, the
underwriters exercised their over-allotment option to purchase additional shares
of Common Stock. In December 1999, the Company issued 2,917,800 shares of Common
Stock in conjunction with a follow-on public offering that also included
underwriters' exercise of their over-allotment option. Gross proceeds from this
offering were $119.6 million with underwriters' discount and offering expenses
of $6.7 million.
We expect to use the net proceeds of the 1999 offering for working capital
and general corporate purposes, which may include the purchase of equipment and
the expansion of facilities. We also may use a portion of the net proceeds to
acquire or invest in businesses, technologies, products or services that are
complementary to our business. From time to time we have discussed potential
strategic acquisitions and investments with third parties. Pending our uses of
the proceeds, the net proceeds have been invested primarily in short-term,
investment-grade, interest-bearing instruments.
WARRANTS
In September 1997, in connection with a software license agreement, the
Company issued a warrant to purchase 75,000 shares of its Common Stock at an
exercise price of $24.31 per share. The warrant is exercisable for a period of
four years from a date beginning one year after the issuance date of the
warrant. The $717,000 estimated value of the warrant, is being amortized over
the four-year period of the license agreement. The unamortized balance at
December 31, 1999 of $297,000 is included in prepaid expenses and other current
assets.
STOCK OPTION PLANS
1993 STOCK OPTION PLAN
The Company's 1993 Stock Option Plan (the "1993 Option Plan") was adopted by
the Board of Directors of the Company and approved by the stockholders of the
Company in July 1993. A total of 2,940,000 shares of Common Stock have been
reserved for issuance under the 1993 Option Plan. The 1993 Option Plan provides
for grants of options to employees, non-employee directors and consultants. The
1993 Option Plan is currently being administered by the Compensation Committee
of the Board of
F-14
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' EQUITY: (CONTINUED)
Directors of the Company, which determines the optionees and the terms of the
options granted, including the exercise price, number of shares subject to the
option plan and the exercisability thereof. The option price for shares granted
under the 1993 Option Plan is typically equal to the fair market value of the
common stock at the date of grant. The 1993 Option Plan will terminate in July
2003, unless terminated sooner by the Board of Directors.
Generally, options granted under the 1993 Option Plan are fully exercisable
on and after the date of grant, subject to the Company's right to repurchase
from an optionee, at the optionee's original per share exercise price, any
unvested shares which the optionee has purchased and holds in the event of the
termination of the Optionee's employment, with or without cause. The Company's
right lapses as shares subject to the option become vested. Such shares
generally vest in monthly installments over two or four years following the date
of grant (as determined by the Compensation Committee of the Board of
Directors), subject to the optionee's continuous service. Options expire ten
years from the date of grant and an option shall generally terminate three
months after termination of employment.
In August 1998, substantially all options with an exercise price in excess
of $5.94 were cancelled and replaced with new options having an exercise price
of $5.94, the market price on the date that the employees accepted the
repricing. A total of 924,164 shares were repriced.
At December 31, 1999, shares available for grant under this plan were
133,000.
1995 OUTSIDE DIRECTORS STOCK OPTION PLAN
The Company's Outside Directors Stock Option Plan (the "Directors Plan") was
adopted by the Company's Board of Directors in October 1995, and was approved by
its stockholders in December 1995. A total of 200,000 shares of Common Stock
have been reserved for issuance under the Directors Plan. The Directors Plan
provides for the grant of nonstatutory stock options to nonemployee directors of
the Company. The Directors Plan provides that each new nonemployee director will
automatically be granted an option to purchase 20,000 shares on the date the
optionee first becomes a nonemployee director (the "Initial Grant"). Thereafter,
on the date immediately following each annual stockholders' meeting, each
nonemployee director who is reelected at the meeting to an additional term shall
be granted an additional option to purchase 4,800 shares of Common Stock if, on
such date, he or she shall have served on the Company's Board of Directors for
at least six months (the "Annual Grant"). The Initial Grant is exercisable in
four equal annual installments, and each Annual Grant shall become exercisable
in full one year after the date of grant, subject to the director's continuous
service. The exercise price of all stock options granted under the Directors
Plan is equal to the fair market value of the Company's Common Stock on the date
of grant. Options granted under the Directors Plan have a term of ten years.
At December 31, 1999 shares available for future issuance under this plan
was 35,000.
F-15
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' EQUITY: (CONTINUED)
The following table summarizes the Company's stock option activity for the
years ended December 31, 1999, 1998 and 1997. The weighted average exercise
price for each category presented is also shown in the table below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997
-------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period......................... 2,226,265 $ 5.11 2,053,171 $ 8.62 2,164,208 $ 2.30
Granted.......................... 698,803 20.49 1,665,491 7.23 771,890 18.86
Exercised........................ (700,854) 2.87 (329,963) 0.56 (727,882) 0.39
Canceled......................... (291,658) 6.43 (1,162,434) 15.64 (155,045) 10.01
--------- ---------- ---------
Options outstanding at period
end............................ 1,932,556 11.22 2,226,265 5.11 2,053,171 8.62
========= ========== =========
Options exercisable at period
end............................ 1,926,549
=========
</TABLE>
Significant option groups outstanding as of December 31, 1999 and the
related weighted average exercise price and contractual life information, are as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE CONTRACTUAL
EXERCISE PRICE NUMBER PRICE NUMBER PRICE LIFE (YEARS)
-------------- --------- -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
$0.13 - $0.60.............. 199,778 $ 0.15 199,778 $ 0.15 4.8
$1.57 - $4.69.............. 25,542 4.49 19,535 4.43 6.5
$5.94 - $5.94.............. 854,726 5.94 854,726 5.94 7.6
$8.50 - $20.38............. 653,110 17.66 653,110 17.66 8.9
$21.00 - $45.00............ 199,400 24.72 199,400 24.72 9.3
--------- ---------
1,932,556 11.22 1,926,549 11.24 7.9
========= =========
</TABLE>
The weighted average grant date fair value of options granted during the
years ended December 31, 1999, 1998 and 1997 as defined by SFAS 123, were
$17.05, $3.41 and $9.19 per share, respectively.
1995 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1995 Employee Stock Purchase Plan ("ESPP") was adopted by the
Company's Board of Directors in October 1995, and approved by its stockholders
in December 1995. The ESPP enables employees to purchase shares through payroll
deductions at approximately 85% of the lesser of the fair value of Common Stock
at the beginning of a 24-month offering period or the end of each six-month
segment within such offering period. The ESPP is intended to qualify as an
"employee stock purchase plan" under Section 423 of the U.S. Internal Revenue
Code. During the years ended December 31, 1999 and 1998, 87,222 and 84,354
shares were purchased by employees under the terms of the plan agreements at a
weighted average price of $8.73 and $9.57 per share, respectively. At December
31, 1999, 161,558 shares were reserved and available for issuance under this
plan.
F-16
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' EQUITY: (CONTINUED)
The weighted average grant date fair value of rights granted during the year
ended December 31, 1999, 1998 and 1997 as defined by SFAS 123, was $3.91, $3.55
and $3.64 per share, respectively.
FAIR VALUE DISCLOSURES
Had compensation cost for the Company's option and stock purchase plans been
determined based on the fair value at the grant dates, as prescribed in FAS 123,
the Company's net income (loss) and net income (loss) per share for each of the
three years ended December 31, 1999 would have been as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)
As reported..................................... $6,659 $ 929 $4,229
Pro forma....................................... $1,212 $ (4,144) $ 547
Net income (loss) per share:
As reported
Basic......................................... $ 0.61 $ 0.09 $ 0.45
Diluted....................................... $ 0.54 $ 0.08 $ 0.38
Pro forma
Basic......................................... $ 0.11 $ (0.41) $ 0.06
Diluted....................................... $ 0.10 $ (0.41) $ 0.05
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black Scholes model with the following assumptions used for options and
purchase grants during the applicable period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Dividend rate.................... 0.0% 0.0% 0.0%
Risk-free interest rates......... 4.6% to 6.2% 4.2% to 5.6% 5.1% to 6.3%
Volatility....................... 93.0% 61.0% 67.0%
Expected life
Option plans................... 5 years 5 years 5 years
Purchase plan.................. 0.5 years 0.5 years 0.5 years
</TABLE>
The pro forma amounts reflect compensation expense related to stock options
and purchase rights granted during the years ended December 31, 1999, 1998 and
1997.
F-17
<PAGE>
ZORAN COPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8--EARNINGS PER SHARE:
A reconciliation of the numerators and the denominators of the basic and
diluted per share computation are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------- -------------------------------------- -----------
PER PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR)
----------- ------------- -------- ----------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income........... $6,659 10,844 $0.61 $ 929 10,042 $0.09 $4,229
===== =====
Effects of Dilutive
Securities:
Stock Options........ -- 1,405 -- 1,064 --
Warrants............. -- -- -- 13 --
------ ------ ----- ------ ------
Diluted EPS:
Net income........... $6,659 12,249 $0.54 $ 929 11,119 $0.08 $4,229
====== ====== ===== ===== ====== ===== ======
<CAPTION>
1997
------------------------
PER
SHARES SHARE
(DENOMINATOR) AMOUNT
------------- --------
<S> <C> <C>
Basic EPS:
Net income........... 9,412 $0.45
=====
Effects of Dilutive
Securities:
Stock Options........ 1,539
Warrants............. 121
------
Diluted EPS:
Net income........... 11,072 $0.38
====== =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
--------------------------------------- ---------------------------------------
INCOME SHARES PER SHARE (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) available to
common stockholders............ $ (235) 14,072 $ (0.02) $1,327 10,441 $0.13
====== ====== ======= ====== ====== =====
Effects of Dilutive Securities:
Stock Options.................... -- -- -- 1,294
------ ------ ------- ------ ------ -----
Diluted EPS:
Income (loss) available to common
stockholders................... $ (235) 14,072 $ (0.02) $1,327 11,735 $0.11
====== ====== ======= ====== ====== =====
</TABLE>
NOTE 9--INCOME TAXES:
The components of income before income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S................................................. $2,156 $ 475 $1,925
Foreign............................................. 5,678 686 3,232
------ ------ ------
$7,834 $1,161 $5,157
====== ====== ======
</TABLE>
F-18
<PAGE>
ZORAN COPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9--INCOME TAXES: (CONTINUED)
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
U.S.................................................. $ 50 $106 $360
State................................................ 454 26 98
Foreign.............................................. 671 100 470
------ ---- ----
Total current...................................... 1,175 232 928
Deferred............................................. -- -- --
------ ---- ----
Total............................................ $1,175 $232 $928
====== ==== ====
</TABLE>
The tax provision differs from the amounts obtained by applying the
statutory U.S. Federal Income Tax Rate to income taxes as shown below.
TAX PROVISION DIFFERENCE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax at U.S. statutory rate.......................... $ 2,663 $ 395 $1,753
Utilization of net operating loss carryovers........ (856) (35) (856)
Foreign Earnings.................................... (1,612) (156) (213)
State taxes net of federal benefit.................. 302 -- 65
Other differences not benefited..................... 513 -- --
Permanent differences............................... 85 -- --
Alternative minimum tax............................. 50 -- 50
Other............................................... 30 28 129
------- ----- ------
$ 1,175 $ 232 $ 928
======= ===== ======
</TABLE>
Deferred income tax assets comprise the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal and state net operating loss
carryforwards................................ $ 16,417 $ 12,279 $ 12,286
Capitalized research and development
expenses..................................... 497 372 216
Nondeductible reserves and accruals............ 1,653 951 886
-------- -------- --------
Total deferred tax assets...................... 18,567 13,602 13,388
Deferred tax liabilities....................... -- -- --
-------- -------- --------
Net deferred tax assets........................ 18,567 13,602 13,388
Valuation allowance............................ (18,567) (13,602) (13,388)
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
</TABLE>
F-19
<PAGE>
ZORAN COPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9--INCOME TAXES: (CONTINUED)
As of December 31, 1999, the Company has NOLs of approximately $48 million
for federal tax reporting purposes. The federal NOLs expire on various dates
between 2000 and 2009. Management has recorded a full valuation allowance
against all U.S. deferred tax assets on the basis that significant uncertainty
exists regarding the realizability of the assets.
Pursuant to the Tax Reform Act of 1986, the amounts of and the benefit from
NOLs that can be carried forward may be impaired or limited in certain
circumstances, including a cumulative stock ownership change of more than 50%
over a three-year period. The Company's IPO resulted in a cumulative change of
ownership of greater than 50%. Accordingly, the Company's NOLs incurred prior to
the completion of the IPO that can be utilized to reduce future taxable income
for federal tax purposes will be limited to approximately $3.0 million per year.
The Company's Israeli subsidiary has been granted the status of an "Approved
Enterprise" pursuant to the Israeli law for the Encouragement of Capital
Investments, 1959, as amended. The Company has four approved programs pursuant
to this law. The first program was approved in 1984.
Income subject to this program is taxed at an annual rate of 10% from the
first year in which the enterprise generates taxable income (net of NOLs).
Benefits under the first program expired in 1997. The second program was
approved in 1991. Income subject to this program is exempt from tax for two
years from the first year in which the Company has taxable income (net of NOLs)
and is taxed at a rate of 10% thereafter. Benefits under the second program
expire in 2003. The third program was approved in 1995. Income subject to this
program is exempt from tax for four years from the first year in which the
Company has taxable income (net of NOLs) and is taxed at a rate of 10% during
the remaining period of six years. The fourth program was approved in 1997.
Income subject to this program is exempt from tax for two years from the first
year in which the Company has taxable income (net of NOLs) and is taxed at a
rate of 10% during the remaining period of eight years. Benefits under the third
and the fourth program are limited to fourteen years from approval or twelve
years from commencement of production. The net impact of the tax holidays was an
increase in net income of $1.6 million in fiscal 1999 and an increase in net
income per share of $0.13.
The provision for income taxes (unaudited) for the six month period ended
June 30, 2000, reflects the estimated annualized effective tax rate applied to
earnings for the interim period. The effective tax rate for this period 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 loss carryover limitations and foreign
withholding taxes.
F-20
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--SEGMENT REPORTING (CONTINUED)
Significant customers are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1999 1998 1998
-------- -------- --------
<S> <C> <C> <C>
Customers comprising 10% or more of the Company's total
revenues for the period indicated:
A.................................................... 37% 23% --
B.................................................... -- -- 15%
C.................................................... -- 14% 15%
D.................................................... -- -- 15%
</TABLE>
NOTE 11--SALE OF CERTAIN ASSETS:
In June 1999, the Company sold to MGI Software of Canada the intellectual
property related to its SoftDVD product line and transferred to MGI certain
related software development and support resources in exchange for cash, MGI
common stock and future royalties. The Company's results for the second quarter
of 1999 include a $732,000 gain realized from this transaction which is reported
as part of interest and other income or expense. In connection with this
transaction, the Company also recorded a charge that reduced software, licensing
and development revenue for the quarter by $517,000 for possible issues related
to receivables associated with the SoftDVD product line. The net impact of the
MGI transaction on the Company's results was an after-tax gain of $172,000, or
$0.01 per share on a diluted basis. This gain does not reflect the potential
future economic benefit that may be derived from this transaction and realized
in future periods in the form of royalties. The Company does not currently
expect, however, that these royalties will have a material impact on quarterly
revenues for the foreseeable future. In addition, the shares of MGI stock
received by the Company as part of this transaction are subject to future
appreciation or depreciation. The Company believes that its software revenues
will decline significantly as a result of the sale of the SoftDVD product line.
NOTE 12--RELATED-PARTY TRANSACTIONS:
In January 1996, the Company spun off its wholly-owned subsidiary, Oren
Semiconductor, to the Company's stockholders. Two of the Company's directors are
also members of Oren's board of directors. The Company has no ownership interest
in Oren.
In March 1999, the Company entered into a technology license agreement with
Oren. Under the license arrangement Oren agreed to pay to the Company license
and maintenance fees totalling $400,000 and royalties and maintenance fees based
on related products sold by Oren. License fees of approximately $360,000 were
recognized in the first quarter of 1999.
In April 1999, the company loaned Oren $350,000. The loan plus interest,
computed at 7% per year, was repaid by Oren in July 1999. The Company has no
commitments or plans to loan additional amounts to Oren.
F-21
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--ACQUISITION OR DISPOSITION OF ASSETS
On June 29, 2000, the Company acquired PixelCam, Inc. ("PixelCam"), a
manufacturer of megapixel CMOS image sensors and integrated lens/sensor modules,
in exchange for 370,832 shares of Zoran common stock and options to purchase
4,168 shares of Zoran common stock with an aggregate value of $24.6 million. The
common stock issued includes 123,612 shares of restricted stock subject to
repurchase by the Company exchanged for restricted stock of PixelCam. The
restrictions and vesting periods of the PixelCam shares was maintained and will
apply to the converted shares of the Company. The agreement also includes shares
that are contingently issuable to former PixelCam shareholders upon achievement
of certain milestones. Any contingent consideration will be valued and recorded
as of the date the lifting of the contingency becomes probable.
The acquisition was accounted for under the purchase method of accounting.
The Company had a valuation performed of the in-process research and development
and the intangible assets acquired. The allocation of the purchase price based
on independent appraisal and estimates of fair value and including acquisition
costs of $575,000, is as follows (in thousands):
<TABLE>
<S> <C>
Net tangible assets......................................... $ 419
-------
In-process research and development......................... 6,769
-------
Goodwill and other intangible assets:
Goodwill............................................ 15,956
Covenant not to compete............................. 800
Patents............................................. 900
Acquired employees.................................. 380
-------
$18,036
-------
Net assets acquired......................................... $25,224
=======
</TABLE>
The net tangible assets acquired were comprised primarily of property and
equipment, inventory, and cash offset by accrued liabilities. The acquired
in-process research and development was written-off in the second quarter of
2000. The estimated weighted average useful life of the intangible assets for
purchased technology, covenant not to compete, acquired employees, patents and
residual goodwill, created as a result of the acquisition of PixelCam, is
approximately three years.
Assuming the business combination had taken place as of January 1, 1999,
amortization of goodwill and other intangibles would have been $3.0 million for
each of the six month periods ended June 30, 2000 and June 30, 1999. The Company
will disclose further pro forma financial information in a subsequent filing on
Form 8-K/A.
The allocation of $6.8 million of the purchase price to the acquired
in-process research and development has been determined by identifying the
research project which technological feasibility had not been established and no
alternative future uses existed. The value was determined by estimating the
expected cash flows from the project once commercially viable, discounting the
net cash flows back to their present value, and then applying a percentage of
completion to the calculated value as defined below.
NET CASH FLOWS. The net cash flows from the identified project was based on
estimates of revenues, cost of sales, research and development costs, selling,
general and administrative costs, and
F-22
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--ACQUISITION OR DISPOSITION OF ASSETS (CONTINUED)
income taxes from the project. These estimates were based on the assumptions
discussed below. The research and development costs excluded costs to bring the
acquired in-process project to technological feasibility.
The estimated revenues were based on management projections of the acquired
in-process project. The business projections were compared with and found to be
in line with industry analysts' forecasts of growth in substantially all of the
relevant markets. Estimated total revenues from the acquired in-process research
and development product are expected to peak in fiscal 2002 and decline in
fiscal 2003 as other new products are expected to become available. These
projections were based on estimates of market size and growth, expected trends
in technology, and the nature and expected timing of new product introductions
by the Company and its competitors.
Projected gross margins as well as selling, general and administrative costs
were based on management's estimates.
DISCOUNT RATE. Discounting the net cash flows back to their present value
was based on the cost of capital for well managed venture capital funds which
typically have similar risks and returns on investments. The cost of capital
used in discounting the net cash flows from acquired in-process research was
25%.
PERCENTAGE OF COMPLETION. The percentage of completion was determined using
costs incurred by PixelCam prior to the acquisition date compared to the
remaining research and development to be completed to bring the project to
technological feasibility. The Company estimated, as of the acquisition date,
the project was 62% complete and the estimated costs to complete the project
were approximately $4.1 million.
The Company expects to complete the project within 12 months from the
acquisition date. However, development of this project remains a significant
risk to the Company due to the remaining effort to achieve technical
feasibility, rapidly changing customer markets and significant competitive
threats from numerous companies. Failure to bring these products to market in a
timely manner could adversely impact sales and profitability of the Company in
the future. Additionally, the value of the intangible assets acquired may become
impaired.
F-23
<PAGE>
ZORAN CORPORATION
SELECTED QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------
DEC 31, SEPT 30, JUNE 30, MARCH 31, DEC 31, SEPT 30, JUNE 30, MARCH 31,
1999 1999 1999 1999 1998 1998 1998 1998
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales................ $18,159 $14,519 $10,927 $9,282 $11,235 $8,986 $ 4,610 $8,634
Software, licensing and
development................ 1,896 1,577 2,704 2,610 2,901 2,860 2,465 2,534
------- ------- ------- ------ ------- ------ ------- ------
Total revenues........... 20,055 16,096 13,631 11,892 14,136 11,846 7,075 11,168
------- ------- ------- ------ ------- ------ ------- ------
Cost and expenses:
Cost of product sales........ 10,026 7,720 5,684 5,093 6,286 5,153 2,940 4,657
Research and development..... 2,706 2,430 3,991 3,524 3,894 3,476 2,944 3,234
Selling, general and
administrative............. 4,019 3,683 3,302 3,247 3,240 2,877 2,686 2,748
------- ------- ------- ------ ------- ------ ------- ------
Total costs and
expenses............... 16,751 13,833 12,977 11,864 13,420 11,506 8,570 10,639
------- ------- ------- ------ ------- ------ ------- ------
Operating income (loss)........ 3,304 2,263 654 28 716 340 (1,495) 529
Interest and other income
(expense), net............... 359 249 878 99 375 176 275 245
------- ------- ------- ------ ------- ------ ------- ------
Income (loss) before taxes..... 3,663 2,512 1,532 127 1,091 516 (1,220) 774
Provision (benefit) for income
taxes........................ 342 502 306 25 218 103 (244) 155
------- ------- ------- ------ ------- ------ ------- ------
Net income (loss).............. $ 3,321 $ 2,010 $ 1,226 $ 102 $ 873 $ 413 $ (976) $ 619
======= ======= ======= ====== ======= ====== ======= ======
Net income (loss) per share:
Basic........................ $ 0.29 $ 0.19 $ 0.12 $ 0.01 $ 0.09 $ 0.04 $ (0.10) $ 0.06
======= ======= ======= ====== ======= ====== ======= ======
Diluted...................... $ 0.26 $ 0.17 $ 0.10 $ 0.01 $ 0.08 $ 0.04 $ (0.10) $ 0.06
======= ======= ======= ====== ======= ====== ======= ======
Shares used to compute basic
net income (loss) per
share........................ 11,404 10,681 10,436 10,278 10,154 10,064 9,975 9,856
======= ======= ======= ====== ======= ====== ======= ======
Shares used to compute diluted
net income (loss) per
share........................ 12,853 12,083 11,673 11,776 11,469 10,941 9,975 10,952
======= ======= ======= ====== ======= ====== ======= ======
</TABLE>
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of PixelCam, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of PixelCam, Inc. (a company in the
development stage) at March 31, 2000, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses and negative
cash flow from operations and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 9. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ PricewaterhouseCoopers LLP
May 26, 2000
San Jose, California
F-25
<PAGE>
PIXELCAM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK UNEARNED DURING THE TOTAL
-------------------- STOCK-BASED DEVELOPMENT SHAREHOLDERS'
SHARES AMOUNT COMPENSATION STAGE DEFICIT
--------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock to
founders in exchange for
intellectual property in March
1998 (unaudited)............... 1,750,000 $ 17,500 $ -- $ -- $ 17,500
Unearned stock-based compensation
(unaudited).................... -- 679,280 (679,280) -- --
Amortization of unearned stock-
based compensation
(unaudited).................... -- -- 204,202 -- 204,202
Net loss (unaudited)............. -- -- -- (1,538,095) (1,538,095)
--------- -------- ---------- ------------ ------------
Balance at March 31, 1999........ 1,750,000 696,780 (475,078) (1,538,095) (1,316,393)
Sale of common stock under stock
option plans................... 17,164 687 -- -- 687
Issuance of stock options to non-
employees...................... -- 130 -- -- 130
Unearned stock-based
compensation................... -- 18,298 (18,298) -- --
Amortization of unearned stock-
based compensation............. -- -- 229,165 -- 229,165
Net loss......................... -- -- -- (2,707,333) (2,707,333)
--------- -------- ---------- ------------ ------------
Balance at March 31, 2000........ 1,767,164 $715,895 $ (264,211) $ (4,245,428) $ (3,793,744)
========= ======== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
PIXELCAM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
YEAR MARCH 9, 1998 MARCH 9, 1998
ENDED (INCEPTION) TO (INCEPTION) TO
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 2000
-------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $ (2,707,333) $ (1,538,095) $ (4,245,428)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................... 156,958 51,233 208,191
Loss on disposal of fixed assets.................... -- -- --
Stock-based compensation............................ 229,165 204,202 433,367
Amortization of discount on notes payable........... 13,136 -- 13,136
Non-cash charges.................................... 130 -- 130
Changes in current assets and liabilities:
Accounts receivable............................... (1,422) -- (1,422)
Inventory......................................... (164,722) -- (164,722)
Prepaid expenses and other current assets......... (10,875) (77,387) (88,262)
Accounts payable.................................. 368,371 111,465 479,836
Accrued liabilities............................... 154,254 42,531 196,785
------------ ------------ ------------
Net cash used in operating activities........... (1,962,338) (1,206,051) (3,168,389)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment................. (244,944) (204,732) (449,676)
------------ ------------ ------------
Net cash used in investing activities........... (244,944) (204,732) (449,676)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred
stock............................................... -- 1,485,824 1,485,824
Principal payments on capital lease obligations....... (64,285) -- (64,285)
Proceeds from issuance of notes payable............... 1,950,000 300,000 2,250,000
Proceeds from issuance of common stock................ 687 -- 687
Payment of convertible preferred stock issuance
costs............................................... (1,689) -- (1,689)
------------ ------------ ------------
Net cash provided by financing activities....... 1,884,713 1,785,824 3,670,537
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents.... (322,569) 375,041 52,472
Cash and cash equivalents at beginning of period........ 375,041 -- --
------------ ------------ ------------
Cash and cash equivalents at end of period.............. $ 52,472 $ 375,041 $ 52,472
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
PIXELCAM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
PixelCam, Inc. (the "Company") was incorporated in California on March 9,
1998. The Company designs and markets megapixel CMOS image sensors and
integrated lens/sensor modules. These products have applications in digital
still cameras and video camera products used in a wide variety of consumer and
commercial applications.
The Company is in the development stage, devoting substantially all its
efforts to developing its initial products, recruiting personnel and raising
capital. The Company has experienced recurring net losses and negative cash flow
from operations since inception. In the course of its development stage
activities, the Company has funded its operating losses since inception through
the sale of equity securities and borrowings. The Company may continue to suffer
net losses and negative cash flow from operations in future periods as it
continues to incur substantial costs relating to research and development. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. The Company's continued existence is dependent on the Company's
ability to obtain funding for operations from the sale of equity securities and
the generation of operating revenues.
ACQUISITION BY ZORAN CORPORATION (UNAUDITED)
On June 29, 2000, the Company entered into a definitive agreement to be
acquierd by Zoran Corporation. Under the terms of the agreement, Zoran
Corporation paid $21 million to the shareholders of the Company on the closing
date. A further $21 million may be paid to the shareholders of the Company
contingent upon the achievement of certain revenue milestones by the Company as
described in the definitive agreement. These financial statements have been
prepared on the historical basis and do not reflect any adjustments resulting
from Zoran's application of purchase accounting.
INTERIM RESULTS (UNAUDITED)
The accompanying balance sheet as of June 30, 2000, the statements of
operations and cash flows for the three months ended June 30, 2000 and 1999, and
related note disclosures herein are unaudited. In the opinion of management,
these statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of the results of these periods.
Results for the interim periods presented are not necessarily indicative of the
results to be expected for the full year. The data disclosed in the notes to the
financial statements for these periods are unaudited.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-30
<PAGE>
PIXELCAM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At March 31,
2000 and 1999, $3,507 and $63,079, respectively, of money market funds, the fair
value of which approximates costs, are included in cash and cash equivalents.
The Company deposits cash and cash equivalents with high credit quality
financial institutions.
INVENTORY
Inventory is stated at the lower of cost or market, cost being determined
using the average method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities approximate fair value due to their short maturities.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets, generally three years.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123").
Under APB No. 25, unearned stock-based compensation is based, in general, on
the excess, if any, of the fair value of the Company's common stock over the
exercise price on the date of grant. The Company presents stock-based
compensation expense as a separate line item in its statement of operations. The
compensation expense is recognized over the periods the employee performs the
related services, generally the vesting period, consistent with the multiple
option method described in Financial Accounting Standards Board Interpretation
No. 28. The Company accounts for stock issued to non-employees in accordance
with provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments that are Issued to Other than Employees for
Acquiring or in Conjunction with Selling, Goods or Services."
RESEARCH AND DEVELOPMENT COSTS
Costs related to research, design and development of products are charged to
expense as incurred.
F-31
<PAGE>
PIXELCAM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue is recognized when a purchase order has been received, the product
has been shipped, the sales price is fixed and determinable and collection of
the resulting receivable is probable.
INCOME TAXES
Income taxes are accounted for using the asset and liability approach in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." The asset and liability approach requires the recognition of
taxes payable or refundable for the current year and deferred tax liabilities
and assets for the future tax consequences of events that have been recognized
in the Company's financial statements or tax returns. The measurement of current
and deferred tax liabilities and assets are based on provisions of the enacted
tax law; the effects of future changes in tax laws or rates are not anticipated.
The measurement of deferred tax assets is reduced, if necessary, by the amount
of any tax benefits that, based on available evidence, are not expected to be
realized.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. This statement becomes effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. In June 1999, the FASB issued Statement of
Financial Accounting Standard No. 137 "Accounting for Derivative
Instruments--Deferral of the Effect Date of SFAS Statement No. 133" ("SFAS
137"). SFAS 137 defers the effective date of SFAS 133 until June 15, 2000. The
Company will adopt SFAS 133 in 2001. The Company expects the adoption of SFAS
133 will not affect results of operations.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
circumstances. In June 2000, the SEC issued Staff Accounting Bulletin No. 101B
("SAB 101B"), which delayed the implementation date of SAB 101 until no later
than the fourth fiscal quarter of fiscal years beginning after December 15,
1999. The impact of implementing SAB 101 on the Company's financial statements
is still being assessed by management.
In March 2000, FASB issued FASB Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation - an interpretation of APB
Opinion No. 25." This interpretation has provisions that are effective on
staggered dates, some of which began after December 15, 1998 and others that
become effective after June 30, 2000. The adoption of this interpretation will
not have a material impact on the financial statements.
F-32
<PAGE>
PIXELCAM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
MARCH 31,
----------------------
2000 1999
-------- -----------
(UNAUDITED)
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes.............................. $ 485 $ --
------- --------
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITY:
Property and equipment acquired under capital leases.... $21,505 $115,997
======= ========
Issuance of redeemable preferred stock warrants for
notes payable......................................... $50,128 $ --
======= ========
</TABLE>
3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
MARCH 31,
---------------------- JUNE 30,
2000 1999 2000
-------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
INVENTORY:
Finished goods.......................................... $ 17,041 $ -- $ 26,372
Work-in-process......................................... 99,797 -- 94,399
Raw materials........................................... 47,884 -- --
-------- -------- ---------
$164,722 $ -- $ 120,771
======== ======== =========
PROPERTY AND EQUIPMENT, NET:
Computer equipment and software......................... $462,570 $265,330
Furniture and fixtures.................................. 124,608 55,399
-------- --------
587,178 320,729
Less: Accumulated depreciation and amortization......... (190,691) (33,733)
-------- --------
$396,487 $286,996
======== ========
</TABLE>
Property and equipment includes $137,502 of computer equipment and purchased
software under capital leases at March 31, 2000. Accumulated amortization of
assets under capital leases totaled $61,442 and $25,561 (unaudited) at March 31,
2000 and 1999, respectively.
4. INCOME TAXES
No provision for federal or state income tax has been recorded as the
Company incurred net operating losses for all periods presented. As of March 31,
2000, the Company had approximately $3,000,000 of federal net operating loss
carryforwards and $3,000,000 of state net operating loss carryforwards available
to offset future taxable income. The federal net operating loss carryforwards
expire between 2018 and 2019 and the state net operating loss carryforwards will
expire in 2006, if not utilized. Under the Tax Reform Act of 1986, the amounts
of and benefits from net operating loss carryforwards may be impaired or limited
in certain circumstances. Events which may cause changes in
F-33
<PAGE>
PIXELCAM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
a company's net operating loss and credit carryforwards include, but are not
limited to, a cumulative stock ownership change of greater than 50% over a three
year period.
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
2000 1999
----------- ---------
<S> <C> <C>
Net operating loss carryforwards............................ $ 1,311,000 $ 325,000
Credit carryforwards........................................ 118,000 71,000
Depreciation and amortization............................... 167,000 207,000
Reserves and accruals....................................... 21,000 --
Other....................................................... 5,000 5,000
----------- ---------
1,622,000 608,000
Valuation allowance......................................... (1,622,000) (608,000)
----------- ---------
$ -- $ --
=========== =========
</TABLE>
A valuation allowance has been provided in an amount equal to the deferred
tax assets at March 31, 2000 and 1999 because sufficient uncertainty exists
regarding the realizability of those assets.
5. CONVERTIBLE NOTES PAYABLE
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
2000 1999
----------- ---------
<S> <C> <C>
4.98% notes................................................. $ 2,250,000 $ 300,000
Less: Unamortized discount.................................. (36,992) --
----------- ---------
Less: Current portion....................................... 2,213,008 300,000
(1,000,000) (300,000)
----------- ---------
Long-term portion........................................... $ 1,213,008 --
=========== =========
</TABLE>
On various dates during 1999 and 2000, the Company issued notes to members
of the Board of Directors having an aggregate principal amount of $2.25 million.
The notes are unsecured obligations of the Company and bear interest at 4.98%
per annum, payable at maturity.
As described under Note 7, the Company issued warrants to purchase shares of
preferred stock in connection with the issuance of the convertible notes
payable.
In the event that the Company issues and sells shares of its Series B
preferred stock, then upon the closing of such sale of Series B preferred stock,
(the "Financing"), the notes shall automatically convert in whole into shares of
Series B preferred stock. In the event the Financing has not closed, the notes
shall be due and payable within eighteen months from cash receipt.
F-34
<PAGE>
PIXELCAM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS
LEASES
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through May 2003. Rent expense
for the year ended March 31, 2000 was $54,700. The Company recognizes rent
expense on a straight-line basis over the lease period.
Future minimum lease payments under noncancelable operating and capital
leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING MARCH 31, LEASES LEASES
--------------------- -------- ---------
<S> <C> <C>
2001..................................................... $72,186 $ 56,119
2002..................................................... 11,773 57,796
2003..................................................... -- 59,531
------- --------
Total minimum lease payments............................. 83,959 $173,446
========
Less: Amount representing interest....................... (10,742)
-------
Present value of capital lease obligations............... 73,217
Less: Current portion.................................... (62,419)
-------
Long-term portion of capital lease obligations......... 10,798
=======
</TABLE>
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Under the Company's Certificate of Incorporation, as amended, the Company is
authorized to issue 6,500,000 shares of convertible preferred stock, of which
3,700,000 shares have been designated as Series A and 2,500,000 shares have been
designated as Series B. From inception through March 31, 2000, the Company
issued redeemable convertible preferred stock as follows:
<TABLE>
<CAPTION>
PROCEEDS
SHARES NET OF
------------------------ ISSUANCE LIQUIDATION
SERIES AUTHORIZED OUTSTANDING COSTS AMOUNT
------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
A........................................... 3,700,000 3,488,373 $1,484,135 $1,500,000
B........................................... 2,500,000 -- -- --
Undesignated................................ 300,000 -- -- --
--------- --------- ---------- ----------
6,500,000 3,488,373 $1,484,135 $1,500,000
========= ========= ========== ==========
</TABLE>
F-35
<PAGE>
PIXELCAM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
The holders of preferred stock have various rights and preferences as
follows:
VOTING
Each holder of shares of convertible preferred stock shall be entitled to
the number of votes equal to the number of whole shares of common stock into
which such shares of convertible preferred stock could be converted at the
record date for the determination of the shareholders entitled to vote on such
matters or, if no such record date is established, the date such vote is taken
or any written consent of shareholders is solicited.
DIVIDENDS
Holders of Series A and B convertible preferred stock are entitled to
receive non-cumulative dividends at the per annum rate of $0.043 and $0.20 per
share, respectively, when and if declared by the Board of Directors. The holders
of Series A and B convertible preferred stock will also be entitled to
participate in dividends on common stock, when and if declared by the Board of
Directors, based on the number of shares of common stock held on an as-if
converted basis. No dividends on convertible preferred stock or common stock
have been declared by the Board from inception through March 31, 2000.
LIQUIDATION OR MERGER
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners of
the Company's common stock and convertible preferred stock own less than 51% of
the resulting voting power of the surviving entity, the holders of Series A and
B convertible preferred stock are entitled to receive an amount of $0.43 and
$2.0 per share, respectively, plus any declared but unpaid dividends prior to
and in preference to any distribution to the holders of common stock. In
addition to the above, holders of Series A and B convertible preferred stock
shall receive, from the original issue date of the Series A and B convertible
preferred stock, upon the liquidation events described above, all such remaining
available funds and assets distributed among the holders of the then outstanding
common stock, the Series A and B convertible preferred stock pro rata according
to the number of shares of common stock held by such holders where, for this
purpose, holders of shares of Series A and B convertible preferred stock will be
deemed to hold the greatest whole number of shares of common stock then issuable
upon conversion in full of such shares of Series A and B convertible preferred
stock until such time as each holder of then outstanding Series A and B
convertible preferred stock shall have received an aggregate amount equal to
$0.56 and $2.60 per share, respectively.
CONVERSION
Each share of Series A and B convertible preferred stock is convertible, at
the option of the holder, according to a conversion ratio, subject to adjustment
for dilution. Each share of Series A and B convertible preferred stock
automatically converts into the number of shares of common stock into which such
shares are convertible at the then effective conversion ratio upon: (1) the
closing of a public offering of common stock at a per share price of at least
$5.0 per share with gross proceeds of at least $10,000,000, (2) the consent of
the holders of the majority of convertible preferred stock.
F-36
<PAGE>
PIXELCAM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
At March 31, 2000, the Company had reserved 3,488,373 shares of common stock
for the conversion of Series A convertible preferred stock.
WARRANTS FOR CONVERTIBLE PREFERRED STOCK
In connection with the issuance of the notes payable, the Company issued
warrants to purchase 162,790 and 62,500 shares of Series A and B of convertible
preferred stock for $0.43 and $2.00 per share, respectively. Such warrants are
outstanding at March 31, 2000 and expire in five years. Using the Black-Scholes
pricing model, the Company determined that the fair value of the warrants was
$50,128 at the date of grant. During the year ended March 31, 2000, the Company
recorded $13,136 in interest expense associated with these warrants.
8. STOCK OPTION PLANS
In September 1998, the Company adopted the 1998 Equity Incentive Stock
Option Plan (the "Plan"). The Plan provides for the granting of stock options to
employees and consultants of the Company. Options granted under the Plan may be
either incentive stock options or nonqualified stock options. Incentive stock
options ("ISO") may be granted only to employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO") may be
granted to employees and consultants. The Company has reserved 749,336 shares of
common stock for issuance under the Plan.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date of
grant as determined by the Board of Directors, provided, however, that (i) the
exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii)
the exercise price of an ISO and NSO granted to a 10% shareholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant,
respectively. Options granted under the Plan are exercisable and vest at such
times and under such conditions as determined by the Board of Directors, but the
term of the option and the right of exercise may not exceed ten years from the
date of grant, and the vesting rate should be at least 20% per year over five
years from the date of grant.
F-37
<PAGE>
PIXELCAM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Activity under this plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------
OPTIONS WEIGHTED
AVAILABLE AVERAGE
FOR NUMBER OF EXERCISE
GRANT OPTIONS PRICE
--------- --------- --------
<S> <C> <C> <C>
September 1, 1998 (unaudited)............................... 1,750,000 --
Granted................................................... (973,000) 973,000 $0.04
--------- --------
Outstanding at March 31, 1999............................... 777,000 973,000 0.04
Granted................................................... (35,000) 35,000 0.04
Exercised................................................. -- (17,164) 0.04
Cancelled................................................. 7,336 (7,336) 0.04
--------- --------
Outstanding at March 31, 2000............................... 749,336 983,500 $0.04
========= ========
</TABLE>
The following table summarizes information with respect to stock options
outstanding at March 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
----------- --------------- -------- ----------- --------
<S> <C> <C> <C> <C>
700,000 8.6 $0.04 150,497 $0.04
150,000 8.7 0.04 53,125 0.04
108,500 8.9 0.04 20,709 0.04
25,000 9.7 0.04 -- --
------- -------
983,500 8.7 $0.04 224,331 $0.04
======= =======
</TABLE>
UNEARNED STOCK-BASED COMPENSATION
In connection with certain employee and non-employee stock option grants
during fiscal 1999 and 2000, the Company recorded unearned stock-based
compensation totaling $697,578, which is being amortized over the vesting
periods of the related options, generally four years using the method set out in
FASB Interpretation No. 28 ("FIN 28"). Under FIN 28, each vested tranche of
options is accounted for as a separate option grant for past services.
Accordingly, the compensation expense is recognized over the period during which
the services have been provided. This method results in higher compensation
expense in the earlier vesting periods of the related options. Amortization of
this stock-based compensation recognized during the years ended March 31, 1999
and 2000 totaled approximately $204,202 and $229,165, respectively.
During the three months ended June 30, 2000, the Company recorded unearned
stock-based compensation totaling $1,566,277 (unaudited) and recognized
amortization expense totaling $139,075 (unaudited).
F-38
<PAGE>
PIXELCAM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE DISCLOSURES
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS No. 123, the Company's net loss would not have been
materially impacted and accordingly, pro forma net loss amounts have not been
presented.
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes pricing method with the following assumptions:
dividend yield at 0%; weighted average expected option term of five years; risk
free interest rate of 6.14% and volatility of zero percent.
9. SUBSEQUENT EVENTS
ISSUANCE OF CONVERTIBLE NOTES PAYABLE
On April 10, 2000, the Company issued notes payable in the amount of
$500,000. The notes bear interest at 4.98% per annum and have a maturity of 18
months from date of issue. The note payable is convertible into Series B
preferred stock in the event that the Company issues and sells shares of its
Series B preferred stock.
On May 10, 2000, notes payable in the aggregate principal amount of
$2,750,000 were converted into 1,375,000 shares of Series B preferred stock.
Interest payable of $66,016, relating to these notes, was waived. Holders of
warrants for convertible preferred stock exercised those warrants and purchased
162,790 shares and 87,500 shares of Series A and Series B preferred stock,
respectively.
ACQUISITION BY ZORAN CORPORATION (UNAUDITED)
On June 29, 2000, the Company entered into a definitive agreement to be
acquired by Zoran Corporation. Under the terms of the agreement, Zoran
Corporation will pay $21 million to the shareholders of the Company on the
closing date. A further $21 million may be paid to the shareholders of the
Company contingent upon the achievement of certain revenue milestones by the
Company as described in the definitive agreement.
ISSUANCE OF CONVERTIBLE NOTES PAYABLE (UNAUDITED)
On June 20, 2000, the Company issued convertible notes payable in the amount
of $200,000. The notes bear interest at 4.98% per annum and have a maturity of
18 months from date of issue. On June 21, 2000, these notes were converted into
100,000 shares of Series B preferred stock. Holders of warrants for convertible
preferred stock exercised those warrants and purchased 10,000 shares of Series B
preferred stock.
F-39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
NOGATECH, INC.
We have audited the consolidated balance sheets of Nogatech, Inc. and its
subsidiaries (collectively, the "Company") as of December 31, 1998 and 1999 and
the related consolidated statements of operations, changes in stockholders'
equity (capital deficiency) and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Israel and in the United States, including those prescribed by the
Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the Company's Board
of Directors and management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a fair basis for our
opinion.
In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 1998 and 1999 and the consolidated results of
their operations, changes in stockholders' equity (capital deficiency) and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
<TABLE>
<S> <C>
Tel Aviv, Israel KESSELMAN & KESSELMAN
February 25, 2000 CERTIFIED PUBLIC ACCOUNTANTS (ISRAEL)
(except for Notes 5 and 6
the date of which is
May 23, 2000)
</TABLE>
F-40
<PAGE>
NOGATECH, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,791 $ 2,475 $46,521
Accounts receivable (Note 9a):
Trade................................................... 848 1,019 2,132
Other................................................... 140 197 358
Inventories (Note 9b)..................................... 581 2,109 1,805
Other current assets...................................... 26 169 67
------- ------- -------
Total current assets.................................. 5,386 5,969 50,883
------- ------- -------
FIXED ASSETS (Note 2):
Cost...................................................... 535 835 981
Less--accumulated depreciation and amortization........... (355) (483) (559)
------- ------- -------
Total fixed assets.................................... 180 352 422
------- ------- -------
OTHER ASSETS................................................ 203 256 292
------- ------- -------
$ 5,769 $ 6,577 $51,597
======= ======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accruals (Note 9c):
Trade................................................... $ 508 $ 1,967 $ 1,693
Other................................................... 707 891 983
------- ------- -------
Total current liabilities............................. 1,215 2,858 2,676
EMPLOYEE RIGHTS UPON RETIREMENT (Note 3).................... 255 362 462
------- ------- -------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4)
Total liabilities..................................... 1,470 3,220 3,138
------- ------- -------
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, at
redemption value (Note 5)................................. 7,816 8,243 --
------- ------- -------
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) (Note 6):
Common stock, $0.001 par value: authorized--40,000,000
shares at December 31, 1998 and 1999 and June 30, 2000;
issued and outstanding: 310,995*, 419,370* and
15,094,671 shares at December 31, 1998 and 1999 and June
30, 2000, respectively;................................. 1 1 16
Additional paid-in capital................................ 5,882 6,157 63,719
Note receivable from a stockholder........................ (57) (57) --
Deferred compensation..................................... (271) (392) (193)
Accumulated deficit....................................... (9,072) (10,595) (15,083)
------- ------- -------
Total stockholders' equity (capital deficiency)........... (3,517) (4,886) 48,459
------- ------- -------
$ 5,769 $ 6,577 $51,597
======= ======= =======
</TABLE>
--------------------------
* After giving retroactive effect to the reverse stock split, see Note 6a.
The accompanying notes are an integral part of the consolidated financial
statements.
F-41
<PAGE>
NOGATECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -----------------------
1997 1998 1999 1999 2000
-------- -------- -------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SALES (Notes 8 and 11)................. $ 2,551 $ 3,205 $ 8,856 $ 2,823 $ 5,988
COST OF SALES (Notes 8 and 11)......... 1,699 2,038 5,111 1,685 3,407
-------- -------- -------- ---------- ----------
GROSS PROFIT........................... 852 1,167 3,745 1,138 2,581
-------- -------- -------- ---------- ----------
OPERATING EXPENSES:
Research and development............. 1,266 1,451 2,283 1,108 1,322
Sales and marketing.................. 695 1,020 1,689 894 665
General and administrative........... 321 609 880 378 590
-------- -------- -------- ---------- ----------
TOTAL OPERATING EXPENSES............... 2,282 3,080 4,852 2,380 2,577
-------- -------- -------- ---------- ----------
OPERATING INCOME (LOSS)................ (1,430) (1,913) (1,107) (1,242) 4
OTHER INCOME (EXPENSES), NET........... (32) 90 11 6 330
-------- -------- -------- ---------- ----------
NET INCOME (LOSS)...................... (1,462) (1,823) (1,096) (1,236) 334
CHARGE FOR BENEFICIAL CONVERSION
FEATURE OF SERIES B PREFERRED
STOCK................................ -- -- -- -- (4,570)
ACCRETION OF REDEMPTION VALUE OF SERIES
A REDEEMABLE CONVERTIBLE PREFERRED
STOCK................................ (300) (383) (427) (214) (252)
-------- -------- -------- ---------- ----------
NET LOSS APPLICABLE TO COMMON STOCK.... $ (1,762) $ (2,206) $ (1,523) $ (1,450) $ (4,488)
-------- -------- -------- ---------- ----------
NET LOSS PER SHARE OF COMMON STOCK,
basic and diluted (Note 1k):......... $ (5.86) $ (7.13) $ (4.50) $ (4.66) $ (1.13)
======== ======== ======== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (Note 1k)... 300,709 309,536 338,295 310,995 3,974,443
======== ======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-42
<PAGE>
NOGATECH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTE TOTAL
COMMON STOCK ADDITIONAL RECEIVABLE STOCKHOLDERS'
------------------- PAID-IN FROM A DEFERRED ACCUMULATED EQUITY (CAPITAL
NUMBER AMOUNT CAPITAL STOCKHOLDER COMPENSATION DEFICIT DEFICIENCY)
-------- -------- ---------- ----------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997........ 286,625* $1 $1,113 $(57) $(5,104) $(4,047)
Issuance of common stock in
connection with stock options
exercised..................... 18,120* ** 2 2
Excess of consideration
received, net of issuance
costs of $60, over the
redemption value of Series A
redeemable convertible
perferred stock issued........ 1,283 1,283
Accretion of redemption value of
Series A redeemable
convertible preferred stock... (300) (300)
Net loss........................ (1,462) (1,462)
------- -- ------ ---- ----- ------- -------
BALANCE AT DECEMBER 31, 1997...... 304,745* 1 2,398 (57) (6,866) (4,524)
Issuance of common stock in
connection with stock options
exercised..................... 6,250* ** 1 1
Deferred compensation related to
employee stock option
grants........................ 268 (268) --
Deferred compensation related to
nonemployee stock option
grants........................ 53 (53) --
Amortization of deferred
compensation related to stock
option grants................. 50 50
Excess of consideration
received, net of issuance
costs of $355, over the
redemption value of Series A
redeemable convertible
preferred stock issued........ 3,162 3,162
Accretion of redemption value of
Series A redeemable
convertible preferred stock... (383) (383)
Net loss........................ (1,823) (1,823)
------- -- ------ ---- ----- ------- -------
BALANCE AT DECEMBER 31,
1998--FORWARD................... 310,995* $1 $5,882 $(57) $(271) $(9,072) $(3,517)
</TABLE>
F-43
<PAGE>
NOGATECH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTE TOTAL
COMMON STOCK ADDITIONAL RECEIVABLE STOCKHOLDERS'
--------------------- PAID-IN FROM A DEFERRED ACCUMULATED EQUITY (CAPITAL
NUMBER AMOUNT CAPITAL STOCKHOLDER COMPENSATION DEFICIT DEFICIENCY)
---------- -------- ---------- ----------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1998--BROUGHT FORWARD 310,995* $ 1 $ 5,882 $(57) $(271) $ (9,072) $ (3,517)
Issuance of common stock in
connection with stock options
exercised..................... 108,375* ** 39 39
Deferred compensation related to
employee stock options
grants........................ 214 (214) --
Deferred compensation related to
nonemployee stock option
grants........................ 22 (22) --
Amortization of deferred
compensation related to stock
option grants................. 115 115
Accretion of redemption value of
Series A redeemable
convertible preferred stock... (427) (427)
Net loss........................ (1,096) (1,096)
---------- --- ------- ---- ----- -------- --------
BALANCE AT DECEMBER 31, 1999.... 419,370* 1 6,157 (57) (392) (10,595) (4,886)
Issuance of common stock in
connection with stock options
and warrants exercised........ 1,881,991 2 2,550 2,552
Deferred compensation related to
employee stock option
grants........................ 35 (35) --
Deferred compensation related to
employee stock option
forfeited..................... (40) 40 --
Repayment of note receivable
from a stockholder............ 57 57
Amortization of deferred
compensation related to stock
option grants................. 194 194
Accretion of redemption value of
Series A redeemable
convertible preferred stock... (252) (252)
Beneficial conversion
feature--relating to Series B
convertible preferred stock... 4,570 (4,570)
Issuance costs related to Series
B redeemable convertible
preferred stock issued........ (302) (302)
Issuance of common stock under
initial public offering, net
of issuance costs of $4,733... 3,500,000 4 37,263 37,267
Conversion of Series A and B
redeemable convertible
preferred stock into common
stock......................... 9,293,310 9 13,486 13,495
Net income...................... 334 334
---------- --- ------- ---- ----- -------- --------
BALANCE AT JUNE 30, 2000
(UNAUDITED)................... 15,094,671 $16 $63,719 $ -- $(193) $(15,083) $ 48,459
========== === ======= ==== ===== ======== ========
</TABLE>
* After giving retroactive effect to the reverse stock-split, see Note 6a.
** Representing an amount less than $1,000.
The accompanying notes are an integral part of the consolidated financial
statements.
F-44
<PAGE>
NOGATECH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTE TOTAL
COMMON STOCK ADDITIONAL RECEIVABLE STOCKHOLDERS'
------------------- PAID-IN FROM A DEFERRED ACCUMULATED EQUITY (CAPITAL
NUMBER* AMOUNT CAPITAL STOCKHOLDER COMPENSATION DEFICIT DEFICIENCY)
-------- -------- ---------- ----------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1999........ 310,995 $1 $5,882 $(57) $(271) $ (9,072) $(3,517)
Amortization of deferred
compensation related to stock
option grants................... 56 56
Accretion of redemption value of
Series A redeemable convertible
preferred stock................. (214) (214)
Net loss.......................... (1,236) (1,236)
------- -- ------ ---- ----- -------- -------
BALANCE AT JUNE 30, 1999
(UNAUDITED)..................... 310,995 $1 $5,882 $(57) $(215) $(10,522) $(4,911)
------- -- ------ ---- ----- -------- -------
</TABLE>
* After giving retroactive effect to the reverse stock-split, see Note 6a.
The accompanying notes are an integral part of the financial statements.
F-45
<PAGE>
NOGATECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $(1,462) $(1,823) $(1,096) $(1,236) $ 334
------- ------- ------- ------- -------
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Employee rights upon retirement........................ 7 19 54 46 64
Depreciation and amortization.......................... 97 91 128 54 76
Compensation relating to stock options................. 50 115 56 194
Changes in operating asset and liability items:
Decrease (increase) in accounts receivable:
Trade.............................................. 1 (547) (171) (408) (1,113)
Other.............................................. (75) (65) (57) (58) (161)
Decrease (increase) in inventories................... 94 50 (1,528) (367) 304
Decrease (increase) in other current assets.......... (33) 57 (143) (35) 102
Increase (decrease) in accounts payable and accruals:
Trade.............................................. 151 2 1,459 944 (274)
Other.............................................. 87 344 184 (51) 92
------- ------- ------- ------- -------
329 1 41 181 (716)
------- ------- ------- ------- -------
Net cash used in operating activities.................... (1,133) (1,822) (1,055) (1,055) (382)
------- ------- ------- ------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES--
Purchases of fixed assets................................. (108) (64) (300) (136) (146)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock under initial public offering,
net of issuance costs of $4,733........................ -- -- -- -- 37,267
Issuance of series A redeemable convertible preferred
stock, net of issuance costs of $60 and $355 in 1997
and 1998, respectively................................. 1,790 5,641 -- -- --
Issuance of series B redeemable convertible preferred
stock, net of issuance costs of $302................... -- -- -- -- 4,698
Issuance of common stock in connection with stock options
and warrants exercised................................. 2 1 39 -- 2,552
Receipt (repayment) of short-term credit, net............ (375) (236) -- 74 --
Repayment of note receivable from a stockholder.......... -- -- -- -- 57
------- ------- ------- ------- -------
Net cash provided by financing activities................ 1,417 5,406 39 74 44,574
------- ------- ------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... 176 3,520 (1,316) (1,117) 44,046
BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD.................................................... 95 271 3,791 3,791 2,475
------- ------- ------- ------- -------
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF PERIOD...... $ 271 $ 3,791 $ 2,475 $ 2,674 $46,521
======= ======= ======= ======= =======
Supplemental disclosure of cash flow information--cash paid
during the period for:
Interest................................................. $ 27 $ 57 $ 41 $ 12 $ 24
======= ======= ======= ======= =======
Taxes.................................................... $ 2 $ 9 $ 4 $ 2 $ 4
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-46
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
A. GENERAL
1) Nature of operations:
a) Nogatech, Inc. ("Nogatech Delaware") was incorporated in Delaware
on September 22, 1999.
On December 28, 1999, Nogatech, Inc. ("Nogatech California"),
which was incorporated in California in 1993, merged into
Nogatech Delaware. In the merger, the stockholders of Nogatech
California exchanged their shares for all of the issued and
outstanding stock of Nogatech Delaware. At the time of the
merger, the wholly owned subsidiary of Nogatech California was
Nogatech Ltd., an Israeli company ("Nogatech Israel"). The
ownership interest of each of the two companies' stockholders
before and after the merger was identical.
b) Nogatech Delaware and its two wholly-owned subsidiaries, Nogatech
Israel and Nogatech California, Inc. (collectively, the
"Company"), are engaged in research, development, production,
sales and marketing of the Company's products to customers.
The Company provides video compression chips which establish
connections between video devices and computers, as well as
connections between video devices across a variety of networks.
As to information regarding the Company's major customers and
supplier, see Note 11.
c) The merger described in (a) above has been recorded as a
reorganization of entities under common control, and has been
accounted for at the recorded amount in Nogatech California's
(predecessor) financial statements. Accordingly, the Company's
consolidated financial statements reflect the predecessor's
financial position, results of operations and cash flows, from
its inception to December 28, 1999 (date of merger), in a manner
similar to a pooling-of-interests accounting. Such presentation
reflects the combined financial statements as if the merger
occurred at the beginning of the earliest period presented
herein.
2) Accounting principles
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") in
the United States ("U.S. GAAP").
3) Use of estimates in the preparation of consolidated financial
statements
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets, liabilities at the date of the financial
statements and the reported amounts of sales and expenses during the
reporting periods. Actual results could differ from those estimates.
B. FUNCTIONAL CURRENCY
The currency of the primary economic environment in which the operations
of Nogatech Delaware and Nogatech California are conducted is the U.S.
dollar ("$" or "dollar").
F-47
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Most of Nogatech Israel's sales are made in dollars. Substantially all of
the subsidiary's production costs are comprised of cost of materials,
which are purchased in dollars. Most of the research and development
expenses and general and administrative expenses are incurred in Israeli
currency. Most of the sales and marketing expenses are incurred in
dollars. Thus, the functional currency of Nogatech Israel is the dollar,
and accordingly, the functional currency of the Company is the dollar.
Transactions and balances originally denominated in dollars are presented
at their original amounts. Balances in non-dollar (Israeli) currency are
translated into dollars using historical and current exchange rates for
non-monetary and monetary balances, respectively. For non-dollar
transactions and other items (stated below) reflected in the statements
of operations, the following exchange rates are used: (i) for
transactions--exchange rates at transaction dates; and (ii) for other
items (derived from non-monetary balance sheet items, such as
depreciation and amortization, changes in inventories, etc.)--historical
exchange rates. The resulting currency transaction gains or losses are
included in other income or expenses, as appropriate.
C. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Nogatech
Delaware and its two wholly-owned subsidiaries. Intercompany balances and
transactions have been eliminated. Profits from intercompany sales, not
yet realized, have also been eliminated.
D. INVENTORIES
Inventories are recorded at the lower of cost or market. Cost is
determined on a "first-in, first-out" basis.
E. FIXED ASSETS
Fixed assets are stated at cost.
Depreciation is calculated using the straight-line method, over the
estimated useful life of the assets, at the following annual rates:
<TABLE>
<CAPTION>
%
--------
<S> <C>
Computers and software...................................... 20-33
Office furniture and equipment.............................. 6-15
Laboratory equipment........................................ 20
Motor vehicles.............................................. 15
</TABLE>
Leasehold improvements are amortized by the straight-line method over the
term of the lease, which is shorter than the estimated useful life of the
improvements.
F. IMPAIRMENT IN VALUE OF FIXED ASSETS
The Company adopted Statement of Financial Accounting Standards FAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." This Statement refers to fixed
assets and identifiable intangible assets (hereafter--long-lived assets).
Under the provisions of FAS 121, the Company reviews its long-
F-48
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
lived assets for impairment on an exception basis whenever events or
changes in circumstances indicate that the carrying amount of the assets
may not be recoverable through future undiscounted cash flows. If it is
determined that an impairment has occurred, a loss will be recognized in
the statements of operations based on fair values determined using
discounted cash flows compared to carrying amounts.
G. REVENUE RECOGNITION
Revenue from product sales to customers, other than sales to
distributors, is recognized when products are shipped to the customers.
Sales to distributors, where the Company allows right of return on
products unsold by the distributors, are not recognized until the
products are sold by the distributors to their customers.
The provision for warranty is recorded at the time of the sale of the
related product for probable costs in connection with warranties, based
on the Company's experience.
H. RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are charged to the statements of
operations as incurred.
I. CONCENTRATION OF CREDIT RISKS AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Financial instruments that subject the Company to credit risks consist
primarily of uninsured cash and cash equivalents, which are deposited in
major financial institutions in the United States and in Israel, and of
trade receivables. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company provides
for estimated credit losses.
The provision for doubtful accounts is principally determined for
specific debts when their collection is doubtful.
J. CASH EQUIVALENTS
The Company considers all highly liquid investments, with an original
maturity of three months or less when issued, that are not restricted as
to withdrawal or use, to be cash equivalents.
K. NET LOSS PER SHARE OF COMMON STOCK ("EPS"):
1) Basic EPS is computed by dividing net loss applicable to common stock
by the weighted average number of shares of common stock outstanding
during each period.
2) Since the basic EPS for the years ended December 31, 1997, 1998 and
1999 and for the periods of six months ended June 30, 1999 and 2000
represent a loss per share of common stock, the effect of including
the incremental shares of common stock from assumed exercise of
options and from assumed conversion of redeemable convertible
preferred stock in EPS computation is anti-dilutive, and accordingly
the basic and diluted EPS are the same (see also Note 9d).
3) Weighted average number of common shares outstanding used in the
computation of the basic and diluted EPS has been calculated after
giving retroactive effect in all the
F-49
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
reported periods, to a one-for-two reverse stock split, as approved
by the Company's Board of Directors on March 5, 2000 (Note 6a).
L. STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related
interpretations in accounting for its stock option plan grants to
employees and directors, with the disclosure provisions of Statement of
Financial Accounting Standards (FAS) No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). Under APB 25, compensation expense is computed
under the intrinsic value method of accounting to the extent that the
fair value of the underlying stock on the date of grant exceeds the
exercise price of the stock option. Compensation so computed is deferred
and then recognized over the vesting period of the stock option.
The Company applies FAS 123 in accounting for stock options granted to
nonemployees in exchange for services received using the fair value
method of accounting. Under FAS 123, these equity transactions are
accounted for based on the fair value of the consideration received or
the fair value of the equity instruments issued, whichever is more
reliably measurable. The value of the equity instruments is calculated
using the Black-Scholes pricing model.
M. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Series A and Series B preferred stock, which entitled its holders to
redeem their shares in certain events (see Note 5d), was initially
measured at fair value (consideration received) and reported in
stockholders' equity, and the amount equal to its cash redemption value
was transferred apart from the stockholders' equity and classified as
redeemable convertible preferred stock. The annual accretion of the
redemption value computed using the interest method was charged to
accumulated deficit (see Note 5e).
N. COMPREHENSIVE INCOME (LOSS)
The Company adopted FAS 130, "Reporting Comprehensive Income" (FAS 130).
FAS 130 requires reporting and display of comprehensive income (loss) and
its components, in a full set of general-purpose financial statements.
The Company has no other comprehensive income (loss) components other
than the net income (loss) for the reported periods.
O. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
1) In June 1998, the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 established a
new model for accounting for derivatives and hedging activities. FAS
133 requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be
accounted for, depending on the use of the derivative and whether it
qualifies for hedge accounting. FAS 133 is effective for calendar
year companies beginning January 1, 2001. The Company does not
currently use derivative instruments; accordingly, it does not
anticipate that the new standard will have any impact on its
financial statements.
F-50
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
2) In December 1999, the U.S. Securities and Exchange Commission (SEC)
issued SAB 101, "Revenue Recognition in Financial Statements," which
summarizes certain of the SEC staff views in applying generally
accepted accounting principles to revenue recognition in financial
statements. The Company adopted SAB 101 in these financial
statements. Such adoption has no impact on the Company's financial
statements.
P. DEFERRED INCOME TAXES
Deferred income taxes are created for temporary differences between the
assets and liabilities as measured in the financial statements and for
tax purposes. Deferred taxes are computed using the tax rates expected to
be in effect when these differences reverse. Valuation allowances in
respect of deferred tax assets are provided when it is more likely than
not that all or part of the deferred tax assets will not be realized.
Q. UNAUDITED INFORMATION
The financial statements include the unaudited consolidated balance
sheets as of June 30, 2000 and the related consolidated statements of
operations, changes in stockholders' equity (capital deficiency) and cash
flows for the six months ended June 30, 1999 and 2000. This unaudited
information has been prepared by the Company on the same basis as the
audited consolidated financial statements and, in management's opinion,
reflects all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the financial information, in
accordance with generally accepted accounting principles, for the period
presented. Results for interim periods are not necessarily indicative of
the results to be expected for the entire year.
F-51
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--FIXED ASSETS:
A. Grouped by major classifications, fixed assets are composed as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1998 1999 2000
-------- -------- --------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Cost:
Computers and software............................... $404 $647 $706
Office furniture and equipment....................... 51 78 86
Laboratory equipment................................. 40 45 79
Leasehold improvements............................... 40 41 41
Motor vehicles....................................... -- 24 69
---- ---- ----
$535 $835 $981
---- ---- ----
Less--accumulated depreciation and amortization:
Computers and software............................... 279 386 454
Office furniture and equipment....................... 11 16 19
Laboratory equipment................................. 36 38 41
Leasehold improvements............................... 29 40 40
Motor vehicles....................................... -- 3 5
---- ---- ----
355 483 559
---- ---- ----
$180 $352 $422
==== ==== ====
</TABLE>
B. Depreciation and amortization expenses related to fixed assets totaled
$97,000, $91,000 and $128,000 for the years ended December 31, 1997, 1998
and 1999, respectively, and (unaudited) $54,000 and (unaudited) $76,000
for the periods of six months ended June 30, 1999 and 2000, respectively.
NOTE 3--EMPLOYEE RIGHTS UPON RETIREMENT:
A. Israeli labor laws and agreements require payment of severance pay upon
dismissal of an employee or upon termination of employment in certain
other circumstances. Nogatech Israel's severance pay liability for its
employees, which reflects the undiscounted amount of the liability, is
calculated based upon length of service and the latest monthly salary
(one month's salary for each year worked). This liability is mainly
covered by the Company's insurance policies.
F-52
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--EMPLOYEE RIGHTS UPON RETIREMENT: (CONTINUED)
B. The balance sheet liability for Israeli employee rights upon retirement,
and the amount funded with insurance companies, are composed as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1998 1999 2000
-------- -------- --------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Severance pay liability................................ $255 $362 $462
Less--amount funded (presented in other assets)........ 203 256 292
---- ---- ----
Unfunded balance....................................... $ 52 $106 $170
==== ==== ====
</TABLE>
NOTE 4--COMMITMENTS AND CONTINGENT LIABILITIES:
A. LEASE COMMITMENTS:
1) Rent:
a) The Company leases its U.S. facility under an operating lease
agreement which expires in September 2002. The Israeli
subsidiary's facility is leased under an operating lease which
expires on February 22, 2003, with an option to be extended until
February 2008. Up to $67,000 of the Israeli facility rent is
guaranteed by a financial institution. The guarantees expires on
March 9, 2001 and March 10, 2001.
b) Future minimum lease commitments under non-cancelable operating
lease agreements are as follows (in thousands):
<TABLE>
<S> <C>
Six months ending December 31, 2000
(unaudited)................................ $ 78
Year ended December 31:
2001....................................... 158
2002....................................... 141
2003....................................... 24
----
$401
====
</TABLE>
2) Car lease:
a) The Company has eight vehicles which have been leased since 1999
and 2000 under operating lease agreements for the periods ending
in 2002 and 2003.
F-53
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--COMMITMENTS AND CONTINGENT LIABILITIES: (CONTINUED)
b) Future minimum lease commitments under these agreements are as
follows (in thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
<S> <C>
Six months ending December 31, 2000...... $ 31
Year ended December 31:
2001................................... 67
2002................................... 65
2003................................... 23
----
$186
====
</TABLE>
3) Lease expenses totaled $91,000, $86,000 and $135,000 in the years
ended December 31, 1997, 1998 and 1999, respectively, and (unaudited)
$54,000 and (unaudited) $90,000 in the periods of six months ended
June 30, 1999 and 2000, respectively.
B. ROYALTY COMMITMENTS:
1) The Company licensed technologies from three companies that are
subject to a per unit royalty ranging from $0.50 to $3.00. The
royalties are included in the cost of sales and amounted to $61,000,
$40,000 and $43,000 in the years ended December 31, 1997, 1998 and
1999, respectively, and (unaudited) $18,000 and (unaudited) $7,000 in
the periods of six months ended June 30, 1999 and 2000, respectively.
2) Prior to 1995, the Company participated in Israeli Government
research and development incentive programs, under which the Company
received research and development participation of $263,000. As a
result of this participation, the Company is liable to pay royalties
to the Office of the Chief Scientist in the Israeli Ministry of
Industry and Trade at rates of 3% to 5% of revenues resulting from
projects funded by the Chief Scientist. The royalties to be paid are
up to maximum amounts of 100% to 150% of the funded amounts. Through
1995, the Company repaid the Chief Scientist amounts related to
participation received of $138,000. Of the remaining participation
amount received of $125,000, the Chief Scientist is of the opinion
that revenues already received by the Company involved products
developed under projects funded by the Office of the Chief Scientist.
The Company is of the view that it no longer manufactures or sells
products developed under the funded projects, and believes that it is
not liable for any further royalty payments to the Office of the
Chief Scientist. Therefore, the Company did not provide in its
financial statements for exposure, ranging from $125,000 to $187,500,
with respect to royalties to the Chief Scientist.
The Company and the Chief Scientist have reached an agreement with
respect to one incentive program. Based on the agreement with the
Chief Scientist, the company will be exempted from submitting reports
and making periodic payments to the Chief Scientist in connection
with the research and development incentive program upon payment to
the Chief Scientist of $30,000 prior to August 31, 2000 and one
percent of the Company's sales revenues, commencing in September
2000, up to an aggregate amount of $95,408.
F-54
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--COMMITMENTS AND CONTINGENT LIABILITIES: (CONTINUED)
These payments will not exempt the Company from its continuing
obligations under the terms of Israeli Law for the Encouragement of
Research and Development in Industry, 1984.
C. COMMISSION COMMITMENTS
1. Nogatech Israel is committed to pay a consulting company a commission
equal to 3.0% of the initial order of the net sales initiated by that
consulting company and a commission of 1.5% to 2.5% for all
subsequent orders.
2. Nogatech Israel is committed to pay a commission equal to 3.0% of
orders of the net sales initiated by two other companies in sales to
the Far East.
3. Nogatech Israel is committed to pay a fixed fee of $10,000 per month
to a consulting company for a period of one year ending March 31,
2001.
Commissions paid by the Company amounted to $81,000 in the year ended
December 31, 1999 and (unaudited) $15,000 and (unaudited) $68,000 in the
periods of six months ended June 30, 1999 and 2000, respectively.
D. CONTINGENCY (UNAUDITED)
By letter dated June 27, 2000, the Company received a demand from a
former customer of the Company for the return of $392,400 as an avoidable
preference pursuant to 11 U.S. C. Section 547 of the United States
Bankruptcy Code. The legal advisers of the Company are reviewing this
matter. The Company believes it has received this amount in the normal
course of business and without any preference and accordingly has not set
aside any reserve for this matter at this time.
E. LINE OF CREDIT
The Company has obtained a line of credit from an Israeli financial
institution for working capital purposes, in the amount of $2,000,000.
Payment terms and interest rates are determined at the time of each
request for credit. The Company has pledged all of its assets as
collateral for this line of credit. As of June 30, 2000, the financial
institution has provided the Company guarantees in a total amount of
(unaudited) $162,000 in favor of lessors, a supplier and customs
authorities in Israel.
F-55
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--REDEEMABLE CONVERTIBLE PREFERRED STOCK:
A. Series A redeemable convertible preferred stock consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1998 1999 2000
-------- -------- --------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Series A redeemable convertible preferred
stock--$0.43 redemption value plus an accrued
amount (see Note d(1) below):
Authorized--30,000,000 shares; issued and
outstanding--15,906,304 shares at December 31,
1998 and 1999 (at redemption value)............ $7,816 $8,243 --
====== ====== ======
</TABLE>
B. On January 13, 2000, the Company issued 1,196,172 shares of series B
redeemable convertible preferred stock to a financial investor for a
total consideration of (unaudited) $5,000,000. These shares of preferred
stock are convertible into common stock as described in Note d(4) below.
In connection with this issuance, the Company recorded a beneficial
conversion charge of (unaudited) $4,570,000 in the six months ended
June 30, 2000. This charge was calculated as the difference between the
per share conversion price of $7.315 and the deemed fair value of a share
of common stock at commitment date (the mid-range of the expected initial
public offering price of $14.00 per share of common stock) multiplied by
the applicable number of equivalent shares of common stock (683,527
shares). This nonrecurring amount has been entirely reflected as a
decrease of the net income applicable to common stock, against a
corresponding credit to additional paid-in capital.
The Company closed its initial public offering at a price of $12 per
share of common stock.
C. As stated in Note 6b, the Company's Series A and B redeemable
convertible preferred stock were converted into shares of common stock
upon the closing of the Company's initial public offering.
D. Following are the main terms of the Company's redeemable convertible
preferred stock:
1) Liquidation preference
Holders of preferred stock were entitled to a liquidation preference
of $0.43 and $4.18 for series A and B, respectively, per share plus
an amount equal to 8% of such liquidation price, compounded annually,
for each year (or fraction thereof) after the first two years from
issuance of the stock, plus any declared but unpaid dividends. The
terms of the preferred stock stipulated that certain events (such as
a change in control) shall be considered as a deemed liquidation of
the Company which entitle the holders to redeem the outstanding
shares based on their liquidation amounts.
The excess of the consideration received, net of issuance costs, from
the issuance of the series A convertible preferred stock over its
redemption value, was recorded as additional paid-in capital at the
date of issuance. The annual accretion of the redemption value,
computed using the interest method, was charged to accumulated
deficit.
F-56
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--REDEEMABLE CONVERTIBLE PREFERRED STOCK: (CONTINUED)
2) Voting rights
As long as an aggregate amount of at least 4,000,000 shares of series
A and series B preferred stock was outstanding, preferred
stockholders were entitled to vote on all matters submitted or
required to be submitted to a vote of the stockholders of the Company
and were entitled to the number of votes equal to the number of full
shares of common stock into which such shares of series A and series
B preferred stock could be converted.
3) Election of directors
As long as at least 4,000,000 shares of series A preferred stock were
outstanding, the authorized number of directors shall be nine and any
change in the number was with the consent of the holders of a
majority of the outstanding shares of series A preferred stock. The
holders of the outstanding shares of series A preferred stock, voting
as a single class, were entitled to elect seven directors to the
board of directors. The holders of the outstanding shares of common
stock, voting as a single class, were entitled to elect two directors
to the board of directors.
4) Right to convert
At the option of the holder, each share of series A preferred stock
was convertible, at any time after issuance, into common stock based
on the determined conversion price subject to certain antidilution
provisions. According to the determined conversion price, 5,765,003
shares of series A preferred stock were convertible on a basis of two
shares of preferred stock for one share of common stock and
10,141,301 shares were convertible according to a ratio of 1.7707
shares of preferred stock for one share of common stock.
At the option of the holder, each share of series B preferred stock
was convertible, at any time after issuance, into common stock, based
on the determined conversion price, subject to certain antidilution
provisions. The determined conversion price of series B preferred
stock was equal to the quotient obtained by dividing $4.18 by the
series B conversion price in effect immediately prior to the time of
such conversion. The "Series B Conversion Price" was equal to $8.36
through February 28, 2000. Thereafter, commencing on February 29,
2000 though May 31, 2000, the "Series B Conversion Price" was equal
to $7.315.
On May 23, 2000, the series A and B preferred stock were
automatically converted into a total of 9,293,310 shares of common
stock concurrently with the closing of an underwritten public
offering of common stock.
5) Dividends
When and if declared by the board of directors, noncumulative
dividends at the annual rate of $0.0258 per share of series A
preferred stock and $0.1039 per share of series B preferred stock
were payable in cash to the preferred stockholders, in preference to
any declaration or payment on the common stock.
F-57
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--REDEEMABLE CONVERTIBLE PREFERRED STOCK: (CONTINUED)
E. Details regarding issuances of Series A and Series B redeemable
convertible preferred stock:
<TABLE>
<CAPTION>
NUMBER AMOUNT
---------- ---------------------------------------------------
CLASSIFIED AS
REDEEMABLE
PREFERRED
STOCK--AT CLASSIFIED CHARGED TO
REDEMPTION AS PAID-IN ACCUMULATED
VALUE CAPITAL DEFICIT TOTAL
------------- ---------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1. SERIES A REDEEMABLE CONVERTIBLE
PREFERRED STOCK:
Balance at January 1, 1997............ 8,962,959 $4,147 $ 634 $ (293) $ 4,488
Preferred shares issued on
February 4,
1997................................ 859,871 370 936* -- 1,306
Preferred shares issued on August 17,
1997................................ 318,471 137 347* -- 484
Accretion of redemption value for
1997.................................. -- 300 -- (300) --
---------- ------ ------- ------- -------
Balance as of December 31, 1997....... 10,141,301 4,954 1,917 (593) 6,278
Preferred shares issued on July 15,
1998.................................. 5,765,003 2,479 3,162* 5,641
Accretion of redemption value for
1998.................................. 383 (383) --
---------- ------ ------- ------- -------
Balance as of December 31, 1998....... 15,906,304 7,816 5,079 (976) 11,919
Accretion of redemption value for
1999.................................. -- 427 -- (427) --
---------- ------ ------- ------- -------
Balance as of December 31, 1999....... 15,906,304 8,243 5,079 (1,403) 11,919
Accretion of redemption value for the
period from January 1, 2000 through
conversion date..................... -- 252 -- (252) --
---------- ------ ------- ------- -------
Balance of series A redeemable
convertible preferred stock as of
the
conversion date..................... 15,906,304 $8,495 $ 5,079 $(1,655) $11,919
========== ====== ======= ======= =======
</TABLE>
------------------------
* Net of issuance costs of $60,000 in 1997 and $355,000 in 1998.
<TABLE>
<S> <C> <C> <C> <C> <C>
2. SERIES B REDEEMABLE CONVERTIBLE
PREFERRED STOCK--
Preferred shares issued on
January 13,
2000................................ 1,196,172 $5,000 $ (302)* $ -- $ 4,698
Charge for beneficial conversion
feature............................... -- -- 4,570 (4,570) --
---------- ------ ------- ------- -------
Balance of Series B redeemable
convertible preferred stock as of
the conversion date................. 1,196,172 $5,000 $ 4,268 $(4,570) $ 4,698
========== ====== ======= ======= =======
</TABLE>
------------------------
* reflects issuance costs.
F-58
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY:
A. REVERSE STOCK SPLIT
On March 5, 2000, the Company's board of directors approved a
reorganization of the Company's share capital, whereby each two shares of
common stock of $0.001 par value were reverse stock split into one share
of common stock of $0.001 par value. All share and per share data
included in these financial statements have been retroactively adjusted
to reflect the abovementioned reverse stock split. In addition, the
conversion ratio of the convertible preferred stock, the number of
options and their exercise price have been adjusted accordingly.
B. INITIAL PUBLIC OFFERING
On May 23, 2000, the Company closed an initial public offering for 3.5
million shares of common stock. Net proceeds from the sale of the shares
were approximately $37.3 million, net of issuance costs of approximately
$4.7 million. At the date of the initial public offering, the Series A
and B redeemable convertible preferred stock were converted into
9,293,310 shares of common stock.
C. EMPLOYEE STOCK OPTION PLANS:
1) Previous stock option plans:
a) U.S. 1993 Stock Option Plan
In February 1993, the Company's Board of Directors approved a
U.S. stock option plan (the U.S. plan), under which options are
to be granted to the Company's employees including officers,
directors and consultants, without consideration. Each option can
be exercised to purchase one common share of the Company. Any
option not exercised within 4 or 5 years, as applicable, from
allotment date will expire, unless extended by the Board of
Directors.
Options granted under the plan may be either incentive stock
options or nonstatutory stock options and may become exercisable
as specified in each option agreement.
Options granted to a holder of more that 10% of the voting stock
of the Company may be granted at not less than 110% of fair value
of the common share on the date of grant. Incentive stock options
granted to employees under the U.S. plan must have exercise
prices not less than 100% of fair value of the common share on
the date of the grant, as determined by the Board of Directors.
b) Israeli 1993 Stock Option Plan
In July 1993, the Company's Board of Directors approved an
Israeli employee option plan (the Israeli plan), under which
options are to be granted to the Company's employees including
officers, directors and consultants without consideration. Each
option can be exercised to purchase one common share of the
Company. Any option not exercised within 7 years from allotment
date will expire, unless extended by the Board of Directors.
F-59
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY: (CONTINUED)
c) 1999 Stock Option Plan
On December 8, 1999, in connection with the merger (Note 1a(1)), the
Company adopted the 1999 Stock Option Plan. All issued and
outstanding options under the 1993 plans were assumed under the 1999
Stock Option Plan. In addition, the Company had the right to issue
new options pursuant to the 1999 plan. The terms of the new options
issued under the 1999 plan were identical to the terms of the options
granted under the 1993 plans.
d) Options granted to consultants under these plans were excluded
from the summary presented in the tables 3 and 4 below and were
treated as options granted to nonemployees, see d below.
2) Existing stock option plan--2000 Equity Incentive Plan
On March 5, 2000, the Board of Directors adopted the 2000 Equity
Incentive plan, by which the Company's employees, directors and
consultants are eligible to receive grants of options to purchase
common stock, stock appreciation rights and restricted shares of
common stock. It was further resolved to reserve for issuance under
the plan a maximum amount of 3,500,000 shares plus automatic annual
increases equal to the lesser of 500,000 shares or 5% of the
Company's outstanding shares on the last day of the preceding year.
This plan became effective after the consummation of the Company's
initial public offering.
All issued and outstanding options under the 1999 stock option plan
were assumed by the 2000 Equity Incentive Plan. In addition, the
Company has the right to issue new options pursuant to the 2000 plan.
The terms of the new options issued under the 2000 plan are identical
to the terms of the options granted under the 1999 plan.
The rights of the common stock obtained upon exercise of the options
will be identical to those of the other shares of common stock of the
Company.
F-60
<PAGE>
NOGATECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
3) A summary of the status of the 2000 stock option plan as of
December 31, 1997, 1998, 1999, and as of (unaudited) June 30, 2000,
and changes during the periods ended on those dates, is presented
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------- SIX MONTHS ENDED
1997 1998 1999 JUNE 30, 2000
------------------- -------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE NUMBER PRICE
-------- -------- --------- -------- --------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of
period............................... 772,720 $0.24 734,470 $0.28 1,248,470 $0.26 1,531,220 $0.94
Changes during the period:
Granted.............................. 51,750 $0.72 549,000 $0.24 431,000 $2.78 60,000 8.43
Exercised............................ (18,120) $0.14 (6,250) $0.12 (100,875) $0.34 (578,705) 0.45
Forfeited............................ (71,880) $0.30 (28,750) $0.64 (47,375) $0.72 (31,000) 2.68
------- --------- --------- ---------
Options outstanding at period end...... 734,470 $0.28 1,248,470 $0.26 1,531,220 $0.94 981,515 $1.58
======= ========= ========= =========
Options exercisable at period end...... 556,014 $0.26 791,146 $0.28 948,261 $0.72 626,327 $0.67
======= ========= ========= =========
Options available for grant under the
stock option plan.................... 473,823 953,572 3,011,787 6,482,787
======= ========= ========= =========
Weighted average fair value of options
granted during the period*........... $0.27 $0.58 $1.34 $4.24
</TABLE>
------------------------------
* The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model, based on the following
weighted average assumptions: dividend yield of 0% for all periods; expected
volatility of 55% for all periods; risk-free interest rates (in dollar
terms): 1997--6.1%; 1998--5.4%; 1999--$5.7% and 2000--6%; and expected lives
of 4 years in all periods.
4) The following table summarizes information about options outstanding
at June 30, 2000 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------- -----------------------------
WEIGHTED AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OF OPTIONS IN YEARS EXERCISE PRICE OF OPTIONS EXERCISE PRICE
--------------- ---------- ---------------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
$0.02-$0.20 368,265 1.8 $0.15 365,765 $0.10
$0.72 279,750 3.2 $0.72 183,062 $0.72
$3.00 279,500 5.1 $3.00 77,500 $3.00
$6.88 39,000 6.9 $6.88
$8.00 5,000 6.6 $8.00
$15.00 10,000 6.6 $8.00
------- -------
981,515 $1.58 626,327 $0.67
======= =======
</TABLE>
5) Options to employees were granted at exercise prices which were equal
to the fair value of the common stock at dates of grant, except for
381,500 options granted in July 1998, to the Chairman of the
Company's Board of Directors and to its Chief Executive Officer and
except for 40,000 options granted to employees in December 1999 and
5,000 options
F-61
<PAGE>
NOGATECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
granted to employees in February 2000, which were granted at exercise
prices lower than the fair value of each share of common stock at
dates of grant. The options granted in 1998 were issued at an
exercise price of $0.02 for each share of common stock, while the
fair value of each share of common stock was $0.72. The fair value of
each of these options granted was $0.71. These options were fully
vested and exercised upon the consummation of the initial public
offering of the Company. The 40,000 options granted in 1999 were
issued at an exercise price of $3.00 for each share of common stock,
while the fair value of each share of common stock at the dates of
grant was $8.30. The fair value of each of these options granted was
$5.91. The 5,000 options granted in February 2000 were issued at an
exercise price of $8.00 for each share of common stock, while the
fair value of each share of common stock at the date of grant was
$14.00. The fair value of each of these options granted was $6.00.
6) Accounting treatment of the employee stock option plans
As to the accounting treatment with respect to employee stock option
grants, see Note 1(l).
In 1998, 1999 and in the six months ended June 30, 2000, the Company
recorded $268,000, $214,000, and (unaudited) $35,000, respectively,
of deferred stock compensation for the excess of the deemed fair
value of a share of common stock over the exercise price at the date
of grant related to certain options granted to employees and
directors. In the six months ended June 30, 2000, the Company
cancelled (unaudited) $40,000 of deferred stock compensation related
to employee stock options forfeited. The compensation expense is
being amortized over the vesting period of the options. The
compensation costs that have been charged to the statements of
operations, under "general and administrative expenses," in the years
ended December 31, 1998 and 1999 and in the period of six months
ended June 30, 2000 are $45,000, $90,000, and (unaudited) $159,000,
respectively.
7) Pro forma disclosure
Had compensation cost for the Company's plans been determined using
the fair value at the grant dates, consistent with the method of FAS
123, the Company's net loss and loss per share of common stock would
have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------- -------------------
1997 1998 1999 UNAUDITED
------------------- ------------------- ------------------- -------------------
AS PRO AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net loss applicable to common
stock--in thousands.......... $(1,762) $(1,766) $(2,206) $(2,225) $(1,523) $(1,668) $(1,450) $(1,493)
======= ======= ======= ======= ======= ======= ======= =======
Net loss per share of common
stock--basic and diluted..... $ (5.86) $ (5.87) $ (7.13) $ (7.19) $ (4.50) $ (4.93) $ (4.66) $ (4.80)
======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
2000
-------------------
UNAUDITED
-------------------
AS PRO
REPORTED FORMA
-------- --------
<S> <C> <C>
Net loss applicable to common
stock--in thousands.......... $(4,488) $(4,535)
======= =======
Net loss per share of common
stock--basic and diluted..... $ (1.13) $ (1.14)
======= =======
</TABLE>
F-62
<PAGE>
NOGATECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
D. WARRANTS AND OPTIONS TO NONEMPLOYEES
1) In 1998, in order to obtain a credit line, the Company granted bank
options to purchase 240,208 shares of common stock at an exercise
price of $2.08 per share. The options were excercised upon the
closing of the initial public offering of the Company. The Company
recorded deferred compensation of $37,000 associated with these
options based on the fair value of these options at the date of
grant.
2) In December 1998, the Board of Directors granted 75,000 options to a
consulting company in exchange for marketing services rendered. The
options which were vested in January 1999 are exercisable for 75,000
shares of common stock at an exercise price of $0.72 per share. The
Company recorded deferred compensation of $16,000 associated with
these options based on the fair value of these options at the date of
grant.
3) In connection with the change of ownership in the Company in 1995,
the Board of Directors granted 350,000 options to the current
Chairman of the Company's Board of Directors, who did not have an
active role in the Company at the date of grant. The optionee paid
$5,000 for this right. Each option can be exercised to purchase one
share of common stock of the Company at an exercise price of $0.125
per share. The options were exercised upon the consummation of the
Company's initial public offering. An expense of $10,000 associated
with these options, reflecting the fair value of the option at date
of grant, net of the amount paid for the option, was charged in the
statement of operations for the year ended December 31, 1995.
4) a) In October 1995, the Company issued 7,500 common stock options to
a consultant at an exercise price of $0.125 per share. These
options were exercised in 1999.
b) In January 1996, the Company issued 10,000 common stock options
to a consultant at an exercise price of $0.14 per share. These
options were exercised in January 2000.
c) In August 1999, the Company issued 20,000 common stock options to
four consultants at an exercise price of $3.00 per share. Two
consultants' options vest ratably over a period of four years and
the options issued to the other consultants are fully vested. The
total deferred expense of $22,000 associated with these options
reflects the fair value of the options at dates of grant.
5) Accounting treatment of options granted to nonemployees.
As to the accounting treatment with respect to options granted to
nonemployees, see Note 1(l).
The fair value of equity instruments issued in exchange for services
received is charged against income over the vesting period.
The following weighted average assumptions were used for estimating
the fair value of the options using Black-Scholes option pricing
model: dividend yield of 0%; and expected volatility of 55% for the
years 1998 and 1999, risk free interest of 5.4% and 5.7% for the
years 1998 and 1999, respectively, and average expected life of 4
years for the years 1998 and 1999.
F-63
<PAGE>
NOGATECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
Services costs charged against income in respect of equity
instruments granted to nonemployees were $5,000 and $25,000 in the
years ended December 31, 1998 and 1999, respectively, and (unaudited)
$12,500 and (unaudited) $35,000 in the six month periods ended
June 30, 1999 and 2000, respectively. These costs have been included
in the consolidated statements of operations under "general and
administrative expenses" (except for $16,000 charged to "sales and
marketing expenses" in the year ended December 31, 1999.
E. WARRANTS ISSUED TO SERIES A REDEEMABLE CONVERTIBLE PREFERRED
STOCKHOLDERS
1) In 1997, in connection with the issuance of series A redeemable
convertible preferred stock, the Company issued the buyers of those
shares options to purchase up to 589,171 shares of common stock at an
exercise price of $3.14 per share. 318,471 of these options expired
in 1999, 111,464 options were exercised in January 2000 and 159,236
options were exercised upon the closing of the initial public
offering of the company.
2) In 1998, in connection with the issuance of series A redeemable
convertible preferred stock, the Company granted the buyers of those
shares options to purchase 432,375 shares of common stock at an
exercise price of $2.08 per share. These options were exercised upon
the closing of the initial public offering of the company.
F. EMPLOYEE STOCK PURCHASE PLAN
On March 5, 2000, the Board of Directors adopted the 2000 Employee Stock
Purchase Plan which permits eligible employees to purchase shares of the
Company's common stock pursuant to payroll deductions periodically
applied to the purchase of such shares. A total of 350,000 shares of
common stock initially have been reserved for issuance under the Purchase
Plan. The number of shares reserved for issuance will be increased
automatically on the first day of the Company's fiscal year, commencing
in 2001, by an amount equal to the lesser of 500,000 shares or 1% of the
number of outstanding shares on the last trading day of the immediately
preceding fiscal year.
G. COMMON STOCK RESERVED
As at June 30, 2000 (unaudited), the Company has reserved shares of
common stock for future issuance, as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
-----------
(UNAUDITED)
<S> <C>
Employee stock option plans................................. 7,464,302
Options to nonemployees..................................... 95,000
Employee stock purchase plan................................ 350,000
---------
7,909,302
=========
</TABLE>
H. On March 8, 2000, the note receivable from a stockholder was repaid to
the Company, including the interest accrued at the annual rate of 5.5%.
F-64
<PAGE>
NOGATECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES:
A. U.S. INCOME TAXES
As of June 30, 2000, the Company had federal and state net operating loss
carryforwards of approximately (unaudited) $4,800,000 and (unaudited)
$1,300,000, respectively, which expire through 2019 and 2004,
respectively.
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $5,200,000 and $1,700,000,
respectively, which expire through 2019 and 2004, respectively.
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended, and similar
state provisions. The annual limitation may result in the expiration of
net operating loss carryforwards before utilization.
B. ISRAELI INCOME TAXES
Nogatech Israel has been awarded "approved enterprise" status by the
Israeli government, under the Law for the Encouragement of Capital
Investments, 1959. Under the approved enterprise status, Nogatech Israel
is entitled to a four-year tax exemption on undistributed earnings
commencing in the year in which it attains taxable income and a reduced
corporate tax rate of 10%-15% for the remaining term of the program on
the plan's proportionate share of income. The period of tax benefits has
not yet commenced. In the event of the distribution of dividends from
income which was tax exempt, the amount distributed will be liable to
corporate tax of 10%-15%.
The entitlement to the above benefits is conditional upon the fulfillment
of conditions stipulated by the law, regulations published thereunder and
the instrument of approval for the specific investment in approved
enterprises. In the event of failure to comply with these conditions, the
benefits may be cancelled and Nogatech Israel may be required to refund
the amounts of the benefits in whole or in part with the addition of
linkage differences and interest.
Nogatech Israel's results for tax purposes are measured on a real basis,
adjusted for the increase in the Israeli Consumer Price Index (CPI). As
explained in Note 1b, the financial statements of the Israeli subsidiary
included in consolidation are expressed in U.S. dollars. The difference
between the changes in the Israeli CPI and the NIS/U.S. dollar exchange
rate--both on annual and cumulative basis--causes a difference between
taxable income (loss) and income (loss) reflected in Nogatech Israel's
financial statements expressed in dollars.
Israeli taxable income not eligible for "approved enterprise" benefits
mentioned above is taxed at the regular tax rate of 36%.
As of December 31, 1999 and as of June 30, 2000, Nogatech Israel has
Israeli net operating loss carryforwards of approximately $2,300,000 and
(unaudited) $2,100,000, respectively. The Israeli loss carryforwards have
no expiration date. The Company expects that during the period these tax
losses are utilized, most of its income will be tax exempt, and
therefore, the utilization of the net operating losses will generate no
tax benefit. Accordingly, deferred tax assets from such losses have not
been included in the financial statements.
F-65
<PAGE>
NOGATECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES: (CONTINUED)
C. DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999 JUNE 30, 2000
-------- -------- --------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
In respect of the U.S. operating loss
carryforwards............................... $ 1,500 $ 2,000 $ 1,750
Valuation allowance........................... (1,500) (2,000) (1,750)
------- ------- -------
Net deferred tax assets....................... $ -- $ -- $ --
======= ======= =======
</TABLE>
The valuation allowance increased by $400,000, $300,000 and $500,000 for
the years ended December 31, 1997, 1998 and 1999, respectively. The
valuation allowance for the six months ended June 30, 2000 decreased by
(unaudited) $250,000.
FAS 109 provides for the recognition if deferred tax assets if
realization of such assets is more likely than not. Based upon the weight
of available evidence, which includes the Company's historical operating
performance and the reported cumulative net losses in all prior years,
management has determined that the future realization of the tax benefit
is not sufficiently assured. Consequently, a full valuation has been
provided against the net deferred tax assets.
D. NET LOSS (INCOME) APPLICABLE TO THE ISRAELI AND THE U.S. OPERATIONS:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Net loss (income) applicable to:
Israeli operations................. $1,006 $1,000 $1,805 $ 684 $(406)
U.S. operations.................... 400 433 (264) 676 72
Eliminations....................... 56 390 (445) (124)
------ ------ ------ ------ -----
$1,462 $1,823 $1,096 $1,236 $(334)
====== ====== ====== ====== =====
</TABLE>
E. ISRAELI TAX ASSESSMENTS
Nogatech Israel has had no final tax assessments since its incorporation
in 1993.
NOTE 8--RELATED PARTY TRANSACTIONS
Kenwood Corporation ("Kenwood") is a stockholder in the Company. During
1997, Kenwood subleased premises from the Company for a specific period of
time. Rental income earned by the Company from this sublease was $75,000 for
1997 and at December 31, 1997, Kenwood owed the Company $75,000 pertaining
to this sublease.
F-66
<PAGE>
NOGATECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--RELATED PARTY TRANSACTIONS (CONTINUED)
On June 29, 2000 (unaudited), the Company signed a development agreement
with Kenwood, where by the Company will develop and modify chips, reference
design board and PC driver software to be used by Kenwood in its digital and
analog PC set, based on the USB interfaces, using the Company's
technologies.
Total consideration for the services performed by the Company under the
agreement shall be $900,000 upon reaching the milestones of the agreement.
Sales made to Kenwood aggregated (unaudited) $300,000 in the six month
period ended June 30, 2000. As of June 30, 2000 Kenwood owed the Company
(unaudited) $300,000.
Tomen Electronics ("Tomen") is a stockholder in the Company. Sales made to
Tomen were $439,000, $1,324,000 and $1,272,000 in 1997, 1998 and 1999,
respectively, and (unaudited) $419,000 and (unaudited) $1,529,000 in the six
month periods ended June 30, 1999 and 2000, respectively. As of
December 31, 1998 and 1999, Tomen owed the Company $35,000, $68,000,
respectively and (unaudited) $35,000 and (unaudited) $449,000 in the six
months ended June 30, 1999 and 2000, respectively. The Company purchases
certain products from Tomen.
Purchases from Tomen aggregated $194,000 and $151,000 in 1998 and 1999,
respectively and (unaudited) $121,000 in the six months ended June 30, 1999.
As of December 31, 1998 and 1999, the Company owed Tomen $32,000 and
$60,000, respectively, and (unaudited) $90,000 in the six month period ended
June 30, 1999, pertaining to these purchases. Additionally, during 1997, the
Company entered into an engineering agreement with Tomen, whereunder the
Company will receive four payments of $50,000 upon the achievement of
certain milestones, as agreed. The Company recognized $100,000 of revenue
under this agreement for the year ended December 31, 1997 and 1998. In 1998,
the engineering agreement was canceled and it was agreed between the
companies that there would be no further obligations.
NOTE 9--SUPPLEMENTARY FINANCIAL STATEMENTS INFORMATION:
BALANCE SHEETS:
A. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1999 JUNE 30, 2000
-------- -------- --------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
1) Trade
Open accounts................................ $813 $ 951 $1,383
Related party (Note 8)....................... 35 68 749
---- ------ ------
$848 $1,019 $2,132
==== ====== ======
The item is net of allowance for doubtful
accounts....................................... $(24) $ (150) $ (192)
==== ====== ======
</TABLE>
The change in the allowance for doubtful accounts in the year ended
December 31, 1997 was a decrease of expenses of $23,000. The changes in the
allowance in the years ended December 31, 1998 and 1999 increased the
expenses by $20,000 and $126,000, respectively.
F-67
<PAGE>
NOGATECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SUPPLEMENTARY FINANCIAL STATEMENTS INFORMATION: (CONTINUED)
The change in the allowance for doubtful accounts in the six months ended
June 30, 1999 was an increase of expenses of (unaudited) $11,000. The change
in the allowance in the six months ended June 30, 2000 was an increase of
expenses by (unaudited) $42,000.
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1999 JUNE 30, 2000
-------- -------- --------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
2) Other:
Employees............................................... $ 65 $ 89 $ 144
Institutions............................................ 36 82 128
Other receivables....................................... 39 26 86
---- ------ ------
$140 $ 197 $ 358
==== ====== ======
B. INVENTORIES:
Raw materials........................................... $413 $ 843 $ 735
Finished goods.......................................... 168 1,266 1,070
---- ------ ------
$581 $2,109 $1,805
==== ====== ======
C. ACCOUNTS PAYABLE AND ACCRUALS
1) Trade:
Open accounts........................................... $476 $1,907 $1,693
Related party (Note 8).................................. 32 60 --
---- ------ ------
$508 $1,967 $1,693
==== ====== ======
2) Other and accruals:
Payroll and related expenses............................ $149 $ 90 $ 135
Provision for vacation.................................. 95 127 177
Deferred income......................................... 321 56 18
Provision for warranty.................................. 65 177 239
Distributors............................................ 11 244 143
Accrued expenses........................................ 66 197 271
---- ------ ------
$707 $ 891 $ 983
==== ====== ======
</TABLE>
F-68
<PAGE>
NOGATECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SUPPLEMENTARY FINANCIAL STATEMENTS INFORMATION: (CONTINUED)
STATEMENT OF OPERATIONS:
D. NET LOSS PER SHARE OF COMMON STOCK
The following table sets forth the computation of historical basic and
diluted net loss per share of common stock:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------- --------------------------
1997 1998 1999 1999 2000
---------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NUMERATOR--IN THOUSANDS:
Net loss applicable to common
stock--numerator for basic
net loss per share of common
stock....................... $ (1,762) $ (2,206) $ (1,523) $ (1,450) $ (4,488)
Deemed dividend for beneficial
conversion feature of
preferred stock............. -- -- -- -- 4,570
Accretion of redemption value
of series A redeemable
convertible preferred
stock....................... 300 383 427 214 252
---------- ----------- ----------- ---------- -----------
Numerator for diluted net
income (loss) per share of
common stock................ $ (1,462) $ (1,823) $ (1,096) $ (1,236) $ 334
========== =========== =========== ========== ===========
DENOMINATOR
Denominator for basic net loss
per share of common stock--
weighted average number of
shares of common stock...... 300,709 309,536 338,295 310,995 3,974,443
Incremental shares from
assumed conversions:
Series A and B redeemable
convertible preferred
stock..................... 5,568,334 7,048,428 8,609,783 8,609,783 6,989,615
Stock options............... 2,638,257 3,879,996 2,058,358 792,482 2,149,072
---------- ----------- ----------- ---------- -----------
Denominator for diluted net
loss per share of common
stock--adjusted weighted
average number of shares.... 8,507,300 11,237,960 11,006,436 9,713,260 13,113,130
========== =========== =========== ========== ===========
</TABLE>
The effect of the inclusion of the redeemable convertible preferred stock
and stock options in the computation of the diluted net loss per share of
common stock in 1997, 1998 and 1999 is anti-dilutive.
F-69
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIADTED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Company consist of non-derivative current
assets and liabilities.
In view of their nature, the fair value of financial instruments included in
working capital of the Company is usually identical or close to their
carrying value.
NOTE 11--SEGMENT INFORMATION
The Company adopted the provisions of FAS 131 which sets out disclosure and
reporting requirements in respect of segments.
Management identifies two reportable operating segments that are
differentiated by the locations of the Company's customers: (1) the United
States and (2) the rest of the world. The Company evaluated performance of
these two operating segments based on sales only. The Company does not
evaluate performance based on segment asset information.
SEGMENT SALES--SALES CLASSIFIED BY GEOGRAPHIC AREA (BASED ON THE LOCATION OF
THE CUSTOMERS):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States--North America........ $1,230 $1,373 $5,436 $1,502 $2,184
------ ------ ------ ------ ------
The rest of the world:
Japan............................. 836 1,341 1,314 459 1,869
Taiwan............................ 93 59 1,440 699 1,077
Europe............................ 335 356 617 124 435
Other............................. 57 76 49 39 423
------ ------ ------ ------ ------
1,321 1,832 3,420 1,321 3,804
------ ------ ------ ------ ------
Total............................... $2,551 $3,205 $8,856 $2,823 $5,988
====== ====== ====== ====== ======
</TABLE>
COMPANY-WIDE DISCLOSURE REGARDING ITS TOTAL ASSETS, LONG-LIVED ASSETS AND
MAJOR CUSTOMERS:
A. TOTAL ASSETS AND LONG-LIVED ASSETS
The company's total assets and long-lived assets, net of accumulated
depreciation and amortization, are located in the following geographical
areas:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------- JUNE 30,
1998 1999 2000
--------------------- --------------------- ---------------------
TOTAL LONG-LIVED TOTAL LONG-LIVED TOTAL LONG-LIVED
ASSETS ASSETS ASSETS ASSETS ASSETS ASSETS
-------- ---------- -------- ---------- -------- ----------
(IN THOUSANDS)
(IN THOUSANDS) (IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Israel................ $1,126 $168 $4,269 $324 $ 5,160 $396
North America......... 4,643 12 2,308 28 46,437 26
------ ---- ------ ---- ------- ----
Total................. $5,769 $180 $6,577 $352 $51,597 $422
====== ==== ====== ==== ======= ====
</TABLE>
F-70
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIADTED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--SEGMENT INFORMATION (CONTINUED)
B. MAJOR CUSTOMERS
In the years ended December 31, 1997, 1998 and 1999, and in the periods
of six months ended June 30, 1999 and 2000 major customers of the Company
represented the following percentage of sales:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Customer A.................................. 17% 41% 14% 15% 26%
Customer B.................................. * * 24% 12% 16%
Customer C.................................. * * 13% * *
Customer D.................................. 32% 20% 11% 19% *
Customer E.................................. * * * 17% 11%
</TABLE>
------------------------
* Less that 10%.
MAJOR SUPPLIER
In the years ended December 31, 1997, 1998 and 1999, a major supplier of
the Company represented 8%, 10% and 58% of cost of sales, respectively.
In the periods of six months ended June 30, 1999 and 2000, a major
supplier of the Company represented 41% and 54% of cost of sales,
respectively.
F-71
<PAGE>
ANNEX A
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
among
ZORAN CORPORATION,
a Delaware corporation
("Zoran"),
ZOOM ACQUISITION CORPORATION,
a Delaware corporation and wholly-owned
subsidiary of Zoran,
and
NOGATECH, INC.,
a Delaware corporation
Dated August 23, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I THE MERGER........................................ A-1
Section 1.1 Effective Time of the Merger.......... A-1
Section 1.2 Closing............................... A-1
Section 1.3 Effects of the Merger................. A-2
Section 1.4 Directors and Officers................ A-2
ARTICLE II CONVERSION OF SECURITIES......................... A-2
Section 2.1 Conversion of Capital Stock........... A-2
Section 2.2 Exchange of Certificates.............. A-3
Section 2.3 Tax Consequences...................... A-5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF NOGATECH...... A-5
Section 3.1 Organization.......................... A-5
Section 3.2 Nogatech Capital Structure............ A-6
Section 3.3 Authority; No Conflict; Required
Filings and Consents................................ A-6
Section 3.4 SEC Filings; Financial Statements..... A-7
Section 3.5 Absence of Undisclosed Liabilities.... A-8
Section 3.6 Absence of Certain Changes or
Events.............................................. A-8
Section 3.7 Taxes................................. A-8
Section 3.8 Tangible Assets and Real Property..... A-10
Section 3.9 Intellectual Property................. A-10
Section 3.10 Agreements, Contracts and
Commitments......................................... A-11
Section 3.11 Litigation............................ A-11
Section 3.12 Environmental Claims.................. A-12
Section 3.13 Employee Benefit Plans................ A-13
Section 3.14 Compliance with Laws.................. A-14
Section 3.15 Interested Party Transactions......... A-14
Section 3.16 Registration Statement: Proxy
Statement/Prospectus................................ A-14
Section 3.17 Opinion of Financial Advisor.......... A-14
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ZORAN AND
SUB....................................................... A-14
Section 4.1 Organization.......................... A-15
Section 4.2 Zoran Capital Structure............... A-15
Section 4.3 Authority; No Conflict; Required
Filings and Consents................................ A-16
Section 4.4 SEC Filings; Financial Statements..... A-16
Section 4.5 Absence of Undisclosed Liabilities.... A-17
Section 4.6 Absence of Certain Changes or
Events.............................................. A-17
Section 4.7 Taxes................................. A-17
Section 4.8 Intellectual Property................. A-17
Section 4.9 Litigation............................ A-18
Section 4.10 Interested Party Transactions......... A-19
Section 4.11 Registration Statement; Proxy
Statement/Prospectus................................ A-19
Section 4.12 Opinion of Financial Advisor.......... A-19
Section 4.13 Interim Operations of Sub............. A-19
Section 4.14 Ownership of Nogatech Common Stock.... A-19
ARTICLE V CONDUCT OF BUSINESS............................... A-19
Section 5.1 Covenants of Nogatech................. A-19
Section 5.2 Covenants of Zoran.................... A-21
</TABLE>
A-i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 5.3 Cooperation........................... A-22
ARTICLE VI ADDITIONAL AGREEMENTS............................ A-22
Section 6.1 No Solicitation....................... A-22
Section 6.2 Proxy Statement/Prospectus;
Registration Statement.............................. A-23
Section 6.3 Consents.............................. A-23
Section 6.4 Current Nasdaq Quotation.............. A-23
Section 6.5 Access to Information................. A-23
Section 6.6 Nogatech Stockholders' Meeting........ A-23
Section 6.7 Legal Conditions to Merger............ A-24
Section 6.8 Public Disclosure..................... A-24
Section 6.9 Tax-Free Reorganization............... A-24
Section 6.10 Affiliate Agreements.................. A-24
Section 6.11 Nasdaq Quotation...................... A-25
Section 6.12 Stock Plans, Options, Other Incentive
Awards and Warrants................................. A-25
Section 6.13 Brokers or Finders.................... A-26
Section 6.14 Indemnification of Directors and
Officers............................................ A-27
Section 6.15 Additional Agreements; Reasonable
Efforts............................................. A-27
Section 6.16 Employment and Noncompete
Agreements.......................................... A-28
ARTICLE VII CONDITIONS TO MERGER............................ A-28
Section 7.1 Conditions to Each Party's Obligation
to Effect the Merger................................ A-28
Section 7.2 Additional Conditions to Obligations
of Zoran and Sub.................................... A-28
Section 7.3 Additional Conditions to Obligations
of Nogatech......................................... A-29
ARTICLE VIII TERMINATION AND AMENDMENT...................... A-30
Section 8.1 Termination........................... A-30
Section 8.2 Effect of Termination................. A-30
Section 8.3 Fees and Expenses..................... A-31
Section 8.4 Amendment............................. A-31
Section 8.5 Extension; Waiver..................... A-32
ARTICLE IX MISCELLANEOUS.................................... A-32
Section 9.1 Nonsurvival of Representations,
Warranties and Agreements........................... A-32
Section 9.2 Notices............................... A-32
Section 9.3 Interpretation........................ A-33
Section 9.4 Counterparts.......................... A-33
Section 9.5 Entire Agreement; No Third Party
Beneficiaries....................................... A-33
Section 9.6 Governing Law......................... A-33
Section 9.7 Assignment............................ A-33
</TABLE>
A-ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER as made and entered into as of August 23,
2000 by and among Zoran Corporation, a Delaware corporation ("Zoran"), Zoom
Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of
Zoran ("Sub"), and Nogatech, Inc., a Delaware corporation ("Nogatech").
RECITALS
A. The Boards of Directors of Zoran, Sub and Nogatech deem it advisable
and in the best interests of each corporation and its respective
stockholders that Zoran and Nogatech combine in order to advance the
long-term business interests of Zoran and Nogatech;
B. The combination of Zoran and Nogatech shall be effected by the terms
of this Agreement through a transaction (the "Merger") in which Sub will
merge with and into Nogatech, Nogatech will become a wholly-owned subsidiary
of Zoran and the stockholders of Nogatech will become stockholders of Zoran
(the "Merger");
C. Contemporaneously with the execution and delivery of this Agreement,
and as condition and inducement to Zoran's willingness to enter into this
Agreement, certain stockholders of Nogatech have entered into Voting
Agreements in the form attached hereto as EXHIBIT A pursuant to which they
have agreed to vote their shares in favor of the adoption and approval of
the Merger (the "Voting Agreements"); and
D. For federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties agree as follows:
ARTICLE I
THE MERGER
Section 1.1 EFFECTIVE TIME OF THE MERGER. Subject to the provisions of
this Agreement, a certificate of merger (the "Certificate of Merger") in such
form as is required by the relevant provisions of the Delaware General
Corporation Law (the "DGCL") shall be duly prepared, executed and acknowledged
by the Surviving Corporation (as defined in Section 1.3) and thereafter
delivered to the Secretary of State of the State of Delaware for filing, as
provided in the DGCL, as soon as practicable on or after the Closing Date (as
defined in Section 1.2). The Merger shall become effective upon the filing of
the Agreement of Merger with the Secretary of State of the State of Delaware
(the "Effective Time").
Section 1.2 CLOSING. The closing of the Merger (the "Closing") will take
place at 1:00 p.m., Pacific Time, on a date to be specified by Zoran and
Nogatech, which shall be no later than the second business day after
satisfaction of the latest to occur of the conditions set forth in Sections 7.1,
7.2(b) (other than the delivery of the officers' certificate referred to
therein) and 7.3(b) (other than the delivery of the officers' certificate
referred to therein), provided that the other closing conditions set forth in
Article VII have been met or waived as provided in Article VII at or prior to
the Closing (the "Closing Date"), at the offices of Gray Cary Ware & Freidenrich
LLP, 400 Hamilton Avenue, Palo Alto, CA 94301-1825, unless another date or place
is agreed to in writing by Zoran and Nogatech.
A-1
<PAGE>
Section 1.3 EFFECTS OF THE MERGER.
(a) At the Effective Time (i) the separate existence of Sub shall cease
and Sub shall be merged with and into Nogatech (Sub and Nogatech are
sometimes referred to below as the "Constituent Corporations" and Nogatech
is sometimes referred to below as the "Surviving Corporation"), (ii) the
Certificate of Incorporation of Nogatech shall be amended so that
Article III of such Certificate of Incorporation shall read as follows: "The
total number of shares of all classes of stock which the Corporation shall
have authority to issue is 1,000, all of which shall consist of Common
Stock, par value $.001 per share," and, as so amended, such Certificate of
Incorporation shall be the Certificate of Incorporation of the Surviving
Corporation, and (iii) the Bylaws of Sub as in effect immediately prior to
the Effective Time shall be the Bylaws of the Surviving Corporation.
(b) At and after the Effective Time, the Surviving Corporation shall
possess all the rights, privileges, powers and franchises of a public as
well as of a private nature, and be subject to all the restrictions,
disabilities and duties of each of the Constituent Corporations; and all and
singular rights, privileges, powers and franchises of each of the
Constituent Corporations, and all property, real, personal and mixed, and
all debts due to either of the Constituent Corporations on whatever account,
as well as for stock subscriptions and all other things in action or
belonging to each of the Constituent Corporations, shall be vested in the
Surviving Corporation, and all property, rights, privileges, powers and
franchises, and all and every other interest shall be thereafter as
effectually the property of the Surviving Corporation as they were of the
Constituent Corporations, and the title to any real estate vested by deed or
otherwise, in either of the Constituent Corporations, shall not revert or be
in any way impaired; but all rights of creditors and all liens upon any
property of either of the Constituent Corporations shall be preserved
unimpaired, and all debts, liabilities and duties of the Constituent
Corporations shall thereafter attach to the Surviving Corporation, and may
be enforced against it to the same extent as if such debts and liabilities
had been incurred by it.
Section 1.4 DIRECTORS AND OFFICERS. The directors and officers of Sub
immediately prior to the Effective Time shall be the initial directors and
officers of the Surviving Corporation, each of whom will hold office in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation, in each case until their respective successors are duly elected or
appointed.
ARTICLE II
CONVERSION OF SECURITIES
Section 2.1 CONVERSION OF CAPITAL STOCK. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
shares of Common Stock, $.001 par value, of Nogatech ("Nogatech Common Stock")
or capital stock of Sub:
(a) CAPITAL STOCK OF SUB. Each issued and outstanding share of the
capital stock of Sub shall be converted into and become one fully paid and
nonassessable share of Common Stock, $.001 par value, of the Surviving
Corporation.
(b) CANCELLATION OF TREASURY STOCK AND ZORAN-OWNED STOCK. Any shares of
Nogatech Common Stock that are owned by Nogatech as treasury stock and any
shares that are owned by Zoran, Sub or any other wholly-owned Subsidiary (as
defined below) of Zoran shall be cancelled and retired and shall cease to
exist and no stock of Zoran or other consideration shall be delivered in
exchange therefor. All shares of Common Stock, $.001 par value, of Zoran
("Zoran Common Stock") owned by Nogatech shall remain unaffected by the
Merger. As used in this Agreement, the word "Subsidiary" means, with respect
to any party, any corporation or other organization, whether incorporated or
unincorporated, of which (i) such party or any other Subsidiary of such
A-2
<PAGE>
party is a general partner (excluding partnerships, the general partnership
interests of which held by such party or any Subsidiary of such party do not
have a majority of the voting interest in such partnership) or (ii) at least
a majority of the securities or other interests having by their terms
ordinary voting power to elect a majority of the Board of Directors or
others performing similar functions with respect to such corporation or
other organization is directly or indirectly owned or controlled by such
party or by any one or more of its Subsidiaries, or by such party and one or
more of its Subsidiaries.
(c) EXCHANGE RATIO FOR NOGATECH COMMON STOCK. Subject to Section 2.2,
each issued and outstanding share of Nogatech Common Stock (other than
shares to be cancelled in accordance with Section 2.1(b)) shall be converted
into the right to receive 0.166 fully paid and nonassessable shares of Zoran
Common Stock (which amount will be adjusted for any stock split, stock
dividend or similar transaction effected between the date hereof and the
Effective Time) (the "Exchange Ratio"). All such shares of Nogatech Common
Stock, when so converted, shall no longer be outstanding and shall
automatically be cancelled and retired and shall cease to exist, and each
holder of a certificate representing any such shares shall cease to have any
rights with respect thereto, except the right to receive the shares of Zoran
Common Stock and any cash in lieu of fractional shares of Zoran Common Stock
to be issued or paid in consideration therefor upon the surrender of such
certificate in accordance with Section 2.2, without interest.
(d) NOGATECH STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN. At the
Effective Time, all then outstanding options to purchase Nogatech Common
Stock issued under Nogatech's 1993 Employee and Consultant Stock Plan, 1999
Stock Option Plan, as amended and 2000 Equity Incentive Plan (collectively,
the "Nogatech Option Plans"), not exercised as of the Effective Time will be
assumed by Zoran in accordance with Section 6.12. Immediately prior to the
Effective Time, all then outstanding rights to acquire shares of Nogatech
Common Stock under Nogatech's 2000 Employee Stock Purchase Plan (the
"Nogatech Purchase Plan") will be exercised for the purchase of shares of
Nogatech Common Stock, as provided in Section 6.12. At the Effective Time,
all grants of Deferred Stock then outstanding under Nogatech's 2000 Equity
Incentive Plan will be assumed by Zoran in accordance with Section 6.12.
Section 2.2 EXCHANGE OF CERTIFICATES. The procedures for exchanging
outstanding shares of Nogatech Common Stock for Zoran Common Stock pursuant to
the Merger are as follows:
(a) EXCHANGE AGENT. As of the Effective Time, Zoran shall deposit with a
bank or trust company designated by Zoran (the "Exchange Agent"), for the
benefit of the holders of shares of Nogatech Common Stock, for exchange in
accordance with this Section 2.2, through the Exchange Agent, certificates
representing the shares of Zoran Common Stock (such shares of Zoran Common
Stock, together with any dividends or distributions with respect thereto,
being hereinafter referred to as the "Exchange Fund") issuable pursuant to
Section 2.1 in exchange for outstanding shares of Nogatech Common Stock.
(b) EXCHANGE PROCEDURES. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Nogatech Common Stock (each a
"Certificate" and, collectively, the "Certificates") whose shares were
converted pursuant to Section 2.1 into the right to receive shares of Zoran
Common Stock (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent and shall
be in such form and have such other provisions as Zoran and Nogatech may
reasonably specify) and (ii) instructions for use in effecting the surrender
of the Certificates in exchange for certificates representing shares of
Zoran Common Stock. Upon surrender of a Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by
Zoran, together with
A-3
<PAGE>
such letter of transmittal, duly executed, the holder of such Certificate
shall be entitled to receive in exchange therefor a certificate representing
that number of whole shares of Zoran Common Stock which such holder has the
right to receive pursuant to Section 2.1(c) and cash in lieu of fractional
shares in accordance with Section 2.2(f), and the Certificate so surrendered
shall immediately be cancelled. In the event of a transfer of ownership of
Nogatech Common Stock which is not registered in the transfer records of
Nogatech, a certificate representing the proper number of shares of Zoran
Common Stock may be issued to a transferee if the Certificate representing
such Nogatech Common Stock is presented to the Exchange Agent, accompanied
by all documents required to evidence and effect such transfer and by
evidence that any applicable stock transfer taxes have been paid. Until
surrendered as contemplated by this Section 2.2, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the certificate representing shares of Zoran
Common Stock and cash in lieu of any fractional shares of Zoran Common Stock
as contemplated by this Section 2.2.
(c) LOST OR STOLEN CERTIFICATES. The instructions for effecting the
surrender of the Certificates shall set forth procedures that must be taken
by the holder of any Certificate that has been lost, destroyed or stolen. It
shall be a condition to the right of such holder to receive a certificate
representing shares of Zoran Common Stock that the Exchange Agent shall have
received, along with the letter of transmittal, a duly executed lost
certificate affidavit, including an agreement to indemnify Zoran, signed
exactly as the name or names of the registered holder or holders appeared on
the books of Zoran immediately prior to the Effective Time, together with a
customary bond and such other documents as Zoran or the Exchange Agent may
reasonably require in connection therewith.
(d) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions declared or made after the Effective Time with respect
to Zoran Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Certificate with respect to the
shares of Zoran Common Stock represented thereby and no cash payment in lieu
of fractional shares shall be paid to any such holder pursuant to subsection
(f) below until the holder of record of such Certificate shall surrender
such Certificate. Subject to the effect of applicable laws, following
surrender of any such Certificate, there shall be paid to the record holder
of the certificates representing whole shares of Zoran Common Stock issued
in exchange therefor, without interest, (i) at the time of such surrender,
the amount of any cash payable in lieu of a fractional share of Zoran Common
Stock to which such holder is entitled pursuant to subsection (e) below and
the amount of dividends or other distributions with a record date after the
Effective Time previously paid with respect to such whole shares of Zoran
Common Stock, and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time
but prior to surrender and a payment date subsequent to surrender payable
with respect to such whole shares of Zoran Common Stock.
(e) NO FURTHER OWNERSHIP RIGHTS IN NOGATECH COMMON STOCK. All shares of
Zoran Common Stock issued upon the surrender for exchange of shares of
Nogatech Common Stock in accordance with the terms hereof (including any
cash paid pursuant to subsection (d) or (f) of this Section 2.2) shall be
deemed to have been issued in full satisfaction of all rights pertaining to
such shares of Nogatech Common Stock, subject, however, to the Surviving
Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may have
been declared or made by Nogatech on such shares of Nogatech Common Stock in
accordance with the terms of this Agreement on or prior to the date hereof
and which remain unpaid at the Effective Time, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Nogatech Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be cancelled and exchanged as provided in this Section 2.2.
A-4
<PAGE>
(f) NO FRACTIONAL SHARES. No certificate or scrip representing
fractional shares of Zoran Common Stock shall be issued upon the surrender
for exchange of Certificates, and such fractional share interests will not
entitle the owner thereof to vote or to any rights of a stockholder of
Zoran. Notwithstanding any other provision of this Agreement, each holder of
shares of Nogatech Common Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of Zoran
Common Stock (after taking into account all Certificates delivered by such
holder) shall receive, in lieu thereof, cash (without interest) in an amount
equal to such fractional part of a share of Zoran Common Stock multiplied by
the last reported sale price of Zoran Common Stock, as reported on the
Nasdaq National Market, on the trading day immediately preceding the date of
the Effective Time.
(g) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund which
remains undistributed to the stockholders of Nogatech for one year after the
Effective Time shall be delivered to Zoran, upon demand, and any
stockholders of Nogatech who have not previously complied with this Section
2.2 shall thereafter look only to Zoran for payment of their claim for Zoran
Common Stock, any cash in lieu of fractional shares of Zoran Common Stock,
and any dividends or distributions with respect to Zoran Common Stock.
(h) NO LIABILITY. Neither Zoran nor Nogatech shall be liable to any
holder of shares of Nogatech Common Stock or Zoran Common Stock, as the case
may be, for such shares (or dividends or distributions with respect thereto)
delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
Section 2.3 TAX CONSEQUENCES. It is intended by the parties hereto that
the Merger shall constitute a "plan of reorganization" within the meaning of
Section 368 of the Code and Treasury Regulations Sections 1.368-2(g) and
1.368-3(a).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF NOGATECH
Nogatech represents and warrants to Zoran and Sub that the statements
contained in this Article III are true and correct, except as set forth in the
disclosure schedule delivered by Nogatech to Zoran on or before the date of this
Agreement (the "Nogatech Disclosure Schedule"). The Nogatech Disclosure Schedule
shall be arranged in paragraphs corresponding to the numbered and lettered
Sections contained in this Article III.
Section 3.1 ORGANIZATION. Each of Nogatech and its Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation, has all requisite corporate power to
own, lease and operate its property and to carry on its business as now being
conducted and as proposed to be conducted, and is duly qualified to do business
and is in good standing as a foreign corporation in each other jurisdiction in
which the failure to be so qualified would have a material adverse effect on the
business, assets (including intangible assets), financial condition or results
of operations ("Material Adverse Effect") of Nogatech and its Subsidiaries,
taken as a whole. The Nogatech Disclosure Schedule contains a list of each of
Nogatech's Subsidiaries and the jurisdiction of its incorporation. Except for
their interest in Nogatech Subsidiaries, neither Nogatech nor any of its
Subsidiaries directly or indirectly owns any equity or similar interest in, or
any interest convertible into or exchangeable or exercisable for any such equity
or similar interest in, any corporation, partnership, joint venture or other
business association or entity, excluding securities of any publicly traded
company held for investment by Nogatech and comprising less than five percent
(5%) of the outstanding stock of such company.
A-5
<PAGE>
Section 3.2 NOGATECH CAPITAL STRUCTURE.
(a) The authorized capital stock of Nogatech consists of 40,000,000
shares of Nogatech Common Stock. As of August 23, 2000: (i) 15,095,921
shares of Nogatech Common Stock were issued and outstanding, all of which
are validly issued, fully paid and nonassessable;
(ii) no shares of Nogatech Common Stock were held in the treasury of
Nogatech or by Subsidiaries of Nogatech; (iii) 3,041,537 shares of Nogatech
Common Stock were reserved for issuance under the Nogatech 1999 Stock Option
Plan, 1,048,764 of which were subject to outstanding options;
(iv) 3,500,000 shares of Nogatech Common Stock were reserved for issuance
under Nogatech's 2000 Equity Incentive Plan, 144,000 of which were subject
to outstanding options and 3,356,000 of which were reserved for future
option grants; and (v) 350,000 shares of Nogatech Common Stock were reserved
for future issuance pursuant to rights outstanding under the Nogatech
Purchase Plan. No change in such capitalization has occurred between August
23, 2000 and the date of this Agreement other than the exercise and
termination of outstanding stock options and the accrual of rights under the
Nogatech Purchase Plan. All shares of Nogatech Common Stock subject to
issuance as specified above, upon issuance on the terms and conditions
specified in the instruments pursuant to which they are issuable, shall be
duly authorized, validly issued, fully paid and nonassessable. There are no
obligations, contingent or otherwise, of Nogatech or any of its Subsidiaries
to repurchase, redeem or otherwise acquire any shares of Nogatech Common
Stock or the capital stock of any Nogatech Subsidiary or make any investment
(in the form of a loan, capital contribution or otherwise) in any such
Subsidiary or any other entity other than guarantees of bank obligations of
such Subsidiaries entered into in the ordinary course of business. All of
the outstanding shares of capital stock of each of Nogatech's Subsidiaries
are duly authorized, validly issued, fully paid and nonassessable, and all
such shares (other than directors' qualifying shares in the case of foreign
Subsidiaries) are owned by Nogatech or another Nogatech Subsidiary free and
clear of all security interests, liens, claims, pledges, agreements,
limitations on Nogatech's voting rights, charges or other encumbrances of
any nature.
(b) Except as set forth in this Section 3.2 or as reserved for future
grants of options under the Nogatech Option Plans or future sale under the
Nogatech Purchase Plan, there are no equity securities of any class of
Nogatech or any of its Subsidiaries, or any security exchangeable into or
exercisable for such equity securities, issued, reserved for issuance or
outstanding. Except as set forth in this Section 3.2 or in the Nogatech
Disclosure Schedule, there are no options, warrants, equity securities,
calls, rights, commitments or agreements of any character to which Nogatech
or any of its Subsidiaries is a party or by which it is bound obligating
Nogatech or any of its Subsidiaries to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of capital stock of Nogatech
or any of its Subsidiaries or obligating Nogatech or any of its Subsidiaries
to grant, extend, accelerate the vesting of or enter into any such option,
warrant, equity security, call, right, commitment or agreement. To the
knowledge of Nogatech, there are no voting trusts, proxies or other
agreements or understandings with respect to the shares of capital stock of
Nogatech, except for the Voting Agreements.
Section 3.3 AUTHORITY; NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) Nogatech has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement by Nogatech and the
consummation by it of the transactions contemplated by this Agreement have
been duly authorized by all necessary corporate action on the part of
Nogatech, subject only to the approval of the Merger by Nogatech's
stockholders under the DGCL. This Agreement has been duly executed and
delivered by Nogatech and constitutes the valid and binding obligation of
Nogatech, enforceable in accordance with its terms, except as such
enforceability may be limited by (i) bankruptcy laws and other similar laws
affecting creditors'
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rights generally and (ii) general principles of equity, regardless of
whether asserted in a proceeding in equity or at law.
(b) The execution and delivery of this Agreement by Nogatech does not,
and the consummation by it of the transactions contemplated by this
Agreement will not, (i) conflict with, or result in any violation or breach
of any provision of the Certificate of Incorporation or Bylaws of Nogatech,
(ii) result in any violation or breach of, or constitute (with or without
notice or lapse of time, or both) a default (or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of any
right) under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, lease, contract or other agreement, instrument or
obligation to which Nogatech or any of its Subsidiaries is a party or by
which any of them or any of their properties or assets may be bound, or
(iii) conflict with or violate any permit, concession, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Nogatech or any of its Subsidiaries or any of their properties
or assets, except in the case of clauses (ii) and (iii) for any such
conflicts, violations, defaults, terminations, cancellations or
accelerations which would not be reasonably likely to have a Material
Adverse Effect on Nogatech and its Subsidiaries, taken as a whole, or a
material adverse effect on the ability of the parties to consummate the
transactions contemplated by this Agreement.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission
or other governmental authority or instrumentality ("Governmental Entity")
is required to be obtained or made by or with respect to Nogatech or any of
its Subsidiaries in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby,
except for (i) the filing of a pre-merger notification report under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), (ii) the filing by Zoran of the Registration Statement (as defined in
Section 3.16) with the Securities and Exchange Commission (the "SEC") in
accordance with the Securities Act of 1933, as amended (the "Securities
Act"), (iii) the filing of the Agreement of Merger with the Delaware
Secretary of State in accordance with the DGCL, (iv) the filing of the Proxy
Statement (as defined in Section 3.16) and related proxy materials with the
SEC in accordance with the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), (v) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state securities laws and the laws of any foreign country,
including without limitation approvals of the Office of the Chief Scientist
and the Investment Center of the Israeli Ministry of Industry and Trade, and
(vi) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not be reasonably likely
to have a Material Adverse Effect on Nogatech and its Subsidiaries, taken as
a whole, or a material adverse effect on the ability of the parties to
consummate the transactions contemplated by this Agreement.
Section 3.4 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Nogatech has timely filed and made available to Zoran its
registration statement on Form S-1 (No. 333-32372) and its report on Form
10-Q for the quarter ended June 30, 2000 (collectively, the "Nogatech SEC
Reports"). Each of the Nogatech SEC Reports (i) at the time it was filed,
complied in all material respects with the applicable requirements of the
Securities Act and the Exchange Act, as the case may be, and (ii) did not at
the time it was filed (or if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated in such Nogatech SEC Reports or necessary in order to make the
statements in such Nogatech SEC Reports, in the light of the circumstances
under which they were made, not misleading. None of Nogatech's Subsidiaries
is required to file any forms, reports or other documents with the SEC.
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(b) Each of the consolidated financial statements (including, in each
case, any related notes) contained in the Nogatech SEC Reports, and any
forms, reports or documents filed with the SEC after the date of this
Agreement until the Closing, complied or will comply as to form in all
material respects with the applicable published rules and regulations of the
SEC with respect thereto, was or will be prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes to
such financial statements or, in the case of unaudited statements, as
permitted for quarterly reports on Form 10-Q) and fairly presented, or will
fairly present, in all material respects, the consolidated financial
position of Nogatech and its Subsidiaries as of the respective dates and the
consolidated results of its operations and cash flows for the periods
indicated, except that the unaudited interim financial statements were or
are subject to normal year-end adjustments which were not or are not
expected to be material in amount. The unaudited consolidated balance sheet
of Nogatech as of June 30, 2000 is referred to herein as the "Nogatech
Balance Sheet."
Section 3.5 ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed in the
Nogatech SEC Reports, Nogatech and its Subsidiaries do not have any liabilities,
either accrued or contingent (whether or not required to be reflected in
financial statements in accordance with generally accepted accounting
principles), which individually or in the aggregate, would be reasonably likely
to have a Material Adverse Effect on Nogatech and its Subsidiaries, taken as a
whole, other than (i) liabilities reflected in the Nogatech Balance Sheet,
(ii) liabilities specifically described in this Agreement, or in the Nogatech
Disclosure Schedule, and (iii) normal or recurring liabilities incurred since
the date of the Nogatech Balance Sheet in the ordinary course of business
consistent with past practices.
Section 3.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the date of the
Nogatech Balance Sheet, Nogatech and its Subsidiaries have conducted their
businesses only in the ordinary course and in a manner consistent with past
practice and, since such date, there has not been: (i) any material adverse
change in the financial condition, results of operations or business (together,
a "Material Adverse Change") of Nogatech and its Subsidiaries, taken as a whole;
(ii) any damage, destruction or loss (whether or not covered by insurance) with
respect to Nogatech or any of its Subsidiaries having a Material Adverse Effect
on Nogatech and its Subsidiaries, taken as a whole; (iii) any material change by
Nogatech in its accounting methods, principles or practices; (iv) any material
revaluation by Nogatech of any of its assets, including, without limitation,
writing down the value of capitalized software or inventory or writing off notes
or accounts receivable other than in the ordinary course of business; or
(v) any other action or event that has had or is reasonably likely to have a
Material Adverse Effect on Nogatech and its Subsidiaries, taken as a whole.
Section 3.7 TAXES.
(a) For purposes of this Agreement, a "Tax" or, collectively, "Taxes,"
refers to any and all federal, state, local and foreign taxes, assessments
and other governmental charges, duties, impositions and liabilities,
including taxes based upon or measured by gross receipts, income, profits,
sales, use and occupation, and value added, ad valorem, transfer, franchise,
withholding, payroll, recapture, employment, excise and property taxes,
together with all interest, penalties and additions imposed with respect to
such amounts and any obligations under any agreements or arrangements with
any other person with respect to such amounts and including any liability
for taxes of a predecessor entity.
(b) Nogatech and each of its Subsidiaries has prepared and timely filed
all federal, state, local and foreign returns, estimates, information
statements and reports ("Returns") required to be filed with any taxing
authority relating to any and all Taxes concerning or attributable to
Nogatech or any of its Subsidiaries or to their operations, such Returns are
true and correct in all material respects and have been completed in all
material respects in accordance with applicable law.
(c) Nogatech and each of its Subsidiaries: (i) has paid all Taxes it is
required to pay and (ii) has withheld with respect to its employees all
Taxes required to be withheld.
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(d) There is no Tax deficiency outstanding, proposed or assessed against
Nogatech or any of its Subsidiaries that is not reflected as a liability on
the Nogatech Balance Sheet nor has Nogatech or any of its Subsidiaries
executed any waiver of any statute of limitations on or extending the period
for the assessment or collection of any Tax.
(e) Nogatech does not have any material liabilities for unpaid Taxes
that have not been accrued for or reserved on the Nogatech Balance Sheet,
whether asserted or unasserted, contingent or otherwise (other than Taxes
that have accrued subsequent to the date of the Nogatech Balance Sheet in
the ordinary course of business, consistent with past practices).
(f) Nogatech is not a party to any tax-sharing agreement or similar
arrangement with any other party, and Nogatech has not assumed or agreed to
pay any Tax obligations of, or with respect to any transaction relating to,
any other person or agreed to indemnify any other person with respect to any
Tax.
(g) Neither Nogatech's Returns nor the Returns of any of its
Subsidiaries have been audited by a government or taxing authority, nor is
any such audit in process or pending, and Nogatech has not been notified of
any request for such an audit or other examination.
(h) Neither Nogatech nor any of its Subsidiaries has been a member of an
affiliated group of corporations within the meaning of Section 1504 of the
Code, other than the affiliated group of which Nogatech is the common parent
or (ii) has any liability for the Taxes of any person (other than Nogatech
and its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any
similar provision of state, local or foreign law), as a transferee or
successor, by contract or otherwise.
(i) Nogatech has made available to Zoran copies of all Returns filed for
all periods since its inception.
(j) Neither Nogatech nor any of its Subsidiaries has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section
341(f)(4) apply to any disposition of assets owned by Nogatech or any of its
Subsidiaries.
(k) Neither Nogatech nor any of its Subsidiaries is a party to any
contract, agreement, plan or arrangement, including but not limited to the
provisions of this Agreement, covering any employee or former employee of
Nogatech or any of its Subsidiaries that, individually or collectively,
could give rise to the payment of any amount that would not be deductible
pursuant to Sections 280G, 404 or 162(m) of the Code.
(l) Neither Nogatech nor any of its Subsidiaries has constituted either
a "distributing corporation" or a "controlled corporation" in a distribution
of stock qualifying for tax-free treatment under Section 355 of the Code
(i) in the two years prior to the date of this Agreement or (ii) in a
distribution which could otherwise constitute part of a "plan" or "series of
related transactions" (within the meaning of Section 355(e) of the Code) in
conjunction with the Merger.
(m) Neither Nogatech nor any of its Subsidiaries has agreed to make, nor
is it required to make, any adjustment under Section 481 of the Code by
reason of any change in accounting method.
(n) Nogatech is not a "reporting corporation" subject to the information
reporting and record maintenance requirements of Section 6038A of the Code
and the regulations thereunder.
(o) Neither Nogatech nor any of its Subsidiaries is a party to any joint
venture, partnership or other agreement that could be treated as a
partnership for Tax purposes.
(p) There are no liens, pledges, charges, claims, restrictions on
transfer, mortgages, security interests or other encumbrances of any sort
(collectively "Liens") on the assets of Nogatech relating to or attributable
to Taxes, other than Liens for Taxes not yet due and payable.
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(q) No claim has been made by a Tax authority in a jurisdiction where
neither Nogatech nor any of its Subsidiaries files Returns that Nogatech or
any of its Subsidiaries is or may be subject to taxation in that
jurisdiction.
Section 3.8 TANGIBLE ASSETS AND REAL PROPERTY.
(a) Nogatech owns or leases all tangible assets and properties which are
material to the conduct of its business as currently conducted and which are
reflected on the Nogatech Balance Sheet or acquired since the date of the
Nogatech Balance Sheet (the "Material Tangible Assets"). Nogatech has good
and marketable title to all Material Tangible Assets that it owns (except
properties, interests in properties and assets sold or otherwise disposed of
since the date of the Nogatech Balance Sheet in the ordinary course of
business), free and clear of all Liens, except for Liens for current taxes
not yet due and payable. All leases of Material Tangible Assets to which
Nogatech is a party are in full force and effect and valid, binding and
enforceable in accordance with their respective terms, except as such
enforceability may be limited by (i) bankruptcy, insolvency, moratorium or
other similar laws affecting or relating to creditors' rights generally, and
(ii) general principles of equity. The Nogatech Disclosure Schedule sets
forth a true and correct list of all such leases, and true and correct
copies of all such leases have been provided to Zoran.
(b) Nogatech owns no real property. The Nogatech Disclosure Schedule
sets forth a true and complete list of all real property leased by Nogatech.
All such real property leases are in full force and effect and valid,
binding and enforceable in accordance with their respective terms, except as
such enforceability may be limited by (i) bankruptcy, insolvency, moratorium
or other similar laws affecting or relating to creditors' rights generally,
and (ii) general principles of equity. True and correct copies all such of
real property leases have been provided to Zoran.
Section 3.9 INTELLECTUAL PROPERTY.
(a) Nogatech and its Subsidiaries own, or are licensed or otherwise
possess legally enforceable rights to use, all patents, trademarks, trade
names, service marks, copyrights and mask works, any applications for and
registrations of such patents, trademarks, trade names, service marks,
copyrights and mask works, and all processes, formulae, methods, schematics,
technology, know-how, computer software programs or applications and
tangible or intangible proprietary information or material that are used in
the conduct of the business of Nogatech and its Subsidiaries as currently
conducted, or currently planned to be conducted, the absence of which would
be reasonably likely to have a Material Adverse Effect on Nogatech and its
Subsidiaries, taken as a whole (the "Nogatech Intellectual Property
Rights").
(b) The Nogatech Disclosure Schedule contains a complete and accurate
list of (i) all patents and patent applications and all trademarks,
registered copyrights, trade names and service marks which Nogatech
considers to be material to its business and included in the Nogatech
Intellectual Property Rights, including the jurisdictions in which each such
Nogatech Intellectual Property Right has been issued or registered or in
which any such application for such issuance and registration has been
filed, (ii) all material licenses, sublicenses, distribution agreements and
other agreements to which Nogatech or any of its Subsidiaries is a party and
pursuant to which any person is authorized to use any Nogatech Intellectual
Property Rights or has the right to manufacture, reproduce, market or
exploit any Nogatech product or any adaptation, translation or derivative
work based on a Nogatech product or any portion thereof, (iii) all licenses,
sublicenses and other agreements to which Nogatech or any of its
Subsidiaries is a party and pursuant to which Nogatech or any of its
Subsidiaries is authorized to use any third party patents, trademarks,
copyrights, trade secrets or other proprietary technology including software
(other than standard end-user licenses for "off the shelf" software) of any
third party ("Nogatech Third Party Intellectual Property Rights") which is
used in the manufacture of, incorporated in, or forms a part of any Nogatech
product, and (iv) all material joint development agreements to which
Nogatech or any of its Subsidiaries is a party.
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(c) Nogatech and its Subsidiaries are not, and will not be as a result
of the execution and delivery of this Agreement or the performance of
Nogatech's obligations under this Agreement, in breach of any license,
sublicense or other agreement relating to the Nogatech Intellectual Property
Rights or Nogatech Third Party Intellectual Property Rights, the breach of
which would be reasonably likely to have a Material Adverse Effect on
Nogatech and its Subsidiaries, taken as a whole.
(d) To Nogatech's knowledge, all patents, registered trademarks, service
marks and copyrights held by Nogatech or any of its Subsidiaries are valid
and subsisting. The operation of the businesses of Nogatech and its
Subsidiaries as such businesses are currently conducted including the
design, development, manufacture, marketing and sale of their products has
not and does not infringe or misappropriate any patent, copyright,
trademark, service mark or trade secret of any third party or constitute
unfair competition or trade practices under the laws of any jurisdiction,
except where any of the foregoing could not reasonably be expected to have a
Material Adverse Effect on Nogatech and its Subsidiaries, taken as a whole.
Nogatech (i) has not been sued in any suit, action or proceeding which
involves a claim of infringement of any patent, trademark, service mark,
copyright or violation of any trade secret or other proprietary right of any
third party; and (ii) has no knowledge that the manufacturing, marketing,
licensing or sale of its products infringes any patent, trademark, service
mark, copyright, trade secret or other proprietary right of any third party,
which infringement would reasonably be expected to have a Material Adverse
Effect on Nogatech and its Subsidiaries, taken as a whole.
(e) Nogatech and its Subsidiaries are not subject to any proceeding or
outstanding decree, order, judgment, or stipulation restricting in any
manner the use, transfer, or licensing of any Nogatech Intellectual Property
Rights by Nogatech or its Subsidiaries, or which may affect the validity,
use or enforceability of such Nogatech Intellectual Property Rights.
Nogatech and its Subsidiaries are not subject to any agreement which
restricts in any material respect the use, transfer, or licensing by
Nogatech or any of its Subsidiaries of the Nogatech Intellectual Property
Rights or any Nogatech product where such restriction would be likely to
have a Material Adverse Effect on Nogatech and its Subsidiaries, taken as a
whole.
(f) Nogatech and its Subsidiaries have taken reasonable steps to protect
their rights in their material confidential information and trade secrets or
any trade secrets or confidential information of third parties provided to
them, and, without limiting the foregoing, Nogatech has and enforces a
policy requiring each employee and independent contractor developing
intellectual property or having access to confidential information regarding
Nogatech Intellectual Property Rights to execute a proprietary
information/confidentiality agreement substantially in the form provided to
Zoran and all such current and former employees and contractors of Nogatech
and its Subsidiaries have executed such an agreement, except where the
failure to do so is not reasonably likely to have a Material Adverse Effect
on Nogatech and its Subsidiaries, taken as a whole.
Section 3.10 AGREEMENTS, CONTRACTS AND COMMITMENTS. Nogatech has not
breached, or received in writing any claim or threat that it has breached, any
of the terms or conditions of any material agreement, contract or commitment
filed as an exhibit to the Nogatech SEC Reports ("Nogatech Material Contracts")
in such a manner as would permit any other party to cancel or terminate the same
or would permit any other party to collect material damages from Nogatech under
any Nogatech Material Contract. Each Nogatech Material Contract that has not
expired or been terminated is in full force and effect and is not subject to any
material default thereunder of which Nogatech is aware by any party obligated to
Nogatech pursuant to such Nogatech Material Contract.
Section 3.11 LITIGATION. Except as described in the Nogatech SEC Reports,
there is no action, suit or proceeding, claim, arbitration or investigation
against Nogatech pending or as to which Nogatech has received any written notice
of assertion, which is reasonably likely to have a Material
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Adverse Effect on Nogatech and its Subsidiaries, taken as a whole, or a material
adverse effect on the ability of Nogatech to consummate the transactions
contemplated by this Agreement.
Section 3.12 ENVIRONMENTAL CLAIMS. There are no Environmental Claims (as
defined in Section 3.12(c)(i) hereof) pending (i) against Nogatech or any of its
Subsidiaries, or (ii) against any real or personal property or operations which
Nogatech or any of its Subsidiaries owns, leases or manages, in whole or in
part.
(a) To Nogatech's knowledge, there have been no Releases (as defined in
Section 3.12(c)(iv) hereof) of any Hazardous Material (as defined in Section
3.12(c)(iii) hereof) that would be reasonably likely to form the basis of
any Environmental Claim against Nogatech or any of its Subsidiaries.
(b) Nogatech has no knowledge of any Environmental Claim pending or
threatened, or of any Release of Hazardous Materials that would be
reasonably likely to form the basis of any Environmental Claim, in each case
against any person or entity (including, without limitation, any predecessor
of Nogatech or any of its Subsidiaries) whose liability Nogatech or any of
its Subsidiaries has or may have retained or assumed either contractually or
by operation of law or against any real or personal property which Nogatech
or any of its Subsidiaries formerly owned, leased or managed, in whole or in
part.
(c) As used in this Agreement:
(i) "Environmental Claim" means any and all administrative,
regulatory or judicial actions, suits, demands, demand letters,
directives, claims, liens, investigations, proceedings or notices of
noncompliance or violation by any person or entity (including any
Governmental Authority) alleging liability or potential liability
(including, without limitation, potential responsibility for or liability
for enforcement costs, investigatory costs, cleanup costs, governmental
response costs, removal costs, remedial costs, natural resources damages,
property damages, personal injuries, fines or penalties) arising out of,
based on or resulting from (A) the presence, or Release or threatened
Release into the environment, of any Hazardous Materials at any location,
whether or not owned, operated, leased or managed by Nogatech or any of
its Subsidiaries or joint ventures (for purposes of this SECTION 3.12);
or (B) circumstances forming the basis of any violation, or alleged
violation, of any Environmental Law; or (C) any and all claims by any
third party seeking damages, contribution, indemnification, cost
recovery, compensation or injunctive relief resulting from the presence
or Release of any Hazardous Materials.
(ii) "Environmental Laws" means all federal, state, local and foreign
laws, rules, regulations and requirements of common law relating to
pollution, the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or
protection of human health as it relates to protection of the environment
including, without limitation, laws and regulations relating to Releases
or threatened Releases of Hazardous Materials, or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials.
(iii) "Hazardous Materials" means (a) any petroleum or petroleum
products, radioactive materials, asbestos, urea formaldehyde foam
insulation and transformers or other equipment that contain dielectric
fluid containing polychlorinated biphenyls ("PCBS") in regulated
concentrations; and (b) any chemicals, materials or substances which are
now defined as or included in the definition of "hazardous substances,"
"hazardous wastes," "hazardous materials," "extremely hazardous wastes,"
"restricted hazardous wastes," "toxic substances," "toxic pollutants," or
words of similar import, under any Environmental Law; and (c) any other
chemical, material, substance or waste, which is regulated under any
Environmental Law in a jurisdiction in which Nogatech or any of its
Subsidiaries operate (for purposes of this Section 3.12).
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(iv) "Release" means any release, spill, emission, leaking,
injection, deposit, disposal, discharge, dispersal, leaching or migration
into the atmosphere, soil, surface water, groundwater or property.
Section 3.13 EMPLOYEE BENEFIT PLANS.
(a) The Nogatech Disclosure Schedule sets forth a complete and accurate
list of all employee benefit plans (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and
all bonus, stock option, stock purchase, incentive, deferred compensation,
supplemental retirement, severance and other similar employee benefit plans,
and all unexpired severance agreements, written or otherwise, for the
benefit of, or relating to, any current or former United States employee of
Nogatech or any of its Subsidiaries or any trade or business (whether or not
incorporated) which is a member or which is under common control with
Nogatech within the meaning of Section 414 of the Code (an "ERISA
Affiliate") (together, the "Nogatech U.S. Employee Plans").
(b) With respect to each Nogatech U.S. Employee Plan, Nogatech has made
available to Zoran, a true and correct copy of (i) the most recent annual
report (Form 5500) filed with the Internal Revenue Service ("IRS") with
respect to a Nogatech U.S. Employee Plan subject to such filing requirement,
(ii) such Nogatech U.S. Employee Plan, (iii) each trust agreement and group
annuity contract, if any, relating to such Nogatech U.S. Employee Plan and
(iv) the most recent actuarial report or valuation relating to a Nogatech
U.S. Employee Plan subject to Title IV of ERISA.
(c) With respect to the Nogatech U.S. Employee Plans, individually and
in the aggregate, no event has occurred, and to the knowledge of Nogatech,
there exists no condition or set of circumstances in connection with which
Nogatech could be subject to any liability that is reasonably likely to have
a Material Adverse Effect on Nogatech and its Subsidiaries, taken as a
whole, under ERISA, the Code or any other applicable law.
(d) With respect to the Nogatech U.S. Employee Plans, individually and
in the aggregate, there are no funded benefit obligations for which
contributions have not been made or properly accrued and there are no
unfunded benefit obligations which have not been accounted for by reserves,
or otherwise properly footnoted in accordance with generally accepted
accounting principles, on the financial statements of Nogatech, which
obligations are reasonably expected to have a Material Adverse Effect on
Nogatech and its Subsidiaries, taken as a whole.
(e) Except as disclosed in Nogatech SEC Reports filed prior to the date
of this Agreement, and except as provided for in this Agreement, neither
Nogatech nor any of its Subsidiaries is a party to any oral or written
(i) union or collective bargaining agreement, (ii) agreement with any
officer or other key employee of Nogatech or any of its Subsidiaries, the
benefits of which are contingent, or the terms of which are materially
altered, upon the occurrence of a transaction involving Nogatech of the
nature contemplated by this Agreement, (iii) agreement with any officer of
Nogatech providing any term of employment or compensation guarantee
extending for a period longer than one year from the date hereof or for the
payment of compensation in excess of $100,000 per annum, or (iv) agreement
or plan, including any stock option plan, stock appreciation rights plan,
restricted stock plan or stock purchase plan, any of the benefits of which
will be increased, or the vesting of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by
this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement.
(f) The Nogatech Disclosure Schedule sets forth a complete and accurate
list of all bonus, stock option, stock purchase, incentive, deferred
compensation, supplemental retirement, severance and other similar employee
benefit plans, and all unexpired severance agreements, written or otherwise,
for the benefit of, or relating to, any current or former employee of
Nogatech or any of its Subsidiaries outside the United States (together, the
"Nogatech International Employee
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Plans"). Each Nogatech International Employee Plan has been established,
maintained and administered in material compliance with its terms and
conditions and with the requirements of all applicable statutes and
regulations. No Nogatech International Employee Plan has unfunded
liabilities that, as of the Effective Date, will not be offset by insurance
or fully accrued. Except as required by law, no condition exists that would
prevent Nogatech or any of its Subsidiaries (or Zoran following the Merger)
from terminating or amending any Nogatech International Employee Plan at any
time for any reason.
Section 3.14 COMPLIANCE WITH LAWS. Nogatech has complied with, is not in
violation of, and has not received any notices of violation with respect to, any
federal, state or local statute, law or regulation with respect to the conduct
of its business, or the ownership or operation of its business, except for
failures to comply or violations which would not have a Material Adverse Effect
on Nogatech and its Subsidiaries, taken as a whole.
Section 3.15 INTERESTED PARTY TRANSACTIONS. Except as set forth in the
Nogatech SEC Reports, since May 17, 2000, no event has occurred that would be
required to be reported by
Nogatech as a Certain Relationship or Related Transaction, pursuant to Item
404 of Regulation S-K promulgated by the SEC.
Section 3.16 REGISTRATION STATEMENT: PROXY STATEMENT/PROSPECTUS. The
information supplied by Nogatech for inclusion in the registration statement on
Form S-4 pursuant to which shares of Zoran Common Stock issued in the Merger
will be registered with the SEC (the "Registration Statement") shall not at the
time the Registration Statement is declared effective by the SEC contain any
untrue statement of a material fact or omit to state any material fact required
to be stated in the Registration Statement or necessary in order to make the
statements in the Registration Statement, in light of the circumstances under
which they were made, not misleading. The information supplied by Nogatech for
inclusion in the proxy statement/prospectus (the "Proxy Statement") to be sent
to the stockholders of Nogatech in connection with the meeting of Nogatech's
stockholders to consider this Agreement and the Merger (the "Nogatech
Stockholders' Meeting") shall not, on the date the Proxy Statement is first
mailed to stockholders of Nogatech, at the time of the Nogatech Stockholders'
Meeting or at the Effective Time, contain any statement which, at such time and
in light of the circumstances under which it was made, is false or misleading
with respect to any material fact, or omit to state any material fact necessary
in order to make the statements made in the Proxy Statement not false or
misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the Nogatech Stockholders' Meetings which has become false or
misleading. If at any time prior to the Effective Time any event relating to
Nogatech or any of its Affiliates, officers or directors should be discovered by
Nogatech which is required to be set forth in an amendment to the Registration
Statement or a supplement to the Proxy Statement, Nogatech shall promptly inform
Zoran.
Section 3.17 OPINION OF FINANCIAL ADVISOR. The financial advisor of
Nogatech, W.R. Hambrecht & Co., has delivered to Nogatech its oral opinion dated
the date of this Agreement to the effect that the aggregate Merger consideration
is fair from a financial point of view to the stockholders of Nogatech.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ZORAN AND SUB
Zoran and Sub represent and warrant to Nogatech that the statements
contained in this Article IV are true and correct, except as set forth in the
disclosure schedule delivered by Zoran to Nogatech on or before the date of this
Agreement (the "Zoran Disclosure Schedule"). The Zoran Disclosure Schedule shall
be arranged in paragraphs corresponding to the numbered and lettered Sections
contained in this Article IV.
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Section 4.1 ORGANIZATION. Each of Zoran and Sub and Zoran's other
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has all
requisite corporate power to own, lease and operate its property and to carry on
its business as now being conducted and as proposed to be conducted, and is duly
qualified to do business and is in good standing as a foreign corporation in
each other jurisdiction in which the failure to be so qualified would have a
Material Adverse Effect on Zoran and its Subsidiaries, taken as a whole. Except
as set forth in the Zoran SEC Reports (as defined in Section 4.4) or the Zoran
Disclosure Schedule, neither Zoran nor any of its Subsidiaries directly or
indirectly owns any equity or similar interest in, or any interest convertible
into or exchangeable or exercisable for, any corporation, partnership, joint
venture or other business association or entity, excluding securities of any
publicly traded company held for investment by Zoran and comprising less than
five percent (5%) of the outstanding stock of such company.
Section 4.2 ZORAN CAPITAL STRUCTURE.
(a) The authorized capital stock of Zoran consists of 20,000,000 shares
of Zoran Common Stock and 3,000,000 shares of Preferred Stock, $.001 par
value ("Zoran Preferred Stock"). As of August 23, 2000: (i) 14,656,945
shares of Zoran Common Stock were issued and outstanding, all of which are
validly issued, fully paid and nonassessable; (ii) no shares of Zoran Common
Stock were held in the treasury of Zoran or by Subsidiaries of Zoran; (iii)
approximately 2,495,000 shares of Zoran Common Stock were reserved for
issuance pursuant to stock options granted and outstanding under Zoran's
stock option plans (the "Zoran Option Plans"), and rights outstanding under
Zoran's employee stock purchase plan (the "Zoran Purchase Plan"). No
material change in such capitalization has occurred between June 30, 2000
and the date of this Agreement. As of the date of this Agreement, none of
the shares of Zoran Preferred Stock are issued and outstanding. All shares
of Zoran Common Stock subject to issuance as specified above, upon issuance
on the terms and conditions specified in the instruments pursuant to which
they are issuable, shall be duly authorized, validly issued, fully paid and
nonassessable. There are no obligations, contingent or otherwise, of Zoran
or any of its Subsidiaries to repurchase, redeem or otherwise acquire any
shares of Zoran Common Stock or the capital stock of any Zoran Subsidiary or
to provide funds to or make any investment (in the form of a loan, capital
contribution or otherwise) in any such Subsidiary or any other entity other
than guarantees of bank obligations of such Subsidiaries entered into in the
ordinary course of business. All of the outstanding shares of capital stock
of each of Zoran's Subsidiaries are duly authorized, validly issued, fully
paid and nonassessable, and all such shares (other than directors'
qualifying shares in the case of foreign Subsidiaries) are owned by Zoran or
another Zoran Subsidiary free and clear of all security interests, liens,
claims, pledges, agreements, limitations on Zoran's voting rights, charges
or other encumbrances of any nature.
(b) Except as set forth in this Section 4.2 or as reserved for future
grants of options under the Zoran Option Plans or future sale under the
Zoran Purchase Plan, there are no equity securities of any class of Zoran or
any of its Subsidiaries, or any security exchangeable into or exercisable
for such equity securities, issued, reserved for issuance or outstanding.
Except as set forth in this Section 4.2 or in the Zoran Disclosure Schedule,
there are no options, warrants, equity securities, calls, rights,
commitments or agreements of any character to which Zoran or any of its
Subsidiaries is a party or by which it is bound obligating Zoran or any of
its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of capital stock of Zoran or any of its
Subsidiaries or obligating Zoran or any of its Subsidiaries to grant,
extend, accelerate the vesting of or enter into any such option, warrant,
equity security, call, right, commitment or agreement. To the knowledge of
Zoran, there are no voting trusts, proxies or other agreements or
understandings with respect to the shares of capital stock of Zoran.
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Section 4.3 AUTHORITY; NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) Zoran and Sub have all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated by
this Agreement. The execution and delivery of this Agreement by Zoran and
Sub and the consummation by them of the transactions contemplated by this
Agreement have been duly authorized by all necessary corporate action on the
part of Zoran and Sub. This Agreement has been duly executed and delivered
by Zoran and Sub and constitutes the valid and binding obligation of Zoran
and Sub, enforceable in accordance with its terms, except as such
enforceability may be limited by (i) bankruptcy laws and other similar laws
affecting creditors' rights generally and (ii) general principles of equity,
regardless of whether asserted in a proceeding in equity or at law.
(b) The execution and delivery of this Agreement by Zoran and Sub does
not, and the consummation by them of the transactions contemplated by this
Agreement will not, (i) conflict with, or result in any violation or breach
of any provision of the Certificate of Incorporation or Bylaws of Zoran or
Sub, (ii) result in any violation or breach of, or constitute (with or
without notice or lapse of time, or both) a default (or give rise to a right
of termination, cancellation or acceleration of any obligation or loss of
any material right) under any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, lease, contract or other agreement,
instrument or obligation to which Zoran or any of its Subsidiaries is a
party or by which any of them or any of their properties or assets may be
bound, or (iii) conflict with or violate any permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Zoran or any of its Subsidiaries or any of its or
their properties or assets, except in the case of clauses (ii) and
(iii) for any such conflicts, violations, defaults, terminations,
cancellations or accelerations which would not be reasonably likely to have
a Material Adverse Effect on Zoran and its Subsidiaries, taken as a whole.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required to be
obtained or made by or with respect to Zoran or any of its Subsidiaries in
connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby, except for (i) the
filing of a pre-merger notification report under the HSR Act, (ii) the
filing of the Registration Statement with the SEC in accordance with the
Securities Act, (iii) the filing of the Agreement of Merger with the
Delaware Secretary of State in accordance with the DGCL, (iv) such consents,
approvals, orders, authorizations, registrations, declarations and filings
as may be required under applicable federal and state securities laws and
the laws of any foreign country and (v) such other consents, authorizations,
filings, approvals and registrations which, if not obtained or made, would
not be reasonably likely to have a Material Adverse Effect on Zoran and its
Subsidiaries, taken as a whole.
Section 4.4 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Zoran has timely filed and made available to Nogatech all forms,
reports and documents required to be filed by Zoran with the SEC since
January 31, 1999 other than registration statements on Form S-8
(collectively, the "Zoran SEC Reports"). Each of the Zoran SEC Reports
(i) at the time it was filed, complied in all material respects with the
applicable requirements of the Securities Act and the Exchange Act, as the
case may be, and (ii) did not at the time it was filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date
of such filing) contain any untrue statement of a material fact or omit to
state a material fact required to be stated in such Zoran SEC Reports or
necessary in order to make the statements in such Zoran SEC Reports, in the
light of the circumstances under which they were made, not misleading. None
of Zoran's Subsidiaries is required to file any forms, reports or other
documents with the SEC.
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(b) Each of the consolidated financial statements (including, in each
case, any related notes) contained in the Zoran SEC Reports, including any
Zoran SEC Reports filed after the date of this Agreement until the Closing,
complied or will comply as to form in all material respects with the
applicable published rules and regulations of the SEC with respect thereto,
was or will be prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods involved
(except as may be indicated in the notes to such financial statements or, in
the case of unaudited statements, as permitted for quarterly reports on Form
10-Q) and fairly presented, or will fairly present, the consolidated
financial position of Zoran and its Subsidiaries as at the respective dates
and the consolidated results of its operations and cash flows for the
periods indicated, except that the unaudited interim financial statements
were or are subject to normal and recurring year-end adjustments which were
not or are not expected to be material in amount. The unaudited consolidated
balance sheet of Zoran as of June 30, 2000 is referred to herein as the
"Zoran Balance Sheet."
Section 4.5 ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed in the
Zoran SEC Reports, Zoran and its Subsidiaries do not have any liabilities,
either accrued or contingent (whether or not required to be reflected in
financial statements in accordance with generally accepted accounting
principles), which individually or in the aggregate would be reasonably likely
to have a Material Adverse Effect on Zoran and its Subsidiaries, taken as a
whole, other than (i) liabilities reflected in the Zoran Balance Sheet, (ii)
liabilities specifically described in this Agreement, or in the Zoran Disclosure
Schedule, and (iii) normal or recurring liabilities incurred since the date of
the Zoran Balance Sheet in the ordinary course of business consistent with past
practices.
Section 4.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the date of the
Zoran Balance Sheet, there has been no material adverse change in the business,
assets, financial condition or results of operations of Zoran, and Zoran has
conducted its business in the ordinary course and in a manner consistent with
past practices. Since June 30, 2000, Zoran has not agreed to take any action
outside the ordinary course of business or that would constitute a breach of any
of the representations or warranties of Zoran contained in this Agreement.
Section 4.7 TAXES.
(a) Zoran and each of its Subsidiaries has prepared and timely filed all
Returns required to be filed with any taxing authority relating to any and
all Taxes concerning or attributable to Zoran or any of its Subsidiaries or
to their operations, such Returns are true and correct in all material
respects and have been completed in all material respects in accordance with
applicable law.
(b) Zoran and each of its Subsidiaries: (i) has paid all Taxes it is
required to pay and (ii) has withheld with respect to its employees all
Taxes required to be withheld.
(c) There is no Tax deficiency outstanding, proposed or assessed against
Zoran or any of its Subsidiaries that is not reflected as a liability on the
Zoran Balance Sheet nor has Zoran or any of its Subsidiaries executed any
waiver of any statute of limitations on or extending the period for the
assessment or collection of any Tax.
(d) Zoran does not have any material liabilities for unpaid Taxes that
have not been accrued for or reserved on the Zoran Balance Sheet, whether
asserted or unasserted, contingent or otherwise (other than Taxes that have
accrued subsequent to the date of the Zoran Balance Sheet in the ordinary
course of business, consistent with past practices).
(e) Neither Zoran's Returns nor the Returns of any of its Subsidiaries
have been audited by a government or taxing authority, nor is any such audit
in process or pending, and Zoran has not been notified of any request for
such an audit or other examination.
Section 4.8 INTELLECTUAL PROPERTY.
(a) Zoran and its Subsidiaries own, or are licensed or otherwise possess
legally enforceable rights to use, all patents, trademarks, trade names,
service marks, copyrights and mask works, any
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applications for and registrations of such patents, trademarks, trade names,
service marks, copyrights and mask works, and all processes, formulae,
methods, schematics, technology, know-how, computer software programs or
applications and tangible or intangible proprietary information or material
that are used in the conduct of the business of Zoran and its Subsidiaries
as currently conducted, or currently planned to be conducted, the absence of
which would be reasonably likely to have a Material Adverse Effect on Zoran
and its Subsidiaries, taken as a whole (the "Zoran Intellectual Property
Rights"), including all licenses, sublicenses and other agreements to which
Zoran or any of its Subsidiaries is a party and pursuant to which Zoran or
any of its Subsidiaries is authorized to use any third party patents,
trademarks, copyrights, trade secrets or other proprietary technology
including software (other than standard end-user licenses for "off the
shelf" software) of any third party ("Zoran Third Party Intellectual
Property Rights") which is used in the manufacture of, incorporated in, or
forms a part of any Zoran product.
(b) Zoran and its Subsidiaries are not, and will not be as a result of
the execution and delivery of this Agreement or the performance of Zoran's
obligations under this Agreement, in breach of any license, sublicense or
other agreement relating to the Zoran Intellectual Property Rights or Zoran
Third Party Intellectual Property Rights, the breach of which would be
reasonably likely to have a Material Adverse Effect on Zoran and its
Subsidiaries, taken as a whole.
(c) To Zoran's knowledge, all patents, registered trademarks, service
marks and copyrights held by Zoran or any of its Subsidiaries are valid and
subsisting. The operation of the businesses of Zoran and its Subsidiaries as
such businesses are currently conducted including the design, development,
manufacture, marketing and sale of their products has not and does not
infringe or misappropriate any patent, copyright, trademark, service mark or
trade secret of any third party or constitute unfair competition or trade
practices under the laws of any jurisdiction, except where any of the
foregoing could not reasonably be expected to have a Material Adverse Effect
on Zoran and its Subsidiaries, taken as a whole. Zoran (i) has not been sued
in any suit, action or proceeding which involves a claim of infringement of
any patent, trademark, service mark, copyright or violation of any trade
secret or other proprietary right of any third party; and (ii) has no
knowledge that the manufacturing, marketing, licensing or sale of its
products infringes any patent, trademark, service mark, copyright, trade
secret or other proprietary right of any third party, which infringement
would reasonably be expected to have a Material Adverse Effect on Zoran and
its Subsidiaries, taken as a whole.
(d) Zoran and its Subsidiaries are not subject to any proceeding or
outstanding decree, order, judgment, or stipulation restricting in any
manner the use, transfer, or licensing of any Zoran Intellectual Property
Rights by Zoran or its Subsidiaries, or which may affect the validity, use
or enforceability of such Zoran Intellectual Property Rights. Zoran and its
Subsidiaries are not subject to any agreement which restricts in any
material respect the use, transfer, or licensing by Zoran or any of its
Subsidiaries of the Zoran Intellectual Property Rights or any Zoran product
where such restriction would be likely to have a Material Adverse Effect on
Zoran and its Subsidiaries, taken as a whole.
(e) Zoran and its Subsidiaries have taken reasonable steps to protect
their rights in their material confidential information and trade secrets or
any trade secrets or confidential information of third parties provided to
them, and, without limiting the foregoing, Zoran has and enforces a policy
requiring each employee and independent contractor developing intellectual
property or having access to confidential information regarding Zoran
Intellectual Property Rights to execute a proprietary
information/confidentiality agreement substantially in the form provided to
Zoran and all such current and former employees and contractors of Zoran and
its Subsidiaries have executed such an agreement, except where the failure
to do so is not reasonably likely to have a Material Adverse Effect on Zoran
and its Subsidiaries, taken as a whole.
Section 4.9 LITIGATION. Except as described in the Zoran SEC Reports,
there is no action, suit or proceeding, claim, arbitration or investigation
against Zoran or any of its Subsidiaries pending or as to
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which Zoran has received any written notice of assertion, which is reasonably
likely to have a Material Adverse Effect on Zoran and its Subsidiaries, taken as
a whole, or a material adverse effect on the ability of Zoran to consummate the
transactions contemplated by this Agreement.
Section 4.10 INTERESTED PARTY TRANSACTIONS. Except as set forth in the
Zoran SEC Reports, since the date of Zoran's last proxy statement to its
stockholders, no event has occurred that would be required to be reported by
Zoran as a Certain Relationship or Related Transaction, pursuant to Item 404 of
Regulation S-K promulgated by the SEC.
Section 4.11 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. The
information supplied by Zoran for inclusion in the Registration Statement shall
not at the time the Registration Statement is declared effective by the SEC
contain any untrue statement of a material fact or omit to state any material
fact required to be stated in the Registration Statement or necessary in order
to make the statements in the Registration Statement, in light of the
circumstances under which they were made, not misleading. The information
supplied by Zoran for inclusion in the Proxy Statement shall not, on the date
the Proxy Statement is first mailed to stockholders of Nogatech, at the time of
the Nogatech Stockholder's Meeting or at the Effective Time, contain any
statement which, at such time and in light of the circumstances under which it
shall be made, is false or misleading with respect to any material fact, or omit
to state any material fact necessary in order to make the statements made in the
Proxy Statement not false or misleading; or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the Nogatech Stockholders' Meeting which has
become false or misleading. If at any time prior to the Effective Time any event
relating to Zoran or any of its Affiliates, officers or directors should be
discovered by Zoran which is required be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement, Zoran shall
promptly inform Nogatech.
Section 4.12 OPINION OF FINANCIAL ADVISOR. The financial advisor of Zoran,
C.E. Unterberg, Towbin, has delivered to Zoran an opinion dated the date of this
Agreement to the effect that the Exchange Ratio is fair to Zoran from a
financial point of view.
Section 4.13 INTERIM OPERATIONS OF SUB. Sub was formed solely for the
purpose of engaging in the transactions contemplated by this Agreement, has
engaged in no other business activities and has conducted its operations only as
contemplated by this Agreement.
Section 4.14 OWNERSHIP OF NOGATECH COMMON STOCK. Neither Zoran nor any of
its Subsidiaries owns any shares of Nogatech Common Stock.
ARTICLE V
CONDUCT OF BUSINESS
Section 5.1 COVENANTS OF NOGATECH. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, Nogatech agrees as to itself and its Subsidiaries (except
to the extent that Zoran shall otherwise consent in writing), to carry on its
business in the usual, regular and ordinary course in substantially the same
manner as previously conducted, to pay its debts and taxes when due, subject to
good faith disputes over such debts or taxes, to pay or perform its other
obligations when due, and, to the extent consistent with such business, to use
all reasonable efforts consistent with past practices and policies to
(i) preserve intact its present business organization, (ii) keep available the
services of its present officers and key employees and (iii) preserve its
relationships with customers, suppliers, distributors, licensors, licensees, and
others having business dealings with it. Except as expressly contemplated by
this Agreement, subject to Section 6.1, Nogatech shall not (and shall not permit
any of its Subsidiaries to), without the prior written consent of Zoran:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock granted under any
employee stock plan of Nogatech or authorize cash payments in exchange for
any options granted under any of such plans except as required by the terms
of such plans or any related agreements in effect as of the date of this
Agreement or except as set forth on Schedule 5.1 hereto;
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(b) Transfer or license to any person or entity or otherwise extend,
amend or modify any rights to the Nogatech Intellectual Property Rights
other than the grant of non-exclusive licenses in the ordinary course of
business consistent with past practices;
(c) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, equity securities or property) in respect of
any of its capital stock, or split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock;
(d) Purchase, redeem or otherwise acquire, directly or indirectly, any
shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of
shares in connection with any termination of service by such party;
(e) Issue, deliver or sell or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock or securities
convertible into shares of its capital stock, or subscriptions, rights,
warrants or options to acquire, or other agreements or commitments of any
character obligating it to issue any such shares or other convertible
securities, other than (i) the grant of options to purchase up to an
aggregate of 60,000 shares of Nogatech Common Stock, consistent with past
practices, in connection with the hiring of new employees; or (ii) the
issuance of (A) rights to purchase shares of Nogatech Common Stock under the
Nogatech Purchase Plans, or (B) shares of Nogatech Common Stock issuable
upon the exercise of options granted under the Nogatech Option Plans or
pursuant to rights under the Nogatech Purchase Plan or (C) shares of
Nogatech Common Stock issuable upon exercise of the Nogatech Warrants;
(f) Acquire or agree to acquire by merging or consolidating with, or by
purchasing an equity interest in or substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership or other
business organization or division, or otherwise acquire or agree to acquire
any material assets;
(g) Sell, lease, license or encumber or otherwise dispose of any of its
properties or assets which are material, individually or in the aggregate,
to the business of Nogatech and its Subsidiaries, taken as a whole, except
for transactions entered into in the ordinary course of business consistent
with past practices;
(h) Except as set forth on Schedule 5.1 hereto, take any action to:
(i) increase the compensation payable or to become payable to its officers
or employees, except for increases in salary or wages of non-officer
employees in accordance with past practices, (ii) grant any additional
severance or termination pay to, or enter into any employment or severance
agreements with, officers, (iii) grant any severance or termination pay to,
or enter into any employment or severance agreement, with any non-officer
employee, except in accordance with past practices, (iv) enter into any
collective bargaining agreement, or (v) establish, adopt, enter into or
amend in any material respect any bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, trust, fund,
policy or arrangement for the benefit of any directors, officers or
employees;
(i) Revalue any material amount of its assets, including writing down
the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business consistent with past practices;
(j) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or warrants or rights to
acquire any debt securities or guarantee any debt securities of others,
other than indebtedness incurred under outstanding lines of credit
consistent with past practice;
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(k) Amend or propose to amend its Certificate of Incorporation or
Bylaws, except as contemplated by this Agreement;
(l) Incur or commit to incur any individual capital expenditure in
excess of $50,000 or aggregate capital expenditures in excess of $200,000,
in addition to the existing commitments set forth in the Nogatech Disclosure
Schedule;
(m) Enter into or amend any agreements pursuant to which any third party
is granted exclusive marketing or manufacturing rights with respect to any
Nogatech product;
(n) Amend or terminate any material contract, agreement or license to
which it is a party except in the ordinary course of business;
(o) Waive or release any material right or claim, except in the ordinary
course of business;
(p) Take any action, other than as contemplated by this Agreement, that
would require the approval of Nogatech's stockholders or which could
reasonably be expected to result in a delay in the preparation, filing or
review by the SEC of the Registration Statement;
(q) Make or change any election in respect of Taxes, adopt or change any
accounting method in respect of Taxes, enter into any closing agreement,
settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes, except where such action would not have a
material adverse effect upon Nogatech or its Subsidiaries, individually or
taken as a whole; or
(r) Agree in writing or otherwise to take, any of the actions described
in Sections (a) through (q) above.
Section 5.2 COVENANTS OF ZORAN. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, Zoran agrees as to itself and its Subsidiaries (except to
the extent that Nogatech shall otherwise consent in wiring), to carry on its
business in the usual, regular and ordinary course in substantially the same
manner as previously conducted, to pay its debts and taxes when due subject to
good faith disputes over such debts or taxes, to pay or perform its other
obligations when due, and, to the extent consistent with such business, use all
reasonable efforts consistent with past practices and policies to (i) preserve
intact its present business organization, (ii) keep available the services of
its present officers and key employees and (iii) preserve its relationships with
customers, suppliers, distributors, licensors, licensees, and others having
business dealings with it. Except as expressly contemplated by this Agreement,
Zoran shall not (and shall not permit any of its Subsidiaries to), without the
prior written consent of Nogatech:
(a) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, equity securities or property) in respect of
any of its capital stock, or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock (other than stock splits of
its Common Stock or stock dividends payable in shares of Common Stock);
(b) Purchase, redeem or otherwise acquire, directly or indirectly, any
shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of
shares in connection with any termination of service by such party;
(c) Sell, lease, license or encumber or otherwise dispose of any of its
properties or assets which are material, individually or in the aggregate,
to the business of Zoran and its Subsidiaries, taken as a whole, except for
transactions entered into in the ordinary course of business consistent with
past practices;
(d) Amend or propose to amend its Certificate of Incorporation or
Bylaws, except as contemplated by this Agreement;
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(e) Take any action, other than as contemplated by this Agreement, that
would require the approval of Zoran's stockholders or which could reasonably
be expected to result in a delay in the preparation, filing or review by the
SEC of the Registration Statement; or
(f) Agree in writing or otherwise to take, any of the actions described
in Sections (a) through (e) above.
Section 5.3 COOPERATION. Subject to compliance with applicable law, from
the date hereof until the Effective Time, each of Zoran and Nogatech shall
confer on a regular and frequent basis with one or more representatives of the
other party to report operational matters of materiality and the general status
of ongoing operations and shall promptly provide the other party or its counsel
with copies of all filings made by such party with any Governmental Entity in
connection with this Agreement, the Merger and the transactions contemplated
hereby.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.1 NO SOLICITATION.
(a) From and after the date of this Agreement until the earlier of the
termination of this Agreement or the Effective Time, Nogatech shall not,
directly or indirectly, through any officer, director, employee, affiliate,
representative or agent, (i) solicit, initiate, seek, entertain, or
knowingly encourage or support any inquiries or proposals that constitute,
or could reasonably be expected to lead to, a proposal or offer for a
merger, consolidation, business combination, sale of substantial assets,
sale of a substantial portion of the shares of capital stock of Nogatech
(including without limitation by way of a tender offer) or similar
transactions involving Nogatech, other than the transactions contemplated by
this Agreement (any of the foregoing inquiries or proposals being referred
to in this Agreement as an "Acquisition Proposal"), (ii) engage or
participate in negotiations or discussions concerning, or provide any
non-public information to any person or entity relating to, any Acquisition
Proposal, or (iii) agree to, approve or recommend any Acquisition Proposal;
PROVIDED, HOWEVER, that nothing contained in this Agreement shall prevent
Nogatech or its Board of Directors from (A) providing non-public information
to, or engaging or participating in discussions or negotiations with, any
person or entity in connection with an unsolicited bona fide written
Acquisition Proposal by such person or entity or recommending such an
unsolicited bona fide written Acquisition Proposal to the stockholders of
Nogatech, if and only to the extent that (1) the Board of Directors of
Nogatech determines in good faith (after consultation with and based upon
the advice of its financial advisor) that such Acquisition Proposal would,
if consummated, result in a transaction more favorable to Nogatech's
stockholders from a financial point of view than the transaction
contemplated by this Agreement (any such more favorable Acquisition Proposal
being referred to in this Agreement as a "Superior Proposal") and that the
party making such Superior Proposal has the financial means, or the ability
to obtain the necessary financing, to conclude such transaction, (2) the
Board of Directors of Nogatech determines in good faith (after consultation
with outside legal counsel) that the failure to take such action would
create a substantial risk of liability for breach of its fiduciary duties to
the Nogatech stockholders under applicable law and (3) prior to providing
such non-public information to, or entering into discussions or negotiations
with, such person or entity, such Board of Directors receives from such
person or entity an executed confidentiality agreement with terms no less
favorable to Nogatech than those contained in the non-disclosure agreement
dated August 7, 2000 between Zoran and Nogatech (the "Confidentiality
Agreement"); or (B) complying with Rules 14d-9 or 14e-2 promulgated under
the Exchange Act with regard to an Acquisition Proposal.
(b) Nogatech shall notify Zoran no later than twenty-four (24) hours
after receipt by Nogatech (or its advisors) of any Acquisition Proposal or
any request for nonpublic information in
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connection with an Acquisition Proposal or for access to the properties,
books or records of Nogatech by any person or entity that informs Nogatech
that it is considering making, or has made, an Acquisition Proposal. Such
notice shall be made orally and in writing and shall indicate in reasonable
detail the identity of the offeror and the terms and conditions of such
proposal, inquiry or contact.
Section 6.2 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT.
(a) As promptly as practicable after the execution of this Agreement,
Zoran and Nogatech shall prepare and file with the SEC the Proxy Statement,
and Zoran shall prepare and file with the SEC the Registration Statement, in
which the Proxy Statement will be included as a prospectus. Zoran and
Nogatech shall use all reasonable efforts to cause the Registration
Statement to become effective as soon after such filing as practicable. The
Proxy Statement shall include the recommendation of the Board of Directors
of Nogatech in favor of this Agreement and the Merger; provided that the
Board of Directors of Nogatech may withdraw such recommendation if such
Board of Directors determines in good faith (after consultation with outside
legal counsel) that the failure to withdraw such recommendation would create
a substantial risk of liability for breach of its fiduciary duties to the
Nogatech stockholders under applicable law.
(b) Zoran and Nogatech shall make all necessary filings with respect to
the Merger under the Securities Act and the Exchange Act and applicable
state blue sky laws and the rules and regulations thereunder.
Section 6.3 CONSENTS. Each of Zoran and Nogatech shall use all reasonable
efforts to obtain all necessary consents, waivers and approvals under any of
Zoran's or Nogatech's material agreements, contracts, licenses or leases as may
be necessary to consummate the Merger and the other transactions contemplated by
this Agreement.
Section 6.4 CURRENT NASDAQ QUOTATION. Each of Zoran and Nogatech agrees to
continue the quotation of Zoran Common Stock and Nogatech Common Stock,
respectively, on the Nasdaq National Market during the period from the date of
this Agreement until the earlier of the termination of this Agreement or the
Effective Time.
Section 6.5 ACCESS TO INFORMATION. Upon reasonable notice, Nogatech and
Zoran shall each (and shall cause each of its Subsidiaries to) afford to the
officers, employees, accountants, counsel and other representatives of the
other, access, during normal business hours during the period prior to the
Effective Time, to all its properties, books, contracts, commitments and records
and, during such period, each of Nogatech and Zoran shall (and shall cause each
of its Subsidiaries to) furnish promptly to the other (i) a copy of each report,
schedule, registration statement and other document filed or received by it
during such period pursuant to the requirements of federal securities laws and
(ii) all other information concerning its business, properties and personnel as
such other party may reasonably request. Unless otherwise required by law, the
parties will hold any such information which is nonpublic in confidence in
accordance with the Confidentiality Agreement. No information or knowledge
obtained in any investigation pursuant to this Section 6.5 shall affect or be
deemed to modify any representation or warranty contained in this Agreement or
the conditions to the obligations of the parties to consummate the Merger.
Section 6.6 NOGATECH STOCKHOLDERS' MEETING. Nogatech shall call a meeting
of its stockholders to be held as promptly as practicable for the purpose of
voting upon this Agreement and the Merger. Subject to Sections 6.1 and 6.2,
Nogatech will, through its Board of Directors, recommend to Nogatech's
stockholders approval of such matters and will coordinate and cooperate with
Zoran with respect to the timing of such meeting and shall use its best efforts
to hold such meeting as soon as practicable after the date hereof. Subject to
applicable law and the provisions of Sections 6.1 and
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6.2(a), Nogatech shall use its reasonable efforts to solicit from its
stockholders proxies in favor of such matters.
Section 6.7 LEGAL CONDITIONS TO MERGER. Each of Zoran and Nogatech will
take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on itself with respect to the Merger (which
actions shall include, without limitation, furnishing all information required
under the HSR Act and in connection with approvals of or filings with any other
Governmental Entity and Zoran providing an undertaking to the Office of the
Chief Scientist in the Israeli Ministry of Industry and Trade to the effect that
it will cause the Surviving Corporation to comply with applicable statutory and
regulatory obligations) and will promptly cooperate with and furnish information
to each other in connection with any such requirements imposed upon either of
them or any of their Subsidiaries in connection with the Merger. Each of Zoran
and Nogatech will, and will cause its Subsidiaries to, (i) take all reasonable
actions necessary to obtain (and will cooperate with each other in obtaining)
any consent, authorization, order or approval of, or any exemption by, any
Governmental Entity required to be obtained or made by Zoran, Nogatech or any of
their Subsidiaries in connection with the Merger (any of the foregoing an
"Approval") or the taking of any action contemplated thereby or by this
Agreement, (ii) diligently oppose or pursue any rehearing, appeal or other
challenge which may be available to it of any refusal to issue any Approval or
of any order or ruling of any Governmental Entity which may adversely affect the
ability of the parties hereto to consummate the Merger or, except as permitted
by Sections 6.1, 6.2 and 6.6, to take any action contemplated by any Approval or
by this Agreement until such time as such refusal to issue any Approval or any
order or ruling has become final and non-appealable, and (iii) diligently oppose
any objections to, appeals from or petitions to reconsider or reopen any
Approval or the taking of any action contemplated thereby or by this Agreement.
Notwithstanding the foregoing, neither Nogatech nor Zoran shall be required to
agree, as a condition to any Approval, to divest itself of or hold separate any
Subsidiary, division or business unit which is material to the business of such
party and its Subsidiaries, taken as a whole, or the divestiture or holding
separate of which would be reasonably likely to have a material adverse effect
on (A) the business, financial condition or results of operations of such party
and its Subsidiaries, taken as a whole or (B) the benefits intended to be
derived as a result of the Merger.
Section 6.8 PUBLIC DISCLOSURE. Zoran and Nogatech shall consult with each
other before issuing any press release or otherwise making any public statement
with respect to the Merger or this Agreement and shall not issue any such press
release or make any such public statement prior to such consultation, except as
may be required by law or by the rules of the Nasdaq National Market.
Section 6.9 TAX-FREE REORGANIZATION. Each of Nogatech, Zoran and Sub shall
deliver to Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden Arps"), Nogatech's
counsel, and Gray Cary Ware & Freidenrich LLP ("Gray Cary"), Zoran's counsel, a
certificate executed by an appropriate officer of such corporation, containing
customary representations and covenants reasonably required by Skadden Arps and
Gray Cary in connection with the opinions described in Sections 7.2(c)
and 7.3(c) of this Agreement. Each officer's certificate shall be executed and
dated as of the effective date of the Proxy Statement, and shall be reexecuted
and redelivered as of the Effective Time.
Section 6.10 AFFILIATE AGREEMENTS. Zoran and Nogatech have provided each
other with a list of those persons who are, in Zoran's or Nogatech's respective
reasonable judgment, "affiliates" of Zoran or Nogatech, respectively, within the
meaning of Rule 145 under the Securities Act. Each such person who is an
"affiliate" of Zoran or Nogatech within the meaning of Rule 145 is referred to
herein as an "Affiliate." Zoran and Nogatech shall provide each other such
information and documents as Nogatech or Zoran shall reasonably request for
purposes of reviewing such list and shall notify the other party in writing
regarding any change in the identity of its Affiliates prior to the Closing
Date. Nogatech shall use its best efforts to deliver or cause to be delivered to
Zoran at least 30 days prior to the Closing Date from each of the Affiliates of
Nogatech, an executed agreement, in form and substance
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reasonably satisfactory to Zoran and Nogatech, by which such Affiliate of
Nogatech agrees to comply with the applicable requirements of Rule 145
("Affiliates Agreement"). Zoran shall be entitled to place appropriate legends
on the certificates evidencing any Zoran Common Stock to be received by such
Affiliates of Nogatech pursuant to the terms of this Agreement, and to issue
appropriate stop transfer instructions to the transfer agent for the Zoran
Common Stock, consistent with the terms of the Affiliates Agreements.
Section 6.11 NASDAQ QUOTATION. Zoran shall cause the shares of Zoran
Common Stock to be issued in the Merger to be approved for quotation on the
Nasdaq National Market, subject to official notice of issuance, prior to the
Closing Date.
Section 6.12 STOCK PLANS, OPTIONS, OTHER INCENTIVE AWARDS AND WARRANTS.
(a) At the Effective Time, each outstanding Nogatech Option shall be
deemed to constitute an option to acquire, on the same terms and conditions
as were applicable under such Nogatech Option, the same number of shares of
Zoran Common Stock as the holder of such Nogatech Option would have been
entitled to receive pursuant to the Merger had such holder exercised such
option in full immediately prior to the Effective Time (rounded to the
nearest whole number), at a price per share (rounded to the nearest whole
cent) equal to (i) the aggregate exercise price for the shares of Nogatech
Common Stock otherwise purchasable pursuant to such Nogatech Option divided
by (ii) the number of full shares of Zoran Common Stock deemed purchasable
pursuant to such Nogatech Option in accordance with the foregoing; PROVIDED,
HOWEVER, that in the case of any Nogatech Options to which Section 422 of
the Code applies ("incentive stock options"), the option price, the number
of shares purchasable pursuant to such option and the terms and conditions
of exercise of such option shall be determined in order to comply with
Section 424(a) of the Code.
(b) As soon as practicable after the Effective Time, Zoran shall deliver
to the participants in the Nogatech Option Plans an appropriate notice
setting forth such participants' rights pursuant thereto, and the grants
pursuant thereto shall continue in effect on the same terms and conditions
(subject to the adjustments required by this Section 6.12 after giving
effect to the Merger). Zoran shall comply with the terms of the Nogatech
Option Plans and ensure, to the extent required by, and subject to the
provisions of each such plan, that Nogatech Options which qualified as
incentive stock options prior to the Effective Time will continue to qualify
as incentive stock options after the Effective Time.
(c) Zoran shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Zoran Common Stock for delivery
upon the exercise of the Nogatech Options assumed in accordance with this
Section 6.12. As soon as practicable after the Effective Time, and not more
than ten (10) business days thereafter, Zoran shall file a registration
statement on Form S-8 (or any successor or other appropriate form) with
respect to the shares of Zoran Common Stock subject to the Nogatech Options
assumed pursuant to this Section 6.12 and shall use its reasonable efforts
to maintain the effectiveness of such registration statement or registration
statements (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as the Nogatech Options remain
outstanding. With respect to those individuals, if any, who subsequent to
the Merger will be subject to the reporting requirements under
Section 16(a) of the Exchange Act, where applicable, Zoran shall administer
Nogatech Options assumed pursuant to this Section 6.12 in a manner that
complies with Rule 16b-3 promulgated under the Exchange Act to the extent
the Nogatech Option Plans complied with such rule prior to the Merger.
(d) Nogatech shall take such action as is necessary to (i) terminate the
Nogatech Purchase Plan as of the Effective Time and (ii) cause the ending
date of the then current Purchase Periods under the Nogatech Purchase Plan
(as such term is defined therein) to be the last trading day on which the
Nogatech Common Stock is traded on the Nasdaq National Market immediately
prior to the Effective Time (the "Final Nogatech Purchase Date"); provided,
that, such change in the
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Purchase Periods shall be conditioned upon the consummation of the Merger.
On the Final Nogatech Purchase Date, Nogatech shall apply the funds credited
as of such date under the Nogatech Purchase Plan within each participant's
payroll withholding account to the purchase of whole shares of Nogatech
Common Stock in accordance with the terms of the Nogatech Purchase Plan,
which shares shall be treated in the manner described in Section 2.1(c).
(e) Employees of Nogatech as of the Effective Time shall be permitted to
participate in the Zoran Purchase Plan commencing on the first enrollment
date of such plan following the Effective Time, subject to the eligibility
provisions of such plan (with employees receiving credit, for purposes of
such eligibility provisions, for service with Nogatech or Zoran).
(f) Zoran currently intends, following the Effective Time, to maintain
Nogatech's business operations and facilities (including its research and
development operations) in Israel and to continue to employ Nogatech's
employees.
(g) Zoran shall, and shall cause the Surviving Corporation and its
Subsidiaries to, provide employees of the Surviving Corporation and its
Subsidiaries with benefits, including 401(k), deferred compensation, health
and welfare and paid-time off benefits, which are no less favorable in the
aggregate than those generally provided by Zoran to its U.S. employees.
(h) Except to the extent necessary to avoid duplication of benefits, to
the extent that any employee of Nogatech or any of Nogatech's Subsidiaries
becomes eligible to participate in any employee benefit plan of Zoran after
the Effective Time, Zoran, the Surviving Corporation and their Subsidiaries,
shall credit such employee's service with Nogatech or its Subsidiaries for
purposes of determining such employee's eligibility to participate in and
vesting under, and for purposes of calculating the benefits under, such
employee benefit plan. Zoran, the Surviving Corporation and their
Subsidiaries will (i) waive all limitations as to preexisting conditions
exclusions and waiting periods with respect to participation and coverage
requirements applicable to any employee of Nogatech or any of Nogatech's
Subsidiaries under any welfare plan that such employees may be eligible to
participate in after the Effective Time, to the extent permitted by such
plan, other than limitations or waiting periods that are already in effect
with respect to such employees and that have not been satisfied as of the
Effective Time under any welfare plan maintained for such employees
immediately prior to the Effective Time, and (ii) provide each such employee
with credit for any co-payments and deductibles paid prior to the Effective
Time in satisfying any applicable deductible or out-of-pocket requirements
under any welfare plan that such employees are eligible to participate in
after the Effective Time, to the extent permitted by such plan.
Section 6.13 BROKERS OR FINDERS. Each of Zoran and Nogatech represents, as
to itself, its Subsidiaries and its Affiliates, that no agent, broker,
investment banker, financial advisor or other firm or person is or will be
entitled to any broker's or finder's fee or any other commission or similar fee
in connection with any of the transactions contemplated by this Agreement except
W.R. Hambrecht & Co., whose fees and expenses will be paid by Nogatech in
accordance with Nogatech's agreement with such firm (a copy of which has been
delivered by Nogatech to Zoran prior to the date of this Agreement), and
C.E. Unterberg, Towbin, whose fees and expenses will be paid by Zoran in
accordance with Zoran's agreement with such firm (a copy of which has been
delivered by Zoran to Nogatech prior to the date of this Agreement), and each of
Zoran and Nogatech agrees to indemnify and hold the other harmless from and
against any and all claims, liabilities or obligations with respect to any other
fees, commissions or expenses asserted by any person on the basis of any act or
statement alleged to have been made by such party or its Affiliate.
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Section 6.14 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) From and after the Effective Time, Zoran and the Surviving
Corporation shall, indemnify, defend and hold harmless each person who is
now, or has been at any time prior to the date of this Agreement or who
becomes prior to the Effective Time, an officer, director or employee of
Nogatech or any of its Subsidiaries (the "Indemnified Parties") against all
losses, claims, damages, costs, expenses, liabilities or judgments or
amounts that are paid in settlement with the approval of the indemnifying
party (which approval shall not be unreasonably withheld) of or in
connection with any claim, action, suit, proceeding or investigation based
in whole or in part on or arising in whole or in part out of the fact that
such person is or was a director, officer or employee of Nogatech or any of
its Subsidiaries, whether pertaining to any matter existing or occurring at
or prior to the Effective Time and whether asserted or claimed prior to, or
at or after, the Effective Time ("Indemnified Liabilities") including,
without limitation, all losses, claims, damages, costs, expenses,
liabilities or judgments based in whole or in part on, or arising in whole
or in part out of, or pertaining to this Agreement or the transactions
contemplated hereby. Any Indemnified Party wishing to claim indemnification
under this Section 6.14, upon learning of any such claim, action, suit,
proceeding or investigation, shall promptly notify Nogatech, Zoran or the
Surviving Corporation (but the failure so to notify an Indemnifying Party
shall not relieve it from any liability which it may have under this
Section 6.14 except to the extent such failure prejudices such party), and
shall deliver to Nogatech (or after the Effective Time, Zoran and the
Surviving Corporation) the undertaking contemplated by Section 145(e) of the
DGCL. The Indemnified Parties as a group may retain only one law firm to
represent them with respect to each such matter unless there is, under
applicable standards of professional conduct, a conflict on any significant
issue between the positions of any two or more Indemnified Parties.
(b) From and after the Effective Time, the Surviving Corporation and
Zoran will fulfill and honor in all respects the obligations of Nogatech
pursuant to Nogatech's Bylaws, as in effect as of the date hereof and any
indemnification agreement between Nogatech and any of Nogatech's directors
and officers existing and in force as of the date of this Agreement and
filed as an exhibit to the Nogatech SEC Reports.
(c) Zoran shall maintain, or shall cause the Surviving Corporation to
maintain, in effect a policy or policies of directors and officers liability
insurance with coverage substantially comparable to policies in force as of
the date of this Agreement (copies of which have been provided to Zoran)
covering the directors and officers of Nogatech as of the date of this
Agreement for a period of not less than six years following the Effective
Time; PROVIDED, HOWEVER, that should such comparable coverage be unavailable
for aggregate premiums of less than 150% of the annual premiums currently
being paid by Nogatech for such insurance, Zoran and/or the Surviving
Corporation shall only be required to obtain such lesser coverage as may be
obtained for such amount.
(d) The provisions of this Section 6.14 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his or her
heirs and representatives, and may not be amended, altered or repealed
without the written consent of any affected Indemnified Party.
Section 6.15 ADDITIONAL AGREEMENTS; REASONABLE EFFORTS. Subject to the
terms and conditions of this Agreement, each of the parties agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, subject to the appropriate vote of stockholders of Nogatech
described in Section 6.6, including cooperating fully with the other party,
including by provision of information and making all necessary filings under the
HSR Act. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement or to vest
the Surviving Corporation with full title to all properties, assets, rights,
approvals, immunities and franchises of either of the Constituent Corporations,
the proper officers and directors of each party to this Agreement shall take all
such necessary action.
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Section 6.16 EMPLOYMENT AND NONCOMPETE AGREEMENTS. Zoran and Nogatech
shall each use its reasonable efforts to cause the key employees of Nogatech
identified by Zoran to accept continued employment by the surviving Corporation
on terms reasonably acceptable to Zoran.
ARTICLE VII
CONDITIONS TO MERGER
Section 7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligations of each party to this Agreement to effect
the Merger shall be subject to the satisfaction prior to the Closing Date of the
following conditions:
(a) This Agreement and the Merger shall have been approved and adopted
by the affirmative vote of the holders of a majority of the outstanding
shares of Nogatech Common Stock entitled to vote thereon.
(b) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(c) Other than the filing provided for by Section 1.1, all
authorizations, consents, orders or approvals of, or declarations or filings
with, or expirations of waiting periods imposed by, any Governmental Entity
the absence or nonoccurrence of which would be reasonably likely to have a
Material Adverse Effect on Zoran and its Subsidiaries or Nogatech and its
Subsidiaries, in each case taken as a whole, shall have been filed, occurred
or been obtained.
(d) The Registration Statement shall have become effective under the
Securities Act and shall not be the subject of any stop order or proceedings
seeking a stop order.
(e) No temporary restraining order, preliminary or permanent injunction
or other order issued by any court of competent jurisdiction or other legal
or regulatory restraint or prohibition preventing the consummation of the
Merger or limiting or restricting Zoran's conduct or operation of the
business of Zoran or Nogatech after the Merger shall have been issued, nor
shall any proceeding brought by a domestic administrative agency or
commission or other domestic Governmental Entity, seeking any of the
foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to
the Merger which makes the consummation of the Merger illegal.
(f) The shares of Zoran Common Stock to be issued in the Merger shall
have been approved for quotation on the Nasdaq National Market.
Section 7.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF ZORAN AND SUB. The
obligations of Zoran and Sub to effect the Merger are subject to the
satisfaction of each of the following conditions, any of which may be waived in
writing exclusively by Zoran and Sub:
(a) The representations and warranties of Nogatech set forth in this
Agreement shall be true and correct as of the date of this Agreement and
(except to the extent such representations and warranties speak as of an
earlier date) as of the Closing Date as though made on and as of the Closing
Date, except for (i) changes contemplated by this Agreement and (ii) where
the failure to be true and correct would not be reasonably likely to have a
Material Adverse Effect on Nogatech and its Subsidiaries, taken as a whole,
or a material adverse effect upon the consummation of the transactions
contemplated hereby; and Zoran shall have received a certificate signed on
behalf of Nogatech by the chief executive officer and the chief financial
officer of Nogatech to such effect. For purposes of determining the accuracy
of the representations and warranties set forth in Section 3.6 as of the
Closing Date, (i) any inaccuracy that primarily results from or relates to
general business, economic or industry conditions shall be disregarded,
(ii) any inaccuracy that directly or indirectly results from or relates to
the announcement or pendency of the Merger or any of the
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other transactions contemplated by this Agreement shall be disregarded,
(iii) any inaccuracy that directly or indirectly results from or relates to
the taking of any action contemplated or permitted by this Agreement shall
be disregarded, and (iv) neither Nogatech's failure to achieve operating
results predicted by financial analysts or by Nogatech, nor reductions in
the trading price of Nogatech Common Stock, occurring at any time or from
time to time between the date hereof and the Effective Time, shall be deemed
to be an event or occurrence having a Material Adverse Effect on Nogatech
and its Subsidiaries, taken as a whole.
(b) Nogatech shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior
to the Closing Date; and Zoran shall have received a certificate signed on
behalf of Nogatech by the chief executive officer and the chief financial
officer of Nogatech to such effect.
(c) Zoran shall have received a written opinion from Gray Cary, counsel
to Zoran, to the effect that the Merger will be treated for Federal income
tax purposes as a tax-free reorganization within the meaning of Section
368(a) of the Code. In rendering such opinion, Gray Cary may rely on the
officers' certificates provided by Nogatech, Zoran and Sub pursuant to
Section 6.9.
(d) Zoran shall have received all permits and other authorizations
required under applicable state blue sky laws for the issuance of shares of
Zoran Common Stock pursuant to the Merger.
Section 7.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF NOGATECH. The
obligation of Nogatech to effect the Merger is subject to the satisfaction of
each of the following conditions, any of which may be waived, in writing,
exclusively by Nogatech:
(a) The representations and warranties of Zoran and Sub set forth in
this Agreement shall be true and correct in all material respects as of the
date of this Agreement and (except to the extent such representations speak
as of an earlier date) as of the Closing Date as though made on and as of
the Closing Date, except for (i) changes contemplated by this Agreement and
(ii) where the failure to be true and correct would not be reasonably likely
to have a Material Adverse Effect on Zoran and its Subsidiaries, taken as a
whole, or a material adverse effect upon the consummation of the
transactions contemplated hereby; and Nogatech shall have received a
certificate signed on behalf of Zoran by the chief executive officer and the
chief financial officer of Zoran to such effect. For purposes of determining
the accuracy of the representative and warranties set forth in Section 4.6,
(i) any inaccuracy that primarily results from or relates to general
business, economic or industry conditions shall be disregarded, (ii) any
inaccuracy that directly or indirectly results from or relates to the
announcement or pendency of the Merger or any of the other transactions
contemplated by this Agreement shall be disregarded, (iii) any inaccuracy
that directly or indirectly results from or relates to the taking of any
action contemplated or permitted by this Agreement shall be disregarded, and
(iv) neither Zoran's failure to achieve operating results predicted by
financial analysts or by Zoran, nor reductions in the trading price of Zoran
Common Stock, occurring at any time or from time to time between the date
hereof and the Effective Time, shall be deemed to be an event or occurrence
having a Material Adverse Effect on Zoran and its Subsidiaries, taken as a
whole.
(b) Zoran and Sub shall have performed in all material respects all
obligations required to be performed by them under this Agreement at or
prior to the Closing Date; and Nogatech shall have received a certificate
signed on behalf of Zoran by the chief executive officer and the chief
financial officer of Zoran to such effect.
(c) Nogatech shall have received the opinion of Skadden Arps, counsel to
Nogatech, to the effect that the Merger will be treated for Federal income
tax purposes as a tax-free reorganization within the meaning of Section
368(a) of the Code. In rendering such opinion, Skadden Arps may rely on the
officers' certificates provided by Nogatech, Zoran and Sub pursuant to
Section 6.9.
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(d) The Israeli Tax Commission shall have issued a ruling that Israeli
holders of Nogatech Common Stock and options to acquire Nogatech Common
Stock shall be permitted to defer, and shall not be required to pay
currently, Israeli capital gains tax with respect to the transactions
contemplated hereby.
ARTICLE VIII
TERMINATION AND AMENDMENT
Section 8.1 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time (with respect to Sections 8.1(b) through 8.1(f), by
written notice by the terminating party to the other party), whether before or
after approval of the matters presented in connection with the Merger by the
stockholders of Nogatech:
(a) by the mutual written consent of Zoran and Nogatech;
(b) by either Zoran or Nogatech if the Merger shall not have been
consummated by February 28, 2001; provided, however that the right to
terminate this Agreement under this Section 8.1(b) shall not be available to
any party whose failure to fulfill any obligation under this Agreement has
been the cause of or resulted in the failure of the Merger to occur on or
before such date);
(c) by either Zoran or Nogatech if a court of competent jurisdiction or
other Governmental Entity shall have issued a nonappealable final order,
decree or ruling or taken any other action, in each case having the effect
of permanently restraining, enjoining or otherwise prohibiting the Merger,
except, if the party relying on such order, decree or ruling or other action
has failed to comply in any material respect with its obligations under
Section 6.7 of this Agreement;
(d) by Zoran if, at the Nogatech Stockholders' Meeting (including any
adjournment or postponement), the requisite vote of the stockholders of
Nogatech in favor of this Agreement and the Merger shall not have been
obtained;
(e) by Zoran, if (i) the Board of Directors of Nogatech shall have
withdrawn or modified its recommendation of this Agreement or the Merger in
a manner adverse to Zoran or shall have resolved or publicly announced or
disclosed to any third party its intention to do any of the foregoing;
(ii) an Alternative Transaction (as defined in Section 8.3(d)) shall have
been consummated or the Board of Directors of Nogatech shall have
recommended to the stockholders of Nogatech an Alternative Transaction or
shall have resolved or publicly announced its intention to recommend or
engage in such an Alternative Transaction; or (iii) a tender offer or
exchange offer for more than 50% of the outstanding shares of Nogatech
Common Stock is commenced (other than by Zoran or an Affiliate of Zoran) and
the Board of Directors of Nogatech shall have (A) recommended that the
stockholders of Nogatech tender their shares in such tender or exchange
offer or (B) resolved or publicly announced its intention to take no
position with respect to such tender or exchange offer; or
(f) by Zoran or Nogatech, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the other
party set forth in this Agreement, which breach (i) causes the conditions
set forth in Sections 7.2(a) or (b) (in the case of termination by Zoran) or
7.3(a) or (b) (in the case of termination by Nogatech) not to be satisfied
and (ii) shall not have been cured within ten (10) business days following
receipt by the breaching party of written notice of such breach from the
other party.
Section 8.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement as provided in Section 8.1, there shall be no liability or obligation
on the part of Zoran, Nogatech, Sub or their respective officers, directors,
stockholders or Affiliates, except as set forth in Section 8.3 and further
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<PAGE>
except to the extent that such termination results from the willful breach by a
party of any of its representations, warranties or covenants set forth in this
Agreement; provided that, the provisions of Sections 6.14 and 8.3 of this
Agreement and the Confidentiality Agreement shall remain in full force and
effect and survive any termination of this Agreement.
Section 8.3 FEES AND EXPENSES.
(a) Except as set forth in this Section 8.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses, whether or not
the Merger is consummated; provided, however, that Zoran and Nogatech shall
share equally all fees and expenses, other than attorneys' fees, incurred in
connection with the printing and filing of the Proxy Statement (including
any related preliminary materials) and the Registration Statement (including
financial statements and exhibits) and any amendments or supplements
thereto.
(b) If this Agreement is terminated by Zoran pursuant to Section 8.1(e),
Nogatech shall pay to Zoran a termination fee of $3,000,000 in cash, within
one business day after such termination.
(c) If (i) this Agreement is (A) terminated by Zoran pursuant to Section
8.1(e), or (B) terminated by Zoran pursuant to Section 8.1(d), and at the
time of the Nogatech Stockholders' meeting (including any adjournment
thereof) there is pending a publicly announced offer or proposal to effect
an Alternative Transaction, and (ii) within 12 months following such
termination, any Alternative Transaction is consummated, Nogatech shall pay
to Zoran a termination fee of $3,000,000, in addition to any amount
previously paid pursuant to Section 8.3(b), at or prior to the consummation
of such Alternative Transaction.
(d) As used in this Agreement, an "Alternative Transaction" means (i) a
transaction or series of transactions pursuant to which any person or group
(as such term is defined under the Exchange Act) other tan Zoran or Sub or
any Affiliate thereof, (a "Third Party") acquires or would acquire (upon
completion of such transaction or series of transactions) shares (or
securities exercisable for or convertible into shares) representing more
than 50% of the outstanding shares of Nogatech Common Stock, pursuant to a
tender offer or exchange offer or otherwise, (ii) a merger, consolidation or
share exchange involving Nogatech if, upon consummation of such merger,
consolidation or share exchange such Third Party owns or would own more than
50% of the outstanding equity securities of Nogatech or the entity surviving
such merger or resulting from such consolidation (where Nogatech either
disappears into such entity in such merger or consolidation or becomes a
direct or indirect Subsidiary of such entity), or (iii) any other
transaction or series of transactions pursuant to which any third party
acquires or would acquire (upon completion of such transaction or series of
transaction) control of assets of Nogatech and its Subsidiaries (including,
for this purpose, outstanding equity securities of Subsidiaries of such
party) having a fair market value equal to more than 50% of the fair market
value of all the consolidated assets of Nogatech and its Subsidiaries
immediately prior to such transaction or series of transactions.
(e) Nogatech shall not be required to pay any termination fee pursuant
to Sections 8.3(b) or 8.3(c) if, immediately prior to the termination of
this Agreement, Zoran was in material breach of its obligations under this
Agreement.
(f) If Nogatech fails to promptly pay to Zoran any termination fee
payable by it under Sections 8.3(b) or 8.3(c), Nogatech shall pay the costs
and expenses (including reasonable attorneys' fees) incurred by Zoran in
connection with any action taken to collect such termination fee.
Section 8.4 AMENDMENT. This Agreement may be amended by the parties
hereto, by action taken or authorized by their respective Boards of Directors,
at any time before or after approval of the
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matters presented in connection with the Merger by the stockholders of Nogatech,
but, after any such approval, no amendment shall be made which by law requires
further approval by such stockholders without such further approval. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
Section 8.5 EXTENSION; WAIVER. At any time prior to the Effective Time,
the parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
ARTICLE IX
MISCELLANEOUS
Section 9.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. None of the representations, warranties and agreements in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Closing and the Effective Time, except for the agreements contained
in Sections 1.3, 1.4, 2.1, 2.2, 2.3, 6.12, 6.14, 6.15, the last sentence of
Section 8.4 and Article IX, and the agreements of the Affiliates of Nogatech
delivered pursuant to Section 6.10. The Confidentiality Agreement shall survive
the execution and delivery of this Agreement.
Section 9.2 NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to Zoran or Sub, to
Zoran Corporation
3112 Scott Boulevard
Santa Clara, CA 95054
Attention: President
Facsimile No.: (408) 919-4122
with a copy to:
Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, California 94301
Attention: Dennis C. Sullivan, Esq.
Facsimile No: (650) 327-3699
(b) if to Nogatech, to
Nogatech, Inc.
5201 Great America Parkway
Santa Clara, CA 95054
Attention: President
Facsimile No: (408) 562-6209
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<PAGE>
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036-6522
Attention: David Fox, Esq.
Facsimile No.: (212) 735-2000
Section 9.3 INTERPRETATION.
(a) For purposes of this Agreement:
(i) When reference is made to an Article or Section, such reference
shall be to an Article or Section of this Agreement unless otherwise
indicated;
(ii) The words "include," "includes" and "including" when used herein
shall be deemed in each case to be followed by the words "without
limitation;"
(iii) The phrase "made available" in this Agreement shall mean that
the information referred to has been made available if requested by the
party to whom such information is to be made available;
(iv) The phrases "the date of this Agreement," "the date hereof," and
terms of similar import, unless the context otherwise requires, shall be
deemed to refer to August 16, 2000;
(v) Any reference to a party's "knowledge" means such party's actual
knowledge after reasonable inquiry of its directors, officers, and other
management level employees reasonably believed to have knowledge of such
matters;
(vi) The table of contents and headings contained in this Agreement
are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
(b) This Agreement has been negotiated by the respective parties hereto
and their attorneys and the language hereof shall not be construed for or
against any party.
Section 9.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 9.5 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Agreement
(including the documents and the instruments referred to herein) (a) constitutes
the entire agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, and (b) except as provided in Section 6.14, is not intended to confer
upon any person other than the parties hereto any rights or remedies hereunder.
Section 9.6 GOVERNING LAW. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware, U.S.A. without regard to
any applicable conflicts of law, except that the DGCL shall, to the extent
applicable, govern the procedures to be taken hereunder to effect the Merger.
Section 9.7 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
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<PAGE>
IN WITNESS WHEREOF, Zoran, Sub and Nogatech have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
<TABLE>
<S> <C> <C> <C>
NOGATECH, INC. ZORAN CORPORATION
/s/ YARON GARMAZI /s/ LEVY GERZBERG
By: By:
------------------------------------ ------------------------------------
CHIEF FINANCIAL OFFICER PRESIDENT AND CHIEF EXECUTIVE OFFICER
Title: Title:
ZOOM ACQUISITION CORPORATION
/s/ KARL SCHNEIDER
By:
------------------------------------
CHIEF FINANCIAL OFFICER
Title:
</TABLE>
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<PAGE>
ANNEX B
VOTING AGREEMENT
THIS VOTING AGREEMENT is made and entered into as of August 23, 2000 by and
between Zoran Corporation, a Delaware corporation (the "Company"), and the
undersigned stockholder (the "Stockholder") of Nogatech, Inc., a Delaware
corporation ("Nogatech").
RECITALS
A. Concurrently with the execution of this Agreement, the Company, Nogatech
and Zoom Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of the Company ("Sub"), have entered into an Agreement and Plan of
Merger dated as of August 23, 2000 (the "Merger Agreement"), providing for the
merger of Sub with and into Nogatech (the "Merger") pursuant to which Nogatech
will become a wholly-owned subsidiary of the Company;
B. The Stockholder is the beneficial holder of record of the number of
shares of the outstanding Common Stock of Nogatech as is indicated on the final
page of this Agreement (the "Shares");
C. In connection with the Merger, the Company will acquire the
Stockholder's entire equity interest in Nogatech and the Stockholder will
receive in exchange an equity interest in the Company; and
D. In consideration of and to induce the execution of the Merger Agreement
by the Company, the Stockholder agrees not to sell or otherwise dispose of any
shares of Nogatech stock held by the Stockholder and to vote the Shares so as to
facilitate consummation of the Merger as more fully described below.
NOW, THEREFORE, in consideration of the mutual promises and the mutual
covenants and agreements contained herein, the parties agree as follows:
1. AGREEMENT TO RETAIN SHARES. The Stockholder agrees not to transfer,
pledge, sell, exchange or offer to transfer or sell or otherwise dispose of or
encumber any of the Shares at any time prior to the Expiration Date, as defined
herein. The "Expiration Date" shall mean the earlier of (i) the date and time on
which the Merger shall become effective in accordance with the terms and
provisions of the Merger Agreement or (ii) the date on which the Merger
Agreement shall be terminated pursuant to Article VIII of the Merger Agreement.
2. AGREEMENT TO VOTE SHARES. At any meeting of the Nogatech stockholders
called with respect to any of the following, and at any adjournment thereof, and
with respect to any written consent solicited with respect to any of the
following, the Stockholder agrees to vote the Shares: (i) in favor of approval
of the Merger Agreement and the Merger and any matter which would, or could
reasonably be expected to, facilitate the Merger and (ii) against (A) approval
of any proposal made in opposition to or competition with the Merger Agreement
or the consummation of the Merger, (B) any merger, consolidation, sale of
assets, reorganization or recapitalization involving Nogatech and any other
party, (C) any liquidation, or winding up of Nogatech and (D) any other matter
which would, or could reasonably be expected to, prohibit or discourage the
Merger (each of the foregoing is referred to as an "Opposing Proposal"). The
Stockholder, as the holder of voting stock of Nogatech agrees to be present, in
person or by proxy, at all such meetings of stockholders of Nogatech so that all
Shares are counted for the purposes of determining the presence of a quorum at
each such meeting. This Agreement is intended to bind the Stockholder only with
respect to the specific matters set forth herein, and shall not prohibit the
Stockholder from acting in accordance with his fiduciary duties as an officer or
director of Nogatech.
3. IRREVOCABLE PROXY. Concurrently with the execution of this Agreement,
the Stockholder agrees to deliver to the Company a proxy in the form attached
hereto as ANNEX A (the "Proxy"), which shall
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<PAGE>
be irrevocable to the extent provided therein; provided that the Proxy shall be
revoked upon termination of this Agreement in accordance with its terms.
4. ADDITIONAL PURCHASES. For purposes of this Agreement, the term "Shares"
shall include any shares of Nogatech capital stock which the Stockholder
purchases or otherwise acquires after the execution of this Agreement and prior
to the Expiration Date.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE STOCKHOLDER. The
Stockholder hereby represents, warrants and covenants to the Company the
following:
5.1 OWNERSHIP OF SHARES. Except as specifically described on ANNEX B to
this Agreement, the Stockholder (i) is the record holder and beneficial
owner of the Shares, which at the date hereof are, and at all times until
the Expiration Date will be, free and clear of any liens, claims, options,
charges or other encumbrances, (ii) does not beneficially own any shares of
stock of Nogatech other than the Shares and (iii) has full power and
authority to make, enter into, deliver and carry out the terms of this
Agreement and the Proxy.
5.2 VALIDITY; NO CONFLICT. This Agreement constitutes the legal, valid
and binding obligation of the Stockholder, enforceable against the
Stockholder in accordance with its terms, except as such enforceability may
be limited by bankruptcy, insolvency, moratorium or other similar laws
affecting or relating to creditors' rights generally and by general
principles of equity. Neither the execution of this Agreement by the
Stockholder nor the consummation of the transactions contemplated hereby
will result in a breach or violation of the terms of any agreement by which
the Stockholder is bound or of any decree, judgment, order, law or
regulation now in effect of any court or other governmental body applicable
to the Stockholder.
5.3 NO VOTING TRUSTS AND AGREEMENTS. Between the date of this Agreement
and the Expiration Date, the Stockholder will not, and will not permit any
entity under the Stockholder's control to, deposit any shares of Nogatech
capital stock held by the Stockholder or such entity in a voting trust or
subject any shares of Nogatech capital stock held by the Stockholder or such
entity to any arrangement or agreement with respect to the voting of such
shares of capital stock, other than agreements entered into with the
Company.
5.4 NO PROXY SOLICITATIONS. Between the date hereof and the Expiration
Date, the Stockholder will not, and will not permit any entity under the
Stockholder's control to, (a) solicit proxies or become a participant in a
"solicitation" (as such term is defined in Rule 14a-11 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), with respect to an
Opposing Proposal or otherwise encourage or assist any party in taking or
planning any action which would compete with, restrain or otherwise serve to
interfere with or inhibit the timely consummation of the Merger in
accordance with the terms of the Merger Agreement, (b) initiate a
stockholders' vote or action by written consent of Nogatech stockholders or
(c) become a member of a "group" (as such term is used in Section 13(d) of
the Exchange Act) with respect to any voting securities of Nogatech with
respect to an Opposing Proposal.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company
represents, warrants and covenants to the Stockholder as follows:
6.1 DUE AUTHORIZATION. This Agreement has been authorized by all
necessary corporate action on the part of the Company and has been duly
executed by a duly authorized officer of the Company.
6.2 VALIDITY; NO CONFLICT. This Agreement constitutes the legal, valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, moratorium or other similar laws affecting or
relating to creditors' rights generally and by general principles of equity.
Neither the execution
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<PAGE>
of this Agreement by the Company nor the consummation of the transactions
contemplated hereby will result in a breach or violation of the terms of any
agreement by which the Company is bound or of any decree, judgment, order,
law or regulation now in effect of any court or other governmental body
applicable to the Company.
7. ADDITIONAL DOCUMENTS. The Stockholder and the Company hereby covenant
and agree to execute and deliver any additional documents necessary or
desirable, in the reasonable opinion of the Company's legal counsel or the
Stockholder, as the case may be, to carry out the intent of this Agreement.
8. CONSENT AND WAIVER. The Stockholder hereby gives any consent and grants
any waivers that are required for the consummation of the Merger under the terms
of any agreement to which the Stockholder is a party or pursuant to any other
rights the Stockholder may have.
9. MISCELLANEOUS.
9.1 SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and
shall in no way be affected, impaired or invalidated.
9.2 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement nor
any of the rights, interests or obligations of the parties hereto may be
assigned by any of the parties without the prior written consent of the
other.
9.3 AMENDMENTS AND MODIFICATIONS. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of a
written agreement executed by the parties hereto.
9.4 SPECIFIC PERFORMANCE: INJUNCTIVE RELIEF. The parties hereto
acknowledge that the Company will be irreparably harmed and that there will
be no adequate remedy at law for a violation of any of the covenants or
agreements of the Stockholder set forth herein. Therefore, it is agreed
that, in addition to any other remedies which may be available to the
Company upon such violation, the Company shall have the right to enforce
such covenants and agreements by specific performance, injunctive relief or
by any other means available to it at law or in equity.
9.5 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and sufficient if delivered in
person, by commercial overnight courier service, by confirmed telecopy, or
sent by mail (registered or certified mail, postage prepaid, return receipt
requested) to the respective parties as follows:
If to the Company: Zoran Corporation
3112 Scott Boulevard
Santa Clara, CA 95054
Attn: Chief Executive Officer
Facsimile No.: (408) 919-4122
Telephone No.: (408) 919-4111
If to Stockholder: To the address for notice set
forth
on the last page hereof.
With a copy to: Nogatech, Inc.
5201 Great America Parkway
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<PAGE>
Santa Clara, CA 95054
Attn: Chief Executive Officer
Facsimile No.: (408) 562-6209
Telephone No.: (408) 562-6200
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address
shall only be effective upon receipt.
9.6 GOVERNING LAW. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Delaware without giving
effect to principles of conflicts of law.
9.7 ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the parties in respect of the subject matter hereof, and supersedes all
prior negotiations and understandings between the parties with respect to
such subject matter.
9.8 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be an original, but all of which together shall constitute
one and the same agreement.
9.9 EFFECT OF HEADINGS. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this
Agreement.
9.10 TERMINATION. Notwithstanding anything else in this Agreement, this
Agreement and the Proxy, and all obligations of the Stockholder under either
of them, shall automatically terminate as of the Expiration Date.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
ZORAN CORPORATION
By:
-----------------------------------------------------------------------------
Title:
---------------------------------------------------------------------------
STOCKHOLDER
--------------------------------------------------------------------------------
Stockholder's Address for Notice:
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Shares beneficially owned:
shares of Common Stock
[Signature Page to Voting Agreement]
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<PAGE>
ANNEX A
IRREVOCABLE PROXY
The undersigned stockholder of Nogatech, Inc., a Delaware corporation
("Nogatech"), hereby irrevocably appoints and constitutes the members of the
Board of Directors of Zoran Corporation, a Delaware corporation ("Zoran"), and
each of them (the "Proxyholders"), the agents and proxies of the undersigned,
with full power of substitution and resubstitution, to the full extent of the
undersigned's rights with respect to the shares of capital stock of Nogatech
beneficially owned by the undersigned, which shares are listed below (the
"Shares"), and any and all other shares or securities issued or issuable in
respect thereof on or after the date hereof and prior to the date this proxy
terminates, to vote the Shares as follows:
The agents and proxies named above are empowered at any time prior to
termination of this proxy to exercise all voting and other rights
(including, without limitation, the power to execute and deliver written
consents with respect to the Shares) of the undersigned at every annual,
special or adjourned meeting of Nogatech stockholders, and in every written
consent in lieu of such a meeting, or otherwise,
1. In favor of approval of the Merger (as defined in the Voting
Agreement dated August 23, 2000 between Nogatech and Zoran, of (the "Voting
Agreement")) and that certain Agreement and Plan of Merger dated as of
August 23, 2000 by and among Zoran, Zoom Acquisition corporation, a Delaware
corporation and a wholly-owned subsidiary of Zoran, and Nogatech, (the
"Merger Agreement"), and any matter that could reasonably be expected to
facilitate the Merger, and
2. Against (i) approval of any proposal made in opposition to or
competition with the Merger Agreement or the consummation of the Merger and
the Merger Agreement, (ii) any merger, consolidation, sale of assets,
reorganization or recapitalization involving Nogatech and any other party,
(iii) any liquidation, or winding up of Nogatech and (iv) any other matter
which would, or could reasonably be expected to, prohibit or discourage the
Merger.
The Proxyholders may not exercise this proxy on any other matter. The
undersigned stockholder may vote the Shares on all such other matters.
The proxy granted by the stockholder to the Proxyholders hereby is granted
as of the date of this Agreement in order to secure the obligations of the
stockholder set forth in Section 2 of the Voting Agreement, and is irrevocable
and coupled with an interest in such obligations and in the interests in
Nogatech to be purchased and sold pursuant to the Merger Agreement. This proxy
will terminate upon the termination of the Voting Agreement in accordance with
its terms.
Upon the execution hereof, all prior proxies given by the undersigned with
respect to the Shares and any and all other shares or securities issued or
issuable in respect thereof on or after the date hereof, to the extent they
conflict with the rights granted hereunder, are hereby revoked and no subsequent
proxies will be given until such time as this proxy shall be terminated in
accordance with its terms.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned. The undersigned stockholder
authorizes the Proxyholders to file this proxy and any substitution or
revocation of substitution with the Secretary of Nogatech and with any Inspector
of Elections at any meeting of the stockholders of Nogatech.
B-6
<PAGE>
This proxy is irrevocable and shall survive the insolvency, incapacity,
death or liquidation of the undersigned.
Dated: August 23, 2000
Signature of Stockholder:
Print name of Stockholder:
Shares beneficially owned:
shares of Common Stock
B-7
<PAGE>
August 23, 2000
PRIVILEGED AND CONFIDENTIAL
Board of Directors
Nogatech Inc.
5201 Great America Parkway
Santa Clara, CA 95054
Gentlemen:
We understand that Nogatech Inc., a Delaware corporation ("Company"), Zoran
Corporation, a Delaware corporation ("Parent") and Zoom Acquisition Corporation,
a Delaware corporation and wholly-owned subsidiary of Parent ("Subsidiary"),
propose to enter into an Agreement and Plan of Merger, a draft of which has been
provided to us, dated August 23, 2000 (the "Agreement"), pursuant to which
Subsidiary will be merged with and into the Company, which will be the surviving
entity and which will become a wholly-owned subsidiary of Parent (the "Merger").
Pursuant to the Merger, as more fully described in the Agreement, we understand
that each outstanding share of the common stock, $0.001 par value per share, of
the Company ("Company Common Stock") will be converted into the right to receive
0.166 fully paid and nonassessable shares of Parent Common Stock ("Parent Common
Stock"), subject to certain adjustments (the "Consideration"). The terms and
conditions of the Merger are set forth in more detail in the Agreement.
You have asked our opinion as investment bankers as to whether the
Consideration to be received by the stockholders of the Company pursuant to the
Merger is fair to such stockholders from a financial point of view, as of the
date of the Agreement. As you are aware, we were not retained to nor did we
advise the Company with respect to alternatives to the Merger or the Company's
underlying decision to proceed with or effect the Merger. Further, we were not
requested to nor did we solicit or assist the Company in soliciting indications
of interest from third parties for all or any part of the Company.
In connection with our opinion, we have, among other things: (i) reviewed
publicly available financial and other data with respect to the Company and
Parent, and certain other relevant financial and operating data relating to the
Company and Parent made available to us from published sources; (ii) reviewed
the financial terms and conditions of the Agreement in the form presented to the
Company's Board of Directors; (iii) reviewed certain publicly available
information concerning the trading of, and the trading market for, Company
Common Stock and Parent Common Stock, (iv) compared the financial position and
operating results of the Company and Parent with certain other public companies
which we deemed to be relevant; (v) considered the financial terms, to the
extent publicly available, of selected recent business combinations which we
deemed to be comparable, in whole or in part, to the Merger; (vi) discussed with
representatives of the management of the Company and Parent certain information
of a business and financial nature regarding the Company and Parent, including
the historical and current financial condition and operating results, as well as
the future prospects, of the Company and Parent; (vii) made inquiries regarding
and discussed the Merger and the Agreement and other matters related thereto
with the Company's counsel; and (viii) performed such other analyses and
examinations as we have deemed appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts for Company and Parent provided to us by their respective
C-1
<PAGE>
Board of Directors
Nogatech Inc.
August 23, 2000
Page Two
managements, upon their advice and with your consent we have assumed for
purposes of our opinion that the forecasts have been reasonably prepared on
bases reflecting the best available estimates and judgments of their respective
managements at the time of preparation as to the future financial performance of
Company and Parent and that they provide a reasonable basis upon which we can
form our opinion. We have also assumed that there have been no material changes
in the Company's or Parent's assets, financial condition, results of operations,
business or prospects since the respective dates of their last financial
statements made available to us. We have relied on advice of counsel and
independent accountants to the Company as to all legal and financial reporting
matters with respect to the Company, the Merger and the Agreement. We have
assumed that the Merger will be consummated in a manner that complies in all
respects with the applicable provisions of the Securities Act of 1933 (the
"Securities Act"), the Securities Exchange Act of 1934 and all other applicable
federal and state statutes, rules and regulations. In addition, we have not
assumed responsibility for reviewing any patent applications, technology license
agreements, individual credit files, etc. or making an independent evaluation,
appraisal or physical inspection of any of the assets or liabilities (contingent
or otherwise) of the Company or Parent, nor have we been furnished with any such
appraisals. We are not experts in the evaluation of patents or copyrights and
have assumed, with your consent, that patents and copyrights of each of the
Company and Parent are valid and enforceable. Finally, our opinion is based on
economic, monetary and market and other conditions as in effect on, and the
information made available to us as of, the date hereof. Accordingly, although
subsequent developments may affect this opinion, we have not assumed any
obligation to update, revise or reaffirm this opinion.
We have further assumed with your consent that the Merger will be
consummated in accordance with the terms described in the Agreement, without any
further amendments thereto, and without waiver by the Company of any of the
conditions to its obligations thereunder. We also have assumed that in the
course of obtaining the necessary regulatory approvals for the Merger, no
restrictions will be imposed that could have a material adverse effect on the
contemplated benefits of the Merger.
We have been retained solely for the purpose of advising you on the
fairness, from a financial point of view, of the Merger and will receive a fee
for our services. In the ordinary course of our business, we actively trade the
equity securities of the Company for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities. We have also acted as an underwriter in connection with an
offering of securities of the Company.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Consideration to be received by the stockholders of
the Company pursuant to the Merger was fair to such stockholders from a
financial point of view, as of the date hereof.
We are not expressing an opinion regarding the price at which the Parent
Common Stock may trade at any future time. The Consideration to be received by
the stockholders of the Company pursuant to the Merger is based upon a fixed
exchange ratio and, accordingly, the market value of the Consideration may vary
significantly.
This opinion is directed to the Board of Directors of the Company in its
consideration of the Merger and is not a recommendation to any stockholder as to
how such stockholder should vote with respect to the Merger. Further, this
opinion addresses only the financial fairness of the Consideration to be
received by the stockholders of the Company and does not address the relative
merits of the
C-2
<PAGE>
Board of Directors
Nogatech Inc.
August 23, 2000
Page Three
Merger and any alternatives to the Merger, the Company's underlying decision to
proceed with or affect the Merger or any other aspect of the Merger. This
opinion may not be used or referred to by the Company, or quoted or disclosed to
any person in any manner, without our prior written consent, which consent is
hereby given to the inclusion of this opinion in any proxy statement or
prospectus filed with the Securities and Exchange Commission in connection with
the Merger. In furnishing this opinion, we do not admit that we are experts
within the meaning of the term "experts" as used in the Securities Act and the
rules and regulations promulgated thereunder, nor do we admit that this opinion
constitutes a report or valuation within the meaning of Section 11 of the
Securities Act.
Very truly yours,
W.R. HAMBRECHT+CO LLC
C-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(1) Registrant's Certificate of Incorporation provides that, to the fullest
extent permitted by the Delaware General Corporation Law (the "DGCL"), a
director of Registrant shall not be personally liable to Registrant or its
stockholders for breach of fiduciary duty as a director.
(2) Registrant's Bylaws provide that Registrant shall indemnify its
directors, to the fullest extent permitted by the DGCL. Registrant's bylaws
provide that Registrant shall have power to indemnify its officers as set forth
in the DGCL.
(3) Registrant has entered into indemnification agreements with its
directors and certain of its officers.
(4) Registrant maintains insurance on behalf of any person who is a director
or officer against any loss arising from any claim asserted against him and
incurred by him in any such capacity, subject to certain exclusions.
(5) The Agreement and Plan of Merger provides that, effective upon the
consummation of the merger, Registrant will indemnify the current officers,
directors and employees of Nogatech and its subsidiaries for claims and losses
arising out of their activities in such capacities and will maintain in effect
directors and officers liability insurance covering such persons for a period of
six years thereafter.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
*2.1 Agreement and Plan of Merger, dated as of August 23, 2000,
by and among Registrant, Zoom Acquisition Corporation, and
Nogatech, Inc. (attached as Annex A to the proxy
statement/prospectus)
*2.2 Voting Agreement, dated as of August 23, 2000, by and
between Registrant and certain stockholders of
Nogatech, Inc. (attached as Annex B to the proxy
statement/prospectus)
3.1(1) Form of Restated Certificate of Incorporation of Registrant
3.2(2) Amended Bylaws of Registrant
4.1(3) Amended and Restated Stock Rights Agreement dated July 30,
1993 among the Registrant and certain of its stockholders as
amended.
*5.1 Opinion of Gray Cary Ware & Freidenrich LLP
8.1 Tax Opinion of Gary Cary Ware & Freidenrich LLP
8.2 Tax Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
**10.1(3) 1993 Stock Option Plan, as amended.
**10.2(3) 1995 Outside Directors Stock Option Plan.
**10.3(4) Amended and Restated 1995 Employee Stock Purchase Plan.
**10.4(3) Form of Indemnity Agreement for officers and directors.
+10.5(3) Agreement dated June 28, 1991 between the Registrant and
Fujifilm Microdevices Co., Ltd. ("Fujifilm"), as amended.
+10.6(3) Agreement dated July 27, 1992 between the Registrant and
Fujifilm.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
10.7(3) Letter Agreement dated December 16, 1991 between the
Registrant and Dolby Laboratories Licensing Corporation,
amended.
10.11(3) Lease Agreement dated October 1, 1992 between the
Registrant's subsidiary, Zoran Microelectronics Ltd.
("ZML"), and Matam-Haifa Scientific Industries Center Ltd.
("Matam").
+10.12(3) License Agreement for ZR33891 Digital Filter Processor dated
June 8, 1995 between the Registrant and Atmel Corporation
("Atmel").
+10.13(3) License Agreement for ZR34325 Vector Signal Processor dated
June 8, 1995 between the Registrant and Atmel.
+10.14(3) Cooperation and Project Funding Agreement dated June 16,
1991 between ZML and the Israel-United States Binational
Industrial Research and Development Foundation ("BIRDF").
+10.15(3) Cooperation and Project Funding Agreement dated June 9, 1992
between ZML and BIRDF.
10.16(3) Note of Approval No. 17391 dated September 5, 1994 issued
ZML by the Office of Chief Scientist, Head of the Industry
Research and Development Administration of the Israeli
Ministry of Industry and Trade (the "Chief Scientist"),
together with ZML's Letter of Undertaking dated September
1994.
10.17(3) Note of Approval No. 17337 dated September 5, 1994 issued
ZML by the Chief Scientist, together with ZML's Letter of
Undertaking dated September 4, 1994.
10.18(3) Loan Agreements dated July 25, 1995, August 1, 1995,
August 15, 1995, August 31, 1995 and November 1, 1995
between ZML and the Israel Discount Bank.
10.29(5) Summary of Discussion dated April 23, 1996 between ZML and
Matam regarding Lease Agreement dated October 1, 1992
between ZML and Matam.
10.30(6) Memorandum of Understanding Dated April 23, 1996 between and
IBM Israel Ltd. regarding Lease Agreement dated October 1,
1992 between ZML and Matam.
10.33(7) Sub-Sublease dated April 1, 1997 between the Registrant and
Integrated Silicon Solutions, Inc.
**10.34(8) Confidential Separation Agreement dated August 4, 1997
between the Registrant and George T. Haber.
10.35(9) Agreement for Purchase and Sale of Assets between the
Registrant and MGI Software Corp. dated June 15, 1999.
10.36(9) Unprotected Tenancy Agreement dated September 16, 1997
between ZML and Matam together with Appendix Addendum to
Unprotected Tenancy Agreement of 16.9.97.
23.1 Consent of PricewaterhouseCoopers LLP for Registrant
23.2 Consent of Kesselman & Kesselman, a member firm of
PricewaterhouseCoopers International Limited for Nogatech,
Inc.
23.3 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibits 5.1 and 8.1)
23.4 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 8.2)
*24.1 Powers of Attorney (see signature page)
99.1 Form of Proxy Card of Nogatech, Inc.
*99.2 Fairness Opinion of WR Hambrecht + Co., LLC (attached as
Annex C to the proxy statement/prospectus)
</TABLE>
------------------------
* Previously filed.
II-2
<PAGE>
** Constitutes a management contact or compensatory plan required to be filed.
+ Confidential treatment has been granted as to a portion of this Exhibit.
(1) Incorporated by reference to Exhibit 3.2 or Registrant's Form SB-2
Registration Statement (No. 33-98630-LA), which became effective on
December 14, 1995 (the "1995 Registration Statement").
(2) Incorporated by reference to Exhibit 3.3 to Registrant's Form 10-Q Quarterly
Report for the quarter ended September 30, 1998.
(3) Incorporated by reference to identically numbered Exhibit to the 1995
Registration Statement.
(4) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Annual Report for the year ended December 31, 1995.
(5) Incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q
Quarterly Report for the quarter ended June 30, 1996 (the "June 1996
Form 10-Q").
(6) Incorporated by reference to Exhibit 10.2 to the June 1996 Form 10-Q.
(7) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-Q Quarterly Report for the quarter ended March 31, 1997.
(8) Incorporated by reference to Exhibit 10.34 to Registrant's Form 10-K Annual
Report for the year ended December 31, 1997.
(9) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-Q Quarterly Report for the quarter ended June 30, 1999.
(B) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted because they are not
applicable or not required or because the information is included elsewhere in
this document.
ITEM 22. UNDERTAKINGS.
(1) Registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this Registration Statement by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), Registrant
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(2) Registrant undertakes that every prospectus (i) that is filed pursuant
to paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933, as amended, (the
"Securities Act") and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) Registrant hereby undertakes to respond to requests for information that
is incorporated by reference into the Proxy Statement/Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed
II-3
<PAGE>
subsequent to the effective date of the Registration Statement through the date
of responding to the request.
(4) Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
(5) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a director, officer or controlling person of Registrant in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(6) Registrant hereby undertakes:
A. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
B. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
C. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(7) Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of Registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934 (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Santa Clara, State of California on September
29, 2000.
<TABLE>
<S> <C> <C>
ZORAN CORPORATION
By: /s/ LEVY GERZBERG
-----------------------------------------
Levy Gerzberg
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
President, Chief Executive
/s/ LEVY GERZBERG Officer and Director
------------------------------------------- (PRINCIPAL EXECUTIVE September 29, 2000
Levy Gerzberg OFFICER)
Vice President, Finance and
* Chief Financial Officer
------------------------------------------- (PRINCIPAL FINANCIAL AND September 29, 2000
Karl Schneider ACCOUNTING OFFICER)
*
------------------------------------------- Chairman of the Board of September 29, 2000
Uzia Galil Directors
*
------------------------------------------- Director September 29, 2000
James D. Meindl
*
------------------------------------------- Director September 29, 2000
Arthur B. Stabenow
*
------------------------------------------- Director September 29, 2000
Philip M. Young
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ LEVY GERZBERG
--------------------------------------
Levy Gerzberg,
ATTORNEY-IN-FACT,
PURSUANT TO POWER OF ATTORNEY,
DATED SEPTEMBER 19, 2000
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
*2.1 Agreement and Plan of Merger, dated as of August 23, 2000,
by and among Registrant, Zoom Acquisition Corporation, and
Nogatech, Inc. (attached as Annex A to the proxy
statement/prospectus)
*2.2 Voting Agreement, dated as of August 23, 2000, by and
between Zoran Corporation and certain stockholders of
Nogatech, Inc. (attached as Annex B to the proxy statement/
prospectus)
3.1(1) Form of Restated Certificate of Incorporation of Registrant
3.2(2) Amended Bylaws of Registrant
4.1(3) Amended and Restated Stock Rights Agreement dated July 30,
1993 among the Registrant and certain of its stockholders as
amended.
*5.1 Opinion of Gray Cary Ware & Freidenrich LLP
8.1 Tax Opinion of Gary Cary Ware & Freidenrich LLP
8.2 Tax Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
**10.1(3) 1993 Stock Option Plan, as amended.
**10.2(3) 1995 Outside Directors Stock Option Plan.
**10.3(4) Amended and Restated 1995 Employee Stock Purchase Plan.
**10.4(3) Form of Indemnity Agreement for officers and directors.
+10.5(3) Agreement dated June 28, 1991 between the Registrant and
Fujifilm Microdevices Co., Ltd. ("Fujifilm"), as amended.
+10.6(3) Agreement dated July 27, 1992 between the Registrant and
Fujifilm.
10.7(3) Letter Agreement dated December 16, 1991 between the
Registrant and Dolby Laboratories Licensing Corporation,
amended.
10.11(3) Lease Agreement dated October 1, 1992 between the
Registrant's subsidiary, Zoran Microelectronics Ltd.
("ZML"), and Matam-Haifa Scientific Industries Center Ltd.
("Matam").
+10.12(3) License Agreement for ZR33891 Digital Filter Processor dated
June 8, 1995 between the Registrant and Atmel Corporation
("Atmel").
+10.13(3) License Agreement for ZR34325 Vector Signal Processor dated
June 8, 1995 between the Registrant and Atmel.
+10.14(3) Cooperation and Project Funding Agreement dated June 16,
1991 between ZML and the Israel-United States Binational
Industrial Research and Development Foundation ("BIRDF").
+10.15(3) Cooperation and Project Funding Agreement dated June 9, 1992
between ZML and BIRDF.
10.16(3) Note of Approval No. 17391 dated September 5, 1994 issued
ZML by the Office of Chief Scientist, Head of the Industry
Research and Development Administration of the Israeli
Ministry of Industry and Trade (the "Chief Scientist"),
together with ZML's Letter of Undertaking dated September
1994.
10.17(3) Note of Approval No. 17337 dated September 5, 1994 issued
ZML by the Chief Scientist, together with ZML's Letter of
Undertaking dated September 4, 1994.
10.18(3) Loan Agreements dated July 25, 1995, August 1, 1995,
August 15, 1995, August 31, 1995 and November 1, 1995
between ZML and the Israel Discount Bank.
10.29(5) Summary of Discussion dated April 23, 1996 between ZML and
Matam regarding Lease Agreement dated October 1, 1992
between ZML and Matam.
10.30(6) Memorandum of Understanding Dated April 23, 1996 between and
IBM Israel Ltd. regarding Lease Agreement dated October 1,
1992 between ZML and Matam.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
10.33(7) Sub-Sublease dated April 1, 1997 between the Registrant and
Integrated Silicon Solutions, Inc.
**10.34(8) Confidential Separation Agreement dated August 4, 1997
between the Registrant and George T. Haber.
10.35(9) Agreement for Purchase and Sale of Assets between the
Registrant and MGI Software Corp. dated June 15, 1999.
10.36(9) Unprotected Tenancy Agreement dated September 16, 1997
between ZML and Matam together with Appendix Addendum to
Unprotected Tenancy Agreement of 16.9.97.
23.1 Consent of PricewaterhouseCoopers LLP for Registrant
23.2 Consent of Kesselman & Kesselman, a member firm of
PricewaterhouseCoopers International Limited for Nogatech,
Inc.
23.3 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibits 5.1 and 8.1)
23.4 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 8.2)
*24.1 Powers of Attorney (see signature page)
99.1 Form of Proxy Card of Nogatech, Inc.
*99.2 Fairness Opinion of WR Hambrecht + Co., LLC (attached as
Annex C to the proxy statement/prospectus)
</TABLE>
------------------------
* Previously filed.
** Constitutes a management contact or compensatory plan required to be filed.
+ Confidential treatment has been granted as to a portion of this Exhibit.
(1) Incorporated by reference to Exhibit 3.2 or Registrant's Form SB-2
Registration Statement (No. 33-98630-LA), which became effective on
December 14, 1995 (the "1995 Registration Statement").
(2) Incorporated by reference to Exhibit 3.3 to Registrant's Form 10-Q Quarterly
Report for the quarter ended September 30, 1998.
(3) Incorporated by reference to identically numbered Exhibit to the 1995
Registration Statement.
(4) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Annual Report for the year ended December 31, 1995.
(5) Incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q
Quarterly Report for the quarter ended June 30, 1996 (the "June 1996
Form 10-Q").
(6) Incorporated by reference to Exhibit 10.2 to the June 1996 Form 10-Q.
(7) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-Q Quarterly Report for the quarter ended March 31, 1997.
(8) Incorporated by reference to Exhibit 10.34 to Registrant's Form 10-K Annual
Report for the year ended December 31, 1997.
(9) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-Q Quarterly Report for the quarter ended June 30, 1999.
