<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- - ----- Exchange Act of 1934. For the quarterly period ended March 31, 1996.
Transition report pursuant to Section 13 or 15(d) of the Securities
- - ----- Exchange Act of 1934. For the transition period from
to .
--------------- ----------------
Commission File Number: 0-18738
ZILOG, INC.
(Registrant)
California 13-3092996
- - -------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
210 East Hacienda Avenue, Campbell, California, 95008-6600
----------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 370-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
19,727,139 shares of Common Stock Issued and Outstanding as of April 28, 1996.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZILOG, INC.
CONDENSED CONSOLIDATED STATEMENTS 0F INCOME (UNAUDITED)
( IN THOUSANDS EXCEPT PER SHARE AMOUNTS )
<TABLE>
<CAPTION>
Three months ended
------------------------------
March 31, April 2,
1996 1995
------------- ------------
<S> <C> <C>
Net Sales $80,999 $62,710
Cost and expenses:
Cost of sales 42,941 31,246
Research and development 7,587 6,089
Selling, general and administrative 12,037 10,311
------- -------
62,565 47,646
------- -------
Operating income 18,434 15,064
Other income (expense):
Interest income 733 698
Interest expense (81) (85)
Other, net (368) 1
------- -------
Income before income taxes 18,718 15,678
Provision for income taxes 6,645 5,644
------- -------
Net income $12,073 $10,034
======= =======
Net income per share $ 0.59 $ 0.51
======= =======
Number of shares used in
computing per share amounts 20,424 19,716
======= =======
</TABLE>
See accompanying notes.
1
<PAGE> 3
ZILOG, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,106 $ 7,784
Short-term investments 57,953 73,824
Accounts receivable, less allowance for
doubtful accounts of $250 in 1996 and 1995 42,447 43,061
Inventories 33,258 28,152
Prepaid expenses, deferred income taxes and
other current assets 17,980 16,071
-------- --------
Total current assets 158,744 168,892
Property, plant and equipment, at cost 301,510 264,111
Less: accumulated depreciation and amortization (93,520) (84,771)
-------- --------
Net property, plant and equipment 207,990 179,340
Other assets 5,522 5,198
-------- --------
$372,256 $353,430
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 36,732 $ 36,207
Accrued compensation and employee benefits 12,073 14,747
Other accrued liabilities 6,196 6,574
Income taxes payable 14,566 8,603
-------- --------
Total current liabilities 69,567 66,131
Deferred income taxes 8,435 8,435
Stockholders' equity:
Common Stock, no par value; 75,000,000 shares
authorized; 19,633,593 shares issued and
outstanding at March 31, 1996 (19,455,627
shares at December 31,1995) 148,699 145,313
Retained Earnings 145,447 133,374
Net unrealized gain on securities 108 177
-------- --------
Total stockholders' equity 294,254 278,864
-------- --------
$372,256 $353,430
======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 4
ZILOG, INC.
CONDENSED CONSOLIDATED STATEMENTS 0F CASH FLOWS (UNAUDITED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended
-----------------------------
March 31, April 2,
1996 1995
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 12,073 $ 10,034
Adjustment to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 9,990 5,621
Loss from disposition of equipment 95 8
Changes in assets and liabilities:
Accounts receivable 614 (974)
Inventories (5,106) 3,341
Prepaid expenses, deferred income taxes
and other assets (2,148) (484)
Accounts payable 525 (10,809)
Accrued compensation and employee benefits (2,674) (1,611)
Other accrued liabilities and income taxes payable 5,585 2,225
-------- --------
Cash provided by operating activities 18,954 7,351
-------- --------
Cash flows from investing activities:
Capital expenditures (38,535) (27,400)
Short-term investments:
Purchases (5,964) (16,285)
Proceeds from sales 17,958 29,819
Proceeds from maturities 3,523 9,287
-------- --------
Cash used for investing activities (23,018) (4,579)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 3,386 6,999
-------- --------
Increase (decrease) in cash and cash equivalents (678) 9,771
Cash and cash equivalents at beginning of period 7,784 8,035
-------- --------
Cash and cash equivalents at end of period $ 7,106 $ 17,806
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 5
ZILOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1) Interim information is unaudited; however, in the opinion of the Company's
management, all adjustments (consisting only of normal recurring
adjustments), necessary for a fair statement of interim results have been
included. The results for interim periods are not necessarily indicative of
results to be expected for the entire year. These financial statements and
notes should be read in conjunction with the Company's annual consolidated
financial statements and notes thereto contained in the Company's Annual
Report to Shareholders and the Company's Annual Report on Form 10-K for the
year ended December 31, 1995. The Consolidated Balance Sheet at December
31, 1995 has been derived from audited financial statements at that date.
2) The following is a summary of total securities, which are all held as
available-for-sale (in thousands):
<TABLE>
<CAPTION>
March 31, 1996
-------------------------------------------------------------
Gross Gross Estimated
Cost Unrealized Unrealized Fair
Gains Losses Value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds $57,785 $182 $(14) $57,953
=============================================================
</TABLE>
The gross realized gains and losses on sales have not been material for
the quarters ended March 31, 1996 and April 2, 1995.
The amortized cost and estimated fair value of marketable debt securities
are shown below (in thousands):
<TABLE>
<CAPTION>
March 31, 1996
---------------------
Estimated
Cost Fair
Value
-------- ---------
<S> <C> <C>
Due in 1 year or less $23,937 $23,986
Due after 1 year through 3 years 23,126 23,202
Due after 3 years 10,722 10,765
------- -------
Total debt securities $57,785 $57,953
======= =======
</TABLE>
4
<PAGE> 6
3) The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
Mar. 31, Dec. 31,
1996 1995
------------ ------------
<S> <C> <C>
Raw Materials $ 4,057 $ 3,195
Work-in-process 23,869 22,077
Finished goods 5,332 2,880
-------- --------
$33,258 $28,152
======== ========
</TABLE>
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT:
When used in this Report, the words "estimate," "project," "intend,"
and "expect" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially. For a discussion of certain of such
risks, see "Factors That May Affect Future Results." Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release
updates or revisions to these statements.
5
<PAGE> 7
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table presents unaudited results. The Company believes that all
necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts shown below to state fairly the selected quarterly
information when read in conjunction with the Consolidated Financial Statements
included elsewhere herein. Interim results are based on fiscal quarters of
thirteen weeks in duration ending on the last Sunday of each quarter. The
operating results for any quarter are not necessarily indicative of results for
any subsequent quarter or the full fiscal year. All tabular information is
provided in thousands, except per share amounts and percentages.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
First First
Quarter Quarter Change
1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Net Sales $80,999 $62,710 29.2%
Operating Income $18,434 $15,064 22.4%
Net Income $12,073 $10,034 20.3%
Net Income Per Share $ 0.59 $ 0.51 15.7%
</TABLE>
Net Sales
The Company's quarterly operating results have and will vary because of
a number of factors, including the timing and success of new product
introductions, changes in product mix, volume, timing and shipment of orders and
fluctuations in manufacturing productivity. Quarter-to-quarter sales comparisons
are also subject to customer order patterns and seasonality. Because the
Company's products are available from both the Company and distributors, the
customer's decision to buy from a distributor or directly from the Company can
affect Zilog's quarterly sales and profitability. See "Factors That May Affect
Future Results" for a discussion of additional considerations which may affect
the Company's future operating results.
Net sales increased 29.2% for the first quarter of 1996 over the
comparable quarter of 1995. During the quarter, net sales increased in the
consumer, computer peripherals and datacommunications markets. The increases
were primarily due to strengths in modem, television products, keyboard and
pointing device applications, which saw both higher unit volumes and higher
6
<PAGE> 8
average selling prices. The revenue growth during the last two quarters can also
be attributed in part to the successful ramp up of our new 8 inch sub micron fab
in Nampa, Idaho. The Company continues to improve the functionality and value of
its products, which bring more intelligence to its customers' end products. The
increases were partially offset by expected declines in commodity and low serial
rate communications applications.
The Company will continue to introduce new Application Specific
Standard Products tailored to its served market niches and expects to continue
revenue and unit growth in these markets.
Domestic net sales increased 59.7% in the first quarter of 1996
compared with the first quarter of 1995 and represented 49% of net sales in the
first quarter of 1996. International (export) net sales increased by 9.4% from
the comparable quarter of 1995 and represented 51% of net sales in the first
quarter of 1996. The fastest growing international areas are Hong Kong, Korea,
South-east Asia and Canada.
<TABLE>
<CAPTION>
First First
Quarter Quarter Change
1996 1995
------------ ------------- -----------
<S> <C> <C> <C>
Cost of Sales $42,941 $31,246 37.4%
Percentage of Net Sales 53.0% 49.8%
</TABLE>
Cost of sales increased as a percentage of net sales to 53.0%,
primarily as a result of additional depreciation expense and fab start-up costs.
With this new facility comes added costs which have increased cost of sales
during the start up phase of operating. If, as the Company expects, internal
efficiencies improve during late 1996, and internal production continues to
replace more expensive outside foundry services, the cost of sales as a
percentage of net sales is expected to decline.
<TABLE>
<CAPTION>
First First
Quarter Quarter Change
1996 1995
------------ ------------- -----------
<S> <C> <C> <C>
Research and Development $7,587 $6,089 24.6%
Percentage of Net Sales 9.4% 9.7%
</TABLE>
Research and development expenditures increased during the first
quarter of 1996 in absolute terms. The increase in research and development
expenses reflects the Company's commitment to the continued substantial
investment in new products and new design and manufacturing process technology.
The Company expects research and development expenditures to increase in
absolute terms throughout the remainder of 1996.
7
<PAGE> 9
The Company introduced 10 new products during the quarter, including
four products to serve television applications; two microcontroller products
that require low power to operate; two keyboard controllers; a controller for
personal computer memory applications (PCMCIA) and a security control device.
<TABLE>
<CAPTION>
First First
Quarter Quarter Change
1996 1995
------------ ------------- -----------
<S> <C> <C> <C>
Selling, General & Administrative $12,037 $10,311 16.7%
Percentage of Net Sales 14.9% 16.4%
</TABLE>
Selling, general and administrative expenses increased in absolute
terms and decreased as a percentage of net sales which reflected cost savings in
several areas. The higher absolute expense level reflects increased sales
commissions paid on higher quarterly revenues. Effective cost control has held
overall expenses relatively constant. The Company expects selling, general and
administrative costs to continue to increase in absolute terms but decrease as a
percentage of net sales, if sales continue to grow as expected.
<TABLE>
<CAPTION>
First First
Quarter Quarter Change
1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Other Incom $284 $614 (53.7)%
Percentage of Net Sales 0.4 % 1.0%
</TABLE>
Other income declined during the first quarter of 1996 compared to the
first quarter of 1995. During the first quarter of 1996, the stronger dollar
generated foreign exchange translation losses on the non dollar-based accounts
receivable.
Taxes
The provision for income taxes reflects an estimated annual effective
tax rate of 35.5% for the quarter ended March 31, 1996 and 36% for the quarter
ended April 2, 1995. This rate differs from the combined statutory rate in
effect during the periods primarily as a result of the Company's investment in
tax exempt securities and a lower effective state tax rate.
8
<PAGE> 10
FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that may affect the Company's future
operating results, including uncertain political and general economic
conditions, market acceptance of the Company's new products, the Company's
ability to introduce new products and technologies on a timely basis, changes in
product mix or fluctuations in manufacturing yield that affect the Company's
gross margins, and numerous competitive factors.
During 1995, Zilog introduced a total of 40 new products for its
datacommunications, intelligent peripheral controller and consumer product
lines. The success of these new products is dependent on a number of factors,
including the Company's ability to continue to achieve design wins for these
products and the Company's ability to manufacture the products in sufficient
quantities to meet anticipated demand. New products may exhibit technological
defects which may impede market acceptance if defects are not resolved promptly.
The Company believes that a significant portion of its future revenues will come
from these new products. Gross margins for new products are generally higher and
are expected to somewhat offset price reductions in older products.
The Company's operating results will depend, to a significant extent,
on its ability to continue to introduce new products. The success of new product
introductions is dependent on several factors, including proper new product
selection, timely completion and introduction of new product designs,
development of support tools and collateral literature that make complex new
products easy for engineers to understand as well as use, and market acceptance
of customers' end products.
During the first quarter of 1996, Zilog introduced 10 new products.
There can be no assurance that any new products will receive or maintain
substantial market acceptance, nor can there be assurance that the Company will
continue to introduce new products at a similar pace to that established over
the past year.
Operating results could be adversely affected if the Company is unable
to develop and implement new design and process technologies. Design and process
technology advances are extremely complex areas subject to rapid technological
change and significant risk. New product designs must be completed in time to
meet market requirements, and volume production of new products at acceptable
yields must be achieved for business plan operating results to be realized. New
products anticipated from and introduced by Zilog could create uncertainty in
the marketplace and cause customers to defer or alter design wins or purchasing
decisions. Additionally, new products or product enhancements from competitors
of the Company, or significant pricing pressures, could have an adverse impact
on the Company's operating results.
9
<PAGE> 11
As is typical in the semiconductor industry, the Company has from time
to time experienced lower than anticipated production yields. The Company
increased its production capacity in 1995 and must be able to further increase
capacity in 1996 to support anticipated sales volumes and shortened delivery
times. Much of the 1996 increased production is anticipated to come from the new
wafer fabrication facility that the Company opened in 1995. Qualifying and
ramping a new facility is an extremely complex process. Operating results could
be adversely affected if any problems occur that make it difficult to produce
the quantities of commercial product that the Company anticipates producing in
the new facility in 1996. Such difficulties include but are not limited to:
equipment being delivered later than or not performing as expected; process
technology changes not operating as expected; engineers not operating equipment
as expected; and other possible problems. The Company cannot at this time
foresee with certainty any such problems, but such problems have occurred in the
past in the start-up and ramp of production in a new facility. The company is
also experiencing certain inflationary pressures in labor and materials.
Operating results could be affected if the Company is unable to pass these cost
increases in labor, raw materials and capital equipment through to the Company's
customers.
The Company has used outside wafer foundries and assemblers to supply a
portion of its manufacturing needs, and the Company expects to continue to rely
on one or more wafer foundries and assemblers for a portion of its manufacturing
needs. No assurance can be given that these foundries will not raise prices or
meet expected delivery quantities. In addition, no assurance can be given that
the Company or its outside wafer foundries or assemblers will not experience
production yield problems in the future which could result in an adverse effect
on the Company's results of operations. The prolonged failure of the Company to
increase production capacity, obtain wafers or assembly services from outside
suppliers as needed could adversely affect the Company's operating results.
Certain of the Company's products are incorporated into disk drives,
printers, keyboards and modems. As a result, a slowdown in the demand for
personal computers and related peripherals could adversely affect the Company's
operating results. A significant portion of the Company sales are to the
consumer electronics markets for use in products such as television sets,
infrared remote controls and telephone answering machines. The consumer
electronics markets are subject to volatile and rapid changes in customer
preferences for electronics products that could adversely impact the Company's
results.
Because of the foregoing, as well as other factors affecting the
Company's operating results, past financial performance should not be considered
to be a reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods. In
addition, the Company participates in a highly dynamic industry that may result
in significant volatility of Zilog's common stock price.
10
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
First First
Quarter Quarter
1996 1995
------------- ------------
<S> <C> <C>
Cash, Cash Equivalents and
Short-Term Investments $65,059 $75,564
Working Capital $89,177 $81,707
Cash Provided By Operating Activities $18,954 $ 7,351
Cash Used In Investing Activities ($23,018) $(4,579)
Cash Provided By Financing Activities $ 3,386 $ 6,999
</TABLE>
Cash and Short-Term Investments were reduced during the quarter and
were used to pay for the expansion of the Company's wafer fabrication facilities
in Idaho. It is expected that Cash and Short-Term Investment levels will
continue to decline during the next quarter as additional equipment is acquired
for the new fab and new research facility.
Accounts Receivable, at $42.4 million, remained relatively constant
even though sales for the quarter increased by 11% over the last quarter of
1995. Inventory levels increased to $33.3 million as work in process levels
expanded in conjunction with increased processing at the new wafer fabrication
faciity in Nampa, Idaho.
The Company expects to make total capital additions of approximately
$100 million in 1996. These expenditures will primarily be used for the design,
construction and equipping of the Company's new wafer fabrication facility in
Nampa, Idaho. The expansion will provide increased production capacity and
research facilities.
The Company believes its current cash, cash equivalents and short-term
investment balances, together with funds expected to be generated from
operations, will provide adequate cash to fund the Company's anticipated
liquidity needs for at least the next twelve months. The Company may also use
bank borrowings and capital leases, depending on the terms available. The
Company's cash requirements in the future may also be financed by a combination
of additional equity or debt financing.
11
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 24, 1996 at 4:00 PM, the Annual Meeting of Zilog, Inc.
("Company") was held at 210 East Hacienda Avenue, Campbell, CA. There were
present or represented at the meeting 19,633,603 shares of Common Stock. The
Common Stock Shareholders elected Edgar A. Sack, Thomas J. Connors, William H.
Janeway, Henry Kressel, Robert M. White and Larry W. Wangberg to the Company's
Board of Directors. The vote was as follows: Dr. Sack: For 17,268,175,
Withheld 7,585; Mr. Connors: For 17,267,799, Withheld 7,961; Mr. Janeway: For
17,268,864, Withheld 6,896; Dr. Kressel: For 17,268,864, Withheld 6,896;
Dr. White: For 17,262,161, Withheld 13,599; Mr. Wangberg: For 17,267,148,
Withheld 8,612. The selection of Ernst & Young LLP as the Company's auditors
for the fiscal year ending December 31, 1996 was ratified: 17,248,479 were
voted to confirm Ernst & Young LLP; 19,820 voted Against, 7,461 abstained and
there were no broker non-votes. No other business was transacted at the Annual
Meeting and there have not been any other submissions of matters to a vote of
the security holders.
12
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are filed herewith:
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
None
13
<PAGE> 15
ZILOG, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: May 14, 1996 ZILOG, INC.
/s/ William R. Walker
-----------------------------------
William R. Walker
Senior Vice President and
Chief Financial Officer
14
<PAGE> 16
EXHIBIT INDEX
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 7,106
<SECURITIES> 57,953
<RECEIVABLES> 42,697
<ALLOWANCES> 250
<INVENTORY> 33,258
<CURRENT-ASSETS> 158,744
<PP&E> 301,510
<DEPRECIATION> 93,520
<TOTAL-ASSETS> 372,256
<CURRENT-LIABILITIES> 69,567
<BONDS> 0
0
0
<COMMON> 148,699
<OTHER-SE> 145,555
<TOTAL-LIABILITY-AND-EQUITY> 372,256
<SALES> 80,999
<TOTAL-REVENUES> 80,999
<CGS> 42,941
<TOTAL-COSTS> 42,941
<OTHER-EXPENSES> 7,587
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81
<INCOME-PRETAX> 18,718
<INCOME-TAX> 6,645
<INCOME-CONTINUING> 12,073
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,073
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
</TABLE>
