<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 June 30, 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
--- ---
19,991,014 shares of Common Stock Issued and Outstanding as of July 28, 1996.
<PAGE> 2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZILOG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- -----------------------
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
------- ------- -------- ---------
<S> <C> <C> <C> <C>
Net Sales $85,459 $66,729 $166,458 $129,439
Costs and expenses:
Cost of sales 47,534 33,474 90,475 64,720
Research and development 7,412 6,740 14,999 12,829
Selling, general and administrative 11,477 10,852 23,514 21,163
------- ------- -------- --------
66,423 51,066 128,988 98,712
------- ------- -------- --------
Operating income 19,036 15,663 37,470 30,727
Other income (expense):
Interest income 705 675 1,438 1,373
Interest expense (82) (82) (163) (167)
Other, net (726) 769 (1,094) 770
------- ------- -------- --------
Income before income taxes 18,933 17,025 37,651 32,703
Provision for income taxes 6,533 6,129 13,178 11,773
------- ------- -------- --------
Net income $12,400 $10,896 $ 24,473 $ 20,930
======= ======= ======== --------
Net income per share $ 0.60 $ 0.54 $ 1.19 $ 1.05
======= ======= ======== ========
Number of shares used in computing
per share amounts 20,622 20,334 20,523 20,025
======= ======= ======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 3
ZILOG, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,801 $ 7,784
Short-term investments 47,156 73,824
Accounts receivable, less allowance for doubtful
accounts of $250 in 1996 and 1995 41,611 43,061
Inventories 34,092 28,152
Prepaid expenses, deferred income taxes and
other current assets 17,836 16,071
--------- --------
Total current assets 155,496 168,892
Property, plant and equipment, at cost 338,131 264,111
Less: accumulated depreciation and amortization (104,438) (84,771)
--------- --------
Net property, plant and equipment 233,693 179,340
Other assets 5,208 5,198
--------- --------
$ 394,397 $353,430
========= ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 39,633 $ 36,207
Accrued compensation and employee benefits 14,608 14,747
Other accrued liabilities 4,092 6,574
Income taxes payable 13,335 8,603
--------- --------
Total current liabilities 71,668 66,131
Deferred income taxes 8,435 8,435
Shareholders' equity:
Common Stock, no par value; 75,000,000 shares
authorized; 19,981,245 shares issued and
outstanding at June 30, 1996 (19,455,627 shares
at December 31, 1995) 156,414 145,313
Retained earnings 157,847 133,374
Net unrealized gain on securities 33 177
--------- --------
Total shareholders' equity 314,294 278,864
--------- --------
$ 394,397 $353,430
========= ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
ZILOG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Increase (decrease) in cash and cash equivalents
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
June 30, July 2,
1996 1995
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 24,473 $ 20,930
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 21,093 11,151
Loss from disposition of equipment 96 32
Changes in assets and liabilities:
Accounts receivable 1,450 (1,814)
Inventories (5,940) 3,515
Prepaid expenses, deferred income taxes and
other assets (1,813) (679)
Accounts payable 3,426 (15,377)
Accrued compensation and employee benefits (139) (43)
Other accrued liabilities and income taxes payable 2,250 4.341
------- -------
Cash provided by operating activities 44,896 22,056
------- -------
Cash flows from investing activities:
Capital expenditures (75,161) (38,377)
Short-term investments:
Purchases (17,552) (59,121)
Proceeds from sales 31,141 51,742
Proceeds from maturities 12.592 12.638
------- -------
Cash used for investing activities (48,980) (33,118)
------- -------
Cash flows from financing activities:
Proceeds from issuance of stock 11,101 11,173
------- -------
Increase in cash and cash equivalents 7,017 111
Cash and cash equivalents at beginning of period 7,784 8,035
------- -------
Cash and cash equivalents at end of period $14,801 $ 8,146
======= ========
</TABLE>
See accompanying notes.
4
<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>
June 30, 1996
-----------------------------------------------------------------------
Gross Gross Estimated
Cost Unrealized Unrealized Fair
Gains Losses Value
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds $47,105 $79 $(28) $47,156
========================================================================
</TABLE>
The gross realized gains and losses on sales have not been material for the
three and six month periods ended June 30, 1996 and July 2, 1995.
The amortized cost and estimated fair value of marketable debt securities are
shown below (in thousands):
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------
Estimated
Cost Fair
Value
-------- ---------
<S> <C> <C>
Due in 1 year or less $18,108 $18,129
Due after 1 year through 3 years 28,997 29,027
------- -------
Total debt securities $47,105 $47,156
======= =======
</TABLE>
5
<PAGE> 6
3) The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Raw Materials $ 6,261 $ 3,195
Work-in-process 21,981 22,077
Finished goods 5,850 2,880
------- -------
$34,092 $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.
6
<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 Condensed 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>
Three Months Ended Six Months Ended
-------------------------- -----------------------------
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $85,459 $66,729 $166,458 $129,439
Operating Income $19,036 $15,663 $ 37,470 $ 30,727
Net Income $12,400 $10,896 $ 24,473 $ 20,930
Net Income Per Share $ 0.60 $ 0.54 $ 1.19 $ 1.05
</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 28.1% for the second quarter of 1996 over the
comparable quarter of 1995 and 28.6% for the first half of 1996 compared to the
same period of 1995. During the quarter, net sales increased in the consumer
market and, to a lesser extent, in the datacommunications market, but declined
in the computer peripherals market. During the quarter, the sales increases were
primarily due to higher volumes in modem, television,
7
<PAGE> 8
home communications and pointing device applications. As a result of an industry
slowdown in the shipment of personal computers and some consumer products during
the second calendar quarter of 1996, the Company believes some customers have an
over supply of inventory of some of the Company's products. This over supply of
inventory could have an effect on future sales.
The revenue growth during the last two quarters can also be attributed,
in part, to the successful ramp up of our new eight inch sub-micron fab in
Nampa, Idaho. The increases were partially offset by declines in keyboard,
printer and military operations.
Domestic net sales increased 39.2% for the second quarter of 1996,
compared with the second quarter of 1995, and represented 47.5% of net sales for
the second quarter of 1996. International net sales increased by 19.4% from the
comparable quarter of 1995 and represented 52.5% of net sales for the second
quarter of 1996. The largest increases in sales in international areas are Hong
Kong, Korea and Japan. While the Company expects these trends to continue over
time, prospects for the third quarter of 1996 indicate that domestic net sales
may decrease from the second quarter of 1996. International net sales are
expected to decrease also. The summer slowdown in Europe is one reason for the
expected decrease in international sales.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- --------------------------
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cost of Sales $47,534 $33,474 $90,475 $64,720
Percentage of Net Sales 55.6% 50.2% 54.4% 50.0%
</TABLE>
Cost of sales increased as a percentage of net sales in the second
quarter of 1996 to 55.6% from 50.2% in the same quarter of 1995. For the six
months ending June 30, 1996, cost of sales increased to 54.4% from 50.0%
compared with the same period of 1995. The increase in the percentage of cost of
sales to net sales for both the second quarter of 1996 and for the year to date
was attributable to additional depreciation expenses, wafer fabrication start up
costs and lower average selling prices as a result of a shift in product mix.
During the second half of 1995, the Company began production in its new
eight inch sub-micron facility in Nampa, Idaho. Depreciation expense is expected
to increase throughout 1996, primarily due to capital additions at the new
facility. This occurred throughout the first half of 1996, and further increases
are expected to continue throughout 1996. A shift in mix away from
datacommunications products and toward consumer products also appears to be
lowering the average selling price of many of the Company's products. This trend
is expected to continue during the quarter ending September 29, 1996.
8
<PAGE> 9
The financial impact of the additional depreciation and fab start up
costs will be, in part, determined by the volume of products produced and the
efficiency of the production ramp up at the new facility.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
------ ------ ------- -------
<S> <C> <C> <C> <C>
Research and Development $7,412 $6,740 $14,999 $12,829
Percentage of Net Sales 8.7% 10.1% 9.0% 9.9%
</TABLE>
Research and development expenditures increased during the second
quarter of 1996 in absolute terms when compared to the same period of 1995. The
Company remains committed to continued investment in new product development and
manufacturing process technology.
The Company introduced 11 new products during the second quarter of
1996, bringing the year to date total to 21. During the quarter, seven new
products were for the consumer market, three for the computer peripherals market
and one for the datacommunications market.
The Company will continue to introduce new Application Specific
Standard Products tailored to serve its market niches and expects continued
revenue and unit growth in these markets.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ----------------------
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Selling, General and Administrative $11,477 $10,852 $23,514 $21,163
Percentage of Net Sales 13.4% 16.3% 14.1% 16.3%
</TABLE>
Selling, general and administrative expenses increased in absolute
terms and decreased as a percentage of net sales. The higher absolute dollar
expense levels are primarily due to commissions paid on higher revenues and
promotional spending. With the exception of commissions, which are dependent on
revenues, effective cost controls held overall expenses relatively constant.
9
<PAGE> 10
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -----------------------
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
------- ------ ------- ------
<S> <C> <C> <C> <C>
Other Income (Expense), net $(103) $1,362 $181 $1,976
Percentage of Net Sales, net 0.1% 2.0% 0.1% 1.5%
</TABLE>
Other income declined during the second quarter of 1996 and year to
date period ending June 30, 1996 compared to the same period of 1995, primarily
due to foreign exchange translation losses. During the first half of 1996, the
stronger U.S. dollar generated foreign exchange translation losses on the
Company's non dollar-based accounts receivable.
Taxes
The estimated annual effective tax rate for the second quarter of 1996
and 1995 was 34.5% and 36.0% respectively. For the six months ended June 30,
1996 and July 2, 1995, the estimated effective tax rate was 35.0% and 36.0%
respectively. The lower effective tax rate for the three month and six month
periods is primarily attributable to increased state investment tax credits as a
result of capital investments.
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. The slowdown evident in the
personal computer market in the second quarter of 1996 had a negative effect on
the Company's sales of personal computer-related products. A prolonged slump may
continue to affect the Company's future operating results.
During the first half of 1996, Zilog introduced a total of 21 new
products for its consumer, intelligent peripheral controller and
datacommunications 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
10
<PAGE> 11
products may exhibit technological defects which may impede market acceptance if
defects are not resolved promptly. 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. 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.
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.
As is typical in the semiconductor industry, the Company has from time
to time experienced lower than anticipated production yields. 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.
11
<PAGE> 12
The Company has used outside wafer foundries and assemblers to supply a
portion of its manufacturing needs, and from time to time the Company expects to
utilize 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 continuation of the 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. The semiconductor industry generally has not experienced growth similar
to that experienced in 1995. The Company is uncertain when, if ever, the market
for the semiconductor industry may attain similar growth to that experienced in
1995.
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.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------
June 30, July 2,
1996 1995
-------- -------
<S> <C> <C>
Cash, Cash Equivalents and
Short-Term Investments $61,957 $83,749
Working Capital $83,828 $91,307
Cash Provided By Operating Activities $44,896 $22,056
Cash Used In Investing Activities $48,980 $33,118
Cash Provided By Financing Activities $11,101 $11,173
</TABLE>
12
<PAGE> 13
Cash and Short-Term Investments were reduced during the six months
ended June 30, 1996 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 declined slightly to $41.6 million, even though
sales for the first six months of 1996 were 28.1% above the comparable period of
1995. This was reflected in an improved days sales outstanding for the six month
period of 44 days from 53 days reported in the corresponding period of 1995.
Inventory levels increased to $34.1 million as raw material levels rose in
conjunction with increased processing at the new wafer fabrication facility 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 and for general corporate purposes. 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.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information concerning the matters submitted for a vote at the
Company's 1996 Annual Meeting on April 24, 1996 was reported in the Company's
Form 10-Q for the quarter ended March 31, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibit is filed herewith:
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
None
14
<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: August 12, 1996 ZILOG, INC.
/s/ Robert E. Collins
-----------------------------
Robert E. Collins
Vice President and
Chief Financial Officer
15
<PAGE> 16
CHEMTRAK INCORPORATED
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 14,801
<SECURITIES> 47,156
<RECEIVABLES> 41,861
<ALLOWANCES> 250
<INVENTORY> 34,092
<CURRENT-ASSETS> 155,496
<PP&E> 338,131
<DEPRECIATION> 104,438
<TOTAL-ASSETS> 394,397
<CURRENT-LIABILITIES> 71,668
<BONDS> 0
0
0
<COMMON> 156,414
<OTHER-SE> 157,880
<TOTAL-LIABILITY-AND-EQUITY> 394,397
<SALES> 166,458
<TOTAL-REVENUES> 166,458
<CGS> 90,475
<TOTAL-COSTS> 90,475
<OTHER-EXPENSES> 14,999
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 163
<INCOME-PRETAX> 37,651
<INCOME-TAX> 13,178
<INCOME-CONTINUING> 24,473
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,473
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.19
</TABLE>
