UNITED STATES
SECURITIES & 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 October 4, 1998.
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: 001-13748
---------
ZILOG, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3092996
- - ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
910 East Hamilton Avenue, Campbell, California, 95008
-----------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 558-8500
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 No X
------- -------
As of November 1, 1998, there were 30,098,736 shares of the Company's Voting
Common Stock, $.01 par value and 10,000,000 shares of the Company's Non-Voting
Common Stock, $.01 par value outstanding.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZILOG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- ---------------------
Oct. 4, Sept. 28, Oct. 4, Sept. 28,
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales............................. $52,530 $60,824 $150,637 $202,218
--------- --------- ---------- ----------
Costs and expenses:
Cost of sales....................... 42,070 40,486 123,711 130,061
Research and development............ 7,135 7,554 22,155 22,305
Selling, general and administrative. 13,656 11,372 40,508 35,754
Special charges:
Recapitalization.................... 5,487 -- 31,174 --
Restructimg of operations........... 1,641 -- 1,641 --
--------- --------- ---------- ----------
69,989 59,412 219,189 188,120
--------- --------- ---------- ----------
Operating income (loss)............... (17,459) 1,412 (68,552) 14,098
Other income (expense):
Interest income..................... 733 515 2,653 1,894
Interest expense.................... (7,293) (68) (17,323) (137)
Other, net.......................... 51 158 (200) (93)
--------- --------- ---------- ----------
Income (loss) before income taxes..... (23,968) 2,017 (83,422) 15,762
Provision (benefit) for income taxes.. (2,314) -- (13,016) 4,260
--------- --------- ---------- ----------
Net income (loss)..................... (21,654) 2,017 (70,406) 11,502
Other comprehensive loss,
net of tax......................... -- (7) (93) (20)
--------- --------- ---------- ----------
Comprehensive income (loss)........... ($21,654) $2,010 ($70,499) $11,482
========= ========= ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ZILOG, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
October 4, December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $39,614 $92,184
Short-term investments................................ -- 14,127
Accounts receivable, less allowance for doubtful
accounts of $366 in 1998 and $250 in 1997.......... 24,215 31,633
Inventories........................................... 26,269 32,968
Prepaid expenses, deferred income taxes and
other current assets............................... 19,548 19,769
----------- -----------
Total current assets.......................... 109,646 190,681
----------- -----------
Property, plant and equipment, at cost.................. 432,522 415,458
Less: accumulated depreciation and amortization......... (237,504) (191,881)
----------- -----------
Net property, plant and equipment.................... 195,018 223,577
Other assets............................................ 10,026 1,381
----------- -----------
$314,690 $415,639
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable...................................... $18,212 $24,733
Accrued compensation and employee benefits............ 22,677 18,284
Other accrued liabilities............................. 8,928 5,287
Income taxes payable.................................. -- 10,783
----------- -----------
Total current liabilities..................... 49,817 59,087
Notes Payable........................................... 280,000 --
Deferred income taxes................................... 16,070 16,070
Shareholders' equity (deficiency):
Preferred Stock, $100.00 par value; 5,000,000 shares
authorized; 1,500,000 shares designated as Series A
Cumulative Preferred Stock; 250,000 shares of Series
A Cumulative Preferred Stock issued and outstanding
at October 4, 1998; aggregate liquidation preference
$26,173 ($0.01 par value; 190,000 shares authorized;
no shares issued and outstanding at December 31,
1997)................................................ 25,000 --
Common Stock, $0.01 par value; 70,000,000 shares
authorized; 30,098,736 shares issued and
outstanding at October 4, 1998. Class A
Non-voting Common Stock, $0.01 par value;
30,000,000 shares authorized; 10,000,000 shares
issued and outstanding at October 4, 1998. (Common
Stock, $0.01 par value; 75,000,000 shares
authorized; 20,333,741 shares issued and
outstanding at December 31, 1997; retired in
February 1998)....................................... 401 203
Additional paid-in capital............................. -- 164,950
Retained earnings (deficit)............................ (56,598) 175,236
Net unrealized gain on securities...................... -- 93
----------- -----------
Total shareholders' equity (deficiency)....... (31,197) 340,482
----------- -----------
$314,690 $415,639
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ZILOG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Increase (decrease) in cash and cash equivalents
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------
Oct. 4, Sept. 28,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ ($70,406) $11,502
Adjustments to reconcile net income (loss) to cash
provided (used) by operating activities:
Depreciation and amortization....................... 47,986 47,381
Loss from disposition of equipment.................. 10 28
Changes in assets and liabilities:
Accounts receivable................................. 7,418 (6,081)
Inventories......................................... 6,699 2,354
Prepaid expenses, deferred income taxes and
other assets...................................... 484 (329)
Accounts payable.................................... (6,521) (6,161)
Accrued compensation and employee benefits.......... 4,393 401
Other accrued liabilities and income taxes payable.. (9,155) 2,035
---------- ----------
Cash provided (used) by operating activities.. (19,092) 51,130
---------- ----------
Cash flows from investing activities:
Capital expenditures.................................. (18,635) (28,507)
Short-term investments:
Purchases........................................... -- (157,534)
Proceeds from sales................................. 14,127 63,039
Proceeds from maturities............................ -- 76,974
---------- ----------
Cash provided (used) by investing activities... (4,508) (46,028)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock................. 208 1,894
Purchase of outstanding shares......................... (399,475) --
Merger costs charged to retained earnings.............. (17,401) --
Net proceeds from issuance of notes.................... 270,198 --
Investment by Texas Pacific Group...................... 117,500 --
---------- ----------
Cash provided (used) by financing activities.. (28,970) 1,894
---------- ----------
Decrease in cash and cash equivalents.................... (52,570) 6,996
Cash and cash equivalents at beginning of period......... 92,184 15,511
---------- ----------
Cash and cash equivalents at end of period............... $39,614 $22,507
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ZILOG, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1) BASIS OF PRESENTATION
The accompanying interim financial information is unaudited. In the
opinion of ZiLOG, Inc.'s ("ZiLOG" or the "Company") management, all
adjustments (consisting only of normal recurring adjustments),
necessary for a fair presentation 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 Form 8-K filed on February 11, 1998. The
condensed consolidated balance sheet at December 31, 1997 has been
derived from audited financial statements at that date.
2) INVENTORIES
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
October 4, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Raw materials.............. $2,688 $4,171
Work-in-process............. 19,069 23,543
Finished goods.............. 4,512 5,254
----------- -----------
$26,269 $32,968
=========== ===========
</TABLE>
3) THE MERGER
Pursuant to the Agreement and Plan of Merger by and among TPG Partners
II, L.P. ("TPG II"), TPG Zeus Acquisition Corporation ("Merger Sub")
and ZiLOG dated as of July 20, 1997, as amended (the "Merger
Agreement"), Merger Sub merged with and into ZiLOG on February 27,
1998 and ZiLOG continues as the surviving corporation (the "Merger").
The Merger was accounted for as a recapitalization (the
"Recapitalization") which resulted in TPG Partners, II, L.P. owning
90 percent of the voting shares and the pre-Merger shareholders owning
10 percent of the voting shares.
Approximately $434.3 million was used to complete the Merger and
consisted of the following: (i) $399.5 million for the purchase of the
pre-Merger outstanding common stock; (ii) $4.2 million for the
cancellation of existing stock options; and (iii) approximately $30.6
million in fees and expenses.
The cash funding requirements for the Merger were satisfied through the
following: (i) an equity investment by TPG II and certain other
investors of $117.5 million; (ii) use of approximately $36.8 million of
ZiLOG's cash and cash equivalents; and (iii) $280 million of gross
proceeds from the sale of senior secured notes through a private
placement. As a result of the Merger (on a post-split basis), the
Company, as of October 4, 1998, had 250,000 shares of Series A
Cumulative Preferred Stock, 30,098,736 shares of Common Stock and
10,000,000 shares of Class A Non-Voting Common Stock issued and
outstanding.
The Company has issued $280 million 9 1/2 % Senior Secured Notes (the
"Notes"), which mature on February 27, 2005. Interest is payable to
note holders semi-annually on the first of March and September.
Expenses associated with the offering of approximately $9.8 million
were deferred and are being amortized to interest expense over the term
of the notes.
4) STOCK SPLIT
The Company's Board of Directors approved a 2:1 stock split which
became effective in August 1998. Common Stock authorized shares
increased from 35,000,000 shares to 70,000,000 shares and issued and
outstanding shares increased from 15,049,368 to 30,098,736 shares.
Class A Non-Voting Common Stock authorized shares increased from
15,000,000 shares to 30,000,000 shares and issued and outstanding
shares increased from 5,000,000 shares to 10,000,000 shares.
5) STOCK PLANS
The ZiLOG, Inc. Long-Term Stock Incentive Plan (the "Plan") and the
ZiLOG, Inc. 1998 Executive Officer Stock Incentive Plan (the
"Executive Plan") were adopted by the Company's Board of Directors
(the "Board") in August 1998. Under the Plan and the Executive Plan,
the Company may grant to eligible employees Nonstatutory Stock Options
("NSO's) and Incentive Stock Options ("ISO's) or award eligible
employees restricted shares or stock units up to a total of 2,500,000
and 5,500,000 shares, respectively, at an exercise price established by
a committee (the "Committee") appointed by the Board.
Options under the Plan and the Executive Plan generally vest 25% at the
end of one year from the date of the grant and 25% on each anniversary
of the grant date thereafter. The terms and conditions of each option
grant or stock award are determined by the Committee and are set forth
in a Stock Option agreement between the employee and the Company. As
of October 4, 1998, options granted under the Plan and the Executive
Plan were approximately 2,234,000 and 3,960,000, respectively.
6) CREDIT FACILITIES
On October 2, 1998, ZiLOG received a commitment letter from a financial
institution (the "Lender") for up to $40 million in the form of a
senior secured revolving and capital equipment credit facility (the
"New Facility"). The New Facility will replace ZiLOG's existing $25
million senior secured credit facility (the "Old Facility") which was
subject to financial covenants that restricted the Company's ability to
utilize the Old Facility. The revolving line of credit for the New
Facility provides for borrowings of up to $25 million, subject to a
borrowing base consisting of 80% of eligible accounts receivable and
40% of eligible inventories. The $15 million capital expenditure line
is secured by eligible equipment financed. Borrowings, on the
revolving line of credit under the New Facility will bear interest at a
rate per annum (at ZiLOG's option) equal to the London Inter-Bank
Overnight Rate (LIBOR) plus 2%, or the Lender's published prime rate.
Borrowings for the capital expenditure line under the New Facility will
bear interest at a rate per annum (at ZiLOG's option) equal to LIBOR
plus 3% or the Lender's prime rate plus 1%. The term of the revolving
credit facility is three years and the capital expenditure line is five
years. There have been no borrowings under either credit facility.
7) RELATED PARTY TRANSACTIONS
On September 10, 1998, Newbridge Asia signed an agreement to acquire
100 percent of P.T. Astra Microtronics Technology ("AMT"). Texas
Pacific Group ("TPG") and Richard C. Blum & Associates jointly
established Newbridge Asia in 1994. Affiliates of TPG owned
approximately 89 percent of ZiLOG's outstanding Common Stock at October
4, 1998. ZiLOG purchased semiconductor assembly and test services from
AMT totaling approximately $1.9 million and $1.8 million for the three
months ended October 4, 1998 and September 28, 1997, respectively, and
$5.0 million and $6.1 million for the nine months ended October 4, 1998
and September 28, 1997, respectively. ZiLOG had payables to AMT of
approximately $652,000 and $736,000 at October 4, 1998 and December 31,
1997, respectively. Payment terms between ZiLOG and AMT are net 30
days.
8) SPECIAL CHARGES
Recapitalization expenses consist of charges directly related to the
change in control and repositioning of the Company as a result of the
Merger (as discussed in Note 3 above), including an executive bonus
which is earned ratably over the current year. Restructuring expenses
consist primarily of employee severance and termination benefits
related to the reductions in force completed during the third quarter
at the Company's Nampa, Idaho wafer fab plant and in its sales and
headquarters operations. Special charges are as follows:
<TABLE>
<CAPTION>
Three Nine
Months Months
Ended Ended
October 4, October 4,
(in thousands) 1998 1998
- - ----------------------------------- ----------- -----------
<S> <C> <C>
Recapitalization:
Executive severance pay and
new executive bonuses......... $2,236 $12,049
Stock option buyout............. -- 4,195
Bridge loan fees................ -- 3,360
Employee retention bonus........ 2,178 9,511
Consultants, other.............. 1,073 2,059
----------- -----------
5,487 31,174
----------- -----------
Restructimg of operations:
Employee severance and
termination benefits.......... 1,641 1,641
----------- -----------
$7,128 $32,815
=========== ===========
</TABLE>
9) CONCENTRATION OF CREDIT RISK
For the nine month period ended October 4, 1998, one customer accounted
for approximately 10.5% of net sales. No customer accounted for more than
10% of net sales for the comparable nine month period ended September 28,
1997.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-Q includes "forward-looking statements" within the
meaning of various provisions of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts, included in this
Form 10-Q that address activities, events or developments that the
Company expects or anticipates will or may occur in the future, are
forward-looking statements. These forward-looking statements involve a
number of risks and uncertainties which are described throughout this
Form 10-Q, including the significant considerations and risks discussed
in this Form 10-Q; the results of the Company's Recapitalization;
execution of the Company's new business strategy and cost reduction
programs; general economic, market or business conditions; the
opportunities (or lack thereof) that may be presented to and pursued by
the Company and its subsidiaries; competitive actions by other
companies; changes in the mix of products or customers or in the level
of operating expenses; the ability of the Company to generate cash and
service debt; and other factors, many of which are beyond the control
of ZiLOG and its subsidiaries. The actual results that the Company
achieves may differ materially from any forward-looking statements due
to such risks and uncertainties. Consequently, all of the forward-
looking statements made in this Form 10-Q are qualified by these
cautionary statements and there can be no assurance that the results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences
to or effects on the Company and its subsidiaries or their business or
operations. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to these
forward-looking statements to reflect events or circumstances that
occur or arise or are anticipated to occur or arise after the date
hereof.
During the second half of 1997 and the nine months ended October 4,
1998, ZiLOG experienced a decline in revenue and profit comparable to
the decline suffered generally in the semiconductor industry.
Accordingly, the Company implemented and is considering additional
cost-cutting measures which include, but are not limited to, the
following: refocusing business priorities; renegotiations with vendors
and service providers to lower costs of materials and services;
reallocation of personnel and responsibilities to better employ human
resources; partnering to better utilize assets; reductions in
workforce; changes in manufacturing processes; increased use of
subcontractor or foundry for greater efficiency and lower short term
costs; changes in shift structures; and temporary plant shutdowns. In
addition, ZiLOG is realigning capital expenditures to make them
consistent with its current level of business. There can be no
assurance that such cost-cutting measures will be successful or result
in increased efficiency or profitability.
The following tables present unaudited financial information. The
Company believes that all necessary adjustments, consisting only of
normal recurring adjustments, are included in the amounts shown below
to state fairly the selected quarterly and nine month information when
read in conjunction with the condensed consolidated financial
statements included elsewhere herein. Interim results are based on
fiscal quarters of thirteen weeks duration ending on the last Sunday of
each quarter. The operating results for any quarter or the nine month
period ended October 4, 1998 are not necessarily indicative of results
for any subsequent quarter or the full fiscal year. All tabular
information is presented in thousands, except percentages.
RESULTS OF OPERATIONS
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, the success of cost reduction programs, 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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- ---------------------
Oct. 4, Sept. 28, Oct. 4, Sept. 28,
(in thousands) 1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales............................. $52,530 $60,824 $150,637 $202,218
Operating income (loss)............... ($17,459) $1,412 ($68,552) $14,098
Net income (loss)..................... ($21,654) $2,017 ($70,406) $11,502
</TABLE>
NET SALES
Net sales for the third quarter of 1998 decreased 13.6% from the
comparable quarter of 1997, and decreased 25.5% for the nine months
ended October 4, 1998 when compared to the similar period of 1997. The
decline in sales was primarily attributable to a decrease in the sale
of products in the Company's communications group as a result of lower
volumes and prices, particularly in the modem product line, and weaker
distribution sales as distributors reduced inventory levels. The modem
product sales volume decline was affected by the loss of a significant
design position with a data communications equipment manufacturer.
This customer placed no orders for modem products in the nine months
ended October 4, 1998 and ZiLOG does not anticipate receiving future
orders for modem products from this customer. This decrease was
partially offset by an increase in sales in the Company's home
entertainment group.
Domestic and international net sales in the third quarter of 1998 each
represented 50.0% of total net sales, compared to 58.1% and 41.9%,
respectively, in the third quarter of 1997. For the nine months ended
October 4, 1998, domestic and international net sales were 50.8% and
49.2% of total net sales, respectively, as compared to 52.9% and 47.1%,
respectively, for the same period in 1997. While recent economic events
in Asia have not significantly affected the Company, the Company has
significant international revenues, which may be affected by such
events in the future.
Although ZiLOG believes it has developed a business strategy that will
improve its operating performance, it is anticipated that revenue and
EBITDA will decline significantly in 1998 as compared to prior years
while this strategy is being implemented.
COST OF SALES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- ---------------------
Oct. 4, Sept. 28, Oct. 4, Sept. 28,
(in thousands) 1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Cost of sales....................... $42,070 $40,486 $123,711 $130,061
Percentage of sales................. 80.1% 66.6% 82.1% 64.3%
</TABLE>
The Company's cost of sales represents the cost of its wafer
fabrication, assembly and test operations. Cost of sales fluctuates,
depending on manufacturing productivity, product mix, equipment
utilization and depreciation. The increase in percentage of cost of
sales to sales for both the third quarter of 1998 and for the 1998 year
to date period was attributable to lower revenue and under utilization
of wafer fabrication manufacturing capacity. Late in the third
quarter of 1998, ZiLOG implemented a restructuring of its Nampa, Idaho
wafer fabrication operations. In connection with this action,
approximately 120 employees were terminated and more production was
shifted into the Company's newer 8-inch, .35 micron silicon wafer
fabrication facility. The restructuring actions are intended to reduce
manufacturing costs so that they align more closely with the Company's
current revenue base. A consequence of this restructuring is that lead
times for certain of the Company's products may be extended.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- ---------------------
Oct. 4, Sept. 28, Oct. 4, Sept. 28,
(in thousands) 1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Research and development............ $7,135 $7,554 $22,155 $22,305
Percentage of sales................. 13.6% 12.4% 14.7% 11.0%
</TABLE>
The Company's investment in research and development in 1998 was
consistent with 1997 levels. During 1998, the Company's research and
development was focused largely on technology for its 8-inch silicon
wafer fabrication processes, as well as continued investment in new and
enhanced product development. During 1998, the Company's research and
development expenditures were focused on technology for its new .35
micron CMOS wafer fabrication process, new and enhanced product
development, and new customer development tools. Product development
in 1998 was primarily in the areas of modem and modem modules, home
entertainment and Z8+ microprocessor core products.
SELLING, GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- ---------------------
Oct. 4, Sept. 28, Oct. 4, Sept. 28,
(in thousands) 1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Selling, general and administrative. $13,656 $11,372 $40,508 $35,754
Percentage of sales................. 26.0% 18.7% 26.9% 17.7%
</TABLE>
Selling, general and administrative expenses increased during both the
quarter and nine month periods ended October 4, 1998 as compared to
similar periods in 1997. The increases over 1997 levels were primarily
related to increased rent and operating costs associated with the
Company's new headquarters facility, increased information systems
costs, higher payroll and travel expenses.
SPECIAL CHARGES (Recapitalization Related and Restructuring Expenses)
As a result of the Merger, the Company recorded recapitalization
expenses related to the change in control and repositioning of ZiLOG in
the amount of $5.5 million during the third quarter of 1998 and $31.2
million for the nine months ended October 4, 1998. These charges
consisted primarily of executive severance costs, employee stock option
buy-outs, retention bonus accruals for existing employees, new
executive bonuses (including an executive bonus which is ratably
accrued over the current year), bridge loan fees and consulting fees
and expenses. The Company also incurred restructuring expenses in the
amount of $1.6 million primarily related to severance costs during the
third quarter of 1998.
OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- ---------------------
Oct. 4, Sept. 28, Oct. 4, Sept. 28,
(in thousands) 1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Other income (expense), net......... ($6,509) $605 ($14,870) $1,664
Percentage of sales................. -12.4% 1.0% -9.9% 0.8%
</TABLE>
Other income (expense), net, increased to $6.5 million in expense in
the third quarter of 1998 from $605,000 of income for the similar
period in 1997. The primary reason for the increase was interest
expense on the Notes, which exceeded royalty income. The Company will
incur approximately $26.6 million in interest expense annually on the
Notes.
INCOME TAXES
The estimated annual benefit for income taxes was 9.7% and 15.6% for
the three and nine months ended Oct. 4, 1998, respectively, compared to
tax provisions for income taxes of 0% and 27% for similar periods of
1997. The 1998 rate reflects the estimated benefit of refundable taxes
related to the Company's overall loss position and realization of
deferred tax assets based on the reversal of taxable temporary
differences, offset by foreign taxes. The third quarter of 1998 was
impacted by a cumulative adjustment to record the revised lower
estimated tax rate for the year. A valuation allowance was set up in
1998 for approximately $19.0 million related to net operating loss
carryforwards based on management's assessment of future taxable income
over the next two to three years. The tax provisions for 1997 differed
from the federal statutory rate primarily as a result of the tax
benefit from exempt earnings and foreign earnings taxed at a lower than
U.S. tax rate, offset by state taxes. The Philippines tax holiday
expired December 1996.
Under Statement of Financial Accounting Standards No. 109 (FAS 109),
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. FAS 109 provides
for the recognition of deferred tax assets if realization of such
assets is more likely than not. Based on the weight of available
evidence, the Company has provided a valuation allowance against
certain deferred tax assets for 1998. The Company will continue to
evaluate the realizability of the deferred tax assets on a quarterly
basis.
EBITDA
EBITDA represents earnings (losses) from operations before interest
income and expense (including amortization of deferred financing
costs), income taxes, depreciation, amortization of goodwill, non-cash
stock option compensation expenses and special charges. EBITDA is
presented because it is a widely accepted financial indicator of a
leveraged company's ability to service and/or incur indebtedness and
because management believes that EBITDA is a relevant measure of the
Company's ability to generate cash without regard to its capital
structure or working capital needs. EBITDA as presented may not be
comparable to similarly titled measures presented by other companies,
depending on the non-cash charges included.
For the third quarter ended Oct. 4, 1998 the Company recorded EBITDA of
$5.3 million as compared to $17.7 million for the year-ago period.
ZiLOG had EBITDA of $11.2 million for the nine months ended October 4,
1998 compared to $60.9 million for the nine months ended September 28,
1997. The primary reason for the decrease in EBITDA from 1997 to 1998
was lower sales.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
Nine Months Ended
----------------------
Oct. 4, Sept. 28,
1998 1997
---------- ----------
<S> <C> <C>
Cash, cash equivalents and
short-term investments................................ $39,614 $93,455
Working capital.......................................... $59,829 $122,341
Cash provided (used) by operating activities............. ($19,092) $51,130
Cash provided (used) by investing activities............. ($4,508) ($46,028)
Cash provided (used) by financing activities............. ($28,970) $1,894
</TABLE>
At October 4, 1998, the Company had cash, cash equivalents and short-
term investments totaling $39.6 milion, a decrease of $52.6 million
from the period ended December 31, 1997.
Cash used by operating activities was $19.1 million for the nine months
ended October 4, 1998, while cash provided by operations was $51.1
million for the similar period of 1997. The use of cash by operating
activities in 1998 was primarily due to the Company's net loss, which
was the result of reduced sales when compared to the similar period of
1997, approximately $32.8 million in special charges, as a result of
the Merger and restructuring of the Company, and approximately $17.3
million of interest expense associated with the Company's notes
payable, none of which were present in the comparable period of 1997.
Cash used by investing activities was $4.5 million during the nine
months ended Oct. 4, 1998, as compared to $46.0 million for the similar
period of 1997. Cash used by investing activities in 1998 was
primarily due to capital expenditures while cash used by investing
activities in 1997 was primarily due to capital expenditures and
purchases of short-term investments (which were partially offset by
sales and maturities).
Cash used by financing activities for the nine months ended Oct. 4,
1998 was $29.0 million, while cash provided by financing activities was
$1.9 million for the similar period of 1997. The use of cash by
financing activities in 1998 was primarily for cash transactions
related to the Merger, while cash provided by financing activities in
1997 was primarily for exercises of stock options and purchases under
ZiLOG's Stock Purchase Plan.
In conjunction with the Merger, ZiLOG entered into a five-year
Revolving Credit Agreement (the "Agreement") with a commercial bank,
which was collateralized by certain accounts receivable and
inventories. The Agreement allowed the Company to borrow up to $25
million subject to certain restrictive conditions and financial
covenants. ZiLOG's ability to meet its sales and income projections
were hampered by an overall decline in the semiconductor industry
during the first nine months of 1998.
On October 2, 1998, ZiLOG received a commitment letter from another
lender (the "Lender") for a new senior secured credit facility (the
"New Facility") with an outline of terms more favorable to the
Company. The commitment of up to $40 million provides for a three-year
revolving credit facility of up to $25 million and a five-year capital
expenditure line of up to $15 million. The New Facility will be
secured by a perfected interest in all of the accounts receivable and
inventory and proceeds thereof of ZiLOG, and all equipment eligible for
financing. Loans and letters of credit under the New Facility will be
available at any time during its three-year term subject to a borrowing
base of 80% of eligible accounts receivable and 40% of eligible
inventory and the fulfillment of customary conditions precedent. The
capital equipment line provides for loans up to 70% of invoice for new
equipment and 80% of appraised value for used equipment. Under the New
Facility, ZiLOG will not be subject to any financial covenants as long
as there remains $7.5 million in availability on both the revolving
credit facility and capital equipment line. Borrowings under the New
Facility will bear interest at a rate per annum equal (at ZiLOG's
option) to the Lender's stated prime rate or the London Interbank
Overnight Rate ("LIBOR") plus 2% for the revolving credit facility
and the lender's prime rate plus 1% or LIBOR plus 3% for the capital
expenditure line. ZiLOG is required to pay the Lender, on a quarterly
basis, a commitment fee on the undrawn portion of the facility equal to
1/4 of 1% per annum. ZiLOG is also obligated to pay a per annum letter
of credit fee on the aggregate amount of outstanding letters of credit
and customary arrangement and similar fees. The Company terminated the
Agreement at the end of the third quarter. There have been no
borrowings under either facility. The final financing agreement for
the New Facility is expected to be completed by November 20, 1998.
The Company has incurred substantial indebtedness in connection with
the Merger. ZiLOG's ability to make scheduled principal payments, or
to pay the interest, or premium if any, or to refinance its
indebtedness (including the Notes), or to fund capital and other
expenditures will depend on its future performance, which, to a certain
extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond its control.
ZiLOG's primary cash needs are working capital and capital
expenditures. In addition, ZiLOG made its first semi-annual interest
payment on the Notes of approximately $13.4 million on September 1,
1998. The Company has financed its cash requirements for working
capital and capital expenditures primarily through internally generated
cash flow and existing cash reserves. Based upon the current level of
operations, management believes that cash flow from operations,
available cash and its new credit facility will be adequate to meet
ZiLOG's future requirements for working capital, budgeted capital and
other expenditures and scheduled payments of principal and interest on
its indebtedness, including the Notes, for at least the next twelve
months. However, there can be no assurance that ZiLOG's business will
generate sufficient cash to enable the Company to service its
indebtedness, including the Notes, or make anticipated capital and
other expenditures.
YEAR 2000 COMPLIANCE
ZiLOG has an active year 2000 ("Y2K") readiness program and has, as
of October 4, 1998, made a substantial effort to reasonably evaluate
that its operations to prevent material adverse Y2K-related impact.
This program began with a survey of potential sources of Y2K exposure
which could reasonably affect the Company's business. As of October 4,
1998, the majority of this initial source identification phase has been
completed. For potential sources of Y2K risk which are external to the
Company, such as with the Company's external vendors and suppliers, the
Company typically relied upon written assurances of Y2K compliance from
those various parties in lieu of physical testing by the Company's
employees. To date, the Company has not identified any Y2K issues
inherent in the products manufactured by the Company.
The next step in the Company's remediation program was to
systematically analyze each identified potential internal source of Y2K
exposure to determine its likelihood of material effect on the
Company's operations and the range of available remediation actions by
performing physical tests which simulated performance of the systems
with post-year 2000 dates. The Company's products, for the most part,
involve hardware integrated circuits which, at the time of sale to
customers, have no inherent date sensitive features. As of October 4,
1998, the analysis phase of the Y2K readiness program is still
underway. The analysis phase is expected to be substantially completed
by December 31, 1998 and the Company expects to complete its internal
and external Y2K readiness programs by July 1, 1999.
The total cost associated with required modifications to become Y2K
compliant is not expected to be material to the Company's financial
position. The amount expended through October 4, 1998 was
approximately $2.6 million, primarily associated with the total
replacement of the information systems related to the Company's sales
order process, planning, physical distribution and finance functions
which are expected to be completed by December 31, 1998. The Company
had intended to replace such systems in the ordinary course of its
business and the implementation was not substantially accelerated due
to Y2K. The Company believes that the cost of its Y2K readiness
program, as well as currently anticipated costs to be incurred with
respect to Y2K issues of third-parties, will not exceed $8 million,
inclusive of the costs described above. It is anticipated that all
such expenditures will be funded from operating cash flows and absorbed
as part of the Company's ongoing operations.
THE FOREGOING STATEMENTS RELATED TO MATERIALITY OF Y2K COSTS, THE COSTS
TO ADDRESS Y2K ISSUES AND THE FUNDING AND ABSORPTION OF SUCH COSTS ARE
FORWARD LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY
BECAUSE OF THE FOLLOW FACTORS, AMONG OTHERS: THE FAILURE TO CORRECTLY
AND/OR TIMELY IDENTIFY AND CORRECT Y2K PROBLEMS, EITHER BY THE COMPANY
OR ITS KEY SUPPLIERS OR CUSTOMERS.
Having reasonably determined that the Company's own hardware and
software systems will be substantially Y2K compliant and that its
products inherently have no date code-related issues, management
believes that the worst case scenarios would most likely involve
massive, simultaneous Y2K-related disruptions from the Company's key
external raw material suppliers and/or service providers. For these
worst case scenarios to have maximum adverse impact on the Company, the
vendors in question would either need to be sole-source providers, or
their peer companies, who would otherwise be potential second-source
suppliers, would also need to undergo similar Y2K-related disruption.
Examples on the material supplier side would include extended and
substantial disruptions of the Company's key raw material suppliers of:
silicon wafers, leadframes, specialty chemicals and gasses. Examples
on the service provider side would include extended, substantial
disruptions of the Company's third party semiconductor assembly firms,
telecommunications and datacommunications services, airfreight and
delivery services, or the worldwide banking system. The Company
believes that such massive and simultaneous disruptions of the supply
of basic goods and services due to Y2K-related issues are unlikely to
occur.
The Company has made no contingency plans for handling Y2K issues
because it believes that the steps it has taken to assess its own
hardware and software systems and those of its key vendors and
suppliers are adequate to prevent all but minimal disruptions to its
business processes. In the event of random, unforeseen Y2K problems
(such as the failure of specific pieces of process equipment, or the
temporary inability of certain vendors to provide materials or
services), the Company believes that these types of issues will most
likely be able to be resolved in the normal course of business,
including the potential use of alternate suppliers, in most cases.
FACTORS THAT MAY AFFECT FUTURE RESULTS.
This Form 10-Q contains certain forward-looking statements within the
meaning of various provisions of the Securities Act of 1933, as amended
and the Securities Exchange Act of 1934 as amended. Actual results
could differ materially from those projected in the forward-looking
statements as a result of certain factors and uncertainties including
those set forth below and elsewhere in this Form 10-Q.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE INDEBTEDNESS. ZiLOG has
incurred substantial indebtedness in connection with the
Recapitalization, which became effective February 27, 1998. At Oct. 4,
1998, ZiLOG had $280 million of consolidated long-term indebtedness and
a capital deficiency of $31.2 million.
The high degree to which the Company is leveraged may have important
consequences to the Company, including the following: (i) the
Company's ability to obtain additional financing for working capital,
capital expenditures, product development, future acquisitions (if
any), or other purposes may be impaired or any such financing may not
be available on terms favorable to the Company; (ii) a substantial
portion of the Company's cash flow available from operations after
satisfying certain liabilities arising in the ordinary course of
business will be dedicated to the payment of debt service, thereby
reducing funds that would otherwise be available to the Company; (iii)
a decrease in net operating cash flows or an increase in expenses could
make it difficult for the Company to meet its debt service requirements
or force it to modify its operations; and (iv) high leverage may place
the Company at a competitive disadvantage, limit its flexibility in
reacting to changes in its operating environment and make it vulnerable
to a downturn in its business or the economy generally.
To satisfy the Company's obligations under the Notes, the Company will
be required to generate substantial operating cash flow. The ability
of the Company to meet debt service and other obligations or to
refinance any such obligation will depend on the future performance of
the Company, which will be subject to prevailing economic conditions
and to financial, business and other factors, certain of which may be
beyond the control of the Company. While the Company believes that,
based on current levels of operations and its business plan, it will be
able to meet its debt service and other obligations or to refinance its
indebtedness, there can be no assurances with respect thereto. During
the second quarter of 1998 Standard & Poor's lowered its ratings of the
Company's corporate credit and senior secured notes to single `B' minus
from single `B' and lowered its bank loan rating on the Company to
single `B' from single `B' plus, citing the Company's leveraged capital
structure, reduced revenues and cash balances, weak profitability and
low ratio of EBITDA to interest coverage.
RECENT AND ANTICIPATED OPERATING RESULTS. The Company's operating
results are affected by a wide variety of factors which could have a
material adverse effect on it including, but not limited to, the
Company's ability to introduce and sell new products and technologies
on a timely basis, execute on cost reduction programs, changes in
product mix or fluctuations in manufacturing yields which affect the
Company's gross margins, market acceptance of the Company's and its
customers' products, the level of orders that are received and can be
shipped in a quarter, customer order patterns and seasonality,
cyclicality in the semiconductor industry, increases in freight costs,
gain or loss of a significant customer and whether the Company's
customers buy from a distributor or directly from the Company. Certain
of the Company's products have sustained decreases in average selling
prices during 1998 and this trend may continue. Significant reductions
in selling prices may have a material adverse effect on the Company.
The Company will likely experience substantial period-to-period
fluctuations in future operating results due to general industry
conditions including cyclical periods of diminished product demand,
product mix, accelerated erosion of average selling prices and
production over-capacity or events occurring in the United States
economy or the economies of the worldwide markets the Company serves.
A significant decline in demand for the Company's products could have a
material adverse effect on the Company, and there can be no assurance
that any new products will receive or maintain substantial market
acceptance.
The Company's revenue and EBITDA have declined from $298.4 million and
$92.0 million, respectively, for 1996 to $261.1 million and
$75.7 million, respectively, for 1997. For the nine months ended Oct.
4, 1998, ZiLOG had revenues of $150.6 million and EBITDA of
$11.2 million. Although the Company believes that it has developed a
business strategy that will improve its operating performance, it is
anticipated that revenue and EBITDA will decline significantly in 1998
while this business strategy is being implemented. Many of the factors
which affect the Company's operating performance are outside the
Company's control and there can be no assurance that the Company's
business strategy will be successful or that results of operations will
not continue to decline. Implementation of the Company's business plan
requires significant expenditures and there can be no assurance that
the Company will be in a position to implement it fully or that such
expenditures will be offset by any increase in revenue. Continued
significant declines in operating performance could have a material
adverse effect on the Company and its ability to meet its debt service
and other obligations.
During the second half of 1997 and the nine months ended October 4,
1998, ZiLOG experienced a general decline in revenue and profit as the
semiconductor industry also incurred an overall decline. Similar to
other semiconductor companies, the Company has implemented and is
considering implementing additional cost-cutting measures which may
include, but are not limited to, the following: refocusing of business
priorities; renegotiations with vendors and service providers to lower
the costs of materials and services; reallocation of personnel and
responsibilities to better utilize human resources; partnering to
better utilize assets; reductions in workforce; changes of
manufacturing mix; increased use of subcontractors or foundry for
greater efficiency and lower short term costs; changes in shift
structures; and temporary plant shutdowns. In addition, the Company is
considering realignment of capital expenditures consistent with its
current level of business. There can be no assurance that such cost-
cutting measures will be successful in repositioning the Company or
result in increased efficiency or profitability.
THE SEMICONDUCTOR INDUSTRY. The semiconductor industry has been
characterized by cyclicality. The industry has experienced significant
economic downturns at various times in the last three decades,
characterized by diminished product demand, accelerated erosion of
average selling prices and production over-capacity. During the second
half of 1997 and the nine months ended October 4, 1998, ZiLOG
experienced a general decline in revenue and profit as the
semiconductor industry also incurred an overall decline. The Company
will likely experience substantial period-to-period fluctuations in
future operating results due to general industry conditions or events
occurring in the general economy. The fluctuations are difficult to
foresee and there can be no assurance that future fluctuations will not
be more severe or prolonged or otherwise would not have a material
adverse effect on the Company.
Certain of the Company's products are incorporated into printers,
mouse-type pointing devices, 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's 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
volatile and rapid changes in customer preferences for electronics
products could have a material adverse effect on the Company.
DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES. The Company's operating
results will depend to a significant extent on its ability to continue
to introduce and sell 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, complexity of the new products to be designed and
manufactured, development of support tools and collateral literature
that make complex new products easy for engineers to understand and use
and market acceptance of customers' end products. There can be no
assurance that any new products will receive or maintain substantial
market acceptance. The Company's new business strategy includes
increased focus on design wins. However, there is a substantial delay
between a design win and sales of new products. Any such sales are
subject to the success or failure of the customer's product. There can
be no assurance that the Company will successfully identify new product
opportunities and develop and bring new products to market in a timely
and cost-effective manner, or that products or technologies developed
by others will not render the Company's products or technologies
obsolete or noncompetitive. A fundamental shift in technology in
ZiLOG's product markets could have a material adverse effect on the
Company.
NEW MANAGEMENT AND KEY PERSONNEL. As of February 27, 1998, upon
completion of the Recapitalization, Curtis J. Crawford became President
and CEO of the Company, replacing the former CEO. In addition, the
Company has hired a number of other officers and executives during
1998, essentially replacing most of its executive management team.
Although Mr. Crawford has significant experience in the industry in
which ZiLOG competes, there can be no assurance that the management
transition and the implementation of a new management team and strategy
will not adversely affect operating results. In addition, the Company
depends upon its ability to hire and retain qualified technical, sales
and management personnel. The competition for such personnel is
intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel.
CUSTOMER CONCENTRATION. In 1997, the Company's 10 largest customers
accounted for approximately 44% of the Company's net sales, although no
single customer accounted for more than 8% of the Company's net sales.
For the first nine months of 1998, the Company's 10 largest customers
accounted for approximately 45% of the Company's net sales, with one
customer accounting for approximately 10.5% of the Company's net sales.
Particular customers may change from period to period but the Company
expects that sales to a limited number of customers will continue to
account for a significant percentage of its revenue in any particular
period for the foreseeable future. The Company has no long-term
contracts with its customers and there can be no assurance that its
current customers will place additional orders, or that the Company
will obtain orders of similar magnitude from other customers. The loss
of one or more major customers or any reduction, delay or cancellation
of orders by any such customer or the failure of the Company to market
successfully to new customers, could have a material adverse effect on
the Company. During 1997, purchases by a major customer, which had
accounted for approximately 13% of the Company's total revenue in 1996,
declined to approximately 6% of the Company's total revenue in 1997 and
declined to less than 1% in the nine months ended October 4, 1998.
This decline was primarily attributable to a technology shift at the
customer resulting in a product that did not require a controller,
which had been provided by ZiLOG. There can be no assurance that sales
to one or more significant customers will not decline in the future or
that any such decline will not have a material adverse effect on the
Company.
PRODUCTION YIELDS AND MANUFACTURING RISKS. The manufacture of
semiconductor products is highly complex and production yields are
sensitive to a wide variety of factors, including the level of
contaminants in the manufacturing environment, impurities in the
materials used and the performance of personnel and equipment. In
addition, as is common in the semiconductor industry, the Company has
from time to time experienced difficulty in beginning production at its
facilities or in effecting transitions to new manufacturing processes,
delays in product deliveries or reduced yields. As an example,
operating results could be adversely affected if any problems occur
that make it difficult to produce quantities of commercial product at
its facility in Nampa, Idaho. Such difficulties can include, but are
not limited to (i) equipment being delivered later than or not
performing as expected; (ii) process technology changes not operating
as expected; (iii) engineers not operating equipment as expected; and
(iv) other difficulties. The Company believes that an important
competitive factor will be its ability to continue to successfully
increase production capacity to meet customer demand and shorten
delivery time. No assurance can be given that the Company or its
outside wafer foundries will not experience production yield problems
in the future which could have a material adverse effect on the
Company. While the Company believes its manufacturing capacity to be
sufficient, the failure to increase production capacity through the
successful and efficient expansion of production at its facility in
Nampa, Idaho or to obtain wafers from outside suppliers as needed
during periods of increased demand could have a material adverse effect
on the Company. A consequence of the Company's restructuring is that
lead times for certain of the Company's products may be extended.
The Company's future success is dependent upon its ability to develop
and implement new design and process technologies. Semiconductor
design and process methodologies are extremely complex and subject to
rapid technological change, requiring large expenditures for research
and development. Most new products are extremely complex in design and
many use the Company's 0.65 micron CMOS process. The Company has
developed a 0.35 micron CMOS process. A failure to make a successful
transition to the 0.35 micron CMOS process could have a material
adverse effect on the Company. Manufacture of large complex die
involves a significant technological risk. The failure to complete new
product designs in time to meet market requirements and achieve volume
production of new products at acceptable yields using the new
manufacturing processes would have a material adverse effect on the
Company.
The Company also uses outside contract assemblers for packaging a
portion of its production. Shortages in contract assembly capacity
could adversely impact the Company's financial results. Should the
Company be unable to obtain additional assembly capacity, the Company's
ability to achieve continued revenue growth might be restricted.
Shortage of product could also result in the loss of customers.
COMPETITION. The semiconductor industry is intensely competitive and
is characterized by price erosion, rapid technological change and
heightened foreign competition in many markets. The industry consists
of major domestic and international semiconductor companies, many of
which have substantially greater financial and other resources than the
Company with which to pursue engineering, manufacturing, marketing and
distribution of their products. Emerging companies are also increasing
their participation in the semiconductor market. The ability of the
Company to compete successfully in its markets depends on factors both
within and outside of its control including, but not limited to,
success in designing and manufacturing new products that implement new
technologies, protection of the Company's products by effective
utilization of intellectual property laws, product quality,
reliability, ease of use, price, diversity of product line, efficiency
of production, the pace at which customers incorporate the Company's
microprocessors, microcontrollers and digital signal processors into
their products, success of competitors' products and general economic
conditions.
EXPORT SALES; INTERNATIONAL OPERATIONS. Approximately 58% and 50%,
respectively, of the Company sales in 1997 and the first nine months of
1998 were to foreign customers and the Company expects that export
sales will continue to represent a significant portion of sales,
although there can be no assurance that export sales, as a percentage
of net sales, will remain at current levels. Beginning in the fourth
quarter of 1997, certain countries in Asia, which accounted for
approximately 38% and 40%, respectively, of ZiLOG's 1997 and the first
nine months of 1998 revenue, experienced general market instability
characterized by a substantial decrease in demand that resulted in
significant capital constraints throughout the region. In many cases,
these constraints were exacerbated by the continuing need of businesses
in the region to service indebtedness denominated in dollars or other
foreign currencies. As a result, many businesses in the region have
explored ways to preserve capital, including reducing capital
investment, reducing working capital, outsourcing manufacturing
functions, selling assets and discontinuing lines of business. In
addition, substantial devaluations of local currencies have
significantly improved the competitive position of certain competitors
of the Company that operate in the affected regions. ZiLOG believes
that this instability did not have a material effect on revenue in
1997. During the nine months ended October 4, 1998, certain of
the Company's customers in these regions have delayed purchases of the
Company's products, significantly reduced the production of products
which utilize the Company's Application Specific Standard Products
("ASSPs") or have purchased ASSPs from the Company's competitors that
operate in the affected regions. There can be no assurance that this
instability will not continue to have a material adverse effect on the
Company.
The Company purchases a substantial portion of its raw materials and
equipment from foreign suppliers. While the Company's export sales are
primarily United States Dollar denominated transactions, the Company is
subject to the risks of conducting business internationally, including
unexpected changes in, or impositions of, legislative or regulatory
requirements, fluctuations in the United States Dollar against foreign
currencies, which could increase the sales price in local currencies of
the Company's products in foreign markets or increase the cost of
wafers purchased by the Company, delays resulting from difficulty in
obtaining export licenses for certain technology, tariffs and other
barriers and restrictions, potentially longer payment cycles, greater
difficulty in accounts receivable collection, potentially adverse taxes
and the burdens of complying with a variety of foreign laws. In
addition, the Company is subject to general geopolitical risks, such as
political and economic instability and changes in diplomatic and trade
relationships, which could affect, among other things, customers'
ordering patterns and inventory levels. There can be no assurance
that such regulatory, geopolitical, economic and other factors will not
adversely impact the Company in the future or require ZiLOG to modify
its current business practices. In addition, the laws of certain
foreign countries may not protect the Company's intellectual property
rights to the same extent as do the laws of the United States.
The Company operates two primary assembly and test facilities in the
Philippines through two wholly owned subsidiaries. ZiLOG has a
significant capital investment at these facilities. The Company's
reliance on personnel and assets and its maintenance of inventories at
these facilities entails certain political and economic risks,
including political instability and expropriation, currency controls
and exchange fluctuations, as well as changes in tax laws, tariff and
freight rates. Political stability in the Philippines appears to
have increased markedly during the past three years, but no
assurances of continued stability can be given. The Company has not
experienced any significant interruptions in its business operations in
the Philippines to date. Nonetheless, any loss or disruption of
production in the Philippines could have a material adverse effect on
the Company, particularly if operations or air transportation from the
Philippines were disrupted for a substantial period of time.
INTELLECTUAL PROPERTY RIGHTS. The Company's ability to compete will be
affected by its ability to protect its proprietary information. The
Company relies primarily on its trade secrets and technological know-
how in the conduct of its business. There can be no assurance that the
steps taken by the Company to protect its intellectual property will be
adequate to prevent misappropriation of its technology or that the
Company's competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology.
The semiconductor industry is characterized by frequent claims and
related litigation regarding patent and other intellectual property
rights. There can be no assurance that third parties will not assert
additional claims or initiate litigation against the Company, its
foundries or its customers with respect to existing or future products.
In addition, the Company may initiate claims or litigation against
third parties for infringement of the Company's proprietary rights or
to determine the scope and validity of the proprietary rights of the
Company or others. Litigation by or against the Company could result
in significant expense to the Company and divert the efforts of the
Company's technical and management personnel, whether or not litigation
is determined in favor of the Company. In the event of an adverse
result in any such litigation, the Company could be required to pay
substantial damages, cease the manufacture, use, sale, offer for sale
and importation of infringing products, expend significant resources to
develop or obtain non-infringing technology, discontinue the use of
certain processes, or obtain licenses to the technology which is the
subject of the litigation. There can be no assurance that the Company
would be successful in such development or acquisition or that any such
licenses, if available, would be available on commercially reasonable
terms, and any such development or acquisition could require
expenditures by the Company of substantial time and other resources.
Any such litigation or adverse result therefrom could have an adverse
effect on the Company.
The Company has been notified by three parties that it may be
infringing certain patent ownership and other intellectual property
rights. In the event the Company determines that such notices may
involve meritorious claims, the Company may seek a license. Based on
industry practice, the Company believes that in most cases any
necessary licenses or other rights could be obtained on commercially
reasonable terms. However, no assurance can be given that licenses
could be obtained on acceptable terms or that litigation will not
occur. The failure to obtain necessary licenses or other rights or the
advent of litigation arising out of such claims could have a material
adverse effect on the Company.
ENVIRONMENTAL REGULATION. The Company is subject to a variety of
government regulations related to the discharge or disposal of
hazardous materials used in its manufacturing process. Although the
Company believes that it is in substantial compliance with all relevant
regulations and has all permits necessary to conduct its business, the
failure to comply with present or future regulations or the loss of any
permit could result in fines being imposed on the Company, limitation
or suspension of production or cessation of operations. Compliance
with any such future regulations could require the Company to acquire
additional equipment or to incur substantial other
expenses. Any failure by the Company to control the use of, or
adequately restrict the discharge of, hazardous materials could subject
it to future liabilities. Further there can be no assurance that the
Company will not in the future incur significant expense in connection
with governmental investigations and/or environmental or employee
health and safety matters.
RESTRICTIVE DEBT COVENANTS. The terms of the Notes contain a number of
significant covenants that, among other things, restrict the ability of
the Company to dispose of assets, incur additional indebtedness, prepay
other indebtedness or amend certain debt instruments, pay dividends,
create liens on assets, enter into sale and leaseback transactions,
make investments, loans or advances, make acquisitions, engage in
mergers or consolidations, change the business conducted by the company
or its subsidiaries, make capital expenditures or engage in certain
transactions with affiliates and otherwise restrict certain corporate
activities.
The Company's ability to comply with such agreements may be affected by
events beyond its control, including prevailing economic, financial and
industry conditions. The breach of any of such covenants or
restrictions could result in a default, which would permit the holders
of the Notes, to declare all amounts borrowed thereunder to be due and
payable, together with accrued and unpaid interest.
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
a) The following exhibits are filed herewith:
Exhibit 3.5 Certificate of Amendment of Certificate of
Incorporation
Exhibit 10.17 1998 Long-Term Stock Incentive Plan
Exhibit 10.18 1998 Executive Officer Stock Incentive Plan
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K:
None.
<PAGE>
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: November 17, 1998
ZILOG, INC.
/s/ James M. Thorburn
----------------------------
James M. Thorburn
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- - ------- -----------
3.5 Certificate of Amendment of Certificate of
Incorporation
10.17 1998 Long-Term Stock Incentive Plan
10.18 1998 Executive Officer Stock Incentive Plan
27 Financial Data Schedule
EXHIBIT 3.5
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ZILOG, INC.
Zilog, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Certificate of Incorporation of this corporation
is hereby amended by changing the Article thereof number "IV" so that
as amended said Article shall be and read as follows (provided that the
Certificate of Designations of Series A Cumulative Preferred Stock of
Zilog, Inc. filed with the Delaware Secretary of State on February 22,
1998 shall remain in effect and shall not be amended or modified by this
Certificate of Amendment):
"IV
The Corporation shall be authorized to issue 100,000,000
shares of common stock and 5,000,000 shares of preferred stock.
There shall be two classes of common stock of the Corporation. The
first class of common stock of the Corporation shall have a par
value of $0.01 and shall be designated "Common Stock" and the
number of shares constituting such class shall be 70,000,000. The
second class of stock of the Corporation shall have a par value of
$0.01 and shall be designated "Class A Non-Voting Common Stock"
and the number of shares constituting such class shall be
30,000,000. Holders of shares of Common Stock shall be entitled to
one vote for each share of such stock held on all matters as to
which stockholders may be entitled to vote pursuant to the Delaware
General Corporation Law. Holders of shares of Class A Non-Voting
Common Stock shall not have any voting rights, except that the
holders of shares of Class A Non-Voting Common Stock shall have the
right to vote as a class to the extent required by the Delaware
General Corporation Law. In all other respects the rights, powers,
preferences and limitations of the Common Stock and Class A Non-
Voting Common Stock shall be identical.
The preferred stock shall have a par value of $100.00 and the board
of directors may authorize the issuance of the preferred stock (in
addition to the Series A Preferred Stock authorized pursuant to the
Certificate of Designations of Series A Cumulative Preferred Stock
of Zilog, Inc. filed with the Delaware Secretary of State on
February 22, 1998) from time to time in one or more classes and/or
series and with such powers, designations, preferences, rights and
qualifications, limitations or restrictions (which may differ with
respect to each such class and/or series) as the board may fix by
resolution.
Effective upon the filing of this Certificate of Amendment each
outstanding share of the Corporation's (i) Common Stock shall be
split up, subdivided and converted into two (2) shares of Common
Stock and (ii) Class A Non-Voting Common Stock will be split up,
subdivided and converted into two (2) shares of Class A Non-Voting
Stock."
SECOND: That said Certificate of Amendment was duly adopted in
accordance with the provisions of Sections 228 and 242 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Zilog, Inc. has caused this Certificate of
Amendment to be signed in its name and on its behalf by Richard R.
Pickard, its Vice President, General Counsel and Secretary, this 17th day
of August, 1998.
ZILOG, INC.
By: s/s Richard R. Pickard
Name: Richard R. Pickard
Title: Vice President, General
Counsel and Secretary
EXHIBIT 10.17
ZILOG, INC.
1998 LONG-TERM STOCK INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1. INTRODUCTION 1
ARTICLE 2. ADMINISTRATION 1
2.1 Committee Composition 1
2.2 Committee Responsibilities 1
ARTICLE 3. SHARES AVAILABLE FOR GRANTS. 2
3.1 Basic Limitation 2
3.2 Additional Shares 2
3.3 Dividend Equivalents 2
ARTICLE 4. ELIGIBILITY 2
4.1 General Rules 2
4.2 Incentive Stock Options 2
ARTICLE 5. OPTIONS 3
5.1 Stock Option Agreement 3
5.2 Number of Shares 3
5.3 Exercise Price 3
5.4 Exercisability and Term 3
5.5 Effect of Change in Control 4
5.6 Modification or Assumption of Options. 4
ARTICLE 6. PAYMENT FOR OPTION SHARES 4
6.1 General Rule 4
6.2 Surrender of Stock 4
6.3 Exercise/Sale 4
6.4 Exercise/Pledge 5
6.5 Promissory Note 5
6.6 Other Forms of Payment 5
ARTICLE 7. STOCK APPRECIATION RIGHTS 5
7.1 SAR Agreement 5
7.2 Number of Shares 5
7.3 Exercise Price 5
7.4 Exercisability and Term 5
7.5 Effect of Change in Control 6
7.6 Exercise of SARs 6
7.7 Modification or Assumption of SARs. 6
ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS 6
8.1 Time, Amount and Form of Awards 6
8.2 Payment for Awards 6
8.3 Vesting Conditions 6
8.4 Form and Time of Settlement of Stock Units 7
8.5 Death of Recipient 7
8.6 Creditors' Rights 7
ARTICLE 9. VOTING AND DIVIDEND RIGHTS 7
9.1 Restricted Shares 7
9.2 Stock Units 8
ARTICLE 10. PROTECTION AGAINST DILUTION 8
10.1 Adjustments 8
10.2 Reorganizations 8
ARTICLE 11. AWARDS UNDER OTHER PLANS 9
ARTICLE 12. LIMITATION ON RIGHTS 9
12.1 Retention Rights 9
12.2 Shareholders' Rights 9
12.3 Regulatory Requirements 9
ARTICLE 13. LIMITATION ON PAYMENTS 9
13.1 Basic Rule 9
13.2 Reduction of Payments 10
13.3 Overpayments and Underpayments 10
13.4 Related Corporations 11
ARTICLE 14. WITHHOLDING TAXES 11
14.1 General 11
14.2 Share Withholding 11
ARTICLE 15. ASSIGNMENT OR TRANSFER OF AWARDS 11
15.1 General 11
15.2 Trusts 12
ARTICLE 16. FUTURE OF THE PLAN 12
16.1 Term of the Plan 12
16.2 Amendment or Termination 12
ARTICLE 17. DEFINITIONS 12
ARTICLE 18. EXECUTION 15
<PAGE>
ZILOG, INC. 1998 LONG-TERM STOCK INCENTIVE PLAN
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board on August 14, 1998, subject to
approval by the Company's shareholders. The Plan is effective August 14,
1998.
The purpose of the Plan is to promote the long-term success of the
Company and the creation of shareholder value by (a) encouraging Key
Employees to focus on critical long-range objectives, (b) encouraging the
attraction and retention of Key Employees with exceptional qualifications
and (c) linking Key Employees directly to shareholder interests through
increased stock ownership. The Plan seeks to achieve this purpose by
providing for Awards in the form of Restricted Shares, Stock Units,
Options (which may constitute incentive stock options or nonstatutory
stock options) or stock appreciation rights.
The Plan shall be governed by, and construed in accordance with,
the laws of the State of California (except their choice-of-law
provisions).
ARTICLE 2. ADMINISTRATION.
2.1 Committee Composition. The Plan shall be administered by a
Committee appointed by the Board. Effective with the Company's initial
public offering, the Committee shall consist of two or more directors of
the Company who shall satisfy the requirements of Rule 16b-3 (or its
successor) under the Exchange Act with respect to the grant of Awards to
persons who are officers or directors of the Company under Section 16 of
the Exchange Act or the Board itself.
The Board may also appoint one or more separate committees of the Board,
each composed of one or more directors of the Company who need not
qualify under Rule 16b-3, who may administer the Plan with respect to Key
Employees who are not considered officers or directors of the Company
under Section 16 of the Exchange Act, may grant Awards under the Plan to
such Key Employees and may determine all terms of such Awards.
2.2 Committee Responsibilities. The Committee shall:
(a) select the Key Employees who are to receive Awards
under the Plan;
(b) determine the type, number, vesting requirements
and other features and conditions of such Awards;
(c) interpret the Plan; and
(d) make all other decisions relating to the operation
of the Plan.
The Committee may adopt such rules or guidelines as it deems appropriate
to implement the Plan. The Committee's determinations under the Plan
shall be final and binding on all persons.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 Basic Limitation. Common Shares issued pursuant to the Plan
shall be authorized but unissued shares or treasury shares. The
aggregate number of Common Shares reserved for award as Restricted
Shares, Stock Units, Options and SARs shall be limited to 2,500,000
Common Shares (after giving effect to the 2-for-1 stock split approved by
the Board of Directors on August 14, 1998) on a fully diluted basis. The
limitation of this Section 3.1 shall be subject to adjustment pursuant to
Article 10.
3.2 Additional Shares. If Stock Units, Options or SARs are
forfeited or if Options or SARs terminate for any other reason before
being exercised, then such Stock Units, Options or SARs shall again
become available for Awards under the Plan. If SARs are exercised, then
only the number of Common Shares (if any) actually issued in settlement
of such SARs shall reduce the number available under Section 3.1 and the
balance shall again become available for Awards under the Plan. If
Restricted Shares are forfeited before any dividends have been paid with
respect to such Restricted Shares, then such Restricted Shares shall
again become available for Awards under the Plan.
3.3 Dividend Equivalents. Any dividend equivalents distributed
under the Plan shall not be applied against the number of Restricted
Shares, Stock Units, Options or SARs available for Awards, whether or not
such dividend equivalents are converted into Stock Units.
ARTICLE 4. ELIGIBILITY.
4.1 General Rules. Only Key Employees (including, without
limitation, independent contractors who are not members of the Board)
shall be eligible for designation as Participants by the Committee.
4.2 Incentive Stock Options. Only Key Employees who are common-
law employees of the Company, a Parent or a Subsidiary shall be eligible
for the grant of ISOs. In addition, a Key Employee who owns more than
ten percent (10%) of the total combined voting power of all classes of
outstanding stock of the Company or any of its Parents or Subsidiaries
shall not be eligible for the grant of an ISO unless the requirements set
forth in section 422(c)(5) of the Code are satisfied.
ARTICLE 5. OPTIONS.
5.1 Stock Option Agreement. Each grant of an Option under the
Plan shall be evidenced by a Stock Option Agreement between the Optionee
and the Company. Such Option shall be subject to all applicable terms of
the Plan and may be subject to any other terms that are not inconsistent
with the Plan. The Stock Option Agreement shall specify whether the
Option is an ISO or an NSO. The provisions of the various Stock Option
Agreements entered into under the Plan need not be identical. A Stock
Option Agreement may provide that new Options will be granted
automatically to the Optionee when he or she exercises the prior Options.
5.2 Number of Shares. Each Stock Option Agreement shall specify
the number of Common Shares subject to the Option and shall provide for
the adjustment of such number in accordance with Article 10.
5.3 Exercise Price. Each Stock Option Agreement shall specify
the Exercise Price; provided that the Exercise Price under an ISO shall
in no event be less than one-hundred percent (100%) of the Fair Market
Value of a Common Share on the date of grant. In the case of an NSO, a
Stock Option Agreement may specify an Exercise Price that varies in
accordance with a predetermined formula while the NSO is outstanding. To
the extent required by applicable law, the exercise price will not be
less than 85% of the Fair Market Value of a Common Share on the date of
grant.
5.4 Exercisability and Term. Each Stock Option Agreement shall
specify the date when all or any installment of the Option is to become
exercisable. To the extent required by applicable law, Options shall
vest at least as rapidly as 20% annually over a five-year period. The
Stock Option Agreement shall also specify the term of the Option;
provided that the term of an ISO, and to the extent required by
applicable law a NSO, shall in no event exceed ten (10) years from the
date of grant. To the extent required by applicable law, Options shall
be exercisable for a period of six months following termination of
employment due to death or disability and 30 days following termination
of employment (other than terminations for cause, as defined in the
Company's personnel policies). A Stock Option Agreement may provide for
accelerated exercisability in the event of the Optionee's death,
disability or retirement or other events and may provide for expiration
prior to the end of its term in the event of the termination of the
Optionee's service. Options may be awarded in combination with SARs, and
such an Award may provide that the Options will not be exercisable unless
the related SARs are forfeited. NSOs may also be awarded in combination
with Restricted Shares or Stock Units, and such an Award may provide that
the NSOs will not be exercisable unless the related Restricted Shares or
Stock Units are forfeited.
5.5 Effect of Change in Control. The Committee may determine, at
the time of granting an Option or thereafter, that such Option shall
become fully exercisable as to all Common Shares subject to such Option
in the event that a Change in Control occurs with respect to the Company.
If the Committee finds that there is a reasonable possibility that,
within the succeeding six months, a Change in Control will occur with
respect to the Company, then the Committee at its sole discretion may
determine that any or all outstanding Options shall become fully
exercisable as to all Common Shares subject to such Options.
5.6 Modification or Assumption of Options. Within the
limitations of the Plan, the Committee may modify, extend or assume
outstanding options or may accept the cancellation of outstanding options
(whether granted by the Company or by another issuer) in return for the
grant of new options for the same or a different number of shares and at
the same or a different exercise price. The foregoing notwithstanding,
no modification of an Option shall, without the consent of the Optionee,
alter or impair his or her rights or obligations under such Option.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 General Rule. The entire Exercise Price of Common Shares
issued upon exercise of Options shall be payable in cash at the time when
such Common Shares are purchased, except as follows:
(a) In the case of an ISO granted under the Plan,
payment shall be made only pursuant to the express provisions
of the applicable Stock Option Agreement. The Stock Option
Agreement may specify that payment may be made in any form(s)
described in this Article 6.
(b) In the case of an NSO, the Committee may at any
time accept payment in any form(s) described in this Article
6.
6.2 Surrender of Stock. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made
with Common Shares which have already been owned by the Optionee for such
duration as shall be specified by the Committee. Such Common Shares
shall be valued at their Fair Market Value on the date when the new
Common Shares are purchased under the Plan.
6.3 Exercise/Sale. To the extent that this Section 6.3 is
applicable, payment may be made by the delivery (on a form prescribed by
the Company) of an irrevocable direction to a securities broker approved
by the Company to sell Common Shares and to deliver all or part of the
sales proceeds to the Company in payment of all or part of the Exercise
Price and any withholding taxes.
6.4 Exercise/Pledge. To the extent that this Section 6.4 is
applicable, payment may be made by the delivery (on a form prescribed by
the Company) of an irrevocable direction to pledge Common Shares to a
securities broker or lender approved by the Company, as security for a
loan, and to deliver all or part of the loan proceeds to the Company in
payment of all or part of the Exercise Price and any withholding taxes.
6.5 Promissory Note. To the extent that this Section 6.5 is
applicable, payment for all or any part of the Exercise Price may be made
with a full-recourse promissory note.
6.6 Other Forms of Payment. To the extent that this Section 6.6
is applicable, payment may be made in any other form that is consistent
with applicable laws, regulations and rules.
ARTICLE 7. STOCK APPRECIATION RIGHTS.
7.1 SAR Agreement. Each grant of a SAR under the Plan shall be
evidenced by a SAR Agreement between the Optionee and the Company. Such
SAR shall be subject to all applicable terms of the Plan and may be
subject to any other terms that are not inconsistent with the Plan. The
provisions of the various SAR Agreements entered into under the Plan need
not be identical. SARs may be granted in consideration of a reduction in
the Optionee's other compensation.
7.2 Number of Shares. Each SAR Agreement shall specify the
number of Common Shares to which the SAR pertains and shall provide for
the adjustment of such number in accordance with Article 10.
7.3 Exercise Price. Each SAR Agreement shall specify the
Exercise Price. A SAR Agreement may specify an Exercise Price that
varies in accordance with a predetermined formula while the SAR is
outstanding.
7.4 Exercisability and Term. Each SAR Agreement shall specify
the date when all or any installment of the SAR is to become exercisable.
The SAR Agreement shall also specify the term of the SAR. A SAR
Agreement may provide for accelerated exercisability in the event of the
Optionee's death, disability or retirement or other events and may
provide for expiration prior to the end of its term in the event of the
termination of the Optionee's service. SARs may also be awarded in
combination with Options, Restricted Shares or Stock Units, and such an
Award may provide that the SARs will not be exercisable unless the
related Options, Restricted Shares or Stock Units are forfeited. A SAR
may be included in an ISO only at the time of grant but may be included
in an NSO at the time of grant or at any subsequent time, but not later
than six months before the expiration of such NSO. A SAR granted under
the Plan may provide that it will be exercisable only in the event of a
Change in Control.
7.5 Effect of Change in Control. The Committee may determine, at
the time of granting a SAR or thereafter, that such SAR shall become
fully exercisable as to all Common Shares subject to such SAR in the
event that a Change in Control occurs with respect to the Company. If
the Committee finds that there is a reasonable possibility that, within
the succeeding six months, a Change in Control will occur with respect to
the Company, then the Committee at its sole discretion may determine that
any or all outstanding SARs shall become fully exercisable as to all
Common Shares subject to such SARs.
7.6 Exercise of SARs. If, on the date when a SAR expires, the
Exercise Price under such SAR is less than the Fair Market Value on such
date but any portion of such SAR has not been exercised or surrendered,
then such SAR shall automatically be deemed to be exercised as of such
date with respect to such portion. Upon exercise of a SAR, the Optionee
(or any person having the right to exercise the SAR after his or her
death) shall receive from the Company (a) Common Shares, (b) cash or (c)
a combination of Common Shares and cash, as the Committee shall
determine. The amount of cash and/or the Fair Market Value of Common
Shares received upon exercise of SARs shall, in the aggregate, be equal
to the amount by which the Fair Market Value (on the date of surrender)
of the Common Shares subject to the SARs exceeds the Exercise Price.
7.7 Modification or Assumption of SARs. Within the limitations
of the Plan, the Committee may modify, extend or assume outstanding SARs
or may accept the cancellation of outstanding SARs (whether granted by
the Company or by another issuer) in return for the grant of new SARs for
the same or a different number of shares and at the same or a different
exercise price. The foregoing notwithstanding, no modification of a SAR
shall, without the consent of the Optionee, alter or impair his or her
rights or obligations under such SAR.
ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS.
8.1 Time, Amount and Form of Awards. Awards under the Plan may
be granted in the form of Restricted Shares, in the form of Stock Units,
or in any combination of both. Restricted Shares or Stock Units may also
be awarded in combination with NSOs or SARs, and such an Award may
provide that the Restricted Shares or Stock Units will be forfeited in
the event that the related NSOs or SARs are exercised.
8.2 Payment for Awards. No cash consideration shall be required
of the recipients of Awards under this Article 8.
8.3 Vesting Conditions. Each Award of Restricted Shares or Stock
Units shall become vested, in full or in installments, upon satisfaction
of the conditions specified in the Stock Award Agreement. A Stock Award
Agreement may provide for accelerated vesting in the event of the
Participant's death, disability or retirement or other events. The
Committee may determine, at the time of making an Award or thereafter,
that such Award shall become fully vested in the event that a Change in
Control occurs with respect to the Company.
8.4 Form and Time of Settlement of Stock Units. Settlement of
vested Stock Units may be made in the form of (a) cash, (b) Common Shares
or (c) any combination of both. The actual number of Stock Units
eligible for settlement may be larger or smaller than the number included
in the original Award, based on predetermined performance factors.
Methods of converting Stock Units into cash may include (without
limitation) a method based on the average Fair Market Value of Common
Shares over a series of trading days. Vested Stock Units may be settled
in a lump sum or in installments. The distribution may occur or commence
when all vesting conditions applicable to the Stock Units have been
satisfied or have lapsed, or it may be deferred to any later date. The
amount of a deferred distribution may be increased by an interest factor
or by dividend equivalents. Until an Award of Stock Units is settled,
the number of such Stock Units shall be subject to adjustment pursuant to
Article 10.
8.5 Death of Recipient. Any Stock Units Award that becomes
payable after the recipient's death shall be distributed to the
recipient's beneficiary or beneficiaries. Each recipient of a Stock
Units Award under the Plan shall designate one or more beneficiaries for
this purpose by filing the prescribed form with the Company. A
beneficiary designation may be changed by filing the prescribed form with
the Company at any time before the Award recipient's death. If no
beneficiary was designated or if no designated beneficiary survives the
Award recipient, then any Stock Units Award that becomes payable after
the recipient's death shall be distributed to the recipient's estate.
8.6 Creditors' Rights. A holder of Stock Units shall have no
rights other than those of a general creditor of the Company. Stock
Units represent an unfunded and unsecured obligation of the Company,
subject to the terms and conditions of the applicable Stock Award
Agreement.
ARTICLE 9. VOTING AND DIVIDEND RIGHTS.
9.1 Restricted Shares. The holders of Restricted Shares awarded
under the Plan shall have the same voting, dividend and other rights as
the Company's other shareholders. A Stock Award Agreement, however, may
require that the holders of Restricted Shares invest any cash dividends
received in additional Restricted Shares. Such additional Restricted
Shares shall be subject to the same conditions and restrictions as the
Award with respect to which the dividends were paid. Such additional
Restricted Shares shall not reduce the number of Common Shares available
under Article 3.
9.2 Stock Units. The holders of Stock Units shall have no voting
rights. Prior to settlement or forfeiture, any Stock Unit awarded under
the Plan may, at the Committee's discretion, carry with it a right to
dividend equivalents. Such right entitles the holder to be credited with
an amount equal to all cash dividends paid on one Common Share while the
Stock Unit is outstanding. Dividend equivalents may be converted into
additional Stock Units. Settlement of dividend equivalents may be made
in the form of cash, in the form of Common Shares, or in a combination of
both. Prior to distribution, any dividend equivalents which are not paid
shall be subject to the same conditions and restrictions as the Stock
Units to which they attach.
ARTICLE 10. PROTECTION AGAINST DILUTION.
10.1 Adjustments. In the event of a subdivision of the
outstanding Common Shares, a declaration of a dividend payable in Common
Shares, a declaration of a dividend payable in a form other than Common
Shares in an amount that has a material effect on the price of Common
Shares, a combination or consolidation of the outstanding Common Shares
(by reclassification or otherwise) into a lesser number of Common Shares,
a recapitalization, a spinoff or a similar occurrence, the Committee
shall make such adjustments as it, in its sole discretion, deems
appropriate in one or more of:
(a) the number of Options, SARs, Restricted Shares and
Stock Units available for future Awards under Article 3;
(b) the number of Stock Units included in any prior
Award which has not yet been settled;
(c) the number of Common Shares covered by each
outstanding Option and SAR; or
(d) the Exercise Price under each outstanding Option
and SAR.
Except as provided in this Article 10, a Participant shall have no rights
by reason of any issue by the Company of stock of any class or securities
convertible into stock of any class, any subdivision or consolidation of
shares of stock of any class, the payment of any stock dividend or any
other increase or decrease in the number of shares of stock of any class.
10.2 Reorganizations. In the event that the Company is a party
to a merger or other reorganization, outstanding Options, SARs,
Restricted Shares and Stock Units shall be subject to the agreement of
merger or reorganization. Such agreement may provide, without
limitation, for the assumption of outstanding Awards by the surviving
corporation or its parent, for their continuation by the Company (if the
Company is a surviving corporation), for accelerated vesting and
accelerated expiration, or for settlement in cash.
ARTICLE 11. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such
awards may be settled in the form of Common Shares issued under this
Plan. Such Common Shares shall be treated for all purposes under the
Plan like Common Shares issued in settlement of Stock Units and shall,
when issued, reduce the number of Common Shares available under
Article 3.
ARTICLE 12. LIMITATION ON RIGHTS.
12.1 Retention Rights. Neither the Plan nor any Award granted
under the Plan shall be deemed to give any individual a right to remain
an employee, consultant or director of the Company, a Parent, a
Subsidiary or an Affiliate. The Company and its Parents and Subsidiaries
reserve the right to terminate the service of any employee, consultant or
director at any time, and for any reason, subject to applicable laws, the
Company's certificate of incorporation and by-laws and a written
employment agreement (if any).
12.2 Shareholders' Rights. A Participant shall have no dividend
rights, voting rights or other rights as a shareholder with respect to
any Common Shares covered by his or her Award prior to the issuance of a
stock certificate for such Common Shares. No adjustment shall be made
for cash dividends or other rights for which the record date is prior to
the date when such certificate is issued, except as expressly provided in
Articles 8, 9 and 10.
12.3 Regulatory Requirements. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares
under the Plan shall be subject to all applicable laws, rules and
regulations and such approval by any regulatory body as may be required.
The Company reserves the right to restrict, in whole or in part, the
delivery of Common Shares pursuant to any Award prior to the satisfaction
of all legal requirements relating to the issuance of such Common Shares,
to their registration, qualification or listing or to an exemption from
registration, qualification or listing.
ARTICLE 13. LIMITATION ON PAYMENTS.
13.1 Basic Rule. Any provision of the Plan to the contrary
notwithstanding, in the event that the independent auditors most recently
selected by the Board (the "Auditors") determine that any payment or
transfer by the Company to or for the benefit of a Participant, whether
paid or payable (or transferred or transferable) pursuant to the terms of
this Plan or otherwise (a "Payment"), would be nondeductible by the
Company for federal income tax purposes because of the provisions
concerning "excess parachute payments" in section 280G of the Code, then
the aggregate present value of all Payments shall be reduced (but not
below zero) to the Reduced Amount; provided that the Committee, at the
time of making an Award under this Plan or at any time thereafter, may
specify in writing that such Award shall not be so reduced and shall not
be subject to this Article 13. For purposes of this Article 13, the
"Reduced Amount" shall be the amount, expressed as a present value, which
maximizes the aggregate present value of the Payments without causing any
Payment to be nondeductible by the Company because of section 280G of the
Code.
13.2 Reduction of Payments. If the Auditors determine that any
Payment would be nondeductible by the Company because of section 280G of
the Code, then the Company shall promptly give the Participant notice to
that effect and a copy of the detailed calculation thereof and of the
Reduced Amount, and the Participant may then elect, in his or her sole
discretion, which and how much of the Payments shall be eliminated or
reduced (as long as after such election the aggregate present value of
the Payments equals the Reduced Amount) and shall advise the Company in
writing of his or her election within ten (10) days of receipt of notice.
If no such election is made by the Participant within such ten (10)-day
period, then the Company may elect which and how much of the Payments
shall be eliminated or reduced (as long as after such election the
aggregate present value of the Payments equals the Reduced Amount) and
shall notify the Participant promptly of such election. For purposes of
this Article 13, present value shall be determined in accordance with
section 280G(d)(4) of the Code. All determinations made by the Auditors
under this Article 13 shall be binding upon the Company and the
Participant and shall be made within sixty (60) days of the date when a
Payment becomes payable or transferable. As promptly as practicable
following such determination and the elections hereunder, the Company
shall pay or transfer to or for the benefit of the Participant such
amounts as are then due to him or her under the Plan and shall promptly
pay or transfer to or for the benefit of the Participant in the future
such amounts as become due to him or her under the Plan.
13.3 Overpayments and Underpayments. As a result of uncertainty
in the application of section 280G of the Code at the time of an initial
determination by the Auditors hereunder, it is possible that Payments
will have been made by the Company which should not have been made (an
"Overpayment") or that additional Payments which will not have been made
by the Company could have been made (an "Underpayment"), consistent in
each case with the calculation of the Reduced Amount hereunder. In the
event that the Auditors, based upon the assertion of a deficiency by the
Internal Revenue Service against the Company or the Participant which the
Auditors believe has a high probability of success, determine that an
Overpayment has been made, such Overpayment shall be treated for all
purposes as a loan to the Participant which he or she shall repay to the
Company, together with interest at the applicable federal rate provided
in section 7872(f)(2) of the Code; provided, however, that no amount
shall be payable by the Participant to the Company if and to the extent
that such payment would not reduce the amount which is subject to
taxation under section 4999 of the Code. In the event that the Auditors
determine that an Underpayment has occurred, such Underpayment shall
promptly be paid or transferred by the Company to or for the benefit of
the Participant, together with interest at the applicable federal rate
provided in section 7872(f)(2) of the Code.
13.4 Related Corporations. For purposes of this Article 13, the
term "Company" shall include affiliated corporations to the extent
determined by the Auditors in accordance with section 280G(d)(5) of the
Code.
ARTICLE 14. WITHHOLDING TAXES.
14.1 General. To the extent required by applicable federal,
state, local or foreign law, a Participant or his or her successor shall
make arrangements satisfactory to the Company for the satisfaction of any
withholding tax obligations that arise in connection with the Plan. The
Company shall not be required to issue any Common Shares or make any cash
payment under the Plan until such obligations are satisfied.
14.2 Share Withholding. The Committee may permit a Participant
to satisfy all or part of his or her withholding or income tax
obligations by having the Company withhold all or a portion of any Common
Shares that otherwise would be issued to him or her or by surrendering
all or a portion of any Common Shares that he or she previously acquired.
Such Common Shares shall be valued at their Fair Market Value on the date
when taxes otherwise would be withheld in cash. Any payment of taxes by
assigning Common Shares to the Company may be subject to restrictions,
including any restrictions required by rules of the Securities and
Exchange Commission.
ARTICLE 15. ASSIGNMENT OR TRANSFER OF AWARDS.
15.1 General. Except as provided in Article 14, or in a stock
option agreement, or as required by applicable law, an Award granted
under the Plan shall not be anticipated, assigned, attached, garnished,
optioned, transferred or made subject to any creditor's process, whether
voluntarily, involuntarily or by operation of law. An Option or SAR may
be exercised during the lifetime of the Optionee only by him or her or by
his or her guardian or legal representative. Any act in violation of
this Article 15 shall be void. However, this Article 15 shall not
preclude a Participant from designating a beneficiary who will receive
any outstanding Awards in the event of the Participant's death, nor shall
it preclude a transfer of Awards by will or by the laws of descent and
distribution.
15.2 Trusts. Neither this Article 15 nor any other provision of
the Plan shall preclude a Participant from transferring or assigning
Restricted Shares or Stock Units to (a) the trustee of a trust that is
revocable by such Participant alone, both at the time of the transfer or
assignment and at all times thereafter prior to such Participant's death,
or (b) the trustee of any other trust to the extent approved in advance
by the Committee in writing. A transfer or assignment of Restricted
Shares or Stock Units from such trustee to any person other than such
Participant shall be permitted only to the extent approved in advance by
the Committee in writing, and Restricted Shares or Stock Units held by
such trustee shall be subject to all of the conditions and restrictions
set forth in the Plan and in the applicable Stock Award Agreement, as if
such trustee were a party to such Agreement.
ARTICLE 16. FUTURE OF THE PLAN.
16.1 Term of the Plan. The Plan, as set forth herein, shall
become effective on August 14, 1998, subject to approval by the Company's
shareholders and no Awards shall be exercisable until such approval is
obtained. To the extent required by applicable law, the Plan shall
terminate on August 13, 2008, except that the Plan may be terminated
under Section 16.2; provided, however, that no ISO may be granted after
August 13, 2008.
16.2 Amendment or Termination. The Board may, at any time and
for any reason, amend or terminate the Plan. An amendment of the Plan
shall be subject to the approval of the Company's shareholders only to
the extent required by applicable laws, regulations or rules. No Awards
shall be granted under the Plan after the termination thereof. The
termination of the Plan, or any amendment thereof, shall not affect any
Award previously granted under the Plan.
ARTICLE 17. DEFINITIONS.
17.1 "Affiliate" means any entity other than a Subsidiary, if the
Company and/or one or more Subsidiaries own not less than 50% of such
entity.
17.2 "Award" means any award of an Option, a SAR, a Restricted
Share or a Stock Unit under the Plan.
17.3 "Board" means the Company's Board of Directors, as
constituted from time to time.
17.4 "Change in Control" means the occurrence of any "person" (as
defined in Section 13(d) of the Exchange Act), other than the Company,
its Parent or Subsidiary or employee benefit plan or trust maintained by
the Company, its Parent or Subsidiary, becoming the "beneficial owner"
(as defined in Rule 13d-3 of the Exchange Act), directly or indirectly,
of more than 25% of the Common Shares of the Company outstanding at such
time, without the prior approval of the Board.
17.5 "Code" means the Internal Revenue Code of 1986, as amended.
17.6 "Committee" means a committee of the Board, as described in
Article 2.
17.7 "Common Share" means one share of the common stock of the
Company.
17.8 "Company" means Zilog, Inc., a Delaware corporation.
17.9 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
17.10 "Exercise Price," in the case of an Option, means the amount
for which one Common Share may be purchased upon exercise of such Option,
as specified in the applicable Stock Option Agreement. "Exercise Price,"
in the case of a SAR, means an amount, as specified in the applicable SAR
Agreement, which is subtracted from the Fair Market Value of one Common
Share in determining the amount payable upon exercise of such SAR.
17.11 "Fair Market Value" means the market price of Common Shares,
determined by the Committee as follows:
(a) If the Common Shares were traded over-the-counter on the
date in question but were not classified as a national market
issue, then the Fair Market Value shall be equal to the mean
between the last reported representative bid and asked prices
quoted by the NASDAQ system for such date;
(b) If the Common Shares were traded over-the-counter on the
date in question and were classified as a national market issue,
then the Fair Market Value shall be equal to the last-transaction
price quoted by the NASDAQ system for such date;
(c) If the Common Shares were traded on a stock exchange on
the date in question, then the Fair Market Value shall be equal to
the closing price reported by the applicable composite transactions
report for such date; and
(d) If none of the foregoing provisions is applicable, then
the Fair Market Value shall be determined by the Committee in good
faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the
Committee shall be based on the prices reported in the Western Edition of
The Wall Street Journal. Such determination shall be conclusive and
binding on all persons.
17.12 "ISO" means an incentive stock option described in section
422(b) of the Code.
17.13 "Key Employee" means (a) a common-law employee of the
Company, a Parent, a Subsidiary or an Affiliate or (b) a consultant or
adviser who provides services to the Company, a Parent, a Subsidiary or
an Affiliate as an independent contractor.
17.14 "NSO" means an employee stock option not described in
section 422 of the Code.
17.15 "Option" means an ISO or NSO granted under the Plan and
entitling the holder to purchase one Common Share.
17.16 "Optionee" means an individual or estate who holds an Option
or SAR.
17.17 "Parent" means any corporation (other than the Company) in
an unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain. A corporation that
attains the status of a Parent on a date after the adoption of the Plan
shall be considered a Parent commencing as of such date.
17.18 "Participant" means an individual or estate who holds an
Award.
17.19 "Plan" means this Zilog, Inc. 1998 Long-Term Stock Incentive
Plan, as it may be amended from time to time.
17.20 "Restricted Share" means a Common Share awarded under the
Plan.
17.21 "SAR" means a stock appreciation right granted under the
Plan.
17.22 "Share" means one share of the common stock of the Company.
17.23 "SAR Agreement" means the agreement between the Company and
an Optionee which contains the terms, conditions and restrictions
pertaining to his or her SAR.
17.24 "Stock Award Agreement" means the agreement between the
Company and the recipient of a Restricted Share or Stock Unit which
contains the terms, conditions and restrictions pertaining to such
Restricted Share or Stock Unit.
17.25 "Stock Option Agreement" means the agreement between the
Company and an Optionee which contains the terms, conditions and
restrictions pertaining to his or her Option.
17.26 "Stock Unit" means a bookkeeping entry representing the
equivalent of one Common Share, as awarded under the Plan.
17.27 "Subsidiary" means any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company, if each
of the corporations other than the last corporation in the unbroken chain
owns stock possessing fifty percent (50%) or more of the total combined
voting power of all classes of stock in one of the other corporations in
such chain. A corporation that attains the status of a Subsidiary on a
date after the adoption of the Plan shall be considered a Subsidiary
commencing as of such date.
ARTICLE 18. EXECUTION.
To record the adoption of the Plan by the Board, the Company has
caused its duly authorized officer to affix the corporate name and seal
hereto.
ZILOG, INC.
By ________________________________
EXHIBIT 10.18
ZILOG, INC.
1998 EXECUTIVE OFFICER STOCK INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1. INTRODUCTION 1
ARTICLE 2. ADMINISTRATION 1
2.1 Committee Composition 1
2.2 Committee Responsibilities 1
ARTICLE 3. SHARES AVAILABLE FOR GRANTS. 2
3.1 Basic Limitation 2
3.2 Additional Shares 2
3.3 Dividend Equivalents 2
ARTICLE 4. ELIGIBILITY 2
4.1 General Rules 2
4.2 Incentive Stock Options 2
ARTICLE 5. OPTIONS 2
5.1 Stock Option Agreement 2
5.2 Number of Shares 3
5.3 Exercise Price 3
5.4 Exercisability and Term 3
5.5 Effect of Change in Control 3
5.6 Modification or Assumption of Options. 3
ARTICLE 6. PAYMENT FOR OPTION SHARES 4
6.1 General Rule 4
6.2 Surrender of Stock 4
6.3 Exercise/Sale 4
6.4 Exercise/Pledge 4
6.5 Promissory Note 4
6.6 Other Forms of Payment 4
ARTICLE 7. STOCK APPRECIATION RIGHTS 5
7.1 SAR Agreement 5
7.2 Number of Shares 5
7.3 Exercise Price 5
7.4 Exercisability and Term 5
7.5 Effect of Change in Control 5
7.6 Exercise of SARs 5
7.7 Modification or Assumption of SARs. 6
ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS 6
8.1 Time, Amount and Form of Awards 6
8.2 Payment for Awards 6
8.3 Vesting Conditions 6
8.4 Form and Time of Settlement of Stock Units 6
8.5 Death of Recipient 7
8.6 Creditors' Rights 7
ARTICLE 9. VOTING AND DIVIDEND RIGHTS 7
9.1 Restricted Shares 7
9.2 Stock Units 7
ARTICLE 10. PROTECTION AGAINST DILUTION 8
10.1 Adjustments 8
10.2 Reorganizations 8
ARTICLE 11. AWARDS UNDER OTHER PLANS 8
ARTICLE 12. LIMITATION ON RIGHTS 8
12.1 Retention Rights 8
12.2 Shareholders' Rights 9
12.3 Regulatory Requirements 9
ARTICLE 13. LIMITATION ON PAYMENTS 9
13.1 Basic Rule 9
13.2 Reduction of Payments 9
13.3 Overpayments and Underpayments 10
13.4 Related Corporations 10
ARTICLE 14. WITHHOLDING TAXES 11
14.1 General 11
14.2 Share Withholding 11
ARTICLE 15. ASSIGNMENT OR TRANSFER OF AWARDS 11
15.1 General 11
15.2 Trusts 11
ARTICLE 16. FUTURE OF THE PLAN 12
16.1 Term of the Plan 12
16.2 Amendment or Termination 12
ARTICLE 17. DEFINITIONS 12
ARTICLE 18. EXECUTION 15
<PAGE>
ZILOG, INC. 1998 EXECUTIVE OFFICER STOCK INCENTIVE PLAN
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board on August 14, 1998, subject to
approval by the Company's shareholders. The Plan is effective August 14,
1998.
The purpose of the Plan is to promote the long-term success of the
Company and the creation of shareholder value by (a) encouraging the
Company's Executive Officers to focus on critical long-range objectives,
(b) encouraging the attraction and retention of Executive Officers with
exceptional qualifications and (c) linking Executive Officers directly to
shareholder interests through increased stock ownership. The Plan seeks
to achieve this purpose by providing for Awards in the form of Restricted
Shares, Stock Units, Options (which may constitute incentive stock
options or nonstatutory stock options) or stock appreciation rights.
The Plan shall be governed by, and construed in accordance with,
the laws of the State of California (except their choice-of-law
provisions).
ARTICLE 2. ADMINISTRATION.
2.1 Committee Composition. The Plan shall be administered by a
Committee appointed by the Board. Effective with the Company's initial
public offering, the Committee shall consist of two or more directors of
the Company who shall satisfy the requirements of Rule 16b-3 (or its
successor) under the Exchange Act or the Board itself.
2.2 Committee Responsibilities. The Committee shall:
(a) select the Executive Officers who are to receive Awards under the
Plan;
(b) determine the type, number, vesting requirements and other features
and conditions of such Awards;
(c) interpret the Plan; and
(d) make all other decisions relating to the operation of the Plan.
The Committee may adopt such rules or guidelines as it deems appropriate
to implement the Plan. The Committee's determinations under the Plan
shall be final and binding on all persons.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 Basic Limitation. Common Shares issued pursuant to the Plan
shall be authorized but unissued shares or treasury shares. The
aggregate number of Common Shares reserved for award as Restricted
Shares, Stock Units, Options and SARs shall be limited to 5,500,000
Common Shares Shares (after giving effect to the 2-for-1 stock split
approved by the Board of Directors on August 14, 1998) on a fully diluted
basis. The limitation of this Section 3.1 shall be subject to adjustment
pursuant to Article 10.
3.2 Additional Shares. If Stock Units, Options or SARs are
forfeited or if Options or SARs terminate for any other reason before
being exercised, then such Stock Units, Options or SARs shall again
become available for Awards under the Plan. If SARs are exercised, then
only the number of Common Shares (if any) actually issued in settlement
of such SARs shall reduce the number available under Section 3.1 and the
balance shall again become available for Awards under the Plan. If
Restricted Shares are forfeited before any dividends have been paid with
respect to such Restricted Shares, then such Restricted Shares shall
again become available for Awards under the Plan.
3.3 Dividend Equivalents. Any dividend equivalents distributed
under the Plan shall not be applied against the number of Restricted
Shares, Stock Units, Options or SARs available for Awards, whether or not
such dividend equivalents are converted into Stock Units.
ARTICLE 4. ELIGIBILITY.
4.1 General Rules. Only Executive Officers shall be eligible for
designation as Participants by the Committee.
4.2 Incentive Stock Options. Only Executive Officers who are
common-law employees of the Company, a Parent or a Subsidiary shall be
eligible for the grant of ISOs. In addition, an Executive Officer who
owns more than ten percent (10%) of the total combined voting power of
all classes of outstanding stock of the Company or any of its Parents or
Subsidiaries shall not be eligible for the grant of an ISO unless the
requirements set forth in section 422(c)(5) of the Code are satisfied.
ARTICLE 5. OPTIONS.
5.1 Stock Option Agreement. Each grant of an Option under the
Plan shall be evidenced by a Stock Option Agreement between the Optionee
and the Company. Such Option shall be subject to all applicable terms of
the Plan and may be subject to any other terms that are not inconsistent
with the Plan. The Stock Option Agreement shall specify whether the
Option is an ISO or an NSO. The provisions of the various Stock Option
Agreements entered into under the Plan need not be identical. A Stock
Option Agreement may provide that new Options will be granted
automatically to the Optionee when he or she exercises the prior Options.
5.2 Number of Shares. Each Stock Option Agreement shall specify
the number of Common Shares subject to the Option and shall provide for
the adjustment of such number in accordance with Article 10.
5.3 Exercise Price. Each Stock Option Agreement shall specify
the Exercise Price; provided that the Exercise Price under an ISO shall
in no event be less than one-hundred percent (100%) of the Fair Market
Value of a Common Share on the date of grant. In the case of an NSO, a
Stock Option Agreement may specify an Exercise Price that varies in
accordance with a predetermined formula while the NSO is outstanding.
5.4 Exercisability and Term. Each Stock Option Agreement shall
specify the date when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of
the Option; provided that the term of an ISO shall in no event exceed ten
(10) years from the date of grant. A Stock Option Agreement may provide
for accelerated exercisability in the event of the Optionee's death,
disability or retirement or other events and may provide for expiration
prior to the end of its term in the event of the termination of the
Optionee's service. Options may be awarded in combination with SARs, and
such an Award may provide that the Options will not be exercisable unless
the related SARs are forfeited. NSOs may also be awarded in combination
with Restricted Shares or Stock Units, and such an Award may provide that
the NSOs will not be exercisable unless the related Restricted Shares or
Stock Units are forfeited.
5.5 Effect of Change in Control. The Committee may determine, at
the time of granting an Option or thereafter, that such Option shall
become fully exercisable as to all Common Shares subject to such Option
in the event that a Change in Control occurs with respect to the Company.
If the Committee finds that there is a reasonable possibility that,
within the succeeding six months, a Change in Control will occur with
respect to the Company, then the Committee at its sole discretion may
determine that any or all outstanding Options shall become fully
exercisable as to all Common Shares subject to such Options.
5.6 Modification or Assumption of Options. Within the
limitations of the Plan, the Committee may modify, extend or assume
outstanding options or may accept the cancellation of outstanding options
(whether granted by the Company or by another issuer) in return for the
grant of new options for the same or a different number of shares and at
the same or a different exercise price. The foregoing notwithstanding,
no modification of an Option shall, without the consent of the Optionee,
alter or impair his or her rights or obligations under such Option.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 General Rule. The entire Exercise Price of Common Shares
issued upon exercise of Options shall be payable in cash at the time when
such Common Shares are purchased, except as follows:
(a) In the case of an ISO granted under the Plan,
payment shall be made only pursuant to the express provisions
of the applicable Stock Option Agreement. The Stock Option
Agreement may specify that payment may be made in any form(s)
described in this Article 6.
(b) In the case of an NSO, the Committee may at any
time accept payment in any form(s) described in this Article
6.
6.2 Surrender of Stock. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made
with Common Shares which have already been owned by the Optionee for such
duration as shall be specified by the Committee. Such Common Shares
shall be valued at their Fair Market Value on the date when the new
Common Shares are purchased under the Plan.
6.3 Exercise/Sale. To the extent that this Section 6.3 is
applicable, payment may be made by the delivery (on a form prescribed by
the Company) of an irrevocable direction to a securities broker approved
by the Company to sell Common Shares and to deliver all or part of the
sales proceeds to the Company in payment of all or part of the Exercise
Price and any withholding taxes.
6.4 Exercise/Pledge. To the extent that this Section 6.4 is
applicable, payment may be made by the delivery (on a form prescribed by
the Company) of an irrevocable direction to pledge Common Shares to a
securities broker or lender approved by the Company, as security for a
loan, and to deliver all or part of the loan proceeds to the Company in
payment of all or part of the Exercise Price and any withholding taxes.
6.5 Promissory Note. To the extent that this Section 6.5 is
applicable, payment for all or any part of the Exercise Price may be made
with a full-recourse promissory note.
6.6 Other Forms of Payment. To the extent that this Section 6.6
is applicable, payment may be made in any other form that is consistent
with applicable laws, regulations and rules.
ARTICLE 7. STOCK APPRECIATION RIGHTS.
7.1 SAR Agreement. Each grant of a SAR under the Plan shall be
evidenced by a SAR Agreement between the Optionee and the Company. Such
SAR shall be subject to all applicable terms of the Plan and may be
subject to any other terms that are not inconsistent with the Plan. The
provisions of the various SAR Agreements entered into under the Plan need
not be identical. SARs may be granted in consideration of a reduction in
the Optionee's other compensation.
7.2 Number of Shares. Each SAR Agreement shall specify the
number of Common Shares to which the SAR pertains and shall provide for
the adjustment of such number in accordance with Article 10.
7.3 Exercise Price. Each SAR Agreement shall specify the
Exercise Price. A SAR Agreement may specify an Exercise Price that
varies in accordance with a predetermined formula while the SAR is
outstanding.
7.4 Exercisability and Term. Each SAR Agreement shall specify
the date when all or any installment of the SAR is to become exercisable.
The SAR Agreement shall also specify the term of the SAR. A SAR
Agreement may provide for accelerated exercisability in the event of the
Optionee's death, disability or retirement or other events and may
provide for expiration prior to the end of its term in the event of the
termination of the Optionee's service. SARs may also be awarded in
combination with Options, Restricted Shares or Stock Units, and such an
Award may provide that the SARs will not be exercisable unless the
related Options, Restricted Shares or Stock Units are forfeited. A SAR
may be included in an ISO only at the time of grant but may be included
in an NSO at the time of grant or at any subsequent time, but not later
than six months before the expiration of such NSO. A SAR granted under
the Plan may provide that it will be exercisable only in the event of a
Change in Control.
7.5 Effect of Change in Control. The Committee may determine, at
the time of granting a SAR or thereafter, that such SAR shall become
fully exercisable as to all Common Shares subject to such SAR in the
event that a Change in Control occurs with respect to the Company. If
the Committee finds that there is a reasonable possibility that, within
the succeeding six months, a Change in Control will occur with respect to
the Company, then the Committee at its sole discretion may determine that
any or all outstanding SARs shall become fully exercisable as to all
Common Shares subject to such SARs.
7.6 Exercise of SARs. If, on the date when a SAR expires, the
Exercise Price under such SAR is less than the Fair Market Value on such
date but any portion of such SAR has not been exercised or surrendered,
then such SAR shall automatically be deemed to be exercised as of such
date with respect to such portion. Upon exercise of a SAR, the Optionee
(or any person having the right to exercise the SAR after his or her
death) shall receive from the Company (a) Common Shares, (b) cash or (c)
a combination of Common Shares and cash, as the Committee shall
determine. The amount of cash and/or the Fair Market Value of Common
Shares received upon exercise of SARs shall, in the aggregate, be equal
to the amount by which the Fair Market Value (on the date of surrender)
of the Common Shares subject to the SARs exceeds the Exercise Price.
7.7 Modification or Assumption of SARs. Within the limitations
of the Plan, the Committee may modify, extend or assume outstanding SARs
or may accept the cancellation of outstanding SARs (whether granted by
the Company or by another issuer) in return for the grant of new SARs for
the same or a different number of shares and at the same or a different
exercise price. The foregoing notwithstanding, no modification of a SAR
shall, without the consent of the Optionee, alter or impair his or her
rights or obligations under such SAR.
ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS.
8.1 Time, Amount and Form of Awards. Awards under the Plan may
be granted in the form of Restricted Shares, in the form of Stock Units,
or in any combination of both. Restricted Shares or Stock Units may also
be awarded in combination with NSOs or SARs, and such an Award may
provide that the Restricted Shares or Stock Units will be forfeited in
the event that the related NSOs or SARs are exercised.
8.2 Payment for Awards. No cash consideration shall be required
of the recipients of Awards under this Article 8.
8.3 Vesting Conditions. Each Award of Restricted Shares or Stock
Units shall become vested, in full or in installments, upon satisfaction
of the conditions specified in the Stock Award Agreement. A Stock Award
Agreement may provide for accelerated vesting in the event of the
Participant's death, disability or retirement or other events. The
Committee may determine, at the time of making an Award or thereafter,
that such Award shall become fully vested in the event that a Change in
Control occurs with respect to the Company.
8.4 Form and Time of Settlement of Stock Units. Settlement of
vested Stock Units may be made in the form of (a) cash, (b) Common Shares
or (c) any combination of both. The actual number of Stock Units
eligible for settlement may be larger or smaller than the number included
in the original Award, based on predetermined performance factors.
Methods of converting Stock Units into cash may include (without
limitation) a method based on the average Fair Market Value of Common
Shares over a series of trading days. Vested Stock Units may be settled
in a lump sum or in installments. The distribution may occur or commence
when all vesting conditions applicable to the Stock Units have been
satisfied or have lapsed, or it may be deferred to any later date. The
amount of a deferred distribution may be increased by an interest factor
or by dividend equivalents. Until an Award of Stock Units is settled,
the number of such Stock Units shall be subject to adjustment pursuant to
Article 10.
8.5 Death of Recipient. Any Stock Units Award that becomes
payable after the recipient's death shall be distributed to the
recipient's beneficiary or beneficiaries. Each recipient of a Stock
Units Award under the Plan shall designate one or more beneficiaries for
this purpose by filing the prescribed form with the Company. A
beneficiary designation may be changed by filing the prescribed form with
the Company at any time before the Award recipient's death. If no
beneficiary was designated or if no designated beneficiary survives the
Award recipient, then any Stock Units Award that becomes payable after
the recipient's death shall be distributed to the recipient's estate.
8.6 Creditors' Rights. A holder of Stock Units shall have no
rights other than those of a general creditor of the Company. Stock
Units represent an unfunded and unsecured obligation of the Company,
subject to the terms and conditions of the applicable Stock Award
Agreement.
ARTICLE 9. VOTING AND DIVIDEND RIGHTS.
9.1 Restricted Shares. The holders of Restricted Shares awarded
under the Plan shall have the same voting, dividend and other rights as
the Company's other shareholders. A Stock Award Agreement, however, may
require that the holders of Restricted Shares invest any cash dividends
received in additional Restricted Shares. Such additional Restricted
Shares shall be subject to the same conditions and restrictions as the
Award with respect to which the dividends were paid. Such additional
Restricted Shares shall not reduce the number of Common Shares available
under Article 3.
9.2 Stock Units. The holders of Stock Units shall have no voting
rights. Prior to settlement or forfeiture, any Stock Unit awarded under
the Plan may, at the Committee's discretion, carry with it a right to
dividend equivalents. Such right entitles the holder to be credited with
an amount equal to all cash dividends paid on one Common Share while the
Stock Unit is outstanding. Dividend equivalents may be converted into
additional Stock Units. Settlement of dividend equivalents may be made
in the form of cash, in the form of Common Shares, or in a combination of
both. Prior to distribution, any dividend equivalents which are not paid
shall be subject to the same conditions and restrictions as the Stock
Units to which they attach.
ARTICLE 10. PROTECTION AGAINST DILUTION.
10.1 Adjustments. In the event of a subdivision of the
outstanding Common Shares, a declaration of a dividend payable in Common
Shares, a declaration of a dividend payable in a form other than Common
Shares in an amount that has a material effect on the price of Common
Shares, a combination or consolidation of the outstanding Common Shares
(by reclassification or otherwise) into a lesser number of Common Shares,
a recapitalization, a spinoff or a similar occurrence, the Committee
shall make such adjustments as it, in its sole discretion, deems
appropriate in one or more of:
(a) the number of Options, SARs, Restricted Shares and Stock Units
available for future Awards under Article 3;
(b) the number of Stock Units included in any prior Award which has not
yet been settled;
(c) the number of Common Shares covered by each outstanding Option and
SAR; or
(d) the Exercise Price under each outstanding Option and SAR.
Except as provided in this Article 10, a Participant shall have no rights
by reason of any issue by the Company of stock of any class or securities
convertible into stock of any class, any subdivision or consolidation of
shares of stock of any class, the payment of any stock dividend or any
other increase or decrease in the number of shares of stock of any class.
10.2 Reorganizations. In the event that the Company is a party
to a merger or other reorganization, outstanding Options, SARs,
Restricted Shares and Stock Units shall be subject to the agreement of
merger or reorganization. Such agreement may provide, without
limitation, for the assumption of outstanding Awards by the surviving
corporation or its parent, for their continuation by the Company (if the
Company is a surviving corporation), for accelerated vesting and
accelerated expiration, or for settlement in cash.
ARTICLE 11. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such
awards may be settled in the form of Common Shares issued under this
Plan. Such Common Shares shall be treated for all purposes under the
Plan like Common Shares issued in settlement of Stock Units and shall,
when issued, reduce the number of Common Shares available under
Article 3.
ARTICLE 12. LIMITATION ON RIGHTS.
12.1 Retention Rights. Neither the Plan nor any Award granted
under the Plan shall be deemed to give any individual a right to remain
an employee, consultant or director of the Company, a Parent, a
Subsidiary or an Affiliate. The Company and its Parents and Subsidiaries
reserve the right to terminate the service of any employee, consultant or
director at any time, and for any reason, subject to applicable laws, the
Company's certificate of incorporation and by-laws and a written
employment agreement (if any).
12.2 Shareholders' Rights. A Participant shall have no dividend
rights, voting rights or other rights as a shareholder with respect to
any Common Shares covered by his or her Award prior to the issuance of a
stock certificate for such Common Shares. No adjustment shall be made
for cash dividends or other rights for which the record date is prior to
the date when such certificate is issued, except as expressly provided in
Articles 8, 9 and 10.
12.3 Regulatory Requirements. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares
under the Plan shall be subject to all applicable laws, rules and
regulations and such approval by any regulatory body as may be required.
The Company reserves the right to restrict, in whole or in part, the
delivery of Common Shares pursuant to any Award prior to the satisfaction
of all legal requirements relating to the issuance of such Common Shares,
to their registration, qualification or listing or to an exemption from
registration, qualification or listing.
ARTICLE 13. LIMITATION ON PAYMENTS.
13.1 Basic Rule. Any provision of the Plan to the contrary
notwithstanding, in the event that the independent auditors most recently
selected by the Board (the "Auditors") determine that any payment or
transfer by the Company to or for the benefit of a Participant, whether
paid or payable (or transferred or transferable) pursuant to the terms of
this Plan or otherwise (a "Payment"), would be nondeductible by the
Company for federal income tax purposes because of the provisions
concerning "excess parachute payments" in section 280G of the Code, then
the aggregate present value of all Payments shall be reduced (but not
below zero) to the Reduced Amount; provided that the Committee, at the
time of making an Award under this Plan or at any time thereafter, may
specify in writing that such Award shall not be so reduced and shall not
be subject to this Article 13. For purposes of this Article 13, the
"Reduced Amount" shall be the amount, expressed as a present value, which
maximizes the aggregate present value of the Payments without causing any
Payment to be nondeductible by the Company because of section 280G of the
Code.
13.2 Reduction of Payments. If the Auditors determine that any
Payment would be nondeductible by the Company because of section 280G of
the Code, then the Company shall promptly give the Participant notice to
that effect and a copy of the detailed calculation thereof and of the
Reduced Amount, and the Participant may then elect, in his or her sole
discretion, which and how much of the Payments shall be eliminated or
reduced (as long as after such election the aggregate present value of
the Payments equals the Reduced Amount) and shall advise the Company in
writing of his or her election within ten (10) days of receipt of notice.
If no such election is made by the Participant within such ten (10)-day
period, then the Company may elect which and how much of the Payments
shall be eliminated or reduced (as long as after such election the
aggregate present value of the Payments equals the Reduced Amount) and
shall notify the Participant promptly of such election. For purposes of
this Article 13, present value shall be determined in accordance with
section 280G(d)(4) of the Code. All determinations made by the Auditors
under this Article 13 shall be binding upon the Company and the
Participant and shall be made within sixty (60) days of the date when a
Payment becomes payable or transferable. As promptly as practicable
following such determination and the elections hereunder, the Company
shall pay or transfer to or for the benefit of the Participant such
amounts as are then due to him or her under the Plan and shall promptly
pay or transfer to or for the benefit of the Participant in the future
such amounts as become due to him or her under the Plan.
13.3 Overpayments and Underpayments. As a result of uncertainty
in the application of section 280G of the Code at the time of an initial
determination by the Auditors hereunder, it is possible that Payments
will have been made by the Company which should not have been made (an
"Overpayment") or that additional Payments which will not have been made
by the Company could have been made (an "Underpayment"), consistent in
each case with the calculation of the Reduced Amount hereunder. In the
event that the Auditors, based upon the assertion of a deficiency by the
Internal Revenue Service against the Company or the Participant which the
Auditors believe has a high probability of success, determine that an
Overpayment has been made, such Overpayment shall be treated for all
purposes as a loan to the Participant which he or she shall repay to the
Company, together with interest at the applicable federal rate provided
in section 7872(f)(2) of the Code; provided, however, that no amount
shall be payable by the Participant to the Company if and to the extent
that such payment would not reduce the amount which is subject to
taxation under section 4999 of the Code. In the event that the Auditors
determine that an Underpayment has occurred, such Underpayment shall
promptly be paid or transferred by the Company to or for the benefit of
the Participant, together with interest at the applicable federal rate
provided in section 7872(f)(2) of the Code.
13.4 Related Corporations. For purposes of this Article 13, the
term "Company" shall include affiliated corporations to the extent
determined by the Auditors in accordance with section 280G(d)(5) of the
Code.
ARTICLE 14. WITHHOLDING TAXES.
14.1 General. To the extent required by applicable federal,
state, local or foreign law, a Participant or his or her successor shall
make arrangements satisfactory to the Company for the satisfaction of any
withholding tax obligations that arise in connection with the Plan. The
Company shall not be required to issue any Common Shares or make any cash
payment under the Plan until such obligations are satisfied.
14.2 Share Withholding. The Committee may permit a Participant
to satisfy all or part of his or her withholding or income tax
obligations by having the Company withhold all or a portion of any Common
Shares that otherwise would be issued to him or her or by surrendering
all or a portion of any Common Shares that he or she previously acquired.
Such Common Shares shall be valued at their Fair Market Value on the date
when taxes otherwise would be withheld in cash. Any payment of taxes by
assigning Common Shares to the Company may be subject to restrictions,
including any restrictions required by rules of the Securities and
Exchange Commission.
ARTICLE 15. ASSIGNMENT OR TRANSFER OF AWARDS.
15.1 General. Except as provided in Article 14, or in a stock
option agreement, an Award granted under the Plan shall not be
anticipated, assigned, attached, garnished, optioned, transferred or made
subject to any creditor's process, whether voluntarily, involuntarily or
by operation of law. An Option or SAR may be exercised during the
lifetime of the Optionee only by him or her or by his or her guardian or
legal representative. Any act in violation of this Article 15 shall be
void. However, this Article 15 shall not preclude a Participant from
designating a beneficiary who will receive any outstanding Awards in the
event of the Participant's death, nor shall it preclude a transfer of
Awards by will or by the laws of descent and distribution.
15.2 Trusts. Neither this Article 15 nor any other provision of
the Plan shall preclude a Participant from transferring or assigning
Restricted Shares or Stock Units to (a) the trustee of a trust that is
revocable by such Participant alone, both at the time of the transfer or
assignment and at all times thereafter prior to such Participant's death,
or (b) the trustee of any other trust to the extent approved in advance
by the Committee in writing. A transfer or assignment of Restricted
Shares or Stock Units from such trustee to any person other than such
Participant shall be permitted only to the extent approved in advance by
the Committee in writing, and Restricted Shares or Stock Units held by
such trustee shall be subject to all of the conditions and restrictions
set forth in the Plan and in the applicable Stock Award Agreement, as if
such trustee were a party to such Agreement.
ARTICLE 16. FUTURE OF THE PLAN.
16.1 Term of the Plan. The Plan, as set forth herein, shall
become effective on August 14, 1998, subject to the approval of the
Company's shareholders and no Awards shall be exercisable until such
approval is obtained. The Plan shall remain in effect until it is
terminated under Section 16.2, except that no ISOs shall be granted after
August 13, 2008.
16.2 Amendment or Termination. The Board may, at any time and
for any reason, amend or terminate the Plan. An amendment of the Plan
shall be subject to the approval of the Company's shareholders only to
the extent required by applicable laws, regulations or rules. No Awards
shall be granted under the Plan after the termination thereof. The
termination of the Plan, or any amendment thereof, shall not affect any
Award previously granted under the Plan.
ARTICLE 17. DEFINITIONS.
17.1 "Affiliate" means any entity other than a Subsidiary, if the
Company and/or one or more Subsidiaries own not less than 50% of such
entity.
17.2 "Award" means any award of an Option, a SAR, a Restricted
Share or a Stock Unit under the Plan.
17.3 "Board" means the Company's Board of Directors, as
constituted from time to time.
17.4 "Change in Control" means the occurrence of any "person" (as
defined in Section 13(d) of the Exchange Act), other than the Company,
its Parent or Subsidiary or employee benefit plan or trust maintained by
the Company, its Parent or Subsidiary, becoming the "beneficial owner"
(as defined in Rule 13d-3 of the Exchange Act), directly or indirectly,
of more than 25% of the Common Shares of the Company outstanding at such
time, without the prior approval of the Board.
17.5 "Code" means the Internal Revenue Code of 1986, as amended.
17.6 "Committee" means a committee of the Board, as described in
Article 2.
17.7 "Common Share" means one share of the common stock of the
Company.
17.8 "Company" means Zilog, Inc., a Delaware corporation.
17.9 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
17.10 "Executive Officer" means a common-law employee of the
Company, a Parent, a Subsidiary or an Affiliate who is an officer of the
Company, a Parent, a Subsidiary or an Affiliate.
17.11 "Exercise Price," in the case of an Option, means the amount
for which one Common Share may be purchased upon exercise of such Option,
as specified in the applicable Stock Option Agreement. "Exercise Price,"
in the case of a SAR, means an amount, as specified in the applicable SAR
Agreement, which is subtracted from the Fair Market Value of one Common
Share in determining the amount payable upon exercise of such SAR.
17.12 "Fair Market Value" means the market price of Common Shares,
determined by the Committee as follows:
(a) If the Common Shares were traded over-the-counter on the
date in question but were not classified as a national market
issue, then the Fair Market Value shall be equal to the mean
between the last reported representative bid and asked prices
quoted by the NASDAQ system for such date;
(b) If the Common Shares were traded over-the-counter on the
date in question and were classified as a national market issue,
then the Fair Market Value shall be equal to the last-transaction
price quoted by the NASDAQ system for such date;
(c) If the Common Shares were traded on a stock exchange on
the date in question, then the Fair Market Value shall be equal to
the closing price reported by the applicable composite transactions
report for such date; and
(d) If none of the foregoing provisions is applicable, then
the Fair Market Value shall be determined by the Committee in good
faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the
Committee shall be based on the prices reported in the Western Edition of
The Wall Street Journal. Such determination shall be conclusive and
binding on all persons.
17.13 "ISO" means an incentive stock option described in section
422(b) of the Code.
17.14 "NSO" means an employee stock option not described in
section 422 of the Code.
17.15 "Option" means an ISO or NSO granted under the Plan and
entitling the holder to purchase one Common Share.
17.16 "Optionee" means an individual or estate who holds an Option
or SAR.
17.17 "Parent" means any corporation (other than the Company) in
an unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain. A corporation that
attains the status of a Parent on a date after the adoption of the Plan
shall be considered a Parent commencing as of such date.
17.18 "Participant" means an individual or estate who holds an
Award.
17.19 "Plan" means this Zilog, Inc. 1998 Executive Officer Stock
Incentive Plan, as it may be amended from time to time.
17.20 "Restricted Share" means a Common Share awarded under the
Plan.
17.21 "SAR" means a stock appreciation right granted under the
Plan.
17.22 "Share" means one share of the common stock of the Company.
17.23 "SAR Agreement" means the agreement between the Company and
an Optionee which contains the terms, conditions and restrictions
pertaining to his or her SAR.
17.24 "Stock Award Agreement" means the agreement between the
Company and the recipient of a Restricted Share or Stock Unit which
contains the terms, conditions and restrictions pertaining to such
Restricted Share or Stock Unit.
17.25 "Stock Option Agreement" means the agreement between the
Company and an Optionee which contains the terms, conditions and
restrictions pertaining to his or her Option.
17.26 "Stock Unit" means a bookkeeping entry representing the
equivalent of one Common Share, as awarded under the Plan.
17.27 "Subsidiary" means any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company, if each
of the corporations other than the last corporation in the unbroken chain
owns stock possessing fifty percent (50%) or more of the total combined
voting power of all classes of stock in one of the other corporations in
such chain. A corporation that attains the status of a Subsidiary on a
date after the adoption of the Plan shall be considered a Subsidiary
commencing as of such date.
ARTICLE 18. EXECUTION.
To record the adoption of the Plan by the Board, the Company has
caused its duly authorized officer to affix the corporate name and seal
hereto.
ZILOG, INC.
By ___________________________
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