<PAGE>
As filed with the Securities and Exchange Commission on August 3, 2000
Registration Statement No. 333--
-------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
Form S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
ZiLOG, Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 3674 13-3092996
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
---------------
910 East Hamilton Avenue, Suite 110
Campbell, California 95008
(408) 558-8500
(Address, including zip code, and telephone number including area code, of
Registrant's principal executive offices)
---------------
Curtis J. Crawford
ZiLOG, Inc.
910 East Hamilton Avenue, Suite 110
Campbell, California 95008
(408) 558-8500
(Name, address, including zip code, and telephone number including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Thomas J. Ivey Scott N. Wolfe
Kathleen M. Merrill Craig M. Garner
Skadden, Arps, Slate, Meagher & Flom LLP Latham & Watkins
525 University Avenue, Suite 220 701 B Street, Suite 2100
Palo Alto, California 94301 San Diego, California 92101-8197
(650) 470-4500 (619) 236-1234
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement
number of the earlier effective registration statement for the same
offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Securities Aggregate Amount of
to Be Registered Offering Price(1) Registration Fee
-------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock, par value $0.01 per share.... $172,500,000 $45,540
</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o).
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file an amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it is not soliciting an offer to buy +
+these securities, in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated August 3, 2000
PROSPECTUS
Shares
[ZiLOG LOGO]
ZiLOG, INC.
Common Stock
--------------------------------------------------------------------------------
This is our initial public offering of common stock. We are offering up to
shares of common stock. No public market currently exists for our
shares.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "ZLOG." The anticipated price range is $ to $ per share.
Investing in the shares involves risks. "Risk Factors" begin on page 6.
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price............................................... $ $
Underwriting Discount...............................................
Proceeds to ZiLOG...................................................
</TABLE>
We have granted the underwriters a 30-day option to purchase up to
additional shares of common stock on the same terms and conditions as set forth
above to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares
on or about , 2000.
--------------------------------------------------------------------------------
Lehman Brothers
Prudential Volpe Technology
a unit of Prudential Securities
SG Cowen
Fidelity Capital Markets
a division of National Financial Services
Corporation
, 2000
<PAGE>
Top one-quarter of page:
[ZILOG Logo with black background]
`Making Connections'
Bottom three-quarters of page:
[Three diagonal rows of eZ80 semiconductor chips]
<PAGE>
Top one-seventh of the two-page gatefold has a black background with the
exception of the far left corner which has a blue-sky background and a line
drawing of the globe in red. On the black background the following words are
printed:
"ZILOG's primary strategic focus is to become a key semiconductor technology
enabler of people's increasing ability to be connected to each other and to
their electronic devices at anytime and from anywhere. We call this concept
Extreme Connectivity."
The bottom six-sevenths of the gatefold contains 14 pictures with accompanying
copy divided into essentially three columns.
<TABLE>
<CAPTION>
Column 1 Column 2 Column 3
---------------------------------------------------------------------------------------------------------------
"Morning.... Connectivity begins "A busy work day that's Extremely "Evening lets the family reconnect"
early" Connected"
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
[picture of house in the morning] [picture of people at control panel [picture of point-of-sale terminal]
[picture of coffee pot] in automated factory] "On the way home from work, you
"Your day starts with a wake-up "In your factory, many of the stop to pick up some groceries.
from a clock radio powered by a machines use Z80 microprocessors Your credit card passes through a
ZILOG Z8 microcontroller. The for control functions. In the near point-of-sale terminal powered by a
coffeepot, with a Z8Plus future, eZ80 processors will allow ZILOG Z80S180 microprocessor."
Microcontroller, started brewing you to monitor the factory's
ten minutes earlier." machinery by way of the Internet."
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[picture of kitchen] [picture of meeting taking place in [picture of family watching
"The kitchen comes alive with the conference room] [picture of television] [picture of remote
microwave oven and lighting personal digital assistant] control]
controls powered by Z8 and Z8Plus "Later at the corporate offices, "As your family re-connects for the
multi-purpose microcontrollers you beam your revolutionary idea to evening, you all enjoy your
that help your family to start a colleague's personal digital favorite shows together on a
their busy day." assistant without interrupting the television that utilizes ZILOG's
presentation." eZVision on-screen display
controller. Your universal remote
controller also utilizes a ZILOG
microcontroller."
---------------------------------------------------------------------------------------------------------------
[picture of woman working in home [picture of man at telephone [picture of house with pool in the
office] company central office] [picture of evening] [picture of house security
"You busily address the needs of telephone lines plugged into panel]
your worldwide clients from your central office switch] "ZILOG's Z8Plus and Muze
connected home office. The fax "After the presentation, your call microcontrollers will enable your
machine, printer and modem all home is routed through the security and HVAC systems to help
use ZILOG's Z80S180 telephone company's central office your family feel safe and
microprocessor for control and that uses a ZILOG Serial comfortable all evening."
communication. Soon, the Communication Controller. ZILOG's
Internet gateways and routers in Cartezian Communications Engine is
this office may utilize eZ80 and being designed to help handle the
Cartezian technologies." massive increase in the amount of
information going across the
communications infrastructure."
---------------------------------------------------------------------------------------------------------------
</TABLE>
[Lower right-center of page, adjacent to bottom of page under second row, ZILOG
Extreme Connectivity logo]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 1
Risk Factors............................................................... 6
Forward-Looking Statements................................................. 17
Use of Proceeds............................................................ 18
Dividend Policy............................................................ 18
Capitalization............................................................. 19
Dilution................................................................... 21
Selected Consolidated Financial Data....................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................. 24
Business................................................................... 35
Recent and Pending Transactions............................................ 51
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management ................................................................ 52
Related Party Transactions................................................. 62
Principal Stockholders..................................................... 63
Description of Capital Stock............................................... 65
Shares Eligible for Future Sale............................................ 68
Material Federal Tax Consequences to
Non-United States Stockholders............................................ 70
Underwriting............................................................... 72
Legal Matters.............................................................. 75
Experts.................................................................... 75
Where You Can Find More Information........................................ 75
Index to Financial Statements.............................................. F-1
</TABLE>
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it
is unlawful. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of common stock.
Unless we indicate otherwise, information in this prospectus:
. assumes the underwriters will not exercise their over-allotment option;
. assumes the redemption of all outstanding shares of our preferred stock
for cash; and
. assumes the reclassification of all outstanding shares of our non-voting
common stock into shares of our common stock.
ZiLOG, Calibre, Cartezian, eZ80, eZSelect, eZVision, FileConnect, Muze,
PrintConnect, SyncMonitor, Wizard, XConnect, Z8, Z80, Z8Plus, ZCC, ZDS and our
other logos and trademarks are the property of ZiLOG. All other brand names or
trademarks appearing in this prospectus are the property of their respective
holders. Use or display by us of other parties' trademarks, trade dress or
products is not intended to, and does not, imply a relationship with, or
endorsement or sponsorship of, us by the trademark or trade dress owners. The
term Extreme Connectivity is copyrighted by ZiLOG. (C) ZiLOG 1999.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and consolidated financial statements and notes to those statements
appearing elsewhere in this prospectus. This prospectus contains forward-
looking statements. The outcome of the events described in these forward-
looking statements is subject to risks, and actual results could differ
materially.
ZiLOG, Inc.
We are a worldwide designer, manufacturer and marketer of semiconductor
micro-logic devices for use in the growing communications and embedded control
markets. Using proprietary technology that we have developed over our 25-year
operating history, we provide advanced devices that our customers design into
their end products. Our devices, which often include related application
software, typically combine a microprocessor and/or digital signal processor,
memory and input and output functions on a single semiconductor. Our
communications devices enable data communications and telecommunications
companies to process and transmit information. These devices include serial
communication controllers and network processors used in communication networks
for voice and data transmission. Our embedded control devices enable a broad
range of consumer and industrial electronics manufacturers to control the
functions and performance of their products. These devices control such
functions as the speed of a motor, the on-screen display of a television or
videocassette recorder and the charging cycle of a battery charger.
Our primary strategic focus is to become a key semiconductor technology
enabler of people's increasing ability to be connected to each other and to
their electronic devices at any time and from anywhere. We call this concept
Extreme Connectivity. Our two distinct business segments--communications and
embedded control--develop solutions to address critical aspects of Extreme
Connectivity. For example, our communications segment focuses on developing
efficient solutions that address the speed and capacity requirements of the
next generation of Internet and telecommunications infrastructures and devices.
Recently, we have increased the focus of our human and financial resources on
our communications segment in response to growth in the Internet infrastructure
and telecommunications markets. Our embedded control segment provides solutions
for controlling electronic devices that have the potential to be connected
through wired and wireless networks.
We currently offer approximately 850 products, each sold in a wide selection
of packages, speed grades and other configurations, which are sold to over
5,000 original equipment manufacturers and end-users across the globe. Our
customer base includes many leaders in their respective industries, including
Alcatel, Cisco Systems, Handspring, Hewlett-Packard, Hypercom, Lucent
Technologies, Multi-Tech Systems, Nortel, Palm Computing and Texas Instruments
in the communications market, and Black & Decker, Chamberlain Group, Daewoo,
Digital Security Controls, Hitachi, Icon Health & Fitness, Recoton/STD
Manufacturing, Samsung, SMK and Thomson/RCA in the embedded control market.
We are headquartered in Northern California and have wafer fabrication
facilities in Idaho, design centers in California, Texas, Idaho, Washington and
India, a final test facility in the Philippines and an international network of
sales and support offices. We outsource our assembly operations to
subcontractors primarily in Indonesia and the Philippines.
Our Industry
The Semiconductor Industry Association estimates that total industry
revenues were $92 billion during the first half of 2000, which represents an
increase of 36% over total revenues of $67 billion during the first half of
1999. The semiconductor market is comprised of five broad product segments:
micro-logic, other logic,
1
<PAGE>
memory, analog and discrete devices. We compete in the micro-logic device
segment, which, according to the Semiconductor Industry Association,
represented $52 billion, or approximately 35% of the semiconductor market's
total sales in 1999. Total sales in this segment are forecast to grow at a
compound annual growth rate of 19% through 2001.
Micro-logic devices are processor-based semiconductors that include
microprocessors, microcontrollers and digital signal processors which
typically process information, output data or control signals according to
programmed instructions and various external inputs. Micro-logic devices also
include microperipherals which operate in conjunction with these processor-
based devices to provide systems support or to control communications,
graphics and images, mass storage, voice and other user input systems.
We target two distinct categories within the micro-logic market:
. application specific standard products, which are tailored for a
particular application but are not proprietary to a single customer; and
. general purpose products, which are neither application nor customer
specific and are used for a wide array of logic-related functions.
We design, manufacture and market application specific standard products,
or ASSPs, for use in the communications segment, and both ASSPs and general
purpose products for use in the embedded control segment, of the micro-logic
market. Our products operate or perform specialized functions in products such
as routers, telecommunications switches, gateways and servers, personal
digital assistants, electronic point-of-sales transaction devices, garage door
openers, home appliances, security systems and televisions.
Our Competitive Strengths
Our franchise is built on several key strengths, including our:
. proven track record of technological innovation;
. extensive product portfolio;
. prominent customer base;
. excellence in manufacturing; and
. strong and experienced management team.
Our Strategy
Our objective is to be a key technology enabler of Extreme Connectivity.
Our key business strategies include:
. focusing on high-growth opportunities in the communications market;
. targeting attractive segments of the embedded control market;
. delivering value-added solutions to our customers by:
-collaborating closely with customers;
-integrating system functionality into our solutions; and
-helping customers realize rapid time-to-market;
. pursuing strategic acquisitions; and
. utilizing efficient manufacturing.
We were incorporated in California in 1974 and reincorporated in Delaware
in 1997. Our principal executive offices are located at 910 East Hamilton
Avenue, Suite 110, Campbell, California 95008, and our telephone number is
(408) 558-8500.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by ZiLOG....................... shares
Common stock to be outstanding after this offering.. shares
Over-allotment option............................... shares
Use of proceeds..................................... We intend to use the
estimated net proceeds of
$ from this offering
to redeem all outstanding
shares of our preferred
stock, to repurchase a
portion of our
outstanding senior notes
and for working capital
and general corporate
purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol.............. "ZLOG"
</TABLE>
The number of shares of our common stock that will be outstanding after this
offering is based on the number outstanding on July 2, 2000. The shares
outstanding exclude:
. 9,235,768 shares of common stock issuable as of July 2, 2000, upon the
exercise of outstanding stock options issued under our 1998 Long-Term
Stock Incentive Plan, as amended, and our 1998 Executive Officer Stock
Incentive Plan, as amended, at a weighted average exercise price of
$3.72 per share;
. 1,042,404 shares of common stock available for future issuance as of
July 2, 2000, under our 1998 Long-Term Stock Incentive Plan, as amended,
and our 1998 Executive Officer Stock Incentive Plan, as amended;
. 743,714 shares of common stock issued in connection with our recent
acquisition of Calibre, Inc., including shares of common stock issuable
upon the exercise of vested options;
. up to 527,799 shares of common stock to be issued to former Calibre
stockholders in the event that Calibre achieves specified financial
goals; and
. shares of common stock which may be issued in connection with our
acquisition of the remaining 80% interest in Qualcore Group, Inc. based
on an assumed exchange ratio as described in "Recent and Pending
Transactions."
3
<PAGE>
Summary Consolidated Financial Data
The following table sets forth our summary consolidated financial data. This
summary consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements and the notes to those
statements appearing elsewhere in this prospectus. The information in this
table is presented in thousands, except per share data.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, ------------------
---------------------------- July 4, July 2,
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net sales................... $261,097 $204,738 $245,138 $115,248 $121,015
Cost of sales............... 171,722 163,315 158,768 80,204 71,137
-------- -------- -------- -------- --------
Gross margin................ 89,375 41,423 86,370 35,044 49,878
Research and development.... 30,467 28,846 32,777 15,521 18,840
Selling, general and
administrative............. 47,806 54,317 59,082 29,104 29,904
Special charges............. -- 38,620 4,686 4,686 1,191
-------- -------- -------- -------- --------
Operating income (loss)..... 11,102 (80,360) (10,175) (14,267) (57)
Interest income............. 3,167 3,755 2,567 1,175 1,458
Interest expense............ (275) (24,375) (28,954) (14,445) (14,522)
Other, net.................. 832 (796) (324) (228) (296)
-------- -------- -------- -------- --------
Income (loss) before income
taxes and equity loss...... 14,826 (101,776) (36,886) (27,765) (13,417)
Provision (benefit) for
income taxes............... 2,965 (14,248) 1,004 500 265
-------- -------- -------- -------- --------
Income (loss) before equity
loss....................... 11,861 (87,528) (37,890) (28,265) (13,682)
Equity in loss of Qualcore
Group, Inc. ............... -- -- -- -- (297)
-------- -------- -------- -------- --------
Net income (loss)........... 11,861 (87,528) (37,890) (28,265) (13,979)
Less: preferred stock
dividends.................. -- 2,928 3,965 1,917 2,189
-------- -------- -------- -------- --------
Net income (loss)
attributable to common
stockholders............... $ 11,861 $(90,456) $(41,855) $(30,182) $(16,168)
======== ======== ======== ======== ========
Net income (loss) per common
share:
Basic..................... $ 0.59 $ (2.46) $ (1.04) $ (0.75) $ (0.40)
Diluted................... 0.57 (2.46) (1.04) (0.75) (0.40)
Weighted average common
shares outstanding:
Basic..................... 20,233 36,789 40,238 40,134 40,822
Diluted................... 20,676 36,789 40,238 40,134 40,822
Pro forma net (loss) per
common share(1):
Basic and diluted.........
Pro forma as adjusted net
(loss) per common share(2):
Basic and diluted.........
Pro forma and pro forma as
adjusted weighted average
common shares outstanding:
Basic and diluted.........
Other Consolidated Financial
Data:
EBITDA(3)................... $ 75,684 $ 19,259 $ 46,555 $ 21,354 $ 21,555
Cash provided by (used in)
operating activities....... 72,644 (5,072) 24,379 14,712 (1,033)
Cash provided by (used in)
investing activities....... 1,073 (7,190) (14,200) (10,617) (18,461)
Cash provided by (used in)
financing activities....... 2,956 (29,066) (229) (262) 1,613
Capital expenditures........ 38,437 21,317 8,269 4,686 10,405
Depreciation and
amortization............... 63,750 61,795 52,368 31,228 21,087
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
July 2, 2000
-------------------------
Actual As Adjusted(4)
--------- --------------
(unaudited)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............................. $ 42,925 $
Working capital....................................... 43,843
Total assets.......................................... 267,706
Total long-term debt.................................. 280,000
Total preferred stock................................. 25,000
Stockholders' equity (deficiency)..................... (103,722)
</TABLE>
(1) Pro forma basic and diluted net (loss) per common share is computed
using the weighted average number of shares of common stock outstanding as
adjusted to include the sale of shares of common stock offered by
us in this offering, weighted as if those common shares were outstanding at the
beginning of the periods presented.
(2) Pro forma as adjusted basic and diluted net (loss) per common share is
computed using the weighted average number of shares of common stock
outstanding as adjusted to include the sale of shares of common stock
offered by us in this offering and as further adjusted to give effect to the
application of the proceeds of this offering to redeem our preferred stock and
$70.0 million aggregate principal amount of our senior notes as if these
transactions had occurred at the beginning of the periods presented.
(3) EBITDA represents earnings (losses) before interest, income taxes,
depreciation, amortization of intangible assets, non-cash stock compensation
expenses, equity in loss of Qualcore and special charges. We believe EBITDA is
a widely accepted financial indicator of a company's historical ability to
service and/or incur indebtedness. However, EBITDA should not be considered as
an alternative to operating income or to cash provided/(used) for operating
activities, each as measured under generally accepted accounting principles.
Additionally, EBITDA as we are using the term may not be comparable to
similarly titled measures reported by other companies.
(4) The as adjusted balance sheet data gives effect to the sale of the
shares of common stock offered by us in this offering at an assumed initial
public offering price of $ per share, based on the mid-point of the filing
range, after deducting the underwriting discounts and commissions and estimated
offering expenses, as further adjusted to give effect to the application of the
proceeds to redeem our preferred stock and repurchase $70.0 million aggregate
principal amount of our senior notes.
5
<PAGE>
RISK FACTORS
An investment in our common stock involves risks. You should consider these
risks carefully, as well as the other information in this prospectus. If any of
these risks actually occurs, our business could be harmed materially. In that
event, the trading price of our common stock might decline, and you might lose
all or part of your investment.
Risks Related to Our Business and Industry
Our quarterly operating results are likely to fluctuate and may fail to meet
expectations, which may cause our stock price to decline.
Our quarterly operating results have fluctuated in the past and will likely
continue to fluctuate in the future. Our future operating results will depend
on a variety of factors and they may fail to meet expectations. Any failure to
meet expectations could cause our stock price to fluctuate or decline
significantly. In addition, a high proportion of our costs are fixed, due in
part to our significant sales, research and development and manufacturing
costs. Therefore, small declines in revenue could disproportionately affect our
operating results in a quarter. A variety of factors could cause our quarterly
operating results to fluctuate, including:
. our ability to introduce and sell new products and technologies on a
timely basis;
. changes in the prices of our products;
. technological change and product obsolescence;
. changes in product mix or fluctuations in manufacturing yields;
. variability of our customers' product life cycles;
. the level of orders that we receive and can ship in a quarter, customer
order patterns and seasonality;
. increases in the cost of raw materials; and
. gain or loss of significant customers.
In addition to causing stock price fluctuations, any significant declines in
our operating performance could harm our ability to meet our debt service and
other obligations.
If our industry were to experience a downturn in the business cycle, our
revenues could be adversely affected.
The semiconductor industry is highly cyclical and has experienced
significant economic downturns at various times in the last three decades,
characterized by diminished product demand, erosion of average selling prices
and production over-capacity. In particular, we experienced significant
declines in the pricing of our products as customers reduced demand in 1997 and
1998. In response to these reductions in demand, we and other semiconductor
manufacturers reduced prices to avoid a significant decline in capacity
utilization. We will likely experience substantial period-to-period
fluctuations in future operating results that are attributable to general
industry conditions or events occurring in the general economy. Any economic
downturn could pressure us to reduce our prices and decrease our revenues and
profitability.
We have a history of losses, we expect future losses and we may not achieve or
maintain profitability in the future.
We have a history of losses, we expect future losses and we do not expect to
achieve profitability in the near future. We incurred net losses of $87.5
million in 1998, $37.9 million in 1999 and $14.0 million in the first half of
2000. As of July 2, 2000, we had an accumulated deficit of approximately $132.5
million.
6
<PAGE>
If we are unable to implement our business strategy, our revenues and future
profitability may be harmed materially.
Our future financial performance and success are largely dependent on our
ability to implement our business strategy, which is described under
"Business--Strategy." We have recently changed our business strategy to focus
more of our resources on the communications market. We may be unable to
implement our business strategy and, even if we do implement our strategy
successfully, our results of operations may fail to improve. In addition,
although the communications market has grown rapidly in the last few years, it
may not continue to grow and a significant slowdown in this market may occur.
If the communications market experiences a significant slowdown, our revenues
and future profitability could be harmed seriously.
We may not be able to introduce and sell new products and our inability to do
so may harm our business materially.
Our operating results depend on our ability to introduce and sell new
products. Rapidly changing technologies and industry standards, along with
frequent new product introductions, characterize the industries that are
currently the primary end-users of semiconductors. As these industries evolve
and introduce new products, our success will depend on our ability to adapt to
such changes in a timely and cost-effective manner by designing, developing,
manufacturing, marketing and providing customer support for new products and
technologies.
Our ability to introduce new products successfully depends 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
products easy for engineers to understand and use; and
. market acceptance of our products and our customers' products.
We cannot assure you that the design and introduction schedules for any new
products or any additions or modifications to our existing products will be
met, that these products will achieve market acceptance or that we will be able
to sell these products at prices that are favorable to us.
Our future success is dependent on the release and acceptance of our new eZ80
Internet Engine and Cartezian Communication Engine family of products.
We announced our newest products, the eZ80 Internet Engine and the Cartezian
Communications Engine family of products, in September 1999 and November 1999,
respectively. We have delivered samples of our first eZ80 product to some of
our customers. Our Cartezian family of products is still being designed. These
new products may not perform as anticipated and there may be unforeseen delays
in their final release. Our failure to release these products as scheduled or
the failure of these products to meet our customers' expectations would affect
us adversely. We do not expect to receive significant revenues from these
products in 2000 and future revenues may not be sufficient to recover the costs
associated with their development.
Products as complicated as the eZ80 Internet Engine and Cartezian
Communications Engine family of products frequently contain errors and defects
when first introduced or as new versions are released. Delivery of products
with such errors or defects, or reliability, quality or compatibility problems,
could require significant expenditures of capital and other resources and
significantly delay or hinder market acceptance of these products. Any such
capital expenditures or delays could harm our operating results materially,
damage our reputation and affect our ability to retain our existing customers
and to attract new customers.
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Our industry is highly competitive and we cannot assure you that we will be
able to compete effectively.
The semiconductor industry is intensely competitive and is characterized by
price erosion, rapid technological change and heightened 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 we do with which to pursue engineering, manufacturing,
marketing and distribution of their products. Emerging companies are also
increasing their participation in the semiconductor industry. Our current and
future communications products compete with, or are expected to compete with,
products offered by Advanced Micro Devices, ARM, Atmel, Dallas Semiconductor,
Intel, Lucent Technologies, MIPS Technologies, Mitel, Motorola, NEC,
NetSilicon, Philips, PMC-Sierra, Scenix, Sharp, Texas Instruments and Toshiba.
Our current and future embedded control products compete with, or are expected
to compete with, products offered by Atmel, Hitachi, Intel, Microchip,
Mitsubishi, Motorola, NEC, Philips, Samsung, Sanyo, Sharp, ST Microelectronics
and Toshiba.
Our ability to compete successfully in our markets depends on factors both
within and outside of our control, including:
. our ability to design and manufacture new products that implement new
technologies;
. our ability to protect our products by effectively utilizing
intellectual property laws;
. our product quality, reliability, ease of use and price;
. the diversity of product line and our efficiency of production;
. the pace at which customers incorporate our devices into their products;
and
. the success of our competitors' products and general economic
conditions.
To the extent that our products achieve market acceptance, competitors
typically seek to offer competitive products or embark on pricing strategies
which, if successful, could harm our results of operations and financial
condition materially.
Unless we maintain manufacturing efficiency and avoid manufacturing
difficulties, our future profitability could be harmed.
Our semiconductors are highly complex to manufacture and our production
yields are sensitive. Our production yields may be inadequate in the future to
meet our customers' demands. 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. From time to time, we have experienced difficulties in effecting
transitions to new manufacturing processes and have suffered delays in product
deliveries or reduced yields. We may experience similar difficulties or suffer
similar delays in the future, and our operating results could be harmed as a
result.
For example, we may experience problems that make it difficult to
manufacture the quantities of our products that we anticipate producing in our
.35 and .65 micron wafer fabrication processes. These difficulties may include:
. equipment being delivered later than or not performing as expected;
. process technology changes not operating as expected; and
. engineers not operating equipment as expected.
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If we fail to increase production capacity, our business could be harmed.
We believe that an important competitive factor will be our ability to
increase production capacity to meet anticipated customer demands. Our failure
to increase production capacity through the successful and efficient expansion
of production at our Idaho facilities or to obtain wafers from outside
suppliers as needed during periods of increased demand could harm our business
materially. We intend to spend approximately $40 million on various capital
expenditures in 2000, of which we spent approximately $10 million as of July 2,
2000. These capital expenditures may not increase our future sales or
profitability.
We intend to rely on independent third-party foundry manufacturers to fabricate
some of our products, including some of our communications products, and the
failure of these manufacturers to deliver products or otherwise perform as
requested could damage our relationship with our customers and may decrease our
sales.
We intend to rely on independent third-party foundry manufacturers to
fabricate some of our products, including some of our communications products.
Industry-wide shortages in foundry capacity could harm our financial results.
Should we be unable to obtain the requisite foundry capacity to manufacture our
complex new products, or should we have to pay high prices to foundries in
periods of tight capacity, our ability to increase our revenues might be
impaired. Any delay in initiating production at third-party facilities, any
inability to have new products manufactured at foundries or any failure to meet
our customers' demands could damage our relationships with our customers and
may decrease our sales.
Other significant risks associated with relying on these third-party
manufacturers include:
. we have reduced control over the cost of our products, delivery
schedules and product quality;
. the warranties on wafers or products supplied to us are limited;
. we face increased exposure to potential misappropriation of our
intellectual property; and
. switching foundries may be costly or time consuming.
We depend on third-party assemblers and the failure of these third parties to
continue to provide services to us on sufficiently favorable terms could harm
our business.
We use outside contract assemblers for packaging our products. If we are
unable to obtain additional assembly capacity on sufficiently favorable terms,
our ability to achieve continued revenue growth may be impaired. Shortages in
contract assembly capacity could cause shortages in our products and could also
result in the loss of customers. Because we rely on these third parties, we
also have less control over our costs, delivery schedules and quality of our
products and our intellectual property is at greater risk of misappropriation.
Our international operations subject us to risks inherent in doing business in
foreign countries that could impair our results of operations.
Approximately 55% of our net sales in the first half of 2000 were to foreign
customers and we expect that international sales will continue to represent a
significant portion of our net sales in the future. We maintain significant
operations and rely on a number of contract manufacturers in the Philippines,
Indonesia, Taiwan, Malaysia and India. Our planned acquisition of the remaining
80% interest in Qualcore will increase our international operations, as a
significant portion of Qualcore's human resources are also located in India.
We cannot assure you that we will be successful in overcoming the risks that
relate to or arise from operating in international markets. Risks inherent in
doing business on an international level include:
. economic and political instability;
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. changes in regulatory requirements, tariffs, customs, duties and other
trade barriers;
. transportation delays;
. power supply shortages and shutdowns;
. difficulties in staffing and managing foreign operations and other labor
problems;
. existence of language barriers and cultural distinctions;
. taxation of our earnings and the earnings of our personnel; and
. other uncertainties relating to the administration of or changes in, or
new interpretations of, the laws, regulations and policies of the
jurisdictions in which we conduct our business.
In addition, our activities outside the United States are subject to risks
associated with fluctuating currency values and exchange rates, hard currency
shortages and controls on currency exchange. While our sales are primarily
denominated in U.S. dollars, worldwide semiconductor pricing is influenced by
currency rate fluctuations, and such fluctuations could harm our operating
results materially.
Our operations are located in areas prone to natural disasters such as
earthquakes, and any such natural disasters could harm our financial results
significantly.
We maintain significant operations and rely on a number of contract
manufacturers in the Philippines, Indonesia, Taiwan, Malaysia and India. Our
headquarters are located in Northern California. The risk of natural disasters,
including earthquakes, in these regions of the world is significant to our
operations. The occurrence of an earthquake or other natural disaster could
disrupt our headquarters, foundry, or assembly and test capacity. Any such
disruption could cause significant delays in the production or shipment of our
products and we may not be able to obtain alternate capacity on favorable
terms, if at all, which could harm our operating results materially.
We have changed our North American distributors, and we may lose some of our
customers as a result.
In January 2000, we announced our intention to terminate our existing
relationships with our three largest distributors in North America: Arrow
Electronics, Future Electronics and Unique Technologies. As of July 2, 2000, we
had substantially completed the termination of our relationships with Future
Electronics and Unique Technologies, and we expect to complete the termination
of our relationship with Arrow Electronics by the end of the third quarter of
2000. In 1999, these three distributors collectively purchased $42.3 million of
our products. In their place, we have franchised Pioneer-Standard Electronics
as our sole exclusive full service distributor in North America, and in the
first half of 2000, Pioneer-Standard alone purchased $12.6 million of our
products. We expect that Pioneer-Standard will take over the majority of the
business that we previously conducted with Arrow Electronics, Future
Electronics and Unique Technologies, but this transition may not occur
smoothly. Some of our products sold through distribution, such as our Z85C30
serial communication controller, are also manufactured and sold by our
competitors. The distributors we have terminated may try to direct their
customers to purchase these second sourced products instead of ours. Other
customers may not wish to transfer their business to Pioneer-Standard. As a
result, we may lose some of our business that we used to sell through our prior
distributors, which could harm our operating results materially. Pioneer-
Standard also distributes products of our competitors that may directly compete
with our product offerings. If Pioneer-Standard chooses to promote those
products over our products, our operating results could be harmed
significantly. In addition, if Pioneer-Standard were to terminate our
distribution agreement, we could experience a period of significant
interruption of our business while we obtained other distribution channels.
A significant amount of our revenues comes from relatively few of our
customers, and any decrease of revenues from these customers, or the loss of
their business, could significantly harm our financial results.
Historically we have been, and we expect to continue to be, dependent on a
relatively small number of customers for a significant portion of our revenues
primarily because we depend on third-party distributors to
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market and sell our products. These third-party distributors accounted for
approximately 41% of our sales in 1999 and 45% of our sales in the first half
of 2000. Our distributors may not continue to effectively market, sell or
support our products. Our ten largest customers accounted for approximately 48%
of our net sales in 1999 and 49% of our net sales in the first half of 2000.
Arrow Electronics alone accounted for approximately 13% of our net sales in
1999 and Pioneer-Standard accounted for approximately 10% of our net sales in
the first half of 2000. Particular customers may change from period to period,
but we expect that sales to a limited number of customers will continue to
account for a significant percentage of our revenues in any particular period
for the foreseeable future. The loss of one or more major customers or any
reduction, delay or cancellation of orders by any of these customers or our
failure to market successfully to new customers could harm our business
materially.
We have very few long-term contracts with our customers and, like us, our
customers typically compete in cyclical industries. In the future, these
customers may decide not to purchase our products at all, to purchase fewer
products than they did in the past, or to alter their purchasing patterns,
particularly because substantially all of our sales are made on a purchase
order or sales order acknowledgment basis, which permits our customers to
cancel, change or delay product purchase commitments upon 30 days notice for
standard products and 60 days notice for custom products. Customers may still
cancel or reschedule within these time periods, however they routinely incur a
cancellation or rescheduling charge. This risk is increased because our
customers can purchase some similar products from our competitors.
Changes in technologies or consumption patterns could reduce the demand for our
products.
As a result of technological changes, from time to time, our products are
designed out of some devices by our customers. Any resulting decreased sales
could reduce our profitability. For example, we have learned recently that a
number of our customers are changing the designs of computer mouse pointing
devices that they manufacture, and that as a result, these devices will no
longer contain our products. Because we do not have long-term supply contracts
with most of our customers, changes in the designs of their products can have
sudden and significant impacts on our sales. As a result of these design
changes, net sales of our computer mouse pointing devices and other computer
peripheral products decreased substantially from approximately $15.6 million in
the first half of 1999 to approximately $7.7 million in the first half of 2000.
These reduced sales may harm our operating results materially.
We depend on key personnel, and the loss of our current personnel or our
failure to hire and retain additional personnel could affect our business
negatively.
We depend on our ability to attract and retain highly-skilled technical and
managerial personnel. We believe that our future success in developing
marketable products and achieving a competitive position will depend in large
part on our ability to identify, recruit, hire, train, retain and motivate
highly skilled technical, executive, managerial, marketing and customer service
personnel. Competition for these personnel is intense, especially in Northern
California, where our headquarters are located, and we may not be able to
successfully recruit, assimilate or retain sufficiently qualified personnel.
Our failure to recruit and retain necessary technical, executive, managerial,
editorial, merchandising, marketing and customer service personnel could harm
our business and our ability to obtain new customers and develop new products.
We may fail to protect our proprietary rights and the cost of protecting those
rights, whether we are successful or not, may harm our ability to compete.
The measures we take to protect our intellectual property rights may be
inadequate to protect our proprietary technologies and processes from
misappropriation, and these measures may not prevent independent third party
development of competitive products. We may not be able to detect the
unauthorized use of, or take appropriate steps to enforce, our intellectual
property rights. Despite our efforts to protect our proprietary rights in both
the United States and in foreign countries, existing intellectual property laws
in the United States provide only limited protection and, in some cases, the
laws of foreign countries provide even less protection.
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Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of our proprietary rights or the proprietary rights of others. Any such
litigation could require us to incur substantial costs and divert significant
valuable resources, including the efforts of our technical and management
personnel, which may harm our business materially.
We could be subject to claims of infringement of third-party intellectual
property rights, which could result in significant expense to us and/or our
loss of such rights.
The semiconductor industry is characterized by frequent claims and related
litigation regarding patent and other intellectual property rights. Third
parties may assert claims or initiate litigation against us, our licensors, our
foundries, our service providers or our customers with respect to existing or
future products. Any intellectual property litigation initiated against us
could subject us to significant liability for damages and attorneys' fees,
invalidation of our proprietary rights, injunctions or other court orders that
could prevent us from using specific technologies or engaging in specific
business activities. These lawsuits, regardless of their success, would likely
be time-consuming and expensive to resolve and would divert management's time
and attention from our business. Any potential intellectual property litigation
could also force us to do one or more of the following:
. pay substantial damages;
. cease using key aspects of our technologies or processes that
incorporate the challenged intellectual property;
. cease the manufacture, use, sale, offer for sale and importation of
infringing products;
. alter our designs around a third party's patent;
. obtain licenses to use the technology that is the subject of the
litigation from a third party;
. expend significant resources to develop or obtain non-infringing
technology;
. create new brands for our services and establish recognition of these
new brands; or
. make significant changes to the structure and the operation of our
business.
Implementation of any of these alternatives could be costly and time-
consuming and might not be possible at all. An adverse determination in any
litigation to which we were a party could harm our business, our results of
operations and financial condition. In addition, we may not be able to develop
or acquire the technologies we need, and licenses to such technologies, if
available, may not be obtainable on commercially reasonable terms. Any
necessary development or acquisition could require us to expend substantial
time and other resources.
Four parties have notified us that we may be infringing their patents and
other intellectual property rights. In the event we determine that such notices
may involve meritorious claims, we may seek a license. Based on industry
practice, we believe that, in most cases, any necessary licenses or other
rights could be obtained on commercially reasonable terms. However, we may not
be able to obtain the licenses we need on acceptable terms and costly
litigation may occur. Our failure to obtain necessary licenses or other rights
or the advent of litigation arising out of such claims could materially harm
our business.
We are defending several lawsuits, both in and out of the ordinary course of
business; we may lose these suits and we may be subject to material judgments
against us.
In January 1998, a purported class action lawsuit was filed against us and
some of our executive officers in the U.S. District Court for the Northern
District of California. The plaintiffs purport to represent a class of all
persons who purchased our common stock between June 30, 1997 and November 20,
1997. The complaint alleges that we and some of our executive officers made
false and misleading statements regarding our business that caused the market
price of our common stock to be artificially inflated during the class period.
The
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complaint does not specify the amount of damages sought. Based upon information
presently known to management, we are unable to determine the ultimate
resolution of this lawsuit or whether it will harm our financial condition
materially.
In July 1996, our former insurers, Pacific Indemnity Company, Federal
Insurance Company and Chubb & Son, Inc., filed a lawsuit in the Superior Court
of the State of California in and for Santa Clara County. In this suit, our
former insurers claim that two lawsuits brought against us were not covered by
our insurance policies. In these underlying lawsuits, some of our employees and
their families claimed that they suffered personal injuries and discrimination
because of alleged exposure to chemicals at our manufacturing facility in Idaho
in 1993 and 1994. The insurers seek reimbursement of attorneys' fees, costs and
settlement funds expended on our behalf, totaling approximately $6.3 million
plus interest. Based upon information presently known to management, we are
unable to determine the ultimate resolution of this lawsuit or whether it will
materially harm our financial condition.
Both the purported class action lawsuit and the insurance coverage lawsuit
have been and are likely to continue to be time consuming and expensive to
resolve. We are also participating in other litigation and responding to claims
arising in the ordinary course of business. We intend to defend ourselves
vigorously in these matters. Our management believes that it is unlikely that
the outcome of these matters will materially harm our business, but as the
results are still undetermined, we may face liabilities that may harm our
business.
We may engage in acquisitions that harm our operating results, dilute our
stockholders' equity, or cause us to incur additional debt or assume contingent
liabilities.
To grow our business and maintain our competitive position, we have made
acquisitions in the past and may acquire other businesses in the future. In the
past, for example, we acquired substantially all of the assets and assumed the
operating liabilities of Seattle Silicon Corporation in April 1999 for
approximately $6.1 million. In March 2000, we acquired 20% of the common stock
of Qualcore, along with an option to acquire the remaining 80% interest in
Qualcore, for approximately $8.1 million, including expenses. We will exercise
this option to become the sole stockholder of Qualcore after the completion of
this offering. In July 2000, we acquired Calibre in exchange for 743,714 shares
of our common stock, including shares of our common stock issuable upon the
exercise of vested options, plus additional shares issuable pursuant to an
earn-out provision.
Acquisitions involve a number of risks that could harm our business and
result in the acquired business not performing as expected, including:
. insufficient experience with technologies and markets in which the
acquired business is involved that may be necessary to successfully
operate and integrate the business;
. ineffective communication and cooperation in product development and
marketing among senior executives and key technical personnel;
. problems integrating the acquired operations, personnel, technologies or
products with the existing business and products;
. diversion of management time and attention from our core business and to
the acquired business;
. potential failure to retain key technical, management, sales and other
personnel of the acquired business; and
. difficulties in retaining relationships with suppliers and customers of
the acquired business.
In addition, acquisitions could require investment of significant financial
resources and may require us to obtain additional equity financing, which may
dilute our stockholders' equity, or to incur additional indebtedness.
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We are subject to a variety of environmental laws and regulations and our
failure to comply with present or future laws and regulations could harm our
business materially.
Our manufacturing processes require us to use various hazardous substances
and, as a result, we are subject to a variety of governmental laws and
regulations related to the storage, use, emission, discharge and disposal of
such substances. Although we believe that we are in material compliance with
all relevant laws and regulations and have all material permits necessary to
conduct our business, our failure to comply with present or future laws and
regulations or the loss of any permit required to conduct our business could
result in fines being imposed on us, the limitation or suspension of
production or cessation of our operations. Compliance with any future
environmental laws and regulations could require us to acquire additional
equipment or to incur substantial other expenses. Any failure by us to control
the use of, or adequately restrict the discharge of, hazardous materials could
subject us to future liabilities that could materially harm our business. In
addition, we may be required to incur significant expense in connection with
governmental investigations and/or environmental employee health and safety
matters.
We have implemented and may consider implementing significant cost cutting
measures, but these cost cutting measures may not result in increased
efficiency or future profitability.
Similar to other semiconductor companies, we have implemented and may
consider implementing significant cost cutting measures which may include:
. refocusing of business priorities;
. reallocation of personnel and responsibilities to better utilize human
resources; and
. reductions in workforce.
As part of our cost cutting measures, we may also consider the disposition
of one or more product lines or business units. We may not be able to
consummate any divestiture at a fair market price. We may also be unable to
reinvest the proceeds from any disposition to produce the same level of
operating profit as the divested product lines or to generate a commensurate
rate of return on the amount of our investment. Our cost cutting measures may
not increase our efficiency or future profitability.
Risks Related to Our Capital Structure
Our substantial indebtedness may limit the cash flow we have available for our
operations and place us at a competitive disadvantage.
At July 2, 2000, we had $280.0 million of consolidated long-term
indebtedness and a stockholders' deficiency of $103.7 million. On an as
adjusted basis, after giving effect to the repurchase of a portion of our
senior notes from the proceeds of this offering, as of July 2, 2000, we would
have had $210.0 million of consolidated long-term indebtedness and
stockholders' equity of $ million.
The high degree to which we are leveraged may have important consequences
to our business, including:
. our ability to obtain additional financing for working capital, capital
expenditures, product development, possible future acquisitions or other
purposes may be impaired or any such financing may not be available on
terms favorable to us;
. a substantial portion of our cash flow available from operations after
satisfying liabilities that arise in the ordinary course of business
will be dedicated to the payment of debt service obligations, thereby
reducing funds that would otherwise be available to us;
. a decrease in net operating cash flows or an increase in expenses could
make it difficult for us to meet our debt service requirements or force
us to modify our operations; and
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. high leverage may place us at a competitive disadvantage, limit our
flexibility in reacting to changes in our operating environment and make
us vulnerable to a downturn in our business or the economy generally.
To satisfy our obligations under our indebtedness, we will be required to
generate substantial operating cash flow. Our ability to meet debt service and
other obligations or to refinance any such obligation will depend on our future
performance, which will be subject to prevailing economic conditions and to
financial, business and other factors, many of which may be beyond our control.
While we believe that, based on the current levels of our operations and our
business plan, we will be able to meet our debt service and other obligations
or to refinance our indebtedness, we may not be able to generate sufficient
cash flow to service our interest payment obligations under our outstanding
debt and our cash flows, future borrowings and equity financing may not be
available or may be insufficient for the payment or refinancing of our debt.
The agreements governing our indebtedness may limit our ability to finance
future operations or capital needs or engage in business activities that may be
in our interest.
The terms of our indebtedness contain restrictive covenants that may impair
our ability to take corporate actions that we believe to be in the best
interests of our stockholders, including restricting our ability to:
. dispose of assets;
. incur additional indebtedness;
. prepay other indebtedness or amend some debt instruments;
. pay dividends or repurchase our stock;
. create liens on assets;
. enter into sale and leaseback transactions;
. make investments, loans or advances;
. make acquisitions or engage in mergers or consolidations;
. change the business conducted by us or our subsidiaries;
. make capital expenditures or engage in specific transactions with
affiliates; and
. otherwise restrict other corporate activities.
Our ability to comply with these agreements may be affected by events beyond
our 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 some of our creditors to cause all amounts we owe them to
accelerate and become due and payable, together with accrued and unpaid
interest. We may not be able to repay all our borrowings if they are
accelerated, and, in such event, our business may be harmed materially and the
value of our common stock could decrease significantly.
Risks Related to this Offering
Our stock price may be highly volatile.
Historically, the stock prices and trading volumes for newly public
companies fluctuate widely for a variety of reasons, including some reasons
that are unrelated to their businesses or results of operations. Accordingly,
the price at which our common stock will trade after this offering may be
highly volatile for a number of reasons, including:
. actual or anticipated fluctuations in our results of operations;
. changes in expectations as to our future financial performance;
. the announcement of new products or product enhancements by our
competitors;
. changes in our forecasted financial performance by securities analysts
or the inability to obtain analyst coverage;
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. the operating and stock price performance of our competitors; or
. general market conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have affected the market prices for the
securities of technology companies. These broad market fluctuations may result
in a material decline in the market price of our common stock, regardless of
our operating performance.
Anti-takeover provisions in our charter documents and Delaware law could
prevent a potential acquirer from buying our stock.
Provisions of our amended and restated certificate of incorporation and our
amended and restated bylaws could delay, deter or prevent a merger or
acquisition that you may consider to be favorable. These provisions include:
. authorizing the issuance of preferred stock without stockholder
approval;
. providing for a classified board of directors with staggered, three-year
terms;
. limiting the persons who may call special meetings of stockholders; and
. prohibiting stockholders from taking action by written consent.
In addition, the provisions of Delaware law impose some restrictions on
mergers and business combinations even if the offer may be considered
beneficial by some stockholders. These provisions prevent us from engaging,
under limited circumstances, in a merger or sale of more than 10% of our assets
with a stockholder who owns 15% or more of our outstanding voting stock. If a
change of control is delayed or prevented by our charter documents or by
Delaware law, the market price of our common stock may decline.
After this offering, our executive officers, directors and principal
stockholder, whose interests may conflict with yours, will collectively control
approximately % of our common stock.
Upon completion of this offering, our executive officers, directors and
principal stockholder will collectively control approximately % of our
outstanding common stock. As a result, these stockholders will be able to
exercise control over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions, which
could have the effect of delaying or preventing a third party from acquiring
control or merging with us. We also plan to reserve % of the shares offered
in this offering under a directed share program in which our executive
officers, directors, employees, business associates and related persons may be
able to purchase shares in this offering at the initial public offering price.
This program may further increase the amount of stock held by persons whose
interests are closely aligned with the interests of management.
An active trading market for our stock may not develop and, if one does not
develop, selling your stock may be difficult.
An active trading market for the shares of our common stock may not develop
or be sustained after this offering. The initial public offering price has been
determined through negotiations between the underwriters and us. The public
offering price may not correspond to the price at which our common stock will
trade in the public market subsequent to the offering and the price of our
common stock available in the public market may not reflect our actual
financial performance.
If our existing stockholders sell a substantial number of shares of our common
stock in the public market, the market price of our common stock will likely
fall.
Future sales of shares of our common stock held by our stockholders could
materially harm the market price of our stock. Upon completion of this
offering, we expect that:
. shares of common stock (or shares if the underwriters' over-
allotment option is exercised in full) sold in this offering will be
freely tradable without restriction under the Securities Act of 1933,
except any such shares which may be acquired by an affiliate of our
company;
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. 40,823,736 shares of common stock held by our existing stockholders as
of July 2, 2000, will be eligible for sale into the public market,
subject to compliance with the resale volume limitations and other
restrictions of Rule 144 under the Securities Act, beginning 180 days
after the date of this prospectus;
. 743,714 shares of common stock issued in connection with our recent
acquisition of Calibre will be eligible for sale into the public market,
subject to compliance with the resale volume limitations and other
restrictions of Rule 144 under the Securities Act, beginning
approximately one year from the issuance of such shares; and
. shares of common stock which may be issued in connection with our
acquisition of the remaining 80% interest in Qualcore based on an
assumed exchange ratio as described in "Recent and Pending Transactions"
will be eligible for sale into the public market, subject to compliance
with the resale volume limitations and other restrictions of Rule 144
under the Securities Act, beginning approximately one year from the
issuance of such shares.
In addition, beginning 180 days after the completion of this offering, the
holders of an aggregate of approximately 41,023,736 shares of common stock will
have limited rights to require us to register their shares of common stock
under the Securities Act, at our expense.
You will experience immediate and substantial dilution upon completion of this
offering and may experience further dilution soon after this offering.
Because the initial offering price of our common stock is substantially
higher than the book value per share of our common stock, you will be subject
to immediate and substantial dilution of $ per share, at an assumed initial
public offering price of $ per share. This dilution is, in large part, based
on the substantially lower price our earlier investors paid for their shares of
common stock than the price at which these shares are being sold in this
offering. You will experience additional dilution upon the exercise of any
outstanding stock options, including any options we may issue in connection of
our acquisition of the remaining 80% interest in Qualcore. As a result of this
dilution, you may not be able to sell your shares of common stock for more
than, or even as much as, you purchased the shares in this offering and you may
lose money.
FORWARD-LOOKING STATEMENTS
Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are forward-looking statements. These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"anticipates," "believes," "continue," "could," "estimates," "expects,"
"intends," "may," "plans," "potential," "predicts," "seeks," "should" or "will"
or the negative of these terms or other similar expressions are generally
intended to identify forward-looking statements. Because these forward-looking
statements involve risks and uncertainties, there are important facts that
could cause actual results to differ materially from those expressed or implied
by these forward-looking statements, including our plans, objectives,
expectations and intentions and other factors discussed under "Risk Factors."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are not under any duty to update any
of the forward-looking statements after the date of this prospectus to conform
these statements to actual results.
17
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of our
common stock we are offering will be approximately $ , or approximately
$ if the underwriters exercise their over-allotment option in full, based
upon an assumed offering price of $ per share and after deducting estimated
underwriting discounts and commissions and our estimated offering expenses of
$ .
We intend to use a portion of the net proceeds of this offering:
. to redeem all outstanding shares of our preferred stock for an aggregate
redemption price of approximately $35.8 million, which includes accrued
dividends through October 1, 2000; and
. to repurchase $70.0 million aggregate principal amount of our
outstanding senior notes for an aggregate redemption price of
approximately $77.3 million, which includes a redemption premium and
accrued and unpaid interest through October 1, 2000.
Our senior notes mature on March 1, 2005 and accrue interest on the $280.0
million aggregate principal amount at 9.5% per annum. We intend to use the
remaining net proceeds of this offering for working capital, capital
expenditures and general corporate purposes, as well as to invest in joint
ventures or other collaborative arrangements, or to invest in or acquire
businesses, technologies, products or services. Pending use of the net proceeds
as discussed above, we intend to invest these funds in short-term, interest-
bearing, investment-grade obligations.
DIVIDEND POLICY
We are restricted from paying any cash dividends on our common stock by the
terms of the indenture governing our senior notes and the credit agreement
governing our revolving credit facility as described under the caption
"Management's Discussion and Analysis of Financial Condition and Result of
Operations--Liquidity and Capital Resources." As a result, we do not anticipate
paying any such dividends on our common stock for the foreseeable future, and
instead we will retain all future earnings to fund the growth and development
of our business.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of July 2, 2000 on two
bases:
. on an actual basis; and
. on an as adjusted basis to reflect: (1) the receipt of the net proceeds
from the sale of shares of common stock in this offering at an
assumed initial public offering price of $ per share, based upon the
mid-point of the filing range, after deducting estimated underwriting
discounts and commissions and estimated offering expenses; (2) the
redemption of all outstanding shares of our preferred stock for cash;
(3) the reclassification of all outstanding shares of our non-voting
common stock into shares of our common stock; and (4) the repurchase of
$70.0 million aggregate principal amount of our outstanding senior
notes.
<TABLE>
<CAPTION>
As of July 2, 2000
----------------------
Actual As Adjusted
--------- -----------
(in thousands)
<S> <C> <C>
Cash and cash equivalents........................... $ 42,925 $
========= =====
Current portion of long-term debt................... $ $
Long-term debt, net of current portion.............. 280,000
Stockholders' equity (deficiency):
Series A cumulative preferred stock, $100.00 par
value, 5,000,000 shares authorized; 250,000
issued and outstanding, actual; 5,000,000 shares
authorized, no shares issued and outstanding, as
adjusted......................................... 25,000
Class A non-voting common stock, $0.01 par value;
30,000,000 shares authorized; 10,000,000 issued
and outstanding, actual; no shares authorized, no
shares issued and outstanding, as adjusted....... 100
Common stock, $0.01 par value; 70,000,000 shares
authorized; 31,120,564 shares issued and
outstanding, actual; shares authorized,
shares issued and outstanding, as adjusted....... 311
Additional paid-in capital.......................... 5,391
Deferred stock compensation......................... (2,070)
Accumulated deficit................................. (132,454)
--------- -----
Total stockholders' equity (deficiency)......... (103,722)
--------- -----
Total capitalization............................ $ 176,278 $
========= =====
</TABLE>
The common stock to be outstanding after the offering is based on shares
outstanding as of July 2, 2000. The shares outstanding exclude:
. 9,235,768 shares of common stock issuable, as of July 2, 2000, upon the
exercise of outstanding stock options issued under our 1998 Long-Term
Stock Incentive Plan, as amended, and our 1998 Executive Officer Stock
Incentive Plan, as amended, at a weighted average exercise price of
$3.72 per share;
. 1,042,404 shares of common stock available, as of July 2, 2000, for
future issuance under our 1998 Long-Term Stock Incentive Plan, as
amended, and our 1998 Executive Officer Stock Incentive Plan, as
amended;
. 743,714 shares of common stock issued in connection with our recent
acquisition of Calibre, including shares of common stock issuable upon
the exercise of vested options;
19
<PAGE>
. up to 527,799 shares of common stock to be issued to former Calibre
stockholders in the event that Calibre achieves specified financial
goals; and
. shares of common stock that may be issued in connection with our
acquisition of the remaining 80% interest in Qualcore based on an
assumed exchange ratio as described in "Recent and Pending
Transactions."
See "Selected Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and the notes to those statements included elsewhere in
this prospectus.
20
<PAGE>
DILUTION
As of July 2, 2000, our net tangible book value (deficiency) was
approximately $(103,722), or $(0.0025) per share of our common stock. Net
tangible book value per share represents the amount of total tangible assets
less total liabilities, divided by 41,120,564, the number of outstanding shares
of common stock. After giving effect to our sale of the shares of common stock
offered by this prospectus at an assumed initial public offering price of $
per share, the redemption of all outstanding shares of our preferred stock, and
the repurchase of $70.0 million aggregate principal amount of our outstanding
senior notes, our pro forma net tangible book value at July 2, 2000 would have
been $ , or $ per share. This represents an immediate increase in net
tangible book value to existing stockholders of $ per share and an immediate
and substantial dilution of $ per share to new investors. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share:.................. $
Net tangible book value (deficiency) per share before this
offering as of July 2, 2000.................................... $
Increase per share attributable to new investors................
----
Pro forma as adjusted net tangible book value per share after this
offering.........................................................
----
Dilution per share to new investors...............................
====
</TABLE>
The following table summarizes, as of July 2, 2000, the number of shares of
common stock purchased from us, the total consideration paid and average price
per share paid by existing stockholders and by investors purchasing shares of
our common stock in this offering, before deducting estimated underwriting
discounts and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ --------------------- Price Per
Number Percent Amount Percent Share
---------- ------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 41,120,564 % $ % $
New investors...............
---------- ----- -------- ----------
Total....................... 100.0% $ 100.0%
========== ===== ======== ==========
</TABLE>
The above discussions and tables assume no exercise of any stock options
outstanding at July 2, 2000. As of July 2, 2000, there were options outstanding
to purchase 1,042,404 shares of common stock at a weighted average exercise
price of $3.72 per share. To the extent that any of these options are
exercised, there will be further dilution to the new investors.
In addition, the above discussions and tables do not reflect the dilution
that may result from the issuance of shares of our common stock which we
may issue to acquire the remaining 80% interest in Qualcore as described in
"Recent and Pending Transactions." To the extent that the per share initial
public offering price exceeds the per share price of any shares issued in
connection with the Qualcore acquisition, there will be further dilution to the
new investors.
The above discussions also do not reflect the dilution that may result from
the 743,714 shares of our common stock issued in connection with our recent
acquisition of Calibre, including shares of our common stock issuable upon the
exercise of vested options, and up to 527,799 shares that may be issued to
former stockholders of Calibre in the event that Calibre achieves specified
financial goals, as described in "Recent and Pending Transactions." To the
extent that the per share initial public offering price exceeds the per share
price of any shares issued in connection with the Calibre acquisition, there
will be further dilution to the new investors.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the
related notes included elsewhere in this prospectus. The consolidated statement
of operations data for the years ended December 31, 1997, 1998 and 1999 and the
consolidated balance sheet data at December 31, 1998 and 1999 have been derived
from our audited consolidated financial statements included elsewhere in this
prospectus, which have been audited by Ernst & Young LLP, independent auditors.
The consolidated statement of operations data for the years ended December 31,
1995 and 1996 and the consolidated balance sheet data at December 31, 1995,
1996 and 1997 have been derived from our audited consolidated financial
statements which are not included in this prospectus. The consolidated
statement of operations data for the six-month periods ended July 4, 1999 and
July 2, 2000 and the consolidated balance sheet data at July 2, 2000 are
derived from our unaudited consolidated financial statements and include all
adjustments consisting only of normal, recurring adjustments that we consider
necessary for a fair presentation of our financial position and results of
operations for these periods. The historical financial information may not be
an accurate indicator of our future performance. The information in this table
is presented in thousands, except per share data.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, ------------------
------------------------------------------------- July 4, July 2,
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- --------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net sales................................. $265,122 $298,425 $261,097 $ 204,738 $245,138 $115,248 $121,015
Cost of sales............................. 135,066 175,319 171,722 163,315 158,768 80,204 71,137
-------- -------- -------- --------- -------- -------- --------
Gross margin.............................. 130,056 123,106 89,375 41,423 86,370 35,044 49,878
Research and development.................. 24,546 30,548 30,467 28,846 32,777 15,521 18,840
Selling, general and administrative....... 41,943 47,934 47,806 54,317 59,082 29,104 29,904
Special charges........................... -- -- -- 38,620 4,686 4,686 1,191
-------- -------- -------- --------- -------- -------- --------
Operating income.......................... 63,567 44,624 11,102 (80,360) (10,175) (14,267) (57)
Interest income........................... 3,034 2,733 3,167 3,755 2,567 1,175 1,458
Interest expense.......................... (358) (290) (275) (24,375) (28,954) (14,445) (14,522)
Other, net................................ (360) (911) 832 (796) (324) (228) (296)
-------- -------- -------- --------- -------- -------- --------
Income (loss) before income taxes and
equity investment........................ 65,883 46,156 14,826 (101,776) (36,886) (27,765) (13,417)
Provision (benefit) for income taxes...... 23,418 16,155 2,965 (14,248) 1,004 500 265
-------- -------- -------- --------- -------- -------- --------
Income (loss) before equity loss.......... 42,465 30,001 11,861 (87,528) (37,890) (28,265) (13,682)
Equity in loss of Qualcore Group, Inc. ... -- -- -- -- -- -- (297)
-------- -------- -------- --------- -------- -------- --------
Net income (loss)......................... 42,465 30,001 11,861 (87,528) (37,890) (28,265) (13,979)
Less: preferred stock dividends........... -- -- -- 2,928 3,965 1,917 2,189
-------- -------- -------- --------- -------- -------- --------
Net income (loss) attributable to common
stockholders............................. $ 42,465 $ 30,001 $ 11,861 $ (90,456) $(41,855) $(30,182) $(16,168)
======== ======== ======== ========= ======== ======== ========
Net income (loss) per common share:
Basic................................... $ 2.21 $ 1.51 $ 0.59 $ (2.46) $ (1.04) $ (0.75) $ (0.40)
Diluted................................. 2.09 1.47 0.57 (2.46) (1.04) (0.75) (0.40)
Weighted average common shares
outstanding:
Basic................................... 19,172 19,896 20,233 36,789 40,238 40,134 40,822
Diluted................................. 20,285 20,454 20,676 36,789 40,238 40,134 40,822
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, -------------------
---------------------------------------------- July 4, July 2,
1995 1996 1997 1998 1999 1999 2000
-------- -------- ------- -------- -------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Consolidated
Financial Data:
EBITDA(1)............... $ 89,478 $ 91,307 $75,684 $ 19,259 $ 46,555 $ 21,354 $ 21,555
Cash provided by (used
in) operating
activities............. 54,862 91,636 72,644 (5,072) 24,379 14,712 (1,033)
Cash provided by (used
in) investing
activities............. (71,389) (96,941) 1,073 (7,190) (14,200) (10,617) (18,461)
Cash provided by (used
in) financing
activities............. 16,276 13,032 2,956 (29,066) (229) (262) 1,613
Capital expenditures.... 79,346 117,065 38,437 21,317 8,269 4,686 10,405
Depreciation and
amortization........... 27,214 48,315 63,750 61,795 52,368 31,228 21,087
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------- July 2,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 81,608 $ 68,923 $106,311 $ 50,856 $ 60,806 $ 42,925
Working capital......... 102,761 88,567 131,594 46,807 55,562 43,843
Total assets............ 353,430 401,066 415,639 297,071 284,286 267,706
Total long-term debt.... -- -- -- 280,000 280,000 280,000
Total preferred stock... -- -- -- 25,000 25,000 25,000
Stockholders' equity
(deficiency)........... 278,864 325,280 340,482 (48,231) (89,768) (103,722)
</TABLE>
--------
(1) EBITDA represents earnings (losses) before interest, income taxes,
depreciation, amortization of intangible assets, non-cash stock
compensation expenses, equity in loss of Qualcore and special charges. We
believe EBITDA is a widely accepted financial indicator of a company's
historical ability to service and/or incur indebtedness. However, EBITDA
should not be considered as an alternative to operating income or to cash
provided/(used) for operating activities, each as measured under generally
accepted accounting principles. Additionally, EBITDA as we are using the
term may not be comparable to similarly titled measures reported by other
companies.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial statements and the
notes to those statements included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including those risks set forth in
"Risk Factors" and elsewhere in this prospectus.
Overview
We were founded in 1974 as a designer, developer and manufacturer of 8-bit
microprocessors and have evolved over our 25-year operating history into a
designer, manufacturer and marketer of semiconductor micro-logic devices for
use in the growing communications and embedded control markets. Using
proprietary technology, we provide advanced devices that our customers design
into their end products. Our devices enable data communications and
telecommunications companies to process and transmit information and also
enable a broad range of consumer and industrial electronics manufacturers to
control the functions and performance of their products.
The semiconductor industry in which we currently operate is dynamic and
growing rapidly. The Semiconductor Industry Association estimates that total
industry revenues were $92 billion during the first half of 2000, which
represents an increase of 36% over total revenues of $67 billion during the
first half of 1999. The industry's growth reflects a recovery that began in the
second half of 1998. Prior to the recovery, sales in the semiconductor industry
had been in decline since 1996 due to reduced average selling prices resulting
primarily from excess semiconductor manufacturing capacity and the Asian
economic crisis. The Semiconductor Industry Association estimates that total
industry revenues will continue to grow at a compound annual growth rate of 28%
through 2001.
Prior to February 1998, our common stock had been publicly traded on the New
York Stock Exchange under the symbol "ZLG." On February 27, 1998, we
consummated a merger with an affiliate of Texas Pacific Group, and in
connection with that transaction we ceased having publicly traded equity. Since
the merger was structured as a recapitalization with a continuing minority
stockholder group, our financial statements still reflect our historical basis
of accounting. After the merger, our strategy has changed significantly. Under
the guidance of our current Chief Executive Officer, Curtis J. Crawford, who
joined us at the time of the merger, we added a new management team and
restructured our operations. Our restructuring activities have included
streamlining various production facilities and outsourcing our assembly
operations. In addition, we have shifted our focus to serving the
communications and embedded control markets.
In 1998 we undertook restructuring actions to reposition our cost structure
in light of the downturn that the semiconductor industry was then experiencing,
including:
. We terminated 33 sales and headquarters personnel, 120 people in our
Idaho wafer manufacturing facilities and 384 people in our Philippines
assembly operations and incurred charges of approximately $5.3 million
relating to these actions. We also shifted production at our Idaho
fabrication site into our newer and more efficient eight-inch wafer
fabrication facility in order to achieve lower production costs and
provide assembly flexibility; and
. We closed our entire assembly operation in the Philippines and moved
production to several contractors in Southeast Asia, which improved our
pricing, cycle times and quality and allowed us to focus resources on
product design, wafer manufacturing, product testing and customer
support.
In April 1999, we acquired the net assets of Seattle Silicon Corporation,
net of cash acquired, in a transaction valued at $5.9 million paid in a
combination of cash and assumption of some liabilities of Seattle Silicon. This
company, which is now our Seattle design center, engages in product design for
analog and
24
<PAGE>
complex electronic systems contained on a single silicon chip. In connection
with this acquisition, we recorded a $1.0 million charge for purchased in-
process research and development projects.
In July 1999, we changed the estimated useful lives on some of the equipment
in our eight-inch wafer fabrication facility from five to seven years, based on
the recent qualification of a new .35 micron wafer manufacturing process and
the transfer of additional production into this facility. This change in
accounting estimate reduced depreciation expense by $9.1 million during 1999,
and we expect it to decrease depreciation by $14.3 million in 2000 compared to
the amount we would have recorded under our previous useful life estimates. In
the second quarter of 2000, we reclassified our military product line from our
communications segment to our embedded control segment. Information for
historical periods has been reclassified to conform to the current
organizational structure.
In June 2000, to allocate greater resources to our growing communications
segment, we refocused our operations by transferring 12 people to our
communications group from our other business groups. We further reduced the
number of people dedicated to these other business groups by 24. We recorded a
restructuring charge of $1.2 million and a $0.9 million charge related to
inventory write-offs.
Our communications segment focuses on developing efficient solutions that
address the speed and capacity requirements of the next generation of Internet
and telecommunications infrastructures and devices. We currently offer a wide
variety of products and we plan to introduce many more products. These include
the eZ80 Internet Engine family of 8-bit microprocessors, samples of which are
available now, with commercial availability expected in the fourth quarter of
2000, and the Cartezian Communications Engine family of processors, which we
expect to be commercially available in late 2001. Revenues from our
communications segment increased 10.9% to $47.2 million in the first half of
2000 from $42.5 million in the first half of 1999.
Within our embedded control segment, we have focused our resources on the
growing field programmable microcontroller market. During the first half of
2000, our revenues from our field programmable microcontroller unit grew 11.3%
to $32.8 million compared to $29.4 million for the first half of 1999. Our
other unit within our embedded control segment is home entertainment, which
experienced a 5.5% decline in net sales for the first half of 2000 as a result
of our decision to exit from less profitable product lines. For example, the
net sales from the peripheral product line of our home entertainment unit
declined 50.7% to $7.7 million in the first half of 2000, compared to $15.6
million in the same period in 1999.
We sell our products through two channels, direct sales to original
equipment manufacturers and sales through third-party distributors. During the
first half of 2000, original equipment manufacturers accounted for 55% of our
total net sales, and distributors accounted for 45% of total net sales. During
the same period, our total net sales were comprised of approximately 45%
domestic sales and 55% international sales. Some of our agreements with
distributors allow limited right of return and price protection on merchandise
unsold by the distributors. We recognize revenue when we transfer the title of
our goods to our customers, including distributors, generally upon shipment.
Appropriate reserves are provided for returns and price allowances.
In January 2000, in order to streamline our distribution channels, we
announced our intention to terminate our existing relationships with our three
largest distributors in North America: Arrow Electronics, Future Electronics
and Unique Technologies. In 1999, these three distributors collectively
purchased $42.3 million of our products. In their place, we have franchised
Pioneer-Standard Electronics as our sole exclusive full service distributor in
North America. Pioneer-Standard has committed a much larger base of resources
to us than our prior three distributors combined. As of July 2, 2000, we had
substantially completed the termination of our relationships with Future
Electronics and Unique Technologies, and we expect to complete the termination
of our relationship with Arrow Electronics by the end of the third quarter of
2000. As a result of the termination of our relationships with our previous
distributors and the commencement of our relationship with Pioneer-Standard as
our sole service distributor in North America, there may be an initial decrease
in net sales as these previous distributors sell their existing inventories of
our products to Pioneer-Standard.
25
<PAGE>
During the six months ended July 2, 2000, we issued stock options to
employees that have exercise prices below the deemed fair value of our common
stock. Accordingly, we recorded deferred compensation of $2.2 million,
representing the excess of the fair market value of the common stock on the
date of grant over the options' exercise price. Deferred compensation expense
is being amortized ratably over the four-year option vesting period and totaled
$0.1 million for the six months ended July 2, 2000.
Results of Operations
The following table sets forth statements of operations data expressed as a
percentage of net sales for the periods indicated. For the six-month periods
ended July 2, 2000 and July 4, 1999, the information is derived from our
unaudited consolidated statements of operations. This information is expressed
as a percentage of net sales and should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, --------------------
-------------------------- July 4, July 2,
1997 1998 1999 1999 2000
------- ------- ------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............ 65.8 79.8 64.8 69.6 58.8
------- ------- ------- -------- --------
Gross margin............. 34.2 20.2 35.2 30.4 41.2
Research and
development............. 11.6 14.1 13.4 13.5 15.6
Selling, general and
administrative.......... 18.3 26.5 24.1 25.2 24.7
Special charges.......... -- 18.9 1.9 4.1 1.0
------- ------- ------- -------- --------
Operating income (loss).. 4.3 (39.3) (4.2) (12.4) (0.1)
Interest income.......... 1.2 1.8 1.0 1.0 1.2
Interest expense......... (0.1) (11.9) (11.8) (12.5) (12.0)
Other, net............... 0.3 (0.4) (0.1) (0.2) (0.2)
------- ------- ------- -------- --------
Income (loss) before
income taxes and equity
loss.................... 5.7 (49.8) (15.1) (24.1) (11.1)
Provision (benefit) for
income taxes............ 1.2 (7.0) 0.4 0.4 0.2
Equity in loss of
Qualcore Group, Inc..... -- -- -- -- (0.2)
------- ------- ------- -------- --------
Net income (loss)........ 4.5% (42.8)% (15.5)% (24.5)% (11.5)%
======= ======= ======= ======== ========
</TABLE>
Six Months Ended July 2, 2000 and July 4, 1999.
Net Sales. Our net sales increased 5.0% to $121.0 million for the six months
ended July 2, 2000 from $115.2 million for the six months ended July 4, 1999.
The increase was primarily the result of higher unit shipments of
communications products and partially the result of higher overall average
selling prices. Net sales of products in our communications segment increased
10.9% to $47.2 million for the six months ended July 2, 2000 as compared to
$42.5 million for the six months ended July 4, 1999. This increase resulted
primarily from higher unit shipments of serial communication controllers and
other network processor products. Net sales of products in our embedded control
segment increased 1.3% to $73.7 million for the six months ended July 2, 2000,
as compared to $72.7 million for the six months ended July 4, 1999. This
increase resulted primarily from higher unit shipments of military, infrared
remote and one-time programmable microcontrollers, which are a subset of our
field programmable microcontrollers unit, and was offset partially by a 50.7%
decline in sales of peripheral products. During the six months ended July 2,
2000, net sales of our peripheral products were $7.7 million compared to $15.6
million in the six months ended July 4, 1999. We expect this trend to continue
and to result in sales of peripheral products at or below current levels in the
foreseeable future. Our primary customer for our military products placed what
we believe to be a last time buy order for these products in the second quarter
of 2000. We intend to discontinue our line of military products by the end of
2000. During the six months ended July 2, 2000, net sales of military products
were $4.2 million.
26
<PAGE>
Gross Margin. Our cost of sales represents the cost of our wafer
fabrication, assembly and test operations. Cost of sales fluctuates, depending
on manufacturing productivity, product mix, equipment utilization and
depreciation. Gross margin as a percentage of net sales improved to 41.2% for
the six months ended July 2, 2000 from 30.4% for the six months ended July 4,
1999. The improvement in gross margin was primarily attributable to our change
in the estimated useful lives of certain equipment used in our eight-inch wafer
fabrication facility during the third quarter of 1999. As a result of this
change in accounting estimate, our depreciation expense was $9.1 million lower
than would have been recorded under the previous depreciation schedule in the
six months ended July 2, 2000. In addition, our gross margin improved as a
result of higher net sales, cost reduction programs and increased factory
utilization.
Research and Development Expenses. Research and development expenses
increased 21.4% to $18.8 million for the six months ended July 2, 2000 from
$15.5 million for the six months ended July 4, 1999. The increase in research
and development expense was attributable primarily to higher product
development costs, including spending at our new design centers in India,
Seattle and Fort Worth. Research and development expense during the six months
ended July 2, 2000 also included $0.9 million of amortization relating to
goodwill and other intangible assets acquired in connection with our Seattle
and Fort Worth design centers. During the six months ended July 2, 2000, both
of our business segments were engaged in new product development projects,
including eZ80 and Cartezian microprocessors, .35 micron one-time programmable
microcontrollers and integrated television controller products. Our research
and development headcount also increased from 150 employees as of July 4, 1999
to 173 employees as of July 2, 2000. We expect this trend in the increase of
research and development expenses to continue.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 2.7% to $29.9 million for the six months
ended July 2, 2000 from $29.1 million for the six months ended July 4, 1999.
The increase resulted primarily from higher compensation and employee benefit
related costs. In addition, commissions and marketing expenses were higher in
connection with increased sales.
Special Charges. We recognized special charges of $1.2 million in the six
months ended July 2, 2000, consisting of $1.0 million of severance and related
benefits and $0.2 million of asset write-offs and contractual liabilities.
These charges relate to a restructuring of operations intended to focus our
human and financial resources on our communications segment. We terminated
approximately 24 people in connection with this action and an additional 12
were re-deployed from other areas of our business into our communications
segment. In the six-month period ended July 4, 1999, we recorded special
charges of $3.7 million for write-downs of equipment held for sale and $1.0
million of purchased in-process research projects in connection with the
acquisition of assets from Seattle Silicon.
Other Income/(Expense), Net. Interest income represents interest earned on
cash and cash equivalent balances, all of which have a maturity of less than
ninety days. Interest expense is comprised primarily of interest on our senior
notes and amortization of deferred financing costs. We incur approximately
$26.6 million in interest coupon payments and $1.4 million in amortization of
deferred financing costs annually on our senior notes.
Income Taxes. Our provision for income taxes was $0.3 million for the six
months ended July 2, 2000 compared to $0.5 million for the six months ended
July 4, 1999. Our tax provisions in 1999 and 2000 related to the foreign
jurisdictions in which we operate where profits have been or are expected to be
earned. Because of our overall loss position, we established a full valuation
allowance for the tax assets originating from current year losses and we have
not realized any benefit in the 2000 tax rate. We will continue to evaluate the
future utilization of the deferred tax assets on a quarterly basis. In
addition, changes in our share ownership may restrict our ability to utilize
our net operating loss carryforwards.
Equity in Loss of Qualcore. Our equity in loss of Qualcore for the six
months ended July 2, 2000 primarily represents $0.4 million of goodwill
amortization associated with our 20% equity ownership interest in Qualcore.
Goodwill on the Qualcore investment is being amortized over a five-year period.
27
<PAGE>
Years Ended December 31, 1999 and 1998
Net Sales. Our net sales of $245.1 million in 1999 increased 19.7% over net
sales of $204.7 million in 1998. The increase was attributable primarily to
higher unit shipments for most of our product lines as a result of improved
market conditions. Net sales from our communications segment grew 31.0% to
$84.7 million in 1999 compared to 1998, which was the result of higher unit
shipments of serial communications and modem products and slightly higher
average selling prices for most product lines. In 1999, net sales from our
embedded control segment increased 14.5% to $160.4 million as a result of
increased unit shipments, particularly of one-time programmable
microcontrollers, while average selling prices remained unchanged from the
prior year. This improvement was offset by a decline in sales of peripheral
products as our products were designed out of some mouse-type pointing device
applications. As a result, the bookings rate for peripheral products decreased
substantially in the second half of 1999 to approximately $9.9 million as
compared to approximately $17.0 million in the first half of 1999. Bookings for
our peripherals products decreased from $35.9 million in 1998 to $26.9 million
in 1999. In 1999, net sales of our home entertainment unit increased 9.8% to
$96.1 million from 1998 due to higher unit shipments, offset partially by
slightly lower average selling prices of both television products and infrared
remote control products.
Net sales of our products in the Americas in 1999 increased 14.6% to $113.3
million from $98.9 million in 1998. Net sales of our products in Asia,
including Japan, in 1999 increased 27.6% to $105.8 million, and net sales of
our products in Europe increased 13.4% to $26.1 million in 1999.
Gross Margin. Gross margin as a percent of net sales improved to 35.2% in
1999 from 20.2% in 1998. This improvement was a result of higher net sales and
related increases in factory utilization, our cost reduction programs and
reduced depreciation expense, particularly in our eight-inch wafer fabrication
facility. We completed the outsourcing of our assembly operations to
subcontractors in the first quarter of 1999. Effective July 5, 1999, we changed
the estimated useful lives of some of our machinery and equipment located in
our eight-inch wafer fabrication facility in Idaho from five to seven years.
This change in accounting estimate resulted in a $9.1 million reduction of
depreciation expense in the second half of 1999 as compared to the amount that
would have been recorded under the previous useful life estimates. Had the
accounting change been in effect for the full year in 1999, it would have
resulted in an approximately $18.2 million reduction in depreciation expense
compared to the amount that would have been recorded under the previous useful
life estimates.
Late in the third quarter of 1998, we implemented two actions to reduce the
cost structure of our wafer fabrication facilities in Idaho. These actions
reduced the workforce by 20% and changed the shift structure to accommodate the
transfer of more wafer manufacturing into our more efficient, eight-inch
fabrication facility from our five-inch facility. We continue to manufacture
wafers at or near the staffed capacity of the five-inch facility. In addition,
we were able to negotiate significant reductions in raw material prices.
Research and Development Expenses. Research and development expenses
increased to $32.8 million in 1999 from $28.8 million in 1998 but decreased
slightly as a percentage of sales, dropping to 13.4% in 1999 from 14.1% in
1998. The 1999 increase in research and development spending was due
principally to higher product and design tool development costs, including
expenses associated with the our new design centers in India and Seattle.
During 1998, our research and development expenditures were focused on
technology for our new .35 micron 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 Z8Plus microprocessor core products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $59.1 million in 1999 from $54.3 million
in 1998 and decreased as a percentage of net sales to 24.1% in 1999 from 26.5%
in 1998. The increase in selling, general and administrative spending in 1999
was due primarily to increased personnel costs, product advertising, promotion
and trade show expenses and higher commission on increased sales volume.
28
<PAGE>
Special Charges. During 1999, we recorded special charges of $4.7 million.
Approximately $1.0 million was purchased in-process research and development
expense related to several partially developed semiconductor product designs
that were acquired through the acquisition of Seattle Silicon in April 1999. We
also recognized a $3.7 million charge for the write-down to estimated net
realizable value of some test equipment. The carrying value of assets at
December 31, 1999 was $0.9 million and was recorded in other current assets on
the consolidated balance sheet. The net realizable value of these assets held
for disposal was based on an independent appraisal.
In 1998, we recorded special charges of $38.6 million, which included
expenses of $33.3 million in connection with our recapitalization merger with
the Texas Pacific Group affiliate and expenses of $5.3 million related to the
restructuring of operations. Those charges consisted primarily of executive
severance costs, employee stock option buy-outs, retention bonuses for existing
employees, new executive bonuses, bridge loan fees and consulting fees and
expenses. We incurred restructuring charges totaling approximately $5.3
million. Of this amount, approximately $4.6 million was related to
manufacturing operations and approximately $0.7 million was related to sales
and headquarters operations. The restructuring costs reflect our strategy to
align worldwide operations with market conditions, improve the productivity of
our manufacturing facilities by leveraging our technology investments and renew
our focus on the distribution channel. Restructuring actions related to
manufacturing operations took place in the third and fourth quarters of 1998.
The third quarter restructuring costs consisted of approximately $1.7 million
for severance pay and benefits for terminated employees. These actions reduced
our workforce in our Idaho wafer fabrication facilities by approximately
120 positions and eliminated 33 positions in sales and headquarters operations.
The restructuring costs for the fourth quarter of 1998 consisted of
approximately $2.4 million for severance pay and benefits for terminated
employees and $1.2 million for fixed asset write-offs related to the closure of
our assembly operations in the Philippines. In connection with these actions,
we completed the transition of our assembly operations to subcontractors. The
benefits that subcontractors provide include advanced packaging technology, as
well as competitive pricing, cycle times and quality. In addition, outsourcing
assembly operations permits us to mitigate future capital expenditures in this
area.
Interest Expense. Interest expense increased to $29.0 million in 1999 from
$24.4 million in 1998. The increase resulted from the first full year of
interest expense on our senior notes issued in conjunction with our
recapitalization merger in February 1998.
Income Taxes. Our provision for income taxes in 1999 reflects foreign income
taxes for the jurisdictions in which we were profitable as well as foreign
withholding taxes. The 1998 tax benefit rate of 14.0% reflected benefits from
the carryback of operating losses, net of foreign income and withholding taxes.
Based on available evidence, including our cumulative losses to date, we have
provided a full valuation allowance of $28.5 million against our net deferred
tax assets.
Years Ended December 31, 1998 and 1997
Net Sales. During 1998, like other companies in the semiconductor industry,
we experienced a general decline in net sales and average selling prices. Net
sales in 1998 were $204.7 million, compared to $261.1 million in 1997, a
decrease of 21.6%. The decline in 1998 net sales from 1997 was attributable
primarily to a decrease in sales of our communications products and weaker
distribution sales as distributors reduced inventory levels during the first
nine months of 1998. These decreases reflected both lower unit volume shipments
and a lower average selling price. Since communications products typically have
higher average selling prices than the average selling prices of our other
products, the unit volume reduction of communication product shipments resulted
in an overall average selling price decline in 1998.
Net sales of our products in the Americas were $98.8 million in 1998, a
decline of 26.9% from 1997. The decrease was primarily the result of lower unit
volume of communications products. Net sales of our products in Asia were $82.9
million, including Japan, a decrease of 16.4% over the prior year due to the
turmoil in several of the economies comprising that region. Net sales of $23.0
million in Europe dropped 14.6% from the prior year.
29
<PAGE>
Gross Margin. Gross margin as a percent of net sales was 20.2% in 1998
compared to 34.2% in 1997. The lower gross margin in 1998 was attributable
primarily to lower net sales, particularly communications products, and the
under-utilization of wafer fabrication manufacturing capacity.
Research and Development Expenses. Research and development expenses in 1998
were $28.8 million or 14.1% of net sales compared to $30.5 million or 11.7% of
net sales in 1997. During 1998, our research and development expenditures were
focused on technology for our new .35 micron wafer fabrication process, new and
enhanced product development, and new customer development tools. The decrease
in 1998 research and development expenses, as compared to 1997, was due
primarily to a decrease of $2.8 million in tooling and wafer mask expenses
which were offset partially by an increase in depreciation expense for our tool
development laboratory.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1998 increased 13.6% to $54.3 million compared to
$47.8 million in 1997. The 1998 increase over 1997 levels was related primarily
to increased rent and operating costs associated with our new headquarters
facility, increased information systems costs, and higher payroll and travel
expenses, including $1.5 million for a sales conference.
Special Charges. In 1998, we recorded special charges of $38.6 million,
which included expenses of $33.3 million in connection with our
recapitalization merger and expenses of $5.3 million related to the
restructuring of operations. These charges consisted primarily of executive
severance costs, employee stock option buy-outs, retention bonuses for existing
employees, new executive bonuses, bridge loan fees, and consulting fees and
expenses. We incurred restructuring charges totaling approximately $5.3
million. Of this amount, approximately $4.6 million was related to
manufacturing operations and approximately $0.7 million was related to sales
and headquarters operations.
Other Income/(Expense), Net. Interest expense increased to $24.4 million in
1998 from $0.3 million in 1997. The increase was primarily attributable to
interest on our senior notes issued in conjunction with our recapitalization
merger in February 1998.
Income Taxes. Our benefit for income taxes was 14.0% in 1998 compared to a
provision for income taxes of 20.0% in 1997. The 1998 rate reflects the benefit
of refundable taxes related to our overall loss position and realization of
deferred tax assets based on the reversal of taxable temporary differences,
offset by foreign taxes. The provision for income taxes in 1997 was lower than
the expected tax rate due to the impact of tax exempt interest income, foreign
earnings taxed at a lower rate than the U.S. federal tax rate and the
reinstatement of the research and development tax credit.
30
<PAGE>
Quarterly Financial Information
The following table sets forth our statement of operations data for the
three-month periods ended April 4, July 4, October 3 and December 31, 1999, and
April 2 and July 2, 2000. Our year end is December 31 with interim results
based on fiscal quarters of thirteen weeks of duration ending on the last
Sunday of each quarter. The information for each of these quarters has been
prepared on substantially the same basis as the audited financial statements
included elsewhere in this prospectus and, in the opinion of our management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations for such
periods. Historical quarterly results are not necessarily indicative of results
for the entire year or for any future period. The information in this table is
presented in thousands.
<TABLE>
<CAPTION>
Quarter Ended (unaudited)
------------------------------------------------------
Dec.
Apr. 4, Jul. 4, Oct. 3, 31, Apr. 2, Jul. 2,
1999 1999 1999 1999 2000 2000
-------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $54,209 $61,039 $64,528 $65,362 $59,518 $61,497
Cost of sales........... 38,410 41,794 39,488 39,076 34,860 36,277
-------- -------- ------- ------- ------- -------
Gross margin............ 15,799 19,245 25,040 26,286 24,658 25,220
Research and
development............ 7,263 8,258 8,476 8,780 9,761 9,079
Selling, general and
administrative......... 14,506 14,598 14,786 15,192 15,489 14,415
Special charges......... -- 4,686 -- -- -- 1,191
-------- -------- ------- ------- ------- -------
Operating income
(loss)................. (5,970) (8,297) 1,778 2,314 (592) 535
Interest, net........... (6,619) (6,651) (6,644) (6,473) (6,510) (6,554)
Other, net.............. (85) (143) 180 (276) (316) 20
-------- -------- ------- ------- ------- -------
Income (loss) before
income taxes and equity
loss................... (12,674) (15,091) (4,686) (4,435) (7,418) (5,999)
Provision (benefit) for
income taxes........... 250 250 250 254 132 133
Equity in loss of
Qualcore Group, Inc. .. -- -- -- -- -- (297)
-------- -------- ------- ------- ------- -------
Net income (loss)....... $(12,924) $(15,341) $(4,936) $(4,689) $(7,550) $(6,429)
======== ======== ======= ======= ======= =======
</TABLE>
Strong sales in the fourth quarter of 1999, followed by a decline in the
first quarter of 2000, reflect fourth quarter seasonality caused by increased
holiday demand from our customers in the home entertainment and consumer
products markets. Our higher gross margin levels beginning in the second
quarter of 1999 reflect the cost cutting measures we implemented during the
second half of 1998 and the first quarter of 1999 and a reduction in
depreciation expense resulting from a change in accounting estimate made in the
last half of 1999. Research and development expenses have grown steadily
quarter to quarter primarily as a result of increased investment in product
development and support tool design for communication products and field
programmable microcontrollers, the asset acquisitions from Seattle Silicon in
the second quarter of 1999 and Production Languages in the fourth quarter of
1999 and the opening of our India design center in the fourth quarter of 1999.
Lower selling, general and administrative expenses during the second quarter of
2000 primarily reflect a reduction of incentive payroll expenses.
In connection with our increased focus on our communications segment, we
recognized special charges of $1.2 million in the quarter ended July 2, 2000,
consisting of $1.0 million of severance and related benefits and $0.2 million
of asset write-offs and contractual liabilities. In the quarter ended July 4,
1999, we recorded special charges of $3.7 million for write-downs of equipment
held for sale and $1.0 million for purchased in-process research projects
related to our acquisition of assets from Seattle Silicon.
We have experienced, and expect to continue to experience, fluctuations in
revenues and operating results from quarter-to-quarter for a variety of reasons
which are more fully set forth under the caption "Risk Factors--Our quarterly
operating results are likely to fluctuate and may fail to meet expectations,
which may cause our stock price to decline." As a result of these factors, we
believe that quarter-to-quarter comparisons of our revenues and operating
results are not necessarily meaningful, and that these comparisons may not be
accurate indicators of future performance. Our operating expenses, especially
our manufacturing expenses, are based on
31
<PAGE>
anticipated revenues. If we are unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall, any significant revenue
shortfall would likely have an immediate negative effect on our operating
results.
Liquidity and Capital Resources
Our primary cash needs are debt service, working capital and capital
expenditures. We meet these needs with our operating cash flow, cash on hand
and available credit lines. As of July 2, 2000, we had cash and cash
equivalents of approximately $42.9 million. Additionally, we have a senior
secured credit facility from a commercial lender that provides for total
borrowings of up to $40.0 million, consisting of a three-year revolving credit
facility of up to $25.0 million and a five-year capital expenditure line of up
to $15.0 million which expire on December 30, 2001 and 2003, respectively. The
calculated availability under this credit facility was $34.9 million as of July
2, 2000. Borrowings under the credit facility bear interest at a rate per annum
equal, at our option, to the commercial lender's stated prime rate or the
London Interbank Overnight Rate, commonly known as LIBOR, plus 2.0% (9.2% at
July 2, 2000) for the revolving credit facility and the commercial lender's
prime rate plus 1.0% (10.5% at July 2, 2000) or LIBOR plus 3.0% (10.2% at July
2, 2000) for the capital expenditure line. There were no borrowings under
either facility as of July 2, 2000.
During the six months ended July 2, 2000, our operating activities used net
cash of $1.0 million, which was primarily attributable to our overall net loss
of $14.0 million, an increase in our inventories and a decrease in our accounts
payable, partially offset by non-cash items, including $21.1 million of
depreciation and amortization. During the six months ended July 4, 1999, our
operating activities provided net cash of $14.7 million which was primarily
attributable to an $8.3 million increase in other accrued and noncurrent
liabilities. In addition, our operating cash flow was improved by the effect of
non-cash items including $31.2 million of depreciation and amortization, a
write-down of assets held for disposal of $3.7 million and an in-process
research and development charge of $1.0 million, partially offset by our $28.3
million net loss.
During 1999, our operating activities generated net cash of $24.4 million
which was primarily attributable to an increase in accounts payable, accrued
compensation and employee benefits and other accrued and non-current
liabilities of $23.3 million and adjusted by non-cash items including
depreciation and amortization of $52.4 million, a write-down of assets held for
disposal of $3.7 million and a charge for purchased in-process research and
development of $1.0 million. These items were offset by a net loss of $37.9
million and an increase in inventories, accounts receivable and other assets of
$18.3 million. Cash used by operating activities was $5.1 million for 1998,
while cash provided by operations was $72.6 million for 1997. The use of cash
by operating activities in 1998 was primarily due to our net loss, which was
the result of reduced sales when compared to 1997, $38.6 million in special
charges, as a result of our recapitalization merger and restructuring, and
approximately $24.4 million of interest expense, primarily associated with our
senior notes, none of which existed in 1997. These amounts were partially
offset by depreciation and amortization of $61.8 million, and a $10.7 million
reduction of inventory levels and cash provided by an improvement in accounts
receivable collections.
During the six months ended July 2, 2000, our investing activities used cash
of $18.5 million consisting of $10.4 million of capital expenditures and $8.1
million, including expenses, for the acquisition of a 20% equity investment in
Qualcore with an option to purchase the remaining 80% interest. We accounted
for this investment in Qualcore using the equity method. During the six months
ended July 4, 1999, our investing activities used cash of $10.6 million
consisting of $4.7 million of capital expenditures and $5.9 million for the
acquisition of the assets of Seattle Silicon. We used $14.2 million in cash for
investing activities in 1999. We invested $8.3 million in capital expenditures
primarily for new test equipment, product development tools and computer system
upgrades and $5.9 million for the acquisition of the net assets of Seattle
Silicon. In 1998, cash used for investing activities was $7.2 million as we
invested $21.3 million primarily in manufacturing equipment, computer systems
and office upgrades. This use of cash was partially offset by $14.1 million in
proceeds received from the sale of short-term investments. In 1997, cash
provided by investing activities of $1.1 million was attributable to the sale
of short-term investments, which were almost entirely offset by capital
expenditures in the amount of $38.4 million.
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<PAGE>
During the six months ended July 2, 2000, cash provided from financing
activities totaled $1.6 million and related primarily to $2.1 million of
proceeds received from issuances of common stock which were offset by principal
payments under capital leases of $0.5 million. Cash used by financing
activities of $0.2 million in 1999 was from principal payments under capital
leases offset by exercises of stock options. Cash used by financing activities
for 1998 was $29.1 million, while cash provided by financing activities in 1997
was $3.0 million. The use of cash by financing activities in 1998 was primarily
for cash transactions related to our recapitalization merger including cash
used to retire shares of common stock and costs and fees associated with the
merger. Cash provided by financing activities in 1998 was $280.0 million of
gross proceeds from the sale of our senior notes and an equity investment by an
affiliate of Texas Pacific Group and several other investors of $117.5 million,
both of which were used for the purchase of pre-merger outstanding common
stock. Cash provided by financing activities in 1997 was primarily from
exercises of stock options and purchases under our stock purchase plan.
We incurred substantial indebtedness in connection with our recapitalization
merger. We currently have $280.0 million in aggregate principal amount of
senior notes outstanding which are publicly traded and subject us to the
reporting requirements of the Securities Exchange Act of 1934. Our ability to
make scheduled principal payments, or to pay the interest, premium if any, or
to refinance our indebtedness, including the senior notes, or to fund capital
and other expenditures will depend on our future performance, which, to a
certain extent, is subject to general economic, financial, competitive,
legislative, regulatory, and other factors that are beyond our control. The
agreement governing our senior notes contains covenants that, among other
things, limit our ability and the ability of our subsidiaries to incur
particular types of additional indebtedness, issue particular types of capital
stock, pay dividends or distributions, make investments or other payments,
enter into transactions with affiliates, dispose of particular types of assets,
incur liens and engage in mergers and consolidations. The senior notes will
mature on March 1, 2005. Interest on the senior notes accrues at the rate of
9.5% per annum and is payable semi-annually in arrears on March 1 and September
1, to holders of record on the immediately preceding February 15 and August 15,
respectively. After giving effect to the application of a portion of the
proceeds from this offering to the repayment of senior notes, as of July 2,
2000 approximately $210.0 million of senior notes would have been outstanding.
We have financed our cash requirements for working capital and capital
expenditures primarily through internally generated cash flows and existing
cash reserves. We intend to spend approximately $40.0 million in capital
expenditures in 2000, primarily for expansion of our sub-micron wafer
fabrication capacity in Idaho, of which $10.4 million had been spent as of July
2, 2000. We also intend to pay approximately $9.9 million to Curtis J.
Crawford, our Chief Executive Officer, related to a previously recorded
deferred compensation arrangement after completion of this offering. Based upon
the current level of operations, our management believes that cash flow from
operations, available cash and available borrowings under the credit facility
will be adequate to meet our future requirements for working capital, capital
expenditures, and other expenditures and scheduled interest payments on our
indebtedness, including the senior notes, for at least the next 12 months. We
cannot assure you, however, that the business will generate sufficient cash to
enable us to service our indebtedness, including the senior notes, or make
anticipated capital and other expenditures.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Financial Accounting Standard No. 133, Accounting for Derivative Instruments
and Hedging Activities, or FAS No. 133. FAS No. 133 requires all derivatives to
be recorded on the balance sheet at fair value and establishes special
accounting rules for different types of hedges. Adoption of this statement is
required in the year ending December 31, 2001 and is not expected to have any
impact on our results of operations or financial condition.
In December 1999, the Securities and Exchange Commission issued SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, or
SAB 101. SAB 101 summarizes the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements. We have
reviewed SAB 101 and are evaluating the effect of its application to our
financial statements.
33
<PAGE>
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of APB No.
25, or FIN 44. FIN 44 clarifies the application of APB No. 25 and, among other
issues clarifies the following: the definition of an employee for purposes of
applying APB No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for
an exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but some provisions of FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 did not have a material impact on our financial position
or results of operations.
Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk for changes in interest rates relates primarily
to our short-term investment portfolio and long-term debt obligations. We do
not use derivative financial investments in our investment portfolio. Our
primary investment objectives are to preserve capital and maintain liquidity.
These objectives are met by investing in high quality credit issuances and
limiting the amount of credit exposure to any one company. We mitigate default
risk by investing in only the highest quality securities and monitoring the
credit ratings of such investments. We have no cash flow exposure due to rate
changes for our cash equivalents or the senior notes, as these instruments have
fixed interest rates.
The table below presents principal amounts and related average interest
rates by year of maturity for our cash equivalents and debt obligations as of
July 2, 2000 (dollars in thousands):
<TABLE>
<CAPTION>
Fair
2000 2005 Total Value
------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash equivalents
Fixed rate........................... $40,980 $ -- $ 40,980 $ 40,980
Average interest rate................ 6.49% -- 6.49% --
Long-term debt
Fixed rate........................... $ -- $280,000 $280,000 $239,400
Stated interest rate................. -- 9.50% 9.50% --
</TABLE>
34
<PAGE>
BUSINESS
Our Business
We are a worldwide designer, manufacturer and marketer of semiconductor
micro-logic devices for use in the growing communications and embedded control
markets. Using proprietary technology that we have developed over our 25-year
operating history, we provide advanced devices that our customers design into
their end products. Our devices, which often include related application
software, typically combine a microprocessor and/or digital signal processor,
memory and input and output functions on a single semiconductor. Our
communications devices enable data communications and telecommunications
companies to process and transmit information. These devices include serial
communication controllers and network processors used in communication networks
for voice and data transmission. Our embedded control devices enable a broad
range of consumer and industrial electronics manufacturers to control the
functions and performance of their products. These devices control such
functions as the speed of a motor, the on-screen display of a television or
videocassette recorder and the charging cycle of a battery charger.
Our primary strategic focus is to become a key semiconductor technology
enabler of people's increasing ability to be connected to each other and to
their electronic devices at any time and from anywhere. We call this concept
Extreme Connectivity. Our two distinct business segments--communications and
embedded control--develop solutions to address critical aspects of Extreme
Connectivity. For example, our communications segment focuses on developing
efficient solutions that address the speed and capacity requirements of the
next generation of Internet and telecommunications infrastructures and devices.
Recently, we have increased the focus of our human and financial resources on
our communications segment in response to growth in the Internet infrastructure
and telecommunications markets. Our embedded control segment provides solutions
for controlling electronic devices that have the potential to be connected
through wired and wireless networks.
Our Industry
The Semiconductor Industry Association estimates that total industry
revenues were $92 billion during the first half of 2000, which represents an
increase of 36% over total revenues of $67 billion during the first half of
1999. The semiconductor market is comprised of five broad product segments:
micro-logic, other logic, memory, analog and discrete devices. We compete in
the micro-logic device segment, which, according to the Semiconductor Industry
Association, represented $52 billion, or approximately 35% of the semiconductor
market's total sales in 1999. Total sales in this segment are forecast to grow
at a compound annual growth rate of 19% through 2001.
Micro-logic devices are processor-based semiconductors that include
microprocessors, microcontrollers and digital signal processors which typically
process information, output data or control signals according to programmed
instructions and various external inputs. Micro-logic devices also include
microperipherals which operate in conjunction with these processor-based
devices to provide systems support or to control communications, graphics and
images, mass storage, voice and other user input systems.
Semiconductor manufacturers target the micro-logic market through both
application specific standard products, or ASSPs, which are tailored for a
specific application but are not proprietary to a single customer, and general
purpose products, which are neither application nor customer specific. We
design, manufacture and market ASSPs targeted at the communications portion of
the micro-logic device segment, and both ASSPs and general purpose products
targeted at the embedded control portion of the micro-logic device segment.
Communications Market. One of the most powerful forces behind the need for
specialized micro-logic devices has been the rapid development of
communications networks such as intranets and the Internet, as businesses and
consumers seek immediate access to more information and entertainment in an
increasingly networked society. International Data Corporation, or IDC,
estimates that the number of devices worldwide with Internet access grew from
approximately 14 million in 1995 to 237 million in 1999 and estimates that
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approximately 462 million Internet-connected devices will exist by the end of
2001. Similarly, the amount of content available on the Internet is increasing
rapidly. For example, IDC estimates that the number of web pages worldwide grew
from approximately 18 million in 1995 to approximately 2 billion in 1999 and
will increase to approximately 7 billion by 2001.
The greater volume of network traffic evidenced by these increases, as well
as the emergence of streaming audio and video content and transaction-intensive
e-commerce websites, have strained the ability of networks to process and
transmit information quickly. These factors have created the need for increased
communications and Internet infrastructure capacity, or bandwidth. To increase
bandwidth, many communications products are required to process greater amounts
of information in less time. All of these products, therefore, need high levels
of performance from the micro-logic devices embedded within them.
Embedded Control Market. As consumer and industrial product manufacturers
seek to enhance the value of their products by increasing functionality,
performance and ease of use, they are embedding more advanced control devices
into their designs. Embedded control devices may enable manufacturers to
differentiate their products, replace less efficient electromechanical devices,
add product functionality and reduce product costs. Today, embedded control
devices are used in a broad range of everyday products such as personal digital
assistants, telephones, televisions, thermostats, battery chargers, garage door
openers, heaters, air conditioners and a variety of other consumer and
industrial products.
Microcontrollers are currently available in 4-bit through 32-bit
architectures. Although 4-bit microcontrollers are relatively inexpensive,
typically costing less than $1.00 each, they generally cannot provide the
levels of performance and spectrum of features that design engineers require to
differentiate their products today. These 4-bit microcontrollers are typically
used only to produce basic functionality in simpler products. While 32-bit
architectures offer very high levels of performance, they typically cost more
than $7.00 each. As a result, manufacturers of competitive, high-volume
products have increasingly found 8-bit microcontrollers, which typically cost
less than $2.00 each, to be the most cost-effective embedded control solution.
For example, a cellular phone battery charger will typically utilize an 8-bit
microcontroller to monitor and control the charging cycle to ensure that the
battery charges rapidly and does not overcharge.
Customer Requirements
Manufacturers of communication, industrial and consumer products continually
strive to provide products with higher performance and greater functionality.
To achieve this goal, these manufacturers are requiring their semiconductor
suppliers to provide higher levels of device integration and higher performance
in terms of faster processing speed, lower power consumption and smaller size,
all at a reduced time-to-market.
Higher Levels of System Integration. Manufacturers of communications,
industrial and consumer equipment are requiring semiconductor suppliers to
integrate more functionality onto individual semiconductor devices, which has
resulted in the reduction of the number of components used in their products.
By reducing the number of individual components, manufacturers of end-products
are able to offer more compact products with the potential for lower aggregate
costs, reduced power consumption and increased performance.
Higher Levels of Performance. Customers of many segments of the
semiconductor market require ongoing improvements in performance such as faster
processing speed, lower power consumption and/or smaller size. For example, the
need to quickly route data around the Internet places a premium on increased
processing speed. The desire to extend battery life in cellular phones places a
premium on reduced power consumption. Similarly, the need to equip cellular
phones with more functions is driving semiconductor manufacturers towards
advanced, higher density packaging techniques.
Accelerated Time-to-Market. Semiconductor customers require solutions that
enable them to reduce the time they must spend getting their new products to
market. By introducing their products before their competitors do, these
customers may achieve greater market share and profitability. In response to
these
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<PAGE>
requirements, semiconductor suppliers are offering their customers highly
integrated devices that accelerate their customers' design and production
processes. Semiconductor suppliers also provide various forms of support tools
and services to assist their customers in achieving rapid development cycles
for new products. These tools include easy-to-use software and hardware,
application notes, reference designs, sample application software and various
kinds of field or centralized customer support.
Our Competitive Strengths
We have over 25 years of experience selling semiconductor devices in the
micro-logic market. As a pioneer in this industry, we believe that our brand
name is respected and well recognized in our markets. We have established
strong, long-standing relationships with numerous customers that are leaders in
their respective markets. More recently, we have increased our focus on the
high-growth communications segment of the semiconductor market.
Our extensive experience as a supplier to the micro-logic market has allowed
us to develop the following key competitive strengths, which we believe
differentiate us from many of our competitors:
Proven Track Record of Technological Innovation. We have a proven track
record of technological innovation that extends from the Z80, which has been in
production for over 25 years and is now one of the world's largest selling 8-
bit microprocessor architectures, to the new Z80S183 microprocessor, which
extends the Z80 family by providing analog-to-digital and digital-to-analog
capabilities for wireless communications device manufacturers. Our latest
innovations, the eZ80 Internet Engine and the Cartezian Communications Engine,
focus on expanding the capacity and connectivity of the Internet and the
extensive communications infrastructure. We have approximately 250 engineers
who are working to develop new products and manufacture processes to meet the
needs of our customers.
Extensive Product Portfolio. Our expertise in communications processor core
design, semiconductor architectural development and digital signal processing
has enabled us to develop serial communication controllers and network
processors designed to meet the capacity and connectivity needs of the
communications industry. We also produce microcontroller-based devices for the
embedded control market, including field programmable microcontrollers for
consumer and industrial devices, on-screen display technology for the
television market, violence-blocking chips, also known as V-chips, for parental
control of television viewing, universal and multi-brand remote controls and
infrared keyboards. All of these embedded control products are supported by an
extensive set of Windows(R)-based development tools and proven application
assistance. Our proprietary library of reusable intellectual property
facilitates our ability to rapidly develop new products to meet the needs of
our customers.
Prominent Customer Base. We have developed relationships with over 5,000
original equipment manufacturers and end-users, many of which are leaders in
their respective markets. By collaborating with customers in an interactive
product design and development process, we have been able to establish long-
standing strategic relationships, which solidify our customer base and help us
to define our next generation products. In our communications segment, we have
collaborated with such customers as Alcatel, Cisco Systems, Hypercom, Lucent
Technologies, Nortel and Texas Instruments. In our embedded control segment, we
have collaborated with such customers as Black & Decker, Hitachi, Samsung and
Thomson/RCA.
Excellence in Manufacturing. Our manufacturing facilities in Idaho feature
advanced manufacturing processes and equipment, such as the .35 micron one-time
programmable process. These facilities have been awarded three International
Standards Organization certifications, commonly known as ISO certifications, by
the National Standards Authority of Ireland: the ISO 9001 and 9002
certifications for quality management and the ISO 14001 certification for
implementation of an extensive environmental management system. These
facilities also have received the Idaho Governor's Quality Award and the Idaho
Association of Commerce and Industry's Environmental Excellence Award. In
addition, our test facility in the Philippines has received ISO 9002 and ISO
14001 certifications from SGS International Certification Services AG of
Zurich, Switzerland.
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Strong and Experienced Management Team. We have assembled a strong and
experienced management team at both the administrative and the operating
levels. Our Chairman, President and Chief Executive Officer, Curtis J.
Crawford, joined us in 1998 and was formerly Group President of the
Microelectronics Group and President of the Intellectual Property Division of
Lucent Technologies. Our senior management team includes 14 individuals with an
average of more than 15 years of management service.
Our Strategy
Our objective is to be a key technology enabler of Extreme Connectivity. Our
key business strategies include:
Focusing on High-Growth Opportunities in the Communications Market. We are
developing advanced semiconductor solutions that leverage our existing
expertise in communications technologies to focus on high-growth opportunities
in the communications market. For example, we are developing advanced network
and Internet processor devices to help expand the capacity of the Internet
infrastructure. These devices include the Cartezian Communications Engine
family of products for manufacturers of network routers and switches, and the
eZ80 Internet Engine family of products for embedded web servers, gateways and
wireless data modems. In addition, we are dedicating increased human and
financial resources to developing new applications and relationships with new
customers for our existing and future communications products.
Targeting Attractive Segments of the Embedded Control Market. We offer a
large selection of application specific standard products, as well as general
purpose devices, that address the embedded control needs of a broad range of
consumer and industrial customers. We target products that offer attractive
revenue and margin growth potential, such as field programmable
microcontrollers. According to the market research firm Semico, unit sales of
field programmable microcontrollers are forecast to grow at a compound annual
growth rate of 33% between 1999 and 2002. We have begun to capitalize on the
growth in this market. For example, revenues attributable to our one-time
programmable microcontrollers grew 49% from the first half of 1999 to the first
half of 2000. Our devices feature a variety of memory configurations, low
voltage and power, small packaging and ease of use that allow electronics
manufacturers to differentiate their products, add product functionality and
reduce product costs.
Delivering Value-Added Solutions to Our Customers. We are focused on
providing advanced semiconductor solutions that assist our customers in adding
functionality and enhancing the performance of their products. Our efforts in
this regard include:
. Collaborating Closely with Customers. We work closely with our customers
to jointly define our next generation products. We believe that our
strong relationships are a competitive advantage, enabling us to target
our research and development investments more effectively and to
maximize the quality of our decisions on the function, features,
performance, market timing and pricing requirements of our devices.
. Integrating System Functionality into Our Solutions to Enhance
Performance. High levels of integration can enable our customers to
significantly reduce the number of individual components used with our
semiconductor solutions, which can improve system assembly yields,
reduce required board space and enhance performance. We achieve high
levels of integration by actively developing advanced intellectual
property that we integrate into our semiconductors and thereby increase
the value we are able to provide to our customers. We also acquire
advanced intellectual property from outside sources. For example, in
connection with our recently announced Cartezian family of
communications processors, we were the first announced licensee of
Tensilica's high performance 32-bit Xtensa(TM) reduced instruction set
computing, or RISC, core. We expect this family of processors to provide
communications equipment manufacturers with faster processing and
greater space savings, lower power consumption and lower cost per
communications channel.
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. Helping Customers Realize Rapid Time-to-Market. We believe that the
combination of our integrated engineering and wafer fabrication
capabilities enable us to provide rapid design and cost-effective
production of micro-logic devices for targeted markets. We enable our
customers to quickly design our new products into their systems by
providing advanced, intuitive development tools such as our ZiLOG
Developer's Studio, or ZDS. In addition, we are working with suppliers
of third party development tools to facilitate compatibility of their
systems with our devices. We are increasing the number of application
notes, reference designs and sample software applications that we make
available to our customers in order to facilitate the initiation of
their design processes. Through our web site, our customers may download
ZDS and development tool documentation and may access a search engine
that helps them to quickly select the best product for their specific
needs. For high volume original equipment manufacturers, we provide
extensive worldwide field applications engineering support, which
further decreases time-to-market for our customers.
Pursuing Strategic Acquisitions. We pursue key acquisitions to support our
growth strategy. Since April 1999, we have acquired three companies that
provide specialized design capabilities, complementary technologies, design and
engineering resources and/or an opportunity to enter attractive new markets. In
addition, we will exercise our option to acquire the remaining 80% interest in
Qualcore after this offering, which we expect to provide us with an extensive
intellectual property library, rapid design services capability and 114
additional product development engineers.
Utilizing Efficient Manufacturing. We balance our commitment to rapidly
deliver highly integrated, high performance solutions to our customers with our
desire to maximize our return on invested capital. We intend to continue
production of wafers in our own facilities and to augment that production by
using external foundries as appropriate. By utilizing both internal and
external manufacturing resources, we believe we will both optimize our access
to leading edge manufacturing processes and available capacity as well as
reduce our capital and operating infrastructure requirements. As part of our
manufacturing strategy, we intend to continue to utilize third party
contractors to assemble and package our products, which has enabled us to
improve our pricing, cycle times and quality and has allowed us to focus
resources on product design, wafer manufacturing, product testing and customer
support.
Products and Applications
We rely on our knowledge, experience, customer relationships and expertise
in micro-logic devices to target products to compete in the growing
communications and embedded control markets. We work closely with industry
leaders in our target markets to design application specific standard products
and general purpose products that are used for a wide variety of applications.
Through our customer relationships, we have been able to provide innovative
solutions and thereby attract multiple customers that compete in the same
markets.
We currently offer approximately 850 products that are sold in a wide
selection of configurations to over 5,000 original equipment manufacturers and
end-users worldwide in the communications and embedded control markets.
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Existing Communications Products and Applications.
We provide high-performance programmable communications processors that are
adaptable to a variety of communications applications. Our communications
products are designed to process the flow of information in communications
equipment. The following table identifies our best-selling existing
communications products and the applications targeted by these products:
<TABLE>
<CAPTION>
Existing Communications
Products Applications
<S> <C>
Serial Communication Controllers
(SCCs) Switches and Line Cards
-----------------------------------------------------------------------------------------
Z80S180 Microprocessors General purpose processors
Internet gateways
Printer controllers
Cameras
Point-of-Sale terminals
Wide Area Network (WAN) gateways
-----------------------------------------------------------------------------------------
Z80181 and Z80182 Communication WAN controllers
Processors Intelligent serial communication processors
Modems and industrial controls for embedded Internet
communication processing
Small office / small business routers
-----------------------------------------------------------------------------------------
Z80S183 Microprocessors Wireless data modems
Remote access and controls
-----------------------------------------------------------------------------------------
Z80382 Data Communication Local Area Network (LAN) gateways
Processors Integrated Services Digital Network (ISDN) gateways
-----------------------------------------------------------------------------------------
General purpose, high-speed and mobile infrared
Infrared Data Transceivers (IrDA) communications for:
-Personal digital assistants
-Mobile telephones
-Pagers
-Handheld appliances
-Notebook personal computers
-Personal printers
-Network access points
-Universal Serial Bus (USB) infrared data adapters
-Digital cameras
-Wristwatches
-----------------------------------------------------------------------------------------
Wireless Connectivity Application File transfers
Software: Data synchronization
-xConnect Wireless printing
-FileConnect Wireless connectivity management
-PrintConnect
-SyncMonitor
</TABLE>
Serial Communication Controllers. We created the market for serial
communication controllers, commonly known as SCCs, in 1981 with the
introduction of our high-level data link controller, or HDLC. These controllers
are microperipherals used in switches to code and decode information that
enable voice and data communications to be transmitted and received over
telephone lines. We continue to serve this market and provide a wide range of
serial communication controllers with varied functions. In particular, we have
focused on single and dual channel SCCs that are used in everyday
communications.
Z80S180 Microprocessors. The Z80S180 microprocessor is the successor to the
Z180, which expanded the reach of our earlier line of Z80 products to markets
such as point-of-sale, industrial control, gaming and personal digital
assistant devices. In 1991, we integrated the Z180 with SCC peripherals to
produce one of the first network processors to reach the data communication and
telecommunication markets.
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Z80181 and Z80182 Communication Processors. The Z80181 and Z80182 are 8-bit
microprocessors with high-speed communication ports for Internet communication
processing. Unlike other 8-bit processors, the Z80182 includes complete
Internet connectivity software, including a fully compliant transmission
control protocol/Internet protocol stack, commonly referred to as a TCP/IP
stack, and a hyper text transfer protocol, commonly referred to as HTTP, web
server, as well as an integrated hyper text markup language, or HTML,
development environment.
Z80S183 Microprocessors. In the third quarter of 1999, we introduced the
Z80S183, a general purpose microprocessor that focuses on industrial control
and electronic transactions and provides Internet software stacks that enable
communications between stand-alone Internet connected devices. This
microprocessor is able to convert voice and data information from an analog
format into a digital format, and vice versa, helping to speed transmission and
reduce the cost of communications. This product offers an extended set of
communication peripherals that are suitable for use in complex applications in
various segments of the communications market, including the wireless personal
digital assistant and point-of-sale device markets.
Z80382 Data Communication Processor. Our Z80382 data communication processor
is suitable for a broad range of applications, from general purpose use through
high-end local area networks, also known as LANs, and wide area networks, also
known as WANs. With general purpose industry standard architecture, or ISA, and
personal computer memory card international association, or PCMCIA, interfaces,
this device is designed for use in stand-alone, desktop and laptop
applications.
Infrared Data Transceivers. Infrared data transceivers are used for point-
to-point wireless data transmission between a variety of electronic appliances,
including notebook computers, mobile phones and personal digital assistants. We
supply transceivers designed for general purpose data communications in today's
ultra-compact, power conscious portable products such as mobile phones,
wristwatches and handheld computers. We also supply the needs for faster data
communications of personal computers, network access points, digital cameras
and printers.
Wireless Connectivity Application Software. Our wireless connectivity
application software enables the management of a wireless connection and the
transfer of data between personal computers and mobile appliances such as
mobile phones, handheld computers and portable printers.
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Communications Products in Development.
We anticipate commencing commercial shipments of our newest communications
processors over the next 18 months. The following table identifies these
products and the applications for which they are intended:
<TABLE>
<CAPTION>
Communications Products In
Development Applications
<S> <C>
Cartezian Communications
Engine Voice-over Internet Protocol (VoIP) routers
Internet gateways
Local Area Network (LAN) gateways
Integrated Services Digital Network (ISDN) gateways
Wide Area Network (WAN) gateways
Digital Subscriber Lines (DSL)
Asynchoronous Transfer Mode
Small office/home office routers
Cable modems
----------------------------------------------------------------------------------
eZ80 Internet Engine Factory automation
Facility management
Voice-over Internet Protocol
Point-of-Sale terminals
Internet appliances
Storage area networks
----------------------------------------------------------------------------------
ZiLOG Communication
Controllers Local Area Network (LAN) gateways
(ZCCs) Integrated Services Digital Network (ISDN) gateways
Wide Area Network (WAN) gateways
Network controllers
----------------------------------------------------------------------------------
Z80S188 Microprocessors Internet gateways
Point-of-Sale terminals
Internet appliances
Electronic games
Home and office security systems
</TABLE>
Cartezian Communications Engine. Our Cartezian Communications Engine, which
we expect to introduce in the second half of 2001, is a family of embedded
communications processors that will be designed to combine the efficiency of
reduced instruction set computing, known as RISC, with the high-end performance
of digital signal processors or DSPs. The Cartezian solution is being built
around multiple, high performance processing elements supported by an extensive
set of communications peripherals and software stacks. The Cartezian
Communications Engine will embed a main processor to handle system control and
data manipulation, a digital signal processor to process voice and a
communication engine to configure and manage the interfaces to support these
different media. This product is expected to bridge between LANs and WANs,
providing the flexibility and performance necessary to handle varying network
access technologies, such as ISDN, DSL, cable modems and asynchronous transfer
mode. Cartezian Communications Engines will include all the software stacks
that are required to enable these communications processes and protocols to
operate together.
One of the main features of Cartezian products will be Voice-over Internet
Protocol, or VoIP. The first generation of our Cartezian products is expected
to provide four-channel VoIP capability and a low-cost system solution for
expanded voice and data transfer for the home, small office and small business.
We expect that the next generation of Cartezian processors will expand to
provide eight channels of VoIP capability to provide data communications
solutions for larger businesses. We expect that subsequent generation Cartezian
processors will target higher capacity switches that enable and facilitate the
communication of voice, data and video between businesses and their discrete
systems.
eZ80 Internet Engine. The eZ80 Internet Engine, which is expected to be
available in the fourth quarter of 2000, is a high-performance 8-bit embedded
microprocessor enabling Internet connectivity and a clear
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migration path for existing Z80 and Z180 customers. This new eZ80 architecture
is expected to enable the processor to function 10 to 16 times faster than the
widely used Z80 processor while occupying only one-quarter of the space and
consuming less than half of the power. Using a multiply accumulator, as found
in digital signal processors, the eZ80 Internet Engine is expected to be able
to execute secure communications algorithms with Internet connected
applications and equipment, whether consumer or industrial, from anywhere its
user accesses the Internet.
The eZ80 Internet Engine will include Internet connectivity software that
will allow users to communicate with their devices through the Internet using
HTML, the Internet's standard communication language. This software is expected
to simplify and reduce the customers' product development cycle time.
Both the eZ80 Internet Engine and Cartezian Communications Engine will offer
TCP/IP, the standard of Internet communication, and HTTP to enable users to
code their applications in HTML. This software suite will provide web
management capability to its user from any point of Internet access to remotely
manage, control, diagnose and reconfigure products in which these processors
are embedded. We believe that this software solution will reduce the time our
customers invest in getting their products to market.
ZiLOG Communication Controller. Building on the established technologies
used in our serial communication controllers, we are currently developing a
higher-end SCC which we refer to as the ZiLOG Communication Controller, or ZCC.
We anticipate that this controller will deliver eight physical channels that
will have the capacity to carry 256 phone calls simultaneously, significantly
more than the 128 phone calls carried by the largest capacity SCC currently
available. We intend to introduce the ZCC by early 2001.
Z80S188 Microprocessors. We anticipate introducing our newest
microprocessor, the Z80S188, during the fourth quarter of 2000. The Z80S188 is
expected to be compatible with the products designed with the existing Z80S180
and will augment our similar existing products with an extended suite of
software that will offer additional functionality to the customers' end
product. The Z80S180 will offer TCP/IP, the most popular protocol of Internet
communication, and HTTP to enable customers to code their application in HTML.
As in the Cartezian Communications Engine and eZ80 Internet Engine, the
combination of these software items in the suite will provide web management
capability to remotely manage, control, diagnose and reconfigure the product in
which the Z80S188 is embedded from any point of Internet access. We expect that
this suite of software programming will reduce the time our customers must
spend getting their products to market.
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Existing Embedded Control Products and Applications.
We provide embedded controllers that are adaptable for use in a variety of
consumer products and industrial equipment. These microcontrollers are designed
to provide increased functionality, performance and ease of use in the products
in which they are embedded. The following table identifies our best-selling
existing embedded control products and the applications targeted by these
products:
<TABLE>
<CAPTION>
Existing Embedded Control
Products Applications
-----------------------------------------------------------------------------
Home Entertainment
<C> <S>
eZSelect Vertical Blanking Interval Closed caption decoding
Decoders Parental control V-chips
Auto time set
Station call letters
-----------------------------------------------------------------------------
eZVision On-Screen Display Controllers Television on-screen displays
-----------------------------------------------------------------------------
Infrared Remote Controllers Infrared remote controls for:
- Multi-brand televisions
- Videocassette recorders
- Set-top box remote controls
Infrared keyboards
<CAPTION>
Field Programmable Microcontrollers
<C> <S>
Microcontrollers for use in consumer
Z8 Microcontrollers, and industrial applications,
Z8Plus Microcontrollers such as:
- Battery chargers
- Appliance controls
- Garage door openers
- Exercise equipment
- Electric toothbrushes
- Security systems
- Automated utility meter readers
- Point-of-Sale terminals
- Telephones
- Keyboards
- Pointing devices (e.g., computer
mouse)
</TABLE>
eZSelect Vertical Blanking Interval Decoders. Our vertical blanking interval
products exploit the portion of a television signal that carries information
other than video or audio such as test signals, closed caption displays,
electronic program guides, program rating information, extended data services
and teletext information. Our products, such as the V-chip, decode closed
captioning and program rating information to allow consumers to block offensive
television content and provide the auto time-set function for televisions and
video cassette recorders.
eZVision On-Screen Display Controllers. We are a leading supplier of
television on-screen display controllers. On-screen display controllers enable
manufacturers to develop unique on-screen graphics and to generate text in any
language for the display of special icons and information such as channel
numbers and volume settings, as well as electronic program guide information.
The hardware and software development tools for this allow the user to create
and test proposed new television screen designs quickly and economically using
a personal computer display, shortening the overall design cycle.
Infrared Remote Controllers. We are a leading supplier of 8-bit
microcontrollers for television, video cassette recorder, cable and satellite
set-top box remote control applications. We offer a complete family of
efficient low-voltage, large memory-size Z8 microcontrollers customized for use
in battery-operated infrared remote control and infrared keyboard applications.
We specialize in multi-brand or universal remote controls that support up to
300 infrared codes and consolidate multiple single-function infrared remotes
into one multifunction remote control.
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<PAGE>
Z8 and Z8Plus. The Z8 is a standard microcontroller that has been in use for
over 20 years. This microcontroller is used in a wide variety of everyday
products from battery chargers to coffeepots. Based on this standard
technology, we have developed the next generation Z8 microcontroller, the
Z8Plus. The Z8Plus offers higher performance and functionality than the Z8
while reducing noise output and power requirements.
Embedded Control Products in Development.
We intend to introduce our newest embedded control products over the next
nine months. The following table identifies these new embedded control
products, as well as the markets and applications for which they are intended:
<TABLE>
<CAPTION>
Embedded Control
Products In Development Applications
---------------------------------------------------------------------------
Home Entertainment
<C> <S>
Digital video decoders Digital video decoding with on-screen display
Integrated vertical blanking interval decoding
Deflection control
<CAPTION>
Field Programmable
Microcontrollers
<C> <S>
Wizard Microcontrollers Multiple applications for consumer and industrial
control
Muze Microcontrollers products, such as:
- Motor controls
- Appliance controls
- Battery chargers
- Security systems
</TABLE>
Digital Video Decoders. As television performance and price become more
competitive, manufacturers must continually strive to reduce overall costs.
Multi-chip modules and system-on-a-chip solutions that integrate the multiple
microcontrollers in current chassis designs into a single chip or module are
being sought. Video processing is a rapidly-growing area within the television
and video arenas.
The first video decoder product, scheduled to be commercially available in
the first half of 2001, will offer a single-chip alternative to the multiple-
chip television controllers currently available. The first video decoder
product is expected to provide an advanced, multi-standard video decoder,
powerful on-screen display engine and deflection control for projection
television and direct view color television. This product will process analog
broadcast signals digitally to provide a high quality video picture.
Wizard Microcontrollers. We are developing the Wizard family of field
programmable microcontrollers that are based on the Z8Plus microcontroller and
will contain at least 4,000 bytes of one-time programmable memory and 128,000
bytes of random access memory, otherwise known as RAM. The Wizard family will
contain a series of analog peripherals on a chip designed for use in motor
control applications in appliances, power tools, vending machines and office
products. The Wizard family will also provide a high level of system
integration features that may result in lower costs for our customers. Other
members of the Wizard family will be designed for use in many other
applications that need to control analog functions, such as battery chargers
and security systems. The Wizard family is expected to be in production
beginning in the first quarter of 2001.
Muze Microcontrollers. We have recently announced our development of the
Muze family of field programmable microcontrollers. The ten products in the
Muze family will be based on the Z8 microcontroller and will have one-time
programmable memory capabilities ranging from 4,000 to 64,000 bytes. This
microcontroller family, scheduled to begin production in the fourth quarter of
2000, is expected to have many applications including, for example, security
systems, industrial control and appliances.
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Development Tools
We offer a comprehensive set of low cost and easy-to-learn application
development tools. These tools enable system designers to quickly and easily
program our microcontrollers and processors for specific applications and are a
key factor for obtaining design wins.
ZiLOG's Developer Studio, which we refer to as ZDS, is a complete stand-
alone software program that provides an all-in-one development environment for
designers using our comprehensive line of development tools. ZDS integrates a
language-sensitive editor, project manager C-compiler, assembler, linker and
symbolic debugger that supports our entire line of Z8, Z8Plus, eZ80, Z80S180
and DSP processors. ZDS provides a standard user interface that revolves around
a Windows(R)-based environment. The program contains an integrated set of
windows, document views, menus and toolbars which enable developers to create,
test and refine applications without having to alternate from one screen or
program to another.
Many independent companies also develop and market application development
tools and systems that support our standard product architecture. We believe
that familiarity with, and adoption of, our and third-party development systems
by an increasing number of product designers will be an important factor in the
future selection of our products. These development tools allow design
engineers to develop thousands of applications from our standard products.
Customers, Sales and Marketing
We use a total marketing approach to build relationships with a targeted
list of original equipment manufacturers, distributors and end-users in the
communications and embedded control markets. The following is a list of our top
customers in terms of sales, by business segment, over the six months ended
July 2, 2000:
<TABLE>
<CAPTION>
Communications Customers Embedded Control Customers
---------------------------------------------------------
<S> <C>
Alcatel Black & Decker
Cisco Systems Chamberlain Group
Handspring Daewoo
Hypercom Digital Security Controls
Hewlett-Packard Hitachi
Lucent Technologies Icon Health & Fitness
Multi-Tech Systems Recoton/STD Manufacturing
Nortel Samsung
Palm Computing SMK
Texas Instruments Thomson/RCA
</TABLE>
To effectively market our products to our customers, we utilize a well-
trained and highly-skilled direct sales and distribution sales force, a
customer-centric website, technical documentation that includes product
specifications and application notes, development tools and reference designs,
sales promotional materials, targeted advertising and public relations
activities, and involvement in key trade shows and technical conferences in
North America, Europe and Asia. In the first half of 2000, we derived
approximately 55% of our net sales from direct sales to original equipment
manufacturers, compared to 59% in 1999, and 45% from sales through
distributors, compared to 41% in 1999.
We have instituted a unique team-based selling approach for reaching high-
volume customers in the communications market. After key customers are
identified, a cross-functional team of our employees contacts their key
decision-makers and we present the customer with all aspects of the solution
represented by the various disciplines on the team. Our teams provide a
comprehensive view of our products that enables the customer to make an
informed decision more easily. By using this method, we have generated
substantial interest in our new communications products among the leaders in
the communications industry.
Our direct sales force of approximately 100 people focuses on four
geographic areas: Americas, Europe, Asia and Japan. We have sales offices
located in the metropolitan areas of Atlanta, Austin, Boston, Campbell,
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Chicago, Cleveland, Dallas, El Paso, Los Angeles, Minneapolis, Philadelphia,
Portland, San Diego, Beijing, Hong Kong, Kuala Lumpur, London, Munich, Seoul,
Shanghai, Shenzhen (China), Singapore, Soemmerda (Germany), Taichung City
(Taiwan), Taipei, Tokyo, Toronto and Vancouver.
We provide direct customer support through our field application engineers,
who are located in our sales offices around the world and work directly with
local customers in close consultation with our factory-based technical
specialists. Field application engineers typically develop technology expertise
in a market segment that is most prominent in their geographic areas. These
engineers provide significant aid to the customer throughout the design
process. Customer support for the Americas and Japan is handled by our customer
support center in Austin, Texas. This facility provides responses for
customers' technical questions, product availability and order entry
administration. Our local area sales offices handle customer service functions
for Asia and Europe.
In January 2000, we announced an exclusive full-service distribution
agreement with Pioneer-Standard in North America and our intention to terminate
our existing relationships with our three largest distributors in North
America: Arrow Electronics, Future Electronics and Unique Technologies. In
1999, these three distributors collectively purchased $42.3 million of our
products. By virtue of this exclusive agreement, we receive more dedicated
sales and marketing resources from Pioneer-Standard than from our previous
three distributors combined. These resources include sales representatives
focused full-time on our business. co-operative trade advertising, seminars and
workshops to train design engineers about our products, direct mail advertising
and collateral materials and website pages dedicated to our products. As of
July 2, 2000, we had substantially completed the termination of our
relationships with Future Electronics and Unique Technologies, and we expect to
complete the termination of our relationship with Arrow Electronics by the end
of the third quarter of 2000.
Pioneer-Standard accounted for approximately 10.4% of our net sales during
the first half of 2000. During the years ended December 31, 1999 and 1998,
Arrow Electronics accounted for approximately 12.6% and 10.5% of our net sales,
respectively. In early 2000, we terminated our North American distribution
agreement with Arrow Electronics.
Manufacturing and Sourcing
We operate two semiconductor fabrication facilities in Idaho. We are
currently producing at .35, .65, .8 and 1.2 micron geometries. For the six-
month period ended July 2, 2000, we estimate that our wafer fabrication
facilities were operating at approximately 76% of capacity which should enable
us to capitalize on future upswings in industry demand. We also believe that
our manufacturing facilities provide cost and quality competitive advantages.
We conduct most of our final test operations at our facility in the Philippines
and outsource our assembly operations to subcontractors primarily in Indonesia
and the Philippines. We expect to outsource the manufacture of our Cartezian
products and several other products to third party foundries as volume and
return on capital considerations so dictate.
A skilled workforce is very important to high productivity in semiconductor
manufacturing. We maintain extensive personnel training and certification
programs in our plants and believe that this leads to lower turnover and higher
worker involvement. Our manufacturing operations are managed through the use of
statistical process control techniques.
ISO 9001 and 9002 certifications were granted to our facilities in Idaho by
the National Standards Authority of Ireland and an ISO 9002 certification was
granted to our Philippines test facility by the SGS International Certification
Services AG of Zurich, Switzerland. ISO certifications reflect the stringent
quality standards to which all of our products are manufactured. We believe
that these certifications enhance the reputation and quality of our products.
Research and Development
As of July 2, 2000, we employed 173 people in research and development as
compared to 150 people as of July 4, 1999. Expenditures for research and
development in 1999 were $32.8 million and represented 13% of
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net sales, in 1998 were $28.8 million and represented 14% of net sales and in
1997 were $30.5 million and represented 12% of net sales. Expenditures for
research and development during the first half of 2000 were $18.8 million,
representing 16% of net sales.
We believe that the continued introductions of new product solutions in our
target markets are essential to our growth. In July 2000, we acquired Calibre,
which added 10 engineers to our staff. In addition, in the first half of 2000,
we acquired approximately 20% of the common stock of Qualcore and an option to
purchase the remaining 80% interest in Qualcore, which we will exercise after
the completion of this offering. We expect that the acquisition of Qualcore
will add 114 engineers to our staff. As a result of these acquisitions, we
expect to employ over 350 engineers, who will create most of our new products
through the use of our proprietary design library.
During 1999, we focused on growing and enhancing our research and
development in the areas of product design and tool development. In April 1999,
we acquired the assets of Seattle Silicon Corporation, which offers product
design capability for analog and mixed signal system-on-a-chip technology. In
the fourth quarter of 1999, we opened a design center in Bangalore, India, and
we also acquired the assets of Production Languages Corporation in Fort Worth,
Texas. Both the India Design Center and the former Production Languages
Corporation are focused on development of embedded software and development
tools optimized for our products.
Competition
The semiconductor industry is characterized by price erosion, rapid
technological change and heightened competition in many markets. The industry
consists of major domestic and international semiconductor companies, many of
which have substantially greater resources than ours with which to pursue
engineering, manufacturing, marketing and distribution of their products.
Emerging companies are also expected to increase their participation in the
semiconductor market.
We compete with other micro-logic device manufacturers who target the same
specific market segment. Our current and future communications products compete
with, or are expected to compete with, products offered by Advanced Micro
Devices, ARM, Atmel, Dallas Semiconductor, Intel, Lucent Technologies, MIPS
Technologies, Mitel, Motorola, NEC, NetSilicon, Philips, PMC-Sierra, Scenix,
Sharp, Texas Instruments and Toshiba. Our current and future embedded control
products compete with, or are expected to compete with, products offered by
Atmel, Hitachi, Intel, Microchip, Mitsubishi, Motorola, NEC, Philips, Samsung,
Sanyo, Sharp, ST Microelectronics and Toshiba. However, we believe that no
single competitor addresses exactly the same set of products or markets as we
do.
Backlog
Our total backlog of released orders was $55.6 million as of July 2, 2000 as
compared to $42.7 million as of July 4, 1999. Our sales are generally made
pursuant to short-term purchase orders rather than long-term contracts. As a
result, our backlog may not be an accurate measure of net sales or operating
results for any period.
Patents and Licenses
As of July 2, 2000, we held 108 U.S. and 8 foreign patents and had 42 U.S.
and 17 foreign patent applications pending. We have more than 79 U.S. mask work
registrations on our products. We hold copyright registrations to protect
proprietary software employed in over 100 of our products. We have 5 registered
trademarks and have common law rights in more than 40 trademarks or
servicemarks.
In addition, we have more than 150 active licenses for product or technology
exchange. The purpose of these licenses has, in general, been to provide second
sources for standard products or to convey or receive rights to valuable
proprietary or patented cores, cells or other technology.
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Employees
As of July 2, 2000, we had 1,377 full-time employees, including 967 in
manufacturing, 173 in research and development, 166 in sales and marketing and
71 in finance and administration. In January 1999, we terminated 384 employees
in connection with the outsourcing of our Philippines assembly operations. In
June 2000, we transferred 12 employees to our communications business segment
and terminated 24 other employees in connection with our shift in business
strategy to focus on communications products. We consider our relations with
our employees to be good and believe that our future success will depend, in
large part, upon our ability to attract, retain, train and motivate our
employees. None of our employees are represented by labor unions.
Environmental
Our manufacturing processes require substantial use of various hazardous
substances, and, as a result, we are subject to a variety of governmental laws
and regulations related to the storage, use, emission, discharge and disposal
of such substances, including the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response, Compensation and Liability Act, the
Superfund Amendment and Reauthorization Act, the Clean Air Act and the Water
Pollution Control Act. We believe that we have obtained all material
environmental permits necessary to conduct our business.
In February 1999, our facilities in Idaho received ISO 14001 certification
by the National Standards Authority of Ireland, an independent auditor of
environmental management systems. We believe that ISO 14001 certification is
widely recognized as the global standard for measuring the effectiveness of a
company's environmental management. To qualify, companies must implement an
environmental management system, comply with all relevant regulations, commit
to prevent pollution, adopt a program of continual improvement, and submit to
periodic outside audits of their environmental management system. Our
environmental management system controls and monitors all of the ways in which
we impact the environment, including air quality, water use, conservation,
waste disposal and chemical handling.
Properties
Our headquarters are located in Campbell, California in a 108,000 square
foot facility leased through February 2004. We perform wafer fabrication at our
77,000 square foot and 128,000 square foot buildings located on a 65-acre site
in Nampa, Idaho. We own these Idaho facilities. Most of our final test
operations are performed at our 54,000 square foot facility in the Philippines,
which is leased through 2004. We have leased a 17,249 square foot customer
support and engineering design center in Austin, Texas through February 2003.
We have leased 3,152 square feet in Bellevue, Washington that we use as an
engineering design center. This lease, which we expect to renew through July
31, 2003, currently expires on July 31, 2000. In 1999, we opened a design
center in Bangalore, India and effective May 1, 2000, we entered into a lease
in that area for approximately 10,172 square feet which expires in April 2005.
In addition, we have short-term leases for our sales offices located in the
United States, Canada, England, Germany, Japan, Korea, Malaysia, the People's
Republic of China (including Hong Kong), Singapore and Taiwan. We believe that
our existing facilities will be adequate to meet our requirements for at least
the next 12 months.
Legal Proceedings
We have been named as a defendant in a purported class action lawsuit that
was filed on January 23, 1998 in the U.S. District Court for the Northern
District of California. Some of our executive officers are also named as
defendants. The plaintiffs purport to represent a class of all persons who
purchased our common stock between June 30, 1997 and November 20, 1997. The
complaint alleges that we and some of our executive officers made false and
misleading statements regarding our business that caused the market price of
our common stock to be artificially inflated during the defined period. The
complaint does not specify the amount of damages sought. On March 24, 1999, the
court granted our motion to dismiss and entered judgment in favor of all
defendants. On April 16, 1999, the plaintiffs filed their notice of appeal with
the Ninth Circuit of
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Appeals. This appeal was fully briefed and argued to the Ninth Circuit Court of
Appeals on June 8, 2000. Based upon information presently known to management,
we are unable to determine the ultimate resolution of this lawsuit or whether
it will materially harm our business.
We are a party to an insurance coverage lawsuit in the Superior Court of the
State of California in and for Santa Clara County filed on July 29, 1996, in
which our former insurers, Pacific Indemnity Company, Federal Insurance Company
and Chubb & Son, Inc., claim that insurance coverage did not exist for
allegations made in two underlying lawsuits brought by some of our employees
and their families who claimed that they suffered personal injuries and
discrimination because of alleged exposure to chemicals at our manufacturing
plant in Idaho in 1993 and 1994. The insurers seek a declaration that insurance
coverage under the applicable policies did not exist, and they seek
reimbursement of attorneys' fees, costs, and settlement funds expended on our
behalf totaling approximately $6.3 million plus interest. Both the insurers and
we have each brought separate motions for summary judgment or, in the
alternative, motions for summary adjudication. All such motions were denied by
the Superior Court, and the Court of Appeals denied each party's respective
petition for review of each denial of their summary judgment motions. We
petitioned the California Supreme Court for review of the denial of our motion
for summary judgment. The California Supreme Court denied our petition for
review without making a decision on the merits of the dispute. The insurers
have renewed their motion for summary adjudication. We are opposing that
motion. No trial date has been set. Based upon information presently known to
us, we are unable to determine the ultimate resolution of this lawsuit or
whether it will materially harm our business.
Four parties have notified us that we may be infringing their patents and
other intellectual property rights. In the event we determine that such notices
may involve meritorious claims, we may seek a license. Based on industry
practice, we believe that in most cases any necessary licenses or other rights
could be obtained on commercially reasonable terms. However, we cannot make any
assurances 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 materially
harm our business.
We are participating in other litigation and responding to claims arising in
the ordinary course of business. We intend to defend our interests vigorously
in these matters. Our management believes that it is unlikely that the outcome
of these matters will materially harm our business, although we cannot make any
assurances in this regard.
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RECENT AND PENDING TRANSACTIONS
Qualcore
On March 22, 2000, we acquired 20% of the outstanding common stock of
Qualcore Group, Inc., along with an option to purchase the remaining 80%
interest, for $8.1 million in cash, including expenses. Qualcore is a holding
company with two wholly owned subsidiaries: Qualcore Logic Private Limited of
Hyderabad, India and Virtual IP Group, Inc., based in Sunnyvale, California.
The company has approximately 114 engineers. Qualcore specializes in designing
general purpose microcontrollers and microprocessors, as well as application
specific standard products using soft processor cores. Pursuant to the purchase
and sale agreement with Qualcore, we will be obligated to exercise the option
within 30 days of the completion of this offering. We will pay a total of $14.1
million, payable at our election in either cash or our common stock or in some
combination of cash and common stock, to exercise the option. The value of any
stock-based portion of this consideration will be determined based on the
average of the closing prices for our stock on each of the five trading days
immediately following the completion of this offering. Assuming that the
average of the closing prices for our stock on each of the five trading days
immediately following the completion of this offering is $ , the mid-point of
the filing range, we would issue shares of our common stock in connection
with the exercise of the Qualcore option if we elect to pay the exercise price
in our stock.
Calibre
On July 27, 2000, we acquired all of the outstanding shares of Calibre, Inc.
in exchange for 629,666 shares of our common stock. Calibre provides a fully
integrated family of products and services enabling universal wireless
connectivity among portable computers, mobile information appliances and the
network infrastructure. Prior to the acquisition by us, Calibre employed 10
engineers and was located in San Jose, California. In connection with this
acquisition, we agreed to convert all the stock options that had vested
pursuant to Calibre's 1998 Stock Option Plan as of the closing date of the
acquisition into vested options to purchase shares of our common stock. As a
result of this agreement, 114,048 shares of our common stock are issuable upon
the exercise of these options. Up to an additional 527,799 shares of common
stock may be issued to former Calibre stockholders in the event that Calibre
achieves specified financial goals within 12 months after the closing of the
acquisition.
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MANAGEMENT
Executive Officers and Directors
Our executive officers, directors and key employees, their ages and
positions as of July 2, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Curtis J. Crawford.... 52 Chairman, President, Chief Executive Officer and
Director
William S. Price III.. 43 Director
David M. Stanton...... 37 Director
Murray A. Goldman..... 63 Director
Richard S. Friedland.. 49 Director
Lionel S. Sterling.... 63 Director
John W. Marren........ 37 Director
Alice Baluni.......... 54 Senior Vice President, Chief Reliability and
Quality Assurance Officer
Michael J. Bradshaw... 51 Senior Vice President, Worldwide Operations
Michael D. Burger..... 42 Senior Vice President, and General Manager, Field
Programmable Microcontroller Business Unit
Gerald J. Corvino..... 52 Senior Vice President and Chief Information
Officer
Robert G. Couch....... 48 Senior Vice President and Chief Communications
Officer
Aydin Koc............. 49 Senior Vice President and General Manager, Home
Entertainment
Didier J. LeLannic.... 42 Senior Vice President and General Manager,
Communications Business Unit
Steven C. Mizell...... 40 Senior Vice President and Chief Human Resources
Officer
Richard L. Moore...... 65 Senior Vice President and General Manager,
Professional Services
Gary Patten........... 39 Senior Vice President and Chief Financial Officer
Richard R. Pickard.... 47 Senior Vice President, General Counsel and
Secretary
Edward P. Ponganis.... 50 Senior Vice President and Chief Technology
Officer
W. Norman Wu.......... 47 Senior Vice President and Chief Strategy Officer
</TABLE>
Curtis J. Crawford became our President, Chief Executive Officer and one of
our directors upon our recapitalization merger with an affiliate of Texas
Pacific Group. In May 1999, Mr. Crawford was named Chairman of our board of
directors. From 1997 to 1998, Mr. Crawford was Group President of the
Microelectronics Group and President of the Intellectual Property division of
Lucent Technologies. From 1995 to 1997, he was the President of the
Microelectronics Group. From 1993 to 1995, prior to the formation of Lucent
Technologies, Mr. Crawford was President of AT&T Microelectronics, a business
unit of AT&T Corporation. From 1991 to 1993, he held the position of Vice
President and Co-Chief Executive Officer of AT&T Microelectronics. From 1988 to
1991, he held the position of Vice President, Sales, Service and Support for
AT&T Computer Systems. Prior to that, he served in various sales, marketing and
executive management positions at various divisions of IBM. Mr. Crawford holds
a Bachelor of Arts in Computer Sciences and a Master of Arts in Marketing from
Governors State University. In addition, he received a Master of Business
Administration from the Charles H. Kellstadt Graduate School of Business at
DePaul University. Mr. Crawford received his Doctorate of Philosophy in
Organization and Management from the Graduate School of Capella University in
July 1999. He currently serves as Chairman of the board of directors of ON
Semiconductor and as a member of the board of directors of E. I. DuPont and ITT
Industries, Inc. Additionally, he serves as a member of the Board of Trustees
of DePaul University.
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William S. Price III became one of our directors upon our recapitalization
merger with an affiliate of Texas Pacific Group. Mr. Price was a founding
partner of Texas Pacific Group in 1993. Prior to forming Texas Pacific Group,
Mr. Price was Vice President of Strategic Planning and Business Development for
GE Capital, and from 1985 to 1991 he was employed by the management consulting
firm of Bain & Company, attaining partnership status and acting as co-head of
the Financial Services Practice. Mr. Price is a graduate of Stanford University
and received a Juris Doctorate from the Boalt Hall School of Law at the
University of California at Berkeley. He serves on the boards of directors of
Belden & Blake Corporation, Beringer Wine Estates, Continental Airlines, Del
Monte Foods, Denbury Resources, Inc., First World Communications, numerous
private companies and The American Center for Wine, Food and Arts.
David M. Stanton became one of our directors upon our recapitalization
merger with an affiliate of Texas Pacific Group. He is a founding partner of
Francisco Partners, a technology buyout firm. Mr. Stanton was a partner of
Texas Pacific Group from 1994 until August 1999. From 1991 until he joined
Texas Pacific Group in 1994, Mr. Stanton was a venture capitalist with Trinity
Ventures, where he specialized in information technology, software and
telecommunications investing. Mr. Stanton received a Bachelor of Science in
Chemical Engineering from Stanford University and a Master of Business
Administration from the Stanford Graduate School of Business. Mr. Stanton
serves on the boards of directors of Denbury Resources, GlobeSpan, ON
Semiconductor and Paradyne Networks, Inc.
Murray A. Goldman joined our board of directors in August 1998. He was
employed at Motorola beginning in 1969 after six years at Bell Telephone
Laboratories. Dr. Goldman assumed operational responsibility for the Motorola
microprocessor business in 1976. He retired from Motorola in 1997 as Executive
Vice President and Assistant General Manager of the Semiconductor Products
Sector. Dr. Goldman serves as Chairman of the board of directors of Transmeta
Corporation, and is a member of the board of directors of Wafer Scale
Integration. He was awarded a Masters and a Doctorate from New York University
after receiving a Bachelor of Science in Electrical Engineering from the
University of Pittsburgh.
Richard S. Friedland joined our board of directors in August 1998. He was
previously associated with General Instrument Corporation. During his 19-year
tenure, Mr. Friedland held various executive positions, including Chief
Financial Officer, President and Chief Operating Officer. In 1995, he was
appointed Chairman of the board of directors and Chief Executive Officer. Mr.
Friedland currently serves on the boards of directors of Tech-Sym Corporation,
Applied Digital Solutions, Inc. and Video Network Communications, Inc., as well
as several privately-held development stage companies. Mr. Friedland holds a
Bachelor of Science in Accounting from Ohio State University and a Master of
Business Administration from Seton Hall University.
Lionel N. Sterling was appointed to our board of directors in January 2000.
Since 1987, Mr. Sterling has served as President of Equity Resources, Inc., a
private investment firm. From 1982 to 1986, he served as Chairman of the board
of directors of Rayovac Corporation. Mr. Sterling is currently a member of the
board of directors of i-Stat Corporation, Ludlow Corporation, Matting
Technology Corporation and Model Service Agency, Inc. Mr. Sterling received a
Master of Business Administration from New York University's Graduate School of
Business after receiving his Bachelor of Arts in Economics from Brooklyn
College.
John W. Marren joined our board of directors in June 2000. Mr. Marren has
been a partner of Texas Pacific Group and leader of Texas Pacific Group's
technology team since April 2000. From 1996 to 2000, Mr. Marren was a Managing
Director at Morgan Stanley Dean Witter, most recently as co-head of the
Technology Investment Banking Group. From 1992 to 1996, Mr. Marren was a
Managing Director and Senior Semiconductor Research Analyst at Alex. Brown and
Sons. Mr. Marren also serves on the boards of directors of GlobeSpan and Zhone
Technologies, and on the advisory board for the Intel 64 Venture Fund.
Mr. Marren received his Bachelor of Science in Electrical Engineering from the
University of California at Santa Barbara.
Alice Baluni has served as our Senior Vice President, Chief Reliability and
Quality Assurance Officer since 1998. From 1993 to 1998, Ms. Baluni served as
our Vice President of Reliability and Quality Assurance.
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From 1986 to 1993, Ms. Baluni served as our Director of Reliability and Quality
Assurance. From 1985 to 1986, Ms. Baluni served as our Test Engineering
Manager. Before joining us in 1985, Ms. Baluni was the Product Engineering
Manager at Signetics, a Senior Design Engineer at Synertek and an Engineering
Supervisor for Intel. Ms. Baluni holds a Master of Engineering Management from
Santa Clara University and a Master of Physics of Semiconductors from Moscow
State University.
Michael J. Bradshaw has served as our Senior Vice President, Worldwide
Operations since March 1985. From 1982 to 1985, Mr. Bradshaw was the Vice
President, Operations Planning and Control of General Instrument
Microelectronics. Mr. Bradshaw holds a Bachelor of Science in Math from the
University of Missouri and a Master of Business Administration from the
University of Houston.
Michael D. Burger has served as our Senior Vice President of Worldwide Sales
since November 1998. From December 1997 to November 1998, Mr. Burger was Vice
President of Sales and Marketing at QuickLogic Corporation. Prior to December
1997, Mr. Burger held several positions with National Semiconductors Asia
Division based in Hong Kong, including Vice President and General Manager,
Director of Marketing and Director of Sales. Mr. Burger holds a Bachelor of
Science in Analog Design from New Mexico State University.
Gerald J. Corvino has served as our Senior Vice President and Chief
Information Officer since June 1998. From March 1996 to May 1998, Mr. Corvino
served as Senior Vice President and Chief Information Officer for Oracle
Corporation. From February 1994 to February 1996, Mr. Corvino served as Senior
Vice President and Chief Information Officer for AT&T Microelectronics.
Robert G. Couch has served as our Senior Vice President and Chief
Communications Officer since August 1998. From 1997 to 1998, Mr. Couch served
as Senior Vice President, Corporate Relations at Visa USA. From 1981 to 1997,
Mr. Couch served in several positions at Anheuser-Busch Companies, Inc., most
recently as Director of International Communications. Mr. Couch holds a Master
of Arts in Communications from the University of Memphis and a Bachelor of Arts
in History from Christian Brothers University.
Aydin Koc has served as the Senior Vice President and General Manager of our
home entertainment business unit since August 1998. From December 1997 to June
1998, Mr. Koc served as President of the Optical Storage Group at Oak
Technology, Inc. and as Vice President and General Manager of the Optical
Storage Group from September 1996 to December 1997. From October 1994 to August
1996, Mr. Koc served as Director Worldwide ASIC Marketing at LSI Logic
Corporation. Mr. Koc holds a Master of Business Administration from Stanford
University and both a Master of Science and a Bachelor of Science in
Electronics Engineering from Middle East Technical University.
Didier J. LeLannic has served as the Senior Vice President and General
Manager of our communications segment since November 1998. From June 1997 to
October 1998, Mr. LeLannic was the General Manager of the PCI RAID division of
Adaptec. From October 1994 to May 1997, Mr. LeLannic served as Executive Vice
President of Pertec Memories, Inc. From November 1992 to November 1994, Mr.
LeLannic was Vice President and General Manager of ATG Cygnet Inc. Prior to
November 1992, Mr. LeLannic was International Sales Support Director for
Alcatel Thompson Gigadise SA. Mr. LeLannic holds a Master of Physics from the
University of Montpellier. He also holds a Master of Data Signal Processing and
a Bachelor of Science in Electro-mechanics and Electronics from the University
of Saint Etienne.
Steven C. Mizell has served as our Senior Vice President and Chief Human
Resources Officer since October 1998. From November 1985 to July 1998, Mr.
Mizell held several positions at CBS Corporation (formerly Westinghouse
Electric Corporation) culminating with the position of Vice President of Human
Resources and Operations. Mr. Mizell holds a Bachelor of Science in Industrial
Management from Georgia Institute of Technology and a Master of Science from
Carnegie Mellon University.
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Richard L. Moore has served as our Senior Vice President and General
Manager, Professional Services since May 2000. From March 1998 to May 2000, Mr.
Moore served as our Senior Vice President of Technology and Chief Technology
Officer. From May 1996 to March 1998, Mr. Moore served as our Senior Vice
President of Engineering. From May 1995 to May 1996, Mr. Moore served as our
Vice President of Engineering. Mr. Moore holds a Bachelor of Science from Saint
Mary's College.
Gary Patten has served as our Senior Vice President and Chief Financial
Officer since November 1999. From June 1998 to November 1999, Mr. Patten served
as Executive Vice President and Chief Financial Officer at Rockshox Inc. From
June 1997 to June 1998, Mr. Patten served as Chief Financial Officer for
Powermate, a Division of The Coleman Company. From October 1996 to June 1997,
Mr. Patten served as Director, Corporate Financial Planning and Analysis for
The Coleman Company. Mr. Patten served as Manager of Business Analysis and
Financial Planning for Lexmark International from December 1994 to October
1996. Mr. Patten holds a Master of Business Administration from the University
of Michigan and a Bachelor of Science from the University of California at
Berkeley.
Richard R. Pickard has served as our Senior Vice President, General Counsel
and Secretary since May 1998. From 1992 to 1998, Mr. Pickard served as our Vice
President, General Counsel and Secretary. From 1987 to March 1992, Mr. Pickard
served as our General Counsel and Secretary. Prior to joining us in 1987,
Mr. Pickard was Corporate Counsel at NEC Electronics, Inc. and in private legal
practice. Mr. Pickard holds a Juris Doctor from William and Mary and a Bachelor
of Arts from Williams College.
Edward P. Ponganis has served as our Senior Vice President and Chief
Technology Officer since May 2000. From May 1998 to May 2000, Mr. Ponganis
served as the Assistant to our President. From June 1995 to May 2000, Mr.
Ponganis served as our Vice President of Design Engineering. From July 1993 to
June 1995, Mr. Ponganis served as our Director of Design Engineering. Mr.
Ponganis holds a Bachelor of Science in Electrical Engineering from Santa Clara
University.
W. Norman Wu has served as our Senior Vice President and Chief Strategy
Officer since June 1998. From October 1997 to June 1998, Mr. Wu served as
Consultant to Avantos Performance Systems, Inc. From March 1991 to October
1997, Mr. Wu served as President and Chief Executive Officer of Avantos
Performance Systems, Inc., a management software company he co-founded. Mr. Wu
holds a Bachelor of Science and a Master of Science in Electrical Engineering
from Stanford University and a Master of Business Administration from Harvard
Business School.
Board Committees
Our audit committee consists of Messrs. Friedland, Goldman and Sterling. The
audit committee reviews our financial statements and accounting practices,
makes recommendations to our board of directors regarding the selection of our
independent auditors and reviews the results and scope of the audit and other
services provided by our independent auditors.
Our compensation committee consists of Messrs. Friedland, Goldman and Price.
The compensation committee reviews and recommends the compensation and benefits
of all our directors, officers and consultants to our board of directors and
reviews our general policies relating to compensation and benefits.
Director Compensation
We grant each of our outside directors an option to purchase 15,000 shares
of our common stock effective as of the date of their commencement as a member
of our board of directors. These options vest twenty-five percent on each
anniversary of the commencement as a member of the board of directors. On each
outside director's anniversary date of the commencement of his term as a member
of our board of directors, we have agreed to grant to him an additional option
to purchase 7,000 shares of our common stock. We also compensate
55
<PAGE>
each of our outside directors $1,000 for each board of directors meeting or
committee meeting the outside director attends in person or by telephone, and
reimburse the outside director for any expenses incurred in connection with
these meetings. This compensation is not paid pursuant to consulting contracts.
Effective January 2001 outside directors will receive an annual retainer of
$20,000.
Our other directors currently do not receive any compensation for their
service on our board of directors. There are no family relationships between
any of our directors or executive officers.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee has at any time been one
of our officers or employees. During the year ended December 31, 1999, none of
our executive officers served as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee. Mr.
Crawford, our Chairman, Chief Executive Officer and President, and Mr. Mizell,
our Senior Vice President of Human Resources, provide staff to support this
committee. Messrs. Crawford and Mizell are not members of the compensation
committee and do not participate in the deliberations concerning their own
respective compensation.
Employment Contracts, Termination of Employment and Change of Control
Arrangements
We have entered into an employment agreement with Mr. Crawford, which
provides that, for a period of five years commencing on February 27, 1998 Mr.
Crawford will serve as our President and Chief Executive Officer and as a
member of our board of directors. Mr. Crawford was elected Chairman of our
board of directors on May 28, 1999. His employment agreement provides for an
annual base salary of at least $800,000, and provides an annual target bonus of
at least $600,000 provided that we achieve defined performance objectives to be
determined each year. In 1998, Mr. Crawford's base salary was $800,000 and he
received a performance bonus of $1.7 million. In 1999, Mr. Crawford's base
salary was $840,000 and he received a performance bonus of $1.4 million.
Upon commencement of his employment with us, Mr. Crawford received a $1.0
million sign-on bonus, and we established a deferred compensation account of
$8.0 million, which earns interest of 8.0% per annum, compounded annually. We
will pay Mr. Crawford this $8.0 million deferred compensation, plus
approximately $2.0 million in accrued interest, upon completion of this
offering. This payment will be made out of cash we had on hand prior to the
offering.
We issued Mr. Crawford 100,000 shares of our common stock in 1998 and
300,000 shares in 1999. In addition, we granted Mr. Crawford options to
purchase 1,000,000 shares of our common stock at an exercise price of $2.50 per
share and 1,000,000 shares of common stock at an exercise price of $5.00 per
share. Of these options, 625,000 have vested and the remaining 375,000 are
scheduled to vest upon the end of each calendar quarter in each of the calendar
years 2000 and 2001. Pursuant to the terms of his employment agreement,
however, Mr. Crawford's unvested options will immediately vest in full upon the
completion of this offering. Mr. Crawford has the right to require us to
register the shares of common stock at any time prior to six months after he
terminates employment, or, at our option and in lieu of registering such
shares, we may purchase these shares from Mr. Crawford at an appraised fair
market value on such date.
Under the terms of his employment agreement, Mr. Crawford's employment with
us may be terminated prior to February 27, 2003. If we terminate Mr. Crawford
without cause or if Mr. Crawford terminates his employment with us for good
reason, including Mr. Crawford's election to terminate employment for any
reason following a change of control, we will be obligated to pay Mr. Crawford
a cash payment equal to twice his annual base salary plus twice the amount of
his prior year's bonus (with a minimum bonus amount of $600,000). Under these
circumstances, we will be obligated to pay Mr. Crawford at least $2.8 million
and all of his unexercisable stock options will become immediately exercisable
and will remain exercisable until December 31, 2004. If we terminate Mr.
Crawford for cause, he will be entitled to any benefits accrued as of his
termination date and his vested options as of his termination date will remain
exercisable for six months. If
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<PAGE>
Mr. Crawford terminates his employment without good reason, he will be entitled
to any benefits accrued as of his termination date and his vested options as of
his termination date will remain exercisable for twenty-four months. If Mr.
Crawford dies prior to the expiration of his agreement, his beneficiaries will
be entitled to his prorated bonus payment and, assuming this offering is
completed, his options will remain exercisable until December 31, 2004. If we
terminate Mr. Crawford's employment due to disability prior to the expiration
of his agreement, he will be entitled to medical, dental, life and disability
insurance coverage for five years and will also be entitled to the benefits as
if he were terminated on account of death, as described above.
Mr. Crawford's employment agreement also provides for a "gross-up" payment
to reimburse him for any excise tax liability imposed under Section 4999 of the
U.S. Internal Revenue Code of 1986, as amended, in connection with payments
made on account of our change of control.
We have also entered into employment agreements with Michael D. Burger,
Gerald J. Corvino, Robert G. Couch, Didier J. LeLannic, Steven C. Mizell, Gary
Patten, Richard R. Pickard and Edward P. Ponganis. The term of each agreement
is for two years, and is automatically extended for an additional two years
from the date of a change of control. Each employment agreement provides that
the executive officer is entitled to a base salary and participation in our
bonus plans. In addition, each employment agreement provides that the executive
officer will receive stock option grants under our stock option plans, as well
as such benefits normally provided by us to our executives.
Under these employment agreements, if an executive officer terminates his
employment with us either voluntarily for good reason or involuntarily for
reasons other than for cause or detrimental activity, the executive officer is
entitled to the following: (a) payment of base salary through the remainder of
the term of the employment agreement, (b) awards earned under our Executive
Performance Incentive Plan and Executive Bonus Plan prior to termination of
employment and payable prior to the expiration of the employment agreement, and
(c) unvested outstanding stock options as of the date of termination will
continue to vest for the period of time remaining under the employment
agreement. If, following a change of control, the executive officer terminates
his employment with us either voluntarily for good reason or involuntarily for
reasons other than for cause or detrimental activity, the executive officer is
entitled to the benefits described in (a), (b) and (c), above, as well as
continued participation in group insurance plans, including life, disability
and health insurance maintained by us through the expiration of the term of the
employment agreement. However, the payment of base salary as described in (a),
above, will be made in a lump sum and payments under our bonus plans will be
treated as if the executive officer terminated employment on the last day of
our fiscal year.
The employment agreements also provide for a "gross-up" payment to reimburse
the executive officer for any excise tax liability imposed under Section 4999
of the U.S. Internal Revenue Code of 1986, as amended, in connection with
payments made on account of our change of control.
57
<PAGE>
Executive Compensation
The following table presents information regarding compensation paid or
earned by our Chief Executive Officer and the four other most highly
compensated executive officers during the years ended December 31, 1997, 1998
and 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards
-------------------------------------- -----------------------
Restricted Securities
Name and Salary ($) Bonus Other Annual Stock Underlying All Other
Principal Position Year ($)(1) Compensation ($) Awards ($) Options (#) Compensation($)(2)
------------------ ---- ---------- ---------- ---------------- ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Curtis J. Crawford...... 1999 $839,231 $1,380,000 $ 47,026(3) $750,000(4) -- $ 2,400
Chairman, President, 1998 794,871 1,700,000 422,093(3) 250,000(4) 2,000,000 2,400
Chief Executive 1997 -- -- -- -- -- --
Officer and Director --
Didier J. LeLannic...... 1999 226,962 252,000 -- -- -- 2,400
Senior Vice President 1998 53,558 18,000 -- -- 180,000 --
and General Manager 1997 -- -- -- -- -- --
Michael J. Bradshaw..... 1999 243,098 234,000 -- -- -- 2,400
Senior Vice President, 1998 244,331 81,000 -- -- 120,000 2,400
Worldwide Operations 1997 220,823 44,000 -- -- 20,350 17,538
Gerald J. Corvino....... 1999 232,944 220,000 734 -- -- 2,400
Senior Vice President, 1998 179,808 99,000 -- -- 150,000 1,363
Chief Information 1997 -- -- -- -- -- --
Officer --
W. Norman Wu............ 1999 232,454 230,000 -- -- -- 2,400
Senior Vice President, 1998 136,154 90,000 -- -- 180,000 1,558
Chief Strategy Officer 1997 -- -- -- -- -- --
</TABLE>
--------
(1) For each named executive in the table above, one-half of the amount
indicated is a long-term bonus earned in 1999 of which 50% of that amount
will be paid in February 2001 and 50% paid in February 2002. Such long-term
bonuses require that the executive be employed by us at the time of
distribution.
(2) Amounts represent our matching and discretionary contributions to our
401(k) Tax-Deferred Investment Plan and contribution to our non-qualified
Deferred Compensation Plan.
(3) Represents amounts paid for relocation expenses in 1998 of $391,394 and
$30,699 for other payroll gross-ups for Mr. Crawford incurred in 1999.
(4) Reflects 300,000 shares of our common stock issued to Mr. Crawford in 1999
and 100,000 shares of our common stock issued in 1998. These shares were
initially issued as restricted stock, though in 1999 these restrictions
lapsed.
No options were granted to any of our executive officers in 1999.
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<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table presents information regarding the aggregate option
exercises and fiscal year-end option values for each of the five executive
officers named in the Summary Compensation Table above for the year ended
December 31, 1999. Also reported are values of unexercised "in-the-money"
options, which represent the positive spread between the respective exercise
prices of outstanding stock options and the fair value of our common stock on
December 31, 1999, as determined by our board of directors to be $4.00 per
share.
<TABLE>
<CAPTION>
Unexercised Underlying
Acquired Number of Securities Value of Unexercised
Shares Options At Year End (#) Options At Year End ($)
On Exercise Value Realized ------------------------- -------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Curtis J. Crawford...... -- -- 1,000,000 1,000,000 $750,000 $750,000
Didier J. LeLannic...... -- -- 45,000 135,000 67,500 202,500
Michael J. Bradshaw..... -- -- 30,000 90,000 45,000 135,000
Gerald J. Corvino....... -- -- 37,500 112,500 56,250 168,750
W. Norman Wu............ -- -- 45,000 135,000 67,500 202,500
</TABLE>
1998 Long-Term Stock Incentive Plan
In 1998, we adopted our 1998 Long-Term Stock Incentive Plan. As amended, the
Long-Term Plan is intended to promote our long-term success and create value
for our stockholders by encouraging our key employees to focus on our critical,
long-term objectives, by encouraging attraction and retention of key employees
with exceptional qualifications and by linking key employees directly with the
interests of our stockholders through increased stock ownership. The Long-Term
Plan provides for grants of incentive stock options, nonqualified stock
options, restricted shares and other equity-based awards. Up to 4.65 million
shares of our common stock, subject to adjustment to prevent dilution, are
reserved for the grant of awards. As of July 2, 2000, options to purchase an
aggregate 3,309,768 shares of our common stock, at prices ranging from $2.50 to
$6.00 per share were outstanding under the Long-Term Plan. No additional grants
will be made under the Long-Term Plan after the completion of this offering.
1998 Executive Officer Stock Incentive Plan
In 1998, we adopted our 1998 Executive Officer Stock Incentive Plan. As
amended, the Executive Officer Plan is intended to promote our long-term
success and create value for our stockholders by encouraging our executive
officers to focus on our critical, long-term objectives, by encouraging
attraction and retention of executive officers with exceptional qualifications
and by linking executive officers directly with the interests of our
stockholders through increased stock ownership. The Executive Officer Plan
provides for grants of incentive stock options, nonqualified stock options,
restricted shares and other equity-based awards. Up to 6.75 million shares of
our common stock, subject to adjustment to prevent dilution, are reserved for
the grant of awards. As of July 2, 2000, options to purchase an aggregate
5,926,000 shares of our common stock, at prices ranging from $2.50 to $6.00 per
share were outstanding under the Executive Officer Plan. No additional grants
will be made under the Executive Officer Plan after the completion of this
offering.
2000 Stock Incentive Plan
Prior to the completion of this offering, we intend to adopt and solicit
stockholder approval of our 2000 Stock Incentive Plan, effective upon the
completion of this offering. All shares remaining available for granting of
awards under our Long-Term Plan and our Executive Officer Plan will be
transferred to our 2000 Stock Incentive Plan. The purpose of the plan is to
promote our long-term growth and profitability by providing key people with
incentives to improve stockholder value and to contribute to our growth and
financial success by enabling us to attract, retain and reward the best
available persons for positions of substantial responsibility.
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<PAGE>
Awards may be granted under the 2000 Stock Incentive Plan to our employees,
directors, including directors who are not employees, and consultants, as
selected by the committee.
In addition to the shares that will be transferred from our other incentive
plans, we have reserved for issuance under the 2000 Stock Incentive Plan a
maximum of shares of our common stock, subject to appropriate adjustment
upon the occurrence of some corporate transactions or events. This plan will
provide for the grant of stock options, including incentive stock options,
nonqualified stock options, restricted stock, stock units, dividend equivalent
rights and other equity based awards. If an award granted under the 2000 Stock
Incentive Plan expires or is terminated for any reason, the shares of common
stock underlying the award will again be available for purposes of this plan.
The 2000 Stock Incentive Plan will be administered by our compensation
committee, which is constituted to satisfy the provisions of Rule 16b-3
promulgated under Section 16 of the Securities Exchange Act of 1934 and Section
162(m) of the Internal Revenue Code, and the 2000 Stock Incentive Plan will be
interpreted in a manner consistent with the requirements of those rules and
regulations.
The committee will determine the persons to whom awards will be granted, the
type of award to be granted, the number of shares subject to awards, the
exercise price and the other terms and conditions of the awards, including
terms governing vesting, exercisability, term of the award and the treatment of
the award upon termination of employment. The committee will interpret the 2000
Stock Incentive Plan and prescribe, amend and rescind rules and regulations
relating to the plan.
The award agreement may provide for acceleration of vesting of awards, and
the lapse of restrictions on restricted stock, in the event of a change of
control. In addition, the committee will have the discretion to accelerate the
vesting or exercisability of the remainder of any award granted under the 2000
Stock Incentive Plan.
Our board of directors may amend or terminate the 2000 Stock Incentive Plan,
except that an amendment will be subject to stockholder approval if required by
applicable law.
Employee Stock Purchase Plan
Prior to the completion of this offering, we intend to adopt and solicit
stockholder approval of our Employee Stock Purchase Plan, effective upon the
completion of this offering. The Employee Stock Purchase Plan is designed to
encourage the purchase by our employees of shares of our common stock. The
Employee Stock Purchase Plan is intended to comply with the requirements of
Section 423 of the Internal Revenue Code, and to assure the participants of the
tax advantages provided thereby. Our Employee Stock Purchase Plan will be
administered by our compensation committee. The committee may establish such
rules, regulations and procedures for the administration of the Employee Stock
Purchase Plan as it deems appropriate. We have reserved for issuance under this
plan a total of shares of our common stock, subject to adjustment by the
committee in the event of some corporate transactions or events.
All our employees who have at least one year of service and work more than
20 hours per week will be eligible to participate in our Employee Stock
Purchase Plan, except that employees who own five percent or more of our common
stock or the common stock of any of our subsidiaries will not be eligible to
participate. Each eligible employee will be permitted to purchase shares of our
common stock through regular payroll deductions and/or cash payments in an
aggregate amount equal to 1% to 10% of the employee's compensation for each
payroll period. The fair market value of the shares of our common stock that
may be purchased by any employee under this or any other of our plans that is
intended to comply with Section 423 of the Internal Revenue Code during any
calendar year may not exceed $25,000.
Our Employee Stock Purchase Plan provides for a series of consecutive,
overlapping offering periods that generally will be six months long. Six-month
purchase periods will coincide with each offering period.
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<PAGE>
Offering periods generally will commence on January 1 and July 1 of each year
during the term of this plan, and purchase periods will run from January 1 to
June 30 and from July 1 to December 31.
During each offering period, participating employees will be able to
purchase shares of our common stock with payroll deductions at a purchase price
equal to 85% of the fair market value of the common stock at either the
beginning of each offering period or the end of each purchase period within the
offering period, whichever price is lower.
To the extent permitted by applicable laws, regulations or stock exchange
rules, if the fair market value of the shares at the end of any purchase period
is lower than the fair market value of the shares on the date the related
offering period began, then all participants in that offering period will be
automatically withdrawn from the offering period immediately after the exercise
of their option on the date the purchase period ends. The participants will
automatically be re-enrolled in the immediately following offering period when
that offering period begins.
The options granted to a participant under our Employee Stock Purchase Plan
are not transferable otherwise than by will or the laws of descent and
distribution, and are exercisable, during the participant's lifetime, only by
the participant.
Our board of directors may amend or terminate the Employee Stock Purchase
Plan, except that an amendment will be subject to stockholder approval if
required by applicable law.
401(k) Tax Deferred Investment Plan
We have an employee savings plan with a cash or deferred arrangement that is
intended to qualify as a deferred salary arrangement under Sections 401(a) and
401(k) of the Internal Revenue Code. Under the 401(k) plan, participating U.S.
employees may defer a portion of their pretax earnings, up to the Internal
Revenue Code annual contribution limit. We may make matching contributions on
behalf of each participating employee in an amount up to 1.5% of the
participant's compensation on a quarterly basis. We may also make additional
discretionary contributions to the 401(k) plan up to a limit set by the
Internal Revenue Code. Matching contributions were approximately $727,000 in
1999, $721,000 in 1998 and $583,000 in 1997. The discretionary contribution for
1997 was approximately $1.8 million. There were no discretionary contributions
made for 1998 or 1999.
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<PAGE>
RELATED PARTY TRANSACTIONS
We merged with an affiliate of Texas Pacific Group on February 27, 1998 and
continued as the surviving corporation. As a result of the merger, we ceased
being a publicly traded company and the affiliate of Texas Pacific Group became
our principal stockholder. In connection with the merger, we paid Texas Pacific
Group and some of its affiliates financial advisory and other fees and
reimbursed related expenses in an aggregate amount of approximately $8.0
million.
Also in connection with the merger, affiliates of Texas Pacific Group
received 27,000,000 new shares of our common stock, 10,000,000 shares of our
non-voting common stock and 250,000 shares of our preferred stock, after giving
effect to the 4-for-1 stock split declared by our board of directors upon
consummation of the merger and the 2-for-1 stock split approved by our board of
directors in August 1998. Subject to restrictions imposed by the terms of our
indebtedness, we have the option to redeem the preferred stock at any time at
prices ranging from 105% of liquidation value plus accumulated and unpaid
dividends at February 27, 1998 to 100% of liquidation value plus accumulated
and unpaid dividends any time after February 27, 2003 and thereafter. In
connection with this offering, we intend to redeem the outstanding shares of
preferred stock for cash and to reclassify the non-voting common stock into
shares of our common stock.
In January 1999, we entered into an agreement with P.T. Astra Microtronics
Technology, now known as Advanced Interconnect Technologies, or AIT, pursuant
to which AIT will provide us with semiconductor assembly and test services
through January 2003. AIT is owned by Newbrige Asia, an affiliate of Texas
Pacific Group, which in turn is an affiliate of our principal stockholder. We
purchased services from AIT totaling approximately $10.3 million in the first
half of 2000, $23.1 million in 1999, $7.1 million in 1998 and $8.1 million in
1997. We had payments due to AIT of approximately $3.8 million at December 31,
1999 and $0.5 million at December 31, 1998. Our payment terms with AIT are net
30 days.
We provide products and engineering services to GlobeSpan, Inc., of which
Texas Pacific Group is a significant stockholder. Our net sales to GlobeSpan
totaled $2.7 million during the first half of 2000 and $1.0 million during
1999.
During 1999, we made an interest-free loan in the amount of $65,000 to
Michael D. Burger, Senior Vice President and General Manager of our field
programmable microcontroller business unit. This indebtedness was repaid in
February 2000.
We made sales of restricted stock at $4.00 per share to four persons
pursuant to Section 4(2) of the Securities Act of 1933. In January 2000, we
sold 250,000 shares of restricted stock to Robert D. Norman, an independent
consultant. In February 2000, we sold restricted stock to three of our
directors: 25,000 shares to Richard S. Friedland, 50,000 shares to Murray A.
Goldman and 100,000 shares to Lionel N. Sterling. The restricted stock sold to
these three directors vests 50% per year over two years.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents information regarding the beneficial ownership
of our common stock by our principal stockholders as of July 2, 2000, with
respect to:
. each person known to us to be the owner of more than 5% of any class of
voting securities;
. each of our directors and named executive officers; and
. all directors and executive officers, as a group.
Beneficial ownership of our common stock is determined under the rules of
the Securities and Exchange Commission and generally includes any shares over
which a person exercises sole or shared voting or investment power. To our
knowledge, except under applicable community property laws or as otherwise
indicated, the persons named in the table have sole voting and sole investment
control with respect to all shares beneficially owned. Shares of common stock
subject to options currently exercisable or exercisable within 60 days of July
2, 2000 are deemed outstanding for calculating the percentage of outstanding
shares of the person holding these options. Applicable percentage ownership in
the following table is based on 41,120,564 shares of common stock outstanding
as of July 2, 2000, after giving effect to the redemption of all outstanding
shares of our preferred stock and the reclassification of all outstanding
shares of our non-voting common stock into shares of our common stock, and
shares of common stock outstanding immediately following the completion of the
offering. Unless otherwise indicated, the address of each beneficial owner
listed below is c/o ZiLOG, Inc., 910 East Hamilton Avenue, Suite 110, Campbell,
California 95008.
<TABLE>
<CAPTION>
Number of Percentage of
Shares Outstanding
Number of Beneficially Shares
Shares Owned -----------------
Beneficially Subject to Before After
Beneficial Owner Owned Options Offering Offering
---------------- ------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Principal Stockholder:
TPG Partners II, L.P. .......... 35,866,390(1) -- 87.2% %
201 Main Street
Suite 2420
Fort Worth, TX 76102
Directors and Executive
Officers:
Curtis J. Crawford.............. 714,892 1,250,000 4.8%
Lionel S. Sterling.............. 100,000(2) -- *
W. Norman Wu.................... -- 90,000 *
Aydin Koc....................... 45,000 45,000 *
Gerald J. Corvino............... -- 75,000 *
Richard R. Pickard.............. 8,776 60,000 *
Michael J. Bradshaw............. -- 60,000 *
Robert G. Couch................. -- 60,000 *
Richard L. Moore................ -- 60,000 *
Murray A. Goldman............... 50,000(3) 8,000 *
Alice Baluni.................... 25,000 25,000 *
Didier J. LeLannic.............. -- 45,000 *
Michael D. Burger............... -- 45,000 *
Edward P. Ponganis.............. -- 40,000 *
Richard S. Friedland............ 25,000(3) 8,000 *
Steven C. Mizell................ -- 30,000 *
John W. Marren.................. -- (4) -- *
William S. Price................ -- (5) -- *
Gary Patten..................... -- -- *
David M. Stanton................ -- -- *
All current executive officers
and directors, as a group (20
persons)....................... 968,668 1,901,000 6.7%
</TABLE>
--------
* Represents less than one percent of the total.
(1) Includes 3,190,674 shares held of record by TPG Investors II, L.P. and
2,087,424 shares held of record by TPG Parallel II, L.P., as these
shares may be deemed to be beneficially owned by TPG Partners II, L.P.
(2) Represents shares of restricted stock which vest 50% on each of
February 1, 2001 and February 1, 2002.
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<PAGE>
(3) Represents shares of restricted stock which vest 50% on each of
February 7, 2001 and February 7, 2002.
(4) Excludes shares listed above as owned or deemed to be beneficially
owned by TPG Partners II, L.P., which may be deemed an affiliate of Mr.
Marren. Mr. Marren disclaims beneficial ownership of those shares.
(5) Excludes shares listed above as owned or deemed to be beneficially
owned by TPG Partners II, L.P., which may be deemed an affiliate of Mr.
Price. Mr. Price disclaims beneficial ownership of those shares.
Texas Pacific Group
Texas Pacific Group was founded by David Bonderman, James G. Coulter and
William S. Price, III in 1993 to pursue public and private investment
opportunities through a variety of methods, including leveraged buyouts,
recapitalizations, joint ventures, restructurings and strategic public
securities investments. The principals of Texas Pacific Group manage TPG
Partners, L.P., TPG Partners II, L.P., TPG Partners III, L.P. and T/3/
Partners, L.P., all Delaware limited partnerships which, with their affiliated
partnerships, have aggregate committed capital of more than $7.0 billion.
Texas Pacific Group's other investments in technology and telecommunications
companies include Paradyne Corporation, GlobeSpan, GT Com, Landis & Gyr
Communications, Zhone Technologies, ON Semiconductor, Advanced Telecom Group,
Star One, AG and Gemplus.
Texas Pacific Group's portfolio of companies also includes America West
Airlines, Bally International, Belden & Blake, Beringer Wine Estates, Del Monte
Foods, Denbury Resources, Ducati Motorcycle Holdings, Genesis ElderCare, J.
Crew, Magellan Health Services, Oxford Health Plans, Punch Taverns, Virgin
Entertainment and Vivra. In addition, the principals of Texas Pacific Group led
the $9.0 billion reorganization of Continental Airlines in 1993.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering and the filing of our amended and
restated certificate of incorporation, our authorized capital stock will
consist of shares of common stock, par value $0.01 per share, and 5,000,000
shares of preferred stock, par value $0.01 per share.
Common Stock
As of July 2, 2000, and assuming the reclassification of all outstanding
shares of our non-voting common stock into shares of our common stock, there
were 41,120,564 shares of our common stock outstanding held by 92 stockholders.
There will be shares of our common stock outstanding, after giving effect
to the shares of our common stock being sold in this offering, assuming no
exercise of the underwriters' over-allotment option and no exercise of options
after July 2, 2000.
Subject to preferences that may be applicable to the senior notes and any
series of our preferred stock outstanding at the time, the holders of
outstanding shares of our common stock are entitled to receive dividends or
distributions as may be lawfully declared by our board of directors. The
holders of our common stock are entitled to one vote per share on all matters
to be voted on by stockholders. Upon our dissolution, the holders of our common
stock are entitled to share ratably in all assets that may be available for
distribution after satisfaction of our liabilities, subject to any prior
distribution rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights and is not subject to redemption.
All outstanding shares are fully paid and nonassessable, and the shares of
common stock to be issued upon completion of this offering will be fully paid
and nonassessable.
Preferred Stock
As of July 2, 2000, there were 250,000 shares of our series A cumulative
preferred stock outstanding held by eight stockholders, three of which are
affiliates of Texas Pacific Group. We intend to redeem all outstanding shares
of our preferred stock upon the completion of this offering.
Our board of directors has the authority, without action by our
stockholders, to designate and issue preferred stock in one or more additional
series and to designate the rights, preferences and privileges of any series.
The rights designated to the preferred stock may be greater than the rights of
the common stock. It is not possible to state the actual effect of the issuance
of any additional series of preferred stock upon the rights of holders of the
common stock until our board of directors determines the specific rights of the
holders of any series issued. However, the effects might include, among other
things:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; or
. delaying or preventing a change in control of us.
Options
As of July 2, 2000, options to purchase a total of 9,235,768 shares of our
common stock were outstanding and up to 1,042,404 shares of our common stock
were available for future issuance under our 1998 Long-Term Stock Incentive
Plan, as amended, and our 1998 Executive Officer Stock Incentive Plan, as
amended.
Piggyback Registration Rights
If we register any securities following the completion of this offering,
holders of 41,023,736 shares of our common stock will have the right to include
their shares in the registration statement. These rights are provided
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<PAGE>
under a stockholders' agreement and under other agreements with similar
registration rights. The underwriters of any underwritten offering to be
distributed on a firm commitment basis have the right to limit the number of
shares to be included in the registration statement.
Expenses of Registration
We will pay all expenses relating to any piggyback registration.
Expiration of Registration Rights
The registration rights described above will expire February 27, 2013.
Delaware Anti-Takeover Law and Charter Provisions
The provisions of the General Corporation Law of the State of Delaware, or
the DGCL, our amended and restated certificate of incorporation and our amended
and restated bylaws, each as described below, may have the effect of delaying,
deterring or preventing another person from acquiring control of us.
Delaware Law. We will be subject to Section 203 of the Delaware General
Corporation Law, which regulates corporate acquisitions. In general, Section
203 prohibits a publicly held Delaware corporation from engaging in a business
combination with an interested stockholder for a period of three years
following the date the person became an interested stockholder, unless:
. the board of directors approved the transaction in which such
stockholder became an interested stockholder prior to the date the
interested stockholder attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and
officers; or
. the business combination is approved by a majority of the board of
directors and by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the interested
stockholder.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an interested stockholder is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
Our Certificate of Incorporation and Bylaws. The provisions of our amended
and restated certificate of incorporation and amended and restated bylaws may
have the effect of making it more difficult for a third party to acquire, or
discourage a third party from attempting to acquire, control of us. These
provisions could delay, deter or prevent a merger or acquisition. These
provisions include:
. authorizing the issuance of preferred stock without stockholder
approval;
. providing for a classified board of directors with staggered, three-year
terms;
. limiting the persons who may call special meetings of stockholders; and
. prohibiting stockholders from taking action by written consent.
Because our board of directors will be divided into three classes of
directors, with each serving a staggered three-year term, replacing a majority
of the directors may be more difficult. As a result, this system may discourage
a third party from making a tender offer or otherwise attempting to obtain
control of us and
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<PAGE>
may maintain the incumbency of our board of directors. In addition, our amended
and restated certificate of incorporation provides that our stockholders may
not take action by written consent. This provision could make it more difficult
for our stockholders to take action by requiring that a formal meeting be held.
Indemnification of Directors and Executive Officers and Limitation of Liability
Our amended and restated certificate of incorporation includes a provision
that eliminates the personal liability of our directors for breach of fiduciary
duty of a director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. for any transaction from which the director derived an improper personal
benefit.
Our amended and restated certificate of incorporation and amended and
restated bylaws also provide that we will indemnify our directors and officers,
including our former directors and officers, to the fullest extent permitted by
the DGCL including circumstances in which indemnification is otherwise
discretionary. Indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and our controlling stockholders under
the foregoing positions, or otherwise. We have been advised that, in the
opinion of the Securities and Exchange Commission, this indemnification is
against public policy as expressed in the Securities Act and is unenforceable.
Transfer Agent and Registrar
EquiServe Limited Partnership will serve as transfer agent and registrar for
our common stock.
Listing
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "ZLOG."
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SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, no public market existed for our common
stock and we cannot guarantee that a significant public market for our common
stock will develop or continue after this offering. Future sales of substantial
amounts of our common stock, including shares issued upon the exercise of
outstanding options in the public market, could adversely affect the market
price of our common stock and could impair our ability to raise capital through
an offering of our equity securities in the future. Shares that are currently
outstanding will not be available for sale immediately following this offering
due to contractual and legal restrictions on such sales. After these
restrictions lapse, the sale of these shares, or the possibility of their sale,
could adversely affect the market price of our common stock and could impair
our ability to raise capital through an offering of our equity securities in
the future.
Upon completion of this offering, based on the number of shares outstanding
as of July 2, 2000, we will have an aggregate of shares of common stock
outstanding, assuming the reclassification of all outstanding shares of our
non-voting common stock into shares of our common stock, no exercise of the
underwriters' over-allotment option and no exercise of outstanding options. Of
these outstanding shares, the shares of common stock sold in this offering
will be freely tradable without restriction under the Securities Act of 1933.
40,823,736 shares of our common stock held by our existing stockholders may
be sold in the public market only if they qualify for an exemption from
registration under Rule 144 or Rule 701 under the Securities Act, which are
summarized below. Sales of these restricted shares in the public market, or the
mere availability of these shares for sale, could adversely affect the trading
price of our common stock. These restricted shares will become eligible for
public sale as follows:
<TABLE>
<CAPTION>
Approximate
Number of
Shares Eligible
Date for Future Sale
---- ---------------
<S> <C>
Date of this prospectus......................................
181 days after the date of this prospectus...................
At various times thereafter..................................
</TABLE>
In addition to the shares of our common stock offered in this offering and
those held by our existing stockholders, we expect that 743,714 shares of our
common stock issued in connection with our recent acquisition of Calibre,
including shares of common stock issuable upon the exercise of vested options,
up to 527,799 shares of common stock to be issued to former Calibre
stockholders in the event that Calibre achieves specified financial goals and
shares of our common stock issuable in connection with our acquisition of
the remaining 80% interest in Qualcore based on an assumed exchange ratio, as
described in "Recent and Pending Transactions," will be eligible for sale in
the public market one year after the date of issuance of such shares, subject
to compliance with Rule 144.
Lock-Up Agreements
Our directors, officers, key employees and principal stockholders, including
certain affiliates of Texas Pacific Group, have signed agreements under which
they have agreed not to sell, dispose of, loan, pledge or grant any rights with
respect to any shares of common stock or any securities convertible into or
exercisable for shares of common stock without the prior written consent of
Lehman Brothers Inc. for a period of 180 days after the date of this
prospectus. These agreements are known as lock-up agreements.
Lehman Brothers Inc. may choose, in its sole discretion, to release some or
all of these shares from these restrictions before the expiration of this 180-
day period without notice.
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Rule 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
. 1% of the number of shares of our common stock then outstanding, which
will equal approximately shares upon completion of this offering,
assuming no exercise of the underwriters' over-allotment option and no
exercise of outstanding options; or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 for the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of public information about us.
Shares otherwise eligible for sale under Rule 144 that are the subject of lock-
up agreements will only become eligible for sale when the 180-day lock-up
agreements expire.
Rule 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares of our common stock proposed to be sold for at least two years, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144 as described
above. Unless otherwise restricted, these shares of our common stock may be
sold in the open market immediately after any lock-up agreements covering these
shares expire.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors, other than affiliates, who purchased
or received shares from us prior to June 28, 1999, in connection with a
compensatory stock purchase plan or option plan or other written agreement will
be eligible to resell their shares, subject only to the manner of sale
provisions of Rule 144, and affiliates will be eligible to resell their shares
under Rule 144 without compliance with its holding period requirements. All
shares issued under Rule 701, however, which are subject to lock-up agreements
will only become eligible for sale when the 180-day lock-up agreements expire.
Registration Rights
Upon completion of this offering, if we file a registration statement, the
holders of up to 41,023,736 shares of our common stock may elect to include
their shares under that registration. In addition, pursuant to Mr. Crawford's
employment agreement, on one occasion prior to the six month anniversary of his
termination date, Mr. Crawford may demand that we register his shares under the
Securities Act, or at our option in lieu of such registration, we may purchase
his shares for their fair market value. If any of these shares are registered,
they will be freely tradable without restriction under the Securities Act.
Stock Options
On June 28, 1999, we filed a registration statement on Form S-8 under the
Securities Act to register 7,800,000 shares of our common stock available for
grant under our 1998 Long-Term Stock Incentive Plan and 1998 Executive Officer
Incentive Plan. On March 30, 2000, we filed a registration statement on Form S-
8 under the Securities Act to register 2,801,187 shares of our common stock
available for grant under our 1998 Long-Term Stock Incentive Plan, as amended,
and 1998 Executive Officer Incentive Plan, as amended, and 598,813 shares of
our common stock subject to outstanding options and restricted stock grants
granted under these plans. Following completion of this offering, we intend to
file one or more additional registration statements on Form S-8 under the
Securities Act covering the shares of our common stock reserved for issuance
under our 2000 Stock Incentive Plan and Employee Stock Purchase Plan that will
become effective upon filing. Accordingly, shares registered under those
registration statements will, subject to Rule 144 volume limitations applicable
to affiliates, be available for sale in the open market, except those shares
subject to lock-up agreements and unvested shares.
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MATERIAL FEDERAL TAX CONSEQUENCES TO
NON-UNITED STATES STOCKHOLDERS
The following is a general discussion of certain of the material United
States federal tax consequences of the acquisition, ownership, and disposition
of our common stock by a holder that, for United States federal income tax
purposes, is not a "United States person" as defined below. This discussion is
based upon the United States federal tax law now in effect, which is subject to
change, possibly retroactively, and assumes that investors will hold our common
stock as capital assets (generally, property held for investment) within the
meaning of section 1221 of the United States Internal Revenue Code of 1986, as
amended. This discussion does not address all aspects of United Stated federal
taxation and does not address any foreign, state or local tax considerations.
In addition, this discussion does not consider any specific facts or
circumstances that may apply to a particular non-United States stockholder and
does not address all aspects of United States federal income taxation, which
may be important to investors subject to special tax rules, such as financial
institutions, insurance companies, broker-dealers, tax-exempt organizations,
and certain United States expatriates. Prospective investors are urged to
consult their tax advisors regarding the United States federal tax consequences
of acquiring, holding, and disposing of our common stock, as well as any tax
consequences that may arise under the laws of any foreign, state, local, or
other taxing jurisdiction.
For purposes of this discussion, a "United States person" means any one of
the following:
. a citizen or resident of the United States;
. a corporation, partnership, or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof;
. an estate whose income is includible in gross income for United States
federal income tax purposes regardless of its source; or
. a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who
have the authority to control all substantial decisions of the trust.
Dividends
Any dividends paid to a non-United States stockholder will generally be
subject to withholding of United States federal income tax at the rate of 30%
unless the dividend is effectively connected with the conduct of a trade or
business within the United States by the non-United States stockholder, in
which case the dividend will be subject to the United States federal income tax
on net income that applies to United States persons generally (and, with
respect to corporate holders and under certain circumstances, the branch
profits tax). Non-United States stockholders should consult any applicable
income tax treaties, which may provide for a lower rate of withholding or other
rules different from those described above. A non-United States stockholder may
be required to satisfy certain certification requirements in order to claim
treaty benefits or otherwise claim a reduction of or exemption from withholding
under the foregoing rules.
Gain on Disposition
A non-United States stockholder will generally not be subject to United
States federal income tax on gain recognized on a sale or other disposition of
our common stock unless (1) the gain is effectively connected with the conduct
of a trade or business within the United States by the non-United States
stockholder or (2) in the case of a non-United States stockholder who is a
nonresident alien individual, such holder is present in the United States for
183 or more days in the taxable year and certain other requirements are met.
Gain that is effectively connected with the conduct of a trade or business
within the United States by the non-United States stockholder will be subject
to the United States federal income tax on net income that applies to United
States persons generally (and, with respect to corporate holders and under
certain circumstances, the branch profits tax) but will not be subject to
withholding. Non-United States stockholders should consult applicable treaties,
which may provide for different rules.
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Federal Estate Taxes
Our common stock that is owned or treated as owned by an individual who is
not a citizen or resident (as specially defined for United States federal
estate tax purposes) of the United States at the date of death will be included
in such individual's estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
In general, we must report annually to the United States Internal Revenue
Service and to each non-United States stockholder the amount of dividends paid
to, and the tax withheld with respect to, such stockholder, regardless of
whether any tax has been actually withheld. This information may also be made
available to the tax authorities of a country in which the non-United States
stockholder resides.
Under current United States Treasury regulations, United States information
reporting requirements and backup withholding tax will generally not apply to
dividends paid on our common stock to a non-United States stockholder at an
address outside the United States. Payments by a United States office of a
broker of the proceeds of a sale of our common stock is subject to both backup
withholding at a rate of 31% and information reporting unless the holder
certifies its non-United States stockholder status under penalties of perjury
or otherwise establishes an exemption. Information reporting requirements (but
not backup withholding) will also apply to payments of the proceeds of sales of
our common stock by foreign offices of United States brokers, or foreign
brokers with certain types of relationships to the United States, unless the
broker has documentary evidence in its records that the holder is a non-United
States stockholder and certain other conditions are met, or the holder
otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the non-United
States stockholder's United States federal income tax liability, provided that
the required information is furnished to the Internal Revenue Service.
The United States Treasury Department has promulgated final regulations
regarding the withholding and information reporting rules discussed above,
which are generally effective for payments made after December 31, 2000. In
general, those regulations do not significantly alter the substantive
withholding and information reporting requirements, but unify current
certification procedures and forms and clarify reliance standards.
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UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below, for whom Lehman Brothers Inc., Prudential Securities Incorporated, SG
Cowen Securities Corporation and Fidelity Capital Markets, a division of
National Financial Services Corporation, are acting as representatives, have
each agreed to purchase from us the respective number of shares of common stock
set forth opposite its name below:
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ ------
<S> <C>
Lehman Brothers Inc...................................................
Prudential Securities Incorporated....................................
SG Cowen Securities Corporation.......................................
Fidelity Capital Markets,
a division of National Financial Services Corporation................
----
Total...............................................................
====
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of
common stock are purchased by the underwriters under the underwriting
agreement, then all of the shares of common stock which the underwriters have
agreed to purchase under the underwriting agreement must be purchased. The
conditions contained in the underwriting agreement include the requirement that
the representations and warranties made by us to the underwriters are true,
that there is no material change in the financial markets and that we deliver
to the underwriters customary closing documents.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by us. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by ZiLOG No Exercise Full Exercise
------------- ----------- -------------
<S> <C> <C>
Per Share.......................................... $ $
--- ---
Total.............................................. $ $
=== ===
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to dealers, who may include
the underwriters, at the public offering price less a selling concession not in
excess of $ per share. The underwriters may allow, and the dealers may
reallow, a concession not in excess of $ per share to brokers and dealers.
After the offering, the underwriters may change the offering price and other
selling terms.
We have granted to the underwriters an option to purchase up to an aggregate
of additional shares of common stock, exercisable to cover over-
allotments, if any, at the public offering price less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise this option at any time until 30 days after the date
of the underwriting agreement. If this option is exercised, each underwriter
will be committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of common stock
proportionate to the underwriter's initial commitment as indicated in the
preceding table and we will be obligated, under the over-allotment option, to
sell the shares of common stock to the underwriters.
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We have agreed that, without the prior consent of Lehman Brothers Inc., we
will not, directly or indirectly, offer, sell or otherwise dispose of any
shares of our common stock or any securities which may be converted into or
exchanged for any shares of our common stock for a period of 180 days from the
date of this prospectus. In addition, our executive officers, directors, key
employees and principal stockholders, including certain affiliates of Texas
Pacific Group, have agreed under the lock-up agreements that, without the
prior written consent of Lehman Brothers Inc., they will not, directly or
indirectly, offer, sell or otherwise dispose of any shares of our common stock
or any securities which may be converted into or exchanged for any shares for
the period ending 180 days after the date of this prospectus.
Prior to the offering, there has been no public market for the shares of
our common stock. The initial public offering price has been negotiated
between the representatives and us. In determining the initial public offering
price of our common stock, the representatives will consider prevailing market
conditions, our historical performance and capital structure, estimates of our
business potential and earning prospects, an overall assessment of our
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
We have applied to list our common stock on the Nasdaq National Market
under the symbol "ZLOG."
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act of 1933 and liabilities arising from
breaches of the representations and warranties contained in the underwriting
agreement, and to contribute to payments that the underwriters may be required
to make for these liabilities.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $ million.
The underwriters may purchase and sell shares of common stock in the open
market. These transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Short sales involve
the sale by the underwriters of a greater number of shares than they are
required to purchase in the offering. "Covered" short sales are sales made in
an amount not greater than the underwriters' option to purchase additional
shares from the issuer in the offering. The underwriters may close out any
covered short position by either exercising their option to purchase
additional shares or purchasing shares in the open market. In determining the
source of shares to close out the covered short position, the underwriters
will consider, among other things, the price of shares available for purchase
in the open market as compared to the price at which they may purchase shares
through the over-allotment option. "Naked" short sales are any sales in excess
of such option. The underwriters must close out any naked short position by
purchasing shares in the open market. A naked short position is more likely to
be created if the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market after pricing
that could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of various bids for or purchases of common
stock made by the underwriters in the open market prior to the completion of
the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the
underwriting discount received by it because the representatives have
repurchased shares sold by or for the account of such underwriter in
stabilizing or short covering transactions.
Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the common stock or preventing or retarding a decline in
the market price of the common stock. As a result, the price of the common
stock may be higher than the price that might otherwise exist in the open
market.
The underwriters have informed us that they do not intend to confirm sales
to accounts over which the underwriters have discretionary authority that
exceed 5% of the total number of shares of common stock offered by them.
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Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada where the
sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the public offering price shown on the
cover page of this prospectus.
At our request, the underwriters have reserved up to shares of the
common stock offered by this prospectus for sale to our officers, directors,
employees, consultants and their family members and to our business associates
at the initial public offering price set forth on the cover page of this
prospectus. These persons must commit to purchase no later than the close of
business on the day following the date of this prospectus and following
effectiveness of the registration statement. The number of shares available for
sale to the general public will be reduced to the extent these persons purchase
the reserved shares.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter of this offering, and will be
facilitating electronic distribution of information through the Internet.
Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
AdvisorSM, a full service brokerage firm program, may view offering terms and a
prospectus online and place orders through their financial advisors.
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LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California.
Various legal matters in connection with this offering will be passed upon for
the underwriters by Latham & Watkins, San Diego, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1999 and 1998, and for each
of the three years in the period ended December 31, 1999, as set forth in their
report. We have included our financial statements and schedule in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered by this prospectus. This prospectus does not contain all
of the information set forth in the registration statement and the exhibits and
schedules to the registration statement. For further information about us and
with respect to our common stock, we refer you to the registration statement
and the exhibits and schedules filed as a part of the registration statement.
Statements contained in this prospectus regarding the contents of any contract
or any other document to which reference is made are not necessarily complete;
we refer you to the copy of each contract or other document filed as an exhibit
to the registration statement. These statements are qualified in all respects
by reference to the applicable exhibit. The registration statement, including
the exhibits and schedules, may be inspected without charge at the public
reference facilities maintained by the Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New
York 10048. Copies of all or any part of the registration statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission. Information on the operation of the public reference facilities may
be obtained by calling the Commission at 1-800-SEC-0330. The Commission
maintains a world wide web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the web site is http://www.sec.gov.
We are subject to the information and periodic reporting requirements of the
Exchange Act and, accordingly, file periodic reports, proxy statements and
other information with the Commission. These periodic reports, proxy statements
and other information are available for inspection and copying at the
Commission's public reference rooms, and the website of the Commission referred
to above.
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ZiLOG, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ANNUAL FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997..................................................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997 .................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficiency) for the
Years Ended December 31, 1999, 1998 and 1997............................ F-6
Notes to Consolidated Financial Statements............................... F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets as of July 2, 2000 and
December 31, 1999....................................................... F-24
Unaudited Condensed Consolidated Statements of Operations for the Six
Months ended July 2, 2000 and July 4, 1999.............................. F-25
Unaudited Condensed Consolidated Statements of Cash Flows for the Six
Months ended July 2, 2000 and July 4, 1999 ............................. F-26
Notes to Unaudited Condensed Consolidated Financial Statements........... F-27
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ZiLOG, Inc.
We have audited the accompanying consolidated balance sheets of ZiLOG, Inc.
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity (deficiency) and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of ZiLOG, Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/Ernst & Young LLP
San Jose, California
January 18, 2000, except for the second paragraph
of Note 14, as to which the date is July 2, 2000
F-2
<PAGE>
ZiLOG, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
--------- ---------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 60,806 $ 50,856
Accounts receivable, less allowance for doubtful
accounts of $423 in 1999 and $366 in 1998............. 31,834 25,151
Inventories............................................ 28,456 22,232
Prepaid expenses and other current assets.............. 12,917 7,521
--------- ---------
Total current assets................................. 134,013 105,760
Property, plant and equipment, at cost:
Land, buildings and leasehold improvements............. 37,520 37,026
Machinery and equipment................................ 376,196 387,375
--------- ---------
413,716 424,401
Less: accumulated depreciation and amortization........ (277,570) (242,653)
--------- ---------
Net property, plant and equipment.................... 136,146 181,748
Other assets............................................. 14,127 9,563
--------- ---------
$ 284,286 $ 297,071
========= =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable....................................... $ 21,998 $ 16,381
Accrued compensation and employee benefits............. 32,656 24,595
Other accrued liabilities.............................. 23,797 17,977
--------- ---------
Total current liabilities............................ 78,451 58,953
Notes payable............................................ 280,000 280,000
Other non-current liabilities............................ 15,603 6,349
Commitments and contingencies
Stockholders' 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
December 31, 1999 and 1998; aggregate liquidation
preference $31,050.................................... 25,000 25,000
Common Stock, $0.01 par value; 70,000,000 shares
authorized; 30,525,786 and 30,098,736 shares issued
and outstanding at December 31, 1999 and 1998,
respectively. Class A Stock, $0.01 par value;
30,000,000 shares authorized; 10,000,000 shares issued
and outstanding at December 31, 1999 and 1998......... 405 401
Additional paid-in capital............................... 1,113 799
Accumulated deficit...................................... (116,286) (74,431)
--------- ---------
Total stockholders' deficiency....................... (89,768) (48,231)
--------- ---------
$ 284,286 $ 297,071
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
ZiLOG, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales....................................... $245,138 $204,738 $261,097
Cost of sales................................... 158,768 163,315 171,722
-------- -------- --------
Gross margin.................................... 86,370 41,423 89,375
Operating expenses:
Research and development...................... 32,777 28,846 30,467
Selling, general and administrative........... 59,082 54,317 47,806
Special charges............................... 4,686 38,620 --
-------- -------- --------
96,545 121,783 78,273
-------- -------- --------
Operating income (loss)......................... (10,175) (80,360) 11,102
Other income (expense):
Interest income............................... 2,567 3,755 3,167
Interest expense.............................. (28,954) (24,375) (275)
Other, net.................................... (324) (796) 832
-------- -------- --------
Income (loss) before income taxes............... (36,886) (101,776) 14,826
Provision (benefit) for income taxes............ 1,004 (14,248) 2,965
-------- -------- --------
Net income (loss)............................... (37,890) (87,528) 11,861
Preferred stock dividends....................... 3,965 2,928 --
-------- -------- --------
Net income (loss) attributable to common
stockholders................................... $(41,855) $(90,456) $ 11,861
======== ======== ========
Net income (loss) per common share:
Basic......................................... $ (1.04) $ (2.46) $ 0.59
Diluted....................................... $ (1.04) $ (2.46) $ 0.57
Shares used in per share calculation:
Basic......................................... 40,238 36,789 20,233
Diluted....................................... 40,238 36,789 20,676
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
ZiLOG, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $(37,890) $ (87,528) $ 11,861
Adjustments to reconcile net (loss) income to
cash (used) provided by operating activities:
Depreciation and amortization............... 52,368 61,795 63,750
Write-down of assets held for disposal...... 3,677 -- --
Charge for purchased in-process research and
development................................ 1,009 -- --
Loss from disposition of equipment.......... 261 1,351 50
Deferred income taxes....................... -- (7,150) (2,229)
Changes in assets and liabilities:
Accounts receivable......................... (6,683) 6,482 (2,238)
Inventories................................. (6,224) 10,736 1,501
Prepaid expenses and other assets........... (5,396) 13,875 201
Accounts payable............................ 5,617 (8,352) (4,053)
Accrued compensation and employee benefits.. 8,061 7,311 739
Other accrued and non-current liabilities... 9,579 (3,592) 3,062
-------- --------- ---------
Cash (used) provided by operating
activities............................. 24,379 (5,072) 72,644
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (8,269) (21,317) (38,437)
Acquisition of Seattle Silicon, net of cash
acquired..................................... (5,931) -- --
Short-term investments:
Purchases................................... -- -- (229,730)
Proceeds from sales......................... -- 14,127 141,936
Proceeds from maturities.................... -- -- 127,304
-------- --------- ---------
Cash (used) provided by investment
activities............................. (14,200) (7,190) 1,073
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock........ 318 212 2,956
Purchase of outstanding shares................ -- (399,475) --
Merger costs charged to retained earnings..... -- (17,401) --
Net proceeds from issuance of notes........... -- 270,098 --
Investment by Texas Pacific Group Partners II,
L.P.......................................... 117,500 --
Principal payments under capital leases....... (547) -- --
-------- --------- ---------
Cash (used) provided by financing
activities............................. (229) (29,066) 2,956
-------- --------- ---------
Increase (decrease) in cash and cash
equivalents.................................. 9,950 (41,328) 76,673
Cash and cash equivalents at beginning of
period....................................... 50,856 92,184 15,511
-------- --------- ---------
Cash and cash equivalents at end of period.... $ 60,806 $ 50,856 $ 92,184
======== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid during the year............... $ 26,869 $ 13,596 $ --
Income taxes paid (net refund) during the
year....................................... $ (7,137) $ (1,955) $ 1,905
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITIES:
Equipment purchased under capital leases.... $ 2,077 $ -- $ --
</TABLE>
See accompanying notes to the consolidated financial statements
F-5
<PAGE>
ZiLOG, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(dollars in thousands)
<TABLE>
<CAPTION>
Common Stock Common Stock Retained Accumulated Total
Preferred Stock Voting Class A Additional Earnings Other Stockholders'
--------------- ------------------ ----------------- Paid-in (Accumulated Comprehensive Equity
Shares Amount Shares Amount Shares Amount Capital Deficit) Income (Loss) (Deficiency)
------- ------- ---------- ------ ---------- ------ ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997.. -- $ -- 20,127,976 $201 -- $ -- $ 161,599 $ 163,375 $ 105 $ 325,280
Issuance of
Common Stock
under stock
option and stock
purchase plans,
including tax
benefit of $397.. -- -- 205,766 2 -- -- 3,351 -- -- 3,353
Comprehensive
income:
Net income...... -- -- -- -- -- -- -- 11,861 -- 11,861
Other
comprehensive
loss:
Adjustments to
unrealized gains
(losses) on
available-for-
sale securities,
net of tax of
$3.............. -- -- -- -- -- -- -- -- (12) (12)
---------
Total
comprehensive
income.......... 11,849
------- ------- ---------- ---- ---------- ----- --------- --------- ----- ---------
Balance at
December 31,
1997............. -- -- 20,333,742 203 -- -- 164,950 175,236 93 340,482
Issuance of
Common Stock
under stock
option plans..... -- -- 14,852 -- -- -- 212 -- -- 212
Recapitalization
of company....... 250,000 25,000 (5,299,226) (52) 5,000,000 50 (164,163) (159,211) -- (298,376)
Common Stock
split (2:1)...... -- -- 15,049,368 150 5,000,000 50 (200) -- -- --
Preferred
dividends
accrued.......... -- -- -- -- -- -- -- (2,928) -- (2,928)
Comprehensive
loss:
Net loss........ -- -- -- -- -- -- -- (87,528) -- (87,528)
Other
comprehensive
loss:
Adjustments to
unrealized gains
(losses) on
available-for-
sale securities,
net of tax of
$15............. -- -- -- -- -- -- -- -- (93) (93)
---------
Total
comprehensive
loss............ (87,621)
------- ------- ---------- ---- ---------- ----- --------- --------- ----- ---------
Balance at
December 31,
1998............. 250,000 25,000 30,098,736 301 10,000,000 100 799 (74,431) -- (48,231)
Issuance of
Common Stock
under stock
option plans..... -- -- 127,050 1 -- -- 317 -- -- 318
Issuance of
Common Stock for
employee
compensation..... -- -- 300,000 3 -- -- (3) -- -- --
Preferred
dividends
accrued.......... (3,965) =-- (3,965)
Net loss and
comprehensive
loss............. -- -- -- -- -- -- -- (37,890) -- (37,890)
------- ------- ---------- ---- ---------- ----- --------- --------- ----- ---------
Balance at
December 31,
1999............. 250,000 $25,000 30,525,786 $305 10,000,000 $ 100 $ 1,113 $(116,286) $ -- $ (89,768)
======= ======= ========== ==== ========== ===== ========= ========= ===== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
ZiLOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 1. Description of Business and Summary of Significant Accounting Policies
Nature of business: ZiLOG, Inc. ("ZiLOG" or "the Company") designs,
develops, manufactures and markets semiconductor micro-logic devices for
application specific standard products (ASSPs) for the communications and
embedded control markets.
Principles of consolidation: The consolidated financial statements include
the accounts of ZiLOG and its subsidiaries. All significant transactions and
accounts between the Company and these subsidiaries have been eliminated in
consolidation.
Revenue recognition: Certain of the Company's sales are made through
distributors under agreements allowing limited right of return and price
protection on merchandise unsold by the distributors. Revenue is recognized at
the time of shipment with appropriate reserves provided for returns and price
allowances. Royalty income is recognized when the income is earned from the
licensees.
In December 1999, the Securities and Exchange Commission (SEC) issued SEC
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company has reviewed SAB 101 and is evaluating the effect of
its application to the Company's financial statements.
Derivative instruments and hedging activities: In June 1998, the FASB issued
FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
FAS No. 133 requires all derivatives to be recorded on the balance sheet at
fair value and establishes special accounting rules for different types of
hedges. Adoption of this statement is required in the year ending December 31,
2001, and is not expected to have any impact on the Company's results of
operations or financial condition.
Foreign currency translation: All of the Company's subsidiaries use the U.S.
dollar as the functional currency. Accordingly, monetary accounts and
transactions are remeasured at current exchange rates and non-monetary accounts
are remeasured at historical rates. Revenues and expenses are remeasured at the
average exchange rates for each period, except for depreciation expense which
is remeasured at historical rates. Foreign currency exchange gains and (losses)
were included in determining results of operations and aggregated ($196,000),
($215,000) and $940,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Cash equivalents: Cash equivalents consist of financial instruments which
are readily convertible to cash and have original maturities of three months or
less at the time of acquisition.
Inventories: Inventories are stated at the lower of standard cost (which
approximates actual cost on a first-in, first-out basis) or market and consist
of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
1999 1998
------- -------
<S> <C> <C>
Raw materials.............................................. $ 1,477 $ 2,439
Work-in-process............................................ 20,146 17,844
Finished goods............................................. 6,833 1,949
------- -------
$28,456 $22,232
======= =======
</TABLE>
Property, plant and equipment: Property, plant and equipment are stated at
cost. Depreciation is computed using the straight-line method over the
estimated economic lives of the assets which are generally
F-7
<PAGE>
ZiLOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
between three and seven years for machinery and equipment and 30 years for
buildings. Effective July 5, 1999, the Company changed the estimated useful
lives of certain machinery and equipment located in its eight-inch wafer fab in
Nampa, Idaho from five to seven years. The decision to change the estimated
service period for these assets was based on the Company's recent qualification
of a new .35 micron wafer manufacturing process in its eight-inch wafer fab and
the transfer of many of ZiLOG's products into volume production in this
facility. This change in accounting estimate resulted in a $9.1 million
reduction of depreciation expense in the second half of 1999 as compared to the
amount that would have been recorded under the previous useful life estimates.
Had the accounting change been in effect for the full year in 1999, it would
have resulted in a $18.2 million reduction in depreciation expense compared to
the amount that would have been recorded under the previous useful life
estimates. Accordingly, the Company believes that extending the service period
on these assets is consistent with its current production plans. Amortization
of leasehold improvements is computed using the shorter of the remaining terms
of the leases or the estimated economic lives of the improvements. Depreciation
expense of property, plant and equipment was $51,110,000, $61,795,000 and
$63,522,000 for 1999, 1998 and 1997, respectively. Assets leased under a
capital lease are recorded at the present value of the lease obligation and
amortized on a straight-line basis over the lease term to depreciation expense.
Amortization of leased assets was $682,000 in 1999.
Advertising expenses: The Company accounts for advertising costs as expense
for the period in which they are incurred. Advertising expenses for 1999, 1998
and 1997 were approximately $1,727,000, $473,000 and $922,000, respectively.
Use of estimates: The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Stock awards: The Company accounts for employee stock awards in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees." As stock option grants are issued with an exercise price equal
to the fair value of the stock, the Company recognizes no compensation expense
for stock option grants. Additionally, as the Stock Purchase Plan qualified as
an "Employee Stock Purchase Plan" under Section 423 of the Code, no
compensation expense was recorded. Pro forma information required by FASB
Statement No. 123, "Accounting for Stock Based Compensation" is presented in
Note 10 below.
Net income (loss) per share: Basic and diluted net income (loss) per share
is presented in conformity with Statement of Financial Accounting Standards No.
128, "Earnings Per Share" (SFAS 128). In accordance with SFAS 128, basic net
income (loss) per common share has been computed using the weighted average
number of shares of common stock outstanding during the period. Diluted net
income (loss) per common share incorporates the incremental shares issuable
upon the assumed exercise of stock options, warrants and convertible preferred
stock, if dilutive.
For the years ended December 31, 1999 and 1998 no stock options were
excluded from the calculation of diluted net income (loss) per common share
because they were anti-dilutive, but these options may be dilutive in the
future. For the year ended December 31, 1997, 897,314 stock options were
excluded from the calculation of diluted net income (loss) per common share
because they were anti-dilutive, but these options may be dilutive in the
future.
As discussed in Note 6, the Company affected two stock-splits in fiscal
1998. For purposes of calculating earnings per common share, shares outstanding
prior to February 27, 1998 do not reflect the two stock-splits because the
shares outstanding prior to February 27, 1998 were canceled in connection with
the recapitalization
F-8
<PAGE>
ZiLOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
as described in Note 2. Shares outstanding prior to the recapitalization have
not been restated to reflect these stock-splits, as they were either
repurchased and cancelled, or exchanged for new common shares and cancelled as
a result of the recapitalization.
The following table sets forth the computation of basic and diluted net
income (loss) per common share:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
(in thousands, except per
share amounts)
<S> <C> <C> <C>
Numerator:
Net income (loss)................................ $(41,855) $(90,456) $11,861
======== ======== =======
Denominator:
Denominator for basic net income (loss) per
common share--weighted average common shares.... 40,238 36,789 20,233
Effect of dilutive securities:
Stock options.................................... -- -- 443
-------- -------- -------
Denominator for diluted net income (loss) per
common share--weighted average common and
potentially dilutive securities................. 40,238 36,789 20,676
======== ======== =======
Basic net income (loss) per common share........... $ (1.04) $ (2.46) $ 0.59
======== ======== =======
Diluted net income (loss) per common share......... $ (1.04) $ (2.46) $ 0.57
======== ======== =======
</TABLE>
Note 2. 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"). By virtue of the Merger, 374,842 shares (pre-
split) of ZiLOG Common Stock held by certain of ZiLOG's stockholders prior to
the Merger were exchanged for new common shares of the Company. All other
shares of outstanding Common Stock were canceled and converted into the right
to receive cash consideration. By virtue of the Merger, the Common Stock of
Merger Sub was converted into new shares of Common Stock, Non-Voting Common
Stock and Preferred Stock of ZiLOG. Also in connection with the Merger, stock
options to purchase shares of Common Stock issued under ZiLOG's stock plans
outstanding immediately prior to the consummation of the Merger were canceled
and, in certain instances, were converted into the right to receive an amount
in cash, as set forth in the Merger Agreement. The transaction was accounted
for as a recapitalization which resulted in TPG II owning approximately 89% of
the voting shares and pre-Merger stockholders owning approximately 10% of the
voting shares. Because TPG II acquired less than substantially all of the
Common Stock, the basis of the Company's assets and liabilities were not
impacted by the transaction.
In connection with the Merger, ZiLOG amended its articles of incorporation
with respect to the Company's authorized share capital. Authorized shares are
as follows: (i) 5,000,000 shares of $100 par value preferred stock, (ii)
15,000,000 of $0.01 par value Class A Non-Voting Common Stock and
(iii) 35,000,000 shares of $0.01 par value Common Stock. Immediately after the
consummation of the Merger, the Board of Directors (the "Board") declared a 4-
for-1 stock split in the form of a dividend for each share of Common Stock and
Class A Non-Voting Common Stock and designated 1,500,000 shares of Preferred
Stock as Series A Cumulative Preferred Stock ("Series A Stock").
F-9
<PAGE>
ZiLOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Approximately $434.4 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 $30.7 million in fees and expenses,
which were charged to retained earnings at the date of the Merger.
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 $36.1 million of ZiLOG's cash and
cash equivalents; and (iii) $280 million of gross proceeds from the sale of the
Notes (see Note 8) through a private placement. As a result of the Merger (on a
post-split basis; see Note 6), the Company, as of December 31, 1998, had
250,000 shares of Series A Stock, 30,098,736 shares of Common Stock and
10,000,000 shares of Class A Non-Voting Common Stock issued and outstanding.
Note 3. Acquisition
On April 20, 1999, ZiLOG acquired substantially all of the assets and
assumed the operating liabilities of Seattle Silicon Corporation ("Seattle
Silicon") a fabless semiconductor company based in Bellevue, Washington that
offers a customized design capability for analog devices and mixed signal
system-on-a-chip (SOC) technology. The purchase price of approximately $6.1
million, including acquisition costs of approximately $0.4 million, was
allocated based on fair values as follows: tangible net assets of $0.1 million;
in-process research and development of $1.0 million; and goodwill of $5.0
million (three-year amortization period). For financial statement purposes,
this acquisition was accounted for as a purchase, and accordingly, the results
of operations of Seattle Silicon subsequent to April 20, 1999, are included in
the Company's condensed consolidated statements of operations.
In-process research and development was expensed in April 1999 because the
projects related to the acquired research and development (partially developed
semiconductor product designs), had not reached technological feasibility and
have no alternative future use. The nature of efforts required to develop the
purchased in-process technology into commercially viable products primarily
relates to completion of design, prototyping and testing to ensure the products
can be produced to meet customer design specifications, including functions,
features and performance requirements. There can be no assurance that these
products will ever achieve commercial viability.
Factors considered in valuing in-process research and development included
the stage of development of each project, target markets and associated risks
of achieving technological feasibility and market acceptance of the products.
The value of the purchased in-process technology was determined by estimating
the projected net cash flows arising from commercialization of the products
over periods ranging from one to four years. These cash flows were then
discounted to their net present value using a discount rate of 25 percent. The
estimated stage of completion was applied to the net present value of future
discounted cash flows to arrive at the $1.0 million charge for in-process
research and development that was immediately written off to the statement of
operations.
Due to the insignificance of Seattle Silicon's operations compared to
ZiLOG's financial statements, it was not deemed appropriate to disclose pro
forma results.
Note 4. Fair Values Of Financial Instruments
Cash and cash equivalents consist primarily of cash in bank accounts,
commercial paper, money market accounts and short-term time deposits. The
carrying amount on the balance sheet for cash and cash equivalents at December
31, 1999 and 1998 were $60,806,000 and $50,856,000, respectively, which
approximates fair
F-10
<PAGE>
ZiLOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
value, due to their short maturities. Based on market quoted values, the Notes
(see Note 8) had an estimated fair value of $255.5 million and $224.0 million
at December 31, 1999 and 1998, respectively.
Note 5. Special Charges
During the second quarter of 1999, ZiLOG incurred special charges of $4.7
million. Approximately $1.0 million was purchased in-process research and
development related to several partially developed semiconductor product
designs that were acquired through the acquisition of Seattle Silicon in April
1999 (see Note 3). ZiLOG also recognized a $3.7 million charge for the write-
down to estimated net realizable value of under-utilized test equipment, which
is being held for sale. The carrying value of such assets at December 31, 1999
is $900,000 and is recorded in other current assets on the consolidated balance
sheet. The net realizable value of assets held for disposal was based on an
independent appraisal.
Recapitalization expenses consisted of charges directly related to the
change in control and repositioning of the Company as a result of the Merger
(as discussed in Note 2). During 1998, the Company incurred restructuring
charges totaling approximately $5.3 million. Of this amount, approximately $4.6
million was related to manufacturing operations and approximately $0.7 million
was related to sales and headquarters operations. The restructuring costs
reflect the Company's strategy to align worldwide operations with market
conditions and improve the productivity of its manufacturing facilities.
Restructuring actions related to manufacturing operations took place in the
third and fourth quarters of 1998. The third quarter restructuring costs
consisted of approximately $1.0 million for severance pay and benefits for
terminated employees. This action reduced the Company's workforce in its Nampa,
Idaho wafer fabrication facility by 20%, or approximately 120 positions. The
restructuring costs for the fourth quarter consisted of approximately
$2.4 million for severance pay and benefits for approximately 384 terminated
employees and $1.2 million for fixed asset write-offs related to the closure of
its assembly operations in the Philippines. In connection with the fourth
quarter action, ZiLOG completed the transition of its assembly operations to
subcontractors.
Special charges for the years ended December 31, 1999 and 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
Write-down of assets held for disposal.......................... $3,677 $ --
Purchased in-process research and development................... 1,009 --
Recapitalization:
Executive severance pay and new executive bonuses............. -- 13,195
Stock option buyout........................................... -- 4,195
Bridge loan fees.............................................. -- 3,360
Employee retention bonuses.................................... -- 9,511
Consultants, other............................................ -- 3,073
Restructuring of operations:
Employee severance and termination benefits................... -- 4,060
Abandonment of equipment and leasehold improvements........... -- 1,226
------ -------
$4,686 $38,620
====== =======
</TABLE>
Note 6. Stock Splits
As discussed in Note 2, the Board declared a 4-for-1 stock split immediately
after the consummation of the Merger. The Board also approved a 2-for-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
F-11
<PAGE>
ZiLOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
increased from 15,049,368 to 30,098,736 shares (on a post split basis). Class A
Non-Voting Common Stock authorized shares increased from 15,000,000 shares to
30,000,000 shares and issued and outstanding shares (on a post split basis)
increased from 5,000,000 shares to 10,000,000 shares. Shares outstanding prior
to the Merger have not been restated to reflect these stock splits, as they
were either repurchased and cancelled, or exchanged for new common shares and
cancelled as a result of the Merger.
Note 7. Credit Facility
On December 30, 1998, ZiLOG executed an agreement with a financial
institution (the "Lender") for up to $40 million in the form of a senior
secured revolving and capital equipment credit facility (the "Facility"). The
revolving line of credit for the 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 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 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. At
December 31, 1999, the Company's total calculated availability under the
Facility was $38.5 million.
Note 8. Notes Payable
The Company has issued $280 million 9% Senior Secured Notes (the "Notes"),
which mature on March 1, 2005. Interest is payable semi-annually on the first
of March and September. Expenses associated with the offering of approximately
$9.9 million were deferred and are being amortized to interest over the term of
the Notes. 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 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.
Note 9. Retirement and Pension Plans
The Company has an employee savings plan that qualifies as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code. Under the plan,
participating U.S. employees may defer a portion of their pretax earnings, up
to the Internal Revenue Service annual contribution limit ($10,000 for calendar
year 1999). The Company may make matching contributions on behalf of each
participating employee in an amount equal to 100% of the participant's deferral
contribution, up to 1.5% of the participant's compensation on a quarterly
basis. The Company may also make additional discretionary contributions to the
401(k) Plan. Matching contributions to the savings plan were approximately
$727,000, $721,000, and $583,000 in 1999, 1998 and 1997, respectively. The
discretionary contribution for 1997 was approximately $1,820,000. There were no
discretionary contributions made for 1999 or 1998.
The Company's Philippines subsidiaries have a defined benefit pension plan
that is consistent with local statutes and practices. These benefit plans had
no material impact on the Company's financial statements for the periods
presented.
F-12
<PAGE>
ZiLOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10. Stockholders' Equity (Deficiency)
Common stock: Holders of Common Stock are entitled to one vote per share on
all matters submitted to a vote of stockholders. Approval of matters brought
before the stockholders requires the affirmative vote of a majority of the
holders of the outstanding shares of Common Stock, except as otherwise required
by the General Corporation Law of the State of Delaware (the "DGCL"). Holders
of Class A Non-Voting Common Stock do not have any voting rights, except the
right to vote as a class to the extent required by DGCL.
Except for differences in voting rights described above, the rights, powers,
preferences and limitations of the Common Stock and Class A Non-Voting Common
Stock are identical. Subject to the rights of holders of Series A Stock and
other classes and/or series of preferred stock, if any, all shares of Common
Stock and Class A Non-Voting Common Stock are entitled to share in such
dividends as the Board may from time to time declare from sources legally
available therefore. Subject to the rights of creditors and holders of Series A
Stock and other classes and/or series of preferred stock, if any, holders of
Common Stock and Class A Non-Voting Common Stock are entitled to share ratably
in a distribution of assets of the surviving corporation upon any liquidation,
dissolution or winding up of a surviving corporation.
Preferred stock: The Board has the authority to issue, from time to time, by
resolution and without any action by stockholders, up to 5,000,000 shares of
Preferred Stock, par value $100.00 per share, in one or more classes and/or
series and may establish the powers, designations, preferences, rights and
qualifications, limitations or restrictions (which may differ with respect to
each such class and/or series) of such class and/or series. Upon consummation
of the recapitalization, the Board adopted a resolution providing for the
creation of Series A Cumulative Preferred Stock ("Series A Stock") into which
the shares of capital stock of Merger Sub were converted in the Merger. The
Series A Stock is a non-voting 13.5% preferred stock with a par value of
$100.00 per share.
The Series A Stock will accumulate dividends at the rate of 13.5% per annum
(payable quarterly) for periods ending on or prior to February 25, 2008, and
15.5% per annum thereafter. Dividends will be payable, at the election of the
Board but subject to availability of funds and the terms of the Notes in cash
or in kind through corresponding increase in the liquidation preference (as
described below) of the Series A Stock. The Series A Stock had an initial
liquidation preference of $100.00 per share.
To the extent that a quarterly dividend payment in respect to a share of
Series A Stock is not made in cash when due, the amount of such unpaid dividend
will accumulate (whether or not declared by the Board) through an increase in
the liquidation preference of such share of Series A Stock equal to the amount
of such unpaid dividend and compounded dividends will accumulate on all such
accumulated and unpaid dividends. Such dividends are included in other accrued
liabilities in the consolidated balance sheets. The liquidation preference will
be reduced to the extent that previously accumulated dividends are thereafter
paid in cash. The Company is required to pay in cash all accumulated dividends
that have been applied to increase the liquidation preference on February 26,
2008 (the "Clean-Down").
Shares of Series A Stock may be redeemed at the option of the Company, in
whole or in part, at 100% of par value, if redeemed after February 25, 2003, in
each case of the sum of (i), the liquidation preference thereof, increases to
the extent that accumulated dividends thereon shall not have been paid in cash,
plus (ii) accrued and unpaid dividends thereon to the date of redemption.
Redemption of shares of Series A Stock prior to February 26, 2003 would be at a
premium to par value based on a declining scale as follows: 103.5% after August
25, 1999; 103.0% after February 25, 2000; 102.5% after August 25, 2000; 102.0%
after February 25, 2001; 101.5% after August 25, 2001; 101% after February 25,
2002 and 100.5% after August 25, 2002. Optional redemption of the Series A
Stock will be subject to, and expressly conditioned upon, certain limitations
under the Notes.
F-13
<PAGE>
ZiLOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In certain circumstances, including the occurrence of a change of control at
the Company, but again subject to certain limitations under the Notes, the
Company may be required to repurchase shares of Series A Stock at 101% of the
sum of the liquidation preference thereof, increased to the extent that
accumulated dividends thereon shall not have been paid in cash, plus
accumulated and unpaid dividends to the repurchase date.
Holders of Series A Stock will not have any voting rights with respect
thereto, except for (i) such rights as are provided under the DGCL, (ii) the
right to elect, as a class, one director of the Company in the event that the
Company fails to comply with its Clean-Down or repurchase obligations and (iii)
class voting rights with respect to transactions adversely affecting the
rights, preferences or powers of the Series A Stock and certain transactions
involving stock that ranks junior in payment of dividends, or upon liquidation,
to the Series A Stock.
Pre-merger stock plans: Prior to the Merger, the Company had a stock
purchase plan (the "Purchase Plan") and a stock option plan (the "Old Option
Plan") both of which were terminated upon completion of the Merger. The
Purchase Plan had 600,000 shares authorized for eligible employees to purchase
the Company's common stock through payroll deductions at a purchase price equal
to 85% of the lower of the closing price of the Company's common stock on the
first or last day of each six-month offer period. Shares issued under the
Purchase Plan were 92,898 in 1997. The Company had reserved 3.5 million shares
for granting restricted shares, stock units, stock options or stock
appreciation rights under the Old Option Plan. In November 1996, the Company
canceled and re-granted approximately 2.5 million stock options at a new
exercise price equal to the share price of the Company's common stock on the
re-grant date. Re-granted stock options continued to vest under the original
vesting schedule, but were not exercisable for a period of one year from the
re-grant. As a result of the Merger (see Note 2) approximately 434,000 stock
options were repurchased from optionees and all remaining options under the Old
Option Plan were canceled.
New stock plans: In August 1998, the ZiLOG, Inc. Long-Term Stock Incentive
Plan (the "Plan") and the ZiLOG, Inc. 1998 Executive Officer Stock Incentive
Plan (the "Executive Plan"), jointly referred to as the "1998 Plans," were
adopted by the Board. Under the 1998 Plans, the Company may grant eligible
employees restricted shares, stock units and nonstatuatory and incentive stock
options. Options under the 1998 Plans generally have a life of 10 years and
vest at a rate of 25% on each of the first four anniversaries following the
option grant date. The terms and conditions of each option or stock award under
the 1998 Plans are determined by a committee of the Board and are set forth in
agreements between the recipient employee and the Company. As of December 31,
1999, 4.35 million and 6.75 million shares have been reserved for issuance and
667,575 and 904,000 options have been granted under the Plan and the Executive
Plan, respectively. An executive was awarded 400,000 shares at zero
consideration during 1998. The Company recorded $1.0 million of compensation
expense in connection with the award in 1998. The shares were issued 100,000 in
1998 and 300,000 in 1999.
F-14
<PAGE>
ZiLOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the Company's activity for all stock option plans for the years
ended December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Weighted
Shares Average
Available Options Exercise
For Grant Outstanding Price
---------- ----------- --------
<S> <C> <C> <C>
1994 Option Plan
Balance at January 1, 1997.................... -- 4,670,273 $20.67
Shares reserved............................. 1,000,000 -- --
Options granted............................. (916,800) 916,800 $22.84
Options exercised........................... -- (112,868) $12.89
Options cancelled........................... (83,200) (330,872) $21.79
---------- ----------
Balance at December 31, 1997.................. -- 5,143,333 $21.11
Shares reserved............................. 1,000,000 -- --
Options exercised........................... -- (14,852) $14.50
Options cancelled or repurchased upon
Merger..................................... (1,000,000) (5,128,481) $21.13
---------- ----------
Balance at February 27, 1998.............. -- --
========== ==========
The 1998 Plans
Shares reserved............................. 8,000,000 -- --
Options granted............................. (6,469,030) 6,469,030 $ 2.89
Shares granted.............................. (100,000) -- $ 0.00
Options cancelled........................... 270,580 (270,580) $ 2.50
---------- ----------
Balance at January 1, 1999................ 1,701,550 6,198,450 $ 2.90
Shares reserved............................. 3,100,000 -- --
Options granted............................. (1,571,575) 1,571,575 $ 3.05
Shares granted.............................. (300,000) -- $ 0.00
Options exercised........................... -- (127,050) $ 2.50
Options cancelled........................... 371,974 (371,974) $ 2.50
---------- ----------
Balance at December 31, 1999.............. 3,301,949 7,271,001 $ 2.96
========== ==========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.50-$5.00............. 7,271,001 9.20 years $2.96 2,014,281 $3.14
========= ===== ========= =====
</TABLE>
The weighted average fair value of options granted in 1999, 1998 and 1997
were $1.13, $0.61 and $8.52 per share, respectively. Options that were
exercisable as of December 31, 1999, 1998 and 1997, were 2,014,281, 500,000 and
2,800,621, respectively.
Pro forma stock based compensation: Pro forma information regarding net
income is required by FAS No. 123, which also requires that the information be
determined as if the Company has accounted for its employee options granted
subsequent to December 31, 1994 under the fair value method of that statement.
The fair value of the options granted under the 1998 Plans was estimated at the
date of grant using the Minimum Value Method option pricing model using the
following weighted average assumptions for 1999: risk free
F-15
<PAGE>
ZiLOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
interest rate annual average of 6.7%, dividend yield of zero, and the weighted
average of expected life of five years. The fair value for the options granted
under the 1994 Option Plans prior to the 1998 Option Plans, was estimated at
the date of grant utilizing the Black Scholes option-pricing model with a
multiple option approach. The following weighted-average assumptions for 1997
were used: risk free interest rate (annual average) of 6.1%, dividend yield of
zero, volatility factor of the expected market price of the Company's Common
Stock of 47%, and a weighted-average expected option life of 4.5 years.
To comply with the pro forma reporting requirements of FAS No. 123 for stock
awards granted under the Purchase Plan, compensation cost is estimated for the
fair value of the employees' purchase rights using the Black Scholes method
with the following assumptions for those rights granted in 1997; dividend yield
of 0.0%; an expected life ranging up to .5 years; expected volatility factor of
48%; and a risk free interest rate of 6.0%. The weighted average fair value of
those purchase rights granted in March 1997 was $5.93. The Purchase Plan was
terminated upon completion of the Merger.
For purposes of pro forma disclosure, the expense amortization of the
options' fair value is allocated over the options' four-year vesting period.
Future pro forma net income (loss) results may be materially different from
actual amounts reported. The pro forma net income (loss) amounts for the year
ended December 31, 1999, 1998 and 1997 were $(38,958,000), $(88,144,000) and
$2,012,000, respectively.
Note 11. Income Taxes
The provision (benefit) for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1999 1998 1997
------ -------- -------
<S> <C> <C> <C>
Federal:
Current.......................................... $ -- $ (8,252) $ 3,036
Deferred......................................... -- (6,364) (1,949)
------ -------- -------
-- (14,616) 1,087
State:
Current.......................................... 197 293 565
Deferred......................................... -- (1,499) 55
------ -------- -------
197 (1,206) 620
Foreign:
Current.......................................... 807 861 1,593
Deferred......................................... -- 713 (335)
------ -------- -------
807 1,574 1,258
------ -------- -------
Provision (benefit) for income taxes............... $1,004 $(14,248) $ 2,965
====== ======== =======
</TABLE>
The tax benefit associated with the exercise of stock options reduced taxes
currently payable as shown above by $397,000 in 1997. Such benefit was credited
to additional paid-in-capital when realized.
Pretax income from foreign operations was $1,379,000, $658,000 and
$5,309,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Unremitted foreign earnings that are considered to be permanently invested
outside the U.S. and on which no deferred income taxes have been provided
amounted to approximately $6,700,000 at December 31, 1999. If such amounts were
remitted, the residual U.S. tax liability (net of foreign tax credits), would
be approximately $750,000.
F-16
<PAGE>
ZiLOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision (benefit) for income taxes differs from the amount computed by
applying the statutory income tax rate to income before taxes. The source and
tax effects of the differences are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- -------- ------
<S> <C> <C> <C>
Computed expected provision (benefit).......... $(12,910) $(35,622) $5,189
State tax, net of federal benefit.............. 197 (784) 403
Tax exempt interest income..................... -- (13) (721)
Foreign rates greater than (less than) the
federal rate.................................. 593 1,327 (838)
Research and development credits............... -- -- (921)
Losses for which no current year benefit is
recognized.................................... 12,630 17,451 --
Other.......................................... 494 3,393 (147)
-------- -------- ------
$ 1,004 $(14,248) $2,965
======== ======== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax liabilities--tax over book depreciation... $(17,606) $(17,606)
Deferred tax assets:
Net operating losses................................. 33,482 24,274
Accruals not currently deductible.................... 6,803 5,845
Inventory valuation adjustments and reserves......... 2,700 3,398
Tax credits.......................................... 2,340 1,065
Other................................................ 830 475
-------- --------
46,155 35,057
Valuation allowance.................................... (28,549) (17,451)
-------- --------
Net deferred taxes..................................... $ -- $ --
======== ========
</TABLE>
Approximately $1,150,000 of the valuation allowance is attributable to stock
option deductions, the benefit of which will be credited to paid-in capital
when realized.
Realization of deferred tax assets is dependent on future earnings, the
timing and amount of which are uncertain. Accordingly, a valuation allowance,
in an amount equal to the net deferred tax assets as of December 31, 1999 has
been established to reflect these uncertainties. The valuation allowance was
established in 1998 in the amount of $17,451,000 and increased by approximately
$11,098,000 during the fiscal year ended December 31, 1999.
As of December 31, 1999, the Company had federal and California net
operating loss carryforwards of approximately $92,000,000 and $15,000,000,
respectively, which will expire beginning in years 2003 through 2019, if not
utilized. As of December 31, 1999, the Company also had federal tax credit
carryforwards of approximately $2,340,000, which will expire at various dates
beginning in 2003 through 2013, if not utilized.
Utilization of net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the "change in ownership"
limitations provided by the Internal Revenue Code of 1986, as
F-17
<PAGE>
ZiLOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
amended, and similar state provisions. The annual limitation may result in
expiration of net operating loss and tax credit carryforwards and tax credit
carryforwards before full utilization.
Note 12. Commitments and Contingencies
The Company leases certain of its facilities and equipment under non-
cancelable operating leases, which expire in 2000 through 2005. The facility
lease agreements generally provide for base rental rates which increase at
various times during the terms of the leases and also provide for renewal
options at fair market rental value. During 1999, the Company entered into a
capital lease agreement with a bargain purchase option to acquire the assets at
the end of the lease term.
Minimum future lease payments under these non-cancelable leases at December
31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Capitalized Operating
Leases Leases
----------- ---------
<S> <C> <C>
2000................................................... $ 800 $ 5,775
2001................................................... 879 5,297
2002................................................... -- 5,195
2003................................................... -- 4,862
2004................................................... -- 903
Thereafter............................................. -- --
------ -------
Total minimum lease payments........................... 1,679 $22,032
=======
Less amount representing interest...................... 148
------
Present value of minimum lease payments................ $1,531
======
</TABLE>
Total operating lease expense, including month-to-month rentals, was
$6,609,000, $5,442,000 and $2,875,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
The Company has been named as a defendant in a purported class action
lawsuit which was filed on January 23, 1998 in the U.S. District Court for the
Northern District of California. Certain executive officers of the Company are
also named as defendants. The plaintiff purports to represent a class of all
persons who purchased the Company's Common Stock between June 30, 1997 and
November 20, 1997 (the "Class Period"). The complaint alleges that the Company
and certain of its executive officers made false and misleading statements
regarding the Company that caused the market price of its Common Stock to be
"artificially inflated" during the Class Period. The complaint does not specify
the amount of damages sought. On March 24, 1999, the court granted ZiLOG's
motion to dismiss and entered judgment in favor of all defendants. On April 16,
1999, the plaintiffs filed their notice of appeal to the Ninth Circuit of
Appeals. Based upon information presently known to management, the Company is
unable to determine the ultimate resolution of this lawsuit or whether it will
have a material adverse effect on the Company's financial condition.
The Company is a party to an insurance coverage lawsuit in the Superior
Court of the State of California in and for Santa Clara County filed on July
29, 1996, in which its former insurers, Pacific Indemnity Company, Federal
Insurance Company and Chubb & Son, Inc., claim that insurance coverage did not
exist for allegations made in two underlying lawsuits brought by some employees
of the Company and their families who claimed that they suffered personal
injuries and discrimination because of alleged exposure to chemicals at ZiLOG's
manufacturing plant in Nampa, Idaho in 1993 and 1994. The insurers seek a
declaration that insurance coverage under the applicable policies did not
exist, and they seek reimbursement of attorneys' fees, costs and
F-18
<PAGE>
ZiLOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
settlement funds expended on the Company's behalf. A total of approximately six
million, three hundred thousand dollars ($6,300,000) plus interest is sought by
the insurers. Both the insurers and the Company have each brought separate
motions for summary judgment or, in the alternative, motions for summary
adjudication. All such motions were denied by the Superior Court, and the Court
of Appeals denied each party's respective petition for review of each denial of
their summary judgment motions. The Company petitioned the California Supreme
Court for review of the denial of its motion for summary judgment. The
California Supreme Court denied the Company's petition for review without
making a decision on the merits of the dispute. The insurers have renewed their
motion for summary adjudication. The Company is opposing that motion. No trial
date has been set. Based upon information presently known to management, the
Company is unable to determine the ultimate resolution of this lawsuit or
whether it will have a material adverse effect on the Company's financial
condition.
Two parties have notified ZiLOG that it may be infringing certain patents
and other intellectual property rights. In the event ZiLOG determines that such
notice may involve meritorious claims, ZiLOG may seek a license. Based on
industry practice, ZiLOG 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 ZiLOG.
ZiLOG is participating in other litigation and responding to claims arising
in the ordinary course of business. The Company intends to defend itself
vigorously. The Company believes that it is unlikely that the outcome of these
matters will have a material adverse effect on the Company, although there can
be no assurance in this regard.
Note 13. Related Party Transactions
On September 10, 1998, Newbridge Asia signed an agreement to acquire 100% 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% of ZiLOG's outstanding common stock
at December 31, 1999. ZiLOG purchased semiconductor assembly and test services
from AMT totaling approximately $23.1 million, $7.1 million, and $8.1 million
for the years ended December 31 1999, 1998 and 1997, respectively. ZiLOG had
payables to AMT of approximately $3.8 million and $469,000 at December 31, 1999
and 1998, respectively. Payment terms between ZiLOG and AMT are net 30 days.
Note 14. Segment Reporting
Effective January 1, 1998, the Company adopted FAS No. 131, "Disclosures
about Segment of an Enterprise and Related Information." FAS No. 131
establishes standards for reporting information about operating segments and
related disclosures about products, geographic information and major customers.
During the second quarter of fiscal 2000, ZiLOG reorganized its operating
segments. ZiLOG continues to have two reportable segments, communications and
embedded control. The information presented below has been reclassified to
reflect the change.
The Company's embedded control segment is divided into two business units,
Field Programmable Microcontrollers and Home Entertainment. Consistent with the
rules of FAS No. 131, the Company has aggregated these two business units into
one reportable segment because both units have similar gross margins and target
consumer and industrial customer applications based largely on ZiLOG's Z-8 line
of 8-bit microcontrollers and digital signal processors. The Communications
business unit is generally more profitable
F-19
<PAGE>
ZiLOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
than the Company's other business units and is predominantly based on the
Company's Z80 line of 8-bit microprocessors and serial communication devices.
ZiLOG's Chief Executive Officer has been identified as the chief operating
decision maker ("CODM") for FAS No.131 purposes as he assesses the performance
of the business units and decides how to allocate resources to the business
units. EBITDA, which is defined as earnings from operations before interest
income and expense (including amortization of deferred financing costs), income
taxes, depreciation, amortization of goodwill, non-cash stock option
compensation and special charges, is the measure of profit and loss that the
CODM uses to assess performance and make decisions. ZiLOG's sales and corporate
marketing, manufacturing, central technology, finance and administration groups
are shared resources and therefore allocated to operating segments included in
the results below. Interest income, interest expense and net other are
considered to be corporate items.
ZiLOG's business units do not sell to each other, and accordingly, there are
no inter-segment sales. ZiLOG's CODM does not review total assets by operating
segment and such data are not presented below since these items are shared
resources of the Company and not separated, therefore no breakout by segment
exists. The accounting policies for reporting segments are the same as for the
Company as a whole. Subsequent to the Merger in 1998, the Company hired new
management who defined the Company's current internal reporting structure that
included budgeting and evaluating business units' financial performance by the
CDOM commencing in 1999. During 1998 and 1997, the Company was managed and
reported operating results at the enterprise level and comparable segment
financial data is not available.
Information regarding reportable segments for the years ended December 31,
1999, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Embedded Corporate Total
Communications Control and Other Consolidated
-------------- -------- --------- ------------
<S> <C> <C> <C> <C>
1999
Net sales.................... $ 84,697 $160,441 $ -- $245,138
========
EBITDA....................... 32,368 13,523 664 $ 46,555
Depreciation and
amortization................ (10,420) (41,948) -- (52,368)
Special charges.............. -- -- (4,686) (4,686)
Interest income.............. -- -- 2,567 2,567
Interest expense............. -- -- (28,954) (28,954)
--------
Loss before income taxes..... $(36,886)
========
1998
Net sales.................... $ 64,674 $140,064 $ -- $204,738
1997
Net Sales.................... $109,276 $151,821 $ -- $261,097
</TABLE>
F-20
<PAGE>
ZiLOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net sales are attributable to the ship-to location of ZiLOG's customers as
presented in the following table (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
United States.................................... $ 93,361 $ 79,190 $106,858
China (including Hong Kong)...................... 40,669 35,569 34,235
Korea............................................ 22,417 16,433 20,697
Thailand......................................... 15,759 11,064 14,128
Taiwan R.O.C..................................... 13,177 10,453 15,399
Germany.......................................... 9,822 8,624 9,499
Other foreign countries.......................... 49,933 43,405 60,281
-------- -------- --------
Total.......................................... $245,138 $204,738 $261,097
======== ======== ========
</TABLE>
The following table shows the location of long-lived assets (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
United States (including corporate assets).............. $127,054 $164,819
Philippines............................................. 9,008 16,810
Other................................................... 84 119
-------- --------
$136,146 $181,748
======== ========
</TABLE>
Major customers: During the years ended December 31, 1999 and 1998, one
distributor, Arrow Electronics, Inc., who buys from both segments, accounted
for approximately 12.6% and 10.5% of net sales, respectively. In 1997, no
single customer accounted for more than 10.0% of net sales.
Note 15. Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments and trade accounts receivable. By policy, the Company places its
investments only with high credit quality financial institutions. Almost all of
the Company's trade accounts receivable are derived from sales to electronics
distributors and original equipment manufacturers in the areas of computers and
peripherals, consumer electronics, appliances and building controls. The
Company performs ongoing credit evaluations of its customers' financial
condition and limits its exposure to accounting losses by limiting the amount
of credit extended whenever deemed necessary and generally does not require
collateral.
F-21
<PAGE>
ZiLOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 16. Quarterly Results (Unaudited)
The following table presents unaudited quarterly results (in thousands) for
the eight quarters of 1999 and 1998. The Company believes that all necessary
adjustments, consisting only of normal recurring adjustments, have been
included in the amounts stated below to state fairly the selected quarterly
information when read in conjunction with the Consolidated Financial
Statements. The Company's year-end is December 31 with interim results based on
fiscal quarters of thirteen weeks of duration ending on the last Sunday of each
quarter. The operating results for any quarter are not necessarily indicative
of results for any subsequent period.
<TABLE>
<CAPTION>
Quarter Ended (Unaudited)
----------------------------------------------------------------------------
Dec.
31, Oct. 3, Jul. 4, Apr. 4, Dec. 31, Oct. 4, Jul. 5, Apr. 5,
1999 1999 1999 1999 1998 1998 1998 1998
------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $65,362 $64,528 $ 61,039 $ 54,209 $ 54,101 $ 52,530 $ 48,568 $ 49,539
Cost of sales........... 39,076 39,488 41,794 38,410 39,604 42,070 40,874 40,767
------- ------- -------- -------- -------- -------- -------- --------
Gross margin.......... 26,286 25,040 19,245 15,799 14,497 10,460 7,694 8,772
Costs and expenses:
Research and
development.......... 8,780 8,476 8,258 7,263 6,691 7,135 6,916 8,104
Selling, general and
administrative....... 15,192 14,786 14,598 14,506 13,809 13,656 12,911 13,941
Special charges....... -- -- 4,686 -- 5,805 7,128 12,383 13,304
------- ------- -------- -------- -------- -------- -------- --------
Total costs and
expenses............ 23,972 23,262 27,542 21,769 26,305 27,919 32,210 35,349
------- ------- -------- -------- -------- -------- -------- --------
Operating income
(loss)................. 2,314 1,778 (8,297) (5,970) (11,808) (17,459) (24,516) (26,577)
Other income (expense):
Interest, net......... (6,473) (6,644) (6,651) (6,619) (5,950) (6,560) (6,291) (1,819)
Other, net............ (276) 180 (143) (85) (596) 51 (163) (88)
------- ------- -------- -------- -------- -------- -------- --------
Loss before income
taxes.................. (4,435) (4,686) (15,091) (12,674) (18,354) (23,968) (30,970) (28,484)
Provision (benefit) for
income taxes........... 254 250 250 250 (1,232) (2,314) (2,157) (8,545)
------- ------- -------- -------- -------- -------- -------- --------
Net loss................ $(4,689) $(4,936) $(15,341) $(12,924) $(17,122) $(21,654) $(28,813) $(19,939)
======= ======= ======== ======== ======== ======== ======== ========
</TABLE>
Note 17. Subsequent Event (Unaudited)
On March 22, 2000 ZiLOG acquired approximately 20% of the common stock of
Qualcore Group, Inc. ("Qualcore") for cash of $8.0 million, plus expenses of
$0.1 million, pursuant to a Purchase and Sale Agreement. ZiLOG intends to
account for its investment in Qualcore common stock using the equity method.
F-22
<PAGE>
ZiLOG, Inc.
Unaudited Interim Financial Statements
F-23
<PAGE>
ZiLOG, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
July 2, December 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 42,925 $ 60,806
Accounts receivable, less allowance for doubtful
accounts of $423 at July 2, 2000 and December 31,
1999................................................ 28,302 31,834
Inventories.......................................... 35,467 28,456
Prepaid expenses and other current assets............ 13,551 12,917
--------- ---------
Total current assets............................... 120,245 134,013
Property, plant and equipment, at cost................. 424,214 413,716
Less: accumulated depreciation and amortization........ (297,003) (277,570)
--------- ---------
Net property, plant and equipment.................... 127,211 136,146
Other assets........................................... 20,250 14,127
--------- ---------
$ 267,706 $ 284,286
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable..................................... $ 19,473 $ 21,998
Accrued compensation and employee benefits........... 32,947 32,656
Other accrued liabilities............................ 23,982 23,797
--------- ---------
Total current liabilities.......................... 76,402 78,451
Notes payable.......................................... 280,000 280,000
Other non-current liabilities.......................... 15,026 15,603
Stockholders' 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 July 2, 2000 and December 31, 1999; aggregate
liquidation preference $33,239...................... 25,000 25,000
Common Stock, $0.01 par value; 70,000,000 shares
authorized; 31,120,564 shares issued and outstanding
at July 2, 2000 and 30,525,786 shares at December
31, 1999. Class A Non-voting Common Stock, $0.01 par
value; 30,000,000 shares authorized; 10,000,000
shares issued and outstanding at July 2, 2000 and
December 31, 1999................................... 411 405
Deferred stock compensation............................ (2,070) --
Additional paid-in capital............................. 5,391 1,113
Accumulated deficit.................................... (132,454) (116,286)
--------- ---------
Total stockholders' deficiency..................... (103,722) (89,768)
--------- ---------
$ 267,706 $ 284,286
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-24
<PAGE>
ZiLOG, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
------------------
July 2, July 4,
2000 1999
-------- --------
<S> <C> <C>
Net sales.................................................. $121,015 $115,248
Cost of sales.............................................. 71,137 80,204
-------- --------
Gross margin............................................... 49,878 35,044
Operating expenses:
Research and development................................. 18,840 15,521
Selling, general and administrative...................... 29,904 29,104
Special charges.......................................... 1,191 4,686
-------- --------
49,935 49,311
-------- --------
Operating income (loss).................................... (57) (14,267)
Other income (expense):
Interest income.......................................... 1,458 1,175
Interest expense......................................... (14,522) (14,445)
Other, net............................................... (296) (228)
-------- --------
Loss before income taxes and equity loss................... (13,417) (27,765)
Provision for income taxes................................. 265 500
-------- --------
Loss before equity loss.................................... (13,682) (28,265)
Equity in loss of Qualcore Group, Inc. .................... (297) --
-------- --------
Net loss................................................... (13,979) (28,265)
Preferred stock dividends.................................. 2,189 1,917
-------- --------
Net loss attributable to common stockholders............... $(16,168) $(30,182)
======== ========
Net loss per common share (basic and diluted).............. $ (0.40) $ (0.75)
Shares used in per share calculation (basic and diluted)... 40,822 40,134
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-25
<PAGE>
ZiLOG, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
------------------
July 2, July 4,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(13,979) $(28,265)
Adjustments to reconcile net loss to cash (used) provided
by operating activities:
Depreciation and amortization........................... 21,087 31,228
Write-down of assets held for disposal.................. -- 3,677
Write-off of in-process research and development........ -- 1,009
Changes in certain assets and liabilities:
Accounts receivable..................................... 3,532 (1,287)
Inventories............................................. (7,011) (5,580)
Prepaid expenses and other assets....................... (358) (393)
Accounts payable........................................ (2,525) 6,080
Accrued compensation and employee benefits.............. 291 (22)
Other accrued and noncurrent liabilities................ (2,070) 8,265
-------- --------
Cash (used) provided by operating activities.......... (1,033) 14,712
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................... (10,405) (4,686)
Acquisition of Seattle Silicon, net of cash acquired.... -- (5,931)
Purchase of equity interest in Qualcore Group, Inc...... (8,056) --
-------- --------
Cash (used) provided by investing activities.......... (18,461) (10,617)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................. 2,124 --
Principal payments under capital leases................. (511) (262)
-------- --------
Cash (used) provided by financing activities.......... 1,613 (262)
-------- --------
Increase (decrease) in cash and cash equivalents.......... (17,881) 3,833
Cash and cash equivalents at beginning of period.......... 60,806 50,856
-------- --------
Cash and cash equivalents at end of period................ $ 42,925 $ 54,689
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-26
<PAGE>
ZiLOG, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 condensed consolidated financial statements and notes should be
read in conjunction with the Company's annual consolidated financial statements
and notes thereto included elsewhere herein. The condensed consolidated balance
sheet at December 31, 1999 has been derived from audited financial statements
at that date, but does not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Certain reclassifications have been made to the prior year
condensed consolidated financial statements to conform to the 2000
presentation. Such reclassifications had no effect on previously reported
results of operations or accumulated deficit.
As described in Note 10 to the annual consolidated financial statements of
the Company included elsewhere herein, ZiLOG's Series A Cumulative Preferred
Stock (Series A Stock) accumulates dividends at a rate of 13.5% per annum, with
dividends payable quarterly at the election of the Board of Directors. Unpaid
dividends are recognized as a charge to accumulated deficit and as an increase
in the liquidation preference of the Series A Stock. As of July 2, 2000, the
Company has not paid any dividends on the Series A Stock and the corresponding
accrued dividends are $9.1 million, which amount is included in other accrued
liabilities in the Company's condensed consolidated balance sheet. During the
six month period ended July 2, 2000, $1.1 million of dividends on Series A
Stock were accrued and charged to accumulated deficit.
(2) Equity Investment
On March 22, 2000, ZiLOG acquired 3.0 million shares or 20% of the common
stock of Qualcore Group, Inc. ("Qualcore") for cash of $8.0 million, plus
expenses of $0.1 million, $5.5 million paid on March 22, 2000 and $2.5 million
paid on April 14, 2000, pursuant to a Purchase and Sale Agreement. Under the
terms of this agreement, ZiLOG has the option ("Option") until June 30, 2001
("Expiration Date") to acquire all of the remaining common shares of Qualcore
for cash and/or common stock. ZiLOG accounts for its investment in Qualcore
common stock using the equity method. Following an initial public offering of
ZiLOG's common stock prior to the Expiration Date, ZiLOG is required to
exercise the Option. If the Option is not exercised prior to the Expiration
Date, ZiLOG may be required to pay up to $5.2 million to acquire up to 1.8
million additional shares of Qualcore common stock.
(3) Related Party Transactions
ZiLOG purchased semiconductor design services from Qualcore totaling
approximately $459,000 for the six-month period ended July 2, 2000. For the
six-month period ended July 4, 1999, ZiLOG made no purchases from Qualcore.
ZiLOG had payables to Qualcore of approximately $127,000 at July 2, 2000.
Payment terms between ZiLOG and Qualcore are net zero, payable upon percentage
of completion.
In January 1999, ZiLOG entered into an agreement with P.T. Astra
Microtronics Technology, now known as Advanced Interconnect Technologies, or
AIT, pursuant to which AIT provides the Company with semiconductor assembly and
test services through January 2003. AIT is owned by Newbrige Asia, an affiliate
of Texas Pacific Group, which in turn is an affiliate of our principal
stockholder. ZiLOG purchased services from AIT totaling approximately $10.1
million in the first half of 2000, and $10.3 million in the first half of 1999.
The Company had payments due to AIT of approximately $3.8 million at December
31, 1999 and $2.5 million at July 2, 2000. The Company's payment terms with AIT
are net 30 days.
F-27
<PAGE>
ZiLOG, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company sells products and engineering services to GlobeSpan, of which
Texas Pacific Group is a significant stockholder. The Company's net sales to
GlobeSpan totaled approximately $2.7 million and $21,000 during the six-month
periods ended July 2, 2000 and July 4, 1999, respectively. As of July 2, 2000
the Company had accounts receivable from GlobeSpan of $0.8 million.
(4) Inventories
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
July 2, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Raw materials........................................ $ 1,453 $ 1,477
Work-in-process...................................... 25,626 20,146
Finished goods....................................... 8,388 6,833
-------- -------
$ 35,467 $28,456
======== =======
</TABLE>
(5) Segment Reporting
During the second quarter of fiscal 2000, ZiLOG reorganized its operating
segments. ZiLOG continues to have two reportable segments, communications and
embedded control. The information presented below has been reclassified to
reflect the change. The Company's embedded control segment is divided into two
business units, Field Programmable Microcontrollers and Home Entertainment.
Consistent with the rules of Statement of Financial Accounting Standards No.
131, the Company has aggregated these two business units into one reportable
segment because both units have similar gross margins and target consumer and
industrial customer applications based largely on ZiLOG's Z-8 line of 8-bit
microcontrollers and digital signal processors. The Communications business
unit is generally more profitable than the Company's other business units and
is predominantly based on the Company's Z80 line of 8-bit microprocessors and
serial communication devices.
Information regarding reportable segments for the six-month periods ended
July 2, 2000 and July 4, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Embedded Corporate Total
Communications Control and Other Consolidated
-------------- -------- --------- ------------
<S> <C> <C> <C> <C>
Six Months Ended July 2, 2000:
Net sales.................... $47,153 $ 73,680 $ 182 $121,015
========
EBITDA....................... 17,186 4,012 357 $ 21,555
Special charges.............. -- -- (1,191) (1,191)
Equity investment............ -- -- 297 297
Depreciation and
amortization................ (4,835) (16,121) (58) (21,014)
Interest income.............. -- -- 1,458 1,458
Interest expense............. -- -- (14,522) (14,522)
--------
Loss before income taxes
and equity loss........... $(13,417)
========
Six Months Ended July 4, 1999:
Net sales.................... $42,515 $ 72,733 $ -- $115,248
========
EBITDA....................... 17,720 3,634 -- $ 21,354
Special charges.............. -- -- (4,686) (4,686)
Depreciation and
amortization................ (6,413) (24,750) -- (31,163)
Interest income.............. -- -- 1,175 1,175
Interest expense............. -- -- (14,445) (14,445)
--------
Loss before income taxes
and equity loss........... $(27,765)
========
</TABLE>
F-28
<PAGE>
ZiLOG, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Major customers: During the six-month period ended July 2, 2000, one
distributor, Pioneer-Standard Electronics, who buys from both segments,
accounted for approximately 10.4% of net sales. A second distributor, Arrow
Electronics, who buys from both segments, accounted for approximately 10.3% of
net sales in the six-month period ended July 2, 2000. For the six-month period
ended July 4, 1999 Arrow Electronics accounted for 11.9% of net sales.
(6) Special Charges
During the six-month period ended July 2, 2000, ZiLOG incurred special
charges of $1.2 million relating to the Company refocusing its resources on the
communications segment. In connection with this action, approximately 24 people
were terminated and 12 people were transferred into the communications segment
from other areas of the company. In the six-month period ended July 4, 1999 the
Company incurred special charges of $4.7 million comprised of a $1.0 million
charge for in-process research and development acquired from Seattle Silicon
and a $3.7 million charge to write-down assets held for disposal to estimated
net realizable value. The components of special charges are as follows (in
thousands):
<TABLE>
<CAPTION>
Six Months
Ended
-------------
July July
2, 4,
2000 1999
------ ------
<S> <C> <C>
Severance benefits.......................................... $ 951 $ --
Write-off of impaired assets................................ 140 --
Contractual liabilities..................................... 100 --
Write-down of assets held for sale.......................... -- 3,677
In-process research and development......................... -- 1,009
------ ------
$1,191 $4,686
====== ======
</TABLE>
(7) Deferred Stock Compensation
During the six-month period ended July 2, 2000 the Company issued stock
options to employees that management has determined to have exercise prices
below the deemed fair value of the Company's common stock on the date of grant.
Accordingly, during the six-month period ended July 2, 2000, ZiLOG recorded
deferred compensation of $2.2 million, representing the excess of the deemed
fair value of the common stock on the date of grant over the options' exercise
price. Deferred compensation expense is being amortized ratably over the four-
year option vesting period and totaled $0.1 million for the six-month period
ended July 2, 2000.
(8) Comprehensive Income
The Company had no items of other comprehensive income to report in either
of the six-month periods ended July 2, 2000 and July 4, 1999.
(9) Net Loss Per Common Share
Basic and diluted net income (loss) per common share is presented in
conformity with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (FAS 128). In accordance with FAS 128, basic net income (loss) per
common share has been computed using the weighted average number of shares of
common stock outstanding during the period. Diluted net income (loss) per
common share incorporates the incremental shares issuable upon the assumed
exercise of stock options, warrants and convertible preferred stock, if
dilutive.
F-29
<PAGE>
ZiLOG, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the six months ended July 2, 2000 and July 4, 1999 all stock options
were excluded from the calculation of diluted net income (loss) per common
share because they were antidilutive, but these options may be dilutive in the
future.
(10) Legal Proceedings
The Company has been named as a defendant in a purported class action
lawsuit that was filed on January 23, 1998 in the U.S. District Court for the
Northern District of California. Some of the Company's executive officers are
also named as defendants. The plaintiffs purport to represent a class of all
persons who purchased our common stock between June 30, 1997 and November 20,
1997. The complaint alleges that the Company and some of the executive officers
made false and misleading statements regarding our business that caused the
market price of our common stock to be artificially inflated during the defined
period. The complaint does not specify the amount of damages sought. On March
24, 1999, the court granted the Company's motion to dismiss and entered
judgment in favor of all defendants. On April 16, 1999, the plaintiffs filed
their notice of appeal with the Ninth Circuit of Appeals. This appeal was fully
briefed and argued to the Ninth Circuit Court of Appeals on June 8, 2000. Based
upon information presently known to management, the Company is unable to
determine the ultimate resolution of this lawsuit or whether it will have a
material adverse effect on the Company's financial condition.
The Company is a party to an insurance coverage lawsuit in the Superior
Court of the State of California in and for Santa Clara County filed on July
29, 1996, in which our former insurers, Pacific Indemnity Company, Federal
Insurance Company and Chubb & Son, Inc., claim that insurance coverage did not
exist for allegations made in two underlying lawsuits brought by some employees
of the Company and their families who claimed that they suffered personal
injuries and discrimination because of alleged exposure to chemicals at our
manufacturing plant in Idaho in 1993 and 1994. The insurers seek a declaration
that insurance coverage under the applicable policies did not exist, and they
seek reimbursement of attorneys' fees, costs, and settlement funds expended on
the Company's behalf totaling approximately $6.3 million plus interest. Both
the insurers and the Company have each brought separate motions for summary
judgment or, in the alternative, motions for summary adjudication. All such
motions were denied by the Superior Court, and the Court of Appeals denied each
party's respective petition for review of each denial of their summary judgment
motions. The Company petitioned the California Supreme Court for review of the
denial of our motion for summary judgment. The California Supreme Court denied
the Company's petition for review without making a decision on the merits of
the dispute. The insurers have renewed their motion for summary adjudication.
The Company is opposing that motion. No trial date has been set. Based upon
information presently known to management, the Company is unable to determine
the ultimate resolution of this lawsuit or whether it will have a material
adverse effect on the Company's financial condition.
Four parties have notified ZiLOG that it may be infringing their patents and
other intellectual property rights. In the event ZiLOG determines that such
notices may involve meritorious claims, it may seek a license. Based on
industry practice, ZiLOG believes that in most cases any necessary licenses or
other rights could be obtained on commercially reasonable terms. However, ZiLOG
cannot make any assurances 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 ZiLOG.
ZiLOG is participating in other litigation and responding to claims arising
in the ordinary course of business. The Company intends to defend its interests
vigorously in these matters. Management believes that it is unlikely that the
outcome of these matters will have a material adverse effect on the Company,
although management cannot make any assurances in this regard.
F-30
<PAGE>
ZiLOG, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) Recent Accounting Pronouncement
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB No. 25" ("FIN 44"). FIN 44 clarifies the
application of APB No. 25 and, among other issues clarifies the following: the
definition of an employee for purposes of applying APB No. 25; the criteria for
determining whether a plan qualifies as a noncompensatory plan; the accounting
consequence of various modifications to the terms of previously fixed stock
options or awards; and the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, but certain
provisions of FIN 44 cover specific events that occurred after either December
15, 1998 or January 12, 2000. The application of FIN 44 did not have a material
impact on the Company's financial position or results of operations.
(12) Subsequent Event
On July 27, 2000 ZiLOG acquired Calibre, Inc. ("Calibre") pursuant to a
merger agreement ("the Agreement"), for common stock and vested common stock
options totaling 743,714 shares. The Agreement provides that the former Calibre
stockholders may receive up to 527,799 additional shares of ZiLOG common stock
as earn-out consideration in the event that Calibre achieves specified
financial goals in the twelve-month period following the acquisition. ZiLOG
intends to account for the acquisition of Calibre using the purchase method.
F-31
<PAGE>
Background color for the entire page is black. [On the top third of the page is
inset picture of ZILOG Fabrication facility in Nampa, Idaho]
Immediately under the photo is a headline:
"Meet the Engines of Extreme Connectivity"
Under the headline are two pictures. [On the left is a picture of a future
Cartezian Processor chip] [On the right is a picture of ZILOG Muze chips]
Under each picture is a sub-headline and block of copy.
The copy under the Cartezian chip is as follows:
"Communications"
"The emergence of streaming audio and video content and transaction-intensive e-
commerce websites have strained the ability of networks to process and transmit
information quickly. These factors have created the need for increased
communications and Internet infrastructure capacity, or bandwidth. ZILOG is
developing advanced semiconductor solutions that leverage our existing expertise
in communications technologies to enter high-growth communications sectors. For
example, we are developing advanced network and Internet processor devices to
help expand the capacity of the Internet infrastructure. These devices include
the Cartezian family of products for manufacturers of network routers and
switches and the eZ80 family of products for embedded web servers, gateways and
wireless data modems."
"Embedded Control"
"As consumer and industrial manufacturers seek to enhance the value of their
products by increasing functionality, performance and ease of use, they are
embedding more advanced control devices into their designs. Embedded control
devices may enable manufacturers to differentiate their products, replace less
efficient electro-mechanical devices, add product functionality and reduce
production costs. ZILOG offers a large selection of application specific
standard products, as well as general purpose devices, that address the embedded
control needs of a broad range of consumer and industrial customers. Our
devices feature a variety of memory configurations, low voltage and power, small
packaging and ease of use that are designed to allow electronics manufacturers
to differentiate their products, add product functionality and reduce product
costs."
[At the bottom center of this page is the ZILOG logo]
<PAGE>
Shares
[LOGO OF ZILOG, INC.]
ZiLOG, Inc.
Common Stock
-------------
Prospectus
, 2000
-------------
Lehman Brothers
Prudential Volpe Technology
a unit of Prudential Securities
SG Cowen
Fidelity Capital Markets
a division of National Financial Services Corporation
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table indicates the expenses to be incurred in connection
with the offering described in this Registration Statement, all of which will
be paid us. All amounts are estimates, other than the registration fee, the
NASD fee, and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC Registration fee................................................ $45,540
NASD Filing fee..................................................... 17,750
Nasdaq National Market listing fee.................................. 45,235
Accounting fees and expenses........................................ *
Legal fees and expenses............................................. *
Director and officer insurance expenses............................. *
Printing and engraving expenses..................................... *
Transfer agent fees and expenses.................................... *
Blue sky fees and expenses.......................................... *
Miscellaneous fees and expenses..................................... *
-------
Total............................................................. $ *
=======
</TABLE>
--------
* To be completed by amendment.
Item 14. Indemnification of Directors and Officers.
Section 102 of the General Corporation Law of the State of Delaware (the
"DGCL"), as amended, allows a corporation to eliminate or limit the personal
liability of directors of a corporation to the corporation or its stockholders
for monetary damages for a breach of fiduciary duty as a director, except
where the director breached his duty of loyalty, failed to act in good faith,
engaged in intentional misconduct or knowingly violated a law, authorized the
payment of a dividend or approved a stock repurchase in violation of Delaware
corporate law or obtained an improper personal benefit.
Section 145 of the DGCL provides, among other things, that we may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in our right) by reason of the fact that the person is or was our
director, officer, agent or employee or is or was serving at our request as a
director, officer, agent, or employee of another corporation, partnership,
joint venture, trust or other enterprise, against expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with such action, suit or
proceeding. The power to indemnify applies (a) if such person is successful on
the merits or otherwise in defense of any action, suit or proceeding, or (b)
if such person acted in good faith and in a manner he reasonably believed to
be in our best interest, or not opposed to our best interest, and with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful.
The power to indemnify applies to actions brought by or in our right as
well, but only to the extent of expenses (including attorneys' fees) actually
and reasonably incurred by the person in connection with the defense or
settlement of such action or suit if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to our best
interests, and with the further limitation that in such actions no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to us, unless the
court believes that in light of all the circumstances indemnification should
apply.
Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for such actions. A
director who was either absent when the unlawful actions were approved or
dissented at the time, may avoid liability by causing his or her dissent to
such actions to be entered in the books containing the
II-1
<PAGE>
minutes of the meetings of our board of directors at the time such action
occurred or immediately after such absent director receives notice of the
unlawful acts.
Our Certificate of Incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages for breach of
fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the DGCL regarding unlawful dividends and stock
purchases; or
. for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our Bylaws provide that we shall indemnify our directors and officers and
our employees, who serve as an officer or director of any corporation at our
request, to the fullest extent permitted by Delaware law.
The indemnification provisions contained in our Certificate of
Incorporation and Bylaws are not exclusive of any other rights to which a
person may be entitled by law, agreement, vote of stockholders or
disinterested directors or otherwise. In addition, we maintain insurance on
behalf of our directors and executive officers insuring them against any
liability asserted against them in their capacities as directors or officers
or arising out of such status.
Item 15. Recent Sales of Unregistered Securities.
On February 27, 1998, we consummated a recapitalization merger with an
affiliate of Texas Pacific Group. In connection with the merger, we issued
29,998,736 shares of our common stock, 10,000,000 shares of our non-voting
common stock and 250,000 shares of our preferred stock, after taking effect of
a 4-for-1 stock split declared by our board of directors upon the consummation
of the merger and the 2-for-1 stock split approved by our board of directors
in August 1998. This issuance was exempt from registration under the
Securities Act of 1933 pursuant to 4(2) thereof on the basis that the
transaction did not involve a public offering.
As of July 2, 2000, an aggregate of 296,828 shares of common stock have
been issued upon exercise of options under our Employee Long-Term Incentive
Stock Option Plan and Executive Officer Stock Option Plan at a weighted
average exercise price of $2.50 per share, or an aggregate of $742,070. The
foregoing purchases and sale were exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof or Rule 701
promulgated thereunder.
In 1998 and 1999, we issued 100,000 and 300,000 shares of common stock,
respectively to Curtis Crawford. These issuance were exempt from registration
under the Securities Act of 1933 pursuant to 4(2) thereof on the basis that
the transactions did not involve a public offering.
On February 7, 2000, we sold 25,000 shares of our common stock to Richard
S. Friedland for $4.00 per share, or an aggregate of $100,000. The sale was
exempt from registration under the Securities Act of 1933 pursuant to Section
4(2) thereof on the basis that the transactions did not involve a public
offering.
On February 7, 2000, we sold 50,000 shares of our common stock to Murray A.
Goldman for $4.00 per share, or an aggregate of $200,000. The sale was exempt
from registration under the Securities Act of 1933 pursuant to Section 4(2)
thereof on the basis that the transactions did not involve a public offering.
On January 13, 2000, we sold 250,000 shares of our common stock to Robert
D. Norman for $4.00 per share, or an aggregate of $1,000,000. The sale was
exempt from registration under the Securities Act of 1933 pursuant to Section
4(2) thereof on the basis that the transactions did not involve a public
offering.
II-2
<PAGE>
On February 1, 2000, we sold 100,000 shares of our common stock to Lionel
N. Sterling for $4.00 per share, or an aggregate of $400,000. The sale was
exempt from registration under the Securities Act of 1933 pursuant to Section
4(2) thereof on the basis that the transactions did not involve a public
offering.
On July 27, 2000, we issued 629,666 shares of our common stock in
connection with our acquisition of Calibre, Inc. This sale was exempt from
registration under Regulation D the Securities Act of 1933.
Item 16. Exhibits and Financial Statement Schedules.
a. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1(a) Agreement and Plan of Merger, dated as of July 20, 1997, between TPG
Partners II, L.P. and ZiLOG Inc.
NOTE: Pursuant to the provisions of paragraph (b) (2) of Item 601 of
Regulation S-K, the Registrant hereby undertakes to furnish to
the Commission upon request copies of any Schedule to the
Recapitalization Agreement.
2.2(a) Amendment Number One to the Recapitalization Agreement, dated as of
November 18, 1997, by and between TPG Partners II, L.P., TPG, Zeus
Acquisition Corporation and ZiLOG, Inc.
2.3(a) Amendment Number Two to the Recapitalization Agreement, dated as of
December 10, 1997, by and between TPG Partners II, L.P., TPG, Zeus
Acquisition Corporation and ZiLOG, Inc.
2.4(a) Amendment Number Three to the Recapitalization Agreement, dated as of
January 26, 1998, by and between TPG Partners II, L.P., TPG Zeus
Acquisition Corporation and ZiLOG, Inc.
3.1(a) Certificate of Incorporation of ZiLOG, Inc.
3.2* Amended and Restated Certificate of Incorporation of ZiLOG, Inc.
3.3(a) Certificate of Merger of TPG Zeus Acquisition Corporation into ZiLOG,
Inc filed with the Delaware Secretary of State on February 27, 1998.
3.4(a) Bylaws of ZiLOG, Inc.
3.5* Amended and Restated Bylaws of ZiLOG, Inc.
3.6(b) Certificate of Amendment of Certificate of Incorporation of ZiLOG,
Inc.
4.1(a) Stockholders' Voting Agreement, dated as of July 20, 1997, by and
among TPG Partners II, L.P., Warburg, Pincus Capital Company, L.P.
and Warburg, Pincus & Co.
4.2(a) Stockholders' Agreement dated as of February 27, 1998, by and among
ZiLOG, Inc., TPG Partners II, L.P., TPG Investors II, L.P., TPG
Parallel II, L.P. and certain other stockholders of ZiLOG, Inc.
4.3(a) Letter Agreement, dated as of November 18, 1997, by and among TPG
Partners II, L.P., Warburg, Pincus Capital Company, L.P. and Warburg,
Pincus & Co., and ZiLOG, Inc.
4.4(a) Form of 9.5% Senior Secured Notes due 2005 of ZiLOG, Inc.
4.5(a) Indenture, dated as of February 27, 1998, by and among ZiLOG, Inc.,
ZiLOG Europe, ZiLOG TOA Company and State Street Bank and Trust
Company.
4.6(a) Purchase Agreement dated as of February 23, 1998, by and among ZiLOG,
Inc., ZiLOG Europe, ZiLOG TOA Company, Goldman, Sachs & Co.,
BancBoston Securities Inc. and Citicorp Securities, Inc.
4.7(a) Registration Rights Agreement, dated as of February 27, 1998, by and
among ZiLOG, Inc., ZilOG Europe, ZiLOG TOA Company, Goldman, Sachs, &
Co., BancBoston Securities Inc. and Citicorp Securities, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.8(a) Company Security Agreement dated as of February 27, 1998, by and
among ZiLOG, Inc. and State Street Bank and Trust Company.
4.9(a) Subsidiary Security Agreement, dated as of February 27, 1998, by and
among each of the direct and indirect ZiLOG, Inc. Subsidiary
signatories thereto and State Street Bank and Trust Company.
4.10(a) Company Pledge Agreement, dated as of February 27, 1998, by and among
ZiLOG, Inc. and State Street Bank and Trust Company.
4.11(a) Subsidiary Pledge Agreement, dated as of February 27, 1998, by each
of the direct and indirect ZiLOG, Inc. Subsidiary signatories
thereto and State Street Bank and Trust Company.
4.12(a) Company and Subsidiary Patent and Trademark Security Agreement, dated
as of February 27, 1998, by and among ZiLOG, Inc., each of the
direct and indirect domestic ZiLOG, Inc. Subsidiary signatories
thereto and State Street Bank and Trust Company.
4.13(a) Copyright Security Agreement, dated as of February 27, 1998, by
ZiLOG, Inc., each of the direct and indirect ZiLOG, Inc. Subsidiary
signatories thereto and State Street Bank and Trust Company.
4.14(a) Stockholders' Agreement, dated as of March 26, 1998, by and among
ZiLOG, Inc., TPG Partners II, L.P., TPG Investors II, L.P., TPG
Parallel II, L.P. and certain other stockholders of ZiLOG, Inc.
4.15* Form of common stock certificate.
5.1* Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
10.1(a) Contract of Lease, dated March 22, 1979, by and between ZiLOG
Philippines, Inc. and Fruehauf Electronics Phils. Corporation.
10.2(c) Credit Agreement, dated December 30, 1998, by and between ZiLOG, Inc.
and The CIT Group/ Business Credit, Inc.
10.3(a) 1997 Employee Performance Incentive Plan.
10.4(a) 1997 ZiLOG Employee Performance Incentive Plan Administrative Guide.
10.5(a) 1997 ZiLOG Employee Performance Incentive Plan Executive Bonus
Administrative Guide.
10.6(c) Employment Agreement, dated as of November 20, 1998, by and between
Michael Burger and ZiLOG, Inc.
10.7(c) Employment Agreement, dated November 20, 1998, by and between Michael
D. Burger and ZiLOG, Inc.
10.8* Employment Agreement, dated August 2, 2000, by and between Gerald J.
Corvino and ZiLOG, Inc.
10.9* Employment Agreement, dated August 2, 2000, by and between Robert G.
Couch and ZiLOG, Inc.
10.10(c) Employment Agreement, dated October 16, 1998, by and between Steven
C. Mizell and ZiLOG, Inc.
10.11(c) Employment Agreement, dated as of March 1, 1998, by and between
Curtis J. Crawford and TPG Partners II, L.P.
10.12(a) Lease, dated as of February 18, 1998, between ZiLOG, Inc. and
CarrAmerica Realty Corporation.
10.13(d) ZiLOG, Inc. 1998 Long-Term Stock Incentive Plan, as amended.
10.14(d) ZiLOG, Inc. 1998 Executive Officer Stock Incentive Plan, as amended.
10.15* 2000 Stock Option Plan.
10.16(d) Employment Agreement, dated November 1, 1999, by and between Gary
Patten and ZiLOG, Inc.
10.17(c) Employment Agreement, dated November 11, 1998, by and between Didier
J. LeLannic and ZiLOG, Inc.
10.18* Employment Agreement, dated August 2, 2000, by and between Aydin Koc
and ZiLOG, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.19(d) Restricted Share Agreement, dated February 7, 2000, by and between
Richard S. Friedland and ZiLOG, Inc.
10.20(d) Restricted Share Agreement, dated February 7, 2000, by and between
Murray A. Goldman and ZiLOG, Inc.
10.21(d) Restricted Share Agreement, dated February 1, 2000, by and between
Lionel Sterling and ZiLOG, Inc.
10.22 Restricted Share Agreement, dated January 14, 2000, by and between
Robert D. Norman and ZiLOG, Inc.
10.23(d) Distributor Agreement, dated February 2, 2000 by and between Pioneer-
Standard Electronics, Inc. and ZiLOG, Inc.
10.24* Registration Rights Agreement by and between ZiLOG, Inc. and TPG
Partners II, L.P.
10.25* Employee Stock Purchase Plan.
10.26 Purchase and Sale Agreement, dated March 22, 2000, by and between
ZiLOG, Inc., Dasaradha R. Gude, certain stockholders, Virtual IP
Group, Inc., Qualcore Group, Inc. and Qualcore Logic Private
Limited.
NOTE: Pursuant to the provisions of paragraph (b)(2) of Item 601 of
Regulation S-K, the Registrant hereby undertakes to furnish to
the Commission upon request copies of any Schedule to the
Purchase and Sale Agreement.
10.27 Merger Agreement, dated July 16, 2000, between ZiLOG, Inc. and
Calibre, Inc.
NOTE: Pursuant to the provisions of paragraph (b)(2) of Item 601 of
Regulation S-K, the Registrant hereby undertakes to furnish to
the Commission upon request copies of any Schedule to the
Merger Agreement.
10.28* Employment Agreement, dated August 2, 2000, by and between Richard R.
Pickard and ZiLOG, Inc.
10.29* Employment Agreement, dated August 2, 2000 by and between Edward P.
Ponganis and ZiLOG, Inc.
21.1(a) Subsidiaries of ZiLOG, Inc.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2* Consent of Skadden, Arps, Slate, Meagher & Flom LLP.
24.1 Power of Attorney (included on signature page).
25.1(a) Form T-1 with respect to the eligibility of State Street Bank and
Trust Company with respect to the Indenture.
</TABLE>
--------
(a) Incorporated herein by reference to the item of the same name filed as an
Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-
51203) declared effective by the Securities and Exchange Commission on July
9, 1998.
(b) Incorporated herein by reference to the item of the same name filed as an
Exhibit to the Company's Quarterly Report on Form 10-Q for the Quarter
ended September 30, 1998.
(c) Incorporated herein by reference to the item of the same name filed as an
Exhibit to the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1998.
(d) Incorporated herein by reference to the item of the same name, filed as an
Exhibit to the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1999.
* To be filed by amendment.
II-5
<PAGE>
b. Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers, and controlling persons
pursuant to the provisions described in Item 14, or otherwise, we have been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable. In the event that a claim for
indemnification by us against such liabilities (other than the payment by us
of expenses incurred or paid by our director, officer, or controlling person
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the
securities being registered, we will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against pubic policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
We hereby undertake that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by us pursuant to Rule 424(b) (1) or (4)
or 497 (h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we have duly
caused this registration statement to be signed on our behalf by the
undersigned, thereunto duly authorized, in the City of Campbell, State of
California, on August 2, 2000.
ZiLOG, Inc.
Name: /s/ Curtis J. Crawford
Title: Chairman, President, Chief
Executive Officer and Director
Each person whose signature appears below hereby constitutes and appoints
Richard R. Pickard and Eric Mogensen, and each of them, his true and lawful
attorneys-in-fact and agents with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all (i) amendments (including post-effective
amendments) and additions to this Registration Statement and (ii) Registration
Statements, and any and all amendments thereto (including post-effective
amendments), relating to the offering contemplated pursuant to Rule 462(b)
under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, and hereby grants to such attorneys-in-fact and agents
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Curtis J. Crawford Chairman, President, Chief August 2, 2000
_________________________________ Executive Officer and
Curtis J. Crawford Director
/s/ Gary Patten Senior Vice President, Chief August 2, 2000
_________________________________ Financial Officer
Gary Patten
/s/ Richard S. Friedland Director August 2, 2000
_________________________________
Richard S. Friedland
/s/ Murray A. Goldman Director August 2, 2000
_________________________________
Murray A. Goldman
/s/ William S. Price Director August 2, 2000
_________________________________
William S. Price
/s/ David M. Stanton Director August 2, 2000
_________________________________
David M. Stanton
/s/ Lionel N. Sterling Director August 2, 2000
_________________________________
Lionel N. Sterling
Director , 2000
_________________________________
John W. Marren
</TABLE>
II-7
<PAGE>
SCHEDULE II
ZiLOG, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions
Beginning Charged to Costs Balance at
Description of Period and Expenses Deductions(1) End of Period
----------- ---------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31,
1999:
Allowance for doubtful
accounts............... $366 $127 $ (70) $423
==== ==== ===== ====
Year ended December 31,
1998:
Allowance for doubtful
accounts............... $250 $153 $ (37) $366
==== ==== ===== ====
Year ended December 31,
1997:
Allowance for doubtful
accounts............... $250 $189 $(189) $250
==== ==== ===== ====
</TABLE>
--------
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1(a) Agreement and Plan of Merger, dated as of July 20, 1997, between TPG
Partners II, L.P. and ZiLOG Inc.
NOTE: Pursuant to the provisions of paragraph (b)(2) of Item 601 of
Regulation S-K, the Registrant hereby undertakes to furnish to
the Commission upon request copies of any Schedule to the
Recapitalization Agreement.
2.2(a) Amendment Number One to the Recapitalization Agreement, dated as of
November 18, 1997, by and between TPG Partners II, L.P., TPG, Zeus
Acquisition Corporation and ZiLOG, Inc.
2.3(a) Amendment Number Two to the Recapitalization Agreement, dated as of
December 10, 1997, by and between TPG Partners II, L.P., TPG, Zeus
Acquisition Corporation and ZiLOG, Inc.
2.4(a) Amendment Number Three to the Recapitalization Agreement, dated as of
January 26, 1998, by and between TPG Partners II, L.P., TPG Zeus
Acquisition Corporation and ZiLOG, Inc.
3.1(a) Certificate of Incorporation of ZiLOG, Inc.
3.2* Amended and Restated Certificate of Incorporation of ZiLOG, Inc.
3.3(a) Certificate of Merger of TPG Zeus Acquisition Corporation into ZiLOG,
Inc filed with the Delaware Secretary of State on February 27, 1998.
3.4(a) Bylaws of ZiLOG, Inc.
3.5* Amended and Restated Bylaws of ZiLOG, Inc.
3.6(b) Certificate of Amendment of Certificate of Incorporation of ZiLOG,
Inc.
4.1(a) Stockholders' Voting Agreement, dated as of July 20, 1997, by and
among TPG Partners II, L.P., Warburg, Pincus Capital Company, L.P.
and Warburg, Pincus & Co.
4.2(a) Stockholders' Agreement dated as of February 27, 1998, by and among
ZiLOG, Inc., TPG Partners II, L.P., TPG Investors II, L.P., TPG
Parallel II, L.P. and certain other stockholders of ZiLOG, Inc.
4.3(a) Letter Agreement, dated as of November 18, 1997, by and among TPG
Partners II, L.P., Warburg, Pincus Capital Company, L.P. and
Warburg, Pincus & Co., and ZiLOG, Inc.
4.4(a) Form of 9.5% Senior Secured Notes due 2005 of ZiLOG, Inc.
4.5(a) Indenture, dated as of February 27, 1998, by and among ZiLOG, Inc.,
ZiLOG Europe, ZiLOG TOA Company and State Street Bank and Trust
Company.
4.6(a) Purchase Agreement dated as of February 23, 1998, by and among ZiLOG,
Inc., ZiLOG Europe, ZiLOG TOA Company, Goldman, Sachs & Co.,
BancBoston Securities Inc. and Citicorp Securities, Inc.
4.7(a) Registration Rights Agreement, dated as of February 27, 1998, by and
among ZiLOG, Inc., ZilOG Europe, ZiLOG TOA Company, Goldman, Sachs,
& Co., BancBoston Securities Inc. and Citicorp Securities, Inc.
4.8(a) Company Security Agreement dated as of February 27, 1998, by and
among ZiLOG, Inc. and State Street Bank and Trust Company.
4.9(a) Subsidiary Security Agreement, dated as of February 27, 1998, by and
among each of the direct and indirect ZiLOG, Inc. Subsidiary
signatories thereto and State Street Bank and Trust Company.
4.10(a) Company Pledge Agreement, dated as of February 27, 1998, by and among
ZiLOG, Inc. and State Street Bank and Trust Company.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.11(a) Subsidiary Pledge Agreement, dated as of February 27, 1998, by each
of the direct and indirect ZiLOG, Inc. Subsidiary signatories
thereto and State Street Bank and Trust Company.
4.12(a) Company and Subsidiary Patent and Trademark Security Agreement, dated
as of February 27, 1998, by and among ZiLOG, Inc., each of the
direct and indirect domestic ZiLOG, Inc. Subsidiary signatories
thereto and State Street Bank and Trust Company.
4.13(a) Copyright Security Agreement, dated as of February 27, 1998, by
ZiLOG, Inc., each of the direct and indirect ZiLOG, Inc. Subsidiary
signatories thereto and State Street Bank and Trust Company.
4.14(a) Stockholders' Agreement, dated as of March 26, 1998, by and among
ZiLOG, Inc., TPG Partners II, L.P., TPG Investors II, L.P., TPG
Parallel II, L.P. and certain other stockholders of ZiLOG, Inc.
4.15* Form of common stock certificate.
5.1* Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
10.1(a) Contract of Lease, dated March 22, 1979, by and between ZiLOG
Philippines, Inc. and Fruehauf Electronics Phils. Corporation.
10.2(c) Credit Agreement, dated December 30, 1998, by and between ZiLOG, Inc.
and The CIT Group/ Business Credit, Inc.
10.3(a) 1997 Employee Performance Incentive Plan.
10.4(a) 1997 ZiLOG Employee Performance Incentive Plan Administrative Guide.
10.5(a) 1997 ZiLOG Employee Performance Incentive Plan Executive Bonus
Administrative Guide.
10.6(c) Employment Agreement, dated as of November 20, 1998, by and between
Michael Burger and ZiLOG, Inc.
10.7(c) Employment Agreement, dated November 20, 1998, by and between Michael
D. Burger and ZiLOG, Inc.
10.8* Employment Agreement, dated August 21, 2000, by and between Gerald J.
Corvino and ZiLOG, Inc.
10.9* Employment Agreement, dated August 21, 2000, by and between Robert G.
Couch and ZiLOG, Inc.
10.10(c) Employment Agreement, dated October 16, 1998, by and between Steven
C. Mizell and ZiLOG, Inc.
10.11(c) Employment Agreement, dated as of March 1, 1998, by and between
Curtis J. Crawford and TPG Partners II, L.P.
10.12(a) Lease, dated as of February 18, 1998, between ZiLOG, Inc. and
CarrAmerica Realty Corporation.
10.13(d) ZiLOG, Inc. 1998 Long-Term Stock Incentive Plan, as amended.
10.14(d) ZiLOG, Inc. 1998 Executive Officer Stock Incentive Plan, as amended.
10.15* 2000 Stock Option Plan.
10.16(d) Employment Agreement, dated November 1, 1999, by and between Gary
Patten and ZiLOG, Inc.
10.17(c) Employment Agreement, dated November 11, 1998, by and between Didier
J. LeLannic and ZiLOG, Inc.
10.18* Employment Agreement, dated August 2, 2000, by and between Aydin Koc
and ZiLOG, Inc.
10.19(d) Restricted Share Agreement, dated February 7, 2000, by and between
Richard S. Friedland and ZiLOG, Inc.
10.20(d) Restricted Share Agreement, dated February 7, 2000, by and between
Murray A. Goldman and ZiLOG, Inc.
10.21(d) Restricted Share Agreement, dated February 1, 2000, by and between
Lionel Sterling and ZiLOG, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.22 Restricted Share Agreement, dated January 13, 2000, by and between
Robert D. Norman and ZiLOG, Inc.
10.23(d) Distributor Agreement, dated February 2, 2000 by and between Pioneer-
Standard Electronics, Inc. and ZiLOG, Inc.
10.24* Registration Rights Agreement by and between ZiLOG, Inc. and TPG
Partners II, L.P.
10.25* Employee Stock Purchase Plan.
10.26 Purchase and Sale Agreement, dated March 22, 2000, by and between
ZiLOG, Inc., Dasaradha R. Gude, certain stockholders, Virtual IP
Group, Inc., Qualcore Group, Inc. and Qualcore Logic Private
Limited.
NOTE: Pursuant to the provisions of paragraph (b)(2) of Item 601 of
Regulation S-K, the Registrant hereby undertakes to furnish to
the Commission upon request copies of any Schedule to the
Purchase and Sale Agreement.
10.27 Merger Agreement, dated July 16, 2000, between ZiLOG, Inc. and
Calibre, Inc.
NOTE: Pursuant to the provisions of paragraph (b)(2) of Item 601 of
Regulation S-K, the Registrant hereby undertakes to furnish to
the Commission upon request copies of any Schedule to the
Merger Agreement.
10.28* Employment Agreement, dated August 2, 2000, by and between Richard R.
Pickard and ZiLOG, Inc.
10.29* Employment Agreement, dated August 2, 2000, by and between Edward P.
Ponganis and ZiLOG, Inc.
21.1(a) Subsidiaries of ZiLOG, Inc.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2* Consent of Skadden, Arps, Slate, Meagher & Flom LLP.
24.1 Power of Attorney (included on signature page).
25.1(a) Form T-1 with respect to the eligibility of State Street Bank and
Trust Company with respect to the Indenture.
</TABLE>
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(a) Incorporated herein by reference to the item of the same name filed as an
Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-
51203) declared effective by the Securities and Exchange Commission on July
9, 1998.
(b) Incorporated herein by reference to the item of the same name filed as an
Exhibit to the Company's Quarterly Report on Form 10-Q for the Quarter
ended September 30, 1998.
(c) Incorporated herein by reference to the item of the same name filed as an
Exhibit to the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1998.
(d) Incorporated herein by reference to the item of the same name, filed as an
Exhibit to the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1999.
* To be filed by amendment.
