Item 1. Business.
Introduction
We develop and market integrated circuits, integrated circuit cores and
embedded software used by original equipment manufacturers, or OEMs, in digital
video and audio products for commercial and consumer markets. We also provide
complete, copy-ready system reference designs based on our technology that help
our customers produce commercial and consumer products more quickly and
cost-effectively. Our integrated circuits are used in a variety of products,
including digital versatile disc, or DVD, players, filmless digital cameras,
professional and consumer video editing systems and digital speakers and audio
systems.
We were incorporated in California in
December 1981 and reincorporated in Delaware in November 1996. Our corporate
headquarters are located at 3112 Scott Boulevard, Santa Clara California 95054,
and our telephone number is (408) 919-4111. Our website can be found at
www.zoran.com.
Industry Background
Until the mid-1990s, video images and audio soundtracks were
transmitted, edited and stored almost exclusively using analog formats. More
recently, however, advances in technology have allowed audio and video to be
processed and stored in digital form. Unlike analog formats, which are
inherently unstable and difficult to edit and enhance, digital formats permit
the manipulation of audio and video signals through digital signal processing
and offer a number of fundamental advantages over analog technologies. Through
complex digital signal processing operations, digital audio and video signals
may be compressed, providing significant storage and transmission efficiencies.
They also may be filtered, allowing for noise reduction, and they may be
transmitted and reproduced without perceptible image or sound degradation.
Digital formats provide users with additional benefits, including random access
to data, superior editing capabilities and enhanced security features such as
protection against unauthorized copying and controlled and secure access.
One of the most significant barriers to the widespread adoption of
digital technology has been the huge amount of data required to represent
images and sounds in a digital format, making cost-effective storage or
transmission impractical. For example, storage of a two-hour movie in
uncompressed digital form would require approximately 200 video CDs. Through
digital compression techniques a substantial number of the redundancies
inherent in audio and video data can be identified and eliminated,
significantly reducing the overall amount of data which needs to be retained.
Compression techniques introduced in the early 1990s allowed the same two-hour
movie which required 200 video CDs to be compressed and stored on only two
video CDs with video resolution comparable to that of a standard VHS tape. More
recent techniques allow the storage of a full-length movie of more than three
hours on a single DVD, with substantially improved audio and video quality and
the incorporation of additional data, such as additional languages, scenes and
director and actor commentary. Additionally, digital compression of video data
allows previously unmanageable amounts of data to be stored in the memory of a
standard personal computer, thereby permitting the data to be accessed and
edited easily. Digital audio compression allows efficient storage and delivery
of multi-channel audio, making possible high-quality special effects such as
multi-channel surround sound, virtual surround sound and wireless audio
delivery via two speakers or headphones. In the field of still photography,
digital compression allows dozens or hundreds of digital pictures to be stored
on a single memory card, depending on the resolution desired.
To drive the implementation and speed the adoption of products based on
digital formats, industry participants organized committees to define
international compression standards. The principal standards in use today
include:
• The
Joint Photographic Experts Group, or JPEG, standard for the high quality
compression of still images and the real-time, low-cost compression and
decompression of moving images;
• The
MPEG 1 standard, adopted by the Moving Pictures Experts Group, or MPEG, for the
compression of both audio and video data at the high compression ratios
necessary for the limited storage capacity of the CD-ROM format;
• The
MPEG 2 standard, subsequently adopted by the Motion Pictures Expert Group, for
the compression of both audio and video data, designed to provide improved
quality in broadcast and video playback applications;
• The
MPEG 4 standard is an extension of MPEG 1 and MPEG 2 that provides the ability
to view, access and manipulate objects rather than pixels, which is especially
significant in video streaming, digital television, module multimedia and video
game applications; and
• Dolby
AC-3, also known as Dolby Digital, developed by Dolby Laboratories, an industry
standard for the compression of audio for use in multi-channel digital surround
sound systems.
These industry standard techniques have enabled the dramatic growth in
a variety of digital multimedia markets, including:
• DVD Players.
DVD players use MPEG 2 video compression and Dolby Digital audio technology to
provide significantly higher quality playback than is possible with VCR or
video CD technology. According to Cahners In-Stat Group, a market research
firm, worldwide sales of DVD players are expected to grow from 2.4 million
units in 1998 to 71.1 million units in 2005, a compounded annual growth rate of
62.3%.
• Filmless
Digital Cameras. Filmless digital cameras use JPEG compression
technology to capture high resolution images that can be viewed, edited and
stored on a computer system and transmitted over telephone lines and computer
networks. According to Cahners In-Stat Group, sales of megapixel digital cameras
are expected to grow from 3.6 million units in 1998 to 40.8 million units in
2004, a compounded annual growth rate of 49.9%.
• PC Video
Systems. JPEG-based PC video systems are used to capture and “cut
and paste” video sequences and add special audio and video effects. The growth in the desktop video editing
market has slowed in recent years.
However, according to Cahners In-Stat Group, the demand for PC TV tuners that incorporate
universal serial bus, or USB, connectors is expected to grow from 186,000 units
in 2000 to 5.8 million units in 2005, a compound annual growth rate of 99.0%.
• Digital
Audio Systems. Dolby Digital and other audio compression techniques
are used in multi-channel surround sound products including movie theater sound
systems, audio/video receivers and digital speakers. According to data gathered
from Cahners In Stat Group, the demand for digital audio systems is expected to
grow from 980,000 units in 2000 to 9.5 million units in 2005, a compounded
annual growth rate of 57.6%.
Additional products and markets are developing based on these
established compression standards as well as emerging compression technologies
such as MLP, a new standard for DVD audio, and MP3, a compression standard for
the download of audio recordings from the Internet.
These established and emerging compression standards specify data
formats in which compressed data must be presented in order to enable products
from different vendors to interact and permit the capture, transmission,
storage and display of audio and video data in digital format. These standards
do not specify the compression methodologies to be employed or additional
functionality which may be used to enhance or manipulate digital signals. These
standards, therefore, do not determine image or sound quality or compression
efficiency. For example, data
compression may comply with relevant standards despite being poorly processed
and containing artifacts which result in image
degradation in video applications or poor sound quality in audio
applications. As a result there can be significant differences in overall image
or sound quality between two solutions based on the same standard. Therefore,
integrated circuit manufacturers can differentiate their products on the basis
of the quality of their compression solution.
Historically, as system vendors sought compression solutions, the cost,
complexity, and time required to compress and decompress data have imposed
significant limitations on the use of digital compression. Over the last
several years, as cost-effective compression solutions have emerged, product
manufacturers have increasingly sought to design and market lower-cost digital
audio and video systems and products to address high volume consumer
applications. In addition, product manufacturers are facing competitive
pressure to introduce their products more rapidly. To address these issues,
OEMs seek to integrate multiple functions on individual chips in order to
reduce their costs, speed time-to-market and produce smaller products with
reduced power consumption. They also seek solutions that can be easily
integrated into their commercial and consumer products. The current challenge
to manufacturers of compression integrated circuits is, therefore, to provide
product manufacturers with high-quality, cost-effective, standards-based
solutions that deliver flexible control, image enhancement, audio effects and
other functions in addition to high quality compression solutions.
The Zoran Solution
We provide feature-rich, cost-effective, standards-based solutions for
a broad range of digital video and audio applications. We were a pioneer in the
development of high performance digital signal processor products, and have
developed expertise in digital signal processing, integrated circuit design,
mathematical algorithms and software development, as well as proprietary
digital signal processing, video and audio compression technologies. We apply
our multi-disciplinary expertise and proprietary technologies to the
development of fully-integrated solutions for high-growth multimedia markets.
The key elements of our solution are:
Standards-Plus
Methodology. We have leveraged our broad multi-disciplinary
expertise and proprietary digital signal processing and compression
technologies to develop what we refer to as “standards-plus” solutions. We have
enabled OEMs to improve image and sound quality and deliver superior products
to end users by adding more features around compression standards, such as more
efficient use of memory, processing and communication resources, as well as
audio and image enhancement algorithms. We have also provided OEMs the ability
to include OEM-programmable effects, as well as variable compression ratios for
video. These “standards-plus” features allow our customers to differentiate
their products from those of their competitors.
Expandable
and Programmable Architecture. We design our integrated
circuits to enable easy adaptation for a broad range of specific applications.
We can vary the architecture of our chips by adding or deleting modules, and we
can also modify the software embedded in the chips themselves to address
specific applications. We also license ready-to manufacture “cores”-building
blocks of integrated circuits-that can be integrated into our customers’ chips.
Combined with the enhanced functionality of our “standards-plus” technology,
our expandable and programmable architecture facilitates product design,
upgrades and customization, substantially accelerating our customers’ time to
market with differentiated products.
Integrated
System Solutions. We help our customers meet their total
system requirements by providing integrated products that combine hardware and
software to address required system functions and features on a single
integrated circuit or chip set, reducing the number of integrated circuits, and
in some cases providing a complete solution on a single chip. As a result, our
customers’ total system cost can be reduced and they can concentrate on
differentiating their products from those of their competitors. For example, we
introduced the Camera On A CHip, or COACH, which includes most of the
electronics of a filmless digital camera. We also offer the CMOS sensor that is
tightly integrated with COACH. By delivering a camera on a chip with the CMOS
sensor, we enable our customers to reduce the costs of their products and focus
on providing products that meet the needs of their end users.
Cost-Effective
Products. We focus on reducing the feature size, power
requirements and number of integrated circuits necessary to perform required
system functions, including compression functions. This reduces our customers’
manufacturing costs for their products which incorporate our integrated
circuits, and also reduces the operating costs for these products, enabling the
use of our products in a broader range of high volume applications. The modular
nature of our architecture reduces our new product development costs, and
enables our design engineers to meet our customers’ new product specification
and cost parameters.
Copy-Ready
System Reference Designs. We provide our customers with a
broad range of engineering reference boards and products complete with device
driver software, embedded software and detailed schematics. These products
substantially shorten our customers’ product design time.
Strategy
We provide cost-effective, high-performance digital audio and video
solutions addressing selected high-growth applications enabled by compression
in evolving multimedia markets. Key elements of our strategy include:
Focus
On High-Growth Applications. Our strategy is to focus on
providing digital video and audio solutions for emerging high-growth consumer
electronics, PC and communications applications. Our current focus markets
include DVD players, filmless digital cameras, professional and consumer video
editing systems and digital speakers and audio systems.
Leverage
Existing Technology and Expertise. We intend to continue to
identify those markets that we believe have the highest growth potential for
our products and to actively pursue those markets. Our proprietary digital
signal processing and compression technologies can be used to serve emerging
markets for digital video and audio. Potential markets include Internet audio
and video appliances, digital television and television set-top boxes, as well
as personal digital video and audio devices.
Further
Penetrate Key International Markets. In 1998, we opened an
office in Shenzhen, China. During 2000, we opened offices in Taiwan and Japan.
In 2001, we opened offices in Korea and Hong Kong. We believe that by opening
these offices we will be able to better provide sales, marketing, and
applications support for these growing consumer electronics markets.
Extend
Technological Leadership. Our years of experience in the
fields of digital signal processing, integrated circuit design, algorithms and
software development have enabled us to become a leader in the development of
digital audio and video solutions enabled by compression. Using our
multi-disciplinary expertise, we have developed new technologies for
compression of digital audio and video. For example, our proprietary bit rate
control technology has helped us provide reliable and inexpensive JPEG-based
video compression, and our proprietary Virtual Multi-Channel Digital, or VMD,
technology enables high-quality surround-sound effects from two low-cost audio
speakers, rather than the four or five speakers required by other technologies.
During 2000, we acquired PixelCam Inc., which enabled us to develop a
competitive advantage by combining our Camera On A Chip, or COACH, processor
with PixelCam’s CMOS sensor, providing a more integrated system. Furthermore, during
2000 we acquired Nogatech Inc., which provided us with low cost PC connectivity
and MPEG-4 technologies. We intend to
continue to invest in our own research and development, and to evaluate
opportunities to acquire additional technologies in order to maintain and
extend our technological leadership.
Expand
Strategic Partnerships. We work closely in the product
development process with leading manufacturers of products that incorporate our
integrated circuits. We also work closely with key customers and provide them
early access to our technologies. Potential products are designed to meet
customer-driven product requirements defined jointly by us and our partners
with the partner providing technological input and, in selected cases, a
portion of the development funding. This strategy has enabled us to develop
products with substantial financial and other assistance while retaining
ownership of the technology and ensuring an established customer for the
product once development is completed. In some cases, our strategic partners
also provide sales and marketing support. We have also established long-term
relationships with strategic partners that provide manufacturing capacity and
will seek to develop additional strategic relationships with manufacturers.
Markets and Applications
Our products are currently used in a variety of consumer multimedia and
PC applications.
Video
Playback Systems
Currently, three types of digital video playback systems are available
for consumer video applications: video CD players, Super Video CD players and
DVD players.
Video CD players are essentially CD audio players with MPEG 1 decoders
and a video output. Video CD players offer video playback of near-VCR quality
and two-channel stereo audio playback. Compression enables 60 to 70 minutes of
video to be stored on a single CD. Video CD players can also play karaoke
titles and were particularly popular in China, although we believe that the
volume for these players have declined. We formerly sold MPEG 1-based products
to manufacturers of stand-alone video CD players but are no longer selling
these products for this market.
In 1998, the Chinese government adopted the Super Video CD standard. By
utilizing MPEG 2 compression technology as well as graphics, Super Video CD
offers substantially higher audio and video quality than is possible with a
video CD player. The Super Video CD standard that replaced video CD in China
is, in turn, being replaced by DVD players.
DVD players, the latest generation of
video playback systems, use MPEG 2 video compression and Dolby Digital or
similar audio technology to provide significantly higher quality playback than
is possible with VCRs, Video CD or Super Video CD players. DVD players are sold
as stand-alone products and are now also being bundled with other functions
including DVD+VCR combinations, DVD-Receivers and DVD+TV combinations. In
addition, the DVD player can act as a platform for connecting digital cameras
so that the player becomes the playback mechanism for digital still images. DVD
players are also included in place of CD-ROM drives in some newer PCs, where
they are referred to as DVD-ROMs. DVD-ROMs are also sold as upgrade products.
The growth in the DVD market is demonstrated by the rapidly growing sales of
DVD players, the increasing number of models and manufacturers, and the
increasing number of DVD titles available for purchase and rent.
Filmless
Digital Cameras
Filmless digital cameras allow the capture of high resolution images,
the viewing, editing and storage of such images on a computer system and their
transmission over telephone lines and computer networks. High quality copies of
these images can be printed using color printers. In addition, digital cameras
can be connected directly to a PC for downloading of pictures and to a
television for displaying pictures. The original digital cameras were developed
for the professional market and currently sell at prices of $3,000 to $10,000.
As technology has advanced and manufacturing costs have decreased, digital
cameras for the consumer market have been introduced in the $69 to $1,000 price
range. Compression technology has also enabled the development of digital video
security cameras and low cost digital video cameras for use with PCs.
Digital
Video Recording Systems
Digital video recording systems are
aimed at replacing the analog VCR. Digital video recording systems will not
only store home made movies and TV programs but will allow them to be easily
edited. In addition, digital video recording systems will enable high quality
time shifting of TV program viewing by recording the program so that it can be
watched simultaneously or on a delayed basis. The recording media includes DVD
recordable media and hard disks. Digital video recording systems use MPEG 2 as
the video compression format and Dolby Digital or MPEG audio as the audio
format.
PC
Video Systems
Historically, professional video editing systems were comprised of
expensive pieces of analog audio and video equipment. Compression technology
allows digital video images to be stored in a computer’s memory in sufficient
volume to enable capture and “cut and paste” editing to be performed through
random access to stored images. As the cost of compression technology has
declined, a number of manufacturers have designed low cost digital video
capture and editing systems that run on PCs, creating a new category of users
in the corporate, education and government markets.
The availability of universal serial bus, or USB, connectors on most
PCs currently being manufactured creates an opportunity for the development of
low-cost external video capture and editing accessories that can be easily
installed by
consumers. We believe that enhanced support of video in consumer PCs,
and the growing popularity of wideband Internet services will open new
opportunities for video capture and sharing applications on the PC and will
increase the popularity of such products.
Digital
Audio Systems
Digital audio facilitates enhanced audio playback with features such as
multi-channel surround sound and virtual surround sound utilizing two channel
technology. Many standards have emerged for the digital compression of audio.
Current digital audio compression standards in use include Dolby
Digital, DTS, MLP and MP3. Dolby Digital and DTS are competing standards of
audio compression for use in multi-channel digital surround sound systems in
movie theaters and at home. MLP was developed for audio compression in DVD
audio. MP3 is one of the compression standards recognized for the download of
audio recordings over the Internet. Our audio integrated circuits incorporate
all of these standards. The principal products using compressed digital audio in
the consumer market are DVD players, PCs incorporating DVD-ROMs, digital
speakers and portable MP3 players.
Other
Applications
Other existing and potential applications for our audio and video
compression technologies include Internet audio and video appliances, digital
television and television set-top boxes, as well as personal digital audio and
video devices.
Technology
Image
and Video Technology
The
JPEG Standard. In 1991, the Joint Photographic Experts Group,
or JPEG, Committee of the International Standards Organization completed a
technical specification for a standard to compress individual digitized images
which may consist of still images or consecutive frames of video data. JPEG has
been widely adopted for video editing applications, since each frame in the
video is individually compressed, allowing cutting and pasting of sequences as
well as modification of individual frames. Images are compressed through
elimination of spatial redundancies within an image and the filtering of high
frequency areas to which the eye is less sensitive. Using these techniques, the
JPEG compression standard is able to reduce the data necessary to represent an
image without significant degradation of image quality. Still images or motion
video can be compressed to varying degrees using JPEG, with greater compression
resulting in lower quality. Typically, four-to-one or five-to-one compression
yields broadcast image quality while 20-to-1 compression is similar to VHS
quality.
Zoran
JPEG Technology. Our JPEG technology incorporates a
proprietary bit rate control algorithm that enables our JPEG-based products to
compress any image to a predetermined size while optimizing video quality using
pre-selected parameters. Without this feature, the JPEG compression process results
in compressed data files of various sizes based on the actual content of the
original image given a constant degree of compression. An image with large
amounts of visual detail will generate a larger data file than that generated
from an image with less detail. Performance of many video applications is
hampered by variability in the size of the compressed images in a video
sequence, which can result in inefficient use of available memory, bus speed or
communication channel capacity or even the loss of images. Our bit rate control
is a “standards-plus” solution that uses real-time digital signal processing
algorithms to optimize video quality based on pre-selected parameters, which
can be programmed by OEMs, without the loss of any image or video frame. Our
bit rate control has been incorporated in our JPEG-based devices that are used
in video editing systems, filmless and tapeless digital cameras, color
scanners, PC-based security systems, video conferencing and other applications.
Other features of our JPEG-based products include their ability to handle a
wide range of compression ratios, to perform a “lossless” compression algorithm
in the same JPEG device, to rapidly scan or browse a large number of images and
utilize advanced image processing algorithms that enable bit rate control of
USB data, vertical blank interval detection, infrared remote control detection
and scene analysis for computer control applications. We implement these
functions in a single integrated circuit while we believe most other manufacturers
either offer fewer functions or require multiple chips, resulting in higher
manufacturing costs and greater power consumption.
CMOS Sensor Technology. With
the widespread availability of inexpensive complementary metal oxide
semiconductor, or CMOS, fabrication facilities, image sensor designers are now
able to offer a single chip solution to perform the “light-to-bytes” function
at a quality level that is competitive with the long established charge coupled
device, or CCD, sensor
technology, but with far greater operational flexibility and at much
lower power consumption. CMOS sensors can scan in a variety of modes and
directions and perform analog-domain pre-processing of the signal which may be
advantageous from a system perspective. Although the greater pixel circuit
complexity results in a larger imager today, progress is being made to both
reduce the geometry of the pixel and use more aggressive design rules. The
result will be a sensor which provides both cost reduction and performance
enhancement paths to the system designer over the traditional CCD-based
solution.
Zoran
CMOS Sensor Technology. The PixelCam ZR32112 and ZR32212 are
high performance 1.3 megapixel CMOS image sensors that are ideal for digital
still and video imaging products. Using our proprietary Distributed-Pixel
Amplifier design, the pixel response is independent of its distance from each
column’s CDS circuitry. This unique architecture results in an extremely uniform
pixel array with low fixed-pattern noise without the need for off-chip
background frame subtraction circuitry. The bank of analog front-end circuits
quantizes each pixel to 10 bit resolution. This highly parallel approach eases
speed requirements on individual analog circuits and reduces overall power
consumption. Separate programmable red, green and blue PGA circuits enable
analog-domain color balance. The flexibility of these sensors’ output image
format permits the tradeoff between resolution and frame rate. The image output
may also be horizontally “mirrored” and vertically “flipped”.
The
MPEG Standards. In 1991, the Moving Pictures Expert Group, or
MPEG, Committee of the International Standards Organization completed a
technical specification for a standard to compress moving audio and video into
a single data stream. Like JPEG, MPEG 1 removes spatial redundancies from
single frames of video data. MPEG 1 improves on JPEG by also removing
redundancies that occur between consecutive video frames. Because video
represents movement, it is possible to detect and estimate the movement of
similar picture elements between video frames, a process called motion
estimation. MPEG motion estimation uses the content of previous and future
frames to predict the content of the current frame without using its full
content. MPEG 1 implements audio compression by exploiting psycho-acoustic
masking, taking advantage of the fact that the ear is less sensitive to a quiet
note at one frequency when a much louder note is present at a nearby frequency.
MPEG 1 often achieves audio compression ratios of six-to-one and video
compression ratios of over 100-to-1. MPEG 1 is particularly suitable for
low-cost CD-ROM applications due to its low-cost implementation.
In 1993, the MPEG 2 video committee completed a technical specification
to address the more stringent requirements of the broadcast industry. MPEG 2
provides more sophisticated prediction techniques, enabling a compression
solution to comprehend video as interlaced fields of data, rather than
individual frames. MPEG 2 also allows for operation at higher resolution and at
higher bit rates than MPEG 1, resulting in improved image quality for high
motion, high detail video. MPEG 2 typically achieves compression ratios of
50-to-1. Because of its higher bit rate, MPEG 2 technology cannot be used in
standard CD-ROM applications, but can be used in DVD players.
MPEG 4 builds on the experience of the MPEG 1 and MPEG 2 standards,
which are currently used in digital video applications. MPEG 4 is rich in
features, and can be customized to serve the needs of specific industries while
preserving a high level of interoperability across a variety of applications.
It allows a new level of interaction with visual content, providing the ability
to view, access and manipulate objects rather than pixels. MPEG 4’s impact is
especially significant in video streaming, digital television, mobile
multimedia and game applications
Zoran
MPEG Technology. Beginning in 1997, we established ourselves
as a leading provider of MPEG 2 technology for DVD and Super Video CD
applications. We introduced the first DVD decoder device integrating digital
video with multi-channel digital audio and programmable audio effects for use
in DVD players. We also introduced new MPEG compression chip cores that can be
integrated into chips manufactured by OEM customers, enabling these customers
to reduce the cost of custom chip design and accelerate the time-to-market of
their products.
Audio
Technology
The
Dolby Digital Standard. In 1992, Dolby Laboratories launched
Dolby Digital, an audio compression technique which has emerged as an industry
standard. Dolby Digital was developed as a successor to Dolby’s Pro-Logic
analog technique for use in multi-channel digital surround sound systems. It is
currently used in movie theaters comprising over 24,000 screens worldwide and
is also used in home theater and computer multimedia applications. Digital
compression of audio data allows the storage of full quality multi-channel
audio playback in the limited space allocated for audio in video-oriented
formats. It also facilitates the seamless integration of sound with compressed
video. The Dolby Digital
audio compression standard is currently the principal audio compression
technique used in DVD players. Dolby Digital has also been adopted as a
standard for use in high-definition television and digital cable systems.
Other
Audio Standards. Other digital audio compression standards
currently in use include DTS, an audio compression standard that competes with
Dolby Digital, MLP, a compression standard for DVD audio, and MP3, used for the
download of audio recordings from the Internet.
Zoran
Audio Technology. Working closely with Dolby Laboratories, we
have developed a programmable audio digital signal processing engine with an
architecture optimized for Dolby Digital and other demanding audio applications
and we were the first to develop a single-chip solution for Dolby Digital
decoding. Our Vaddis DVD decoders and audio processors now incorporate this
engine to allow systems manufacturers to replace system components with
software modules, differentiate their products from their competition, use our
Silicon Software library of advanced audio algorithms, and reduce system costs
and time to market. In addition to Dolby Digital, our DVD decoders and audio
processors implement all principal audio compression standards, including DTS,
MLP and MP3. Our integrated circuits also include additional functions such as
Virtual Multi-Channel Digital, surround sound for headphones, High-Definition
CD, karaoke processing and speaker equalization.
Products
Our multimedia product line consists of four principal product
families:
• DVD-video
and audio decompression products based on MPEG, Dolby Digital and DTS;
• Filmless
Digital Cameras-video compression and decompression products based on JPEG
technology and CMOS sensors;
• PC
Video-video compression and decompression products based on JPEG technology and
USB multimedia controllers; and
• Digital
Audio-audio decompression products for use in products using MPEG, Dolby
Digital, DTS, MLP, MP3 and other audio technologies.
The following table lists our principal multimedia integrated circuits
currently in production, including the months in which initial production units
were first made available to customers:
* Designed and manufactured by
a third party and sold by us under our name pursuant to a non-exclusive
license. See “Proprietary Rights and Licenses.”
DVD.
Our Vaddis decoders perform all the audio and video decoding and display
requirements of the DVD specification, including MPEG 2 audio and video
decoding, Dolby Digital, DTS and MLP audio decoding, on-screen display,
decryption required for copyright protection and presentation of graphic
information. The Vaddis has additional computation power that can be utilized
for customer differentiation features. For example, it can incorporate virtual
surround sound algorithms without the addition of hardware. This allows the
user to enjoy the theater-like sound obtained from six speakers using a system
that includes only two speakers and the Vaddis. The Vaddis IV incorporates a
more powerful audio digital signal processor that enables the support of
advanced audio algorithms like MPEG 5.1, DTS and audio DVD, which are needed in
today’s DVD player systems. The Vaddis V integrates the host controller and
incorporates DVD audio and progressive scan output features that are part of
current high-end DVD player systems. Vaddis decoders are being used in DVD
players manufactured by Sharp, Toshiba and others. We provide full reference
designs of DVD players, based on our Vaddis chips, that help our customers
accelerate their time to market for their players.
Filmless
Digital Camera Products. Our JPEG technology is used in
filmless digital cameras. In September 1999, we introduced the Camera On A
CHip, or COACH-an integrated system on a chip solution that includes most of
the electronics of a filmless digital camera. The COACH can be connected
directly to a high-resolution (up to 4 mega pixel) CCD or CMOS sensor, process
the video information in real time, compress the captured image in real time to
a flash memory, interface an LCD or micro display and interface to all types of
flash memory. Among the unique capabilities of the COACH is the ability to
transfer in real-time, over a USB bus, high quality video to the PC and thus
serve also as a PC video camera. The COACH also allows for direct connection to
a printer, including color correction and special effects, for the non-PC
consumer environment. The COACH is supplemented by full filmless digital camera
reference designs, “Cam ON” and “Cam Mini,” shortening the time to market for
COACH customers. Our PixelCam CMOS sensor products currently deliver CCD image
quality with 1.3 megapixel resolution at one-quarter the power dissipation and
twice the integration level of CCD sensors. The sensor’s architecture is
scalable, which will enable higher resolution product offerings as the digital
camera OEM’s needs change. These products also offer the digital camera
manufacturer longer battery life and reduced “time to next shot”.
PC
Video Products. Our ZR36050 and ZR36060 codecs are
compression/decompression devices used for real time encoding and decoding of
JPEG video for editing applications. They are fully compliant with JPEG
standards. The ZR36050 and ZR36060 utilize our proprietary bit rate control
technology for high quality video capture. The ZR36050 also features a unique,
embedded, “lossless” mode that allows customers to elect to use low compression
ratio techniques that result in no data loss for applications where quality is
the primary consideration. The ZR36050 and ZR36060 can be installed in a
chipset that includes the ZR36067 motion controller for PCI board implementation
or pre/post-processing devices such as the ZR36016 integrated color
space/raster-to-block converter. The ZR36060 integrates the functions of the
ZR36050, ZR36015 and an additional SRAM device in a single chip. The ZR36067 is
a PCI motion JPEG controller targeting consumer-priced but professional quality
desktop PCI video editing systems. The ZR36503 is a video chip for video
communication across the USB channel to the PC. The ZR36504 chip incorporates
video, audio and data streaming into a single chip for video, audio and data
transfer across the USB channel to the PC.
Digital
Audio Products. The ZR38601, a single-chip digital audio
processor designed to support the PC and home theater digital speaker market,
takes advantage of most of the advanced audio algorithms included in our
Silicon Software library. Its eight channel output architecture supports the
latest home theater applications, including Dolby Surround EX 6.1 channel
sound. The ZR38601’s ability to accept six individual channels of audio input
also makes it the ideal processor for today’s four channel Direct Sound
computer games. The ZR38650, a true multi-standard digital audio processor,
takes advantage of our complete Silicon Software library. It is designed to
support the large mid and low range audio/video receiver market, while
providing features previously available only on more expensive models.
Integrated
Circuit Cores. We offer multimedia integrated circuit, or
intellectual property ("IP"), cores which can be incorporated into
our customers’ chips. For example, Zoran licenses a video decoder IP core for
conversion of an NTSC, PAL, or SECAM TV signal into a format that allows the
information in the TV signal to be displayed on a TV monitor. This IP Core
enables the integration of TV functionality into ICs for LCD panels, LCD-TVs,
Plasma Display TVs, set-top boxes, Digital TVs (“DTVs”), projector systems, PC
video capture and other applications. Our video encoder IP cores perform the
reverse function, converting component video data into an NTSC, PAL or SECAM TV
signal. This IP core has applications in ICs for graphics display, set-top
boxes, digital cameras, DTVs, DVD players, gaming systems and other
applications.
conversion of various digital video formats for display on televisions
and PC monitors, and can be integrated into graphics integrated circuits,
digital televisions, television set-top boxes and digital cameras.
Customers
The following table lists representative customers, as well as other
OEMs who purchase our products through our distributors. Each of these
customers and OEMs purchased, directly or indirectly, at least $100,000 of our
products from January 1, 2001 through December 31, 2001:
Fujifilm purchases our products primarily as a distributor and resells
these products, in many cases under its own trade name. Fujifilm acts as our
primary distributor in Japan and accounts for most of our product sales in
Japan.
During 2000, sales to Fujifilm accounted for 25.2% of our total
revenues, including 27.5% of product sales. During 2001, sales to Fujifilm
accounted for 29.2% of our total revenues, including 30.6% of product sales. In
addition, sales to Fly Ring Digital Technology during 2001 accounted for 12.0%
of our total revenues, including 12.9% of product sales. During 2000, our four largest customers
accounted for 45.4% of our revenues, and during 2001, our four largest
customers accounted for 56.3% of our revenues.
Research and Development
We believe that our future success depends on our ability to continue
to enhance our existing products and to develop new products that maintain
technological competitiveness and compliance with new standards in rapidly
evolving consumer-oriented digital audio and video markets. We attempt to
leverage our expertise in the fields of digital signal processing, integrated
circuit design, algorithms and software development to maintain our position as
a leader in the
development of digital audio and video solutions enabled by
compression. Accordingly, we devote a significant portion of our resources to
maintaining and upgrading our products to reduce integrated circuit cost,
feature size, power consumption and the number of integrated circuits required
to perform compression and other functions necessary for the evolving digital
audio and video application markets. In addition, we seek to design integrated
circuits and cores, as well as copy-ready reference designs which can reduce
the time needed by manufacturers to integrate our products into their own
products.
We have historically generated a significant percentage of our total
revenues from development contracts with our strategic partners. These
development contracts provide that we will receive payments upon reaching
certain development milestones and that we will retain ownership of the
intellectual property developed. Development contracts have enabled us to fund
portions of our product development efforts, to respond to the feature
requirements of our customers, to accelerate the incorporation of our products
into our customers’ products and to accelerate the time-to-market of our
customers’ products. We are currently developing new integrated circuits based
on MPEG and Dolby Digital compression standards pursuant to a development
contract with Fujifilm, under which Fujifilm is providing a portion of the
development funding. Fujifilm has participated directly in product definition
for these development programs and has the right to sell resulting products in
Japan under its distribution agreement with us. Fujifilm also has the right to
manufacture a portion of our requirements for which it has contributed
significant funding.
We are a party to research and development agreements with the Chief
Scientist in Israel’s Ministry of Industry and Trade and the Israel-United
States Binational Industrial Research and Development Foundation. These
organizations fund up to 50% of incurred project costs for approved projects up
to contract maximums. The agreements require us to use our best efforts to
achieve specified results and to pay royalties at rates of 3% to 5% of
resulting product sales and up to 30% of resulting license revenues, up to a
maximum of 100% to 150% of the total funding received. Reported research and
development expenses are net of these grants, which fluctuate from period to
period. Total grants earned in 1999 were $484,000, and in 2000 were $333,000.
In 2001 we did not receive any grants from these organizations. The terms of
Israeli Government participation also contain restrictions on the location of
research and development activities, and the terms of the grants from the Chief
Scientist prohibit the transfer of technology developed pursuant to these
grants to any person without the prior written consent of the Chief Scientist.
We are currently engaged in the development of improvements to our Camera On A
CHip, or COACH, technology under grant from the Chief Scientist. Although we
have received grants from the Chief Scientist and the Foundation in the past,
we intend to fund future research and development efforts for new products
primarily from our own funds and through research and development arrangements
with our major OEM customers.
As of December 31, 2001, we had a staff of 118 full-time and 33
part-time research and development personnel, 138 of whom are based in Israel.
Sales and Marketing
Our sales and marketing strategy is to focus on providing solutions,
primarily compression related, for manufacturers seeking to design audio and video
products for emerging high volume consumer applications. In cooperation with
leading manufacturers of audio and video equipment in the commercial and
consumer markets, we attempt to identify market segments which have the
potential for substantial growth. To implement our strategy, we have
established a direct sales force located at several sales and marketing
offices, and a worldwide network of independent sales representatives and
distributors. In some cases, our strategic partners also provide sales and
marketing support.
We work closely in the product development process with strategic
partners to incorporate our integrated circuits and software into their
products. Potential products are designed to meet customer-specific product
requirements defined jointly by us and our strategic partners with our partners
providing technological input, and in some cases, a portion of the development
funding. This strategy has permitted us to develop products with substantial
financial and other assistance, while retaining ownership of the technology and
ensuring an established customer for the product once development is completed.
In addition, our application engineers assist customers in designing their
products to incorporate our integrated circuits.
Our sales are generally made pursuant to purchase orders received
between one and six months prior to the scheduled delivery date. We sell our
products primarily through our 14-person direct sales staff, of whom four are
located in the United States and ten are located internationally. Our United
States sales staff is primarily responsible for sales in North
America, South America and Asia, and our Israeli sales staff is
primarily responsible for sales in Europe and the Middle East. In addition, we
sell our products indirectly through 23 commissioned sales representatives as
well as selected distributors. We typically warrant our products for a 12-month
period. To date, we have not experienced material product returns or warranty
expense.
We have opened offices in other parts of the world in order to better
address specific markets. During 1998, we opened an office in Shenzhen, China
as part of our effort to capture a leadership position in the Chinese digital audio
and video markets. During 2000, we opened an office in Taipei, Taiwan in an
effort to better address the digital camera market. As of December 31, 2001, we
had a staff of 24 employees in our China office and 8 employees in our Taiwan
office, including sales, applications and customer support employees. In
addition, in 2001 we opened offices in Hong Kong and Korea. At December 31,
2001 we had a staff of three in each location. These offices also provide
sales, applications and customer support.
We distribute our integrated circuit products in Japan primarily under
an agreement with Fujifilm. Under this agreement, Fujifilm acts as the primary
distributor in Japan of products developed by us under development contracts
with Fujifilm. Fujifilm also sells some of these products in Japan under its
own name. We may sell these products directly in Japan only to specified
customers and must first buy the products from Fujifilm. Fujifilm also has a
nonexclusive license to distribute most of our products outside of Japan. We
operate a representative office in Tokyo to help promote our products in Japan
and to manage the sale of products not sold through Fujifilm, such as
integrated circuit cores and certain JPEG products.
We sell our Dolby Digital-based products under a perpetual,
non-exclusive license from Dolby to sell products that incorporate the Dolby
Digital algorithm. We are not required to pay license fees or royalties to
Dolby under this agreement. Our customers enter into license agreements
directly with Dolby, pursuant to which they pay royalties to Dolby. Under our
agreement with Dolby, we may sell our Dolby Digital-based products only to
customers who are licensees of Dolby. To date, most potential customers for our
Dolby Digital-based products are licensees of Dolby. However, the failure or
refusal of potential customers to enter into license agreements with Dolby in
the future could harm our sales.
We sell our DTS Technology-based products under a non-exclusive license
from DTS Technology LLC to sell products that incorporate the DTS algorithm. We
are not required to pay royalties to DTS Technology under this agreement. Our
customers enter into license agreements directly with DTS, pursuant to which
they pay royalties to DTS. Under our agreement with DTS, we may sell our
DTS-based products only to customers who are licensees of DTS. The failure or
refusal of potential customers to enter into license agreements with DTS in the
future could harm our sales.
Backlog
Sales of our products are made pursuant to firm purchase orders.
However, sometimes we allow customers to cancel or reschedule deliveries. In
addition, purchase orders are subject to price renegotiations and to changes in
quantities of products ordered as a result of changes in customers’ requirements
and manufacturing availability. Our business is characterized by short lead
times and quick delivery schedules. As a result of these factors, we do not
believe that backlog at any given time is a meaningful indicator of future
sales.
Manufacturing
We contract our wafer fabrication, assembly and testing to independent
foundries and contractors, which enables us to focus on our design strengths,
minimize fixed costs and capital expenditures and gain access to advanced
manufacturing facilities. Our engineers work closely with our foundry partners
and subcontractors to increase yields, lower manufacturing costs and assure
quality.
Our primary foundry is Taiwan Semiconductor Manufacturing Company, or
TSMC, which has manufactured integrated circuits for us since 1987. TSMC is
currently manufacturing our DVD, audio, JPEG and some of our digital camera
products. In addition, Fujifilm and National Semiconductor manufacture some
integrated circuit products for us. Fujifilm is currently manufacturing our JPEG
codec, our JPEG-based converter products and our MPEG 1 decoder. National
Semiconductor manufactures some of our digital camera products. Hyundai and
Fujitsu manufacture our USB
multimedia controller chips. Our independent foundries fabricate
products for other companies and may also produce products of their own design.
All of our devices are currently fabricated using standard
complementary metal oxide semiconductor process technology with 0.18 micron to
0.8 micron feature sizes. All of our semiconductor products are currently being
assembled by one of
five independent contractors, ASE, Amkor, ASAT, Kyocera or Vate, and
tested by those contractors or other independent contractors.
Our ZR36050 JPEG codec was developed jointly with Fujifilm and is
currently manufactured by Fujifilm pursuant to an agreement that grants
Fujifilm the right to manufacture up to 80% of our requirements for this
product subject to Fujifilm’s ability to manufacture the product on
substantially the same or better terms and conditions as we could obtain from a
third party. This agreement also grants Fujifilm marketing rights in Japan with
respect to these products. See “Sales and Marketing.”
We currently purchase products from all of our foundries under
individually negotiated purchase orders. Our agreement with Fujifilm entitles
us to obtain wafer foundry services from Fujifilm on most favored pricing and
availability terms, subject to Fujifilm’s technological capabilities and
reasonable limitations as to quality and delivery terms requested by us.
We do not currently have a long-term supply contract with TSMC, and
therefore TSMC is not obligated to manufacture products for us for any specific
period, in any specific quantity or at any specified price, except as may be
provided in a particular purchase order.
Competition
Our existing and potential competitors include many large domestic and
international companies that have substantially greater resources in the areas
of:
• finance;
• manufacturing;
• technology;
• marketing;
and
• distribution.
Some of these competitors also have broader product lines and longer
standing relationships with customers than we do. Some of our principal
competitors maintain their own semiconductor foundries and may therefore
benefit from capacity, cost and technical advantages. In the market for
JPEG-based products for desktop video editing applications, our principal
competitors are Divio and Sunplus. Cirrus Logic (Crystal Semiconductor), Fujitsu,
Motorola, STMicroelectronics and Yamaha are currently shipping Dolby
Digital-based audio compression products. C-Cube, now part of LSI Logic,
ESS, LuxSonor, Matsushita, National
Semiconductor, STMicroelectronics, Sony
and Winbond have introduced integrated audio and video devices for DVD and
Super Video CD applications. These manufacturers, as well as others, are
licensed by Dolby to incorporate Dolby Digital technology in their products. In
addition, some manufacturers, including Sony, incorporate compression
technologies other than Dolby Digital in audio products that compete with
products using our integrated circuits. In the markets for JPEG-based products
for use in filmless digital cameras, our principal competitors are in-house
solutions developed and used by major Japanese OEMs, Atmel, Omnivision, Sunplus
and Texas Instruments. Motorola is providing CMOS sensor products. In the
market for MPEG-based chip core products, our principal competitors are David
Sarnoff Research Center and SICAN Microelectronics.
We believe that our ability to compete successfully in the rapidly
evolving markets for high performance audio and video compression technology
depends on a number of factors, including:
• price,
quality, performance and features of our products;
• the
timing and success of new product introductions by us, our customers and our
competitors;
• the
emergence of new industry standards;
• our
ability to obtain adequate foundry capacity;
• the
number and nature of our competitors in a given market; and
• general
market and economic conditions.
The markets in which we compete are intensely competitive and are
characterized by rapid technological change, declining average unit selling
prices and rapid product obsolescence. We expect competition to increase in the
future from existing competitors and from other companies that may enter our
existing or future markets with solutions which may be less costly or provide
higher performance or more desirable features than our products.
The DVD market is growing, and additional competitors are expected to
enter the market for integrated circuits used in DVD players. We believe that
several large Japanese consumer electronics companies may be planning to enter
this market and may attempt to develop MPEG 2 hardware or software to compete
with our products. Some of these potential competitors may develop captive
implementations for use only with their own PC and commercial and consumer
electronics products. This increased competition may result in price
reductions, reduced profit margins and loss of market share.
Historically, average unit selling prices in the semiconductor industry
in general, and for our products in particular, have decreased over the life of
a particular product. We expect that the average unit selling prices of our
products will continue to be subject to significant pricing pressures. In order
to offset expected declines in the average unit selling prices of our products,
we will likely need to reduce the cost of our products. We intend to accomplish
this by implementing design changes that lower the cost of manufacture,
assembly and testing, by negotiating reduced charges by our foundries as and if
volumes increase, and by successfully managing our manufacturing and
subcontracting relationships. Since we do not operate our own manufacturing,
assembly or testing facilities, we may not be able to reduce our costs as
rapidly as companies that operate their own facilities. If we fail to introduce
lower cost versions of our products in a timely manner or to successfully
manage our manufacturing, assembly and testing relationships our business would
be harmed.
Proprietary Rights and Licenses
Our ability to compete successfully is dependent in part upon our
ability to protect our proprietary technology and information. Although we rely
on a combination of patents, copyrights, trademarks, trade secret laws and
licensing arrangements to protect some of our intellectual property, we believe
that factors such as the technological and creative skills of our personnel and
the success of our ongoing product development efforts are more important in
maintaining our competitive position. We generally enter into confidentiality
or license agreements with our employees, distributors, customers and potential
customers and limit access to our proprietary information. We currently hold
several U.S. patents, and have additional patent applications pending, that
pertain to technologies and processes relating to our current business. Our
intellectual property rights, if challenged, may not be upheld as valid, may
not be adequate to prevent misappropriation of our technology or may not
prevent the development of competitive products. Additionally, we may not be
able to obtain patents or other intellectual property protection in the future.
In particular, the existence of several consortiums that license patents
relating to the MPEG standard has created uncertainty with respect to the use
and enforceability of patents implementing that standard. Furthermore, the laws
of certain foreign countries in which our products are or may be developed,
manufactured or sold, including various countries in Asia, may not protect our
products or intellectual property rights to the same extent as do the laws of
the United States and thus make the possibility of piracy of our technology and
products more likely in these countries.
We sell our Dolby Digital-based products under a perpetual
non-exclusive license from Dolby which permits us to incorporate the Dolby
Digital algorithm into our products. Our customers enter into license
agreements with Dolby pursuant to which they pay royalties directly to Dolby.
Under our agreement with Dolby, we may sell our Dolby Digital-based products
only to customers who are licensees of Dolby. To date, most potential customers
for our Dolby Digital-
based products are licensees of Dolby. However, the failure or refusal
of potential customers to enter into license agreements with Dolby in the
future could harm our business. We sell our DTS Technology-based products under
a non-exclusive license from DTS Technology LLC to sell products that
incorporate the DTS algorithm. We are not required to pay royalties to DTS
under this agreement. Our customers enter into license agreements directly with
DTS, pursuant to which they pay royalties to DTS. Under our agreement with DTS,
we may sell our DTS-based products only to customers who are licensees of DTS. The
failure or refusal of potential customers to enter into license agreements with
Dolby in the future could harm our sales.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights, which have resulted in significant and
often protracted and expensive litigation. We or our foundries from time to
time are notified of claims that we may be infringing patents or other
intellectual property rights owned by third parties. We have been subject to
intellectual property claims and litigation in the past and we may be subject
to additional claims in the future. In particular, given the uncertainty
discussed above regarding patents relating to the MPEG standard, it is
difficult for us to assess the possibility that our activities in the MPEG
field may give rise to future patent infringement claims. Litigation by or
against us relating to patent infringement or other intellectual property
matters could result in significant expense to us and divert the efforts of our
technical and management personnel, whether or not such litigation results in a
determination favorable to us. In the event of an adverse result in any such
litigation, we could be required to pay substantial damages, cease the
manufacture, use and sale of infringing products, expend significant resources
to develop non-infringing technology, discontinue the use of certain processes
or obtain licenses to the infringing technology. Licenses may not be offered or
the terms of any offered licenses may not be acceptable to us. If we fail to
obtain a license from a third party for technology used by us we could incur
substantial liabilities and to suspend the manufacture of products, or the use
by our foundries of certain processes.
Employees
As of December 31, 2001, we had 258 full-time and 46 part-time and
contract employees, including 118 full-time and 33 part-time and contract
employees primarily involved in research and development activities, 104 in
marketing and sales, 31 in finance and administration and 18 in manufacturing
control and quality assurance. We have 141 full-time employees and 38 part-time
and contract employees based in Israel, including 138 employees who are
primarily involved in engineering and research and development. We have 77 employees
at our facilities in Santa Clara, California. The remaining employees are
located in our international offices in Canada, Japan, China, Taiwan, Hong Kong
and Korea. We believe that our future success will depend in large part on our
ability to attract and retain highly-skilled, engineering, managerial, sales
and marketing personnel. Competition for such personnel is intense. Our
employees are not represented by any collective bargaining unit, and we have
never experienced a work stoppage. We believe that our employee relations are
good.
Item 2.
Item 2. Properties.
Our executive offices, our principal administration, marketing and
sales operations and a portion of our research and development operations are
located in approximately 24,000 square feet of leased space in Santa Clara,
California under a lease expiring in March 2003. Our principal research and
development and engineering facilities and the balance of our administration,
marketing and sales operations are located in approximately 20,000 square feet
of leased space in an industrial park in Haifa, Israel under a lease expiring
in 2005 and approximately 3,000 square feet of leased space in Kfar Saba,
Israel under a lease expiring in 2003. The aggregate annual gross rent for our
facilities was approximately $1,531,000 in 2001. We also lease sales offices in
Tokyo, Japan, Taipei, Taiwan, and Shenzhen, China. See Note 6 of Notes to
Consolidated Financial Statements. In addition, at the beginning of 2001 we
opened offices in Hong Kong and Korea. We believe that our current facilities
are adequate for our needs for the foreseeable future and that, should it be
needed, suitable additional space will be available to accommodate expansion of
our operations on commercially reasonable terms.
Item 3.
Item 3. Legal
Proceedings.
We
are not a party to any pending legal proceedings which we believe will
materially affect our financial condition or results of operations.
Item 4.
Item 4. Submission
of Matters to a Vote of Security Holders.
We
did not submit any matters to a vote of security holders during the fourth
quarter of the year ended December 31, 2001.
Executive
Officers
The names of our executive officers and their ages as of December 31,
2001 are as follows:
Levy
Gerzberg was a co-founder of Zoran in 1981 and has served as
our President and Chief Executive Officer since December 1988 and as a director
since 1981. Dr. Gerzberg also served as our President from 1981 to 1984 and as
our Executive Vice President and Chief Technical Officer from 1985 to 1988.
Prior to co-founding Zoran, Dr. Gerzberg was Associate Director of Stanford
University’s Electronics Laboratory. Dr. Gerzberg holds a Ph.D. in Electrical
Engineering from Stanford University and an M.S. in Medical Electronics and a
B.S. in Electrical Engineering from the Technion-Israel Institute of Technology
in Haifa, Israel.
Camillo
Martino joined Zoran as Executive Vice President and Chief
Operating Officer in August 2001. From January 2001 through July 2001, Mr.
Martino served as Chief Executive Officer of Merinta Inc., a subsidiary of
Boundless Corporation, engaged in the business of delivering integrated
Linux-based internet appliances solutions to network operators. Mr. Martino served as Marketing Director for
National Semiconductor from May 2000 to December 2000. From February 2000 to
May 2000, he served as Vice President & General Manager - International
Operations for Netpliance Inc., an internet appliance company. From January
1997 through February 2000, Mr. Martino served in various director of marketing
positions for National Semiconductor. Mr. Martino holds a M.S. in Digital
Communications from Chisholm Institute of Technology and a B.S. in Electrical
Engineering from the University of Melbourne.
Isaac
Shenberg has served as Vice President, Sales and Marketing of
Zoran since January 1995 and as Senior Vice President, Business and Strategic
Development since October 1998. From August 1990 to January 1995, Dr. Shenberg
served as our Product Line Business Manager. Dr. Shenberg holds a Ph.D. in
Electrical Engineering from Stanford University and a B.S. and M.S. in
Electrical Engineering from the Technion.
Karl
Schneider joined Zoran as Corporate Controller in January
1998 and was elected Vice President, Finance and Chief Financial Officer in
July 1998. From September 1996 through 1997, Mr. Schneider served as Controller
for the Film Measurement and Robotics and Integrated Technologies divisions of
KLA-Tencor, a semiconductor equipment company. Mr. Schneider served as the
Corporate Controller for SCM Microsystems, Inc. from October 1995 to September
1996, Controller for Reply Corporation from January 1994 to September 1995,
Director of Finance for Digital F/X from October 1992 to January 1994 and
Controller for Flextronics from September 1987 through June 1991. Mr. Schneider
holds a B.S. in Business Administration from San Diego State University.
PART II
Item 5.
Item 5. Market for the Registrant’s
Common Stock and Related Stockholder Matters.
We effected our
initial public offering of our common stock on December 15, 1995. Since that date, our common stock has been
quoted on the Nasdaq National Market under the symbol “ZRAN.” The following
table sets forth the high and low closing sales price of our common stock as
reported on The Nasdaq National Market for the periods indicated:
As of December 31,
2001, there were 290 holders of record of our common stock.
We have never paid
cash dividends on our capital stock. It
is our present policy to retain earnings to finance the growth and development
of our business and, therefore, we do not anticipate paying any cash dividends
in the foreseeable future.
Item 6.
Item 6. Selected Financial Data.
The following
selected consolidated financial data should be read in conjunction with the
consolidated financial statements and the notes thereto included elsewhere
herein.
(1) See Note 2 of Notes to Consolidated
Financial Statements for a description of the computation of the number of
shares and net income (loss) per share.
Item 7.
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
Overview
From our inception in 1981 through 1991, we derived the substantial
majority of our revenue from digital filter processors and vector signal
processors used principally in military, industrial and medical applications.
In 1989, we repositioned our business to develop and market data compression
products for the evolving multimedia markets and discontinued development of
digital filter processor and vector signal processor products. In 1994, we
discontinued production of these products. Our current lines of digital audio
and video products include integrated circuits and related products used in
digital versatile disc players, movie and home theater systems, filmless
digital cameras and video editing systems.
We derive most of our revenues from the sale of our integrated circuit
products. Historically, average selling prices in the semiconductor industry in
general, and for our products in particular, have decreased over the life of a
particular product. Average selling prices for our hardware products have
fluctuated substantially from period to period, primarily as a result of
changes in our customer mix of original equipment manufacturer, or OEM, sales
versus sales to distributors and the transition from low-volume to high-volume
production. In the past, we have reduced the prices of some of our products in
order to better penetrate the consumer market. We believe that, as our product
lines continue to mature and competitive markets evolve, we are likely to
experience further declines in the average selling prices of our products,
although we cannot predict the timing and amount of such future changes with
any certainty.
Our cost of product sales consists primarily of fabrication costs,
assembly and test costs, and the cost of materials and overhead from
operations. If we are unable to reduce our cost of product sales to offset
anticipated decreases in average selling prices, our product gross margins will
decrease. Our product gross margin is also dependent on product mix and on the
percentage of products sold directly to our OEM customers versus indirectly
through our marketing partners who purchase our products at lower prices but
absorb most of the associated marketing and sales support expenses, maintain
inventories and provide customer support and training. Lower gross margins on
sales to distributors are partially offset by reduced selling and marketing
expenses related to such sales. Product sales in Japan are primarily made
through Fujifilm, our strategic partner and distributor in Japan. Fujifilm
provides more sales and marketing support than our other distributors. We
expect both product and customer mix to continue to fluctuate in future
periods, causing further fluctuations in margins.
We also derive revenue from licensing our software and other
intellectual property. Licensing revenue includes one-time license fees and
royalties based on the number of units distributed by the licensee. In
addition, we have historically generated a significant percentage of our total
revenues from development contracts, primarily with key customers, although
development revenue has declined as a percentage of total revenues over the
past several years. These development contracts have provided us with partial
funding for the development of some of our products. These development
contracts provide for license and milestone payments which are recorded as
development revenue. We classify all development costs, including costs related
to these development contracts, as research and development expenses. We retain
ownership of the intellectual property developed by us under these development
contracts. While we intend to continue to enter into development contracts with
certain strategic partners, we expect development revenue to continue to
decline as a percentage of total revenues.
Our research and development expenses consist of salaries and related
costs of employees engaged in ongoing research, design and development
activities and costs of engineering materials and supplies. We are also a party
to research and development agreements with the Chief Scientist in Israel’s
Ministry of Industry and Trade and the Israel-United States Binational
Industrial Research and Development Foundation, which fund up to 50% of
incurred project costs for approved products up to specified contract maximums.
These agreements require us to use our best efforts to achieve specified
results and require us to pay royalties at rates of 3% to 5% of resulting
product sales, and up to 30% of resulting license revenues, up to a maximum of
100% to 150% of total funding received. Reported research and development
expenses are net of these grants, which fluctuate from period to period. We
believe that significant investments in research and development are required
for us to remain competitive and we expect to continue to devote significant
resources to product development, although such expenses as a percentage of
total revenues may fluctuate.
Our selling, general and administrative expenses consist primarily of
employee-related expenses, royalties, sales commissions, product promotion and
other professional services. We expect that selling, general and administrative
expenses will continue to increase to support our anticipated growth.
We conduct most of our research and development and certain sales and
marketing and administrative operations in Israel through our wholly-owned
Israeli subsidiary. As a result, some of our expenses are incurred in New
Israeli Shekels. To date, substantially all of our product sales and our
development and licensing revenue have been denominated in U.S. dollars and
most costs of product sales have been incurred in U.S. dollars. We expect that
most of our sales and costs of sales will continue to be denominated and
incurred in U.S. dollars for the foreseeable future. We have not experienced
material losses or gains as a result of currency exchange rate fluctuations and
have not engaged in hedging transactions to reduce our exposure to such
fluctuations. We may in the future elect to take action to reduce our foreign
exchange risk.
Our effective income tax rate has benefited from the availability of
net operating losses which we have utilized to reduce taxable income for U.S.
federal income tax purposes and by our Israeli subsidiary’s status as an
“Approved Enterprise” under Israeli law, which provides a ten-year tax holiday
for income attributable to a portion of our operations in Israel. Our U.S.
federal net operating losses expire at various times between 2002 and 2020, and
the benefits from our subsidiary’s Approved Enterprise status expire at various
times beginning in 2003.
In June 1999, we sold to MGI Software of Canada the intellectual
property related to our SoftDVD product line and transferred to MGI certain
related software development and support resources in exchange for cash, MGI
common stock and future royalties. We do not currently expect, however, that
these royalties will have a material impact on quarterly revenues for the foreseeable
future. In addition, the shares of MGI stock received by us as part of this
transaction are subject to future appreciation or depreciation. Our software
revenues have declined significantly as a result of the sale of the SoftDVD
product line.
In June 2000, we acquired PixelCam, Inc., a manufacturer of megapixel
CMOS image sensors, in exchange for 370,832 shares of our common stock and
options to purchase 4,168 shares of our common stock with an aggregate value of
$24.6 million. The acquisition was accounted for under the purchase method of
accounting. See Note 11 of Notes to Consolidated Financial Statements.
On October 26, 2000, we acquired Nogatech Inc., a provider of chips
that compress digital video images and establish connections, or video
connectivity, between video devices and computers, as well as between video
devices across a variety of networks, in exchange for 2,534,599 shares of our
common stock and options to purchase 168,472 shares of our common stock with an
aggregate value of $163.6 million. The acquisition was accounted for under the
purchase method of accounting. See Note 11 of Notes to Consolidated Financial
Statements.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including bad debts, inventories, investments, intangible assets and
income taxes. We base these estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
• We
recognize development revenue using the percentage-of-completion method. Under
the percentage-of-completion method, revenue recognized is that portion of the
total contract price equal to the ratio of costs expended to date to the
anticipated final total costs, based on current estimates of the costs to
complete the
project. These estimates
are reviewed and revised periodically throughout the lives of the contracts.
Any revisions are recorded in the accounting period in which the revisions are
made.
• Inventories
are recorded at the lower of standard cost, which approximates actual cost on a
first-in-first-out basis, or market value. We write down inventories to net
realizable value based on forecasted demand and market conditions. Actual
demand and market conditions may be different from those projected by our
management. This could have a material effect on our operating results and
financial position.
• We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
• We
hold minority interests in companies having operations or technology in areas
within our strategic focus. At December 31, 2001 these investments totaled $3.6
million. We record an investment impairment charge when we believe an
investment has experienced a decline in value that is other than temporary. We
assess the value of this investment principally by using information acquired
from the investee, including historical and projected financial performance and
recent funding events. Future adverse changes in market conditions or poor
operating results of underlying investments could result in losses or an
inability to recover the carrying value of the investments that may not be
reflected in an investment’s current carrying value thereby possibly requiring
an impairment charge in the future.
• We
evaluate the recoverability of our property and equipment and intangible assets
in accordance with Statement of Financial Accounting Standards No. 121
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. This standard requires recognition of impairment of long-lived
assets in the event the carrying value of such assets exceeds the future
undiscounted cash flows attributable to such assets. Impairment evaluations
involve management estimates of asset useful lives and future cash flows.
Actual useful lives and cash flows could be different from those estimated by our
management. This could have a material effect on our operating results and
financial position.
• We
follow the liability method of accounting for income taxes which requires
recognition of deferred tax liabilities and assets for the expected future tax
consequence of temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. In the event actual
results differ from these expectations then the resulting impact to income
would be assessed in the period such determination was made.
Results
of Operations
The following
table sets forth certain consolidated statement of operations data as a
percentage of total revenues for the periods indicated:
Year Ended December 31, 2001
Compared to Year Ended December 31, 2000
Revenues. Total revenues increased by 35.2% to $107.7
million in 2001 from $79.7 million in 2000.
Product sales increased by 47.5% to $100.0 million in 2001 from $67.8
million in 2000. The increase in product sales resulted primarily from
increased unit sales of DVD products and to a lesser extent filmless digital
cameras. Offsetting these increases somewhat were decreased unit sales for our
digital audio and PC video products. Software, licensing and development
revenues decreased by 35.3% to $7.7 million in 2001 from $11.9 million in 2000.
This decrease was due to a decline in the number and size of significant new
licensing contracts, as well as the timing of revenue recognition on a
long-term development contract.
Product Gross Margin. Product gross margin
decreased to 35.3% in 2001 compared to 43.9% in 2000. The decrease was due to a substantial shift in product mix to a
higher percentage of lower-margin DVD products, which include CPU companion
chips that are sold at low margin, and a shift in customer mix to a lower
percentage of direct sales to OEM customers. In addition, we experienced a
decline in the average selling price of our older Vaddis III DVD chip that is
being phased out as we transition our customer base to our new Vaddis IV Plus
DVD chip.
Research and Development. Research and development
(“R&D”) expenses increased by 24.6% to $23.2 million in 2001 from $18.6
million in 2000. Gross R&D expenses increased primarily as a result of our
acquisitions of PixelCam and Nogatech in June 2000 and October 2000,
respectively and the timing of major project expenses such as tape-outs. R&D expenses in 2001 did not include
reimbursements from the Chief Scientist.
For 2000, Chief Scientist reimbursements were $333,000. R&D expenses decreased as a percentage
of total revenues to 21.5% in 2001, compared to 23.4% in 2000 due to the
increase in revenue.
Selling, General and
Administrative. Selling,
general and administrative (“SG&A”) expenses increased by 11.4% to $21.3
million in 2001 from $19.1 million in 2000.
The increase was primarily due to our acquisitions of PixelCam and
Nogatech, and the
continued expansion of our presence in the Asia Pacific region including the
establishment of offices in Hong Kong and Korea at the beginning of 2001.
Amortization
of goodwill and write-off of acquired in-process research and development. The acquisitions of PixelCam and Nogatech
resulted in the following charges:
• PixelCam:
During 2001, we recorded $6.0 million in charges related to the amortization of
goodwill associated with our acquisition of PixelCam compared to $3.0 million
recorded during 2000. During 2001, we
did not record any charges related to the write-off of in-process research and
development associated with the PixelCam acquisition. For 2000 we incurred $6.8
million in charges associated with the write-off of in process research and
development.
• Nogatech:
During 2001, we recorded $36.7 million in charges related to the amortization
of goodwill associated with our acquisition of Nogatech compared to $6.8
million recorded during 2000. During
2001 we did not record any charges related to the write-off of in-process
research and development associated with the Nogatech acquisition. For 2000 we
incurred $15.1 million in charges associated with the write-off of in process
research and development.
The in-process research
and development project related to our PixelCam acquisition was completed and
we began shipping the resulting product in the third quarter of 2001. The
project associated with the acquisition of Nogatech has been delayed due to
uncertainty in the market concerning implementation timing of this technology.
Completion of this project remains a significant risk to the Company due to the
remaining effort to achieve technical feasibility, rapidly changing customer
markets and significant competitive threats from other companies. Failure to
bring related products to market in a timely manner could adversely impact our
future sales and profitability. Additionally, the value of the intangible
assets acquired may become impaired.
We have not yet completed our assessment of goodwill and other
intangibles in accordance with Financial Accounting Standards Board (FASB)
Statements Nos. 141 and 142, “Business Combinations” and “Goodwill and Other
Intangible Assets” (“SFAS 141” and “SFAS 142”). SFAS 142 changes the accounting
for goodwill from an amortization method to an impairment-only approach. Under
SFAS 142, goodwill will be tested annually and whenever events or circumstances
occur indicating that goodwill might be impaired. Upon adoption of SFAS 142,
amortization of goodwill recorded for business combinations consummated prior
to July 1, 2001 will cease, and intangible assets acquired prior to July 1,
2001 that do not meet the criteria for recognition under SFAS 141 will be
reclassified to goodwill. Companies are required to adopt SFAS 142 for fiscal
years beginning after December 15, 2001. Accordingly, our amortization of
goodwill expense, which totaled $33.2 million in 2001, will be discontinued in
2002. In connection with the adoption of SFAS 142, the Company will be required
to perform a transitional goodwill impairment assessment and has six months
from January 1, 2002 to complete this task.
Interest and Other Income (Expense),
Net. Net interest and
other income increased by 8.4% to $10.0 million in 2001 from $9.2 million in
2000. The increase resulted primarily from increased interest income on higher
cash balances following our acquisition of Nogatech in October 2000.
Provision for Income Taxes. Excluding charges related to the amortization of goodwill and the
write-off of acquired in-process research and development our estimated
effective tax rate remained at 15.0% for 2001 and 2000.
Year Ended December 31, 2000
Compared to Year Ended December 31, 1999
Revenues. Total revenues increased by 29.2% to $79.7
million in 2000 from $61.7 million in 1999.
Product sales increased by 28.2% to $67.8 million in 2000 from $52.9
million in 1999. The increase in product sales resulted primarily from
increased unit sales of DVD and Super Video CD products as well as filmless
digital cameras. Software, licensing and development revenues increased by
35.3% to $11.9 million in 2000 from $8.8 million in 1999. This increase was the
result of significant license and development contracts entered into during
2000 which offset the decline in revenues resulting from our sale of our
SoftDVD product line in June 1999.
Product Gross Margin. Product gross margin
decreased to 43.9% in 2000 compared to 46.1% in 1999. The decrease was due to a shift in product mix to a higher
percentage of lower-margin products and a shift in customer mix to a lower
percentage of direct sales to OEM customers.
Research and Development. Research and development
(“R&D”) expenses increased by 47.2% to $18.6 million in 2000 from $12.7
million in 1999. R&D expenses in 2000
were net of reimbursements in the amounts of $333,000 under product development
agreements with the Chief Scientist. For
1999, Chief Scientist reimbursements were $484,000. Gross R&D expenses increased primarily as a result of our
acquisitions of PixelCam in June 2000 and Nogatech in October 2000 as well as
our planned enhancement to our technology and development capabilities. R&D expenses increased as a percentage
of total revenues to 23.4% in 2000, compared to 20.5% in 1999.
Selling, General and
Administrative. Selling,
general and administrative (“SG&A”) expenses increased by 34.4% to $19.1
million in 2000 from $14.3 million in 1999.
The increase was primarily due to our acquisitions of PixelCam and
Nogatech, the continued expansion of our China office and the opening of our
Taiwan office.
Amortization
of goodwill and write-off of acquired in-process research and development. The acquisitions of PixelCam and Nogatech
resulted in the following charges:
• PixelCam:
During 2000, we recorded $3.0 million in charges related to the amortization of
goodwill associated with our acquisition of PixelCam. In addition to the
amortization charge, during the second quarter of 2000, we recorded a $6.8
million charge related to the write-off of acquired in-process research and
development associated with the PixelCam acquisition. The allocation of $6.8
million of the purchase price to the acquired in-process research and
development was determined by identifying the research project for which
technological feasibility had not been established at the time of the
acquisition and for which no alternative future uses then existed. The value
was determined by estimating the expected cash flows from the project once
commercially viable, discounting the net cash flows back to their present
value, and then applying a percentage of completion to the calculated value.
The percentage of completion was determined using costs incurred by PixelCam prior
to the acquisition date compared to the remaining research and development to
be completed to bring the project to technological feasibility. We estimated
that, as of the acquisition date, the project was 62% complete and the
estimated costs to complete the project were approximately $4.1 million.
• Nogatech:
During 2000, we recorded $6.8 million in charges related to the amortization of
goodwill and other intangibles associated with our acquisition of Nogatech. In
addition to the amortization charge, during the fourth quarter of 2000, we
recorded a $15.1 million charge related to the write-off of acquired in-process
research and development associated with the Nogatech acquisition. The
allocation of $15.1 million of the purchase price to the acquired in-process
research and development was determined by identifying the research project for
which technological feasibility had not been established at the time of the
acquisition and for which no alternative future uses then existed. The value
was determined by estimating the expected cash flows from the project once
commercially viable, discounting the net cash flows back to their present
value, and then applying a percentage of completion to the calculated value.
The percentage of completion was determined using costs incurred by Nogatech
prior to the acquisition date compared to the remaining research and
development to be completed to bring the project to technological feasibility.
We estimated that, as of the acquisition date, the project was 60% complete and
the estimated costs to complete the project were approximately $1.2 million.
Interest and Other Income (Expense),
Net. Net interest and
other income increased by 482.3% to $9.2 million in 2000 from $1.6 million in
1999. The increase resulted primarily from increased interest income on higher
cash balances following a follow-on public offering of common stock in December
1999.
Provision for Income Taxes. Excluding charges related to the amortization of goodwill and the
write-off of acquired in-process research and development our estimated
effective tax rate remained at 15.0% for 2000 and 1999.
Liquidity and Capital Resources
At December 31, 2001, we had $20.3 million of cash and cash equivalents,
$89.8 million of short-term investments and $130.8 million of working capital.
In addition, we had $86.1 million of investments in other assets that have
maturity dates that are beyond one year.
Our operating activities provided
cash of $12.4 million during 2001, primarily due to the net loss adjusted for
the non-cash impact of depreciation and the amortization of goodwill and other
intangibles associated with our acquisitions of PixelCam and Nogatech during
2000. In addition, an increase in accounts payable and decrease in inventory,
partially offset by an increase in accounts receivable, also contributed to the
cash provided by operating activities.
Cash used in investing activities was $11.2 million during 2001. Cash
used for short-term investments during the year was $6.2 million. Capital
equipment expenditures accounted for $3.8 million of the cash used while the
purchase of long-term investments used $1.2 million
Cash provided by financing activities was $3.0 million during 2001 and
primarily consisted of proceeds from the issuance of common stock under our
incentive stock option and employee stock purchase plans of $6.9 million,
offset by the repurchase 255,000 shares of our common stock for $3.9 million.
As of December 31, 2001 we are responsible for lease commitments
of $2.9 million associated with our
worldwide facilities of which $1.3 million is due in 2002, $649,000 is due in
2003 and $464,000 is due in 2004 and 2005, respectively. In addition, we had
inventory purchase commitments of $11.8 million at December 31, 2001.
At December 31, 2001 and 2000, we did
not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. Accordingly, we are not exposed to the type of financing, liquidity,
market or credit risk that could arise if we had engaged in such relationships.
We believe that our current balances of cash, cash equivalents and
short-term investments, and anticipated cash flow from operations, will satisfy
our anticipated working capital and capital expenditure requirements at least
through 2002. Nonetheless, our future capital requirements may vary materially
from those now planned and will depend on many factors including, but not
limited to:
• the
levels at which we maintain inventory and accounts receivable;
• the
market acceptance of our products;
• the
levels of promotion and advertising required to launch our new products or to
enter markets and attain a competitive position in the marketplace;
• our
business, product, capital expenditure and research and development plans and
technology roadmap;
• volume
pricing concessions;
• capital
improvements to new and existing facilities;
• technological
advances;
• the
response of competitors to our products; and
• our
relationships with our suppliers and customers.
In addition, we may require an increase in the level of working capital
to accommodate planned growth, hiring and infrastructure needs. Additional
capital may also be required for consummation of any acquisitions of
businesses, products or technologies.
To the extent that our existing resources and cash generated from
operations, are insufficient to fund our future activities, we may need to
raise additional funds through public or private financings or borrowings. If
additional funds are raised through the issuance of debt securities, these
securities could have rights, preferences and privileges senior to holders of
common stock, and the terms of this debt could impose restrictions on our
operations. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders. We cannot be certain that
additional financing will be available in amounts or on terms acceptable to us,
if at all. If we are unable to obtain this additional financing, we may be
required to reduce the scope of our planned product development and sales and
marketing efforts, which could harm our business, financial condition and
operating results.
Selected Pro Forma Financial Data
The
following pro forma consolidated results of operations do no represent our
results of operations or earnings per share information in accordance with
accounting principles generally accepted in the United States of America. Pro
forma results of operations have been presented, in addition to the actual
results, to provide period-to-period comparability of our underlying operating
results excluding the following: amortization of goodwill and other
intangibles, the write-off of acquired in-process technology, and the
amortization of deferred stock-based compensation associated with the
acquisition of Nogatech, Inc.
Future Performance and Risk Factors
The Company’s future
business, operating results and financial condition are subject to various
risks and uncertainties, including those described below.
Our
quarterly revenues and operating results fluctuate due to a variety of factors,
which may result in volatility or a decline in the price of our stock.
Our quarterly operating results have varied
significantly due to a number of factors, including:
• fluctuation
in demand for our products;
• the
timing of new product introductions by us and our competitors;
• the
level of market acceptance of new and enhanced versions of our products and our
customers’ products;
• the
timing of large customer orders;
• the
length and variability of the sales cycle for our products;
• the
cyclical nature of the semiconductor industry;
• the
availability of development funding and the timing of development revenue;
• changes
in the mix of products sold;
• seasonality
in demand for our products;
• competitive
pricing pressures; and
• the
evolving and unpredictable nature of the markets for products incorporating our
integrated circuits and embedded software.
We expect that our operating results will continue to
fluctuate in the future as a result of these factors and a variety of other
factors, including:
• the
cost and availability of adequate foundry capacity;
• fluctuations
in manufacturing yields;
• the
emergence of new industry standards;
• product
obsolescence; and
• the
amount of research and development expenses associated with new product
introductions.
Our operating results could also be harmed by:
• economic
conditions generally or in various geographic areas where we or our customers
do business;
• other
conditions affecting the timing of customer orders; or
• a
downturn in the markets for our customers’ products, particularly the consumer
electronics market.
These factors are difficult or impossible to forecast.
We place orders to purchase our products from independent foundries several
months in advance of the scheduled delivery date, often in advance of receiving
non-cancelable orders from our customers. If anticipated shipments in any
quarter are canceled or do not occur as quickly as expected, expense and
inventory levels could be disproportionately high. If anticipated license
revenues in any quarter are canceled or do not occur, gross margins may be
reduced. A significant portion of our expenses are relatively fixed, and the
timing of increases in expenses is based in large part on our forecast of
future revenues. As a result, if revenues do not meet our expectations we may
be unable to quickly adjust expenses to levels appropriate to actual revenues,
which could harm our operating results.
As a result of these factors, our operating results
may vary significantly from quarter to quarter. Any shortfall in revenues or
net income from levels expected by securities analysts could cause a decline in
the trading price of our stock.
Our success for the
foreseeable future will be dependent on growth in demand for integrated
circuits for DVD, filmless digital camera applications and, to a lesser extent,
on digital audio and video editing applications and our ability to market and
sell our products to manufacturers who incorporate those types of integrated
circuits into their products.
In 2000 and 2001, we derived a majority of our product
revenues from the sale of integrated circuits for DVD and, to a lesser extent,
Super Video CD applications. We expect that sales of our products for DVD
applications will continue to account for a significant portion of our revenues
for the near future. Our ability to sell our products for filmless digital
camera applications and to a lesser extent digital
audio and video editing applications will also have an impact on our financial
performance for the foreseeable future. If the markets for these products and
applications decline or fail to develop as expected, or we are not successful
in our efforts to market and sell our products to manufacturers who incorporate
integrated circuits into these products, our financial results will be harmed.
Our customers experience
fluctuating product cycles and seasonality, which causes our sales to
fluctuate.
Because the markets our customers serve are
characterized by numerous new product introductions and rapid product
enhancements, our operating results may vary significantly from quarter to
quarter. During the final production of a mature product, our customers
typically exhaust their existing inventory of our products. Consequently,
orders for our products may decline in those circumstances, even if our
products are incorporated into both mature products and replacement products. A
delay in the customer’s transition to commercial production of a replacement
product would delay our ability to recover the lost sales from the
discontinuation of the related mature product. Our customers also experience
significant seasonality in the sales of their consumer products, which affects
their orders of our products. Typically, the fourth calendar quarter represents
a disproportionate percentage of sales for our customers due to the holiday
period, and therefore a disproportionate percentage of our sales. We expect
these sales fluctuations to continue for the foreseeable future.
Product supply and demand
in the semiconductor industry is subject to cyclical variations.
The semiconductor industry is subject to cyclical
variations in product supply and demand. Downturns in the industry often occur
in connection with, or anticipation of, maturing product cycles for both
semiconductor companies and their customers and declines in general economic
conditions. These downturns have been characterized by abrupt fluctuations in
product demand, production over-capacity and accelerated decline of average
selling prices. In some cases, these downturns have lasted more than one year.
A downturn in the semiconductor industry could harm our sales and revenues if
demand drops or our gross margins if average selling prices decline.
The development and
evolution of markets for our integrated circuits is dependent on factors such
as industry standards, over which we have no control; for example, if
manufacturers adopt new or competing industry standards with which our products
are not compatible, our existing products would become less desirable to the
manufacturers and our sales would suffer.
The emergence of markets for our products is affected
by a variety of factors beyond our control. In particular, our products are
designed to conform to current specific industry standards. Manufacturers may
not continue to follow these standards, which would make our products less
desirable to manufacturers and reduce our sales. Also, competing standards may
emerge that are preferred by manufacturers, which could also reduce our sales
and require us to make significant expenditures to develop new products. The
emergence of new markets for our products is also dependent in part upon third
parties developing and marketing content in a format compatible with commercial
and consumer products that incorporate our products. If content compatible with
commercial and consumer products that incorporate our products is not
available, manufacturers may not be able to sell products incorporating our
integrated circuits, and our sales to manufacturers would suffer.
We rely on independent
foundries and contractors for the manufacture, assembly and testing of our
integrated circuits, and the failure of any of these third parties to deliver
products or otherwise perform as requested could damage our relationships with
our customers and harm our sales and financial results.
We do not operate any manufacturing facilities, and we
rely on independent foundries to manufacture substantially all of our products.
These independent foundries fabricate products for other companies and may also
produce products of their own design. From time to time there are manufacturing
capacity shortages in the semiconductor industry. We do not have long-term
supply contracts with any of our suppliers, including our principal supplier,
Taiwan Semiconductor Manufacturing Company, or TSMC. Therefore, TSMC and these other suppliers are not obligated
to manufacture products for us for any specific period, in any specific
quantity or at any specified price, except as may be provided in a particular
purchase order.
Our reliance on independent foundries involves a
number of risks, including:
• the
inability to obtain adequate manufacturing capacity;
• the
unavailability of or interruption in access to certain process technologies necessary
for manufacture of our products;
• reduced
control over delivery schedules;
• reduced
control over quality assurance;
• reduced
control over manufacturing yields and cost; and
• potential
misappropriation of our intellectual property.
In addition, TSMC and some of our other foundries are
located in areas of the world which are subject to natural disasters such as
earthquakes. While the 1999 earthquake in Taiwan did not have a material impact
on our independent foundries, a similar event centered near TSMC’s facility
could severely reduce TSMC’s ability to manufacture our integrated circuits.
The loss of any of our manufacturers as a supplier, our inability to expand the
supply of our products in response to increased demand, or our inability to
obtain timely and adequate deliveries from our current or future suppliers due
to a natural disaster or any other reason could delay or reduce shipments of
our products. Any of these circumstances could damage our relationships with
current and prospective customers and harm our sales and financial results.
We also rely on independent contractors for the
assembly and testing of our products. At present, all of our semiconductor
products are assembled by one of five independent contractors: ASE, Amkor, ASAT,
Kyocera, or Vate. Our semiconductor products are tested by these contractors or
other independent contractors. Our reliance on independent assembly and testing
houses limits our control over delivery schedules, quality assurance and
product cost. Disruptions in the services provided by our assembly or testing
houses or other circumstances that would require us to seek alternative sources
of assembly or testing could lead to supply constraints or delays in the
delivery of our products. These constraints or delays could damage our
relationships with current and prospective customers and harm our sales and
financial results.
Because foundry capacity
is limited from time to time we may be required to enter into costly long-term
supply arrangements to secure foundry capacity.
If we are not able to obtain additional foundry
capacity as required, our relationships with our customers would be harmed and
our sales would likely be reduced. In order to secure additional foundry
capacity, we have considered and will continue to consider various arrangements
with suppliers, which could include, among others:
• option
payments or other prepayments to a foundry;
• nonrefundable
deposits with or loans to foundries in exchange for capacity commitments;
• contracts
that commit us to purchase specified quantities of silicon wafers over extended
periods;
• issuance
of our equity securities to a foundry;
• investment in
a foundry;
• joint
ventures; or
• other
partnership relationships with foundries.
We may not be able to make any such arrangement in a
timely fashion or at all, and such arrangements, if any, may not be on terms
favorable to us. Moreover, if we are able to secure foundry capacity, we may be
obligated to utilize all of that capacity or incur penalties. Such penalties
may be expensive and could harm our financial results.
If our independent
foundries do not achieve satisfactory yields, our relationships with our
customers may be harmed.
The fabrication of silicon wafers is a complex
process. Minute levels of contaminants in the manufacturing environment,
defects in photomasks used to print circuits on a wafer, difficulties in the
fabrication process or other factors can cause a substantial portion of the
integrated circuits on a wafer to be non-functional. Many of these problems are
difficult to detect at an early stage of the manufacturing process and may be
time consuming and expensive to correct. As a result, foundries often
experience problems achieving acceptable yields, which are represented by the
number of good integrated circuits as a proportion of the number of total
integrated circuits on any particular wafer.
Poor yields from our independent foundries would reduce our ability to
deliver our products to customers, harm our relationships with our customers,
and harm our business.
To be successful, we must
efficiently develop new and enhanced products to meet rapidly changing customer
requirements and industry standards.
The markets for our products are characterized by:
• rapidly
changing technologies;
• evolving
industry standards;
• frequent
new product introductions; and
• short product
life cycles.
Over the long run, we expect to increase our product
development expenses, and our future success will depend to a substantial
degree upon our ability to develop and introduce, on a timely and
cost-effective basis, new and enhanced products that meet rapidly changing
customer requirements and industry standards. We may not successfully develop,
introduce or manage the transition to new products. Delays in the introduction
or shipment of new or enhanced products, lack of market acceptance for such
products or problems associated with new product transitions could harm our
sales and financial results.
We face competition or
potential competition from companies with greater resources than ours, and if
we are unable to compete effectively with these companies, our market share may
decline and our business could be harmed.
Competition in the compression technology market has
historically been dominated by large companies, such as STMicroelectronics, and
companies that develop and use their own integrated circuits, such as Sony. As
this market continues to develop, we face competition from other large
semiconductor vendors, including:
• Atmel
Corporation;
• Cirrus
Logic (Crystal Semiconductor);
• ESS
Technology, Inc.;
• Fujitsu;
• LSI
Logic (including C-Cube Microsystems Inc. acquired during 2001);
• Motorola;
• Omnivision
Technologies, Inc.;
• Sunplus
Technology; and
• Texas
Instruments.
We also face competition from internally-developed
solutions developed and used by major Japanese original equipment
manufacturers, who may also be our customers.
Many of our existing and potential competitors have
substantially greater resources than ours in many areas, including:
• finances;
• manufacturing;
• technology;
• marketing;
and
• distribution.
Many of our competitors have broader product lines and
longer standing relationships with customers than we do. Moreover, our
competitors may foresee the course of market developments more accurately than
we do and could in the future develop new technologies that compete with our
products or even render our products obsolete. In addition, a number of private
companies have announced plans for new products to address the same digital
multimedia compression problems that our products address. If we are unable to
compete successfully against our current and future competitors, we could
experience price reductions, order cancellations and reduced gross margins, any
one of which could harm our business.
The DVD market is growing, and additional competitors
are expected to enter the market for DVD players and software. Some of these
potential competitors may develop captive implementations for use only with
their own PC and consumer electronics products. It is also possible that
application software vendors, such as Microsoft, may attempt to enter the DVD
application market in the future. This increased competition may result in
price reductions, reduced profit margins and loss of market share.
Our products are
characterized by average selling prices that decline over relatively short time
periods; if we are unable to reduce our costs or introduce new products with
higher average selling prices, our financial results would suffer.
Average selling prices for our products decline over
relatively short time periods. Many of our manufacturing costs are fixed. When
our average selling prices decline, our revenues decline unless we sell more
units, and our gross margins decline unless we are able to reduce our
manufacturing costs by a commensurate amount. Our operating results suffer when
gross margins decline. We have experienced these problems and may continue to
experience them in the future and cannot predict when they may occur or their
severity.
We derive most of our
revenue from sales to a small number of large customers, and if we are not able
to retain these customers, or they reschedule, reduce or cancel orders, our
revenues would be reduced and our financial results would suffer.
Our largest customers account for a substantial
percentage of our revenues. In 2001, sales to Fujifilm accounted for 29.2% of
our total revenue. Our four largest customers in 2001 accounted for
approximately 56.3% of our total revenues.
During 2000, our four largest customers accounted for approximately
45.4% of our revenues with Fujifilm accounting for 25.2%. Sales to these large
customers have varied significantly from year to year and will continue to
fluctuate in the future. These sales
also may fluctuate significantly from quarter to quarter. We may not be able to
retain our key customers or these customers may cancel purchase orders or
reschedule or decrease their level of purchases from us. Any substantial
decrease or delay in sales to one or more of our key customers could harm our
sales and
financial results. In addition, any difficulty in
collecting amounts due from one or more key customers could harm our financial
results.
We are dependent on our
relationship with Fujifilm for a significant percentage of our product sales,
and if this relationship were terminated, our business would be harmed.
Fujifilm has been our largest customer in four of the
last five years. Fujifilm purchases our products primarily as a distributor.
Under our arrangement with Fujifilm, Fujifilm acts as the primary distributor in
Japan of products developed by us under development contracts with Fujifilm.
Fujifilm also sells some of these products in Japan under its own name. We may
sell these products directly in Japan only to specified customers and must
first buy the products from Fujifilm. Fujifilm provides more sales and
marketing support than our other distributors. Fujifilm also has a nonexclusive
license to distribute most of our products outside of Japan. Fujifilm has
provided wafer manufacturing services on a most-favored terms basis to us since
1993 and has also provided funding to support our development efforts. If our
relationship with Fujifilm were terminated, our business would be harmed.
Our products generally
have long sales cycles and implementation periods, which increases our costs in
obtaining orders and reduces the predictability of our earnings.
Our products are technologically complex. Prospective
customers generally must make a significant commitment of resources to test and
evaluate our products and to integrate them into larger systems. As a result,
our sales process is often subject to delays associated with lengthy approval
processes that typically accompany the design and testing of new products. The
sales cycles of our products often last for many months or even years. Longer
sales cycles require us to invest significant resources in attempting to make
sales and delay the generation of revenue.
Long sales cycles also subject us to other risks,
including customers’ budgetary constraints, internal acceptance reviews and
cancellations. In addition, orders expected in one quarter could shift to
another because of the timing of customers’ purchase decisions. The time
required for our customers to incorporate our products into their own can vary
significantly with the needs of our customers and generally exceeds several
months, which further complicates our planning processes and reduces the
predictability of our operating results.
We are not protected by
long-term contracts with our customers.
We generally do not enter into long-term purchase
contracts with our customers, and we cannot be certain as to future order
levels from our customers. When we do enter into a long-term contract, the
contract is generally terminable at the convenience of the customer. In the
event of an early termination by one of our major customers, it is unlikely
that we will be able to rapidly replace that revenue source, which would harm
our financial results.
We are dependent upon our
international sales and operations; economic, political or military events in a
country where we make significant sales or have significant operations could
interfere with our success or operations there and harm our business.
During 2001, 93% of our total revenues were derived
from international sales. We anticipate that international sales will continue
to represent a substantial majority of our total revenues for the foreseeable
future. In addition, substantially all of our semiconductor products are
manufactured, assembled and tested outside of the United States by independent
foundries and subcontractors.
We are subject to the risks inherent in doing business
internationally, including:
• unexpected
changes in regulatory requirements;
• fluctuations
in exchange rates;
• political
and economic instability;
• imposition
of tariffs and other barriers and restrictions; and
• the
burdens of complying with a variety of foreign laws.
The majority of our research and development personnel
and facilities and a significant portion of our sales personnel are located in
Israel. Political, economic and military conditions in Israel directly affect
our operations. Some of our officers and employees in Israel are obligated to
perform up to 39 days of military reserve duty annually. The absence of these
employees for significant periods during the work week may cause us to operate
inefficiently during these periods.
Our operations in China are subject to the economic
and political uncertainties affecting that country. For example, the Chinese
economy has experienced significant growth in the past decade, but such growth
has been uneven across geographic and economic sectors and has recently been
slowing. This growth may continue to decrease and any slowdown may have a
negative effect on our business. During 2000 and the beginning of 2001 we also
opened offices in Taipei, Taiwan, Hong Kong and Seoul, Korea. Our operations
are subject to the economic and political uncertainties affecting these
countries as well.
Our business and future
operating results could be harmed by terrorist activity or armed conflict.
Our business and operating results are subject to
uncertainties arising out of possible terrorist attacks on the United States
and other regions of the world including locations where we maintain operations
and by the potential expansion of armed conflict and potential instability
associated with terrorism. Our operations could be harmed due to:
• disruption
in commercial activities associated with heightened security concerns affecting
international travel and commerce;
• reduced
demand for consumer electronic products due to a potential extension of the global economic slowdown;
• tightened
immigration controls that may adversely affect the residence status of key
non-U.S. managers and technical employees in our U.S. facilities or our ability
to hire new non-U.S. employees in such facilities; or
• potential
expansion of armed conflict in the Middle East which could adversely affect our
operations in Israel.
The prices of our
products may become less competitive due to foreign exchange fluctuations.
Foreign currency fluctuations may affect the prices of
our products. Prices for our products are currently denominated in U.S. dollars
for sales to our customers throughout the world. If there is a significant
devaluation of the currency in a specific country, the prices of our products
will increase relative to that country’s currency and our products may be less
competitive in that country. Also, we cannot be sure that our international
customers will continue to be willing to place orders denominated in U.S.
dollars. If they do not, our revenue and operating results will be subject to
foreign exchange fluctuations.
Our ability to compete
could be jeopardized if we are unable to protect our intellectual property
rights from challenges by third parties.
Our success and ability to compete depend in large
part upon protecting our proprietary technology. We rely on a combination of
patent, trade secret, copyright and trademark laws, non-disclosure and other
contractual agreements and technical measures to protect our proprietary
rights. These agreements and measures may not be sufficient to protect our
technology from third-party infringement, or to protect us from the claims of
others. Monitoring unauthorized use of our products is difficult and we cannot
be certain that the steps we have taken will prevent unauthorized use of our
technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States. The laws of certain
foreign countries in which our products are or may be developed, manufactured
or sold, including various countries in Asia, may not protect our products or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of our technology and products
more likely in these countries. If competitors are able to use our technology,
our ability to compete effectively could be harmed.
We could become subject
to claims and litigation regarding intellectual property rights, which could
seriously harm our business and require us to incur significant costs.
In recent years, there has been significant litigation
in the United States involving patents and other intellectual property rights.
In the past, we have been subject to claims and litigation regarding alleged
infringement of other parties’ intellectual property rights. We could become
subject to litigation in the future either to protect our intellectual property
or as a result of allegations that we infringe others’ intellectual property
rights. Claims that our products infringe proprietary rights would force us to
defend ourselves and possibly our customers or manufacturers against the
alleged infringement. These claims and any resulting lawsuit, if successful,
could subject us to significant liability for damages and invalidation of our
proprietary rights. These lawsuits, regardless of their success, would likely
be time-consuming and expensive to resolve and would divert management time and
attention. Any potential intellectual property litigation could force us to do
one or more of the following:
• stop
selling our products that incorporate the challenged intellectual property;
• obtain
from the owner of the infringed intellectual property right a license to sell
or use the relevant technology, which license may not be available on
reasonable terms or at all;
• pay
damages; or
• redesign
those products that use such technology.
If we are forced to take any of the foregoing actions,
our business could be severely harmed.
If necessary licenses of
third-party technology are not available to us or are very expensive, our
products could become obsolete.
From time to time we may be required to license
technology from third parties to develop new products or product enhancements.
Third party licenses may not be available to us on commercially reasonable
terms, if at all. If we are unable to obtain any third-party license required
to develop new products and product enhancements, we may have to obtain
substitute technology of lower quality or performance standards or at greater
cost, either of which could seriously harm the competitiveness of our products.
If we are not able to
apply our net operating losses against taxable income in future periods, our
financial results will be harmed.
Our future net income and cash flow will be affected
by our ability to apply our net operating losses, which totaled approximately
$48.0 million for federal tax reporting purposes as of December 31, 2001,
against taxable income in future periods. Our net operating losses incurred
prior to the consummation of our initial public offering in 1995 that we can
use to reduce future taxable income for federal tax purposes are limited to
approximately $3.0 million per year. Changes in tax laws in the United States
may further limit our ability to utilize our net operating losses. Any further
limitation on our ability to utilize our net operating losses could harm our
financial condition.
Any acquisitions we make
could disrupt our business and severely harm our financial condition.
We have made investments in, and acquisitions of,
complementary companies, products and technologies. During 2000, we acquired
PixelCam and Nogatech, and we may acquire additional businesses, products, or
technologies in the future. In the event of any future acquisitions, we could:
• issue
stock that would dilute our current stockholders’ percentage ownership;
• incur
debt;
• assume
liabilities;
• incur
amortization expenses related to goodwill and other intangible assets; or
• incur
large write-offs immediately or in the future.
Our operation of any acquired business will also
involve numerous risks, including:
• problems
combining the purchased operations, technologies or products;
• unanticipated
costs;
• diversion
of management’s attention from our core business;
• adverse
effects on existing business relationships with customers;
• risks
associated with entering markets in which we have no or limited prior
experience; and
• potential
loss of key employees, particularly those of the purchased organizations.
We may not be able to successfully integrate any
businesses, products or technologies or personnel that we might acquire in the
future and any failure to do so could disrupt our business and seriously harm
our financial condition.
Our products could contain
defects, which could reduce sales of those products or result in claims against
us.
We develop complex and evolving products. Despite
testing by us and our customers, errors may be found in existing or new
products. This could result in, among other things, a delay in recognition or
loss of revenues, loss of market share or failure to achieve market acceptance.
These defects may cause us to incur significant warranty, support and repair
costs, divert the attention of our engineering personnel from our product
development efforts and harm our relationships with our customers. The
occurrence of these problems could result in the delay or loss of market
acceptance of our products and would likely harm our business. Defects,
integration issues or other performance problems in our products could result
in financial or other damages to our customers or could damage market
acceptance of our products. Our customers could also seek damages from us for
their losses. A product liability claim brought against us, even if
unsuccessful, would likely be time consuming and costly to defend.
If we do not maintain our
current development contracts or are unable to enter into new development
contracts, our business could be harmed.
We historically have generated a significant
percentage of our total revenues from development contracts, primarily with key
customers. These development contracts have provided us with partial funding
for the development of some of our products. Under these contracts, we receive
payments upon reaching certain development milestones. If we fail to achieve
the milestones specified in our existing development contracts, if our existing
contracts are terminated or we are unable to secure future development
contracts, our ability to cost-effectively develop new products would be
reduced and our business would be harmed.
We may need additional
funds to execute our business plan, and if we are unable to obtain such funds,
we will not be able to expand our business as planned.
We may require substantial additional capital to
finance our future growth, secure additional foundry capacity and fund our
ongoing research and development activities beyond 2002. Our capital
requirements will depend on many factors, including:
• acceptance
of and demand for our products;
• the
types of arrangements that we may enter into with our independent foundries;
and
• the
extent to which we invest in new technology and research and development
projects.
To the extent that our existing sources of liquidity
and cash flow from operations are insufficient to fund our activities, we may
need to raise additional funds. If we raise additional funds through the
issuance of equity securities, the percentage ownership of our existing
stockholders would be reduced. Further, such equity securities may have rights,
preferences or privileges senior to those of our common stock. Additional
financing may not be available to us when needed or, if available, it may not
be available on terms favorable to us.
If we fail to manage our
future growth, if any, our business would be harmed.
We anticipate that our future growth, if any, will
require us to recruit and hire a substantial number of new engineering,
managerial, sales and marketing personnel. Our ability to manage our growth
successfully will also require us to expand and improve our administrative,
operational, management and financial systems and controls. Many of our key
operations, including the major portion of our research and development
operations and a significant portion of our sales and administrative
operations, are located in Israel. A majority of our sales and marketing and
certain of our research and development and administrative personnel, including
our President and Chief Executive Officer and other officers, are based in the
United States. The geographic separation of these operations places additional
strain on our resources and our ability to effectively manage our growth. If we
are unable to manage growth effectively, our business would be harmed.
We rely on the services
of our executive officers and other key personnel, whose knowledge of our
business and industry would be extremely difficult to replace.
Our success depends to a significant degree upon the continuing
contributions of our senior management. The loss of key management personnel
could delay product development cycles or otherwise harm our business. We may
not be able to retain the services of any of our key employees. We believe that
our future success will also depend in large part on our ability to attract,
integrate and retain highly-skilled engineering, managerial, sales and
marketing personnel, both in the United States and in Israel. Competition for
such personnel is intense, and we may not be successful in attracting,
integrating and retaining such personnel. Failure to attract, integrate and
retain key personnel could harm our ability to carry out our business strategy
and compete with other companies.
The Israeli rate of
inflation may negatively impact our costs if it exceeds the rate of devaluation
of the New Israeli Shekel against the U.S. dollar.
A portion of the cost of our operations, relating
mainly to our personnel and facilities in Israel, is incurred in New Israeli
Shekels. As a result, we bear the risk that the rate of inflation in Israel
will exceed the rate of devaluation of the New Israeli Shekel in relation to
the dollar, which will increase our costs as expressed in dollars. To date, we
have not engaged in hedging transactions. In the future, we may enter into
currency hedging transactions to decrease the risk of financial exposure from
fluctuations in the exchange rate of the U.S. dollar against the New Israeli
Shekel. These measures may not adequately protect us from the impact of
inflation in Israel.
The government programs
we participate in and tax benefits we receive require us to meet several
conditions and may be terminated or reduced in the future, which would increase
our costs.
In the year ended December 31, 2001, we did not
receive proceeds from grants for research and development from the Chief
Scientist in Israel’s Ministry of Industry and Trade. However, we did receive
an aggregate of $333,000 in such grants
during 2000. We plan to seek additional grants from the Chief Scientist
in the future. To be eligible for these grants, our development projects must
be approved by the Chief Scientist on a case-by-case basis. If our development projects are not approved
by the Chief Scientist, we will not receive grants to fund these projects,
which would increase our research and development costs. We also receive tax
benefits, in particular exemptions and reductions as a result of the “Approved
Enterprise” status of our existing operations in Israel. To be eligible for these
tax benefits, we must maintain our Approved Enterprise status by meeting
conditions, including making specified investments in fixed assets located in
Israel and investing additional equity in our Israeli subsidiary. If we fail to
meet these conditions in the future, the tax benefits would be canceled and we
could be required to refund the tax benefits already received. These tax
benefits may not be continued in the future at their current levels or at any
level. Israeli governmental authorities have indicated that the government may
reduce or eliminate these benefits in the future, which would harm our
business.
We have anti-takeover
provisions in our charter documents and there are provisions of Delaware law
that could prevent or delay a change in control of our company.
Our certificate of incorporation, our bylaws and
Delaware law contain provisions that could make it more difficult for a third
party to acquire us, even if doing so would be beneficial to our stockholders.
These include provisions:
• prohibiting
a merger with a party that has acquired control of 15% or more of our
outstanding common stock, such as a party that has completed a successful
tender offer, until three years after that party acquired control of 15% of our
outstanding common stock;
• authorizing
the issuance of up to 3,000,000 shares of “blank check” preferred stock;
• eliminating
stockholders’ rights to call a special meeting of stockholders; and
• requiring
advance notice of any stockholder nominations of candidates for election to our
board of directors.
Our stock price has
fluctuated and may continue to fluctuate widely.
The market price of our common stock has fluctuated
significantly since our initial public offering in 1995. Between January 1,
2001 and December 31, 2001, the closing sale price of our common stock, as
reported on the Nasdaq National Market, ranged from a low of $13.00 to a high
of $40.55. The market price of our
common stock is subject to significant fluctuations in the future in response
to a variety of factors, including:
• announcements
concerning our business or that of our competitors or customers;
• quarterly
variations in operating results;
• changes
in analysts’ earnings estimates;
• announcements
of technological innovations;
• the
introduction of new products or changes in product pricing policies by us or
our competitors;
• proprietary
rights or other litigation;
• general
conditions in the semiconductor industry; and
• developments
in the financial markets.
In addition, the stock market has, from time to time, experienced
extreme price and volume fluctuations that have particularly affected the
market prices for semiconductor companies or technology companies generally and
which have been unrelated to the operating performance of the affected
companies. Broad market fluctuations of this type may reduce the future market
price of our common stock.
Item
7A.
Item
7A. Quantitative and Qualitative
Disclosures about Market Risks.
We are exposed to financial market risks including changes in interest
rates and foreign currency exchange rates.
The fair value of our investment portfolio or related income would not
be significantly impacted by either a 10% increase or decrease in interest rates
due mainly to the short-term nature of the major portion of our investment
portfolio.
A majority of our revenue and capital spending is transacted in U.S.
dollars, although a portion of the cost of our operations, relating mainly to
our personnel and facilities in Israel, is incurred in New Israeli Shekels. We
have not engaged in hedging transactions to reduce our exposure to fluctuations
that may arise from changes in foreign exchange
rates. Based on our overall currency rate exposure at December 31, 2001
a near-term 10% appreciation or depreciation of the New Israeli Shekel would
have an immaterial affect on our financial condition.
Item 8.
Item 8. Financial Statements and
Supplemental Data.
Index to Consolidated Financial Statements
Report of Independent
Accountants
Consolidated Balance Sheets
as of December 31, 2001 and 2000
Consolidated
Statements of Operations for each of the three years ended December 31, 2001
Consolidated
Statements of Stockholders’ Equity for the three years ended December 31,
Consolidated
Statements of Cash Flows for each of the three years ended December 31, 2001
Notes to
Consolidated Financial Statements
Supplemental
Data: Selected Quarterly Financial
Information (Unaudited)
REPORT
OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Zoran Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Zoran Corporation and its subsidiaries at December 31, 2001
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. These financial statements are the
responsibility of the Company’s management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United States
of America, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 30, 2002
ZORAN
CORPORATION
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share data)
The accompanying notes
are an integral part of these consolidated financial statements.
ZORAN
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except share data)
The accompanying notes
are an integral part of these consolidated financial statements.
ZORAN
CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(In
thousands)
The accompanying notes
are an integral part of these consolidated financial statements.
ZORAN
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
The accompanying notes
are an integral part of these consolidated financial statements.
ZORAN
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY:
Zoran Corporation (“Zoran” or the “Company”) was incorporated in
California in December 1981 and reincorporated in Delaware in November
1986. Zoran develops and markets
integrated circuits, integrated circuit cores and embedded software used by
original equipment manufacturers, or OEMs, in digital audio and video products
for commercial and consumer markets. Current applications incorporating Zoran’s
products and IP include digital versatile disc, or DVD, players, Super Video CD
players, filmless digital cameras, professional and consumer video editing
systems and digital speakers and audio systems. The Company operates
predominantly in one industry segment.
The Company performs research and development and generates a
substantial portion of its sales from its operations located in the State of
Israel. A significant number of the Company’s full-time employees are located
in Israel, including a majority of the Company’s research and development
personnel. Therefore, the Company is directly affected by the political, economic
and military conditions to which that country is subject.
The semiconductor business is highly cyclical and has been subject to
significant downturns at various times that have been characterized by
diminished product demand, decreased production, overcapacity, and accelerated
erosion of average selling prices. As such, the selling price that the Company
is able to command for its products is highly dependent on industry-wide
production capacity and demand. Both of
these factors could result in rapid deviations in product pricing and therefore
could adversely effect the Company’s operating results.
Principles of consolidation and basis of presentation
The consolidated financial statements include the accounts of Zoran and
all of its subsidiaries. Intercompany transactions and balances have been
eliminated in consolidation.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
Zoran has adopted accounting policies which are generally accepted in
the industry in which it operates. The following is a summary of the Company’s
significant accounting policies.
Use of estimates
The preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates,
although such differences are not expected to be material to the consolidated
financial statements.
Translation of foreign currencies
ZML, an Israeli subsidiary, treats the U.S. dollar as its functional
currency. In accordance with Statement of Financial Accounting Standards No.
52, gains and losses resulting from translation of accounts designated in other
than the functional currency are reflected in results of operations and to date
have been insignificant.
To date, substantially all of the Company’s product sales have been
denominated in U.S. dollars and most costs of product sales have been incurred
in U.S. dollars. The Company has not experienced material losses or gains as a
result of currency exchange rate fluctuations and has not engaged in hedging
transactions to reduce its exposure to such fluctuations. The Company may take
action in the future to reduce its foreign exchange risk.
Revenue recognition
Revenue from product sales is generally recognized upon shipment. A
provision for estimated future returns and potential warranty liability is
recorded at the time revenue is recognized. Development revenue under
development contracts is recognized on the percentage-of-completion method.
Under the percentage-of-completion method, revenue recognized is that portion
of the total contract price equal to the ratio of costs expended to date to the
anticipated final total costs, based on current estimates of the costs to
complete the project. Amounts received in advance of performance under
contracts are recorded as deferred revenue and are generally recognized within
one year from receipt. Estimates are
reviewed and revised periodically throughout the lives of the contracts. Any
revisions are recorded in the accounting period in which the revisions are
made. Costs associated with development revenues are included primarily in
research and development expenses. Revenue resulting from the licensing of the
Company’s technology is recognized when significant contractual obligations
have been fulfilled and the customer has indicated acceptance. The Company does
not provide customers with product return or exchange rights in connection with
the sale of software licenses. Periodic service and maintenance fees provide
customers access to technical support and minor enhancements to licensed
releases are recognized ratably over the service or maintenance period. Royalty
revenue is recognized in the period licensed sales are reported to the Company.
Research and development costs
Costs related to the conceptual formation and design of internally
developed software are expensed as research and development as incurred. It is
the Company’s policy that certain internal software development costs incurred
after technological feasibility has been demonstrated and which meet
recoverability tests are capitalized and amortized over the estimated economic
life of the product. To date, the Company has incurred no significant internal
software development costs which meet the criteria for capitalization.
Fair value of financial instruments
For certain of Zoran’s financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses and other
current liabilities, the carrying values approximate their fair values due to
the relatively short maturity of these items.
Cash equivalents and investments
All highly liquid investments purchased with an original maturity of 90
days or less are considered to be cash and cash equivalents.
All of Zoran’s investments in marketable securities are classified as
available-for-sale and, therefore, are reported at fair value with unrealized
gains and losses, net of related tax, if any, included as other comprehensive
income, a component of stockholders’ equity. Gains and losses realized upon
sales of all such securities are reported in interest and other income and have
not been significant to date.
At December 31, 2001, the Company’s marketable securities consisted
primarily of commercial paper with maturities of less than one year and the
stock acquired as a result of the MGI transaction (See Note 11). The unrealized
loss on the MGI stock amounting to $630,659 at December 31, 2001, is included
in comprehensive income (loss). Investments in marketable securities also
consisted of bonds and medium term notes with maturities greater than one year,
which are included in other assets, and amounted to $86.1 million and $11.4
million at December 31, 2001 and 2000, respectively.
Other assets also include investments in non-marketable securities
which are accounted for on the cost basis and amounted to $3.6 million and $2.5
million at December 31, 2001 and 2000, respectively. We record an investment
impairment charge when a decline in value of a cost basis investment is
determined to be other than temporary.
Concentration of credit risk of financial instruments
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash and cash
equivalents, short-term investments and trade accounts receivable. The Company
places its cash in banks and cash equivalents primarily in auction rate
preferred, certificates of deposit and commercial paper. The Company, by
policy, limits the amount of credit exposure through diversification and
restricting its investments to highly rated securities. The Company has not
experienced any significant losses on its cash equivalents or short-term
investments.
The Company markets
integrated circuits and technology to manufacturers and distributors of
electronic equipment primarily in North America, Europe and the Pacific Rim.
The Company performs ongoing credit evaluations of its customers’ financial
condition and limits the amount of credit extended when deemed necessary, but
generally does not require collateral. Management believes that any risk of
loss is significantly reduced due to the diversity of its customers and
geographic sales areas. The Company maintains a provision for potential credit
losses, and write-offs of accounts receivable were insignificant in each of the
three years in the period ended December 31, 2001. As of December 31, 2001, three customers accounted for
approximately 21%, 12% and 11% of the accounts receivable balance. As of
December 31, 2000, three customers accounted for approximately 15%, 10%, and 7%
of the accounts receivable balance.
Inventory
Inventories are stated at the lower of standard cost (which
approximates actual cost on a first-in, first-out basis) or market. Market is
based on estimated net realizable value.
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of three to five
years. Leasehold improvements are
amortized on a straight-line basis over the shorter of the estimated useful
lives of the assets or the remaining term of the lease.
Goodwill and other intangibles
Acquired technology is amortized to expense on a straight-line basis
over two to three years. Goodwill and other intangible assets recorded in
connection with the acquisitions of PixelCam, Inc., and Nogatech, Inc., are
amortized on a straight-line basis over
the estimated periods of benefit, which is approximately three years.
Long-lived assets
The Company periodically evaluates the recoverability of its long-lived
assets based on expected undiscounted cash flows and recognizes impairment from
the carrying value of long-lived assets, if any, based on the fair value of
such assets. To date, the Company has not recorded any impairment charges
against the value of its long-lived assets.
Income taxes
The Company follows the liability method of accounting for income taxes
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequence of temporary differences between the financial
statement carrying amounts and the tax bases of assets and liabilities.
For the twelve month periods ended December 31, 2001 and 2000 the
provision for income taxes reflects the effective tax rate applied to earnings,
excluding charges related to the amortization of goodwill and the write-off of
acquired in-
process research and development, for the periods. The effective tax
rate differs from the U.S. statutory rate due to utilization of net operating
losses and State of Israel tax benefits on foreign earnings. The provision
includes primarily taxes on income in excess of net operating loss carryover
limitations and foreign withholding taxes.
Earnings per share
In accordance with
Statement of Financial Accounting Standards No. 128, Zoran reports Earnings per
Share (“EPS”), both basic and diluted, on the statement of operations. Basic
EPS is based upon the weighted average number of common shares outstanding.
Diluted EPS is computed using the weighted average common shares outstanding
plus any potential common stock, except when their effect is anti-dilutive.
Potential common stock includes stock options and warrants. See Note 8.
Stock compensation
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25 (“APB
25”), “Accounting for Stock Issued to Employees” and related interpretations.
Under APB 25, compensation expense is recognized based on the difference, if
any, on the date of grant between the fair value of the Company’s stock and the
amount an employee must pay to acquire the stock. The compensation expense is recognized over the periods the
employee performs the related services, generally the vesting period of four
years, consistent with the multiple option method described in FASB
Interpretation No. 28 (“FIN 28”). The Company provides additional pro forma
disclosures as required under Statement of Financial Accounting Standards No.
123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” See Note 7.
Segment reporting
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 (“SFAS 131”), “Disclosures about Segments of an Enterprise
and Related Information.” The management approach established by SFAS 131
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company’s
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas, and major customers. The Company operates in one
industry segment comprising the development and marketing of integrated
circuits and software products for use in a variety of video and audio products
addressing PC and consumer multimedia markets.
Comprehensive income
The Company applies Statement of Financial Accounting Standards No.
130, “Reporting Comprehensive Income.”
The following are the components of comprehensive income (loss) (in
thousands):
The components of accumulated other comprehensive income (loss) are as
follows (in thousands):
Recent accounting pronouncements
In July 2001, the FASB issued FASB Statements Nos. 141 and 142 (“SFAS
141” and “FAS 142”), “Business Combinations” and “Goodwill and Other Intangible
Assets.” SFAS 141 replaced APB 16 and eliminated pooling-of-interests
accounting prospectively. It also provides guidance on purchase accounting
related to the recognition of intangible assets and accounting for negative
goodwill. SFAS 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Under SFAS 142, goodwill will be tested
annually and whenever events or circumstances occur indicating that goodwill
might be impaired. SFAS 141 and SFAS 142 are effective for all business
combinations completed after June 30, 2001. Upon adoption of SFAS 142,
amortization of goodwill recorded for business combinations consummated prior
to July 1, 2001 will cease, and intangible assets acquired prior to July 1,
2001 that do not meet the criteria for recognition under SFAS 141 will be
reclassified to goodwill. Companies are required to adopt SFAS 142 for fiscal
years beginning after December 15, 2001, and interim periods within those
fiscal years, but early adoption is permitted. The Company will adopt SFAS 142
on January 1, 2002. Accordingly, our amortization of goodwill expense, which
totaled $33.2 million in 2001, will be discontinued in 2002. In connection with
the adoption of SFAS 142, the Company will be required to perform a
transitional goodwill impairment assessment and has six months from January 1,
2002 to complete this evaluation. The Company has not yet determined the impact
these standards will have on its results of operations and financial position.
In August 2001, the FASB issued SFAS No. 143 (“SFAS 143”), “Accounting
for Asset Retirement Obligations”. This Statement addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This Statement
applies to all entities. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of a long-lived asset, except for
certain obligations of lessees. SFAS 143 is effective for financial statements
issued for fiscal years beginning after June 25, 2002. The Company expects that
the initial application of SFAS 143 will not have a material impact on its
financial statements.
In October 2001, the FASB issued SFAS No. 144 (“SFAS 144”), “Accounting
for the Impairment or Disposal of Long-lived Assets”. The objectives of SFAS
144 are to address significant issues relating to the implementation of SFAS
No. 121 (“SFAS 121”), “Accounting for the Impairment of Long-lived Assets and
for Long-lived assets to be Disposed Of,” and to develop a single accounting model,
based on the framework established by SFAS 121, for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired.
Although SFAS 144 supersedes SFAS 121, it retains some fundamental provisions
of SFAS 121. SFAS No. 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years. The Company expects that the initial application of SFAS
144 will not have a material impact on its financial statements.
NOTE 3 - BALANCE SHEET COMPONENTS (in thousands):
Unbilled
accounts receivable consists of both development revenue recognized, but not
yet billed and research and development funding not yet received. Unbilled development revenue represents
revenue recognized under the percentage-of-completion method prior to
achievement of the related contract milestones. The Company bills development revenue when contract milestones
are achieved. The Company recognizes
research and development funding as reimbursable expenses, under research and
development agreements, as incurred.
This funding is offset against research and development expenses. During
2001, we wrote-off $2.4 million against the allowance for doubtful accounts
reserve.
NOTE 4 - RESEARCH AND DEVELOPMENT ARRANGEMENTS:
The
Company is a party to certain research and development agreements with the
Chief Scientist in Israel’s Ministry of Industry and Trade Department (the
“Chief Scientist”) and the Israel-United States Binational Industrial Research
and Development Foundation (“BIRDF”), which fund up to 50% of incurred project
costs for approved products up to specified contract maximums. The Company is not obligated to repay
funding regardless of the outcome of its development efforts; however, these
agreements require the Company to use its best efforts to achieve specified
results and require the Company to pay royalties at rates of 3% to 5% of
resulting products sales, and up to 30% of resulting license revenues, up to a
maximum of 100% to 150% of the total funding received. Reported research and development expenses
are net of these grants, which fluctuate from period to period.
Gross
research and development expenses and the related grants are as follows:
Royalty
expenses related to these grants were $502,000, $299,000, and $5,000 in 2001,
2000 and 1999, respectively.
NOTE 5 - DEVELOPMENT CONTRACTS:
The
Company has generated a portion of its total revenues from development
contracts, primarily with key customers.
These development contracts have provided the Company with partial
funding for the development of certain of its products. The Company classifies
costs related to these development contracts as research and development
expenses. The Company is not obligated
to repay funding regardless of the outcome of its development efforts; however,
the agreements require the Company to use its best efforts to achieve specified
results as per the agreements. The Company retains ownership of the
intellectual property developed under the contracts; however, some contracts
limit the product markets in which the Company may directly sell the developed
product. Revenues generated under these
contracts were $4,674,000, $5,080,000 and $1,185,000 in 2001, 2000 and 1999,
respectively.
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
From
time to time, the Company may have certain contingent liabilities that arise in
the ordinary course of its business activities. The Company accrues contingent
liabilities when it is probable that future expenditures will be made and such
expenditures can be reasonably estimated.
In the opinion of management, there are no pending claims of which the
outcome is expected to result in a material adverse effect in the financial
position or results of operations of the Company.
Lease
commitments
The
Company rents facilities and equipment under various lease agreements expiring
through 2005. Rent expense for 2001,
2000 and 1999 totaled approximately $1,531,000, $1,239,000 and $1,010,000
respectively. Future minimum lease
payments required under noncancelable leases at December 31, 2001 are as
follows: (in thousands)
In addition, the Company had
inventory purchase commitments of $11.8 million at December 31, 2001.
NOTE 7 - STOCKHOLDERS’ EQUITY:
Common Stock
In December
1999, the Company issued 2,917,800 shares of common stock in conjunction with a
follow-on public offering that also included underwriters’ exercise of their
over-allotment option. Gross proceeds
from this offering were $119.6 million with underwriters’ discount and offering
expenses of $6.7 million. In June 2000, the Company acquired PixelCam, Inc. in
exchange for 370,832 shares of Zoran common stock and options to purchase 4,168
shares of Zoran common stock. In October 2000, the Company acquired Nogatech,
Inc. in exchange for 2,534,559 shares of Zoran common stock and options to
purchase 168,472 shares of Zoran common stock. Both acquisitions were accounted
for under the purchase method of accounting (see Note 11). During 2001, the
Company repurchased 255,000 shares of its common stock for $3.9 million.
Warrants
In
September 1997, in connection with a software license agreement, the
Company issued a warrant to purchase 75,000 shares of its Common Stock at an
exercise price of $24.31 per share. The
warrant is exercisable for a period of four years from a date beginning one
year after the issuance date of the warrant.
The $717,000 estimated value of the warrant, was amortized over the
four-year period of the license agreement.
Stock
option plans
1993 Stock Option Plan
The
Company’s 1993 Stock Option Plan (the “1993 Option Plan”) was adopted by the
Board of Directors of the Company and approved by the stockholders of the
Company in July 1993. A total of 4,420,000 shares of common stock have
been reserved for issuance under the 1993 Option Plan. The 1993 Option Plan provides for grants of
options to employees, non-employee directors and consultants. The 1993 Option Plan is currently being
administered by the Compensation Committee of the Board of Directors of the
Company, which determines the optionees and the terms of the options granted,
including the exercise price, number of shares subject to the option plan and
the exercisability thereof. The option
price for shares granted under the 1993 Option Plan is typically equal to the
fair market value of the common stock at the date of grant. The 1993 Option Plan will terminate in
July 2003, unless terminated sooner by the Board of Directors.
Generally,
options granted under the 1993 Option Plan are fully exercisable on and after
the date of grant, subject to the Company’s right to repurchase from an
optionee, at the optionee’s original per share exercise price, any unvested
shares which the optionee has purchased and holds in the event of the
termination of the Optionee’s employment, with or without cause. The Company’s right lapses as shares subject
to the option become vested. Such
shares generally vest in monthly installments over two or four years following
the date of grant (as determined by the Compensation Committee of the Board of
Directors), subject to the optionee’s continuous service. Options expire ten years from the date of
grant and an option shall generally terminate three months after termination of
employment.
In
August 1998, substantially all options with an exercise price in excess of $5.94 were cancelled and replaced with new
options having an exercise price of $5.94, the market price on the date that
the employees accepted the repricing. A
total of 924,164 shares were repriced.
At
December 31, 2001, shares available for grant under this plan were
558,000.
2000 Stock Option Plan
The
Company’s 2000 Nonstatutory Stock Option Plan (the “2000 Option Plan”) was
adopted by the Board of Directors of the Company in October 2000. A total
of 300,000 shares of preferred stock were initially reserved for issuance under
the 2000 Option Plan. The options to purchase preferred stock automatically
converted to options to purchase common stock however, upon the filing of an
amendment of the certificate of incorporation of the Company with the Secretary
of State of Delaware to effect an increase in the number of authorized shares
of common stock to 55,000,000 in October 2000. A total of 1,550,000 shares of
common stock have been reserved for issuance under the 2000 Option Plan. The 2000 Option Plan provides for grants of
options to employees or consultants.
The 2000 Option Plan is currently being administered by the Compensation
Committee of the Board of Directors of the Company, which determines the
optionees and the terms of the options granted, including the exercise price,
number of shares subject to the option plan and the exercisability thereof. The
2000 Option plan was modified in 2001 to allow for exercisability of stock
options ahead of vesting subject to selling restrictions. The option price for shares granted under
the 2000 Option Plan is typically equal to the fair market value of the common
stock at the date of grant. Options expire ten years from the date of grant and
an option shall generally terminate three months after termination of
employment. The 2000 Option Plan will
terminate in October 2010, unless terminated sooner by the Board of
Directors.
At
December 31, 2001, shares available for grant under this plan were 111,000.
Outside Directors Stock Option Plan
The
Company’s Outside Directors Stock Option Plan (the “Directors Plan”) was
adopted by the Company’s Board of Directors in October 1995, and was approved
by its stockholders in December 1995. A
total of 300,000 shares of Common Stock have been reserved for issuance under
the Directors Plan. The Directors Plan
provides for the grant of nonstatutory stock options to nonemployee directors
of the Company. The Directors Plan
provides that each new nonemployee director will automatically be granted an
option to purchase 20,000 shares on the date the optionee first becomes a
nonemployee director (the “Initial Grant”).
Thereafter, on the date immediately following each annual stockholders’
meeting, each nonemployee director who is reelected at the meeting to an
additional term shall be granted an additional option to purchase 4,800 shares
of Common Stock if, on such date, he or she shall have served on the Company’s
Board of Directors for at least six months (the “Annual Grant”). The Initial Grant is exercisable in four
equal annual installments, and each Annual Grant shall become exercisable in
full one year after the date of grant, subject to the director’s continuous
service. The exercise price of all
stock options granted under the Directors Plan is equal to the fair market
value of the Company’s Common Stock on the date of grant. Options granted under the Directors Plan
have a term of ten years.
At
December 31, 2001 shares available for grant under this plan were 97,000.
The
following table summarizes the Company’s stock option activity for the years
ended December 31, 2001, 2000 and 1999.
The weighted average exercise price for each category presented is also
shown in the table below:
Significant
option groups outstanding as of December 31, 2001 and the related weighted
average exercise price and contractual life information, are as follows:
The
weighted average grant date fair value of options granted during the years
ended December 31, 2001, 2000 and 1999 as defined by SFAS 123, were
$16.20, $34.18 and $17.05 per share, respectively.
Employee Stock Purchase Plan
The
Company’s 1995 Employee Stock Purchase Plan (“ESPP”) was adopted by the
Company’s Board of Directors in October 1995, and approved by its stockholders
in December 1995. The ESPP enables
employees to purchase shares through payroll deductions at approximately 85% of
the lesser of the fair value of Common Stock at the beginning of a 24-month
offering period or the end of each six-month segment within such offering
period. The ESPP is intended to qualify
as an “employee stock purchase plan” under Section 423 of the U.S. Internal
Revenue Code. During the years ended
December 31, 2001 and 2000, 65,340 and 89,831 shares were purchased by
employees under the terms of the plan agreements at a weighted average price of
$18.65 and $10.37 per share, respectively.
At December 31, 2001, 156,387 shares were reserved and available for
issuance under this plan.
The
weighted average grant date fair value of rights granted during the year ended
December 31, 2001, 2000 and 1999 as defined by SFAS 123, was $11.72,
$17.27 and $3.91 per share, respectively.
Fair Value Disclosures
Had
compensation cost for the Company’s option and stock purchase plans been
determined based on the fair value at the grant dates, as prescribed in SFAS
123, the Company’s net income (loss) and net income (loss) per share for each
of the three years ended December 31, 2001, would have been as follows (in
thousands, except per share data):
The
fair value of each option grant is estimated on the date of grant using the
Black Scholes model with the following assumptions used for options and
purchase grants during the applicable period.
The pro
forma amounts reflect compensation expense related to stock options and
purchase rights granted during the years ended December 31, 2001, 2000 and
1999.
NOTE 8 - EARNINGS PER SHARE:
A
reconciliation of the numerators and the denominators of the basic and diluted
per share computation are as follows (in thousands):
Stock options and
a warrant to purchase 3,648,000, 2,715,000 and 603,000 shares of common stock
were outstanding at December 31, 2001, 2000 and 1999 respectively, but were not
included in the weighted average diluted earnings per share calculation as they
were antidilutive.
NOTE 9 - INCOME
TAXES:
The
components of income before income taxes are as follows:
The
components of the provision for income taxes are as follows:
The tax
provision differs from the amounts obtained by applying the statutory U.S.
Federal Income Tax Rate to income taxes as shown below.
Tax provision difference
Deferred
income tax assets comprise the following:
As of December
31, 2001, the Company had NOLs of approximately $48.0 million for federal tax
reporting purposes. The federal NOLs expire on various dates between 2002 and
2020. Management has recorded a full
valuation allowance against all U.S. deferred tax assets on the basis that
significant uncertainty exists regarding the realizability of the assets.
Pursuant
to the Tax Reform Act of 1986, the amounts of and the benefit from NOLs that
can be carried forward may be impaired or limited in certain circumstances,
including a cumulative stock ownership change of more than 50% over a
three-year period. The Company’s IPO
resulted in a cumulative change of ownership of greater than 50%.
Accordingly,
the Company’s NOLs incurred prior to the completion of the IPO that can be
utilized to reduce future taxable income for federal tax purposes will be
limited to approximately $3.0 million per year.
The
Company’s Israeli subsidiary has been granted the status of an “Approved
Enterprise” pursuant to the Israeli law for the Encouragement of Capital
Investments, 1959, as amended. The
Company has six approved programs pursuant to this law. The first program was approved in 1984. Income subject to this program is taxed at
an annual rate of 10% from the first year in which the enterprise generates
taxable income (net of NOLs). Benefits
under the first program expired in 1997.
The second program was approved in 1991. Income subject to this program is exempt from tax for two years
from the first year in which the Company has taxable income (net of NOLs) and
is taxed at a rate of 10% thereafter.
Benefits under the second program expire in 2003. The third program was approved in 1995. Income subject to this program is exempt
from tax for four years from the first year in which the Company has taxable
income (net of NOLs) and is taxed at a rate of 10% during the remaining period
of six years. The fourth program was
approved in 1997. Income subject to
this program is exempt from tax for two years from the first year in which the
Company has taxable income (net of NOLs) and is taxed at a rate of 10% during
the remaining period of eight years.
Benefits under the third and the fourth program are limited to fourteen
years from approval or twelve years from commencement of production. The fifth
program was approved in 2000. Income subject to this program is exempt from tax
for two years from the first year in which the Company has taxable income (net
of NOLs) and is taxed at a rate of 10% during the remaining period of eight
years. The sixth program was approved in 2001. Income subject to this program
is exempt from tax for two years from the first year in which the Company has
taxable income (net of NOLs) and is taxed at a rate of 10% during the remaining
period of eight years. The net impact of the tax holidays was an increase in
net income of $635,000 in fiscal 2000 and $1.6 million in fiscal 1999, and an
increase in net income per share of $0.45 and $0.13 in 2000 and 1999 respectively.
There was no impact for tax holidays in 2001.
NOTE 10 - SEGMENT REPORTING:
The
Company operates in one industry segment comprising the design, development,
manufacture and sale of integrated circuits.
The following is a summary of the Company’s operations:
Sales to customers
located in:
Significant customers are
as follows:
NOTE 11
- ACQUISITION AND DISPOSITION OF ASSETS:
SoftDVD Product Line: In
June 1999, the Company sold to MGI Software of Canada the intellectual property
related to its SoftDVD product line and transferred to MGI certain related
software development and support resources in exchange for cash, MGI common
stock and future royalties. The Company’s results for the second quarter of
1999 include a $732,000 gain realized from this transaction which is reported
as part of interest and other income or expense. In connection with this
transaction, the Company also recorded a charge that reduced software,
licensing and development revenue for the quarter by $517,000 for possible
issues related to receivables associated with the SoftDVD product line. The net
impact of the MGI transaction on the Company’s results was an after-tax gain of
$172,000, or $0.01 per share on a diluted basis. This gain does not reflect the
potential future economic benefit that may be derived from this transaction and
realized in future periods in the form of royalties. The Company does not
currently expect, however, that these royalties will have a material impact on
quarterly revenues for the foreseeable future. In addition, the shares of MGI
stock received by the Company as part of this transaction are subject to future
appreciation or depreciation. The Company’s software revenues have declined
significantly as a result of the sale of the SoftDVD product line.
PixelCam:
On June 29, 2000, the Company acquired PixelCam, Inc. (“PixelCam”), a
manufacturer of megapixel CMOS image sensors, in exchange for 370,832 shares of
Zoran common stock and options to purchase 4,168 shares of Zoran common stock
with an aggregate value of $24.6 million. The common stock issued includes
123,612 shares of restricted stock subject to repurchase by the Company
exchanged for restricted stock of PixelCam. The restrictions and vesting
periods of the PixelCam shares were maintained and will apply to the converted
shares of the Company. The agreement also included shares that were
contingently issuable to former PixelCam shareholders upon achievement of
certain milestones. These milestones were not met and therefore no additional
shares will be issued. The common stock issued was valued using the average of
the market price per share of the Company’s common stock for the three trading
days prior to the date the acquisition was consummated. The options were valued
using the Black-Scholes valuation model. The results of operations of PixelCam
are included in the Company’s financial statements from the date of acquisition.
The acquisition
was accounted for under the purchase method of accounting. The Company had a valuation performed of the
in-process research and development and the intangible assets acquired. The allocation of the purchase price based
on independent appraisal and estimates of fair value and including acquisition
costs of $575,000, is as follows (in
thousands):
The net tangible assets acquired were comprised primarily of property
and equipment, inventory, and cash offset by accrued liabilities. The acquired
in-process research and development was written-off in the second quarter of
2000. The estimated weighted average useful life of the intangible assets for
purchased technology, covenant not to compete, acquired employees, patents and
residual goodwill, created as a result of the acquisition of PixelCam, is
approximately three years.
The allocation of $6.8 million of the purchase price to the acquired
in-process research and development has been determined by identifying the
research project for which technological feasibility had not been established
and no alternative future uses existed. The value was determined by estimating
the expected cash flows from the project once commercially viable, discounting
the net cash flows back to their present value, and then applying a percentage
of completion to the calculated value as defined below.
NET CASH FLOWS. The net cash
flows from the identified project was based on estimates of revenues, cost of
sales, research and development costs, selling, general and administrative
costs, and income taxes from the project. These estimates were based on the
assumptions discussed below. The research and development costs excluded costs
to bring the acquired in-process project to technological feasibility.
The estimated revenues were based on management projections of the
acquired in-process project. The business projections were compared with and
found to be in line with industry analysts’ forecasts of growth in
substantially all of the relevant markets. Estimated total revenues from the
acquired in-process research and development product are expected to peak in
fiscal 2002 and decline in fiscal 2003 as other new products are expected to
become available. These projections were based on estimates of market size and
growth, expected trends in technology, and the nature and expected timing of
new product introductions by the Company and its competitors.
Projected gross margins as well as selling, general and administrative
costs were based on management’s estimates.
DISCOUNT RATE. Discounting the
net cash flows back to their present value was based on the cost of capital for
well managed venture capital funds which typically have similar risks and
returns on investments. The cost of capital used in discounting the net cash
flows from acquired in-process research was 25%.
PERCENTAGE OF COMPLETION. The
percentage of completion was determined using costs incurred by PixelCam prior
to the acquisition date compared to the remaining research and development to
be completed to bring the project to technological feasibility. The Company
estimated, as of the acquisition date, the project was 62% complete and the
estimated costs to complete the project were approximately $4.1 million.
The Company has completed the project and the related IC began shipping
in the third quarter of 2001.
Nogatech:
On October 26, 2000, the Company acquired Nogatech, Inc. (“Nogatech”), a
manufacturer of integrated circuits that establish connections between video
devices and computers as well as connections between video devices across a
variety of networks, in exchange for 2,534,559 shares of Zoran common stock with
a fair value of $154.4 million and options to purchase 168,472 shares of Zoran
common stock with a fair value of $9.2 million. The common stock issued was
valued using the average of the market price per share of the Company’s common
stock on the date the proposed merger was announced and the three trading days
before and two trading days subsequent to the date of the announcement. The
options were valued using the Black-Scholes valuation mode. The results of
operations of Nogatech are included in the Company’s financial statements from
the date of acquisition.
The acquisition
was accounted for under the purchase method of accounting. The Company had a valuation performed of the
in-process research and development and the intangible assets acquired. The allocation of the purchase price based
on independent appraisal and estimates of fair value including acquisition
costs of approximately $1.5 million is as follows (in thousands):
The net tangible assets acquired were comprised primarily of cash,
inventory, and prepaid expense offset by accrued liabilities. The acquired
in-process research and development was written-off in the fourth quarter of
2000. The intangible assets for core technology, assembled workforce, customer
base and residual goodwill, created as a result of the acquisition of Nogatech
will be amortized on a straight line basis over their estimated useful lives of
three years. The completed technology will be amortized on a straight line
basis over its estimated useful life of two years.
The allocation of $15.1 million of the purchase price to the acquired
in-process research and development has been determined by identifying the
research project for which technological feasibility had not been established
and no alternative future uses existed. The value was determined by estimating
the expected cash flows from the project once commercially viable, discounting
the net cash flows back to their present value, and then applying a percentage
of completion to the calculated value as defined below.
NET CASH FLOWS. The net cash
flows from the identified project was based on estimates of revenues, cost of
sales, research and development costs, selling, general and administrative
costs, and income taxes from the project. These estimates were based on the
assumptions discussed below. The research and development costs excluded costs
to bring the acquired in-process project to technological feasibility.
The estimated revenues were based on management projections of the
acquired in-process project. The business projections were compared with and
found to be in line with industry analysts’ forecasts of growth in
substantially all of the relevant markets. Estimated total revenues from the
acquired in-process research and development product are expected to peak in
fiscal 2006 and decline in fiscal 2007 as other new products are expected to
become available.
These projections were based on estimates of market size and growth,
expected trends in technology, and the nature and expected timing of new
product introductions by the Company and its competitors.
Projected gross margins as well as selling, general and administrative
costs were based on management’s estimates.
DISCOUNT RATE. Discounting the
net cash flows back to their present value was based on the cost of capital for
well managed venture capital funds which typically have similar risks and
returns on investments. The cost of capital used in discounting the net cash
flows from acquired in-process research was 25%.
PERCENTAGE OF COMPLETION. The
percentage of completion was determined using costs incurred by Nogatech prior
to the acquisition date compared to the remaining research and development to
be completed to bring the project to technological feasibility. The Company
estimated, as of the acquisition date, the project was 60% complete and the
estimated costs to complete the project were approximately $1.2 million.
The Company has delayed the
completion of the project due to uncertainty in the market concerning
implementation timing of this technology. Completion of this project remains a
significant risk to the Company due to the remaining effort to achieve
technical feasibility, rapidly changing customer markets and significant
competitive threats from other companies. Failure to bring related products to
market in a timely manner could adversely impact sales and profitability of the
Company in the future. Additionally, the value of the intangible assets
acquired may become impaired.
Unaudited pro forma results
The unaudited pro forma information below assumes that PixelCam and
Nogatech had been acquired at the beginning of each period presented and
includes the effect of amortization of goodwill and other identified
intangibles from those dates. The impact of charges for in-process research and
development has been excluded. This information is presented for informational
purposes only and is not necessarily indicative of the results of future
operations or results that would have been achieved had the acquisition taken
place at the beginning of any of the periods presented.
NOTE 12
- RELATED-PARTY TRANSACTIONS:
In January 1996, the Company spun off its wholly-owned subsidiary, Oren
Semiconductor, to the Company’s stockholders. Two of the Company’s directors
are also members of Oren’s board of directors. The Company has no ownership
interest in Oren.
In March 1999, the Company entered into a technology license agreement
with Oren. Under the license arrangement Oren agreed to pay to the Company
license and maintenance fees totaling $400,000 and royalties and maintenance
fees
based on related products sold by Oren. License fees of approximately
$360,000 were recognized in the first quarter of 1999.
In April 1999, the Company loaned Oren $350,000. The loan plus
interest, computed at 7% per year, was repaid by Oren in July 1999. The Company
has no commitments or plans to loan additional amounts to Oren.
ZORAN
CORPORATION
SELECTED
QUARTERLY FINANCIAL INFORMATION
(Unaudited)
Item 9.
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
Certain information
required by Part III is omitted from this report in that the Company intends to
file its definitive proxy statement pursuant to Regulation 14A (the “Proxy
Statement”) not later than 120 days after the end of the fiscal year
covered by this report and certain information therein is incorporated herein
by reference.
Item 10.
Item 10. Directors and Executive Officers of the
Registrant.
The information
required by this Item is incorporated by reference to information set forth in
the Proxy Statement under the heading “Proposal No. 1 - Election of Directors”
and in Part I of this Report under the heading “Executive Officers of the
Registrant.”
The information
required by this Item with respect to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated by reference to information set
forth in the Proxy Statement under the heading “Section 16(a) Beneficial
Ownership Reporting Compliance.”
Item 11.
Item 11. Executive Compensation.
The information
required by this Item is incorporated by reference to information set forth in
the Proxy Statement under the heading “Executive Compensation.”
Item 12.
Item 12. Security Ownership of Certain Beneficial
Owners and Management.
The information
required by this Item is incorporated by reference to information set forth in
the Proxy Statement under the heading “Principal Stockholders and Share
Ownership by Management.”
Item 13.
Item 13. Certain Relationships and Related
Transactions.
The information
required by this Item is incorporated by reference to information set forth in
the Proxy Statement under the heading “Certain Transactions.”
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pursuant to the
requirements of the Security Exchange Act of 1934, this report has been signed
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature
Title
Date
/s/ Levy Gerzberg
President, Chief Executive Officer and Director
April 1, 2002
Levy Gerzberg
(Principal Executive Officer)
/s/ Karl Schneider
Vice President, Finance and Chief Financial Officer
April 1, 2002
Karl Schneider
(Principal Financial and Accounting Officer)
/s/ Uzia Galil
Chairman of the Board of Directors
April 1, 2002
Uzia Galil
/s/ James D. Meindl
Director
April 1, 2002
James D. Meindl
/s/ Arthur B. Stabenow
Director
April 1, 2002
Arthur B. Stabenow
/s/ Philip M. Young
Director
April 1, 2002
Philip M. Young
EXHIBIT INDEX
Exhibit Title
Exhibit
Number
3.1(11)
Form of Restated Certificate of Incorporation of the
Registrant.
3.2(1)
Amended Bylaws of the Registrant.
4.1(2)
Amended and Restated Stock Rights Agreement dated
July 30, 1993 among the Registrant and certain of its stockholders, as
amended.
*10.1(11)
1993 Stock Option Plan, as amended.
*10.2(9)
1995 Outside Directors Stock Option Plan.
*10.3(12)
Amended and Restated 1995 Employee Stock Purchase
Plan.
*10.4(2)
Form of Indemnity Agreement for officers and
directors.
10.5(2)
Agreement dated June 28, 1991 between the Registrant
and Fujifilm Microdevices Co., Ltd. (“Fujifilm”), as amended.
10.6(2)
Agreement dated July 27, 1992 between the Registrant
and Fujifilm.
10.7(2)
Letter Agreement dated December 16, 1991 between the
Registrant and Dolby Laboratories Licensing Corporation, as amended.
10.11(2)
Lease Agreement dated October 1, 1992 between the
Registrant’s subsidiary, Zoran Microelectronics Ltd. (“ZML”), and Matam-Haifa
Scientific Industries Center Ltd. (“Matam”).
10.12(2)
License Agreement for ZR33891 Digital Filter
Processor dated June 8, 1995 between the Registrant and Atmel Corporation
(“Atmel”).
10.13(2)
License Agreement for ZR34325 Vector Signal
Processor dated June 8, 1995 between the Registrant and Atmel.
10.14(2)
Cooperation and Project Funding Agreement dated June
16, 1991 between ZML and the Israel-United States Binational Industrial
Research and Development Foundation
(“BIRDF”).
10.15(2)
Cooperation and Project Funding Agreement dated June
9, 1992 between ZML and BIRDF.
10.16(2)
Note of Approval No. 17391 dated September 5, 1994
issued to ZML by the Office of Chief Scientist, Head of the Industrial
Research and Development Administration of the Israeli Ministry of Industry
and Trade (the “Chief Scientist”), together with ZML’s Letter of Undertaking
dated September 4, 1994.
10.17(2)
Note of Approval No. 17337 dated September 5, 1994
issued to ZML by the Chief Scientist, together with ZML’s Letter of
Undertaking dated September 4, 1994.
10.18(2)
Loan Agreements dated July 25, 1995, August 1, 1995,
August 15, 1995, August 31, 1995 and November 1, 1995 between ZML and the
Israel Discount Bank.
10.29(4)
Summary of Discussion dated April 23, 1996 between
ZML and Matam regarding Lease Agreement dated October 1, 1992 between ZML and
Matam.
10.30(5)
Memorandum of Understanding Dated April 23, 1996
between ZML and IBM Israel Ltd. regarding Lease Agreement dated October 1, 1992
between ZML and Matam.
10.33(6)
Sub-Sublease dated April 1, 1997 between the
Registrant and Integrated Silicon Solutions, Inc.
*10.34(7)
Confidential Separation Agreement dated
August 4, 1997 between the Registrant and George T. Haber.
10.35(8)
Agreement for Purchase and Sale of Assets between
the Registrant and MGI Software Corp. dated June 15, 1999
10.36(10)
Unprotected Tenancy Agreement dated September 16,
1997 between ZML and Matam, together with Appendix Addendum to Unprotected
Tenancy Agreement of 16.9.97
10.37(11)
Addendum to sub-sublease dated April 1, 1997 between
the Registrant Integrated Silicon Solution, Inc.
10.38(12)
Form of Amendment of Nonstatutory Stock Option
Agreement for Outside Directors.
21.1
List of subsidiaries of the Registrant.
23.1
Consent of PricewaterhouseCoopers LLP.
*
Constitutes a management contact or compensatory
plan required to be filed pursuant to Item 14(c) of Form 10-K.

Confidential treatment has been granted as to a
portion of this Exhibit.
(1)
Incorporated by reference to Exhibit 3.3 to
Registrant’s Form 10-Q Quarterly Report for the quarter ended September 30,
1998.
(2)
Incorporated by reference to identically numbered
exhibit to the 1995 Registration Statement.
(3)
Incorporated by reference to identically numbered
exhibit to Registrant’s Form 10-K Annual Report for the year ended December
31, 1995.
(4)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 1996
(the “June 1996 Form 10-Q”).
(5)
Incorporated by reference to Exhibit 10.2 to the
June 1996 Form 10-Q.
(6)
Incorporated by reference to identically numbered
exhibit to Registrant’s Form 10-Q Quarterly Report for the quarter ended
March 31, 1997.
(7)
Incorporated by reference to Exhibit 10.34 to
Registrant’s Form 10-K Annual Report for the year ended December 31, 1997.
(8)
Incorporated by reference to identically numbered
exhibit to Registrant’s Form 10-Q Quarterly Report for the quarter ended June
30, 1999.
(9)
Incorporated by reference to identically numbered
exhibit to Registrant’s Form 10-Q Quarterly Report for the quarter ended September
30, 2000.
(10)
Incorporated by reference to identically numbered
exhibit to Registrant’s Form 10-K Annual Report for the year ended December
31, 1999.
(11)
Incorporated by reference to identically numbered
exhibit to Registrant’s Form 10-K Annual Report for the year ended December
31, 2000
(12)
Incorporated by reference to identically numbered
exhibit to Registrant’s Form 10-Q Quarterly Report for the quarter ended June
30, 2001.