UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2006
Or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-27246
ZORAN CORPORATION
(Exact Name of registrant as specified in its charter)
Delaware |
| 94-2794449 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
1390 Kifer Road, Sunnyvale, California |
| 94086 |
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: (408) 523 6500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class |
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| Name of Exchange on which registered |
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None |
| None |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined by Rule 12b-2 of the Act).
Large accelerated filer x |
| Accelerated filer o |
| Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
The aggregate market value of registrant’s voting stock held by non-affiliates of registrant based upon the closing sale price of the Common Stock on June 30, 2006, as reported on the Nasdaq Global Select Market, was approximately $1,196,461,000.
Outstanding shares of registrant’s Common Stock, $0.001 par value, as of March 31, 2007: 49,448,791.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive proxy statement for registrant’s 2007 Annual Meeting of Stockholders, to be filed with the Commission pursuant to Regulation 14A, are incorporated by reference into Part III of this Report. Except with respect to information specifically incorporated by reference in this Report, the Proxy Statement is not deemed to be filed as part hereof.
ZORAN CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2006
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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i
Special Note Regarding Forward-Looking Statements
The Business section and other parts of this Annual Report on Form 10-K (“Form 10-K”) contain forward-looking statements that involve risks and uncertainties. Many of the forward-looking statements are located in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled “Risk Factors” under “Item 1A—Risk Factors” of this Annual Report on Form 10-K. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Explanatory Note Regarding Restatement
In this Annual Report on Form 10-K, we are restating prior fiscal periods to reflect additional stock-based compensation expense relating to stock option grants made during the period January 1, 1997 to December 31, 2003. We are also restating the pro forma disclosures for stock-based compensation expense required under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” The effects of these restatements are reflected in the consolidated financial statements, selected financial data and other financial data, including quarterly data, included in this report. For additional information, see “Note 2—Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements. We have also included restated financial information under “Item 6. Selected Financial Data,” for the periods 2002-2006. “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes the income statement impact of the restatements during the period 1997 to 2005, “Item 8. Financial Statements and Supplementary Data—Selected Quarterly Information (Unaudited),” includes restated quarterly financial information for each interim period during the years 2005 and 2006. We have not amended any of our other previously filed Annual Reports on Form 10-K for the periods affected by the restatement or our Quarterly Reports on Form 10-Q filed prior to December 31, 2005. For this reason, the consolidated financial statements and related financial information contained in such previously filed reports should no longer be relied upon.
On July 3, 2006, we announced that, at the recommendation of the Audit Committee, the Board of Directors had created a special committee of independent directors (“Special Committee”) to conduct a review of our historical stock option practices. Based on the results of the review, we have concluded that certain stock options granted during the period January 1, 1997 to December 31, 2003 were not correctly accounted for in accordance with accounting principles generally accepted in the United States applicable at the time those grants were made. As a result, we are restating our historical financial statements to record adjustments for additional stock-based compensation expense relating to past stock option grants in accordance with APB No. 25, “Accounting for Stock Issued to Employees,” to record additional stock-based compensation expense associated with options granted to a consultant and to record additional adjustments that were previously considered to be immaterial.
ii
Zoran Corporation is a leading provider of digital solutions in the digital entertainment and digital imaging market.
Our products consist of integrated circuits and related products used in digital versatile disc, or DVD, players, movie and home theater systems, digital cameras and video editing systems. We also provide integrated circuits, software and platforms for digital television applications that enable the delivery and display of digital video content through a set-top box or television as well as digital imaging products consisting of semiconductor hardware and software that enable users to print, scan, process and transmit documents to computer peripherals that perform printing functions. Subsequent to our acquisition of Emblaze Semiconductor Ltd. on July 8, 2004, we also provide high performance, low-power application processors, technology and products for the multimedia mobile phone market. Through the acquisition of Oren Semiconductor, Inc. on June 10, 2005, we obtained Oren’s demodulator IC technology for the global high definition television market. We sell our products to original equipment manufacturers, or OEMs that incorporate them into digital video and audio products for consumer and commercial applications.
We were incorporated in California in December 1981 and reincorporated in Delaware in November 1986. Our corporate headquarters are located at 1390 Kifer Road, Sunnyvale, California 94086, and our telephone number is (408) 523-6500. Our website can be found at www.zoran.com. Our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, are available free of charge on our website under “Investors / SEC Filings” as soon as reasonably practicable after they are filed with the Securities and Exchange Commission. Additionally, these filings may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330, by sending an electronic message to the SEC at publicinfo@sec.gov or by sending a fax to the SEC at 1-202-777-1027. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically.
Until the mid-1990s, video images and audio soundtracks were transmitted, edited and stored almost exclusively using analog formats. Since then, 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 higher quality audio and video, 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 had been the huge amount of data required to represent images and sounds in a digital format, making cost-effective storage or transmission impractical. 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 a two-hour movie to be compressed and stored on only two video CDs with video resolution
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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 disk drive, thereby permitting the data to be accessed and edited easily. It also allows for easier transmission of sharper resolution pictures through a standard definition or high definition television or set-top box. 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 following:
· 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 Experts 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, which 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, mobile multimedia and video game applications. MPEG 4 part 10 standard, also known as Advanced Video Codec (AVC) or H.264, is an addition to the MPEG 4 standard, offering significantly improved compression efficiencies;
· DivX standard, which is a proprietary codec similar to MPEG-4 used for encoding high quality digital video at low bit rates. DivX encoded content can be viewed on the PC with a software player, on select DVD Players, portable media players and is used by some Internet-based video on demand services;
· Windows Media, Microsoft’s standard digital media software platform for developing digital media products and services; and
· 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 digital multimedia markets, including the following:
DVD Players and Recorders. DVD players and recorders primarily use MPEG 2 video compression and Dolby Digital audio technology to provide significantly higher quality playback or recording than is possible with VCR or video CD technology. According to In-Stat, sales of DVD players are estimated to be 140 million units in 2006 and expected to remain flat to slightly up in 2007 and shipments of DVD recorders are expected to increase from 18 million units in 2006 to 23 million units in 2007.
Standard Definition and High Definition Televisions and Set Top Boxes. Digital televisions receive digital content and process it to display a picture which has far greater resolution and sharper, more clearly
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defined images than televisions based on the older analog technology. Standard definition televisions generally contain 480 lines with 720 pixels per line. High definition television, or HDTV, television sets contain 1280 to 1920 pixels per line and up to 1080 lines. The aspect ratio of standard definition sets is 4:3, compared to 16:9 for HDTV. The lines may be displayed using different techniques, often referred to as interlacing or alternatively progressive scan. The functionality to receive and process digital television signals can be contained in a set-top box which then drives a television display that is capable of displaying digital content. Alternatively, this functionality can be integrated into a digital television that does not require a set-top box. Digital content is broadcast via satellite, cable networks or over the air (terrestrial broadcast) in various markets throughout the world. Intex Management Services, LTD., or IMS, estimates that over 140 million digital televisions and set-top boxes were shipped worldwide in 2006 and that over 177 million units will be shipped in 2007.
Mobile Products. Digital cameras use JPEG compression technology to capture high resolution still images that can be viewed, edited and stored on a computer system on a recordable DVD and transmitted over telephone lines and computer networks. Recently, digital cameras have been introduced that are capable of capturing and playing back quality video, using the MPEG 4 algorithm. According to IDC, sales of digital cameras are expected to exceed 105 million units in 2006 and 113 million units during 2007. The multimedia mobile phone market segment is expected to grow from 151 million units in 2006 to 463 million units in 2010, representing 37 percent of worldwide mobile phone shipments in 2010, according to IDC.
Additional products and markets are developing based on these established compression standards and additional compression technologies such as Meridian Lossless PCM, or MLP, a new standard for DVD audio, Super Audio, or SACD, Microsoft Windows Media Audio, or WMA, Advanced Audio Codec (AAC) used in conjunction with the MPEG-4 video standard and MP3, a compression standard for the download of audio recordings from the Internet.
These established and emerging compression standards specify data formats which 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 that 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 that 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 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 an increasing number of high volume consumer applications. In addition, product manufacturers are facing competitive pressure to introduce their products more rapidly. To address these issues, OEMs continually seek to integrate more and more functions on individual chips in order to reduce their costs, time-to-market and power consumption. They also seek solutions that can easily be integrated into their commercial and consumer products. The challenge to manufacturers of compression integrated circuits is, therefore, to provide product manufacturers with high-quality, cost-effective, standards-based solutions that enable flexible control, image enhancement, audio effects and other functions in addition to high quality compression solutions.
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We provide feature-rich, cost-effective, standards-based solutions for a broad range of digital video, audio and imaging applications. We were a pioneer in the development of high performance digital signal processor (DSP) products, and have developed expertise in integrated mixed signal circuit design, mathematical algorithms and software development, as well as proprietary digital signal processing, and 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 solutions include the following:
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 and features, 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 Architectures. 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 is reduced and they can concentrate on differentiating their products from those of their competitors. For example, our COACH IC includes most of the electronics of a digital camera on a single chip.
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 costs of operating those products so that our products can be used 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 specifications and cost parameters.
Near Production 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.
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We provide cost-effective, high-performance digital audio, video and imaging solutions addressing selected high-growth applications enabled by compression in evolving multimedia markets. Key elements of our strategy include the following:
Focus on High-Growth and High Volume Applications. Our strategy is to focus on providing digital video, audio and imaging solutions for high-growth consumer electronics and printing applications. Our current focus markets include: DVD players and recorders, digital cameras, digital televisions and set-top boxes, portable multimedia devices and multifunction printing devices.
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 a number of emerging markets for digital video and audio. Potential markets include home network audio and video appliances, as well as personal digital video, audio and imaging devices.
Further Penetrate Key International Markets. Between 1998 and 2006, we expanded offices in Canada, England, Germany, Hong Kong, India, Japan, Korea, China and Taiwan. At the end of 2006 we had 476 full-time, part-time and contract employees working in these offices. We believe that by opening and expanding our presence in these offices we are better able to provide marketing and application support for our customers in 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, video and imaging. In August 2004, we acquired Emblaze Semiconductor which provided us important technologies for extending our capabilities into the growing multimedia mobile phone market. In June 2005, we acquired Oren Semiconductor, Inc. which provided us demodulator IC technology for the global high definition television market. We intend to continue to invest in our 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 by us with our partners 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 we continually seek to develop additional strategic relationships with manufacturers.
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Our products are currently used in a variety of consumer multimedia applications, including the following:
Consumer Video Playback Systems
DVD players primarily use MPEG 2 video compression and Dolby Digital or similar audio technology to provide significantly higher quality playback than is possible with earlier generation products such as VCRs, Video CD or Super Video CD players. DVD players are sold as stand-alone products and are also bundled with other functions including DVD+VCRs, DVD-receivers and DVD+TV combinations. In addition, the DVD player can act as a platform for playback and editing of digital still images from digital cameras through integrated memory card slots or via direct connection to digital cameras.
Digital Video Recording Systems
Digital video recording systems are expected to replace the analog VCR. Digital video recording systems not only store home movies and TV programs but allow them to be easily edited. In addition, digital video recording systems 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 used in digital video recording systems 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.
Digital Televisiosn
The digital television market represents the most significant technological shift in the consumer electronics market since color televisions were introduced in the late 1950s. Today, digital content providers broadcast programming via satellite, cable or terrestrial (over-the-air) networks. The mix of broadcast networks varies by geographic region. For example, most digital television content in Japan and Korea is broadcast via terrestrial networks, while cable networks currently predominate in the United States. Satellite networks offer an alternative source of content to consumers and are continuing to grow in various regions. Each geographic market is subject to regulations that require compliance with different governmental standards applicable to broadcast technology and content format. In each region, individual broadcasters also have developed their own proprietary standards for content, security and conditional access. This market requires television products, set-top boxes, personal video recorders and other digital consumer appliances to include sophisticated integrated circuits and embedded software that address the emerging requirements of multiple broadcast networks throughout the world. The requirement by the U.S. Federal Communications Commission, or FCC, that all new televisions contain a built-in digital receiver, has accelerated the growth of the digital television market in the U.S. We expect this growth to continue over the next several years.
Digital Imaging Print Products
The market for personal printers is beginning to undergo a shift from traditional PC-centric peripherals toward new PC-independent printing appliances. Fueling this shift is the rapid growth of digital photography, home Internet and wireless connectivity. As these new technologies make their way into the home, they are creating demand for a new class of appliance-type printers that allow image rich content such as web pages, digital photos, and scanned documents to be printed without using a PC. According to IDC, IC controllers for multifunction print devices, including ink jet for personal as well as monochrome and color laser applications in the office, are addressing a market estimated at 63 million units in 2006 and growing to 83 million units in 2010.
The market for embedded software for page description languages, or PDLs, is somewhat more mature than other areas of the imaging market. It is characterized by a small number of suppliers selling to very large OEM customers designing print devices that need to be connected to a network. The
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page description language, or PDL, enables the printer to receive a file or job from a PC and translate that file into a set of instructions that the printer can understand and lay down on paper with a great deal of precision. In general, applications are designed to send jobs to printers using one or both of two major protocol or language families. Print Control Language, or PCL, originated as a Hewlett-Packard developed protocol for page printers and has become an industry standard in office environments. Both PCL 5 and PCL XL, or PCL 6, are supported in office printers today. The application may also use the PostScript language originally developed by Adobe, which tends to be focused more on graphic arts and Apple operating system environments. Recently, page printers have also offered support for portable digital document formats that support a more complex graphics model and are designed to be widely viewed and shared. These include PDF, originally developed by Adobe, and XML Paper Specification, or XPS, introduced by Microsoft in Windows Vista.
Mobile Products
Digital cameras enable 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. Digital cameras have added video capture and compression capability enabling them to provide basic camcorder functionality. Digital cameras can be connected directly to a PC for downloading of pictures or movies and to a television for display. The original digital cameras were developed for the professional market, and sold at prices of $1,000 to $3,000. As technology has advanced and manufacturing costs have decreased, digital cameras for the consumer market have been introduced in the $69 to $600 price range.
Many mobile phones now incorporate digital still camera functionality and even video clips. These phones can be connected to a PC for downloading the pictures or video clips or the files can be transmitted over the mobile phone network to another mobile phone or sent to an e-mail account. Digital camera functionality was originally included in mobile phones that sold for over $500. With the spread of the technology and decreased manufacturing costs, digital camera enabled mobile phones now are available in every price range.
Our product offerings consist of four principal product families:
· DVD—high-performance integrated system-on-a-chip solutions, including video and audio compression and decompression products based on MPEG, Dolby Digital and DivX standards and front-end technology for use in DVD players and DVD recorders.
· DTV—high-performance, highly integrated ASICs and system-on-a-chip solutions for standard and high definition digital television products including televisions, set top boxes, personal video recorders, digital video recorders, and recordable DVDs, as well as platforms, drivers and software stacks for a variety of operating systems required for digital television applications.
· Mobile—highly integrated digital camera processor and multimedia mobile phone processors including image signal processing, image and video compression and decompression products based on JPEG, MPEG 4 and other technologies for the digital camera and multimedia mobile phone markets.
· Digital imaging—IC-based controller products and digital page processing software for the digital imaging, production and printing market.
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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:
Product Family |
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| Products |
| Initial Commercial |
| Principal Applications |
DVD |
| Vaddis® 5R video playback chip (ZR36750) |
| July 2003 |
| DVD recorders | |
|
| Activa® 100—MPEG 2 encoder (ZR35100) |
| February 2004 |
| DVD recorders | |
|
| Vaddis® 7 integrated DVD decoder (ZR36776) |
| March 2004 |
| DVD players | |
|
| HDXtreme® (ZR36721) |
| March 2004 |
| DVD players and recorders | |
|
| Vaddis® 8 integrated DVD decoder (ZR36868) |
| August 2004 |
| DVD players | |
|
| Vaddis® 9 integrated DVD processor (ZR36966) |
| December 2005 |
| DVD players | |
|
| Activa® 200—DVD Recorder SoC (ZR35220) |
| December 2006 |
| DVD recorders | |
DTV |
| Generation 9® integrated HD decoder with 64 Bit CPU and Audio DSP Core (TL 955) |
| June 2002 |
| HDTV and HD set-top boxes | |
|
| Generation 9® integrated HD decoder with 64 bit CPU and audio DSP core (TL 945) |
| July 2002 |
| HDTV and HD set-top boxes | |
|
| SupraTV® integrated SD decoder with 32-bit CPU and audio DSP core (ZR39140) |
| September 2003 |
| SDTV and SD set-top boxes | |
|
| Generation 9® Elite integrated HD decoder with dual 32 bit CPU and audio DSP core (ZR 391055) |
| October 2004 |
| HDTV and HD set-top boxes | |
|
| Cascade Demodulator (CAS-220) |
| June 2005 |
| ATSC Demodulator for HDTV and set-top boxes | |
|
| SupraHD® integrated decoder (ZR39660) |
| August 2005 |
| HDTV and SoC | |
|
| SupraHD® integrated decoder (ZR39640) |
| August 2005 |
| ATSC decoder for CRT and set-top boxes | |
|
| Supra TV® 160 integrated processors (ZR39160) |
| May 2006 |
| ATSC decoder for CRT and set-top boxes | |
|
| SupraHD® 740 Integrated processor (ZR39740) |
| December 2006 |
| SDTV and SD set-top boxes | |
Mobile |
| Digital camera processor—COACH 5 (ZR36430) |
| June 2002 |
| Digital cameras, security | |
|
| Digital camera processor—COACH 6 (ZR36440) |
| October 2003 |
| Digital cameras, security | |
|
| Digital camera processor—COACH 7 (ZR36450) |
| July 2004 |
| Digital cameras, security | |
|
| Approach® multimedia application coprocessor- (ER4521) |
| July 2004 |
| Cellular and multi-media applications |
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|
| Approach® multimedia application accelerator- (ER4525 and ER 4527) |
| July 2004 |
| Cellular and multi-media applications |
|
| Digital camera processor—COACH 8 (ZR36460) |
| May 2005 |
| Digital cameras, security |
|
| Digital camera processor—COACH 9 (ZR36470) |
| October 2006 |
| Digital cameras, security |
Digital Imaging |
| Quatro® 4110 Inkjet and laser high performance mid range print head controller platform |
| March 2003 |
| Mid range inkjet MFPs and laser printers |
|
| Quatro® 4100 Inkjet high performance low cost print head controller platform |
| October 2003 |
| Low cost inkjet MFPs |
|
| Integrated Print System (IPS) 6.0 Embedded Software |
| April 2003 |
| Print devices connected to a network |
|
| IPS Conductor (IPS/DDK) |
| September 2004 |
| Print devices connected to Microsoft operating systems |
|
| Quatro® 4200 Full feature, highly integrated SOC with high quality scanner analog front-end, USB high speed host and color LCD interface |
| April 2005 |
| Print devices connected directly or to a network |
|
| Quatro® 4050 Ultra-low-cost SOC for all-in-one printers and direct-connect photo printers. |
| May 2005 |
| Print devices connected directly or to a network |
|
| Quatro® 4230 Full feature, highly integrated SOC for printer manufacturers |
| September 2006 |
| Print devices connected directly or to a network |
Zoran, the Zoran logo, Activa, APPROACH, Generation 9, HDXtreme, IPS, Quatro, SupraHD, SupraTV and Vaddis are trademarks or registered trademarks of Zoran Corporation and its subsidiaries in the United States and/or other countries. All other names and brands may be claimed as property of others.
DVD. Our Vaddis® processors perform all the audio and video decoding and display requirements of the DVD specification, including MPEG 2 audio and video decoding, Dolby Digital, DivX and MLP audio decoding, on-screen display, decryption required for copyright protection and presentation of graphic information. The Vaddis® processor has additional computational 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. The Vaddis® 7 processor incorporates all the functions of previous generations with the addition of MPEG 4 decoding and an interface that can support high definition television. The Vaddis® 8 adds Super Audio CD, or SACD, upscaler and HDMI transmitter functionality. In 2004, we introduced HDXtreme® technology that allows DVD play back and the viewing of JPEG pictures on an HDTV with an HDMI interface. The Activa® 200 product, announced in December 2005, delivers the entire DVD recorder capability on a single system-on-a-chip, integrating the front-end and back-end functions to greatly reduce system costs and chip count in DVD recorders. We also provide DVD player and DVD recorder reference designs based on our Vaddis® and Activa® product families that help our customers accelerate the time to market for their products.
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DTV. Our DTV Division offers integrated circuit products for both high definition and standard definition formats for digital televisions, set top boxes and related applications, including personal video recorders. In 2004, we introduced the Generation 9® Elite system-on-a-chip which utilizes dual CPUs resulting in higher performance with lower power consumption compared to its forerunner, the Generation 9® product family. During 2005, we began shipping our highly integrated SurpaHD® product line that addresses the mainstream market segment as well as high-end and entry-level segments of the flat panel display and analog-to-digital broadcast transition markets. We also shipped production volumes of our SupraTV® 150 ICs for use in the worldwide standard definition digital terrestrial, satellite and cable broadcast markets. As a result of the Oren acquisition in June 2005, we offer the Cascade 2 TV demodulator with our SupraHD® and Generation 9® back-end decoder and end-to-end solution for the US Advanced Television Systems Committee market. The Cascade 2 product is also sold to TV tuner suppliers as an integrated tuner and demodulator solution.
Mobile. Our COACH processors are integrated system-on-a-chip solutions that include most of the electronics of a digital camera, which can be connected directly to a high-resolution CCD or CMOS sensor. The COACH IC processes the video information in real time, compresses the captured image in real time, while interfacing to an LCD or micro display and to all types of flash memory. Among the unique capabilities of the COACH product is the ability to transfer in real time, over a USB bus, high quality video to the PC and function as a PC video camera. The COACH products also allow for direct connection to a printer, including color correction and special effects, for the non-PC consumer environment. The COACH product is supplemented by digital camera reference designs, “CamON” and “CamMini,” products shorten the time to market for Zoran’s customers. The newest COACH processors utilize MPEG-4 Codecs to incorporate basic digital camcorder capabilities for displaying video clips on a PC or TV. As a result of our acquisition of Emblaze Semiconductor in July 2004, our Mobile Products Division also offers mobile multimedia telephone products.
Digital Imaging. Our Quatro® product addresses the consumer market for personal printers and the increasing demand for PC - independent printing appliances. The Quatro® product is a programmable SOC solution for consumer oriented imaging and printing appliances, including multifunction color inkjet and laser devices that feature print, copy, scan and fax capabilities and that allow image-rich content such as web pages, digital photos and scanned documents to be printed without the use of a PC. Quatro® ASICs are designed for mid-range and entry level inkjet printers, color photo printers, laser printers and the new generation of dye sublimation printers. The Integrated Print System, or IPS 7.0, is a modular, scalable embedded software product that provides processing and control functions for document imaging peripheral devices. IPS was developed based on a long standing expertise in page description language interpreters such as PCL and Postscript. The IPS product line gives the OEM the ability to build high performance, network enabled devices quickly and cost effectively.
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The following table lists representative customers, as well as other OEMs who purchase our products through us or from our resellers. Each of these customers and OEMs purchased, directly or indirectly, at least $500,000 of Zoran products during 2006:
Product Family |
| Direct Customers and resellers |
| Other OEMs | ||
DVD |
| Alco Electronics Ltd. Anam Electronics Co. Ltd. Eastech Electronics (hui Yang) Co. Ltd. Everbest Industrial (HK) Ltd. Fly Ring Digital Technology Ltd. LG Electronic Inc. Qisheng International Ltd. Samsung Electronics Sea Star Technology (Hong kong) |
| Shenzhen Kaixinda Multi-Media Co. Ltd. Sky Wise Holdings Ltd. Sony TCL Electronics (HK) Ltd. Tecobest Digital Ltd. Thomson Hong Kong Holdings Ltd. Tomei Shoji Ltd. Universal Pacific Co. Ltd. Zhongshan Dingcai AV Technology |
| Orion Sanyo Sharp Toshiba |
DTV |
| 3S Digital |
| Lacewood International Corp. |
| Funai |
Mobile |
| ASD Technology Ltd. |
| Ningbo Guangbo Digital |
| Funai |
Digital Imaging |
| Avision Enterprise (BVI) Inc. |
| Mag-Tek Inc. |
| Funai |
In 2006, one customer accounted for 14% of our total revenues, and sales to our four largest customers accounted for 36% of our total revenues. In 2005, no single customer accounted for more than 10% of our total revenues, and sales to our four largest customers accounted for 29% of our total revenues.
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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, video and imaging solutions. 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, video and imaging application markets. In addition, we seek to design integrated circuits and cores, as well as near production ready reference designs which reduce the time needed by manufacturers to integrate our ICs into their own products.
We have historically generated a portion of our 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 anticipate, however, that in the future development contracts with strategic partners will fund a smaller portion of our development efforts than in the past.
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 Bi-national Industrial Research and Development Foundation. These organizations fund up to 50% of incurred 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. In 2004, we earned grants totaling $1.5 million. There were no grant receipts in 2005 and 2006. The terms of Israeli Government participation include 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.
Research and development expenses that qualify for the grants and the related grants are as follows (in thousands):
|
| Year Ended December 31, |
| |||||||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||||||
|
|
|
| (restated) |
| (restated) |
| |||||||
Research and development expenses |
| $ | 60,147 |
|
| $ | 48,377 |
|
|
| $ | 38,461 |
|
|
Less: grants earned |
| — |
|
| — |
|
|
| (1,460 | ) |
| |||
|
| $ | 60,147 |
|
| $ | 48,377 |
|
|
| $ | 37,001 |
|
|
As of December 31, 2006, we had 645 research and development personnel, of which 523 were employed full-time, and 122 were part-time or contract employees.
Our sales and marketing strategy is to focus on providing solutions to manufacturers seeking to design audio, video and imaging products for existing and emerging high volume consumer applications. In
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cooperation with leading manufacturers of audio, video and imaging 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 worldwide direct sales force in offices located near our key customers and strategic partners, and a worldwide network of independent sales representatives and resellers. In some cases, our strategic partners also provide sales and marketing support.
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 138-person direct sales staff, of whom 11 are located in the United States and 127 are located internationally. Our United States sales staff is primarily responsible for sales in North America, Europe and South America. Sales management and sales operations staff also reside in the United States. Our marketing staff in China, Japan, Korea and Taiwan are responsible for marketing in their respective regions. In addition, we sell our products indirectly primarily through selected resellers. 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. 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 and an office in Taipei, Taiwan in an effort to better address the digital camera market. As of December 31, 2006, we had a staff of 305 employees and 19 contractors in our China office and 66 employees in our Taiwan office, including sales support, applications and customer support employees. In addition, we opened offices in Hong Kong and Korea, which had staff of 4 employees and 25 employees, respectively, as of December 31, 2006. These offices also provide sales, applications and customer support.
We distribute our products in Japan primarily through resellers. We also operate an office in Tokyo to help promote our products in Japan, assist with the marketing of products not sold through resellers, such as integrated circuit cores and certain digital camera, digital video, digital television, imaging and JPEG products, and provide applications support for some of our customers. At December 31, 2006, we had 38 employees and 19 contractors in our Tokyo office.
We sell our Dolby technology enabled 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 DivX and DTS Technology-based products under a non-exclusive license from DivX Inc. and DTS Technology LLC to sell products that incorporate their algorithm. We are not required to pay royalties under this agreement. Our customers enter into license agreements directly with DivX and DTS, pursuant to which they pay royalties. Under our agreement, we may sell our DivX or DTS-based products only to customers who are licensees of DivX or DTS. The failure or refusal of potential customers to enter into license agreements with DivX or DTS in the future could harm our sales.
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
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changes in quantities of products ordered as a result of changes in customers’ requirements and manufacturing availability. Our ability to order products can carry lead times of between four and sixteen weeks; however, most of 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.
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, Philips and Tower Semiconductor Ltd. are currently manufacturing our DVD, JPEG, DTV imaging and some of our mobile products. Fujitsu manufactures our USB multimedia controller chips. Our independent foundries fabricate products for other companies and may also produce products of their own design.
Most of our devices are currently fabricated using standard complementary metal oxide semiconductor process technology with 0.13 micron to 0.18 micron feature sizes. Most of our semiconductor products are currently being assembled by one of four independent contractors and tested by those contractors or other independent contractors.
We currently purchase products from all of our foundries under individually negotiated purchase orders. 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.
Our existing and potential competitors include many large domestic and international companies that have substantially greater finance, manufacturing, technology, marketing and distribution resources than we have.
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. Our principal competitors in the integrated audio and video devices for DVD applications include Cheertek, ESS, LSI Logic, Magnum Semiconductor, Matsushita, MediaTek, Renesas Technology, Samsung and Sunplus. In the markets for JPEG-based products for use in digital cameras, our principal competitors are in-house solutions developed and used by major Japanese OEMs, as well as products sold by Sunplus and Texas Instruments. In the market for JPEG-based products for desktop video editing applications, our principal competitor is Sunplus. Cirrus Logic (Crystal Semiconductor), Fujitsu, Freescale Semiconductor, STMicroelectronics and Yamaha are currently shipping Dolby Digital-based audio compression products. Our principal competitors for digital semiconductor devices in the digital television market include Advanced Micro Devices, Broadcom, Renesas Technology, M-Star, Mediatek and ST Microelectronics. Others who also participate in this market are ALi Corporation, Cheertek, Fujitsu, Genesis Microchip, NEC, Pixelworks and Trident Microsystems. Competitors in the Printer and Multifunction peripheral space include Sigmatel
14
Inc, Marvell semiconductor, TAK Imaging, Peerless Systems, Global Graphics and in-house captive suppliers.
We believe that our ability to compete successfully in the rapidly evolving markets for high performance audio, video and imaging technology depends on a number of factors, including the following:
· price, quality, performance and features of our products;
· the timing and success of new product introductions by itself, our customers and our competitors;
· the emergence of new industry standards;
· its 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.
We believe that growth of the DVD player market will be modest in the foreseeable future, and that continued strong competition will lead to further price reductions, and reduced profit margins. We believe that the DVD recorder market will continue to grow and that as technology barriers become higher, fewer competitors will enter this market.
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 need to continually reduce the cost of our products and continue to integrate additional functions into our ICs. We intend to accomplish this by implementing design changes that integrate additional functionality, lower the cost of manufacturing, 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, resellers, customers and potential customers and limit access to our proprietary information. We currently hold approximately 300 issued patents worldwide, and have additional patent applications pending. 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
15
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. See Item 3—Legal Proceedings. We may be subject to additional claims and litigation 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 that it uses, we could incur substantial liabilities and be forced to suspend the manufacture of products, or the use by our foundries of certain processes.
As of December 31, 2006, we had 1,191 full-time and 160 part-time and contract employees, including 645 full-time, part-time and contract employees primarily involved in research and development activities, 528 in marketing and sales, 128 in finance, human resources, information systems, legal and administration, and 50 in manufacturing control and quality assurance. We have 377 full-time employees and 84 part-time and contract employees based in Israel, of which 371 employees, including both full time and contract employees, are involved in engineering and research and development. We have 198 full-time employees and 29 part-time and contract employees at our facilities in Sunnyvale, California, 143 full-time employees and 6 part-time and contract employees at our facility in Woburn, Massachusetts, and 305 full-time employees and 19 part-time contract employees at our facilities in Shenzhen, China. The remaining
16
employees are located in our international offices in Canada, England, Germany, Hong Kong, India, Japan, Korea and Taiwan. 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.
The names of our executive officers and their ages as of December 31, 2006 are as follows:
NAME |
|
|
| AGE |
|
| POSITION |
|
| ||
Levy Gerzberg, Ph.D |
|
| 61 |
|
| President, Chief Executive Officer and Director |
| ||||
Karl Schneider |
|
| 52 |
|
| Senior Vice President, Finance and Chief Financial Officer |
| ||||
Isaac Shenberg, Ph.D |
|
| 56 |
|
| Senior Vice President, Business and Strategic Development |
|
Levy Gerzberg was a co-founder of Zoran in 1981 and has served as our President and Chief Executive Officer since 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.
Karl Schneider joined Zoran as Corporate Controller in 1998 and was elected Vice President, Finance and Chief Financial Officer in 1998 and Senior Vice President, Finance and Chief Financial Officer in July 2003. From 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 1995 to 1996, Controller for Reply Corporation from 1994 to 1995, Director of Finance for Digital F/X from 1992 to 1994 and Controller for Flextronics from 1987 through 1991. Mr. Schneider holds a B.S. in Business Administration from San Diego State University.
Isaac Shenberg has served as Senior Vice President, Business and Strategic Development since 1998 and previously as Vice President, Sales and Marketing from 1995 through 1998. From 1990 to 1995, Dr. Shenberg served as our Product Line Business Manager. Prior to joining Zoran, Dr. Shenberg was Images Processing Group manager and Electro Optics Department manager at Rafael, a leading aerospace provider in Israel. 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-Israel Institute of Technology in Haifa, Israel.
17
Our future business, operating results and financial condition are subject to various risks and uncertainties, including those described below.
The discovery that the appropriate measurement dates for financial accounting purposes of certain stock option grants differed from the recorded grant dates of those awards has had, and may continue to have, a material adverse effect on our financial results.
We cannot predict the outcome of the pending government inquiries or stockholder lawsuits, and we may face additional government actions, stockholder lawsuits and other legal proceedings related to our historical stock option practices and the remedial actions we have taken. All of these events have required us, and will continue to require us, to expend significant management time and incur significant accounting, legal, and other expenses. This could divert attention and resources from the operation of our business and adversely affect our financial condition and results of operations in a manner that could potentially be material.
The independent investigation of our historical stock option practices and resulting restatements has been time consuming and expensive, and has had a material adverse effect on our financial performance.
The independent investigation of our historical stock option practices and resulting restatement activities have required us to expend significant management time and incur significant accounting, legal and other expenses totaling $5.8 million in 2006 and we expect to incur additional costs in the future periods. The resulting restatements have had a material adverse effect on our results of operations. We have recorded additional stock-based compensation expense of $13.0 million for stock option grants, recognized over the periods from 1997 to 2005. There was no tax impact of these additional stock-based compensation expenses due to the full valuation allowance on our tax assets. In addition, we have recorded other adjustments previously considered to be immaterial totaling $1.3 million (net of tax of $0.2 million). As a result, our restated consolidated financial statements reflect a decrease in net income of $13.0 million for the period of 1997 to 2005. The effect of the restatement adjustments on our consolidated balance sheet at December 31, 2005 resulted in a $2.4 million decrease in stockholders’ equity.
Ongoing government inquiries relating to our historical stock option practices are time consuming and expensive and could result in injunctions, fines and penalties that may have a material adverse effect on our financial condition and results of operations.
The inquiries by the United States Attorney’s Office for the Northern District of California (“USAO”) and the United States Securities and Exchange Commission (“SEC”) into our historical stock option practices are ongoing. We have cooperated with the USAO and the SEC and intend to continue to do so. The period of time necessary to resolve these inquiries is uncertain, and we cannot predict the outcome of these inquiries or whether we will face additional government inquiries, investigations or other actions related to our historical stock option practices. These inquiries will likely require us to continue to expend significant management time and incur significant legal and other expenses, and could result in civil and criminal actions seeking, among other things, injunctions against the Company and the payment of significant fines and penalties by the Company, which may have a material adverse effect on our financial condition, results of operations and cash flow.
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We have not been in compliance with SEC reporting requirements and Nasdaq listing requirements and may continue to face compliance issues with both. If we are unable to remain in compliance with SEC reporting requirements and Nasdaq listing requirements, there may be a material adverse effect on us and our stockholders.
Due to the independent investigation and resulting restatements, in recent periods we were unable to file our periodic reports with the SEC on time and faced the possibility of delisting of our stock from the Nasdaq Global Select Market. As a result of our delay in filing periodic reports on a timely basis, we will not be eligible to use a registration statement on Form S-3 to register offers and sales our securities until all periodic reports have been timely filed for at least 12 months. If the Nasdaq Listing and Hearing Review Council concludes that we are not in compliance with applicable listing requirements, then we may be unable to maintain an effective listing of our stock on a national securities exchange. If this happens, the price of our stock and the ability of our stockholders to trade in our stock could be adversely affected. In addition, we would be subject to a number of restrictions regarding the registration of our stock under federal securities laws, and we would not be able to issue stock options or other equity awards to our employees or non-employees or allow them to exercise their outstanding options, which could adversely affect our business and results of operations.
We have been named as a party to stockholder derivative and class action lawsuits relating to our historical stock option practices, and we may be named in additional lawsuits in the future. This litigation could become time consuming and expensive and could result in the payment of significant judgments and settlements, which could have a material adverse effect on our financial condition and results of operations.
In connection with our historical stock option practices and resulting restatements, a number of derivative actions were filed against certain of our current and former directors, officers and certain other individuals purporting to assert claims on Zoran’s behalf. In addition, a securities class action complaint was filed against us and certain of our current and former officers and our current directors, seeking damages related to our historical stock option practices. There may be additional lawsuits of this nature filed in the future. We cannot predict the outcome of these lawsuits, nor can we predict the amount of time and expense that will be required to resolve these lawsuits. If these lawsuits become time consuming and expensive, or if there are unfavorable outcomes in any of these cases, there could be a material adverse effect on our business, financial condition and results of operations.
Our insurance coverage will not cover our total liabilities and expenses in these lawsuits, in part because we have a significant deductible on certain aspects of the coverage. In addition, we are obligated to indemnify our current and former directors, officers and employees in connection with the investigation of our historical stock option practices and the related government inquiries and litigation. We currently hold insurance policies for the benefit of our directors and officers, although our insurance coverage may not be sufficient in some or all of these matters. Furthermore, the insurers may seek to deny or limit coverage in some or all of these matters, in which case we may have to self-fund all or a substantial portion of our indemnification obligations.
We are subject to the risks of additional lawsuits from former officers and employees in connection with our historical stock option practices, the resulting restatements, and the remedial measures we have taken.
In addition to the possibilities that there may be additional governmental actions and shareholder lawsuits against us, we may be sued or taken to arbitration by former officers and employees in connection with their stock options and other matters. These lawsuits may be time consuming and expensive, and cause
19
further distraction from the operation of our business. The adverse resolution of any specific lawsuit could have a material adverse effect on our business, financial condition and results of operations.
Failure to maintain effective internal controls may cause us to delay filing our periodic reports with the SEC, affect our Nasdaq listing, and adversely affect our stock price.
We are required to include a report of management on internal control over financial reporting in our Annual Report on Form 10-K that contains an assessment by management of the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of the internal control over financial reporting. The restatement of financial statements in prior filings with the SEC is a strong indicator of the existence of a “material weakness” in the design or operation of internal control over financial reporting. However, we have concluded that the control deficiencies that resulted in the restatement of the previously issued consolidated financial statements did not constitute a material weakness as of December 31, 2006 because management determined that as of December 31, 2006 there were effective controls designed and in place to prevent or detect a material misstatement and therefore the likelihood of stock-based compensation, deferred compensation and deferred tax assets being materially misstated is not more than remote.
The SEC may disagree with the manner in which we have accounted for and reported, or not reported, the financial impact of past option grant measurement date errors, and there is a risk that its inquiry could lead to circumstances in which we may have to further restate our prior financial statements, amend prior filings with the SEC, or otherwise take other actions not currently contemplated. In addition, the SEC may issue guidance or disclosure requirements related to the financial impact of past option grant measurement date errors that may require us to amend this filing or prior filings with the SEC to provide additional disclosures pursuant to this guidance. Any such circumstance could also lead to future delays in filing our subsequent SEC reports and delisting of our common stock from the NASDAQ Global Select Market.
It may be difficult or costly to obtain director and officer liability insurance coverage as a result of our stock options problems.
We expect that the issues arising from our historical stock option grant practices and the related accounting will make it more difficult to obtain director and officer insurance coverage in the future. If we are able to obtain this coverage, it could be significantly more costly than in the past, which would have an adverse effect on our financial results and cash flow. As a result of this and related factors, our directors and officers could face increased risks of personal liability in connection with the performance of their duties. As a result, we may have difficultly attracting and retaining qualified directors and officers, which could adversely affect our business.
Our annual revenues and operating results fluctuate due to a variety of factors, which may result in volatility or a decline in the prices of our common stock.
Our historical operating results have varied significantly from period to period due to a number of factors, including:
· fluctuation in demand for our products;
· the timing of new product introductions or enhancements by us and our competitors;
· the level of market acceptance of new and enhanced versions of our products and our customers’ products;
· the timing or cancellation of large customer orders;
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· the length and variability of the sales cycle for our products;
· pricing policy changes by us and by our competitors and suppliers;
· 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;
· increased competition in product lines, and 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;
· changes in or the emergence of new industry standards;
· failure to anticipate changing customer product requirements;
· the loss or gain of important customers;
· 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;
· terrorism and international conflicts or other crises;
· other conditions affecting the timing of customer orders;
· changes in governmental regulations that could affect our products;
· a downturn in the markets for our customers’ products, particularly the consumer electronics market;
· disruption in commercial activities associated with heightened security concerns affecting international travel and commerce;
· reduced demand for consumer electronic products due to a potential 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.
These factors are difficult or impossible to forecast. We place orders with independent foundries several months in advance of the scheduled delivery date, often in advance of receiving non-cancelable orders from our customers. This limits our ability to react to fluctuations in demand for their products. If
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anticipated shipments in any quarter are canceled or do not occur as quickly as expected, or if we fail to foresee a technology change that could render a product obsolete, 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.
Our customers experience fluctuating product cycles and seasonality, which causes their sales to fluctuate.
Because the markets that 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 inventories of our products. Consequently, orders for our products may decline in those circumstances, even if the products are incorporated into both mature products and replacement products. A delay in a 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 second half of the calendar year represents a disproportionate percentage of sales for our customers due to the holiday shopping period for consumer electronics products, and therefore, a disproportionate percentage of our sales. We expect these seasonal sales fluctuations to continue for the foreseeable future.
Our ability to match production mix with the product mix needed to fill current orders and orders to be delivered in the given quarter may affect our ability to meet that quarter’s revenue forecast. In addition, when responding to customers’ requests for shorter shipment lead times, we manufacture products based on forecasts of customers’ demands. These forecasts are based on multiple assumptions. If we inaccurately forecast customer demand, we may hold inadequate, excess or obsolete inventory that would reduce our profit margins and adversely affect our results of operations and financial condition.
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 will suffer.
Average selling prices for our products decline over relatively short time periods, while many of our manufacturing costs are fixed. When our average selling prices decline, our revenues decline unless we are able to 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 we expect to continue to experience them in the future, although we cannot predict when they may occur or how severe they will be.
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. We cannot predict whether we will achieve timely, cost-effective access to that capacity when
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needed, or when there will be a capacity shortage again in the future. A downturn in the semiconductor industry could harm our sales and revenues if demand drops, or our gross margins if average selling prices decline.
Our success for the foreseeable future will depend on demand for integrated circuits for a limited number of applications.
In recent years, we have derived a substantial majority of our product revenues from the sale of integrated circuits for DVD and digital camera applications. We expect that sales of our products for these applications will continue to account for a significant portion of our revenues for the foreseeable future. Our future financial performance will also depend on our ability to successfully develop and market new products in the digital television, HDTV and digital imaging markets. 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 financial performance is highly dependent on the timely and successful introduction of new and enhanced products.
Our financial performance depends in large part on our ability to successfully develop and market next-generation and new products in a rapidly changing technological environment. If we fail to successfully identify new product opportunities and timely develop and introduce new products that achieve market acceptance, we may lose our market share and our future revenues and earnings may suffer.
In the consumer electronic market, our performance has been dependent on our successful development and timely introduction of integrated circuits for DVD players, DVD recorders, digital cameras, broadband digital television and HDTV. These markets are characterized by the incorporation of a steadily increasing level of integration and numbers of features on a chip at the same or lower system cost, enabling original equipment manufacturers, or OEMs, to continually improve the features or reduce the prices of the systems they sell. If we are unable to continually develop and introduce integrated circuits with increasing levels of integration and new features at competitive prices, our operating results will suffer.
In the Imaging market, our performance has been dependent on our successful development and timely introduction of integrated circuits for printers and multi-function peripherals. These markets are characterized by the incorporation of a steadily increasing level of integration and higher speeds on a chip at the same or lower system cost, enabling original equipment manufacturers, or OEMs, to continually improve the performance and features or reduce the prices of the systems they sell. If we are unable to develop and introduce integrated circuits with increasing levels of integration, performance and new features at competitive prices, our operating results will suffer. The performance of our software licensing business is dependent on our ability to develop and introduce new releases of our software, which incorporate new or enhanced printing standards, as well as performance enhancements required by our OEM customers. If we are unable to develop and release versions of our software supporting required standards and offering enhanced performance, our operating results will suffer.
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.
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
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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. Competition typically occurs at the design stage, when customers evaluate alternative design approaches requiring integrated circuits. Because of short product life cycles, there are frequent design win competitions for next-generation systems.
Our existing and potential competitors include many large domestic and international companies that have substantially greater financial, manufacturing, technological, market, distribution and other resources. These competitors may also have broader product lines and longer standing relationships with customers and suppliers than we have.
Some of our principal competitors maintain their own semiconductor foundries and may therefore benefit from capacity, cost and technical advantages. Our principal competitors in the integrated audio and video devices for DVD applications include Cheertek, ESS, LSI Logic, Magnum Semiconductor, Matsushita, MediaTek, Renesas Technology, Samsung and Sunplus. In the markets for JPEG-based products for use in digital cameras, our principal competitors are in-house solutions developed and used by major Japanese OEMs, as well as products sold by Sunplus and Texas Instruments. In the market for JPEG-based products for desktop video editing applications, our principal competitor is Sunplus. Cirrus Logic (Crystal Semiconductor), Fujitsu, Freescale Semiconductor, STMicroelectronics and Yamaha are currently shipping Dolby Digital-based audio compression products. Our principal competitors for digital semiconductor devices in the digital television market include Advanced Micro Devices, Broadcom, Renesas Technology, M-Star, Mediatek and ST Microelectronics. Others who also participate in this market are ALi Corporation, Cheertek, Fujitsu, Genesis Microchip, NEC, Pixelworks and Trident Microsystems. Competitors in the Printer and Multifunction peripheral space include Sigmatel Inc., Marvell Semiconductor, TAK Imaging, Peerless Systems, Global Graphics and in-house captive suppliers.
We believe that growth of the DVD player market will be modest in the foreseeable future, and that continued strong competition will lead to further price reductions, and reduced profit margins. We also face significant competition in the digital Imaging and digital camera markets. The future growth of both markets is highly dependent on OEMs continuing to outsource an increasing portion of their product development work. Many of our existing competitors, as well as OEM customers that are expected to compete with us in the future, have substantially greater financial, manufacturing, technical, marketing, distribution and other resources, broader product lines and longer standing relationships with customers than we have. In addition, much of our future success is dependent on the success of our OEM customers. If we or our OEM customers are unable to compete successfully against current and future competitors, we could experience price reductions, order cancellations and reduced gross margins, any one of which could harm our business.
We must keep pace with rapid technological changes and evolving industry standards to remain competitive.
Our future success will depend on our ability to anticipate and adapt to changes in technology and industry standards and our customers’ changing demands. The consumer electronics market, in particular, is characterized by rapidly changing technology, evolving industry standards, frequent new product introductions, short product life cycles and increasing demand for higher levels of integration. Our ability to adapt to these changes and to anticipate future standards, and the rate of adoption and acceptance of those standards, will be a significant factor in maintaining or improving our competitive position and prospects for growth. If new industry standards emerge, our products or the products of our customers could become unmarketable or obsolete, and we could lose market share or be required to incur substantial unanticipated costs to comply with these new standards.
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Our success will also depend on the successful development of new markets and the application and acceptance of new technologies and products in those new markets. For example, our success will depend on the ability of our customers to develop new products and enhance existing products in the recordable DVD player market and products for the broadband digital television and HDTV markets and to introduce and promote those products successfully. These markets may not continue to develop to the extent or in the time periods that we currently anticipate due to factors outside our control, such as delays in implementation of FCC 02-320 requiring all new televisions to include a digital receiver by February 2009. If new markets do not develop as we anticipate, or if our products do not gain widespread acceptance in these markets, our business, financial condition and results of operations could be harmed. 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 this content is not available, manufacturers may not be able to sell products incorporating our products, and our sales would suffer.
We rely on independent foundries and contractors for the manufacture, assembly and testing of our integrated circuits and other hardware products, 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 our 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;
· lack of control over delivery schedules;
· lack of control over quality assurance;
· lack of 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 that 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 their 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 a limited number of independent contractors for the assembly and testing of our products. Our reliance on independent assembly and testing houses limits our control over delivery schedules,
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quality assurance and product cost. Disruptions in the services provided by our assembly or testing houses or other circumstances that would require them 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 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 may in the future need 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 photo masks 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.
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 2006, only 7% of our total revenues were derived from North America sales. We anticipate that international sales will continue to account for 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.
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We are subject to a variety of 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;
· the burdens of complying with a variety of foreign laws; and
· health risks in a particular region.
A material amount of our research and development personnel and facilities and a portion of our sales and marketing personnel are located in Israel. Political, economic and military conditions in Israel directly affect our operations. Some of our 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. This growth may decrease and any slowdown may have a negative effect on our business. We also maintain offices in Taipei, Taiwan, Hong Kong and Seoul, Korea, and our operations are subject to the economic and political uncertainties affecting these countries as well.
The significant concentration of our manufacturing activities with third party foundries in Taiwan exposes us to the risk of political instability in Taiwan, including the potential for conflict between Taiwan and China. We have several significant OEM customers in Japan, Korea and other parts of Asia. Adverse economic circumstances in Japan and elsewhere in Asia could affect these customers’ willingness or ability to do business with us in the future or their success in developing and launching devices containing our products.
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, our products may be less competitive in that country and our revenues may be adversely affected. 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.
Because we have significant operations in Israel, our business and future operating results could be harmed by future terrorist activity or military conflict.
We conduct a significant portion of our research and development and engineering activities at our design center in Haifa, Israel, a 109,700 square foot facility where we employ approximately 390 people. We also conduct a portion of our sales and marketing operations at our Haifa facility. We have an additional 16,100 square foot facility in Kfar Netter, Israel, where we conduct research and development activities.
Haifa was a principal target in the recent armed conflict in Northern Israel, and, accordingly, our facility and personnel in Haifa were at significant risk during that conflict. Although we suffered no damage to our facilities or injury to our personnel during the recent conflicts, significant damage to our facilities in Israel,
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injury of our employees working there, or damage to the Israeli business or transportation infrastructure as a result of future military conflict or terrorist activity could materially affect our operations in Israel and harm our business. In addition, some of our employees in Israel serve in the military reserve. Any prolonged absence of a substantial number of these employees could materially harm our business.
In addition to their impact on our operations in Israel, military conflict in the Middle East or future terrorist activities there or elsewhere in the world could harm our business as a result of a disruption in commercial activity affecting international commerce or a general economic slowdown and reduced demand for consumer electronic products.
The Israeli rate of inflation may negatively impact our costs if it exceeds the rate of devaluation of the new Israeli shekel against the United States 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 or the decline in the value of United States dollar compared to the Israeli shekel will increase our costs as expressed in United States 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 United States dollar against the new Israeli shekel. These measures may not adequately protect us from the impact of inflation in Israel.
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 have accounted for a substantial percentage of our revenues. In 2006, one customer accounted for 14% of our total revenues, while sales to our four largest customers accounted for 36% of our total revenues. In 2005, no single customer accounted for more than 10% of our total revenues, and sales to our four largest customers accounted for 29% of our total revenues. 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. As of December 31, 2006 four customers accounted for approximately 13%, 12%, 10% and 10% of the net accounts receivable balance, respectively.
Our products generally have long sales cycles and implementation periods, which increases our costs in obtaining orders and reduces the predictability of our operating results.
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 processes are 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. 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
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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. Customers generally purchase our products subject to cancelable short-term purchase orders. We cannot predict whether our current customers will continue to place orders, whether existing orders will be canceled, or whether customers who have ordered products will pay invoices for delivered products. When we do enter into a long-term contract, the contract is generally terminable at the convenience of the customer. Early termination by one of our major customers would harm our financial results.
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 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 customers or could damage market acceptance of such 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.
Regulation of our customers’ products may slow the process of introducing new products and could impair our ability to compete.
The Federal Communications Commission, or FCC, has broad jurisdiction over our target markets in the digital television business. Various international entities or organizations may also regulate aspects of our business or the business of our customers. Although our products are not directly subject to regulation by any agency, the transmission pipes, as well as much of the equipment into which our products are incorporated, are subject to direct government regulation. For example, before they can be sold in the United States, advanced televisions and emerging interactive displays must be tested and certified by Underwriters Laboratories and meet FCC regulations. Accordingly, the effects of regulation on our customers or the industries in which our customers operate may in turn harm our business. FCC regulatory policies affecting the ability of cable operators or telephone companies to offer certain services and other terms on which these companies conduct their business may impede sales of our products. In addition, our digital television business may also be adversely affected by the imposition of tariffs, duties and other import restrictions on our suppliers or by the imposition of export restrictions on products that we sell internationally. Changes in current laws or regulations or the imposition of new laws or regulations in the United States or elsewhere could harm our business. For example, any delays by the FCC in imposing its pending requirement that all new televisions have a digital receiver could have an adverse effect on our HDTV business.
Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights.
Our success and ability to compete depend in large part upon protection of 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
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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.
The protection offered by patents is subject to numerous uncertainties. For example, our competitors may be able to effectively design around our patents, or the patents may be challenged, invalidated or circumvented. Those competitors may also independently develop technologies that are substantially equivalent or superior to our technology. Moreover, while we hold, or have applied for, patents relating to the design of our products, some of our products are based in part on standards, for which we do not hold patents or other intellectual property rights.
We have generally limited access to and distribution of the source and object code of our software and other proprietary information. With respect to our page description language software, SOC platform firmware and drivers for the digital office market and in limited circumstances with respect to firmware on SCS products, firmware and platforms for our DTV, DVDR products, we grant licenses that give our customers access to and restricted use of the source code of our software. This access increases the likelihood of misappropriation or misuse of our technology.
Claims and litigation regarding intellectual property rights 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, Zoran has been subject to claims and litigation regarding alleged infringement of other parties’ intellectual property rights, and both Oak and Zoran have been parties to a number of patent-related lawsuits, both as plaintiff and defendant. We could become subject to additional 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. Future litigation against us, if successful, could subject us to significant liability for damages or invalidation of our proprietary rights. These lawsuits, regardless of their success, are time-consuming and expensive to resolve and require significant management time and attention. Future intellectual property litigation could force us to do one or more of the following:
· stop selling 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.
Although patent disputes in the semiconductor industry have often been settled through cross-licensing arrangements, we may not be able in any or every instance to settle an alleged patent infringement claim through a cross-licensing arrangement. We have a more limited patent portfolio than many of our competitors. If a successful claim is made against us or any of our customers and a license is not made
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available to us on commercially reasonable terms or we are required to pay substantial damages or awards, our business, financial condition and results of operations would be materially adversely affected.
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 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.
We rely on licenses to use various technologies that are material to our products. We do not own the patents that underlie this license. Our rights to use these technologies and employ the inventions claimed in the licensed patents are subject to our abiding by the terms of the licenses. Under the license agreements we must fulfill confidentiality obligations and pay royalties. If we fail to abide by the terms of the license, we would be unable to sell and market the products under license. In addition, we do not control the prosecution of the patents subject to this license or the strategy for determining when such patents should be enforced. As a result, we are dependent upon our licensor to determine the appropriate strategy for prosecuting and enforcing those patents.
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, or NOLs, against taxable income in future periods. Our NOLs totaled approximately $185 million for federal and $36 million for state tax reporting purposes as of December 31, 2006. The Internal Revenue Code contains a number of provisions that limit the use of NOLs under certain circumstances. During 2006 we reduced the NOL deferred tax asset for amounts which we believe will expire before they become available for utilization. Changes in tax laws in the United States may further limit our ability to utilize these NOLs. Any further limitation on our ability to utilize these respective NOLs could harm our financial condition.
Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities. While we believe our tax reserves adequately provide for any tax contingencies, the ultimate outcomes of any future tax audits are uncertain, and we can give no assurance as to whether an adverse result from one or more of them will have a material effect on our operating results and financial position.
Any additional acquisitions we make could disrupt our business and severely harm our financial condition.
We have made investments in, and acquisitions of other complementary companies, products and technologies, 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 its current stockholders’ percentage ownership;
· incur debt;
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· use a significant amount of our cash;
· assume liabilities;
· incur expenses related to the future impairment of goodwill and the amortization of other intangible assets; or
· incur other large write-offs immediately or in the future.
Our operation of any other 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 complete the integration of the business, 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.
If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.
Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization, future cash flows, and slower growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined resulting in an impact on our results of operations.
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 during 2007 and beyond. Our capital requirements will depend on many factors, including:
· 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;
32
· 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 additional acquisitions of businesses, products or technologies.
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 growth successfully will also require us to expand and improve administrative, operational, management and financial systems and controls. Many of our key operations, including a material 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 manage growth effectively. If we are unable to manage growth effectively, our business will 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. Management and other employees may voluntarily terminate their employment with us at any time upon short notice. The loss of key personnel could delay product development cycles or otherwise harm our business. 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, located in the United States, Israel and China. 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.
Provisions in our charter documents and Delaware law could prevent or delay a change in control of Zoran.
Our certificate of incorporation and 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.
33
The market price of our common stock has fluctuated significantly since our initial public offering in 1995. Between January 1, 2006 and December 31, 2006, the closing sale price of our common stock, as reported on the Nasdaq Global Select Market, ranged from a low of $13.67 to a high of $29.13. The market price of our common stock is subject to significant fluctuations in the future in response to a variety of factors, including:
· results of regulatory investigations;
· announcements concerning our business or that of our competitors or customers;
· annual and quarterly variations in our operating results;
· changes in analysts’ earnings estimates;
· announcements of technological innovations;
· the introduction of new products or changes in product pricing policies by Zoran or its competitors;
· loss of key personnel;
· proprietary rights or other litigation;
· general conditions in the semiconductor industry; and
· developments in the financial markets.
From time to time the stock market experiences 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 1B—Unresolved Staff Comments
None
Our executive offices and principal marketing, sales and product development operations are located in approximately 89,000 square feet of leased space in Sunnyvale, California, under a lease that expires in September 2016. A significant portion of our research and development and engineering facilities and our administration, marketing and sales operations are currently located in approximately 109,700 square feet of leased space in an industrial park in Haifa, Israel under a lease expiring in November 2016. We also lease facilities, primarily for sales, product development, and technical support, in Woburn, Massachusetts; Manchester, England; Dortmund, Germany; Tokyo, Japan; Seoul, Korea; Taipei, Taiwan and Shenzhen, Shanghai and Hong Kong, China. We believe that our current facilities are adequate for our needs for the foreseeable future and that, should it be needed, suitable additional space in each of the locations in which we operate will be available to accommodate expansion of our operations on commercially reasonable terms.
U.S. Attorney and SEC Investigations: On July 3, 2006, Zoran disclosed in a press release that it received a grand jury subpoena from the office of the U.S. attorney for the Northern District of California requesting documents from 1995 through the present referring to, relating to or involving stock options, and also received an informal inquiry from the SEC requesting documents related to Zoran’s stock option grants. Zoran intends to cooperate fully in all government investigations. These inquiries likely will require the Company to expend significant management time and incur significant legal and other expenses, and could result in civil and criminal actions seeking, among other things, injunctions against the Company and its
34
officers and directors and the payment of significant fines and penalties by the Company and its officers and directors, which may adversely affect its results of operations and cash flow. The Company cannot predict how long it will take to or how much more time and resources it will have to expend to resolve these government inquiries, nor can it predict the outcome of these inquiries. Also, there can be no assurance that other inquiries, investigations or actions will not be started by other United States federal or state regulatory agencies or by foreign governmental agencies.
Late SEC Filings and Nasdaq Delisting Proceedings Due to the Special Committee investigation and the resulting restatements, the Company did not file on time its Quarterly Reports on Form 10-Q for the quarters ended June 30, 2006 and September 30, 2006, or its Annual Report on Form 10-K for the year ended December 31, 2006. As a result, the Company received Nasdaq Staff Determination letters, dated August 14, 2006, November 15, 2006 and March 20, 2007 stating that the Company was not in compliance with the filing requirements of Marketplace Rule 4310(c)(14) and, therefore, that the Company’s stock was subject to delisting from the Nasdaq Global Select Market. A hearing before a Nasdaq Listing Qualifications Panel was held on September 27, 2006 and a decision to grant the Company’s request for continued listing on Nasdaq subject to certain conditions occurred on December 28, 2006. The Company has appealed this decision, and the Nasdaq Listing Council has determined to stay the December 28, 2006 Panel decision, and any future Panel determinations to suspend Zoran’s securities from trading, pending further action from the Listing Council. On March 2, 2007, the Company provided the Listing Council with an additional submission for its consideration regarding continued listing. The Listing Council will review the matter on the basis of the written record.
Shareholder Class Actions and Derivative Litigation Relating to Historical Stock Option Practices: As discussed further below, certain persons and entities identifying themselves as shareholders of Zoran have filed litigation purporting to assert claims arising out of the historical accounting for stock options.
Zucker v. Zoran Corporation, et al.. On August 10, 2006, a securities class action complaint was filed against Zoran and certain of its officers and directors in the United States District Court, Northern District of California, alleging violations of federal securities laws. The Court selected Middlesex Pension Fund as lead plaintiff and approved lead plaintiff’s selection of counsel for the class. Plaintiff filed an amended complaint on February 1, 2007 and a second amended complaint on February 20, 2007. On March 8, 2007, Defendants filed a motion to dismiss. On March 20, 2007, lead plaintiff filed a notice voluntarily dismissing the action with prejudice as to the lead plaintiff.
NCEA-IBEW Pension Fund (The Decatur Plan) v. Galil, et al. On June 12, 2006, a purported shareholder derivative action was filed by the Decatur Plan against Zoran as a nominal defendant and certain of its officers and directors in the United States District Court, Northern District of California, alleging, inter alia, violations of federal and state securities laws and breaches of fiduciary duty. On December 4, 2006, Decatur Plan filed a notice of voluntary dismissal.
Pfeiffer v. Zoran Corporation et al. On September 7, 2006, a purported shareholder derivative action was filed by Milton Pfeiffer against Zoran as a nominal defendant and certain of its officers and directors in the United States District Court, Northern District of California, alleging, inter alia, violations of federal securities laws and breaches of fiduciary duties.
Gerald del Rosario v. Aharon et al. On September 26, 2006, a purported shareholder derivative action was filed by Gerald del Rosario against Zoran as a nominal defendant and certain of its current and former officers and directors in the United States District Court, Northern District of California, alleging, inter alia, violations of federal securities laws and breaches of fiduciary duty. On December 8, 2006, the Court issued an order consolidating the Del Rosario action with the Pfeiffer action. The
35
Court selected del Rosario as lead plaintiff and approved lead plaintiff’s selection of counsel for the consolidated derivative action. Plaintiffs filed a consolidated amended complaint on March 14, 2007.
Barone v. Gerzberg et al.; Durco v. Gerzberg et al. On October 23, 2006, two purported shareholder derivative actions were filed by Moshe Barone and John Durco against Zoran as a nominal defendant and certain of its current and former officers and directors in the California Superior Court of Santa Clara County, alleging, inter alia, violations of state securities laws and breaches of fiduciary duty. On January 24, 2007 the Court consolidated the Barone and Durco actions, appointed Messrs. Barone and Durco as co-lead plaintiffs and approved their selection of counsel for the consolidated derivative action. Co-Lead Plaintiffs filed a consolidated amended complaint on March 26, 2007.
On February 20, 2007, the Company filed a complaint against ArcSoft Inc. in the California Superior Court for the County of Alameda, seeking payment of $4 million in principal, together with accrued interest then in the amount of approximately $525,000, under four separate convertible promissory notes. On February 28, 2007, the Company filed an application with the Court seeking to attach assets of ArcSoft as security for the payment of its obligations under the notes. The notes represent amounts loaned by the Company to ArcSoft in 2004 in connection with a transaction involving the transfer to ArcSoft of rights related to a software product then under development and related agreements regarding the continued development and commercialization of the product. On March 28, 2007, ArcSoft filed an answer denying liability under the notes and asserting various affirmative defenses. ArcSoft also filed a cross complaint alleging fraud in the inducement of the business arrangement, fraudulent and negligent misrepresentation, breach of contract and of the implied covenant of good faith and fair dealing, and unjust enrichment and seeking monetary damages of more than $6.9 million. The hearing on our application for an attachment is currently scheduled for May 14, 2007.
Indemnification Obligations. Subject to certain limitations, the Company is obligated to indemnify its current and former directors, officers and employees in connection with the investigation of the Company’s historical stock option practices and related government inquiries and litigation. These obligations arise under the terms of the Company’s certificate of incorporation, its bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that the Company is required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters. The Company is currently paying or reimbursing legal expenses being incurred in connection with these matters by a number of its current and former directors, officers and employees.
Other Legal Matters. The Company is named from time to time as a party to lawsuits in the normal course of its business. Litigation, in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings are difficult to predict.
Item 4—Submission of Matters to a Vote of Security Holders
We did not submit any matters to a vote of our security holders during the fourth quarter of the year ended December 31, 2006.
36
Item 5—Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the Nasdaq Global Select 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 Global Select Market for the periods indicated:
|
| High |
| Low |
| ||
2005 |
|
|
|
|
| ||
First Quarter |
| $ | 11.21 |
| $ | 9.63 |
|
Second Quarter |
| $ | 13.95 |
| $ | 8.97 |
|
Third Quarter |
| $ | 17.19 |
| $ | 13.31 |
|
Fourth Quarter |
| $ | 17.38 |
| $ | 12.51 |
|
2006 |
|
|
|
|
| ||
First Quarter |
| $ | 22.48 |
| $ | 16.83 |
|
Second Quarter |
| $ | 29.13 |
| $ | 21.00 |
|
Third Quarter |
| $ | 24.31 |
| $ | 14.17 |
|
Fourth Quarter |
| $ | 16.54 |
| $ | 13.67 |
|
As of December 31, 2006, there were 287 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.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Neither we nor any affiliated purchaser repurchased any of our equity securities in the fourth quarter of 2006.
Item 6—Selected Financial Data
The consolidated balance sheet as of December 31, 2005, and the consolidated statements of operations for the years ended December 31, 2005 and 2004, have been restated as set forth in this Annual Report on Form 10-K. The data for the consolidated balance sheets as of December 31, 2004, 2003 and 2002 and the consolidated statements of operations for the fiscal years ended December 31, 2003 and 2002, have been restated to reflect the impact of the stock-based compensation adjustments, but such restated data have not been audited and is derived from the books and records of the Company. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included in Item 8 of this Annual Report on Form 10-K to fully understand factors that may affect the comparability of the information presented below. The information presented in the following tables has been adjusted to reflect the restatement of the Company’s financial results, which is more fully described in the “Explanatory Note” immediately preceding Part I, Item 1 and in Note 2, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
The Company has not amended its previously-filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by this restatement, other than the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, which is being filed concurrently with this Annual
37
Report on Form 10-K. The financial information that has been previously filed or otherwise reported for these periods is superseded by the information in this Annual Report on Form 10-K, and the financial statements and related financial information contained in such previously-filed reports should no longer be relied upon.
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere herein.
|
| Year Ended December 31, |
| |||||||||||||||||||||||
|
| 2006 |
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| |||||||||||||||
|
| (in thousands, except per share data) |
| |||||||||||||||||||||||
|
|
|
| (As |
| (As |
| (As |
| (As |
| |||||||||||||||
STATEMENTS OF OPERATIONS DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total revenues |
|
| $ | 495,805 |
|
|
| $ | 395,758 |
|
|
| $ | 378,864 |
|
|
| $ | 216,528 |
|
|
| $ | 149,117 |
|
|
Gross profit |
|
| 269,545 |
|
|
| 210,209 |
|
|
| 152,629 |
|
|
| 85,477 |
|
|
| 62,213 |
|
| |||||
Operating income (loss) |
|
| 10,556 |
|
|
| (27,100 | ) |
|
| (46,857 | ) |
|
| (72,004 | ) |
|
| 6,831 |
|
| |||||
Net income (loss) |
|
| 16,328 |
|
|
| (26,971 | ) |
|
| (47,354 | ) |
|
| (67,978 | ) |
|
| 5,698 |
|
| |||||
Basic net income (loss) per share(1) |
|
| $ | 0.34 |
|
|
| $ | (0.61 | ) |
|
| $ | (1.11 | ) |
|
| $ | (2.05 | ) |
|
| $ | 0.21 |
|
|
Diluted net income (loss) per share(1) |
|
| $ | 0.33 |
|
|
| $ | (0.61 | ) |
|
| $ | (1.11 | ) |
|
| $ | (2.05 | ) |
|
| $ | 0.20 |
|
|
Shares used in diluted per share calculations(1) |
|
| 50,099 |
|
|
| 44,267 |
|
|
| 42,788 |
|
|
| 33,231 |
|
|
| 28,629 |
|
|
|
| Year Ended December 31, |
| |||||||||||||||||||||||
|
| 2006 |
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| |||||||||||||||
|
| (in thousands, except per share data) |
| |||||||||||||||||||||||
|
|
|
| (as |
| (as |
| (as |
| (as |
| |||||||||||||||
STATEMENTS OF OPERATIONS DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total revenues |
|
| $ | 495,805 |
|
|
| $ | 395,758 |
|
|
| $ | 378,864 |
|
|
| $ | 216,962 |
|
|
| $ | 148,683 |
|
|
Gross profit |
|
| 269,545 |
|
|
| 209,586 |
|
|
| 152,403 |
|
|
| 85,797 |
|
|
| 61,710 |
|
| |||||
Operating income (loss) |
|
| 10,556 |
|
|
| (29,879 | ) |
|
| (45,767 | ) |
|
| (75,729 | ) |
|
| 3,187 |
|
| |||||
Net income (loss) |
|
| 16,328 |
|
|
| (30,272 | ) |
|
| (48,108 | ) |
|
| (71,351 | ) |
|
| 2,093 |
|
| |||||
Basic net income (loss) per share(1) |
|
| $ | 0.34 |
|
|
| $ | (0.68 | ) |
|
| $ | (1.12 | ) |
|
| $ | (2.15 | ) |
|
| $ | 0.08 |
|
|
Diluted net income (loss) per share(1) |
|
| $ | 0.33 |
|
|
| $ | (0.68 | ) |
|
| $ | (1.12 | ) |
|
| $ | (2.15 | ) |
|
| $ | 0.07 |
|
|
Shares used in diluted per share calculations(1) |
|
| 50,099 |
|
|
| 44,267 |
|
|
| 42,788 |
|
|
| 33,231 |
|
|
| 28,629 |
|
|
|
| As of December 31, |
| |||||||||||||||
|
| 2006 |
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| |||||||
|
| (in thousands) |
| |||||||||||||||
|
|
|
| (As |
| (As |
| (As |
| (As |
| |||||||
BALANCE SHEETS DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash, cash equivalents and short-term investments |
| $ | 296,229 |
| $ | 149,346 |
| $ | 70,413 |
| $ | 126,366 |
|
| $ | 137,075 |
|
|
Working capital |
| 314,790 |
| 170,946 |
| 109,320 |
| 146,810 |
|
| 159,288 |
|
| |||||
Total assets |
| 676,630 |
| 604,223 |
| 599,281 |
| 622,237 |
|
| 342,616 |
|
| |||||
Accumulated deficit |
| (227,510 | ) | (230,795 | ) | (203,824 | ) | (156,470 | ) |
| (88,492 | ) |
| |||||
Total stockholders’ equity |
| $ | 583,997 |
| $ | 499,348 |
| $ | 500,627 |
| $ | 534,279 |
|
| $ | 311,012 |
|
|
38
|
| As of December 31, |
| |||||||||||||||
|
| 2006 |
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| |||||||
|
| (in thousands) |
| |||||||||||||||
|
|
|
| (as |
| (as |
| (as |
| (as |
| |||||||
BALANCE SHEET DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash, cash equivalents and short-term investments |
| $ | 296,229 |
| $ | 149,346 |
| $ | 70,413 |
| $ | 126,366 |
|
| $ | 137,075 |
|
|
Working capital |
| 314,790 |
| 170,114 |
| 108,597 |
| 146,528 |
|
| 158,854 |
|
| |||||
Total assets |
| 676,630 |
| 602,631 |
| 598,016 |
| 621,847 |
|
| 342,182 |
|
| |||||
Accumulated deficit |
| (227,510 | ) | (243,838 | ) | (213,566 | ) | (165,458 | ) |
| (94,107 | ) |
| |||||
Total stockholders’ equity |
| $ | 583,997 |
| $ | 496,924 |
| $ | 498,769 |
| $ | 533,607 |
|
| $ | 310,578 |
|
|
Effective in fiscal year 2006, we implemented Statement of Financial Accounting Standards (“SFAS”) No. 123(R) “Share-Based Payment.” It requires us to measure all employee stock-based compensation awards using a fair value method and record such expense in our consolidated financial statements. In addition, to correct our past accounting for some stock options granted primarily from 1997 to 2003, we recorded an aggregate of $11.7 million of additional non-cash, stock-based compensation expense for the periods 1997 to 2005 under APB No. 25 and $0.4 million for 2006 under SFAS No. 123(R). There was no tax impact of these additional stock-based compensation expenses due to the full valuation allowance on our tax assets. Net income in fiscal year 2006 includes approximately $17.2 million of non-cash, stock-based compensation expense, compared to $4.5 million in fiscal year 2005, $2.6 million in fiscal year 2004, $10.2 million in fiscal year 2003 and $3.5 million in fiscal year 2002.
In connection with the restatement, the Company is recording additional non-cash adjustments that were previously considered to be immaterial relating to the timing of revenue recognition, accrued expenses, amortization of premiums and discounts on investments, additional expense related to options granted to a consultant and the calculation of amortization of stock-based compensation relating to a business combination in 2003. The Company is also recording losses under Accounting Principles Board Opinion 18 (“APB No. 18”), “The Equity Method of Accounting for Investments in Common Stock,” to record the losses on investment of the prior 17% ownership of Oren Semiconductor, Inc. under the equity method of accounting which was subsequently acquired by Zoran in 2005. These additional adjustments resulted in a cumulative expense of $1.3 million, including $0.2 million of tax expense, for the periods 2000 through 2005.
39
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled “Item 1A—Risk Factors” above. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of this report. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
On July 3, 2006, the Company announced that, at the recommendation of the Audit Committee, the Board of Directors had created a special committee of independent directors (“Special Committee”) to conduct a review of our historical stock option practices. As a result of its investigation, the Special Committee found, among other things, that some of the original measurement dates used by the Company for option grants were not adequately supported by contemporaneous records, and therefore the measurement dates used by us for accounting purposes required adjustment. The Special Committee concluded that the evidence did not establish that the errors which it identified resulted from fraud or intentional misconduct by our current senior management.
Based on the Special Committee’s findings and its own review of the facts, the Board of Directors concluded that there was no fraud or intentional misconduct by any current member of senior management. The Board also concluded that it has confidence in the integrity of the Company’s Chief Executive Officer, Dr. Levy Gerzberg, and the Company’s Chief Financial Officer, Mr. Karl Schneider.
Based on information obtained from the Special Committee’s review and additional work undertaken by the Company, management has concluded, and the Audit Committee has agreed, that the Company should restate certain previously filed financial statements, to reflect additional stock-based compensation expense with regard to certain past stock option grants. The corrections made in the restatements relate to options covering approximately 3.6 million shares. These adjustments amounted to an additional stock-based compensation expense of $0.4 million and $2.6 million in 2006 and 2005, respectively, and a benefit of $1.5 million in 2004. There was no tax impact of these additional stock-based compensation expenses due to the full valuation allowance on our tax assets.
In connection with the restatement, the Company is recording additional non-cash adjustments that were previously considered to be immaterial relating to the timing of revenue recognition, accrued expenses, amortization of premiums and discounts on investments, additional expense related to options granted to a consultant and the calculation of amortization of stock-based compensation relating to a business combination in 2003. The Company is also recording losses under Accounting Principles Board Opinion 18 (“APB No. 18”), “The Equity Method of Accounting for Investments in Common Stock,” to record the losses on investment of the prior 17% ownership of Oren Semiconductor, Inc. under the equity method of accounting which was subsequently acquired by Zoran in 2005. These additional adjustments resulted in a cumulative expense of $1.3 million, including $0.2 million of tax expense, for the periods 2000 through 2005.
Through 2005, we applied Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations, and provided the required pro forma disclosures under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based
40
Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” Under APB Opinion No. 25 (“APB No. 25”), non-cash, stock-based compensation expense was recognized for any option for which the exercise price was below the market price on the actual grant date. Because each of the options identified below (other than those which we have determined should be accounted for variably) was deemed to have an exercise price below the market price on the appropriate measurement date, we should have recognized a charge for each of those options under APB No. 25, in an amount equal to the number of shares covered by such options, multiplied by the difference between the exercise price and the market price on the appropriate measurement date. That expense should have been amortized over the vesting periods of the options. Starting in 2006, we adopted SFAS No. 123(R), “Share-Based Payment.” As a result, for 2006, the additional stock-based compensation expense required to be recorded for each of the options identified below was equal to the incremental fair value of those options on the appropriate measurement date over the remaining vesting periods of those options. We did not record such stock-based compensation expenses under APB No. 25 or SFAS No. 123(R) in our previously issued financial statements, and that is the reason for the restatement in this report. To correct our past accounting for stock options, we recorded additional pre-tax, non-cash, stock-based compensation expense of (a) $11.7 million for the periods 1997 to 2005 under APB No. 25 and (b) the remaining $0.4 million for 2006 under SFAS No. 123(R). The fair value of the options is being recorded using the accelerated amortization method under FIN 28 over the respective vesting periods of the awards.
Consistent with the accounting literature and recent guidance from the Securities and Exchange Commission (“SEC”), the Company has organized the grants with respect to which an accounting adjustment is required into categories based on grant type and process by which the grant was finalized. Based on the relevant facts and circumstances, the Company applied the relevant accounting standards to determine the measurement date for every grant within each category. The Company recorded accounting adjustments as required, resulting in stock-based compensation expense and related tax effects. The Company organized the grants where adjustments were required as follows:
· Company-wide option grants where optionees were added or grant amounts were changed after the option list was complete, or where insufficient contemporaneous documentation of the grant date exists. For seven Company-wide refresh and retention grants made between 1998 and 2003, the Company determined that some employees who were omitted from the option grant list were added to the list after the stated grant date, and that the number of shares covered by option grants to some employees was not finally determined until after the stated grant date. Further, in 2001 and 2002, insufficient contemporaneous documentation of the stated grant date existed. As a result of these issues, the Company restated its historical financial statements to increase stock-based compensation expense by approximately $6.3 million, recognized over the vesting periods of the relevant options.
· Re-priced options. In August 2002, after consideration of relevant information, the Compensation Committee rescinded its April 2002 grant, and its June 2002 grant, to executives and other key employees. The Company thereafter reissued the grants in August 2002. At the time, in consultation with our external advisors, we determined that these transactions did not require variable accounting. As a result of the Special Committee review of our historical stock option practices, we have reassessed the circumstances surrounding these transactions with our external advisors and have determined that the grants should have been accounted for variably. As a result, the Company restated its historical financial statements to increase stock-based compensation expense by a cumulative net amount of approximately $3.8 million, recognized over the vesting periods of these options.
· Acquisition-related options. The Company determined a grant given to retain employees hired in connection with an acquisition in October 2000 should have been accounted for variably. As a result, the Company restated its historical financial statements to increase stock-based
41
compensation expense by approximately $0.3 million, recognized over the vesting periods of these options.
· Improper measurement dates for non-refresh stock option grants. The Company revised the measurement dates for certain grants made to new hires and for promotional and other miscellaneous non-refresh grants made between 1997 and 2003 as a result of approvals that were obtained subsequent to the stated grant dates or as a result of administrative delays or errors and a small number of stock option grants to non-executives that were determined to have been established retrospectively. As a result, the Company restated its historical financial statements to increase stock-based compensation expense by approximately $1.3 million, recognized over the vesting periods of these options.
In the aggregate, we have recorded additional stock-based compensation expense for the periods 1997 through 2005 of approximately $11.7 million on stock option grants made from 1997 through 2003.
The incremental impact from recognizing stock-based compensation expense resulting from the investigation of past stock option grants is as follows (dollars in thousands):
|
| Expense |
| |
|
| (Benefit) |
| |
Fiscal Year |
|
|
| |
1997 |
| $ | 190 |
|
1998 |
| 223 |
| |
1999 |
| 123 |
| |
2000 |
| 120 |
| |
2001 |
| 1,385 |
| |
2002 |
| 3,182 |
| |
2003 |
| 5,299 |
| |
Cumulative effect at December 31, 2003 |
| 10,522 |
| |
2004 |
| (1,476 | ) | |
2005 |
| 2,623 |
| |
|
| $ | 11,669 |
|
The cumulative effect of all of the restatements through December 31, 2003 increased additional paid-in capital by $10.7 million from $703.8 million to $714.5 million, increased accumulated deficit by $9.0 million from $156.4 million to $165.4 million, and decreased total stockholders’ equity by $0.7 million from $534.3 million to $533.6 million. All the restatements of financial statements, financial data and related disclosures described in this report are collectively referred to in this report as the “restatements.”
In December 2006, the Company amended options to purchase approximately 218,000 shares of common stock held by Dr. Gerzberg and Mr. Schneider to increase the exercise price of those options to the fair market value of the Company’s common stock on the revised measurement date so that these options are no longer subject to a penalty tax under IRC Section 409A.
We have not amended, and we do not intend to amend, any of our other previously filed Annual Reports on Form 10-K. We have amended our Quarterly Report for the period ended March 31, 2006 concurrent with the filing of our Annual Report on Form 10-K, and we do not intend to amend any of our other previously filed Quarterly Reports on Form 10-Q for the periods affected by the restatements. We present restated quarterly financial information for each of the quarters in 2006 and 2005 in “Selected Quarterly Financial Information (Unaudited)” included in this report.
42
The impact of the restatements on the interim periods of each of the first three quarters of 2006 and each of the quarters of 2005 are disclosed in “Selected Quarterly Financial Information (Unaudited)” included in this report.
Based on the definition of “material weakness” in the Public Company Accounting Oversight Board’s Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements, the restatement of financial statements in prior filings with the SEC is a strong indicator of the existence of a “material weakness” in the design or operation of internal control over financial reporting. However, the Company has concluded that the control deficiencies that resulted in the restatement of the previously issued consolidated financial statements did not constitute a material weakness as of December 31, 2006 because management determined that as of December 31, 2006 the Company’s internal controls were effective.
The SEC may disagree with the manner in which we have accounted for and reported, or not reported, the financial impact of past option grant measurement date errors, and there is a risk that its inquiry could lead to circumstances in which we may have to further restate our prior financial statements, amend prior filings with the SEC, or otherwise take other actions not currently contemplated. In addition, the SEC may issue guidance on disclosure requirements related to the financial impact of past option grant measurement date errors that may require us to amend this filing or prior filings with the SEC to provide additional disclosures pursuant to this guidance. Any such circumstance could also lead to future delays in filing our subsequent SEC reports and delisting of our common stock from the NASDAQ Global Select Market.
As a result of the investigation of its historical stock option practices, we analyzed Zoran’s internal control over financial reporting for periods before January 1, 2003, and determined that the Company did not have sufficient safeguards in place to monitor its control practices regarding stock option pricing and related financial reporting and to foster an effective flow of information between those responsible for stock option pricing and those responsible for financial reporting. Inadequate training, communication and coordination in and among the Company’s human resources, stock administration, legal and finance functions prevented the Company from assuring that stock options were priced and accounted for correctly, primarily for the years 1997 through 2002.
From 2003 through 2005, in compliance with the Sarbanes-Oxley Act of 2002 and evolving accounting guidance, the Company implemented improved procedures, processes and systems to provide additional safeguards and greater internal control over its stock option granting and administration. These improvements included:
· Documenting and assessing the design and operation of internal controls;
· Segregating responsibilities, adding reviews and reconciliations, and redefining roles and responsibilities;
· Implementing a new equity accounting system and a new stock administration function; and
· Implementing, prior to the adoption of SFAS No. 123(R), the practice of using the receipt of the final Board or Compensation Committee approval as the grant and measurement date for stock option grants.
43
As a result of the recommendations of the Special Committee of our Board of Directors and deliberations of the Compensation Committee of our Board of Directors, we have adopted the following policies governing all stock option grants:
· All option grants must be approved by the Compensation Committee or the Board of Directors; the authority to approve option grants may not be delegated.
· Option grants (including officer, vice president, rank and file, promotional and new hire grants) are generally considered at regularly scheduled quarterly meetings of the Compensation Committee or the Board of Directors, and action may not be taken by unanimous written consent.
· Grants are generally effective as of the later of (i) the second trading day following the Company’s public announcement of its financial results for the preceding quarter or (ii) the date of the Board or committee meeting.
· Grants should be recorded promptly in the Company’s option accounting database, and grantees should receive prompt written notification of their grants.
· The annual focal review process will identify a specific date to complete the process of generating recommended grant amounts, after which the recommendations will be submitted to the Compensation Committee or the Board of Directors for approval.
· Board or committee minutes are to be drafted and circulated to directors for comment as soon as reasonably possible.
The Special Committee investigation and the Company’s related activities discovered no stock option grant after December 31, 2003 that required accounting adjustments.
U.S. Attorney and SEC Requests. On July 3, 2006, Zoran disclosed in a press release that it received a grand jury subpoena from the office of the U.S. attorney for the Northern District of California requesting documents from 1995 through the present referring to, relating to or involving stock options, and also received an informal inquiry from the SEC requesting documents related to Zoran’s stock option grants. Zoran intends to cooperate fully in all government inquiries or investigations. There is no assurance that we will not be subject to inquiries related to our stock option grant practices by other federal, state or foreign regulatory agencies. All such inquiries are likely to require us to continue to expend significant management time and incur significant legal and other expenses, and could result in civil and criminal actions seeking injunctions, fines or other sanctions that could adversely affect our business and financial results.
Shareholder Class Actions and Derivative Litigation Relating to Historical Stock Option Practices: As discussed under Item 3—Legal Proceedings above, certain persons and entities identifying themselves as shareholders of Zoran have filed class action complaints against the Company and derivative actions purporting to assert claims on behalf of and in the name of the Company against various of the Company’s current and former directors and officers relating to Zoran’s historical accounting for and disclosures related to stock options. There may be additional lawsuits of this nature filed in the future. We cannot predict the outcome of any such litigation, or the amount of time and expenses that will be required to resolve them. If these lawsuits become time consuming and expensive, or if there are unfavorable outcomes in any of these cases, there could be a material adverse effect on our business, financial condition and results of operations.
44
Cost of Related Proceedings and Restated Financial Statements. We have incurred substantial expenses for legal, accounting, tax and other professional services in connection with the Special Committee investigation, our own related review work, the preparation of the restated financial statements, the SEC and Department of Justice matters and inquiries from other government agencies, and the related litigation. We have recorded expenses of $5.8 million in aggregate through 2006 and we expect to incur additional costs in the future.
Restatement and Impact on Financial Statements
The following information has been adjusted to reflect the restatement of the Company’s financial results, which is more fully described in the “Explanatory Note” immediately preceding Part I, Item 1 and in Note 2, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
In connection with the restatement, the Company is recording additional non-cash adjustments that were previously considered to be immaterial relating to the timing of revenue recognition, accrued expenses, amortization of premiums and discounts on investments, additional expense related to options granted to a consultant and the calculation of amortization of stock-based compensation relating to a business combination in 2003.
For additional information, refer to “Note 2—Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements.
The income statement impact of the restatements are as follows (in thousands):
|
| Cumulative |
| Year Ended |
| Year Ended |
| Cumulative |
| ||||||||||||
Net loss as previously reported |
|
|
|
|
|
| $ | (26,971 | ) |
|
| $ | (47,354 | ) |
|
|
|
|
| ||
Additional compensation (expense) benefit resulting from improper measurement dates for stock option grants, net of tax |
|
| $ | (11,669 | ) |
|
| (2,623 | ) |
|
| 1,476 |
|
|
| $ | (10,522 | ) |
| ||
Other adjustments, net of tax |
|
| (1,374 | ) |
|
| (678 | ) |
|
| (2,230 | ) |
|
| 1,534 |
|
| ||||
Total increase to net loss |
|
| (13,043 | ) |
|
| (3,301 | ) |
|
| (754 | ) |
|
| (8,988 | ) |
| ||||
Net loss, as restated |
|
|
|
|
|
| (30,272 | ) |
|
| (48,108 | ) |
|
|
|
|
| ||||
|
| Year Ended December 31, |
| |||||||||||||||||||
|
| 2003 |
| 2002 |
| 2001 |
| 2000 |
| 1999 |
| 1998 |
| 1997 |
| |||||||
Stock-based employee compensation expense, as previously reported |
| $ | (6,281 | ) | $ | (292 | ) | $ | (544 | ) | $ | (99 | ) | $ | — |
| $ | — |
| $ | — |
|
Additional compensation expense resulting from improper measurement dates for stock option grants |
| (5,299 | ) | (3,182 | ) | (1,385 | ) | (120 | ) | (123 | ) | (223 | ) | (190 | ) | |||||||
Stock-based employee compensation expense, as restated |
| $ | (11,580 | ) | $ | (3,474 | ) | $ | (1,929 | ) | $ | (219 | ) | $ | (123 | ) | $ | (223 | ) | $ | (190 | ) |
45
Zoran Corporation is a leading provider of digital solutions in the digital entertainment and digital imaging market.
Our products consist of integrated circuits and related products used in digital versatile disc, or DVD, players, movie and home theater systems, digital cameras and video editing systems. We also provide integrated circuits, software and platforms for digital television applications that enable the delivery and display of digital video content through a set-top box or television as well as digital imaging products consisting of semiconductor hardware and software that enable users to print, scan, process and transmit documents to computer peripherals that perform printing functions. Subsequent to our acquisition of Emblaze Semiconductor Ltd. on July 8, 2004, we also provide high performance, low-power application processors, technology and products for the multimedia mobile telephone market. Through the acquisition of Oren Semiconductor, Inc. on June 10, 2005, Zoran obtained Oren’s demodulator IC technology for the global high definition television market. We sell our products to original equipment manufacturers, or OEMs, who incorporate them in digital video and audio products for consumer and commercial applications.
Revenues
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 resellers and the transition from low-volume to high-volume production. In the past, we have periodically reduced the prices of some of our products in order to penetrate the consumer market more broadly. 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 changes with any certainty.
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. Annual licensing revenue can be significantly affected by the timing of a small number of licensing transactions, each accounting for substantial revenues. Accordingly, licensing revenues have fluctuated, and will continue to fluctuate, on an annual basis. In addition, we have historically generated a portion of our total revenues from development contracts, primarily with key customers, although development revenue has declined substantially 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.
We recognize software license revenues in accordance with the provisions of Statement of Position (SOP) No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Modification of SOP No. 97-2, Software Revenue Recognition, With Respect to Certain Transactions. Our software license agreements typically include obligations to provide maintenance and other support over a fixed term and allow for renewal of maintenance services on an annual basis. We determine the fair value of our maintenance obligations with reference to substantive renewal rates within the agreement or objective
46
evidence of fair value as required under SOP No. 97-2. Maintenance and support revenue is recognized ratably over the term of the arrangement. We also receive royalty revenues based on per unit shipments of products embedding our software which we recognize upon receipt of a royalty report from the customer, typically one quarter in arrears.
Cost of Hardware Product Revenues
Our cost of hardware product revenues 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 hardware product revenues to offset anticipated decreases in average selling prices, our product gross margins will decrease. We expect both product and customer mix to continue to fluctuate in future periods, causing fluctuations in margins.
Research and Development
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 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. From time to time, we enter into non-refundable joint development projects in which our customers reimburse us for a portion of our development costs. We classify such reimbursement of development costs as an offset to research and development expenses as we retain ownership of the intellectual property developed by us under these development arrangements. During 2006, we received approximately $347,000 in such reimbursements. We received $1.2 million in reimbursements in 2005. 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.
Selling, General and Administrative
Our selling, general and administrative expenses consist primarily of employee-related expenses, 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.
Income Taxes
Our effective income tax rate has benefited from the availability of previously unbenefitted net operating losses which we have utilized to reduce taxable income for U.S. federal income tax purposes and by our Israel based 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 2017 and 2024, and the benefits from our subsidiary’s Approved Enterprise status expire at various times beginning in 2008.
47
Oren Semiconductor, Inc.
On June 10, 2005, we completed our acquisition of Oren Semiconductor, Inc. (“Oren”), a privately-held provider of demodulator ICs for the global high definition television market. Prior to this acquisition, we had made investments in Oren that represented a 17% ownership interest. Under the terms of the acquisition agreement, we acquired the remaining 83% of Oren’s outstanding stock by means of a merger of Oren with a wholly-owned subsidiary of Zoran, in consideration for which we paid an aggregate of $28.4 million in cash and issued 1,188,061 shares of Zoran common stock valued at $12.9 million, for total consideration of $41.3 million, to the other stockholders of Oren and to employees holding Oren options. The acquisition was accounted for under the purchase method of accounting.
Following the completion of the acquisition, the results of operations of Oren have been included in our consolidated financial statements. In addition, we recorded retroactive losses under Accounting Principles Board Opinion 18 (“APB No. 18”), “The Equity Method of Accounting for Investments in Common Stock,” to record the losses on investment of the prior 17% ownership of Oren Semiconductor, Inc. under the equity basis. Accordingly, our results of operations for the year ended December 31, 2006 include Oren’s operations for the full year; our results of operations for the year ended December 31, 2005 include Oren’s operations between June 10, 2005 and December 31, 2005 and $218,000 representing our portion of the losses incurred by Oren between January 1, 2005 and June 10, 2005; and our results of operations for the year ended December 31, 2004 do not include Oren’s operations.
Emblaze Semiconductor Ltd.
On July 8, 2004, we completed our acquisition of Emblaze Semiconductor Ltd. (“Emblaze”), a wholly-owned subsidiary of Emblaze Ltd. for $54.2 million in cash. The acquisition was accounted for under the purchase method of accounting.
Following the completion of the acquisition, the results of operations of Emblaze have been included in our consolidated financial statements. Accordingly, our results of operations for the years ended December 31, 2006 and 2005 include Emblaze’s operations for the full years presented while the results of operations for the year ended December 31, 2004 only reflect Emblaze’s operations between July 8, 2004 and December 31, 2004.
During the first quarter of 2006, we reorganized our operating structure to bring together our consumer electronic product lines under a single operating group, in recognition of the accelerating convergence of consumer products and our strategy of sharing technology among our various product lines. The new Consumer segment combines the former Digital Versatile Disc (DVD), Digital Television (DTV) and Mobile product groups whose operations were previously reported separately. We will continue to report the operations of our Imaging group as a separate operating segment.
Prior to July 2004, we had four reportable segments: Digital Versatile Disc (DVD), Imaging, Digital Camera (DC) and Digital Television (DTV). Subsequent to the Emblaze acquisition in July 2004, the operations of Emblaze were combined with the Digital Camera group and the group was renamed the Mobile segment. Each segment’s primary products are based on highly integrated application-specific integrated circuits, or ASICs, and system-on-a-chip, or SOC, solutions. The DVD, Imaging and DTV segments also license certain software and other intellectual property. The DVD group provides products for use in DVD players and recordable DVD players. The Imaging group provides products used in digital copiers, laser and inkjet printers as well as multifunction peripherals. The Mobile group focuses on
48
solutions for multimedia mobile phone products and digital camera products. The DTV group provides products for standard and high definition digital television products including televisions, set top boxes and personal video recorders.
Critical Accounting Policies and Estimates
This 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 debt, inventories, investments, intangible assets and income taxes. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates 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 require our most significant judgments and estimates used in the preparation of our consolidated financial statements:
· We generally recognize product sales to distributors at the time of delivery. However, in some cases we grant rights of return or provide price protection arrangements. When we are able to estimate the effect of such an arrangement, we establish a reserve for the estimated adjustment and recognize the balance of the product revenue associated with that arrangement upon shipment. When we cannot reasonably estimate the effect of such an arrangement, we defer all revenue subject to the arrangement until the return right has lapsed or the price has become fixed. The deferred revenue balance at the end of each accounting period was not material.
· Revenue from development contracts is generally recognized as the services are performed based on the specific deliverables outlined in each contract. Amounts received in advance of performance under contracts are recorded as deferred revenue and are generally recognized within one year from receipt. Costs associated with development revenues are included primarily in research and development expenses.
· Revenue from litigation settlement is recognized in accordance with the terms of the agreement when actual cash payments are received.
· 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. Inventory write-downs are not reversed and permanently reduce the cost basis of the affected inventory until such inventory is sold or scrapped.
· We maintain allowances for doubtful accounts for estimated losses resulting from the delays or inability of certain customers to make required payments. These allowances are estimated based on both specific identification of facts and circumstances with respect to each doubtful account. 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 private companies having operations or technology in areas within our strategic focus. At December 31, 2006, these investments totaled $4.2 million. The investments are in start up companies engaged in development and are expected to incur losses. We record an
49
investment impairment charge when we believe an investment has experienced a decline in value. We assess the value of this investment principally by using information obtained from the investee, including historical and projected financial performance and recent funding events. Future adverse changes in market conditions or unexpected operating losses 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 assess the impairment of goodwill annually, or more frequently if events or changes in circumstances indicate that the carrying value of such assets exceeds their fair value. We assess the carrying value of our long lived assets if events or circumstances indicate the carrying value of the assets exceeds the future undiscounted cash flows attributable to such assets. With respect to both goodwill and long lived assets, factors which could trigger an impairment review include significant negative industry or economic trends, exiting an activity in conjunction with a restructuring of operations, current, historical or projected losses that demonstrate continuing losses associated with an asset or a significant decline in our market capitalization for an extended period of time, relative to net book value. Impairment evaluations involve management estimates of asset useful lives and future cash flows. These estimates include assumptions about future conditions such as future revenues, gross margins, operating expenses, the fair values of certain assets based on appraisals, and industry trends. 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.
· Prior to January 1, 2006, we applied APB No. 25, “Accounting for Stock Issued to Employees,” and its related Interpretations and provided the required pro forma disclosures under SFAS No. 123, “Accounting for Stock-Based Compensation.” In accordance with APB No. 25, a non-cash stock-based compensation expense was recognized for any options for which the exercise price was below the market price on the actual grant date. The charge for the options with an exercise price below the market price on the actual grant date was equal to the number of options multiplied by the difference between the exercise price and the market price of the option shares on the actual grant date. That expense was amortized over the vesting period of the option. Beginning January 1, 2006, we have accounted for stock-based compensation using the fair value of stock options using a Black-Scholes valuation model, consistent with the provisions of SFAS No. 123(R), SEC Staff Accounting Bulletin (“SAB”) No. 107. We elected to adopt the modified prospective application method as provided by SFAS No. 123(R). SFAS No. 123(R) requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The expected stock price volatility assumption was determined using the historical volatility of the Company’s common stock. We determined that historical volatility is reflective of market conditions and a good indicator of expected volatility. Prior to the adoption of SFAS No. 123(R), we also used historical volatility in deriving the expected volatility assumption. In November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” (“FSP 123R-3”). We have elected not to adopt the alternative transition method provided in the FSP 123R-3 for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123(R). We followed paragraph 81 of SFAS No. 123(R) to calculate the initial pool of excess tax benefits and to determine the subsequent impact on the Additional Paid-In-Capital (“APIC”) pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123(R). See Notes 3 and 11 to Consolidated Financial Statements for a detailed description. Additionally, the Company has restated the pro forma expense under Statement of Financial
50
Accounting Standards (“SFAS”) No. 123 in Note 2 of the Notes to Consolidated Financial Statements of this Form 10-K to reflect the impact of the restatement adjustments for the years ended December 31, 2005 and 2004.
· We are subject to the possibility of losses from various contingencies. Considerable judgment is necessary to estimate the probability and amount of any loss from such contingencies. An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. We accrue a liability and charge operations for the estimated costs expected to be incurred over the next twelve months of adjudication or settlement of asserted and unasserted claims existing as of the balance sheet date. See Note 9 to Consolidated Financial Statements, “Commitments and Contingencies,” for a detailed description.
· 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. Realization of deferred tax assets is based on our ability to generate sufficient future taxable income. The valuation allowance was determined in accordance with the provisions of SFAS No. 109 which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction by jurisdiction basis. Historical operating losses and continuing business uncertainty represent sufficient negative evidence which it was difficult for positive evidence to overcome under SFAS No. 109 and accordingly, a full valuation allowance was recorded. If the facts or estimates of future financial results were to change, increasing the likelihood of realizing the deferred tax assets, judgment would have to be applied to determine the amount of valuation allowance required in any given period. We intend to maintain a full valuation allowance until sufficient positive evidence exists to support reversal of the valuation allowance.
· With respect to mergers and acquisitions, we assess the technological feasibility of in process research and development projects and determine the number of alternative future uses for the technology being developed. To the extent there are no alternative future uses we allocate a portion of the purchase price to in-process research and development expense. This expense is generally estimated based upon the projected fair value of the technology, as determined by a discounted future cash flow reduced by the cost to complete. This analysis includes certain estimates and assumptions made by management. For larger acquisitions, we have historically engaged an external appraiser to assist with the assumptions and models used in this analysis.
51
The following table sets forth certain consolidated statement of operations data as a percentage of total revenues for the periods indicated and percentage changes from period to period:
|
| Years ended December 31, |
| Percentage change |
| ||||||||||||||
|
|
|
|
|
|
|
| 2006 to |
| 2005 to |
| ||||||||
|
| 2006 |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||||||
|
|
|
| (restated) |
| (restated) |
| (restated) |
| (restated) |
| ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware product revenues |
| 81.5 | % |
| 85.8 | % |
|
| 83.3 | % |
|
| 18.9 | % |
|
| 7.6 | % |
|
Software and other revenues |
| 11.3 | % |
| 14.2 | % |
|
| 16.7 | % |
|
| 0.1 | % |
|
| (11.0 | )% |
|
License revenues related to litigation settlement |
| 7.2 | % |
| — |
|
|
| — |
|
|
| * |
|
|
| * |
|
|
Total revenues |
| 100.0 | % |
| 100.0 | % |
|
| 100.0 | % |
|
| 25.3 | % |
|
| 4.5 | % |
|
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of hardware product revenues |
| 45.6 | % |
| 47.0 | % |
|
| 59.8 | % |
|
| 21.5 | % |
|
| (17.8 | )% |
|
Research and development |
| 20.0 | % |
| 22.7 | % |
|
| 21.6 | % |
|
| 10.3 | % |
|
| 9.8 | % |
|
Selling, general and administrative |
| 22.1 | % |
| 24.1 | % |
|
| 17.4 | % |
|
| 15.4 | % |
|
| 43.8 | % |
|
Amortization of intangible assets |
| 10.1 | % |
| 12.7 | % |
|
| 12.0 | % |
|
| (0.4 | )% |
|
| 10.8 | % |
|
Amortization of stock-based compensation resulting from business combinations |
| — |
|
| 0.4 | % |
|
| 1.1 | % |
|
| * |
|
|
| (61.8 | )% |
|
Restructuring expense |
| — |
|
| — |
|
|
| 0.2 | % |
|
| * |
|
|
| * |
|
|
In-process research and development |
| — |
|
| 0.7 | % |
|
| — |
|
|
| * |
|
|
| * |
|
|
Total costs and expenses |
| 97.8 | % |
| 107.6 | % |
|
| 112.1 | % |
|
| 14.0 | % |
|
| 0.2 | % |
|
Operating income (loss) |
| 2.2 | % |
| (7.6 | )% |
|
| (12.1 | )% |
|
| * |
|
|
| (34.7 | )% |
|
Interest income |
| 2.2 | % |
| 0.7 | % |
|
| 0.1 | % |
|
| 326.4 | % |
|
| 885.9 | % |
|
Other income (loss), net |
| 0.1 | % |
| (0.2 | )% |
|
| (0.3 | )% |
|
| * |
|
|
| * |
|
|
Income (loss) before income taxes |
| 4.5 | % |
| (7.1 | )% |
|
| (12.3 | )% |
|
| * |
|
|
| (40.1 | )% |
|
Provision for income taxes |
| 1.2 | % |
| 0.6 | % |
|
| 0.4 | % |
|
| 144.6 | % |
|
| 53.0 | % |
|
Net income (loss) |
| 3.3 | % |
| (7.7 | )% |
|
| (12.7 | )% |
|
| * |
|
|
| (37.1 | )% |
|
Supplemental Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross margin |
| 44.0 | % |
| 45.2 | % |
|
| 28.3 | % |
|
| 15.7 | % |
|
| 71.9 | % |
|
(*) not meaningful
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Total revenues increased by $100.0 million, or 25.3%, to $495.8 million in 2006 from $395.8 million in 2005. This increase was a result of a $110.2 million increase in Consumer segment revenues, partially offset by a $10.2 million decrease in the Imaging segment. Within the Consumer segment, license revenues related to the litigation settlement accounted for $35.8 million of the increase while the remaining increase was primarily a result of increase in hardware product revenues of $73.5 million. The decrease in Imaging segment revenues in 2006 was primarily due to a $9.3 million decrease in hardware product revenues due to decrease in unit shipments.
Hardware product revenues increased by $64.2 million, or 18.9%, to $403.7 million in 2006 from $339.5 million in 2005. The increase in hardware product revenues was driven by growth in Consumer segment product revenues. Within the Consumer segment, hardware product revenues increased primarily due to a $46.9 million increase in the Mobile product line and $31.0 million increase in the DTV product line, in each case driven by increased unit shipments offset by a reduction of $4.5 million in the DVD product line attributable to reductions in unit shipments and average selling prices.
52
Software and other revenues remained essentially unchanged at $56.3 million and $56.2 million in 2006 and 2005, respectively.
Cost of Hardware Product Revenues
Cost of hardware product revenues were $226.3 million in 2006 compared to $186.2 million in 2005. The increase in costs was primarily a result of the corresponding increase in hardware product revenues. As a percentage of hardware product revenues, hardware product costs were 56.0% in 2006 compared to 54.8% in 2005. Hardware product costs for 2005 included adjustments resulting in a $9.4 million decrease in inventory. Excluding the benefit of the net reduction in the inventory allowance, hardware product costs as a percentage of hardware product revenues would have been 57.6 % in 2005 with no significant change in 2006. The decrease in hardware product costs as a percentage of hardware product revenues in 2006 to 56.0% compared to the adjusted costs of 57.6% in 2005 reflected a change in product mix as revenues from the lower margin DVD product line represented a smaller proportion of total hardware product revenue with a relative increase in revenue from the higher margin Mobile and DTV product lines.
Research and Development
Research and development (“R&D”) expenses increased to $99.1 million in 2006 from $89.8 million in 2005, an increase of 10.3%. The increase in 2006 was primarily due to stock-based compensation expenses of $5.5 million recorded in 2006 as a result of the adoption of SFAS No. 123(R), compared with stock-based compensation expense of $0.8 million in 2005 prior to the adoption of SFAS No. 123(R); the inclusion of the operations of Oren which was acquired in June 2005 for the full year in 2006 as well as continued investments in research and development across all of our segments.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses increased to $109.8 million in 2006 from $95.2 million in 2005, representing a 15.4% increase. This increase was primarily due to stock-based compensation expenses of $11.3 million recorded in 2006 as a result of the adoption of SFAS No. 123(R), compared with stock-based compensation expense of $1.7 million in 2005 prior to the adoption of SFAS No. 123(R); $5.8 million of expenses in connection with the ongoing stock option review, continued increases in marketing and field application support expenses to support revenue growth in our Asia Pacific markets and the inclusion of the operations of Oren which was acquired in June 2005 for the full year in 2006. This increase was partially offset by the reduction of legal fees as a result of the completion of the Mediatek litigation.
Amortization of Intangible Assets
Amortization of intangible assets decreased to $50.1 million in 2006 from $50.3 million in 2005. At December 31, 2006, we had approximately $69.2 million in net intangible assets acquired through the Oak, Emblaze and Oren acquisitions which we will continue to amortize on a straight line basis for various periods extending through 2010.
Amortization of Stock-Based Compensation Resulting from Business Combinations
As a result of the adoption of SFAS No. 123(R) during the first quarter of 2006, we now record a charge for all stock-based compensation expenses as described in Note 3 to Notes to Consolidated Financial Statements and no longer record a separate charge for amortization of stock-based compensation resulting from business combinations. In 2005, we recorded charges of $1.5 million related to the amortization of amortization of stock-based compensation resulting from business combinations primarily as a result of stock options granted in connection with the Oak acquisition.
53
In-Process Research and Development
There were no charges recorded for in-process research and development during 2006. In 2005, approximately $2.7 million of the purchase price of Oren Semiconductor, Inc. was allocated to in-process research and development for projects which had not reached technical feasibility and had no alternative future use. Accordingly, this amount was immediately expensed upon the acquisition date. This amount was determined using management’s estimates including consultation with an independent appraiser. At December 31, 2006, there have been no material variations from the underlying assumptions that were used in the original computation of the value of the acquired in-process research and development.
Interest Income
Interest income increased by $8.5 million to $11.1 million in 2006 compared to $2.6 million in 2005. The increase was a result of higher average cash and short term investment balances and the higher interest rates during 2006.
Provision for Income Taxes
Our effective tax rate differs from the U.S. statutory rate primarily due to utilization of previously unbenefitted net operating losses (“NOLs”) and State of Israel tax benefits on foreign earnings. The provision is primarily due to domestic income offset by previously unbenefitted purchased NOLs which when utilized reduce goodwill and not tax expense. For the year ended December 31, 2006, the Company reduced its income tax reserves by $2.1 million. This was due to an expiring statute of limitations and the settlement of a domestic income tax audit.
Realization of deferred tax assets is based on our ability to generate sufficient future taxable income. The valuation allowance was determined in accordance with the provisions of SFAS No. 109, which requires an assessment of both positive and negative evidence on a jurisdiction by jurisdiction basis when determining whether it is more likely than not that deferred tax assets are recoverable. Historical operating losses and continuing business uncertainty represent sufficient negative evidence which it was difficult for positive evidence to overcome under SFAS No. 109 and accordingly, a full valuation allowance was recorded. If the facts or estimates of future financial results were to change, increasing the likelihood of realizing the deferred tax assets, judgment would have to be applied to determine the amount of valuation allowance required in any given period. We intend to maintain a full valuation allowance until sufficient positive evidence exists to support reversal of the valuation allowance.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Revenues
Total revenues increased by $16.9 million, or 4.5%, to $395.8 million in 2005 from $378.9 million in 2004. This increase was a result of a $16.2 million increase in Consumer segment revenues and a $0.7 million increase in Imaging segment revenues. Within the Consumer segment, the increase in revenues was primarily as a result of increase in hardware product revenues.
Hardware product revenues increased by $23.8 million, or 7.6%, to $339.5 million in 2005 from $315.7 million in 2004. The increase in hardware product revenues was driven by growth in Consumer segment product revenues by $20.5 million and Imaging segment product revenues by $3.3 million. Within the Consumer segment, hardware product revenues increased primarily due to revenue increases of $75.8 million in the Mobile product line, $17.5 million in the DTV product line, in each case driven by increased unit shipments. These increases were partially offset by a decrease of $72.8 million in the DVD product line due to reduced unit shipments. The increase in Imaging segment revenues was due to increase in unit shipments.
54
Software and other revenues decreased by $6.9 million, or 11.0%, to $56.2 million in 2005 from $63.2 million in 2004. The decrease in software and other revenues primarily resulted from decreases of $4.3 million in the Consumer segment and $2.6 million in the Imaging segment revenues. Within the Consumer segment, software and other revenues decreased by $6.3 million in the DVD product line and $2.3 million in the Mobile product line, partially offset by an increase of $4.3 million in the DTV segment. These changes were primarily due to the timing of new agreements.
Cost of Hardware Product Revenues
Cost of hardware product revenues was $186.2 million in 2005 compared to $226.5 million in 2004. This decrease in the cost of hardware product revenues was mainly due to lower unit costs primarily due to changes in product mix. In addition, part of the unit cost reduction was due to charges recorded in 2004 for inventory write-downs of $14.7 million coupled with the reduction in our inventory allowances of $9.4 million in 2005 as a result of the sale or disposal of inventory that had been fully written down in 2004. Most of the inventory write-downs in 2004, as well as the sale of previously written down inventory in 2005, primarily related to our DVD Vaddis 6 product and a companion chip. The revenue recorded in 2005 associated with the sale of these previously written down products was approximately $18.5 million. Partially offsetting these reductions in unit costs was an increase associated with increased unit shipments, primarily in the Mobile product line. As a percentage of hardware product revenues, hardware product costs were 54.8% in 2005 compared to 71.7% in 2004. The decrease in hardware product costs as a percentage of hardware product revenues was primarily due to a change in product mix to a lower percentage of DVD products which generally have higher product costs as a percentage of hardware product revenues than Mobile and DTV products. The inventory write down charges in 2004 coupled with the reduction in inventory allowances also contributed to the reduction in hardware product costs as a percentage of hardware product revenues.
Research and Development
Research and development (“R&D”) expenses increased to $89.8 million in 2005 from $81.8 million in 2004, an increase of 9.8%. This increase was driven primarily by the acquisition of Oren Semiconductor, Inc. in June 2005 and inclusion of Emblaze operations acquired in July 2004 for the full year in 2005. R&D expense included increased stock-based compensation expense of $0.8 million in 2005, compared with a benefit (credit) of $0.5 million in 2004. Actual R&D expenses in 2004 were offset in part by $1.5 million of research grants received from the Chief Scientist in Israel. We did not receive any such grants in 2005. These grants are provided by the Israeli government to fund specific R&D projects. We are not obligated to repay the grants; however, future royalties may be owed to the government if the R&D activities result in commercial product sales. We remain committed to investing in research and development to enhance our technology and development capabilities.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses increased to $95.2 million in 2005 from $66.2 million in 2004, representing a 43.8% increase. This increase was primarily due to increase in legal fees by $8.4 million related to our patent litigation with Mediatek, Inc., continued increases in marketing and field application support expenses to support revenue growth in our Asia Pacific markets, an increase in the allowance for doubtful accounts receivable by $4.8 million to cover slow paying accounts and potential risk with increasing business in certain regions of the world and the inclusion of the Oren and Emblaze operations in 2005. Selling, general and administrative expense included increased stock-based compensation expense of $1.8 million in 2005, compared with a benefit of $1.0 million in 2004.
55
Amortization of Intangible Assets
Amortization of intangible assets increased to $50.3 million in 2005 from $45.4 million in 2004, an increase of 10.8%. This increase was the result of amortization of approximately $24.2 million of intangible assets acquired in the Emblaze acquisition in July 2004 for the full year in 2005 and amortization of $9.1 million of intangible assets acquired in the Oren acquisition in June 2005. At December 31, 2005, we had approximately $119.2 million in net intangible assets acquired through the Oak, Emblaze and Oren acquisitions which we will continue to amortize on a straight line basis for various periods extending through 2010.
Amortization of Stock-Based Compensation Resulting from Business Combinations
Amortization of stock-based compensation resulting from business combinations was recorded primarily as a result of stock options granted in connection with the Oak acquisition. For the year ended December 31, 2005, these charges were $1.5 million compared to $4.1 million during the prior year. The 61.8 % decrease for fiscal 2005 was due to the cancellation of options held by employees who terminated their employment during the year and the lower amortization associated with the graded vesting under the FIN 28 model.
Restructuring Expense
There were no charges recorded for restructuring expenses during 2005. During the year ended December 31, 2004, we recorded restructuring charges of $746,000 due to the discontinuation of the Sensor product line of the Mobile group. This charge included $523,000 related to the reduction in force of 15 employees for severance and other termination expenses, $173,000 for lease losses on abandoned office space and other miscellaneous legal and consulting fees of approximately $50,000. The remaining accrual balance at December 31, 2005 of $73,000 relating to facilities will be paid over the lease term through June 2007.
In-Process Research and Development
In 2005, approximately $2.7 million of the purchase price of Oren Semiconductor, Inc. was allocated to in-process research and development for projects which had not reached technical feasibility and had no alternative future use. Accordingly, this amount was immediately expensed upon the acquisition date. This amount was determined using management’s estimates including consultation with an independent appraiser. The value of in-process research and development was determined using the multi-period excess earnings method by estimating the expected net cash flows from the projects once commercially viable and discounting the net cash flows back to their present value using a discount rate of 21%. This rate was based on the industry segment for the technology, nature of the products to be developed, length of time to complete the project and overall maturity and history of the development team. The net cash flows from the identified projects were based on estimates of revenue, cost of revenue, research and development expenses, selling general and administrative expenses, and applicable income taxes. These estimates did not take into account any potential synergies that could be realized as a result of the acquisition. At December 31, 2005, there have been no material variations from the underlying assumptions that were used in the original computation of the value of the acquired in-process research and development. There were no charges recorded for in-process research and development during 2004.
Interest Income
Interest income increased by $2.3 million to $2.6 million in 2005 compared to $0.3 million in 2004. The increase was a result of the higher interest rates during 2005.
56
Provision for Income Taxes
Our effective tax rate differs from the U.S. statutory rate primarily due to utilization of previously unbenefitted net operating losses and State of Israel tax benefits on foreign earnings. The provision is primarily due to domestic income offset by previously unbenefitted purchased NOLs which when utilized reduce goodwill and not tax expense.
Liquidity and Capital Resources
At December 31, 2006, we had $100.0 million of cash and cash equivalents, $196.2 million of short-term investments and $314.8 million of working capital.
Our operating activities generated cash of $101.5 million during 2006, primarily due to net income of $16.3 million adjusted for non-cash items such as amortization of $50.1 million, depreciation of $9.4 million and stock based compensation expense of $17.3 million. Cash provided by operations also increased due to a net decrease of $27.6 million in accounts receivable due to the timing of collections. These increases were partially offset by a $12.4 million increase in inventories to meet the increasing demand for our products, net decrease in accounts payable, accrued expenses and other liabilities, goodwill and other long term liabilities totaling $4.8 million and a $2.0 million increase in prepaid expenses and other assets.
Cash used in investing activities was $132.6 million during 2006, principally reflecting the net purchase of investments of $123.6 million. In addition we spent $9.0 million for purchases of property and equipment.
Cash provided by financing activities during 2006 was $52.3 million consisting of proceeds received from issuances of common stock through exercises of employee stock options and proceeds from the sale of stock under our employee stock purchase plan.
Our operating activities generated cash of $51.2 million during 2005, primarily due to non-cash items such as amortization of $50.4 million, depreciation of $10.3 million, in process research and development expense of $2.7 million and stock based compensation of $4.5 million which offset our net loss of $30.3 million. Cash provided by operations also increased due to decreases of $17.6 million in net inventory primarily associated with our DVD product line due to reduction in supply chain inventory, $0.5 million in prepaid expenses and other assets and increases in accounts payable, accrued expenses and other liabilities, goodwill and other long term liabilities totaling $5.4 million which were partially offset by a $9.9 million increase in net accounts receivable due to higher revenues recorded in the fourth quarter of 2005 compared to the same period of 2004.
Cash used in investing activities was $19.2 million during 2005, principally reflecting the use of $27.6 million in the acquisition of Oren Semiconductor, Inc, partially offset by $16.8 million of net proceeds from sales and maturities of investments. In addition we spent $8.5 million for property and equipment.
Cash provided by financing activities was $9.5 million during 2005 and consisted of proceeds received from issuances of common stock through exercises of employee stock options and employee stock purchase programs.
57
Off Balance Sheet Arrangements
At December 31, 2006 and 2005, 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.
The following is a summary of fixed payments related to certain contractual obligations (in thousands):
Contractual Obligation |
|
|
| Total |
| 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| Thereafter |
| |||||||||
Operating leases and license commitments |
| $ | 39,566 |
| $ | 10,188 |
| $ | 3,819 |
| $ | 3,345 |
| $ | 3,211 |
| $ | 3,108 |
|
| $ | 15,895 |
|
| ||
Purchase commitments |
| 58,930 |
| 58,930 |
| — |
| — |
| — |
| — |
|
| — |
|
| |||||||||
Total |
| $ | 98,496 |
| $ | 69,118 |
| $ | 3,819 |
| $ | 3,345 |
| $ | 3,211 |
| $ | 3,108 |
|
| $ | 15,895 |
|
|
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 the next 12 months. 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 additional 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
58
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.
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. As a result, we bear the risk that the rate of inflation in Israel or the decline in the value of United States dollar compared to the New Israeli Shekel will increase our costs as expressed in United States dollars. 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, 2006, a near-term 10% appreciation or depreciation of the New Israeli Shekel would have an immaterial affect on our financial condition.
59
Item 8—Financial Statements and Supplemental Data
Index to Consolidated Financial Statements
60
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Zoran Corporation:
We have completed integrated audits of Zoran Corporation’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying 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, 2006 and December 31, 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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.
As discussed in Note 2 to the Consolidated Financial Statements, the Company has restated its fiscal 2005 and fiscal 2004 consolidated financial statements.
As discussed in Note 3 to the Consolidated Financial Statements, the Company changed the manner in which it accounts for share-based compensation in fiscal 2006.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
61
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
San Jose, California
April 19, 2007
62
ZORAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| December 31, |
| December 31, |
| |||||||
|
|
|
| (restated)(1) |
| ||||||
ASSETS |
|
|
|
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
|
|
|
| ||
Cash and cash equivalents |
|
| $ | 100,034 |
|
|
| $ | 78,856 |
|
|
Short-term investments |
|
| 196,195 |
|
|
| 70,490 |
|
| ||
Accounts receivable, net of allowance for doubtful accounts of $9,265 and $6,180, respectively |
|
| 42,640 |
|
|
| 70,174 |
|
| ||
Inventory |
|
| 45,044 |
|
|
| 32,616 |
|
| ||
Prepaid expenses and other current assets |
|
| 10,726 |
|
|
| 11,746 |
|
| ||
Total current assets |
|
| 394,639 |
|
|
| 263,882 |
|
| ||
Property and equipment, net |
|
| 15,673 |
|
|
| 16,057 |
|
| ||
Other assets and investments |
|
| 22,890 |
|
|
| 20,799 |
|
| ||
Goodwill |
|
| 174,259 |
|
|
| 182,662 |
|
| ||
Intangible assets, net |
|
| 69,169 |
|
|
| 119,231 |
|
| ||
|
|
| $ | 676,630 |
|
|
| $ | 602,631 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
|
|
|
| ||
Accounts payable |
|
| $ | 33,767 |
|
|
| $ | 38,999 |
|
|
Accrued expenses and other liabilities |
|
| 46,082 |
|
|
| 54,769 |
|
| ||
Total current liabilities |
|
| 79,849 |
|
|
| 93,768 |
|
| ||
Other long-term liabilities |
|
| 12,784 |
|
|
| 11,939 |
|
| ||
Commitments and contingencies (Note 9) |
|
|
|
|
|
|
|
|
| ||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
| ||
Common stock, $0.001 par value; 105,000,000 shares authorized at December 31, 2006 and December 31, 2005; 49,433,780 shares issued and outstanding as of December 31, 2006; and 45,426,912 shares issued and outstanding as of December 31, 2005 |
|
| 49 |
|
|
| 45 |
|
| ||
Additional paid-in capital |
|
| 807,220 |
|
|
| 738,253 |
|
| ||
Deferred stock-based compensation |
|
| — |
|
|
| (593 | ) |
| ||
Accumulated other comprehensive income |
|
| 4,238 |
|
|
| 3,057 |
|
| ||
Accumulated deficit |
|
| (227,510 | ) |
|
| (243,838 | ) |
| ||
Total stockholders’ equity |
|
| 583,997 |
|
|
| 496,924 |
|
| ||
|
|
| $ | 676,630 |
|
|
| $ | 602,631 |
|
|
(1) See Note 2, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements.
63
ZORAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
| Year Ended December 31, |
| |||||||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||||||
|
|
|
| (restated)(1) |
| (restated)(1) |
| |||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
| |||
Hardware product revenues |
| $ | 403,744 |
|
| $ | 339,539 |
|
|
| $ | 315,697 |
|
|
Software and other revenues |
| 56,269 |
|
| 56,219 |
|
|
| 63,167 |
|
| |||
License revenues related to litigation settlement |
| 35,792 |
|
| — |
|
|
| — |
|
| |||
Total revenues |
| $ | 495,805 |
|
| $ | 395,758 |
|
|
| $ | 378,864 |
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
| |||
Cost of hardware product revenues |
| 226,260 |
|
| 186,172 |
|
|
| 226,461 |
|
| |||
Research and development |
| 99,102 |
|
| 89,809 |
|
|
| 81,820 |
|
| |||
Selling, general and administrative |
| 109,825 |
|
| 95,206 |
|
|
| 66,195 |
|
| |||
Amortization of intangible assets |
| 50,062 |
|
| 50,254 |
|
|
| 45,358 |
|
| |||
Amortization of stock-based compensation resulting from business combinations |
| — |
|
| 1,546 |
|
|
| 4,051 |
|
| |||
Restructuring expense |
| — |
|
| — |
|
|
| 746 |
|
| |||
In-process research and development |
| — |
|
| 2,650 |
|
|
| — |
|
| |||
Total costs and expenses |
| 485,249 |
|
| 425,637 |
|
|
| 424,631 |
|
| |||
Operating income (loss) |
| 10,556 |
|
| (29,879 | ) |
|
| (45,767 | ) |
| |||
Interest income |
| 11,057 |
|
| 2,593 |
|
|
| 263 |
|
| |||
Other income (loss), net |
| 477 |
|
| (630 | ) |
|
| (1,064 | ) |
| |||
Income (loss) before income taxes |
| 22,090 |
|
| (27,916 | ) |
|
| (46,568 | ) |
| |||
Provision for income taxes |
| 5,762 |
|
| 2,356 |
|
|
| 1,540 |
|
| |||
Net income (loss) |
| $ | 16,328 |
|
| $ | (30,272 | ) |
|
| $ | (48,108 | ) |
|
Basic net income (loss) per share |
| $ | 0.34 |
|
| $ | (0.68 | ) |
|
| $ | (1.12 | ) |
|
Diluted net income (loss) per share |
| $ | 0.33 |
|
| $ | (0.68 | ) |
|
| $ | (1.12 | ) |
|
Shares used to compute basic net income (loss) per share |
| 48,353 |
|
| 44,267 |
|
|
| 42,788 |
|
| |||
Shares used to compute diluted net income (loss) per share |
| 50,099 |
|
| 44,267 |
|
|
| 42,788 |
|
|
(1) See Note 2, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements.
64
ZORAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
|
|
|
| Additional |
| Deferred |
| Accumulated |
|
|
|
|
| ||||||||||||||||||||
|
| Common Stock |
| Paid-In |
| Stock-Based |
| Income |
| Accumulated |
|
|
| ||||||||||||||||||||
|
| Shares |
| Amount |
| Capital |
| Compensation |
| (Loss) |
| Deficit |
| Total |
| ||||||||||||||||||
Balance at December 31, 2003, as reported |
|
| 42,348 |
|
|
| $ | 42 |
|
|
| $ | 703,812 |
|
|
| $ | (13,014 | ) |
|
| $ | (91 | ) |
|
| $ | (156,470 | ) |
| $ | 534,279 |
|
Cumulative effect of restatements on prior years |
|
| — |
|
|
| — |
|
|
| 10,656 |
|
|
| (1,147 | ) |
|
| (1,193 | ) |
|
| (8,988 | ) |
| (672 | ) | ||||||
Balance at December 31, 2003, as restated (1) |
|
| 42,348 |
|
|
| 42 |
|
|
| 714,468 |
|
|
| (14,161 | ) |
|
| (1,284 | ) |
|
| (165,458 | ) |
| 533,607 |
| ||||||
Issuance of common stock |
|
| 847 |
|
|
| 1 |
|
|
| 8,021 |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 8,022 |
| ||||||
Amortization of deferred stock-based compensation, net |
|
| — |
|
|
| — |
|
|
| (6,172 | ) |
|
| 8,747 |
|
|
| — |
|
|
| — |
|
| 2,575 |
| ||||||
Change in unrealized gain (loss) on securities available for sale |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,673 |
|
|
| — |
|
| 2,673 |
| ||||||
Net loss, as restated |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (48,108 | ) |
| (48,108 | ) | ||||||
Balance at December 31, 2004, as restated (1) |
|
| 43,195 |
|
|
| 43 |
|
|
| 716,317 |
|
|
| (5,414 | ) |
|
| 1,389 |
|
|
| (213,566 | ) |
| 498,769 |
| ||||||
Issuance of common stock |
|
| 1,044 |
|
|
| 1 |
|
|
| 9,487 |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 9,488 |
| ||||||
Issuance of common stock in conjunction with the acquisition of Oren Semiconductor, Inc., net of issuance costs of $89 |
|
| 1,188 |
|
|
| 1 |
|
|
| 12,815 |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 12,816 |
| ||||||
Amortization of deferred stock-based compensation, net |
|
| — |
|
|
| — |
|
|
| (366 | ) |
|
| 4,821 |
|
|
| — |
|
|
| — |
|
| 4,455 |
| ||||||
Change in unrealized gain (loss) on securities available for sale |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,668 |
|
|
| — |
|
| 1,668 |
| ||||||
Net loss, as restated |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (30,272 | ) |
| (30,272 | ) | ||||||
Balance at December 31, 2005, as restated (1) |
|
| 45,427 |
|
|
| 45 |
|
|
| 738,253 |
|
|
| (593 | ) |
|
| 3,057 |
|
|
| (243,838 | ) |
| 496,924 |
| ||||||
Issuance of common stock |
|
| 4,007 |
|
|
| 4 |
|
|
| 52,265 |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 52,270 |
| ||||||
Elimination of deferred stock-based compensation upon adoption of SFAS No. 123(R) |
|
| — |
|
|
| — |
|
|
| (593 | ) |
|
| 593 |
|
|
| — |
|
|
| — |
|
| — |
| ||||||
Stock-based compensation, net |
|
| — |
|
|
| — |
|
|
| 17,294 |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 17,294 |
| ||||||
Change in unrealized gain (loss) on securities available for sale |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,181 |
|
|
| — |
|
| 1,181 |
| ||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 16,328 |
|
| 16,328 |
| ||||||
Balance at December 31, 2006 |
|
| 49,434 |
|
|
| $ | 49 |
|
|
| $ | 807,220 |
|
|
| $ | — |
|
|
| $ | 4,238 |
|
|
| $ | (227,510 | ) |
| $ | 583,997 |
|
(1) See Note 2, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements.
65
ZORAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
| Year Ended December 31, |
| |||||||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||||||
|
|
|
| (restated)(1) |
| (restated)(1) |
| |||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | 16,328 |
|
| $ | (30,272 | ) |
|
| $ | (48,108 | ) |
|
Adjustments to reconcile net income(loss) to net cash provided by (used in) operations: |
|
|
|
|
|
|
|
|
|
|
| |||
Depreciation |
| 9,403 |
|
| 10,329 |
|
|
| 9,896 |
|
| |||
Amortization |
| 50,062 |
|
| 50,366 |
|
|
| 45,358 |
|
| |||
Stock based compensation expense |
| 17,294 |
|
| 4,455 |
|
|
| 2,575 |
|
| |||
In-process research and development |
| — |
|
| 2,650 |
|
|
| — |
|
| |||
Provision for doubtful accounts |
| 3,085 |
|
| 4,771 |
|
|
| 175 |
|
| |||
Write-down of inventory |
| — |
|
| — |
|
|
| 14,680 |
|
| |||
Changes in assets and liabilities, net of effect of acquisitions: |
|
|
|
|
|
|
|
|
|
|
| |||
Accounts receivable |
| 24,449 |
|
| (14,706 | ) |
|
| 5,188 |
|
| |||
Inventory |
| (12,428 | ) |
| 17,630 |
|
|
| (47,022 | ) |
| |||
Prepaid expenses and other current assets and other assets |
| (2,034 | ) |
| 464 |
|
|
| (7,048 | ) |
| |||
Accounts payable |
| (5,233 | ) |
| 4,437 |
|
|
| 4,595 |
|
| |||
Accrued expenses and other liabilities, goodwill and other long term liabilities |
| 562 |
|
| 1,029 |
|
|
| 2,391 |
|
| |||
Net cash provided by (used in) operating activities |
| 101,488 |
|
| 51,153 |
|
|
| (17,320 | ) |
| |||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
| |||
Purchases of property and equipment |
| (8,997 | ) |
| (8,492 | ) |
|
| (7,165 | ) |
| |||
Proceeds from sale of property and equipment |
| — |
|
| — |
|
|
| 978 |
|
| |||
Purchases of investments |
| (356,339 | ) |
| (43,576 | ) |
|
| (116,165 | ) |
| |||
Proceeds from sales and maturities of investments |
| 232,756 |
|
| 60,415 |
|
|
| 175,252 |
|
| |||
Acquisition of Emblaze, net of cash acquired |
| — |
|
| — |
|
|
| (54,161 | ) |
| |||
Acquisition of Oren Semiconductor, Inc., net of cash acquired |
| — |
|
| (27,567 | ) |
|
| — |
|
| |||
Net cash used in investing activities |
| (132,580 | ) |
| (19,220 | ) |
|
| (1,261 | ) |
| |||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
| |||
Proceeds from issuance of common stock |
| 52,270 |
|
| 9,488 |
|
|
| 8,022 |
|
| |||
Net cash provided by financing activities |
| 52,270 |
|
| 9,488 |
|
|
| 8,022 |
|
| |||
Net increase (decrease) in cash and cash equivalents |
| 21,178 |
|
| 41,421 |
|
|
| (10,559 | ) |
| |||
Cash and cash equivalents at beginning of period |
| 78,856 |
|
| 37,435 |
|
|
| 47,994 |
|
| |||
Cash and cash equivalents at end of period |
| $ | 100,034 |
|
| $ | 78,856 |
|
|
| $ | 37,435 |
|
|
Supplemental information: |
|
|
|
|
|
|
|
|
|
|
| |||
Fair value of stock issued in Oren acquisition, net of issuance costs of $89 |
| $ | — |
|
| $ | 12,816 |
|
|
| $ | — |
|
|
(1) See Note 2, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements.
66
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, digital television applications and digital imaging products. Current applications incorporating Zoran’s products and IP include digital versatile disc, or DVD, players and recorders, digital cameras, professional and consumer video editing systems, digital speakers and audio systems, applications that enable the delivery and display of digital video content through a set top box or television as well as digital imaging products consisting of semiconductor hardware and software that enable users to print, scan, process and transmit documents to computer peripherals that perform printing functions. The Company operates in two reportable segments, Consumer group which combines the former Digital Versatile Disc (DVD), Digital Television (DTV) and Mobile product groups and Imaging group.
Risk and Uncertainties
Because the markets that the Company’s customers serve are characterized by numerous new product introductions and rapid product enhancements, its operating results may vary significantly from quarter to quarter. During the final production of a mature product, its customers typically exhaust their existing inventories of the Company’s products. Consequently, orders for its products may decline in those circumstances, even if the products are incorporated into both mature products and replacement products. A delay in a customer’s transition to commercial production of a replacement product would delay the Company’s ability to recover the lost sales from the discontinuation of the related mature product. The Company’s customers also experience significant seasonality in the sales of their consumer products, which affects their orders of the Company’s products. Typically, the second half of the calendar year represents a disproportionate percentage of sales for the Company’s customers due to the holiday shopping period for consumer electronics products, and therefore, a disproportionate percentage of the Company’s sales.
Average selling prices for the Company’s products decline over relatively short time periods, while many of its manufacturing costs are fixed. When the Company’s average selling prices decline, its revenues decline unless the Company is able to sell more units, and its gross margins decline unless it is able to reduce its manufacturing costs by a commensurate amount. The Company’s operating results suffer when gross margins decline. The Company has experienced these problems, and the Company expects to continue to experience them in the future.
The Company does not operate any manufacturing facilities, and it relies on independent foundries to manufacture substantially all of its 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. The Company does not have long-term supply contracts with any of its suppliers, including its principal supplier, Taiwan Semiconductor Manufacturing Company, or TSMC. Therefore, TSMC and the Company’s other suppliers are not obligated to manufacture products for the Company for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular purchase order.
The Company anticipates that international sales will continue to account for a substantial majority of its total revenues for the foreseeable future. In addition, substantially all of its semiconductor products are manufactured, assembled and tested outside of the United States by independent foundries and
67
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
subcontractors. The Company is subject to a variety of 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;
· the burdens of complying with a variety of foreign laws; and
· health risks in a particular region.
Economic, political or military events in a country where the Company make significant sales or has significant operations could harm its business.
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—RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
On July 3, 2006, the Company announced that, at the recommendation of the Audit Committee, the Board of Directors had created a special committee of independent directors (“Special Committee”) to conduct a review of our historical stock option practices. As a result of its investigation, the Special Committee found, among other things, that some of the original measurement dates used by the Company for option grants were not adequately supported by contemporaneous records, and therefore the measurement dates used by us for accounting purposes required adjustment. The Special Committee concluded that the evidence did not establish that the errors which it identified resulted from fraud or intentional misconduct by our current senior management.
Based on the Special Committee’s findings and its own review of the facts, the Board of Directors concluded that there was no fraud or intentional misconduct by any current member of senior management. The Board also concluded that it has confidence in the integrity of the Company’s Chief Executive Officer, Dr. Levy Gerzberg, and the Company’s Chief Financial Officer, Mr. Karl Schneider.
Based on information obtained from the Special Committee’s review and additional work undertaken by the Company, management has concluded, and the Audit Committee has agreed, that the Company should restate certain previously filed financial statements, to reflect additional stock-based compensation expense with regard to certain past stock option grants. The corrections made in the restatements relate to options covering approximately 3.6 million shares. These adjustments amounted to an additional stock-based compensation expense of $0.4 million and $2.6 million in 2006 and 2005, respectively, and a reduction of expense of $1.5 million in 2004. There was no tax impact of these additional stock-based compensation expenses due to the full valuation allowance on our tax assets.
68
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In connection with the restatement, the Company is recording additional non-cash adjustments that were previously considered to be immaterial relating to the timing of revenue recognition, accrued expenses, amortization of premiums and discounts on investments, additional expense related to options granted to a consultant and the calculation of amortization of stock-based compensation relating to a business combination in 2003. The Company is also recording losses under Accounting Principles Board Opinion 18 (“APB No. 18”), “The Equity Method of Accounting for Investments in Common Stock,” to record the losses on investment of the prior 17% ownership of Oren Semiconductor, Inc. under the equity method of accounting which was subsequently acquired by Zoran in 2005. These additional adjustments resulted in a cumulative expense of $1.3 million, including $0.2 million of tax expense, for the periods 2000 through 2005.
Through 2005, we applied Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations, and provided the required pro forma disclosures under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” Under APB No. 25, non-cash, stock-based compensation expense was recognized for any option for which the exercise price was below the market price on the actual grant date. Because each of the options identified below (other than those which we have determined should be accounted for variably) was deemed to have an exercise price below the market price on the appropriate measurement date, we should have recognized a charge for each of those options under APB No. 25, in an amount equal to the number of shares covered by such options, multiplied by the difference between the exercise price and the market price on the appropriate measurement date. That expense should have been amortized over the vesting periods of the options. Starting in 2006, we adopted SFAS No. 123(R), “Share-Based Payment.” As a result, for 2006, the additional stock-based compensation expense required to be recorded for each of the options identified below was equal to the incremental fair value of those options on the appropriate measurement date over the remaining vesting periods of those options. We did not record such stock-based compensation expenses under APB No. 25 or SFAS No. 123(R) in our previously issued financial statements, and that is the reason for the restatement in this report. To correct our past accounting for stock options, we recorded additional pre-tax, non-cash, stock-based compensation expense of (a) $11.7 million for the periods 1997 to 2005 under APB No. 25 and (b) the remaining $0.4 million for 2006 under SFAS No. 123(R). The fair value of the options is being recorded using the accelerated amortization method under FIN 28 over the respective vesting periods of the awards.
Consistent with the accounting literature and recent guidance from the Securities and Exchange Commission (“SEC”), the Company has organized the grants with respect to which an accounting adjustment is required into categories based on grant type and process by which the grant was finalized. Based on the relevant facts and circumstances, the Company applied the relevant accounting standards to determine the measurement date for every grant within each category. The Company recorded accounting adjustments as required, resulting in stock-based compensation expense and related tax effects. The Company organized the grants where adjustments were required as follows:
· Company-wide option grants where optionees were added or grant amounts were changed after the option list was complete, or where insufficient contemporaneous documentation of the grant date exists. For seven Company-wide refresh and retention grants made between 1998 and 2003, the Company determined that some employees who were omitted from the option grant list were added to the list after the stated grant date, and that the number of shares covered by option grants to some employees was not finally determined until after the stated grant date. Further, in 2001 and 2002,
69
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
insufficient contemporaneous documentation of the stated grant date existed. As a result of these issues, the Company restated its historical financial statements to increase stock-based compensation expense by approximately $6.3 million, recognized over the vesting periods of the relevant options.
· Re-priced options. In August 2002, after consideration of relevant information, the Compensation Committee rescinded its April 2002 grant, and its June 2002 grant, to executives and other key employees. The Company thereafter reissued the grants in August 2002. At the time, in consultation with our external advisors, we determined that these transactions did not require variable accounting. As a result of the Special Committee review of our historical stock option practices, we have reassessed the circumstances surrounding these transactions with our external advisors and have determined that the grants should have been accounted for variably. As a result, the Company restated its historical financial statements to increase stock-based compensation expense by a cumulative net amount of approximately $3.8 million, recognized over the vesting periods of these options.
· Acquisition-related options. The Company determined a grant given to retain employees hired in connection with an acquisition in October 2000 should have been accounted for variably. As a result, the Company restated its historical financial statements to increase stock-based compensation expense by approximately $0.3 million, recognized over the vesting periods of these options.
· Improper measurement dates for non-refresh stock option grants. The Company revised the measurement dates for certain grants made to new hires and for promotional and other miscellaneous non-refresh grants made between 1997 and 2003 as a result of approvals that were obtained subsequent to the stated grant dates or as a result of administrative delays or errors and a small number of stock option grants to non-executives that were determined to have been established retrospectively. As a result, the Company restated its historical financial statements to increase stock-based compensation expense by approximately $1.3 million, recognized over the vesting periods of these options.
In the aggregate, we have recorded additional stock-based compensation expense for the periods 1997 through 2005 of approximately $11.7 million on stock option grants made from 1997 through 2003.
70
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The incremental impact from recognizing stock-based compensation expense resulting from the investigation of past stock option grants is as follows (dollars in thousands):
|
| Expense |
| |
Fiscal Year |
|
|
| |
1997 |
| $ | 190 |
|
1998 |
| 223 |
| |
1999 |
| 123 |
| |
2000 |
| 120 |
| |
2001 |
| 1,385 |
| |
2002 |
| 3,182 |
| |
2003 |
| 5,299 |
| |
Cumulative effect at December 31, 2003 |
| 10,522 |
| |
2004 |
| (1,476 | ) | |
2005 |
| 2,623 |
| |
|
| $ | 11,669 |
|
The cumulative effect of all of the restatements through December 31, 2003 increased additional paid-in capital by $10.7 million from $703.8 million to $714.5 million, increased accumulated deficit by $9.0 million from $156.4 million to $165.4 million, and decreased total stockholders’ equity by $0.7 million from $534.3 million to $533.6 million. All the restatements of financial statements, financial data and related disclosures described in this report are collectively referred to in this report as the “restatements.”
In December 2006, the Company amended options to purchase approximately 218,000 shares of common stock held by Dr. Gerzberg and Mr. Schneider to increase the exercise price of those options to the fair market value of the Company’s common stock on the revised measurement date so that these options are no longer subject to a penalty tax under IRC Section 409A.
We have not amended, and we do not intend to amend, any of our previously filed Annual Reports on Form 10-K. We have amended our Quarterly Report for the period ended March 31, 2006 concurrent with the filing of our Annual Report on Form 10-K, and we do not intend to amend any of our other previously filed Quarterly Reports on Form 10-Q for the periods affected by the restatements. We present restated quarterly financial information for each of the quarters in 2006 and 2005 in “Selected Quarterly Financial Information (Unaudited)” included in this report.
The impact of the restatements on the interim periods of each of the first three quarters of 2006 and each of the quarters of 2005 are disclosed in “Selected Quarterly Financial Information (Unaudited)” included in this report.
71
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Restatement and Impact on Financial Statements
The income statement impacts of the restatements are as follows (in thousands):
|
| Cumulative |
| Year Ended |
| Year Ended |
| Cumulative |
| ||||||||||||
Net loss as previously reported |
|
|
|
|
|
| $ | (26,971 | ) |
|
| $ | (47,354 | ) |
|
|
|
|
| ||
Additional compensation (expense) benefit resulting from improper measurement dates for stock option grants, net of tax |
|
| $ | (11,669 | ) |
|
| (2,623 | ) |
|
| 1,476 |
|
|
| $ | (10,522 | ) |
| ||
Other adjustments, net of tax |
|
| (1,374 | ) |
|
| (678 | ) |
|
| (2,230 | ) |
|
| 1,534 |
|
| ||||
Total increase to net loss |
|
| (13,043 | ) |
|
| (3,301 | ) |
|
| (754 | ) |
|
| (8,988 | ) |
| ||||
Net loss, as restated |
|
|
|
|
|
| (30,272 | ) |
|
| (48,108 | ) |
|
|
|
|
| ||||
|
| Year Ended December 31, |
| |||||||||||||||||||
|
| 2003 |
| 2002 |
| 2001 |
| 2000 |
| 1999 |
| 1998 |
| 1997 |
| |||||||
Stock-based employee compensation expense, as previously reported |
| $ | (6,281 | ) | $ | (292 | ) | $ | (544 | ) | $ | (99 | ) | $ | — |
| $ | — |
| $ | — |
|
Additional compensation expense resulting from improper measurement dates for stock option grants |
| (5,299 | ) | (3,182 | ) | (1,385 | ) | (120 | ) | (123 | ) | (223 | ) | (190 | ) | |||||||
Stock-based employee compensation expense, as restated |
| $ | (11,580 | ) | $ | (3,474 | ) | $ | (1,929 | ) | $ | (219 | ) | $ | (123 | ) | $ | (223 | ) | $ | (190 | ) |
In addition, the Company evaluated the impact of the restatements on its global tax provision. The Company and its subsidiaries file tax returns in multiple tax jurisdictions around the world. In certain jurisdictions, including, but not limited to, the United States and Israel, the Company is able to claim a tax deduction relative to stock options. In those jurisdictions, where a tax deduction is claimed, the Company has recorded deferred tax assets relative to the book compensation now recorded on the restated options. As with our other deferred tax assets, the Company recorded a full valuation allowance on all deferred tax assets relating to restated options. The Company also believes that it should not have taken a United States tax deduction of $0.6 million in prior years for stock option related amounts pertaining to certain executives under Internal Revenue Code (IRC) Section 162(m) which limits the deductibility of compensation above certain thresholds. The deferred tax asset and related valuation allowance have been adjusted accordingly. The cumulative tax effect of all components of the restatements for 1997 to 2005 is an increase in tax expense of $200,000.
On February 27, 2007, the Company elected to: (i) participate in the Internal Revenue Service remediation program 2007-18 and pay to the IRS, on behalf of affected and eligible employees (not including executive officers), their IRC 409A tax liabilities and penalties; (ii) participate in any similar remediation program that may be offered by any state for applicable state tax liabilities and penalties; (iii) act directly with any state not offering a similar remediation program to address any applicable tax liabilities and penalties on behalf of employees; and (iv) pay to such employees a “gross-up” payment to offset the associated federal and state income tax consequences. The Company took this action because the vast majority of the holders of stock options issued by the Company that are now subject to re-measurement as a result of the
72
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Company’s option investigation were not involved in or aware of the stock option pricing determination. Employees who exercised such options in 2006, other than executive officers at the time of option grant or entering into this program, will participate in this program. The Company estimates that the total cash payments needed to deal with the adverse tax consequences of previously exercised discount priced options granted to non-officers will be approximately $0.8 million, which is expected to be recorded in 2007.
In addition, the Company may consider taking action to minimize the adverse tax consequences that may be incurred by the holders of unexercised discount options. Discount-priced stock options vesting after December 31, 2004 (“409A Affected Options”) subject U.S. option holders to a penalty tax under IRC Section 409A (and to similar penalty taxes under California and other state tax laws, as applicable). The Company may consider offering to amend the 409A Affected Options held by persons other than directors and executive officers to increase the exercise prices of those options to the market price of our common stock on the revised measurement date. The amended options would not be subject to taxation under IRC Section 409A. Under IRS regulations, the amendments for non-executives cannot be offered until after this Report is filed and do not need to be completed until December 31, 2007. The Company may also consider approving the payment of bonuses to holders of those amended options to compensate them for the resulting increase in their option exercise price. The amount of these bonuses would be effectively repaid to the Company if and when the options are exercised and the increased exercise price is paid (but there is no assurance that the options will be exercised). The Company has not estimated the expense of any such bonus payments.
The restatement adjustments did not affect the Company’s previously reported cash and cash equivalents and investments balances in prior periods. The following presents the effect of the restatement adjustments by financial statement line item for the Consolidated Balance Sheet as of December 31, 2005, Statements of Operations for the years ended December 31, 2005 and 2004 and the Statements of Cash Flows for the years ended December 31, 2005 and 2004 and the SFAS No. 123 pro forma disclosures.
73
ZORAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
| December 31, |
| Adjustments(1) |
| December 31, |
| |||||||||
|
| (As reported) |
|
|
| (As restated) |
| |||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents |
|
| $ | 78,856 |
|
|
| $ | — |
|
|
| $ | 78,856 |
|
|
Short-term investments |
|
| 70,490 |
|
|
| — |
|
|
| 70,490 |
|
| |||
Accounts receivable, net of allowance for doubtful accounts of $6,180 and $1,409, respectively |
|
| 70,174 |
|
|
| — |
|
|
| 70,174 |
|
| |||
Inventory |
|
| 32,616 |
|
|
| — |
|
|
| 32,616 |
|
| |||
Prepaid expenses and other current assets |
|
| 11,746 |
|
|
| — |
|
|
| 11,746 |
|
| |||
Total current assets |
|
| 263,882 |
|
|
| — |
|
|
| 263,882 |
|
| |||
Property and equipment, net |
|
| 16,057 |
|
|
| — |
|
|
| 16,057 |
|
| |||
Other assets and investments |
|
| 20,799 |
|
|
| — |
|
|
| 20,799 |
|
| |||
Goodwill |
|
| 184,254 |
|
|
| (1,592 | ) |
|
| 182,662 |
|
| |||
Intangible assets, net |
|
| 119,231 |
|
|
| — |
|
|
| 119,231 |
|
| |||
|
|
| $ | 604,223 |
|
|
| $ | (1,592 | ) |
|
| $ | 602,631 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Accounts payable |
|
| $ | 38,999 |
|
|
| $ | — |
|
|
| $ | 38,999 |
|
|
Accrued expenses and other liabilities |
|
| 53,937 |
|
|
| 832 |
|
|
| 54,769 |
|
| |||
Total current liabilities |
|
| 92,936 |
|
|
| 832 |
|
|
| 93,768 |
|
| |||
Other long-term liabilities |
|
| 11,939 |
|
|
| — |
|
|
| 11,939 |
|
| |||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Common stock, $0.001 par value; 105,000,000 shares authorized at December 31, 2005 and December 31, 2004; 45,426,912 shares issued and outstanding as of December 31, 2005; and 43,195,432 shares issued and outstanding as of December 31, 2004 |
|
| 45 |
|
|
| — |
|
|
| 45 |
|
| |||
Additional paid-in capital |
|
| 727,597 |
|
|
| 10,656 |
|
|
| 738,253 |
|
| |||
Deferred stock-based compensation |
|
| (593 | ) |
|
| — |
|
|
| (593 | ) |
| |||
Accumulated other comprehensive income |
|
| 3,094 |
|
|
| (37 | ) |
|
| 3,057 |
|
| |||
Accumulated deficit |
|
| (230,795 | ) |
|
| (13,043 | ) |
|
| (243,838 | ) |
| |||
Total stockholders’ equity |
|
| 499,348 |
|
|
| (2,424 | ) |
|
| 496,924 |
|
| |||
|
|
| $ | 604,223 |
|
|
| $ | (1,592 | ) |
|
| $ | 602,631 |
|
|
(1) The restated consolidated balance sheet for the fiscal year ended 2005 reflects a $13.0 million increase to accumulated deficit and a $10.7 million increase to additional paid-in capital primarily due to additional stock-based compensation recorded in connection with this restatement to correct prior year stock option-related accounting errors as described above and to reflect the cumulative impact of other adjustments that were previously considered to be immaterial. The $1.6 million decrease to goodwill is the impact of recording losses associated with our investment in Oren Semiconductor under the equity method of accounting and $0.8 million increase to accrued expenses and other liabilities relates to the accrual of royalty obligations that was previously not recorded at December 31, 2005.
74
ZORAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
| Year Ended December 31, 2005 |
| Year Ended December 31, 2004 |
| ||||||||||||||
|
| As |
| Adjust- |
| As |
| As |
| Adjust- |
| As |
| ||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Hardware product revenues |
| $ | 339,539 |
| $ | — |
| $ | 339,539 |
| $ | 315,697 |
| $ | — |
| $ | 315,697 |
|
Software and other revenues |
| 56,219 |
| — |
| 56,219 |
| 63,167 |
| — |
| 63,167 |
| ||||||
Total revenues |
| 395,758 |
| — |
| 395,758 |
| 378,864 |
| — |
| 378,864 |
| ||||||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cost of hardware product revenues* |
| 185,549 |
| 623 |
| 186,172 |
| 226,235 |
| 226 |
| 226,461 |
| ||||||
Research and development* |
| 89,028 |
| 781 |
| 89,809 |
| 82,245 |
| (425 | ) | 81,820 |
| ||||||
Selling, general and administrative* |
| 93,831 |
| 1,375 |
| 95,206 |
| 67,086 |
| (891 | ) | 66,195 |
| ||||||
Amortization of intangible assets |
| 50,254 |
| — |
| 50,254 |
| 45,358 |
| — |
| 45,358 |
| ||||||
Amortization of stock-based compensation resulting from business combinations |
| 1,546 |
| — |
| 1,546 |
| 4,051 |
| — |
| 4,051 |
| ||||||
Restructuring expense |
| — |
| — |
| — |
| 746 |
| — |
| 746 |
| ||||||
In-process research and development |
| 2,650 |
| — |
| 2,650 |
| — |
| — |
| — |
| ||||||
Total costs and expenses |
| 422,858 |
| 2,779 |
| 425,637 |
| 425,721 |
| (1,090 | ) | 424,631 |
| ||||||
Operating loss |
| (27,100 | ) | (2,779 | ) | (29,879 | ) | (46,857 | ) | 1,090 |
| (45,767 | ) | ||||||
Interest income |
| 2,705 |
| (112 | ) | 2,593 |
| 1,307 |
| (1,044 | ) | 263 |
| ||||||
Other income (loss), net |
| (412 | ) | (218 | ) | (630 | ) | (264 | ) | (800 | ) | (1,064 | ) | ||||||
Loss before income taxes |
| (24,807 | ) | (3,109 | ) | (27,916 | ) | (45,814 | ) | (754 | ) | (46,568 | ) | ||||||
Provision for income taxes |
| 2,164 |
| 192 |
| 2,356 |
| 1,540 |
| — |
| 1,540 |
| ||||||
Net loss |
| $ | (26,971 | ) | $ | (3,301 | ) | $ | (30,272 | ) | $ | (47,354 | ) | $ | (754 | ) | $ | (48,108 | ) |
Basic net loss per share |
| $ | (0.61 | ) | $ | (0.07 | ) | $ | (0.68 | ) | $ | (1.11 | ) | $ | (0.01 | ) | $ | (1.12 | ) |
Diluted net loss per share |
| $ | (0.61 | ) | $ | (0.07 | ) | $ | (0.68 | ) | $ | (1.11 | ) | $ | (0.01 | ) | $ | (1.12 | ) |
Shares used to compute basic net loss per share |
| 44,267 |
|
|
| 44,267 |
| 42,788 |
|
|
| 42,788 |
| ||||||
Shares used to compute diluted loss per share |
| 44,267 |
|
|
| 44,267 |
| 42,788 |
|
|
| 42,788 |
|
* includes the following amounts related to employee equity awards
Cost of hardware product revenues |
| $ | — |
| $ | 57 |
| $ | 57 |
| $ | — |
| $ | (32 | ) | $ | (32 | ) |
Research and development |
| $ | — |
| $ | 815 |
| $ | 815 |
| $ | — |
| $ | (459 | ) | $ | (459 | ) |
Selling, general and administrative |
| $ | 286 |
| $ | 1,751 |
| $ | 2,037 |
| $ | — |
| $ | (985 | ) | $ | (985 | ) |
(1) In addition to restating the consolidated financial statements in response to the Special Committee’s findings, the Company has recorded additional non-cash adjustments that were considered to be immaterial to our previously filed consolidated financial statements relating to the timing of revenue recognition, accrued expenses, amortization of premiums and discounts on investments, additional expense related to options granted to a consultant and the amortization of stock-based compensation relating to a business combination in 2003. In addition, the Company is also recording losses under Accounting Principles Board Opinion 18 (“APB No. 18”), “The Equity Method of Accounting for Investments in Common Stock,” to record the losses on investment of the prior 17% ownership of Oren Semiconductor, Inc. under the equity method of accounting which was subsequently acquired by Zoran in 2005.
75
ZORAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
| Year Ended December 31, 2005 |
| Year Ended December 31, 2004 |
| ||||||||||||||||||||||
|
| As |
| Adjust- |
| As |
| As |
| Adjust- |
| As |
| ||||||||||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net loss |
|
| $ | (26,971 | ) |
|
| $ | (3,301 | ) |
| $ | (30,272 | ) |
| $ | (47,354 | ) |
|
| $ | (754 | ) |
| $ | (48,108 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Depreciation |
|
| 10,329 |
|
|
| — |
|
| 10,329 |
|
| 9,896 |
|
|
| — |
|
| 9,896 |
| ||||||
Amortization |
|
| 50,254 |
|
|
| 112 |
|
| 50,366 |
|
| 45,358 |
|
|
| 1,044 |
|
| 46,402 |
| ||||||
Stock based compensation expense |
|
| 1,832 |
|
|
| 2,623 |
|
| 4,455 |
|
| 4,051 |
|
|
| (1,476 | ) |
| 2,575 |
| ||||||
In-process research and development |
|
| 2,650 |
|
|
| — |
|
| 2,650 |
|
| — |
|
|
| — |
|
|
|
| ||||||
Allowance for doubtful accounts |
|
| 4,771 |
|
|
| — |
|
| 4,771 |
|
| 175 |
|
|
| — |
|
| 175 |
| ||||||
Write-down of inventory. |
|
| — |
|
|
| — |
|
| — |
|
| 14,680 |
|
|
| — |
|
| 14,680 |
| ||||||
Changes in assets and liabilities, net of effect of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Accounts receivable |
|
| (14,706 | ) |
|
| — |
|
| (14,706 | ) |
| 5,188 |
|
|
| — |
|
| 5,188 |
| ||||||
Inventory |
|
| 17,630 |
|
|
| — |
|
| 17,630 |
|
| (47,022 | ) |
|
| — |
|
| (47,022 | ) | ||||||
Prepaid expenses and other current assets and other assets |
|
| 1,784 |
|
|
| (1,320 | ) |
| 464 |
|
| (7,978 | ) |
|
| 930 |
|
| (7,048 | ) | ||||||
Accounts payable |
|
| 4,437 |
|
|
| — |
|
| 4,437 |
|
| 4,595 |
|
|
| — |
|
| 4,595 |
| ||||||
Accrued expenses and other liabilities, goodwill and other long term liabilities |
|
| (857 | ) |
|
| 1,886 |
|
| 1,029 |
|
| 2,135 |
|
|
| 256 |
|
| 2,391 |
| ||||||
Net cash provided by (used in) operating activities |
|
| 51,153 |
|
|
| — |
|
| 51,153 |
|
| (16,276 | ) |
|
| — |
|
| (16,276 | ) | ||||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Purchases of property and equipment |
|
| (8,492 | ) |
|
| — |
|
| (8,492 | ) |
| (7,165 | ) |
|
| — |
|
| (7,165 | ) | ||||||
Proceeds from sale of property and equipment |
|
| — |
|
|
| — |
|
| — |
|
| 978 |
|
|
| — |
|
| 978 |
| ||||||
Purchases of investments |
|
| (43,576 | ) |
|
| — |
|
| (43,576 | ) |
| (117,209 | ) |
|
| — |
|
| (117,209 | ) | ||||||
Proceeds from sales and maturities of investments |
|
| 60,415 |
|
|
| — |
|
| 60,415 |
|
| 175,252 |
|
|
| — |
|
| 175,252 |
| ||||||
Acquisition of Emblaze, net of cash acquired |
|
| — |
|
|
| — |
|
| — |
|
| (54,161 | ) |
|
| — |
|
| (54,161 | ) | ||||||
Acquisition of Oren Semiconductor, Inc., net of cash acquired |
|
| (27,567 | ) |
|
| — |
|
| (27,567 | ) |
| — |
|
|
| — |
|
| — |
| ||||||
Net cash used in investing activities |
|
| (19,220 | ) |
|
| — |
|
| (19,220 | ) |
| (2,305 | ) |
|
| — |
|
| (2,305 | ) | ||||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Proceeds from issuance of common stock |
|
| 9,488 |
|
|
| — |
|
| 9,488 |
|
| 8,022 |
|
|
| — |
|
| 8,022 |
| ||||||
Net cash provided by financing activities |
|
| 9,488 |
|
|
| — |
|
| 9,488 |
|
| 8,022 |
|
|
| — |
|
| 8,022 |
| ||||||
Net increase (decrease) in cash and cash equivalents |
|
| 41,421 |
|
|
| — |
|
| 41,421 |
|
| (10,559 | ) |
|
| — |
|
| (10,559 | ) | ||||||
Cash and cash equivalents at beginning of period |
|
| 37,435 |
|
|
| — |
|
| 37,435 |
|
| 47,994 |
|
|
| — |
|
| 47,994 |
| ||||||
Cash and cash equivalents at end of period |
|
| $ | 78,856 |
|
|
| $ | — |
|
| $ | 78,856 |
|
| $ | 37,435 |
|
|
| $ | — |
|
| $ | 37,435 |
|
Supplemental information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fair value of stock issued in Oren acquisition, net of issuance costs of $89 |
|
| $ | 12,816 |
|
|
| $ | — |
|
| $ | 12,816 |
|
| $ | — |
|
|
| $ | — |
|
| $ | — |
|
76
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SFAS NO. 123 PRO FORMA DISCLOSURE
(in thousands)
|
| Year Ended December 31, 2005 |
| Year Ended December 31, 2004 |
| ||||||||||||||||||
|
| As |
| Adjustments |
| As |
| As |
| Adjustments |
| As |
| ||||||||||
Net loss |
| $ | (26,971 | ) |
| $ | (3,301 | ) |
| $ | (30,272 | ) | $ | (47,354 | ) |
| $ | (754 | ) |
| $ | (48,108 | ) |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Stock-based employee compensation expense (benefit) included in net loss |
| 1,832 |
|
| 2,623 |
|
| 4,455 |
| 4,051 |
|
| (1,476 | ) |
| 2,575 |
| ||||||
Stock-based employee compensation expense determined under the fair value method |
| (26,831 | ) |
| (1,431 | ) |
| (28,262 | ) | (39,693 | ) |
| (3,119 | ) |
| (42,812 | ) | ||||||
Pro forma net loss |
| $ | (51,970 | ) |
| $ | (2,109 | ) |
| $ | (54,079 | ) | $ | (82,996 | ) |
| $ | (5,349 | ) |
| $ | (88,345 | ) |
Pro forma net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Basic |
| $ | (1.18 | ) |
| $ | (0.05 | ) |
| $ | (1.22 | ) | $ | (1.94 | ) |
| $ | (0.13 | ) |
| $ | (2.07 | ) |
Diluted |
| $ | (1.18 | ) |
| $ | (0.05 | ) |
| $ | (1.22 | ) | $ | (1.94 | ) |
| $ | (0.13 | ) |
| $ | (2.07 | ) |
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Basic |
| $ | (0.61 | ) |
| $ | (0.07 | ) |
| $ | (0.68 | ) | $ | (1.11 | ) |
| $ | (0.01 | ) |
| $ | (1.12 | ) |
Diluted |
| $ | (0.61 | ) |
| $ | (0.07 | ) |
| $ | (0.68 | ) | $ | (1.11 | ) |
| $ | (0.01 | ) |
| $ | (1.12 | ) |
NOTE 3—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 in the Unites States of America 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
The majority of the Company’s purchasing and sales transactions are denominated in US dollars, which is considered to be the functional currency of the Company and its subsidiaries. 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. Monetary assets and liabilities of the Company’s foreign subsidiaries are remeasured into U.S. dollars from the local currency at rates in effect at period-end and non-monetary assets and liabilities are remeasured at historical rates. Revenues and expenses are remeasured at average rates during the period. In accordance with Statement of Financial Accounting Standards No. 52, gains and losses arising from the remeasurement of local currency financial statements are included in other income (loss), net and have not been significant for any of the periods presented.
77
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue recognition
The Company’s policy is to recognize revenue from product sales upon shipment, provided that persuasive evidence of an arrangement exists, the price is fixed and determinable, collectibility is reasonably assured and legal title and risk of ownership has transferred. A provision for estimated future returns and potential warranty liability is recorded at the time revenue is recognized. Warranty expenses in 2006, 2005 and 2004, were immaterial. Development revenue under development contracts is recognized as the services are performed based on the specific deliverables outlined in each contract. Amounts received in advance of performance under contracts are recorded as deferred revenue and are recognized when our obligations have been met. 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. Periodic service and maintenance fees which 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 which typically ranges between one month to one quarter in arrears. Revenue from litigation settlement is recognized in accordance with the terms of the agreement when actual cash payments are received.
Research and development costs
Research and development expenses are charged to operations as incurred.
Cash equivalents and investments
All highly liquid investments purchased with an original maturity of 90 days or less are considered to be cash equivalents.
All of the Company’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 accumulated other comprehensive income (loss), a component of stockholders’ equity. Gains and losses realized upon sales of all such securities are reported in interest income. See Note 3.
When the fair value of an investment declines below its amortized cost, the Company considers all available evidence to evaluate whether an other-than-temporary decline in value has occurred. Among other things, the Company considers the duration and extent to which the market value has declined relative to our cost basis, the economic factors influencing the markets, the relative performance of the investee and its near-term prospects.
At December 31, 2006 and 2005, the Company’s marketable securities included corporate debt, US government securities, auction rate securities, foreign bonds, municipal bonds and marketable equity securities. See Note 4.
A significant portion of the Company’s portfolio is comprised of auction rate securities with stated maturity dates that may be one year or more beyond the balance sheet dates. Based on historical experience in the financial markets, the Company believes there is a reasonable expectation of completing a successful auction within a 12-month period.
Other assets and investments also include investments in non-marketable securities which are accounted for on the cost basis and amounted to $4.2 million and $5.2 million at December 31, 2006 and 2005, respectively. The Company records an investment impairment charge when the fair value of an investment
78
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
declines below its cost basis. In making this determination the Company considers all available evidence including the historical and projected financial performance and recent funding events which are ascertained from an investee. The Company recorded an investment impairment charge of $0.9 million in 2006. There were no such charges in 2005.
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, investments in marketable securities, non-marketable equity securities and trade accounts receivable. The Company places its cash in banks and cash equivalents consist primarily of certificates of deposit and commercial paper. The Company, by policy, limits the amount of its credit exposure through diversification and restricting its investments to highly rated securities. Individual securities are limited to comprising no more than 10% of the portfolio value at the time of purchase. Highly rated securities are defined as having a minimum Moody or Standard & Poor’s rating of A2 or A respectively. The average maturity of the portfolio shall not exceed 24 months. 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. As of December 31, 2006 four customers accounted for approximately 13%, 12%, 10% and 10% of the net accounts receivable balance, respectively. As of December 31, 2005 one customer accounted for approximately 14% of the net 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. The Company writes down inventories to net realizable value based on forecasted demand and market conditions. Inventory write-downs are not reversed and permanently reduce the cost basis of the affected inventory until such inventory is sold or scrapped.
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
In accordance with Financial Accounting Standards Board (“FASB”) Statement No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”) goodwill is not amortized. The Company monitors the recoverability of goodwill recorded in connection with acquisitions, by reporting unit, annually, or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable. For each of the years ended December 31, 2006, 2005 and 2004, the Company performed the annual analysis and concluded that goodwill was not impaired, as the fair value of each reporting unit exceeded its carrying value, including goodwill.
79
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other Intangibles
Other intangible assets were recorded in connection with the acquisitions of Oak Technology, Inc., Emblaze Semiconductor, Ltd and Oren Semiconductor, Inc. and are amortized on a straight-line basis over the estimated periods of benefit, which range between three and five years.
Long-lived assets
The Company evaluates the recoverability of its long-lived assets, other than goodwill, whenever events or changes in circumstance indicate the carrying amounts of the assets may not be recoverable. The Company evaluates these assets by comparing expected undiscounted cash flows to the carrying value of the related assets. If the expected undiscounted cash flows are less than the carrying value of the assets, the Company recognizes an impairment charge based on the fair value of the assets. To date, the Company has not recorded any impairment charges against the value of its long-lived assets.
Fair value of financial instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts for cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values because of the short-term maturity of these items.
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.
The Company’s effective income tax rate has benefited from the availability of previously unbenefitted net operating losses which the Company has utilized for U.S. federal income tax purposes and by our Israel based 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 2017 and 2024, and the benefits from our subsidiary’s Approved Enterprise status expire at various times beginning in 2008.
Realization of deferred tax assets is based on our ability to generate sufficient future taxable income. The valuation allowance was determined in accordance with the provisions of SFAS No. 109 which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction by jurisdiction basis. Historical operating losses and continuing business uncertainty represent sufficient negative evidence which it was difficult for positive evidence to overcome under SFAS No. 109 and accordingly, a full valuation allowance was recorded. If the facts or estimates of future financial results were to change, increasing the likelihood of realizing the deferred tax assets, judgment would have to be applied to determine the amount of valuation allowance required in any given period. We intend to maintain a full valuation allowance until sufficient positive evidence exists to support reversal of the valuation allowance.
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 consolidated statement of operations. Basic EPS is based
80
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 common stock issuable upon the exercise of stock options and restricted stock units. See Note 13.
Stock-based compensation
Effective January 1, 2006, Zoran adopted SFAS No. 123(R), using the modified prospective application transition method, which establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, over the requisite service period. The Company previously applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations and provided the pro forma disclosures required by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”).
Periods Prior to the Adoption of SFAS 123(R)
Prior to the adoption of SFAS No. 123(R), the Company provided the disclosures required under SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and 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 No. 123, the Company’s net loss and net loss per share for each of the year ended December 31, 2005 and 2004, would have been as follows (in thousands, except per share data):
|
| Year ended December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (restated) |
| (restated) |
| ||
Net loss as restated |
| $ | (30,272 | ) | $ | (48,108 | ) |
Adjustments: |
|
|
|
|
| ||
Stock-based compensation expense included in net loss |
| 4,455 |
| 2,575 |
| ||
Stock-based compensation expense determined under the fair value method |
| (28,262 | ) | (42,812 | ) | ||
Pro forma net loss as restated |
| $ | (54,079 | ) | $ | (88,345 | ) |
Pro forma net loss per share as restated: |
|
|
|
|
| ||
Basic |
| $ | (1.22 | ) | $ | (2.07 | ) |
Diluted |
| $ | (1.22 | ) | $ | (2.07 | ) |
Net loss per share as restated: |
|
|
|
|
| ||
Basic |
| $ | (0.68 | ) | $ | (1.12 | ) |
Diluted |
| $ | (0.68 | ) | $ | (1.12 | ) |
For purposes of this pro forma disclosure, the value of the options was estimated using the accelerated amortization method under FIN 28 over the respective vesting periods of the awards. Due to the valuation allowance provided on our deferred tax assets, the Company has not recorded any tax benefits attributable to pro forma stock-based compensation.
The Company provides information regarding the methodology and assumptions used for the above pro forma disclosure in Note 11.
81
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Impact of Adoption of SFAS No. 123(R)
During the year ended December 31 2006, the Company recorded stock-based compensation expense for awards granted prior to but not yet vested as of January 1, 2006 as if the fair value method required for pro forma disclosure under SFAS No. 123 were in effect for expense recognition purposes adjusted for estimated forfeitures. For these awards, the Company has continued to recognize compensation expense using the accelerated amortization method. For stock-based awards granted after January 1, 2006, the Company recognized compensation expense based on the grant date fair value required under SFAS No. 123(R). For these awards, the Company recognized compensation expense using a straight-line amortization method. As SFAS No. 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest, estimated stock-based compensation for the year ended December 31, 2006 has been reduced for estimated forfeitures. The adoption of SFAS No. 123(R) resulted in a one-time benefit of $314,000 related to unvested awards for which compensation expense had already been recorded.
The following table summarizes stock-based compensation expense related to employee stock options, employee stock purchases and restricted stock unit grants for the year ended December 31, 2006 as recorded in accordance with SFAS No. 123(R) (including the effect of the restatements) (in thousands):
|
| Year Ended |
| |||
Cost of hardware product revenues. |
|
| $ | 526 |
|
|
Research and development |
|
| 5,509 |
|
| |
Selling, general and administrative |
|
| 11,259 |
|
| |
Total costs and expenses |
|
| $ | 17,294 |
|
|
The effect of recording additional stock-based compensation expense on basic and diluted net income per share was $0.36 and $0.35 per share respectively for the year ended December 31, 2006.
Segment reporting
SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the manner in which management organizes the operating segments within the Company for making operational decisions and assessments of financial performance. The Company’s chief operating decision-maker is considered to be the Chief Executive Officer.
The Company’s products are based on highly integrated application-specific integrated circuits, or ASICs, and system-on-a-chip, or SOC, solutions. The Company also licenses certain software and other intellectual property. During the first quarter of 2006, the Company reorganized its operating structure to bring together its consumer electronic product lines under a single operating group, in recognition of the accelerating convergence of consumer products and the Company’s strategy of sharing technology among its various product lines. The new Consumer group combines the former Digital Versatile Disc (DVD), Digital Television (DTV) and Mobile product groups whose operations were previously reported separately. The Company will continue to report the operations of its Imaging group as a separate operating segment.
The Consumer group provides products for use in DVD players, recordable DVD players, standard and high definition digital television products, digital camera products and multimedia mobile phone products.
82
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Imaging group provides products used in digital copiers, laser and inkjet printers as well as multifunction peripherals.
Comprehensive Income (loss)
Comprehensive Income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive loss includes unrealized gains and losses on available-for-sale securities.
The following are the components of comprehensive income (loss) (in thousands):
|
| Year ended December 31, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
|
|
|
| (restated) |
| (restated) |
| |||
Net income (loss) |
| $ | 16,328 |
| $ | (30,272 | ) | $ | (48,108 | ) |
Change in unrealized gain (loss) on investments, net |
| 1,181 |
| 1,668 |
| 2,673 |
| |||
Total comprehensive income (loss) |
| $ | 17,509 |
| $ | (28,604 | ) | $ | (45,435 | ) |
The components of accumulated other comprehensive income (loss) as of December 31, 2006, 2005 and 2004 consisted of the unrealized gain (loss) on marketable securities, net of related taxes.
Recent accounting pronouncements
In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement expands the standards under SFAS No. 157, “Fair Value Measurement,” to provide entities the one-time election (Fair Value Option or FVO) to measure financial instruments and certain other items at fair value. Most of the provisions of this statement apply only to entities that elect the fair value option. The provisions of SFAS No. 159 are effective for the Company for fiscal years beginning January 1, 2008. The Company is evaluating the impact of the provisions of this statement on its consolidated financial position, results of operations and cash flows.
In September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. SAB No. 108 requires registrants to quantify the impact of correcting all misstatements using both the “rollover” method, which focuses primarily on the impact of a misstatement on the income statement and is the method currently used by the Company, and the “iron curtain” method, which focuses primarily on the effect of correcting the period-end balance sheet. The use of both of these methods is referred to as the “dual approach” and should be combined with the evaluation of qualitative elements surrounding the errors in accordance with SAB No. 99, “Materiality.” The provisions of SAB No. 108 are effective for the Company for the fiscal year ended December 31, 2006. The adoption of SAB No. 108 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for the Company for fiscal years beginning after December 31, 2007. The Company is evaluating the impact of the provisions of this statement on its consolidated financial position, results of operations and cash flows.
83
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare and other post-retirement plans in their financial statements. The provisions of SFAS No. 158 are effective for the Company as of the end of the fiscal year ending December 31, 2006. The adoption of SFAS No. 158 did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
In June 2006, the FASB published FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for the Company in fiscal years beginning January 1, 2007. The impact of the provisions of this Interpretation on the Company’s retained earnings is expected to be less than $5 million.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” an amendment of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This Statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. This Statement is effective for the Company for all financial instruments acquired or issued after July 1, 2007. The adoption of SFAS No. 155 is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” a replacement of APB No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles required recognition via a cumulative effect adjustment within net income of the period of the change. SFAS No. 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for the Company for accounting changes made in fiscal years beginning January 1, 2006; however, the Statement does not change the transition provisions of any existing accounting pronouncements. The adoption of SFAS No. 154 did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
In March 2005, the FASB published FIN 47, “Accounting for Conditional Asset Retirement Obligations,” which clarifies that the term, conditional asset retirement obligation, as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. The Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The adoption of this Interpretation did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
84
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 4—MARKETABLE SECURITIES
The Company’s portfolio of marketable securities at December 31, 2006 was as follows (in thousands):
|
| Cost |
| Unrealized |
| Unrealized |
| Estimated |
| ||||||||
Corporate debt |
| $ | 97,175 |
|
| $ | 10 |
|
|
| $ | (245 | ) |
| $ | 96,940 |
|
U.S. government securities |
| 42,822 |
|
| 7 |
|
|
| (141 | ) |
| 42,688 |
| ||||
Auction rate securities |
| 37,550 |
|
| — |
|
|
| — |
|
| 37,550 |
| ||||
Foreign bonds |
| 11,427 |
|
| 1 |
|
|
| (12 | ) |
| 11,416 |
| ||||
Municipal bonds |
| 1,500 |
|
| — |
|
|
| (1 | ) |
| 1,499 |
| ||||
Total fixed income securities |
| 190,474 |
|
| 18 |
|
|
| (399 | ) |
| 190,093 |
| ||||
Publicly traded equity securities |
| 1,483 |
|
| 4,619 |
|
|
| — |
|
| 6,102 |
| ||||
Total |
| $ | 191,957 |
|
| $ | 4,637 |
|
|
| $ | (399 | ) |
| $ | 196,195 |
|
The Company’s portfolio of marketable securities at December 31, 2005 was as follows (in thousands):
|
| Cost |
| Unrealized |
| Unrealized |
| Estimated |
| ||||||||||
Corporate debt |
| $ | 26,211 |
|
| $ | — |
|
|
| $ | (151 | ) |
|
| $ | 26,060 |
|
|
U.S. government securities |
| 20,000 |
|
| — |
|
|
| (151 | ) |
|
| 19,849 |
|
| ||||
Auction rate securities |
| 15,125 |
|
| — |
|
|
| — |
|
|
| 15,125 |
|
| ||||
Foreign bonds |
| 4,474 |
|
| — |
|
|
| (6 | ) |
|
| 4,468 |
|
| ||||
Total fixed income securities |
| 65,810 |
|
| — |
|
|
| (308 | ) |
|
| 65,502 |
|
| ||||
Publicly traded equity securities |
| 1,623 |
|
| 3,365 |
|
|
| — |
|
|
| 4,988 |
|
| ||||
Total |
| $ | 67,433 |
|
| $ | 3,365 |
|
|
| $ | (308 | ) |
|
| $ | 70,490 |
|
|
The following table summarizes the contractual maturities of the Company’s fixed income securities at December 31, 2006 (in thousands):
|
| Cost |
| Estimated |
| ||
Less than 1 year |
| $ | 90,417 |
| $90,310 |
| |
Due in 1 to 2 years |
| 46,389 |
| 46,178 |
| ||
Due in 2 to 5 years |
| 16,118 |
| 16,055 |
| ||
Greater than 5 years* |
| 37,550 |
| 37,550 |
| ||
Total fixed income securities |
| $ | 190,474 |
| $ | 190,093 |
|
* Comprised of auction rate securities which have reset dates of 90 days or less but final expiration dates over 5 years.
Gross realized gains on sales of marketable securities were $2,398,000; $143,000 and $94,000 in 2006, 2005 and 2004, respectively. There were no gross realized losses on sales of marketable securities in 2006. Gross realized losses on sales of marketable securities were $287,000 and $104,000 in 2005 and 2004, respectively.
85
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Interest income on cash and marketable securities was $11,057,000, $2,593,000 and $263,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
NOTE 5—BALANCE SHEET COMPONENTS (in thousands)
|
| December 31, |
| ||||||
Accounts receivable: |
|
|
| 2006 |
| 2005 |
| ||
Trade |
| $ | 51,905 |
| $ | 76,354 |
| ||
Less: allowance for doubtful accounts |
| (9,265 | ) | (6,180 | ) | ||||
|
| $ | 42,640 |
| $ | 70,174 |
| ||
|
| December 31, |
| ||||||
Inventory: |
|
|
| 2006 |
| 2005 |
| ||
Purchased parts and work in process |
| $ | 18,748 |
| $ | 14,904 |
| ||
Finished goods |
| 26,296 |
| 17,712 |
| ||||
|
| $ | 45,044 |
| $ | 32,616 |
| ||
|
| December 31, |
| ||||||
Property and equipment: |
|
|
| 2006 |
| 2005 |
| ||
Computer equipment |
| $ | 13,992 |
| $ | 15,749 |
| ||
Office equipment and furniture |
| 4,079 |
| 2,512 |
| ||||
Machinery and equipment |
| 12,910 |
| 5,762 |
| ||||
Software |
| 29,397 |
| 24,196 |
| ||||
Building and leasehold improvements |
| 6,157 |
| 4,465 |
| ||||
|
| 66,535 |
| 52,684 |
| ||||
Less: accumulated depreciation and amortization |
| (50,862 | ) | (36,627 | ) | ||||
|
| $ | 15,673 |
| $ | 16,057 |
| ||
|
| December 31, |
| ||||||
Accrued expenses and other liabilities: |
|
|
| 2006 |
| 2005 |
| ||
|
|
|
| (restated) |
| ||||
Accrued payroll and related expenses |
| $ | 19,873 |
| $ | 18,981 |
| ||
Accrued royalties |
| 3,134 |
| 6,179 |
| ||||
Taxes payable |
| 7,579 |
| 12,188 |
| ||||
Deferred revenue |
| 4,360 |
| 5,590 |
| ||||
Other accrued liabilities |
| 11,136 |
| 11,831 |
| ||||
|
| $ | 46,082 |
| $ | 54,769 |
| ||
NOTE 6—GOODWILL AND OTHER INTANGIBLE ASSETS
In accordance with SFAS No. 142, goodwill is not amortized. The Company monitors the recoverability of goodwill recorded in connection with acquisitions, by reporting unit, annually, or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable. For each of the years ended December 31, 2006, 2005 and 2004, the Company performed the annual analysis and concluded that goodwill was not impaired, as the fair value of each reporting unit exceeded its carrying value, including goodwill.
86
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Components of Acquired Intangible Assets (in thousands):
|
|
|
| December 31, 2006 |
| December 31, 2005 |
| ||||||||||||||||||||
|
| Life |
| Gross |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net |
| ||||||||||||
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Purchased technology |
|
| 2-3 |
|
| $ | 195,505 |
|
| $ | (142,658 | ) |
| $ | 52,847 |
| $ | 195,505 |
|
| $ | (105,088 | ) |
| $ | 90,417 |
|
Patents |
|
| 3-5 |
|
| 40,265 |
|
| (29,500 | ) |
| 10,765 |
| 40,265 |
|
| (19,978 | ) |
| 20,287 |
| ||||||
Customer base |
|
| 3-5 |
|
| 13,860 |
|
| (9,583 | ) |
| 4,277 |
| 13,860 |
|
| (7,123 | ) |
| 6,737 |
| ||||||
Tradename and others |
|
| 3-5 |
|
| 3,350 |
|
| (2,070 | ) |
| 1,280 |
| 3,350 |
|
| (1,560 | ) |
| 1,790 |
| ||||||
Total |
|
|
|
|
| $ | 252,980 |
|
| $ | (183,811 | ) |
| $ | 69,169 |
| $ | 252,980 |
|
| $ | (133,749 | ) |
| $ | 119,231 |
|
Estimated future intangible amortization expense, based on current balances, as of December 31, 2006 is as follows (in thousands):
Year ending December 31, |
|
|
| Amount |
| |
2007 |
| $ | 43,224 |
| ||
2008 |
| 23,315 |
| |||
2009 |
| 1,820 |
| |||
2010 |
| 810 |
| |||
Total |
| $ | 69,169 |
|
Changes in the carrying amount of goodwill for the year ended December 31, 2006 are as follows (including the effect of the restatements related to acquisition of Oren Semiconductor, Inc.) in thousands:
|
| Amount |
| |
Balance at December 31, 2004 |
| $ | 150,151 |
|
Acquisition of Oren Semiconductor, Inc. |
| 33,897 |
| |
Adjustment to goodwill related to acquisition of Oak |
| (1,386 | ) | |
Balance at December 31, 2005 |
| 182,662 |
| |
Adjustment to goodwill related to acquisition of Oak |
| (8,403 | ) | |
Balance at December 31, 2006. |
| $ | 174,259 |
|
The adjustment to goodwill in 2006 and 2005 is related to the realization of certain pre-acquisition tax net operating losses. Realization of these net operating losses is reported as an adjustment to goodwill in accordance with FAS No. 109.
Goodwill by operating segment at December 31, 2006 and 2005 were as follows (in thousands):
|
| December 31, |
| December 31, |
| ||||||
|
| 2006 |
| 2005 |
| ||||||
|
|
|
| (restated) |
| ||||||
Consumer |
|
| $ | 169,060 |
|
|
| $ | 176,623 |
|
|
Imaging |
|
| 5,199 |
|
|
| 6,039 |
|
| ||
|
|
| $ | 174,259 |
|
|
| $ | 182,662 |
|
|
87
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 7—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 incurred in Israel are net of these grants, which fluctuate from period to period.
Research and development expenses that qualify for the grants and the related grants are as follows (in thousands):
|
| Year Ended December 31, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
|
|
|
| (restated) |
| |||||
Research and development expenses |
| $ | 60,147 |
| $ | 48,377 |
| $ | 38,461 |
|
Less: grants earned |
| — |
| — |
| (1,460 | ) | |||
|
| $ | 60,147 |
| $ | 48,377 |
| $ | 37,001 |
|
There were no grant receipts or royalty expense in 2006 and 2005. Royalty expenses related to these grants were $654,000 in 2004.
NOTE 8—DEVELOPMENT CONTRACTS
The Company has generated a portion of its total revenues from development contracts, primarily with key customers. 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 $2.7 million in 2006; $3.2 million in 2005 and $1.6 million in 2004. In addition, from time to time, we enter into non-refundable joint development projects in which our customers reimburse us for a portion of our development costs. We classify such reimbursement of development costs as an offset to research and development expenses as we retain ownership of the intellectual property developed by us under these development arrangements. During 2006 and 2005, we received approximately $370,000 and $1.2 million in such reimbursements. We did not receive any reimbursements in 2004.
NOTE 9—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.
88
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Lease and license commitments
The Company rents facilities under various lease agreements expiring through 2016. Rent expense for 2006, 2005 and 2004 totaled approximately $5.4 million; $5.6 million and $4.4 million, respectively. The Company also entered into a time based license agreement for the right to use certain intellectual property. Future minimum lease and license payments required under non-cancelable agreements at December 31, 2006 are as follows: (in thousands)
Year ending December 31, |
|
|
| Amount |
| |
2007 |
| $ | 10,188 |
| ||
2008 |
| 3,819 |
| |||
2009 |
| 3,345 |
| |||
2010 |
| 3,211 |
| |||
2011 |
| 3,108 |
| |||
Thereafter |
| 15,895 |
| |||
Total |
| $ | 39,566 |
|
Legal proceedings
U.S. Attorney and SEC Investigations: On July 3, 2006, Zoran disclosed in a press release that it received a grand jury subpoena from the office of the U.S. attorney for the Northern District of California requesting documents from 1995 through the present referring to, relating to or involving stock options, and also received an informal inquiry from the SEC requesting documents related to Zoran’s stock option grants. Zoran intends to cooperate fully in all government investigations. These inquiries likely will require the Company to expend significant management time and incur significant legal and other expenses, and could result in civil and criminal actions seeking, among other things, injunctions against the Company and its officers and directors and the payment of significant fines and penalties by the Company and its officers and directors, which may adversely affect its results of operations and cash flow. The Company cannot predict how long it will take to or how much more time and resources it will have to expend to resolve these government inquiries, nor can it predict the outcome of these inquiries. Also, there can be no assurance that other inquiries, investigations or actions will not be started by other United States federal or state regulatory agencies or by foreign governmental agencies.
Late SEC Filings and Nasdaq Delisting Proceedings Due to the Special Committee investigation and the resulting restatements, the Company did not file on time its Quarterly Report on Form 10-Q for the quarters ended June 30, 2006 and September 30, 2006, or its Annual Report on Form 10-K for the year ended December 31, 2006. As a result, the Company received Nasdaq Staff Determination letters, dated August 14, 2006, November 15, 2006 and March 20, 2007 stating that the Company was not in compliance with the filing requirements of Marketplace Rule 4310(c)(14) and, therefore, that the Company’s stock was subject to delisting from the Nasdaq Global Select Market. A hearing before a Nasdaq Listing Qualifications Panel was held on September 27, 2006 and a decision to grant the Company’s request for continued listing on Nasdaq subject to certain conditions occurred on December 28, 2006. The Company has appealed this decision, and the Nasdaq Listing Council has determined to stay the December 28, 2006 Panel decision, and any future Panel determinations to suspend Zoran’s securities from trading, pending further action from the Listing Council. On March 2, 2007, the Company provided the Listing Council with an additional submission for its consideration regarding continued listing. The Listing Council will review the matter on the basis of the written record.
89
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Shareholder Class Actions and Derivative Litigation Relating to Historical Stock Option Practices: As discussed further below, certain persons and entities identifying themselves as shareholders of Zoran have filed litigation purporting to assert claims arising out of the historical accounting for stock options.
Zucker v. Zoran Corporation, et al.. On August 10, 2006, a securities class action complaint was filed against Zoran and certain of its officers and directors in the United States District Court, Northern District of California, alleging violations of federal securities laws. The Court selected Middlesex Pension Fund as lead plaintiff and approved lead plaintiff’s selection of counsel for the class. Plaintiff filed an amended complaint on February 1, 2007 and a second amended complaint on February 20, 2007. On March 8, 2007, Defendants filed a motion to dismiss. On March 20, 2007, lead plaintiff filed a notice voluntarily dismissing the action with prejudice as to the lead plaintiff.
NCEA-IBEW Pension Fund (The Decatur Plan) v. Galil, et al. On June 12, 2006, a purported shareholder derivative action was filed by the Decatur Plan against Zoran as a nominal defendant and certain of its officers and directors in the United States District Court, Northern District of California, alleging, inter alia, violations of federal and state securities laws and breaches of fiduciary duty. On December 4, 2006, Decatur Plan filed a notice of voluntary dismissal.
Pfeiffer v. Zoran Corporation et al. On September 7, 2006, a purported shareholder derivative action was filed by Milton Pfeiffer against Zoran as a nominal defendant and certain of its officers and directors in the United States District Court, Northern District of California, alleging, inter alia, violations of federal securities laws and breaches of fiduciary duties.
Gerald del Rosario v. Aharon et al. On September 26, 2006, a purported shareholder derivative action was filed by Gerald del Rosario against Zoran as a nominal defendant and certain of its current and former officers and directors in the United States District Court, Northern District of California, alleging, inter alia, violations of federal securities laws and breaches of fiduciary duty. On December 8, 2006, the Court issued an order consolidating the Del Rosario action with the Pfeiffer action. The Court selected del Rosario as lead plaintiff and approved lead plaintiff’s selection of counsel for the consolidated derivative action. Plaintiffs filed a consolidated amended complaint on March 14, 2007.
Barone v. Gerzberg et al.; Durco v. Gerzberg et al. On October 23, 2006, two purported shareholder derivative actions were filed by Moshe Barone and John Durco against Zoran as a nominal defendant and certain of its current and former officers and directors in the California Superior Court of Santa Clara County, alleging, inter alia, violations of state securities laws and breaches of fiduciary duty. On January 24, 2007 the Court consolidated the Barone and Durco actions, appointed Messrs. Barone and Durco as co-lead plaintiffs and approved their selection of counsel for the consolidated derivative action. Co-Lead Plaintiffs filed a consolidated amended complaint on March 26, 2007.
On February 20, 2007, the Company filed a complaint against ArcSoft Inc. in the California Superior Court for the County of Alameda, seeking payment of $4 million in principal, together with accrued interest then in the amount of approximately $525,000, under four separate convertible promissory notes. On February 28, 2007, the Company filed an application with the Court seeking to attach assets of ArcSoft as security for the payment of its obligations under the notes. The notes represent amounts loaned by the Company to ArcSoft in 2004 in connection with a transaction involving the transfer to ArcSoft of rights related to a software product then under development and related agreements regarding the continued development and commercialization of the product. On March 28, 2007, ArcSoft filed an answer denying liability under the notes and asserting various affirmative defenses. ArcSoft also filed a cross complaint alleging fraud in the inducement of the business arrangement, fraudulent and negligent misrepresentation, breach of contract and of the implied covenant of good faith and fair dealing, and unjust enrichment and
90
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
seeking monetary damages of more than $6.9 million. The hearing on our application for an attachment is currently scheduled for May 14, 2007.
Indemnification Obligations. Subject to certain limitations, the Company is obligated to indemnify its current and former directors, officers and employees in connection with the investigation of the Company’s historical stock option practices and related government inquiries and litigation. These obligations arise under the terms of the Company’s certificate of incorporation, its bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that the Company is required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters. The Company is currently paying or reimbursing legal expenses being incurred in connection with these matters by a number of its current and former directors, officers and employees. Although the maximum potential amount of future payments the Company could be required to make under these agreements is theoretically unlimited, the Company believes the fair value of this liability is adequately covered within the reserves it has established for currently pending legal proceedings.
Other Legal Matters. The Company is named from time to time as a party to lawsuits in the normal course of its business. Litigation, in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings are difficult to predict.
During the year ended December 31, 2004, the Company recorded restructuring charges of $746,000 due to the discontinuation of the Sensor product line of the Consumer operating segment. These charges included $523,000 related to the reduction in force of 15 employees for severance and other termination expenses, $173,000 for lease losses on abandoned office space and other miscellaneous legal and consulting fees of approximately $50,000. The remaining balance at December 31, 2006 of approximately $52,000 related to facilities will be paid over the lease term through June 2007.
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 7,755,000 shares of common stock were reserved for issuance under the 1993 Option Plan. The 1993 Option Plan provided for grants of options to employees, non-employee directors and consultants. The 1993 Stock Option Plan expired during 2003 and no future shares will be granted under this plan. The option price for shares granted under the 1993 Option Plan was typically equal to the fair market value of the common stock at the date of grant.
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.
91
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2000 Nonstatutory 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 450,000 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 upon the amendment of the Company’s certificate of incorporation to affect an increase in the number of authorized shares of common stock to 55,000,000 in October 2000. A total of 13,325,000 shares of common stock were reserved for issuance under the 2000 Option Plan. The 2000 Option Plan provided for grants of options to employees or consultants. The 2000 Option Plan was modified in 2001 to allow for exercisability of stock options ahead of vesting subject to the Company’s right to repurchase the associated stock at the option exercise price through the original vesting schedule. The option price for shares granted under the 2000 Option Plan was 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 generally terminates three months after termination of employment. The 2000 Stock Option Plan was terminated in 2005 and was replaced by the 2005 Equity Incentive Plan.
1995 Outside Directors Stock Option Plan
The Company’s Outside Directors Stock Option Plan (the “1995 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 525,000 shares of Common Stock were reserved for issuance under the 1995 Directors Plan. The 1995 Directors Plan provided for the grant of nonstatutory stock options to nonemployee directors of the Company. The 1995 Directors Plan provided that each new nonemployee director would automatically be granted an option to purchase 30,000 shares on the date the optionee first became a nonemployee director (the “Initial Grant”). Thereafter, on the date immediately following each annual stockholders’ meeting, each nonemployee director who was reelected at the meeting to an additional term was granted an additional option to purchase 15,000 shares of Common Stock if, on such date, he or she had served on the Company’s Board of Directors for at least six months (the “Annual Grant”). Initial Grants were exercisable in four equal annual installments, and each Annual Grant became 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 1995 Directors Plan was equal to the fair market value of the Company’s Common Stock on the date of grant. Options granted under the 1995 Directors Plan have a term of ten years. This plan was terminated in July 2005 and was replaced by the 2005 Outside Directors Equity Plan.
2005 Equity Incentive Plan
The 2005 Equity Incentive Plan (the “2005 Plan”) was adopted by the Board of Directors in May 2005 and replaced the 1993 Stock Option Plan, which expired in 2003, and the 2000 Nonstatutory Stock Option Plan, which was terminated by the Board of Directors upon stockholder approval of the 2005 Plan in July 2005. A total of 4,556,663 shares of the Company’s common stock is authorized for issuance pursuant to awards granted under the 2005 Plan. Such awards may include stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, deferred stock units and other stock-based or cash-based awards. The 2005 Plan is generally administered by the Compensation Committee of the Board of Directors and has a term of 10 years. Participation in the 2005 Plan is limited to employees and consultants of Zoran and its subsidiaries and other affiliates.
Options and stock appreciation rights granted under the 2005 Plan must have exercise prices per share not less than the fair market value of Zoran common stock on the date of grant and may not be repriced
92
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
without stockholder approval. Such awards will vest and become exercisable upon conditions established by the Compensation Committee and may not have a term exceeding 10 years.
Except with respect to 5% of the number of shares authorized under the 2005 Plan, awards of restricted stock, restricted stock units, performance shares, performance units and other full value awards granted under the 2005 Plan generally must have service-based vesting schedules of at least three years or a performance period of at least 12 months. However, restricted stock or restricted stock units issued pursuant to a stockholder-approved option exchange program which vest based on service must have a vesting schedule of at least two years. Performance share and performance unit awards vest to the extent that pre-established performance goals based on one or more measures of business and financial performance authorized by the 2005 Plan are attained during a performance period established by the Compensation Committee. The grant or vesting of other types of awards under the 2005 Plan may similarly be based on the attainment of one or more such performance goals. The 2005 Plan provides that the number of shares remaining available for issuance will be reduced by 1.3 shares for each one share of Zoran common stock subject to a full value award granted under the 2005 Plan.
At December 31, 2006, 3,555,449 shares of the Company’s common stock were available for the grant of the options and other awards under the 2005 Plan, subject to the provisions described above that reduce the number of shares available for full value awards.
2005 Outside Directors Equity Plan
The 2005 Outside Directors Equity Plan (the “2005 Directors Plan”) was adopted by the Board of Directors in May 2005 and replaced the 1995 Outside Directors Stock Option Plan, which was terminated by the Board of Directors upon stockholder approval of the Directors Plan in July 2005. A total of 600,000 shares of the Company’s common stock is authorized for issuance pursuant to awards granted under the 2005 Directors Plan. Such awards may include stock options, stock appreciation rights, restricted stock units and deferred stock units. The 2005 Directors Plan is generally administered by the Board of Directors and has a term of 10 years. Participation in the Directors Plan is limited to non-employee members of the Zoran Board of Directors (“outside directors”). The 2005 Directors Plan provides that the number of shares remaining available for issuance will be reduced by 1.3 shares for each one share of Zoran common stock subject to a full value award granted under the 2005 Directors Plan.
Awards under the 2005 Directors Plan are granted by the Board of Directors to all outside directors on a periodic, nondiscriminatory basis within limits prescribed by the 2005 Directors Plan. Subject to appropriate adjustment for any change in the Company’s capital structure, awards granted to any outside director in any fiscal year may not exceed 20,000 shares, increased by one or more of the following: 40,000 shares upon an outside director’s initial election, 10,000 shares for service as Chairman of the Board or Lead Director, 5,000 shares for service on a Board committee as chairman and 2,500 shares for service on a Board committee other than as chairman. Stock options, stock appreciation rights, restricted stock units and deferred stock units granted under the Directors Plan are generally subject to terms substantially similar to those applicable to the same type of award granted under the 2005 Plan.
At December 31, 2006, 405,000 shares of the Company’s common stock were available for the grant of the options and other awards under the 2005 Directors Plan, subject to the provisions described above that reduce the number of shares available for full value awards.
93
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the Company’s stock option activity for the years ended December 31, 2006, 2005 and 2004. The weighted average exercise price for each category presented is also shown in the table below:
|
| Options |
| Weighted |
| |||
Balances, December 31, 2003 |
| 13,669,164 |
|
| $ | 16.86 |
|
|
Granted |
| 1,091,733 |
|
| $ | 16.80 |
|
|
Exercised |
| (502,921 | ) |
| $ | 8.57 |
|
|
Canceled |
| (1,412,219 | ) |
| $ | 17.95 |
|
|
Balances, December 31, 2004 |
| 12,845,757 |
|
| $ | 17.06 |
|
|
Granted |
| 2,296,315 |
|
| $ | 11.63 |
|
|
Exercised |
| (555,106 | ) |
| $ | 9.26 |
|
|
Canceled |
| (1,631,381 | ) |
| $ | 17.95 |
|
|
Balances, December 31, 2005 |
| 12,955,585 |
|
| $ | 16.32 |
|
|
Granted |
| 363,065 |
|
| $ | 21.13 |
|
|
Exercised |
| (3,683,846 | ) |
| $ | 13.53 |
|
|
Canceled* |
| (1,538,460 | ) |
| $ | 23.09 |
|
|
Balances, December 31, 2006 |
| 8,096,344 |
|
| $ | 16.52 |
|
|
* Includes 1,060,536 underwater options exchanged for restricted shares and restricted stock units. See “Restricted Shares and Restricted Stock Units” below.
Significant option groups outstanding as of December 31, 2006 and the related weighted average exercise price and contractual life information, are as follows:
|
| Options Outstanding |
| Options Exercisable |
| ||||||||||||||||||||||||||||||||||
Exercise Prices |
|
|
| Shares |
| Weighted |
| Weighted |
| Aggregate |
| Shares |
| Weighted |
| Weighted |
| Aggregate |
| ||||||||||||||||||||
$0.00 to $9.99 |
|
| 577,841 |
|
|
| 5.11 |
|
|
| $ | 6.27 |
|
|
| $ | 4,800 |
|
|
| 539,359 |
|
|
| 4.95 |
|
|
| $ | 6.12 |
|
|
| $ | 4,564 |
|
| ||
$10.00 to $11.99 |
|
| 1,354,392 |
|
|
| 7.39 |
|
|
| $ | 10.56 |
|
|
| 5,442 |
|
|
| 1,354,392 |
|
|
| 7.39 |
|
|
| $ | 10.56 |
|
|
| 5,442 |
|
| ||||
$12.00 to $14.99 |
|
| 1,632,033 |
|
|
| 6.32 |
|
|
| $ | 13.00 |
|
|
| 2,581 |
|
|
| 1,389,337 |
|
|
| 5.92 |
|
|
| $ | 12.86 |
|
|
| 2,364 |
|
| ||||
$15.00 to $19.99 |
|
| 2,333,485 |
|
|
| 7.07 |
|
|
| $ | 17.11 |
|
|
| — |
|
|
| 1,970,133 |
|
|
| 6.92 |
|
|
| $ | 17.11 |
|
|
| — |
|
| ||||
$20.00 to $25.99 |
|
| 1,803,997 |
|
|
| 6.66 |
|
|
| $ | 24.04 |
|
|
| — |
|
|
| 1,566,024 |
|
|
| 6.26 |
|
|
| $ | 24.21 |
|
|
| — |
|
| ||||
$26.00 to $46.53 |
|
| 394,596 |
|
|
| 3.79 |
|
|
| $ | 28.59 |
|
|
| — |
|
|
| 385,631 |
|
|
| 3.66 |
|
|
| $ | 28.61 |
|
|
| — |
|
| ||||
Total |
|
| 8,096,344 |
|
|
| 6.58 |
|
|
| $ | 16.52 |
|
|
| $ | 12,823 |
|
|
| 7,204,876 |
|
|
| 6.35 |
|
|
| $ | 16.40 |
|
|
| $ | 12,370 |
|
| ||
The weighted average grant date fair value of options, as determined under SFAS No. 123(R), granted during the year ended December 31, 2006 was $11.46 per share. The weighted average grant date fair value of options granted during the year ended December 31, 2005 and 2004 as defined by SFAS No. 123, was $6.62 and $11.08 per share, respectively.
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $14.58 as of December 31, 2006, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of shares of common stock underlying in-the-money options exercisable as of December 31, 2006 was 3.3 million.
94
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The total intrinsic value of options exercised during the year ended December 31, 2006 was $40.8 million. The total cash received from employees as a result of employee stock option exercises during the year ended December 31, 2006 was approximately $49.8 million. In connection with these exercises, there was no tax benefit realized by the Company due to the Company’s current loss position.
As of December 31, 2006, the total unrecognized compensation cost related to stock options was $8.4 million after estimated forfeitures which are expected to be recognized over an estimated amortization period of up to four years.
The Company settles employee stock option exercises with newly issued common shares.
For purposes of the disclosure requirements of SFAS No. 123 and the requirements of SFAS No. 123(R), the Company estimates the fair value of stock options using the Black-Scholes option pricing model using the following weighted-average assumptions:
|
| Stock Option Plans |
| Stock Purchase Plan |
| ||||||||
|
| 2006 |
| 2005 |
| 2004 |
| 2006 |
| 2005 |
| 2004 |
|
Average expected term (years) |
| 5.7 |
| 3.9 |
| 5.1 |
| 1.25 |
| 1.25 |
| 1.25 |
|
Expected volatility |
| 70 | % | 68 | % | 75 | % | 57 | % | 46 | % | 59 | % |
Risk-free interest rate |
| 4.6% to 5.0 | % | 3.8% to 4.4 | % | 3.0% to 3.7 | % | 2.3 | % | 2.9% to 4.3 | % | 1.0% to 2.3 | % |
Dividend yield |
| 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % |
Expected Term: The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on the Company’s historical experience with similar awards, giving consideration to the contractual terms of the stock-based awards and vesting schedules.
Expected Volatility: The Company used historical volatility in deriving its volatility assumption. Management believes that historical volatility appropriately reflects the market’s expectations of future volatility.
Risk-Free Interest Rate: Management bases its assumptions regarding the risk-free interest rate on U.S. Treasury zero-coupon issues with an equivalent remaining term.
Expected Dividend: The Company has not paid and does not anticipate paying any dividends in the near future.
Estimated Pre-vesting Forfeitures: When estimating forfeitures, the Company considers voluntary termination behavior based on actual historical information.
Restricted Shares and Restricted Stock Units
Restricted shares and restricted stock units are granted under the 2005 Plan. On January 6, 2006, the Company filed a Tender Offer Statement with the Securities and Exchange Commission and commenced an offer to current employees to exchange outstanding options with exercise prices per share that were
95
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
more than the greater of $20.00 and the closing sale price of Zoran common stock on the offer expiration date of February 6, 2006. The exchange offer was approved by Zoran’s stockholders at their 2005 annual meeting. On February 6, 2006, the Company accepted for exchange options to purchase an aggregate of 1,060,536 shares of Zoran common stock having an exercise price greater than $22.48. Subject to the terms and conditions of the exchange, the Company granted 197,433 restricted shares of common stock or restricted stock units in exchange for the tendered options. The shares of restricted stock and restricted stock units granted as part of this exchange vest over a period of two years. None of the directors or executive officers was eligible for participation in the exchange offer. This exchange was accounted as a modification under FAS No. 123(R). As of December 31, 2006, there was $0.3 million of total unrecognized stock-based compensation expense related to restricted shares and restricted stock units. This cost is expected to be recognized over the vesting period of two to four years.
The following is a summary of restricted shares and restricted stock units activities:
|
| Outstanding |
| Weighted |
| |||||
Balances, December 31, 2005 |
|
| 65,333 |
|
|
| $ | 13.59 |
|
|
Granted |
|
| 197,433 |
|
|
| $ | 21.56 |
|
|
Released |
|
| (64,986 | ) |
|
| $ | 19.56 |
|
|
Forfeited |
|
| (8,064 | ) |
|
| $ | 21.56 |
|
|
Balances, December 31, 2006 |
|
| 189,716 |
|
|
| $ | 19.50 |
|
|
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, 2006 and 2005, 263,349 and 488,313 shares were purchased by employees under the terms of the plan agreements at a weighted average price of $9.16 and $8.90 per share, respectively. As of December 31, 2006, 2,311,447 shares were reserved and available for issuance under this plan. Due to the delay in the filing of its periodic reports during 2006, the Company was unable to issue shares under the ESPP for the six-month segment ended October 31, 2006.
NOTE 12—RETIREMENT AND EMPLOYEE BENEFIT PLANS
We maintain a 401(k) Plan that covers substantially all of the Company’s US employees. Participants may elect to contribute a percentage of their compensation to this plan, up to the statutory maximum amount prescribed by the Internal Revenue Code. The Company has the ability to make a discretionary matching contribution to the 401(k) Plan based on a uniform percentage of the employee’s eligible contribution up to a maximum employer match of $2,000 per year per employee. Approximately $525,000, $235,000 and $384,000 in matching contributions were recorded during 2006, 2005 and 2004, respectively.
96
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Under Israeli law, the Company is required to make severance payments to its retired or dismissed Israeli employees and Israeli employees leaving its employment in certain other circumstances. The Company’s severance pay liability to its Israeli employees, which is calculated based on the salary of each employee multiplied by the years of such employee’s employment, is reflected in the Company’s balance sheet in other long-term liabilities on an accrual basis, and is partially funded by the purchase of insurance policies in the name of the employees. The surrender value of the insurance policies is recorded in other non-current assets. The severance pay expenses for the years ended December 31, 2006, 2005 and 2004 were $979,000, $645,000 and $412,000 respectively. The severance pay detail is as follows (in thousands):
|
| Year Ended December 31, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Accrued severance |
| $ | 11,052 |
| $ | 7,690 |
| $ | 6,212 |
|
Less : amount funded |
| (9,702 | ) | (6,404 | ) | (5,492 | ) | |||
Unfunded portion, net accrued severance pay |
| $ | 1,350 |
| $ | 1,286 |
| $ | 720 |
|
The following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations for the periods presented (in thousands except per share amounts):
|
| Year ended December 31, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
|
|
|
| (restated) |
| (restated) |
| |||
Net income (loss) |
| $ | 16,328 |
| $ | (30,272 | ) | $ | (48,108 | ) |
Shares: |
|
|
|
|
|
|
| |||
Weighted average shares outstanding |
| 48,353 |
| 44,267 |
| 42,788 |
| |||
Effect of dilutive options, ESPP and restricted stock units. |
| 1,746 |
| — |
| — |
| |||
Dilutive weighted average shares |
| 50,099 |
| 44,267 |
| 42,788 |
| |||
Net income (loss) per share: |
|
|
|
|
|
|
| |||
Basic |
| $ | 0.34 |
| $ | (0.68 | ) | $ | (1.12 | ) |
Diluted |
| $ | 0.33 |
| $ | (0.68 | ) | $ | (1.12 | ) |
For the years ended December 31, 2006, 2005 and 2004 outstanding options and restricted stock units totaling 3.1 million, 13.0 million and, 12.8 million shares, respectively, were excluded from the calculation of diluted net income (loss) per share as the inclusion of such shares would have had an anti-dilutive effect.
The components of income (loss) before income taxes are as follows (in thousands):
|
| December 31, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
|
|
|
| (restated) |
| (restated) |
| |||
Current: |
|
|
|
|
|
|
| |||
Federal |
| $ | (754 | ) | $ | (49,313 | ) | $ | (35,593 | ) |
Foreign |
| 22,844 |
| 21,397 |
| (10,975 | ) | |||
|
| $ | 22,090 |
| $ | (27,916 | ) | $ | (46,568 | ) |
97
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The components of the provision for income taxes are as follows:
|
| December 31, |
| |||||||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||||||
|
|
|
| (restated) |
| (restated) |
| |||||||
Current: |
|
|
|
|
|
|
|
|
|
|
| |||
Federal |
| $ | 4,463 |
|
| $ | 896 |
|
|
| $ | (694 | ) |
|
State |
| (623 | ) |
| (183 | ) |
|
| — |
|
| |||
Foreign |
| 1,922 |
|
| 1643 |
|
|
| 2,234 |
|
| |||
|
| 5,762 |
|
| 2,356 |
|
|
| 1,540 |
|
| |||
Deferred |
| — |
|
| — |
|
|
| — |
|
| |||
Total income tax expense |
| $ | 5,762 |
|
| $ | 2,356 |
|
|
| $ | 1,540 |
|
|
The tax provision differs from the amounts obtained by applying the statutory U.S. Federal Income Tax Rate to income taxes as shown below.
|
| December 31, |
| |||||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||||
|
|
|
| (restated) |
| (restated) |
| |||||
Tax provision (benefit) at U.S. statutory rate |
| $ | 7,511 |
|
| $ | (9,491 | ) |
| $ | (15,834 | ) |
Foreign earnings |
| (6,016 | ) |
| (5,632 | ) |
| 3,331 |
| |||
State taxes net of federal benefit |
| 259 |
|
| 98 |
|
| — |
| |||
Other differences not benefited |
| 5,234 |
|
| 16,145 |
|
| 15,387 |
| |||
Permanent differences |
| (1,597 | ) |
| 1,214 |
|
| 36 |
| |||
Alternative Minimum tax |
| 371 |
|
| 22 |
|
| — |
| |||
Research and development credits |
| — |
|
| — |
|
| (1,380 | ) | |||
Total income tax expense |
| $ | 5,762 |
|
| $ | 2,356 |
|
| $ | 1,540 |
|
Deferred income tax assets comprise the following:
|
| December 31, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
|
|
|
| (restated) |
| (restated) |
| |||
Deferred tax assets: |
|
|
|
|
|
|
| |||
Federal and state net operating loss carryforwards |
| $ | 66,218 |
| $ | 101,820 |
| $ | 103,903 |
|
Tax credits |
| 43,102 |
| 30,859 |
| 33,540 |
| |||
Nondeductible reserves and accruals |
| 8,782 |
| 9,923 |
| 10,475 |
| |||
Total deferred tax assets |
| 118,102 |
| 142,602 |
| 147,918 |
| |||
Deferred tax liabilities: |
|
|
|
|
|
|
| |||
Intangible assets |
| (17,964 | ) | (34,964 | ) | (46,904 | ) | |||
Deferred tax assets |
| 100,138 |
| 107,638 |
| 101,014 |
| |||
Valuation allowance |
| (100,138 | ) | (107,638 | ) | (101,014 | ) | |||
Net deferred tax assets |
| $ | — |
| $ | — |
| $ | — |
|
A significant portion of the deferred tax asset above relates to pre-acquisition loss carryforwards and other attributes or stock option benefits that will result in an adjustment to goodwill or paid in capital respectively, when realized. During 2006, the Company realized $7.1 million related to certain pre-acquisition tax net operating losses. Realization of these net operating losses is reported as an adjustment to goodwill in accordance with SFAS No. 109. During 2006 we reduced the NOL deferred tax asset for
98
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
amounts which we believe will expire before they become available for utilization. As of December 31, 2006, the Company had NOLs of approximately $185 million for federal and $36 million for state tax reporting purposes. The federal NOLs expire on various dates between 2017 and 2024. The state NOLs expire between 2012 and 2014. Approximately $45 million of the valuation allowance relates to tax benefits for stock option deductions, for which a full valuation allowance has been recorded. As of December 31, 2006, the Company had tax credits of approximately $23 million for federal and $19 million for state tax purposes, which will expire beginning in 2007.
Realization of deferred tax assets is based on our ability to generate sufficient future taxable income. The valuation allowance was determined in accordance with the provisions of SFAS No. 109 which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction by jurisdiction basis. Historical operating results and continuing business uncertainty represent sufficient negative evidence which it was difficult for positive evidence to overcome under SFAS No. 109 and accordingly, a full valuation allowance was recorded. The amount of the deferred tax asset valuation allowance, however, could be reduced in the near term if estimates of future taxable income are realized. The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company records liabilities for anticipated tax audit issues based on its estimate of whether, and the extent to which, additional taxes may be due. Actual tax liabilities may be different than the recorded estimates and could result in an additional charge or benefit to the tax provision in the period when the ultimate tax assessment is determined.
The Company has not provided for federal income tax on approximately $55.6 million of undistributed earnings of its foreign subsidiaries since the Company intends to reinvest this amount outside the U.S. indefinitely. If the Company did not intend to permanently reinvest this amount outside the U.S., it would calculate a deferred tax liability of approximately $19.5 million related to the U.S. taxes that would be due upon repatriation.
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 eight approved programs pursuant to this law; the first was approved in 1984 and the most recent was approved in 2004. Income subject to this program is exempt from tax for two/four years from the first year in which the Company has taxable income, net of NOLs, and is taxed at a rate of 10% for eight/six years thereafter. Benefits under the programs are granted for a period of ten years limited to the earlier of fourteen years from application or twelve years from commencement of production. Benefits for the eighth program will expire on 2014. The benefit of these Approved Enterprise programs to the Company’s net income in 2006 was $7.8 million and resulted in a benefit of $5.7 million to the net loss in 2005. These tax holidays had no impact to the Company’s net loss in 2004.
SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance. The Company’s chief operating decision-maker is considered to be the Chief Executive Officer.
99
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Subsequent to the acquisition of Oak Technology, Inc. in 2003, the Company determined it had four reportable segments: Digital Versatile Disc (DVD), Imaging, Digital Camera (DC) and Digital Television (DTV). Subsequent to the Emblaze acquisition in July 2004, the Digital Camera segment was combined with the Emblaze Mobile business unit and was renamed the Mobile segment. Each segment’s primary products are based on highly integrated application-specific integrated circuits, or ASICs, and system-on-a-chip, or SOC, solutions. The DVD, DTV, Mobile and Imaging segments also license certain software and other intellectual property. The DVD group provides products for use in DVD players and recordable DVD players. The DTV group provides products for standard and high definition digital television products including televisions, set top boxes and personal video recorders. The Mobile group focuses on solutions for multimedia mobile phone products and digital camera products. The Imaging group provides products used in digital copiers, laser and inkjet printers as well as multifunction peripherals.
During the first quarter of 2006, we reorganized our operating structure to bring together our consumer electronic product lines under a single operating group, in recognition of the accelerating convergence of consumer products and our strategy of sharing technology among our various product lines. The new Consumer group combines the former DVD, DTV and Mobile product groups whose operations were previously reported separately. We will continue to report the operations of our Imaging group as a separate operating segment.
The Company evaluates operating segment performance based on net revenues and operating expenses of these segments. The accounting policies of the operating segments are the same as those described in the summary of accounting policies. No reportable segments have been aggregated.
Information about reported segment income or loss is as follows for the years ended December 31, 2006, 2005 and 2004 (in thousands):
|
| 2006 |
| 2005 |
| 2004 |
| |||
|
|
|
| (restated) |
| (restated) |
| |||
Net revenues: |
|
|
|
|
|
|
| |||
Consumer |
| $ | 420,990 |
| $ | 310,695 |
| $ | 294,496 |
|
Imaging |
| 74,815 |
| 85,063 |
| 84,368 |
| |||
|
| $ | 495,805 |
| $ | 395,758 |
| $ | 378,864 |
|
Operating expenses: |
|
|
|
|
|
|
| |||
Consumer |
| $ | 374,435 |
| $ | 312,488 |
| $ | 323,637 |
|
Imaging |
| 60,752 |
| 58,699 |
| 50,839 |
| |||
|
| $ | 435,187 |
| $ | 371,187 |
| $ | 374,476 |
|
Contribution Margin: |
|
|
|
|
|
|
| |||
Consumer |
| $ | 46,555 |
| $ | (1,793 | ) | $ | (29,141 | ) |
Imaging |
| 14,063 |
| 26,364 |
| 33,529 |
| |||
|
| $ | 60,618 |
| $ | 24,571 |
| $ | 4,388 |
|
100
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following is a reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements for the years ended December 31, 2006, 2005 and 2004 (in thousands):
|
| 2006 |
| 2005 |
| 2004 |
| |||
|
|
|
| (restated) |
| (restated) |
| |||
Contribution margin from operating segments |
| $ | 60,618 |
| $ | 24,571 |
| $ | 4,388 |
|
Amortization of intangibles |
| (50,062 | ) | (50,254 | ) | (45,358 | ) | |||
Amortization of stock-based compensation resulting from business combinations |
| — |
| (1,546 | ) | (4,051 | ) | |||
Restructuring expense |
| — |
| — |
| (746 | ) | |||
Acquired in-process research and development |
| — |
| (2,650 | ) | — |
| |||
Total operating income (loss) |
| $ | 10,556 |
| $ | (29,879 | ) | $ | (45,767 | ) |
Zoran maintains operations in the Canada, China, Germany, Israel, India, Japan, Korea, Taiwan, the United Kingdom and United States. Activities in Israel and United States consist of corporate administration, product development, logistics and worldwide sales management. Other foreign operations consist of sales, product development and technical support.
The distribution of net revenues for the years ended December 31, 2006, 2005 and 2004 was as follows (in thousands):
|
| Year ended December 31, |
| |||||||
|
| 2006 |
| 2005 |
| 2004 |
| |||
Revenue from unaffiliated customers originating from: |
|
|
|
|
|
|
| |||
China |
| $ | 165,611 |
| $ | 156,737 |
| $ | 150,562 |
|
Japan |
| 109,066 |
| 111,370 |
| 101,792 |
| |||
Korea |
| 28,544 |
| 24,865 |
| 28,353 |
| |||
Taiwan |
| 127,311 |
| 51,900 |
| 36,631 |
| |||
United States |
| 35,949 |
| 24,201 |
| 34,403 |
| |||
North America (excluding United States) |
| 65 |
| 1,206 |
| — |
| |||
Other |
| 29,259 |
| 25,479 |
| 27,123 |
| |||
|
| $ | 495,805 |
| $ | 395,758 |
| $ | 378,864 |
|
101
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The distribution of identifiable assets by geographic areas and property and equipment as of December 31, 2006 and 2005 was as follows (in thousands):
|
| December 31, |
| ||||
|
| 2006 |
| 2005 |
| ||
|
|
|
| (restated) |
| ||
Identifiable assets: |
|
|
|
|
| ||
U.S. |
| $ | 506,885 |
| $ | 476,664 |
|
Israel |
| 162,473 |
| 117,736 |
| ||
China |
| 2,744 |
| 2,399 |
| ||
Japan |
| 1,867 |
| 2,722 |
| ||
United Kingdom |
| 831 |
| 689 |
| ||
Korea |
| 578 |
| 186 |
| ||
Canada |
| 274 |
| 266 |
| ||
Taiwan |
| 271 |
| 318 |
| ||
Other |
| 707 |
| 1,651 |
| ||
|
| $ | 676,630 |
| $ | 602,631 |
|
Property and equipment, net: |
|
|
|
|
| ||
U.S. |
| $ | 6,080 |
| $ | 7,569 |
|
Israel |
| 6,219 |
| 4,940 |
| ||
China |
| 1,367 |
| 1,388 |
| ||
Japan |
| 548 |
| 685 |
| ||
United Kingdom |
| 261 |
| 318 |
| ||
Taiwan |
| 611 |
| 229 |
| ||
Canada |
| 197 |
| 158 |
| ||
Korea |
| 132 |
| 73 |
| ||
Other |
| 258 |
| 697 |
| ||
|
| $ | 15,673 |
| $ | 16,057 |
|
The following table summarizes the percentage contribution to net revenues by customers when sales to such customers exceeded 10% of net revenues:
|
| Year ended |
| ||||||||||
|
| December 31, |
| ||||||||||
|
| 2006 |
| 2005 |
| 2004 |
| ||||||
Percentage of net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
A |
|
| 14 | % |
|
| — |
|
|
| 11 | % |
|
The above customer had accounts receivable balance greater than 10% as of the end of 2006.
On June 10, 2005, Zoran completed the acquisition of Oren Semiconductor, Inc. (“Oren”), a privately-held provider of demodulator ICs for the global high definition television market. Prior to this acquisition, Zoran had made investments in Oren that represented a 17% ownership interest with a net book value of $3.4 million at the time of the acquisition. Under the terms of the acquisition agreement, Zoran acquired
102
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
the remaining 83% of Oren’s outstanding stock by means of a merger of Oren with a wholly-owned subsidiary of Zoran, in consideration for which Zoran paid an aggregate of $28.4 million in cash and issued 1,188,061 shares of Zoran common stock valued at $12.9 million, for total consideration of $41.3 million, to the other stockholders of Oren and to employees holding Oren options. As a result of the restatement, the Company considered the requirements under Accounting Principles Board Opinion 18 (“APB No. 18”), “The Equity Method of Accounting for Investments in Common Stock,” to record the gains or losses on investment of the prior 17% ownership under the equity method of accounting. Based on the Company’s analysis, the prior financial results of the Company were restated to record the loss on investment.
The primary purpose of the acquisition was to obtain Oren’s demodulator IC technology for the global high definition television market. This technology was combined with Zoran’s digital television technology to deliver a complete and cost-effective system solution for digital television makers. As of December 31, 2006, there have been no material variations from the underlying assumptions that were used in the original computation of the value of the acquired entity.
The transaction was accounted for under SFAS No. 141, “Business Combinations,” using the purchase method of accounting. The Company incurred approximately $375,000 for acquisition-related expenses consisting of financial advisory, legal and other consulting services. The Company completed a valuation analysis and purchase price allocation. The results of operations of Oren have been included in the consolidated financial statements from the date of acquisition. The acquisition resulted in goodwill of approximately $33.9 million. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill will not be amortized and will be tested for impairment at least annually. The Company does not expect goodwill to be deductible for tax purposes.
Allocation of the purchase price is as follows (restated) (in thousands):
Net liabilities acquired |
| $ | (941 | ) |
In process research and development |
| 2,650 |
| |
Intangible assets |
| 9,100 |
| |
Goodwill |
| 33,897 |
| |
|
| $ | 44,706 |
|
Tangible assets were valued at estimates of their current fair values. The purchase price exceeded the net assets acquired resulting in the recognition of goodwill and other intangible assets. The amounts allocated to intangible assets include purchased technology totaling $7.0 million, trade name and other intangible assets totaling $1.25 million and customer base totaling $850,000 which are being amortized over their estimated useful lives of five years.
Approximately $2.7 million of the purchase price was allocated to in-process research and development which had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed upon the acquisition date. This amount was determined using management’s estimates including consultation with an independent appraiser. The value of the in-process research and development was determined using a discounted cash flow method and factors including projected financial results, relative risk of successful development, time-value of money and level of completion.
103
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On July 8, 2004, Zoran acquired Emblaze Semiconductor Ltd. (“Emblaze”), a subsidiary of Emblaze Ltd. and a provider of semiconductor-based solutions for high volume manufacturers of multimedia mobile telephones. Under the terms of the agreement, Zoran’s wholly-owned Israel based subsidiary, Zoran Microelectronics Ltd., acquired all of the outstanding common shares of Emblaze for approximately $54.2 million in cash.
The primary purpose of the acquisition was to gain high performance, low-power application processors, technology and products for the fast growing multimedia mobile phone market. This technology was combined with Zoran’s image processing technology to deliver reliable, cost-effective system solutions for mobile phone makers. As of December 31, 2006, there have been no material variations from the underlying assumptions that were used in the original computation of the value of the acquired entity.
The transaction was accounted for under SFAS No. 141, “Business Combinations,” using the purchase method of accounting. The Company incurred approximately $180,000 for acquisition-related expenses consisting of financial advisory, legal and other consulting services. The Company completed a valuation analysis and purchase price allocation with the assistance of a third party appraiser. The results of operations of Emblaze have been included in the consolidated financial statements from the date of acquisition. The acquisition resulted in goodwill of approximately $30.9 million. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill will not be amortized and will be tested for impairment at least annually. The Company does not expect goodwill to be deductible for tax purposes.
Net liabilities acquired |
| $ | (649 | ) |
Intangible assets |
| 24,150 |
| |
Goodwill |
| 30,879 |
| |
|
| $ | 54,380 |
|
The purchase price exceeded the net assets acquired resulting in the recognition of goodwill and other intangible assets. The amounts allocated to intangible assets include purchased technology totaling $11.8 million and patents totaling $12.4 million which are being amortized over their estimated useful lives of three years.
104
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined results of operations of Zoran, Emblaze and Oren as if the acquisitions had occurred as of the beginning of each period presented, after giving effect to certain adjustments, including amortization of intangibles. The in-process research and development charge of $2.7 million related to the Oren acquisition is not reflected in the unaudited pro forma combined condensed statement of operations. The unaudited pro forma financial information does not necessarily reflect the results of operations that would have occurred had the combined companies constituted a single entity during such periods, and is not necessarily indicative of results which may be obtained in the future.
|
| Year Ended December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (restated) |
| (restated) |
| ||
In thousands except for per share data: |
|
|
|
|
| ||
Pro forma revenues |
| $ | 396,737 |
| $ | 383,131 |
|
Pro forma net loss |
| $ | (33,024 | ) | $ | (63,207 | ) |
Pro forma net loss per share: |
|
|
|
|
| ||
Basic |
| $ | (0.75 | ) | $ | (1.48 | ) |
Diluted |
| $ | (0.75 | ) | $ | (1.48 | ) |
On February 27, 2007, the Company elected to (i) participate in the Internal Revenue Service remediation program 2007-18 and pay to the IRS, on behalf of affected and eligible employees (not including executive officers), their IRC 409A tax liabilities and penalties; (ii) participate in any similar remediation program that may be offered by any state for applicable state tax liabilities and penalties; (iii), act directly with any state not offering a similar remediation program to address any applicable tax liabilities and penalties on behalf of employees; and (iv) pay to such employees a “gross-up” payment to offset the associated federal and state income tax consequences. The Company took this action because the vast majority of the holders of stock options issued by the Company that are now subject to re-measurement as a result of the Company’s option investigation were not involved in or aware of the stock option pricing determination. Employees who exercised such options in 2006, other than executive officers at the time of option grant or entering into this program, will participate in this program. The Company estimates that the total cash payments needed to deal with the adverse tax consequences of previously exercised discount priced options granted to non-officers will be approximately $0.8 million, which is expected to be recorded in 2007.
In addition, the Company may consider taking action to minimize the adverse tax consequences that may be incurred by the holders of unexercised discount options. Discount-priced stock options vesting after December 31, 2004 (“409A Affected Options”) subject U.S. option holders to a penalty tax under IRC Section 409A (and to similar penalty taxes under California and other state tax laws, as applicable). The Company may consider offering to amend the 409A Affected Options held by persons other than directors and executive officers to increase the exercise prices of those options to the market price of our common stock on the revised measurement date. The amended options would not be subject to taxation under IRC Section 409A. Under IRS regulations, the amendments for non-executives cannot be offered until after this Report is filed and do not need to be completed until December 31, 2007. The Company may also consider approving the payment of bonuses to holders of those amended options to compensate them for the resulting increase in their option exercise price. The amount of these bonuses would be effectively repaid to the Company if and when the options are exercised and the increased exercise price is paid (but there is no assurance that the options will be exercised). The Company has not estimated the expense of any such bonus payments.
105
The following tables contain selected unaudited quarterly financial data for the eight fiscal quarters in the period ended December 31, 2006. In management’s opinion, the unaudited data has been prepared on the same basis as the audited information and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the data for the periods presented. Our results of operations have varied and may continue to fluctuate significantly from quarter to quarter. The results of operations in any period should not be considered indicative of the results to be expected from any future period.
The selected quarterly information has been restated for all quarters of fiscal 2005 and the first quarter of fiscal 2006 from previously reported information filed on Form 10-Q and Form 10-K, as a result of the restatement of our financial results discussed in this Annual Report on Form 10-K.
ZORAN CORPORATION
SELECTED QUARTERLY FINANCIAL INFORMATION
(Unaudited)
(restated)
| Three Months Ended |
| |||||||||||||||||||||||
|
|
|
|
|
|
|
| Mar. 31, |
| Dec. 31, |
| Sep 30, |
| Jun. 30, |
| Mar. 31, |
| ||||||||
|
| Dec. 31, |
| Sep 30, |
| Jun. 30, |
| 2006 |
| 2005 |
| 2005 |
| 2005 |
| 2005 |
| ||||||||
|
| 2006 |
| 2006 |
| 2006 |
| (restated) |
| (restated) |
| (restated) |
| (restated) |
| (restated) |
| ||||||||
|
| (In thousands, except per share data) |
| ||||||||||||||||||||||
Total revenues |
| $ | 96,251 |
| $ | 129,379 |
| $ | 127,929 |
| $ | 142,246 |
| $ | 109,311 |
| $ | 117,484 |
| $ | 95,079 |
| $ | 73,884 |
|
Gross profit |
| $ | 50,806 |
| $ | 62,569 |
| $ | 67,574 |
| $ | 88,596 |
| $ | 59,359 |
| $ | 63,575 |
| $ | 49,703 |
| $ | 36,949 |
|
Operating income (loss) |
| $ | (14,644 | ) | $ | (1,016 | ) | $ | (496 | ) | $ | 26,712 |
| $ | (3,459 | ) | $ | 4,517 |
| $ | (12,111 | ) | $ | (18,826 | ) |
Net income (loss) |
| $ | (10,986 | ) | $ | 1,852 |
| $ | 4,779 |
| $ | 20,683 |
| $ | (3,769 | ) | $ | 3,995 |
| $ | (11,775 | ) | $ | (18,723 | ) |
Basic net income (loss) per |
| $ | (0.22 | ) | $ | 0.04 |
| $ | 0.10 |
| $ | 0.45 |
| $ | (0.08 | ) | $ | 0.09 |
| $ | (0.27 | ) | $ | (0.43 | ) |
Diluted net income (loss) per |
| $ | (0.22 | ) | $ | 0.04 |
| $ | 0.09 |
| $ | 0.43 |
| $ | (0.08 | ) | $ | 0.09 |
| $ | (0.27 | ) | $ | (0.43 | ) |
Shares used in basic per share calculations(1) |
| 49,426 |
| 49,333 |
| 48,461 |
| 46,207 |
| 45,249 |
| 44,877 |
| 43,707 |
| 43,213 |
| ||||||||
Shares used in diluted per share calculations(1) |
| 49,426 |
| 50,712 |
| 51,311 |
| 48,487 |
| 45,249 |
| 46,622 |
| 43,707 |
| 43,213 |
|
(1) Computed on the basis described in Note 3 of Notes to Consolidated Financial Statements.
106
The following tables present the impact of the financial statement adjustments on our previously reported Condensed Consolidated Statements of Operations for the three month period ended March 31, 2006 (in thousands, except per share data):
|
| Three Months Ended |
| |||||||||||||
|
| As previously reported |
| Adjustments(1) |
| As restated(1) |
| |||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Hardware product revenues |
|
| $ | 99,169 |
|
|
| $ | — |
|
|
| $ | 99,169 |
|
|
Software and other revenues |
|
| 12,909 |
|
|
| — |
|
|
| 12,909 |
|
| |||
License revenues related to litigation settlement. |
|
| 30,168 |
|
|
| — |
|
|
| 30,168 |
|
| |||
Total revenues |
|
| 142,246 |
|
|
| — |
|
|
| 142,246 |
|
| |||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cost of hardware product revenues |
|
| 54,466 |
|
|
| (816 | ) |
|
| 53,650 |
|
| |||
Research and development |
|
| 24,151 |
|
|
| 97 |
|
|
| 24,248 |
|
| |||
Selling, general and administrative |
|
| 24,755 |
|
|
| 146 |
|
|
| 24,901 |
|
| |||
Amortization of intangible assets |
|
| 12,735 |
|
|
| — |
|
|
| 12,735 |
|
| |||
Total costs and expenses |
|
| 116,107 |
|
|
| (573 | ) |
|
| 115,534 |
|
| |||
Operating income |
|
| 26,139 |
|
|
| 573 |
|
|
| 26,712 |
|
| |||
Interest income |
|
| 1,630 |
|
|
| (37 | ) |
|
| 1,593 |
|
| |||
Other income (loss), net |
|
| 1,193 |
|
|
| — |
|
|
| 1,193 |
|
| |||
Income before income taxes |
|
| 28,962 |
|
|
| 536 |
|
|
| 29,498 |
|
| |||
Provision for income taxes |
|
| 8,202 |
|
|
| 613 |
|
|
| 8,815 |
|
| |||
Net income |
|
| $ | 20,760 |
|
|
| $ | (77 | ) |
|
| $ | 20,683 |
|
|
Basic net income per share |
|
| $ | 0.45 |
|
|
| $ | — |
|
|
| $ | 0.45 |
|
|
Diluted net income per share |
|
| $ | 0.43 |
|
|
| $ | — |
|
|
| $ | 0.43 |
|
|
Shares used to compute basic net income per share |
|
| 46,207 |
|
|
|
|
|
|
| 46,207 |
|
| |||
Shares used to compute diluted income per share |
|
| 48,487 |
|
|
|
|
|
|
| 48,487 |
|
|
(1) In addition to restating the consolidated financial statements in response to the Special Committee’s findings, the Company has recorded additional non-cash adjustments that were considered to be immaterial to our previously filed consolidated financial statements relating to the timing of revenue recognition, accrued expenses, amortization of premiums and discounts on investments, additional expense related to options granted to a consultant and the calculation of amortization of stock-based compensation relating to a business combination in 2003. In addition, the Company is also recording losses under Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock,” to record the losses on investment of the prior 17% ownership of Oren Semiconductor, Inc. under the equity method of accounting which was acquired by Zoran in 2005.
107
The following tables present the impact of the financial statement adjustments on our previously reported Condensed Consolidated Statements of Operations for the three month periods ended December 31, 2005 and September 30, 2005 (in thousands, except per share data):
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
| Three Months Ended |
| Three Months Ended |
| ||||||||||||||||||||||||||
|
| As previously |
| Adjustments(1) |
| As restated |
| As previously |
| Adjustments(1) |
| As restated |
| ||||||||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Hardware product revenues |
|
| $ | 95,432 |
|
|
| $ | — |
|
|
| $ | 95,432 |
|
|
| $ | 104,208 |
|
|
| $ | — |
|
|
| $ | 104,208 |
|
|
Software and other revenues |
|
| 13,879 |
|
|
| — |
|
|
| 13,879 |
|
|
| 13,276 |
|
|
| — |
|
|
| 13,276 |
|
| ||||||
Total revenues |
|
| 109,311 |
|
|
| — |
|
|
| 109,311 |
|
|
| 117,484 |
|
|
| — |
|
|
| 117,484 |
|
| ||||||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cost of hardware product revenues |
|
| 49,689 |
|
|
| 263 |
|
|
| 49,952 |
|
|
| 53,660 |
|
|
| 249 |
|
|
| 53,909 |
|
| ||||||
Research and development |
|
| 24,138 |
|
|
| 379 |
|
|
| 24,517 |
|
|
| 23,469 |
|
|
| 213 |
|
|
| 23,682 |
|
| ||||||
Selling, general and administrative |
|
| 24,522 |
|
|
| 815 |
|
|
| 25,337 |
|
|
| 21,817 |
|
|
| 458 |
|
|
| 22,275 |
|
| ||||||
Amortization of intangible assets |
|
| 12,736 |
|
|
| — |
|
|
| 12,736 |
|
|
| 12,757 |
|
|
| — |
|
|
| 12,757 |
|
| ||||||
Amortization of stock-based compensation resulting from business combinations |
|
| 228 |
|
|
| — |
|
|
| 228 |
|
|
| 344 |
|
|
| — |
|
|
| 344 |
|
| ||||||
Total costs and expenses |
|
| 111,313 |
|
|
| 1,457 |
|
|
| 112,770 |
|
|
| 112,047 |
|
|
| 920 |
|
|
| 112,967 |
|
| ||||||
Operating income (loss) |
|
| (2,002 | ) |
|
| (1,457 | ) |
|
| (3,459 | ) |
|
| 5,437 |
|
|
| (920 | ) |
|
| 4,517 |
|
| ||||||
Interest income |
|
| 909 |
|
|
| (42 | ) |
|
| 867 |
|
|
| 689 |
|
|
| (43 | ) |
|
| 646 |
|
| ||||||
Other income (loss), net |
|
| (21 | ) |
|
| — |
|
|
| (21 | ) |
|
| 32 |
|
|
| — |
|
|
| 32 |
|
| ||||||
Income (loss) before income taxes |
|
| (1,114 | ) |
|
| (1,499 | ) |
|
| (2,613 | ) |
|
| 6,158 |
|
|
| (963 | ) |
|
| 5,195 |
|
| ||||||
Provision for income taxes |
|
| 964 |
|
|
| 192 |
|
|
| 1,156 |
|
|
| 1,200 |
|
|
| — |
|
|
| 1,200 |
|
| ||||||
Net income (loss) |
|
| $ | (2,078 | ) |
|
| $ | (1,691 | ) |
|
| $ | (3,769 | ) |
|
| $ | 4,958 |
|
|
| $ | (963 | ) |
|
| $ | 3,995 |
|
|
Basic net loss per share |
|
| $ | (0.05 | ) |
|
| $ | (0.03 | ) |
|
| $ | (0.08 | ) |
|
| $ | 0.11 |
|
|
| $ | (0.02 | ) |
|
| $ | 0.09 |
|
|
Diluted net loss per share |
|
| $ | (0.05 | ) |
|
| $ | (0.03 | ) |
|
| $ | (0.08 | ) |
|
| $ | 0.11 |
|
|
| $ | (0.02 | ) |
|
| $ | 0.09 |
|
|
Shares used to compute basic net loss per share |
|
| 45,249 |
|
|
|
|
|
|
| 45,249 |
|
|
| 44,877 |
|
|
|
|
|
|
| 44,877 |
|
| ||||||
Shares used to compute diluted loss per share |
|
| 45,249 |
|
|
|
|
|
|
| 45,349 |
|
|
| 46,622 |
|
|
|
|
|
|
| 46,622 |
|
|
(1) In addition to restating the consolidated financial statements in response to the Special Committee’s findings, the Company has recorded additional non-cash adjustments that were considered to be immaterial to our previously filed consolidated financial statements relating to the timing of revenue recognition, accrued expenses, amortization of premiums and discounts on investments, additional expense related to options granted to a consultant and the calculation of amortization of stock-based compensation relating to a business combination in 2003. In addition, the Company is also recording losses under Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock,” to record the losses on investment of the prior 17% ownership of Oren Semiconductor, Inc. under the equity method of accounting which was acquired by Zoran in 2005.
108
The following tables present the impact of the financial statement adjustments on our previously reported Condensed Consolidated Statements of Operations for the three month periods ended June 30, 2005 and March 31, 2005 (in thousands, except per share data):
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
| Three Months Ended |
| Three Months Ended |
| ||||||||||||||||||||||||||
|
| As previously |
| Adjustments(1) |
| As restated |
| As previously |
| Adjustments(1) |
| As restated |
| ||||||||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Hardware product revenues |
|
| $ | 80,897 |
|
|
| $ | — |
|
|
| $ | 80,897 |
|
|
| $ | 59,002 |
|
|
| $ | — |
|
|
| $ | 59,002 |
|
|
Software and other revenues |
|
| 14,182 |
|
|
| — |
|
|
| 14,182 |
|
|
| 14,882 |
|
|
| — |
|
|
| 14,882 |
|
| ||||||
Total revenues |
|
| 95,079 |
|
|
| — |
|
|
| 95,079 |
|
|
| 73,884 |
|
|
| — |
|
|
| 73,884 |
|
| ||||||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cost of hardware product revenues |
|
| 45,236 |
|
|
| 140 |
|
|
| 45,376 |
|
|
| 36,964 |
|
|
| (29 | ) |
|
| 36,935 |
|
| ||||||
Research and development |
|
| 21,321 |
|
|
| 202 |
|
|
| 21,523 |
|
|
| 20,100 |
|
|
| (13 | ) |
|
| 20,087 |
|
| ||||||
Selling, general and administrative |
|
| 24,318 |
|
|
| 435 |
|
|
| 24,753 |
|
|
| 23,174 |
|
|
| (333 | ) |
|
| 22,841 |
|
| ||||||
Amortization of intangible assets |
|
| 12,431 |
|
|
| — |
|
|
| 12,431 |
|
|
| 12,330 |
|
|
| — |
|
|
| 12,330 |
|
| ||||||
Amortization of stock-based compensation resulting from business combinations |
|
| 457 |
|
|
| — |
|
|
| 457 |
|
|
| 517 |
|
|
| — |
|
|
| 517 |
|
| ||||||
In-process research and development |
|
| 2,650 |
|
|
| — |
|
|
| 2,650 |
|
|
| — |
|
|
| — |
|
|
| — |
|
| ||||||
Total costs and expenses |
|
| 106,413 |
|
|
| 777 |
|
|
| 107,190 |
|
|
| 93,085 |
|
|
| (375 | ) |
|
| 92,710 |
|
| ||||||
Operating loss |
|
| (11,334 | ) |
|
| (777 | ) |
|
| (12,111 | ) |
|
| (19,201 | ) |
|
| 375 |
|
|
| (18,826 | ) |
| ||||||
Interest income |
|
| 572 |
|
|
| (19 | ) |
|
| 553 |
|
|
| 535 |
|
|
| (8 | ) |
|
| 527 |
|
| ||||||
Other income (loss), net |
|
| (293 | ) |
|
| 76 |
|
|
| (217 | ) |
|
| (130 | ) |
|
| (294 | ) |
|
| (424 | ) |
| ||||||
Loss before income taxes |
|
| (11,055 | ) |
|
| (720 | ) |
|
| (11,775 | ) |
|
| (18,796 | ) |
|
| 73 |
|
|
| (18,723 | ) |
| ||||||
Provision for income taxes |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| ||||||
Net loss |
|
| $ | (11,055 | ) |
|
| $ | (720 | ) |
|
| $ | (11,775 | ) |
|
| $ | (18,796 | ) |
|
| $ | 73 |
|
|
| $ | (18,723 | ) |
|
Basic net loss per share |
|
| $ | (0.25 | ) |
|
| $ | (0.02 | ) |
|
| $ | (0.27 | ) |
|
| $ | (0.43 | ) |
|
| $ | — |
|
|
| $ | (0.43 | ) |
|
Diluted net loss per share |
|
| $ | (0.25 | ) |
|
| $ | (0.02 | ) |
|
| $ | (0.27 | ) |
|
| $ | (0.43 | ) |
|
| $ | — |
|
|
| $ | (0.43 | ) |
|
Shares used to compute basic net loss per share |
|
| 43,707 |
|
|
|
|
|
|
| 43,707 |
|
|
| 43,213 |
|
|
|
|
|
|
| 43,213 |
|
| ||||||
Shares used to compute diluted loss per share |
|
| 43,707 |
|
|
|
|
|
|
| 43,707 |
|
|
| 43,213 |
|
|
|
|
|
|
| 43,213 |
|
|
(1) In addition to restating the consolidated financial statements in response to the Special Committee’s findings, the Company has recorded additional non-cash adjustments that were considered to be immaterial to our previously filed consolidated financial statements relating to the timing of revenue recognition, accrued expenses, amortization of premiums and discounts on investments, additional expense related to options granted to a consultant and the calculation of amortization of stock-based compensation relating to a business combination in 2003. In addition, the Company is also recording losses under Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock,” to record the losses on investment of the prior 17% ownership of Oren Semiconductor, Inc. under the equity method of accounting which was acquired by Zoran in 2005.
109
The following tables present the impact of the financial statement adjustments on our previously reported Condensed Consolidated Balance Sheets as of March 31, 2006:
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
| March 31, 2006 |
| Adjustment(1) |
| March 31, 2006 |
| |||||||||
|
| (As reported) |
|
|
| (As restated) |
| |||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents |
|
| $ | 113,752 |
|
|
| $ | — |
|
|
| $ | 113,752 |
|
|
Short-term investments |
|
| 104,124 |
|
|
| — |
|
|
| 104,124 |
|
| |||
Accounts receivable, net |
|
| 62,431 |
|
|
| — |
|
|
| 62,431 |
|
| |||
Inventories |
|
| 38,663 |
|
|
| — |
|
|
| 38,663 |
|
| |||
Prepaid expenses and other current assets |
|
| 9,800 |
|
|
| — |
|
|
| 9,800 |
|
| |||
Total current assets |
|
| 328,770 |
|
|
| — |
|
|
| 328,770 |
|
| |||
Property and equipment, net |
|
| 14,905 |
|
|
| — |
|
|
| 14,905 |
|
| |||
Other assets and investments |
|
| 21,627 |
|
|
| — |
|
|
| 21,627 |
|
| |||
Goodwill |
|
| 180,254 |
|
|
| (1,592 | ) |
|
| 178,662 |
|
| |||
Intangible assets, net |
|
| 106,496 |
|
|
| — |
|
|
| 106,496 |
|
| |||
|
|
| $ | 652,052 |
|
|
| $ | (1,592 | ) |
|
| $ | 650,460 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Accounts payable |
|
| $ | 44,737 |
|
|
| $ | — |
|
|
| $ | 44,737 |
|
|
Accrued expenses and other liabilities |
|
| 53,562 |
|
|
| 621 |
|
|
| 54,183 |
|
| |||
Total current liabilities |
|
| 98,299 |
|
|
| 621 |
|
|
| 98,920 |
|
| |||
Other long-term liabilities |
|
| 12,770 |
|
|
| — |
|
|
| 12,770 |
|
| |||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Common stock, $0.001 par value; 105,000,000 shares authorized at March 31, 2006; 46,716,431 shares issued and outstanding as of March 31, 2006 |
|
| 47 |
|
|
| — |
|
|
| 47 |
|
| |||
Additional paid-in capital |
|
| 748,792 |
|
|
| 10,907 |
|
|
| 759,699 |
|
| |||
Accumulated other comprehensive income |
|
| 2,179 |
|
|
| — |
|
|
| 2,179 |
|
| |||
Accumulated deficit |
|
| (210,035 | ) |
|
| (13,120 | ) |
|
| (223,155 | ) |
| |||
Total stockholders’ equity |
|
| 540,983 |
|
|
| (2,213 | ) |
|
| 538,770 |
|
| |||
|
|
| $ | 652,052 |
|
|
| $ | (1,592 | ) |
|
| $ | 650,460 |
|
|
(1) The restated consolidated balance sheet as of March 31, 2006 reflects a $13.1 million increase to accumulated deficit and a $10.9 million increase to additional paid-in capital primarily due to additional stock-based compensation recorded in connection with this restatement to correct prior year stock option-related accounting errors as described above and to reflect the cumulative impact of other adjustments that were previously considered to be immaterial. The $1.6 million decrease to goodwill is the impact of recording losses associated with our investment in Oren Semiconductor and $0.6 million increase to accrued expenses and other liabilities relates to the tax adjustments associated with other adjustments at March 31, 2006.
110
The following tables present the impact of the financial statement adjustments on our previously reported Condensed Consolidated Balance Sheets as of December 31, 2005:
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
| December 31,2005 |
| Adjustments(1) |
| December 31,2005 |
| |||||||||
|
| (As reported) |
|
|
| (As restated) |
| |||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents |
|
| $ | 78,856 |
|
|
| $ | — |
|
|
| $ | 78,856 |
|
|
Short-term investments |
|
| 70,490 |
|
|
| — |
|
|
| 70,490 |
|
| |||
Accounts receivable, net |
|
| 70,174 |
|
|
| — |
|
|
| 70,174 |
|
| |||
Inventory |
|
| 32,616 |
|
|
| — |
|
|
| 32,616 |
|
| |||
Prepaid expenses and other current assets |
|
| 11,746 |
|
|
| — |
|
|
| 11,746 |
|
| |||
Total current assets |
|
| 263,882 |
| �� |
| — |
|
|
| 263,882 |
|
| |||
Property and equipment, net |
|
| 16,057 |
|
|
| — |
|
|
| 16,057 |
|
| |||
Other assets and investments |
|
| 20,799 |
|
|
| — |
|
|
| 20,799 |
|
| |||
Goodwill |
|
| 184,254 |
|
|
| (1,592 | ) |
|
| 182,662 |
|
| |||
Intangible assets, net |
|
| 119,231 |
|
|
| — |
|
|
| 119,231 |
|
| |||
|
|
| $ | 604,223 |
|
|
| $ | (1,592 | ) |
|
| $ | 602,631 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Accounts payable |
|
| $ | 38,999 |
|
|
| $ | — |
|
|
| $ | 38,999 |
|
|
Accrued expenses and other liabilities |
|
| 53,937 |
|
|
| 832 |
|
|
| 54,769 |
|
| |||
Total current liabilities |
|
| 92,936 |
|
|
| 832 |
|
|
| 93,768 |
|
| |||
Other long-term liabilities |
|
| 11,939 |
|
|
| — |
|
|
| 11,939 |
|
| |||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Common stock, $0.001 par value; 105,000,000 shares authorized at December 31, 2005 45,426,912 shares issued and outstanding as of December 31, 2005 |
|
| 45 |
|
|
| — |
|
|
| 45 |
|
| |||
Additional paid-in capital |
|
| 727,597 |
|
|
| 10,656 |
|
|
| 738,253 |
|
| |||
Deferred stock-based compensation |
|
| (593 | ) |
|
| — |
|
|
| (593 | ) |
| |||
Accumulated other comprehensive income |
|
| 3,094 |
|
|
| (37 | ) |
|
| 3,057 |
|
| |||
Accumulated deficit |
|
| (230,795 | ) |
|
| (13,043 | ) |
|
| (243,838 | ) |
| |||
Total stockholders’ equity |
|
| 499,348 |
|
|
| (2,424 | ) |
|
| 496,924 |
|
| |||
|
|
| $ | 604,223 |
|
|
| $ | (1,592 | ) |
|
| $ | 602,631 |
|
|
(1) The restated consolidated balance sheet for the fiscal year ended 2005 reflects a $13.0 million increase to accumulated deficit and a $10.7 million increase to additional paid-in capital primarily due to additional stock-based compensation recorded in connection with this restatement to correct prior year stock option-related accounting errors as described above and to reflect the cumulative impact of other adjustments that were previously considered to be immaterial. The $1.6 million decrease to goodwill is the impact of recording losses associated with our investment in Oren Semiconductor under the equity method of accounting and $0.8 million increase to accrued expenses and other liabilities relates to the accrual of royalty obligations that was previously not recorded at December 31, 2005.
111
The following tables present the impact of the financial statement adjustments on our previously reported Condensed Consolidated Balance Sheets as of September 30, 2005:
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| September 30, |
| Adjustments(1) |
| September 30, |
| ||||||||||
|
| (As reported) |
|
|
| (As restated) |
| |||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents |
|
| $ | 64,782 |
|
|
| $ | — |
|
|
| $ | 64,782 |
|
|
Short-term investments |
|
| 65,412 |
|
|
| — |
|
|
| 65,412 |
|
| |||
Accounts receivable, net |
|
| 80,735 |
|
|
| — |
|
|
| 80,735 |
|
| |||
Inventories |
|
| 27,331 |
|
|
| — |
|
|
| 27,331 |
|
| |||
Prepaid expenses and other current assets |
|
| 13,151 |
|
|
| — |
|
|
| 13,151 |
|
| |||
Total current assets |
|
| 251,411 |
|
|
| — |
|
|
| 251,411 |
|
| |||
Property and equipment, net |
|
| 16,627 |
|
|
| — |
|
|
| 16,627 |
|
| |||
Other assets and investments |
|
| 20,488 |
|
|
| — |
|
|
| 20,488 |
|
| |||
Goodwill |
|
| 185,456 |
|
|
| (1,408 | ) |
|
| 184,048 |
|
| |||
Intangible assets, net |
|
| 131,966 |
|
|
| — |
|
|
| 131,966 |
|
| |||
|
|
| $ | 605,948 |
|
|
| $ | (1,408 | ) |
|
| $ | 604,540 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Accounts payable |
|
| $ | 37,800 |
|
|
| $ | — |
|
|
| $ | 37,800 |
|
|
Accrued expenses and other liabilities |
|
| 59,306 |
|
|
| 586 |
|
|
| 59,892 |
|
| |||
Total current liabilities |
|
| 97,106 |
|
|
| 586 |
|
|
| 97,692 |
|
| |||
Other long-term liabilities |
|
| 11,538 |
|
|
| — |
|
|
| 11,538 |
|
| |||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Common stock, $0.001 par value; 105,000,000 shares authorized at September 30, 2005; 45,011,293 shares issued and outstanding as of September 30, 2005 |
|
| 45 |
|
|
| — |
|
|
| 45 |
|
| |||
Additional paid-in capital |
|
| 723,671 |
|
|
| 10,656 |
|
|
| 734,327 |
|
| |||
Deferred stock-based compensation |
|
| (957 | ) |
|
| (1,219 | ) |
|
| (2,176 | ) |
| |||
Accumulated other comprehensive income |
|
| 3,262 |
|
|
| (79 | ) |
|
| 3,183 |
|
| |||
Accumulated deficit |
|
| (228,717 | ) |
|
| (11,352 | ) |
|
| (240,069 | ) |
| |||
Total stockholders’ equity |
|
| 497,304 |
|
|
| (1,994 | ) |
|
| 495,310 |
|
| |||
|
|
| $ | 605,948 |
|
|
| $ | (1,408 | ) |
|
| $ | 604,540 |
|
|
(1) The restated consolidated balance sheet as of September 30, 2005 reflects a $11.4 million increase to accumulated deficit and a $10.7 million increase to additional paid-in capital primarily due to additional stock-based compensation recorded in connection with this restatement to correct prior year stock option-related accounting errors as described above and to reflect the cumulative impact of other adjustments that were previously considered to be immaterial. The $1.4 million decrease to goodwill is the impact of recording losses associated with our investment in Oren Semiconductor under the equity method of accounting and $0.6 million increase to accrued expenses and other liabilities relates to the accrual of royalty obligations that were previously not recorded at September 30, 2005.
112
The following tables present the impact of the financial statement adjustments on our previously reported Condensed Consolidated Balance Sheets as of June 30, 2005:
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| June 30, |
| Adjustments(1) |
| June 30, |
| ||||||||||
|
| (As reported) |
|
|
| (As restated) |
| |||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents |
|
| $ | 53,425 |
|
|
| $ | — |
|
|
| $ | 53,425 |
|
|
Short-term investments |
|
| 62,618 |
|
|
| — |
|
|
| 62,618 |
|
| |||
Accounts receivable, net |
|
| 68,454 |
|
|
| — |
|
|
| 68,454 |
|
| |||
Inventories |
|
| 25,353 |
|
|
| — |
|
|
| 25,353 |
|
| |||
Prepaid expenses and other current assets |
|
| 14,903 |
|
|
| — |
|
|
| 14,903 |
|
| |||
Total current assets |
|
| 224,753 |
|
|
| — |
|
|
| 224,753 |
|
| |||
Property and equipment, net |
|
| 17,233 |
|
|
| — |
|
|
| 17,233 |
|
| |||
Other assets and investments |
|
| 24,435 |
|
|
| — |
|
|
| 24,435 |
|
| |||
Goodwill |
|
| 185,456 |
|
|
| (1,408 | ) |
|
| 184,048 |
|
| |||
Intangible assets, net |
|
| 144,724 |
|
|
| — |
|
|
| 144,724 |
|
| |||
|
|
| $ | 596,601 |
|
|
| $ | (1,408 | ) |
|
| $ | 595,193 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Accounts payable |
|
| $ | 38,837 |
|
|
| $ | — |
|
|
| $ | 38,837 |
|
|
Accrued expenses and other liabilities |
|
| 56,330 |
|
|
| 353 |
|
|
| 56,683 |
|
| |||
Total current liabilities |
|
| 95,167 |
|
|
| 353 |
|
|
| 95,520 |
|
| |||
Other long-term liabilities |
|
| 12,250 |
|
|
| — |
|
|
| 12,250 |
|
| |||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Common stock, $0.001 par value; 105,000,000 shares authorized at June 30, 2005; 44,759,422 shares issued and outstanding as of June 30, 2005 |
|
| 45 |
|
|
| — |
|
|
| 45 |
|
| |||
Additional paid-in capital |
|
| 721,143 |
|
|
| 10,656 |
|
|
| 731,799 |
|
| |||
Deferred stock-based compensation |
|
| (1,417 | ) |
|
| (1,906 | ) |
|
| (3,323 | ) |
| |||
Accumulated other comprehensive income |
|
| 3,088 |
|
|
| (122 | ) |
|
| 2,966 |
|
| |||
Accumulated deficit |
|
| (233,675 | ) |
|
| (10,389 | ) |
|
| (244,064 | ) |
| |||
Total stockholders’ equity |
|
| 489,184 |
|
|
| (1,761 | ) |
|
| 487,423 |
|
| |||
|
|
| $ | 596,601 |
|
|
| $ | (1,408 | ) |
|
| $ | 595,193 |
|
|
(1) The restated consolidated balance sheet as of June 30, 2005 reflects a $10.4 million increase to accumulated deficit and a $10.7 million increase to additional paid-in capital primarily due to additional stock-based compensation recorded in connection with this restatement to correct prior year stock option-related accounting errors as described above and to reflect the cumulative impact of other adjustments that were previously considered to be immaterial. The $1.4 million decrease to goodwill is the impact of recording losses associated with our investment in Oren Semiconductor under the equity method of accounting and $0.4 million increase to accrued expenses and other liabilities relates to the accrual of royalty obligations that were previously not recorded at June 30, 2005.
113
The following tables present the impact of the financial statement adjustments on our previously reported Condensed Consolidated Balance Sheets as of March 31, 2005:
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| March 31, |
| Adjustments(1) |
| March 31, |
| ||||||||||
|
| (As reported) |
|
|
| (As restated) |
| |||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents |
|
| $ | 31,025 |
|
|
| $ | — |
|
|
| $ | 31,025 |
|
|
Short-term investments |
|
| 50,311 |
|
|
| — |
|
|
| 50,311 |
|
| |||
Accounts receivable, net |
|
| 68,023 |
|
|
| — |
|
|
| 68,023 |
|
| |||
Inventories |
|
| 34,207 |
|
|
| — |
|
|
| 34,207 |
|
| |||
Prepaid expenses and other current assets |
|
| 17,995 |
|
|
| — |
|
|
| 17,995 |
|
| |||
Total current assets |
|
| 201,561 |
|
|
| — |
|
|
| 201,561 |
|
| |||
Property and equipment, net |
|
| 16,270 |
|
|
| — |
|
|
| 16,270 |
|
| |||
Other assets and investments |
|
| 62,470 |
|
|
| (1,484 | ) |
|
| 60,986 |
|
| |||
Goodwill |
|
| 150,151 |
|
|
| — |
|
|
| 150,151 |
|
| |||
Intangible assets, net |
|
| 148,054 |
|
|
| — |
|
|
| 148,054 |
|
| |||
|
|
| $ | 578,506 |
|
|
| $ | (1,484 | ) |
|
| $ | 577,022 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Accounts payable |
|
| $ | 27,955 |
|
|
| $ | — |
|
|
| $ | 27,955 |
|
|
Accrued expenses and other liabilities |
|
| 53,797 |
|
|
| 227 |
|
|
| 54,024 |
|
| |||
Total current liabilities |
|
| 81,752 |
|
|
| 227 |
|
|
| 81,979 |
|
| |||
Other long-term liabilities |
|
| 13,064 |
|
|
| — |
|
|
| 13,064 |
|
| |||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Common stock, $0.001 par value; 105,000,000 shares authorized at March 31, 2005; 45,252,892 shares issued and outstanding as of March 31, 2005 |
|
| 43 |
|
|
| — |
|
|
| 43 |
|
| |||
Additional paid-in capital |
|
| 705,761 |
|
|
| 10,656 |
|
|
| 716,417 |
|
| |||
Deferred stock-based compensation |
|
| (1,999 | ) |
|
| (2,557 | ) |
|
| (4,556 | ) |
| |||
Accumulated other comprehensive income |
|
| 2,505 |
|
|
| (141 | ) |
|
| 2,364 |
|
| |||
Accumulated deficit |
|
| (222,620 | ) |
|
| (9,669 | ) |
|
| (232,289 | ) |
| |||
Total stockholders’ equity |
|
| 483,690 |
|
|
| (1,711 | ) |
|
| 481,979 |
|
| |||
|
|
| $ | 578,506 |
|
|
| $ | (1,484 | ) |
|
| $ | 577,022 |
|
|
(1) The restated consolidated balance sheet as of March 31, 2005 reflects a $9.7 million increase to accumulated deficit and a $10.7 million increase to additional paid-in capital primarily due to additional stock-based compensation recorded in connection with this restatement to correct prior year stock option-related accounting errors as described above and to reflect the cumulative impact of other adjustments that were previously considered to be immaterial. The $1.5 million decrease to goodwill is the impact of recording losses associated with our investment in Oren Semiconductor under the equity method of accounting and $0.2 million increase to accrued expenses and other liabilities relates to the accrual of royalty obligations that were previously not recorded at March 31, 2005.
114
Item 9—Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A—Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of its disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2006. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely discussions regarding required disclosures.
Management’s Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”), and includes those policies and procedures that:
1. pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
2. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
3. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation using criteria established in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2006.
Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
115
Management’s Consideration of the Restatement
As disclosed in Note 2, “Restatement of Consolidated Financial Statements,” to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, we restated previously issued financial statements to record incremental non-cash stock based compensation charges under APB No. 25 in the amount of $11.7 million between 1997 and 2005 and an additional $0.4 million in 2006 under SFAS No. 123(R). These accounting errors arose from the use of incorrect stock option grant measurement dates for grants made during the period 1997 to 2003.
In coming to the conclusion that our disclosure controls and procedures and our internal control over financial reporting were effective as of December 31, 2006, management considered control deficiencies related to the stock option granting process that resulted in the need to restate our previously issued financial statements.
During fiscal year 2004 in compliance with the Sarbanes-Oxley Act of 2002, the Company implemented improved procedures, processes and systems to provide additional safeguards and greater internal control over its stock option granting and administration. These improvements included:
· Segregating responsibilities, adding reviews and reconciliations, and redefining roles and responsibilities in the human resources function;
· Upgrading systems and system controls that support the grant process and improving the accuracy and timeliness of accounting for grants, including robust documentation of grant approvals and usage of a hosted stock administration system; and
· Obtaining and training more qualified competent individuals in the human resources and stock administration function.
The Company believes that these changes remediated the historical control deficiency. Consequently, the stock option grant process did not constitute a control deficiency as of December 31, 2006.
Changes to Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the fourth quarter of fiscal 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Not applicable.
116
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—Directors, Executive Officers and Corporate Governance
The information concerning our directors required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Proposal No. 1—Election of Directors.”
The information concerning our executive officers required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Executive Officers.”
The information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Section 16(a) Beneficial Ownership Reporting Compliance.”
The information concerning whether we have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, is incorporated by reference to the section in our Proxy Statement entitled “Committee Charters and Other Corporate Governance Materials.”
The information concerning material changes to the procedures by which stockholders may recommend nominees to the Board of Directors required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Director Nominations.”
The information concerning the audit committee of the Board of Directors required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Board Meetings and Committees.”
Item 11—Executive Compensation
The information required by this Item is incorporated by reference to the section of our Proxy Statement entitled “Executive Compensation and Other Matters”.
Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated by reference to the section of our Proxy Statement entitled “Principal Stockholders and Stock Ownership by Management” and “Equity Compensation Plan Information.”
Item 13—Certain Relationships and Related Transactions, and Director Independence
The information required by this Item with respect to certain relationships and related transactions is incorporated by reference to the section of our Proxy Statement entitled “Certain Relationships and Related Transactions.”
The information required by this Item with respect to director independence is incorporated by reference to the section of our Proxy Statement entitled “Directors” “Independence of the Board of Directors and its Committees.”
Item 14—Principal Accounting Fees and Services
The information required by this Item is incorporated by reference to the section of our Proxy Statement entitled “Principal Auditor Fees and Services.”
117
Item 15—Exhibits and Financial Statement Schedules
The following documents are filed as a part of this report:
(1) Financial Statements:
See Index to Consolidated Financial Statements at page 62 of this report.
(2) Financial Statement Schedules:
All financial statement schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements and Notes thereto which are included herein.
(3) Exhibits:
|
|
| Incorporated by Reference | |||||||||
Exhibit |
|
|
|
|
|
|
|
|
|
|
| Filed |
Number |
| Exhibit Title |
| Form |
| File No. |
| Exhibit |
| Filing Date |
| Herewith |
3.1 |
| Restated Certificate of Incorporation of the Registrant |
|
|
|
|
|
|
|
|
| X |
3.2 |
| Amended Bylaws of the Registrant |
|
|
|
|
|
|
|
|
| X |
4.1 |
| Form of Stock Certificate |
|
|
|
|
|
|
|
|
| X |
*10.1 |
| Form of Indemnity Agreement for officers and directors |
| SB-2 |
| 33-98630 |
| 10.4 |
| 12/14/1995 |
|
|
*10.2 |
| 2000 Nonstatutory Stock Option Plan |
| 10-K |
| 000-27246 |
| 10.39 |
| 03/31/2003 |
|
|
*10.3 |
| Executive Retention and Severance Plan, as amended |
| 8-K |
| 000-27246 |
| 99.1 |
| 10/31/05 |
|
|
10.4 |
| Oak Technology, Inc. 1994 Stock Option Plan (as amended and restated) |
| S-8 |
| 333-104498 |
| 99.1 |
| 04/14/2003 |
|
|
10.5 |
| Oak Technology, Inc. 1994 Outside Directors’ Stock Option Plan (as Amended and Restated November 21, 2002) |
| 10-Q/A |
| 000-25298 |
| 10.1 |
| 06/27/2003 |
|
|
*10.6 |
| Form of Oak Technology, Inc. Outside Directors’ Non-Qualified Stock Option Agreement for the 1994 Stock Option Plan and 1994 Outside Director’s Stock Option Plan entered into by David Rynne and Peter Simone |
| 10-Q |
| 000-27246 |
| 10.46 |
| 11/14/2003 |
|
|
10.7 |
| Asset Purchase Agreement between Oak Technology, Inc., and Sunplus Technology, Co. LTD. dated February 5, 2003 |
| 8-K |
| 000-25298 |
| 2.1 |
| 02/20/2003 |
|
|
10.8 |
| First Amendment to Asset Purchase Agreement between Oak Technology, Inc., and Sunplus Technology, Co. LTD. dated April 3, 2003 |
| 8-K |
| 000-25298 |
| 2.2 |
| 04/18/2003 |
|
|
*10. 9 |
| Summary of Compensation Arrangements with Named Executive Officers and Nonemployee Directors |
| 8-K |
| 000-27246 |
| 99.1 |
| 03/31/2006 |
|
|
*10.10 |
| Offer Letter to Karl Schneider dated December 15, 1997, as amended July 15, 1998 |
| 10-K/A |
| 000-27246 |
| 10.49 |
| 05/02/2005 |
|
|
118
10.11 |
| Lease Agreement dated February 2005 between ZML and Matam |
| POS-AM |
| 333-125948 |
| 10.11 |
| 07/29/05 |
|
|
10.12 |
| Form of Employee Proprietary Information and Invention Agreement |
| 10-K/A |
| 000-27246 |
| 10.51 |
| 05/02/2005 |
|
|
*10.13 |
| Zoran Corporation 2005 Equity Incentive Plan |
| 8-K |
| 000-27246 |
| 99.1 |
| 07/13/2006 |
|
|
10.14 |
| Zoran Corporation 2005 Outside Directors Equity Plan |
| 8-K |
| 000-27246 |
| 99.2 |
| 08/03/2005 |
|
|
10.15 |
| PC Optical Storage Technology Patent License Agreement dated as of January 25, 2006 among Zoran, Zoran’s subsidiary Oak Technology, Inc., and MediaTek, Inc |
| 10-Q |
| 000-27246 |
| 10.54 |
| 05/10/2006 |
|
|
10.16 |
| PC Optical Storage Patent Cross License Agreement dated as of January 25, 2006 among Zoran, Zoran’s subsidiary Oak Technology, Inc. and MediaTek, Inc. |
| 10-Q |
| 000-27246 |
| 10.55 |
| 05/10/2006 |
|
|
*10.17 |
| 1993 Stock Option Plan, as amended |
|
|
|
|
|
|
|
|
| X |
*10.18 |
| 1995 Outside Directors Stock Option Plan |
|
|
|
|
|
|
|
|
| X |
*10.19 |
| Form of Amendment of Nonstatutory Stock Option Agreement for Outside Directors |
|
|
|
|
|
|
|
|
| X |
10.20 |
| Lease Agreement dated as of February 8, 2007 by and between Arturo J. Gutierrez and John A. Cataldo, Trustees of Auburn-Oxford Trust, u/d/t dated October 19, 1983 and Zoran Corporation |
|
|
|
|
|
|
|
|
| X |
10.21 |
| Lease Agreement dated as of May 19, 2006 by and between WTA Kifer LLC and Zoran Corporation, as amended on May 19, 2006 |
|
|
|
|
|
|
|
|
| X |
*10.22 |
| Amended Summary of Compensation Arrangements with Named Executive Officers and Non Employee Directors |
| 8-K |
| 000-27246 |
| 99.1 |
| 03/31/2006 |
|
|
21.1 |
| List of Subsidiaries of the Registrant |
|
|
|
|
|
|
|
|
| X |
23.1 |
| Consent of PricewaterhouseCoopers LLP |
|
|
|
|
|
|
|
|
| X |
31.1 |
| Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) |
|
|
|
|
|
|
|
|
| X |
31.2 |
| Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) |
|
|
|
|
|
|
|
|
| X |
32.1 |
| Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
|
| X |
32.2 |
| Certification of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
|
| X |
* Constitutes a management contract or compensatory plan, contract or arrangement.
119
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.
Dated: April 19, 2007 |
| ZORAN CORPORATION | ||
|
| By: |
| /s/ LEVY GERZBERG |
|
|
|
| Levy Gerzberg, |
Pursuant to the requirements of the Securities 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 19, 2007 | ||||||
Levy Gerzberg |
| (Principal Executive Officer) |
|
| ||||||
/s/ KARL SCHNEIDER |
| Senior Vice President, Finance and Chief Financial |
| April 19, 2007 | ||||||
Karl Schneider |
| Officer (Principal Financial Officer and Principal Accounting Officer) |
|
| ||||||
/s/ UZIA GALIL |
| Chairman of the Board of Directors |
| April 19, 2007 | ||||||
Uzia Galil |
|
|
|
| ||||||
/s/ RAYMOND A. BURGESS |
| Director |
| April 19, 2007 | ||||||
Raymond A. Burgess |
|
|
|
| ||||||
/s/ JAMES D. MEINDL |
| Director |
| April 19, 2007 | ||||||
James D. Meindl |
|
|
|
| ||||||
/s/ JAMES B. OWENS |
| Director |
| April 19, 2007 | ||||||
James B. Owens, Jr. |
|
|
|
| ||||||
/s/ DAVID RYNNE |
| Director |
| April 19, 2007 | ||||||
David Rynne |
|
|
|
| ||||||
/s/ ARTHUR B. STABENOW |
| Director |
| April 19, 2007 | ||||||
Arthur B. Stabenow |
|
|
|
| ||||||
/s/ PHILIP M. YOUNG |
| Director |
| April 19, 2007 | ||||||
Philip M. Young |
|
|
|
|
120
|
|
| Incorporated by Reference |
| |||||||||||||||||
Exhibit |
| Exhibit Title |
|
|
| Form |
| File No. |
| Exhibit |
| Filing Date |
| Filed |
| ||||||
| 3.1 |
|
| Restated Certificate of Incorporation of the Registrant |
|
|
|
|
|
|
|
|
|
|
|
| X |
|
| ||
| 3.2 |
|
| Amended Bylaws of the Registrant |
|
|
|
|
|
|
|
|
|
|
|
| X |
|
| ||
| 4.1 |
|
| Form of Stock Certificate |
|
|
|
|
|
|
|
|
|
|
|
| X |
|
| ||
| *10.1 |
|
| Form of Indemnity Agreement for officers and directors |
| SB-2 |
| 33-98630 |
|
| 10.4 |
|
| 12/14/1995 |
|
|
|
|
| ||
| *10.2 |
|
| 2000 Nonstatutory Stock Option Plan |
| 10-K |
| 000-27246 |
|
| 10.39 |
|
| 03/31/2003 |
|
|
|
|
| ||
| *10.3 |
|
| Executive Retention and Severance Plan, as amended |
| 8-K |
| 000-27246 |
|
| 99.1 |
|
| 10/31/05 |
|
|
|
|
| ||
| 10.4 |
|
| Oak Technology, Inc. 1994 Stock Option Plan (as amended and restated) |
| S-8 |
| 333-104498 |
|
| 99.1 |
|
| 04/14/2003 |
|
|
|
|
| ||
| 10.5 |
|
| Oak Technology, Inc. 1994 Outside Directors’ Stock Option Plan (as Amended and Restated November 21, 2002) |
| 10-Q/A |
| 000-25298 |
|
| 10.1 |
|
| 06/27/2003 |
|
|
|
|
| ||
| *10.6 |
|
| Form of Oak Technology, Inc. Outside Directors’ Non-Qualified Stock Option Agreement for the 1994 Stock Option Plan and 1994 Outside Director’s Stock Option Plan entered into by David Rynne and Peter Simone |
| 10-Q |
| 000-27246 |
|
| 10.46 |
|
| 11/14/2003 |
|
|
|
|
| ||
| 10.7 |
|
| Asset Purchase Agreement between Oak Technology, Inc., and Sunplus Technology, Co. LTD. dated February 5, 2003 |
| 8-K |
| 000-25298 |
|
| 2.1 |
|
| 02/20/2003 |
|
|
|
|
| ||
| 10.8 |
|
| First Amendment to Asset Purchase Agreement between Oak Technology, Inc., and Sunplus Technology, Co. LTD. dated April 3, 2003 |
| 8-K |
| 000-25298 |
|
| 2.2 |
|
| 04/18/2003 |
|
|
|
|
| ||
| *10.9 |
|
| Summary of Compensation Arrangements with Named Executive Officers and Nonemployee Directors |
| 8-K |
| 000-27246 |
|
| 99.1 |
|
| 03/31/2006 |
|
|
|
|
| ||
| *10.10 |
|
| Offer Letter to Karl Schneider dated December 15, 1997, as amended July 15, 1998 |
| 10-K/A |
| 000-27246 |
|
| 10.49 |
|
| 05/02/2005 |
|
|
|
|
| ||
| 10.11 |
|
| Lease Agreement dated February 2005 between ZML and Matam |
| POS-AM |
| 333-125948 |
|
| 10.11 |
|
| 07/29/05 |
|
|
|
|
| ||
| 10.12 |
|
| Form of Employee Proprietary Information and Invention Agreement |
| 10-K/A |
| 000-27246 |
|
| 10.51 |
|
| 05/02/2005 |
|
|
|
|
| ||
| *10.13 |
|
| Zoran Corporation 2005 Equity Incentive Plan |
| 8-K |
| 000-27246 |
|
| 99.1 |
|
| 07/13/2006 |
|
|
|
|
| ||
121
|
|
| Incorporated by Reference |
| |||||||||||||||||
Exhibit |
| Exhibit Title |
|
|
| Form |
| File No. |
| Exhibit |
| Filing Date |
| Filed |
| ||||||
| 10.14 |
|
| Zoran Corporation 2005 Outside Directors Equity Plan |
| 8-K |
| 000-27246 |
|
| 99.2 |
|
| 08/03/2005 |
|
|
|
|
| ||
| 10.15 |
|
| PC Optical Storage Technology Patent License Agreement dated as of January 25, 2006 among Zoran, Zoran’s subsidiary Oak Technology, Inc., and MediaTek, Inc |
| 10-Q |
| 000-27246 |
|
| 10.54 |
|
| 05/10/2006 |
|
|
|
|
| ||
| 10.16 |
|
| PC Optical Storage Patent Cross License Agreement dated as of January 25, 2006 among Zoran, Zoran’s subsidiary Oak Technology, Inc. and MediaTek, Inc. |
| 10-Q |
| 000-27246 |
|
| 10.55 |
|
| 05/10/2006 |
|
|
|
|
| ||
| *10.17 |
|
| 1993 Stock Option Plan, as amended | �� |
|
|
|
|
|
|
|
|
|
|
| X |
|
| ||
| *10.18 |
|
| 1995 Outside Directors Stock Option Plan |
|
|
|
|
|
|
|
|
|
|
|
| X |
|
| ||
| *10.19 |
|
| Form of Amendment of Nonstatutory Stock Option Agreement for Outside Directors |
|
|
|
|
|
|
|
|
|
|
|
| X |
|
| ||
| 10.20 |
|
| Lease Agreement dated as of February 8, 2007 by and between Arturo J. Gutierrez and John A. Cataldo, Trustees of Auburn-Oxford Trust, u/d/t dated October 19, 1983 and Zoran Corporation |
|
|
|
|
|
|
|
|
|
|
|
| X |
|
| ||
| 10.21 |
|
| Lease Agreement dated as of May 19, 2006 by and between WTA Kifer LLC and Zoran Corporation, as amended on May 19, 2006 |
|
|
|
|
|
|
|
|
|
|
|
| X |
|
| ||
| *10.22 |
|
| Amended Summary of Compensation Arrangements with Named Executive Officers and Non Employee Directors |
| 8-K |
| 000-27246 |
|
| 99.1 |
|
| 03/31/2006 |
|
|
|
|
| ||
| 21.1 |
|
| List of Subsidiaries of the Registrant |
|
|
|
|
|
|
|
|
|
|
|
| X |
|
| ||
| 23.1 |
|
| Consent of PricewaterhouseCoopers LLP |
|
|
|
|
|
|
|
|
|
|
|
| X |
|
| ||
| 31.1 |
|
| Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) |
|
|
|
|
|
|
|
|
|
|
|
| X |
|
| ||
| 31.2 |
|
| Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) |
|
|
|
|
|
|
|
|
|
|
|
| X |
|
| ||
| 32.1 |
|
| Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 |
|
|
|
|
|
|
|
|
|
|
|
| X |
|
| ||
| 32.2 |
|
| Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 |
|
|
|
|
|
|
|
|
|
|
|
| X |
|
| ||
* Constitutes a management contract or compensatory plan, contract or arrangement.
122