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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
---
THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2001
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period __________ to __________
Commission File Number: 001-13748
ZiLOG, INC.
(exact name of registrant as specified in its charter)
Delaware 13-3092996
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
532 Race Street, San Jose, CA 95126
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 558-8500
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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
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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 the 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
----
The aggregate value of voting Common Stock and Class A Non-Voting Common
Stock held by non-affiliates of the Registrant cannot be determined as the
Company has filed for bankruptcy and its stock does not trade on an
established exchange nor is it quoted on an established or an automated
inter-dealer quotation system.
At March 1, 2002, 32,017,272 shares of the Registrant's voting Common Stock
and 10,000,000 shares of the Registrant's Class A Non-Voting Common Stock
were issued and outstanding.
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TABLE OF CONTENTS
Part I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
This Report on Form 10-K and other oral and written statements made by the
Company contain and incorporate forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), regarding future events and the Company's
plans and expectations that involve risks and uncertainties. When used in
this Report, the words "estimate," "project," "intend," "expect,"
"anticipate," "believe," "may," "will," and similar expressions are
intended to identify such forward-looking statements. Forward-looking
statements in this report include, but are not limited to, those relating
to the general direction of our business; the restructuring of our debt and
equity; the utilization of our manufacturing facilities; our ability to
sell or lease MOD III and our ability to successfully complete our
restructuring of operations and realize expected cost savings, capital
expenditures and expenses for future periods. Although we believe our
plans, intentions, and expectations reflected in these forward-looking
statements are reasonable, we can give no assurance that these plans,
intentions, or expectations will be achieved. Actual results, performance,
or achievements could differ materially from those contemplated, express or
implied, by the forward-looking statements contained in this report.
Factors that may cause or contribute to differences include, but are not
limited to, continued availability of third-party foundry and assembly
services at commercially reasonable quality and prices, under-absorption of
manufacturing costs in our wafer fabrication facilities from
under-utilization of production capacity, and ZiLOG's distributors and
customers significantly reducing their existing inventories before ordering
new products, and those discussed below under "Management's Discussion and
Analysis of Financial Condition and Results of Operation," "Factors That
May Affect Future Results," as well as those discussed elsewhere in this
Report and in other reports filed with the Securities and Exchange
Commission. These factors are not intended to represent a complete list of
the general or specific factors that affect us. Other factors, including
general economic factors and business strategies, may be significant,
presently or in the future, and the factors set forth in this report may
affect us to a greater extent than indicated. The reader is therefore
cautioned not to place undue reliance on the forward-looking statements
contained herein, that reflect our position as of the date of this report.
The Company undertakes no obligation to publicly release updates or
revisions to these statements.
Based in San Jose, California, we were incorporated in California in
October 1981 and reincorporated in Delaware in April 1997. In this report,
"ZiLOG," "the Company," "our," "us," "we," and similar expressions refer to
ZiLOG, Inc. and its subsidiaries. ZiLOG and Z80 are registered trademarks
of ZiLOG, Inc.
Extreme Connectivity(C)ZiLOG, Inc. 1999.
PART I
ITEM 1. BUSINESS
Executive Summary
We are a worldwide designer, manufacturer and marketer of semiconductor
micro-logic devices for use in the embedded control and communications
markets. Using proprietary technology that we have developed over our
27-year operating history, we provide semiconductor devices that our
customers design into their end products. Our devices, which often include
related application software, typically combine a microprocessor and/or
digital signal processor, memory, and input and output functions on a
single semiconductor. Our embedded control devices enable a broad range of
consumer and industrial electronics manufacturers to control the functions
and performance of their products. These devices control such functions as
the speed of a motor, an infrared remote control and the charging cycle of
a battery charger. Our communications devices enable data communications
and telecommunications companies to process and transmit information. These
devices include serial communication controllers, modems and
microprocessors used in communication networks for voice and data
transmission.
Our primary product focus is on 8-bit and 16-bit microcontrollers and
microprocessors. Our microcontroller products include a broad range of
standard products for use in hundreds of embedded control applications. We
are also developing more application specific standard products (ASSPs)
that are more specialized for targeted high potential market segments.
These ASSP's include our microcontrollers and modules focused on
short-range infra-red communication that are built into applications such
as infra-red remote control, and IrDA transceivers for use in PDAs,
cellphones, and laptop computers. Our microprocessor products are higher
performance products addressing the high-end 8-bit and 16-bit
microprocessor and microcontroller markets. These products are available
with integrated software that enables the devices to communicate across
public and private networks. In these applications the device can function
as a stand-alone embedded web server, providing monitoring and control
functionality to a remote site, using a standard web browser interface. Our
microcontrollers and microprocessors are also used in our modem products,
providing low cost connectivity solutions in applications such as credit
card readers and set top boxes for satellite television. Over time, we have
augmented these core products with serial communication controllers (SCC)
and digital signal processing (DSP).
Our Industry
The semiconductor market is comprised of five broad product segments:
micro-logic, other logic, memory, analog and discrete devices. We compete
in the micro-logic device segment.
Micro-logic devices are processor-based semiconductors that include
microprocessors, microcontrollers and digital signal processors that
typically process information, output data or control signals according to
programmed instructions and various external inputs. Micro-logic devices
also include microperipherals that operate in conjunction with these
processor-based devices to provide systems support or to control
communications, graphics and images, mass storage, voice and other user
input systems.
Semiconductor manufacturers target the micro-logic market through both
application specific standard products tailored for a specific application
but are not proprietary to a single customer, and general-purpose products,
which are neither application nor customer specific. We design, manufacture
and market both ASSPs and general-purpose micro-logic products.
Financial Restructuring and Reorganization
We filed a pre-packaged Chapter 11 plan of reorganization with the
bankruptcy court of the Northern District of California on February 28,
2002 and the bankruptcy court has set a hearing for the confirmation of the
plan for April 30, 2002. After we receive such confirmation, we expect to
exit from bankruptcy by the middle of May, 2002 or as soon as practicable
thereafter.
We will continue to operate our business in Chapter 11 in the ordinary
course and have obtained the necessary relief from the bankruptcy court to
pay our employees, trade, and certain other creditors in full and on time
regardless of whether their claims arose before or after the Chapter 11
filing. The claims of our employees, general unsecured creditors (including
trade creditors, licensors, and lessors) and secured creditors, other than
holders of our senior secured notes, are not impaired under the plan.
Under the plan of reorganization, our $280M senior notes will be cancelled.
Each holder will receive, in exchange for its senior notes, its pro rata
share of:
o 100% of our newly-issued common stock, except for 14%, which will
be issued or reserved for issuance to our employees, consultants,
and directors under a management incentive plan.
o 100% of the newly issued series A preferred stock issued by our
currently wholly owned subsidiary, MOD III. Holders of MOD III
series A preferred stock will be entitled to receive an aggregate
liquidation preference of $30 million plus any accrued but unpaid
dividends on the MOD III series A preferred stock from the net
proceeds of the sale of our MOD III fabrication plant including the
facility, equipment and all other assets necessary for the
operation of the facility, located in Nampa, Idaho, which we will
transfer to MOD III when the plan becomes effective and from
certain operating lease proceeds. Dividends will accrue on the MOD
III series A preferred stock at 9 1/2% per annum.
o 50% of MOD III's newly issued series B preferred stock. We will
retain the remaining 50% of the new MOD III series B preferred
stock. Holders of the new MOD III series B preferred stock will be
entitled to receive the net sale proceeds from any sale of Mod
III's assets in excess of $30 million plus accrued but unpaid
dividends on the New MOD III series A preferred stock.
o The plan of reorganization provides for the cancellation of our
currently outstanding preferred and common stock and all options
and warrants related thereto. All accumulated dividends and any
other obligations with respect to our outstanding preferred and
common shares will be extinguished. Each holder of common stock
will, however, receive a pro rata share of $50,000. Each holder of
preferred stock will receive a pro rata share of $150,000.
The plan of reorganization also provides for the payment in full, with
interest if appropriate, or reinstatement, as appropriate, of all employee
and trade claims. Upon the plan of reorganization's effectiveness, we will,
among other things, revise our charter and bylaws, enter into a new secured
financing agreement, and designate a new board of directors.
Historical background to the plan of reorganization
We issued the senior secured notes in connection with our going-private
transaction in 1998. Since then, our business and financial growth have
been negatively affected by the extremely difficult business climate in
which we have been operating.
In March 2001, we retained Lazard Freres & Co., LLC as financial advisor to
assist us in exploring a number of strategic alternatives. Also in March of
2001, Lazard began the process of soliciting bids for the sale of all or
parts of our business. While we received a number of proposals, each of
these contained significant financing or due diligence contingencies. After
consultation with our financial advisor, we determined that these
contingencies could seriously jeopardize the likelihood that a strategic
transaction could be consummated.
In July 2001, holders of senior notes who collectively held or managed
approximately $165.0 million in principal amount of our senior notes formed
an informal group to discuss and negotiate the terms of a possible
restructuring with us. All members of this group executed confidentiality
agreements and on July 13, 2001, members of our management met with these
holders and their counsel to discuss a possible restructuring.
Discussions continued over the course of the summer and fall of 2001.
During the course of these discussions, we concluded that the best vehicle
to achieve a restructuring of our senior notes was through consummation of
a voluntary pre-packaged plan of reorganization under Chapter 11 of the
U.S. Bankruptcy Code. On November 27, 2001, we reached a non-binding
agreement regarding the terms of the plan with this informal group of our
noteholders.
On January 28, 2002, we commenced solicitation of acceptances of the plan
of reorganization from the holders of our senior notes and preferred stock.
We did not solicit votes from holders of our old common stock. In
connection with this solicitation, we entered into lock-up agreements with
members of the noteholders' group. Under the lock-up agreements, the
members of the noteholders' group agreed, among other things and subject to
certain conditions, to vote to accept the plan of reorganization.
The voting period for the solicitation ended on February 26, 2002. Holders
of approximately $221.0 million of our senior notes accepted the plan of
reorganization. None of the holders rejected the plan. All of the holders
of preferred stock who voted also accepted the plan of reorganization.
We believe that the restructuring will substantially reduce uncertainty
with respect to our future and better position us to develop new products
and maintain and expand our customer base by focusing on our core business.
ZiLOG is a pioneer in the semiconductor industry and we have a
well-recognized brand. We believe that the elimination of our senior
secured notes will allow us to devote more resources towards developing and
expanding our core business. There can be no assurance that we will be
successful in consummating the plan of reorganization, however we believe
that completion of the plan will provide a stronger financial base upon
which we can focus and execute to develop a successful business. Our
financial statements do not include any adjustments that reflect the
restructuring or other events contemplated by the plan.
Products and Applications
We rely on our knowledge, experience, customer relationships and expertise
in micro-logic devices to target products to compete in the embedded
control and communications markets. We work closely with industry leaders
in our target markets to design application-specific standard products and
general-purpose products that are used for a wide variety of applications.
Through our customer relationships, we have been able to provide innovative
solutions and thereby attract multiple customers that compete in the same
markets.
We currently offer approximately 800 products that are sold in a wide
selection of configurations to over 5000 original equipment manufacturers
and end-users worldwide in the embedded control and communications markets.
Embedded Control Products and Applications. Our embedded control devices
enable a broad range of consumer and industrial electronics manufacturers
to control the functions and performance of their products. These devices
control such functions as the speed of a motor, an infrared remote control
and the charging cycle of a battery charger. We provide embedded
controllers that are adaptable for use in a variety of consumer products
and industrial equipment. These microcontrollers are designed to provide
increased functionality, performance and ease of use in the products in
which they are embedded. Most of our embedded control microcontrollers are
based on our Z8 and Z8 Plus microcontroller architecture with
read-only-memory, commonly known as ROM, or one-time-programmable, commonly
known as OTP, program memory, and a broad range of peripherals. The Z8 and
Z8 Plus microcontrollers we design, manufacture and sell are used in such
applications as controllers for home appliances, personal consumer
appliances, security systems, exercise equipment, battery chargers, and
garage door openers. Our infrared remote controller products primarily
address the universal remote control market for multiple brands of
televisions, videocassette recorders and set top box systems.
Embedded control products in development include the Z8 Encore! family of
microcontrollers with a higher performance core, new analog and digital
peripherals, and flash or ROM program memory. The Z8 Encore! family of
products is expected to be introduced throughout 2002. See risks listed
under "We may not be able to introduce and sell new products and our
inability to do so may harm our business materially."
Communications Products and Applications. Our communications products are
designed to process the flow of information in communications equipment.
Among the many communications products that we currently design,
manufacture and sell are serial communication controllers, Z180 family of
microprocessors, Z380 family data communications controllers and infrared
data transceivers. The primary applications for serial communications
controllers are switches and line cards. These microperipherals code and
decode information that enables voice and data communications to be
transmitted and received over telephone lines. The Z180 family of
microprocessors is used in Wide Area Network (WAN) controllers, modems
(both wired and wireless) and small office routers. Markets that use these
products include point of sale terminals, industrial control, gaming and
personal digital assistant devices. Internet connectivity software is
available for certain members of this family of products. The Z382 data
communication processor is used in a broad range of applications, from
general purpose to local area networks (LANs) to wide area networks. The
Z382's personal computer memory card international association (PCMCIA)
interfaces permit it to be readily integrated into stand-alone, desktop and
laptop computer applications. Infrared data transceivers are used for point
to point wireless data transmission between a variety of electronic
appliances, including notebook computers, printers, digital cameras, mobile
phones and personal digital assistants.
We launched the first product in our eZ80 Internet Engine family of high
performance 8-bit microprocessors in the fourth quarter of 2001 and we
expect to introduce additional products in this family during 2002. The
eZ80 can function as a high-performance 8-bit microprocessor or as a
complete web-server when it is equipped with various communication
interfaces and protocols. See risks listed under "We may not be able to
introduce and sell new products and our inability to do so may harm our
business materially" and "Our future success is dependent on the release
and acceptance of our new eZ80 Internet Engine family of products."
Development Tools
Our Developer Studio (ZDS) is a stand-alone software development
environment that provides a comprehensive development solution for embedded
designers and incorporates our sophisticated line of development tools. ZDS
integrates a language-sensitive editor, project manager, highly optimizing
ANSI C-compiler, assembler, linker and symbolic source-level debugger that
supports our entire line of Z8, Z8Plus, eZ80, Z80S180 and DSP processors.
ZDS provides an industry standard user interface running under all
Windows(R)-based operating systems, and features an integrated set of
windows, document views, menus and toolbars that enable developers to
create, test and refine applications in a familiar and productive
environment.
ZDS II is the next generation descendant of ZDS that has been enhanced to
meet the challenges of our more sophisticated developers. ZDS II supports a
scripting engine for more flexible user-configuration and automated
regression testing. ZDS II also supports a new communication layer allowing
it to be interface with third-party emulation products as well as our new
ZPAK II high-speed emulation and evaluation hardware interface.
Many independent companies develop and market application development tools
and systems that support our standard product architectures. Although we do
not generate significant revenues from the sale of development tools, we
believe that familiarity with, and adoption of, development systems offered
by ourselves as well as third-party vendors will be an important factor
when considering ZiLOG as the vendor of choice by new product developers.
Customers, Sales and Marketing
We use a total marketing approach to build relationships with a targeted
list of original equipment manufacturers, distributors and end-users in the
communications and embedded control markets. Important embedded control
customers include Tyco, Black & Decker, Chamberlain Group, Samsung and
Thomson/RCA. Lead communications customers in 2001 included Alcatel, Cisco
Systems, Handspring, Lucent Technologies, Hewlett-Packard and Nortel.
To market our products to our customers, we utilize a well-trained and
highly-skilled direct sales and distribution sales force, a
customer-centric website, technical documentation that includes product
specifications and application notes, development tools and reference
designs, sales promotional materials, targeted advertising and public
relations activities, and involvement in key trade shows and technical
conferences in North America, Europe and Asia. During 2001, we derived
approximately 61% of our net sales from direct sales to original equipment
manufacturers, compared to 60% in 2000 and 39% from sales through
distributors in 2001, compared to 40% in 2000.
Our direct sales force of approximately 100 people focuses on four
geographic areas: Americas, Europe, Asia and Japan. We have sales offices
located in the metropolitan areas of, Chicago, Dallas, El Paso, Los
Angeles, Minneapolis, Philadelphia, San Diego, Beijing, Hong Kong, Kuala
Lumpur, London, Munich, San Jose, Seoul, Shanghai, Shenzhen (China),
Singapore, Soemmerda (Germany), Taichung City (Taiwan), Taipei, and
Toronto.
We provide direct customer support through our field application engineers,
who are located in our sales offices around the world and work directly
with local customers in close consultation with our factory-based technical
specialists. Field application engineers typically develop technology
expertise in a market segment that is most prominent in their geographic
areas. These engineers provide significant aid to the customer throughout
the design process. Customer support in the Americas is being provided by
our American-based personnel. Our local area sales offices handle customer
service functions for Asia and Europe.
In 2000, we announced an exclusive full-service distribution agreement with
Pioneer-Standard in North America and we terminated our existing
relationships with our three largest distributors in North America: Arrow
Electronics, Future Electronics and Unique Technologies. These terminations
were completed at the end of the third quarter of 2000. In 1999, these
three distributors collectively purchased $42.3 million of our products. By
virtue of this exclusive agreement, we receive more dedicated sales and
marketing resources from Pioneer-Standard than from our previous three
distributors combined. These resources include sales representatives
focused full-time on our business, co-operative trade advertising, seminars
and workshops to train design engineers about our products, direct mail
advertising and collateral materials and web site pages dedicated to our
products.
Pioneer-Standard accounted for approximately 12.6% and 11.5% of our net
sales during the years ended December 31, 2001 and 2000, respectively.
During the year ended December 31, 1999, Arrow Electronics accounted for
approximately 12.6% of our net sales.
As further explained in Note 2 to the consolidated financial statements,
commencing in 2000, revenue on shipments to distributors who have rights of
return and price protection on unsold merchandise held by them is deferred
until products are resold by the distributor to end users. Prior to fiscal
2000, revenue on shipments to distributors having rights of return and
price protection on unsold merchandise held by them were recognized upon
shipment to the distributors, with appropriate provisions for reserves for
returns and allowances. The figures presented above for 1999 net sales to
Arrow Electronics have not been restated to the new method of accounting
for revenue recognition.
Manufacturing and Sourcing
We operate one five-inch semiconductor wafer fabrication facility in Idaho.
We closed our eight-inch wafer fabrication facility, which we call Mod III,
at the end of January 2002 and it is being held for sale. Currently our
five-inch wafer fabrication facility is producing wafers with circuit
geometries of 0.65, 0.8 and 1.2 microns. Our products that have circuit
sizes below 0.65 microns are being produced at outside foundries in Taiwan.
We conduct most of our final test operations at our facility in the
Philippines and outsource our assembly operations to subcontractors located
primarily in Indonesia and the Philippines.
The National Standards Authority of Ireland granted ISO 9001 and 9002
certifications to our facilities in Idaho. The SGS International
Certification Services AG of Zurich, Switzerland granted an ISO 9002
certification to our Philippines test facility. ISO certifications reflect
the stringent quality standards to which all of our products are
manufactured. We believe that these certifications enhance the reputation
and quality of our products.
If the plan of reorganization is approved and becomes effective, the assets
of Mod III will be transferred to our new subsidiary. The holders of our
senior notes will enjoy most of the expected economic value of this Mod III
subsidiary if the facility is leased or sold.
Research and Development
As of December 31, 2001, we employed approximately 131 people in research
and development as compared to approximately 140 people as of December 31,
2000. Expenditures for research and development during 2001were $28.7
million, representing 17% of net sales. Expenditures for research and
development in 2000 were $36.9 million and represented 15% of net sales; in
1999 our R&D expenditures were $32.8 million and represented 13% of net
sales. During 2001, our research and development activities were focused
largely on communications product development relating to our eZ80 and
CarteZian products. In January 2002, we announced the discontinuation of
our Cartezian product development efforts and the closure of our Austin,
Texas design center. Accordingly, in 2002, we expect to reduce our research
and development spending compared to 2001 levels. In 2002, we expect our
research and development expenditures will be focussed largely on new
products in the eZ80 family, enhancing our embedded control product
offerings and IrDA transceivers.
Competition
The semiconductor industry is characterized by price erosion, rapid
technological change and heightened competition in many markets. The
industry consists of major domestic and international semiconductor
companies, many of which have substantially greater resources than ours
with which to pursue engineering, manufacturing, marketing and distribution
of their products. Emerging companies are also expected to increase their
participation in the semiconductor market.
We compete with other micro-logic device manufacturers who target the same
specific market segment. Our current and future products compete with, or
are expected to compete with, products offered by Atmel, Hitachi, Intel,
Microchip, Mitsubishi, Motorola, NEC, Philips, Samsung, Sanyo, Sharp, ST
Microelectronics, Toshiba among others. However, we believe that no single
competitor addresses exactly the same set of products or markets as we do.
Backlog
Our total backlog of released orders was $23.4 million as of December 31,
2001 as compared to $33.0 million as of December 31, 2000. Our sales are
generally made pursuant to short-term purchase orders rather than long-term
contracts. As a result, our backlog may not be an accurate measure of net
sales or operating results for any period.
Patents and Licenses
As of December 31, 2001, we held 123 U.S. and 10 foreign patents and had 41
U.S. and 28 foreign patent applications pending. We have more than 80 U.S.
mask work registrations on our products. We hold copyright registrations to
protect proprietary software employed in over 100 of our products. We have
16 U.S. registered trademarks, 3 foreign registered trademarks, 13 pending
U.S. trademarks, 2 pending foreign trademarks, and have common law rights
in more than 40 trademarks or servicemarks. In addition, we have more than
150 active licenses for product or technology exchange. The purpose of
these licenses has, in general, been to provide second sources for standard
products or to convey or receive rights to valuable proprietary or patented
cores, cells or other technology.
Employees
As of December 31, 2001, we had 946 full-time employees, including 607 in
manufacturing, 131 in research and development, 112 in sales and marketing
and a total of 98 in information technology, finance and administration.
This compares with 1,611 full-time employees that were employed by us on
January 1, 1999.
In order to reduce our costs and improve our operating efficiency, we have
reduced our worldwide headcount in each of the last three years.
Significant headcount reductions occurred in connection with our
outsourcing of assembly operations in January 1999 and in connection with
the closures in the first quarter of 2002 of our Mod III wafer fabrication
facility in Nampa, Idaho and our customer support and engineering design
center in Austin, Texas. In addition to these actions, we have also had
various other voluntary and involuntary reductions in force during the last
three years. We consider our relations with our employees to be good and
believe that our future success will depend, in large part, upon our
ability to attract, retain, train and motivate our employees. None of our
employees are represented by labor unions.
Environmental
Our manufacturing processes require substantial use of various hazardous
substances, and, as a result, we are subject to a variety of governmental
laws and regulations related to the storage, use, emission, discharge and
disposal of such substances, including the Resource Conservation and
Recovery Act, the Comprehensive Environmental Response, Compensation and
Liability Act, the Superfund Amendment and Reauthorization Act, the Clean
Air Act and the Water Pollution Control Act. We believe we have all the
material environmental permits necessary to conduct our business.
In February 1999, our facilities in Idaho received ISO 14001 certification
by the National Standards Authority of Ireland, an independent auditor of
environmental management systems. We believe that ISO 14001 certification
is widely recognized as the global standard for measuring the effectiveness
of a company's environmental management. To qualify, companies must
implement an environmental management system, comply with all relevant
regulations, commit to prevent pollution, adopt a program of continual
improvement, and submit to periodic outside audits of their environmental
management system. Our environmental management system controls and
monitors all of the ways in which we impact the environment, including air
quality, water use, conservation, waste disposal and chemical handling.
ITEM 2. PROPERTIES
On January 25, 2002, we moved our headquarters from Campbell, California to
a 41,000 square foot facility in San Jose, California, leased through
January 31, 2007. Excluding the cost of terminating our old lease and
relocation expenditures, this move is expected to save us approximately
$5.0 million per year in annual operating costs.
We currently own and perform wafer fabrication at our 118,000 square foot
building located on a 53-acre site in Nampa, Idaho. We recently closed our
Mod III facility, which is approximately 158,000 square feet. In connection
with our plan of reorganization, we will transfer the assets of the Mod III
facility to an entity primarily owned by our bondholders which will hold
this facility pending resale to a third party, subject to certain
requirements.
A majority of our final test operations are performed at a 54,000 square
foot facility in the Philippines, which is leased from a third party
through 2004. We recently completed the closure of our 17,000 square foot
customer support and engineering design center in Austin, Texas. In 1999,
we opened a design center in Bangalore, India and have entered into a lease
agreement for approximately 10,000 square feet. In addition, we have
short-term leases for its sales offices located in the U.S., Canada,
England, Germany, Japan, Korea, Malaysia, the People's Republic of China
(including Hong Kong), Singapore and Taiwan. We are in the process of
closing several sales offices located in the U.S. and Japan.
ITEM 3. LEGAL PROCEEDINGS
On July 29, 1996, we filed an action in the Superior Court of the State of
California in and for Santa Clara against Pacific Indemnity Company,
Federal Insurance Company and Chubb & Son Inc. In that action, we sought a
declaration that our former insurers, Pacific and Federal, had an
unconditional duty to defend and indemnify us in connection with two
lawsuits brought in 1994: (1) in Santana v. ZiLOG and, (2) in Ko v. ZiLOG.
Our complaint in the Santa Clara County action also alleged that Chubb,
which handled the defense of Santana and Ko on behalf of Pacific and
Federal, was negligent. Pacific cross-complained against the Company,
seeking reimbursement of defense costs for both underlying lawsuits and a
payment it contributed to the settlement of Ko. According to its
cross-complaint, Pacific sought a total of approximately six million, three
hundred thousand dollars ($6,300,000), plus interest and costs of suit.
On February 26, 2002, we agreed to make a payment of $300,000 to fully
settle these lawsuits. We have already paid $75,000 of this amount. The
balance is to be paid in 3 equal installments over the next twelve months.
The outstanding balance accrues interest at 6% per annum.
We filed for protection under Chapter 11 of the United States Bankruptcy
Code in the Northern District of California on February 28, 2002. Prior to
this filing, we solicited the acceptance of our plan of reorganization from
holders of our senior notes and our preferred stock. We received unanimous
acceptance of our plan of reorganization from the noteholders and preferred
shareholders voting. In connection with the filing, we made several motions
to the judge requesting, among other things, that we be able to pay our
employees and trade creditors in the ordinary course. These motions were
granted. We expect to have our plan of reorganization confirmed before the
middle of May 2002, or as soon as possible thereafter. The terms of the
plan of restructuring are described in greater detail under the heading
"ITEM 1. BUSINESS, Financial Restructuring and Reorganization."
One party has notified us that we may be infringing certain patents. Four
of our customers have notified us that they have been approached by patent
holders who claim that they are infringing certain patents. The customers
have asked us for indemnification. We are investigating the claims of all
of these parties. We have had no further communications about any of this
for at least 8 months. In the event that we determine, however, that any
such notice may involve meritorious claims, we may seek a license. Based on
industry practice, we believe that in most cases any necessary licenses or
other rights could be obtained on commercially reasonable terms. However,
no assurance can be given that licenses could be obtained on acceptable
terms or that litigation will not occur. The failure to obtain necessary
licenses or other rights or the advent of litigation arising out of such
claims could have a material adverse effect on our financial condition. See
Factors That May Affect Future Results - "We could be subject to claims of
infringement of third-party intellectual property rights, which could
result in significant expense to us and/or loss of such rights."
We are participating in other litigation and responding to claims arising
in the ordinary course of business. We intend to defend ourselves
vigorously in these matters. Our management believes that it is unlikely
that the outcome of these matters will have a material adverse effect on
our financial statements, although there can be no assurance in this
regard.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 28, 2002, we commenced solicitation of acceptances of the plan
of reorganization from the holders of our senior notes and preferred stock
by sending a copy of a disclosure statement with respect to the plan of
reorganization together with a ballot to each such holder. We established
January 16, 2002 as the record date for determining holders of senior notes
and preferred stock entitled to vote on the plan of reorganization. The
voting period for the solicitation ended on February 26, 2002. The result
of the solicitation was the acceptance of the plan of reorganization by
holders of senior notes with respect to both number and amount and
preferred stock with respect to amount, in each case as required for class
acceptance of the plan of reorganization under the Bankruptcy Code, as
follows:
For Against
-------------------------------- -------------------------------
Amount/ Percent Amount/ Percent
Number of Voted Number of Voted
-------------------------------- -------------------------------
Principal amount of Senior Notes......... $ 221,210,000 100.0% $ -- 0.0%
Number of Senior Notes................... 42 100.0% $ -- 0.0%
Principal amount Preferred Stock......... $ 249,014 100 % $ -- 0.0%
We did not solicit votes from holders of our common stock. They are deemed
to have rejected the plan of reorganization, and thus, their vote is not
required.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Pre-Reorganization Equity
As of December 31, 2001, there were approximately 245 stockholders of
record of our Common Stock, eight holders of the Company's Class A
Non-Voting Common Stock and eight holders of our Series A Cumulative
Preferred Stock.
We have not paid cash dividends on our Common Stock, Class A Non-Voting
Common Stock or Series A Cumulative Preferred Stock and do not anticipate
paying any dividends on its Common Stock in the foreseeable future. In
addition, the agreements governing our senior notes and our credit facility
limit our ability to pay dividends on our capital stock. We intend to
retain our earnings for the development of our business.
Our Series A Cumulative Preferred Stock accumulates dividends at the rate
of 13.5% per annum (payable quarterly) for periods ending on or prior to
February 27, 2008, and 15.5% per annum thereafter. Dividends will be
payable, at the election of the Board but subject to availability of funds
and the terms of the Indenture governing our senior notes and our credit
facility, in cash or in kind through a corresponding increase in the
liquidation preference of the Series A Cumulative Preferred Stock. The
Series A Cumulative Preferred Stock has an initial liquidation preference
of $100.00 per share.
To the extent that a quarterly dividend payment in respect of a share of
Series A Cumulative Preferred Stock is not made in cash when due, the
amount of such unpaid dividend will accumulate (whether or not declared by
the Board) through an increase in the liquidation preference of such share
of Series A Cumulative Preferred Stock equal to the amount of such unpaid
dividend, and compounding dividends will accumulate on all such accumulated
and unpaid dividends. The liquidation preference will be reduced to the
extent that previously accumulated dividends are thereafter paid in cash.
We are required on February 27, 2008 to pay in cash all accumulated
dividends that have been applied to increase the liquidation preference,
but only to the extent that such dividends have not been paid in cash.
Shares of Series A Cumulative Preferred Stock may be redeemed at our
option, in whole or in part, at 100%, if redeemed on or after February 25,
2003, in each case of the sum of (a) the liquidation preference thereof,
increased to the extent that accumulated dividends thereon shall not have
been paid in cash, plus (b) accrued and unpaid dividends thereon to the
date of redemption. Redemption of shares of the Series A Stock prior to
February 26, 2003 would be at a premium to par value based on a declining
scale as follows: 101.5% after August 25, 2001; 101% after February 25,
2002 and 100.5% after August 25, 2002. Optional redemption of the Series A
Cumulative Preferred Stock will be subject to, and expressly conditioned
upon, certain limitations under the Indenture governing our senior notes
and our credit facility.
In certain circumstances, including the occurrence of a change of control
of our ownership, but subject to certain limitations under the indenture
governing our senior notes, and under the credit facility, we may be
required to repurchase shares of Series A Cumulative Preferred Stock at
101% of (a) the sum of the liquidation preference thereof, increased to the
extent that accumulated dividends thereon shall not have been paid in cash,
plus (b) accrued and unpaid dividends thereon to the repurchase date.
Post-Reorganization Equity
Upon effectiveness of our plan of reorganization, our currently outstanding
preferred and common stock and all options and warrants related thereto
will be cancelled. All accumulated dividends and any other obligations with
respect to our outstanding preferred and common stock will be extinguished.
Each holder of common stock, however, will receive a pro rata share of
$50,000. Each holder of preferred stock will receive a pro rata share of
$150,000.
The plan of reorganization provides for the cancellation of the senior
notes. Each holder will receive, in exchange for its senior notes, its pro
rata share of:
o 100% of our newly issued common stock, except for 14%,
issued or reserved for issuance to our employees,
directors and consultants under a management incentive
plan.
o 100% of the newly issued series A preferred stock issued
by our currently wholly owned subsidiary, MOD III, Inc.
Holders of the new MOD III Series A preferred stock will
be entitled to receive an aggregate liquidation
preference of $30 million plus any accrued but unpaid
dividends on the new MOD III series A preferred stock
from the net proceeds of the sale of our MOD III
fabrication plant including the facility, equipment and
all other assets necessary for the operation of the
facility, located in Nampa, Idaho, which we will transfer
to MOD III when the plan of reorganization becomes
effective and from certain operating lease proceeds.
Dividends will accrue on the new MOD III Series A
preferred stock at 9 1/2% per annum.
o 50% of MOD III Subsidiary's newly issued series B
preferred stock. We will retain the remaining 50% of the
MOD III series B preferred stock. Holders of the MOD III
series B preferred stock will be entitled to receive the
net sale proceeds from the sale of MOD III in excess of
$30 million plus accrued but unpaid dividends on the MOD
III Series A preferred stock.
There were no sales of unregistered securities by us in 2001.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data
of the Company and its subsidiaries.
Years Ended December 31,
(in thousands)
-------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Consolidated Statements of Operations
Data:
Net sales................................ $ 172,310 $ 239,213 $ 245,138 $ 204,738 $ 261,097
Cost of sales............................ 130,064 151,721 158,768 163,315 171,722
------- ------- ------- ------- -------
Gross margin............................. 42,246 87,492 86,370 41,423 89,375
Research and development................. 28,668 36,856 32,777 28,846 30,467
Selling, general and administrative...... 46,143 54,478 59,082 54,317 47,806
Special charges(1)....................... 54,329 17,489 4,686 38,620 --
------- ------- ------- ------- -------
129,140 108,823 96,545 121,783 78,273
------- ------- ------- ------- -------
Operating income (loss).................. (86,894) (21,331) (10,175) (80,360) 11,102
Interest income.......................... 1,144 2,756 2,567 3,755 3,167
Interest expense......................... 33,710 29,062 28,954 24,375 275
Other, net............................... (827) (805) (324) (796) 832
-------- ------- -------- ------- ------
Income (loss) before income taxes, equity
investment and cumulative effect of
change in accounting principle......... (120,287) (48,442) (36,886) (101,776) 14,826
Provision (benefit) for income taxes..... 499 332 1,004 (14,248) 2,965
------- ------- ------- ------- -------
Income (loss) before equity investment and
cummulative effect of change in
accounting principle................... (120,786) (48,774) (37,890) (87,528) 11,861
Equity in loss of Qualcore Group, Inc.... (7,178) (885) -- -- --
------- ------- ------- ------- -------
Income (loss) before cumulative effect
of change in accounting principle...... (127,964) (49,659) (37,890) (87,528) 11,861
Cumulative effect of change in accounting
principle.............................. -- (8,518) -- -- --
------- ------- ------- ------- -------
Net income (loss)........................ $(127,964) $(58,177) $ (37,890) $ (87,528) $ 11,861
======= ======= ======= ====== =======
Pro forma net loss (2)................... $ -- $(49,659) $ (41,597) $ (84,946) $ --
EBITDA (3)............................... $ 4,662 $ 37,829 $ 46,555 $ 19,259 $ 75,456
Consolidated Balance Sheet Data
(at end of period):
Working capital.......................... $(306,817) $ 23,692 $ 55,562 $ 46,807 $ 131,594
Total assets............................. $ 115,724 $ 239,747 $ 284,286 $ 297,071 $ 415,639
Notes Payable............................ $ 280,000 $ 280,000 $ 280,000 $ 280,000 $ --
Total preferred stock.................... $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ --
Stockholders' equity (deficiency)........ $(274,057) $(142,883) $ (89,768) $ (48,231) $ 340,482
(1) Special charges consist of asset write-downs, restructuring charges
and bond restructuring fees in 2001; asset write-downs; restructuring
charges and purchased in-process R&D charge in 2000; asset write-downs
and purchased in-process R&D charge in 1999; and recapitalization and
restructuring charges in 1998. See Note 5 of Notes to Consolidated
Financial Statements.
(2) Pro forma net loss reflects pro forma amounts with the change in
accounting principle related to revenue recognition applied
retroactively for the years 1999 and 1998. Data was not available in
sufficient detail to provide pro forma information for 1997. See Note
2 of the Notes to Consolidated Financial Statements.
(3) EBITDA represents earnings (losses) before interest, income taxes,
depreciation, amortization of intangible assets, non-cash stock
compensation expenses, equity in loss of Qualcore, cumulative effect
of change in accounting principle and special charges. EBITDA is
presented because it is a widely accepted financial indicator of a
company's ability to service and/or incur indebtedness. However,
EBITDA should not be construed as a substitute for income from
operations, net income or cash flows from operating activities in
analyzing our operating performance, financial position and cash
flows. The EBITDA measure presented herein may not be compared to
EBITDA as presented by other companies. Summarized below is a
reconciliation of our net income (loss) to EBITDA:
Years Ended December 31,
(in thousands)
----------------------------------------------------------------
2001 2000 1999 1998 1997
----------------------------------------------------------------
Net income (loss) $ (127,964) $ (58,177) $ (37,890) $ (87,528) $ 11,861
Special charges 54,329 17,489 4,686 38,620 -
Depreciation and amortization 37,888 41,954 52,368 61,795 63,522
Non-cash stock charges 166 522 - - -
Equity investment loss 7,178 885 - - -
Interest expense (income), net 32,566 26,306 26,387 20,620 (2,892)
Cumulative effect of accounting change - 8,518 - - -
Income tax expense (benefit) 499 332 1,004 (14,248) 2,965
------------ ----------- ----------- ----------- ---------
EBITDA $ 4,662 $ 37,829 $ 46,555 $ 19,259 $ 75,456
============ =========== =========== =========-- =========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of financial
condition and results of operations of the Company and its subsidiaries for
the years ended December 31, 2001, 2000 and 1999. This discussion and
analysis should be read in conjunction with the section entitled "Selected
Consolidated Financial Data" and the consolidated financial statements and
notes thereto included elsewhere herein. Management's discussion and
analysis provides information concerning our business environment,
consolidated results of operations and liquidity and capital resources.
We prepare and release quarterly unaudited financial statements prepared in
accordance with generally accepted accounting principles or GAAP. We also
disclose and discuss EBITDA in our filings with the Securities and Exchange
Commission, earnings releases and investor conference calls. This pro forma
financial information excludes certain non-cash and special charges,
consisting primarily of depreciation and amortization, asset impairments,
equity investments, stock-based compensation, debt restructuring,
restructuring of operations and lease termination costs. We believe the
disclosure of such information helps investors more meaningfully evaluate
the results of our ongoing operations. However, we urge investors to
carefully review the GAAP financial information included as part of our
Quarterly Reports on Form 10-Q, our Annual Reports on Form 10-K, and our
quarterly earnings releases, compare GAAP financial information with the
pro forma financial results disclosed in our quarterly earnings releases
and investor calls, and read the associated reconciliation.
Results of Operations
Our operating results have and will vary because of a number of factors,
including the timing and success of new product introductions, customer
design wins and losses, the success of cost reduction programs, changes in
product mix, volume, timing and shipment of orders, fluctuations in
manufacturing productivity, availability of third-party manufacturing
services at commercially reasonable prices and quality, and overall
economic conditions. Sales comparisons are also subject to customer order
patterns and business seasonality.
Critical Accounting Policies
We believe our critical accounting policies are as follows:
o revenue recognition;
o estimating sales, returns and allowances;
o estimating allowance for doubtful accounts;
o estimating write-downs of excess and obsolete inventories; and
o asset impairments
A brief description of these policies is set forth below. For more
information regarding our accounting policies, see Note 1 in the notes to
the consolidated financial statements. The preparation of financial
statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, we evaluate our
estimates, including those related to revenue recognition, sales returns,
allowance for bad debts, and inventory write-downs and asset impairments.
We base our estimates on historical facts and various other assumptions
that we believe to be reasonable at the time the estimates are made. Actual
results could differ from those estimates.
Revenue recognition. We sell our products through two channels, direct
sales to original equipment manufacturers and sales through third-party
distributors. During 2001, sales to original equipment manufacturers
accounted for approximately 61.2% of our total net sales, and sales to
distributors accounted for 38.8% of total net sales. We apply the
provisions of Staff Accounting Bulletin 101 "Revenue Recognition." and
Statement of Financial Accounting Standards No. 48 "Revenue Recognition
When Right of Return Exists." Revenues from product sales to OEMs are
recognized upon transfer of title, which usually occurs upon delivery of
our products to a customer or their designated shipping agent. At that
time, we provide for estimated sales returns and other allowances related
to those sales. Approximately 38.8% of our net sales are made to
distributors under terms allowing certain rights of return and price
protection for our products held in the distributors' inventories.
Therefore, we defer recognition of revenue and the proportionate cost of
revenues derived from sales to distributors until the distributors sell our
products to their customers. We evaluate the amounts to defer based on the
level of actual distributors' inventory on hand as well as inventory that
is in transit. The gross profit deferred as a result of this policy is
reflected as "deferred income on sales to distributors" in the accompanying
consolidated balance sheets. See note 2 in the notes to consolidated
financial statements.
Estimating sales returns and allowances. Net revenue consists of product
revenue reduced by estimated sales returns and allowances. To estimate
sales returns and allowances, we analyze historical returns, current
economic trends, levels of inventories of our products held by our
customers, and changes in customer demand and acceptance of our products
when initially establishing and then evaluating quarterly the adequacy of
the reserve for sales returns and allowances. This reserve is reflected as
a reduction to accounts receivable in the accompanying consolidated balance
sheets. Increases to the reserve are recorded as a reduction to net
revenue. Because the reserve for sales returns and allowances is based on
our judgments and estimates, particularly as to future customer demand and
acceptance of our products, our reserves may not be adequate to cover
actual sales returns and other allowances. If our reserves are not
adequate, our net revenues could be adversely affected.
Allowance for doubtful accounts. We maintain an allowance for losses we may
incur as a result of our customers' inability to make required payments.
Any increase in the allowance results in a corresponding increase in our
general and administrative expenses. In establishing this allowance, and
then evaluating the adequacy of the allowance for doubtful accounts, we
analyze historical bad debt, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer
payment terms. If the financial condition of one or more of our customers
unexpectedly deteriorated, resulting in their inability to make payments,
or if we otherwise underestimate the losses we incur as a result of our
customers' inability to pay us, we could be required to increase our
allowance for doubtful accounts which could adversely affect our operating
results.
Estimating write-downs of excess and obsolete inventories. We identify
excess and obsolete products and analyze historical net sales demand
forecasts, current economic trends, inventory age and historical write-offs
when evaluating the net realizable value of our inventories. Write-offs of
excess and obsolete inventories are reflected as a reduction to inventory
values in the accompanying consolidated balance sheets, and an increase in
cost of revenues. If actual market conditions are less favorable than our
assumptions, we may be required to take further write-downs of our
inventory value, which could adversely impact our cost of revenues and
operating results.
Asset Impairments. We apply the provisions of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
long-lived Assets." We assess the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying value may not
be recoverable. Factors we consider important which could trigger an
impairment review include the following:
o significant changes in the manner of our use of the acquired assets;
o significant changes in the strategy for our overall business; and
o significant negative industry or economic trends.
When we determine that the carrying value of long-lived assets may not be
recoverable based upon the existence of one or more of the above indicators
of impairment, and the undiscounted cash flows estimated to be generated by
those assets are less than the asset's carrying value, the carrying value
of the assets is reduced to their estimated fair value. The estimated fair
value is usually determined based on an estimate of future undiscounted
cash flows. Asset impairments are recorded as a reduction in the asset
value in our consolidated balance sheets and as special charges in our
consolidated statements of operations. During 2001, we reported special
charges of $42.7 million relating to write-offs of long-lived assets. If
actual market conditions or net proceeds of assets to be sold are less
favorable than our assumptions, we may be required to take further special
charges for asset impairment, which could adversely impact our operating
results.
Overview
We were founded in 1974 as a designer, developer and manufacturer of 8-bit
microprocessors and we have evolved into a designer, manufacturer and
marketer of semiconductor micro-logic devices for use in the communications
and embedded control markets. Using proprietary technology, we provide
devices that our customers design into their end products. Our devices
enable data communications and telecommunications companies to process and
transmit information and also enable a broad range of consumer and
industrial electronics manufacturers to control the functions and
performance of their products.
Prior to February 1998, our common stock had been publicly traded on the
New York Stock Exchange under the symbol "ZLG." On February 27, 1998, we
consummated a merger with an affiliate of Texas Pacific Group, and in
connection with that transaction we ceased having publicly traded equity.
Since the merger was structured as a recapitalization with a continuing
minority stockholder group, our financial statements still reflect our
historical basis of accounting. After the merger, our strategy changed
significantly. Our restructuring activities have included streamlining
various production facilities and outsourcing our assembly and some of our
wafer fabrication operations. In addition, we have recently discontinued
development of our Cartezian family of 32-bit microprocessors and refocused
on our core 8-bit and 16-bit product lines.
We sell our products through two channels, direct sales to original
equipment manufacturers and sales through third-party distributors. During
2001, sales to original equipment manufacturers accounted for approximately
61.2% of our total net sales, and sales to distributors accounted for 38.8%
of total net sales. During the same period, our total net sales were
comprised of approximately 34.6% domestic sales and 65.4% international
sales.
In 2000, in order to streamline our distribution channels, we terminated
our existing relationships with our three largest distributors in North
America: Arrow Electronics, Future Electronics and Unique Technologies.
During 2000, we engaged Pioneer-Standard Electronics as our sole exclusive
full service distributor in North America.
Beginning in the second half of 2000, our customer order levels began to
decline as a result of slowing general economic conditions and high
customer inventory levels. Our 2001 net sales declined by 28% when compared
to net sales in 2000. Under the leadership of our new Chief Executive
Officer, Jim Thorburn, we have responded to this protracted market downturn
with several restructuring actions. These actions are aimed at refocusing
our organization on our core 8-bit micro-logic products and cost reduction
actions designed to save approximately $50.0 million of cash expenditures
annually, (compared to the first quarter of 2001 cash expenditure levels).
Part of our cost reduction actions involves plans to restructure our
long-term debt, which will by itself save about $26.6 million in interest
payments annually. Some of the significant actions to date include:
o Streamlining of executive management, including the termination of 9
senior executives and the appointment of Jim Thorburn as Chairman and
Chief Executive Officer;
o Reduction of our global headcount by approximately 35% since December
31, 2000;
o Closure of our eight-inch wafer manufacturing facility and wafer probe
operations in Nampa, Idaho;
o Successful migration of production processes to our five-inch wafer
fabrication facility, outside foundries and our Philippine wafer probe
and test facility;
o Termination of our third-party sales representative commission
program;
o Relocation of our headquarters from a 108,000 square foot facility in
Campbell, CA, to a 41,000 square foot facility in San Jose, CA ;
o Termination of investment relationship with Qualcore Group, Inc.;
o Termination of our development of the Cartezian family of 32-bit
microprocessors and closure of our Austin, TX design center; and
o Receipt of unanimous support from voting senior note holders for our
plan to recapitalize ZiLOG by exchanging $280 million in secured debt,
plus accrued interest, for equity.
Financial Restructuring and Reorganization
We filed a pre-packaged Chapter 11 plan of reorganization with the
bankruptcy court of the Northern District of California on February 28,
2002 and the bankruptcy court has set a hearing for the confirmation of the
plan for April 30, 2002. After we receive such confirmation, we expect to
exit from bankruptcy by the middle of May, 2002 or as soon as practicable
thereafter.
We will continue to operate our business in Chapter 11 in the ordinary
course and have obtained the necessary relief from the bankruptcy court to
pay our employees, trade, and certain other creditors in full and on time
regardless of whether their claims arose before or after the Chapter 11
filing. The claims of our employees, general unsecured creditors (including
trade creditors, licensors, and lessors) and secured creditors, other than
holders of our senior secured notes, are not impaired under the plan.
Under the plan of reorganization, our $280M senior notes will be cancelled.
Each holder will receive, in exchange for its senior notes, its pro rata
share of:
o 100% of our newly issued common stock, except for 14%, which will
be issued or reserved for issuance to our employees, consultants,
and directors under a management incentive plan.
o 100% of the newly issued series A preferred stock issued by our
currently wholly owned subsidiary, MOD III. Holders of MOD III
series A preferred stock will be entitled to receive an aggregate
liquidation preference of $30 million plus any accrued but unpaid
dividends on the MOD III series A preferred stock from the net
proceeds of the sale of our MOD III fabrication plant including the
facility, equipment and all other assets necessary for the
operation of the facility, located in Nampa, Idaho, which we will
transfer to MOD III when the plan becomes effective and from
certain operating lease proceeds. Dividends will accrue on the MOD
III series A preferred stock at 9 1/2% per annum.
o 50% of MOD III's newly issued series B preferred stock. We will
retain the remaining 50% of the new MOD III series B preferred
stock. Holders of the new MOD III series B preferred stock will be
entitled to receive the net sale proceeds from any sale of Mod
III's assets in excess of $30 million plus accrued but unpaid
dividends on the new MOD III series A preferred stock.
o The plan of reorganization provides for the cancellation of our
currently outstanding preferred and common stock and all options
and warrants related thereto. All accumulated dividends and any
other obligations with respect to our outstanding preferred and
common shares will be extinguished. Each holder of common stock
will, however, receive a pro rata share of $50,000. Each holder of
preferred stock will receive a pro rata share of $150,000.
The plan of reorganization also provides for the payment in full, with
interest if appropriate, or reinstatement, as appropriate, of all employee
and trade claims. Upon the plan of reorganization's effectiveness, we will,
among other things, revise our charter and bylaws, enter into a new secured
financing agreement, and designate a new board of directors.
Historical background to the plan of reorganization
We issued the senior secured notes in connection with our going-private
transaction in 1998. Since then, our business and financial growth have
been negatively affected by the extremely difficult business climate in
which we have been operating.
In March 2001, we retained Lazard Freres & Co., LLC as financial advisor to
assist us in exploring a number of strategic alternatives. Also in March of
2001, Lazard began the process of soliciting bids for the sale of all or
parts of our business. While we received a number of proposals, each of
these contained significant financing or due diligence contingencies. After
consultation with our financial advisor, we determined that these
contingencies could seriously jeopardize the likelihood that a strategic
transaction could be consummated.
In July 2001, holders of senior notes who collectively held or managed
approximately $165.0 million in principal amount of our senior notes formed
an informal group to discuss and negotiate the terms of a possible
restructuring with us. All members of this group executed confidentiality
agreements and on July 13, 2001, members of our management met with these
holders and their counsel to discuss a possible restructuring.
Discussions continued over the course of the summer and fall of 2001.
During the course of these discussions, we concluded that the best vehicle
to achieve a restructuring of our senior notes was through consummation of
a voluntary pre-packaged plan of reorganization under Chapter 11 of the
U.S. Bankruptcy Code. On November 27, 2001, we reached a non-binding
agreement regarding the terms of the plan with this informal group of our
noteholders.
On January 28, 2002, we commenced solicitation of acceptances of the plan
of reorganization from the holders of our senior notes and preferred stock.
We did not solicit votes from holders of our old common stock. In
connection with this solicitation, we entered into lock-up agreements with
members of the noteholders' group. Under the lock-up agreements, the
members of the noteholders' group agreed, among other things and subject to
certain conditions, to vote to accept the plan of reorganization.
The voting period for the solicitation ended on February 26, 2002. Holders
of approximately $221.0 million of our senior notes accepted the plan of
reorganization. None of the holders rejected the plan. All of the holders
of preferred stock who voted also accepted the plan of reorganization.
We believe that the restructuring will substantially reduce uncertainty
with respect to our future and better position us to develop new products
and maintain and expand our customer base by focusing on our core business.
ZiLOG is a pioneer in the semiconductor industry and we have a
well-recognized brand. We believe that the elimination of our senior
secured notes will allow us to devote more resources towards developing and
expanding our core business. There can be no assurance that we will be
successful in consummating the plan of reorganization, however we believe
that completion of the plan will provide a stronger financial base upon
which we can focus and execute to develop a successful business. Our
financial statements do not include any adjustments that reflect the
restructuring or other events contemplated by the plan.
Upon emergence from Chapter 11 proceedings, we will adopt fresh start
reporting pursuant to the provisions of the American Institute of Certified
Public Accountant's Statement of Position 90-7. Under statement 90-7, on
the consummation date our assets and liabilities will be restated to
reflect their fair values, the accumulated deficit will be eliminated, and
our debt and capital structure will be recast pursuant to the provisions of
the prepackaged plan.
Years Ended December 31, 2001 and 2000
Net Sales. Our net sales of $172.3 million in 2001 declined 28% from net
sales of $239.2 million in 2000. The decrease was attributable primarily to
lower unit shipments of embedded control products. Overall, we experienced
a significant decline in bookings and net sales during the fourth quarter
of 2000, which continued throughout 2001 and has adversely affected net
sales for most of our product lines. We believe that this overall decline
in demand for our products is reflective of general economic trends,
particularly in the high technology sector, and may continue for several
quarters. Net sales from our communications segment declined 15.1% to $77.2
million in 2001 compared to 2000, which was primarily the result of lower
unit shipments of serial communications, wireless connectivity and DSL
products, offset partially by higher unit sales of Modem products. In 2001,
net sales from our embedded control segment decreased 34.4% to $93.1
million as a result of decreased unit shipments of every product line in
the segment. During 1999 we began to de-emphasize our peripherals product
line and in 2000, we announced the discontinuation of our military business
line. Accordingly, during 2001, net sales of our peripheral products were
$4.9 million compared to $15.4 million in 2000 and we had no military
product sales in 2001, compared to $10.7 million in 2000. We expect
continuation of the trend of declining net sales of PC peripheral products.
Net sales of our products in the Americas in 2001 decreased 29.8% to $87.0
million. Net sales of our products in Asia, including Japan, in 2001
decreased 28.6% to $64.6 million, and net sales of our products in Europe
declined by 16.2% to $20.7 million in 2001.
Gross Margin. Our cost of sales represents the cost of our wafer
fabrication, assembly and test operations. Cost of sales fluctuates,
depending on manufacturing productivity, product mix, equipment utilization
and depreciation. Gross margin as a percent of net sales declined to 24.5%
in 2001 from 36.6% in 2000. This decline in gross margin was primarily
brought on by a substantial reduction in sales volume that translated into
significant factory under-utilization and resulted in under-absorbed
factory overhead and unfavorable manufacturing variances during 2001. As a
consequence of our surplus wafer fabrication capacity, we announced during
July of 2001 that our wafer manufacturing plants would be consolidated. In
January 2002 we closed our eight-inch Mod III wafer fabrication facility
and we expect to realize significant operating cost savings beginning in
2002 as a result of the Mod III closure. These savings will be partially
offset by higher spending in our five-inch manufacturing facility and from
purchases of manufactured wafers from outside foundries. During December
2000, we wrote-down the book value of our five-inch wafer fabrication
facility, which was being held for sale until June of 2001 (see Special
Charges below). After actively pursuing the sale of our five-inch wafer
fabrication facility to several potential buyers, we were unable to
consummate a sale and the fabrication facility was placed back into
productive asset status in July 2001. During 2001, depreciation expense was
reduced by approximately $2.8 million as a result of the fiscal 2000
write-down in book value of the five-inch wafer fabrication facility assets
and due to holding of these assets for sale during the first half of 2001.
Research and Development Expenses. Research and development expenses
decreased to $28.7 million in 2001 from $36.9 million in 2000. The 2001
decrease in research and development spending was due principally to lower
headcount and reduced spending in our central process technology
organization, elimination of goodwill amortization in connection with the
write-off of our investment in the assets of Seattle Silicon Corporation,
and an overall reduction in the number of product development projects.
During 2002, we expect further reductions in research and development
spending as a consequence of the write-off of goodwill acquired from
Calibre, Inc. in the fourth quarter of 2001 and due to the closure of our
Austin, Texas design center in the first quarter of 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $46.1 million in 2001 from $54.5
million in 2000, but increased as a percentage of net sales to 26.8% in
2001 from 22.8% in 2000. The decrease in our selling, general and
administrative spending in 2001 was due primarily to lower payroll-related
costs as a result of lower headcount, elimination of outside sales
representative commissions and reduced incentive compensation and
commissions. Also during 2000 we incurred a $1.1 million charge for
expenses relating to our planned initial public offering of common stock,
which costs did not recur in 2001.
Special Charges. Special charges, charged to expense, for the years ended
December 31, 2001, 2000, and 1999 are as follows (in thousands):
2001 2000 1999
------------ ------------ ------------
Asset Impairments:
Impairment of MOD III assets..................... $ 30,417 $ -- $ --
Other impaired and dispositioned assets.......... 6,501 9,274 3,677
Restructuring of operations:
Employee retention bonuses, severance pay and
termination benefits........................... 8,537 6,470 --
Termination and exit charges..................... 3,225 200 --
Other............................................ 1,399 -- --
Debt restructuring:
Professional Fees................................ 4,250 -- --
Purchased in-process research and development.... -- 1,545 1,009
------------ ------------ ------------
$ 54,329 $ 17,489 $ 4,686
============ ============ ============
The following table details special charges accrual activity and ending
accrual balances for the years ended December 31, 2001 and December 31,
2000 (in thousands):
Severance Termination,
and Cancellation
Termination and Exit Debt
Benefits Charges Restructuting Other Total
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1999......$ -- $ -- $ -- $ -- $ --
Total charge to special charges... 6,470 200 -- -- 6,670
Cash paid......................... (1,218) (100) -- -- (1,318)
Deferred stock compensation....... (1,989) -- -- -- (1,989)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2000...... 3,263 100 -- -- 3,363
Total charge to special charges... 8,537 3,225 4,250 1,399 17,411
Cash paid......................... (6,187) (550) (3,192) (1,181) (11,110)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2001......$ 5,613 $ 2,775 $ 1,058 $ 218 $ 9,664
============= ============= ============= ============= =============
During the fourth quarter of 2001, we recorded a fixed asset impairment charge
of $30.4 million to adjust to the carrying value of the Mod III eight-inch
wafer fabrication facility in Nampa, Idaho to its estimated fair value of
$30.0 million. Mod III completed its final manufacturing in January 2002. The
property, plant and equipment of Mod III were idled in January 2002, and are
now being held for sale.
During the fourth quarter of 2001, we reached a settlement agreement with
our equity investment partner, Qualcore Group, Inc. in which we paid
Qualcore a termination charge of $450,000, and returned all the shares
representing our 20% equity ownership in Qualcore. In return, Qualcore
cancelled its right to "put" approximately 11% of Qualcore's common stock
to us for an aggregate cost of $5.2 million. All future design services
from Qualcore, if any, will be purchased under standard
pay-for-performance-and-delivery contracts.
During the fourth quarter of 2001, we also recorded an impairment charge of
$2.1 million for the entire remaining book value of goodwill associated
with our acquisition of Calibre, Inc. The Calibre goodwill was deemed to be
impaired because our expected revenues from the acquired business have not
been realized.
In November 2001, we negotiated an agreement with the owner of our
Campbell, California headquarters facility to terminate its lease. We
agreed to pay termination charges of $2.7 million in cash and transfer
title to certain assets and leasehold improvements in return for
cancellation of approximately $10.0 million in future lease commitments on
our 108,000 square foot headquarters facility. We recorded $1.5 million of
special charges to write-off the net book value of disposed assets in
connection with the lease cancellation. During the year ended December 31,
2001, we accrued $2.8 million of termination charges.
During the third and fourth quarters of 2001, we charged to expense
approximately $4.5 million for employee retention bonuses, severance, and
termination benefits for the announced reduction in force due to our plans
to close its eight-inch wafer fabrication facility in Nampa, Idaho. This
action is expected to affect approximately 200 employees. At December 31,
2001, approximately $4.2 million was reserved for these payments, which are
expected to be paid primarily in the first quarter of 2002.
Also during the third and fourth quarters of 2001, a charge of $1.0 million
was incurred for manufacturing consolidation costs, including new mask sets
to support our wafer fabrication consolidation efforts, and relocation
costs relating to moving our wafer probe operation to its facilities in the
Philippines. Approximately $0.2 million was reserved for payment in
connection with the manufacturing consolidation charges.
We charged $3.5 million to expense for professional fees related to our
debt restructuring efforts that accrued during the third and fourth quarter
of 2001. At December 31, 2001, approximately $1.1 million was accrued for
payment in connection with these professional fees.
During the second quarter of 2001, we incurred special charges of $8.1
million for restructuring of operations comprised of severance-related
expenses of $4.0 million, including $1.7 million of non-cash stock-option
related expenses, fixed-asset related write-offs of $2.9 million, including
planning software and surplus test equipment; manufacturing consolidation
charges of $0.4, and $0.8 million relating to consultants who are assisting
with the Company's restructuring plans. In connection with this
restructuring, we eliminated approximately 200 positions worldwide,
including 4 senior vice presidents, with continuation payments through the
length of such senior vice presidents' employment agreements. As of
December 31, 2001, approximately $0.4 million was reserved for future
payments in connection with these restructurings.
Details of special charges for the years ended December 31, 2000 and 1999
are described below.
Interest Expense. Interest expense increased to $33.7 million in 2001 from
$29.1 million in 2000. Interest expense in both years relates primarily to
our senior notes issued in conjunction with our recapitalization merger in
February 1998. The increase in our interest expense in 2001 compared to
2000 relates primarily to interest on borrowings under our revolving credit
facility and a $4.2 million dollar write off of all remaining unamortized
net debt issuance cost in the fourth quarter of 2001, as a result of the
default on our senior notes.
Income Taxes. Our provision for income taxes in both 2001 and 2000 reflects
foreign income taxes for the jurisdictions in which we were profitable as
well as foreign withholding taxes. Based on available evidence, including
our cumulative losses to date, we have provided a full valuation allowance
of $79.1 million against our net deferred tax assets.
Equity in Loss of Qualcore Group, Inc. In March 2000, we acquired a 20%
equity stake in Qualcore Group, Inc. for approximately $8.1 million. We
accounted for this investment under the equity method. During the fourth
quarter of 2001, we terminated our agreement with Qualcore. As a result of
this transaction, we recorded a $5.8 million special charge to write off
the book value of our equity investment in Qualcore. The loss in equity of
Qualcore Group, Inc. also includes the amortization of goodwill associated
with our equity investment.
Years Ended December 31, 2000 and 1999
Net Sales. Our net sales of $239.2 million in 2000 declined 2.4% from net
sales of $245.1 million in 1999. The decrease was attributable primarily to
lower unit shipments of embedded control products Overall, we experienced a
significant decline in bookings and net sales during the fourth quarter of
2000 which affected net sales for most of our product lines. Net sales from
our communications segment grew 7.4% to $90.9 million in 2000 compared to
1999, which was primarily the result of higher unit shipments of serial
communications, wireless connectivity and modem products.
In 2000, net sales from our embedded control segment decreased 11.5% to
$142.0 million as a result of decreased unit shipments of PC peripheral, TV
and ROM-based microcontroller products. These sales declines were partially
offset by higher unit shipments of military and infrared remote devices.
During 2000, net sales of our peripheral products were $15.4 million
compared to $28.2 million in 1999. During 2000, net sales of military
products totaled $10.7 million and we expect no further sales of these
products.
Net sales of our products in the Americas in 2000 increased 21.1% to $137.2
million from $113.3 million in 1999. Net sales of our products in Asia,
including Japan, in 2000 decreased 24.0% to $80.4 million, and net sales of
our products in Europe remained flat at $26.1 million in 2000.
Gross Margin. Our cost of sales represents the cost of our wafer
fabrication, assembly and test operations. Cost of sales fluctuates,
depending on manufacturing productivity, product mix, equipment utilization
and depreciation. Gross margin as a percent of net sales improved to 36.6%
in 2000 from 35.2% in 1999. This improvement was primarily a result of
reduced depreciation expense in our eight-inch wafer fabrication facility
and increased sales of higher-margin communications and military products,
offset partially by higher unfavorable manufacturing variances in the
second half of 2000 due to a reduction in wafer fabrication facility
utilization. Effective July 5, 1999, we changed the estimated useful lives
of some of our machinery and equipment located in our eight-inch wafer
fabrication facility in Idaho from five to seven years. This change in
accounting estimate reduced depreciation expense by $9.1 million during
1999, and by $14.3 million in 2000 compared to the amount we would have
recorded under our previous useful life estimates. Had the change in
accounting estimate been in effect for the full year in 1999, it would have
resulted in an approximately $18.2 million reduction in depreciation
expense compared to the amount that would have been recorded under the
previous useful life estimates. During December 2000, we recorded an
impairment of our five-inch wafer fabrication facility.
Research and Development Expenses. Research and development expenses
increased to $36.9 million in 2000 from $32.8 million in 1999. The 2000
increase in research and development spending was due principally to higher
product and design tool development costs, primarily relating new
communications products. Additionally, 2000 was the first full year of
operations for our Seattle and India design centers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $54.5 million in 2000 from $59.1
million in 1999 and decreased as a percentage of net sales to 22.8% in 2000
from 24.1% in 1999. The decrease in our selling, general and administrative
spending in 2000 was due primarily to lower payroll-related costs as a
result of reduced incentive compensation expense, partially offset by a
$1.1 million charge for expenses relating to our planned initial public
offering of common stock in 2000.
Special Charges. During 2000, we recorded special charges of $17.5 million.
In June 2000, we recorded $1.2 million of restructuring charges consisting
of $1.0 million of severance and related benefits and $0.1 million of asset
write-offs and $0.1 million contractual liabilities. These actions were
intended to focus our human and financial resources on our communications
segment. We terminated 24 people in connection with this action and an
additional 12 were re-deployed from other areas of our business into our
communications segment.
Approximately $1.5 million was purchased in-process research and
development expense related to several partially developed semiconductor
product designs that were acquired through the acquisition of Calibre, Inc.
in July 2000. In December 2000 we implemented a restructuring action that
resulted in termination of 86 employees worldwide, including five members
of our senior management. This action resulted in severance and benefits
expenses of $5.5 million, including $2.0 million of non-cash stock charges.
The $3.5 million cash portion of these severance benefits was scheduled to
be paid as follows: $0.5 million in 2000; $2.3 million in 2001; and $0.7
million in 2002. During the fourth quarter of 2000 we also recorded a
charge of $0.1 million for contractual liabilities and $9.2 million for
write-down of long-lived assets, including $2.3 million for intangible
assets acquired from Seattle Silicon and $6.9 million for assets held for
sale in our five-inch wafer manufacturing facility in Idaho. In December
2000, management approved a plan for the sale of our five-inch wafer
fabrication facility in Nampa, Idaho. The decision to sell this facility
was based on our desire to reduce fixed manufacturing overhead costs by
transferring most production into its newer eight-inch wafer fabrication
facility that was significantly under-utilized. Property, plant, and
equipment, with a book value of $9.9 million, were written down by $6.9
million to an estimated realizable value of $3.0 million at December 31,
2000. The Company reclassified these assets and the remaining carrying
value of $3.0 million to other current assets during the first half of
2001. The Company engaged in discussions with several prospective buyers of
the five-inch wafer fabrication facility, but we were unable to consummate
a sale of these assets at an acceptable price. In July 2001, we abandoned
our plan to sell the five-inch wafer fabrication facility. In accordance
with SFAS No. 144, the $3.0 million of remaining carrying value of the
five-inch facility was reclassified back into property, plant and
equipment.
During 1999, we recorded special charges of $4.7 million. Approximately
$1.0 million was purchased in-process research and development expense
related to several partially developed semiconductor product designs that
were acquired through the acquisition of Seattle Silicon in April 1999. We
also recognized a $3.7 million charge in 1999 for the write-down to
estimated net realizable value of surplus test equipment.
Interest Expense. Interest expense increased to $29.1 million in 1999 from
$29.0 million in 1999. Interest expense in both years relates primarily to
our senior notes issued in conjunction with our recapitalization merger in
February 1998.
Income Taxes. Our provision for income taxes in both 2000 and 1999 reflects
foreign income taxes for the jurisdictions in which we were profitable as
well as foreign withholding taxes. Based on available evidence, including
our cumulative losses, we provided a full valuation allowance against our
net deferred tax assets at December 31, 2000 and 1999.
Equity in Loss of Qualcore Group, Inc. In March 2000, we acquired a 20%
equity stake in Qualcore Group, Inc. for approximately $8.1 million. We
accounted for this investment under the equity method. The loss in equity
of Qualcore Group, Inc. primarily represents amortization of goodwill
associated with our equity investment.
Liquidity and Capital Resources
We incurred substantial indebtedness in connection with our
recapitalization merger. We currently have $280.0 million in aggregate
principal amount of senior notes outstanding, plus approximately $27.0
million of accrued interest, which are publicly registered and subject us
to the reporting requirements of the Securities Exchange Act of 1934.
Interest on the senior notes accrues at the rate of 9.5% per annum and is
payable semi-annually in arrears on March 1 and September 1, to holders of
record on the immediately preceding February 15 and August 15,
respectively. We did not make the scheduled semi-annual interest payments
of $13.3 million on the notes for either the September 2001 or the March
2002 payment dates. Consequently, we are currently in default on these
notes and the noteholders can request payment for the entire amount at any
time. We currently do not have sufficient cash to pay the entire amount
that would be due if the noteholders demanded payment of the principal
and/or interest due on the notes. Accordingly, if the noteholders exercise
this right or if they were to foreclose on our collateral assets, we may
not be able to continue as a going concern. As noted previously, we have
concluded that the best vehicle to achieve a restructuring of its senior
secured indebtedness was through consummation of a voluntary prepackaged
plan of reorganization pursuant to Chapter 11 of the U.S. Bankruptcy Code.
Our primary cash needs over the past three years have been for debt
restructuring expenditures, restructuring of operations, working capital,
interest on our senior notes, payments to our former chief executive and
capital expenditures. We have met these needs with our operating cash flow,
cash on hand and available credit lines. As of December 31, 2001, we had
cash and cash equivalents of approximately $30.7 million. Additionally, we
have a senior secured credit facility from a commercial lender that
provides for total borrowings of up to $40.0 million, consisting of a
four-year revolving credit facility of up to $25.0 million and a five-year
capital expenditure line of up to $15.0 million which expire on December
30, 2002 and 2003, respectively. Borrowings under the credit facility bear
interest at a rate per annum equal, at our option, to the commercial
lender's stated prime rate or the London Interbank Overnight Rate, commonly
known as LIBOR, plus 2.0% (5.7% at December 31, 2001) for the revolving
credit facility and the commercial lender's prime rate plus 1.0% (5.8% at
December 31, 2001) or LIBOR plus 3.0% (6.7% at December 31, 2001) for the
capital expenditure line. As of December 31, 2001 borrowings under the
revolving credit facility totaled $12.8 million and there were no
borrowings under the capital expenditure line. As of February 24, 2002
borrowings under the revolving credit facility totaled $11.5 million,
including $1.2 million representing standby letters of credit. There was no
additional borrowing capacity under either facility and this loan is
currently in default and could be called by the lender.
We have a commitment letter in place from our current lender to replace of
current credit facility with a three-year $15.0 million senior secured
revolving credit facility upon emergence from our Chapter 11 bankruptcy.
The new facility will be on substantially similar terms as the existing
facility, except that borrowings will bear interest at a rate per annum
equal, at our option, to the commercial lender's stated prime rate or
LIBOR, plus 2.5%. The capital expenditure line will be cancelled.
During the year ended December 31, 2001, our operating activities used net
cash of $18.8 million, which was primarily attributable to our overall net
loss of $128 million adjusted for the following non-cash items: $37.9
million of depreciation and amortization; $36.9 million of write-offs of
long-lived assets; $1.9 million stock option compensation,, and $7.2
million equity in loss of Qualcore Group, Inc., which includes a write-off
of equity assets of $5.8 million. Reductions in inventories, accounts
receivable and prepaid and other assets totaled $35.4 million and
contributed to 2001 operating cash flow, as did a $13.6 million increase in
accrued interest expense. Decreases in accounts payable, accrued
compensation and employee benefits and other accrued and non-current
liabilities used a total of $24.5 million of operating cash during 2001.
During the year ended December 31, 2000, our operating activities provided
net cash of $8.5 million, which was primarily attributable to our overall
net loss of $58.2 million adjusted for the following non-cash items: $42.0
million of depreciation and amortization; $9.3 million write-down of
long-lived assets; $8.5 million cumulative change in accounting principle;
$2.6 million stock option compensation; $1.5 million of purchased
in-process research and development expense, and $0.9 million equity in
loss of Qualcore Group, Inc. During 1999, our operating activities
generated net cash of $24.4 million which was primarily attributable to an
increase in accounts payable, accrued compensation and employee benefits
and other accrued and non-current liabilities of $23.3 million and adjusted
by non-cash items including depreciation and amortization of $52.4 million,
a write-down of assets held for disposal of $3.7 million and a charge for
purchased in-process research and development of $1.0 million. These items
were offset by a net loss of $37.9 million and an increase in inventories,
accounts receivable and other assets totaling $18.3 million.
During the year ended December 31, 2001, our investing activities used cash
of $4.1 million consisting entirely of capital expenditures. During the
year ended December 31, 2000, our investing activities used cash of $30.3
million consisting of $21.9 million of capital expenditures and $8.1
million, including expenses, for the acquisition of a 20% equity investment
in Qualcore with an option to purchase the remaining 80% interest. During
2000, our capital expenditures primarily related to enhancements to our 0.
35-micron wafer manufacturing capability. We used $14.2 million in cash for
investing activities in 1999. We invested $8.3 million in capital
expenditures primarily for new test equipment, product development tools
and computer system upgrades and $5.9 million for the acquisition of the
net assets of Seattle Silicon.
During the year ended December 31, 2001, cash provided from financing
activities totaled $12.9 million and represented $12.8 million of
borrowings on our revolving credit facility and $0.1 million of proceeds
received from issuance of common stock pursuant to stock option exercises.
During the year ended December 31, 2000, cash provided from financing
activities totaled $1.8 million and related primarily to $2.7 million of
proceeds received from issuance of common stock pursuant to stock sales and
stock option exercises, which were offset by principal payments under
capital leases of $0.9 million. Cash used by financing activities of $0.2
million in 1999 was from principal payments under capital leases offset by
exercises of stock options.
Our cash needs include debt-restructuring expenditures, restructuring of
operations, working capital, and capital expenditures. As of March 29,
2002, we had commitments of approximately $0.4 million for capital
expenditures. The 2002 business climate is expected to continue to be
extremely difficult. Upon emergence from Chapter 11, we presently expect
that anticipated cash flows from operations and available cash, coupled
with some operational restructuring activities and other cash-savings
initiatives will allow us to satisfy all of our cash needs for the next 12
months. Whether we are able to do so will depend primarily on our results
from operations during 2002 and on the success of our debt restructuring
plan and our other initiatives. If we are not able to do so, we may be
unable to continue as a going concern unless we can obtain additional cash
resources, such as from new sources of debt or equity financing or one or
more sales of assets.
Effects of Inflation and Changing Prices
The Company believes that inflation and/or deflation had a minimal impact
on its overall operations during 2001, 2000, and 1999.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 (SFAS 141), "Business
Combinations." SFAS 141 requires the purchase method of accounting for all
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The adoption of SFAS 141 did not have a
material effect on its financial condition or results of operations.
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets," which requires the discontinuance of goodwill amortization. SFAS
142 is required to be applied for fiscal years beginning after December 15,
2001, with certain early adoption permitted. We will adopt SFAS 142 for the
first fiscal quarter of 2002, and the adoption will not have any effect on
our financial condition or results of operations.
In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets
and the associated retirement costs. We are in the process of assessing the
effect of adopting SFAS 143.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of long-lived Assets." SFAS 144 supersedes SFAS 121,
"Accounting for the Impairment of long-lived Assets and for long-lived
Assets to be Disposed Of," and addresses financial accounting and reporting
for the impairment of long-lived assets and for long-lived assets to be
disposed of. ZiLOG adopted the provisions of SFAS 144 in 2001 and it had no
effect on our financial condition or results of operations.
.
Factors That May Affect Future Results
Risks Related to Our Business and Industry
If our plan of reorganization does not become effective, our cash flow will
not be sufficient to satisfy all of our cash needs for the remainder of
2002.
Our cash needs include future requirements for working capital, capital
expenditures, and other projected expenditures, related to our announced
restructuring and wafer fabrication facility consolidation plans and
payment of our indebtedness. In the event that we do not successfully
emerge from Chapter 11 as contemplated under our plan of reorganization we
could be required to repay the total outstanding balances due under our
senior notes and our credit facility. We do not have sufficient cash to
make these payments. If we are unable to restructure these obligations, our
creditors could liquidate our assets to satisfy their debt.
Recent terrorist activities and resulting military and other actions could
harm our business.
Terrorist attacks in New York, Washington, D.C. and Pennsylvania in
September 2001 have disrupted domestic and international commerce. The
continued threat of terrorism, any ongoing military action and heightened
security measures in response to this threat may cause significant
disruption to commerce throughout the world. To the extent that this
disruption results in delays or cancellations of orders, a general decrease
in spending on technology products or our inability to effectively market
and ship our products, our business and results of operations could be
harmed. We are unable to predict whether the threat of terrorism or the
responses thereto will result in any long-term commercial disruptions or if
such activities or responses will have a long-term adverse effect on our
business, results of operations or financial condition.
Our quarterly operating results are likely to fluctuate and may fail to
meet expectations, which may cause the price of our securities to decline.
Our quarterly operating results have fluctuated in the past and will likely
continue to fluctuate in the future. Our future operating results will
depend on a variety of factors and they may fail to meet expectations. Any
failure to meet expectations could cause the price of our securities to
fluctuate or decline significantly. In addition, high proportions of our
costs are fixed, due in part to our significant sales, research and
development and manufacturing costs. Therefore, small declines in revenue
could disproportionately affect our operating results in a quarter. A
variety of factors could cause our quarterly operating results to
fluctuate, including:
o our ability to introduce and sell new products and
technologies on a timely basis;
o changes in the prices of our products;
o technological change and product obsolescence;
o changes in product mix or fluctuations in manufacturing
yields;
o variability of our customers' product life cycles;
o the level of orders that we receive and can ship in a
quarter, customer order patterns and seasonality;
o increases in the cost of raw materials; and
o gain or loss of significant customers.
In addition to causing fluctuations in the price of our securities, any
significant declines in our operating performance could harm our ability to
meet our debt service and other obligations.
We are currently experiencing a downturn in the business cycle and our
revenues, cash generation and profitability are being adversely affected.
The semiconductor industry is highly cyclical and has experienced
significant economic downturns at various times in the last three decades,
characterized by diminished product demand, erosion of average selling
prices and production over-capacity. In the fourth quarter of 2000, another
downturn in our business cycle began and continues today. The terrorist
acts of September 2001 in New York City, Washington, D.C. and Pennsylvania,
and the United States' military response, have exacerbated the downturn and
created an uncertain economic environment. We cannot predict the impact of
these events, any subsequent terrorist acts or of any related military
action, on our customers or business. We believe that, in light of these
events, some businesses may curtail spending on technology, which could
also negatively affect our quarterly results or financial condition in the
future. We are experiencing a decline in revenues, as our customers are not
ordering product from us in the quantities that they previously ordered. We
are uncertain how long this decline will last. In 1997 and 1998, we
experienced similar significant declines in customer demand for our
products. In response to these reductions in demand, other semiconductor
manufacturers and we reduced prices to avoid a significant decline in
capacity utilization. We are currently experiencing significant declines in
our capacity utilization in our manufacturing facilities and we have
reduced selling prices on certain products. We may be required to further
reduce selling prices given the fixed costs associated with such
manufacturing capacity, this decline has had and will continue to have a
negative impact on our financial condition. In addition, we are currently,
and will likely in the future experience substantial period-to-period
fluctuations in future operating results that are attributable to general
industry conditions or events occurring in the general economy. Any
economic downturn could pressure us to reduce our prices and decrease our
revenues, cash generation and profitability.
We have a history of losses, we expect future losses and we may not achieve
or maintain profitability in the future.
We have a history of net losses, we expect future net losses and we do not
expect to achieve profitability in the near future. We incurred net losses
of $128.0 million in 2001, $58.2 million in 2000, and $37.9 million in
1999. As of December 31, 2001, we had an accumulated deficit of
approximately $312.1 million.
We have implemented and are considering additional implementing significant
cost cutting measures, but these cost-cutting measures may not result in
increased efficiency or future profitability.
Similar to other semiconductor companies, we have implemented and may
consider implementing additional significant cost cutting measures that may
include:
o consolidation of our wafer fabrication facilities,
outsourcing significant manufacturing transfer of our probe
operations to the Philippines;
o refocusing of business priorities;
o reallocation of personnel and responsibilities to better
utilize human resources;
o reductions in workforce; and
o temporary office and facility shutdowns.
As part of our cost cutting measures, we are considering the disposition of
one or more product lines, business units or other assets. We may not be
able to consummate any divestiture at a fair market price. We may also be
unable to reinvest the proceeds from any disposition to produce the same
level of operating profit as the divested product lines or to generate a
commensurate rate of return on the amount of our investment. We may also be
required to pay some or all of the proceeds from assets sales to our senior
lenders rather than retaining such proceeds for working capital. Our cost
cutting measures may not increase our efficiency or future profitability.
If we are unable to implement our business strategy, our revenues and
future profitability may be harmed materially.
Our future financial performance and success are largely dependent on our
ability to implement our business strategy. We may be unable to implement
our business strategy and, even if we do implement our strategy
successfully, our results of operations may fail to improve.
In addition, although the semiconductor micro-logic market has grown in
prior years, it is currently in a significant downturn. Our revenues and
future profitability could be harmed seriously. It is uncertain for how
long this slowdown will last.
We may not be able to introduce and sell new products and our inability to
do so may harm our business materially.
Our operating results depend on our ability to introduce and sell new
products. Rapidly changing technologies and industry standards, along with
frequent new product introductions, characterize the industries that are
currently the primary end-users of semiconductors. As these industries
evolve and introduce new products, our success will depend on our ability
to adapt to such changes in a timely and cost-effective manner by
designing, developing, manufacturing, marketing and providing customer
support for new products and technologies.
Our ability to introduce new products successfully depends on several factors,
including:
o proper new product selection;
o timely completion and introduction of new product designs;
o complexity of the new products to be designed and
manufactured;
o development of support tools and collateral literature that
make complex products easy for engineers to understand and
use; and
o market acceptance of our products and our customers'
products.
We cannot assure you that the design and introduction schedules for any new
products or any additions or modifications to our existing products will be
met, that these products will achieve market acceptance or that we will be
able to sell these products at prices that are favorable to us.
Our future success may be dependent on the release and acceptance of our
new eZ80 Internet Engine family of products.
We announced our newest product, the eZ80 Webserver family of products, in
September 1999. We have delivered samples of our first eZ80 product to some
of our customers and have released the first eZ80 product to production.
These new products may not perform as anticipated and there may be
unforeseen redesigns or delays in their final release. Our failure to
release these products as scheduled or the failure of these products to
meet our customers' expectations would affect us adversely. While we do
expect to receive revenues from these products in 2002, it is not clear how
significant those revenues will be. Future revenues may also be
insufficient to recover the costs associated with their development.
Products as complicated as the eZ80 Webserver frequently contain errors and
defects when first introduced or as new versions are released. Delivery of
products with such errors or defects, or reliability, quality or
compatibility problems, could require significant expenditures of capital
and other resources and significantly delay or hinder market acceptance of
these products. Any such capital expenditures or delays could harm our
operating results materially, damage our reputation and affect our ability
to retain our existing customers and to attract new customers.
Our industry is highly competitive and we cannot assure you that we will be
able to compete effectively.
The semiconductor industry is intensely competitive and is characterized by
price erosion, rapid technological change and heightened competition in
many markets. The industry consists of major domestic and international
semiconductor companies, many of which have substantially greater financial
and other resources than we do with which to pursue engineering,
manufacturing, marketing and distribution of their products. Emerging
companies are also increasing their participation in the semiconductor
industry. Our current and future communications products compete with, or
are expected to compete with, products offered by Advanced Micro Devices,
ARM, Atmel, Conexant, Intel, Lucent Technologies, Maxim, MIPS Technologies,
Mitel, Motorola, NEC, NetSilicon, Philips, PMC-Sierra, Sharp, Texas
Instruments and Toshiba. Our current and future embedded control products
compete with, or are expected to compete with, products offered by Atmel,
Hitachi, Intel, Microchip, Mitsubishi, Motorola, NEC, Philips, Samsung,
Sanyo, Sharp, ST Microelectronics and Toshiba. Our ability to compete
successfully in our markets depends on factors both within and outside of
our control, including:
o our ability to design and manufacture new products that
implement new technologies;
o our ability to protect our products by effectively utilizing
intellectual property laws;
o our product quality, reliability, ease of use and price;
o the diversity of product line and our efficiency of
production;
o the pace at which customers incorporate our devices into
their products; and
o the success of our competitors' products and general economic
conditions.
To the extent that our products achieve market acceptance, competitors
typically seek to offer competitive products or embark on pricing
strategies, which, if successful, could harm our results of operations and
financial condition materially.
Unless we maintain manufacturing efficiency and avoid manufacturing
difficulties, our future profitability could be harmed.
Our semiconductors are highly complex to manufacture and our production
yields are sensitive. Our production yields may be inadequate in the future
to meet our customers' demands. Production yields are sensitive to a wide
variety of factors, including the level of contaminants in the
manufacturing environment, impurities in the materials used and the
performance of personnel and equipment. From time to time, we have
experienced difficulties in effecting transitions to new manufacturing
processes and have suffered delays in product deliveries or reduced yields.
We may experience similar difficulties or suffer similar delays in the
future, and our operating results could be harmed as a result.
For example, we may experience problems that make it difficult to
manufacture the quantities of our products that we anticipate producing in
our .65 micron wafer fabrication processes. These difficulties may include:
o equipment being delivered later than or not performing as
expected;
o process technology changes not operating as expected;
o complications in moving production from our eight-inch wafer
fabrication facility to our five-inch wafer fabrication
facility or to outside foundries in connection with our
announced wafer fabrication facility consolidation plans; and
o engineers not operating equipment as expected.
If we are unable to obtain adequate production capacity, our business could
be harmed.
We intend to rely on independent third-party foundry manufacturers to
fabricate an increasing percentage of our products. Industry-wide shortages
in foundry capacity could harm our financial results. Should we be unable
to obtain the requisite foundry capacity to manufacture our complex new
products, or should we have to pay high prices to foundries in periods of
tight capacity, our ability to increase our revenues might be impaired. Any
delay in initiating production at third-party facilities, any inability to
have new products manufactured at foundries or any failure to meet our
customers' demands could damage our relationships with our customers and
may decrease our sales.
Other significant risks associated with relying on these third-party
manufacturers include:
o reduced control over the cost of our products, delivery
schedules and product quality;
o the warranties on wafers or products supplied to us are
limited;
o increased exposure to potential misappropriation of our
intellectual property; and
o the cost and consumption of time associated with switching
foundries.
We depend on third-party assemblers and the failure of these third parties
to continue to provide services to us on sufficiently favorable terms could
harm our business.
We use outside contract assemblers for packaging our products. If we are
unable to obtain additional assembly capacity on sufficiently favorable
terms, our ability to achieve continued revenue growth might be impaired.
Shortages in contract assembly capacity could cause shortages in our
products and could also result in the loss of customers. Because we rely on
these third parties, we also have less control over our costs, delivery
schedules and quality of our products and our intellectual property is at
greater risk of misappropriation.
Our international operations subject us to risks inherent in doing business
in foreign countries that could impair our results of operations.
Approximately 65% of our net sales in 2001 were to foreign customers and we
expect that international sales will continue to represent a significant
portion of our net sales in the future. We maintain significant operations
and rely on a number of contract manufacturers in the Philippines,
Indonesia, Taiwan, Malaysia and India. We cannot assure you that we will be
successful in overcoming the risks that relate to or arise from operating
in international markets. Risks inherent in doing business on an
international level include:
o economic and political instability;
o changes in regulatory requirements, tariffs, customs, duties
and other trade barriers;
o transportation delays;
o power supply shortages and shutdowns;
o difficulties in staffing and managing foreign operations and
other labor problems;
o existence of language barriers and cultural distinctions;
o taxation of our earnings and the earnings of our personnel;
and
o other uncertainties relating to the administration of or
changes in, or new interpretation of, the laws, regulations
and policies of the jurisdictions in which we conduct our
business.
In addition, our activities outside the United States are subject to risks
associated with fluctuating currency values and exchange rates, hard
currency shortages and controls on currency exchange. While our sales are
primarily denominated in U.S. dollars, worldwide semiconductor pricing is
influenced by currency rate fluctuations, and such fluctuations could harm
our operating results materially.
The risks inherent in our international operations have been increased by
the terrorist attacks of September 2001. These attacks, coupled with the
international military response, have created an uncertain economic
environment and we cannot predict the impact of these events, any
subsequent terrorist acts or of any related military action, on our
customers or our business.
A significant amount of our revenues comes from relatively few of our
customers, and any decrease of revenues from these customers, or the loss
of their business, could significantly harm our financial results.
Historically we have been, and we expect to continue to be, dependent on a
relatively small number of customers for a significant portion of our
revenues primarily because we depend on third-party distributors to market
and sell our products. These third-party distributors accounted for
approximately 40% of our sales in 1999, 40% of our sales in 2000 and 39% of
our sales in 2001. Our distributors may not continue to effectively market,
sell or support our products. Our ten largest customers accounted for
approximately 48% of our net sales in 1999, approximately 49% of our net
sales in 2000 and 55% of our net sales in 2001. Arrow Electronics alone
accounted for approximately 13% of our net sales in 1999 and
Pioneer-Standard accounted for approximately 12% of our net sales in 2000
and approximately 13% of our net sales in 2001. Particular customers may
change from period to period, but we expect that sales to a limited number
of customers will continue to account for a significant percentage of our
revenues in any particular period for the foreseeable future. The loss of
one or more major customers or any reduction, delay or cancellation of
orders by any of these customers or our failure to market successfully to
new customers could harm our business materially.
We have very few long-term contracts with our customers and, like us, our
customers typically compete in cyclical industries. In the future, these
customers may decide not to purchase our products at all, to purchase fewer
products than they did in the past, or to alter their purchasing patterns,
particularly because substantially all of our sales are made on a purchase
order or sales order acknowledgment basis, which permits our customers to
cancel, change or delay product purchase commitments upon 30 days notice
for standard products and 60 days notice for custom products. Customers may
still cancel or reschedule within these time periods, however they
routinely incur a cancellation or rescheduling charge. This risk is
increased because our customers can purchase some similar products from our
competitors.
Changes in technologies or consumption patterns could reduce the demand for
our products.
As a result of technological changes, from time to time our customers
design our product out of some devices. Any resulting decreased sales could
reduce our profitability. For example, we have learned that a number of our
customers have changed the designs of computer mouse pointing devices that
they manufacture, and that as a result, these devices will no longer
contain our products. Because we do not have long-term supply contracts
with most of our customers, changes in the designs of their products can
have sudden and significant impacts on our sales. As a result of these
design changes, net sales of our computer mouse pointing devices and other
computer peripheral products decreased substantially from approximately
$28.2 million in 1999 to approximately $15.4 million in 2000 and to
approximately $4.9 million in 2001. These reduced sales have and may
continue to harm our operating results materially.
We depend on key personnel, and the loss of our current personnel or our
failure to hire and retain additional personnel could affect our business
negatively.
We depend on our ability to attract and retain highly skilled technical and
managerial personnel. We believe that our future success in developing
marketable products and achieving a competitive position will depend in
large part on our ability to identify, recruit, hire, train, retain and
motivate highly skilled technical, executive, managerial, marketing and
customer service personnel. Competition for these personnel is intense,
especially in Northern California, where our headquarters are located, and
we may not be able to successfully recruit, assimilate or retain
sufficiently qualified personnel. Our failure to recruit and retain
necessary technical, executive, managerial, merchandising, marketing and
customer service personnel could harm our business and our ability to
obtain new customers and develop new products. In addition, the current
financial condition of the Company could have a negative impact on our
ability to recruit and retain employees.
We may fail to protect our proprietary rights and the cost of protecting
those rights, whether we are successful or not, may harm our ability to
compete.
The measures we take to protect our intellectual property rights may be
inadequate to protect our proprietary technologies and processes from
misappropriation, and these measures may not prevent independent third
party development of competitive products. We may not be able to detect the
unauthorized use of, or take appropriate steps to enforce our intellectual
property rights. Despite our efforts to protect our proprietary rights in
both the United States and in foreign countries, existing intellectual
property laws in the United States provide only limited protection and, in
some cases, the laws of foreign countries provide even less protection.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity
and scope of our proprietary rights or the proprietary rights of others.
Any such litigation could require us to incur substantial costs and divert
significant valuable resources, including the efforts of our technical and
management personnel, which may harm our business materially.
We could be subject to claims of infringement of third-party intellectual
property rights, which could result in significant expense to us and/or our
loss of such rights.
The semiconductor industry is characterized by frequent claims and related
litigation regarding patent and other intellectual property rights. Third
parties may assert claims or initiate litigation against us, our licensors,
our foundries, our service providers, or our customers with respect to
existing or future products. Any intellectual property litigation initiated
against us could subject us to significant liability for damages and
attorneys' fees, invalidation of our proprietary rights, injunctions or
other court orders that could prevent us from using specific technologies
or engaging in specific business activities.
These lawsuits, regardless of their success, would likely be time-consuming
and expensive to resolve and would divert management's time and attention
from our business. Any potential intellectual property litigation could
also force us to do one or more of the following:
o pay substantial damages;
o cease using key aspects of our technologies or processes that
incorporate the challenged intellectual property;
o cease the manufacture, use, sale, offer for sale and
importation of infringing products;
o alter our designs around a third party's patent;
o obtain licenses to use the technology that is the subject of
the litigation from a third party;
o expend significant resources to develop or obtain
non-infringing technology;
o create new brands for our services and establish recognition
of these new brands; or
o make significant changes to the structure and the operation
of our business.
Implementation of any of these alternatives could be costly and
time-consuming and might not be possible at all. An adverse determination
in any litigation to which we were a party could harm our business, our
results of operations and financial condition. In addition, we may not be
able to develop or acquire the technologies we need, and licenses to such
technologies, if available, may not be obtainable on commercially
reasonable terms. Any necessary development or acquisition could require us
to expend substantial time and other resources.
One party has notified ZiLOG that it may be infringing certain patents.
Four of our customers have notified us that they have been approached by
patent holders who claim that they are infringing certain patents. The
customers have asked us for indemnification. ZiLOG is investigating the
claims of all of these parties. Even though we have not heard anything
about any of these for at least eight months, and while we believe that we
are unlikely to have liability in any of these situations, no assurance can
be given in this regard. In the event ZiLOG determines that such notice may
involve meritorious claims, ZiLOG may seek a license. Based on industry
practice, ZiLOG believes that in most cases any necessary licenses or other
rights could be obtained on commercially reasonable terms. However, no
assurance can be given that licenses could be obtained on acceptable terms
or that litigation will not occur. The failure to obtain necessary licenses
or other rights or the advent of litigation arising out of such claims
could have a material adverse effect on ZiLOG.
We are defending one lawsuit, in the ordinary course of business. We may
lose this suit and we may be subject to a material judgment against us.
We may engage in acquisitions that harm our operating results, dilute our
stockholders' equity, or cause us to incur additional debt or assume
contingent liabilities.
To grow our business and maintain our competitive position, we have made
acquisitions in the past and may acquire other businesses in the future. In
the past, for example, we acquired substantially all of the assets and
assumed the operating liabilities of Seattle Silicon Corporation in April
1999 for approximately $6.1 million. In July 2000, we acquired Calibre in
exchange for 741,880 shares of our common stock, including shares of our
common stock issuable upon the exercise of vested options, plus additional
shares issuable pursuant to an earn-out provision.
Acquisitions involve a number of risks that could harm our business and
result in the acquired business not performing as expected, including:
o insufficient experience with technologies and markets in
which the acquired business is involved that may be necessary
to successfully operate and integrate the business;
o ineffective communication and cooperation in product
development and marketing among senior executives and key
technical personnel;
o problems integrating the acquired operations, personnel,
technologies or products with the existing business and
products;
o diversion of management time and attention from our core
business and to the acquired business;
o potential failure to retain key technical, management, sales
and other personnel of the acquired business; and
o difficulties in retaining relationships with suppliers and
customers of the acquired business.
In addition, acquisitions could require investment of significant financial
resources and may require us to obtain additional equity financing, which
may dilute our stockholders' equity, or to incur additional indebtedness.
We are subject to a variety of environmental laws and regulations and our
failure to comply with present or future laws and regulations could harm
our business materially.
Our manufacturing processes require us to use various hazardous substances
and, as a result, we are subject to a variety of governmental laws and
regulations related to the storage, use, emission, discharge and disposal
of such substances. Although we believe that we are in material compliance
with all relevant laws and regulations and have all material permits
necessary to conduct our business, our failure to comply with present or
future laws and regulations or the loss of any permit required to conduct
our business could result in fines being imposed on us, the limitation or
suspension of production or cessation of our operations. Compliance with
any future environmental laws and regulations could require us to acquire
additional equipment or to incur substantial other expenses. Any failure by
us to control the use of, or adequately restrict the discharge of,
hazardous materials could subject us to future liabilities that could
materially harm our business. In addition, we may be required to incur
significant expense in connection with governmental investigations and/or
environmental employee health and safety matters.
Risks Related to Our Capital Structure
Our substantial indebtedness may limit the cash flow we have available for
our operations and place us at a competitive disadvantage.
At December 31, 2001, we had $280.0 million of consolidated long-term
indebtedness and a stockholders' deficiency of $274.1 million.
If we are unable to successfully restructure our senior notes, the high
degree to which we are leveraged may have important consequences to our
business, including:
o we may not be able to continue as a going concern;
o our ability to obtain additional financing for working
capital, capital expenditures, product development, possible
future acquisitions or other purposes may be impaired or any
such financing may not be available;
o a substantial portion or all of any cash flow available from
operations after satisfying liabilities that arise in the
ordinary course of business will be dedicated to the payment
of debt service obligations;
o high leverage may place us at a competitive disadvantage,
limit our flexibility in reacting to changes in our operating
environment and make us more vulnerable to a downturn in our
business or the economy generally.
o we will be required to generate substantial operating cash
flow to pay interest and other obligations.
The 2002 business climate is expected to be extremely difficult. We
presently expect that anticipated cash flows from operations and available
cash, coupled with some operational restructuring activities and other
cash-savings initiatives will allow us to satisfy all of our cash needs.
Whether we are able to do so will depend primarily on our results from
operations during 2002 and on the success of our other initiatives. If we
are not able to do so, we may require additional cash resources, such as
from new sources of debt or equity financing or one or more sales of
assets.
The agreements governing our indebtedness may limit our ability to finance
future operations or capital needs or engage in business activities that
may be in our interest.
The terms of our indebtedness contain, and the terms of our
post-confirmation credit facility are expected to contain restrictive
covenants that may impair our ability to take corporate actions that we
believe to be in the best interests of our stockholders, including
restricting our ability to:
o dispose of assets;
o incur additional indebtedness;
o prepay other indebtedness or amend some debt instruments;
o pay dividends or repurchase our stock;
o create liens on assets;
o enter into sale and leaseback transactions;
o make investments, loans or advances;
o make acquisitions or engage in mergers or consolidations;
o change the business conducted by us or our subsidiaries;
o make capital expenditures or engage in specific transactions
with affiliates; and
o otherwise restrict other corporate activities.
Our ability to comply with these agreements may be affected by events
beyond our control, including prevailing economic, financial and industry
conditions. The breach of any of such covenants or restrictions could
result in a default, which would permit some of our creditors to cause all
amounts we owe them to accelerate and become due and payable, together with
accrued and unpaid interest. We may not be able to repay all of our
borrowings if they are accelerated and, in such event, our business may be
harmed materially and the value of our common stock and debt securities
could decrease significantly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market risk for changes in interest rates relate primarily
to our short-term investment portfolio and short-term debt obligations. We
do not use derivative financial investments in its investment portfolio.
Our primary investment objectives are to preserve capital and maintain
liquidity. These objectives are met by investing in high quality credit
issuances and limiting the amount of credit exposure to any one company. We
mitigate default risk by investing in only the highest quality securities
and monitoring the credit ratings of such investments. We have no cash flow
exposure due to rate changes for its cash equivalents or the fixed-rate
debt as these instruments have fixed interest rates. The variable rate debt
is an obligation established with a commercial lender, and we have cash
flow exposure due to rate changes. See Note 6 of Notes to Consolidated
Financial Statements for a discussion on the interest rates.
The table below presents principal amounts and related average interest
rates by year of maturity for our cash equivalents and debt obligation (in
thousands):
Fair
2002 Total Value
--------- -------- ---------
Cash Equivalents:
Fixed rate......................... $ 29,239 $ 29,239 $ 29,239
Average interest rate.............. 1.76% 1.76% --
Short-term Debt:
Variable-rate debt................. $ 12,800 $ 12,800 $ 12,800
Interest rate...................... 4.75% 4.75% --
Fixed-rate debt.................... $ 280,000 $ 280,000 $ 78,400
Stated interest rate............... 9.50% 9.50% --
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and supplementary data are
provided herein:
Report of KPMG LLP, Independent Auditors...................................................pg. 38
Report of Ernst & Young LLP, Independent Auditors..........................................pg. 40
Consolidated Balance Sheets as of December 31, 2001 and 2000 ..............................pg. 41
Consolidated Statements of Operations for the Years Ended December 31, 2001,
2000 and 1999.....................................................................pg. 42
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001,
2000 and 1999.....................................................................pg. 43
Consolidated Statements of Stockholders' Deficiency for the Years Ended
December 31, 2001, 2000, and 1999.................................................pg. 44
Notes to Consolidated Financial Statements.................................................pg. 45
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors
ZiLOG, Inc.:
We have audited the accompanying consolidated balance sheet of ZiLOG, Inc.
and subsidiaries, (the Company), as of December 31, 2001, and the related
consolidated statements of operations, stockholders' deficit, and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ZiLOG,
Inc. and subsidiaries, as of December 31, 2001, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has suffered recurring
losses from operations and has a net capital deficiency that raise substantial
doubt about the Company's ability to continue as a going concern. In addition,
the Company filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court on
February 28, 2002. Although the Company is currently operating their business
as debtor-in-possession under the jurisdiction of the Bankruptcy Court, the
continuation of their business as a going concern is contingent upon, among
other things, the Company's ability to gain confirmation of their plan of
reorganization by the Bankruptcy Court and ultimately to achieve profitable
operations and positive cash flow. The accompanying consolidated financial
statements to not include any adjustments that might result from the outcome
of these uncertainties.
/s/ KPMG LLP
Mountain View, California
March 29, 2002
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ZiLOG, Inc.
We have audited the accompanying consolidated balance sheet of ZiLOG, Inc.
as of December 31, 2000 and the related consolidated statements of
operations, stockholders' deficiency and cash flows for the years ended
December 31, 2000 and 1999. Our audits also included the financial
statement schedule for the years ended December 31, 2000 and 1999 listed in
the index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ZiLOG,
Inc. at December 31, 2000, and the consolidated results of its operations
and its cash flows for the years ended December 31, 2000 and 1999, in
conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Notes 1 and 2 to the consolidated financial statements,
during the year ended December 31, 2000, the Company changed its accounting
method for recognizing revenue on shipments to its distributors.
/s/ Ernst & Young LLP
San Jose, California
January 26, 2001
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share amounts)
December 31,
---------------------
2001 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 30,707 $ 40,726
Accounts receivable, less allowance for doubtful
accounts of $678 in 2001 and $879 in 2000........ 16,664 29,378
Inventories....................................... 17,362 27,547
Prepaid expenses and other current assets......... 3,905 14,005
--------- ---------
Total current assets........................... 68,638 111,656
--------- ---------
Property, plant and equipment, at cost:
Land, buildings and leasehold improvements........ 6,219 28,860
Machinery and equipment........................... 88,273 286,470
--------- ---------
94,492 315,330
Less:accumulated depreciation and amortization.... (48,708) (205,879)
--------- ---------
Net property, plant and equipment.............. 45,784 109,451
Other assets......................................... 1,302 18,640
---------- ----------
$ 115,724 $ 239,747
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Short-term debt................................... $ 12,800 $ --
Notes payable..................................... 280,000 --
Interest payable on notes......................... 22,516 8,867
Accounts payable.................................. 13,355 17,098
Accrued compensation and employee benefits........ 8,992 27,720
Other accrued liabilities......................... 4,923 5,496
Accrued special charges........................... 9,664 3,363
Dividends payable on preferred stock.............. 16,594 11,422
Deferred income on shipments to distributors...... 6,611 13,998
--------- ---------
Total current liabilities...................... 375,455 87,964
Notes payable........................................ -- 280,000
Other non-current liabilities........................ 14,326 14,666
Commitments and contingencies
Stockholders' deficiency:
Preferred Stock, $100.00 par value; 5,000,000 shares
authorized; 1,500,000 shares designated as Series A
Cumulative Preferred Stock; 250,000 shares of Series
A Cumulative Preferred Stock issued and outstanding
at December 31, 2001 and 2000; aggregate
liquidation preference $40,750 at
December 31, 2001.................................. 25,000 25,000
Common Stock, $0.01 par value; 70,000,000 shares
authorized; 32,017,272 and 31,962,845 shares issued
and outstanding at December 31, 2001 and 2000,
respectively. Class A Stock, $0.01 par value;
30,000,000 shares authorized; 10,000,000 shares
issued and outstanding at December 31, 2001 and
2000............................................... 420 419
Deferred stock compensation.......................... (596) (1,462)
Additional paid-in capital........................... 13,247 12,151
Accumulated deficit.................................. (312,128) (178,991)
--------- ---------
Total stockholders' deficiency................. (274,057) (142,883)
---------- ----------
$ 115,724 $ 239,747
========= =========
See accompanying notes to the consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Year Ended December 31,
----------------------------
2001 2000 1999
------- ------- -------
Net sales................................ $ 172,310 $ 239,213 $ 245,138
Cost of sales............................ 130,064 151,721 158,768
------- ------- -------
Gross margin............................. 42,246 87,492 86,370
Operating expenses:
Research and development................. 28,668 36,856 32,777
Selling, general and administrative...... 46,143 54,478 59,082
Special charges.......................... 54,329 17,489 4,686
------- ------- -------
129,140 108,823 96,545
------- ------- -------
Operating loss........................... (86,894) (21,331) (10,175)
Other income (expense):
Interest income.......................... 1,144 2,756 2,567
Interest expense......................... (33,710) 29,062 28,954
Other, net............................... (827) (805) (324)
------- ------- -------
Loss before income taxes, equity
investment and cumulative effect of
change in accounting principle......... (120,287) (48,442) (36,886)
Provision for income taxes............... 499 332 1,004
------- ------- -------
Loss before equity investment and
cumulative effect of change in
accounting principle................... (120,786) (48,774) (37,890)
Equity in loss of Qualcore Group, Inc.... (7,178) (885) --
------- ------- -------
Loss before cumulative effect
of change in accounting principle...... (127,964) (49,659) (37,890)
Cumulative effect of change in accounting
principle.............................. -- (8,518) --
--------- --------- --------
Net loss................................. (127,964) (58,177) (37,890)
Preferred stock dividends accrued........ 5,173 4,528 3,965
--------- --------- --------
Net loss attributable to common
stockholders........................... $(133.137) $(62,705) $(41,855)
========= ======== =========
Pro forma amounts with the change in
accounting principle related to
revenue recognition applied
retroactively (unaudited):
Net loss................................ $ -- $ -- $(41,597)
========= ========= =========
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
----------------------------
2001 2000 1999
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................... $ (127,964) $ (58,177) $ (37,890)
Adjustments to reconcile net loss to net
cash (used) provided by operating
activities:
Cumulative change in accounting
principle............................... -- 8,518 --
Equity in loss of Qualcore Group, Inc... 7,178 885 --
Depreciation and amortization........... 37,888 41,954 52,368
Impairment of long lived assets......... 34,831 6,852 3,677
Impairment of goodwill.................. 2,086 2,422 --
Stock compensation...................... 1,896 2,641 --
Charge for purchased in-process
research and development.............. -- 1,545 1,009
Interest on notes payable............... 13,649 -- --
Loss from disposition of equipment...... 700 119 261
Change in assets and liabilities:
Accounts receivable..................... 12,714 3,069 (6,683)
Inventories............................. 10,185 1,470 (6,224)
Prepaid expenses and other
current and noncurrent assets......... 12,497 2,121 (5,396)
Accounts payable........................ (3,024) (6,037) 5,617
Accrued compensation and employee
benefits.............................. (18,728) (4,939) 8,061
Other accrued expenses.................. (2,719) 6,050 9,579
------- ------- -------
Cash provided (used) by operating
activities........................ (18,811) 8,493 24,379
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures.................... (4,075) (21,926) (8,269)
Acquisition of Seattle Silicon, net of
cash acquired......................... -- -- (5,931)
Acquisition of Calibre, Inc., net of
cash acquired......................... -- (355) --
Purchase of equity interest in Qualcore
Group, Inc. .......................... -- (8,056) --
------- ------- -------
Cash used by investing activities... (4,075) (30,337) (14,200)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt........... 12,800 -- --
Proceeds from issuance of common stock.. 67 2,658 318
Principal payments under capital leases. -- (894) (547)
------- ------- -------
Cash provided (used) by financing
activities........................ 12,867 1,764 (229)
------- ------- -------
Increase (decrease) in cash and cash
equivalents............................... (10,019) (20,080) 9,950
Cash and cash equivalents at beginning
of period................................. 40,726 60,806 50,856
------- ------- -------
Cash and cash equivalents at end of
period.................................... $ 30,707 $ 40,726 $ 60,806
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the year......... $ 14,365 $ 26,896 $ 26,869
Income taxes paid (net refund) during
the year............................ $ 479 $ 175 $ (7,137)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Equipment purchased under capital
leases.............................. $ -- $ -- $ 2,077
Issuance of common stock in connection with
Calibre, Inc. acquisition........... $ -- $ 4,291 $ --
Preferred dividend accrued............ $ 5,173 $ 4,528 $ 3,965
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(dollars in thousands)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(dollars in thousands)
Common Stock Common Stock Deferred Addt'l Total
Preferred Stock Voting Class A Stock Paid Accumu- Stock-
-------------------- ------------------- ------------------ Compensa- in lated holders'
Shares Amount Shares Amount Shares Amount tion Capital Deficit Deficiency
--------- --------- ----------- ----- ----------- ----- ----- ------ -------- ---------
Balance at January 1, 1999....... 250,000 $ 25,000 30,098,736 $ 301 10,000,000 $ 100 $ -- $ 799 $ (74,431) $ (48,231)
Issuance of Common Stock under
stock option plans............. -- -- 127,050 1 -- -- -- 317 -- 318
Issuance of Common Stock for
employee compensation.......... -- -- 300,000 3 -- -- -- (3) -- --
Preferred dividends accrued...... -- -- -- -- -- -- -- -- (3,965) (3,965)
Net loss and comprehensive loss.. -- -- -- -- -- -- -- -- (37,890) (37,890)
--------- --------- ----------- ----- ----------- ----- ----- ------ -------- ---------
Balance at December 31, 1999..... 250,000 25,000 30,525,786 305 10,000,000 100 -- 1,113 (116,286) (89,768)
Issuance of Common Stock under
stock option plans............. -- -- 382,393 4 -- -- -- 954 -- 958
Sales of restricted stock........ -- -- 425,000 4 -- -- -- 1,696 -- 1,700
Issuance of common stock for
acquisition.................... -- -- 629,666 6 -- -- -- 4,285 -- 4,291
Preferred dividends accrued...... -- -- -- -- -- -- -- -- (4,528) (4,528)
Deferred stock compensation...... -- -- -- -- -- -- (2,160) 2,160 -- --
Deferred stock compensation
cancellations.................. -- -- -- -- -- -- 333 (333) -- --
Amortization of deferred stock
compensation................... -- -- -- -- -- -- 365 -- -- 365
Stock option compensation........ -- -- -- -- -- -- -- 2,276 -- 2,276
Net loss and comprehensive loss.. -- -- -- -- -- -- -- -- (58,177) (58,177)
--------- --------- ----------- ----- ----------- ----- ----- ------ -------- ---------
Balance at December 31, 2000..... 250,000 25,000 31,962,845 319 10,000,000 100 (1,462) 12,151 (178,991) (142,883)
Issuance of Common Stock under
stock option plans, net........ -- -- 54,427 1 -- -- -- 66 -- 67
Preferred dividends accrued...... -- -- -- -- -- -- -- -- (5,173) (5,173)
Deferred stock compensation
cancellations.................. -- -- -- -- -- -- 700 (700) -- --
Amortization of deferred stock
compensation................... -- -- -- -- -- -- 166 -- -- 166
Stock option compensation........ -- -- -- -- -- -- -- 1,730 -- 1,730
Net loss and comprehensive loss.. -- -- -- -- -- -- -- -- (127,964) (127,964)
--------- --------- ----------- ----- ----------- ----- ----- ------ -------- ---------
Balance at December 31, 2001..... 250,000 $ 25,000 32,017,272 $ 320 10,000,000 $ 100 $ (596)$13,247 $(312,128) $(274,057)
========= ========= =========== ===== =========== ===== ===== ======= ======== =========
See accompanying notes to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------------------------
Nature of business: ZiLOG designs, develops, manufactures and markets
integrated circuits for application specific standard products (ASSPs) for
the communications, integrated controls, and home entertainment markets.
Basis of Presentation: The consolidated financial statements include the
accounts of ZiLOG, Inc. and its subsidiaries. All significant transactions
and accounts between the Company and these subsidiaries have been
eliminated in consolidation.
The Company has incurred recurring operating losses and has a net capital
deficiency as of December 31, 2001. As described in Note 16, on February 28,
2002, ZiLOG filed a plan of reorganization under Chapter 11 of the U.S.
Bankruptcy Code with the Northern District of California (the Reorganization
Plan") and currently expects to emerge sometime in May 2002. We believe there
is a strong likelihood that the Reorganization Plan will be approved by the
Bankruptcy Court because the holders of our senior notes and preferred stock
have already approved the terms of the plan. None of ZiLOG's other debts are
being restructured as part of this plan. Consequently it is not expected that
employees and general unsecured creditors will be compromised under this
Reorganization Plan. Although ZiLOG believes that it is likely that the
Reorganization Plan will be approved with terms and conditions substantially
the same as those submitted and discussed above, there is a possibility that
the Reorganization Plan may not be approved. In the event that the
Reorganization Plan is not approved or if the Bankruptcy Court changes the
Reorganization Plan significantly, ZiLOG's ability to continue as a going
concern could be severely adversely affected. The consolidated financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Revenue recognition: Revenue from product sales to OEM customers is
recognized upon shipment net of appropriate allowances for returns and
warranty costs, recorded at the time of shipment. As further explained in
Note 2, commencing in 2000, revenue on shipments to distributors who have
rights of return and price protection on unsold merchandise held by them,
is deferred until products are resold by the distributors to end users.
Prior to fiscal 2000, revenue on shipments to distributors having rights of
return and price protection on unsold merchandise held by them were
recognized upon shipment to the distributors, with appropriate provisions
for reserves for returns and allowances.
In December 1999, the Securities and Exchange Commission ("SEC") issued SEC
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
Financial Statements." In October 2000, the SEC issued a summary of
Frequently Asked Questions ("FAQ") relating to SAB 101. SAB 101 and the
related FAQ provide guidance on the recognition, presentation and
disclosure of revenue in financial statements. Adoption of SAB 101 had no
impact on the Company's consolidated financial statements.
Foreign currency translation: All of the Company's subsidiaries use the
U.S. dollar as the functional currency. Accordingly, monetary accounts and
transactions are remeasured at current exchange rates, and non-monetary
accounts are remeasured at historical rates. Revenues and expenses are
remeasured at the average exchange rates for each period, except for
depreciation expense, which is remeasured at historical rates. Foreign
currency exchange losses were included in determining results of operations
and aggregated $0.2 million, $0.3 million and $0.2 million for the years
ended December 31, 2001, 2000 and 1999, respectively.
Cash and cash equivalents: Cash and cash equivalents consist of financial
instruments, including auction rate securities, which are readily
convertible to cash and have original maturities of three months or less at
the time of acquisition. Auction-rate securities included in cash and cash
equivalents totaled $11.0 million at December 31, 2000. ZiLOG had no
outstanding auction-rate securities in cash and cash equivalents at
December 31, 2001.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 - (Continued)
Inventories: Inventories are stated at the lower of standard cost (which
approximates actual cost on a first-in, first-out basis) or market and
consist of the following (in thousands):
December 31,
-------------------------
2001 2000
------- -------
Raw materials............... $ 1,011 $ 1,313
Work-in-process............. 10,295 19,827
Finished goods.............. 6,056 6,407
-------- --------
$ 17,362 $ 27,547
======== ========
Property, plant and equipment: Property, plant and equipment are stated at
cost. Depreciation is computed using the straight-line method over the
estimated economic lives of the assets, which are generally between three
and seven years for machinery and equipment and 30 years for buildings.
Significant impairments of property, plant and equipment were recorded in
2001 due to the operational restructuring of the Company, and write-down of
ZiLOG's eight-inch wafer fabrication facility to its expected realizable
value. See Note 5 below for a further discussion. Amortization of leasehold
improvements is computed using the shorter of the remaining terms of the
leases or the estimated economic lives of the improvements. Depreciation
expense of property, plant and equipment was $35.2 million, $39.4 million
and $51.1 million for 2001, 2000 and1999, respectively. Assets leased under
a capital lease are recorded at the present value of the lease obligation
and are primarily amortized over the shorter of the remaining term of the
lease or the estimated economic life of the asset. Amortization of leased
assets was approximately $0.2 million in 2001, $0.7 million in 2000 and
$0.7 million in 1999.
Advertising expenses: The Company accounts for advertising costs as expense
for the period in which they are incurred. Advertising expenses for 2001,
2000, and 1999 were approximately $0.7 million, $1.0 million and $1.7
million, respectively.
Shipping costs: Shipping costs are included in cost of sales.
Use of estimates: The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Stock awards: The Company accounts for employee stock awards in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. For stock option grants issued with an exercise price
equal to the fair market value of the stock as determined by the board of
directors, the Company recognizes no compensation expense for stock option
grants. Pro forma information required by FASB Statement No. 123,
Accounting for Stock Based Compensation is presented in Note 9 below.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of APB
No. 25, or FIN 44. FIN 44 clarifies the application of APB No. 25 and,
among other issues, clarifies the following: the definition of an employee
for purposes of applying APB No. 25; the criteria for determining whether a
plan qualifies as a non-compensatory plan; the accounting consequence of
various modifications to the terms of previously fixed stock options or
awards; and the accounting for an exchange of stock compensation awards in
a business combination. FIN 44 is effective July 1, 2000, but some
provisions of FIN 44 cover specific events that occurred after either
December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have
any impact on our financial position or results of operations.
Recent Accounting Pronouncements:
In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" ("FAS 141") and No. 142, "Goodwill and
Other Intangible Assets" ("FAS 142"). FAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase methods. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized, but are reviewed annually (or
more frequently if impairment indicators arise) for impairment. Separable
intangible assets that are not deemed to have indefinite lives will
continue to be amortized over their useful lives (but with no maximum
life). The amortization provisions of FAS 142 apply to goodwill and
intangible assets acquired after July 1, 2001. With respect to goodwill and
intangible assets acquired prior to July 2, 2001, ZiLOG is required to
adopt FAS 142 effective January 1, 2001. The Company expects no impact from
the adoption of the provisions to FAS 142 that are effective January 1,
2002.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Impairment of Disposal of Long-Lived Assets" ("FAS 144"), which
is applicable to financial statements for fiscal years beginning after
December 15, 2001. The provisions of this statement provide a single
accounting model for impairment if long-lived assets. The Company adopted
FAS 144 in 2001 there was no impact to the consolidated financial
statements.
NOTE 2. ACCOUNTING CHANGE - RECOGNITION OF REVENUE ON SALES TO DISTRIBUTORS
-------------------------------------------------------------------
In the fourth quarter of 2000, the Company changed its accounting method
for recognizing revenue on shipments to distributors who have rights of
return and price protection on unsold merchandise held by them. The Company
previously recognized revenue upon shipment to these distributors, net of
appropriate allowances for sales returns, price protection and warranty
costs. Following the accounting change, revenue recognition on shipments to
these distributors is deferred until the products are resold by the
distributors to their customers. The Company believes that deferral of
revenue recognition on these distributor shipments and related gross margin
until the product is shipped by the distributor results in a more
meaningful measurement of results of operations as it better conforms to
the changing business environment and is more consistent with industry
practice; therefore it is a preferable method of accounting. The cumulative
effect of the change in accounting method was a charge of $8.5 million, net
of a zero income tax effect. The pro forma effects of the accounting change
on prior years' results are shown in the statement of operations. The
effect of adopting the new accounting method in 2000 resulted in an
increase in the net loss of $1.6 million, exclusive of the cumulative
effect of the accounting change. In the below table, net loss for 2000
represents net loss after the cumulative effect adjustment as a result of
the accounting change and pro forma net loss represents net loss before the
cumulative effect adjustment. The pro forma effects of the accounting
change on prior years' results are as follows (in thousands):
Year Ended
December 31,
-------------------------
2000 1999
------- -------
As reported
Net sales................... $ 239,213 $ 245,138
Net loss.................... (58,177) (37,890)
Pro forma amounts with the change
in accounting principle related to
revenue recognition applied
retroactively (unaudited):
Net sales................... $ 239,213 $ 240,694
Net loss.................... (49,659) (41,597)
NOTE 3: ACQUISITIONS AND EQUITY INVESTMENT
- ------------------------------------------
On July 27, 2000, ZiLOG acquired Calibre, Inc. ("Calibre") pursuant to a
merger agreement for 629,666 shares of ZiLOG common stock, par value $.01
per share ("Common Shares") and 112,214 Common Shares issuable upon
exercise of vested options. The purchase price of approximately $4.9
million, including acquisition costs of approximately $0.1 million, was
allocated based on fair values as follows: tangible net assets of $0.1
million; goodwill of $3.3 million and in-process research and development
of approximately $1.5 million. Goodwill was being amortized on a
straight-line basis over four years and the net book value at December 31,
2000 is $2.9 million. During the fourth quarter of 2001, the remaining $2.1
million net book value of this goodwill was deemed impaired and recorded as
special charges. For financial statement purposes, the acquisition was
accounted for as a purchase and, accordingly, the results of operations of
Calibre subsequent to July 27, 2000 are included in the Company's
consolidated statements of operations.
Calibre's in-process research and development, primarily focused on a
partially developed technology that replaces third-party transceivers to
enable wireless communications, was expensed in the third quarter because
the projects related to the acquired research and development had not
reached technological feasibility and have no alternative future use. The
nature of efforts required to develop the purchased in-process technology
into commercially viable products primarily relates to completion of
design, prototyping and testing to ensure the products can be produced to
meet customer design specifications. Such customer design specifications
include product functions, features and performance requirements. To date,
we have been unsuccessful in marketing these products and there can be no
assurance that these products will ever achieve commercial viability.
Factors considered in valuing Calibre's in-process research and development
included the state of development of each project, target markets and
associated risks of achieving technological feasibility and market
acceptance of the products. The value of the purchased in-process
technology was determined by estimating the projected net cash flows
relating to such products, including costs to complete the technology and
product development and the future expected income upon commercialization
of the products over periods ranging from three to five years. These cash
flows were then discounted to their net present value using an after-tax
discount rate of 40 percent. The estimated steps of completion were applied
to the net present value of the future discounted cash flows to arrive at
the $1.5 million charge for in-process research and development that was
immediately written off to the statement of operations.
Calibre's pro forma results are not presented, as the pro forma results of
operations would not be materially different from ZiLOG's financial
statements.
On March 22, 2000, ZiLOG acquired 3.0 million shares or 20 percent of the
then-outstanding common stock of Qualcore Group, Inc. ("Qualcore") for cash
of $8.0 million plus expenses of $0.1 million, pursuant to a purchase and
sale agreement (the "Qualcore Agreement"). Subject to the Qualcore
Agreement, $5.5 million was paid on March 22, 2000 and $2.5 million was
paid on April 14, 2000. ZiLOG accounted for its investment in Qualcore
common stock using the equity method. The difference between the total cost
of ZiLOG's investment in Qualcore of $8.1 million and ZiLOG's underlying
equity in Qualcore's net assets was being amortized on a straight-line
basis over five years. Under the terms of the Agreement, ZiLOG had the
option until June 30, 2001 to acquire all of the remaining outstanding
shares of common stock of Qualcore for cash and/or a number of ZiLOG's
Common Shares. If ZiLOG did not exercise this option, Qualcore had the
right to put approximately 11% of Qualcore's common stock to the Company
for $5.2 million. The Company did not exercise this option. During the
fourth quarter of 2001, the Company reached a settlement agreement with
Qualcore in which the Company paid Qualcore a termination charge of
$450,000, and returned all the shares representing ZiLOG's 20% equity
ownership in Qualcore. The termination charge has been recorded as a
special charge. In return, Qualcore cancelled its put right. In connection
with this settlement the Company wrote-off the remaining balance of its
investment in Qualcore.
On April 20, 1999, ZiLOG acquired substantially all of the assets and
assumed the operating liabilities of Seattle Silicon Corporation ("Seattle
Silicon") a fabless semiconductor company based in Bellevue, Washington
that offers a customized design capability for analog devices and mixed
signal system-on-a-chip (SOC) technology. The purchase price of
approximately $6.1 million, including acquisition costs of approximately
$0.4 million, was allocated based on fair values as follows: tangible net
assets of $0.1 million; in-process research and development of $1.0
million; and goodwill of $5.0 million. Goodwill was being amortized on a
straight-line basis over three years and the net book value at December 31,
1999, was $3.9 million. During the fourth quarter of 2000, the remaining
$2.3 million net book value of this goodwill was expensed to special
charges, see Note 5 below. For financial statement purposes, this
acquisition was accounted for as a purchase, and accordingly, the results
of operations of Seattle Silicon subsequent to April 20, 1999, are included
in the Company's consolidated statements of operations.
In-process research and development was expensed in April 1999 because the
projects related to the acquired research and development (partially
developed semiconductor product designs), had not reached technological
feasibility and have no alternative future use. The nature of efforts
required to develop the purchased in-process technology into commercially
viable products primarily relates to completion of design, prototyping and
testing to ensure the products can be produced to meet customer design
specifications, including functions, features and performance requirements.
The cost of completing these projects was not material and the Company was
not successful in bringing these products to commercial viability.
Factors considered in valuing in-process research and development included
the stage of development of each project, target markets and associated
risks of achieving technological feasibility and market acceptance of the
products. The value of the purchased in-process technology was determined
by estimating the projected net cash flows arising from commercialization
of the products over periods ranging from one to four years. These cash
flows were then discounted to their net present value using a discount rate
of 25 percent. The estimated stage of completion was applied to the net
present value of future discounted cash flows to arrive at the $1.0 million
charge for in-process research and development that was immediately written
off to the statement of operations.
Seattle Silicon's pro forma results are not presented, as the pro forma
results of operations would not be materially different from ZiLOG's
financial statements.
NOTE 4. FAIR VALUES OF FINANCIAL INSTRUMENTS
------------------------------------
Cash and cash equivalents consist primarily of cash in bank accounts,
commercial paper, money market accounts and short-term time deposits. The
short-term debt represents borrowings under a revolving line of credit with
a commercial lender. The Notes Payable are 9.5% Senior Secured Notes which
mature on March 1, 2005. The carrying amount on the balance sheet for Cash
and cash equivalents at December 31, 2001 and 2000 were $30.7 million and
$40.7 million, respectively, which approximates fair value, due to their
short maturities. Based on market quoted values, the Notes had an estimated
fair value of $78.4 million and $159.6 million at December 31, 2001 and
2000, respectively. The carrying amount, which approximates fair value, on
the balance sheet at December 31, 2001 for the short-term debt was $12.8
million, which represents the principle amount borrowed.
NOTE 5. SPECIAL CHARGES
---------------
During the fourth quarter of 2001, ZiLOG recorded an impairment of $30.4
million to the carrying amount of the Mod III eight-inch wafer fabrication
facility in Nampa, Idaho ("Mod III"), to its estimated fair value of
$30.0 million. The fabrication facility completed its final manufacturing
in January 2002. The property, plant and equipment of Mod III were idled in
January 2002, and at that time were classified as assets held for sale.
During the fourth quarter of 2001, the Company reached a settlement
agreement with our equity investment partner, Qualcore Group ("Qualcore")
in which the Company paid Qualcore a termination charge of $450,000, and
returned all the shares representing ZiLOG's 20% equity ownership in
Qualcore. In return, Qualcore cancelled its right to "put" approximately
11% of Qualcore's common stock to the Company for an aggregate cost of $5.2
million. All future design services from Qualcore, if any, will be
purchased under standard pay-for-performance-and-delivery contracts. In
addition, net goodwill of $2.1 million for Calibre was deemed to be
impaired and was written off because expected revenues from this acquired
business have not been realized.
In November 2001, the Company negotiated with the owner of its Campbell,
California headquarters facility to terminate its lease. The Company has
agreed to pay termination charges of $2.8 million in cash and transfer
title to certain assets and leasehold improvements in return for
cancellation of approximately $10.0 million in future lease commitments on
its 108,000 square foot headquarters facility. The Company incurred $1.5
million of special charges to write-off the net book value of assets in
connection with the lease termination. At December 31, 2001, approximately
$2.8 million of lease termination charges were accrued and were paid in
February 2002.
During the third and fourth quarters of 2001, ZiLOG incurred special
charges of approximately $4.5 million for employee retention bonuses,
severance, and termination benefits for the announced reduction in force
due to ZiLOG's management plans to close its eight-inch fabrication
facility in Nampa, Idaho. This action affected approximately 200 employees.
At December 31, 2001, approximately $4.2 million was accrued for these
payments, which were made in the first quarter of 2002.
During the third and fourth quarters of 2001, special charges aggregating
$1.0 million were recognized for manufacturing consolidation costs,
including new mask sets to support ZiLOG's wafer fabrication facility
consolidation efforts and relocation costs relating to moving the Company's
wafer probe operation to its facilities in the Philippines. At December 31,
2001, approximately $0.2 remained accrued in connection with the
manufacturing consolidation charges.
ZiLOG charged $3.5 million to expense for professional fees related to its
debt restructuring efforts during the third and fourth quarter of 2001. At
December 31, 2001, approximately $1.1 million remained accrued for payment
in connection with these professional fees.
During the second quarter of 2001, ZiLOG incurred special charges of $8.1
million for restructuring of operations comprised of severance-related
expenses of $4.0 million, including $1.7 million of non-cash stock-option
related expenses, fixed-asset related write-offs of $2.9 million, including
planning software and surplus test equipment; manufacturing consolidation
charges of $0.4 million, and $0.8 million relating to consultants who are
assisting with the Company's restructuring plans. In connection with this
restructuring, ZiLOG eliminated approximately 200 positions worldwide,
including 4 senior vice presidents, with continuation payments through the
length of such senior vice presidents' employment agreements. As of
December 31, 2001, approximately $0.4 million was accrued for future
payments in connection with these agreements.
During the fourth quarter of 2000, ZiLOG incurred special charges totaling
$14.8 million. In December 2000, management approved a plan for the sale of
the Company's five-inch wafer fabrication facility in Nampa, Idaho. The
decision to sell this facility was based on the Company's desire to reduce
fixed manufacturing overhead costs by transferring most production into its
newer eight-inch wafer fabrication that was under-utilized. Property,
plant, and equipment, with a book value of $9.9 million, were written down
by $6.9 million to an estimated realizable value of $3.0 million at
December 31, 2000. In 2000, the Company reclassified these assets and the
remaining carrying value of $3.0 million to other current assets. As of
July 1, 2001, the Company changed its decision and now intends to keep its
five-inch wafer fabrication facility and close its eight-inch fabrication
facility. The Company then reclassified the $3.0 million carrying value of
the five-inch wafer fabrication facility from other current assets to
property, plant and equipment. For the year ended December 31, 2001,
depreciation expense was lowered by approximately $2.8 million, compared to
what would have been recorded without the December 2000 write-down and
reclassification of these assets.
Also, during the fourth quarter of 2000, the net unamortized Seattle
Silicon goodwill of $2.3 million was written off as the Company decided not
to pursue further development on commercial production of the products and
technology that the goodwill was originally established for. ZiLOG also
incurred special charges of $0.1 million for the cancellation of
contractual liabilities and $5.5 million for severance benefits, which
includes $2.0 million of non-cash stock option compensation. Of the
approximately $3.5 million cash payments for severance benefits, $2.1
million and $0.5 million was paid in 2001 and 2000, respectively. The
Company expects to make cash payments of approximately $0.9 million in
2002. In connection with this action, approximately 86 employees were
terminated, including 5 senior vice presidents, with continuation payments
through the length of such senior vice presidents' employee agreements.
During the third quarter of 2000, ZiLOG incurred a special charge of $1.5
million of in-process research and development resulting from the
acquisition of Calibre, Inc.
During the second quarter of 2000, ZiLOG incurred special charges of $1.2
million relating to a restructuring of its Communications segment. In
connection with this action, approximately 24 employees were terminated and
12 other employees were transferred into the Communications segment from
other areas of the Company. The $1.2 million charge included $0.9 million
for severance and benefits, $0.1 million of non-cash stock option
compensation, $0.1 million for write-off of impaired assets, and $0.1
million for contractual liabilities. As of December 31, 2001, approximately
$0.1 million was accrued for payment of severance and termination benefits.
During the second quarter of 1999, ZiLOG incurred special charges of $4.7
million. Approximately $1.0 million was purchased in-process research and
development related to several partially developed semiconductor product
designs that were acquired through the acquisition of Seattle Silicon in
April 1999. ZiLOG also recognized a $3.7 million charge for the write-down
to estimated fair value for test equipment held for sale, which was based
on an independent appraisal. These assets were disposed of during the year
ended December 31, 2000.
The following table details special charges activity for the years ended
December 31, 2001 and December 31, 2000 (in thousands):
Severance Termination
and Cancellation
Termination and Exit Debt
Benefits Charges Restructuting Other Total
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1999......$ -- $ -- $ -- $ -- $ --
Total charge to special charges... 6,470 200 -- -- 6,670
Cash paid......................... (1,218) (100) -- -- (1,318)
Deferred stock compensation....... (1,989) -- -- -- (1,989)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2000...... 3,263 100 -- -- 3,363
Total charge to special charges... 8,537 3,225 4,250 1,399 17,411
Cash paid......................... (6,187) (550) (3,192) (1,181) (11,110)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2001......$ 5,613 $ 2,775 $ 1,058 $ 218 $ 9,664
=========== =========== ========== ============= ===========
Special charges, charged to expense, for the years ended December 31, 2001,
2000, and 1999 are as follows (in thousands):
2001 2000 1999
------------ ------------ ------------
Asset Impairments:
Impairment of MOD III assets..................... $ 30,417 $ -- $ --
Other impaired and dispositioned assets.......... 6,501 9,274 3,677
Restructuring of operations:
Employee retention bonuses, severance pay and
termination benefits........................... 8,537 6,470 --
Termination and exit charges..................... 3,225 200 --
Other............................................ 1,399 -- --
Debt restructuring:
Professional Fees................................ 4,250 -- --
Purchased in-process research and development.... -- 1,545 1,009
------------ ------------ ------------
$ 54,329 $ 17,489 $ 4,686
============ ============ ============
NOTE 6. CREDIT FACILITY
---------------
On December 30, 1998, ZiLOG executed an agreement with a financial
institution (the "Lender") for up to $40 million in the form of a senior
secured revolving line of credit and capital equipment credit facility (the
"Facility"). The Facility provides for borrowings of up to $25 million,
subject to a borrowing base consisting of 80% of eligible accounts
receivable and 40% of eligible inventories. The Facility also provided $15
million for a capital expenditure line, which is secured by eligible
equipment financed. Borrowings, on the $25 million portion bear interest at
a rate per annum (at ZiLOG's option) equal to the London Inter-Bank
Overnight Rate (LIBOR) plus 2%, or the Lender's published prime rate.
Borrowings for the capital expenditure line under the Facility bear
interest at a rate per annum (at ZiLOG's option) equal to LIBOR plus 3% or
the Lender's prime rate plus 1%. As of December 31, 2001, The Company had
borrowings of $12.8 million on the revolving line of credit, which bore
interest at 4.75%, per annum. There were no borrowings under the capital
equipment credit facility. The Company's default on the payment due on
notes payable, and the expiration of the applicable grace period on this
payment on October 4, 2001, constitutes a default under the Facility. As a
result, this lender is under no obligation to make additional loans to the
Company, and the Company therefore may not be able to borrow any additional
amounts under this Facility. In addition, this lender has the option to
call the loan and render the amounts outstanding under the Facility
immediately due and payable. The term of the revolving credit facility is
four years and the capital expenditure line is five years, and they expire
on December 30, 2002 and 2003, respectively.
We received a commitment letter from its current lender to replace the
Facility with a three-year $15.0 million senior secured revolving credit
facility upon emergence from Chapter 11 bankruptcy. The terms of the
commitment letter indicate that the new facility will be on substantially
similar terms as the Facility, except that borrowings will bear interest at
a rate per annum equal to the commercial lender's stated prime rate or
LIBOR, plus 2.5%, and the capital expenditure line will be cancelled.
NOTE 7. NOTES PAYABLE
-------------
The Company has issued $280 million 9.5% senior secured notes ("the
Notes"), which mature on March 1, 2005. Interest is payable semi-annually
on the first of March and September. ZiLOG did not make its scheduled
semi-annual interest payment of $13.3 million on the outstanding senior
notes that was due on September 4, 2001. As a result, the senior notes are
now callable by the bondholders at any time.
Accordingly, during the third quarter of 2001, the Company reclassified its
indebtedness under the senior notes from a long-term liability to a current
liability on the consolidated balance sheet. ZiLOG has continued to accrue
interest, including associated penalties, amounting to approximately $22.5
million at December 31, 2001. Subsequent to December 31, 2001, the Company
reached agreement with the holders of the senior notes to convert the
senior notes and accrued interest and penalties into equity. See Note 16
for a further discussion of our planned financial restructuring and
reorganization.
Expenses associated with the senior notes of approximately $9.9 million were
deferred and are being amortized to interest over the term of the senior
notes. According to the terms of the senior note agreement, the Company had
until October 4, 2001, to pay the interest due on September 4, 2001. Since
this did not happen, the debt became immediately due and payable at the option
of the holders, and accordingly, the Company charged to interest expense the
$4.2 million of remaining unamortized net debt issuance costs during the
fourth quarter of 2001. The senior notes contain a number of significant
covenants that, among other things, restrict the ability of the Company to
dispose of assets, incur additional indebtedness or amend certain debt
instruments, pay dividends, create liens on assets, enter into sale and
leaseback transactions, make investments, loans or advances, make
acquisitions, engage in mergers or consolidations, change the business
conducted by the Company or its subsidiaries, make capital expenditures or
engage in certain transactions with affiliates and otherwise restrict certain
corporate activities.
NOTE 8. RETIREMENT AND PENSION PLANS
----------------------------
The Company has an employee savings plan that qualifies as a deferred
salary arrangement under Section 401(k) of the Internal Revenue Code (the
"401(k) Plan"). Under the 401(k) Plan, participating U.S. employees may
defer a portion of their pretax earnings, up to the Internal Revenue
Service annual contribution limit ($10,500 for calendar year 2001). The
Company may make matching contributions on behalf of each participating
employee in an amount equal to 100% of the participant's deferral
contribution, up to 1.5% of the participant's compensation on a quarterly
basis. The Company may also make additional discretionary contributions to
the 401(k) Plan. Matching contributions to the 401(k) Plan were
approximately $0.6 million, $0.8 million, and $0.7 million in 2001, 2000,
and 1999, respectively. There were no discretionary contributions made for
2001, 2000 or 1999.
During the second quarter of 2001, ZiLOG's Board of Directors cancelled the
Company's Deferred Compensation Plan (the "Plan"), which allowed certain
management employees to defer their receipt of selected amounts of
compensation. These deferrals were transferred to a third party Trustee for
investment purposes. The third party Trustee paid out the deferred
compensation to the affected employees upon termination of the Plan.
The Company's Philippines subsidiaries maintain a defined benefit pension
plan for local employees, which is consistent with local statutes and
practices. This benefit plan had no material impact on the Company's
financial statements for the periods presented.
NOTE 9. STOCKHOLDERS' DEFICIENCY
------------------------
Common stock: Holders of Common Stock are entitled to one vote per share on
all matters submitted to a vote of stockholders. Approval of matters
brought before the stockholders requires the affirmative vote of a majority
of the holders of the outstanding shares of Common Stock, except as
otherwise required by the General Corporation Law of the State of Delaware
(the "DGCL"). Holders of Class A Non-Voting Common Stock do not have any
voting rights, except the right to vote as a class to the extent required
by DGCL.
Except for differences in voting rights described above, the rights,
powers, preferences, and limitations of the Common Stock and Class A
Non-Voting Common Stock are identical. Subject to the rights of holders of
Series A Stock and other classes and/or series of preferred stock, if any,
all shares of Common Stock and Class A Non-Voting Common Stock are entitled
to share in such dividends as the Board may from time to time declare from
sources legally available therefore. Subject to the rights of creditors and
holders of Series A Stock and other classes and/or series of preferred
stock, if any, holders of Common Stock and Class A Non-Voting Common Stock
are entitled to share ratably in a distribution of assets of the surviving
corporation upon any liquidation, dissolution or winding up of a surviving
corporation.
Preferred stock: The Board has the authority to issue, from time to time,
by resolution and without any action by stockholders, up to 5,000,000
shares of preferred stock, par value $100.00 per share, in one or more
classes and/or series and may establish the powers, designations,
preferences, rights and qualifications, limitations or restrictions (which
may differ with respect to each such class and/or series) of such class
and/or series. The Board adopted a resolution on February 26, 1998,
providing for the creation of series A cumulative preferred stock ("Series
A Stock"). On February 28, 1998, the Board issued 250,000 shares of series
A stock, which is a non-voting 13.5% preferred stock with a par value of
$100.00 per share.
The series A stock will accumulate dividends at the rate of 13.5% per annum
(payable quarterly) for periods ending on or prior to February 27, 2008,
and 15.5% per annum thereafter. Dividends will be payable, at the election
of the Board but subject to availability of funds and the terms of the
Notes in cash or in kind through corresponding increase in the liquidation
preference (as described below) of the Series A Stock. The Series A Stock
had an initial liquidation preference of $100.00 per share.
To the extent that a quarterly dividend payment in respect to a share of
series A stock is not made in cash when due, the amount of such unpaid
dividend will accumulate (whether or not declared by the Board) through an
increase in the liquidation preference of such share of series A stock
equal to the amount of such unpaid dividend, and compounded dividends will
accumulate on all such accumulated and unpaid dividends. The liquidation
preference will be reduced to the extent that previously accumulated
dividends are thereafter paid in cash. The Company is required to pay in
cash all accumulated dividends that have been applied to increase the
liquidation preference on February 27, 2008 (the "Clean-Down").
Shares of Series A Stock may be redeemed at the option of the Company, in
whole or in part, at 100% of par value, if redeemed after February 25,
2003, in each case of the sum of (i), the liquidation preference thereof,
increases to the extent that accumulated dividends thereon shall not have
been paid in cash, plus (ii) accrued and unpaid dividends thereon to the
date of redemption. Redemption of shares of the series A stock prior to
February 26, 2003 would be at a premium to par value based on a declining
scale as follows: 103.5% after August 25, 1999; 103.0% after February 25,
2000; 102.5% after August 25, 2000; 102.0% after February 25, 2001; 101.5%
after August 25, 2001; 101% after February 25, 2002 and 100.5% after August
25, 2002. Optional redemption of the series A stock will be subject to, and
expressly conditioned upon, certain limitations under the notes.
In certain circumstances, including the occurrence of a change of control
at the Company, but again subject to certain limitations under the notes,
the Company may be required to repurchase shares of series A stock at 101%
of the sum of the liquidation preference thereof, increased to the extent
that accumulated dividends thereon shall not have been paid in cash, plus
accumulated and unpaid dividends to the repurchase date.
Holders of series A stock will not have any voting rights with respect
thereto, except for (i) such rights as are provided under the DGCL, (ii)
the right to elect, as a class, one director of the Company in the event
that the Company fails to comply with its Clean-Down or repurchase
obligations and (iii) class voting rights with respect to transactions
adversely affecting the rights, preferences or powers of the series A stock
and certain transactions involving stock that ranks junior in payment of
dividends, or upon liquidation, to the series A stock.
Deferred stock compensation: During the second quarter of 2000, in
connection with a planned public offering of the Company's common stock,
management determined that the Company had issued stock options to
employees having exercise prices below the deemed fair value for financial
reporting purposes of the common shares on the date of grant. Accordingly,
ZiLOG recorded deferred stock compensation of $2.1 million, representing
the excess of the deemed fair value of the common shares on the date of
grant over the options' exercise price. Deferred compensation expense is
generally being amortized ratably over the four-year option-vesting period.
Stock option compensation expense related to these options totaled
approximately $0.2 million and $0.5 million for the years ended December
31, 2001 and 2000, respectively.
In addition, the vesting periods on certain stock options were accelerated
for employees subject to the reduction in force during the second quarter
of 2001 and the second and fourth quarters of 2000 (See Note 5).
Accordingly, the excess of the fair market value over the exercise price of
$2.1 million and $1.7 million for these options were recorded as a special
charge during the years ended December 31, 2000 and December 31, 2001,
respectively.
1998 stock plans: In August 1998, the ZiLOG, Inc. Long-Term Stock Incentive
Plan (the "Plan") and the ZiLOG, Inc. 1998 Executive Officer Stock
Incentive Plan (the "Executive Plan"), jointly referred to as the "1998
Plans," were adopted by the Board. Under the 1998 Plans, the Company may
grant eligible employees, directors and consultants restricted shares,
stock units and nonstatuatory and incentive stock options. Options under
the 1998 Plans generally have a life of 10 years and vest at a rate of 25%
on each of the first four anniversaries following the option grant date.
The terms and conditions of each option or stock award under the 1998 Plans
are determined by a committee of the Board and are set forth in agreements
between the recipient and the Company. As of December 31, 2001, 4.65
million and 6.75 million shares have been reserved for issuance and
approximately 2,669,000 and 4,400,000 options have been granted, net of
cancellations, under the Plan and the Executive Plan, respectively.
2000 stock plan: In February 2001, the ZiLOG, Inc. 2000 Stock Incentive
Plan ("2000 Plan") was adopted by the Board. Under the 2000 Plan, the
Company may grant eligible employees, directors and consultants restricted
shares, stock units and nonstatutory and incentive stock options. Options
under the 2000 Plan have a maximum life of 10 years and vest at a rate of
25% on the first anniversary of the date of the grant and ratably each
month for the following three (3) years. The terms and conditions of each
option stock award under the 2000 Plan are determined by a committee of the
Board and are set forth in agreements between the recipient and the
Company. A total of 3.0 million shares have been reserved for issuance
under the 2000 Plan. No grants were awarded under the 2000 Plan as of
December 31, 2001.
A summary of the Company's activity for all stock plans for the years ended
December 31, 2001, 2000 and 1999, is as follows:
Shares Weighted-
Available Average
for Options Exercise
Grant Outstanding Price
------------ ------------ ------------
The 1998 and 2000 Plans (1)
Balance as of January 1, 1999.................... 1,701,550 6,198,450 $2.90
Additional shares reserved...................... 3,100,000 -- --
Options granted................................. (1,571,575) 1,571,575 $3.05
Shares granted.................................. (300,000) -- $0.00
Options exercised............................... -- (127,050) $2.50
Options cancelled............................... 371,974 (371,974) $2.50
------------ ------------
Balance as of December 31, 1999.................. 3,301,949 7,271,001 $2.96
Additional shares reserved...................... 3,300,000 -- --
Options granted................................. (3,282,899) 3,282,899 $5.58
Restricted shares sold.......................... (425,000) -- $0.00
Options exercised............................... -- (382,393) $2.50
Options cancelled............................... 1,165,960 (1,165,960) $3.77
------------ ------------
Balance as of December 31, 2000.................. 4,060,010 9,005,547 $3.83
Options granted................................. (247,815) 247,815 $6.00
Options exercised............................... -- (60,613) $1.72
Options cancelled............................... 2,694,019 (2,694,019) $4.08
------------ ------------
Balance as of December 31, 2001.................. 6,506,214 6,498,730 $3.83
============ ============
(1) No grants were awarded under the 2000 Plan as of December 31, 2001.
The following table summarizes information about stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
--------------------------------------------------------- -------------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Out- Contractual Exercise Exer- Exercise
Exercise Prices standing Life Price cisable Price
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
$1.09 - $1.09 21,338 8.01 $1.09 21,338 $1.09
$2.39 - $2.50 3,465,973 6.60 $2.50 2,746,003 $2.50
$4.00 - $6.00 3,001,419 7.82 $5.39 1,501,243 $5.01
----------------- ----------------- ----------------- ----------------- -----------------
$1.09 - $6.00 6,498,730 7.17 $3.83 4,268,584 $3.37
----------------- ----------------- ----------------- ----------------- -----------------
The weighted average grant date fair value of options granted in 2001,
2000, and 1999 were $0.95, $1.24, and $1.13, per share, respectively.
Options that were exercisable as of December 31, 2001, 2000, and 1999 were
4,268,584, 3,726,909, and 2,014,281, respectively.
Pro forma stock based compensation: FAS No. 123 requires that the
information be determined as if the Company has accounted for its employee
options granted subsequent to December 31, 1994 under the fair value method
of that statement. The fair value of the options granted under the 1998
Plans was estimated at the date of grant using the Minimum Value Method
option-pricing model using the following weighted average assumptions for
2001, 2000, and 1999:
Year Ended December 31,
--------------------------------
2001 2000 1999
--------------------------------
Annual average risk free interest rate................... 3.5% 5.0% 6.7%
Estimated life in years.................................. 5 5 5
Dividend yield........................................... 0.0% 0.0% 0.0%
For purposes of pro forma disclosure, the expense amortization of the
options' fair value is allocated over the options' four-year vesting
period. Future pro forma net income (loss) results may be materially
different from actual amounts reported. The pro forma net loss amounts for
the year ended December 31, 2001,2000, and 1999 were approximately $124.8
million, $60.6 million, and $39.0 million, respectively.
NOTE 10. INCOME TAXES
------------
The provision for income taxes is as follows (in thousands):
Year Ended December 31,
---------------------------
2001 2000 1999
------- ------- -------
State, All Current............................... $ 179 $ -- $ 197
------- ------- -------
179 -- 197
Foreign, All Current............................. 320 332 807
------- ------- -------
320 332 807
------- ------- -------
Provision for income taxes........... $ 499 $ 332 $ 1,004
======= ======= =======
Pretax income (loss) from foreign operations was $(1.8) million, $(2.5)
million and $1.4 million for the years ended December 31, 2001, 2000, and
1999, respectively.
The provision for income taxes differs from the amount computed by applying
the statutory income tax rate to income before taxes. The source and tax
effects of the differences are as follows (in thousands):
Year Ended December 31,
---------------------------
2001 2000 1999
------- ------- -------
Computed expected benefit..................... $(42,100) $(16,955) $ (12,910)
State taxes, net of federal benefit........... 116 -- 197
Foreign taxes................................. 320 332 807
MOD III write-off............................. 10,646 -- --
Calibre Goodwill write-off.................... 730 -- --
Foreign losses not benefited.................. 731 1,047 --
Losses for which no current year benefit is
recognized.................................. 30,012 15,799 12,630
Other......................................... 44 109 280
------- ------- -------
$ 499 $ 332 $ 1,004
======= ======= ========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
are as follows (in thousands):
December 31,
---------------------------
2001 2000
------- -------
Deferred tax liabilities - tax over book
depreciation................................. $(10,019) $(11,828)
Deferred tax assets:
Net operating losses carryforward............ 77,315 42,368
Accruals not currently deductible............ 4,213 4,958
Inventory valuation adjustments.............. 7,161 4,815
Tax credits carryforward..................... 9,120 2,540
Prepaid expenses and other................... 308 (257)
------- -------
98,117 54,424
Deferred tax asset valuation allowan.......... (88,098) (42,596)
------- -------
Net deferred taxes............................ $ -- $ --
======= =======
Realization of deferred tax assets is dependent on future earnings, which
are uncertain. Accordingly, a valuation allowance, in an amount equal to
the net deferred tax assets as of December 31, 2001 has been established to
reflect this uncertainty. The valuation allowance increased by
approximately $45.5 million, $14.0 million, and $11.1 million during the
fiscal years ended December 31, 2001, 2000, and 1999, respectively.
As of December 31, 2001, the Company had federal and California net
operating loss carryforwards of approximately $213.0 million and $63.0
million, respectively, which will expire beginning in years 2004 through
2021, if not utilized. As of December 31, 2001, the Company also had
federal and California tax credit carryforwards of approximately $7.0
million and 3.2 million, respectively, which will expire at various dates
beginning in 2004 through 2021, if not utilized.
Utilization of the net operating loss carryforwards and tax credit
carryforwards may be subject to a substantial annual limitation due to the
"change of ownership" limitations provided by the Internal Revenue Code of
1986, as amended, and similar state provisions. The annual limitations may
result in the expiration of net operating loss carryforwards and tax credit
carryforwards before full utilization. The Company expects that
consummation of the financial restructuring plan described in Note 16 will
result in a change in ownership and that substantially all of its tax
attributes will be either eliminated or significantly limited.
NOTE 11. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company leases certain of its facilities and equipment under
non-cancelable operating leases, which expire in 2002 through 2007. The
facility lease agreements generally provide for base rental rates which
increase at various times during the terms of the leases and also provide
for renewal options at fair market rental value.
Minimum future lease payments under these non-cancelable leases at December
31, 2001 are as follows (in thousands):
Operating
Leases
---------
2002................................ $ 2,554
2003................................ 1,529
2004................................ 1,341
2005................................ 1,130
2006................................ 1,041
Thereafter.......................... 83
---------
Total minimum lease payments........ 7,678
=========
The Company is also responsible for common area maintenance charges on
certain office leases, which are not included in the above table. These
charges are generally less than 10% of base rents. Total operating lease
expense, including month-to-month rentals, was approximately $6.9 million,
$7.3 million, and $6.6 million, for the years ended December 31, 2001,
2000, and 1999, respectively.
On July 29, 1996, the Company filed an action in the Superior Court of the
State of California in and for Santa Clara against Pacific Indemnity
Company, Federal Insurance Company and Chubb & Son Inc. In that action, we
sought a declaration that our former insurers, Pacific and Federal, had an
unconditional duty to defend and indemnify us in connection with two
lawsuits brought in 1994: (1) in Santana v. ZiLOG and, (2) in Ko v. ZiLOG.
Our complaint in the Santa Clara County action also alleged that Chubb,
which handled the defense of Santana and Ko on behalf of Pacific and
Federal, was negligent. Pacific cross-complained against the Company,
seeking reimbursement of defense costs for both underlying lawsuits and a
payment it contributed to the settlement of Ko. According to its
cross-complaint, Pacific sought a total of approximately six million, three
hundred thousand dollars ($6,300,000), plus interest and costs of suit.
On February 26, 2002, the Company agreed to make a payment of $300,000 to
fully settle these lawsuits. We have already paid $75,000 of this amount.
The balance is to be paid in 3 equal installments over the next twelve
months. The outstanding balance accrues interest at 6% per annum.
One party has notified ZiLOG that it may be infringing certain patents.
Four of our customers have notified us that they have been approached by
patent holders who claim that they are infringing certain patents. The
customers have asked us for indemnification. ZiLOG is investigating the
claims of all of these parties. In the event ZiLOG NOTES determines that
such notice may involve meritorious claims, ZiLOG may seek a license. Based
on industry practice, ZiLOG believes that in most cases any necessary
licenses or other rights could be obtained on commercially reasonable
terms. However, no assurance can be given that licenses could be obtained
on acceptable terms or that litigation will not occur. The failure to
obtain necessary licenses or other rights or the advent of litigation
arising out of such claims could have a material adverse effect on ZiLOG.
ZiLOG is participating in other litigation and responding to claims arising
in the ordinary course of business. The Company intends to defend itself
vigorously. The Company believes that it is unlikely that the outcome of
these matters will have a material adverse effect on the Company, although
there can be no assurance in this regard.
NOTE 12. RELATED PARTY TRANSACTIONS
--------------------------
In January 1999, ZiLOG entered into an agreement with P.T. Astra
Microtronics Technology, now known as Advanced Interconnect Technologies,
("AIT"), pursuant to which, AIT provides the Company with semiconductor
assembly and test services through January 2003. AIT is owned by Newbridge
Asia, an affiliate of Texas Pacific Group, which in turn is an affiliate of
our principal stockholder. ZiLOG purchased services from AIT totaling
approximately $6.3 million, $17.4 million, and $23.1 million for the years
ended December 31, 2001, 2000, and 1999, respectively. The Company had
payments due to AIT of approximately $0.5 million, $1.5 million and $3.8
million at December 31, 2001, 2000 and 1999, respectively. The Company's
payment terms with AIT are net 30 days.
The Company sells products and engineering services to Globespan, of which
Texas Pacific Group is a significant stockholder. The Company's net sales
to Globespan totaled approximately $6.0 million, $9.2 million and $0.9
million for the years ended December 31, 2001, 2000, and 1999,
respectively. ZiLOG's receivables from Globespan were approximately $0.3
million, $2.6 million and $0.5 million for the years ended December 31,
2001, 2000, and 1999, respectively. Payment terms between Globespan and
ZiLOG are net 30 days.
During 2001, our present Chief Executive Officer, Jim Thorburn, was
functioning as ZiLOG's Acting CEO pursuant to a consulting agreement with
Texas Pacific Group. Under the agreement, Mr. Thorburn was paid $3000 per
day, plus out-of-pocket expenses. In 2001, ZiLOG paid Mr. Thorburn
consulting fees of $574,000, pursuant to this agreement.
NOTE 13. SEGMENT REPORTING
-----------------
Effective January 1, 1998, the Company adopted FAS No. 131, "Disclosures
about Segment of an Enterprise and Related Information". FAS No. 131
establishes standards for reporting information about operating segments
and related disclosures about products, geographic information and major
customers.
During the second quarter of fiscal 2000, ZiLOG reorganized its operating
segments. This reorganization resulted in military products being
reclassified from the communications segment to the embedded control
segment. ZiLOG continues to have two reportable segments, communications
and embedded control. The 1999-year information presented below has been
reclassified to reflect the change.
The Company's embedded control segment is divided into two business units:
Field Programmable Microcontrollers and Home Entertainment. Consistent with
the rules of FAS No. 131, the Company has aggregated these two business
units into one reportable segment because both units have similar gross
margins and target consumer and industrial customer applications based
largely on ZiLOG's Z-8 line of 8-bit microcontrollers and digital signal
processors. ZiLOG's communications segment consisted of its Communications
business unit, which is generally more profitable than the Company's other
business units and is predominantly based on the Company's Z80 line of
8-bit microprocessors and serial communication devices. In 2000, net sales,
EBITDA, and depreciation and amortization, included in Corporate and other,
were generated from foundry work performed for manufacturing partners.
ZiLOG's Chief Executive Officer has been identified as the chief operating
decision maker ("CODM") for FAS No. 131 purposes as he assesses the
performance of the business units and decides how to allocate resources to
the business units. EBITDA, which is defined as earnings from operations
before interest income and expense (including amortization of deferred
financing costs), income taxes, depreciation, amortization of goodwill,
non-cash stock option compensation and special charges, is the measure of
profit and loss that the CODM uses to assess performance and make
decisions. ZiLOG's sales and corporate marketing, manufacturing, central
technology, finance and administration groups are shared resources and
therefore allocated to operating segments included in the results below.
Interest income, interest expense and net other are considered to be
corporate items.
ZiLOG's business units do not sell to each other and, accordingly, there
are no inter-segment sales. ZiLOG's CODM does not review total assets by
operating segment and such data is not presented below since these items
are shared resources of the Company and not separated, therefore no
breakout by segment exists. The accounting policies for reporting segments
are the same as for the Company as a whole. Subsequent to the Merger in
1998, the Company hired new management who defined the Company's current
internal reporting structure that included budgeting and evaluating
business units' financial performance by the CODM commencing in 1999.
During 1998, the Company was managed and reported operating results at the
enterprise level and comparable segment financial data is not available.
Information regarding reportable segments for the years ended December 31,
2001, 2000, and 1999 is as follows (in thousands):
Embedded Corporate Total
Communications Control and Other Consolidated
--------------- -------------- -------------- --------------
2001
Net sales.............................. $ 77,245 $ 93,108 $ 1,957 $ 172,310
==============
EBITDA................................. (6,585) 10,186 1,061 4,662
Depreciation and amortization.......... (12,052) (24,701) (1,135) (37,888)
Special charges........................ -- -- (54,329) (54,329)
Amortization of deferred stock option
compensation........................ -- -- (166) (166)
Interest income........................ -- -- 1,144 1,144
Interest expense....................... -- -- (33,710) (33,710)
--------------
Loss before income taxes and equity
investment.......................... $ (120,287)
=============
2000
Net sales.............................. $ 90,931 $ 141,990 $ 6,292 $ 239,213
=============
EBITDA................................. 29,136 9,488 (795) 37,829
Depreciation and amortization.......... (10,608) (30,900) (446) (41,954)
Special charges........................ -- -- (17,489) (17,489)
Amortization and direct stock option
compensation charges................ -- -- (522) (522)
Interest income........................ -- -- 2,756 2,756
Interest expense....................... -- -- (29,062) (29,062)
--------------
Loss before income taxes, equity
investment and cumulative effect
of change in accounting
principle............................ $ (48,442)
=============
1999
Net sales.............................. $ 84,697 $ 160,441 $ -- $ 245,138
=============
EBITDA................................. 32,368 13,523 664 46,555
Depreciation and amortization......... (10,420) (41,948) -- (52,368)
Special charges........................ -- -- (4,686) (4,686)
Interest income........................ -- -- 2,567 2,567
Interest expense....................... -- -- (28,954) (28,954)
--------------
Loss before income taxes............... $ (36,886)
=============
Net sales are attributable to the ship-to location of ZiLOG's customers as
presented in the following table (in thousands):
Year Ended December 31,
--------------------------------
2001 2000 1999
--------- --------- ---------
United States..................... $ 59,648 $ 110,884 $ 93,361
Mexico............................ 18,294 1,267 41
China (including Hong Kong)....... 17,086 26,880 40,669
Korea............................. 11,545 14,600 22,417
Singapore......................... 11,287 12,962 7,595
Canada............................ 8,818 8,788 8,802
Other Foreign Countries........... 45,632 63,832 72,253
--------- ------- -------
Total....................... $ 172,310 239,213 245,138
========= ======= =======
The following table shows the location of long-lived assets (in thousands):
December 31,
------------------------
2001 2000
-------- --------
United States (including corporate
assets)......................... $ 43,982 $ 104,010
Philippines....................... 1,477 5,031
Other............................. 325 410
-------- --------
Total assets................. $ 45,784 109,451
======== ========
Major customers: During the years ended December 31, 2001 and 2000, one
distributor, Pioneer-Standard Electronics, who buys from both segments,
accounted for approximately 12.6% and 11.5% of net sales, respectively.
During the year ended December 31, 1999, one distributor, Arrow
Electronics, Inc., who buys from both segments, accounted for approximately
12.6% of net sales.
NOTE 14. CONCENTRATION OF CREDIT RISK
----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents,
short-term investments and trade accounts receivable. By policy, the
Company places its investments only with high credit quality financial
institutions. Almost all of the Company's trade accounts receivable are
derived from sales to electronics distributors and original equipment
manufacturers in the areas of computers and peripherals, consumer
electronics, appliances and building controls. The Company performs ongoing
credit evaluations of its customers' financial condition and limits its
exposure to accounting losses by limiting the amount of credit extended
whenever deemed necessary and generally does not require collateral.
NOTE 15. QUARTERLY RESULTS (UNAUDITED)
-----------------------------
The following tables present unaudited quarterly financial information (in
thousands) for the eight quarters of 2001 and 2000. The financial
information presented for the first three quarters of 2000 has been
restated and gives effect to the accounting change discussed in Note 2. The
Company's year-end is December 31, with interim results based on fiscal
quarters of thirteen weeks of duration ending on the last Sunday of each
quarter.
Quarter Ended (Unaudited)
---------------------------------------------
Dec. 31, Sep. 30, July 1, April 1,
2001 2001 2001 2001
-------- -------- -------- --------
Net sales.................. $ 41,418 $ 42,659 $ 43,983 $ 44,250
Gross margin............... 14,427 13,212 8,528 6,079
Special charges............ 41,700 4,513 8,116 --
Net loss................... (62,046) (14,738) (27,124) (24,056)
Quarter Ended (Unaudited)
---------------------------------------------
Dec. 31, Oct. 1, July 2, April 2,
2000 2000 2000 2000
-------- -------- -------- --------
Net sales.................. $ 56,010 $ 66,216 $ 61,143 $ 55,844
Gross margin............... 15,538 24,669 25,296 21,989
Special charges............ 14,753 1,545 1,191 --
Net loss................... (25,211) (7,876) (6,353) (18,737)
NOTE 16. FINANCIAL RESTRUCTURING AND REORGANIZATION
------------------------------------------
As discussed in Note 1 to the financial statements, the Company has
suffered recurring losses from operations, has a net stockholders'
deficiency and its business and financial growth were negatively affected
by the extremely difficult business climate. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern and have lead to the need to restructure the Notes.
ZiLOG filed a pre-packaged Reorganization Plan was filed with the
bankruptcy court of the Northern District of California on February 28,
2002 and the bankruptcy court has set a hearing for the confirmation of the
Reorganization Plan for April 30, 2002. After such confirmation, the
Company expects to exit from bankruptcy by the middle of May, 2002 or as
soon as practicable thereafter.
The Company will continue to operate its business in Chapter 11 in the
ordinary course and has obtained the necessary relief from the bankruptcy
court to pay employees, trade, and certain other creditors in full and on
time regardless of whether their claims arose before or after the Chapter
11 filing. The claims of employees, general unsecured creditors (including
trade creditors, licensors, and lessors) and secured creditors, other than
holders of the Notes, are not impaired under the Reorganization Plan.
Under the Reorganization Plan, the Notes will be cancelled. Each noteholder
will receive, in exchange for its senior notes, its pro rata share of:
o 100% of ZiLOG's newly-issued common stock, except for 14%, which
will be issued or reserved for issuance to employees, consultants,
and directors under a management incentive plan.
o 100% of the newly issued series A preferred stock issued by a
currently wholly-owned subsidiary, MOD III, Inc. Holders of MOD III
series A preferred stock will be entitled to receive an aggregate
liquidation preference of $30 million plus any accrued but unpaid
dividends on the MOD III series A preferred stock from the net
proceeds of the sale of the MOD III fabrication plant including the
facility, equipment and all other assets necessary for the
operation of the facility, located in Nampa, Idaho, which the
Company will transfer to MOD III when the Reorganization Plan
becomes effective and from certain operating lease proceeds.
Dividends will accrue on the MOD III series A preferred stock at 9
1/2% per annum.
o 50% of MOD III's newly issued series B preferred stock. ZiLOG will
retain the remaining 50% of the new MOD III series B preferred
stock. Holders of the new MOD III series B preferred stock will be
entitled to receive the net sale proceeds from any sale of MOD
III's assets in excess of $30 million plus accrued but unpaid
dividends on the new MOD III series A preferred stock.
o The Reorganization Plan provides for the cancellation of all
currently outstanding preferred and common stock and all options
and warrants related thereto. All accumulated dividends and any
other obligations with respect to the Company's outstanding
preferred and common shares will be extinguished. Each holder of
common stock will, however, receive a pro rata share of $50,000.
Each holder of preferred stock will receive a pro rata share of
$150,000.
The Reorganization Plan also provides for the payment in full, with
interest if appropriate, or reinstatement, as appropriate, of all employee
and trade claims. Upon the Reorganization Plan's effectiveness, the Company
will, among other things, revise its charter and bylaws, enter into a new
secured financing agreement, and designate a new board of directors.
Historical background to the Reorganization Plan
The Notes were issued in connection with ZiLOG's going-private transaction
in 1998. Since then, the Company's business and financial growth have been
negatively affected by the extremely difficult business climate in which it
has been operating.
In March 2001, ZiLOG retained Lazard Freres & Co., LLC as financial advisor
to assist in exploring a number of strategic alternatives. Also in March of
2001, Lazard began the process of soliciting bids for the sale of all or
parts of the Company. Although the Company received a number of proposals,
each of these contained significant financing or due diligence
contingencies. After consultation with its financial advisor, ZiLOG
determined that these contingencies could seriously jeopardize the
likelihood that a strategic transaction could be consummated.
In July 2001, holders of senior notes who collectively held or managed
approximately $165.0 million in principal amount of the Notes formed an
informal group to discuss and negotiate the terms of a possible
restructuring plan. All members of this group executed confidentiality
agreements and on July 13, 2001, members of ZiLOG's management met with
these holders and their counsel to discuss a possible restructuring.
Discussions continued over the course of the summer and fall of 2001.
During the course of these discussions, the Company concluded that the best
vehicle to achieve a restructuring of the Notes was through consummation of
a voluntary pre-packaged reorganization plan under Chapter 11 of the U.S.
Bankruptcy Code. On November 27, 2001, the Company reached a non-binding
agreement regarding the terms of a reorganization plan with this informal
group of noteholders.
On January 28, 2002, the Company commenced solicitation of acceptances of
the Reorganization Plan from the holders of the Notes and Series A stock.
No voting was solicited from holders of the Company's common stock. In
connection with this solicitation, ZiLOG entered into lock-up agreements
with members of the noteholders' group. Under the lock-up agreements, the
members of the noteholders' group agreed, among other things and subject to
certain conditions, to vote to accept the Reorganization Plan.
The voting period for the solicitation ended on February 26, 2002. Holders
of approximately $221.0 million of the Notes accepted the Reorganization
Plan and there were no votes to reject the Reorganization Plan. All of the
holders of preferred stock who voted also accepted the Reorganization Plan.
The Company believes that consummation of the Reorganization Plan will
substantially reduce uncertainty with respect to ZiLOG's future and better
position it to develop new products and maintain and expand its customer
base by focusing on its core business. ZiLOG is a pioneer in the
semiconductor industry and has a well-recognized brand. It is expected that
the retirement of the Notes will allow the Company to devote more resources
towards developing and expanding its core business. There can be no
assurance that the Company will be successful in consummating the
Reorganization Plan, however management believes that completion of the
Reorganization Plan will provide a stronger financial base upon which to
focus and execute its business plans. The consolidated financial statements
do not include any adjustments that reflect the restructuring or other
events contemplated by the Reorganization Plan.
NOTE 17. SUBSEQUENT EVENT (UNAUDITED)
----------------------------
In January 2002, ZiLOG terminated development of its Cartezian family of
32-bit RISC microprocessors. As a result, the Company will close its
Austin, Texas Design Center and will reduce its workforce by approximately
50 people in both research and development, as well as its sales general
and administrative organizations. The Company expects to incur special
charges of approximately $3.5 million in the first quarter of 2002 to cover
costs of severance, relocation, and asset impairment write-offs.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On December 21, 2001, ZiLOG dismissed Ernst & Young LLP as its independent
auditors. This dismissal was recommended by ZiLOG's Audit Committee and
approved by the Company's Board of Directors. Also, on December 21, 2001,
the Company engaged KPMG LLP as its principal accountant to audit its
financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The following table sets forth information regarding individuals who
currently serve as our directors or executive officers. Each director will
hold office until the next annual meeting of stockholders or until his or
her successor is elected and qualified. If the Reorganization Plan is
approved and becomes effective, we do not expect that John W. Marren and
William S. Price, III, will continue as directors. We expect that certain
new directors will be elected. Officers are appointed by the Board of
Directors and serve at the Board's discretion. The executive officers
listed below serve on our Executive Council, which meets periodically to
advise the CEO concerning certain matters.
Name Age Position
---- --- --------
John W. Marren ......................... 39 Director
William S. Price, III................... 46 Director
James M. Thorburn........................ 46 Chairman, Chief Executive Officer and Director
Michael D. Burger....................... 43 President and Director
Gerald J. Corvino....................... 54 Executive Vice President and Chief Information Officer
Perry Grace............................. 44 Vice President and Chief Financial Officer
Daniel M. Jochnowitz..................... 40 Vice President, General Counsel and Secretary
John W. Marren joined Texas Pacific Group in 2000 as a partner and
currently leads TPG's technology team. He also serves on the Board of
Directors of GlobeSpan and Zhone, and on the Advisory Board of Intel 64
Venture Fund. From 1996 through 2000, Mr. Marren was a Managing Director at
Morgan Stanley Dean Witter, most recently as co-head of the Technology
Investment Banking Group. Prior to Morgan Stanley, he was a Managing
Director and Senior Semiconductor Research Analyst at Alex. Brown and Sons.
He spent eight years in the semiconductor industry working for VLSI
Technology and Vitesse Semiconductor. Mr. Marren received his B.S. in
Electrical Engineering from the University of California in Santa Barbara.
William S. Price III became a director of the Company upon consummation in
1998. Mr. Price was a founding partner of Texas Pacific Group in 1993.
Prior to forming Texas Pacific Group, Mr. Price was Vice President of
Strategic Planning and Business Development for GE Capital, and from 1985
to 1991 he was employed by the management consulting firm of Bain &
Company, attaining partnership status and acting as co-head of the
Financial Services Practice. Mr. Price is a graduate of Stanford University
and received a Juris Doctorate degree from the Boalt Hall School of Law at
the University of California, Berkeley. Mr. Price is Chairman of the Board
of Favorite Brands International, Inc. and Co-Chairman of the Board of
Beringer Wine Estates. He also serves on the Boards of Directors of
Continental Airlines, Inc., Del Monte Foods, Denbury Resources, Inc., Vivra
Specialty Partners, Inc., Landis & Gyr, Belden & Blake Corporation, Punch
Taverns, Aerfi, and American Center for Wine, Food and Arts.
James M. Thorburn was appointed Chief Executive Officer, Chairman of the
Board, and a director in January 2002. In March 2001, Mr. Thorburn was
appointed the acting Chief Executive Officer and President. He is also
employed by Texas Pacific Group as a consultant. Prior to his joining us,
Mr. Thorburn was Senior Vice President and Chief Operating Officer of ON
Semiconductor. From May 1998 until August 1999, Mr. Thorburn served as our
Senior Vice President and Chief Financial Officer. Prior to May 1998, Mr.
Thorburn was the Vice President of Operations Finance at National
Semiconductor. During his 17-year career at National Semiconductor, Mr.
Thorburn managed the financial needs for National Semiconductor's
Communications and Computing Group, Analog Division and European
Operations. Mr. Thorburn holds a Bachelor of Science degree in Economics
from the University of Glasgow, Scotland and is a qualified accountant with
the Institute of Chartered Management Accountants.
Michael D. Burger was appointed President and a director in January 2002.
In April 2001, Mr. Burger was appointed Executive Vice President and
General Manager of the Connecting Technology Business Unit. He joined us in
December 1998 as Senior Vice President of Worldwide Sales. Before joining
us, Mr. Burger was Vice President of Worldwide Marketing and Sales at
QuickLogic Corporation. Prior to QuickLogic, Mr. Burger was the Vice
President and Managing Director for National Semiconductors ASICs Division
based in Hong Kong. Mr. Burger holds a Bachelor of Science degree in
Electrical Engineering from New Mexico State University. He is a graduate
of Stanford's Executive Management Program.
Gerald J. Corvino was appointed Executive Vice President in January 2002.
In June 1998, Mr. Corvino was appointed Senior Vice President and Chief
Information Officer. Beginning in 1996, 1994 and 1979 respectively, Mr.
Corvino held the position of CIO for Oracle Corporation, CIO for AT&T
Microelectronics, and Vice President Corporate Information Services at
Amdahl. Mr. Corvino studied three years toward a Bachelor of Science in
Mathematics at Boston College and is certified for Managing Information
Systems Resources from Harvard Business School.
Perry Grace was appointed Vice President and Chief Financial Officer for
ZiLOG in July 2001. Prior to ZiLOG, Mr. Grace served as Vice President of
Finance and Chief Financial Officer for Ramp Networks, an Internet security
appliance provider acquired by Nokia in 2001. Prior to Ramp Networks, Mr.
Grace was employed by National Semiconductor Corporation from 1987 to 1999,
where he held several finance and controller positions. Mr. Grace holds a
Bachelor of Science degree in Accounting and Finance, Commercial Law, and
Computer Science from Deakin University in Geelong, Australia, and is a
chartered accountant.
Daniel J. Jochnowitz was appointed Vice President, General Counsel and
Secretary for ZiLOG in June 2001. Prior to ZiLOG, Mr. Jochnowitz served as
Senior Corporate Counsel for Inktomi Corporation. Prior to Inktomi, Mr.
Jochnowitz was the Senior Vice President and General Counsel for BHP Power,
Inc. Earlier in his career, Mr. Jochnowitz worked for O'Melveny & Meyers;
Milbank, Tweed, Hadley & McCloy; and Milgrim Thomajan & Lee PC. He also
clerked for the Honorable William E. Doyle of the Tenth Circuit Court of
Appeals in Denver, Colo. Mr. Jochnowitz received a Bachelor of Arts degree
and a Juris Doctorate from Columbia University.
ITEM 11. EXECUTIVE COMPENSATION
Employment Contracts and Termination of Employment and Change in Control
Arrangements
In connection with our plan of reorganization, we entered into a two-year
employment agreement, dated January 7, 2002, with our Chief Executive
Officer and Chairman, James M. Thorburn. This agreement provides that: (1)
Mr. Thorburn will be employed as our Chairman and Chief Executive Officer
and will be paid an annual salary of $800,000; (2) Mr. Thorburn will be
eligible to earn an annual incentive payment in an amount between 25% and
200% of his annual base salary based on our annual EBITDA; (3) on the
effective date of the plan of reorganization, Mr. Thorburn will be eligible
to receive up to 4% of the shares of our common stock in options and
restricted stock; and (4) Mr. Thorburn will receive a signing bonus of
$650,000 upon the fulfillment of certain conditions. These conditions were
met as of February 28, 2002 and the signing bonus was paid to Mr. Thorburn
on March 8, 2002.
Mr. Thorburn's employment agreement automatically terminates on the second
anniversary of the Effective Date. In the event that, before such second
anniversary, we terminate Mr. Thorburn's employment without cause, or Mr.
Thorburn resigns at any time for good reason, we shall pay to Mr. Thorburn
the greater of (a) 180% Mr. Thorburn's base salary, or (b) Mr. Thorburn's
base salary for the balance of the term of the agreement plus an additional
amount equal to 80% of Mr. Thorburn's base salary for the balance of the
term of the agreement. For the purposes of this employment agreement,
"cause" means one or more of the following: (i) Mr. Thorburn's material
breach of the agreement; (ii) Mr. Thorburn's failure to reasonably and
substantially perform his duties under the agreement; (iii) Mr. Thorburn's
willful misconduct or gross negligence which materially injures us; or (iv)
Mr. Thorburn's conviction or plea of nolo contendere to (A) a felony, or
(B) other serious crime involving moral turpitude. Also for the purposes of
this agreement, "good reason" means a material diminution in Mr. Thorburn's
duties and responsibilities set forth in his employment agreement. Upon any
change in control prior to the effective date of the plan of
reorganization, Mr. Thorburn will be entitled to a percentage of the
purchase price of the company equal to (i) 2.14% of the purchase price,
plus (ii) the difference between (a) 1.86% of the purchase price and (b)
the price per share that Mr. Thorburn would be obligated to pay to acquire
1.86% of the stock under the applicable stock option agreement, plus (iii)
one year's base salary and annual bonus.
If Mr. Thorburn decides to terminate his employment with us, with or
without good reason, within thirty days following a change of control, we
shall pay Mr. Thorburn the balance of his then current base salary for the
remainder of the term of his employment agreement plus an amount equal to
80% of Mr. Thorburn's then current base salary. In addition, we will
accelerate the vesting on all stock, stock options and other stock awards
held by Mr. Thorburn.
Compensation of Directors
As of December 31, 2001, each outside director receives an option grant of
15,000 shares of common stock effective as of the date of their
commencement as a member of the Board of Directors. On each outside
director's anniversary date of the commencement of their term as a member
of the Board, they shall receive an annual stock option grant of 7,500
shares. Beginning January 2001, a cash retainer of $20,000 per annum was
paid to each outside director. Each outside director also receives $1,000
per meeting of the Board or any committee of the Board whether the outside
director appears in person or by telephone and reimbursement of reasonable
expenses incurred to attend such meeting of the Board or committee meeting.
This compensation is not paid pursuant to consulting contracts. The
Company's other directors currently do not receive any compensation for
service on the Board of Directors. There are no family relationships
between any directors or executive officers of the Company. Compensation
for outside directors is currently being reviewed and may change.
Compensation Committee Report
Our compensation program for officers is administered by the Compensation
Committee of the Board of Directors, which is currently composed of Mr.
Price.
Our compensation policy for executive officers is designed to support the
overall objective of enhancing value for shareholders by attracting,
developing, rewarding and retaining highly qualified and productive
individuals, relating compensation to both our performance and individual
performance, and ensuring compensation levels that are externally
competitive and internally equitable.
The key elements of our current executive officer compensation consist of
base salary, a cash bonus, stock options and restricted stock for executive
officers. The Compensation Committee's policies with respect to each of
these elements, including the bases for the compensation awarded to Mr.
Thorburn, are discussed below. In addition, while the elements of
compensation described below are considered separately, the Compensation
Committee takes into account the full compensation package afforded by us
to the individual, including insurance and other benefits.
Prior to January 2002, Mr. Thorburn was paid pursuant to a contract between
TPG Partners II, L.P., and Mr. Thorburn. Under this contract, Mr. Thorburn
was paid by us $3,000/per day, plus reimbursement for reasonable expenses.
The Committee reviews each officer's salary annually. In determining
appropriate salary levels, consideration is given to scope of
responsibility, experience, Company and individual performance, as well as
pay practices of other companies relating to executives with similar
responsibility.
In determining compensation for Mr. Thorburn, the Compensation Committee
considered the role he played in cutting costs and refocusing our business
as well as pay practices at other technology companies of comparable size
and Mr. Thorburn's past business experience.
Our officers may be considered for annual cash bonuses, which are awarded
based on our meeting certain financial goals.
In awarding a bonus to executive officers, the Compensation Committee
reviews compensation levels and financial results available to it for
executive officers for similarly sized technology companies, as well as
those companies located near the Company's headquarters.
In 2001, our financial performance goals were met for the executive
officers. Consequently, the executive officers received a bonus based upon
the Company's financial performance in the year 2001. Mr. Thorburn and
other executive officers that remained employed by us in the first quarter
of 2001 received the long-term components of bonuses paid to them in 1998
and 1999.
Under the ZiLOG 1998 Long Term Stock Incentive Plan and the ZiLOG 1998
Executive Officer Stock Incentive Plan, restricted shares, stock units and
stock options may be granted to the Company's employees, including
executive officers, directors and consultants. Grants are determined by the
Compensation Committee after recommendation by the Company's management,
and the number of options or shares granted under either plan is determined
by the subjective evaluation of the person's ability to influence the
Company's long-term growth and profitability.
Because the value of an option bears a direct relationship to the Company's
stock price, it is an effective incentive for employees to create value for
shareholders. The Committee therefore views stock units, stock options and
restricted stock as an important component of its compensation policy.
Section 162(m) of the Internal Revenue Code limits the Company's tax
deductions to $1 million for compensation paid to certain executive
officers named in Item 11 hereof unless the compensation is "performance
based" within the meaning of Section 162(m). The Compensation Committee's
intention is and has been to comply with the requirements of Section 162(m)
unless the Compensation Committee concludes that such compliance would not
be in the best interest of the Company or its stockholders.
Compensation Committee Members:
/s/ William S. Price, Chairman
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
In 2001, the compensation committee was comprised of William S. Price III,
Chairman, Richard S. Friedland and Murray A. Goldman. Mr. Friedland and Mr.
Goldman resigned as members of the Board of Directors and the Compensation
Committee on December 31, 2001. There were no Compensation Committee
Interlocks as that term is defined under Item 402 (j) of Regulation S-K as
promulgated under the Securities Exchange Act of 1934, as amended, among
the committee members. The Acting Chief Executive Officer and President of
the Company, the Senior Vice President of Human Resources and the General
Counsel provided staff to support this committee. None of the Chairman of
the Company, the Senior Vice President of Human Resources nor the General
Counsel participated in the deliberations concerning their own respective
compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation earned by our Chief
Executive Officers and the four other most highly compensated executive
officers who were serving as executive officers as of December 31, 2001,
2000, and 1999, (collectively, the "Named Executive Officers"):
Annual Compensation
---------------------------------------------- Long-Term Compensation
Awards
Other ----------------------------- All
Annual Restricted Securities Other
Name and Compensa- Stock Underlying Compensa-
Principal Position Year Salary ($) Bonus ($) (1) tion ($) Awards ($) Options (#) tion ($)(2)
- -------------------------------- ----- ------------ -------------- -------------- ------------ -------------- -----------
James M. Thorburn............... 2001 $ 574,000 $ -- $ -- $ -- -- $ 8,743(3)
Chairman, Chief Executive 2000 -- -- -- -- -- --
Officer and Director 1999 158,796 195,000(4) 108,061(5) -- -- 2,400
Curtis J. Crawford (15)......... 2001 204,463 10,236,730(16) 121,087(17) -- -- 1,013,958(18)
Chairman, President and Chief 2000 885,216 -- 58,155(19) -- 400,000 1,450
Executive Officer, Director 1999 839,231 1,380,000 47,026(20) 750,000(21) -- 2,400
Michael D. Burger............... 2001 281,087 204,416(6) -- -- -- 828(7)
President and Director 2000 217,493 -- -- -- 54,500 --
1999 226,569 220,000 -- -- -- 3,491(8)
Gerald J. Corvino............... 2001 280,074 204,316(9) -- -- -- 293,613(10)
Executive Vice President and 2000 222,778 -- 131,250(11) -- 49,500 2,400
Chief Information Officer 1999 232,944 220,000 734(12) -- -- 2,400
Perry Grace (22)................ 2001 88,702 95,950(13) -- -- -- --
Vice President and Chief 2000 -- -- -- -- -- --
Financial Officer 1999 -- -- -- -- -- --
Daniel M. Jochnowitz (23)....... 2001 92,977 47,760(14) -- -- 30,000 1,523
Vice President, General Counsel 2000 -- -- -- -- -- --
and Secretary 1999 -- -- -- -- -- --
(1) For each named executive in the table above, one-half of the
amount indicated is a long-term bonus earned in 1999 of which 50%
of that amount was paid in February 2000 and 25% was paid in
February 2001 and 2002. Such long-term bonuses require that the
executive be employed by ZiLOG, Inc. at the time of payment.
(2) Unless otherwise indicated, amounts represent the Company's
matching contributions to the ZiLOG, Inc. Tax-Deferred 401(k)
Investment Plan.
(3) Represents deferred compensation plan distribution.
(4) Represents a prorated long-term bonus paid in advance.
(5) Represents a realized gain of $105,000 on the exercise of 70,000
stock options in 1999, and accrued vacation paid of $3,061 upon
termination of employment.
(6) Represents quarterly incentive bonuses.
(7) Represents deferred compensation plan distribution.
(8) Represents imputed interest on a personal loan made to Mr. Burger.
(9) Represents quarterly incentive bonuses.
(10) Deferred compensation plan distribution of $291,063.
(11) Represents realized gain on the exercise of 37,500 stock options
in 2000.
(12) Represents airfare for family members.
(13) Represents a sign-on bonus of $55,000 and a quarterly incentive
bonus of $40,950.
(14) Represents quarterly incentive bonuses.
(15) Curtis J. Crawford resigned as Chairman of the Board, President
and Chief Executive Officer effective March 16, 2001.
(16) Represents payment of a contractual obligation paid at termination.
(17) Represents payment of accrued vacation at termination.
(18) Deferred compensation plan distribution of$1,011,558.
(19) Represents payroll gross-up for taxable moving expenses.
(20) Represents the amount paid for relocation expenses.
(21) Reflects earnings relating to a grant of 300,000 shares of our
common stock to Mr. Crawford. These shares were initially issued
as restricted stock, though in 1999 these restrictions lapsed. No
dividends will be paid on these shares.
(22) Mr. Grace commenced employment with the Company in July 2001.
(23) Mr. Jochnowitz commenced employment with the Company in June 2001.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth further information regarding option grants
to each of our Named Executive Officers during 2001. In accordance with the
rules of the Securities and Exchange Commission, the table sets forth the
hypothetical gains or "option spreads" that would exist for the options at
the end of their respective ten-year terms. These gains are based on
assumed rates of annual compound stock price, and appreciation of 5% and
10% from the date the option was granted to the end of the option terms.
Individual Grants Potential Realized
------------------------------------------ Value at Assumed
% of Total Annual Rates of
Number of Options Stock Price
Securities Granted to Appreciation for
Underlying Employees Exercise Option Term
Options in Fiscal Price Expiration -------------------------
Name Granted Year ($/SH) Date 5%($) 10%($)
- ----------------------------- ---------- ---------- ---------- ---------- -------------------------
Daniel M. Jochnowitz......... 30,000(1) 12.1% $6.00 (2) 06/25/11 $ 113,201 $ 286,874
(1) Mr. Jochnowitz's options vest and become exercisable at the rate of 25%
on each of the first four anniversaries following the option grant date.
(2) This option was granted at the fair value for our common stock at the
grant date, as determined by our board of directors.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND OPTION VALUES AT
DECEMBER 31, 2001
The following table provides information regarding the aggregate option
exercises and fiscal year-end option values for each of the Company's Named
Executive Officers for the year ended December 31, 2001. Also reported are
values of unexercised "in-the-money" options, which represent the positive
spread between the respective exercise prices of outstanding stock options
and the fair value of our common stock on December 31, 2001, as determined
by our board of directors to be $6.00 per share.
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-The-Money Options
Acquired at Fiscal Year End (#) at Fiscal Year End ($)
Shares on Value --------------------------- ----------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ -------- ---------- --------------------------- ----------------------------
James M. Thorburn....... -- $ -- -- -- $ -- $ --
Curtis J. Crawford...... -- -- 1,500,000 -- 3,375,000 --
Michael D. Burger....... -- -- 159,500 75,000 501,500 157,500
Gerald J. Corvino....... -- -- 98,250 63,750 291,500 131,250
Perry Grace............. -- -- -- -- -- --
Daniel M. Jochnowitz.... -- -- -- 30,000 -- --
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of ZiLOG, Inc. common and preferred stock as of March 1, 2002, by
(i) each stockholder known by the Company to be the beneficial owner of
more than five percent of ZiLOG, Inc. common or preferred stock, (ii) each
of the directors of ZiLOG, Inc., (iii) each of the Named Executive
Officers, and (iv) all current executive officers and directors of ZiLOG,
Inc. as a group.
Series A Class A Non-voting
Preferred Stock Common Stock Common Stock
------------------- -------------------- ----------------------
Amount Amount Amount
and and and
Nature of Nature of Nature of
Benefi- Benefi- Benefi-
cial Percent cial Percent cial Percent
Name and Address Owner- of Owner- of Owner- of
of Beneficial Owner ship(1) Class ship(1) Class(2) ship(1) Class
- --------------------------------------- ------- ------ ---------- ------- ---------- ------
TPG Partners II, L.P. (3).............. 242,343 96.9% 26,172,770 81.7% 9,693,620 96.9%
201 Main Street
Suite 2420
Fort Worth, TX 76102
Cede & Co. Depository Trust Company.... -- -- 2,831,016 8.8 -- --
Curtis J. Crawford (4),(9)............. 2,127 * 2,129,786 6.7 85,106 *
Michael D. Burger (5).................. -- -- 159,500 * -- --
Gerald J. Corvino (6).................. -- -- 135,750 * -- --
James M. Thorburn...................... -- -- 70,000 * -- --
Perry Grace............................ -- -- -- -- -- --
Daniel M. Jochnowitz................... -- -- -- -- -- --
John W. Marren (7)..................... -- -- -- -- -- --
William S. Price, III (8).............. -- -- -- -- -- --
All current executive.................. -- -- 365,250 1.1 -- --
officers and directors,
as a group (7 persons)
- -------------------
* Less than 1 percent.
(1) Unless otherwise indicated, the persons and entity named in the
table have sole voting and sole investment power with respect to
all shares beneficially owned, subject to community property laws
where applicable.
(2) Applicable percentage ownership is based upon 32,017,272 shares of
common stock outstanding at March 1, 2002.
(3) Includes 2,328,330 and 1,523,256 shares of common stock; 862,344
and 564,168 shares of Class A non-voting common stock; and 21,559
and 14,104 shares of preferred stock held by TPG Investors II,
L.P. and TPG Parallel II, L.P., respectively.
(4) Includes 1,500,000 shares, which Mr. Crawford has the right to
acquire within 60 days of March 1, 2002 through the exercise of
options.
(5) Includes 159,500 shares, which Mr. Burger has the right to acquire
within 60 days of March 1, 2002 through the exercise of options.
(6) Includes 98,250 shares, which Mr. Corvino has the right to acquire
within 60 days of March 1, 2002 through the exercise of options.
(7) Mr. Marren serves as a director for the Company and also is a
partner of TPG Partners II, L.P., and disclaims beneficial
ownership of such securities, except to the extent of his
respective pecuniary interests therein.
(8) Mr. Price serves as a director for the Company and also is a
partner of TPG Partners II, L.P., and disclaims beneficial
ownership of such securities except to the extent of his
respective pecuniary interests therein.
(9) Curtis J. Crawford resigned as Chairman of the Board, President
and Chief Executive Officer effective March 16, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 12 to the consolidated financial statements for a discussion of
related party transactions.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements and Supplementary Data:
Report of KPMG LLP, Independent Auditors..........................................pg. 38
Report of Ernst & Young LLP, Independent Auditors.................................pg. 40
Consolidated Balance Sheets as of December 31, 2001 and 2000......................pg. 41
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000, and 1999.................................................pg. 42
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000, and 1999.................................................pg. 43
Consolidated Statements of Stockholders' Deficiency for the Years
Ended December 31, 2001, 2000, and 1999...........................................pg. 44
Notes to Consolidated Financial Statements........................................pg. 45
2. Financial Statement Schedules
The Financial Statement Schedule listed below is filed as part of
this Report:
Form 10-K
Page
----------
Schedule II Valuation and Qualifying Accounts II-1
All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or the Notes
thereto.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on December 28,
2001, in which it reported a change in its certifying accountant
under Item 4.
(c) Exhibits
The exhibits listed in the accompanying index to exhibits are
filed or incorporated by reference (as stated therein) as part of
this annual report.
(d) Financial Statements Schedules
See Item 14 (a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ZiLOG, INC.
By: /s/ JAMES M. THORBURN Date: April 12, 2002
--------------------------------
(James M. Thorburn)
(Chairman, Chief Executive Officer and Director)
Pursuant to the requirements of the Securities and 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.
Signatures Title Date
---------- ----- ----
/s/ JAMES M. THORBURN Chairman, Chief Executive Officer,
- ------------------------- and Director April 12, 2002
(James M. Thorburn)
/s/ MICHAEL D. BURGER President and Director April 12, 2002
- -------------------------
(Michael D. Burger)
/s/ PERRY GRACE Vice President and Chief Financial April 12, 2002
- --------------------- Officer
(Perry Grace)
/s/ JOHN W. MARREN Director April 12, 2002
- -----------------------
(John W. Marren)
/s/ WILLIAM S. PRICE, III Director April 12, 2002
- -----------------------------
(William S. Price)
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
2.1 (a) Agreement and Plan of Merger, dated as of July 20, 1997,
between TPG Partners II, L.P. and ZiLOG Inc. (the
Recapitalization Agreement).
NOTE: Pursuant to the provisions of paragraph (b) (2) of
Item 601 of Regulation S-K, the Registrant hereby
undertakes to furnish to the Commission upon request copies
of any Schedule to the Recapitalization Agreement.
2.2 (a) Amendment Number One to the Recapitalization Agreement,
dated as of November 18, 1997, by and between TPG Partners
II, L.P., TPG Zeus Acquisition Corporation and ZiLOG, Inc.
2.3 (a) Amendment Number Two to the Recapitalization Agreement,
dated as of December 10, 1997, by and between TPG Partners
II, L.P., TPG Zeus Acquisition Corporation and ZiLOG, Inc.
2.4 (a) Amendment Number Three to the Recapitalization Agreement,
dated as of January 26, 1998, by and between TPG Partners
II, L.P., TPG Zeus Acquisition Corporation and ZiLOG, Inc.
3.1 (a) Certificate of Incorporation of ZiLOG, Inc.
3.2 (a) Certificate of Merger of TPG Zeus Acquisition Corporation
into ZiLOG, Inc filed with the Delaware Secretary of State
on February 27, 1998.
3.3 (a) Bylaws of ZiLOG, Inc.
3.4 (a) Certificate of Designation of Series A Cumulative Preferred
Stock of ZiLOG, Inc.
3.5 (b) Certificate of Amendment of Certificate of Incorporation of
ZiLOG, Inc.
4.1 (a) Stockholders Voting Agreement dated as of July 20 1997, by
and among TPG Partners II, L.P., on the one hand, and
Warburg, Pincus Capital Company, L.P. and Warburg, Pincus &
Co., on the other hand.
4.2 (a) Stockholders' Agreement dated as of February 27, 1998, by
and among ZiLOG, Inc., TPG Partners II, L.P., TPG Investors
II, L.P., TPG Parallel II, L.P. and certain other
stockholders of ZiLOG, Inc.
4.3 (a) Letter Agreement, dated as of November 18, 1997, by and
among TPG Partners II, L.P., Warburg, Pincus Capital
Company, L.P. and Warburg, Pincus & Co., and ZiLOG, Inc.
4.4 (a) Form of 9.5% Senior Secured Notes due 2005 of ZiLOG, Inc.
4.5 (a) Indenture, dated as of February 27, 1998, by and among
ZiLOG, Inc., ZiLOG Europe, ZiLOG TOA Company and State
Street Bank and Trust Company.
NOTE: Pursuant to the provisions of paragraph (b) (2) of
Item 601 of Regulation S-K, the Registrant hereby
undertakes to furnish to the Commission upon request copies
of any schedule to the Indenture.
4.6 (a) Purchase Agreement dated as of February 23, 1998, by and
among ZiLOG, Inc., ZiLOG Europe, ZiLOG TOA Company,
Goldman, Sachs & Co., BancBoston Securities Inc. and
Citicorp Securities, Inc.
4.7 (a) Registration Rights Agreement dated as of February 27,
1998, by and among ZiLOG, Inc., ZiLOG Europe, ZiLOG TOA
Company, Goldman, Sachs, & Co., BancBoston Securities Inc.
and Citicorp Securities, Inc.
4.8 (a) Company Security Agreement dated as of February 27, 1998 by
and between ZiLOG, Inc. and State Street Bank and Trust
Company.
NOTE: Pursuant to the provisions of paragraph (b)(2) of
Item 601 of Regulation S-K, the Registrant hereby
undertakes to furnish to the Commission upon request copies
of any schedule to the Company Security Agreement.
4.9 (a) Subsidiary Security Agreement dated as of February 27,
1998 by and among each of the direct and indirect ZiLOG,
Inc. Subsidiary signatories thereto and State Street Bank
and Trust Company. NOTE: Pursuant to the provisions of
paragraph (b) (2) of item 601 of Regulation S-K, the
Registrant hereby undertakes to furnish to the Commission
upon request copies of any schedule to the Subsidiary
Security Agreement.
4.10 (a) Company Pledge Agreement dated as of February 27, 1998 by
and between ZiLOG, Inc. and State Street Bank and Trust
Company.
NOTE: Pursuant to the provisions of paragraph (b)(2) of
Item 601 of Regulation S-K, the Registrant hereby
undertakes to furnish to the Commission upon request copies
of any schedule to the Company Pledge Agreement.
4.11 (a) Subsidiary Pledge Agreement dated as of February 27, 1998
by each of the direct and indirect ZiLOG, Inc. Subsidiary
signatories thereto and State Street Bank and Trust
Company. NOTE: Pursuant to the provisions of paragraph
(b)(2) of Item 601 of Regulation S-K, the Registrant hereby
undertakes to furnish to the Commission upon request copies
of any schedule to the Subsidiary Pledge Agreement.
4.12 (a) Company and Subsidiary Patent and Trademark Security
Agreement, dated as of February 27, 1998 by and among
ZiLOG, Inc., each of the direct and indirect domestic
ZiLOG, Inc. Subsidiary signatories thereto and State Street
Bank and Trust Company.
NOTE: Pursuant to the provisions of paragraph (b) (2) of
Item 601 of Regulation S-K, the Registrant hereby
undertakes to furnish to the Commission upon request copies
of any schedule to the Company and Subsidiary Patent and
Trademark Security Agreement.
4.13 (a) Copyright Security Agreement dated as of February 27, 1998
by ZiLOG, Inc., each of the direct and indirect ZiLOG, Inc.
Subsidiary signatories thereto and State Street Bank and
Trust Company. NOTE: Pursuant to the provisions of
paragraph (b) (2) of Item 601 of Regulation S-K, the
Registrant hereby undertakes to furnish to the Commission
upon request copies of any schedule to the Copyright
Security Agreement.
4.14 (a) Stockholders' Agreement, dated as of March 26, 1998, by and
among ZiLOG, Inc., TPG Partners II, L.P., TPG Investors II,
L.P. TPG Parallel II, L.P. and certain other stockholders
of ZiLOG.
10.1(a) Contract of Lease, dated March 22, 1979, by and between
ZiLOG Philippines, Inc. and Fruehauf Electronics Phils.
Corporation.
NOTE: Pursuant to the provisions of paragraph (b)(2) of
Item 601 of Regulation S-K, the Registrant hereby
undertakes to furnish to the Commission upon request copies
of any schedule to the Contract of Lease.
10.2 (c) Credit Agreement dated December 30, 1998, by and between
ZiLOG, Inc. and The CIT Group/ BusinessCredit, Inc.
10.2.1(f) Amendment Number One to the Credit Agreement, by and
between ZiLOG, Inc. and The CIT Group/Business Credit, Inc.
10.2.2(f) Amendment Number Two to the Credit Agreement, dated August
18, 2000, by and between ZiLOG, Inc. and The CIT
Group/Business Credit, Inc.
10.2.3(f) Amendment Number Three to the Credit Agreement, dated
December 27, 2000, by and between ZiLOG, Inc. and The CIT
Group/Business Credit, Inc.
10.3 (a) Form of 1997 Employee Performance Incentive Plan (1).
10.4 (a) 1997 ZiLOG Employee Performance Incentive Plan
Administrative Guide (1).
10.5 (a) 1997 ZiLOG Employee Performance Incentive Plan Executive
Bonus Administrative Guide (1).
10.8 (f) Employment Agreement effective September 1, 2000, by and
between Tom Vanderheyden and ZiLOG, Inc. (1)
10.9 (f) Employment Agreement effective November 20, 2000, by and
between Michael Burger and ZiLOG, Inc. (1)
10.12 (f) Employment Agreement effective May 30, 2000, by and between
Gerald J. Corvino and ZiLOG, Inc. (1).
10.13 (f) ZiLOG, Inc. 2000 Stock Incentive Plan.
10.16 Lease, dated as of December 21, 2001, between ZiLOG, Inc.
and The Sobrato Group.
NOTE: Pursuant to the provisions of paragraph (b)(2) of
item 601 of Regulation S-K, the registrant hereby
undertakes to furnish to the Commission upon request copies
of any schedule to the Lease.
10.17 (d) ZiLOG, Inc. 1998 Long-Term Stock Incentive Plan, as
amended.
10.18 (d) ZiLOG, Inc. Executive Officer Stock Incentive Plan, as
amended.
10.21 (e) Restricted Share Agreement dated January 13, 2000, by and
between Robert D. Norman and ZiLOG, Inc.
10.22 (d) Restricted Share Agreement dated February 7, 2000, by and
between Richard S. Friedland and ZiLOG, Inc.
10.23 (d) Restricted Share Agreement dated February 7, 2000 by and
between Murray A. Goldman and ZiLOG, Inc.
10.24 (d) Restricted Share Agreement dated February 1, 2000 by and
between Lionel Sterling and ZiLOG, Inc.
10.25 (d) Distributor Agreement dated February 2, 2000 by and between
Pioneer-Standard Electronics, Inc. and ZiLOG, Inc.
10.26 (e) Purchase and Sale Agreement dated March 22, 2000, by and
between ZiLOG, Inc., Dasaradha R. Gude, certain
stockholders, Virtual IP Group, Inc., Qualcore Group, Inc.
and Qualcore Logic Private Limited.
NOTE: Pursuant to the provisions of paragraph (b) (2) of
Item 601 of Regulation S-K, the Registrant hereby
undertakes to furnish to the Commission, upon request,
copies of any Schedule to the Purchase and Sale Agreement.
10.27 (e) Merger Agreement dated July 16, 2000, by and between ZiLOG,
Inc. and Calibre, Inc. NOTE: Pursuant to the provisions of
paragraph (b) (2) of Item 601 of Regulation S-K, the
Registrant hereby undertakes to furnish to the Commission,
upon request, copies of any Schedule to the Merger
Agreement.
18.1 (f) Letter from Ernst & Young LLP, independent auditors,
regarding change in accounting principle.
21.1 (a) Subsidiaries of ZiLOG, Inc.
23.1 Consent of KPMG LLP, independent auditors.
23.2 Consent of Ernst & Young LLP, independent auditors.
25.1 (a) Form T-1 with respect to the eligibility of State Street
Bank and Trust Company with respect to the Indenture.
------------------------
(a) Incorporated herein by reference to the item of the same
name filed as an Exhibit to the Company's Registration
Statement on Form S-4 (File No. 333-51203) declared
effective by the Securities and Exchange Commission on July
9, 1998.
(b) Incorporated herein by reference to the item of the same
name filed as an Exhibit to the Company's Quarterly Report
on Form 10-Q for the Quarter ended September 30, 1998.
(c) Incorporated herein by reference to the item of the same
name filed as an Exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
(d) Incorporated herein by reference to the item of the same
name filed as an Exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
(e) Incorporated herein by reference to the item of the same
name filed as an Exhibit to the Company's Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission on August 3, 2000.
(f) Incorporated herein by reference to the item of the same
name filed as an Exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000.
(1) Represents a management contract or compensatory plan or
agreement.
SCHEDULE II
ZiLOG, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
Charged
Balance at to Costs Balance at
Beginning and Deductions Ending
of Period Expenses (1) of Period
--------- --------- --------- ---------
December 31, 2001
Allowance for doubtful accounts........ $879 $100 $(301) $678
========= ========= ========= =========
December 31, 2000
Allowance for doubtful accounts........ $423 $456 $ -- $879
========= ========= ========= =========
December 31, 1999
Allowance for doubtful accounts........ $366 $127 $ (70) $423
========= ========= ========= =========
- -----------------
(1) Uncollectable accounts written off, net of recoveries.