Zilog, Inc (ZILG) - Description of business

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Company Description
Founded in 1974, we are a global supplier of 8-bit micrologic semiconductor devices. We design, develop and market various families of devices in this market segment. Using proprietary technology that we have developed over our 30-year operating history, we provide semiconductor integrated circuit devices that our customers design into their end products. Our devices often include related application software and typically combine a microprocessor with memory and various peripheral functions on a single device. Our products enable a broad range of consumer and industrial electronics manufacturers to control the functions and performance of their products. For example, some typical applications include devices that control the speed of a motor, infrared remote controls, security systems and battery chargers. In addition to our micrologic devices, we sell other integrated circuit devices that have a wide variety of uses including the processing and transmission of information for communications and consumer electronics products. These devices include serial communication controllers, modems, IrDA transceivers, television display controllers and personal computer peripheral controllers. Historically we have also performed wafer fabrication foundry services for third parties, which were terminated in 2004. 1998 through 2001 Prior to February 1998, our common stock had been publicly traded on the New York Stock Exchange. On February 27, 1998, we consummated a leveraged merger with an affiliate of Texas Pacific Group. In connection with that transaction we issued $280 million of our former 9 1 ¤ 2 % Senior Secured Notes due 2005 that required us to make semi-annual interest payments of $13.3 million, and we ceased having publicly traded equity securities. From 1998 until 2001, our business focus and research and development efforts moved from the traditional 8 bit microcontroller market to development of a Cartezian family of 32-bit micrologic products targeted for use in the data communication and telecommunications end markets. Commencing in 2000, our business and financial growth was negatively affected by the extremely difficult business climate brought on by the severe downturn in the technology and semiconductor industries. As a result of a rapid deterioration in the communications hardware market during the second half of 2000, our Cartezian family of products was never ultimately brought to market. Like many companies in our industry, during the December quarter of 2000 we began to experience declining sales. During the first half of 2001 our previous CEO resigned and our current CEO, Jim Thorburn, joined the Company to restructure our operations, financials and product portfolio with the goal of eliminating the debt, positioning the Company for growth and returning the Company to profitability. Under this leadership, we implemented a three-phase plan with the objective of establishing and maintaining financial stability, reclaiming the Company’s traditional 8 bit microcontroller markets and customers and investing in innovative products. 2002 Financial Restructuring and Reorganization In 2001, we explored a number of strategic alternatives with the assistance of our financial advisor, Lazard Frères & Co., LLC, and an informal group of holders of our senior notes. 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 United States Bankruptcy Code. On January 28, 2002, we commenced solicitation of acceptances of a joint plan of reorganization, which set forth a plan to reorganize our company and our subsidiary, ZiLOG-MOD III, Inc. On February 28, 2002, we and our subsidiary, ZiLOG-MOD III, Inc., which we call MOD III, Inc., filed voluntary petitions with the United States Bankruptcy Court for the Northern District of California for reorganization under Chapter 11. The bankruptcy court subsequently confirmed MOD III, Inc.’s and our joint reorganization plan by its order entered on April 30, 2002. The joint plan of reorganization became effective on May 13, 2002, but for financial reporting purposes we use May 1, 2002, as the date of emergence from bankruptcy. We refer to the company prior to emergence from bankruptcy as the “Predecessor Company” and to the reorganized company as the “Successor Company.” Pursuant to the joint reorganization plan, we extinguished $325.7 million of liabilities, which included $280.0 million principal amount of our former 9 1 ¤ 2 % Senior Secured Notes due 2005, $27.2 million in accrued interest due on the notes and $18.5 million of dividends payable on our former series A preferred stock. The former note holders received substantially all of our new common stock and a liquidation preference in the net proceeds on the sale of the assets held by MOD III, Inc. On May 1, 2002, we adopted “fresh-start” reporting proscribed by the American Institute of Certified Public Accountant’s Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” and on that date the Predecessor Company recorded a $205.7 million net gain on discharge of debt. For additional information regarding our 2002 reorganization and the subsequent implementation of fresh start reporting pursuant to Statement of Position 90-7 refer to the captions below under “2002 Financial Restructuring and Reorganization” and “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. 2004 Stock Offering On February 18, 2004, our Board of Directors approved a reverse stock split in which every two shares of common stock was converted into one share of common stock, effective March 1, 2004. All common shares and per-share figures presented herein have been retroactively restated to reflect this one-for-two reverse stock split. On March 12, 2004, our common stock was listed for trading on the NASDAQ National Market with a ticker symbol of ZILG. On March 18, 2004, and subsequently on April 6, 2004 through exercise of the underwriters’ over allotment option, we raised approximately $24.4 million through the sale of 2,252,100 shares of our common stock at a price of $12.50 per share in a registered public offering of our stock. Subsequent to our May 2002 financial restructuring and prior to our March 2004 stock offering, our stock was traded on the OTC-Bulletin board. 2004 and 2006 Asset Sales On April 16, 2004, we announced the closure of our MOD II five-inch wafer manufacturing facility in Nampa, Idaho. In association with this decision, we recorded net special charges of $6.9 million reflecting the impairment of long lived assets and costs to cease operations, and $1.8 million for employee severance costs. MOD II production ceased on July 9, 2004 whereby the majority of the products previously manufactured in MOD II were transferred to X-FAB, in Lubbock, Texas. We are now operating under our stated strategy as a fabless semiconductor company. On September 24, 2004, we sold all of our wafer manufacturing equipment and certain other manufacturing support-related assets of our MOD II facility in Nampa, Idaho, to STM for an aggregate cash consideration of $5.9 million net of selling costs and expenses. A net gain of $1.7 million was recorded in connection with these sales. The remaining assets of MOD II primarily consist of land and buildings which have been classified as assets held for sale on our balance sheet as of March 31, 2006. In February 2006, ZiLOG MOD III, Inc., a special purpose subsidiary created for the economic benefit of our former bondholders, completed the sale of the remaining assets of MOD III to Micron Technology, Inc for a total consideration of $3.8 million. These assets included the dormant 8” wafer fabrication facility and associated land owned by ZiLOG Mod III, Inc. ZiLOG MOD III, Inc.’s shareholders have voted to liquidate the special purpose entity and distribute the remaining net proceeds to its Series A Preferred shareholders at the conclusion of that process. The costs to liquidate ZiLOG Mod III, Inc. are estimated to be $0.2 million. We anticipate that approximately $2.5 million will be distributed to holders of ZiLOG Mod III, Inc. Series A Preferred Stock on the liquidation of the subsidiary and accordingly this estimated distribution amount due has been recorded in our consolidated financial statements at March 31, 2006.  A summary of the proceeds, transaction costs and distributions appears in Table 2,

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