Stanford University Law School - Securities Class Action Clearinghouse

 

Michael D. Braun (CSB #167416)
STULL, STULL & BRODY
10940 Wilshire Boulevard
Suite 2300
Los Angeles, CA 90024
(310) 209-2468

Kevin J. Yourman (CSB #147159)
Vahn Alexander (CSB #167373)
WEISS & YOURMAN
10940 Wilshire Boulevard
24th Floor
Los Angeles, CA 90024
(310) 208-2800

Co-Lead Counsel for Plaintiffs

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

STEVEN P. LAWRENCE, HAROLD M.
LIBERMAN, MILES A. SPELLMAN, AND
RONALD D. PITTS On Behalf of Themselves
and All Others Similarly Situated,

                      Plaintiffs,

           v.

ZILOG, INC., EDGAR A. SACK, RICHARD
R. PICKARD and ROBERT E. COLLINS

                      Defendants.
______________________________________

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CASE NO.: C-98-20420 JF

CLASS ACTION

FIRST AMENDED COMPLAINT FOR
VIOLATION OF FEDERAL
SECURITIES LAWS
[filed Nov. 6, 1998]

JURY TRIAL DEMAND

Plaintiffs, through their attorneys, bring this action on behalf of themselves and all others similarly situated. Based on personal knowledge as to themselves and their activities, the investigation conducted by counsel, and on information and belief, plaintiffs hereby allege as follows:

SUMMARY OF ACTION

1. This action is being brought as a class action on behalf of all individuals who purchased or otherwise acquired the common stock of Zilog, Inc. ("Zilog" or the "Company") between June 30, 1997 and November 20, 1997 (the "Class Period") inclusive. As is more fully alleged throughout the Complaint, defendants engaged in a scheme and common course of conduct including the dissemination of false and misleading statements and/or omissions concerning the present and future finances and business prospects of the Company which operated as a fraud and deceit on the Class during the Class Period.

2. Zilog is a worldwide integrated circuit company that designs, develops, manufactures and markets application specific standard products for the consumer electronics, data communications ("datacom") and computer peripherals markets. Founded in 1974, Zilog was taken public in 1991 at $8.42 per share and reached an all time high of $53.25 per share by July 6, 1996.

3. By mid 1996, Zilog's primary business was bifurcated into the sale of datacom products (e.g. chips for modems ) and the sale of consumer electronics (e.g. chips for telephones, televisions, etc...). By late 1996, datacom sales represented approximately 60% of Zilog's business. During the same year, the data communications industry underwent a major technology shift in modem design which would have a profound and material impact on Zilog's business.

4. A modem consists of two major components -- the controller and the data-pump. Prior to, and during the Class Period, a significant portion of Zilog's overall revenue was derived from the sale of computer chips that "ran" the controller portion of a modem. Specifically, Zilog's 80182 chip, primarily designed for Lucent Microelectronics ("Lucent"), was the Company's crown jewel. Lucent combined Zilog's 80182 chips with its own datapump chips to create an operating protocol for a single channel personal computer ("PC") modem. Lucent manufactured these internal modems and sold them primarily to Compaq for use in their desktop computers. In 1996, Lucent alone represented $38 million in sales or approximately 13% of the Company's total revenues.

5. Lucent was Zilog's most important customer. The relationship had been developed over a number of years and reached its pinnacle when Zilog had designed the 80182 for use in Lucent's modem chip sets. However, Lucent was not permanently reliant on Zilog for its products. With the development of the Pentium chip, modem manufacturers began experimenting with a modem design that was "controlled" by the Central Processing Units ("CPUs") rather than a separate "controller" chip, such as the 80182. In fact, the success of Lucent's earliest attempt at a controller-less solution paved the way to a controller-less PC modem design.

6. Consequently, in December of 1996, Lucent informed defendants that it was adopting a controller-less solution which would completely eliminate the need for Zilog's chips by the end of fiscal 1997. This was devastating news to Zilog because it meant that the Company faced an inevitable, drastic and material decline in sales, representing at least 13% of its business. Unfortunately for Zilog, Lucent was not the only customer which was moving towards a controller-less modem chip set solution. In or around December 1996, Zilog's Chicago sales office informed defendants, via an internal account call report, that Lucent had provided its controller-less solution to Multi-Tech Systems Inc. ("Multi-Tech"), another of Zilog's large datacom accounts, and that Zilog should not be surprised if Multi-Tech and others switched to a controller-less modem chip set design.

7. Zilog's management knew that nearly 70-80% of the data communications business was for PC based modems and that this business was moving towards a controller-less design, thereby eliminating the need for Zilog chips. Unfortunately, Dr. Edgar A. Sack, Zilog's President and Chief Executive Officer throughout the Class Period, having experience and background primarily in consumer electronics, consistently failed to dedicate sufficient resources into research and development for the datacom portion of Zilog's business. As a result, when Lucent informed defendants that it was transitioning to a controller-less modem chip set design, Zilog was ill-prepared to maintain its market share. For example, Zilog never invested in the development of its own datapump which would have enabled it to sell an entire modem chip set, or at least survive in a controller-less marketplace.

8. For customers adopting a controller-less solution, Zilog's chip set was of no use. As for Zilog's remaining customers, such as Microcom, Inc. ("Microcom"), who maintained a need for controller chips for high density modem solutions, these customers were also facing rapid changes in technology and pressured Zilog to develop new chip architectures that provided higher functions. However, the 80182 design was nearly 4 years old and Zilog, not having dedicated enough money to research and development for the advancement of this product, was incapable of accommodating these customers. Zilog's product releases, such as the 80187 and 80189 chips, did not represent advances in technology, but were merely cheaper versions of the 80182 designed to maintain Lucent's diminishing business. As such, they were ill suited for customers seeking higher functionality and performance. Zilog's poor management of this fundamental technology shift resulted in significant and material customer attrition, ultimately decimating Zilog's datacom business.

9. The loss of these customers, and the drastic decline in revenue which was necessarily associated with such an exodus, was known to defendants as early as June 3, 1996. In an internal e-mail from Jim Magill, Director of Zilog's Data Communications Division, to Dr. Sack and others, Magill acknowledged that Zilog was "living off the back of" Lucent to the tune of $40 million and that due to the "phase over from controller to controller-less in the PC based modems" only 20-30% of the market remained available to Zilog.

10. It was also well known within the Company that defendant Sack was a micro manager. In fact, Sack had structured Zilog's sales hierarchy so that he was assured of receiving up-to-date information regarding the Company's sales on a weekly and monthly basis. At the lowest level of the sales hierarchy were Field Application Engineers who were Zilog's direct conduit to its customers in the field. Overlooking the Field Application Engineers were Regional Managers. These Regional managers reported to Area Managers who in turn reported to Vice Presidents of Sales who reported to Dr. Sack. Prior to and during the Class Period, Zilog had two Vice Presidents of Sales -- Tom Carson and Charlie Weeks. Of course, this hierarchy was not absolute since Dr. Sack often had direct contact with Regional and Area managers through weekly conference calls, account call reports, e-mail and directed memos.

11. Zilog's sales accounts were divided into 3 groupings known as the "Precious Metals." The most important accounts were the "Gold" accounts ($3 million and above) followed by "Silver" and "Bronze" accounts. As Zilog's biggest customer, Lucent was internally referred to as the "goldest of the gold." Dr. Sack had a dictate in which Area Managers were to have primary knowledge of the status of all Gold accounts at all times. To further these goals, the Vice President of Sales, generally Mr. Carson, every Wednesday would host a "call-around," a weekly conference call in which every Area Manager detailed the status of all Gold accounts. Zilog's management, including defendants, either directly participated in these "call-arounds," which took place in a large conference room at Zilog's Campbell facility, or were apprised of their outcome shortly thereafter. Dr. Sack was always present and an active participant in these calls.

12. The moment a Gold account changed its purchase activity, Dr. Sack and the other defendants were made aware through these call-arounds. Additional efforts were also implemented to keep Dr. Sack and the other defendants abreast of Zilog's overall sales status. Each Regional Manager, in conjunction with Field Application Engineers, were required to document on a weekly basis a minimum of three (3) reports referred to as Account Call Reports ("ACRs"). Each ACR contained the sales activity of the referenced customer as well as numerical representations which specifically articulated sales for that client. For a customer as significant as Lucent, it was common for these ACRs to contain, at a minimum, a one page description of the customer's relevant sales activity. Such a review would specifically articulate any current or potential decline in the customers' purchases. These ACRs were regularly reviewed by Dr. Sack and the other defendants. For example, Dr. Sack freely admits in an August 23, 1996 e-mail to his sales staff that, "[y]es, I read your ACR's ..." Each Regional Manager was also responsible for compiling not only weekly but monthly ACRs. These ACRs would be passed on to Area Managers who in turn condensed the findings and forwarded them to Dr. Sack. In these reports, and through internal e-mail, beginning as early as June 3, 1996, it was revealed that Lucent would significantly reduce and ultimately eliminate its demand for Zilog's 80182 controller chip beginning in early 1997.

13. As a result, by late 1996 and early 1997, Zilog had become a desperate company for the following reasons: (a) the technology shift to controller-less modem chip sets resulted in a material reduction of order inputs for the 80182 and similar controller chip solutions; (b) Zilog's largest customer, Lucent, was completely phasing out the need for controller chips and would no longer be a customer by the end of fiscal 1997; (c) the shift to a controller-less solution meant that Zilog faced the loss of 70-80% of its datacom business in its immediate future; (d) Zilog's inability to provide adequate research and development resources to update its products resulted in an attrition of customers demanding higher functionality and performance from chip set solutions; (e) Zilog's net sales and net income had declined 13.4% and 60.4%, respectively, during the first quarter of 1997 from the same period one year prior; and (f) the Company's stock price languished at 50% below where it was 6 months earlier. Notwithstanding this dismal state of affairs, defendants, without foundation, informed the market that it "believes that it is well-positioned to take advantage of the trends in its target market areas", and predicted "gross profit margins of 39% by the fourth quarter of 1997." These fraudulent representations were made without basis and stood inapposite to Zilog's true financial and technological condition.

14. In light of Zilog's imminent loss of the majority of its datacom business due to its primary customer's adoption of controller-less solutions, and Zilog's inability to research and develop higher functioning chips for its remaining datacom customers, it would be impossible for defendants to fulfill their representations to the financial community. Zilog's business already began declining in the fourth quarter 1996. Incapable of reversing the decline in the Company's sales, defendants desperately searched for a way out. Defendants urgently needed a business alliance that would prevent the Company's stock from further deterioration. Consequently, instead of expending their efforts to rectify Zilog's internal problems (e.g. development of a datapump or datacom chips with architectures to support higher functions and performance), defendants focused their efforts on pursuing "strategic alternatives" for the Company.

15. In March of 1997, Zilog retained Lehman Brothers ("Lehman") to investigate "various strategic alternatives including, among other possibilities, technology transfers, mergers, alliances and acquisitions." Ultimately, a number of parties voiced interest in pursuing a business alliance with Zilog. By June 6, 1997, Zilog had proposals from two undisclosed bidders ("First Bidder" and "Second Bidder") and Texas Pacific Partners ("TPG")(collectively, the "Bidders"). Pursuant to strict confidentiality agreements, Zilog's Board authorized its management to permit these interested parties to conduct a due diligence investigation.

16. During this time, Zilog sales were being manipulated by defendants in contravention of Generally Accepted Accounting Principals in an attempt to maximize the price defendants could obtain for Zilog in the anticipated merger. With respect to Lucent alone: (1) products were being shipped and booked which had not been ordered; (2) a false product backlog was created for as far as the fourth quarter of 1999 to demonstrate a continuing demand for the 80182, which really did not exist; (3) product prices were unilaterally raised and charged without Lucent's approval; (4) products shipped to Lucent prematurely were shipped back and forth from Zilog to Lucent repeatedly to burn up time in the channel before they were accepted; (5) Zilog refused to accept returns from Lucent claiming the chips were "custom products" while knowing that these chips were also being sold to other customers; (6) at least $1 million worth of Zilog product which was "shipped" to Lucent was improperly stored in a warehouse so that Zilog would not have to reflect over shipment as a return on its books; (7) Zilog's technicians intentionally disregarded Lucent's specification orders on products including the 80182, 80187 and 80189, thereby booking and shipping these products against Lucent's wishes. All these fraudulent acts were undertaken by defendants or through their agents with defendants' knowledge in order to prevent TPG and the other Bidders from realizing the true state of Zilog's present and future financial condition, including the fact that by the end of the year, at least 13% of Zilog's business, approximately $40 million, would be entirely eliminated with the loss of Lucent as a primary customer.

17. Desperate to hurriedly consummate a deal with one of the Bidders, Zilog misrepresented the true financial status of Zilog's business in their due diligence disclosures while hoping to sustain quarterly results long enough to sign a deal and obtain shareholder approval. Internally, as early as June 1997, the "Board was advised by management that, although it was too early to be certain, Zilog's order input as it entered the third quarter appeared to be softening to a greater degree than had previously been anticipated and that, if true, Zilog's financial performance for the third quarter and possibly for the year would be below Zilog's original expectations..."and that "officers and employees were taking several actions in an effort to bolster 3Q and year end results"(emphasis added unless otherwise indicated).1

18. However, these facts were never disclosed to TPG or the other bidders. Defendants did not tell TPG or the other Bidders that: (a) Lucent was completely phasing out its need for the 80182 or that a substantial portion of Zilog's sales would be eviscerated by year end; (b) it was over shipping product to Lucent which was being returned and warehoused by Zilog without being properly reflected in the Company's books as returns in contravention of Generally Accepted Accounting Principles ("GAAP"); (c) defendants knew nothing could be done to regain Lucent's business nor those customers switching to controller-less solutions; (d) Zilog's lack of research and development resources left customers who required higher functionality and performance from its controller chips without a viable product; and (e) as a result, Zilog would inevitably continue to loose customers decimating its datacom business.

19. So while TPG and the other Bidders were conducting their due diligence investigation of the Company, defendants already knew that the second, third and fourth quarter earnings and year end results for 1997 would be materially off what defendants were representing to TPG and the other Bidders. Moreover, defendants knew that the precipitous decline in Zilog's sales would not be based on a "softness" in the semiconductor industry or on a general malaise in U.S. markets, but would be due to the above identified systemic problems and could not be cured unless Zilog's management, business model and sales efforts were completely restructured -- an event that would necessarily devastate its stock price.

20. By June 30, 1997, the start of the Class Period, rumors of the Merger began to leak out and Zilog's stock price began to rise. The day before the Merger was publicly announced, Zilog was trading at $22 1/8 per share. In early July 1997, Second Bidder elected not to submit a proposal leaving TPG and First Bidder in contention for Zilog. First Bidder offered a proposal outlining two alternatives. The first was a stock-for-stock merger in a pooling of interests transaction implying a cash equivalent value of $23.74 per share based on First Bidder's then current trading price, and the other was an all cash transaction at $22.82 per share of Common Stock. In contrast, TPG offered to purchase all the outstanding shares of common stock for $24.00 per share in cash and to take the Company private where it would be de-listed and no longer subject to market pressures.

21. On July 13, 1997, during a telephonic meeting, the "Board was [] advised about Zilog's financial performance for the year to date and the continued concern about order input falling short in the first two weeks of the quarter," a month and a half after articulating concerns over softening order inputs and deterioration of third quarter and year end results and falsely representing the financial condition of Zilog to TPG and the other Bidders. During this meeting, defendants confirmed what they had known since late 1996, that order inputs for the Company's datacom products from Lucent and others were materially slowing and would continue to do so throughout the fiscal year until the majority (approximately 70-80%) of its datacom controller chip products were no longer being purchased. Rather than come clean and inform TPG of these events, defendants said nothing and went forward with the Merger. Even worse, defendants used public confidence to bolster their fraud.

22. Defendants knew their only option in maintaining the viability of the Company would be one by which Zilog was taken private -- since it would allow them to completely restructure their sales, products, and marketing strategies -- a process which would devastate Zilog's stock price were it to remain public. Moreover, defendants also knew that as the market learned the complete truth of its dismal financial condition, shareholder confidence in its stock would progressively erode thereby negatively impacting any non-cash (i.e. stock-for-stock) transaction. Likewise, as part of the black-out period, typical in stock-for-stock transactions, Zilog insiders would be prevented from immediately selling their stock and would have to wait months at which time it would be too late to reap any kind of profit. Accordingly, TPG was defendants' only hope.

23. Prior to the release of Zilog's second quarter financial results for 1997, defendants already had preliminary earning results which demonstrated a continued decline in sales and profitability from the same period during the prior year. Defendants knew that if such results were released to the public without concurrent positive news, Zilog's stock price would drop sharply, as it had done in April 1997 when first quarter results had been released. However, if defendants could pair a stock-for-cash merger agreement with the news of poor second quarter results, the market would react positively to the merger announcement and overlook the quarterly results. With this nefarious goal in mind, defendants had an added incentive to consummate a deal quickly.

24. Through Lehman, defendants instructed First Bidder and TPG to make final offers no later than July 18, 1997. Although First Bidder's prior cash offer ($22.00) was below TPG's ($24.00), defendants knew that First Bidder's stock was rising in value and a revised stock-for-stock offer would result in a higher figure. However, since the ultimate goal was to take Zilog private, defendants stepped up negotiations with TPG by using First Bidder's offer and recent rise in share price as leverage to secure a more favorable offer from TPG. Defendants were successful.

25. TPG's new offer allowed Zilog shareholders the ability to elect to receive $25.00 per share of Common Stock in cash. One of the conditions to this offer was that Warburg, Pincus, Capital & Co., L.P. and Warburg Pincus & Co. (collectively "Warburg Pincus"), Zilog's largest shareholder, agree to elect to retain up to 400,000 shares of the Company's Common Stock. Retention of this minimal amount of stock allowed TPG to label this agreement a recapitalization, rather than a merger, which carried more favorable accounting treatment.

26. On July 19, 1997, following the execution of an exclusivity agreement with TPG, First Bidder submitted a revised stock-for-stock proposal with an additional increase in the exchange ratio which implied a cash equivalent value of $24.41 per share based on First Bidder's then current trading price. Having already secured a $25.00 per share cash exchange from TPG, Zilog felt confident in rejecting First Bidders' stock-for-stock proposal. On July 20, 1997, Zilog's Board held a special meeting during which they unanimously approved the Merger.

27. On July 21, 1997, Zilog announced a definitive2 Merger Agreement (hereinafter, the "Merger," "Agreement" or "Merger Agreement") with TPG in which Zilog shareholders could elect to receive $25.00 in cash for their shares. As a direct result of this statement, Zilog's stock jumped to $24 3/16 per share where it hovered for the next two months. As planned, defendants concurrently released the Company's lackluster second quarter results revealing income and earnings significantly down from the same period a year ago and flat and down from the first quarter of 1997, respectively. Zilog purposefully mischaracterized the Merger as "definitive" in order to assuage shareholder concern that poor second quarter results could jeopardize the Merger.

28. As defendants had planned, the hype surrounding the Merger announcement all but eclipsed the Company's poor second quarter results. Nevertheless, defendants' deception was not over, rather it had just begun. The Merger Agreement contained a Material Adverse Change Clause ("MAC Clause") that enabled TPG to terminate or renegotiate the merger upon any material adverse change in Zilog. The loss of Lucent, which represented 13% of Zilog's business, clearly was such a material adverse change. However, by falsifying sales and shipping excess products defendants had hoped to maintain sales figures long enough to consummate the Merger and take the Company private. Integral to this plan was for defendants to maintain shareholder confidence in Zilog stock so that its trading price would remain stable.

29. In order to do so, defendants embarked upon a series of false and misleading statements designed to maintain shareholder confidence and artificially bolster Zilog's stock price. The deception began with labeling the Merger as definitive. Defendants labeled the merger as such despite the fact that once news of the loss of Lucent, as well as Zilog's other problems, became known to TPG, it would constitute a material adverse change and give TPG cause to terminate or force a renegotiation of the Merger. In an effort to prevent the public from suspecting the dire circumstances at Zilog, defendants represented to the public that the Company's third quarter operating results were expected to be "generally in line with the second quarter." This statement, made in connection with the Merger announcement, lent support to the "definitive" nature of the Agreement because if TPG was assured that third quarter earnings were to be "in line" with the second quarter, then TPG would get what it bargained for and the Merger would go through at the price of $25.00 per share.

30. Moreover, defendants knew that a continued decline in sales for the third quarter and the remainder of fiscal 1997, which by now was inevitable, would constitute a "Material Adverse Change," as defined in the Merger Agreement, and as such would afford TPG the right to terminate the Merger. Notwithstanding these facts, defendants needed to maintain shareholder confidence so that Zilog's stock price would stay level, at or near $25.00, so that they could send out the proxy and take a shareholder vote. In order to achieve this goal, defendants continued to tout the Merger and assure shareholders that the $25.00 price was definitive, although they knew TPG would renegotiate or terminate the Merger once it discovered, among other material changes, the loss of Zilog's primary customer, Lucent.

31. Naturally, news of the Merger and multiple reports that it was "definitive" caused Zilog's stock price to trade near the $25.00 mark. The stock traded just below $25.00 until September 29, 1997, when preliminary third quarter results were announced. On this day, Zilog announced that its revenues for the third quarter of 1997 were expected to be $61 million and its earnings per share for such quarter were expected to be between $0.06 and $0.08 per share, significantly off its second quarter results. Zilog's stock immediately fell $3 per share on heavy trading. Zilog could no longer hide the devastating impact it was suffering due to the loss of business from Lucent and other customers who had switched to controller-less solutions and customers demanding higher functionality and performance from controller chips which Zilog could not provide.

32. These third quarter results revealed financials to TPG which were materially different than what it had been presented with in June and July of 1997. Upon receipt of this information, TPG informally informed Zilog that it was going to exercise the MAC Clause and began additional due diligence to reassess the Merger. By the terms set forth in the Merger Agreement, such dismal third quarter earnings in conjunction with poor projections for the overall fiscal year constituted a "Material Adverse Change" which afforded TPG the right to terminate or renegotiate the deal.

33. Even after the release of these third quarter results, which demonstrated to TPG what defendants had known since early 1997 -- that sales were dropping off precipitously -- defendants continued the charade by knowingly representing to the investing community that the Merger was in tact and that renegotiations were not being contemplated. In fact, on the possibility of TPG renegotiating the deal, Zilog's Chief Financial Officer, Bob Collins, stated in the middle of October 1997, "[i]f they were even thinking about renegotiating, I'd go public with that information." He further noted that he did not sense TPG was contemplating lowering its price.

34. These statements were false and misleading because defendants had known since December of 1996 that: (1) Zilog was going to lose 70-80% of its datacom business because of their customers shifting to a controller-less modem chip set design; (2) Lucent, Zilog's biggest customer who represented 13% of Zilog's overall business for fiscal 1996, would phase out its entire use of controller chips by the end of fiscal 1997; and (3) Zilog had not invested enough money in research to develop higher function chips for its remaining controller customers nor did it develop a datapump which would enable it to compete in a controller-less marketplace.

35. Moreover, now that third quarter earnings for 1997 were out, TPG had undertaken renewed due diligence efforts and was waiting for more visibility with respect to the fourth quarter and year end results before terminating or renegotiating the Merger. Under Section 6.2 of the Merger Agreement, each party had a reciprocal obligation to "give prompt notice to the other of any change that is reasonably likely to result in a Material Adverse Effect on it." Immediately after Zilog posted third quarter preliminary results, TPG informed Zilog that the material drop in sales represented a material adverse change within the meaning of Section 9.3 and TPG therefore had the right to terminate the Agreement. However, pursuant to a letter agreement dated May 27, 1997, TPG was bound to confidentiality and not allowed to reveal to the public that it intended to exercise the MAC Clause. Defendants, on the other hand, were not bound by such confidentiality and had a fiduciary duty to reveal the fact that TPG intended to terminate or renegotiate the Merger Agreement. They did not. On the contrary, defendants did more than remain silent. They affirmatively made false and misleading statements to the public through the Company, its web site and through investor relations.

36. The original Merger Agreement was to be completed early in the fourth quarter which began September 29, 1997. But by mid-October the proxy statement, which gave shareholders the right to vote on the Merger, had not been mailed out. Collins explained the delay was due to a backlog at the Securities and Exchange Commission ("SEC"). The expected deal close was pushed back to early November, he added. In truth, however, TPG was re-formulating its offer and refused to go forward with the deal at $25.00 per share. Having been duped by defendants once already, TPG insisted upon waiting until the Company's fourth quarter results became more visible and that action, not the SEC, caused the delay in issuance of the proxy statement and the shareholder vote.

37. After months of due diligence, and additional financial visibility for the fourth quarter and Zilog's year end results, TPG, on the evening of November 11, 1997, formally informed Zilog representatives that as a result of Zilog's recent and current financial results, it was not prepared to proceed with the proposed transaction at the price of $25.00 per share provided for in the Original Merger Agreement, but would proceed at a price of $21.00 per share. Once again, defendants did not inform the public of this material information.

38. Over the next week, defendants informed TPG that fourth quarter operating results would likely "be even less favorable [than] those for the third quarter," and as a direct consequence of these developments, TPG notified defendants on November 17, 1997, that it was only willing to proceed at a price per share of $20.00. Defendants, desperate to effect a deal before the bottom of its stock fell out, agreed to the renegotiated $20.00 per share price in return for an amendment to the Original Merger Agreement which "eliminate[d] certain provisions which gave TPG the ability to terminate the Merger Agreement based on a 'Material Adverse Change' in Zilog's business." (i.e., if Zilog's earnings were even worse than predicted, TPG could not terminate or renegotiate the Merger.)

39. On November 20, 1997, after defendants finally informed the market that the Merger had been renegotiated, and that the price of the stock-for-cash deal had been reduced by 20%, the market accounted for the news and Zilog's stock price plummeted to $19 1/8 per share. This was essentially the same price as it was on June 30, 1997, when defendants initiated their scheme to artificially inflate the value of Zilog's securities and designed their escape from the quandary which they had created.

JURISDICTION AND VENUE

40. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. §§1331 and 1337, and §27 of the Securities Exchange Act of 1934 (the "Exchange Act") (15 U.S.C. §78aa).

41. This action arises under §§10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder (17 C.F.R. §240.10b-5).

42. Venue is proper in this district pursuant to §27 of the Exchange Act and 28 U.S.C. 1391(b) because the acts charged herein, including the dissemination of materially false and misleading information, occurred in this district.

43. In connection with the acts alleged in this complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the national securities markets.

THE PARTIES

44. Plaintiff Steven P. Lawrence purchased 500 shares of Zilog common stock during the Class Period and has been damaged as a result of defendants' deceptive and illegal conduct.

45. Plaintiff Harold M. Liberman purchased 500 shares of Zilog common stock during the Class Period and has been damaged as a result of defendants' deceptive and illegal conduct.

46. Plaintiff Ronald D. Pitts purchased 400 shares of Zilog common stock during the Class Period and has been damaged as a result of defendants' deceptive and illegal conduct.

47. Plaintiff Miles A. Spellman purchased 1,000 shares of Zilog common stock during the Class Period and has been damaged as a result of defendants' deceptive and illegal conduct.

48. Defendant Zilog maintains its principal executive offices in this district at 210 East Hacienda Avenue, Campbell, California 95008. The Company, at all relevant times, was listed as a publicly held corporation whose shares were traded on the NYSE under the ticker symbol "ZLG."

49. Defendant Edgar A. Sack ("Sack") was at all relevant times hereto, President, Chief Executive Officer and a Member of the Board of Directors of Zilog.

50. Defendant Richard R. Pickard ("Pickard") was at all relevant times hereto, Vice President, General Counsel and Secretary of the Board of Directors of Zilog.

51. Defendant Robert E. Collins ("Collins") was at all relevant times hereto, Vice President of Finance and Chief Financial Officer of Zilog.

52. Defendants Sack, Pickard, and Collins (collectively the "Individual Defendants") were at all relevant times controlling persons of Zilog within the meaning of §20(a) of the Exchange Act. By reason of their stock ownership, management positions, and/or membership on Zilog's Board, the Individual Defendants were controlling persons of Zilog and had the power and influence, and exercised the same, to cause it to engage in the illegal conduct complained of herein. The Individual Defendants are liable for the false statements pleaded herein, as those statements were each "group published" information, the result of the collective action of the Individual Defendants.

53. As officers, directors and/or controlling persons of a Company registered with the SEC under the federal securities laws, whose common stock is registered with the SEC, traded on the NYSE, and governed by the provisions of the federal securities laws, the Individual Defendants each had a duty to disseminate truthful information promptly and accurately with respect to the Company's operations, products, markets, management, earnings and business prospects, to correct any previously issued statements that had become materially misleading or untrue, and to disclose any trends that would materially affect earnings and the financial results of Zilog, so that the market price of the Company's publicly traded securities would be based upon truthful and accurate information. Under rules and regulations promulgated by the SEC under the Exchange Act, the Individual Defendants also had a duty to report all trends, demands or uncertainties that were likely to influence: (a) Zilog's liquidity; (b) Zilog's net sales, revenues and/or income; and (c) previously reported financial information such that it would not be indicative of operating results. The Individual Defendants' representations during the Class Period violated these specific requirements and obligations.

54. The Individual Defendants, because of their positions with the Company, controlled and/or possessed the power and authority to control the contents of Zilog's quarterly and annual reports, press releases and presentations to securities analysts, which information was conveyed through the analysts to the investing public. Each defendant was provided with copies of the Company's reports and press releases alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected.

55. Because of their positions and access to material non-public information available to them but not to the public, each of these defendants knew or recklessly disregarded that the adverse facts specified herein had not been disclosed to and were being concealed from the public and that the positive representations which were being made were then materially false and misleading.

56. Defendants are also each liable as individual participants in a fraudulent scheme and course of conduct that operated as a fraud and/or deceit upon the Class. Because of their executive, managerial and/or directorial positions with the Company, each of the defendants had access to the adverse, non-public information about the business, finances and future business prospects of Zilog as particularized herein and acted to misrepresent, misstate or conceal such information from plaintiffs and the investing public.

57. It is also appropriate to treat the defendants as a group for pleading purposes under the federal securities laws and the Federal Rules of Civil Procedure and to presume that the false and misleading information complained of herein was disseminated through the collective actions of the defendants. Defendants were involved in the drafting, producing, reviewing, and/or disseminating of the false and misleading information detailed herein, knew or recklessly disregarded that such materially misleading statements were being issued by the Company, and/or approved or ratified these statements in violation of the federal securities laws. Defendants' false and misleading statements and omissions of fact consequently had the effect of, both on their own and in the aggregate, artificially inflating the price of the common stock of Zilog at all times during the Class Period.

SUBSTANTIVE ALLEGATIONS

58. By December of 1996, Zilog had become a desperate company: (a) the datacom business underwent a technology shift to a controller-less modem which meant that a material amount of Zilog's datacom business, (i.e. 70-80%), would be eliminated in the immediate future; (b) Zilog's largest customer, Lucent, had informed Zilog that it was completely phasing out its need for controller chips produced by Zilog, such as the 80182, and would no longer be a customer by the end of fiscal 1997; and (c) Zilog's decision not to adequately fund its research and development division to update its remaining controller solutions resulted in the continuing attrition of customers who needed higher functioning chip solutions. All these facts were known, or at least were recklessly disregarded by defendants.

59. For example, on June 3, 1996, in an e-mail from Jim Magill, Director of Zilog's Data Communications Division, to defendant Sack and others, Magill acknowledged that Zilog was "living off the back of" Lucent to the tune of $40 million and that due to the "phase over from controller to controller-less in the PC based modems" only 20-30% of the market remained available to Zilog. Moreover, he admitted that Zilog did not have the technology to compete in a controller-less environment concluding, "if we do not have the technology we cannot play in the market."

60. Similarly, on August 23, 1996, defendant Sack admitted in an e-mail to all sales personnel that sales efforts at Zilog were deteriorating, "[p]retty clearly the function 'in trouble' in Zilog today is Sales." Notwithstanding this dismal state of affairs, defendants falsely represented to the market that the Company was competitive and "well-positioned" to take advantage of future growth in the semiconductor industry. As stated in a December 15, 1996 Investext Report:

Through its customer relationships, Zilog is better able to establish and maintain technological leadership, attract additional customers in the same market and create industry standards. [The Company] believes that it is well-positioned to take advantage of the trends in its target market areas, which include the networking of computers and peripherals, the increase in the complexity and sophistication of consumer electronic products and the migration of intelligence from the computer to its peripherals.

61. By December 1996, the datacom business at Zilog had continued to deteriorate. Bob Rango, a General Manager of Lucent, had informed Zilog that Lucent had adopted a controller-less modem solution, would no longer be purchasing chip solutions such as the 80182, and that by the end of 1997 will have completely phased out its need for Zilog's product. Zilog was aware that Lucent's account was worth approximately $40 million dollars and that such a loss over the fiscal year would be material and devastating to Zilog's earnings. Notwithstanding these facts, defendants continued to tout their abilities to the market by predicting "gross profit margins of 39% by the fourth quarter of 1997." As reported in the February 25, 1997 edition of the TechInvestor:

After coming off a weak fourth quarter ended December 31, with a 6.5% decline in sales of $68.2 million compared with $73 million in the fourth quarter of 1995, and a 67.1% decrease in net income, which reached $3.7 million from $11.2 million, Zilog Inc. has given itself lofty goals for the fourth quarter of 1997. The company hopes to reach gross profit margins of 39% in the fourth quarter of 1997 compared with 36% in the fourth quarter of 1996.

62. These false and misleading representations completely ignored the horrendous problems plaguing Zilog's datacom business which made up 60% of its overall business. Defendants knew that even if the consumer electronics side of Zilog did exceptionally well, it could not make up for the drastic and material impact that would result from a substantial loss of the datacom business. Zilog had no basis to support such optimistic representations. Realizing they would never be able to achieve these financial objectives, defendants secretly retained Lehman Brothers to "investigate various strategic alternatives including, among other possibilities, technology transfers, mergers, alliances and acquisitions."

63. According to representations made by defendants in Zilog's December 1997 S-4, which included a background synopsis of the Company's Merger with TPG, by April 1997 "Lehman Brothers and management identified a list of leading candidates, both foreign and domestic, that might be expected to have an interest in engaging in one or more of the above strategic alternatives with Zilog. In addition, Zilog's management compiled a confidential descriptive memorandum regarding Zilog, its current business and prospects."

64. By this time defendants knew or recklessly disregarded that Zilog's sales and income would be significantly down from the same period a year earlier and that overall flat to worsening sales and revenues could be expected throughout 1997, due in great part to a decline in 80182 chip sales to Lucent. Additionally, Zilog's share price had been steadily dropping from a 52 week high of $29.25 nearly 4 months earlier. With this knowledge, known only to defendants and other Company insiders, defendants entered into discussions with a number of potential acquirers including TPG, in an attempt to consummate a business combination that would prevent the entire decimation of Zilog's stock price.

65. As reflected in the December 1997 S-4:

On April 7, 1997 . . . Zilog received a written, nonbinding indication of interest from another company ("First Bidder") regarding a business combination between it and Zilog. The indication of interest proposed an acquisition of Zilog in a stock-for-stock transaction, which would be accounted for as a pooling of interests. First Bidder proposed to exchange shares of its common stock for shares of Common Stock at an exchange ratio determined by dividing Zilog's average closing price for the ten trading days ending two trading days prior to execution of a definitive agreement by First Bidder's average closing price during that same period and then multiplying the amount by 1.30, subject to a maximum number of shares equal to one-third of the combined company on a fully diluted basis. At the time, Zilog's Common Stock was trading at approximately $21.00 per share, and the exchange ratio implied a cash equivalent value of $27.30 per share. In light of the process which Zilog had just started with Lehman Brothers, Zilog advised First Bidder that it intended to continue with the process it had recently started and that First Bidder was welcome to execute a confidentiality agreement, obtain the same materials as the other potential strategic partners and participate in the process.

66. On April 21, 1997, defendants announced Zilog's first quarter 1997 financial results which were significantly below figures for the same period a year ago.

Campbell, Calif.--Apr. 21, 1997--Zilog, Inc. (NYSE:ZLG), a leading semiconductor manufacturer, today reported sales and net income for first quarter 1997.

Net sales for the first quarter of fiscal 1997 were $70.1 million, up 2.9 percent from the $68.2 million reported in the fourth quarter of 1996 and down 13.4 percent from the same period a year ago.

Net income for the first quarter was $4.8 million, up 29.6 percent from the $3.7 million reported in the prior quarter and down 60.4 percent from the first quarter of 1996.

Earnings per share for the first quarter were $0.23 on 20.9 million shares, compared with $0.18 on 20.5 million shares reported in the fourth quarter of 1996, and down from $0.59 on 20.4 million shares reported in the first quarter of 1996.

"During the first quarter of 1997, we strengthened our position as a major chip supplier to the television industry by unveiling new products and forging new strategic partnerships," said Dr. Edgar Sack, president and chief executive officer of Zilog. "We believe that these investments prepare us well for the PC/TV convergence which is now prominent as a major electronics trend."

67. As a result of this announcement, the Company's stock price plummeted 6 points over the next two days, losing 24% of its value. In the face of poor earnings, defendants could only focus the market on the consumer electronics side of Zilog claiming, that "we strengthened our position as a major chip supplier to the television industry by unveiling new products and forging new strategic partnerships." Defendants never explained why profits plummeted 60% from the first quarter of 1996, although they knew or recklessly disregarded at the time that disappointing first quarter earnings would be just the beginning of a progressively worsening year.

68. By the time the Company's first quarter results for 1997 were released, defendants had engaged in discussions with a number of parties interested in exploring business combinations with Zilog. These parties, which included First Bidder and TPG, entered into confidentiality agreements with Zilog and were given the opportunity to examine certain non-public information regarding the Company, including financial projections through fiscal 1998.

69. On June 5, 1997, a second interested party ("Second Bidder") submitted a written preliminary proposal to pursue a pooling of interests transaction with Zilog. Second Bidder indicated it would consider a valuation premium to Zilog's trading price in the range of 30% to 50%, implying a cash equivalent value of $28.44 per share to $32.81 per share based on Zilog's then Common Stock price of $21.88 per share. Also on June 5, 1997, TPG submitted a written, non-binding indication of interest to acquire all of the outstanding Common Stock of Zilog for cash at an anticipated price between $26.00 and $28.00 per share. First Bidder also reiterated its interest in Zilog by orally reaffirming its earlier indication of interest of April 7, 1997 with no modification of the terms.

70. According to Zilog's December 1997 S-4, on June 6, 1997, the Board of Directors authorized Zilog's management to permit interested parties to conduct further due diligence. Zilog assembled due diligence materials for review by the interested parties and scheduled management presentations with First Bidder, Second Bidder and TPG. During the same period that these bidders were conducting their due diligence on Zilog, "...the Board was advised by management that, although it was too early to be certain, Zilog's order input as it entered the third quarter appeared to be softening to a greater degree than had previously been anticipated and that, if true, Zilog's financial performance for the third quarter and possibly for the year would be below Zilog's original expectations. The Board was further advised that the officers and employees of Zilog were taking several actions in an effort to bolster third quarter and year end results." The sworn S-4 statement corroborates that fact that, prior to June 6, 1997, defendants had already known and were anticipating a decline in order inputs for the third quarter, but as of June 6, 1997, that decline was greater than they had anticipated.

71. These material facts were never disclosed to the bidders or made public by defendants. Defendants did not tell TPG or the other Bidders that Lucent was completely phasing out its need for the 80182 chips, or that as a result approximately 13% of Zilog's sales would be eviscerated by year end. Moreover, the only actions defendants were taking to "bolster third quarter and year end results" was to: (i) ship product to Lucent which it did not order; (ii) refuse to accept Lucent returns claiming that the product was custom made to order; (iii) ship orders months in advance and prematurely recognize them as sales; (iv) ship returned product back and forth between Zilog and Lucent in an attempt to keep the product in the channel until it was finally accepted; and (v) improperly warehouse over $1 million of Zilog product without reflecting them as returns in the Company's financial records.

72. Moreover, defendants knew that: (a) due to the shift to a controller-less solution, it could never regain Lucent's business nor the business of those customers switching to controller-less solutions because it had never developed a datapump; (b) Zilog's lack of research and development in controller chips left its remaining customers, who required higher functionality and performance, without a viable Zilog product; and (c) as a result, Zilog would inevitably continue to loose customers which would decimate its data communications business, negatively impacting its sales and earnings figures.

73. By June 30, 1997, the beginning of the Class Period, rumors of the potential Merger began to circulate and Zilog's stock price began to rise. On July 7, 1997, TPG formally submitted a written proposal to acquire all the outstanding shares of Common Stock of Zilog for $24.00 per share in cash. On the same day, First Bidder also submitted a revised term sheet, which outlined two alternative proposals. The first was a stock-for-stock merger in a pooling of interests transaction implying a cash equivalent value of $23.74 per share based on First Bidder's then current trading price, and the other was an all cash transaction at $22.82 per share of Common Stock. Second Bidder elected not to submit a proposal.

74. Given Zilog's dismal financial state, defendants knew their only option would be one by which Zilog was taken private so that its entire business model could be reinvented -- a process that would devastate Zilog's stock price were it to remain public. Defendants also knew that if the market learned the truth about the Company's financial status (e.g. the loss of nearly its entire datacom business), shareholder confidence in Zilog stock would quickly erode, thereby negatively impacting any non-cash (i.e. stock-for-stock) transaction. Moreover, as part of the black-out period, typical in stock-for-stock transactions, Zilog insiders would be prevented from immediately selling their stock and would have to wait months at which time it would be too late to reap any kind of profit. Accordingly, TPG was Zilog's only choice.

75. Shortly thereafter, defendants received lackluster preliminary second quarter earnings for 1997. Defendants knew that if they released these earnings to the public, without concurrent positive news, Zilog's stock price would drop sharply as it had done in the first quarter of 1997. Defendants also knew that if they could pair a definitive Merger Agreement with the news of poor second quarter results, the market would react positively to the Merger, overlook the poor quarterly results, and not wonder if Zilog was suffering from systemic problems.

76. Although First Bidder's cash offer was below TPG's, Zilog knew that First Bidder's stock was rising and, accordingly a revised stock-for-stock offer would certainly result in a higher price than TPG's cash offer. However, since defendants goal was to take Zilog private -- a process whereby its poor management and ineffective business model could be buried -- they stepped up negotiations with TPG, using First Bidder's offer as leverage to secure a more favorable offer from TPG.

77. Defendants' strategy worked. Although TPG would have preferred to wait and conduct a more thorough due diligence investigation, it relied on defendants' representations. TPG made a new offer which gave Zilog stockholders the opportunity to either receive $25.00 per share, cash, or the ability to retain a limited number of shares in what would become a private company. Ironically, only days earlier on July 13, 1997, defendants once again internally admitted their continuing concerns over rapidly dropping order inputs. As revealed by the December 1997 S-4:

At a telephonic meeting held on July 13, 1997, the Board of Directors reviewed at length with Lehman Brothers and Zilog's outside counsel the terms of the two proposals as well as historical and projected financial information of First Bidder. The Board was also advised about Zilog's financial performance for the year to date and the continued concern about order input falling short in the first two weeks of the third quarter. At the conclusion of the meeting, the Board of Directors authorized Zilog's management to attempt to resolve all open issues and negotiate definitive agreements with both First Bidder and TPG. First Bidder and TPG were instructed by Lehman Brothers to submit final offers prior to July 18, 1998.

78. Although defendants knew that they could not hide the loss of Lucent and the virtual decimation of its datacom business forever, they also knew that if TPG were privy to this information it would certainly not go forward with the Merger on its present terms. So defendants said nothing to TPG regarding its continued concern over its "order inputs" and went forward with the Merger. Even worse, defendants used public confidence to bolster their fraud.

79. Just as defendants had anticipated, First Bidder submitted a revised stock-for-stock proposal with an additional increase in the exchange ratio which implied a cash equivalent value of $24.41 per share. However, having already secured a $25.00 per share cash exchange from TPG, defendants felt confident in rejecting First Bidder's stock-for-stock proposal and on July 20, 1997, Zilog's Board held a special meeting during which they unanimously approved the Merger with TPG.

80. On July 20, 1997, defendants announced that a definitive Merger Agreement had been signed with TPG assuring its shareholders $25.00 for each share of Zilog stock. As planned, defendants released news of the Merger with Zilog's lackluster second quarter results anticipating that the negative news of the later would be eclipsed by the positive news of the former and that Zilog's stock price would go up. As reported in the Business Wire, and on the Company's Web Site, on July 21, 1997:

Campbell, CA -- July 21, 1997 -- Zilog, Inc. (NYSE: ZLG), a leading semiconductor manufacturer, has signed a definitive merger agreement with Texas Pacific Group (TPG), a private investment partnership, in which TPG will acquire substantially all of the stock of Zilog. The transaction values Zilog at approximately $527 million.

Under the terms of the agreement, the owner of each outstanding share of Zilog common stock can elect either to receive $25.00 in cash or to retain the share. However, in no event can more than 400,000 shares of Zilog common stock (approximately 2% of the outstanding shares) be retained by current Zilog shareholders. Warburg, Pincus Capital Company, L.P., and related affiliates (Warburg), Zilog's largest current shareholder, have committed to elect to retain up to 400,000 shares, ensuring that all other shareholders who do not elect to retain stock in the company will receive $25.00 in cash for their shares. To the extent that other shareholders also elect to retain shares, the 400,000 shares available to be retained will be prorated among all shareholders electing to retain and cash will be paid for all other shares. The merger is intended to be treated as a recapitalization for accounting purposes.

Following the merger, TPG will own approximately 90% of Zilog's voting common stock, the shares to be retained will represent the remaining 10% of the voting shares. In addition, TPG will own non-voting common stock that will increase its overall economic interest in Zilog to approximately 93.3%. The shares to be retained will have an economic interest of approximately 6.7%. It is not expected that Zilog will have publicly listed shares following the merger.

The Board of Directors of Zilog has unanimously approved the merger agreement. The merger, which is subject to completion of contemplated financing, requires Zilog shareholder and regulatory approvals and is expected to be consummated early in the fourth quarter of 1997. Warburg has agreed to vote its shares, which represent approximately 27% of Zilog's current shares outstanding, in favor of the merger.

Edgar A. Sack, Chairman, President and Chief Executive Officer of Zilog, commented, "This transaction represents an excellent opportunity for Zilog's shareholders, customers and employees. TPG has a proven track record of creating value in its portfolio companies and provides Zilog an outstanding partner with whom we can continue to successfully pursue our business strategies."

"Zilog has a rich history as one of the most experienced designers and manufacturers of microprocessors and microcontrollers, and the company is well positioned to use its expertise to capitalize on the very attractive growing markets in which it participates," said David M. Stanton, partner of TPG. "Technology is an active area of investment for us. We are committed to supporting Zilog as it invests in R&D, manufacturing and marketing of its innovative product line."

* * *

Lehman Brothers Inc. has advised Zilog with respect to the merger. TPG has received commitment letters from Goldman, Sachs & Co. to provide senior and subordinated debt financing for the merger. BankBoston, N.A. is also expected to participate in the financing.

Zilog Second Quarter 1997 Financial Results

Zilog today reported sales and net income for the second quarter of 1997. Net sales for the second quarter of fiscal 1997 were $71.3 million, up 1.6 percent from the $70.1 million reported in the first quarter of 1997 and down 16.6 percent from the $85.5 million reported in the second quarter of 1996.

Net income for the second quarter was $4.7 million, down 1.7 percent from the $4.8 million reported in the first quarter of 1997 and down 62 percent from the $12.4 million reported in the second quarter of 1996.

Earnings per share were $0.23 on 20.4 million shares; the same earnings per share as reported in the first quarter of 1997 on 20.9 million shares, and down from $0.60 on 20.6 million shares a year ago.

Zilog's results in the second quarter 1997 were impacted by continued difficult industry conditions. The company believes that its current visibility regarding the third quarter 1997 suggests operating results generally in line with the second quarter.

81. These statements were false and misleading because defendants knew or recklessly disregarded that:

82. As a result of the definitive Merger announcement and assurances that shareholders would get $25.00 in cash, Zilog's stock rose 8%. As reported by the TechInvestor on July 21, 1997:

Zilog shares were up 8 percent Monday after the company said it will be acquired by Texas Pacific Group, a private investment partnership, for $527 million. Once the acquisition is completed, Zilog stock will not be publicly traded. The acquisition is expected to be completed in the fourth quarter. Under the terms of the Agreement, the owner of each outstanding share of Zilog common stock can elect either to receive $25 in cash or to retain the share.

83. Defendants continued to tout the deal as beneficial to Zilog shareholders which had the effect of maintaining the price of the Company's stock at artificially inflated levels. As reported in the July 22, 1997 issue of EETimes:

Texas Pacific has faith in Zilog's product line, which includes controllers for PC peripherals and a variety of communications components, including the upcoming V-chip for blocking television content.

* * *

"This is not a turnaround story. It's a story about a company with growth opportunities caught in a current downdraft, in a market that's susceptible to occasional downdrafts," Stanton said.

In addition, Zilog won't have to worry about capacity any time soon. The company just completed its fabrication facility in Nampa, Idaho, and paid for it in cash. That the fab expenses are said and done is "one of the reasons we're all optimistic about the prospects of this company," Pickard said.

84. Similarly, as reported in the Idaho Business Review on July 28, 1997:

The market has traditionally undervalued Zilog because it is a diversified company that doesn't gamble everything on one product, Collins said.

"We don't hit home runs, but we don't strike out," he said. "Unfortunately, the industry doesn't value it that way. So, we always felt we were undervalued, even though we managed the company quite well."

* * *

Going private may stimulate growth for Zilog, which experienced lagging revenues and profit in its second quarter.

Using an example, Collins said a case might develop in which $10 million in earnings could be reinvested quickly in the company instead of maintaining it to boost quarterly earnings for the benefit of public shareholders.

"This new company that's private is not so much concerned with earnings as it is cash flow," Collins said. "It might say, take that money and invest it in research and development."

85. Zilog undertook great efforts to explain the fairness of the Merger and to convince the market that Zilog was an undervalued company despite the impending loss of its largest customer, Lucent. As reported in the Electronic Buyers' News on July 28, 1997:

"We never felt that we were fairly valued, because people in this industry are only concerned with high growth," he said. "When I looked at our P/E ratios, they always seemed to be at the bottom end."

Indeed, by returning to the fold of a private company, Zilog believes it can now accomplish what it set out to do when it went public six years ago.

"We can now focus more on cash flow than on quarterly earnings," Collins said. "I can now put more money into R&D, the sales force, and product opportunity, and not have to worry about the bottom line as long as the cash is there."

* * *

With sales in its most recent quarter of $71.3 million and net income of $4.7 million, the company appears to meet TPG's growth and cash requirements.

86. As further reported in Electronic News on July 28, 1997, "[w]e're in great shape, but in a poor position," said defendant Collins, Zilog's Vice President and Chief Financial Officer.

87. At the time of the Merger, defendants also assured investors that this Agreement was "definitive" and not subject to the whim of TPG. Moreover, defendants stated that $25 was a fair price for the stock. As reported by the EDGE: Work-Group Computing Report on July 28, 1997:

Zilog, Inc. (NYSE:ZLG), a leading semiconductor manufacturer, has signed a definitive merger agreement with Texas Pacific Group (TPG), a private investment partnership, in which TPG will acquire substantially all of the stock of Zilog. The transaction values Zilog at approximately $527 million.

* * *

Lehman Brothers Inc. has advised Zilog with respect to the merger. TPG has received commitment letters from Goldman, Sachs & Co. to provide senior and subordinated debt financing for the merger. BankBoston, N.A. is also expected to participate in the financing.

88. These statements were false and misleading because defendants knew or recklessly disregarded the fact that:

89. As reported in Zilog's December 1997 S-4, Lehman Brothers provided an oral opinion (which was subsequently confirmed in writing) that, as of the date of the Original Merger Agreement, the $25.00 cash per share payable in the Merger was fair, from a financial point of view, to the stockholders of Zilog.

90. On or about August 12, 1997, Zilog filed its 10-Q for the second quarter ending June 29, 1997. The 10-Q was signed by defendant Collins and noted:

Sales decreased 16.6% for the second quarter of 1997 from the comparable quarter of 1996, and decreased 15.1% for the first half of 1997 compared to the same period of 1996. During the quarter, sales decreased primarily because of lower modem sales in the data communications market. Overall unit volume has increased in the second quarter of 1997 when compared to the same quarter of 1996. However, volume growth was offset by lower average selling prices. The Company currently anticipates that revenues for the three months ended September 28, 1997 will not exceed the revenues generated during the three months ended June 29, 1997.

* * *

Proposed Merger With Texas Pacific Group

On July 21, 1997, the Company announced that is signed an Agreement and Plan of Merger with TPG Partners II, L.P. Pursuant to that Agreement, TPG will purchase approximately 93.3 % interest in Zilog for $25.00 per share.

* * *

The Board of Directors of Zilog has approved the merger agreement. The merger, which is subject to completion of the contemplated financing, requires Zilog shareholder and regulatory approvals and is expected to be consummated early in the fourth quarter of 1997.

91. Statements made in the 10-Q were false and misleading because at the time they were made defendants knew or recklessly disregarded the following substantiated facts:

92. In late August 1997, although third quarter results were clearly visible, defendants still represented to the investing community that the deal was definitive and that they would get $25 a share. As reported in Buyouts on August 18, 1997:

Banking on the performance of the semiconductor industry, Texas Pacific Group on July 21 signed a definitive agreement to acquire Zilog Inc. for $527 million. The agreement pegged the price of the company at $25 per share.

93. On August 21, 1997, First Bidder asked Zilog to reconsider its offer of a stock-for-stock transaction. First Bidder's stock price had recently risen making the deal worth $27.08 to Zilog shareholders. Although First Bidder's offer was now worth $2.08 more than TPG's ($25.00), defendants knew a stock-for-stock transaction would not inure to their benefit. Desperate to take Zilog private, so that they could hide their wrong doings and reap profit from the transaction, Zilog rejected First Bidder's latest offer. As reported in the December 1997 S-4:

On August 21, 1997, the chief executive officer of First Bidder telephoned Zilog's chairman to note the recent improvement in the trading price of First Bidder's common stock and to indicate that Zilog should still consider "open" First Bidder's proposal of July 19, 1997.

* * *

Based on First Bidder's closing price on August 21, 1997, the exchange ratio set forth in such proposal would have implied a cash equivalent value of $25.44. The following day, First Bidder's closing price improved significantly, resulting in an implied cash equivalent value of $27.08. At a special telephone meeting on August 25, 1997, the Board of Directors was briefed about this development and again considered, with the advice and assistance of Lehman Brothers and outside legal counsel, First Bidder's proposal. After reviewing the then implied cash equivalent value of such a proposal, the significant volatility of First Bidder's stock price and other concerns and uncertainties including those considered by the Board at its July 20, 1997 meeting, the Board determined not to pursue First Bidder's oral expression of continued interest. On several further occasions in October 1997, representatives of First Bidder telephoned representatives of Zilog to express First Bidder's continued interest in pursuing a transaction with Zilog, although no new proposal was made.

94. Notwithstanding defendants' representations that third quarter 1997 earnings would be "in line" with the second quarter, on September 29, 1997, as reported by Business Wire, Zilog revealed poor preliminary third quarter earnings for fiscal year 1997. The article noted "Zilog Inc. (NYSE:ZLG) announced today that the company currently expects revenues for the third quarter ending Sept. 28, 1997 to be approximately $61M. Earnings per share are expected to be between $0.06 to $0.08 per share."

95. As revealed by Zilog's December 1997 S-4, the preliminary third quarter earnings release revealed earnings significantly less than the results which Zilog had anticipated at the time the Original Merger Agreement was executed. Indeed, these preliminary third quarter results were "significantly" lower than the estimates defendants made to the public prior to September 29, 1997, assuring them that the third quarter would be "in line" with second quarter results.

96. These results were not, or should not have been, a surprise to defendants. As stated above in the December 1997 S-4, "On June 6, 1997, the Board of Directors authorized Zilog's management to permit interested parties to conduct further due diligence . . . During this period, the Board was advised by management that, although it was too early to be certain, Zilog's order input as it entered the third quarter appeared to be softening to a greater degree than had previously been anticipated and that, if true, Zilog's financial performance for the third quarter and possibly for the year would be below Zilog's original expectations." Certainly by late August 1997, with only one month left in the quarter, defendants knew or should have known that Zilog's third quarter results would be significantly off. The diminished order input was consistent with the elimination of Zilog's datacom business, which defendants were aware of in December of 1996.

97. Pursuant to Section 6.2 of the Merger Agreement, Zilog was obligated to inform TPG of significantly lower projected earnings. TPG, privy to Zilog's internal data, immediately began re-assessing it merger proposal:

SECTION 6.2 FILINGS; OTHER ACTIONS; NOTIFICATION; ACCESS TO INFORMATION.

(c) The Company and Parent each shall, upon request by the other, furnish the other with all information concerning itself, its Subsidiaries, directors, officers and stockholders and such other matters as may be reasonably necessary or advisable in connection with the Prospectus/Proxy Statement, the S-4 Registration Statement or any other statement, filing, notice or application made by or on behalf of Parent, the Company or any of their respective Subsidiaries to any third party and/or any Governmental Entity in connection with the Merger and the transactions contemplated by this Agreement.

(d) The Company and Parent each shall keep the other apprised of the status of matters relating to completion of the transactions contemplated hereby, including promptly furnishing the other with copies of notices or other communications received by Parent or the Company, as the case may be, or any of its Subsidiaries, from any third party and/or any Governmental Entity with respect to the Merger and the other transactions contemplated by this Agreement. Each of the Company and Parent shall give prompt notice to the other of any change that is reasonably likely to result in a Material Adverse Effect on it.

98. By the time Zilog's preliminary third quarter earnings for 1997 were publicly announced, TPG was made aware of Zilog's financial situation and had informally told Zilog that it was considering termination of the Merger under Section 3. 7 of the Merger Agreement which stated:

SECTION 3.7 ABSENCE OF MATERIAL ADVERSE CHANGE. Except as disclosed in items 3.7 or 3.12(a) of the Company Letter or in the Company SEC Documents filed and publicly available prior to the date of this Agreement (the "Company Filed SEC Documents"), since December 31, 1996, the Company and its Subsidiaries have conducted their respective businesses in all material respects only in the ordinary course consistent with past practice, and there has not been (i) any Material Adverse Change (as defined in Section 9.3), or any event that would reasonably be expected to result in or give rise to a Material Adverse Change, in either case with respect to the Company.....

SECTION 9.3 INTERPRETATION.

* * *

As used in this Agreement, "Material Adverse Change" or "Material Adverse Effect" means, when used in connection with the Company or Parent, as the case may be, any change or effect that is materially adverse to the business, financial condition or results of operations of such entity and its Subsidiaries taken as a whole; provided, however, that (i) any adverse change, event or effect that is demonstrated to be primarily caused by conditions affecting the United States economy generally or the economy of any nation or region in which such entity or any of its Subsidiaries conducts business that is material to the business of such entity and its Subsidiaries, taken as a whole, shall not be taken into account in determining whether there as been or would be a "Material Adverse Change" or "Material Adverse Effect" on or with respect to such entity, (ii) any adverse change, event or effect that is demonstrated to be primarily caused by conditions generally affecting the semiconductor industry shall not be taken into account in determining whether there has been or would be a "Material Adverse Change" or "Material Adverse Effect" on or with respect to such entity and (iii) any adverse change, event or effect that is demonstrated to be primarily caused by the announcement or pendency of the Merger or the transactions contemplated hereby shall not be taken into account in determining whether there has been or would be a "Material Adverse Change" or "Material Adverse Effect" on or with respect to such entity. Whenever the word "knowledge" is used in this Agreement, it shall mean the actual knowledge of any officer of the Company, in the case of the Company, or any officer of TPG Advisors II, Inc., in the case of Parent.

99. However, TPG could not reveal to the public that it was planning to terminate or renegotiate the Merger Agreement because it was legally required to keep all such information confidential. "All information obtained by or on behalf of Parent pursuant to this Section 6.2 shall be kept confidential in accordance with the letter agreement dated May 27, 1997, between Parent and Lehman Brothers, on behalf of the Company (the "Confidentiality Agreement")." Zilog, however, was under no such obligation and, moreover, had a duty to inform its shareholders of a material change in what it had earlier proclaimed to be a definitive Agreement contingent only upon shareholder approval and securing adequate financing. As noted in Section 6.5 of the Merger Agreement:

SECTION 6.5 PUBLIC ANNOUNCEMENTS. Parent and the Company will consult with each other before issuing any press release or otherwise making any public statements with respect to the transactions contemplated by this Agreement and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by applicable law, fiduciary duties or by obligations pursuant to any listing agreement with any national securities exchange.

100. Notwithstanding defendants' obligation to reveal these events to the investment community, they actively prevented investors from learning the truth. A number of concerned shareholders that called the Company were led to believe that the Agreement remained in tact on the terms announced in July.

Date: Wed, Oct 1, 1997 00:19 EDT

. . . I phoned the com[pany] this morning, and got a callback. I asked if the sellout was still in place, and the response was that they are in registration with the SEC and cannot comment. (oh ya, that helps!) I asked when they anticipated mailing the proxy materials, and the response was that if the comment process with the SEC could be settled this week, then proxy materials might be mailed next week. Man, this is unsettling. I'm one of those who thought I'd just sell into the buyout. I'm now regretting not liquidating in past weeks. Could it be that Texas Pacific Group will be re-thinking their acquisition, or their price?

Date: Oct 1 1997 1:08 P.M PST

Question: If Zilog is being bought out by Texas Pacific Group for $25/share (announced 7/21/97). Why would Zilog's announcement of lower expected earning on 9/29/97 affect the stock price. All the indications I've read indicate that the merger is going ahead.

Date: Oct 1 1997 3:52 P.M PST

I contacted the company on September 30th about the merger buyout of $25 per share. They indicated that nothing has changed to their knowledge. It is possible that when the earnings came out, some individuals dumped the stock and others followed, fearing that maybe the merger is in trouble (my own personal opinion); however, if the company is holding back vital information on this merger and some insiders have knowledge, they can be in for a nasty stockholders suit.

Date: Thu, Oct 2, 1997 12:20 EDT

. . . If the Texas group was surprised by the earnings, they might have second thoughts about making the acquisition. Or they might try to adjust the price downward. Obviously, with the stock trading at 21 or so, people are worried that this may not be a done deal. On the other hand, there have been no public statements to the effect that it won't go through just as announced. I'm waiting to see; kicking myself for not selling the stock at 24+.

Date: Sat, Oct 4, 1997 07:09 EDT

I called the company a couple of days ago. The woman in investor relations told me the deal was still on and was expected to close in mid-November. I made some comment about the stock price and the response was silence. Not sure what to make of situation. However, you have to believe that the earnings announcement was no surprise to TPG.

101. Apparently, Zilog's representatives were actively deceiving shareholders in order to prevent a massive sell-off of stock. As evidenced by internal e-mails and ACRs, Zilog knew as early as June 1996 that 70-80% of its datacom business would be eliminated by the end of fiscal 1997. Zilog confirmed knowledge of this fact on June 6, 1997 and July 13, 1997, as memorialized in its December 1997 Form S-4. There was no doubt that upon realizing what they had bought, TPG would exercise the MAC Clause to terminate or force a renegotiation. Defendants knew that the Merger Agreement was predicated on false facts about Zilog's sales and business prospects and would be terminated or renegotiated upon TPG learning the true facts. This notwithstanding, defendants instructed Zilog's representatives to inform the investing community that the Merger Agreement remained definitive and its present terms remained in tact.

102. Zilog's preliminary announcement of poor third quarter earnings caused its stock to drop three points in one day on very heavy trading, reminiscent of the stock drop that came after the announcement of the Company's first quarter results for fiscal 1997. As shareholders and analysts began to worry that third quarter earnings might negatively impact the terms of the Merger, defendants were quick to point out that if TPG were "even thinking about renegotiating," Zilog would go public with that information. As reported by Buyouts on October 13, 1997:

HEADLINE: Will Zilog's Poor Earnings Trigger a TPG Rejigger ?

Pacific Group's $527 million agreement to buy semiconductor manufacturer Zilog hit a snag two weeks ago, with some sources saying they expected to see the price rejiggered down.

The cause was the less-than-stellar third quarter numbers released Sept. 30, which saw Zilog's stock price diving more than 11% to close at $21.8125, widening the deal spread to 15%. Indeed, the stock dipped as low as $19.875 that day. At press time, Zilog shares were trading at $21.06.

The buyout firm signed the definitive agreement July 21 (BUYOUTS Aug. 18, p. 9), providing for an exchange of each Zilog share for $25 cash. Zilog stockholders may also opt to retain the shares, but no more than roughly 2% of the stock can remain outstanding. Zilog's largest shareholder Warburg, Pincus Capital Co. L.P., with 27%, has committed to maintaining that 2%, which TPG needs outstanding for recapitalization purposes.

Deal Close Pushed Back

The proxy was expected to come out at press time, according to Zilog CFO Bob Collins, who explained the delay was due to a backlog at the Securities and Exchange Commission. The expected deal close was pushed back to early November, he added.

On the possibility of TPG cutting the deal, he said, "If they were even thinking about renegotiating, I'd go public with that information ." He noted that he did not sense TPG was contemplating lowering its price.

A TPG spokesman declined comment.

* * *

"I don't hear anything that gives me comfort," noted another arbitrageur watching from the sidelines. This makes for a "great story, but not a good investment," he said.

An analyst said it seemed clear to him TPG would revisit its price. "Look at it this way-if you'd just gone ahead and bought something that you thought was going to do $72 million in revenue . . . and its earnings were a third of what you thought they were going to be, wouldn't you go back and try to renegotiate the price?" he said.

103. Defendants' statements were false and misleading because at the time defendants knew, or recklessly disregarded the following facts:

104. On October 21, 1997, defendants announced Zilog's third quarter earnings which confirmed the Company's preliminary estimates:

Campbell, Calif. -- Oct.21, 1997 -- Zilog, Inc. (NYSE:ZLG), a leading semiconductor manufacturer, today reported sales and net income for the third quarter ended Sept. 28, 1997.

Net sales for the third quarter of fiscal 1997 were $60.8 million, down 4.7 percent from the $63.8 million reported in the third quarter of 1996.

Net income for the third quarter was $2.0 million, up 10.0 percent from the $1.8 million reported in the third quarter of the prior year.

Earnings per share for the third quarter were $0.10 on 20.9 million shares, compared with $0.09 on 20.3 million shares reported in the same quarter of 1996.

Earnings for the third quarter of 1997 were favorably impacted by accumulated adjustments to the Company's estimated tax rate for the fiscal year. Without this favorable tax adjustment, earnings would have been $0.07 per share.

105. Concerned shareholders, based on defendants' representations that the Agreement was in tact, continued to wait for the proxy and still expected to receive $25.00 per share:

Date: Thu., Oct 23, 1997 23:26 EDT

Zilog is not gone. The majority of shares will be purchased, with a small percentage in the hands of public shareholders. The option to sell for $25.00 /share is supposed to be mailed to shareholders any day now--actually when I called Shareholder services 2 weeks ago at Zilog, that is what they told me. That the deal was still on and they had no reason to believe otherwise.

Earnings came out and were pretty sorry--thus the decline in price. I am worried the word is the deal may not fly. But I didn't hear from the company and am awaiting the sell papers. I also cannot understand why the stock does not bounce right back up near $25.00.

Date: Nov 3 1997 10:36 A.M PST

Does anybody have any recent information on the timetable for this Company's pending merger? The original news release announcing the merger indicated a completion date of "early" fourth quarter.

106. On November 11, 1997, TPG formally conveyed to Zilog that its performance constituted a "Material Adverse Change" and that it would not go forward with the transaction at $25.00 but would consider an exchange of $21.00 per share. As renegotiations were undertaken, Zilog also revealed that fourth quarter earnings could be even "less favorable than the third." Pursuant to this latest revelation of bad news, on November 17, 1997, TPG formally told Zilog that it would only go forward at a price of $20.00 per share -- a full 20% lower than its original Merger price. As stated in Zilog's December 1997 S-4:

On the evening of November 11, 1997, TPG informed Zilog representatives that, as a result of Zilog's recent and current financial results, it was not prepared to proceed with the proposed transaction at the price of $25.00 per share provided for in the Original Merger Agreement, but would consider proceeding at a price per share of $21.00. At a special telephonic meeting on November 14, 1997, Zilog's Board reviewed at length with Lehman Brothers and Zilog's outside counsel the nature of Zilog's decline in operating results, the relative rights and obligations of both TPG and Zilog under the Original Merger Agreement, and the various alternatives (and potential consequences) available to Zilog with respect to TPG's position. At the conclusion of the meeting, the Board, although deferring any decision with respect to TPG's position, authorized Zilog's advisors and management to explore with TPG certain other modifications to the Original Merger Agreement which the Board believed would be appropriate if it ultimately were to agree to a reduction in price. During the course of these discussions, Zilog informed TPG of the possibility that fourth quarter operating results in fact might be even less favorable to those for the third quarter. As a consequence of this development, TPG notified Zilog on November 17, 1997 that it was only willing to proceed at a price per share of $20.00, and that in return it would agree to amend the Original Merger Agreement to eliminate certain provisions which gave TPG the ability to terminate the Merger Agreement based on a material adverse change in Zilog's business.

107. Although defendants knew, or should have known, that TPG would terminate and/or renegotiate the Merger, once TPG officially informed Zilog of its plans on November 11, and again on November 17, 1997, defendants had an obligation to immediately inform Zilog's shareholders of these developments. However, defendants did not do so, fearing that such a revelation would further decrease Zilog's stock price.

108. Nevertheless, as Zilog's stock price began to decline on fears that the Merger price of $25.00 was in jeopardy, concerned shareholders anxiously waited for news from the Company:

Date: Nov 17 1997 5:02 P.M PST

. . . I am trying to understand why the stock price is not reflecting what is supposedly a "definitive merger agreement." The price should be much closer to $25, in my opinion. I bought some shares a couple of months ago and am now hooked for a few points. I am concerned the stock will tank if the deal is called off.

109. In a press release dated November 20, 1997, defendants, having no other choice, finally revealed the truth which they had known for months but had kept from the investing community -- that the definitive Merger Agreement was not definitive and shareholders would no longer get $25.00 per share:

ZILOG AND TPG AMEND MERGER AGREEMENT

Campbell, Calif. -- Nov.19, 1997 -- Zilog, Inc. (NYSE:ZLG), announced today that, in light of its recent and current financial performance, its previously announced merger agreement with Texas Pacific Group has been amended. The amendment reduces the per share cash merger consideration from $25 per share to $20 and effects certain other modifications to the rights and obligations of the parties. Zilog expects that its revenues and earnings for the quarter ending December 31, 1997 will likely be below the revenues and earnings for the quarter ended September 30, 1997.

The agreement continues to be subject to certain conditions, including the approval of Zilog's stockholders and the completion of financing in accordance with commitment letters issued by Goldman, Sachs & Co. to TPG or on other reasonable terms. It is expected that Zilog will mail a proxy statement to its stockholders in December for a special meeting to consider the merger to be held in January or February 1998.

Under the original agreement, 400,000 shares of Zilog common stock were to have been retained by current shareholders as shares of the surviving corporation, representing 10% of the voting power and 6.7% of the total common equity of the surviving corporation. Under the amended agreement, 375,000 shares of Zilog common stock will be retained by current shareholders, representing 10% of the voting power and 7.5% of the total common equity.

As originally agreed, Warburg, Pincus Capital Company, L.P., Zilog's largest stockholder, has committed to vote in favor of the amended transaction and to elect to retain up to 375,000 shares to enable all other stockholders to receive cash for their shares. To the extent that other stockholders elect to retain shares, they will be permitted to do so on a pro rata basis and the number of shares retained by Warburg will be reduced to accommodate such elections.

The Board of Directors of Zilog has unanimously approved the revised merger agreement.

110. Once again Zilog's Board of Directors reassessed TPG's new offer which was 20% less than their original offer, voted unanimously to approve it, and sanctified it with a fairness opinion issued by Lehman Brothers. In an attempt to justify the new price, Zilog revealed to the investing community that fourth quarter revenue and earnings will "fall below results in the third." As reported in the November 20, 1997 issue of TechInvestor:

Zilog said Wednesday that Texas Pacific Group has reduced its cash offer to $20 per share from $25 per share because of Zilog's disappointing financial performance. Citing competitive pressures, Zilog said it expects its fourth quarter revenue and earnings will fall below its results in the third quarter, when it earned $2 million on sales of $60.8 million.

111. Defendants blamed the financial shortfalls in the third and fourth quarter on slower sales by key customers and a general downturn in the industry. As reported by the Los Angeles Times on November 20, 1997:

Zilog Inc. said Texas Pacific Group cut its takeover offer by 20%, to $20 a share, because of declining revenue and earnings at Zilog, a Campbell-based a maker of specialized computer chips. Fort Worth-based Texas Pacific cut the price from $25 a share after Zilog disclosed that fiscal fourth-quarter sales and earnings will fall below the third quarter's, which trailed year-earlier results. Zilog blamed the shortfall on slower sales by a key customer, South Korean television maker Samsung Electronics Co., as well as falling prices throughout the industry as chip makers compete for orders and amid a growing inventory. The adjustment in the offer will be sufficient to allow the takeover to proceed unless Zilog discloses further deterioration in its fourth-quarter performance. Zilog shares were unchanged at $19.19 on the New York Stock Exchange.

112. Even after announcing the renegotiated Merger price, defendants further issued false and misleading statements regarding their poor third quarter and expected fourth quarter results for 1997. Although defendants blamed the shortfall "on slower sales by a key customer" and "falling prices throughout the industry," they knew their problems were systemic. First, under the terms of the Merger Agreement TPG could not have exercised the MAC Clause based upon "falling prices throughout the industry" but could only terminate based upon a material adverse change unique to Zilog. Section 9.3 states in relevant part: "any adverse change, event or effect that is demonstrated to be primarily caused by conditions generally affecting the semiconductor industry shall not be taken into account in determining whether there has been or would be a "Material Adverse Change" or "Material Adverse Effect..." Second, poor results were not due to "slower sales" by a key customer, but were due to the elimination of their primary customer, Lucent, which accounted for 13% of their entire business in 1996. Third, defendants do not mention anything about the changing technology of the datacom business or how during 1997, Zilog lost the vast majority of its datacom business.

POST CLASS PERIOD REVELATIONS

113. A post-mortem analysis of the Agreement revealed that it was far less "definitive" than defendants had led shareholders to believe, belying defendants' representations made throughout the Class Period. As reported in Buyouts on November 24, 1997:

HEADLINE: Due Diligence Does Not Get Its Due in Rush to Close Are Definitive Agreements Still Definitive?

With the rush to clinch the agreement and close out deals, it is inevitable, sources say, that agreements are signed before G.P.s realize the need to adjust certain terms. Definitive agreements-once implemented to assure the completion of a deal, the hard copy of a handshake if you will-have now slipped to the point of ensuring little more than the minimum amount to be paid for a company, sources say.

This potentially lands buyout firms in two different scenarios: Where the buyout firm has clinched the definitive agreement only to see another buyer, and more often than not a strategic buyer, come up with a competing offer, G.P.s are scrambling for ways to buttress their agreements to ensure that deals go through; where the buyout firm has inked the definitive only to realize the target is less than alluring after the rush of early meetings, G.P.s again are scrambling, but this time for ways to chip away at the price or even to undo the deal.

Buyout G.P.s have always sought to take advantage of the more casual definitive agreement by renegotiating key terms after having rushed through due diligence, most commonly after they become privy to problems such as falling revenue and management problems.

For example . . . . TPG last week also was able to readjust its bid to buy semiconductor manufacturer Zilog, from $25 per share down to $20 per share, after the company's stock price dove more than 11% through September (BUYOUTS Oct. 13, p. 10). TPG partners did not return calls.

"We're certainly seeing a trend by investment bankers to get definitive agreements locked up early on," says Peter Hermann, a partner at Heritage Partners. "Today's buyout economy hides many sins," he adds. "The beauty of this environment is groups can afford to rush due diligence in a buoyant economy; but when the economy begins to turn, the most troubled deals will be the ones with the least due diligence. It will not be a forgiving environment."

114. Subsequent to defendants' November 20, 1997 announcement, shareholders flocked to Internet message boards -- confused at how a "definitive" Merger could be reduced by 20% and outraged that they had been deceived into supporting the stock of a Company whose directors and officers had been issuing false and misleading information for their own personal gain at the expense of its shareholders.

Date: Nov 20 1997 9:04 A.M. PST

So, TPG decides to amend their offer reducing it by 20% AND Zilog's Board votes to recommend acceptance? Looks like this transaction is going to be railroaded thru without regard to stockholders other than the largest ones.

This deal must have been baked for some time and someone knew about it. What else explains the stock going below $20. Somehow I suspect some parties other than the average investors are going to be made whole on this deal. We could have sold above $20 very recently. The stock has been to $29 within the last year.

Does anyone besides me feel fleeced?

Date: Dec 4 1997 9:30 A.M. PST

Yes, I too feel fleeced. The $25 agreement was described, I believe by company press release[s], as "definitive," meaning "determined with finality, conclusive." If indeed the company used that word (I only know for sure that it is the word I relied on), then WHY did they blythely [sic] change the deal? or, why did they use that word (to mislead investors and jack the stock price up)?

* * *

For me this is a major experience in investing, a lesson: don't believe what you read. Of course, this means I can't invest as an individual investor making his own choices, a conclusion which I believe I shall draw from being burned here.

Date: Sun, Dec 7, 1997 19:02 EST

HOW CAN YOU CHANGE YOUR PRICE AFTER THE DEAL IS DONE.TOP DOGS SOLD OUT THE STOCKHOLDERS. SOUNDS LIKE A GOOD LAWSUIT TO ME! I WILL GIVE YOU $25. NO MAYBE $20. NO MAYBE $15. <expletive deleted>

Date: Dec 9 1997 6:59 A.M. PST

You are absolutely correct regarding their use of the term "definitive.". . . . This aquisition [sic] price appeared to be "final," an appearance none of us can ever trust again. It seemed that the discount in price was due to the time element. It also seemed reliable as the release stated: "Warburg, Pincus Capital Co. L.P. and related affiliates (Warburg), ZLG's largest current shareholder, agreed to retain up to 400,000 shares, ensuring that all other shareholders that do not elect to retain stock in the company will receive $25 in cash for their shares." Note the term "ensuring," also used to encourage investment. I believe that the release was worded to have the deal sound final, as you have noted. You can be sure that those who knew it was not final were selling . . . . These are all investment lessons. They are costly, but should make us wiser.

115. On December 17, 1997, Zilog finally mailed its proxy statement which reflected the Amended Merger Agreement. As stated in Zilog's press release:

Campbell, CA -- December 17, 1997 -- Zilog, Inc. (NYSE:ZLG) today announced that its proxy statement relating to the proposed merger of TPG Acquisition Corporation, a wholly owned subsidiary of TPG Partners II, L.P., an affiliate of Texas Pacific Group, was mailed today to the stockholders of Zilog. The special meeting of stockholders is scheduled to occur on January 27, 1998.

Subject to the approval of the stockholders of Zilog, the merger will occur as soon as practicable on or after the satisfaction or waiver of various conditions which include obtaining certain merger financings as described in the Merger Agreement by and between TPG and Zilog.

116. Lehman Brothers conducted another fairness opinion, and based on the new set of facts, concluded that the deal was once again fair. By issuing a fairness opinion, Lehman validated TPG's action under the Material Adverse Change clause of the original Merger Agreement.

117. On January 6, 1998, Zilog announced that defendant Sack would step down as Chief Executive Officer of the Company. As reported on January 6, 1998, through Business Wire:

Texas Pacific Group Names Curtis Crawford as President, CEO of Zilog, Inc.

Jan. 6, 1998 -- Texas Pacific Group announced today that it will appoint Curtis J. Crawford, a senior executive with Lucent Technologies, as President and Chief Executive Officer of Zilog, Inc. (NYSE: ZLG), following the completion of its previously announced acquisition of the company. He will replace Edgar A. Sack who has announced his intention to step down. Mr. Crawford, 50, has more than 24 years of experience in software, systems and semiconductors.

118. As more information entered the market, it now appeared that defendants had done a good job at hiding the true facts about the viability of Zilog's business while simultaneously absconding with millions in ill-gotten gains. As reported by USA Today on January 13, 1998:

Sack plans to depart as chief executive when the deal is complete, receiving $11.4 million in stock and salary payments and possibly more in bonuses. Bradshaw gets $2.4 million for his stock and a two-year contract extension.

119. Needless to say, the investing community was not pleased with the amended Merger Agreement with TPG. As noted in the Idaho Business Review on January 5, 1998:

A drastic price reduction offer has put Zilog, Inc. in corporate limbo.

In November, Dallas-based Texas Pacific Group withdrew its original $ 527 million July buyout offer for Zilog, with a 20 percent reduction--down to $ 20 per share--to keep the acquisition process at the Securities and Exchange Commission.

Zilog chief financial officer Robert Collins said the buyout deal with Texas Pacific Group should be final by early February.

"For Zilog, most of the year has been spent on working with potential acquirers and in particular with Texas Pacific Group," Collins said. "That's taken up a lot of focus for the year."

Collins, a Zilog vice president, wouldn't sugar-coat the company's philosophy regarding Texas Pacific Group's latest offer--made after Zilog disclosed that fourth quarter earnings for the quarter that concluded at the end of December will be less than the third quarter's.

"Let's face it, shareholders and employees alike were certainly disappointed with the drop in price," Collins said. "However, given he third quarter performance and the fourth quarter outlook, you would have to say that the current price is certainly a fair price."

120. In a desperate attempt to turn the Company around, a new chief executive was hired to replace defendant Sack on or about January 12, 1998. Interestingly, the new chief executive would come from Zilog's biggest customer, Lucent, who accounted for 13% of Zilog's $298.4 million in revenue for 1996. Among other things, Crawford confirmed defendants' knowledge of the faltering datacom business. As stated in an issue of Electronic Buyers' News:

Six months after offering to buy Zilog Inc., the would-be owners have hired a new chief executive to run it - Curtis J. Crawford, the highly regarded president of Lucent Technologies Inc.'s Microelectronics Group.

* * *

"Here I get a chance to take a company that's been listed on the New York Stock Exchange and financed and bought by TPG, with the opportunity to run it as a private company with the prospects of carrying it back to a public company - it's a wonderful opportunity," Crawford said in an interview.

But the task won't be easy. Although Zilog, Campbell, Calif., has a good foundation and is positioned in the right markets, it continues to struggle. Its difficulties began in mid-1996, when the modem chip-set business began to falter and orders were few and far between. While it has generated healthy sales with its devices for Internet set-top boxes and high-definition graphics ICs for TVS, the company hasn't managed to get back on the growth track.

121. Shortly thereafter, Zilog announced devastating fourth quarter and fiscal 1997 financial results on January 20, 1998:

Jan 20, 1998--Zilog Inc. (NYSE:ZLG), a leading semiconductor manufacturer, today reported sales and net income for the fourth quarter and fiscal year ended Dec. 31, 1997. Net sales for the fourth quarter of fiscal 1997 were $ 58.9 million, down 13.6 percent from the $ 68.2 million reported in the fourth quarter of 1996. Net sales for 1997 were $ 261.1 million down 12.5 percent from the $ 298.4 million reported in 1996. Net income for the fourth quarter was $ 359,000, down 90.3 percent from the $ 3.7 million reported in the fourth quarter of the prior year. Net income for the year was $ 11.9 million, down 60.5 percent from the $ 30.0 million reported in 1996. Earnings per share assuming dilution for the fourth quarter were $ 0.02 on 20.5 million shares of stock, compared with $ 0.18 on 20.5 million shares reported in the same quarter of 1996. Earnings per share assuming dilution for 1997 were $ 0.57 on 20.7 million shares of stock, compared with $ 1.47 on 20.5 million shares in 1996.

122. On February 26, 1998, The San Francisco Chronicle clearly articulated the demise of Zilog in the following article which states in pertinent part:

Zilog ran into trouble in 1995, however, when it neglected its core business for the higher-margin products. "They managed to tick off some of their biggest customers," said Will Strauss, a semiconductor analyst at Forward Concepts in Tempe, Ariz.

Zilog also failed to keep pace with advances in microcontrollers and built a costly factory in Idaho that often lies idle.

As a result, profitability plummeted -- Zilog earned $ 42.5 million on sales of $265 million in 1995, but only earned $ 11.9 million on nearly equivalent sales of $261 million in 1997. The stock took a nose-dive, from a high of $ 51 in July 1995 to around $ 19 in late 1997.

123. On April 22, 1998, Zilog announced its first quarter 1998 financial results over the Business Wire which clearly showed that the end of Zilog's financial demise was nowhere in sight:

April 22, 1998--Zilog, Inc., a leading semiconductor manufacturer, today reported sales and net income for the first quarter of 1998 which ended April 5. Net sales for the first quarter of 1998 were $ 49.5 million, down from $ 70.1 million reported in the first quarter of 1997. Net income (loss) for the first quarter of 1998 was ($ 19.9) million, down from the $ 4.8 million reported in the same quarter of 1997. The first quarter includes non-recurring recapitalization expenses totaling $ 13.3 million on a pre-tax basis. These charges were taken in connection with the Company's Feb. 27, 1998 recapitalization merger. Excluding these charges, net income (loss) would have been ($ 10.6) million. The earnings before interest, taxes, depreciation and amortization, excluding non-recurring recapitalization expenses, for the first quarter of 1998 were $ 2.5 million.

124. In a May 1998 Electronic Business article, the following observations were reported regarding defendant Sack and Zilog's demise:

Zilog's employees are not accustomed to fun. Although a skilled technologist, former CEO Sack had a reputation as an autocrat not particularly open to ideas other than his own. Despite being located in the heart of Silicon Valley, Sack required his workers to use dumb terminals instead of personal computers: "He didn't want anybody putting a disk into a computer that might blow up the system or let somebody steal records," recalls one former employee.

* * *

...Crawford says the company ran into trouble primarily because it deviated from its strategy of striking up long-term partnerships with a broad base of customers. Instead, it chose to focus too much attention on a single customer, supplying microcontrollers for modern chipsets until that customer represented about 14% of revenue. When that customer -- ironically, Lucent -- stopped buying, it threw Zilog into a tailspin.

That downturn in 1996 hit just as Zilog opened a new wafer fab in Idaho. The plant has since been seriously under-utilized dragging down profits.

125. On May 20, 1998, defendant Collins was replaced as Chief Financial Officer of Zilog. As reported over the Business Wire:

May 20, 1998--ZiLOG, Inc., a leading supplier of semiconductor products for the home entertainment, communication, and embedded control markets, said today that James M. Thorburn has been named Chief Financial Officer (CFO). Thorburn will officially begin his tenure at ZiLOG on May 26, 1998. Thorburn will replace Robert Collins who is leaving the company on May 29, 1998.

126. On July 9, 1998, Zilog filed a form S-4 with the SEC which substantiated the loss of revenue from Lucent as the primary factor for Zilog's decline in revenue through fiscal 1997. The form S-4 noted:

Sales for 1997 were $261.1 million, compared to $298.4 million in 1996, a decrease of $37.3 million or 12.5%. The sales decline was primarily attributable to (i) the loss of a significant design position with a data communications equipment manufacturer and (ii) the decrease of microprocessor sales to hard disk manufacturers. The data communications customer, which generated approximately 12.8% of 1996 revenues, changed the technology of its newest model(s) of its modem product, which resulted in a decrease to Zilog of approximately $23 million in revenue versus the year-earlier period, although this particular customer continues to purchase Zilog's products for other applications. No single customer accounted for more than 8% of revenue in 1997. The discontinuation of the development and marketing of the hard disk products, which resulted in a decrease to Zilog of approximately $8.5 million in revenue versus the year-earlier period, reflected Zilog's strategic decision to refocus its development efforts on other market opportunities.

* * *

NOTE 8. GEOGRAPHIC INFORMATION

The Company operates in one industry segment and is primarily engaged in the design, development, manufacturing and marketing of application specific standard semiconductor products. The Company sells its products to system manufacturers in a broad range of industries. During the period ending December 31, 1996 one customer, Lucent Technologies, represented 12.8% of sales or approximately $38,000,000. No single customer accounted for more than 8.5% of sales during the years ended December 31, 1997 and 1995.

127. On July 22, 1998, Zilog announced second quarter financial results for fiscal year 1998 over the Business Wire:

July 22, 1998--ZiLOG, Inc., a leading supplier of semiconductor products for the home entertainment, communications, and embedded control markets, today reported sales and net loss for the second quarter of 1998.

In the quarter ending July 5, 1998, ZiLOG recorded net sales of $ 48.6 million, a net loss of $ 28.8 million, and EBITDA of $ 3.5 million. These results compare with net sales of $ 71.3 million, net income of $ 4.7 million and EBITDA of $ 21.7 million for Q2 1997.

128. Days later, on July 24, 1998, Standard & Poor lowered Zilog's Credit, Senior Debt Ratings to B- and downgraded the Company to "outlook negative." As reported over the PR Newswire:

Standard & Poor's today lowered its corporate credit and senior secured ratings on Zilog Inc. to single-'B'-minus from single-'B'. Standard & Poor's also lowered its bank loan rating on the company to single-'B' from single-'B'-plus. The outlook is negative.

The downgrade reflects Zilog's leveraged capital structure and very weak profitability. The rating actions also reflect likely ongoing industry stresses that are expected to further pressure the company's limited financial flexibility.

Campbell, Calif.-based Zilog is a manufacturer of "application-specific standard product" semiconductors that are semicustomized chips used in television-related products, PC keyboards and mice, infrared remote controls, and similar consumer products. Zilog has about a 10% microcontroller market share, principally in the lower-end eight-bit segment. The company lost a major customer in 1997, while overall market conditions have continued to weaken.

Under new leadership, Zilog took aggressive pricing actions that have not generated higher sales. Distributors continue to reduce their inventory levels and customers are deferring commitments for a number of new customized products.

129. On August 19, 1998, Zilog filed its form 10-Q for the period ending July 5, 1998. In the 10-Q, Zilog once again confirmed the material decline in sales to Lucent for fiscal year 1997 under the heading "Customer Satisfaction":

During 1997, purchases by a major customer, which had accounted for approximately 13% of the Company's total revenue in 1996, declined to approximately 6% of the Company's total revenue in 1997 and declined further in the first half of 1998. This decline was primarily attributable to a technology shift at the customer resulting in a product that did not require a controller.

INAPPLICABILITY OF STATUTORY SAFE HARBOR

130. The statutory safe harbor for certain forward-looking statements does not apply to the material misrepresentations and omissions alleged in this complaint because:

131. Nevertheless, if the statutory safe harbor provisions do apply to any forward-looking statements pleaded herein, defendants are still liable since each material misrepresentation was known to the particular speaker(s) to be false or misleading at the time it was made.

ZILOG'S FALSE FINANCIAL REPORTS

132. In order to inflate the price of Zilog's stock, defendants caused the Company to falsely report its financial results during fiscal 1997 as follows: (1) products to Lucent were being shipped and booked which had not been ordered; (2) a false product backlog was created for as far as the fourth quarter of 1999 to demonstrate a continuing demand for the 80182, which really did not exist; (3) product prices were unilaterally raised and charged without Lucent's approval; (4) products shipped to Lucent prematurely were shipped back and forth from Zilog to Lucent repeatedly to burn up time in the channel before they were accepted; (5) Zilog refused to accept returns from Lucent claiming the chips were "custom products" while knowing that these chips were also being sold to other customers; (6) at least $1 million worth of Zilog product which was "shipped" to Lucent was improperly stored in a warehouse so that Zilog would not have to reflect over shipment as a return on its books; (7) Zilog's technicians intentionally disregarded Lucent's specification orders on products including the 80182, 80187 and 80189, thereby booking and shipping these products against Lucent's wishes. All these fraudulent acts were undertaken by defendants or through their agents with defendants' knowledge in order to prevent TPG and the other Bidders from realizing the true state of Zilog's present and future financial condition, including the fact that by the end of the year, at least 13% of Zilog's business, approximately $40 million, would be entirely eliminated with the loss of Lucent as a primary customer.

133. By reporting financial results which were materially overstated, Zilog was able to meet the expectations of TPG, other Bidders, and the investing community including plaintiffs and the other members of the Class. These representations were false and misleading when made, as Zilog's financial statements during fiscal 1997 were not a "fair presentation" of Zilog's results and were presented in violation of Generally Accepted Accounting Principles and SEC rules.

134. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. SEC Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate, despite footnote or other disclosure. Regulation S-X requires that interim financial statements must also comply with GAAP, with the exception that interim financial statements need not include disclosure which would be duplicative of disclosures accompanying annual financial statements. 17 C.F.R. §210.10-01(a).

135. Defendants caused Zilog to falsify its reported financials by, among other things, improperly recognizing revenue on Zilog's shipments of product to its customers, including Lucent, while simultaneously failing to properly account for returns. Pursuant to GAAP, defendants should have deferred recognition of revenue on such shipments, but did not in order to inflate its reported results. Moreover, pursuant to GAAP, Zilog was required to adequately accrue losses for uncollectible accounts receivable, but did not in order to report artificially inflated sales during the Class Period.

136. GAAP, as set forth by Financial Accounting Standards Board ("FASB") Statement of Accounting Standard ("SFAS") No. 48, Revenue Recognition When Right of Return Exists, prohibits the recognition of revenue when the right of return exists unless certain conditions are met. SFAS No. 48 applies to transactions "in which a product may be returned, whether as a matter of contract or as a matter of existing practice." SFAS No. 48, ¶3. SFAS No. 48, ¶6 states:

6. If an enterprise sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at time of sale only if all of the following conditions are met:

137. GAAP, as set forth in SFAS No. 5, Accounting for Contingencies, requires that the estimated portion of uncollectible accounts receivable be accrued in the period it becomes evident that receivables or some portion of the receivables will not be collected. SFAS No. 5, ¶22 states in part:

Losses from uncollectible receivables shall be accrued when both conditions in paragraph 8 [it is probable that an asset has been impaired and the amount of loss can be reasonably estimated] are met. Those conditions may be considered in relation to individual receivables or in relation to groups of similar types of receivables. If the conditions are met, accrual shall be made even though the particular receivables that are uncollectible may not be identifiable.

138. Unfortunately for the investing public, Zilog's financial results throughout 1997, and the representations concerning them, were false. Absent the Company's improper accounting for revenues and receivables, Zilog would not have incorrectly reported financial results throughout 1997.

139. Due to these accounting improprieties, Zilog presented its financial results and statements in a manner which violated GAAP, including the following fundamental accounting principles:

140. Further, the undisclosed adverse information concealed by defendants during the Class Period is the type of information which, because of SEC regulations, regulations of the national stock exchanges and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed.

OPPORTUNITY AND MOTIVE

141. Each defendant had the opportunity and motive to commit the acts alleged herein. Defendants, through their positions as officers and/or directors, controlled the dissemination of false and misleading information to the public through SEC filings, press releases and communications with analysts and thereby benefitted from the positive public and industry-wide perception of Zilog. By virtue of their positions with Zilog and because of the significant reputational and monetary benefits they stood to gain from a positive public perception of Zilog and as a result of artificially inflated stock prices, defendants had both the opportunity and motive to commit the acts alleged herein. Defendants were aware of Zilog's true financial condition yet recklessly disregarded the limitations of the Company.

142. Defendants each had the opportunity and motive to commit and participate in the fraud alleged herein. The air of accomplishment and success created as a result of defendants' material misrepresentations made Zilog more attractive to potential investors, including TPG, and served to maintain its stock price at artificial levels. Defendants, as officers and directors of the Company, would also benefit financially from the Merger with TPG receiving millions of dollars in salaries, bonuses, severance agreements and stock options.

143. For example, each Individual Defendant had a motive to commit and participate in the fraud alleged herein for the following reasons. Pursuant to employment agreements with Zilog, upon consummation of the Merger, the terms of employment of certain executive officers of Zilog would be automatically extended for 24 months from the earlier of the Effective Time of the Merger ("Effective Time") or the expiration date of each respective employment agreement. These executive officers would also be entitled to certain payments upon termination of their employment after the Effective Time of the Merger. The Merger Agreement provides that Zilog's bonus plans (as in effect on or before March 1, 1997) will be maintained after the Merger through the end of the 1997 fiscal year. The maximum amount that may be payable under the Employee Performance Incentive Plan is $4,000,000, with the payouts to occur in the first quarter of 1998. The maximum amount that may be payable under the Executive Bonus Plan is $1,900,000 for the 1997 plan year, with the payouts to occur in the first quarters of 1999 and 2000. Residual payments for the 1996 and 1995 plan years will not exceed $1,081,000 payable in the first quarter of 1998 and $589,400 payable in the first quarter of 1999.

144. Pursuant to the employment agreement between Zilog and defendant Sack, upon consummation of the Merger, the term of Sack's employment would be automatically extended for 24 months from the earlier of the Effective Time or the expiration date of his employment agreement. If defendant Sack terminates employment with Zilog after the Effective Time, either voluntarily or involuntarily: (i) he will be entitled to receive the following payments in a cash lump sum: (A) the then current base salary for the period remaining under his employment agreement, (B) payouts under Zilog's Employee Performance Incentive Plan for awards granted prior to the effective date of termination of employment, and (C) payouts under Zilog's Executive Bonus Plan for awards granted prior to the effective date of termination of employment; (ii) all of defendant Sack's outstanding unvested stock options will fully vest with the last date of his active employment; and (iii) he will be entitled to continue his participation in group insurance plans maintained by Zilog.

145. Pursuant to the employment agreements between Zilog and defendants Collins and Pickard, upon consummation of the Merger, the term of each such executive officer's employment would be automatically extended for 24 months from the earlier of the Effective Time or the expiration date of each respective employment agreement. If either defendant terminates employment with Zilog after the Effective Time, either voluntarily for Good Reason (as defined in each respective employment agreement) or involuntarily for reasons other than for Cause or Detrimental Activity (as defined in each respective employment agreement): (i) he will be entitled to receive the following payments in a cash lump sum: (A) the then current base salary for the period remaining under the employment agreement, (B) payouts under Zilog's Employee Performance Incentive Plan for awards granted prior to the effective date of termination of employment, and (C) payouts under Zilog's Executive Bonus Plan for awards granted prior to the effective date of termination of employment; (ii) his outstanding unvested stock options will continue to vest for the period of time remaining under the employment agreement; and (iii) the executive officer will be entitled to continue participation in group insurance plans maintained by Zilog.

PLAINTIFFS' CLASS ACTION ALLEGATIONS

146. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a Class consisting of all persons who purchased or otherwise acquired shares of Zilog common stock from June 30, 1997 to November 20, 1997 inclusive, and who were damaged thereby. Excluded from the Class are the defendants, officers and directors of the Company, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest.

147. The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to plaintiffs at this time and can only be ascertained through appropriate discovery, plaintiffs believe that there are over a thousand members of the Class. As of December 10, 1997, Zilog had 1,193 stockholders of record. As of October 26, 1997 Zilog had 20,0290,767 shares of Common Stock issued and outstanding. Zilog stock was actively traded in an efficient market, the NYSE. Record owners and other members of the Class may be identified from records maintained by Zilog or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions.

148. Plaintiffs' claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by defendants' wrongful conduct in violation of the federal law that is complained of herein.

149. Plaintiffs will fairly and adequately protect the interests of the members of the Class and have retained counsel competent and experienced in class and securities litigation.

150. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting solely individual members of the Class. Among the questions of law and fact common to the Class are:

151. Plaintiffs will rely, in part, upon the presumption of reliance established by the fraud-on-the-market doctrine in that:

152. Based upon the foregoing, plaintiffs and the other members of the Class are entitled to a presumption of reliance upon the integrity of the market for, at least, the purposes of class certification, as well as for ultimate proof of the claims on their merit. Similarly, plaintiffs and the other members of the Class are entitled to a presumption of reliance with respect to the omissions alleged herein.

153. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this class action.

COUNT I

(Violations of section 10(b) Of The Exchange Act
and Rule 10b-5 Promulgated Thereunder)

154. Plaintiffs incorporate by reference and reallege the preceding paragraphs as though fully set forth herein. This Count is asserted against all defendants.

155. During the Class Period, defendants, directly and indirectly, by use of means and instrumentalities of interstate commerce and/or the mails, engaged in a plan and course of conduct, pursuant to which each of them knowingly or recklessly engaged in acts, transactions, practices and courses of business that operated as a fraud and deceit upon plaintiffs and the other members of the Class; made various untrue statements of material fact and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and employed devices and artifices to defraud in connection with the purchase and sale of securities, which were intended to, and, throughout the Class Period, did: (i) deceive the investing public, including plaintiffs and the other Class members, regarding, among other things, the definitive nature of the Merger Agreement with TPG; (ii) artificially inflate and maintain the market price of Zilog securities; and (iii) cause plaintiffs and the other members of the Class to purchase Zilog securities at artificially inflated prices.

The Actionable Misstatements and Omissions

156. Pursuant to the aforesaid plan and course of conduct, defendants participated, directly and indirectly, in the preparation and/or issuance of the statements and documents referred to above. Each defendant participated directly in the wrongs complained of herein. By reason of their senior positions as executive officers and/or directors, as well as their close personal working relationships, each of the Individual Defendants was a "controlling person" of Zilog within the meaning of §20(a) of the Exchange Act, and had the power and influence, and exercised the same, to cause the Company to engage in the unlawful conduct complained of herein. Defendants were able to, and did, directly or indirectly, in whole or material part, control the content of Zilog's public financial reports, filings with the SEC, and public statements. Each Individual Defendant was provided, for his approval or otherwise, with copies of Zilog's reports, filings, releases and statements herein alleged to have been materially false and misleading prior to or shortly after their issuance by the Company, and had the ability and opportunity to prevent their issuance or to cause them to be corrected.

157. As an officer and/or director of a publicly-held company the common stock of which was, and is, registered pursuant to the federal securities laws, each Individual Defendant had a duty to disseminate timely, accurate, truthful, and complete information and a duty to disseminate on behalf of the Company timely, accurate, truthful, and complete financial statements so that the market price of Zilog common stock would be based on truthful, accurate and complete information. As alleged herein, each Individual Defendant violated these specific duties and obligations.

158. Said statements and documents were materially false and misleading in that, among other things, they misrepresented the nature of the Zilog/TPG Merger, the actual expected revenues and profits of Zilog, and the Company's financial condition in at least the following respects:

Defendants Acted With Scienter

159. At all relevant times, Zilog and the Individual Defendants had actual knowledge that the statements and documents complained of herein were materially false and misleading as set forth herein and intended to deceive plaintiffs and the other members of the Class. In the alternative, those defendants acted in reckless disregard for the truth in that they failed or refused to ascertain and disclose such facts as would have revealed the materially false and misleading nature of the statements and documents complained of herein although such facts were readily available to defendants. Said facts and omissions of defendants were committed willfully or with reckless disregard for the truth. In addition, defendants knew or recklessly disregarded that material facts were being misrepresented or omitted as alleged herein.

160. The majority of information showing that defendants acted knowingly or with reckless disregard for the truth is peculiarly within defendants' knowledge and control. As senior corporate officers of Zilog, the Individual Defendants had knowledge of the details of the Company's financial affairs and results. Plaintiffs, who purchased Zilog common stock on the open market, did not have knowledge of the details of the Company's internal corporate affairs. However, the following facts, among others, indicate a strong inference that Zilog and the Individual Defendants acted with scienter:

Defendants' Fraudulent Misconduct Damaged Plaintiffs and The Class

161. As a result of Zilog's and the Individual Defendants' fraudulent conduct as alleged herein, the prices at which Zilog common stock were initially sold and purchased on the secondary market were artificially inflated throughout the Class Period. At the time that plaintiffs and the other members of the Class purchased Zilog common stock, the true value of such common stock was substantially lower than the prices paid by plaintiffs and the other members of the Class. In ignorance of the materially false and misleading nature of the statements and documents complained of herein, as well as of the adverse, undisclosed information known to defendants, plaintiffs and the other members of the Class relied, to their damage, on such statements and documents, and/or the integrity of the offering and market prices of Zilog common stock in purchasing such common stock at artificially inflated prices during the Class Period. Had plaintiffs and the other members of the Class known the truth, they would not have taken such action.

162. At all relevant times, the misrepresentations and omissions particularized in this Complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by plaintiffs and the other members of the Class. The misstatements and omissions complained of herein had the effect of creating in the market an unrealistically positive assessment of Zilog, as well as of its financial condition and ability to continue as a going concern, causing Zilog common stock to be overvalued and artificially inflated at all relevant times. Defendants' false portrayal, during the Class Period, of the Company's operations and prospects, as well as of Zilog's financial condition, resulted in purchases of Zilog common stock by plaintiffs and by the other members of the Class at artificially inflated prices measured by the difference between the market prices and the actual value of such common stock at the time of purchase, thus causing the damages complained of herein.

163. In addition, at the time Zilog common stock was issued, such common stock was actively traded on the NYSE. As a result, the market for Zilog common stock was well-developed, and the price at which such common stock was initially offered, as well as the prices at which it traded thereafter, necessarily reflected the material misrepresentations and omissions complained of herein.

164. As a direct and proximate result of defendants' aforesaid wrongful conduct during the Class Period, plaintiffs and the other members of the Class have suffered substantial damages in connection with their purchases of Zilog common stock.

165. By virtue of the foregoing, each defendant has violated §10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder.

COUNT II

(Against the Individual Defendants for Violations of
Section 20(a) of the Exchange Act)

166. Plaintiffs incorporate by reference and reallege the preceding paragraphs as though fully set forth herein. This Count is asserted against the Individual Defendants.

167. Throughout the Class Period, each of the Individual Defendants, by reason of their executive positions or position as Chairman of the Board, and as the owners, directly and/or indirectly of their shares of the Company's common stock, had the power and influence, and exercised the same, to cause the Company to engage in the unlawful acts, conduct, and practices complained of herein. As a result, at the time of the wrongs alleged herein, the Individual Defendants were "controlling persons" of the Company within the meaning of §20(a) of the Exchange Act.

168. Pursuant to §20(a) of the Exchange Act, by reason of the foregoing, each of the Individual Defendants is liable to the same extent as is Zilog for the Company's aforesaid violations of §10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. As a direct and proximate result of said defendants' wrongful conduct during the Class Period, plaintiffs and the other members of the Class have suffered substantial damages in connection with their purchases of Zilog common stock.

PRAYER FOR RELIEF

WHEREFORE, plaintiffs pray for relief and judgment, as follows:

1. Determining that this action is a proper class action, certifying plaintiffs as Class representatives under Rule 23 of the Federal Rules of Civil Procedure and their counsel as Class counsel;

2. Awarding compensatory damages in favor of plaintiffs and the other Class members against all defendants, jointly and severally, for all damages sustained as a result of the defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;

3. Awarding plaintiffs and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and

4. Awarding such other and further relief as this Court may deem just and proper including any extraordinary equitable relief and/or injunctive relief as permitted by law or equity to attach, impound or otherwise restrict the defendants' assets to assure plaintiffs and the members of the Class have an effective remedy.

JURY DEMAND

Plaintiffs hereby demand a trial by jury.

Dated: November 6, 1998

    Michael D. Braun
    STULL, STULL & BRODY

By: ___________________________
    Michael D. Braun
    10940 Wilshire Boulevard
    Suite 2300
    Los Angeles, CA 90024
    (310) 209-2468

    Kevin J. Yourman
    Vahn Alexander
    WEISS & YOURMAN

By: ___________________________
    Vahn Alexander
    10940 Wilshire Boulevard
    24th Floor
    Los Angeles, CA 90024
    (310) 208-2800

    Attorneys for Plaintiffs


1 Zilog Form S-4 issued on December 10, 1997.

2 The term "definitive" is commonly defined as: (a) precisely defining or outlining; (b) final, conclusive; or (c) authoritative and complete. The American Heritage Dictionary, Second College Edition. See also Black's Law Dictionary, Fifth Edition -- "[t]hat which finally and completely ends and settles a controversy."

3 The Merger Agreement, dated July 20, 1997, states in relevant part:

SECTION 3.7 - ABSENCE OF MATERIAL ADVERSE CHANGE. Except as disclosed in items 3.7 or 3.12(a) of the Company Letter or in the Company SEC Documents filed and publicly available prior to the date of this Agreement (the "Company Filed SEC Documents"), since December 31, 1996, the Company and its Subsidiaries have conducted their respective businesses in all material respects only in the ordinary course consistent with past practice, and there has not been (i) any Material Adverse Change (as defined in Section 9.3), or any event that would reasonably be expected to result in or give rise to a Material Adverse Change, in either case with respect to the Company[.]

*****

SECTION 3.25 ACCURACY OF INFORMATION. The financial forecasts for fiscal 1997 and 1998 previously furnished to the Parent, as updated through the date hereof, have been prepared in good faith, represent the reasonable judgment of the Company's management and are based on assumptions which the Company believes as of the date hereof are reasonable. No representation is made, however, as to whether the assumptions on which the projections are based are true and correct or that events will not occur which would make such assumptions correct. All of the information furnished to Parent or Sub by the Company (including the information set forth in the Company Letter) was furnished in the good faith belief that, as of the date furnished, such information taken as a whole was accurate and complete in all material respects.

4 As stated in Barron's Dictionary of Finance and Investment Terms, Fourth Edition, "tender offer" is defined as an offer to buy shares of a corporation, usually at a premium above the shares' market price, for cash, securities or both, often with the objective of taking control of the target company.




Source: File to epost from Stull, Stull & Brody