The move comes one month after Zilog disclosed it had not made an interest payment on $13.3 million in senior notes, which was due in early September (see Oct. 25 story).

The recapitalization of Zilog's debt is part of a "prepackaged Chapter 11 filing," which will be implemented once the plan is approved by bondholders. Zilog said the plan is "not expected to have any adverse affect on its day-to-day operations or on its ability to provide a full range of products and services to its customers or pay its suppliers on normal terms."

Zilog on late Tuesday evening announced the preliminary agreement with bondholders, which hold more than 60% of the company's senior debt. Under the proposed recapitalization plan, these bondholders will exchange their $280 million in notes for equity, plus a $30 million non-recourse note. The exchange offer will be completed through a prepackaged Chapter 11 filing for tax and other legal reasons, said Zilog.

"We have made significant progress in returning Zilog to full financial health," said Jim Thorburn, chief executive officer of the company, which was an early leader in 8-bit microprocessors 20 years ago. "We have a cash flow positive business and on approval of this plan we will substantially strengthen our balance sheet, with the elimination of our senior notes.

"This agreement in principle demonstrates strong support from key bondholders by giving us maximum financial flexibility to reinvest in the business, compete for new design wins and strengthen our market position as we navigate through this industry down cycle," added Thorburn, who rejoined Zilog in March to spearheaded a broad-scale restructuring of the troubled chip company. Zilog now promotes as the "Extreme Connectivity" company.

Last month, Zilog reported a net loss of $14.7 million for the third quarter of 2001, compared to a net loss of $7.9 million for the same quarter last year, and a net loss of $27.1 million for the second quarter of 2001. Zilog's Q3 revenues of $42.7 million were 36% lower than $66.2 million in the same period last year and 3% sequentially lower than $44 million in the second quarter.

But Thorburn noted that Zilog's bookings in the third quarter were up 26% from Q2, and the company's book-to-bill ratio of 1.1 in the last quarter was the first time that new orders exceeded product shipments this year. "Our results indicate we are clearly on the right track, particularly in comparison to most other companies in the semiconductor industry," Thorburn stated.

Since March, Zilog has attempted to refocused its business on core products, rationalizing manufacturing, laying off workers and reducing operating costs. The Campbell company said these cost savings are projected to reach $50 million on an annualized basis.