<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File No. 0-25502
INFORMATION STORAGE DEVICES, INC.
(Exact name of registrant as specified in its charter)
California 77-0197173
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2045 Hamilton Avenue
San Jose, CA 95125
(Address of principal executive offices, including zip code)
(408) 369-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
As of October 23, 1996, there were outstanding 9,549,726 shares of the
Registrant's Common Stock.
<PAGE>
INFORMATION STORAGE DEVICES, INC.
INDEX
Part I - Financial Information Page
Item 1. Financial Statements
Condensed Balance Sheets at December 31, 1995
and September 28, 1996 ....................................1
Condensed Statements of Operations for the Three Months
and Nine Months Ended September 30, 1995 and
September 28, 1996.........................................2
Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1995 and
September 28, 1996.........................................3
Notes to Condensed Financial Statements....................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............5
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K..........................10
Signatures................................................10
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 28, December 31,
1996 1995
------------ -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................. $ 16,683 $ 29,202
Short-term investments .................... 30,051 45,892
Accounts receivable, net .................. 4,336 7,554
Inventories ............................... 13,978 9,809
Other current assets ...................... 2,439 1,841
------------ -----------
Total current assets ................. 67,487 94,298
Net property and equipment ..................... 5,768 5,244
Patents and other assets, net .................. 1,779 1,355
Long-term investments .......................... 7,384 4,533
------------ -----------
Total assets ................................... $ 82,418 $ 105,430
============ ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable .......................... $ 3,525 $ 9,784
Current portion of capitalized
lease obligations.......................... 1,232 1,089
Accrued liabilities ....................... 2,407 2,312
Deferred revenue .......................... 1,885 1,834
----------- -----------
Total current liabilities .......... 9,049 15,019
Long-term liabilities:
Capitalized lease obligations,
net of current portion .................... 2,147 2,630
Other non-current liabilities ............. 316 328
----------- -----------
Total long-term liabilities ........ 2,463 2,958
Shareholders' equity:
Common stock .............................. 77,502 86,256
Deferred compensation ..................... (362) (116)
Retained earnings (deficit) ............... (6,214) 1,313
Unrealized gain on investments ............ (20) --
----------- -----------
Total shareholders' equity ......... 70,906 87,453
----------- -----------
Total liabilities and shareholders' equity.. $ 82,418 $ 105,430
=========== ===========
</TABLE>
<PAGE>
Condensed Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months Nine months
ended ended
9/30/95 9/30/95 9/28/96 9/28/96
<S> <C> <C> <C> <C>
Net revenues ....................... $ 8,153 $15,546 $31,671 $42,785
Cost of goods sold ................. 8,219 9,238 24,800 26,399
------- ------- ------- -------
Gross margin ............. (66) 6,308 6,871 16,386
Operating expenses:
Research and development....... 2,662 1,777 8,650 4,660
Selling, general
and administrative ............ 2,620 2,173 7,649 6,180
------- ------- ------- -------
Total operating expenses....... 5,282 3,950 16,299 10,840
------- ------- ------- -------
Income (loss) from operations....... (5,348) 2,358 (9,428) 5,546
Interest and other income, net...... 566 295 1,900 818
------- ------- ------- -------
Income (loss)
before income taxes............ (4,782) 2,653 (7,528) 6,364
Provision for income taxes.......... 961 934 -- 2,232
------- ------- ------- -------
Net income (loss) .................. $(5,743) $ 1,719 $(7,528) $ 4,132
======= ======= ======= =======
Earnings (loss) pershare ........... $ (0.59) $ 0.19 $ (0.76) $ 0.49
======= ======= ======= =======
Shares used in computing
amounts per share................... 9,661 8,948 9,867 8,436
</TABLE>
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
9/28/96 9/30/95
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................. $(7,528) $ 4,132
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-----
Depreciation and amortization.................... 1,849 1,429
Amortization of investment discount.............. 123 --
Compensation costs related to stock and
stock option grants ............................. 207 33
Provision for allowance for doubtful accounts
and returns ..................................... 20 210
Changes in assets and liabilities -----
Accounts receivable............................ 3,198 (3,246)
Inventories ................................... (4,169) (1,300)
Prepaid expenses and other assets ............. (592) (986)
Accounts payable............................... (6,258) 1,616
Accrued liabilities............................ 95 724
Deferred revenue............................... 51 1,090
Deferred rent.................................. (12) 145
-------- --------
Net cash (used for) provided by
operating activities.......................... (13,016) 3,847
-------- --------
Cash flows from investing activities:
Purchase of property and equipment................. (1,764) (685)
Change in other assets............................. (539) (61)
Purchase of short-term investments................. (51,031) (37,285)
Proceeds from maturities of short-term investments. 67,232 18,557
Purchase of long-term investments ................ (12,983) (2,529)
Proceeds from maturities of long-term investments . 9,623 --
-------- --------
Net cash provided by (used for)
investing activities ......................... 10,538 (22,003)
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock,
net of issuance costs ............................. 506 69,526
Repurchase of common stock......................... (9,712) --
Payments on capitalized lease obligations.......... (835) (846)
-------- --------
Net cash (used for) provided by
financing activities.......................... (10,041) 68,680
-------- --------
Net (decrease) increase in cash and cash equivalents.. (12,519) 50,524
Cash and cash equivalents at beginning of period...... 29,202 7,605
-------- --------
Cash and cash equivalents at end of period ........... $ 16,683 $ 58,129
======== ========
</TABLE>
<PAGE>
Notes to Condensed Financial Statements
1. Basis of Presentation:
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These condensed financial statements should be read in conjunction
with the financial statements and notes thereto for the year ended December 31,
1995.
The unaudited condensed financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments) that are, in the
opinion of management, necessary to state fairly the results for the periods
presented. The results for such periods are not necessarily indicative of the
results to be expected for the full fiscal year.
2. Inventories:
Inventories consist of material, labor and manufacturing overhead and are stated
at the lower of cost (first-in, first-out basis) or market. The components of
inventory are as follows (in thousands):
<TABLE>
<CAPTION>
September 28, 1996 December 31, 1995
<S> <C> <C>
Work-in-process................ $ 9,881 $5,706
Finished goods................ 4,097 4,103
------ ------
$13,978 $9,809
</TABLE>
3. Earnings (Loss) Per Share:
Earnings (loss) per share has been computed using the weighted average number of
shares of common stock, and, when dilutive, common equivalent shares from
convertible preferred stock and common equivalent shares from stock options
outstanding (using the treasury stock method). Pursuant to the Securities and
Exchange Commissions Staff Accounting Bulletins, common and common equivalent
shares issued during the twelve-month period prior to the Company's initial
public offering in 1995 have been included in the 1995 calculation as if they
were outstanding for all periods prior to the public offering (using the
treasury stock method and the initial offering price).
4. Repurchase of Common Stock:
In January 1996, the Company's Board of Directors approved a stock repurchase
plan of up to one million shares of common stock. In July 1996, the Company's
Board of Directors approved the repurchase of an additional one hundred thousand
shares. For the nine months ended September 28, 1996, the Company repurchased
1,077,000 shares on the open market at prices ranging from $6.625 to $12.00 for
a total of $9.7 million.
<PAGE>
Item 2.
Management's Discussion And Analysis of Financial
Condition and Results of Operations
This report includes forward looking statements that involve a number of
risks and uncertainties. The following includes a discussion of factors that,
among other factors, could cause actual results to differ materially. For
reference and discussion, see also "Other Factors That May Affect Operating
Results" on page 16 of the ISD 1995 Annual Report and the factors discussed in
ISD's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q filed with
the Securities and Exchange Commission.
Overview
ISD designs, develops, and markets single-chip integrated circuit products
for voice recording and playback, using its proprietary ChipCorder high-density
multilevel storage technology and its mixed signal expertise. The Company
directs its marketing and product development efforts toward the consumer,
communications and industrial markets. The Company distributes its products
through a direct sales organization and a worldwide network of sales
representatives and distributors. The Company was incorporated in California in
December 1987 and introduced its first product in February 1991.
ISD subcontracts with independent foundries to fabricate the wafers for all
of its products. This approach enables the Company to concentrate its resources
on the design and test areas, where the Company believes it has the greatest
competitive advantage, and eliminates the high cost of owning and operating a
semiconductor wafer fabrication facility. The Company depends on these foundries
to allocate to the Company a portion of their foundry capacity sufficient to
meet the Company's needs, to produce products of acceptable quality and with
acceptable manufacturing yields and to deliver those products to the Company on
time.
In order to reduce future manufacturing costs, the Company is designing
smaller die sizes with smaller geometry processes to increase the number of die
produced on each wafer. The Company's ability to remain competitive depends on
migrating its manufacturing to smaller geometries, in particular certain of its
products to the 0.8 micron geometry. A problem was encountered with such a
transition in the first quarter of 1996, resulting in a write-off of in-line
product and of a write-down of certain finished goods inventory, as well as a
delay in the conversion. Although management believes the problems that delayed
the 0.8 micron conversion have been corrected, expected cost reductions from
this conversion have not yet been realized, and there can be no assurance that
the Company's foundries will achieve or maintain acceptable cost reductions,
manufacturing yields, and process control in the future or that sudden declines
in yields will not occur. Failures to improve, or fluctuations in, manufacturing
yields and process controls, particularly at times when the Company is
experiencing severe pricing pressures from its customers or its competitors,
would have a material adverse effect on the Company's results of operations.
<PAGE>
Results of Operations
The following table sets forth, as a percentage of net revenues, each line
item in the Company's statements of operations for the periods indicated.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
- ------------------------------------------------------------------------------
9/28/96 9/30/95 9/28/96 9/30/95
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 100.8 59.4 78.3 61.7
----- ---- ---- ----
Gross margin (0.8) 40.6 21.7 38.3
----- ---- ---- ----
Operating expenses:
Research and development 32.6 11.4 27.3 10.9
Sales, general and administrative 32.1 14.0 24.2 14.4 14.4
----- ---- ---- ----
Total operating expenses 64.7 25.4 51.5 25.3
----- ---- ---- ----
Income (loss) from operations (65.5) 15.2 (29.8) 13.0
----- ---- ---- ----
Other income (expense), net 6.9 1.9 6.0 1.9
----- ---- ---- ----
Income (loss) before income taxes (58.6) 17.1 (23.8) 14.9
Provision for income taxes 11.8 6.0 -- 5.2
----- ---- ---- ----
Net income (loss) (70.4%) 11.1% (23.8%) 9.7%
===== ==== ==== ====
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
Net Revenues
During the nine months ended September 28, 1996, the Company's net revenues
were principally derived from the sale of integrated circuits for voice
recording and playback. Net revenues for the third quarter of 1996 were $8.2
million or 48% lower than the $15.5 million of net revenues for the third
quarter of 1995. Revenues for the nine months ended September 28, 1996 were
$31.7 million. This was a 26% decrease from the revenues of $42.8 million for
the nine months ended September 30, 1995. The decrease in net revenues was the
result of continued softness in demand for ISD's ChipCorder(R) single-chip
integrated circuit products for voice recording and playback by
consumer-oriented customers ($4.7 million less); anticipated price reductions as
announced in the first quarter of 1996; and an unexpected push out of orders by
a major communications-oriented customer which reduced the demand from the
communications market (by about $2 million).
During the third quarter, sales to the Company's top ten customers
accounted for 84% of net revenues compared to 65% in the third quarter of 1995.
During the third quarter of 1996, the top customers were Motorola at 23%,
Marubun (the Company's Japanese distributor) at 22%, and Yes Entertainment at
16% compared to Marubun at 14%, Sanyo at 9% and Motorola at 9% for third quarter
of 1995. The Company has continued to experience significant changes in its
major customer base. The loss of, or significant reduction in purchases by, a
current major customer would have a material adverse effect on the Company's
financial condition and results of operations if the Company is unable to obtain
orders from new or other customers to offset such losses or reductions.
The consumer market for the Company's products remained soft compared to
the previous year, but revenues derived from this market grew by more than 50%
over the second quarter of 1996. Revenues from the communications market for the
Company's products decreased by approximately 33% from the third quarter of
1995. The breakdown of net revenues by market segment for the third quarter of
1996 was 32% consumer, 61% communications, and 7% industrial. During the third
quarter of 1995, the breakdown was approximately 47% consumer, 48%
communications and 5% industrial. The Company's consumer customers in the
current quarter continued purchasing the Company's products primarily for use in
personal memo recorders, toys, cards, photo frames, books, and novelties. The
Company's communications customers represented products consisting primarily of
cellular phones, personal handy phones, pagers and telephone answering machines.
The Company anticipates that the consumer market may continue to be soft
throughout the remainder of 1996. The lack of market demand or the failure to
develop new applications or the failure of existing markets to continue to be
receptive to the Company's products or to offset reduced revenues from the
consumer market could have a material adverse effect on the Company's business,
financial condition, and results of operations.
International sales for the third quarter of 1996 were 60%, compared to 70%
for the third quarter of 1995. Sales to Asia were 49% in the third quarter of
1996, down from 61% in the third quarter of 1995, and sales to Europe were 11%
in the third quarter of 1996, up from 9% in the third quarter of 1995. Sales to
Japan accounted for 29% of total sales in the third quarter of 1996, up from 24%
in the previous year. North American sales were 40% in the third quarter of
1996, up from 30% for the same period last year. The decrease in sales to Asia
in 1996 is primarily a result of the softening in the consumer market, as
mentioned above. Because of its reliance on export sales and its dependence on
foundries outside the United States, the Company is subject to the risks of
conducting business internationally, including foreign government regulation and
general geopolitical risk such as political and economic instability, potential
hostilities, changes in diplomatic and trade relationships, and currency
fluctuation, any of which could have a material effect on the Company's
financial conditions or results of operations.
<PAGE>
Gross Margin
The Company's gross margin for the third quarter of 1996 was a loss of
$66,000 compared to a profit of $6.3 million for the third quarter of 1995.
Gross margin as a percentage of sales for the third quarter of 1996 decreased to
(0.8%) from 41% for the third quarter of 1995. The reduction in gross margin is
primarily the result of three factors: the net value ($1.6 million) of certain
inventory items written off for excess and obsolescence; certain selling prices
were reduced (as announced in the first quarter of 1996); and the lower net
revenues which were experienced could not absorb the fixed manufacturing costs
to the same extent as prior quarters.
The Company is subject to a number of factors which may have an adverse
impact on gross margin, including the availability and cost of product from the
Company's suppliers, changes in the mix of products sold, and the timing of new
product introductions and volume shipments. In addition, the markets for the
Company's products are characterized by intense price competition. To the extent
that the Company fails to facilitate its customers' opening of new markets, or
losses revenues to competition, or experiences yield or other production
problems or shortages in supply that increase its manufacturing costs, or fails
to reduce its manufacturing costs, it would have a material adverse effect
on the Company's financial condition and results of operations.
Research and Development
Research and development expenses were $2.7 million or 33% of net revenues
in the third quarter of 1996, compared to $1.8 million or 11% of net revenues in
the same period of 1995. The increase in research and development expense was
primarily due to an increase in personnel for new product development and en-
hancement of existing products. In addition, the Company increased its
expenditures for materials, including wafers and masks, related to such
development activities. There can be no assurance that new products will be
successfully developed or achieve market acceptance, that yield problems will
not arise in the future, or that the need to improve product yields might not
recur with existing or new products or fabrication processes.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2.6 million or 32% of
net revenues in the third quarter of 1996, compared to $2.2 million or 14% of
net revenues in the third quarter of 1995. The increase in selling expenses for
the third quarter of 1996 continues to be a result of the Company's commitment
to expanding its marketing efforts with participation in public relations,
tradeshows, advertising, web site development, as well as the addition of more
sales and marketing personnel. Selling expenses are expected to increase to the
extent revenues increase as a result of additional personnel and increased
commissions. The increases in general and administrative costs come from
additional professional fees, including legal and accounting, strategic
consulting, office rent, and insurance.
Other Income, Net
Net other income was $0.6 million for the third quarter of 1996 compared to
net other income of approximately $0.3 million for the same period of 1995. Net
other income for 1996 primarily represents interest income earned on the
proceeds of the Company's initial and secondary public offerings of common
stock.
<PAGE>
Provision for Income Taxes
The Company reversed a $961 thousand income tax benefit recorded in prior
quarters during 1996 because it is uncertain whether such benefits could be
realized.
Liquidity and Capital Resources
The Company has a line of credit with a commercial bank under which the
Company may borrow up to $9 million, based on eligible accounts receivable and
$15 million based on eligible investments, with a term through June 30, 1997. At
September 28, 1996, the Company's borrowing base was approximately $18.1
million; there are no borrowings outstanding under this line of credit, but it
is being used to guarantee letters of credit. The line of credit does not
restrict the Company from paying cash dividends on its capital stock but does
require that the Company maintain a ratio of total indebtedness to tangible net
worth of not more than 1 to 1 and a ratio of current assets to current
liabilities of not less than 2 to 1. The Company is currently in compliance with
all financial covenants in the line of credit agreement. As of September 28,
1996, the amount of unrestricted equity available for distribution as a result
of these covenants was $43.4 million.
The Company's operating activities used net cash of $13.0 million in the
first nine months of 1996, primarily due to operating losses, an increase in
inventory and a decrease in accounts payable. The Company's repurchase of common
stock, discussed in Note 4 to Condensed Financial Statements, used $9.7 million
of cash. Capital purchases were $1.8 million in the first nine months of 1996.
The Company has an agreement with a capital equipment leasing company which
provides a lease line of $2.0 million of which $1.0 million was available on
September 28, 1996.
At September 28, 1996, the Company had cash, cash equivalents and
short-term investments of $46.7 million, long-term investments (taxable bonds
with maturities greater than one year) of $7.4 million, and working capital of
$58.4 million. The Company believes its existing cash, cash equivalents and
short-term investments and its available line of credit and current equipment
lease lines, will satisfy the Company's projected working capital and capital
expenditure requirements through at least the next twelve months.
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith.
Exhibit
Number Exhibit Title
11.01 - Statement regarding computation of per share earnings.
27.01 - Financial Data Schedule
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INFORMATION STORAGE DEVICES, INC.
(Registrant)
Date: October 25, 1996
Felix J. Rosengarten
Vice President, Finance and Administration,
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
EXHIBIT 11.01
INFORMATION STORAGE DEVICES, INC.
Statement of Computation of Earnings Per Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
------------------
9/28/96 9/30/95
-------- --------
<S> <C> <C>
Net income (loss) ($7,528) $4,132
======== =======
Weighted average common stock 9,867 7,606
outstanding
Common stock equivalents:
Stock options -- 777
Warrants -- 53
-------- --------
Total shares used in computing net 9,867 8,436
income (loss) per share
-------- --------
Net income (loss) per share ($ $
.76) .49
-------- --------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUN-30-1996
<PERIOD-END> SEP-28-1996
<CASH> 16,683
<SECURITIES> 30,051
<RECEIVABLES> 4,781
<ALLOWANCES> (445)
<INVENTORY> 13,978
<CURRENT-ASSETS> 67,487
<PP&E> 11,146
<DEPRECIATION> 5,378
<TOTAL-ASSETS> 82,418
<CURRENT-LIABILITIES> 9,049
<BONDS> 2,147
0
0
<COMMON> 77,502
<OTHER-SE> (6,596)
<TOTAL-LIABILITY-AND-EQUITY> 82,418
<SALES> 8,153
<TOTAL-REVENUES> 8,153
<CGS> 8,219
<TOTAL-COSTS> 8,219
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116
<INCOME-PRETAX> (4,782)
<INCOME-TAX> 961
<INCOME-CONTINUING> (5,743)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,743)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> (.59)
</TABLE>
