SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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 (IRS Employer
incorporation or organization)
Identification No.)
2045 Hamilton Avenue, San Jose, CA 95125
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (408) 369-2400
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock no par value
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant, was approximately $73,046,649 (based upon the closing price for
shares of the Registrant's Common Stock as reported by the National Market
System of the National Association of Securities Dealers, Inc. Automated
Quotations System on February 29, 1996). Shares of Common Stock held by each
officer, director and holder of 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
On December 31, 1996, approximately 9,564,875 shares of Common Stock, no
par value, were outstanding.
<PAGE>
1996 10-K
Information Storage Devices, Inc.
INDEX
INFORMATION STORAGE DEVICES, INC. (ISD)
PART I Page No.
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Item 1. BUSINESS............................................1
Item 2. PROPERTIES..........................................10
Item 3. LEGAL PROCEEDINGS...................................10
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY-HOLDERS.................................11
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS..............11
Item 6. SELECTED FINANCIAL DATA.............................12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......12
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........18
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..............32
PART III
Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT..........................................32
Item 11.EXECUTIVE COMPENSATION..............................34
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...............................36
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......37
PART IV
Item 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
14. REPORTS ON FORM 8-K.................................38
<PAGE>
This report includes forward looking statements that involve a number of risks
and uncertainties. Actual results could differ materially from those discussed
in these statements. See "Other Factors That May Affect Operating Results" for
discussion of such factors, among others, which could cause actual results to
differ materially.
Item 1. BUSINESS
The Company
ISD designs, develops and markets single-chip integrated circuit ("IC")
products for voice recording and playback using the Company's proprietary
ChipCorder(R) high-density storage technology and its mixed signal (analog and
digital) expertise. The Company believes that its products provide customers
with high quality voice recording and playback functions. These functions have
enabled the Company's customers to develop many diverse applications. ISD offers
six product families incorporating its ChipCorder technology. The Company
directs its marketing and product development efforts towards products for the
communications, consumer and industrial markets. The Company was incorporated in
California in December 1987.
Volume production shipments commenced in 1992 and revenue grew every year
until 1996. In February 1995, ISD had its initial public offering and the
Company did a follow-on offering in September 1995.
Markets, Applications and Customers
ISD's mission is to provide essential products to the communications
marketplace using its proprietary multi-level storage and related technologies.
The Company also provides voice record and playback products for the consumer
and industrial markets. The Company believes that its technology provides
significant advantages over its competitors with single chip, superior sound
quality, low power consumption, no software required, cost-effective, easy to
use, non-volatile, solid-state voice recording and playback solutions.
Sales to the Company's top ten customers accounted for 85% of net revenues in
1996 compared to 66% in 1995, and 70% in 1994. The top five customers in 1996
were Motorola, Marubun (the Company's Japanese distributor), Sanyo, Yes
Entertainment and Sequoia (the Company's United Kingdom distributor), accounting
for 29%, 23%, 8%, 8%, and 5% of net revenues, respectively. Marubun's three
largest customers were Toshiba, Sharp, and Sanyo; Sequoia's largest customer was
Panasonic.
Communications Market
The Company has broadened its marketing efforts in the communications market
by introducing the ISD33000 ChipCorder series, the industry's first family of
3-volt, single-chip record and playback products optimized for communication
devices including cellular and portable phones. Earlier versions of ISD's record
and playback chips are still being used in cellular phones (as an answering
machine function or as a voice memo pad) and many other products, including
pagers and music on hold traffic information systems. The ISD33000 Series is
optimized for both analog and digital cellular phones -- including Global System
Mobile (GSM), Personal Communication Service (PCS), Personal Handy Phone System
(PHS), Japanese Digital Cellular (JDC), and cordless phones that rely on 3-volt
technologies to minimize power consumption. In addition to cellular and portable
phones, the ISD33000 has also already been designed into pocket recorders and
telephone answering machines. Along with offering true 3-volt operation, the new
ISD33000 product family offers longer recording durations than previous ISD
products: up to four minutes. The ISD33000 series is the first ChipCorder series
to support serial protocols, including Motorola's Serial Peripheral Interface
(SPI) and National's Microwire.
The largest single application for the Company's products in the
communications market is currently the cellular phone. A number of
<PAGE>
manufacturers, including Asahi/PhoneMate, GE Thomson, Pioneer, Sanyo, Sharp,
Sony and Matsushita (Panasonic), have incorporated ChipCorder products in their
communications products. The Company is developing single-chip solutions with
considerably longer durations that would address both customers' outgoing and
incoming message requirements and accelerate the migration to all integrated
circuit-based TADs (i.e. those that eliminate tape mechanisms). Motorola has
designed the Company's products into its MicroTAC Elite and Startac cellular
phones to record incoming messages or voice memos directly into the phone. Other
representative applications for ChipCorder products in the communications market
include mobile radios, caller ID devices and telephone announcement systems,
personal handy phones and voice pagers.
Consumer Market
The Company's marketing efforts for its first generation, short duration
products were directed toward the consumer market. The Company believes that the
high voice quality, ease of use, non-volatility and low cost of its products
combined with the short design-in cycle typical of the consumer market have
allowed the Company's customers to bring their products to market rapidly and
economically. The Company's customers in the consumer market typically integrate
a voice recording and playback function to create a new product concept or to
differentiate an existing product with additional features or functionality.
Prior to the introduction of ChipCorder products, voice functions were almost
all accomplished by read only memory ("ROM") devices, which typically have very
low speech quality and can be used only to play back pre-recorded messages.
Representative applications for ChipCorder products in the consumer market
include interactive books for children, keepsakes, novelties, pocket recorders,
cameras, recordable greeting cards, recordable photograph frames, toys and
games.
Industrial Market
Industrial applications for the Company's products are largely oriented toward
voice prompting (i.e., providing a voice interface between the user and the
product) and include applications for alerting, educating, guiding, informing,
prompting and warning. Prior to ChipCorder technology, this market opportunity
had not been well developed because of the complexity of existing voice
solutions, poor voice quality and the high minimum purchase requirements imposed
by manufacturers of ROM-based single-chip solutions. The Company's products
offer OEM customers in the industrial market the ability to differentiate their
products by providing improved functionality and voice interface. ChipCorder
products have the advantages of being easy to record and re-record and of
maintaining the recording in the event of power loss or battery replacement. The
industrial market is characterized by low to moderate production volumes.
Representative applications for ChipCorder products in the industrial market
include announcement/annunciator systems, building security systems,
instrumentation, alarms and point of sale displays.
Products
The Company currently offers six product families incorporating its ChipCorder
technology: the ISD1000A, ISD1100, ISD1200, ISD1400, ISD2500 and ISD33000
series. These products are available in die or packaged form and range in retail
list price from $1.30 to approximately $12.00 per unit.
The Company's first product family, the ISD1000A series, was the industry's
first single-chip recording and playback device. This product won numerous trade
awards, including the 1991 Electronic Design News Magazine "Innovation of the
Year" award and the Electronic Products Magazine "1991 Product of the Year"
award. The Company's latest product family, the ISD33000 series, offers
substantially longer voice recording and playback durations. This family has
enabled the development of a wide variety of product applications and is well
suited for communications and industrial applications.
Most of the Company's ChipCorder products include an on-chip oscillator,
microphone preamplifier, automatic gain control, antialiasing filter, smoothing
filter and speaker amplifier. A complete record and playback system can be
configured with the addition of a microphone, a speaker, a power source and a
few resistors and capacitors. The Company's products are microprocessor
compatible, which provide users complex messaging and addressing capability.
<PAGE>
Marketing, Sales and Distribution
The Company markets and distributes its products through a direct sales and
marketing organization and a worldwide network of sales representatives and
distributors. Major OEM accounts are served directly by the Company's
salespeople and support staff, which includes applications engineers and
customer service personnel. The Company manages its direct sales force from its
headquarters in San Jose, California, and has offices located in New York and
Texas.
In North America, the Company has 20 sales representatives. In addition, the
Company has a non-exclusive distributor that sells the Company's products
directly to many customers throughout North America and a non-exclusive Canadian
distributor. Neither of these distributors is subject to any minimum purchase
requirements and can cease promotion of the Company's products at any time.
Internationally, the Company has 28 distributors located in Australia, China,
Hong Kong, Israel, Japan, Korea, South Africa, Taiwan, Singapore, and every
major country in Europe. The Company relies on its distributors for product
promotion and customer support, including identification and development of
customers, applications support, stocking and media promotion, such as public
relations and advertising activities. The Company's agreements with its
international distributors are renewable on an annual basis, but can be
terminated or discontinued at will.
Export sales (sales outside North America) constituted approximately 58%, 65%
and 65% of the Company's net revenues for 1994, 1995 and 1996, respectively. Due
to its reliance on export sales, the Company is subject to the risks of
conducting business internationally, including foreign government regulation and
general geopolitical risks such as political and economic instability, potential
hostilities and changes in diplomatic and trade relationships. In addition, the
laws of certain foreign countries in which the Company's products are or may be
sold, including various countries in Asia, may not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of the Company's products more
likely. Sales of the Company's products may also be materially adversely
affected by factors such as unexpected changes in, or imposition of, regulatory
requirements, tariffs, import and export restrictions and other barriers and
restrictions, longer payment cycles, greater difficulty in accounts receivable
collection, potentially adverse tax consequences, the burdens of complying with
a variety of foreign laws and other factors beyond the Company's control.
Because the Company's foreign sales are denominated in U.S. dollars, the
Company's products become less price competitive in countries with currencies
declining in value against the dollar. There can be no assurance that these
factors will not have a material adverse effect on the Company's business,
financial condition or results of operations in the future or require the
Company to modify its current business practices.
A limited number of customers historically has accounted for a substantial
portion of the Company's net revenues. In 1994, 1995 and 1996, sales to the
Company's top ten customers, including those discussed below, accounted for
approximately 70%, 66% and 85%, respectively, of the Company's net revenues. The
Company has an agreement with Sanyo for the distribution of a customized
20-second product to the telephone answering device market in Japan. This
agreement terminates in February 2000 and is subject to renewal periodically
upon agreement of both parties. Sales to Sanyo constituted 25%, 10% and 8% of
the Company's net revenues for 1994, 1995 and 1996, respectively. Sales to
Motorola, primarily for use in its MicroTAC Elite cellular phone, accounted for
18% of the Company's net revenues in 1994, sales to Marubun, the Company's
Japanese distributor, and Motorola, accounted for 16% and 13%, respectively, of
the Company's net revenues in 1995 and 23% and 29% respectively in 1996. The
Company expects that sales of its products to a limited number of customers will
continue to account for a substantial portion of its revenues for the
foreseeable future. The Company has also experienced significant changes in the
composition of its major customer base from year to year and expects this
pattern to continue as certain customers, particularly those that design and
sell novelty products in the consumer market, increase or decrease their
purchases of the Company's products as a result of fluctuations in market demand
for such customer's products. For example, Hallmark accounted for 29% and 5% of
the Company's net revenues in the first two quarters of 1994, accounted for none
of the Company's net revenues in 1995 and is not expected to account for <PAGE>
significant Company revenues in the future. Motorola accounted for 18% of the
Company's net revenues in 1994, 13% in 1995 and 29% in 1996. A portion of the
decline in the Company's sales to Motorola in 1995 resulted from the grant by
the Company to Samsung of a license to manufacture and sell ChipCorder products
directly to certain customers of the Company in return for Samsung's allocating
additional foundry capacity to the Company and the designation of Motorola as
one of the customers to which Samsung may sell. The license to Samsung to
manufacture and sell ChipCorder products directly to certain customers was
terminated during 1996. The loss of, or significant reduction in purchases by,
current major customers, such as Motorola, would have a material adverse effect
on the Company's business, financial condition and operating results. The
Company's customers typically do not contract for minimum purchase quantities.
There can be no assurance that the Company will be able to continue to obtain
the orders from new customers necessary to offset losses of or reductions in
purchases by the Company's current major customers.
The Company's sales are also subject to seasonal factors, such as the demand
for novelties, toys and other products that incorporate the Company's products,
which is generally strongest in the third and fourth quarters of each year.
Customer Applications Engineering and Technical Support
To promote acceptance of the ChipCorder products, the Company provides
applications engineering and technical support to its customers. The Company has
implemented an extensive support effort that begins with its sales force, and
extends through the manufacturing and delivery of its products. The Company
offers product design assistance to help customers with limited electronics
expertise create innovative new products. During the production phase, the
Company offers its expertise in integrated circuit assembly services to its
customers. The Company has applications engineering staff located at its
headquarters in San Jose, California, and at its office in Austin, Texas. In
addition to publishing design manuals and other customer support documents, the
Company's applications engineering staff works with customers directly to
facilitate the design-in of the Company's products. The Company's independent
sales representatives supplement the applications and technical support
functions by providing such services directly to customers. The Company works
closely with the independent sales representative organizations to enhance their
ability to provide applications and technical support directly.
Although development systems are not required with ChipCorder devices, ISD
offers four evaluation tools and two sound development and programming systems.
These tools allow users to record and play back messages and create, edit and
mass program ISD devices with accurate message location.
Technology
The Company's technology differentiation lies in its patented technique for
storing multilevel signals. In conventional digital data storage, each memory
cell stores one of two "bits" of information, either a "1" or a "0," or, in
terms of voltage levels, either an "on" or an "off." Using the Company's
multilevel storage technology, each ChipCorder memory cell can store one of more
than 250 voltage levels, approximately the equivalent of eight bits of storage,
without any conversion to digital data. Thus, for a given quality of voice
reproduction, ChipCorder products require one-eighth the silicon storage space
of conventional digital storage techniques and typically provide a cost
advantage over such digital storage technologies in delivering high-quality
voice solutions. Because the Company's ChipCorder technology enables the direct
storage of voice and audio signals without analog-to-digital conversion, the
amount of external circuitry required can also be reduced. ChipCorder products
need only a microphone, a speaker, power source and a few resistors and
capacitors to implement a complete solid-state, tapeless, record/playback
function. Most ChipCorder products use nonvolatile memory and thus do not
require continuous power or battery backup to preserve the recorded message.
Overall power consumption, therefore, is reduced, making the Company's products
ideal for handheld, portable, battery-powered applications.
The Company achieves multilevel storage of analog signals through
architectural, algorithmic and circuit design techniques without the need for
special manufacturing processes. The ISD1000 series product is designed using
CMOS EEPROM processes, with 128,000 storage cells. The Company's technology can
<PAGE>
migrate and scale within industry production technology and standards, and thus
can take advantage of improvements in digital memory processing. Each generation
of new products, from the original ISD1000 series, through the ISD33000 series,
to the new products under development today, benefits from cell area reductions
driven by memory technology advances thereby giving the Company significant
advantages in density as its products migrate to smaller production geometries.
The Company selects its wafer foundries according to its assessment of their
ability to make continually improving process densities available to the
Company.
The Company's technology is compatible with floating gate processes that use
Fowler-Nordheim tunneling for both erasing and programming the storage cell, as
used in most digital EEPROM and some "flash" processes. No special process steps
or cell structures are required. The Company's technology is transferable from
one wafer source to another allowing the Company to provide alternate wafer
sources and position the Company to negotiate for more attractive wafer pricing,
wafer volume and future technology improvements.
The Company announced, in February 1996, the successful demonstration of 4X
nonvolatile digital storage using multilevel storage technology. ISD showed that
it is possible to store four bits of digital data per single memory cell, equal
to 16 distinct voltage levels, or two to the fourth power. Traditional digital
memory stores one bit per transistor cell. The advantage of this technological
advancement could lead to substantial cost savings, given that 75 percent fewer
memory cells are required to store a given amount of information.
Manufacturing
Foundries. The Company subcontracts with independent silicon 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 or packaging facility.
All of the Company's products are manufactured by two independent foundries.
The Company has supply arrangements with each of its current foundries, and the
Company and its foundries agree on production schedules based on purchase orders
and forecasts for the next six to twelve months. The Company's primary supplier
is currently Samsung in Korea. The Company also uses Sanyo in Japan for the
manufacture of a customized 20-second product for the telephone answering device
market in Japan. Sanyo purchases all of its production of this customized
product for its own use or for distribution to its customers. In the manufacture
of this product, Sanyo uses the process technology of Atmel. In January 1995,
Atmel notified the Company and Samsung of certain claims and demanded that the
Company and Samsung either negotiate licenses with Atmel or cease manufacturing
the Company's products at Samsung, and, in June 1995, Atmel filed suit against
the Company. See Item 3: Legal Proceedings.
The Company is dependent 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 products to the Company on time. On occasion, the Company has
experienced difficulties in each of these areas, and the Company is likely to
experience such difficulties in the future. In order to obtain this capacity or
other capacity, the Company may be obligated to pay nonrecurring engineering
fees or make certain other payments to Samsung. The Company has qualified an
additional wafer fabrication facility at Samsung. If the Company receives its
desired allocation, use of this facility should increase the production at
Samsung. In connection with the increase in capacity at Samsung, the Company
granted Samsung the right to use the Company's technology in certain end-user
products distributed by Samsung. The Company has qualified another foundry
supplier, ROHM Co., Ltd. and is in the process of finalizing the design for the
first product. However, there can be no assurances that the Company will
continue to receive its desired requirements of product at these foundries. The
loss of Sanyo or Samsung as a supplier, the inability of the Company or Samsung
to obtain a license from Atmel should that prove to be necessary, the inability
of Sanyo to continue to use the Atmel process technology, the inability of the
Company to maintain or expand foundry capacity from its current suppliers or to
qualify other wafer manufacturers so the Company can obtain additional foundry
capacity, any inability to obtain timely and adequate deliveries from the
<PAGE>
Company's current or future suppliers or any other circumstance that would
require the Company to seek alternative sources of supply could constrain,
interrupt or delay shipments of the Company's products and have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's reliance on third party manufacturers involves a number of
risks, including but not limited to reduced control over delivery schedules,
quality assurance and costs. In addition, as a result of the Company's
dependence on foreign subcontractors, the Company is subject to the risks of
conducting business internationally, including foreign government regulation and
general geopolitical risks, such as political and economic instability,
potential hostilities, changes in diplomatic and trade relationships, unexpected
changes in, or imposition of, regulatory requirements, tariffs, import and
export restrictions and other barriers and restrictions, potentially adverse tax
consequences, the burdens of complying with a variety of foreign laws and other
factors beyond the Company's control. Currently all of the Company's agreements
with its offshore wafer fabrication and assembly facilities provide for pricing
and payment in U.S. dollars.
ChipCorder products are designed using the process specifications of the
Company's foundries. Currently, the foundries use CMOS process technology with
1.5 micron, 1.2 micron and 0.8 micron feature sizes. To reduce manufacturing
costs, the Company continuously evaluates the benefits of migrating particular
products to smaller geometry process technologies. Migration to smaller
geometries is essential if the Company is to remain cost competitive, and
operating results could be materially adversely affected if these transitions
are substantially delayed or inefficiently implemented. In 1996, the Company
transferred all production of the ISD2500 series from a 1.2 micron process to a
0.8 micron process. The Company has experienced delays in these migrations, and
there can be no assurance that further delays will not occur.
Manufacturing Yields. The fabrication of ICs is a highly complex and precise
process, requiring production in a highly controlled, clean environment. As a
result, semiconductor companies often have experienced problems in achieving an
acceptable wafer manufacturing yield, which is the number of good die
(semiconductor products) that results from each manufactured wafer as a
proportion of the total potential die on the wafer. As is typical in the
semiconductor industry, the Company purchases its products from its suppliers on
either a per wafer or die basis. The price of each wafer is typically fixed, as
long as the die yield of such wafer reaches a specified minimum level. As the
number of good die per wafer increases, the price per product to the Company
decreases. Conversely, as manufacturing yields decrease, the number of good
products purchased for the price of a wafer decreases, resulting in a higher
price to the Company per product. In addition, because the capacity for
production of wafers is limited, low yields decrease the total number of
products available for delivery to the Company. Semiconductor manufacturing
yield is a function both of design technology, which is developed by the
Company, and process technology, which is typically proprietary to the foundry.
The design is created from the design rules depicting the process technology.
Since low yields may result from either design or process technology failures,
yield problems may not be effectively determined or improved until an actual
product exists that can be analyzed and tested to recognize process
sensitivities in relation to the design rules that are used. As a result, yield
problems may not be identified until well into the production process and
require cooperation by and communication between the Company and the foundry for
resolution. The Company is particularly susceptible to yield problems because it
is not in direct control of the independent offshore foundries that manufacture
its products, which increases the effort and time required to identify,
communicate and resolve manufacturing yield problems. In addition, as the
Company qualifies additional foundries, the Company must design its products
using the process technology and design rules of each of these foundries.
In the past, the Company has experienced yield problems on its ISD1400 series
as it was converted to a smaller geometry 1.2 micron process and on its ISD2500
series as it was converted to the 0.8 micron process. Current levels are
variable and the Company is continuing to take actions to improve the yields.
The inability of the Company to achieve improved yields could prevent revenue
growth and margin improvement from existing capacity. There can be no assurance
that the Company's foundries will achieve or maintain acceptable manufacturing
yields in the future or that sudden declines in yields will not again occur.
Failure to improve, or fluctuations in, manufacturing yields, particularly at
<PAGE>
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 business, financial condition and results of operations.
Testing and Assembly. Wafers are tested by either Samsung or the Company.
Wafers that have been tested and accepted by the Company are cut into die and
either sold in that form or assembled into packages by subcontractors located in
either Korea, the Philippines or Thailand. The Company qualifies and monitors
assembly contractors using procedures similar in scope to those used for wafer
procurement. Since a significant percentage of Company sales are in die form,
the Company also employs several "die preparation" subcontractors that are
located in Taiwan and Thailand. The Company's die preparation and assembly
subcontractors provide fixed cost per-unit pricing, as is common in the
semiconductor industry.
Because the Company's products are manufactured and assembled by independent
subcontractors, the Company is subject to the risks of shortages, and increases
in the cost, of raw materials used in the manufacture or assembly of the
Company's products. Shortages of raw materials or disruptions in the provision
of services by the Company's manufacturing or assembly houses or other
circumstances that would require the Company to seek alternative sources of
supply or assembly could lead to constraints, interruptions or delays in timely
delivery of the Company's products. Such constraints, interruptions or delays or
any other problem resulting from the risks described above might result in the
loss of customers, limitations or reductions in the Company's revenues or other
material adverse effects on the Company's business, financial condition and
results of operations.
Quality Assurance. The communications industry demands high quality and
reliability. The Company seeks to build product reliability into each circuit
from the beginning stages of design, through specific design and layout
reliability guidelines. Also, to maximize quality, reliability and yield
relationships, the Company participates in quality and reliability monitoring
through each aspect of the production cycle by reviewing electrical and
inspection data from its wafer foundry and assembly subcontractors. The Company
monitors wafer foundry production for consistent overall quality, reliability
and yield levels. As part of its total quality program, the Company completed
its ISO 9000 certification in October of 1996. All of the Company's wafer
foundries and package assembly facilities are also ISO 9000 certified.
Research and Development
The markets for the Company's products are characterized by rapidly changing
technology and evolving industry standards. The Company's operating results will
depend to a significant extent on its ability to introduce commercially
attractive and competitively priced new products on a timely basis and to reduce
production costs of existing products. During 1996, the Company achieved three
volt operation on its ISD33000 product and demonstrated 4x digital storage
resolution. As a result, the Company believes that continued significant
expenditures for research and development will be required in the future. In
particular, the Company expects to develop more products with improved features,
including greater analog storage resolution and faster writing speeds on
extended duration products.
There can be no assurance that these products will be successfully developed
or will achieve market acceptance. The failure of any of these products to be
introduced successfully or to achieve market acceptance could have a material
adverse effect on the Company's business, financial condition and results of
operations. The success of new product introductions is dependent on several
factors, including recognition of market requirements, product cost, timely
completion or acquisition and introduction of new product designs, quality of
new products and achievement of acceptable manufacturing yields from the
Company's subcontractor manufacturers. Because of the design complexity of its
products, the Company has experienced delays from time to time in completing
development and introduction of new products, and there can be no assurance that
the Company will not encounter such delays in the development and introduction
of future products. There can be no assurance that the Company will successfully
identify new product opportunities and develop or acquire and bring new products
to market in a timely manner, that the Company's products will be selected for
<PAGE>
design into the products of its targeted customers or that products or
technologies developed by others will not render the Company's products or
technologies obsolete or noncompetitive. The failure of the Company's new
product development efforts or market acceptance of such products would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Research and development expenses in 1994, 1995 and 1996 were approximately
$3.2 million, $6.6 million and $11.8 million, respectively. As of December 31,
1996, the Company had 38 full-time and contract employees engaged in research
and development.
Backlog
As of December 31, 1996, the Company's total backlog was $6.8 million,
compared to $18.4 million as of December 31, 1995. The Company's backlog
consists of customers' purchase orders that have been booked, acknowledged by
the Company and scheduled for shipment within six months.
The Company's business and, to a large extent, that of the entire
semiconductor industry, is characterized by short-term order and shipment
schedules. Since orders constituting the Company's current backlog are subject
to changes in delivery schedules or to cancellation at the option of the
purchaser without significant penalty, backlog is not necessarily an indication
of future revenue. In addition, there can be no assurance that current backlog
will necessarily lead to revenues in any future period. Cancellations of pending
purchase orders or termination or reduction of purchase orders in progress could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Patents and Licenses
The Company relies on a combination of patents, mask work protection,
trademarks, copyright and trade secret laws, confidentiality procedures and
licensing arrangements to protect its intellectual property rights. The Company
seeks the issuance of patents to protect inventions and technology that support
the Company's multilevel storage technology and various architectural, circuit
design and other techniques. The Company currently has eleven patents granted
(including one patent that was acquired), fifteen patents pending and one patent
application in preparation in the United States, and intends to seek further
United States patents on its technology. The Company's already issued U.S.
patents expire between July 2008 and March 2013. The terms of the issued U.S.
patents and any U.S. patent issued in the future are subject to the Company's
making required annuity payments to the U.S. Patent and Trademark Office three
years and six months, seven years and six months, and eleven years and six
months after the respective issue dates of the patents. The Company has also
filed applications for fifty-seven patents in Europe, Japan and elsewhere, has
one European patent granted, and intends to seek further foreign patents.
Maintenance of the foreign applications and patents also depends upon the timely
payment of annuities in accordance with the applicable foreign requirements. The
Company has four United States mask work registrations and plans to apply for
additional such registrations. There can be no assurance that any patents held
by the Company will not be challenged and invalidated, that patents will issue
from any of the Company's pending applications or that any claims allowed from
existing or pending patents will be of sufficient scope or strength or be issued
in all countries where the Company's products can be sold to provide meaningful
protection or any commercial advantage to the Company. Competitors of the
Company also may be able to design around the Company's patents. In addition,
parties might have or obtain patents or other exclusive proprietary rights that
would potentially limit the number of possible customers for the Company's
products for certain applications. Any such limitations in the Company's
potential markets could have a material adverse effect on the Company's
business, financial condition and results of operations. Finally, the laws of
certain foreign countries in which the Company's products are or may be
developed, manufactured or sold, including various countries in Asia, may not
protect the Company's intellectual property rights to the same extent as do the
laws of the United States and thus make the possibility of piracy of the
Company's products more likely.
The Company owns three trademarks registered in the United States and has
eight additional United States applications pending. The Company attempts to
protect its circuit designs, software, trade secrets, and other proprietary
<PAGE>
information through copyright protection, agreements with customers and
suppliers, proprietary agreements with employees and other security measures.
While no intellectual property right of the Company has been invalidated or
declared unenforceable, there can be no assurance that such rights will be
upheld in the future.
The Company encourages its major customers to display the ChipCorder logo on,
and include ChipCorder promotional materials with, their products through
trademark licenses. The Company has entered into a licensing agreement with
Medtronic, Inc. ("Medtronic"), under which Medtronic has an exclusive license to
use the Company's technology in certain medical devices. In connection with the
increase in capacity at Samsung, the Company granted Samsung the right to use
the Company's technology in certain end-user products distributed by Samsung.
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights or positions, which have resulted in significant
and often protracted and expensive litigation. The only intellectual property
litigation currently pending against the Company is the Atmel litigation
described in "Legal Proceedings" below. However, the Company or its foundries
may from time to time be notified of additional claims that it may be infringing
patents or other intellectual property rights owned by other third parties. If
it is necessary or desirable, the Company may seek licenses under such patents
or intellectual property rights. However, there can be no assurance that
licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license from a third party
for technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture or shipment of products or the use by
the Company's foundries of processes requiring the technology. Furthermore, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation, either as plaintiff or defendant,
could result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel, whether or not such litigation is
determined in favor of the Company. In the event of an adverse result in any
such litigation, the Company could be required to pay substantial damages, cease
the manufacture, use and sale of infringing products, expend significant
resources to develop or acquire non-infringing technology, discontinue the use
of certain processes or obtain licenses to the infringing technology. There can
be no assurance that the Company would be successful in such development or
acquisition or that such licenses would be available under reasonable terms, and
any such development, acquisition or license could require expenditures by the
Company of substantial time and other resources.
Competition
The markets in which the Company competes are characterized by rapid
technological change, declining average selling prices and product obsolescence.
Although the Company believes that it currently faces no direct competition in
direct analog storage, a variety of digital approaches, including DSP and ADPCM,
compete with certain of the Company's products for certain applications. These
digital approaches include products from Oki Semiconductor, United
Microelectronics Corporation, Toshiba Semiconductor, NEC Technologies, Inc., DSP
Group, Inc. and Winbond Electronics Corporation. Many of the Company's customers
may be purchasing products from both the Company and the Company's competitors.
The Company expects competition to increase in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets with similar or substitute voice recording and playback
solutions, such as voice mail services, that may be less costly or provide
additional features. The Company's competitors include many large domestic and
international companies that have substantially greater financial, technical,
marketing and other resources, broader product lines and longer standing
relationships with customers than the Company, as well as emerging companies.
The Company believes that the principal competitive factors are product price,
quality, performance and availability. The Company believes that it competes
favorably with respect to these factors in the Company's targeted markets. The
Company believes that its competitive strengths include the cost advantage of
its single-chip solution and the features and benefits of ChipCorder devices.
The Company believes that the ability of the Company to compete successfully
in its targeted markets depends on a number of factors, which include success in
developing new products, adequate foundry capacity and sources of raw materials,
<PAGE>
efficiency of production, timing of new product introductions by the Company,
its customers and its competitors, the rate at which the Company's customers
design the Company's products into their products, the number and nature of the
Company's competitors in a given market, assertion of intellectual property
rights and general market and economic conditions. Although the Company believes
that it competes favorably on the basis of product cost and performance, there
can be no assurance that the Company will be able to compete successfully in the
future.
Employees
As of December 31, 1996, the Company had 134 full-time, 1 part-time and 16
contract/temporary employees. This included 65 employees in manufacturing, 24 in
finance and administration, 24 in sales and marketing, and 38 in research and
development. The Company's employees are not represented by a labor union and
are not covered by any collective bargaining agreement. The Company has never
experienced a work stoppage and believes its employee relations are good.
The Company's success depends to a significant degree upon the continued
contributions of members of its senior management and other key research and
development, sales, marketing and operations personnel. The Company does have
employment agreements with certain executive officers and key personnel as
described in Item 13. However, the loss of any of such persons could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, certain of the Company's key management
personnel have only recently become associated with the Company. The Company
believes that its future success will depend in large part upon its ability to
attract and retain highly skilled managerial, engineering, sales and marketing
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. The loss of any key employee, the failure of any key employee to
perform in his or her current position or the Company's inability to attract and
retain new qualified employees could have a material adverse effect on the
Company's business, financial condition and results of operations.
Item 2. PROPERTIES
The Company's principal facilities consist of approximately 40,000 square feet
of space located in adjacent buildings in a business park in San Jose,
California. This space is leased pursuant to an agreement that expires in
December 1999. The Company also maintains domestic sales offices in Mendon, New
York and Austin, Texas. The Company believes that its current space will be
adequate for at least the next 12 months.
Item 3. LEGAL PROCEEDINGS
In January 1995, Atmel Corporation ("Atmel") notified the Company and Samsung
Electronics Co., Ltd. ("Samsung") of certain claims and demanded that the
Company and Samsung either negotiate licenses with Atmel or cease manufacturing
the Company's products at Samsung. The Company received an opinion from its
patent counsel, Blakely, Sokoloff, Taylor & Zafman, that the Company does not
violate any of the patents identified in Atmel's notice to the Company, and the
Company believes the patent claims are without merit. The Company also believes
that the other claims in the notice from Atmel were without merit, and its
general counsel, on January 14, 1995, after reviewing with appropriate senior
and knowledgeable personnel at the Company the factual information surrounding
the other claims, provided a written response to Atmel that these claims were
without merit. Atmel, filed a complaint on June 15, 1995 in the United States
District Court for the Northern District of California which alleges causes of
action against the Company for patent infringement, trade secret
misappropriation, breach of written contract, breach of contract
implied-in-fact, unjust enrichment and declaratory relief. Atmel, in addition to
damages and injunctive relief, is seeking a declaration from the Court that
Atmel is a co-owner of the Company's ChipCorder products. All the causes of
action alleged in the complaint appear to be based on the same circumstances
alleged in the January 1995 Atmel notice. The Company believes the causes of
action in the complaint to be without merit and has had its general counsel file
an answer denying any wrongful conduct and asserting counterclaims for damage
caused the Company by Atmel's termination of the fabrication arrangement between
<PAGE>
the parties. While the Company does not believe the ultimate resolution of this
matter will have a material impact on its business or financial position, it may
have a material adverse impact on the results of operations in the period in
which it is resolved.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Not Applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.
The Company's common stock (Nasdaq symbol "ISDI") began trading publicly on
the Nasdaq National Market on February 9, 1995. Prior to that date, there was no
public market for the Company's common stock. The following table presents for
the period indicated the intraday high and low sale prices for the common stock
as reported by the Nasdaq National Market.
As of December 31, 1996, there were approximately 169 shareholders of record
of the Company's common stock. The Company has not paid cash dividends on its
common stock and presently intends to follow a policy of retaining any earnings
for reinvestment in its business.
<TABLE>
<CAPTION>
<S> <C> <C>
1996 High Low
- - -----------------------------------------------------------
First Quarter $12.875 $7.500
Second Quarter $12.375 $8.000
Third Quarter $ 9.875 $6.375
Fourth Quarter $ 7.625 $5.875
1995 High Low
- - ------------------------------------------------------------
First Quarter (from February 8, 1995) $28.000 $19.250
Second Quarter $29.125 $20.750
Third Quarter $27.500 $19.500
Fourth Quarter $26.000 $ 8.000
</TABLE>
<TABLE>
<CAPTION>
Item 6. SELECTED FINANCIAL DATA
<S> <C> <C> <C> <C> <C>
Years Ended December 31, 1992 1993 1994 1995 1996
- - -------------------------------------------------------------------------------
(Amounts in thousands,except per share amounts)
Statement of Operations Data:
Net revenues $5,232 $22,48 $38,80 $55,46 $41,339
Net income (loss) (3,049) 21 4,021 5,812 (8,971)
Net income (loss) per share $(2.87) $ 0.00 $0.63 $0.64 ($0.92)
Shares used in per share
computation 1,064 5,300 6,385 9,084 9,788
Balance Sheet Data:
Cash, cash equivalents and
short-term investments $445 $5,789 $7,605 $75,094 $55,544
Working capital (deficit) (237) 6,789 9,735 79,279 65,102
Total assets 3,165 13,691 22,268 105,430 78,865
Long-term liabilities 328 388 1,775 2,958 1,986
Total shareholders' equity 389 8,094 12,220 87,453 70,301
</TABLE>
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statements of operations
for each of the Company's last eight quarters. These statements reflect all
adjustments, consisting only of normal recurring adjustments, that are, in the
opinion of management, necessary for a fair presentation of the results of
operations for such interim periods, when read in conjunction with the audited
financial statements of the Company and notes thereto. These quarterly results
are not necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarters Ended
---------------------------------------------------------------
Apr1, Jul1, Sep30, Dec31, Mar30, Jun28, Sep28, Dec31,
1995 1995 1995 1995 1996 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
Net revenues.... $13,005 $14,234 $15,546 $12,682 $12,335 $11,183 $ 8,153 $ 9,668
Gross margin..... 4,717 5,361 6,308 5,245 2,907 4,029 (66) 2,195
Income (loss)from
operations...... 1,542 1,646 2,358 867 (3,822) (258) (5,348) (3,499)
Net income (loss) 1,089 1,324 1,719 1,681 (1,977) 191 (5,743) (1,442)
Net income (loss)
per share........ $0.14 $0.15 $0.19 $0.15 $(0.19) $0.02 $(0.60) $(0.15)
Shares used in
computing per
shares amounts.. 7,680 8,688 8,949 11,022 10,235 9,886 9,661 9,552
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION.
This report includes forward looking statements that involve a number of risks
and uncertainties. Actual results could differ materially from those discussed
in these statements. See "Other Factors That May Affect Operating Results" for a
discussion of such factors, among others, which could cause actual results to
differ materially.
RESULTS OF OPERATIONS
Net Revenues
The Company had net revenues of $41.3 in 1996 compared to $55.5 million for
1995, a decrease of 25%. Net revenues in 1995 increased 43% from $38.8 million
for 1994. The decrease in net revenues for 1996 reflects softness in the
consumer market for the Company's products throughout the entire year compared
to the strong demand experienced in the consumer market both in 1995 and in
1994. The consumer market accounted for about $9 million of net revenues in 1996
compared to about $25 million in 1995 and $16 million in 1994. The
communications market grew to about $30 million in 1996 compared to about $28
million in 1995 and $21 million in 1994. The growth in net revenues in both 1995
and 1994 reflected increased volume of ChipCorder products sold both into the
communications market and the consumer market. In 1996, volume continued to
increase in the communications market but decreased significantly in the
consumer market. The Company reduced prices on all existing ISD products during
the year (as explained in the `Gross Margin' section below). As the Company's
products mature, their average selling prices tend to decline.
Sales by market segment for 1996 were 72% communications, 21% consumer and 7%
industrial compared to 50% communications, 45% consumer and 5% industrial for
1995 and 54% communications, 42% consumer and 4% industrial for 1994. The
Company's communications customers in 1996 continued representing such products
as telephone answering machines, cellular phones, personal handy phones and
pagers. Products for consumer customers in 1996 consisted primarily of personal
memory recorders, cameras, photo frames, books, educational toys and novelties.
<PAGE>
Sales to the Company's top ten customers accounted for 85% of net revenues in
1996 compared to 66% in 1995 and 70% in 1994. The top five customers in 1996
were Motorola, Marubun (the Company's Japanese distributor), Sanyo, Yes
Entertainment and Sequoia (the Company's United Kingdom distributor), accounting
for 30%, 23%, 8%, 8%, and 5% of net revenues, respectively. The Company expects
that sales of its products to a limited number of customers will continue to
account for a substantial portion of its revenues for the foreseeable future.
The Company has also experienced significant changes in the composition of its
major customer base from year to year and expects this pattern to continue as
certain customers, particularly those that design and sell novelty products in
the consumer market, increase or decrease their purchases of the Company's
products as a result of fluctuations in market demand for such customer's
products. The loss of, or significant reduction in purchases by, current major
customers would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's customers typically
do not contract for minimum purchase quantities. There can be no assurance that
the Company will be able to continue to obtain the orders from new customers
necessary to offset any losses of or reductions in purchases by the Company's
current major customers.
Export sales for 1996 were 65% compared to 65% in 1995 and 58% in 1994.
Geographically, sales to Asia were 54% in 1996 compared to 58% in 1995 and 53%
in 1994, and sales to Europe increased to 12% in 1996 from 7% in 1995 and 5% in
1994. Japan accounted for 31% of total sales in 1996 versus 27% a year earlier
and 28% in 1994. North American sales were 35% in 1996, 35% in 1995, and 42% in
1994. The Company is subject to the risk of conducting business internationally,
including foreign government regulation and general geopolitical risks, such as
political and economic instability, potential hostilities, changes in diplomatic
and trade relationships, unexpected changes in, or imposition of, regulatory
requirements, tariffs, import and export restrictions and other barriers and
restrictions, potentially adverse tax consequences, the burdens of complying
with a variety of foreign laws and other factors beyond the Company's control.
As is common in the semiconductor industry, certain of the Company's sales are
made to distributors under agreements allowing certain rights of return and
price protection on unsold products. Accordingly, the Company defers recognition
of such sales until the product is sold by the distributor.
Gross Margin
Gross margin decreased to 22% in 1996 compared to 39% in 1995 and 33% in 1994.
The decrease in 1996 was caused by the reduction in average selling prices while
product costs were not reduced as originally planned because of the delay with
the conversion to the smaller and less costly 0.8 micron process. This
conversion had been planned for completion by the end of the first quarter of
1996, but, because of process difficulties, the conversion was delayed and not
completed until the beginning of the fourth quarter of 1996. The higher gross
margin realized in 1995 came as a result of reduced manufacturing costs, yield
improvements and the conversion to smaller (1.2 micron from 1.5 micron) geometry
processes for the majority of products shipped during that year. The Company
expects to continue to experience declines in its average selling prices, which
could adversely affect gross margins, particularly if higher yields and reduced
costs are not achieved. Additionally, the Company expects that it could
experience variations in gross margins as a result of shifts in product and
customer mix.
Research and Development
Research and development (R&D) expenses increased to $11.8 million in 1996
compared to $6.6 million in 1995 and $3.2 million in 1994. R&D expenditures as a
percent of net revenues were 28.6% in 1996 compared to 11.8% in 1995 and 8.3% in
1994. This increase in expenditures was caused by continued investment in the
development of new products and by costs associated with bringing up new
technologies and new foundries. The Company expects research and development
expenses to increase in absolute dollars.
There can be no assurance that new products will be successfully developed or
will achieve market acceptance. The success of new product introductions is
dependent on several factors, including recognition of market requirements,
product cost, timely completion or acquisition and introduction of new product
designs, quality of new products and achievement of acceptable manufacturing
yields from the Company's subcontractor manufacturers. Because of the design
complexity of its products, the Company has experienced delays from time to time
<PAGE>
in completing development and introduction of new products, and there can be no
assurance that the Company will not encounter such delays in the development and
introduction of future products. The failure of the Company's new product
development efforts or market acceptance of such products would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Selling, General and Administrative
Selling, general, and administrative expenses (SG&A) increased in 1996 to
$10.2 million from $8.7 million in 1995 and $5.2 million in 1994. SG&A expenses
as a percent of net revenues grew to 24.6% in 1996 compared to 15.6% in 1995 and
13.4% in 1994. The growth in SG&A expenses in 1996 came from the addition of
staff to marketing and sales as well as increased marketing investments,
including the cost of advertising, participation in trade shows, several direct
mailers, and additional sales collateral. The growth in SG&A expenses in 1995
came from additional legal, accounting and insurance expense incurred in the
first year as a public company, legal expenses incurred in connection with the
Atmel litigation matter, and increased commission expense corresponding to
increased revenue. The Company anticipates that SG&A expenses will continue to
increase in total expenses but will decrease as a percentage of net revenues.
Other Income (Expense)
Net interest and other income was $2.4 million for 1996 compared to $1.8
million for 1995, and net interest and other expense of $91,000 in 1994. The
interest income in 1996 and 1995 was earned primarily from the investment of the
proceeds from the initial public offering in February 1995 and the follow-on
offering in September 1995.
Provision for Income Taxes
For fiscal 1996, the Company recorded a tax benefit of $1.5 million,
reflecting the carryback of 1996 losses to prior years. The Company's effective
tax rate was 29% and 3% for 1995 and 1994, respectively. The provision for 1995
and 1994 reflects the utilization of federal and state net operating loss
("NOL") and tax credit carryforwards.
At December 31, 1996, the Company had established a valuation allowance
against their gross deferred tax asset of $4,156,000. The valuation allowance
was established due to the Company's limited history of profitability,
limitations on the utilization of NOL carryforwards, which are restricted in use
under the Internal Revenue Code of 1986 (see Note 7 of Notes to Financial
Statements) and uncertainties regarding future operations due to the increased
competition within the Company's industry.
LIQUIDITY AND CAPITAL RESOURCES
In February 1995, the Company received net proceeds of approximately $23
million in its initial public offering and, in September 1995, the Company
received net proceeds of approximately $44 million in a follow-on public common
stock offering. 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 December 31, 1996, the Company's borrowing base was
approximately $13.9 million and there were no borrowings outstanding under this
line of credit.
The Company's operating activities used net cash of $11.2 million in 1996 and
provided net cash of $4.6 million in 1995 and $4.0 million 1994. Net cash used
for operations in 1996 was primarily the result of the Company's loss for the
year. In 1995 and 1994 the cash provided by operations was primarily the result
of the Company's net income in each of those years. Cash provided by investing
activities was $14.2 million in 1996 compared to cash used of $51.2 million and
$1.3 million in 1995 and 1994, respectively. In 1996 and 1995, investing
activities consisted principally of the purchase and maturity of investments.
Cash used for financing activities was $10.3 million in 1996 and $.9 million in
1994. Financing activities in 1996 primarily consisted of the repurchase of
common stock. Cash provided by financing activities was $68.3 million in 1995,
primarily resulting from the sale of common and preferred stock.
<PAGE>
In January 1996, the Company's Board of Directors approved a stock repurchase
plan of up to one million shares of common shares. In addition, in July 1996,
the Board of Directors approved a stock repurchase plan of an additional 100,000
shares of common stock. As of December 31, 1996 the Company had repurchased
1,077,000 shares at an average price of $9.02 per share.
At December 31, 1996, the Company had cash, cash equivalents, and short-term
investments of $55.5 million and working capital of $65.1 million. The Company
believes cash generated from operations, 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 for at least the next 12 months. From time to
time, the Company has evaluated and will continue to evaluate possible business
acquisitions.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This report includes forward looking statements that involve a number of risks
and uncertainties. The Company's operating results are subject to quarterly and
annual fluctuations due to a variety of factors. The following includes a
discussion of factors that, among other factors, could cause actual results to
differ materially. All of the Company's products are manufactured by two
independent foundries. The Company's primary supplier is currently Samsung
Electronics Co., Ltd. ("Samsung") in Korea. The Company also uses Sanyo Electric
Co., Ltd. ("Sanyo") to manufacture a customized product using the process
technology of Atmel Corporation ("Atmel"). Sanyo purchases all of its production
of this product for its own use or for distribution to its customers. 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
high quality with acceptable manufacturing yields and to deliver products to the
Company on time. On occasion, the Company has experienced difficulties in each
of these areas, and the Company is likely to experience such difficulties in the
future. The Company has qualified another foundry supplier, ROHM Co., Ltd. and
is in the process of finalizing the design for the first product. However, there
can be no assurance that the Company will receive its desired allocation of
product at these foundries or that additional needed foundry capacity will be
qualified. The loss of Sanyo or Samsung as a supplier, the inability of the
Company to maintain or expand foundry capacity from its current suppliers or to
qualify other wafer manufacturers so the Company can obtain additional foundry
capacity, any inability to obtain timely and adequate deliveries from the
Company's current or future suppliers or any other circumstance that would
require the Company to seek alternative sources of supply could constrain,
interrupt or delay shipments of the Company's products and have a material
adverse effect on the Company's business and results of operations. The
Company's reliance on third party manufacturers also involves a number of
additional risks, including but not limited to reduced control over delivery
schedules, quality assurance and costs.
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights or positions, which have resulted in significant
and often protracted and expensive litigation. On June 15, 1995, Atmel filed a
complaint in the United States District Court for the Northern District of
California which alleges causes of action against the Company for patent
infringement, trade secret misappropriation, breach of written contract, breach
of contract implied-in-fact, unjust enrichment and declaratory relief. Atmel, in
addition to damages and injunctive relief, is seeking a declaration from the
Court that Atmel is a co-owner of the Company's ChipCorder products. In January
1995, Atmel notified the Company and Samsung of certain claims and demanded that
the Company and Samsung either negotiate licenses with Atmel or cease
manufacturing ChipCorder products at Samsung. Prior to its February 1995 initial
public offering, the Company received an opinion from its patent counsel that
the Company does not violate any of the patents identified in Atmel's notice to
the Company, and the Company believes the patent claims are without merit. The
Company also believes that the other claims in the notice from Atmel were
without merit, and its general counsel, on January 14, 1995, after reviewing
with appropriate senior and knowledgeable personnel at the Company the factual
information surrounding the other claims, provided, a written response to Atmel
that these claims were without merit. All the causes of action alleged in the
complaint appear to be based on the same circumstances alleged in the January
<PAGE>
1995 Atmel notice. The Company believes the causes of action in the complaint to
be without merit and has had its general counsel file an answer denying any
wrongful conduct and asserting counterclaims for damage caused the Company by
Atmel's termination of the fabrication arrangement between the parties. While
the Company does not believe the ultimate resolution of this matter will have a
material impact on its business or financial position, it may have a material
adverse impact on the results of operations in the period in which it is
resolved.
The fabrication of ICs is a highly complex and precise process, requiring
production in a highly controlled, clean environment. As a result, the Company
has experienced problems in achieving an acceptable wafer manufacturing yield
(the number of good die per wafer). The Company is particularly susceptible to
yield problems because it is not in direct control of the independent offshore
foundries that manufacture its products, which increases the effort and time
required to identify, communicate and resolve manufacturing yield problems. In
addition, in order to reduce future manufacturing costs and remain competitive,
the Company is continually designing smaller die sizes with smaller geometry
processes to increase the number of die produced on each wafer. Problems with
future transitions of this type could cause disruptions in the manufacturing
flow and reduce manufacturing yields. The inability of the Company to achieve
improved yields could prevent revenue growth from existing capacity and could
delay margin improvements. There can be no assurance that the Company's
foundries will achieve or maintain acceptable manufacturing yields in the future
or that sudden declines in yields will not again occur. Failures to improve, or
fluctuations in, manufacturing yields, 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 business and results of
operations.
The Company's success depends to a significant extent upon the development of
new applications for voice recording and playback in the consumer,
communications and industrial markets. For example, Motorola uses one of the
Company's products to add a record and playback feature to its MicroTAC Elite
cellular phones. If the market for MicroTAC Elite phones fails to develop as
expected, the Company's sales would be negatively impacted. Furthermore, the
Company expects that it may sell many of its new products, including products
with longer recording durations now under development, to customers that are
developing new product applications and markets. Accordingly, the success of the
Company will depend upon the success of its customers in developing such
applications and markets. There can be no assurance that new applications or
markets will develop as expected by the Company or that prospective customers
developing products for any such markets will design the Company's products into
their products and successfully introduce such products. The failure of new
applications or markets to develop or the failure of new markets to be receptive
to the Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations.
The willingness of prospective customers to design the Company's products into
their products depends to a significant extent upon the ability of the Company
to price its products at a level that is cost effective for such customers. The
markets for most of the potential applications for the Company's products,
particularly the consumer market, are characterized by intense price
competition. As the markets for the Company's products develop and competition
increases, the Company anticipates that its average selling prices on these
products will continue to decline, particularly as product technology matures
and if per order unit volumes for such products increase. These and other
downward pressures on the Company's average selling prices will require the
Company to seek sales in emerging markets where average selling prices may be
higher and to produce its products at lower cost if it is to avoid significant
degradation in its gross margins. To the extent that the Company fails to
facilitate its customers' opening of new markets, 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 business, financial condition and results of
operations.
The Company relies on a combination of patents, mask work protection,
trademarks, copyright and trade secret laws, confidentiality procedures and
licensing arrangements to protect its intellectual property rights. There can be
no assurance that any patents held by the Company will not be challenged and
invalidated, that patents will issue from any of the Company's pending
applications or that any claims allowed from existing or pending patents will be
of sufficient scope or strength or be issued in all countries where the
Company's products can be sold to provide meaningful protection or any
commercial advantage to the Company. Competitors of the Company also may be able
<PAGE>
to design around the Company's patents. In addition, parties might have or
obtain patents or other exclusive proprietary rights that would potentially
limit the number of possible customers for the Company's products for certain
applications. Any such limitations in the Company's potential markets could have
a material adverse effect on the Company's business and results of operations.
Finally, the laws of certain foreign countries in which the Company's products
are or may be developed, manufactured or sold, including various countries in
Asia, may not protect the Company's intellectual property rights to the same
extent as do the laws of the United States and thus make the possibility of
piracy of the Company's products more likely.
All of the above factors are difficult to forecast, and these or other factors
can materially affect the Company's quarterly or annual operating results. No
assurance can be given that the Company will be able to achieve or maintain
profitability on a quarterly or annual basis in the future. Due to all of the
foregoing factors, it is possible that in some future quarter the Company's
operating results will be below the expectations of stock market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
December 31,
--------------
1996 1995
Current assets:
Cash and cash equivalents....... $21,927 $29,202
Short-term investments.......... 33,617 45,892
Accounts receivable, net of
allowance for doubtful
accounts of $600 and $275,
respectively.................. 3,203 7,554
Inventories..................... 10,059 9,809
Prepaid expences and other
current assets................ 2,874 1,841
----- ------
Total current assets.... 71,680 94,298
------ ------
Property and equipment, at cost:
Furniture, fixtures and leasehold
improvements.................. 796 563
Equipment....................... 11,063 8,325
------ ------
11,859 8,888
Less -- Accumulated depreciation (6,024) (3,644)
------- ------
Net property and equipment 5,835 5,244
------- ------
Other assets, net................. 1,200 1,355
Long-term investments............. 150 4,533
======= ======
$78,865 $105,430
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized
lease obligations.............. $1,270 $1,089
Accounts payable................ 3,153 9,784
Accrued liabilities............. 856 2,312
Deferred revenue................ 1,299 1,834
------ ------
Total current liabilities 6,578 15,019
------ ------
Long-term liabilities:
Capitalized lease obligations,
net of current portion......... 1,814 2,630
Other long-term liabilities..... 172 328
------ ------
Total long-term
liabilities............ 1,986 2,958
------ ------
Commitments and contingencies (Note 5)
Shareholders' equity:
Preferred stock, no par value -
Authorized -- 5,000,000 shares
Outstanding -- no shares..... --- ---
Common stock, no par value-
Authorized -- 22,000,000 shares
Outstanding -- 9,564,875 and
10,424,470 shares, respectively 78,261 86,256
Deferred compensation........... (332) (116)
Retained earnings (deficit)..... (7,658) 1,313
Unrealized gain on investments.. 30 --
------ ------
Total shareholders' equity 70,301 87,453
------ ------
$78,865 $105,430
======= =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended December 31,
-------------------------
1996 1995 1994
---- ---- ----
Net revenues................... $41,339 $55,467 $38,805
Cost of revenues............... 32,274 33,836 26,107
------ ------ ------
Gross margin................... 9,065 21,631 12,698
------ ------ ------
Operating expenses:
Research and development...... 11,817 6,550 3,234
Sales, general and administrative 10,175 8,668 5,212
------ ------ ------
Total operating expenses. 21,992 15,218 8,446
------ ------ ------
Income (loss) from operations... (12,927) 6,413 4,252
-------- ------ ------
Other income (expense):
Interest expense............... (473) (536) (278)
Interest income............... 2,901 2,340 188
Other, net.................... (14) (2) (1)
------- ------ ------
Total other income
(expense), net.......... 2,414 1,802 (91)
------- ------ ------
Income (loss) before provision
(benefit) for income taxes..... (10,513) 8,215 4,161
Provision (benefit) for income
taxes.......................... (1,542) 2,403 140
-------- ------ ------
Net income (loss)............... ($8,971) $5,812 $4,021
======== ====== ======
Net income (loss) per share..... ($0.92) $0.64 $0.63
======== ====== ======
Shares used in computing per
share amounts.................. 9,788 9,084 6,385
======== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retained
Convertible Deferred Earnings Unrealized Total
Preferred Stock Common Stock Compen- (Accumulated Gain on Shareholders'
Shares Amount Shares Amount sation Deficit) Investments Equity
------ ------ ------ ------ ------ -------- ----------- ------
Balance, December 31, 1993.... 13,773,826 $16,369 1,083,172 $ 245 $ -- $(8,520) $ -- $ 8,094
Common stock issued at in
exchange for services
rendered.................... -- (15) 2,500 25 -- -- -- 10
Common stock issued at as
employee stock awards....... -- -- 3,250 29 -- -- -- 29
Sale of common stock pursuant
stock option exercises for
cash at..................... -- -- 148,915 51 -- -- -- 51
Deferred compensation related
to stock option grants...... -- -- -- 175 (175) -- -- --
Amortization of deferred
compensation related to stock
option grants............... -- -- -- -- 15 -- -- 15
Net income................... -- -- -- -- -- 4,021 -- 4,021
------- ----- ------- ----- ---- ------ ----- --------
Balance, December 31, 1994.... 13,773,826 16,354 1,237,837 525 (160) (4,499) -- 12,220
Preferred stock converted to
common stock at a 3 to 1
conversion rate upon
initial public offering.....(13,773,826) (16,354) 4,591,240 16,354 -- -- -- --
Common stock issued for cash
upon initial public offering
and exercise of underwriters'
overallotment option, net of
issuance costs.............. -- -- 1,725,944 23,086 -- -- -- 23,086
Common stock issued for cash
upon exercise of stock
warrants.................... -- -- 249,169 591 -- -- -- 591
Common stock issued under the
employee stock purchse plan. -- -- 5,895 108 -- -- -- 108
Common stock issued upon
secondary public offering and
exercise of underwriter's
overallotment option, net of
issuance costs.............. -- -- 2,407,781 45,190 -- -- -- 45,190
Sale of common stock pursuant
to stock option exercises
for cash.................... -- -- 206,604 402 -- -- -- 402
Amortization of deferred
compensation related to stock
option grants............... -- -- -- -- 44 -- -- 44
Net income................... -- -- -- -- -- 5,812 -- 5,812
------- ----- ------- ----- ---- ------ ----- --------
Balance, December 31, 1995.... -- -- 10,424,470 86,256 (116) 1,313 -- 87,453
Common stock issued under the
employee stock purchase plan -- -- 43,212 369 -- -- -- 369
Common stock repurchased..... -- -- (1,077,000) (9,711) -- -- -- (9,711)
Sale of common stock pursuant
to stock option exercises
for cash.................... -- -- 174,193 144 -- -- -- 144
Deferred compensation related
to stock option grants -- -- -- 452 (452) -- -- --
Amortization of deferred
compensation related to
stock option grants......... -- -- -- -- 236 -- -- 236
Tax benefit related to
exercise of stock options... -- -- -- 751 -- -- -- 751
Unrealized gain on
investments................. -- -- -- -- -- -- 30 30
Net loss..................... -- -- -- -- -- (8,971) -- (8,971)
======= ===== ========= ======= ====== ======== ===== ========
Balance, December 31, 1996 -- $ -- 9,564,875 $78,261 $(332) $(7,658) $30 $70,301
======= ===== ========= ======= ====== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
(In thousands)
<S> <C> <C> <C>
Years Ended December 31,
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss)................................ ($8,971) $5,812 $4,021
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities -- Depreciation and amortization..... 2,537 1,971 918
Amortization of investment discount.............. 39 (600) --
Compensation costs related to stock and stock
option grants................................... 235 44 45
Common stock issued for services rendered........ -- -- 25
Provision for allowance for doubtful accounts
and returns..................................... 325 210 --
Changes in assets and liabilities --
Accounts receivable............................. 4,026 (2,053) (2,003)
Inventories..................................... (249) (6,042) (1,391)
Prepaid expenses and other assets............... (1,079) (1,521) (142)
Accounts payable................................ (6,630) 4,732 798
Accrued liabilities............................. (705) 410 1,173
Deferred revenue................................ (535) 1,289 545
Other long-term liabilities..................... (156) 307 21
------ ------- -------
Net cash provided by (used for) operating
activities.................................... (11,163) 4,559 4,010
-------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment............... (2,479) (1,296) (1,058)
Patent costs..................................... (174) (95) (565)
Purchases of investments......................... (71,233) (75,749) --
Proceeds from maturities and sale of investments. 88,099 25,924 --
Proceeds from sale of property and equipment..... -- -- 308
-------- ------- -------
Net cash provided by (used for) investing
activities.................................... 14,213 (51,216) (1,315)
-------- -------- -------
Cash flows from financing activities:
Proceeds from sale of common stock, net of
issuance costs.................................. 514 69,377 51
Repurchase of common stock....................... (9,712) -- --
Payments on capitalized lease obligations........ (1,127) (1,123) (602)
Payment of stock issuance costs.................. -- -- (328)
-------- ------- -------
Net cash proviced by (used for) financing
activities.................................... (10,325) 68,254 (879)
-------- ------- -------
Net increase in cash and cash equivalents......... (7,275) 21,597 1,816
Cash and cash equivalents at beginning of year.... 29,202 7,605 5,789
======== ======= =======
Cash and cash equivalents at end of year.......... $21,927 $29,202 $7,605
======== ======= =======
Supplemental cash flow information:
Cash paid for interest........................... $472 $536 $278
======== ======= =======
Cash paid for income taxes....................... $ -- $3,203 $3,203
======== ======= =======
Property and equipment acquired under capital
leases.......................................... $491 $2,314 $2,274
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1....ORGANIZATION AND OPERATIONS:
ISD designs, develops and markets single-chip integrated circuit ("IC")
products for voice recording and playback using the Company's proprietary
ChipCorder(R) high-density storage technology and its mixed signal (analog and
digital) expertise. The Company directs its marketing and product development
efforts toward products for the communications, consumer and industrial markets.
The Company distributes its products through a direct sales and marketing
organization and a worldwide network of sales representatives and distributors.
2....SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. Such investments consisted of
municipal bonds, commercial paper, bankers' acceptance notes and certificates of
deposit.
Short-term and Long-term Investments
At December 31, 1996, approximately $27,685,000 of the Company's investments
in debt securities were classified as available-for-sale, carried at fair value
and had contractual maturities ranging from one month to two years from the date
of purchase by the Company. Approximately $24,828,000 million of the Company's
investments were classified as held-to-maturity, carried at amortized cost and
had contractual maturities of less than one year beyond December 31, 1996. At
December 31, 1996, for all of the Company's investments, the fair value of the
investments approximated amortized cost and, as such, unrealized holding gains
and losses were insignificant. The fair value of the Company's investments was
determined based on quoted market prices at the reporting date for those
instruments. The carrying value of the Company's investments by major security
type at December 31, 1996 and December 31, 1995, is as follows (in thousands):
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Available-for-Sale Securities: 1996 1995
------------------------------ ---- ----
Government bonds........................... $9,012 $ --
Certificates of deposit.................... 4,511 --
Commercial paper........................... 9,378 --
Bankers' acceptance notes.................. 992 --
Corporate debt securities.................. 3,792 --
Municipal debt securities.................. -- 16,130
------ ------
Total available-for-sale securities... 27,685 16,130
------ ------
Held-to-Maturity Securities:
----------------------------
Commercial paper........................... 22,473 43,356
Bankers' acceptance notes.................. -- 7,971
Corporate debt securities.................. -- 1,010
Municipal debt securities.................. 2,355 7,620
------ ------
Total held-to-maturity securities..... 24,828 59,957
====== ======
Total investments in debt securities....... $52,513 $76,087
</TABLE>
====== ======
Approximately $18,896,000 and $25,662,000 of the total investment in debt
securities is included in cash equivalents on the accompanying balance sheets as
of December 31, 1996 and 1995, respectively; the remainder is classified as
either short-term or long-term investments.
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>
<S> <C> <C>
December 31,
------------
1996 1995
---- ----
Work-in-process........ $6,157 $5,706
Finished goods......... 3,902 4,103
----- -----
$10,059 $9,809
------- ------
</TABLE>
Property and Equipment
Depreciation is provided on property and equipment using the straight-line
method over the estimated useful lives of the assets of three (3) to seven (7)
years. Leasehold improvements are amortized over the useful lives of the
improvements or lease term, whichever is shorter. Betterments, renewals and
extraordinary repairs that extend the life of the asset are capitalized; other
repairs and maintenance are expensed. The cost and accumulated depreciation
applicable to assets retired are removed from the accounts and the gain or loss
on disposition recognized in income.
Patent Costs
Legal costs incurred in connection with filing the Company's patent claims are
recorded as patent costs. Upon receiving a determination that the Company's
claims have been approved or denied, these costs are either amortized over their
estimated useful lives or expensed.
<PAGE>
Revenue Recognition
Revenues from product sales are generally recognized at the time of shipment
to the customer, with provisions for estimated returns and allowances. Returns
and allowances have not been significant to date. Certain of the Company's sales
are made to distributors under agreements allowing certain rights of return and
price protection on unsold merchandise. Accordingly, the Company defers
recognition of such sales until the merchandise is sold by the distributor. The
deferral of such sales is included in deferred revenue. Amounts billed to the
distributor upon shipment by the Company are included in accounts receivable.
Warranty Costs
Anticipated costs related to product warranties are charged to expense as
sales are recognized. The Company has not experienced significant warranty
claims to date.
Concentrations of Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash investments and trade receivables.
The Company has cash investment policies that limit cash investments to low risk
investments. With respect to trade receivables, the Company performs ongoing
credit evaluations of its customers' financial condition and requires letters of
credit whenever deemed necessary. Additionally, the Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information.
The Company currently buys approximately 90% of its products from one foundry.
Although there are a limited number of foundries available that could
manufacture the Company's products, management believes that other suppliers
could provide similar integrated circuits on comparable terms. A change in
suppliers, however, could cause a delay in manufacturing and a possible loss of
sales, which would affect operating results adversely.
Net Income (Loss) Per Share
Net income (loss) per share has been computed using the weighted average
number of shares of common stock, common equivalent shares from convertible
preferred stock (when dilutive using the if converted method at date of
issuance) and common equivalent shares from stock options and warrants
outstanding (when dilutive using the treasury stock method). Pursuant to certain
Securities and Exchange Commission Staff Accounting Bulletins, common and common
equivalent shares issued during the twelve-month period prior to the Company's
initial public offering have been included in the calculation as if they were
outstanding for all periods prior to and including the quarter in which the
offering was completed (even if antidilutive using the treasury stock method).
Net loss per share data has been computed using the weighted average number of
shares outstanding during each period; dilutive common stock equivalents have
been excluded from the computation as their effect would be to reduce the net
loss per share amount.
Reclassifications
Certain items from prior year financial statements have been reclassified to
conform with the current year presentation.
3....LINE OF CREDIT:
In June 1996, the Company entered into a revolving line of credit agreement
with a bank under which it can borrow up to $24,000,000 based on eligible
accounts receivable and eligible investments. The line of credit is secured by
substantially all of the Company's assets, bears interest at LIBOR plus 1.75%
<PAGE>
(7.5% at December 31, 1996) for borrowings based on eligible accounts receivable
and at LIBOR plus 1.5% (7.3% at December 31, 1996) for borrowings based on
eligible investments and expires on June 30, 1997. At December 31, 1996, there
were no borrowings outstanding under the line of credit and the Company's
borrowing base was approximately $13,924,000.
4....CAPITALIZED LEASE OBLIGATIONS:
The Company leases certain equipment under capital lease agreements. The cost
of equipment under capital leases included in property and equipment at December
31, 1996 and December 31, 1995 was approximately $6,640,000 and $6,133,000,
respectively. Accumulated amortization of leased equipment at such dates was
approximately $3,955,000 and $2,670,000, respectively. Future minimum lease
payments together with the present value of the payments, as of December 31,
1996, are as follows (in thousands):
Years Ending December 31,
-------------------------
<TABLE>
<CAPTION>
<S> <C>
1997.................................................. $1,575
1998.................................................. 1,500
1999.................................................. 399
2000.................................................. 74
--
Total minimum lease payments.......................... 3,548
Less -- Amount representing interest (9.4% - 14.6%)... (464)
-----
Present value of minimum lease payments............... 3,084
Less -- Current portion............................... (1,270)
-------
Long-term portion..................................... $1,814
=======
</TABLE>
5....COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases its current facilities and certain equipment under
operating leases that expire at various dates through fiscal 2000. Future
minimum annual rental payments under operating leases are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Year Ending December 31,
------------------------
1997.................................... $1,064 873
1998.................................... 873
1999.................................... 719
2000.................................... 6
------
$2,662
======
</TABLE>
During the years ended December 31, 1996, 1995 and 1994, rent expense totaled
approximately $1,380,000, $807,000 and $172,000, respectively.
Litigation
In January 1995, Atmel Corporation ("Atmel") notified the Company and Samsung
Electronics Co., Ltd. ("Samsung") of certain claims and demanded that the
Company and Samsung either negotiate licenses with Atmel or cease manufacturing
the Company's products at Samsung. The Company received an opinion from its
patent counsel, Blakely, Sokoloff, Taylor & Zafman, that the Company does not
violate any of the patents identified in Atmel's notice to the Company, and the
Company believes the patent claims are without merit. The Company also believes
that the other claims in the notice from Atmel are without merit, and its
general counsel, on January 14, 1995, after reviewing with appropriate senior
and knowledgeable personnel at the Company the factual information surrounding
the other claims, provided a written response to Atmel that these claims were
without merit. Atmel, filed a complaint on June 15, 1995 in the United States
District Court for the Northern District of California which alleges causes of
action against the Company for patent infringement, trade secret
misappropriation, breach of written contract, breach of contract
<PAGE>
implied-in-fact, unjust enrichment and declaratory relief. Atmel, in addition to
damages and injunctive relief, is seeking a declaration from the Court that
Atmel is a co-owner of the Company's ChipCorder products. All the causes of
action alleged in the complaint appear to be based on the same circumstances
alleged in the January 1995 Atmel notice. The Company believes the causes of
action in the complaint to be without merit and has had its general counsel file
an answer denying any wrongful conduct and asserting counterclaims for damage
caused the Company by Atmel's termination of the fabrication arrangement between
the parties. While the Company does not believe the ultimate resolution of this
matter will have a material impact on its business or financial position, it may
have a material adverse impact on the results of operations in the period in
which it is resolved.
6....EQUITY:
In November 1994, the Company effected a one-for-three reverse split of its
common stock. All common share and per share amounts in the accompanying
financial statements have been adjusted retroactively to give effect to this
reverse stock split.
In February 1995, the Company sold 1,725,944 shares of common stock in its
initial public offering and simultaneously converted 13,773,826 shares of
preferred stock into 4,591,240 shares of common stock as part of the offering.
Net proceeds from the offering were approximately $23,086,000. In September
1995, the Company sold 2,407,781 shares of common stock in a follow-on offering.
Net proceeds to the Company were approximately $45,190,000.
In January 1996, the Company's Board of Directors approved a stock repurchase
plan of up to one million shares of common shares. In addition, in July 1996,
the Board of Directors approved a stock repurchase plan of an additional 100,000
shares of common stock. As of December 31, 1996 the Company had repurchased
1,077,000 shares at an average price of $9.02 per share.
Shares Reserved for Future Issuance
As of December 31, 1996, the Company had reserved shares of its common stock
for the following purposes:
<TABLE>
<CAPTION>
<S> <C>
1987 Stock Option Plan.............. 208,453
1994 Employee Stock Purchase Plan... 70,893
1994 Equity Incentive Plan.......... 2,080,481
1994 Directors Stock Option Plan.... 120,000
Nonqualified stock options.......... 42,500
=========
2,522,327
=========
</TABLE>
Employee Stock Purchase Plan
In September 1994, the Company approved the Employee Stock Purchase Plan. The
plan reserved up to 120,000 shares of common stock for sale to eligible
employees at 85% of the lesser of the fair market value of the shares on the
first day of the offering period or the last day of the offering period.
Offerings under this plan commence on February 1 and August 1 of each year and
end on July 31 and January 31, respectively. As of December 31, 1996, 49,107
shares have been issued under this plan. The weighted average fair value of
shares sold in 1996 was $7.791.
Stock Option Plans
In December 1987, the Company adopted the 1987 Stock Option Plan (the "1987
Plan"). The 1987 Plan was terminated as to new issuances in February 1995.
Options granted under the 1987 Plan have a term of five years and vest over a
vesting schedule determined by the Board of Directors, generally four years.
Options to purchase 208,453 shares were outstanding under this plan at December
31, 1996.
In September 1994, the Company adopted the 1994 Equity Incentive Plan (the
"1994 Plan"), which became effective upon the closing of the Company's initial
public offering in February 1995 and serves as the successor to the 1987 Plan.
The Company has reserved 2,000,000 shares for issuance under the terms of the
<PAGE>
1994 Plan, and may grant stock options, stock bonuses or issue restricted stock
to employees, officers, directors and consultants. Nonqualified options granted
under this plan have a term of ten years and must be issued at a price equal to
at least 85% of the fair market value of the Company's common stock at the date
of grant. Incentive stock options granted under this plan may be granted only to
employees of the Company, may have a term of up to ten years, and must be issued
at a price equal to the fair market value of the Company's common stock at the
date of grant. Restricted stock may be awarded to eligible personnel as
determined by the Board of Directors, and must be issued at a price equal to at
least 85% of the fair market value of the shares granted. Stock bonuses may be
awarded for services rendered to the Company under such terms as are established
by the Board of Directors.
In September 1994, the Company approved the 1994 Directors Stock Option Plan.
The Company reserved 120,000 shares of its common stock for issuance to
directors under this plan. This plan was amended effective March 21, 1996, the
"Amendment Effective Date", as per the annual shareholder meeting. Any option
grant, granted prior to January 1, 1996, will fully vest as to twenty-five
percent (25%) of the shares at the end of each full year following the grant
date, so long as the optionee continuously remains a director of the Company.
Any option grant, granted following the Amendment Effective Date, will vest
ratably at the end of each of the twelve months following the grant date and
will be fully vested on the first anniversary of the grant date, so long as the
optionee continuously remains a director of the Company until each such first
anniversary. Any option grant made during 1996 prior to the Amendment Effective
Date became fully vested on December 31, 1996.
During 1996, holders of options to purchase 1,368,639 shares of the Company's
common stock at exercise prices of $7.50 to $15.00 per share were given the
opportunity to exchange previously granted stock options for new common stock
options exercisable at $6.875 per share, the fair market value of the common
stock on the date of the exchange. Options to purchase 1,123,621 shares were
exchanged.
Included in the options granted during 1994 were options granted in August
1994 and September 1994 to purchase 58,433 shares of common stock at $3.00 per
share under the 1987 Plan. The Company recorded deferred compensation of
approximately $175,000 for the difference between the option price of these
options and $6.00 (fair market value of the common stock at the date of grant
for financial reporting purposes). The Company is expensing the deferred
compensation ratably over the related vesting periods.
Also included in the options granted during 1996 were options granted in March
1996 to purchase 113,146 shares under the 1994 Plan that were granted below fair
market value. The Company recorded deferred compensation of approximately
$452,000 for the difference between the option price and fair market value of
common stock on the date of grant. The Company is expensing the deferred
compensation over the related vesting periods.
The Company accounts for the above plans under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation", the Company's net income (loss) and net income (loss) per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
<S> <C> <C>
December 31,
------------
1996 1995
---- ----
Net Income (loss):
As reported $(8,971) $5,812
Pro forma (12,558) $4,939
Net Income (loss) per share:
As reported $ (0.92) $ 0.64
Pro forma $ (1.28) $ 0.54
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
A summary of the Company's option plans at December 31, 1996, 1995 and 1994
and changes during the years then ended is presented below:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 1,406,133 $ 8.98 634,897 $ 1.56 619,651 $ .56
Granted 2,465,998 7.51 1,450,519 12.78 181,319 4.20
Exercised (174,193) 1.00 (207,199) 1.84 (148,915) .32
Forfeited (1,645,993) 10.06 (472,084) 15.18 (17,158) .80
----------- --------- ---------
Outstanding at end of year 2,051,945 $ 6.74 1,406,133 $ 8.98 634,897 $1.56
=========== ========= =========
Exercisable at end of year 391,542 329,601 169,814
Weighted average fair value
of options granted $3.27 $4.13
Options available for grant 399,489 219,494 59,306
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------
Options Outstanding Options Exercisable
<S> <C> <C> <C> <C> <C>
-------------------------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
exercise years left exercise
Exercise Prices Number price to exercise Number price
---------------------------------------------------------------------------------------------------------
$ .38 - $ 3.00 198,435 $ 1.22 2.0 123,758 $ 1.12
6.00 - 8.50 1,730,782 6.94 9.3 196,135 7.60
9.00 - 10.50 82,728 9.45 4.8 55,507 9.17
15.00 - 25.25 40,000 19.40 7.4 16,142 18.89
--------- -------
$ .38 - $25.25 2,051,945 $ 6.74 8.4 391,542 $ 6.24
========= =======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: risk-free interest
rates of 6.45% and 5.57%; expected dividend yields of 0%; expected lives of 1.5
years; expected volatility of 47% and 82%.
Warrants
Holders of warrants to purchase a total of 328,981 shares of preferred stock
exercised such warrants in February 1995 on a net issuance basis for a total of
236,730 shares of preferred stock, which converted to 78,910 shares of common
stock upon the closing of the Company's initial public offering in February
1995. Additionally, holders of warrants to purchase 368,874 shares of preferred
stock (122,956 shares of common stock as converted) and 47,303 shares of common
stock exercised such warrants for cash prior to the closing of the Company's
initial public offering in February 1995. Net proceeds to the Company for such
exercises were approximately $591,000.
Shareholder Rights Plan
During December 1995, the Company adopted a Shareholder Rights Plan, and the
Plan became effective in March of 1996 following the filing of the Plan with the
Securities and Exchange Commission. The Shareholder Rights Plan provides that
there shall be declared a dividend of one preferred share purchase right (a
"Right") for each outstanding share of common stock. Under certain conditions,
each Right may be exercised to purchase one one-hundredth of a share of Series A
Preferred Stock at an exercise price of $75. The Rights will be exercisable if a
person or group has acquired beneficial ownership of 15% or more of the common
stock or has announced a tender offer or exchange offer that if consummated
would result in such a person or group owning 15% or more of the common stock.
The Company generally will be entitled to redeem the Rights at $.01 per Right at
any time prior to the earlier of (i) the tenth day following public announcement
that a 15% stock position has been acquired and (ii) the expiration date of the
Rights on December 28, 2005. <PAGE>
If any person or group becomes a beneficial owner of 15% or more of the common
stock (except pursuant to a tender or exchange offer for all shares at a price
determined as fair by a majority of the outside members of the Board of
Directors), each Right not owned by such 15% stockholder will enable its holder
to purchase such number of shares of common stock as is equal to the exercise
price of the Right divided by one-half of the current market price of the common
stock on the date of the occurrence of the event. In addition, if the Company
engages in a merger or other business combination with another person or group
in which it is not the surviving corporation or in connection with which its
common stock is changed or converted, or if the Company sells or transfers 50%
or more of its assets or earning power to another person, each Right that has
not previously been exercised will entitle its holder to purchase such number of
shares of common stock of such other person as is equal to the exercise price of
the Right divided by one-half of the current market price of such common stock
on the date of the occurrence of the event.
7. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended
December 31,
------------
1996 1995 1994
---- ---- ----
Current payable (benefit):
Federal............................................. $(2,314) $3,029 90
State............................................... (185) 331 50
------- ------ ----
Total current.............................. (2,499) 3,360 140
------- ------ ----
Deferred (benefit):
Federal............................................. 752 (629) --
State............................................... 205 (328) --
------ ----- ----
Total deferred............................. 957 (957) --
------ ----- ----
Total provision (benefit) for income taxes. $(1,542) $2,403 $140
======== ====== ====
</TABLE>
The provision (benefit) for income taxes differs from the amounts which would
result by applying the applicable statutory Federal income tax rate to income
(loss) before income taxes as follows (in thousands):
Years Ended
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 31,
------------
1996 1995 1994
---- ---- ----
Provision (benefit) computed at Federal statutory rate. $(3,680) $2,875 $1,456
State income taxes, net of Federal tax benefit......... (636) 497 114
Nondeductible expenses................................. 36 2 19
Tax credits............................................ -- (274) --
Change in valuation allowance.......................... 3,565 (1,205) (1,539)
Other.................................................. (827) 508 90
-------- ------- -------
Total provision, (benefit) for income taxes.. $(1,542) $2,403 $140
======== ======= =======
Effective tax rate............................ (15%) 29% 3%
======== ======= =======
</TABLE>
Components of the net deferred income tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
As of
December 31,
1996 1995
---- ----
Federal net operating loss carryforwards...................................... $ 833 $560
State net operating loss carryforwards........................................ 234 16
Tax credit carryforwards...................................................... 1,322 183
<PAGE>
Cumulative temporary differences:
Deferred revenue............................................................ 225 346
Patent costs................................................................ (141) (95)
Depreciation expense........................................................ (403) (13)
Research and development costs.............................................. -- 123
Reserve for doubtful accounts and returns................................... 204 --
Inventory reserves.......................................................... 1,543 --
Accrued vacation............................................................ 142 124
Other temporary differences................................................. 197 304
----- ----
Total deferred income tax asset................................................ $4,156 $1,548
Valuation allowance........................................................... (4,156) (591)
------- ------
Net deferred income tax asset................................................. -- $957
======= ======
</TABLE>
The Company's net operating loss ("NOL") and tax credit carryforwards expire
at various dates through 2011. In accordance with certain provisions of the
Internal Revenue Code, as amended, a change in ownership of greater than 50% of
a company within a three year period results in an annual limitation on the
Company's ability to utilize its NOL carryforwards from tax periods prior to the
ownership change. Such a change in ownership occurred with respect to the
Company in July 1991 and February 1995. Accordingly, at December 31, 1996, use
of federal NOL carryforwards of approximately $2.6 million is restricted to
annual amounts of approximately $150,000, which accumulate to the extent not
used and are subject to the expiration of these carryforwards.
At December 31, 1996, the Company had established a valuation allowance
against their gross deferred tax asset of $4,156,000. The valuation allowance
was established due to the Company's limited history of profitability,
limitations on the utilization of NOL carryforwards, which are restricted in use
under the Internal Revenue Code of 1986 and uncertainties regarding future
operations due to the increased competition within the Company's industry.
8....EXPORT SALES AND SIGNIFICANT CUSTOMERS:
The Company operates in a single industry segment. The Company markets its
products in the United States and in foreign countries through its sales
personnel, independent sales representatives and distributors. The Company's
geographic sales as a percent of net revenues are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended
December 31,
------------
1996 1995 1994
---- ---- ----
United States............... 35% 35% 42%
Export:
Asia.......................... 54 58 53
Europe........................ 11 7 5
---- ---- ----
100% 100% 100%
---- ---- ----
</TABLE>
Sales to major customers as a percentage of net revenues are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended
December 31,
------------
1996 1995 1994
---- ---- ----
Sanyo.......................... 8% 10% 25%
Motorola....................... 29% 13% 18%
Marubun........................ 23% 16% --
</TABLE>
<PAGE>
To Information Storage Devices, Inc.:
We have audited the accompanying balance sheets of Information Storage
Devices, Inc. (a California corporation) as of December 31, 1996 and 1995, and
the related statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Information Storage Devices,
Inc. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/S/ Arthur Andersen LLP
San Jose, California
January 15, 1997
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Company's Bylaws currently provide that the number of directors of the
Company shall be from four (4) to seven (7), the actual number to be fixed by
resolution of the Board. The current number of authorized directors is four (4).
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C> <C>
Name of Director Age Principal Occupation Director Since
---------------- --- -------------------- --------------
David L. Angel 57 Chairman of the Board of the 1991
Company; Chief Executive Officer
of the Company
Frederick B. Bamber 55 Managing Director of Applied 1990
Technology Investors, Inc. and a
General Partner of Techonologies
for Information & Publishing, L.P.
Eugene J. Flath 60 General Partner of AVI Management 1988
Partners
Frederick L. Zieber 56 President, Pathfinder Research, 1995
Incorporated
</TABLE>
Mr. Angel has served as Chairman of the Board, Chief Executive Officer
and a director of the Company since November 1996. Mr. Angel served as
as President, Chief Executive Officer and a director of the Company since he
joined the Company in February 1991. From January 1989 to January 1991, he
was Group Vice President of the Semiconductor Group of Dataquest, Inc., a
market research company. He holds a B.Sc. degree from Marietta College.
Mr. Bamber has served as a director of the Company since March 1990. He has
been Managing Director of Applied Technology Investors, Inc., a venture capital
firm, since January 1983 and a general partner of Technologies for Information &
Publishing, L.P., a venture capital firm and shareholder of the Company since
June 1990. Since 1988, Mr. Bamber has also a been director of Interleaf, Inc. He
holds a B.A. degree from Yale University and an M.B.A. degree from the Wharton
School of Business of the University of Pennsylvania.
Mr. Flath has served as a director of the Company since October 1988 and as
Chairman of the Board from January 1993 through November 1996. He has been
a general partner of AVI Management Partners, a venture capital firm and an
affiliate of various Company shareholders, since February 1988. Mr. Flath
holds a B.S.E.E. degree from the University of Wisconsin and an M.S.E.E. degree
from the University of New Hampshire.
Mr. Zieber was appointed a director of the Company in July 1995. He has
been President of Pathfinder Research, Incorporated, a semiconductor industry
consulting firm he founded, since May 1991. Mr. Zieber was employed by
Dataquest, Inc. from September 1974 until January 1991, most recently as
Executive Vice President. He holds B.S.E.E. and M.B.A. degrees from
Stanford University.
<PAGE>
Board of Directors' Meetings and Committees
The Board of Directors met 13 times, including telephone conference meetings,
during fiscal 1996. No director attended fewer than 75% of the aggregate of the
total number of meetings of the Board of Directors (held during the period for
which he was a director) and the total number of meetings held by all committees
of the Board of Directors on which he served (during the period that he served).
Standing committees of the Board of Directors include an Audit Committee and a
Compensation Committee. The Board of Directors does not have a nominating
committee or any committee performing similar functions.
Messrs. Bamber and Zieber are currently the members of the Audit Committee.
The Audit Committee met one time during 1996. The Audit Committee meets with the
Company's independent public accountants to review the adequacy of the Company's
internal control systems and financial reporting procedures, review the general
scope of the Company's annual audit and the fees charged by the independent
public accountants, review and monitor the performance of non-audit services by
the Company's independent public accounts, review the fairness of any proposed
transaction between any officer, director or other affiliate of the Company and
the Company and, after such review, makes recommendations to the full Board of
Directors and performs such further functions as may be required by any stock
exchange or over-the-counter market upon which the Company's Common Stock is
listed.
In 1996, Messrs. Flath (except for the period from March 20 through October
28), Bamber and Zieber (from March 20 through the present) were the members of
the Company's Compensation Committee. The Compensation Committee met nine (9)
times during fiscal 1996. The Compensation Committee administers the Company's
1987 Stock Option Plan, 1994 Equity Incentive Plan and 1994 Employee Stock
Purchase Plan and determines the salaries and other compensation for officers
and other employees of the Company.
Director Compensation
Directors of the Company do not receive any compensation for their services as
such but are reimbursed for their reasonable expenses in attending meetings of
the Board of Directors. The Board of Directors adopted, and shareholders
approved adoption of, the 1994 Directors Stock Option Plan (the "Directors
Plan") in September 1994 which became effective on February 16, 1995.
Under the Directors Plan, each non-employee director initially elected to the
Board of Directors on or after February 16, 1995 is granted, on the date such
non-employee director first joined the Board of Directors, an option under the
Directors Plan to purchase 7,500 shares of Common Stock. Each non-employee
director was granted an additional option for 7,500 shares on his anniversary of
joining the Board of Directors. Accordingly, Mr. Bamber received an option to
purchase 7,500 shares on March 30, 1995, his fifth anniversary of joining the
Board of Directors; Mr. Zieber received an option to purchase 7,500 shares on
July 13, 1995, the date he first joined the Board of Directors; and Mr. Flath
received an option to purchase 7,500 shares on October 11, 1995, his seventh
anniversary of joining the Board of Directors. The right to purchase 25% of the
shares subject to currently outstanding options will vest for each year
following the date of grant that the non-employee director continuously remains
a director of the Company.
The Directors Plan was amended effective March 21, 1996. Subsequent grants of
options to purchase 7,500 shares were made to each non-employee director as of
such date and will be made each January 1 thereafter. The right to purchase 100%
of the shares subject to currently outstanding options will vest ratably on a
monthly basis throughout the Company's fiscal year, which is the calendar year,
for each year following the date of grant that the non-employee director
continuously remains a director of the Company. Each option granted to a
director under the amended Directors Plan from March 21, 1996 and in the future
will vest monthly and become exercisable as to all of the shares issuable under
such option at the end of each Company fiscal year, which is the calendar year.
The maximum number of shares issuable to any non-employee director under the
Directors Plan is 30,000. The exercise price for such options is the fair market
value of the Common Stock on the date of grant. A total of 120,000 shares of
<PAGE>
Common Stock is reserved for issuance under the Directors Plan, 37,500 of which
were subject to outstanding options as of December 31, 1997. Accordingly, Mr.
Bamber received an option to purchase 7,500 shares on March 21, 1996 and Mr.
Zieber received an option to purchase 7,500 shares on March 21, 1996, which
shares were fully vested on December 31, 1996. On March 20, 1996, Mr. Flath
became an employee of the Company and was therefore ineligible for option grants
under the Directors Plan. In connection with his employment, Mr. Flath was
granted an option to purchase 50,000 shares of the Company's Common Stock under
the Company's 1994 Equity Incentive Plan. Messrs. Zieber, Flath and Bamber each
received options to purchase 7,500 shares under the Directors Plan on January 1,
1997.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or paid
for services rendered to the Company in all capacities by, the Company's Chief
Executive Officer and the Company's four other most highly compensated executive
officers (together, the "Named Officers") during 1996.
Summary Compensation Table
Annual Compensation
-------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
All Other
Name and Principal Position Salary(1) Bonus Compensation
--------------------------- --------- ----- ------------
David L. Angel................ 175,000 -- 235,245(2)
Chairman and Chief Executive
Officer
Carl Palmer................... 125,000 20,000 23,576(3)
Vice President, Engineering
Ross Hayden................... 95,017 -- 55,488(4)
Vice President, Sales
Jim Brennan................... 140,400 -- --
Vice President, Technology and
Development
Felix J. Rosengarten.......... 130,000 -- 8,525(5)
Vice President, Finance and
Administration, and Chief
Financial Officer
</TABLE>
- - -------------
(1)David Angel's salary is currently $249,000, Carl Palmer's salary is currently
$155,000, Ross Hayden's salary is currently $95,017, Jim Brennan's salary is
currently $155,000 and Felix Rosengarten's salary is currently $155,000.
(2)Represents compensation in connection with the sale of the Company's stock
issued upon the exercise of stock options in the amount of $213,000 and
payment for vacation accrued in excess of 20 days in the amount of $22,245.
(3) Represents compensation for relocation in the amount
of $23,576.
(4)Represents compensation in connection with the sale of the Company's stock
issued upon the exercise of stock options in the amount of $17,750 and
commissions in the amount of $37,738.
(5)Represents payment for vacation accrued in excess of 20 days in the amount
of $8,525.
Option Grants in 1996
The following table sets forth certain information concerning the exercise of
options by each of the Named Officers during 1996, including the aggregate
amount of gain on the date of exercise. In addition, the table includes the
number of shares covered by both exercisable and unexercisable stock options as
of December 31, 1996. Also reported are values of "in-the-money" options that
<PAGE>
represent the difference between the respective exercise prices of outstanding
stock options and the fair market value of the Company's Common Stock as of
December 31, 1996 ($7.375 per share), based on the closing price of the
Company's stock on December 31, 1996. No stock appreciation rights were
exercised during 1996, and no stock appreciation rights were outstanding at the
end of the year.
Aggregate Option Exercises in 1996 and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year-End(#) at Fiscal Year-End
--------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Shares
Acquired on Value
Name Exercise(#) Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
David L. Angel....... 46,875 $540,781 65,972 199,361 $486,543 $1,470,287
Carl Palmer.......... -- $-- -- 57,500 $-- $424,062
Ross Hayden.......... 2,000 $23,750 8,750 49,894 $64,531 $367,968
Jim Brennan.......... -- $-- -- 18,750 $-- $138,281
Felix J. Rosengarten. 10,000 $80,000 45,833 75,666 $338,018 $558,036
</TABLE>
- - -----------
(1)"Value Realized" represents the fair market value of the shares of Common
Stock underlying the options on the date of exercise based on the closing
price of the Company's stock on the date of exercise.
NEW PLAN BENEFITS
The following table sets forth the grant of options received under the
Incentive Plan, the Directors Plan and the Employee Stock Purchase Plan as of
December 31, 1996 by (i) the Named Officers, (ii) all current executive officers
as a group, (iii) all current directors who are not executive officers as a
group, and (iv) all employees, including all officers who are not executive
officers, as a group.
The grants of options under the Incentive Plan are made at the discretion of
the Board of Directors. Accordingly, future grants under the Incentive Plan are
not determinable and have not been set forth in the table.
<TABLE>
<CAPTION>
Stock Purchase Plan(1) Directors Plan(2)
---------------------- -----------------
<S> <C> <C> <C> <C>
Purchase Number Purchase Number
Price of Price of
Name and Position (per share) Shares (per share) Shares
----------------- ----------- ------ ----------- ------
David L. Angel.......................... -- -- -- --
Chairman and Chief Executive Officer
Carl Palmer............................. $8.181 753 -- --
Vice President, Engineering
Ross Hayden............................. $8.537 1,113 -- --
Vice President, Sales
Jim Brennan............................. $8.529 1,619 -- --
Vice President, Technology and
Development
Felix J. Rosengarten.................... $8.556 1,601 -- --
Vice President, Finance and
Administration and Chief Financial
Officer
<PAGE>
All current executive officers as a group
(8) persons............................. $8.543 7.378 -- --
All current directors who are not
executive officers as a group (3) persons -- -- $8.375 15,000
All employees, including officers who
are not executive officers, as a group.. $8.528 43,212 -- --
</TABLE>
(1) Represents shares actually purchased under the Employee Stock Purchase Plan
in 1996. Purchases under this plan are voluntary. Accordingly, future purchases
under this plan are not determinable.
(2) Represents options actually granted under the Directors Plan in 1996. The
grant of options under the Directors Plan is not discretionary. The exercise
price of options to be granted in the future under the Directors Plan is
unknown, as the exercise price is equal to fair market value on the date of
grant.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company, as of
December 31, 1996, with respect to beneficial ownership of the Company's Common
Stock by (i) each shareholder known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock, (ii) each present director, (iii)
each Named Officer and (iv) all executive officers and directors as a group.
<TABLE>
<CAPTION>
Shares Beneficially
Owned (1)
-------------------
<S> <C> <C>
Name of Beneficial Owner Number Percent
------------------------ ------ -------
Frederick B. Bamber
Technologies for Information & Publishing, L.P.(2)............... 561,708 5.9%
David L. Angel(3)..................................................... 176,153 1.8%
Gene J. Flath(4)...................................................... 106,974 1.1%
Felix J. Rosengarten(5)............................................... 89,030 *
Frederick L. Zieber(6)................................................ 18,437 *
Jim Brennan(7)........................................................ 14,187 *
Carl Palmer(8)........................................................ 10,907 *
Ross Hayden(9)........................................................ 7,764 *
All executive officers and directors as a group (12 persons)(10)...... 1,166,247 12.2%
- - ----------------
* less than 1%
</TABLE>
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission that deem shares to be beneficially owned
by any person who has or shares voting or investment power with respect to
such shares. Unless otherwise indicated, the persons named in this table have
sole voting and sole investment power with respect to all shares shown as
beneficially owned, subject to community property laws where applicable.
Shares of Common Stock subject to options that are currently exercisable or
exercisable within 60 days of March 31, 1997 are deemed to be outstanding and
to be beneficially owned by the person holding such options or warrants for
the purpose of computing the percentage ownership of such person but are not
treated as outstanding for the purpose of computing the percentage ownership
of any other person.
(2)Mr. Bamber, a director of the Company, is a managing general partner of such
partnership. The other managing general partners of the partnership are David
A. Boucher and Thomas H. Grant. The managing general partners share voting
and investment power over the shares held by the partnership. The address for
Messrs. Bamber, Boucher and Grant and the partnership is One Cranberry Hill,
Lexington, Massachusetts 02173. Also includes 14,062 shares subject to
options exercisable within 60 days of March 31, 1997.
<PAGE>
(3) Includes 58,112 shares subject to options exercisable within 60 days of
March 31, 1997. Mr. Angel is Chairman of the Board, Chief Executive
Officer and a director of the Company.
(4) Includes 55,468 shares subject to options exercisable within 60 days of
March 31, 1997. Mr. Flath is a director of the Company. The address for
Mr. Flath is 1010 El Camino, Suite 300, Menlo Park, California 94025.
(5) Includes 57,332 shares subject to options exercisable within 60 days of
March 31, 1997. Mr. Rosengarten is Vice President, Finance and
Administration, and Chief Financial Officer of the Company.
(6) Includes 13,437 shares subject to options exercisable within 60 days of
March 31, 1997. Mr. Zieber is a director of the Company. The address for
Mr. Zieber is 1620 Old Oakland Road, D-207, San Jose, California 95131.
(7) Includes 12,187 shares subject to options exercisable within 60 days of
March 31, 1997. Mr. Brennan is Vice President, Technology and Development,
of the Company.
(8) Includes 9,167 shares subject to options exercisable within 60 days of
March 31, 1997. Mr. Palmer is Vice President, Engineering, of the Company.
(9) Includes 7,714 shares subject to options exercisable within 60 days of
March 31, 1997. Mr. Hayden is Vice President, Sales of the Company.
(10) Includes the shares subject to options stated to be included in footnotes
(2), (3), (4), (5), (6), (7), (8) and (9) and 105,446 additional shares
subject to options exercisable within 60 days of March 31, 1997.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1996, there have been no transactions or series of
transactions involving more than $60,000 between the Company and any current
executive officer, director, 5% beneficial owner of the Company's Common Stock
or any member of the immediate family of any of the foregoing in which one or
more of the foregoing individuals or entities had a material interest, except as
indicated below and in "Executive Compensation" above.
In January 1996, the Company entered into option amendment agreements with
certain of the Company's officers and key employees that provide for the
acceleration of vesting of options granted under the 1994 Plan and the 1987
Plan.
In January 1996, the Company entered into employment agreements with certain
of the Company's officers and the same key employees that provide for: (i)
salary at their current rates; (ii) bonuses as determined by the Board of
Directors; and (iii) the payment of severance pay equal to 2.5 times salary in
the event (a) of any corporate reorganization or business combination that is
not approved by the Board and in which the beneficial ownership of 50% or more
of ISD's outstanding voting stock is transferred or (b) that a person or entity
or group of persons or entities acquires 15% or more of the Company's
outstanding stock pursuant to a tender or exchange offer that the Board does not
recommend and that the shareholders of the Company accept or a change in the
composition of the Company's Board of Directors by reason of a contested
election.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The following financial statements and Report of Independent Public
Accounts are incorporated by reference to the 1995 Annual Report to
Shareholders:
<PAGE>
<TABLE>
<CAPTION>
Page(s) in
Annual Report
to Stockholders
<S> <C> <C>
---------------
Balance Sheets at December 31, 1996 and 1995................. 18
Statements of Operations for the years ended
December 31, 1996, 1995, and 1994........................... 19
Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995, and 1994........................... 20
Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994........................... 21
Notes to Financial Statements................................ 22
Report of Independent Public Accountants..................... 31
</TABLE>
2. Financial Statement Schedules.
The following financial statement schedule is filed as part of this Annual
Report on Form 10-K.
<TABLE>
<CAPTION>
<S> <C> <C>
Page(s) in
Annual Report on
Description Form 10-K
----------- ---------
Schedule II - Valuation and Qualifying Accounts.............. F-1
</TABLE>
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the financial
statements or notes thereto.
3. Exhibits -
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit
Number Exhibit Title
------ -------------
3.01 -- Registrant's Articles of Incorporation, as amended to date(1)
3.03 -- Registrant's Bylaws, as amended to date(1) 3.04 -- Certificate
of Determination specifying the terms of the
Series A Participating Preferred Stock of the Registrant as
filed with the California Secretary of State on December 28,
1995(2)
4.01 -- Form of Specimen Certificate for Registrant's Common Stock(1)
4.02 -- Amended and Restated Registration Rights Agreement, dated as
of July 8, 1991, as amended(1)
4.03 -- Rights Agreement dated December 28, 1995, between the
Registrant and the First National Bank of Boston, as Rights
Agent, and related documents(2)
10.01 -- Registrant's 1987 Stock Option Plan, as amended, and related
documents(3)
10.02 -- Registrant's 1994 Equity Incentive Plan, as amended, and
related documents(4)
10.03 -- Registrant's 1994 Directors Stock Option Plan and related
documents
10.04 -- Registrant's 1994 Employee Stock Option Plan and related
documents(1)
10.05 -- Form of Indemnification Agreement entered into with each of
Registrant's directors and executive officers(1)
10.08 -- Lease Agreement between Registrant and Greylands Business
Park, Phase I dated August 24, 1994, together with Addendum
dated July 25, 1995(1)
10.09 -- Wafer Foundry Agreement between Registrant and Samsung
Electronics Co., Ltd., dated December 26, 1992 as amended(1),
together with Amendment to Wafer Foundry Agreement Process and
Storage Cell Technology License dated December 26, 1995(3) as
of July 15, 1993, as amended(1)
<PAGE>
10.11 -- Distributor Agreement between Registrant and Sanyo Electric
Co., Ltd., dated October 29, 1991 with Addendum thereto(1)
10.13 -- License Agreement between Registrant and Medtronic, Inc., dated
March 24, 1993(1)
10.14 -- Development Agreement between Registrant and Medtronic, Inc.,
dated March 24, 1993(1)
10.15 -- Supply Agreement between Registrant and Medtronic, Inc., dated
March 24, 1993(1)
10.17 -- Acceptance, Letter of Credit, Loan and Security Agreement
between Registrant and Union Bank dated June 15, 1995
(includes related Summary Schedule)(1)
10.21 -- Acceptance, Letter of Credit, Loan and Security Agreements
between Registrant and Union Bank dated August 31, 1995
(includes related Summary Schedules)(1)
10.22 -- Agreement for Contract Manufacturing between Registrant and
Rohm Electronics, a Division of Rohm Corporation, dated as of
November 27, 1995(3)
10.23 -- Form of Employment Agreement dated January 19, 1996 between
Registrant and all of the Company's executive officers and
certain key employees(5)
10.24 -- Form of Amended and Restated Employment Agreement dated May
14, 1996 between Registrant and certain of the Company's
executive officers(4)
10.25 -- Form of Amended and Restated Employment Agreement dated
November 19, 1996 between Registrant and certain of the
Company's executive officers
11.01 -- Statement of Computation of Earnings Per Share
23.01 -- Consent of Arthur Andersen LLP, Independent Public Accountants
----------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
(1) Incorporated by reference to the exhibit of the same number filed with
Registrant's Form S-1 Registration Statement (File No. 33-94852).
(2) Incorporated by reference to the exhibit of the same number filed with
Registrant's Form 8-K filed on or about January 5, 1996.
(3) Incorporated by reference to the exhibit of the same number filed with
Registrant's Annual Report on Form 10-K for the year ended December
31, 1995.
(4) Incorporated by reference to the exhibit of the same number filed with
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996.
(5) Incorporated by reference to the exhibit of the same number filed with
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996.
</TABLE>
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K during the
fourth quarter of the fiscal year ended December 31, 1996.
(c) The exhibits required by this Item are listed under Item 14 (a) 3 above.
(d) The financial statement schedule required by this Item is listed under Item
14 (a) 2 above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INFORMATION STORAGE DEVICES, INC.
By: /S/DAVID L. ANGEL
-------------------
David L. Angel
Chairman of the
Board and Chief
Executive Officer
Date:March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities an on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
- - --------- ----- ----
/S/ DAVID L. ANGEL Chairman of the Board, March 21, 1997
Chief Executive Officer
- - ------------------------ and Director
David L. Angel (Principle Executive Officer)
/S/ FELIX J. ROSENGARTEN Vice President, Finance March 21, 1997
and Administration, and
- - ------------------------ Chief Financial Officer
Felix J. Rosengarten (Principle Financial Officer)
/S/ FREDERICK B. BAMBER Director March 21, 1997
- - ------------------------
Frederick B. Bamber
/S/ EUGENE J. FLATH Director March 21, 1997
- - ------------------------
Eugene J. Flath
/S/ FREDERICK L. ZIEBER Director March 21, 1997
- - ------------------------
Frederick L. Zieber
</TABLE>
<PAGE>
EXHIBIT 11.01
INFORMATION STORAGE DEVICES, INC.
Statement of Computation of Earnings Per Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------
<S> <C> <C> <C>
1996 1995 1994
------ ------ ------
Net income (loss) ($8,971) $5,812 $4,021
======== ====== ======
Weighted average common stock outstanding 9,788 8,303 1,145
Common stock equivalents:
Convertible preferred stock -- -- 4,591
Stock options -- 733 268
Warrants -- 48 41
Shares required to be included
under SAB 83 -- -- 340
------ ------ ------
Total shares used in computing net income (loss)
per share 9,788 9,084 6,385
====== ====== ======
Net income (loss) per share ($.92) $.64 $ .63
====== ====== ======
</TABLE>
<PAGE>
Schedule II
<TABLE>
<CAPTION>
INFORMATION STORAGE DEVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
<S> <C> <C> <C> <C>
Balance at Charged to Costs Balance at
Description Beginning of Year and Expenses Deductions End of Year
- - ----------- ----------------- ------------ ---------- -----------
Year ended December 31, 1994
Allowance for doubtful accounts..... $ 213 $ 11 $(148) $76
Year ended December 31, 1995
Allowance for doubtful accounts..... $ 76 $ 210 $ (11) $ 275
Year ended December 31, 1996
Allowance for doubtful accounts..... $ 275 $ 325 $ -- $ 600
Allowance for
</TABLE>
<PAGE>
INFORMATION STORAGE DEVICES, INC.
1994 DIRECTORS STOCK OPTION PLAN
As Adopted September 12, 1994
As Amended Through March 21, 1996
1. Purpose. This 1994 Directors Stock Option Plan (this
"Plan") is established to provide equity incentives for nonemployee members
of the Board of Directors of Information Storage Devices, Inc. (the
"Company"), who are described in Section 6.1 below, by granting such persons
options to purchase shares of stock of the Company.
2. Adoption and Shareholder Approval. This Plan shall become effective
on the closing of the first registration of the Company's Common Stock for sale
to the public under the Securities Act (the "Effective Date"). This Plan shall
be approved by the shareholders of the Company, consistent with applicable laws,
within twelve (12) months after the date this Plan is adopted by the Board of
Directors of the Company (the "Board"). Options ("Options") may be granted under
this Plan after the Effective Date provided that, in the event that shareholder
approval is not obtained within the time period provided herein, this Plan, and
all Options granted hereunder, shall terminate. No Option that is issued as a
result of any increase in the number of shares authorized to be issued under
this Plan shall be exercised prior to the time such increase has been approved
by the shareholders of the Company and all such Options granted pursuant to such
increase shall similarly terminate if such shareholder approval is not obtained.
So long as the Company is subject to Section 16(b) of the Securities Exchange
Act of 1934, as amended, (the "Exchange Act") the Company will comply with the
requirements of Rule 16b-3 with respect to shareholder approval.
3. Types of Options and Shares. Options granted under this Plan shall
be nonqualified stock options ("NQSOs"). The shares of stock that may be
purchased upon exercise of Options granted under this Plan (the "Shares") are
shares of the Common Stock of the Company.
4. Number of Shares. The maximum number of Shares that may be issued
pursuant to Options granted under this Plan is 120,000 Shares, subject to
adjustment as provided in this Plan. If any Option is terminated for any reason
without being exercised in whole or in part, the Shares thereby released from
such Option shall be available for purchase under other Options subsequently
granted under this Plan. At all times during the term of this Plan, the Company
shall reserve and keep available such number of Shares as shall be required to
satisfy the requirements of outstanding Options under this Plan.
5. Administration. This Plan shall be administered by the Board or by a
committee of not less than two members of the Board appointed to administer this
Plan (the "Committee"). As used in this Plan, references to the Committee shall
mean either such Committee or the Board if no Committee has been established.
The interpretation by the Committee of any of the provisions of this Plan or any
Option granted under this Plan shall be final and binding upon the Company and
all persons having an interest in any Option or any Shares purchased pursuant to
an Option.
6. Eligibility and Award Formula.
6.1 Eligibility. Options may be granted only to directors of the
Company who are not employees of the Company or any Parent, Subsidiary or
Affiliate of the Company, as those terms are defined in Section 17 below (each
an "Optionee").
6.2 Initial Grant. Each Optionee who on or after the
Effective Date becomes a member of the Board will automatically be granted an
Option for 7,500 Shares (the "Initial Grant"). Initial Grants shall be made
on the date such Optionee first joins the Board.
<PAGE>
6.3 Succeeding Grants. Each year following the effective date of
the amendment to this Plan giving effect hereto ("Amendment Effective Date") on
January 1 of such year, if the Optionee is still a member of the Board, the
Optionee will automatically be granted an Option for 7,500 Shares (the
"Succeeding Grant").
6.4 Maximum Shares. The maximum number of Shares that may be
issued to any one Optionee under this Plan is 30,000. No grant will be made if
such grant will cause the number of Shares issued or subject to outstanding
Options under this Plan to exceed the number specified in Section 4 above.
7. Terms and Conditions of Options. Subject to the following and
to Section 6 above:
7.1 Form of Option Grant. Each Option granted under this Plan
shall be evidenced by a written Stock Option Grant ("Grant") in such form (which
need not be the same for each Optionee) as the Committee shall from time to time
approve, which Grant shall comply with and be subject to the terms and
conditions of this Plan.
7.2 Vesting. Options granted under this Plan shall be
exercisable as they vest. The date an Optionee receives an Initial Grant or a
Succeeding Grant is referred to in this Plan as the "Start Date" for such
Option. Except as otherwise provided in this Section 7.2, each Initial Grant
granted prior to the Amendment Effective Date will fully vest as to twenty-five
percent (25%) of the Shares at the end of each full year following the Start
Date, so long as the Optionee continuously remains a director of the Company.
Except as otherwise provided in this Section 7.2, each Succeeding Grant granted
prior to the Amendment Effective Date will vest as to twenty-five percent (25%)
of the Shares at the end of each full year following the Start Date, so long as
the Optionee continuously remains a director of the Company. Except as otherwise
provided in this Section 7.2, each Initial Grant or Succeeding Grant granted
following the Amendment Effective Date will vest ratably at the end of each of
the twelve months following the Start Date and will be fully vested on the first
anniversary of the Start Date, so long as the Optionee continuously remains a
director of the Company until each such first anniversary. Any Initial Grant or
Succeeding Grant made during the calendar year of 1996 will vest fully on
December 31, 1996, with options vesting monthly following the Start Date.
7.3 Exercise Price. The exercise price of an Option shall be the
Fair Market Value (as defined in Section 17.4) of the Shares, at the time that
the Option is granted.
7.4 Termination of Option. Except as provided below in this
Section, each Option shall expire ten (10) years after the Start Date (the
"Expiration Date"). The Option shall cease to vest if the Optionee ceases to be
a member of the Board. The date on which the Optionee ceases to be a member of
the Board shall be referred to as the "Termination Date". An Option may be
exercised after the Termination Date only as set forth below:
(a) Termination Generally. If the Optionee ceases
to be a member of the Board for any reason except death or disability, each
Option, to the extent (and only to the extent) that it would have been
exercisable by the Optionee on the Termination Date, may be exercised by the
Optionee within three (3) months after the Termination Date, but in no event
later than the Expiration Date.
(b) Death or Disability. If the Optionee ceases to be
a member of the Board because of the death of the Optionee or the disability
of the Optionee within the meaning of Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended (the "Code"), each Option, to the extent (and
only to the extent) that it would have been exercisable by the Optionee on the
Termination Date, may be exercised by the Optionee (or the Optionee's legal
representative) within twelve (12) months after the Termination Date, but in no
event later than the Expiration Date.
8. Exercise of Options.
8.1 Notice. Options may be exercised only by delivery to the
Company of an exercise agreement in a form approved by the Committee stating the
number of Shares being purchased, the restrictions imposed on the Shares and
such representations and agreements regarding the Optionee's investment intent
<PAGE>
and access to information as may be required by the Company to comply with
applicable securities laws, together with payment in full of the exercise price
for the number of Shares being purchased.
8.2 Payment. Payment for the Shares may be made (a) in cash or
by check; (b) by surrender of shares of Common Stock of the Company that have
been owned by the Optionee for more than six (6) months (and which have been
paid for within the meaning of SEC Rule 144 and, if such shares were purchased
from the Company by use of a promissory note, such note has been fully paid with
respect to such shares) or were obtained by the Optionee in the open public
market, having a Fair Market Value equal to the exercise price of the Option;
(c) by waiver of compensation due or accrued to the Optionee for services
rendered; (d) provided that a public market for the Company's stock exists,
through a "same day sale" commitment from the Optionee and a broker-dealer that
is a member of the National Association of Securities Dealers (a "NASD Dealer")
whereby the Optionee irrevocably elects to exercise the Option and to sell a
portion of the Shares so purchased to pay for the exercise price and whereby the
NASD Dealer irrevocably commits upon receipt of such Shares to forward the
exercise price directly to the Company; (e) provided that a public market for
the Company's stock exists, through a "margin" commitment from the Optionee and
a NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and
to pledge the Shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the exercise price,
and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to
forward the exercise price directly to the Company; or (f) by any combination of
the foregoing.
8.3 Withholding Taxes. Prior to issuance of the Shares upon
exercise of an Option, the Optionee shall pay or make adequate provision for any
federal or state withholding obligations of the Company, if applicable.
8.4 Limitations on Exercise. Notwithstanding the exercise
periods set forth in the Grant, exercise of an Option shall always be subject to
the following limitations:
(a) An Option shall not be exercisable until such
time as the Plan or, in the case of Options granted pursuant to an amendment to
the number of shares that may be issued pursuant to the Plan, the amendment has
been approved by the shareholders of the Company in accordance with Section 15
hereof.
(b) An Option shall not be exercisable unless such
exercise is in compliance with the Securities Act, and all applicable state
securities laws, as they are in effect on the date of exercise.
(c) The Committee may specify a reasonable minimum
number of Shares that may be purchased on any exercise of an Option, provided
that such minimum number will not prevent the Optionee from exercising the full
number of Shares as to which the Option is then exercisable.
9. Nontransferability of Options. During the lifetime of the Optionee,
an Option shall be exercisable only by the Optionee or by the Optionee's
guardian or legal representative, unless otherwise permitted by the Committee.
No Option may be sold, pledged, assigned, hypothecated, transferred or disposed
of in any manner other than by will or by the laws of descent and distribution.
10. Privileges of Stock Ownership. No Optionee shall have any of the
rights of a shareholder with respect to any Shares subject to an Option until
the Option has been validly exercised. No adjustment shall be made for dividends
or distributions or other rights for which the record date is prior to the date
of exercise, except as provided in this Plan. The Company shall provide to each
Optionee a copy of the annual financial statements of the Company, at such time
after the close of each fiscal year of the Company as they are released by the
Company to its shareholders.
11. Adjustment of Option Shares. In the event that the number of
outstanding shares of Common Stock of the Company is changed by a stock
dividend, stock split, reverse stock split, combination, reclassification or
similar change in the capital structure of the Company without consideration,
the number of Shares available under this Plan and the number of Shares subject
<PAGE>
to outstanding Options and the exercise price per share of such Options shall be
proportionately adjusted, subject to any required action by the Board or
shareholders of the Company and compliance with applicable securities laws;
provided, however, that no certificate or scrip representing fractional shares
shall be issued upon exercise of any Option and any resulting fractions of a
Share shall be rounded up to the nearest Share.
12. No Obligation to Continue as Director. Nothing in this Plan or
any Option granted under this Plan shall confer on any Optionee any right to
continue as a director of the Company.
13. Compliance With Laws. The grant of Options and the issuance of
Shares upon exercise of any Options shall be subject to and conditioned upon
compliance with all applicable requirements of law, including without limitation
compliance with the Securities Act, compliance with all other applicable state
securities laws and compliance with the requirements of any stock exchange or
national market system on which the Shares may be listed. The Company shall be
under no obligation to register the Shares with the SEC or to effect compliance
with the registration or qualification requirement of any state securities laws,
stock exchange or national market system.
l4. Acceleration of Options. In the event of a dissolution or
liquidation of the Company, a merger in which the Company is not the surviving
corporation, the sale of substantially all of the assets of the Company, or any
other transaction which qualifies as a "corporate transaction" under Section 424
of the Code wherein the shareholders of the Company give up all of their equity
interest in the Company, the vesting of all options granted pursuant to the Plan
will accelerate and the options will become exercisable in full prior to the
consummation of such event at such times and on such conditions as the Committee
determines.
15. Amendment or Termination of Plan. The Committee may at any time
terminate or amend this Plan but not the terms of any outstanding option;
provided, however, that the Committee shall not, without the approval of the
shareholders of the Company, increase the total number of Shares available under
this Plan (except by operation of the provisions of Sections 4 and 11 above) or
change the class of persons eligible to receive Options. Further, the provisions
in Sections 6 and 7 of this Plan shall not be amended more than once every six
(6) months, other than to comport with changes in the Code, the Employee
Retirement Income Security Act or the rules thereunder. In any case, no
amendment of this Plan may adversely affect any then outstanding Options or any
unexercised portions thereof without the written consent of the Optionee.
16. Term of Plan. Options may be granted pursuant to this Plan from
time to time within a period of ten (10) years from the date this Plan is
adopted by the Board.
17. Certain Definitions. As used in this Plan, the following
terms shall have the following meanings:
17.1 "Parent" means any corporation (other than the Company) in
an unbroken chain of corporations ending with the Company if, at the time of the
granting of the Option, each of such corporations other than the Company owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
17.2 "Subsidiary" means any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company if, at the time
of granting of the Option, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
17.3 "Affiliate" means any corporation that directly, or
indirectly through one or more intermediaries, controls or is controlled by, or
is under common control with, another corporation, where "control" (including
the terms "controlled by" and "under common control with") means the possession,
direct or indirect, of the power to cause the direction of the management and
policies of the corporation, whether through the ownership of voting securities,
by contract or otherwise.
17.4 "Fair Market Value" shall mean, as of any date, the value
of a share of the Company's Common Stock determined by the Board in its sole
discretion, exercised in good faith; provided, however, that where there is a
public market for the Common Stock, the Fair Market Value per share shall be the
average of the closing bid and asked prices of the Common Stock on the last
trading day prior to the date of determination as reported in The Wall Street
Journal (or, if not so reported, as otherwise reported by the Nasdaq Stock
Market) or, in the event the Common Stock is listed on a stock exchange or on
the Nasdaq National Market, the Fair Market Value per share shall be the closing
price on the exchange or on the Nasdaq National Market on the last trading date
prior to the date of determination as reported in The Wall Street Journal.
<PAGE>
INFORMATION STORAGE DEVICES, INC.
DIRECTORS NONQUALIFIED STOCK OPTION GRANT
<TABLE>
<CAPTION>
<S> <C>
Optionee: ______________________________________
Address: ______________________________________
--------------------------------------
Total Shares Subject to Option: _________________7,500_________________
Exercise Price Per Share: ______________________________________
Date of Grant: ______________________________________
Expiration Date: ______________________________________
</TABLE>
1. Grant of Option. Information Storage Devices, Inc., a California
corporation (the "Company"), has granted to the optionee named above
("Optionee") an option (this "Option") to purchase the total number of shares of
Common Stock of the Company set forth above (collectively, the "Shares") at the
exercise price per share set forth above (the "Exercise Price"), subject to all
of the terms and conditions of this Grant and the Company's 1994 Directors Stock
Option Plan, as amended to the date hereof (the "Plan"). Unless otherwise
defined herein, capitalized terms used herein shall have the meanings ascribed
to them in the Plan.
2. Exercise and Vesting of Option. Subject to the terms and conditions
of the Plan and this Grant, this Option shall be exercisable as it vests.
Subject to the terms and conditions of the Plan and this Grant, this Option (if
granted on or after January 1, 1997) shall vest ratably at the end of each of
the twelve months following the date of grant and will be fully vested at the
end of the first full year following the date of grant so long as the Optionee
continuously remains a member of the Board of Directors of the Company (a "Board
Member").
3. Restriction on Exercise. This Option may not be exercised unless
such exercise is in compliance with the 1933 Securities Act, and all applicable
state securities laws, as they are in effect on the date of exercise, and the
requirements of any stock exchange or national market system on which the
Company's Common Stock may be listed at the time of exercise. Optionee
understands that the Company is under no obligation to register, qualify or list
the Shares with the SEC, any state securities commission or any stock exchange
or national market system to effect such compliance.
<PAGE>
4. Termination of Option. Except as provided below in this Section,
this Option shall terminate and may not be exercised if Optionee ceases to be a
Board Member. The date on which Optionee ceases to be a Board Member shall be
referred to as the "Termination Date."
4.1 Termination Generally. If Optionee ceases to be a Board
Member for any reason except death or disability, this Option, to the extent
(and only to the extent) that it would have been exercisable by Optionee on the
Termination Date, may be exercised by Optionee within three (3) months after the
Termination Date, but in no event later than the Expiration Date.
4.2 Death or Disability. If Optionee ceases to be a Board Member
because of the death of Optionee or the disability of Optionee within the
meaning of Section 22(e)(3) of the Code, this Option, to the extent (and only to
the extent) that it would have been exercisable by Optionee on the Termination
Date, may be exercised by Optionee (or Optionee's legal representative) within
twelve (12) months after the Termination Date, but in no event later than the
Expiration Date.
5. Manner of Exercise.
5.1 Exercise Agreement. This Option shall be exercisable by
delivery to the Company of an executed written Directors Stock Option Exercise
Agreement in the form attached hereto as Exhibit A, or in such other form as may
be approved by the Committee, which shall set forth Optionee's election to
exercise some or all of this Option, the number of Shares being purchased, any
restrictions imposed on the Shares and such other representations and agreements
as may be required by the Company to comply with applicable securities laws.
5.2 Payment. Payment for the Shares may be made (a) in cash or
by check; (b) by surrender of shares of Common Stock of the Company that have
been owned by Optionee for more than six (6) months (and which have been paid
for within the meaning of SEC Rule 144 and, if such shares were purchased from
the Company by use of a promissory note, such note has been fully paid with
respect to such shares) or were obtained by the Optionee in the open public
market, having a Fair Market Value equal to the Exercise Price of the Option;
(c) by waiver of compensation due or accrued to Optionee for services rendered;
(d) provided that a public market for the Company's stock exists, through a
"same day sale" commitment from the Optionee and a broker-dealer that is a
member of the National Association of Securities Dealers (a "NASD Dealer")
whereby the Optionee irrevocably elects to exercise the Option and to sell a
portion of the Shares so purchased to pay for the Exercise Price and whereby the
NASD Dealer irrevocably commits upon receipt of such Shares to forward the
Exercise Price directly to the Company; (e) provided that a public market for
the Company's stock exists, through a "margin" commitment from the Optionee and
a NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and
to pledge the Shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the Exercise Price,
and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to
forward the Exercise Price directly to the Company; or (f) by any combination of
the foregoing.
<PAGE>
5.3 Withholding Taxes. Prior to the issuance of the Shares upon
exercise of this Option, Optionee shall pay or make adequate provision for any
applicable federal or state withholding obligations of the Company.
5.4 Issuance of Shares. Provided that such notice and payment
are in form and substance satisfactory to counsel for the Company, the Company
shall cause the Shares to be issued in the name of Optionee or Optionee's legal
representative. To enforce any restrictions on Optionee's Shares, the Committee
may require Optionee to deposit all certificates, together with stock powers or
other instruments of transfer approved by the Committee appropriately endorsed
in blank, with the Company or an agent designated by the Company to hold in
escrow until such restrictions have lapsed or terminated, and the Committee may
cause a legend or legends referencing such restrictions to be placed on the
certificates.
6. Nontransferability of Option. During the lifetime of the Optionee,
this Option shall be exercisable only by Optionee or by Optionee's guardian or
legal representative, unless otherwise permitted by the Committee. No Option may
be sold, pledged, assigned, hypothecated, transferred or disposed of in any
manner other than by will or by the laws of descent and distribution.
7. Interpretation. Any dispute regarding the interpretation of this
Grant shall be submitted by Optionee or the Company to the Committee that
administers the Plan, which shall review such dispute at its next regular
meeting. The resolution of such a dispute by the Committee shall be final and
binding on the Company and on Optionee. Nothing in the Plan or this Grant shall
confer on Optionee any right to continue as a Board Member.
8. Entire Agreement. The Plan and the Directors Stock Option Exercise
Agreement are incorporated herein by this reference. This Grant, the Plan and
the Directors Stock Option Exercise Agreement constitute the entire agreement of
the parties hereto and supersede all prior undertakings and agreements with
respect to the subject matter hereof.
<TABLE>
<CAPTION>
<S> <C>
INFORMATION STORAGE DEVICES, INC.
By: ________________________________________________
Name: _______________________________________________
Title: _____________________________________________
</TABLE>
<PAGE>
ACCEPTANCE
Optionee hereby acknowledges receipt of a copy of the Plan, represents
that Optionee has read and understands the terms and provisions thereof, and
accepts this Option subject to all the terms and conditions of the Plan and this
Grant. Optionee acknowledges that there may be adverse tax consequences upon
exercise of this Option or disposition of the Shares and that Optionee should
consult a qualified tax advisor prior to such exercise or disposition.
---------------------------------
Optionee
<PAGE>
Exhibit A
DIRECTORS STOCK OPTION EXERCISE AGREEMENT
<PAGE>
Exhibit A
INFORMATION STORAGE DEVICES, INC.
1994 DIRECTORS STOCK OPTION PLAN
DIRECTORS STOCK OPTION EXERCISE AGREEMENT
-----------------------------------------
I hereby elect to purchase the number of shares of common stock as set
forth below:
Optionee: Number of Shares Purchased:
Social Security Number: Purchase Price per Share:
Address: Aggregate Purchase Price:
Date of Stock Option Grant:
Type of Stock Option:Nonqualified Exact Name of Title to Shares:
Stock Option
Optionee hereby delivers to the Company the Aggregate Purchase Price,
to the extent permitted in the Directors Nonqualified Stock Option Grant as
follows (check as applicable and complete):
[ ] in cash (by check) in the amount of $__________________, receipt of
which is acknowledged by the Company;
[ ] by delivery of ___________ fully-paid, nonassessable and vested
shares of the common stock of the Company owned by Optionee for at
least six (6) months prior to the date hereof (and which have been paid
for within the meaning of SEC Rule 144), or obtained by Optionee in the
open public market, and owned free and clear of all liens, claims,
encumbrances or security interests, valued at the current Fair Market
Value of $_________ per share;
[ ] by the waiver hereby of compensation due or accrued to Optionee for
services rendered in the amount of $______________________;
[ ] through a "same-day-sale" commitment, delivered herewith, from
Optionee and the NASD Dealer named therein, in the amount of
$___________________; or
[ ] through a "margin" commitment, delivered herewith from Optionee and the
NASD Dealer named therein, in the amount of $---------------------.
Market Standoff Agreement. Optionee agrees in connection with any
registration of the Company's securities that, upon the request of the Company
or the underwriters managing any public offering of the Company's securities,
Optionee will not sell or otherwise dispose of any Shares without the prior
written consent of the Company or such underwriters, as the case may be, for
such period of time from the effective date of such registration as the Company
or the underwriters may specify for the Company's officers and directors.
Tax Consequences. OPTIONEE UNDERSTANDS THAT OPTIONEE MAY SUFFER ADVERSE
TAX CONSEQUENCES AS A RESULT OF OPTIONEE'S PURCHASE OR DISPOSITION OF THE
SHARES. OPTIONEE REPRESENTS THAT OPTIONEE HAS CONSULTED WITH ANY TAX
CONSULTANT(S) OPTIONEE DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR
DISPOSITION OF THE SHARES AND THAT OPTIONEE IS NOT RELYING ON THE COMPANY FOR
ANY TAX ADVICE.
Entire Agreement. The Plan and Directors Nonqualified Stock Option
Grant are incorporated herein by reference. This Agreement, the Plan and the
Directors Nonqualified Stock Option Grant constitute the entire agreement of the
parties and supersede in their entirety all prior undertakings and agreements of
the Company and Optionee with respect to the subject matter hereof, and is
governed by California law except for that body of law pertaining to conflict of
laws.
Date:
Signature of Optionee
<PAGE>
Spouse's Consent
I acknowledge that I have read the Directors Stock Option Exercise
Agreement (the "Agreement") and that I know its contents. I am aware that by the
Agreement's provisions my spouse (the "Optionee") agrees to sell the Number of
Shares Purchased (as provided for in the Agreement and hereinafter referred to
as "Shares"), including any community property interest I may have, on the
occurrence of certain events. I hereby consent to the sale, approve the
provisions of the Agreement and agree that these Shares and any interest I may
have in them are subject to the provisions of the Agreement. I will take no
action at any time to hinder operation of the Agreement on these Shares or any
interest I may have in them.
Spouse of Optionee
__________________________________ Date:____________________________
___________________________________ Date:____________________________
Optionee's Name
<PAGE>
[Employee Name]
November 19, 1996
Amended and Restated Employment Agreement
Page 5
Exhibit 10.25
[ISD LETTERHEAD]
November 19, 1996
[EMPLOYEE NAME]
[EMPLOYEE ADDRESS]
Re: Amended and Restated Employment Agreement With ISD
Dear [NAME]: (See Attached Schedule)
This letter will set forth the binding agreement of employment (the
"Agreement"), effective as of November 19, 1996 (the "Effective Date"), between
you and Information Storage Devices, Inc., a California corporation ("ISD").
This letter amends and restates in its entirety that certain letter agreement
signed by you and ISD dated January 19, 1996 regarding your employment with ISD.
1. EMPLOYMENT AND DUTIES. During the Employment Term, as defined in
Section 3 below, you will serve as (See Section Schedule) of ISD. You will have
such duties and authority as are customary for, and commensurate with such
position, including ___________________________________, and such other
reasonable duties and authority as the Board of Directors of ISD (the "Board")
prescribes from time to time, and you will comply with all reasonable and good
faith policies and directives of the Board in connection therewith.
2. COMPENSATION.
(a) Salary. For your services hereunder, ISD will pay as
salary to you the amount of $(See Attached Schedule) per month during the
Employment Term, as defined in Section 3 below, prorated for any partial month.
Such salary will be paid in conformity with ISD's normal payroll period. Your
salary will be reviewed by the Board from time to time at its discretion, and
you will receive such salary increases, if any, as the Board in its sole
discretion determines.
(b) Bonus. In addition to the salary set forth in Section 2(a)
hereof, you will be eligible starting in fiscal 1997, for an annual bonus
pursuant to a formula, and determined in accordance with criteria, in each case
to be established by the Board and/or its Compensation Committee, which formula
and criteria will be communicated to you in writing reasonably in advance of the
commencement of the performance period to which such bonus will relate.
(c) Other Benefits. You will be entitled to participate in and
receive benefits under ISD's standard benefits plans as in effect from time to
time, including medical insurance, sick leave, and vacation time, subject to and
on a basis consistent with the terms, conditions and overall administration of
such plans and ISD policies.
(d) Expenses. During the term of your employment hereunder,
you will be entitled to receive prompt reimbursement from ISD for all reasonable
business-related expenses incurred by you, in accordance with ISD's policies and
procedures as in effect from time to time, provided that you will properly
account for such business expenses in accordance with ISD's policy.
(e) Deductions and Withholding. All amounts payable or which
become payable under any provision of this Agreement will be subject to any
deductions authorized in writing by you and any deductions and withholdings
required by law.
3. TERM OF EMPLOYMENT.
(a) Term. This Agreement will continue in full force and
effect from and including the Effective Date through and including December 31,
1998, and thereafter will continue for successive one-year periods unless sooner
terminated or extended as hereinafter provided (the period from the Effective
Date through the end of the then-current period referred to herein as the
"Employment Term").
(b) Termination At End Of Then-Current Two Year Period. This
Agreement, and the Employment Term, may be terminated at the end of any
then-current two or one year period as described in Section 3(a) hereof, whether
the initial two-year period or subsequent one-year periods, by written notice by
either party to the other given no later than three (3) months prior to the end
of such then-current one-year period.
(c) Termination By You. You may terminate this Agreement at
any time by giving ISD written notice of your resignation at least thirty (30)
days in advance, provided that no such advance notice will be required if you
voluntarily terminate this Agreement as a result of occurrence of a Constructive
Termination Event, as described in Section 4(b) hereof.
(d) Termination for Cause. This Agreement may be terminated by
ISD prior to the expiration of the Employment Term solely for Cause immediately
upon delivery of written notice to you of such termination. For purposes of this
Agreement, "Cause" means, in each case as determined in good faith by the Board,
your (i) personal dishonesty, willful misconduct, or breach of fiduciary duty
involving personal profit, and/or (ii) willful violation of any felony law,
and/or (iii) willful breach of a material provision of this Agreement after
written notice, in reasonable detail as the alleged breach, has been given to
you by the Board and you have had a reasonable opportunity to cure such breach.
(e) Termination Due to Death or Disability. Your employment
hereunder will terminate immediately upon your death. In the event that by
reason of injury, illness or other physical or mental impairment you are (i)
completely unable to perform your services hereunder for more than three
consecutive months, or (ii) unable in the good faith judgment of the Board to
perform your services hereunder for 50% or more of the normal working day
throughout six consecutive months, then ISD may terminate your employment
hereunder at the end of such three-month or six-month period, as applicable, by
delivery to you of written notice of such termination, specifying the effective
date of such termination.
(f) Termination Upon Closing of Corporate Transaction.
This Agreement will terminate automatically upon the closing of a Corporate
Transaction (as defined in Section 4(c) hereof) that occurs during the
Employment Term.
4. PAYMENTS AND BENEFITS AFTER TERMINATION OF EMPLOYMENT.
(a) Termination For Death or Disability, or Voluntary
Termination. Upon termination of your employment by ISD under Section 3(e)
hereof for death or disability, or upon your voluntary termination of employment
pursuant to Section 3(c) hereof (unless such voluntary termination is as a
result of occurrence of a Constructive Termination Event, as described in
Section 4(b) hereof), all salary and benefits hereunder will cease immediately
upon the date of such termination, and you will be paid, no later than the
applicable time provided by law, all salary accrued and payable, and all
benefits and bonus amount amounts accrued and payable under ISD policies
relating thereto, as of the date of such termination.
(b) Termination By You As A Result of A Constructive
Termination Event. If you voluntarily terminative your employment by ISD as a
result of the occurrence of a Constructive Termination Event, as hereinafter
defined (in which case your written notice to ISD of such voluntary termination
will state that it is as a result of the occurrence of such Constructive
Termination Event), you will be entitled to be paid an amount, as severance,
equal to your annual salary hereunder as in effect immediately prior to the
occurrence of such Constructive Termination Event, to be paid in six equal
installments each paid on the date you otherwise would have been paid your
salary had your employment continued. For purposes of this Agreement, a
"Constructive Termination Event" will be deemed to have occurred at ISD's close
of business on the fourteenth (14th) day after, and including, the first day,
that any of the following actions is taken by ISD and such action is not
reversed in full by ISD within such fourteen-day period unless prior to the
expiration of such fourteen-day period you have otherwise agreed to the specific
relevant event in writing: (i) your aggregate ISD benefits are materially
reduced (as such reduction and materiality are determined by customary practice
within the semiconductor industry within the State of California) below those in
effect immediately prior to the effective date of such Constructive Termination
Event, and such reduction is not applied as part of an overall reduction in
benefits in which you are treated proportionally given your position, length of
service, income and other customary relevant factors, and/or (ii) your duties
and/or authority within ISD are materially decreased or increased from those in
effect immediately prior to such Constructive Termination Event, in a way that
is adverse to you, as such materiality and adverse nature is determined by
customary practice within the semiconductor industry within the State of
California and/or (iii) your title is changed to a title that, under customary
practice within the semiconductor industry within the State of California, would
be considered to be a lower-level title than your prior title, and/or (iv) you
are required to perform your employment obligations with ISD (other than routine
travel in the ordinary course of the ISD's business) at a location more than
twenty-five (25) miles away from your principal place of work for ISD as such
place of work was in effect immediately prior to the effective date of such
Constructive Termination Event.
(c) Termination on Closing of Corporate Transaction.
(i) "Corporate Transaction" Defined. For
purposes of this Section 4(c), a "Corporate Transaction" is defined as (i) a
merger or acquisition in which ISD is not the surviving entity (except for a
merger of ISD into a wholly-owned subsidiary, and except for a transaction the
purpose of which is to change the State in which ISD is incorporated), (ii)
the sale, transfer or other disposition of all or substantially all of the
assets of ISD or (iii) any other corporate reorganization or business
combination, and in which the beneficial ownership of 50% or more of ISD's
outstanding voting stock is transferred.
(ii) Severance Payment on Closing of Corporate
Transaction. Upon the closing of a Corporate Transaction, provided you are
employed hereunder at the date of such closing, then unless you and ISD have
agreed otherwise in writing, ISD will pay you, as a one-time, lump sum severance
payment, an amount equal to two and one-half (2 1/2) times your annual salary
hereunder as in effect immediately prior to such closing.
5. ACCELERATION OF OPTIONS.
(a) Acceleration of Options. Subject to the provisions of
Section 5(b) hereof, immediately prior to the closing of a Corporate
Transaction, the exerciseability of each option granted to you to purchase
shares of ISD's Common Stock that is outstanding immediately prior to the
closing of such Corporate Transaction, will be automatically accelerated so that
each such option will, immediately prior to the closing date for the Corporate
Transaction, become fully exerciseable with respect to the total number of
shares issuable upon exercise thereof and may be exercised prior to the closing
of such Corporate Transaction for all or any portion of such shares.
(b) Automatic Nullification of Acceleration Provisions Under
Certain Conditions. Notwithstanding the provisions of Section 5(a) hereof, if
ISD proposes to close a Corporate Transaction that requires, as a condition of
such transaction, that such Corporate Transaction be accounted for as a pooling
of interest, and if, solely as a result of the operation of the provisions of
Section 5(a) hereof (together with the operation of any equivalent provision of
any written agreement or agreements entered into between ISD and any other of
ISD's executive officers), such Corporate Transaction is, or on its closing will
be, in the good faith judgment of the independent accountants of ISD and/or of
the independent accountants of the other party or parties to such Corporate
Transaction, which determination will be communicated in writing to ISD,
prohibited from being accounted for as a pooling of interest, and that the
nullification of the provisions of Section 5(a) would allow such Corporate
Transaction to be accounted as a pooling of interests, then the provisions of
Section 5(a) hereof will be deemed to be nullified and void automatically upon
delivery of such written determination to ISD, without any discretion on your
part or on the part of ISD, and such options will not accelerate as provided in
Section 5(a) and instead will be exerciseable to the extent provided therein. If
such Corporate Transaction does not close, then the provisions of Section 5(a)
hereof will revive and apply again thereafter, subject still to the provisions
of this Section 5(b).
6. MISCELLANEOUS. This Agreement contains the entire understanding and
agreement between the parties with respect to the subject matter hereof, and
supersedes any and all prior agreements, negotiations and discussions between
the parties hereto with respect to the subject matter covered hereby and may
only be modified by an agreement in writing signed by ISD and you, and which
states the intent of the parties to amend this Agreement. If any provision of
this Agreement is held to be invalid or otherwise unenforceable, in whole or in
part, the remainder of such provision and the remainder of this Agreement will
be enforced to the fullest extent permitted by law. Neither this Agreement nor
the rights or obligations hereunder will be assignable by you. ISD may assign
this Agreement to any successor of ISD, and upon such assignment any such
successor will be deemed substituted for ISD upon the terms and subject to the
conditions hereof. This Agreement will be binding upon the successors and
assigns of the parties hereof and upon your heirs, executors and administrators.
This Agreement has been negotiated and executed in, and will be governed by and
construed with the laws of, the State of California. Any notice, request, demand
or other communication required or permitted hereunder will be deemed to be
properly given when personally served in writing, or when deposited in the
United States mail, postage prepaid, addressed to ISD at the address shown at
the beginning of this letter, or to you at the address shown below, or by
facsimile upon confirmation of receipt. Each party hereto may change its address
by written notice in accordance with this Section 6.
Sincerely,
David L. Angel
Chairman and CEO
[FELIX J. ROSENGARTEN,
V.P. and CFO SIGNS
FOR DAVE ANGEL]
ACCEPTED AND AGREED:
[NAME]
Date signed: ___________________, 1996
Address:
Facsimile:
<PAGE>
Information Storage Devices, Inc.
Schedule of Employment Agreement Terms
Position Salary
Name (Section 1) (Section 2(a))
- - ---- ----------- --------------
David L. Angel Chairman of the Board $ 20,750
and CEO
Felix J. Rosengarten Vice President, Finance and $ 12,917
Administration, CFO
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incoporation of our
report included (or incorporated by reference) in this Form 10-K into the
Company's previously filed Registration Statement No. 33-90824 and No.
333-08037, on Form S-8.
ARTHUR ANDERSEN LLP
San Jose, California
March 20, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 21,927
<SECURITIES> 33,617
<RECEIVABLES> 3,803
<ALLOWANCES> 600
<INVENTORY> 10,059
<CURRENT-ASSETS> 71,680
<PP&E> 11,859
<DEPRECIATION> 6,024
<TOTAL-ASSETS> 78,865
<CURRENT-LIABILITIES> 6,578
<BONDS> 1,814
0
0
<COMMON> 78,261
<OTHER-SE> (960)
<TOTAL-LIABILITY-AND-EQUITY> 78,865
<SALES> 41,339
<TOTAL-REVENUES> 41,339
<CGS> 32,274
<TOTAL-COSTS> 32,274
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 125
<INTEREST-EXPENSE> 472
<INCOME-PRETAX> (10,513)
<INCOME-TAX> (1,542)
<INCOME-CONTINUING> 8,971
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,971)
<EPS-PRIMARY> (0.92)
<EPS-DILUTED> (0.92)
</TABLE>
