1997 Q1 Information Storage Devices, Inc.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 29, 1997
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 of incorporation or organization) Identification No.)
2045 Hamilton Avenue
San Jose, CA 95125
(Address of principal executive offices, including zip code)
(408) 369-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES_X_ NO___.
As of March 29, 1997, there were outstanding 9,606,107 shares of the
Registrant's Common Stock.
<PAGE>
INFORMATION STORAGE DEVICES, INC.
INDEX
Part I - Financial Information Page
- - ------------------------------ ----
Item 1. Financial Statements
Condensed Balance Sheets at December 31, 1996
and March 29, 1997..............................................1
Condensed Statements of Operations for the Three
Months Ended March 30, 1996 and March 29, 1997..................2
Condensed Statements of Cash Flows for the
Three Months Ended March 30, 1996 and March 29, 1997............3
Notes to Condensed Financial Statements.........................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................5
Item 3. Quantitative and Qualitative Disclosures
About Market Risks..............................................8
Part II - Other Information
- - ---------------------------
Item 6. Exhibits and Reports on Form 8-K................................9
Signatures......................................................9
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED BALANCE SHEETS
------------------------
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
March 29, December 31,
1997 1996
---- ----
Assets
Current Assets:
Cash and cash equivalents $ 23,040 $ 21,927
Short-term investments 29,126 33,617
Accounts receivable, net 3,712 3,203
Inventories 10,634 10,059
Other current assets 3,219 2,874
-------- --------
Total current assets 69,731 71,680
Net property and equipment 5,946 5,835
Patents and other assets, net 2,182 1,200
Long-term investments 250 150
-------- --------
Total Assets $ 78,109 $ 78,865
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 4,666 $ 3,153
Current portion of capitalized lease obligations 1,308 1,270
Accrued liabilities 3,785 856
Deferred revenue 1,593 1,299
-------- --------
Total current liabilities 11,352 6,578
-------- --------
Long-term Liabilities:
Capitalized lease obligations, net of current portion 1,472 1,814
Deferred rent 172 172
-------- --------
Total long-term ities 1,644 1,986
-------- --------
Shareholders' Equity:
Common stock 78,483 78,261
Deferred compensation (316) (333)
Retained earnings (deficit) (13,057) (7,657)
Unrealized gain on investments 3 30
-------- --------
Total shareholders' equity 65,113 70,301
======== ========
Total liabilities and shareholders' equity 78,109 78,865
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
CONDENSED STATEMENTS OF OPERATIONS
----------------------------------
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
------------------
3/29/97 3/30/96
------- -------
Net revenues $ 8,342 $ 12,335
Cost of goods sold 5,653 9,428
-------- --------
Gross margin 2,689 2,907
-------- --------
Operating Expenses:
Research and development 2,300 4,120
In-process research and development (1) 4,000 --
Selling, general and administrative 2,422 2,609
-------- --------
Total operating expenses 8,722 6,729
-------- --------
Income (loss) from operations (6,033) (3,822)
Interest and other income, net 636 781
-------- --------
Income (loss) before income taxes (5,397) (3,041)
Provision (benefit) for income taxes -- (1,064)
-------- --------
Net income (loss) $(5,397) $(1,977)
======== ========
Earnings (loss) per share $ (0.56) $ (0.19)
======== ========
Shares used in computing earnings per share 9,589 10,235
</TABLE>
(1) In Process R & D is as a result of the CompactSPEECH(TM) acquisition.
The accompanying notes are an integral part of these statements.
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
------------------
3/29/97 3/30/96
-------- --------
Cash flows from operating activities:
Net income $(5,397) $(1,977)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-----
Depreciation and amortization 651 597
Amortization of investment discount -- 36
Compensation costs related to stock and stock option grant 17 49
Changes in assets and liabilities-----
Accounts receivable (509) 614
Inventories (575) (1,018)
Prepaid expenses and other assets (1,343) (1,530)
Accounts payable 1,513 747
Accrued liabilities and bonuses 78 (808)
Deferred revenue 294 69
Other liabilities 2,889 (19)
-------- --------
Net cash provided by operating activities (2,382) (3,240)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (719) (620)
Change in other assets (25) (467)
Purchase of investments (13,852) (16,640)
Proceeds from maturities of investments 18,311 37,395
Purchase of long-term investments (100) --
-------- --------
Net cash provided by (used for) investing activities 3,615 19,668
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs 222 236
Repurchase of common stock -- (7,938)
Payments on capitalized lease obligations (342) (320)
-------- --------
Net cash provided by (used for) financing activities (120) (8,022)
-------- --------
Net increase in cash and cash equivalents 1,113 8,407
Cash and cash equivalents at beginning of period 21,927 29,202
-------- --------
Cash and cash equivalents at end of period $ 23,040 $ 37,609
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Notes to Condensed Financial Statements
1. Basis of Presentation:
----------------------
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These condensed financial statements should be read in conjunction
with the financial statements and notes thereto for the year ended December 31,
1996.
The unaudited condensed financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments) that are, in the
opinion of management, necessary to state fairly the results for the periods
presented. The results for such periods are not necessarily indicative of the
results to be expected for the full fiscal year.
2. Inventories:
------------
Inventories consist of material, labor and manufacturing overhead and are stated
at the lower of cost (first-in, first-out basis) or market. The components of
inventory are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
March 29, December 31,
1997 1996
--------- ------------
Work-in-process................... $5,837 $6,157
Finished goods.................... 4,797 3,902
------ ------
$10,634 $10,059
======= =======
</TABLE>
3. Earnings Per Share:
-------------------
Net income per share is computed using the weighted average number of shares of
common stock, and dilutive common equivalent shares from stock options using the
treasury stock method. Fully diluted net income per share is substantially the
same as primary net income per share.
In February 1997, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 128, (SFAS 128), "Earnings per Share," which
is required to be adopted by the Company in its fourth quarter of fiscal 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating earnings per share, primary earnings per share will
be replaced with basic earnings per share and fully diluted earnings will be
replaced with diluted earnings per share. Under basic earnings per share, the
dilutive effect of stock options will be excluded. Under SFAS 128, basic
earnings per share for the first quarter ended March 31, 1997 and 1996 would
have been (0.56) and (0.19) per share, respectively. Diluted earnings per share
is substantially the same as the reported primary earnings per share.
4. Acquisitions
------------
At the end of March 1997, the Company acquired the CompactSPEECH product line
from National Semiconductor for approximately $5.0 million in cash. As part of
this acquisition, the Company also acquired certain rights to eight patents and
access to speech recognition technology. The acquisition was accounted for as a
purchase, and, as part of the acquisition, the Company expensed $4.0 million of
the acquisition cost in the first quarter of 1997 as in-process research and
development. Proforma information has not been presented as the results of
operations of the acquired product line are not material to the accompanying
financial statements.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report includes forward looking statements that involve a number of
risks and uncertainties. The following includes a discussion of factors that,
among other factors, could cause actual results to differ materially. For
reference and discussion, see also "Other Factors That May Affect Future
Operating Results" on page 15 of the ISD 1996 Form 10-K filed with the
Securities and Exchange Commission.
Overview
ISD designs, develops, and markets integrated-circuit solutions based on
innovative analog and digital technologies and mixed signal expertise. ISD's
patented ChipCorder(R) and CompactSPEECH technologies enable solid state voice
recording and playback applications in the communications, consumer, and
industrial markets. These devices deliver industry leading voice quality, low
power consumption, message retention without batteries, and the ability to
rerecord up to 100,000 times - all on easy to use, cost effective integrated
circuits.
The Company distributes its products through a direct sales organization
and a worldwide network of sales representatives and distributors. The Company
was incorporated in California in December 1987 and introduced its first product
in February 1991.
ISD subcontracts with independent foundries to fabricate the wafers for all
of its products. This approach enables the Company to concentrate its resources
on the design and test areas, where the Company believes it has the greatest
competitive advantage, and eliminates the high cost of owning and operating a
semiconductor wafer fabrication facility. The Company 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.
Although the Company believes that current capacity is adequate to meet the
Company's current anticipated needs, there can be no assurance that the Company
will be able to qualify additional foundry capacity or otherwise obtain needed
quantities within expected time frames or at all. Moreover, in order to reduce
future manufacturing costs, the Company is designing smaller die sizes with
smaller geometry processes to increase the number of die produced on each wafer.
Expected cost reductions from these conversions have not yet been realized, and
there can be no assurance that the Company's foundries will achieve or maintain
acceptable cost reductions, manufacturing yields, and process control in the
future or that sudden declines in yields will not occur. Failures to improve, or
fluctuations in, manufacturing yields and process controls, particularly at
times when the Company is experiencing severe pricing pressures from its
customers or its competitors, would have a material adverse effect on the
Company's results of operations.
In March 1997, the Company acquired the CompactSPEECH product line from
National Semiconductor for approximately $5.0 million in cash. As part of this
acquisition, the Company also acquired certain rights to eight patents and
access to speech recognition technology. In addition, key CompactSPEECH
engineers will join the Company's Israeli Development Center, as part of ISD
Israel, Ltd., a wholly-owned subsidiary of ISD which was established in March
1997.
<PAGE>
Results of Operations
The following table sets forth, as a percentage of net revenues, each line
item in the Company's statements of operations for the periods indicated.
- - ----------------------------------------------------------------------
Three Months Ended
- - ----------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
3/29/97 3/30/96
------- -------
Net revenues 100.0% 100.0%
Cost of net revenues 67.8 76.4
Gross margin 32.2 23.6
Operating expenses:
Research and development 27.6 33.4
In-process research and development 48.0 --
Sales, general and administrative 29.0 21.2
Total operating expenses 104.6 54.6
Income/(loss) from operations (72.4) (31.0)
Other income (expense), net 7.6 6.4
Income (loss) before income taxes (0.6) (24.6)
Provision (benefit) for income taxes 0.0 (8.6)
Net income (loss) -64.7% -16.0%
</TABLE>
- - ----------------------------------------------------------------------
Net Revenues
During the three months ended March 29, 1997, the Company's net revenues
were principally derived from the sale of integrated circuits for voice
recording and playback. Net revenues for the first quarter of 1997 were $8.3
million or 32% lower than the $12.3 million of net revenues for the first
quarter of 1996. The decrease in net revenues was caused by lower than expected
shipments in the communications market, the continued softness of the consumer
market, and the effect of reduced prices on all existing ISD products.
During the first quarter of 1997, sales to the Company's top ten customers
accounted for 82% of net revenues compared to 65% in the first quarter of 1996.
During the first quarter of 1997, the Company's top five customers were
Motorola, Sequoia, Marubun, Nu-Horizons, and Matshusita. These customers
accounted for 25%, 16%, 13%, 10% and 6% of first quarter net revenues,
respectively. Sequoia, Marubun, and Nu-Horizons are distributors in Great
Britain, Japan, and the United States, respectively. Sequoia's biggest customer
was Panasonic, and Marubun's biggest customers were Casio, JVC, and Aiwa. The
loss of, or significant reduction in purchases by, a current major customer
would have a material adverse effect on the Company's financial condition and
results of operations if the Company is unable to obtain the orders from new or
other customers to offset such losses or reductions.
The communications market in the first quarter of 1997 accounted for 72% of
net revenues down from 75% for the first quarter of 1996. The consumer market
remained very soft at 15% of net revenues compared to 20% of net revenues for
the first quarter of 1996.
<PAGE>
The breakdown of net revenues by market segment for the first quarter of
1997 was 72% communications, 15% consumer, and 13% industrial. During the first
quarter of 1996, the breakdown was approximately 75% communications, 20%
consumer, and 5% industrial. The Company's communications customers represented
products consisting primarily of telephone answering machines, cellular phones,
pagers and personal handy phones. The Company's consumer customers in the first
quarter of 1997 continued purchasing the Company's products primarily for use in
personal memo recorders, cameras, photo frames, books, educational toys and
novelties. The company anticipates that the consumer market may continue to be
soft throughout the remainder of 1997. The failure of new applications or
markets to develop, or the failure of existing markets, particularly the
communications market, to continue to be receptive to the Company's products or
to offset reduced revenues from the consumer market, could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
International sales for the first quarter of 1997 were 71%, compared to 56%
for the first quarter of 1996. Sales to Asia were 38% in the first quarter of
1997, down from 46% in the first quarter of 1996, and sales to Europe were 32%
in the first quarter of 1997, up from 10% in the first quarter of 1996. Sales to
Japan accounted for 15% of total sales in the first quarter of 1997, down from
30% in the previous year. North American sales were 29% in the first quarter of
1997, down from 44% for the same period last year. The decrease in sales to Asia
in 1997 is primarily a result of the softening in the consumer market, as
mentioned above. Due to its reliance on export sales and its dependence on
foundries outside the United States, the Company is subject to the risks of
conducting business internationally, including foreign government regulation and
general geopolitical risk such as political and economic instability, potential
hostilities, changes in diplomatic and trade relationships, and currency
fluctuation, any of which could have a material effect on the Company's
financial conditions or results of operations.
Gross Margin
The Company's gross margin for the first quarter of 1997 was $2.7 million
or 32% compared to $2.9 million or 23% gross margin for the first quarter of
1996. The improvement in margin reflects the increase in shipments of the higher
margin ISD33000 product and the continued effort in manufacturing cost
reduction. 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
ISD's actual research and development expenses were $2.3 million or 28% of
net revenues in the first quarter of 1997, compared to $4.1 million or 33% of
net revenues in the same period of 1996. In the first quarter of 1997, the
Company acquired the CompactSPEECH product line from National Semiconductor for
approximately $5.0 million in cash. As part of this acquisition, the Company
also acquired certain rights to eight patents and access to speech recognition
technology. In addition, key CompactSPEECH engineers will join the Company's
Israeli Development Center. The Company expensed $4.0 million of the acquisition
cost in the first quarter of 1997 as in-process research and development. This
increased the research and development expense to $6.3 million or 76% of net
revenues for the first quarter of 1997. Research and development expenses for
the first quarter of 1997 were actually 55% of last year's first quarter and 72%
of the prior quarter. Research and development expenses are expected to increase
as a result of the CompactSPEECH acquisition. However, there can be no assurance
that new products will be successfully developed or achieve market acceptance,
that yield problems will not arise in the future, or that the need to improve
product yields might not recur with existing or new products or fabrication
processes.
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2.4 million or 29% of
net revenues in the first quarter of 1997, compared to $2.6 million or 21% of
net revenues in the first quarter of 1996. Both selling expenses and general and
administrative costs were flat or decreased when compared with last year's
equivalent quarter and the previous quarter. Selling, general and administrative
expenses are expected to increase as a result of the CompactSPEECH acquisition.
Other Income (Expense)
Net other income was $0.6 million for the first quarter of 1997 compared to
net other income of approximately $0.8 million for the same period of 1996. Net
other income for 1997 primarily represents interest income earned on the
proceeds of the Company's initial and secondary public offerings of common
stock.
Provision for Income Taxes
Due to the loss incurred in the first quarter of 1997, the company has
shown no income tax provision. In the first quarter of 1996, the company showed
an income tax benefit of approximately $1 million. This benefit was reversed in
the third quarter of 1996.
Liquidity and Capital Resources
The Company has a line of credit with a commercial bank under which the
Company may borrow up to $9 million, based on eligible accounts receivable, and
$15 million based on eligible investments, with a term through June 30, 1997. At
March 29, 1997, the Company's borrowing base was approximately $11.5 million and
there were no borrowings outstanding under this line of credit, but it is being
used to guarantee letters of credit. The line of credit does not restrict the
Company from paying cash dividends on its capital stock but does require that
the Company maintain a ratio of total indebtedness to tangible net worth of not
more than one to one and a ratio of current assets to current liabilities of not
less than two to one. The Company is currently in compliance with all financial
covenants in the line of credit agreement. As of March 29, 1997, the amount of
unrestricted equity available for distribution as a result of these covenants
was $47.0 million.
The Company's operating activities used net cash of $2.5 million in the
first three months of 1997, primarily due to operating losses, an increase in
inventory and a decrease in accounts payable. Capital purchases were $0.7
million in the first three months of 1997. The Company is currently negotiating
a new agreement with a capital equipment leasing company for a lease line of
$1.0 million over the next five quarters.
At March 29, 1997, the Company had cash, cash equivalents and short-term
investments of $52.2 million, long-term investments of $0.3 million, and working
capital of $58.4 million. The Company believes its existing cash, cash
equivalents and short-term investments and its available line of credit and
current equipment lease lines, will satisfy the Company's projected working
capital and capital expenditure requirements through at least the next twelve
months.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Not applicable.
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith.
Exhibit
Number Exhibit Title
- - ------- -------------
11.01 - Statement regarding computation of per share earnings.
27.01 - Financial Data Schedule
(b) None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INFORMATION STORAGE DEVICES, INC.
(Registrant)
Date: May 8, 1997
/S/ Felix J. Rosengarten
-------------------------------
Felix J. Rosengarten
Vice President, Finance and Administration
and Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
<PAGE>
EXHIBIT 11.01
INFORMATION STORAGE DEVICES, INC.
Statement of Computation of Earnings Per Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
3/29/97 3/30/96
------- -------
Net income (loss) ($5,397) ($1,977)
======== ========
Weighted average common stock outstanding 9,589 10,235
Common stock equivalents:
Stock options -- --
Warrants -- --
------- --------
Total shares used in computing net income (loss) per share 9,589 10,235
------- --------
Net income (loss) per share ($0.56) ($0.19)
------- --------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-29-1997
<CASH> 23,040
<SECURITIES> 29,126
<RECEIVABLES> 3,712
<ALLOWANCES> 0
<INVENTORY> 10,634
<CURRENT-ASSETS> 69,731
<PP&E> 2,182
<DEPRECIATION> 0
<TOTAL-ASSETS> 78,109
<CURRENT-LIABILITIES> 11,352
<BONDS> 1,308
0
0
<COMMON> 78,433
<OTHER-SE> (316)
<TOTAL-LIABILITY-AND-EQUITY> 78,109
<SALES> 8,342
<TOTAL-REVENUES> 8,342
<CGS> 14,375
<TOTAL-COSTS> 14,375
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,033
<INTEREST-EXPENSE> (636)
<INCOME-PRETAX> (5397)
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,397
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,397)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
