<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File No. 0-25502
INFORMATION STORAGE DEVICES, INC.
(Exact name of registrant as specified in its charter)
California 77-0197173
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2045 Hamilton Avenue
San Jose, CA 95125
(Address of principal executive offices, including zip code)
(408) 369-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
As of November 13, 1998, there were outstanding 9,958,194 shares of the
Registrant's Common Stock.
<PAGE>
INDEX
Part I - Financial Information Page
- - ------------------------------- ----
Item 1. Financial Statements
Condensed Balance Sheets at December 31, 1997
and October 3, 1998.......................................3
Condensed Statements of Operations for the
Three Months and Nine Months Ended
September 27, 1997 and October 3, 1998....................4
Condensed Statements of Cash Flows for the
Nine Months Ended September 27, 1997
and October 3, 1998.......................................5
Notes to Condensed Financial Statements..........................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............7
Part II - Other Information
- - ---------------------------
Item 1. Legal Proceedings...............................................12
Item 6. Exhibits and Reports on Form 8-K................................13
Signatures......................................................14
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED BALANCE SHEETS
------------------------
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
October 3, 1998 December 31, 1997
--------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 6,259 $ 10,102
Short-term investments 18,189 29,706
Accounts receivable, net 8,740 6,577
Inventories 11,774 7,742
Other current assets 2,843 2,265
--------------- ---------------
Total current assets 47,805 56,392
Property and equipment, net 7,158 6,317
Other assets 6,994 2,146
Long-term investments 5,137 6,182
--------------- ---------------
Total Assets $ 67,094 $ 71,037
=============== ===============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,356 $ 1,591
Accounts payable and accrued liabilities 5,514 9,231
Deferred revenue 1,698 1,216
--------------- ---------------
Total current liabilities 8,568 12,038
Long-term liabilities 1,198 994
--------------- ---------------
Shareholders' equity 57,328 58,005
--------------- ---------------
Total Liabilities and Shareholders' Equity $ 67,094 $ 71,037
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
------------------ -----------------
10/03/98 9/27/97 10/03/98 9/27/97
-------- ------- -------- -------
Net revenues $ 13,270 $ 13,813 $ 37,602 $ 33,542
Cost of goods sold 8,119 8,848 21,980 21,736
-------- -------- -------- --------
Gross margin 5,151 4,965 15,622 11,806
Operating expenses:
Research and development 2,916 2,703 8,985 7,904
In-process research and development (1) -- -- -- 4,000
Selling, general and administrative 3,028 3,514 9,675 8,604
-------- -------- -------- --------
Total operating expenses 5,944 6,217 18,660 20,508
Loss from operations (793) (1,252) (3,038) (8,702)
-------- -------- -------- --------
Interest and other income, net 620 551 1,661 1,692
-------- -------- -------- --------
Loss before income taxes $ (173) $ (701) $ (1,377) $ (7,010)
Provision (benefits) for income taxes -- -- -- --
-------- -------- -------- --------
Net loss $ (173) $ (701) $ (1,377) $ (7,010)
======== ======== ======== ========
Net loss per share $ (0.02) $ (0.07) $ (0.14) $ (0.73)
======== ======== ======== ========
Shares used in computing net loss per share 9,904 9,654 9,861 9,622
======== ======== ======== ========
</TABLE>
(1) In-process research and development 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> <C>
Nine Months Ended
-----------------
October 3, 1998 September 27, 1997
--------------- ------------------
Cash flows from operating activities:
Net loss $ (1,377) $(7,010)
Adjustments to reconcile net (loss) to net cash
used in operating activities-----
Depreciation and amortization 3,407 2,323
Compensation costs related to stock and stock option grant 63 58
In process research and development -- 4,000
Changes in assets and liabilities -----
Accounts receivable (2,163) (6,696)
Inventories (4,032) 809
Other current assets (578) (241)
Accounts payable (2,744) 4,329
Accrued liabilities and bonuses (973) 874
Deferred revenue 482 61
Other liabilities (115) 561
--------- ---------
Net cash used in operating activities (8,030) (932)
Cash flows from investing activities:
Purchase of property and equipment (2,387) (2,343)
Change in other assets (2,248) 889
Purchase of equity in Conversa (3,000) --
Purchase of CompactSPEECH(TM) -- (5,100)
Purchase of short-term (18,413) (21,462)
investments
Proceeds from maturities of short-term investments 20,540 33,662
Proceeds from sale of short-term investments 9,537 3,513
Purchase of long-term investments -- (600)
Proceeds from maturities of long-term investments 651 --
Proceeds from sale of long term investments 290 --
--------- ---------
Net cash provided by investing activities 4,970 8,559
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs 600 946
Payments on capitalized lease obligations (1,383) (1,027)
--------- ---------
Net cash used in financing activities (783) (81)
Net increase (decrease) in cash and cash equivalents (3,843) 7,546
Cash and cash equivalents at beginning of period 10,102 21,927
--------- ---------
Cash and cash equivalents at end of period $ 6,259 $29,473
========= =========
</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, 1997.
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 financial 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):
October 3, 1998 December 31, 1997
--------------- -----------------
Work-in-process......................... $ 5,974 $ 4,280
Finished goods.......................... 5,800 3,462
-------- --------
$ 11,774 $ 7,742
======== ========
3. Earnings Per Share:
------------------
Basic net income (loss) per share is computed using the weighted
average number of shares of common stock outstanding. Diluted earnings per share
information takes into account the dilution arising from the conversion of stock
options and warrants, and is only presented for those periods in the
accompanying statement of operations when the company has net income.
4. Comprehensive Income:
--------------------
The Company adopted Statement of Financial Accounting Standard No. 130
"Reporting Comprehensive Income" ("SFAS 130") as of January 1, 1998 and has
restated information for all prior periods reported below (in thousands) to
conform to this standard.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
------------------ -----------------
October 3, 1998 September 27, 1997 October 3, 1998 September 27, 1997
--------------- ------------------ --------------- ------------------
Net loss ................................. $ (173) $ (701) $ (1,377) $ (7,010)
Other Comprehensive Income:
Unrealized holding gains (losses) on
available for sale securities.......... 104 44 63 58
---------- ---------- ------------ ------------
Comprehensive loss........................ $ (69) $ (657) $ (1,314) $ (6,952)
========== ========== ============ ============
</TABLE>
<PAGE>
5. Derivatives:
-----------
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Statement 133 is
effective for fiscal years beginning after June 15, 1999. The Company does not
currently utilize derivative instruments and therefore the adoption of Statement
133 will not have a material effect on the Company's financial statements.
6. Proposed Acquisition:
--------------------
On September 11, 1998, the Company and Winbond Electronics Corporation
("Winbond"), Winbond Int'l Corporation, Oriole Holding Corporation ("Oriole")
and Winbond Acquisition Corporation ("Merger Sub") entered into an Agreement and
Plan of Reorganization (the "Merger Agreement"), pursuant to which Merger Sub
will merge with and into the Company (the "Merger") and the Company will become
a wholly owned-subsidiary of Oriole. Upon consummation of the Merger, each
outstanding share of the Company's common stock not owned by Winbond or any of
its affiliates will be automatically canceled and converted into the right to
receive $7.50 in cash, subject to adjustment in certain events. The Merger is
subject to the approval of the Company's shareholders, and to certain regulatory
approvals and other customary closing conditions. All of the directors of the
Company and certain of executive officers of the Company, as well as Winbond,
Peaceful River Corp. and Pigeon Creek Holding Co., Ltd., have executed Voting
Agreements pursuant to which they have agreed to vote for the Merger.
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. Actual results may differ materially because of a
number of factors, including those set forth under "Other Factors That May
Affect Future Operating Results" on page 16 of the ISD 1997 Form 10-K filed with
the Securities and Exchange Commission.
Overview
Information Storage Devices, Inc. ("ISD" or the "Company") designs,
develops, and markets semiconductor voice solutions based on analog and digital
technologies and mixed signal expertise. ISD's patented ChipCorder(R) and
CompactSPEECH(R) technologies enable solid state voice recording and playback
applications in the communications, consumer, industrial, and automotive
markets. ChipCorder products deliver single-chip solutions, simple integration,
exceptional sound quality, low power consumption, battery-less voice storage,
and low cost. CompactSPEECH products deliver powerful digital speech processing,
advanced telecommunication capabilities, long recording times, cost effective
high voice quality, multi-language speech synthesis, and battery-less voice
storage.
The Company distributes its products through a direct sales organization
and a worldwide network of over 50 sales representatives and distributors. The
Company was incorporated in California in December 1987 and commenced production
shipments in 1992. ISD is an ISO 9001 certified company.
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, development, and marketing 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
<PAGE>
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. Historically, the Company has experienced
difficulties in each of these areas, and the Company expects that it could
experience such difficulties in the future.
Although the Company believes that current foundry capacity is adequate
to meet the Company's anticipated needs, there can be no assurance that the
Company will be able to qualify additional foundry capacity or otherwise obtain
needed quantities of wafers 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. Despite these trends in the Company's design of its integrated
circuits, 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 July 1998, the Company announced that it had received exclusive
worldwide licensing rights to embed Conversa's (Conversational Computing
Corporation) speaker-independent continuous voice recognition technology into a
new family of digital voice processors. As part of the agreement, ISD made a $3
million equity investment in Conversa. The licensing agreement and the equity
investment are an expansion of the joint development agreement ISD signed with
Conversa in March 1998. The new ISD voice recognition chips are expected to
provide high accuracy, continuous, or conversational, speaker independent
capabilities. Products integrating these new chips will not have to be trained
and will respond to a set of American-English commands. Additional languages are
expected to be supported at a later date.
In the third quarter of 1998, the Company transferred a substantial
portion of its wafer sort and final test manufacturing operation to AMKOR, the
Company's assembly and test subcontractor in the Philippines. This consolidation
enables ISD to ship wafers directly from its wafer foundries to AMKOR for
turnkey manufacturing and direct shipment of finished product directly to the
customer. The objective of this move is to improve manufacturing cycle time
while reducing work in process, inventory, and manufacturing cost. The Company's
San Jose manufacturing group will focus on engineering, test development and
pre-production efforts for new products. The cost of the move, all of which was
incurred in the third quarter of 1998 and included in cost of goods sold, was
less than $200 thousand. The Company increased inventory in the second quarter
of 1998 in preparation for this move to Amkor. In the third quarter of 1998,
inventory has been reduced as planned.
In September 1998, ISD and Winbond Electronics Corporation ("Winbond"),
Winbond Int'l Corporation, Oriole Holding Corporation ("Oriole") and Winbond
Acquisition Corporation ("Merger Sub") entered in an Agreement and Plan of
Merger (the "Merger Agreement"), pursuant to which Merger Sub will merge with
and into the Company (the "Merger") and the Company will become a wholly owned
subsidiary of Oriole. Upon consummation of the Merger, each outstanding share of
the Company's common stock not owned by Winbond or any of its affiliates will be
automatically canceled and converted into the right to receive $7.50 in cash,
subject to adjustment in certain events. The Merger is subject to the approval
of the ISD shareholders, and to certain regulatory approvals and other customary
closing conditions. All of the directors of ISD and certain of ISD's executive
officers, as well as Winbond, Peaceful River Corp. and Pigeon Creek Holding Co.,
Ltd., have executed Voting Agreements pursuant to which they have agreed to vote
for the Merger.
<PAGE>
Results of Operations
The following table sets forth, as a percentage of net revenues, each
line item in the Company's statements of operations for the periods indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- - ------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
- - ------------------------------------------------------------------------------------------------------------------
10/3/98 9/27/97 10/3/98 9/27/97
------- ------- ------- -------
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 61.2 64.1 58.5 64.8
------- ------- ------- -------
Gross margin 38.8 35.9 41.5 35.2
------- ------- ------- -------
Operating expenses:
Research and development 22.0 19.6 23.9 23.6
In-process research and development -- -- -- 11.9
Selling, general and administrative 22.8 25.4 25.7 25.6
------- ------- ------- -------
Total operating expenses 44.8 45.0 49.6 61.1
------- ------- ------- -------
Loss from operations (6.0) (9.1) (8.1) (25.9)
Interest and other income, net 4.7 4.0 4.4 5.0
Net Loss (1.3) (5.1) (3.7) (20.9)
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
Net Revenues
During the nine months ended October 3, 1998, the Company's net revenues
were principally derived from the sale of integrated circuits for voice
recording and playback. Net revenues for the nine months ended October 3, 1998
were $37.6 million. This was a 12% increase from the net revenues of $33.5
million in the first three quarters of 1997. The increase in net revenues for
the first nine months of 1998 was primarily caused by the ISD33000 family of
ChipCorder products maturing into production orders as compared to the early
design win orders during the same period of 1997. Net revenues for the third
quarter of 1998 were $13.3 million compared to $13.8 million of net revenues for
the third quarter of 1997, a decrease of 4% over net revenues for the third
quarter of 1997. This decrease in net revenues was primarily caused by lower
average selling prices. The ISD33000 family of ChipCorder products accounted for
approximately 59% of net revenues for the third quarter of 1998 compared to
approximately 25% for the third quarter of 1997; this product accounted for 49%
of net revenues for the first nine months of 1998 compared to approximately 20%
for the first nine months of 1997. The failure of new or broader applications or
markets to develop, or the failure of the existing market to continue to be
receptive to these products, could have a material effect on net revenues and
the Company's results of operations.
During the third quarter of 1998, sales to the Company's top ten
customers accounted for 72% of net revenues compared to 67% in the third quarter
of 1997. In the third quarter of 1998, the Company's top five customers were
Motorola, Matshusita, NuHorizons, V-Tech, and Marubun. These customers accounted
for 46%, 7%, 4%, 3% and 2% of third quarter net revenues, respectively. 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 were unable to obtain the orders from new or
existing customers to offset such losses or reductions.
Net revenues by market segment were approximately 75% for the
communications market, 15% in the consumer market, and 10% in the industrial
market for the third quarter of 1998 compared to 80% for the communications
<PAGE>
market, 15% in the consumer market, and 5% in the industrial market for the
third quarter of 1997. For the first nine months of 1998, net revenues by market
segment were 77% in the communication market, 14% in the consumer market, and 9%
in the industrial market compared to 78% in the communications market, about 15%
in the consumer market, and 5% in the industrial market for the first nine
months of 1997. Sales in the automotive market are included in industrial. The
Company's communications customers represent products, such as telephone
answering machines, cellular phones, cordless phones, personal handy phones and
pagers. 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 were 83% of net revenues in the third quarter of
1998 compared to 80% in the third quarter of 1997. Sales to Europe accounted for
47% of net revenues in the third quarter of 1998, up from 36% in the same period
last year. Sales to Japan were 5% of net revenues in the third quarter of 1998,
down from 25% in the third quarter of 1997, and sales to South East Asia were
31% in the third quarter of 1998, up from 19% in the third quarter of 1997.
North American sales were 17% in the third quarter of 1998, down from 20% for
the same period last year. For the first nine months of 1998, net revenue by
regions were 47% in Europe, 26% in South East Asia, 15% in North America, and
12% in Japan compared to 33% in Europe, 20% in South East Asia, 23% in North
America, and 24% in Japan for the first nine months of 1997. 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, U.S. or foreign
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 distributor sells the product.
Gross Margin
The Company's gross margin for the third quarter of 1998 was $5.2 million,
or 38.8%, compared to $5.0 million or 35.9% gross margin for the third quarter
of 1997. The gross margin for the first nine months of 1998 was $15.6 million or
41.5%, compared to the gross margin for the first nine months of 1997 which was
$11.8 million or 35.2%. This improvement in gross margin of 6.3% for the first
nine months in 1998 compared to 1997 reflects the result of several factors:
strict cost control (approximately 2.0%); higher manufacturing yields
(approximately 1.7%); improved product pricing (approximately 1.6%); and more
efficient utilization of facilities and positive absorption of overhead
(approximately 1.1%).
The Company could experience difficulty in bringing up the offshore
operation disclosed in the "Overview" section and could experience fluctuations
in manufacturing yields, either or both of which could adversely affect gross
margins, particularly if higher yields, efficiency, and quality, and reduced
costs are not achieved. Additionally, the Company could experience variations in
gross margins as a result of declines in its average selling prices or shifts in
product and customer mix.
Research and Development
Research and development expenses were $2.9 million, or 22% of net
revenues, in the third quarter of 1998, compared to $2.7 million, or 20% of net
revenues in the same period of 1997. For the first nine months of 1998, research
and development expenses were $9.0 million, or 24% of net revenues, compared to
$7.9 million or 24% of net revenues, excluding in-process research and
development related to the CompactSPEECH acquisition, for the first nine months
of 1997. Research and development expenses could increase as a result of the
<PAGE>
Company's technology and new product activity associated with the technology
announcements disclosed in the "Overview" section. However, there can be no
assurance that new products will be successfully developed or achieve market
acceptance, that yield problems on new or existing products utilizing new
foundry processes will not arise in the future, or that product yields can be
improved with respect to new or existing products.
Selling, General and Administrative Expenses
Selling, general and administrative ("S, G, & A") expenses were $3.0
million, or 23% of net revenues, in the third quarter of 1998, compared to $3.5
million, or 25% of net revenues in the third quarter of 1997. For the first nine
months of 1998, S, G, & A expenses were $9.7 million, or 26% of net revenues,
compared to $8.6 million, or 26% for the first nine months of 1997. Selling,
general and administrative expenses could increase as a result of sales and
marketing activities, or legal expenses incurred in connection with the Atmel
litigation matter. (See Part II, Item 1.) The Company's advertising expenses
were minimal and are not an integral part of marketing the Company's products.
Interest and Other Income, Net
Net interest and other income was $0.6 million for the third quarter of
1998, the same as the third quarter of 1997. Interest income relates to
investment earnings from the proceeds of the Company's public offerings of
common stock in 1995.
Provision for Income Taxes
Because of the loss incurred in the first three quarters of 1997 and 1998,
the Company has made no provisions for income taxes.
Liquidity and Capital Resources
At October 3, 1998, the Company had cash, cash equivalents, short-term
and long-term investments of $30 million, and working capital of $39 million.
The Company has a line of credit with a commercial bank under which the Company
may borrow up to $15 million based on eligible assets; the term of the credit
line runs through June 30, 1999. As of October 3, 1998, the Company had no
borrowings outstanding under this line of credit, but the credit line was being
used to guarantee certain letters of credit generated by the Company. The line
of credit does not restrict the Company from paying cash dividends on its
capital stock and the only financial covenant is to maintain a minimum of
pledged investments of $17.7 million in the Company's liquidity management
account with the bank. The Company is currently in compliance with this
financial covenant under the line of credit agreement.
The Company's operating activities used net cash of $8.0 million in the
first three quarters of 1998, due to the Company's net loss and to an increase
in inventory of $4.0 million compared to the end of the previous year. Capital
purchases were $2.4 million for the first nine months of 1998. The Company has
entered into a new operating lease agreement of $1.0 million of which $0.9
million is available over the remainder of 1998. The Company's investment
activity used cash of $3.0 million relating to the equity investment in
Conversa.
The Company believes its existing cash, cash equivalents and
investments, together with its available line of credit and current equipment
lease lines, will be sufficient to satisfy the Company's projected working
capital and capital expenditure requirements through at least the next twelve
months.
<PAGE>
Year 2000 Issues
ISD has a well defined internal plan which identifies, eliminates, and
verifies that ISD's software and hardware applications are compliant with the
Year 2000 ("Y2K"). ISD's major systems are 100% compliant and certified. ISD
certifies that Y2K issues do not effect its products, used for voice record and
playback. The Company has a Y2K team with a major ongoing program related to the
assessment of its interfaces with customers, suppliers, and other business
associations. ISD's Y2K team has initiated formal communications with each of
its significant customers, suppliers, and other business associations to
determine the extent to which ISD is vulnerable to those third parties' failure
to remediate their own Y2K issues. ISD is requesting that third party vendors
represent their products and services to be Y2K compliant and that they have a
program to test for Y2K compliance. However, the response of those third parties
is beyond ISD's control. To the extent that ISD does not receive adequate
responses by December 31, 1998, it is prepared to develop contingency plans,
with completion of these plans scheduled for no later than March 31, 1999. At
this time ISD cannot estimate the additional cost, if any, that might develop
from such contingency plans. ISD does not expect the costs to complete Y2K
compliance to be material. Breakdowns in ISD's computer systems and
applications, such as its manufacturing application software, its bar-coding
systems, and the computer chips embedded in its plant equipment, as well as
other Y2K related problems such as disruptions in the delivery of materials,
power, heat, or water to ISD's facilities, could prevent ISD from being able to
manufacture and ship its products. ISD plans to replace, upgrade or otherwise
work around any of its date driven systems that are not Y2K compliant. ISD's Y2K
team intends to have compliance solutions or work-arounds planned by December
31, 1998 and intends to complete compliance testing by June 30, 1999. If ISD
fails to correct a material Y2K problem, its normal business activities and
operations could be interrupted. Such interruptions could materially adversely
affect ISD's business, financial condition and results of operations.
Part II
Other Information
Item 1. Legal Proceedings
In January 1995, Atmel notified ISD and Samsung of certain claims and demanded
that ISD and Samsung either negotiate licenses with Atmel or cease manufacturing
ISD's products at Samsung. ISD received an opinion from its patent counsel,
Blakely, Sokoloff, Taylor & Zafman, that ISD does not violate any of the patents
identified in Atmel's notice to ISD, and ISD believes the patent claims are
without merit. ISD 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 ISD 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 ISD 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 ISD'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. ISD 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 ISD
by Atmel's termination of the fabrication arrangement between the parties. The
Wafer Foundry Agreement between ISD and Samsung obligates Samsung to indemnify
and hold ISD harmless for any claims or suits on account of using any technical
<PAGE>
information provided by Samsung. The Court has bifurcated the issues related to
liability and damages. On February 27, 1998, the Court issued a decision
construing the patent claims. ISD believes that this decision is at least in
part favorable to ISD. On April 14, 1998, the Court issued a decision
invalidating one of the asserted patents. Atmel has filed a Notice of Appeal of
that decision. On November 5, 1998, the Court granted summary judgment of
non-infringement in favor of the Company on the two remaining patents asserted.
While it is difficult to determine, ISD does not believe the ultimate resolution
of this matter will have a material impact on its business or financial
position, although it may have a material adverse impact on the results of
operations in the period in which it is resolved.
On September 17, 1998, a complaint was filed against ISD, its directors
and Winbond in the Santa Clara County Superior Court, Case No. CV776731, (the
"Abraham Action"), bearing the caption "Jeffrey S. Abraham, individually and on
behalf of all persons similarly situated, Plaintiff, v. David L. Angel,
Frederick B. Bamber, Eugene J. Flath, Alan V. King, Eric J. Ochiltree, Frederick
L. Zieber, Information Storage Devices, Incorporated, Winbond Electronics
Corporation, Winbond International Corporation, Peaceful River Corporation,
Pigeon Creek Holding Company, Ltd., Winbond Acquisition Corporation, and Does 1
Through 100, inclusive, Defendants." Defendants David L. Angel, Frederick B.
Bamber, Eugene J. Flath, Alan V. King, Eric J. Ochiltree, Frederick L. Zieber
and Information Storage Devices, Incorporated are referred to as the "ISD
Defendants" and Defendants Winbond Electronics Corporation, Winbond
International Corporation, Peaceful River Corporation, Pigeon Creek Holding
Company, Ltd. and Winbond Acquisition Corporation are referred to as the
"Winbond Defendants." Mr. Abraham seeks to have the matter certified as a class
action of the holders of ISD Common Stock. Mr. Abraham alleges that the
intention of the ISD Defendants to pursue the Merger is in breach of their
fiduciary duties owed to holders of ISD common stock to take all necessary steps
to ensure that such holders will receive the maximum value realizable for their
shares in any extraordinary transaction involving ISD. Mr. Abraham alleges that
the Winbond Defendants knowingly aided and abetted the breaches of fiduciary
duty committed by the ISD Defendants. Mr. Abraham further alleges that the cash
consideration to be paid in connection with the Merger allegedly does not
reflect the fair value of ISD's equity, does not offer a control premium, is
less than the consideration proposed to be paid in a previous offer, and is less
than the intrinsic value of ISD's equity. The complaint seeks a preliminary and
permanent injunction against the Merger, rescission of the Merger if it is
consummated, an accounting for all profits realized or to be realized by the
Defendants as a result of the Merger, appointment of a committee of ISD
shareholders and their representatives to assist in the independent evaluation
of any transaction for ISD's shares, and unspecified compensatory damages and
attorneys' fees. ISD is not aware of any pending motion for a preliminary
injunction or other interim relief in connection with the Abraham Action. ISD
believes that the allegations of the complaint are without merit and intends to
defend the Abraham Action vigorously.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith.
Exhibit
Number Exhibit Title
- - ------- -------------
27.01 - Financial Data Schedule
(b) On September 21, 1998, the Company filed a Form 8-K to report under
Item 1(b) the execution of an Agreement and Plan of Merger by the Company and
Winbond Electronics Corporation ("Winbond"), Winbond Int'l Corporation, Oriole
Holding Corporation and Winbond Acquisition Corporation ("WAC"), providing for
the acquisition of the Company by WAC and Winbond. No financial statements were
filed.
<PAGE>
Signatures
Pursuant to with 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: November 17, 1998
/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)
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