<PAGE>
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, 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
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. [X ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant, was approximately $72,585,252 (based upon the closing price for
shares of the Registrant's Common Stock as reported by the Nasdaq National
Market on February 28, 1998). 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 February 28, 1998, approximately 9,842,068 shares of Common Stock, no
par value, were outstanding.
<PAGE>
1997 10-K
Information Storage Devices, Inc.
INDEX
INFORMATION STORAGE DEVICES, INC. (ISD)
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<S> <C> <C>
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...................................10
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT..................10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS................12
Item 6. SELECTED FINANCIAL DATA...............................12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................13
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.....................................18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........19
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................34
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT............................................34
Item 11. EXECUTIVE COMPENSATION................................36
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................38
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........40
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K...................................40
</TABLE>
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This Report contains forward-looking statements (within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
regarding the Company and its business, financial condition, results of
operations and prospects. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions or variations
of such words are intended to identify forward-looking statements, but are not
the exclusive means of identifying forward-looking statements in this Report.
Additionally, statements concerning future matters such as the features,
benefits and advantages of the Company's products, international sales, the
development of new products, enhancements or technologies, migration to smaller
geometries, foundry relationships and risks, business and sales strategies,
matters relating to proprietary rights, litigation, competition and facilities
needs and other statements regarding matters that are not historical are
forward-looking statements.
Although forward-looking statements in this Report reflect the good faith
judgment of the Company's management, such statements can only be based on facts
and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks and uncertainties, and actual results
and outcomes may differ materially from the results and outcomes discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include without limitation those discussed
in Item 7 of this Report under the heading "Other Factors That May Affect
Operating Results," as well as those discussed elsewhere in this Report. Readers
are urged not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Report. The Company undertakes no obligation
to revise or update any forward-looking statements in order to reflect any event
or circumstance that may arise after the date of this Report. Readers are urged
to review and consider carefully the various disclosures made by the Company in
this Report, which attempts to advise interested parties of the risks and
factors that may affect the Company's business, financial condition and results
of operations.
<PAGE>
Item 1. BUSINESS
The Company
ISD 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, and
industrial 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 was incorporated in California in
December 1987. Volume production shipments commenced in 1992 and net revenues
grew every year until 1996. In 1997, net revenues grew by 16% over 1996 net
revenues.
Markets, Applications and Customers
ISD's mission is to provide products to the communications marketplace using
its proprietary multi-level storage and related technologies. The wireless
communication and telecommunication markets continue to be a key focus for ISD.
While these industries form a large part of the Company's current business, ISD
also provides products to the consumer and industrial markets. In 1997, 79% of
net revenues was derived from the communications market, and the consumer and
the industrial markets accounted for 12% and 9% of net revenues, respectively.
Sales to the Company's top ten customers accounted for 76% of net revenues in
1997 compared to 85% in 1996, and 66% in 1995. The top five customers in 1997
were Marubun (the Company's Japanese distributor), Motorola, Matsushita,
Philips, and NuHorizons (the Company's United States distributor), accounting
for 19%, 17%, 13%, 11%, and 7% of net revenues, respectively.
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 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 been designed into pocket recorders and telephone
answering machines. Along with offering true 3-volt operation, the 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 Semiconductor Corporation's Microwire.
The largest single application for the Company's products in the
communications market is currently the cellular phone. A number of
manufacturers, including Benefon, Casio, Ericsson, JVC, Motorola, Pioneer,
Sagem, Sanyo, Sharp, Sony, Toshiba 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 and/or voice memos
directly into the phone. Other representative applications for ChipCorder
products in the communications market include mobile radios, caller ID devices,
telephone announcement systems, personal handy phones and voice pagers.
The second largest application for the Company's products in the communication
market is the digital telephone answering machine.
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The acquisition of the CompactSPEECH product line in April 1997 brought
advanced, digital speech processing technology and high quality speech
compression algorithms to ISD's product portfolio. CompactSPEECH products have
also expanded ISD's record and playback durations to up to one hour. The
addition of the CompactSPEECH product line has expanded ISD's large base of
customers to include several new ones such as Philips, Siemens, and VTech.
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.
During 1997, ISD introduced the ISD1500 series, a family of low-cost single
chip record and play solutions for the price sensitive consumer market. This
product family delivers high quality single message functionality with added
features such as sound warping and user selectable duration.
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
ChipCorder Products
The Company currently offers seven product families incorporating its
ChipCorder technology. These products are available in die or packaged form and
range in retail list price from less than $1.00 to approximately $11.00 per
unit.
The Company's original 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 ISD33000 series offers substantially longer
voice recording and playback durations. This product family has enabled the
development of a wide variety of product applications, particularly
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, and provide users with complex messaging and addressing capability.
<PAGE>
CompactSPEECH Products
The CompactSPEECH product series provides high quality speech processing, long
recording times, caller ID, full duplex speaker phone functionality and
multi-language speech synthesis. CompactSPEECH products were the first to
provide a digital telephone answering solution with non-volatile memory support.
CompactSPEECH products are available in various packaging options and retail
between $4.00 and $7.00, depending on volume and packaging options.
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 France, Israel,
New York and Texas.
In North America, the Company has 19 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.
Select ISD products are also sold through Radio Shack and Digi-Key Corporation.
Internationally, the Company has 29 distributors located in Australia, China,
Hong Kong, Israel, Japan, Korea, South Africa, Taiwan, Singapore, and every
major country in Europe. The Company also has sales representatives in England,
France, Germany, and Italy. The Company relies on its distributors for local
product promotion and customer support, including identification and development
of customers, applications support, and media promotion, such as public
relations and advertising activities. The Company's agreements with its
international distributors and representatives are renewable on an annual basis,
but can be terminated or discontinued at will.
Export sales (sales outside North America) constituted approximately 65%, 65%
and 79% of the Company's net revenues for 1995, 1996 and 1997, 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, U.S. or
foreign 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 1995, 1996 and 1997, sales to the
Company's top ten customers, including those discussed below, accounted for
approximately 66%, 85% and 76%, respectively, of the Company's net revenues.
Sales to Marubun, the Company's Japanese distributor, and Motorola accounted for
16% and 13%, respectively, of the Company's net revenues in 1995, 23% and 29%
respectively in 1996, and 19% and 17% respectively in 1997. Sales to Matsushita
and Philips accounted for 13% and 11% of net revenues, respectively, in 1997.
<PAGE>
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 changes in the composition
of its customer base from year to year and expects this pattern to continue. 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 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 cellular phones 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 and CompactSPEECH 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. 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
application documentation 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 or
CompactSPEECH devices, ISD offers several evaluation tools and
development/programming systems. These tools allow users to record and play back
messages, create, edit and mass program ISD devices with accurate message
location, and develop or test the products' application environment by using a
PC as the host system to interact with the product.
Technology
The Company's technology differentiation lies in its patented technique for
storing multilevel signals which is used in the design of all ChipCorder
products. 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. Since
ChipCorder products use nonvolatile memory, they 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
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,
<PAGE>
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 or die
pricing, wafer volume and future technology improvements.
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 four 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 Samsung Electronics Co., Ltd. ("Samsung") in Korea, which supplied wafers
comprising about 78% of the Company's 1997 net revenues. Approximately 20% of
the Company's 1997 net revenues were supplied by wafers produced at Tower
Semiconductor ("Tower") in Israel. Rohm Semiconductor Co., Ltd. ("Rohm") in
Japan accounted for about 1% of 1997 net revenues as did Sanyo Electric Co.,
Ltd. ("Sanyo") in Japan. In January 1995, Atmel Corporation ("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 any one of its foundries. The Company has
qualified wafer fabrication facilities at Samsung, Tower, and Rohm. The Company
has qualified another foundry supplier, Winbond Electronics Corporation 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 Samsung or Tower, 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 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, 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, 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. The Company's agreements
with its offshore wafer fabrication and assembly facilities provide for pricing
and payment in U.S. dollars.
<PAGE>
ChipCorder and CompactSPEECH products are designed using the process
specifications of the Company's foundries. Currently, the foundries use CMOS
process technology with 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. In 1997,
wafers produced on a 0.8 micron process accounted for almost half of the
Company's net revenues. 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. 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 integrated circuits 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 wafer or die basis. 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 the 1.2 micron process and on its ISD2500 series as it
was converted to the 0.8 micron process. The ISD33000 experienced a yield
problem in the third and fourth quarters of 1997. The current levels are
variable and the Company continues 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 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 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 or the Philippines. The Company
qualifies and monitors assembly contractors using procedures similar in scope to
those used for wafer procurement. For products sold in die form, the Company
also employs several "die preparation" subcontractors that are located in
Taiwan, the Philippines, China, 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.
<PAGE>
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 9001 certification in October of 1996 and the 1997 surveillance audit
with no deviations. 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. The Company believes that continued
significant expenditures for research and development will be required in the
future as the Company develops more products with improved features. During
1997, the Company introduced the short duration ISD1500, an innovative, low cost
circuit topology manufactured at Rohm Semiconductor in Japan; and demonstrated
the eight minute record and playback capability utilizing a flash-based
technology built at Winbond Electronics Corporation in Taiwan. In addition, in
April 1997, the Company established a design center in Israel to support the
CompactSPEECH product line. This design center is also responsible for the
enhancement of the existing products as well as development of the Company's
next generation of digital signal processing ("DSP") 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
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 1995, 1996 and 1997 were approximately
$6.6 million, $11.8 million and $15.1 million, respectively. Fiscal 1997
research and development expenses includes $4.0 million of in-process research
and development related to the Company's CompactSPEECH product line acquisition.
As of December 31, 1997, the Company had 48 full-time and contract employees
engaged in research and development.
Backlog
As of December 31, 1997, the Company's total backlog was $13.8 million,
compared to $6.8 million as of December 31, 1996. 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.
<PAGE>
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 19 patents granted
(including one patent that was acquired), 22 patents pending and 2 patent
applications 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 May 2016. 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 91 patents in Europe, Japan and elsewhere; has one patent
granted in each of Europe, Singapore, and Korea; 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, three in the approval process and plans to apply for additional
such registrations as necessary. 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 five trademarks registered in the United States; has seven
additional United States applications pending; and has eight trademark
applications pending in Israel. The Company attempts to protect its circuit
designs, software, trade secrets, and other proprietary 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 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.
<PAGE>
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 its ability 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, 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, 1997, the Company had 173 full-time, 1 part-time and 18
contract/temporary employees. This included 79 employees in manufacturing, 33 in
finance and administration, 32 in sales and marketing, and 48 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. 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.
<PAGE>
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 leases approximately 3,500 square feet of
space in an office building in Herzelia, Israel for its Israeli design center.
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 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. 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
the parties. The Court has bifurcated the issues related to liability and
damages, and the parties are in the process of conducting final discovery
relating to the liability issues. On February 27, 1998, the Court issued a
decision regarding the patent claims. The Company believes that this decision is
at least in part favorable to the Company. 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.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists certain information regarding the Company's
executive officers as of December 31, 1997.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Age Position
- ---- --- --------
David L. Angel 56 Chairman of the Board and Chief Executive Officer
Eric J. Ochiltree 50 Director, President and Chief Operating Officer
Karin L. Bootsma 33 Vice President, Marketing
James Brennan 55 Vice President, Technology and Advanced Development
Michael Geilhufe 54 Vice President, Business Development
P. Ross Hayden 53 Vice President, Sales
Carl R. Palmer 46 Vice President, Engineering
Felix J. Rosengarten 63 Vice President, Finance and Administration and Chief Financial
Officer, Assistant Secretary of the Board
Alfred R. Woodhull 58 Vice President, Manufacturing
- -----------
</TABLE>
<PAGE>
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 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. Ochiltree joined the Company as President and Chief
Operating Officer in November 1996. From August 1995 to November
1996, he was Vice President, Products Group, of Exar Corporation,
a semiconductor company. From August 1991 to August 1995, he
served as Vice President of Analog Devices, Inc. and General
Manager of Analog's Santa Clara site. He holds a B.S.E.E. degree
from Georgia Institute of Technology, an M.S.E.E. degree from
Arizona State University, and an M.B.A. degree from the
University of Santa Clara.
Ms. Bootsma joined the Company in April 1993 as Marketing
Manager. She became Director of Marketing in January 1994,
Managing Director of Marketing in November 1996, and she was
appointed Vice President of Marketing in March 1997. From July
1990 to April 1993, she was a Product Marketing Manager for
Cirrus Logic. She holds a B.S.M.E. degree from the University of
the Pacific and an M.B.A. degree from the University of Santa
Clara.
Mr. Brennan joined the Company in June 1995 as principal
engineer and was appointed Vice President, Technology and
Advanced Development in March 1996. From 1989 until he joined
the Company Mr. Brennan held a similar position at Intel. Mr.
Brennan has a B.S.E.E. degree from Duke University and an
M.S.E.E. degree from the University of Houston.
Mr. Geilhufe co-founded the Company in December 1987. He has
served as Vice President, Business Development since February
1997 and Vice President, Quality and Reliability from May 1993 to
February 1997. From June 1989 to May 1993, he served as Vice
President, Manufacturing of the Company. Mr. Geilhufe was also a
director of the Company from December 1987 to May 1990. He holds
a B.S.E.E. degree from the University of California at Berkeley,
an M.S.E.E. degree from California State University at Long Beach
and an M.B.A. degree from the University of Santa Clara.
Mr. Hayden joined the Company in December 1993 as Director of
North American Sales. He became Director of World Wide Sales in
August 1996 and was appointed Vice President of Sales in February
1997. From April 1993 to December 1993, he was Director of
World Wide Sales for Austek Microsystems, a semiconductor
company. He holds B.S.E.E. and M.S.E.E. degrees from the
University of Louisville.
Mr. Palmer joined the Company in November 1995 as Director, IC
Design Center, and was appointed Vice President, Engineering in
March 1996. From 1983 until he joined the Company, Mr. Palmer
held various engineering management positions at SuperFlow
Corporation, a manufacturer of computer automated engine,
vehicle, and emissions test equipment, the most recent being Vice
President, Engineering. He holds B.S.E.E. and M.S.E.E. degrees
from University of Florida and an M.B.A. from the University of
Colorado.
Mr. Rosengarten joined the Company as Acting Vice President of
Finance and Administration in March 1991. He was appointed Chief
Financial Officer of the Company in May 1991 and was elected Vice
President, Finance and Administration and Chief Financial Officer
in July 1991. From May 1989 to December 1990, he was Vice
President and General Manager of the West Coast operations of
Drytek, Inc., a semiconductor processing equipment manufacturer.
Mr. Rosengarten has a B.S. Chem.E. degree from Cornell University
and an M.B.A. degree from Villanova University.
Mr. Woodhull has served as Vice President, Manufacturing since he joined the
Company in April 1994. From November 1989 to April 1994, he was Vice President,
Operations, of Avasem, a semiconductor company, and of Avasem/ICS after Avasem's
acquisition by Integrated Circuit Systems, Inc. He was also founder and
President of Advanced World Products, a company providing duplication services
and equipment repair, from October 1989 to December 1992. From January 1987 to
November 1989, Mr. Woodhull was Vice President and General Manager of National
Computer Consulting, Inc., a distributor of computer supplies. Mr. Woodhull
completed undergraduate studies through Lafayette College.
<PAGE>
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, 1997, there were approximately 2,140 beneficial owners 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>
1997 High Low
- ------------------------------------------------------------------
First Quarter $ 9.125 $6.313
Second Quarter $ 7.500 $6.125
Third Quarter $12.875 $6.750
Fourth Quarter $11.375 $4.813
</TABLE>
<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
</TABLE>
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Years Ended December 31, 1993 1994 1995 1996 1997
(Amounts in thousands, except per share amounts)
Statement of Operations Data:
Net revenues $22,485 $38,805 $ 55,467 $41,339 $47,950
Net income (loss) 21 4,021 5,812 (8,971) (13,528)
Net income (loss) per share:
Basic 0.00 3.51 0.70 (0.92) (1.40)
Diluted 0.00 0.67 0.64 (0.92) (1.40)
Shares used in per share computation:
Basic 5,300 1,145 8,303 9,788 9,652
Diluted 5,300 6,045 9,084 9,788 9,652
Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 5,789 $ 7,605 $ 75,094 $55,544 $39,808
Working capital 6,789 9,735 79,279 65,102 44,354
Total assets 13,691 22,268 105,430 78,865 71,037
Long-term liabilities 388 1,775 2,958 1,986 994
Total shareholders' equity 8,094 12,220 87,453 70,301 58,005
</TABLE>
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.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarters Ended
(Amounts in thousands, -----------------------------------------------------------------------------
except per share amounts) Mar 30, Jun 28, Sep 28, Dec 31, Mar 29, Jun 28, Sep27, Dec 31,
1996 1996 1996 1996 1997 1997 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
Net revenues...................... $12,335 $11,183 $ 8,153 $ 9,668 $ 8,342 $11,387 $13,813 $14,408
Gross margin...................... 2,907 4,029 (66) 2,195 2,689 4,153 4,965 3,205
Income (loss) from operations..... (3,822) (258) (5,348) (3,499) (6,033) (1,415) (1,252) (7,153)
Net income (loss)................. (1,977) 191 (5,743) (1,442) (5,399) (910) (701) (6,518)
Net income (loss) per share:
Basic:....................... $(0.19) $ 0.02 $(0.60) $(0.15) $(0.56) $(0.09) $(0.07) $(0.67)
Diluted:..................... (0.19) 0.02 (0.60) (0.15) (0.56) (0.09) (0.07) (0.67)
Shares used in per share computation:
Basic:...................... 10,235 9,702 9,661 9,552 9,615 9,609 9,654 9,743
Diluted:.................... 10,235 9,886 9,661 9,552 9,615 9,609 9,654 9,743
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements that reflect the Company's
current views with respect to future matters such as gross margins, spending
levels, international operations, gross profit and capital needs. Actual results
may differ materially from the results and outcomes discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include without limitation those discussed
below as well as those discussed elsewhere in this Report.
RESULTS OF OPERATIONS
Net Revenues
The Company had net revenues of $47.9 million in 1997 compared to $41.3
million for 1996, an increase of 16%. Net revenues in 1996 decreased 25% from
$55.5 million for 1995. The increase in net revenues for 1997 reflects the
acceptance of the Company's products into the growing communications market and
additional net revenues as a result of the CompactSPEECH product line
acquisition in March 1997. The decrease in net revenue in 1996 reflects
unexpected softness in the consumer market for the Company's products throughout
1996 compared to the strong demand experienced in the consumer market during
1995. Net revenues in the communications market grew to about $38 million in
1997 compared to about $30 million in 1996 and $28 million in 1995. Net revenues
in the consumer market accounted for about $6 million of net revenues in 1997
compared to about $9 million in 1996 and $25 million in 1995. The growth in net
revenues for 1997 encompasses increased shipment volume of ChipCorder product as
well as the advent of the CompactSPEECH product line shipments. In 1997, as in
1996, product volume continued to increase in the communications market but
decreased significantly in the consumer market. In 1995, net revenue reflected
increased volume of ChipCorder products sold in both the consumer and the
communication markets.
Sales by market segment for 1997 were 79% communications, 12% consumer and 9%
industrial compared to 72% communications, 21% consumer and 7% industrial for
1996 and 50% communications, 45% consumer and 5% industrial for 1995. The
Company's communications customers in 1997 continued representing such products
as telephone answering machines, cellular phones, personal handy phones and
pagers. Products for consumer customers in 1997 consisted primarily of personal
memory recorders, cameras, photo frames, books, educational toys and novelties.
Sales to the Company's top ten customers accounted for 76% of net revenues in
1997 compared to 85% in 1996 and 66% in 1995. The top five customers in 1997
were Marubun (the Company's Japanese distributor), Motorola, Matsushita,
Philips, and NuHorizons (the Company's United States distributor), accounting
for 19%, 17%, 13%, 11%, and 7% 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 changes in the composition
<PAGE>
of its customer base from year to year and expects this pattern to continue. 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 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 1997 were 79% of the Company's net revenues compared to 65%
in 1996 and 1995. Geographically, sales to Europe increased to 37% of the
Company's net revenues in 1997 from 11% in 1996 and 7% in 1995; sales to South
East Asia were 23% of the Company's net revenues in 1997 compared to 22% in 1996
and 35% in 1995. Japan accounted for 19% of total net revenues in 1997 down from
31% a year earlier and 27% in 1995. North American sales were 21% of the
Company's net revenues in 1997, 35% in 1996, and 35% in 1995. 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
Gross margin increased to 31% in 1997 compared to 22% in 1996 but remained
less than the 39% achieved in 1995. The increase in 1997 was caused by the
higher margins generated from the ISD33000 and the CompactSPEECH products, both
of which are manufactured in the smaller geometry 0.8 micron process. In the
fourth quarter of 1997, one of the Company's international customers went into
receivership and inventory, specific to this customer, was written off. In
addition, competitive and market pressures on selling prices for some of the
Company's older product lines required inventory reserves that were also
recorded on the fourth quarter of 1997. 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 1995. 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 $15.1 million in 1997
compared to $11.8 million in 1996 and $6.6 million in 1995. R&D expenditures as
a percent of net revenues were 31.5% in 1997 compared to 28.6% in 1996 and 11.8%
in 1995. This increase in R&D expenses both in absolute dollars and as a
percentage of total revenues relates to continued investment in the development
of new products and to costs associated with bringing up new technologies and
new foundries; specifically this includes $4 million of R & D expense associated
with the acquisition of the CompactSPEECH product line, explained below. The
Company expects research and development expenses to increase in absolute
dollars.
On March 28, 1997, the Company acquired the CompactSPEECH speech processor
line from National Semiconductor for a total purchase price of $5.1 million. The
acquisition was accounted for using the purchase method of accounting. A portion
of the purchase price was allocated to assets acquired based on their estimated
fair value, approximately $0.1 million. In addition, $4.0 million of the
purchase price was allocated to in-process research and development projects
that had not reached technological feasibility and had no probable alternative
future uses, which the Company expensed at the date of the acquisition as a
one-time non-recurring charge. The remainder of the purchase price, $1.0
million, was allocated to goodwill and will be amortized over five years on a
straight-line basis. See Note 3 of Notes to the Financial Statements.
<PAGE>
The in-process research and development projects for the CompactSPEECH product
line relate primarily to developing significant enhancements to the current
product offering as well as introducing advanced new products. The incomplete
projects include caller I.D. Type II, the integration of all telephone answering
functions, and the ability to interface with additional flash memory. Given the
uniqueness of the tasks and the technologies involved, alternative future uses
for these projects, apart from the objectives and economies of the projects for
which they are intended, do not exist.
The Company believes that the efforts to complete the acquired in-process
research and development projects will consist of internally staffed engineering
costs over the next one to two years. These costs are estimated to be
approximately $3.0 million to complete the research and development. There can
be no assurance that the Company will succeed in making commercially viable
products from the CompactSPEECH product line.
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
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 1997 to
$15.7 million from $10.2 million in 1996 and $8.7 million in 1995. SG&A expenses
as a percent of net revenues grew to 32.8% in 1997 compared to 24.6% in 1996 and
15.6% in 1995. The growth in SG&A expenses in 1997 came from the addition of
staff in 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. Further, S G & A expenses increased as
a result of approximately $2.9 million in one-time charges recorded in the
fourth quarter of 1997. These one-time charges relate to a $1.4 million addition
to bad debt reserves as a result of an international customer entering
receivership in the fourth quarter of 1997. Additional costs have also been
incurred related to the new information system implementation. Certain long term
investments were written down, also, in the fourth quarter of 1997, resulting in
a $0.8 million charge. The growth in SG&A expenses in 1996 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.
Other Income (Expense)
Net interest and other income was $2.3 million for 1997 compared to $2.4
million for 1996 and $1.8 million in 1995. The interest income in 1997 and 1996
relates to investment earnings on funds raised from the initial public offering
in February 1995 and the follow-on offering in September 1995.
Provision for Income Taxes
As a result of the Company's net loss in 1997 and the full utilization of
carryback losses in 1996, the Company recorded no provision or benefit for
income taxes. In 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% for 1995 and reflects the utilization of federal and state net
operating loss ("NOL") and tax credit carryforwards.
At December 31, 1997, the Company had established a valuation allowance
against its total gross deferred tax asset of $8,863,000. 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 8 of Notes to Financial
Statements) and uncertainties regarding future operations due to the increased
competition within the Company's industry.
<PAGE>
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 $15 million based on eligible assets; the
term of the credit line runs through June 30, 1998. At December 31, 1997, the
Company had no borrowings outstanding under this line of credit, but the credit
line is 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 $6.3 million in 1997; used
net cash of $11.2 million in 1996; and provided $4.6 million 1995. Net cash used
for operations in 1997 and 1996 was primarily the result of the Company's net
loss for both years. In 1995 the cash provided by operations was primarily the
result of the Company's net income in 1995. Cash used by investing activities
was $5.4 million in 1997 compared to $14.2 million provided in 1996 and $51.2
million used in 1995. From 1995 through 1997, investing activities consisted
principally of the purchase and maturity of investments. Cash used for financing
activities was $0.2 million in 1997 and $10.3 million in 1996. 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.
At December 31, 1997, the Company had cash, cash equivalents, and short-term
investments of $39.8 million and working capital of $44.4 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 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 section on "Other Factors That May Affect Operating Results" includes
forward-looking statements that reflect the Company's current views with respect
to future matters such as factors that can affect the Company's operating
results, foundry capacity, litigation, manufacturing yields, the markets for the
Company's products and protection of intellectual property. This section also
contains cautionary statements that identify important factors, including
certain risks and uncertainties, that could cause actual results or outcomes to
differ materially from those in the forward-looking statements in this section
and elsewhere in this Report.
All of the Company's products are manufactured by four independent foundries.
The Company's primary supplier is Samsung in Korea, which supplied wafers
comprising about 78% of the Company's 1997 net revenues. Approximately 20% of
the Company's 1997 net revenues was supplied by wafers produced at Tower in
Israel. Rohm in Japan accounted for about 1% of 1997 net revenues as did Sanyo
in Japan. The Company depends on these foundries to allocate to the Company a
portion of their foundry capacity sufficient to meet the Company's needs, to
produce products of acceptable quality 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. 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 Samsung
or Tower as a supplier, the inability of the Company or Samsung to obtain a
license from Atmel should that become necessary, 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.
<PAGE>
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. 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. The Court has bifurcated the issues
related to liability and damages, and the parties are in the process of
conducting final discovery relating to the liability issues. On February 27,
1998, the Court issued a decision construing the patent claims. The Company
believes that this decision is at least in part favorable to the Company. 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. See Item 3.
The fabrication of integrated circuits 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 communications,
consumer and industrial markets. In addition, product life cycles in the
communication and consumer markets are typically short. As a result, customers
must design the Company's products into their products as each new generation is
developed. 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
<PAGE>
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
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.
Potential Fluctuations in Operating Results. The Company's operating results
are subject to quarterly and annual fluctuations due to a variety of factors,
including availability of foundry capacity and raw materials, fluctuations in
manufacturing yields, competitive pricing pressures, the timing of significant
orders, changes in shipment schedules, changes in the mix of products sold,
changes in the mix of customers, availability and cost of products from the
Company's suppliers, the timing of new product announcements and introductions
by the Company and its competitors, the cyclical nature of the semiconductor
industry and certain markets addressed by the Company's products, the gain or
loss of significant customers, increased research and development expenses
associated with new product introductions or enhancements, market acceptance of
new or enhanced versions of the Company's products, changes in the channels
through which the Company's products are distributed, and economic conditions
generally or in various geographic areas. These factors are difficult to
forecast, and these or other factors can materially affect the Company's
quarterly or annual operating results. The Company's operating results will also
fluctuate as a result of seasonal factors. Demand for cell phones and other
products that incorporate the Company's products generally is strongest in the
third and fourth quarters of each year. In addition, the Company expects to
continue to increase its operating expenses for personnel and new product
development. If the Company does not achieve increased levels of revenues
commensurate with these increased levels of operating expenses, the Company's
operating results will be materially adversely affected.
For a discussion of other factors that may affect future operating results,
see Item 1: Business; Marketing, Sales and Distribution; Manufacturing;
Research and Development; Competition; and Employees.
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.
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not Applicable.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
December 31,
--------------------
1997 1996
---- ----
Current assets:
Cash and cash equivalents........................................ $10,102 $21,927
Short-term investments........................................... 29,706 33,617
Accounts receivable, net of allowance for doubtful
accounts of $1,870 and $600, respectively....................... 6,577 3,203
Inventories...................................................... 7,742 10,059
Prepaid expenses and other current assets........................ 2,265 2,874
-------- --------
Total current assets..................................... 56,392 71,680
-------- --------
Property and equipment, at cost:
Furniture, fixtures and leasehold improvements................... 1,107 796
Equipment........................................................ 14,287 11,063
-------- --------
15,394 11,859
Less -- Accumulated depreciation................................. (9,077) (6,024)
-------- --------
Net property and equipment............................... 6,317 5,835
-------- --------
Other assets, net.................................................. 2,146 1,200
Long-term investments.............................................. 6,182 150
======== ========
$71,037 $78,865
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease obligations................. $1,591 $1,270
Accounts payable................................................. 6,683 3,153
Accrued liabilities.............................................. 2,548 856
Deferred revenue................................................. 1,216 1,299
-------- --------
Total current liabilities................................ 12,038 6,578
-------- --------
Long-term liabilities:
Capitalized lease obligations, net of current portion............ 817 1,814
Other long-term liabilities...................................... 177 172
-------- --------
Total long-term liabilities.............................. 994 1,986
-------- --------
Commitments and contingencies (Note 5)
Shareholders' equity:
Common stock, no par value-
Authorized -- 22,000,000 shares
Outstanding -- 9,771,526 and 9,564,875 shares respectively.... 79,429 78,261
Deferred compensation............................................ (254) (332)
Accumulated deficit.............................................. (21,186) (7,658)
Unrealized gain on investments................................... 16 30
-------- --------
Total shareholders' equity............................... 58,005 70,301
-------- --------
$71,037 $78,865
======== ========
</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,
------------------------
1997 1996 1995
---- ---- ----
Net revenues.................................................... $47,950 $41,339 $55,467
Cost of revenues................................................ 32,939 32,274 33,836
--------- -------- -------
Gross margin.................................................... 15,011 9,065 21,631
--------- -------- -------
Operating expenses:
Research and development...................................... 11,118 11,817 6,550
In-process research and development (1)....................... 4,000 -- --
Sales, general and administrative............................. 15,748 10,175 8,668
--------- -------- -------
Total operating expenses.............................. 30,866 21,992 15,218
--------- -------- -------
Income (loss) from operations................................... (15,855) (12,927) 6,413
--------- -------- -------
Other income (expense):
Interest expense.............................................. (341) (473) (536)
Interest income............................................... 2,661 2,901 2,340
Other, net.................................................... 7 (14) (2)
--------- -------- -------
Total other income (expense), net..................... 2,327 2,414 1,802
--------- -------- -------
Income (loss) before provision (benefit) for income taxes....... (13,528) (10,513) 8,215
Provision (benefit) for income taxes............................. -- (1,542) 2,403
--------- -------- -------
Net income (loss)............................................... ($13,528) ($8,971) $5,812
========= ========= =======
Net income (loss) per share
Basic.......................................................... $(1.40) $(0.92) $0.70
========= ========= =======
Diluted........................................................ $(1.40) $(0.92) $0.64
========= ========= =======
Shares used in computing per share amounts
Basic.......................................................... 9,652 9,788 8,303
========= ========= =======
Diluted........................................................ 9,652 9,788 9,084
========= ========= =======
</TABLE>
(1) - In-process research and development is as a result of the Compact Speech
Acquisition.
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
Convertible Deferred Retained Unrealized Total
Preferred Stock Common Stock Compen- Earnings Gain on Shareholders'
Shares Amount Shares Amount sation (Deficit) Investments Equity
------ ------ ------ ------ ------ --------- ----------- ------
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'
over-allotment 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 purchase plan..... -- -- 5,895 108 -- -- -- 108
Common stock issued upon
secondary public offering and
exercise of underwriters' over-
allotment 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
Adjustment for unrealized holding
gains on available-for-sale
securities....................... -- -- -- -- -- -- 30 30
Net loss.......................... -- -- -- -- -- (8,971) -- (8,971)
-------- ----- --------- ------ ----- ------- ----- --------
Balance, December 31, 1996.......... -- -- 9,564,875 78,261 (332) (7,658) 30 70,301
Common stock issued under the
employee stock purchase plan..... -- -- 55,288 373 -- -- -- 373
Sale of common stock pursuant to
stock option exercises for cash.. -- -- 151,363 695 -- -- -- 695
Amortization of deferred
compensation related to
stock option grants.............. -- -- -- -- 78 -- -- 78
Issuance of common stock
warrants at fair value........... -- -- -- 100 -- -- -- 100
Adjustment for unrealized holding
gains on available-for-sale
securities....................... -- -- -- -- -- -- (14) (14)
Net loss.......................... -- -- -- -- -- (13,528) -- (13,528)
======== ===== ========= ======= ====== ========= ===== =========
Balance, December 31, 1997.......... -- $ -- 9,771,526 $79,429 $(254) $(21,186) $ 16 $58,005
======== ===== ========= ======= ====== ========= ===== =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended December 31,
---------------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income (loss).................................. $ (13,528 $(8,971) $ 5,812
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities --
Depreciation and amortization..................... 3,403 2,537 1,971
Amortization of investment discount............... -- 39 (600)
Compensation costs related to stock and
stock option grants.............................. 79 235 44
In-process research and development............... 4,000 -- --
Provision for allowance for doubtful accounts..... 1,270 325 210
Changes in assets and liabilities --
Accounts receivable.............................. (4,644) 4,026 (2,053)
Inventories...................................... 2,316 (249) (6,042)
Prepaid expenses and other assets................ 751 (1,079) (1,521)
Accounts payable................................. 3,530 (6,630) 4,732
Accrued liabilities.............................. 1,692 (705) 410
Deferred revenue................................. (83) (535) 1,289
Other long-term liabilities...................... 5 (156) 307
---------- --------- ---------
Net cash provided by (used for) operating
activities................................... (1,209) (11,163) 4,559
---------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment................. (2,885) (2,479) (1,296)
Patent costs ...................................... (338) (174) (95)
Purchase of CompactSPEECH.......................... (5,100) -- --
Purchase of short and long term investments........ (55,033) (71,233) (75,749)
Proceeds from maturities and sale of investments... 52,898 88,099 25,924
---------- --------- ---------
Net cash provided by (used for) investing
activities................................... (10,458) 14,213 (51,216)
---------- --------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock, net of
issuance costs.................................... 1,168 514 69,377
Repurchase of common stock......................... -- (9,712) --
Payments on capitalized lease obligations.......... (1,326) (1,127) (1,123)
---------- --------- ---------
Net cash provided by (used for) financing
activities................................... (158) (10,325) 68,254
---------- --------- ---------
Net increase in cash and cash equivalents............ (11,825) (7,275) 21,597
Cash and cash equivalents at beginning of year....... 21,927 29,202 7,605
========== ========= =========
Cash and cash equivalents at end of year............. $10,102 $21,927 $29,202
========== ========= =========
Supplemental cash flow information:
Cash paid for interest............................. $341 $472 $536
========= ========= ==========
Cash paid for income taxes......................... $ -- $ -- $3,203
========= ========= ==========
Property and equipment acquired under capital
leases............................................ $650 $491 $2,314
========== ========= =========
</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 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, and
industrial markets. The Company's markets are primarily in Europe, North
America, Japan, and South East Asia. 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, 1997, approximately $26,253,000 of the Company's investments in
debt securities were classified as available-for-sale, and had contractual
maturities ranging from one month to two years from the date of purchase by the
Company. Available for sale debt Securities are carried at fair value with
unrealized holding gains and losses reported as a separate component of
shareholders' equity. Debt securities are classified as held-to-maturity when
the Company has the positive intent and ability to hold the securities to
maturity. As of December 31, 1997, approximately $16,241,000 of the Company's
investments were classified as held-to-maturity and were carried at amortized
cost. Contractual maturities range from one month to two years from December 31,
1997. 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, 1997 and December 31, 1996, was as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
December 31,
------------
Available-for-Sale Securities: 1997 1996
------------------------------ ---- ----
Government bonds..................................... $ 7,508 $ 9,012
Certificates of deposit.............................. 5,502 4,511
Commercial paper..................................... 9,541 9,378
Bankers' acceptance notes............................ -- 992
Corporate debt securities............................ 3,702 3,792
-------- -------
Total available-for-sale securities............. 26,253 27,685
-------- -------
Held-to-Maturity Securities:
----------------------------
Commercial paper..................................... 8,175 22,473
Corporate debt securities............................ 1,050 --
Municipal debt securities............................ 7,016 2,355
-------- -------
Total held-to-maturity securities............... 16,241 24,828
-------- -------
Total investments in debt securities................. $42,494 $52,513
======== =======
</TABLE>
<PAGE>
Approximately $6,606,000 and $18,896,000 of the total investment in debt
securities is included in cash equivalents on the accompanying balance sheets as
of December 31, 1997 and 1996, 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,
------------
1997 1996
---- ----
Work-in-process........... $4,280 $ 6,157
Finished goods............ 3,462 3,902
------ ------
$7,742 $10,059
</TABLE>
Inventories contained products in excess of the Company's current estimated
requirements and were fully reserved at December 31, 1997 and 1996. Due to
competitive pressures, it is possible that these estimates could change in the
near term.
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.
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. As of December
31, 1997, ten customers accounted for approximately 71% of the Company's trade
receivables.
<PAGE>
Of the Company's net revenues approximately 78% are supplied by wafers from
one foundry and 20% from another. Although there are a limited number of
foundries available that could manufacture the Company's products, management
believes that other suppliers can 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.
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
December 31,
------------
1997 1996
---- ----
System Implementation Costs..... 812 --
Other........................... 1,736 856
------ ------
2,548 856
====== ======
</TABLE>
Net Income (Loss) Per Share
Effective December 31, 1997, the Company retroactively adopted the provisions
of Statement of Financial Accounting Standards No. 128 (SFAS), "Earnings per
Share". SFAS 128 requires companies to compute net income (loss) per share under
two different methods, basic and diluted; and to present per share data for all
periods for which an income statement is presented. Basic earnings per share
were computed by dividing net income or net loss by the weighted average number
of common shares outstanding during the period. Diluted earnings per share
reflect the potential dilution that could occur if the income were divided by
the weighted average number of common and potential common shares outstanding
during the period. Diluted earnings per share were computed by dividing net
income by the weighted average number of common shares and potential common
shares from outstanding stock options for the year ended December 31, 1995.
Potential common shares were calculated using the treasury stock method and
represent incremental shares issuable upon exercise of the Company's outstanding
options. For the years ended December 31, 1996 and 1997, the diluted loss per
share calculation excludes effects for outstanding stock options as such
inclusion would be anti-dilutive. The following table provides reconciliation of
the numerators and denominators used in calculating basic and diluted earnings
per share for the prior three years.
(In thousands, except per share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the Year Ended December 31,
-------------------------------
1997 1996 1995
---- ---- ----
Net income (loss)........................................ $(13,528) $(8,971) $ 5,812
Basic Earnings Per Share
Income (loss) available to common shareholders.......... $(13,528) $(8,971) $ 5,812
Weighted average common shares outstanding.............. 9,652 9,788 8,303
Basic earnings (loss) per share.......................... $ (1.40) $ (0.92) $ 0.70
========= ======== =======
Diluted Earnings Per Share
Income (loss) available to common shareholders.......... $(13,528) $(8,971) $ 5,812
Weighted average common shares outstanding.............. 9,652 9,788 8,303
Common stock option grants (unless anti-dilutive)....... -- -- 733
Weighted average warrants outstanding................... -- -- 48
--------- -------- -------
Total weighted average common shares and equivalents..... 9,652 9,788 9,084
Diluted earnings (loss) per share........................ $ (1.40) $ (0.92) $ 0.64
========= ======== =======
</TABLE>
<PAGE>
Options to purchase a weighted average of approximately 2.4 million and 1.7
million shares of common stock were outstanding at December 31, 1997 and 1996,
respectively, but were not included in the computation of diluted earnings per
share as a result of their anti-dilutive effect on the loss available to common
shareholders.
3. ACQUISITION:
On March 28, 1997, the Company acquired the CompactSPEECH speech processor
product line from National Semiconductor for a cash purchase price of $5.1
million. The acquisition was accounted for under the purchase method of
accounting. A portion of the purchase price was allocated to assets acquired
based on their estimated fair value. In addition, $4.0 million of the purchase
price was allocated to in-process research and development projects that had not
reached technological feasibility and had no probable alternative future uses,
which the Company expensed at the date of the acquisition as a one-time
non-recurring charge. The remainder of the purchase price, $1.0 million, was
allocated to goodwill and will be amortized over five years on a straight-line
basis. Comparative pro forma information has not been presented, as the results
of operations for CompactSPEECH are not material to the Company's financial
statements.
4. LINE OF CREDIT:
In June 1997, the Company entered into a revolving line of credit agreement
with a bank under which it can borrow up to $15,000,000 based on eligible
investments. The line of credit is secured by substantially all of the Company's
assets, bears interest at LIBOR plus 1.25% (7.2% at December 31, 1997) and
expires on June 30, 1998. At December 31, 1997, there were no borrowings
outstanding under the line of credit and the Company's borrowing base was
approximately $17,700,000. 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.
5. 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, 1997 and December 31, 1996 was approximately $7,408,000 and $6,758,000,
respectively. Accumulated amortization of leased equipment at such dates was
approximately $5,358,000 and $3,955,000, respectively. Future minimum lease
payments together with the present value of the payments, as of December 31,
1997, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
Years Ending December 31,
-------------------------
1998..................................................... 1,763
1999..................................................... 657
2000..................................................... 209
-------
Total minimum lease payments................................ 2,629
Less -- Amount representing interest (9.4% - 14.6%)......... (221)
-------
Present value of minimum lease payments..................... 2,408
Less -- Current portion..................................... (1,591)
-------
Long-term portion........................................... $817
=======
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
Operating Leases
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 leases approximately 3,500 square feet of
space in an office building in Herzelia, Israel for its Israeli design center.
The leases for facilities and certain equipment are operating leases that expire
at various dates through 2000. Future minimum annual rental payments under
operating leases are as follows (in thousands):
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ending December 31,
------------------------
1998..................................................... 1,354
1999..................................................... 1,296
2000..................................................... 121
2001..................................................... 3
------
$2,774
======
</TABLE>
During the years ended December 31, 1997, 1996 and 1995, rent expense totaled
approximately $1,627,000 $1,380,000, and $807,000, 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
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. The Court has bifurcated the issues related to liability and
damages, and the parties are in the process of conducting final discovery
relating to the liability issues. On February 27, 1998, the Court issued a
decision regarding the paten claims. The Company believes that this decision is
at least in part favorable to the Company. 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.
7. EQUITY:
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, 1997 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, 1997, the Company had reserved shares of its common stock
for the following purposes:
<TABLE>
<CAPTION>
<S> <C> <C>
1987 Stock Option Plan.................... 144,387
1994 Employee Stock Purchase Plan......... 65,605
1994 Equity Incentive Plan................ 2,743,184
1994 Directors Stock Option Plan.......... 120,000
Nonqualified stock options................ 42,500
Warrants issued........................... 25,000
---------
3,140,676
=========
</TABLE>
<PAGE>
Employee Stock Purchase Plan
In September 1994, the Company approved the Employee Stock Purchase Plan. The
plan reserved up to 170,000 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, 1997, 104,395
shares have been issued under this plan. The weighted average fair value of
shares sold in 1997 was $6.74.
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 144,387 shares were outstanding under this plan at December
31, 1997.
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 2,750,000 shares for issuance under the terms of the
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.
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:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Net Income (loss):
As reported $ (13,528) $ (8,971) $ 5,812
Pro forma (16,742) (12,558) 4,939
Net Income (loss) per share:
As reported $ (1.40) $ (0.92) $ 0.64
Pro forma $ (1.73) $ (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, 1997, 1996 and 1995
and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995
---- ---- ----
Weighted Weightd Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 2,051,945 $ 6.74 1,406,133 $ 8.98 634,897 $ 1.56
Granted 1,037,879 6.82 2,465,998 7.51 1,450,519 12.78
Exercised (151,363) 4.60 (174,193) 1.00 (207,199) 1.84
Forfeited (190,713) 6.77 (1,645,993) 10.06 (472,084) 15.18
--------- ----------- ---------
Outstanding at end of year 2,747,748 $ 6.92 2,051,945 $ 6.74 1,406,133 $ 8.98
========= =========== =========
Exercisable at end of year 806,819 391,542 329,601
Weighted average fair value
of options granted $3.21 $3.27 $4.13
Options available for grant 367,928 399,489 219,494
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
December 31, 1997
---------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
exercise years left exercise
Exercise Prices Number price to exercise Number price
- --------------------------------------------------------------------------------------------------
$ .45 - $ 6.19 406,312 $ 4.68 6.7 175,349 $ 2.94
6.63 - 6.63 714,909 6.63 10.0 -- 0.00
6.81 - 6.81 148,068 6.81 9.0 28,389 6.81
6.88 - 6.88 960,478 6.88 8.5 332,897 6.88
7.06 - 25.25 517,981 9.19 7.0 270,184 9.43
--------- -------
$ .45 - $25.25 2,747,748 $ 6.92 8.3 806,819 $ 6.87
========= =======
</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 1997, 1996, and 1995, respectively: risk-free
interest rates of 5.66%, 5.57% and 6.45%; expected dividend yields of 0%;
expected lives of 1.5 years; expected volatility of 58%, 82%, and 47%.
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.
<PAGE>
A warrant to purchase 25,000 shares of the Company's common stock was granted
on December 3, 1997 as part of the Company's investment in another entity; these
shares vest over a two year period and can be exercised over a four year period.
The fair value of this warrant was $100,000 and the amount has been recorded as
part of the cost of the Company's investment in the other entity.
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.
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.
8. 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,
------------------------
1997 1996 1995
---- ---- ----
Current payable (benefit):
Federal............................................... $ -- $(2,314) $3,029
State................................................. -- (185) 331
------- -------- -------
Total current................................. -- (2,499) 3,360
Deferred (benefit):
Federal............................................... -- 752 (629)
State................................................. -- 205 (328)
------- -------- -------
Total deferred................................ -- 957 (957)
Total provision (benefit) for income taxes.... $ -- $(1,542) $2,403
======= ======== =======
</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):
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Provision (benefit) computed at Federal statutory rate..... $ (4,735) $ (3,680) $ 2,875
State income taxes, net of Federal tax benefit............. (825) (636) 497
In-process research and development write-off.............. 1,644 -- --
Nondeductible expenses..................................... 47 36 2
Tax credits................................................ -- -- (274)
Change in valuation allowance.............................. 4,707 3,565 (1,205)
Other...................................................... (838) (827) 508
--------- --------- -------
Total provision, (benefit) for income taxes...... -- $ (1,542) $2,403
Effective tax rate............................... -- (15%) 29%
========= ========= =======
</TABLE>
Components of the net deferred income tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
As of December 31,
------------------
1997 1996
---- ----
Federal net operating loss carryforwards................... $ 4,712 $ 833
State net operating loss carryforwards..................... 94 234
Tax credit carryforwards................................... 1,720 1,322
Cumulative temporary differences:
Deferred revenue......................................... 271 225
Patent costs............................................. (148) (141)
Depreciation expense..................................... (434) (403)
Research and development costs........................... 1,545 --
Reserve for doubtful accounts and returns................ 266 204
Inventory reserves....................................... 856 1,543
Accrued vacation......................................... 174 142
Other temporary differences.............................. (193) 197
-------- --------
Total deferred income tax asset............................ 8,863 4,156
Valuation allowance........................................ (8,863) (4,156)
Net deferred income tax asset.............................. $ -- $ --
======== ========
</TABLE>
The Company's net operating loss ("NOL") and tax credit carryforwards expire
at various dates through 2012. 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, 1997,
federal NOL carryforwards of approximately $1.6 million of the $13.5 million
NOL 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, 1997, the Company had established a valuation allowance
against the gross deferred tax asset of $8,863,000. 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.
9. EXPORT SALES AND SIGNIFICANT CUSTOMERS:
The Company operates in the communications, consumer, and industrial market
segments. 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,
------------------------
1997 1996 1995
---- ---- ----
United States..................... 21% 35% 35%
Export:
Asia............................ 42 54 58
Europe.......................... 37 11 7
100% 100% 100%
---- ---- ----
</TABLE>
<PAGE>
Sales to major customers as a percentage of net revenues are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Sanyo............................. 1% 8% 10%
Motorola.......................... 17% 29% 13%
Marubun........................... 19% 23% 16%
Matsushita........................ 13% -- --
Philips........................... 11% -- --
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Information Storage Devices, Inc.:
We have audited the accompanying balance sheets of Information Storage
Devices, Inc. (a California corporation) as of December 31, 1997 and 1996, and
the related statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, 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 19, 1998
<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 information required by this item with respect to the executive officers
of the Company is incorporated by reference from "Item 4A: Executive Officers of
the Registrant" in Part I of this report.
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 six (6).
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name of Director Age Principal Occupation Director Since
---------------- --- -------------------- --------------
David L. Angel 56 Chairman of the Board of the Company; Chief Executive 1991
Officer of the Company
Frederick B. Bamber 55 Managing Director of Applied Technology Investors, Inc., 1990
and a General Partner of Technologies for Information &
Publishing, L.P. (1) (2)
Eugene J. Flath 60 General Partner of AVI Management Partners (1) (2) 1988
Alan V. King 63 Chairman of the Board and Chief Executive Officer of 1997
Volterra Semiconductor Corporation, Chairman of the
Board of Arithmos, Inc., and a Director of Smartflex
Systems (2)
Eric J. Ochiltree 50 President and Chief Operating Officer of the Company 1997
Frederick L. Zieber 56 President, Pathfinder Research, Incorporated (2) 1995
</TABLE>
- -----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
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 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., a
publishing software company. 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.
<PAGE>
Mr. King was appointed a director of the Company in May 1997. Mr. King has
been Chairman of the Board, President, and Chief Executive Officer of Volterra
Semiconductor Corporation, a semiconductor company, since September 1996. He
also has served as Chairman of the Board of Arithmos, Inc., a semiconductor
company, since February 1995; has been a director of Smartflex Systems, a
turnkey contract assembler company, since October 1993; and has been a Director
of Elantec Semiconductor, Inc., an analog semiconductor company, since December
1997. From September 1991 to November 1994, he served as President and Chief
Executive Officer of Silicon Systems, Inc. From September 1986 to August 1991,
he was President and Chief Executive Officer of Precision Monolithics, Inc. Mr.
King holds a B.S. Ceramic E.
degree from the University of Washington.
Mr. Ochiltree joined the Company as President and Chief
Operating Officer in November 1996. From August 1995 to November
1996, he was Vice President, Products Group, of Exar Corporation,
a semiconductor company. From August 1991 to August 1995, he
served as Vice President of Analog Devices, Inc. and General
Manager of Analog's Santa Clara site. He holds a B.S.E.E. degree
from Georgia Institute of Technology, an M.S.E.E. degree from
Arizona State University, and an M.B.A. degree from the
University of Santa Clara.
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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Exchange Act, as amended, requires the Company's directors
and officers, and persons who own more than 10% of a registered class of the
Company's equity securities, to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission. Such persons
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
furnished to the Company and written representations from the executive officers
and directors of the Company, the Company believes that all filings required to
be made by the Company's officers, directors and 10% shareholders during 1997
were made in a timely manner.
<PAGE>
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 who were serving as executive officers at the end of 1997 (together,
the "Named Officers") during 1997, 1996, and 1995.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Summary Compensation Table
Annual Compensation
--------------------------------------
All Other
Name and Principal Position Year Salary Bonus Options Granted Compensation
--------------------------- ---- ------ ----- --------------- ------------
David L. Angel.............................. 1997 $249,000 $ 0 20,837 $ 0
Chairman and Chief Executive Officer 1996 175,000 0 282,000 (1) 22,245 (2)
1995 175,000 30,000 82,000 0
Eric J. Ochiltree........................... 1997 215,000 10,000 21,875 0
President and Chief Operating Officer 1996 24,460 0 150,000 0
Carl R. Palmer.............................. 1997 155,000 0 17,188 28,774 (3)
Vice President, Engineering 1996 125,000 20,000 87,500 (4) 23,576 (5)
1995 15,019 0 25,000 0
Felix J. Rosengarten........................ 1997 155,000 0 13,688 8,942 (2)
Vice President, Finance and Administration, 1996 130,000 0 111,500 (6) 8,525 (2)
and Chief Financial Officer 1995 130,000 30,000 31,000 0
James Brennan............................... 1997 155,000 0 27,500 217 (7)
Vice President, Advanced Technology 1996 140,000 0 28,750 0
1995 74,683 20,000 25,000 0
</TABLE>
(1) Mr. Angel received 100,000 shares as new option grants in 1996. Options
granted in 1996 also include grants of options to purchase 182,000 shares
associated with the repricing of previously granted options.
(2) Represents payment for vacation accrued in excess of 20 days.
(3) Represents compensation for relocation of $8,300 and accrued vacation of
$20,474.
(4) Mr. Palmer received 32,500 shares as new option grants in 1996. Options
granted in 1996 also include grants of options to purchase 55,000 shares
associated with the repricing of previously granted options.
(5) Represents payment for relocation.
(6) Mr. Rosengarten received 40,500 shares as new option grants in 1996. Options
granted in 1996 also include grants of options to purchase 70,000 shares
associated with the repricing of previously granted options.
(7) Represents awards received in connection with the filing of new patent
applications.
<PAGE>
The following table shows, as to each of the Named Officers, option grants
during the last year and the potential realizable value of those options,
assuming 5% and 10% appreciation, at the end of their term:
Option Grants in 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Individual Grants
--------------------------------- Potential Realizable Value
Potential Realizable Number of % of Total at Assumed Annual Rates
Securities Options of Stock Price Appreciation
Underlying Granted to for Option Term
Options Employees in Exercise Expiration -----------------------------
Name Granted (1) Current Year (2) Price Date(3) 5% (4) 10% (4)
- -------------------- ----------- ---------------- -------- ---------- ---------- ----------
David L. Angel 20,837 2.0% $6.625 1/1/08 $ 86,816 $ 220,008
Eric J. Ochiltree 21,875 2.1% 6.625 1/1/08 91,140 230,968
Carl R. Palmer 17,188 1.7% 6.625 1/1/08 71,612 181,480
Felix J. Rosengarten 13,688 1.3% 6.625 1/1/08 57,030 144,525
James Brennan 27,500 2.6% 6.625 1/1/08 114,576 290,360
</TABLE>
- --------
(1)Options granted under the Company's 1994 Stock Option Plan typically have a
10-year term, vest over a four-year period of employment and have an exercise
price equal to market value on the date of grant.
(2)Options to purchase an aggregate of 1,007,879 shares of Common Stock of the
Company were granted to employees during the year ended December 31, 1997.
(3)Options may terminate before their expiration dates if the optionee's status
as an employee or consultant is terminated, upon the optionee's death or upon
an acquisition of the Company.
(4)Potential realizable value is based on an assumption that the market price of
the stock appreciates at the stated rate, compounded annually, from the date
of grant until the end of the ten-year option term. These values are
calculated based on requirements promulgated by the Securities and Exchange
Commission and do not reflect the Company's estimate of future stock price
appreciation.
The following table sets forth certain information concerning the exercise of
options by each of the Named Officers during 1997, 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, 1997. Also reported are values of "in-the-money" options that
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, 1997 ($ 6.031 per share), based on the closing price of the
Company's stock on December 31, 1997. The Company does not grant stock
appreciation rights.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Aggregated Option Exercises in 1997 and Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Year-End (#) at Year-End
----------------------- --------------------
Shares Acquired Value
Name on Exercise (#) Realized (1) Exercisable Unexercisable Exercisable Unexercisable
---- ---------------- ------------ ----------- ------------- ----------- -------------
David L. Angel 0 $ 0 93,333 145,962 $198,003 $ 0
Eric J. Ochiltree 8,000 (2,000) 32,625 131,250 1,011 3,391
Carl R. Palmer 0 0 17,188 57,500 0 0
Felix J. Rosengarten 14,101 91,656 29,688 63,000 40,733 0
James Brennan 0 0 23,021 58,229 0 0
</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, less the aggregate
exercise price of the options.
<PAGE>
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 automatically granted an
option to purchase 7,500 shares of Common Stock ("Initial Option") on the date
such director first joins the Board. In addition, each non-employee director is
granted a succeeding option ("Succeeding Option") to purchase 7,500 shares of
Common Stock on January 1 of each year that vest at the rate of one-twelfth per
month, for as long as the non-employee director continuously remains a director
of the Company. 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 Common Stock is reserved for issuance under the Directors
Plan, 67,500 of which were subject to outstanding options as of December 31,
1997.
Compensation Committee Interlocks and Insider Participation
During 1997, the Compensation Committee of the Board of Directors consisted of
Frederick B. Bamber, Eugene J. Flath and Frederick L. Zieber. In addition, Alan
V. King became a member of the Compensation Committee when he joined the Board
of Directors in May 1997. All of the members of the Compensation Committee are
independent outside directors. There is no interlocking relationship between the
Board or Compensation Committee and the board of directors or compensation
committee of any other company.
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, 1997, 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>
<S> <C> <C>
Shares Beneficially
Owned (1)
-------------------------
Name of Beneficial Owner Number Percent
------------------------ ------ -------
Pioneering Management Corp.(2)........................................... 976,000 9.99%
Kaufmann Fund Inc.(3).................................................... 700,000 7.16%
Frederick B. Bamber
Technologies for Information & Publishing, L.P.(4).................. 568,114 5.81%
Dimensional Fund Advisors Inc.(5)........................................ 503,500 5.15%
David L. Angel(6)........................................................ 218,957 2.24%
Eugene J. Flath(7)....................................................... 113,381 1.16%
Felix J. Rosengarten(8).................................................. 104,120 1.07%
Eric J. Ochiltree(9)..................................................... 47,397 *
Frederick L. Zieber(10).................................................. 26,843 *
James Brennan(11)........................................................ 28,250 *
Carl R. Palmer(12)....................................................... 22,585 *
Alan V. King (13)........................................................ 5,625 *
All executive officers and directors as a group (13 persons)(14)......... 1,352,690 13.84%
</TABLE>
- ----------------
* less than 1%
<PAGE>
(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 December 31, 1997 are deemed to be outstanding
and to be beneficially owned by the person holding such options 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) The share ownership is as reported on schedule 13G/A as amended dated
January 21, 1998. The address for Pioneering Management Corporation is 60
State Street, Boston, Massachusetts 02109.
(3) The share ownership is as reported on schedule 13G as amended dated January
29, 1998. The address for Kaufmann Fund Incorporated is 140 East 45th
Street, 43rd Floor, Suite 2624, New York, New York 10017.
(4) 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 20,468 shares
subject to options exercisable within 60 days of December 31, 1997.
(5) The share ownership is as reported on schedule 13G as amended dated February
10, 1998. The address for Dimensional Fund Advisors Incorporated is 1299
Ocean Avenue, 11th Floor, Santa Monica, California 90401.
(6) Includes 100,916 shares subject to options exercisable within 60 days of
December 31, 1997. Mr. Angel is Chairman of the Board, Chief Executive
Officer and a director of the Company.
(7) Includes 61,874 shares subject to options exercisable within 60 days of
December 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.
(8) Includes 32,687 shares subject to options exercisable within 60 days of
December 31, 1997. Mr. Rosengarten is Vice President, Finance and
Administration, and Chief Financial Officer of the Company.
(9) Includes 38,876 shares subject to options exercisable within 60 days of
December 31, 1997. Mr. Ochiltree is President and Chief Operating Officer of
the Company.
(10)Includes 19,843 shares subject to options exercisable within 60 days of
December 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.
(11)These shares are subject to options exercisable within 60 days of December
31, 1997. Mr. Brennan is Vice President, Technology and Advanced
Development, of the Company.
(12)These shares are subject to options exercisable within 60 days of December
31, 1997. Mr. Palmer is Vice President, Engineering, of the Company.
(13)These shares are subject to options exercisable within 60 days of December
31, 1997. Mr. King is a director of the Company. The address for Mr. King is
2730 San Tomas Expressway, Suite 210, Santa Clara, California 95051.
(14)Includes the shares subject to options stated to be included in footnotes
(4) and (6) through (13) and 234,243 additional shares subject to options
exercisable within 60 days of December 31, 1997.
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1997, 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 in Item 11.
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
Accountants are included in Item 8 of this report.
Balance Sheets at December 31, 1997 and 1996
Statements of Operations for the years ended December 31, 1997,
1996, and 1995
Statements of Stockholders' Equity for the years ended December 31, 1997,
1996, and 1995
Statements of Cash Flows for the years ended December 31, 1997, 1996, and
1995
Notes to Financial Statements
Report of Independent Public Accountants
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 -
<TABLE>
<CAPTION>
<S> <C> <C>
INDEX TO EXHIBITS
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(2)
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(3)
4.01 -- Form of Specimen Certificate for Registrant's Common Stock(2)
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(3)
10.01 -- Registrant's 1987 Stock Option Plan, as amended, and related documents(4)*
10.02 -- Registrant's 1994 Equity Incentive Plan, as amended, and related documents(5)*
10.03 -- Registrant's 1994 Directors Stock Option Plan and related documents(6)*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.04 -- Registrant's 1994 Employee Stock Purchase Plan and related
documents, as amended(5)* 10.05 -- Form of Indemnification Agreement
entered into with each of Registrant's directors and
executive officers(2)*
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(7)
10.21 -- Acceptance, Letter of Credit, Loan and Security Agreements between Registrant and Union
Bank dated June 30, 1997 (includes related Summary Schedules)
10.22 -- Agreement for Contract Manufacturing between
Registrant and Rohm Electronics, a Division of Rohm
Corporation, dated as of November 27, 1995(7)**
10.23 -- Form of Employment Agreement dated January 19, 1996
between Registrant and all of the Company's executive
officers and certain key employees(6)*
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(8)*
10.26 -- International Distributorship Agreement between Registrant and Marubun Corporation
effective as of April 12, 1994(9)
23.01 -- Consent of Arthur Andersen LLP, Independent Public Accountants
27.01 -- Financial Data Schedule
</TABLE>
----------
* Management contract or compensatory plan or arrangement.
** Confidential treatment has been granted for portions of this document.
Such portions have been omitted from this filing and have been filed
separately with the Securities and Exchange Commission.
(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 S-1 Registration Statement (File No. 33-86458).
(3) Incorporated by reference to the exhibit of the same number filed with
Registrant's Form 8-K filed on or about January 5, 1996.
(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
September 27, 1997.
(6) 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.
(7) 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.
(8) 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, 1996.
(9) 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
28, 1997.
<PAGE>
(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 25, 1998
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, Chief Executive March 25, 1998
Officer and Director
- ---------------------- (Principle Executive Officer)
David L. Angel
/S/ FELIX J. ROSENGARTEN Vice President, Finance and Administration, March 25, 1998
and Chief Financial Officer
- ---------------------- (Principal Financial Officer and
Felix J. Rosengarten Principal Accounting Officer)
/S/ FREDERICK B. BAMBER Director March 25, 1998
- ----------------------
Frederick B. Bamber
/S/ EUGENE J. FLATH Director March 25, 1998
- ----------------------
Eugene J. Flath
/S/ ALAN V. KING Director March 25, 1998
- ----------------------
Alan V. King
/S/ ERIC J. OCHILTREE Director March 25, 1998
- ----------------------
Eric J. Ochiltree
/S/ FREDERICK L. ZIEBER Director March 25, 1998
- ----------------------
Frederick L. Zieber
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Schedule II
INFORMATION STORAGE DEVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
Balance at Charged to Costs Balance at
Description Beginning of Year and Expenses Deductions End of Year
- ----------- ----------------- ---------------- ---------- -----------
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
Year ended December 31, 1997
Allowance for doubtful accounts........ $ 600 $ 1,270 $ -- $ 1,870
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included (or incorporated by reference) in this Form 10-K into the
Company's previously filed Registration Statements No. 33-90824, No. 333-08037
and No. 333-43065, on Form S-8.
ARTHUR ANDERSEN LLP
San Jose, California
March 25 , 1998
<PAGE>
COMMERCIAL PROMISSORY NOTE
(BASE RATE)
<TABLE>
<CAPTION>
<S> <C> <C>
Borrower Name:
INFORMATION STORAGE DEVICES, INC.,
a California corporation
Borrower Address: Office: Loan Number:
2045 Hamilton Avenue Sunnyvale 0005-00-0000
San Jose, CA 95125:
Maturity Date: Amount:
June 30,1998 $15,000,000.00
Sunnyvale, California $15,000,000.00 Date: July 24, 1997
- --------------------- -------------- -------------------
</TABLE>
FOR VALUE RECEIVED, on June 30, 1998, the undersigned ("Debtor") promises to pay
to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated below, the
principal sum of FIFTEEN MILLION AND NO/100 DOLLARS ($15,000,000.00), or so much
thereof as is Disbursed, together.with interest on the balance of such principal
from time to time outstanding, at the per annum rate or rates and at the times
set forth below.
1. INTEREST PAYMENTS. Debtor shall pay interest on the last day of each month
(commencing August 31, 1997). Should interest not be paid when due, it shall
become part of the principal and bear interest as herein provided. All
computations of interest under this note shall be made on the basis of a year of
360 days, for actual days elapsed.
a. BASE INTEREST RATE. At Debtor's option, amounts outstanding hereunder in
increments of at least $10,000 shall bear interest at a rate, based on an
index selected by Debtor, which is 1.25% per annum in excess of Bank's LIBOR
Rate for the Interest Period selected by Debtor.
Any Base Interest Rate may not be changed, altered or otherwise modified
until the expiration of the Interest Period selected by Debtor. The exercise
of interest rate options by Debtor shall be as recorded in Bank's records,
which records shall be prima facie evidence of the amount borrowed under
either interest option and the interest rate; provided, however, that
failure of Bank to make any such notation in its records shall not discharge
Debtor from its obligations to repay in full with interest all amounts
borrowed. In no event shall any Interest Period extend beyond the maturity
date of this note.
To exercise this option, Debtor may, from time to time with respect to
principal outstanding on which a Base Interest Rate is not accruing, and on
the expiration of any Interest Period with respect to principal outstanding
on which a Base Interest Rate has been accruing, select an index offered by
Bank for a Base Interest Rate Loan and an Interest Period by telephoning an
authorized lending officer of Bank located at the banking office identified
below prior to 10:00 a.m. Pacific time, on any Business Day and advising
that officer of the selected index, the Interest Period and the Origination
Date selected (which Origination Date, for a Base Interest Rate Loan based
on the LIBOR Rate, shall follow the date of such selection by no more than
two (2) Business Days).
<PAGE>
Bank will mail a written confirmation of the terms of the selection to
Debtor promptly after the selection is made. Failure to send such
confirmation shall not affect Bank's rights to collect interest at the rate
selected. If, on the date of the selection, the index is unavailable for any
reason, the selection shall be void. Bank reserves the right to fund the
principal from any source of funds notwithstanding any Base Interest Rate
selected by Debtor.
b. VARIABLE INTEREST RATE. All principal outstanding hereunder which is not
bearing interest at a Base Interest Rate shall bear interest at a rate per annum
at the Reference Rate, which rate shall vary as and when the Reference Rate
changes.
At any time prior to the maturity of this note, subject to the provisions of
paragraph 4, below, of this note, Debtor may borrow, repay and reborrow hereon
so long as the total outstanding at any one time does not exceed the principal
amount of this note. Debtor shall pay all amounts due under this note in lawful
money of the United States at Bank's Sunnyvale Office, or such other office as
may be designated by Bank, from time to time.
2. LATE PAYMENTS. If any payment required by the terms of this note shall remain
unpaid ten days after same is due, at the option of Bank, Debtor shall pay a fee
of $100 to Bank.
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of
Bank, and, to the extent permitted by law, interest shall be payable on the
outstanding principal under this note at a per annum rate equal to five percent
(5%) in excess of the interest rate specified in paragraph 1.b, above,
calculated from the date of default until all amounts payable under this note
are paid in full.
4. PREPAYMENT.
a. Amounts outstanding under this note bearing interest at a rate based on the
Reference Rate may be prepaid in whole or in part at any time, without penalty
or premium. Amounts outstanding under this note bearing interest at a Base
Interest Rate may only be prepaid, in whole or in part provided Bank has
received not less than five (5) Business Days prior written notice of an
intention to make such prepayment and Debtor pays a prepayment fee to Bank in an
amount equal to the present value of the product of: (i) the difference (but not
less than zero) between (a) the Base Interest Rate applicable to the principal
amount which Debtor intends to prepay, and (b) the return which Bank could
obtain if it used the amount of such prepayment of principal to purchase at bid
price regularly quoted securities issued by the United States having a maturity
date most closely coinciding with the relevant Base Rate Maturity Date and such
securities were held by Bank until the relevant Base Rate Maturity Date ("Yield
Rate"); (ii) a fraction, the numerator of which is the number of days in the
period between the date of prepayment and the relevant Base Rate Maturity Date
and the denominator of which is 360; and (iii) the amount of the principal so
prepaid (except in the event that principal payments are required and have been
made as scheduled under the terms of the Base Interest Rate Loan being prepaid,
then an amount equal to the lesser of (A) the amount prepaid or (B) 50% of the
sum of (1) the amount prepaid and (2) the amount of principal scheduled under
the terms of the Base Interest Rate Loan being prepaid to be outstanding at the
relevant Base Rate Maturity Date). Present value under this note is determined
by discounting the above product to present value using the Yield Rate as the
annual discount factor.
<PAGE>
b.In no event shall Bank be obligated to make any payment or refund to Debtor,
nor shall Debtor be entitled to any setoff or other claim against Bank, should
the return which Bank could obtain under the above prepayment formula exceed the
interest that Bank would have received if no prepayment had occurred. All
prepayments shall include payment of accrued interest on the principal amount so
prepaid and shall be applied to payment of interest before application to
principal. A determination by Bank as to the prepayment fee amount, if any,
shall be conclusive.
c. Such prepayment fee, if any, shall also be payable if prepayment occurs as
the result of the acceleration of the principal of this note by Bank because of
any default hereunder. If, following such acceleration, all or any portion of a
Base Interest Rate Loan is satisfied, whether through sale of property
encumbered by any security agreement or other agreement securing this note, at a
foreclosure sale held thereunder or through the tender of payment at any time
following such acceleration, but prior to such a foreclosure sale, then such
satisfaction shall be deemed an evasion of the prepayment conditions set forth
above, and Bank shall, automatically and without notice or demand, be entitled
to receive, concurrently with such satisfaction the prepayment fee set forth
above, and the amount of such prepayment fee shall be added to the principal.
DEBTOR HEREBY ACKNOWLEDGES AND AGREES THAT BANK WOULD NOT MAKE THE LOAN TO
DEBTOR EVIDENCED BY THIS NOTE WITHOUT DEBTOR'S AGREEMENT, AS SET FORTH ABOVE, TO
PAY BANK A PREPAYMENT FEE UPON THE SATISFACTION OF ALL OR ANY PORTION OF THE
PRINCIPAL BEARING INTEREST AT A BASE INTEREST RATE FOLLOWING THE ACCELERATION OF
THE MATURITY DATE HEREOF BY REASON OF A DEFAULT. DEBTOR HAS CAUSED THOSE PERSONS
SIGNING THIS NOTE ON ITS BEHALF TO SEPARATELY INITIAL THE AGREEMENT CONTAINED IN
THIS PARAGRAPH BY PLACING THEIR INITIALS BELOW:
INITIALS:
5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but not
be limited to, any of the following (a) the failure of Debtor to make any
payment required under this note when due; (b) any breach, misrepresentation or
other default by Debtor, any guarantor, co-maker, endorser, or any person or
entity other than Debtor providing security for this note (hereinafter
individually and collectively referred to as the "Obligor") under any security
agreement, guaranty or other agreement between Bank and any Obligor; (c) the
insolvency of any Obligor or the failure of any Obligor generally to pay such
Obligor's debts as such debts become due; (d) the commencement as to any Obligor
of any voluntary or involuntary proceeding under any laws relating to
bankruptcy, insolvency, reorganization, arrangement, debt adjustment or debtor
relief; (e) the assignment by any Obligor for the benefit of such Obligor's
creditors; (f) the appointment, or commencement of any proceeding for the
appointment of a receiver, trustee, custodian or similar official for all or
substantially all of any Obligor's property; (9) the commencement of any
proceeding for the dissolution or liquidation of any Obligor; (h) the
termination of existence or death of any Obligor; (i) the revocation of any
guaranty or subordination agreement given in connection with this note; (j) the
failure of any Obligor to comply with any order, judgment, injunction, decree,
writ or demand of any court or other public authority; (k) the filing or
recording against any Obligor, or the property of any
<PAGE>
Obligor, of any notice of levy, notice to withhold, or other legal process for
taxes other than property taxes; (1) the default by any Obligor personally
liable for amounts owed hereunder on any obligation concerning the borrowing of
money; (m) the issuance against any Obligor, or the property of any Obligor, of
any writ of attachment, execution, or other judicial lien; or (n) the
deterioration of the financial condition of any Obligor which results in Bank
deeming itself, in good faith, insecure. Upon the occurrence of any such
default, Bank, in its discretion, may cease to advance funds hereunder and may
declare all obligations under this note immediately due and payable; however,
upon the occurrence of an event of default under d, e, f, or g, all principal
and interest shall automatically become immediately due and payable.
6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are not
paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the collection or enforcement of
this note. Debtor and any endorsers of this note, for the maximum period of time
and the full extent permitted by law, (a) waive diligence, presentment, demand,
notice of nonpayment, protest, notice of protest, and notice of every kind; (b)
waive the right to assert the defense of any statute of limitations to any debt
or obligation hereunder; and (c) consent to renewals and extensions of time for
the payment of any amounts due under this note. If this note is signed by more
than one party, the term "Debtor" includes each of the undersigned and any
successors in interest thereof; all of whose liability shall be joint and
several. Any married person who signs this note agrees that recourse may be had
against the separate property of that person for any obligations hereunder. The
receipt of any check or other item of payment by Bank, at its option, shall not
be considered a payment on account until such check or other item of payment is
honored when presented for payment at the drawee bank. Bank may delay the credit
of such payment based upon Bank's schedule of funds availability, and interest
under this note shall accrue until the funds are deemed collected. In any action
brought under or arising out of this note, Debtor and any Obligor, including
their successors and assigns, hereby consent to the jurisdiction of any
competent court within the State of California, as provided in any alternative
dispute resolution agreement executed between Debtor and Bank, and consent to
service of process by any means authorized by said state's law. The term "Bank"
includes, without limitation, any holder of this note. This note shall be
construed in accordance with and governed by the laws of the State of
California. This note hereby incorporates any alternative dispute resolution
agreement previously, concurrently or hereafter executed between Debtor and Bank
7. DEFINITIONS. As used herein, the following terms shall have the meanings
respectively set forth below: "Base Interest Rate" shall mean a rate of interest
based on the LIBOR Rate. "Base Interest Rate Loan" shall mean amounts
outstanding under this note that bear interest at a Base Interest Rate. "Base
Rate Maturity Date" shall mean the last day of the Interest Period with respect
to principal outstanding under a Base Interest Rate Loan. "Business Day" shall
mean a day which is not a Saturday or Sunday on which Bank is open for business
in the state identified in paragraph 6, above, and with the respect to the rate
of interest based on the LIBOR Rate, on which dealings in U.S. dollar deposits
outside of the United States may be carried on by Bank. "Interest Period" shall
mean any calendar period of one, three, six, nine or twelve months. In
determining an Interest Period, a month means a period that starts on one
Business Day in a month and ends on and includes the day preceding the
numerically corresponding day in the next month. For any month in which there is
no such numerically corresponding day, then as to that month, such day shall be
deemed to be the last calendar day of such month. Any Interest Period which
would otherwise end on a non-Business Day shall end on the next succeeding
Business Day unless that is the first day of a month, in which event such
Interest Period shall end on the next preceding Business Day. "LIBOR Rate" shall
<PAGE>
mean a per annum rate of interest (rounded upward, if necessary, to the nearest
1/100 of 1%) at which dollar deposits, in immediately available funds and in
lawful money of the United States would be offered to Bank, outside of the
United States, for a term coinciding with the Interest Period selected by Debtor
and for an amount equal to the amount of principal covered by Debtor's interest
rate selection, plus Bank's costs, including the cost, if any of reserve
requirements. "Origination Date" shall mean the Business Day on which funds are
made available to Debtor relating to Debtor's selection of a Base Interest Rate.
"Reference Rate" shall mean the rate announced by Bank from time to time at its
corporate headquarters as its Reference Rate. The Reference Rate is an index
rate determined by Bank from time to time as a means of pricing certain
extensions of credit and is neither directly tied to any external rate of
interest or index nor necessarily the lowest rate of interest charged by Bank at
any given time.
This note is subject to the terms of that certain Trade Credit Agreement between
Debtor and Bank dated as of July 24, 1997, and any extension, modifications or
amendments thereof.
INFORMATION STORAGE DEVICES, INC.
By: /S/ Felix Rosengarten
Felix Rosengarten
Chief Financial Officer
<PAGE>
AUTHORIZATION
Borrower Name
INFORMATION STORAGE DEVICES, INC.
Borrower Address Office Number Loan Number
2045 HAMILTON AVENUE 126 0005-00-0000
SAN JOSE, CA 95125
Matunty Date Amount
June 30, 1998 $15,000,000.00
Union Bank of California, N.A. ("Bank") is hereby authorized and instructed to
disburse the proceeds of that certain Note referenced above in the following
manner:
Deposit the proceeds of our revolving note into our account #1260002364 from
time to time and in such amounts as may be requested verbally or in writing.
Fees itemized below are payable as follows (check one):
__ Charge account number: N/A __ Check enclosed
TERMS AND CONDITIONS
1. Bank is authorized to charge account number 1260002364 in the name(s) of
INFORMATION STORAGE DEVICES, INC. for payments of interest (or principal/
interest) when due in connection with this Note and all renewals or extensions
thereof.
2. Bank shall disburse proceeds in the amounts stated above in accordance with
the foregoing authorization or when Bank receives verbal or written
authorization from Borrower(s) to do so, or any one of the Borrowers, if
there are joint Borrowers, but not later than June 30, 1998. The Bank, at
its discretion, may elect to extend this date without notice to or
acknowledgement by the borrower(s). This Authorization and the above
mentioned Note will remain in full force and effect until the obligations in
connection with this Note have been fulfilled.
3. Unless dated by Bank prior to execution, the Note shall be dated by Bank as
of the date on which Bank disburses proceeds.
4. Notwithstanding anything to the contrary herein, Bank reserves the right to
decline to advance the proceeds of the above described Note if there is a
filing as to the Borrower(s), or any of them of a voluntary or involuntary
petition under the provisions of the Federal Bankruptcy Act or any other
insolvency law; the issuance of any attachment, garnishment, execution or
levy of any asset of the Borrower(s), or any endorser or guarantor which
results in Bank deeming itself, in good faith insecure.
5. The borrower(s) authorizes Bank to release information concerning the
borrower(s) financial condition to suppliers, other creditors, credit
bureaus and other credit reporters; and also authorizes Bank to obtain such
information from any third party at any time.
<PAGE>
The Borrower(s) by their execution of this Authorization accept the foregoing
terms, conditions and instructions.
Executed on July 24, 1997
Individual's Name (Type) Corporation or Partnership (Typed Name)
Individual's Signature Information Storage Devices, INC.
Individual's Name (Type) By /S/ Felix Rosengarten
Individual's Signature Title: Felix Rosengarten,Chief Financial Officer
Address
<PAGE>
TRADE CREDIT AGREEMENT
This Trade Credit Agreement ("Agreement") entered into as of the date set forth
below between the undersigned ("Borrower") and Union Bank of California. N.A.
("Bank"), with respect to each and every extension of credit (collectively
referred to as the "Trade Facility") from Bank to Borrower. In consideration of
the Trade Facility, Bank and Borrower agree to the following terms and
conditions:
1. THE TRADE: FACILITY
1.1 The Note. The Trade Facility is evidenced by one or more promissory notes,
reimbursement agreements. or other evidence of indebtedness, including each
amendment, extension, renewal or replacement thereof, which are incorporated
herein by this reference.
1.2 The Trade Finance Credit Facilities. The Trade Finance Credit Facilities
available to Borrower shall expire on June 30, 1998, and shall total
$15,000,000.00 and be evidenced by a note and other evidence of indebtedness and
subject to the following, sublimits:
The Commercial L/C Line in an amount not to exceed $ 14,400,000.00
The Trade Finance Line in an amount not to exceed $ - 0 -
The Clean Advance Line in an amount not to exceed $ 14,400,000.00
The Standby L/C Line in an amount not to exceed $ 600,000.00
and other terms and conditions described below. Also, the combined amount
outstanding under the Trade Finance Line and the Clean Advance Line shall not
exceed $ 14,400,000.00, at any time.
1.3 The Commercial L\C Line shall be for commercial letters of credit
("Commercial L/C's") calling for
X sight drafts; X issuance drafts up to 60 days
for the importation or purchase of general merchandise , each having an
expiration date not more than 180 days from its date of issuance, but in any
event not later than October30,1998.
1.4 The Trade Finance Line (the "Line") shall be for the purpose of
X Creating bankers' acceptances under usance Commercial L/Cs;
Each drawing under the Line shall, be due and payable not later than N/A (_)
days following, as the case may be. (a) the release of documents by Bank
(including any issuance period), or (b) the date of shipment on open account,
under the applicable transaction. All advances under the Line must be made on or
before N/A, 199_. In the event of a renewal or extension of the Line, the
original maturities of each advance shall continue unless otherwise agreed in
writing between Borrower and Bank.
1.5 The Clean Advance Line shall be for Borrower's working capital purposes.
Advances must be made on or before June 30,1998. The Clean Advance Line shall be
evidenced by, and subject to the terms of a note on the standard form used by
Bank for commercial loans.
1.6 Clean-up Period. Under the Clean Advance Line, during at least N/A
consecutive clays in each 12 month period, the principal amount outstanding
under such line must be zero.
1.7 The Standby Letter of Credit Line shall be for irrevocable standby letters
of credit, each having an expiration date not more than 12 months from its date
of issuance, but in any event not later than June 30 1998.
<PAGE>
1.8 Limitations on the Trade Finance Credit Facilities. The aggregate amount
available to be drawn under each sublimit listed above shall be reduced, dollar
for dollar, by the aggregate amount of unpaid principal obligations under the
respective sublimit. The aggregate of all unpaid advances and reimbursement
obligations shall reduce, dollar for collar, the maximum
* Wherever , "N/A". appears in a blank in this Agreement, it means the
Subsection in which it appears is deemed deleted from this Agreement If only
a portion of a Subsection is to be deleted. it is crossed-out (e.g.,
crossed-out).
amount available under the Trade Finance Credit Facilities Borrower may reborrow
or obtain new extensions of credit under h such sublimit until the expiration
date of such facilities. to the extent that Borrower has paid or otherwise
satisfied prior borrowings or extensions of credit, subject to all terms and
conditions in the Loan Documents (defined below).
1.9 Trade Finance Fees. All fees in connection with the Trade Finance Credit
Facilities will be in accordance with Bank's standard schedule of fees as
published from time to time or as otherwise agreed to in writing by Borrower and
Bank.
1.10 Other Fee. Borrower shall also pay to Bank a fee of $ N/A
1.11 Collateral. The payment and performance of all obligations of Borrower
under the Loan Documents are and shall be ring the term of the Trade Facility
secured by a perfected security interest in such real or personal property
collateral as is required by Bank and each security interest shall rank in first
priority unless otherwise specit~ied in v rising by Bank.
1.12 Term Loan. In addition to the Trade Finance Credit Facility, each term loan
available to Borrower shall be evidenced a note on the standard form used by
Bank for commercial loans. Proceeds of each term loan shall be available for
disbursement from N/A , 199_, through N/A , 199_ only.
1.13 Guaranty. The payment and performance of all obligations of Borrower under
the Trade Facility are and shall be ring the term of the Trade Facility
guaranteed by: N/A
1.14 Subordination. Certain other obligations of Borrower are and shall be
during the term of the Trade Facility Coordinated to repayment of all
obligations of Borrower to Bank, pursuant to one or more subordination
agreement(s) in, or of Bank executed and delivered by: N/A
2. CONDITIONS TO AVAILABILITY OF THE TRADE FACILITY
re Bank is obligated to extend any credit under this Agreement, Bank must have
received (a) every document required by : in connection with the Trade Facility,
each of which must be in form and substance satisfactory to Bank (together with
Agreement, referred to as the "Loan Documents"), (b) confirmation of the
perfection of its security interest in any feral required by Bank and (c)
payment of any fees required in connection with the Trade Facility.
<PAGE>
3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants (and each request for an extension of credit
hereunder shall be deemed a representation and City made on the date of such
request) that:
3.1 Borrower is an individual or Borrower is duly organized and existing under
the laws of the state of its organization and duly qualified to conduct business
in each jurisdiction in which its business is conducted.
3.2 The execution, delivery and performance of the Loan Documents executed by
Borrower are within Borrower's power, have been duly authorized, are legal,
valid and binding obligations of Borrower, and are not in conflict with the
terms of the after, bylaw, or other organization papers of Borrower or with any
law, indenture, agreement or undertaking to which borrower is a party or by
which Borrower is bound or affected.
3.3 All financial statements and other financial information submitted by
Borrower to Bank are true and correct in all material respects, and there has
been no material adverse change in Borrower's financial condition since the date
of the latest such financial statements.
3.4 Borrower is properly licensed and in good standing in each state in which
Borrower is doing business, and Borrower s complied with all laws and
regulations affecting Borrower, including within limitation, each applicable
fictitious business name statute.
3.5 There is no event which is, or with notice or lapse of time or both would
be, an Event of Default (as defined in article 5).
3.6 Borrower is not engaged in the business of extending credit for the purpose
of, and no part of the Trade Facility will be used, directly or indirectly, for
purchasing or carrying margin stock within the meaning of Federal Reserve Board
Reg. U.
3.7 Borrower is not aware of any fact, occurrence or circumstance which Borrower
has not disclosed to Bank in writing which has or could reasonably be expected
to have, a material adverse effect on Borrower's ability to pay or perform
borrower's obligations to Bank.
4.COVENANTS. Borrower agrees, so long as the Trade Facility or any commitment to
make any advance thereunder is outstanding and until full and final payment of
all sums outstanding under any Loan Document, that Borrower will:
<PAGE>
4.1 Maintain:
(a) Working, Capital of at least $ N/A current assets over current liabilities);
(As used herein, "Working Capital" means the excess of current assets over
current liabilities);
(b) A ratio of current assets to current liabilities of at least N/A l.00;
(c) A quick; ratio of cash, accounts receivable and marketable securities to
current liabilities of at least N/A:1.00;
(d) Tangible Net Worth of at least $ N/A (As used herein, "Tangible Net Worth"
means net worth increased by indebtedness of Borrower subordinated to Bank and
decreased by patents, licenses, trademarks, trade names, goodwill and other
similar intangible assets, organizational expenses and monies due from
affiliates (including officers, shareholders and directors));
(e) A ratio of total liabilities to Tangible Net Worth of not greater than N/A
:1.00 (As used herein "Tangible Net Worth" means net worth increased by
indebtedness of Borrower subordinated to Bank and decreased by patents,
licenses, trademarks, trade names, goodwill and other similar intangible assets,
organizational expenses, and monies due from affiliates (including, officers,
shareholders and directors));
(f) A profit after taxes of not less than $ N/A, to be measured as of the end of
each fiscal N/A of Borrower for the N/A period immediately preceding the date of
measurement;
(g) A ratio of Cash Flow to Debt Service of at least N/A :1.00. Compliance with
this subsection to be measured as of the end of each fiscal N/A of Borrower. (As
used herein, "Cash Flow" means net profit after taxes, to which depreciation,
amortization and other non-cash expenses are added for the N/A month period
immediately preceding the date of calculation, and "Debt Service" means that
portion of long-term liabilities and capital leases coming due within N/A months
after the date of calculation);
(h) Borrower to maintain a minimum of $17,700,000.00 in pledged investments in
its ) Liquidity Management Account.
All accounting terms used in this Agreement shall have the definitions given
them by generally accepted accounting, principles. unless otherwise defined
herein
4.9 Give written notice to Bank within I 5 days after the following,:
(a) Any litigation or arbitration proceeding affecting Borrower where the amount
in controversy is $ 25,000.00 or more:
(b) Any material dispute which may exist between Borrower and any government
regulatory body or law enforcement body;
(c) Any Event of Default or any event which, upon notice, or lapse of time, or
both, would become an Event of Default:
(c) Any other matter which has resulted or is likely to result in a material
adverse change in Borrower's financial condition or operation; and
(e) Any change in Borrower's name or the location of Borrower's principal place
of business, or the location of any collateral for the Trade Facility, or the
establishment of any new place of business or the discontinuance of any existing
place of business.
<PAGE>
4.3 Furnish to Bank an income statement, balance sheet, and statement of
retained earnings with supportive schedules ("Financial Statements"), and any
other financial information requested by Bank, prepared in accordance with
generally accepted accounting principles and in a form satisfactory to Bank as
follows:
(a) Within 45 days after the close of each quarter , Borrower's Financial
Statement as of the close of such period;
(b) Within 120 days after close of each fiscal year, a copy of Borrower's annual
Financial Statement prepared by an independent certified public accountant on
a(n) audited basis. Any independent certified public accountant who prepares
Borrower's Financial Statement shall be selected by Borrower and reasonably
satisfactory to Bank;
(c) Annually, upon request, a copy of each guarantor's annual Financial
Statement;
(d) If a Borrowing Base Addendum is made part of this Agreement, within N/A days
after each calendar monthend' in form required by Bank, a copy of Borrower's
monthly accounts receivable and accounts payable agings,
a report of Borrower's inventory, and a certificate of compliance with the
bonTowing base described in sail Borrowing Base Addendum, which certificate
shall accurately report the collateral in form required by Banli; an
(e) Promptly upon request, any other financial information requested by Bank.
4.4 Furnish to Bank, on Bank's request, a copy of Borrower's and each
guarantor's most recently filed federal income tax unit with all accompanying
schedules.
4.5 Pay or reimburse Bank for all costs, expenses and fees incurred by Bank in
preparing and documenting this Agreement i the Trade Facility and all amendments
and modifications thereof, including but not limited to all filing and recording
s, costs of appraisals, insurance and attorneys' fees, including the reasonable
estimate of the allocated costs and expenses in-house legal counsel and staff.
4.6 Maintain and preserve Borrower's existence, present form of business and all
rights, privileges and franchises necessary desirable in the normal course of
its business and keep all of Borrower s properties in good working order and
condition.
4.7 Maintain and keep in force insurance with companies acceptable to Bank and
in such amounts and types, including without limitation fire and public
liability insurance, as is usual in the business carried on by Borrower, or as
Bank may reasonably request. Stick insurance policies must be in form and
substance satisfactory to Bank.
4.8 Maintain adequate books, accounts and records and prepare all financial
statements required hereunder in accordance th generally accepted accounting
principles and in compliance with the regulations of any governmental regulatory
body having jurisdiction over Borrower or Borrower's business and permit
employees or agents of Bank at any reasonable time to inspect Borrower's assets
and properties, and to examine or audit Borrower's books, accounts and records
and make copies and memoranda thereof.
4.9 At all times comply with or cause to be complied with, all laws, statutes,
rules, regulations, orders and directions of any governmental authority having
jurisdiction over Borrower or Borrower's business, and all material agreements
to which Borrower is a party.
4.10 Except as provided in this Agreement or in the ordinary course of its
business as currently concluded, not make any loans or advances, become a
guarantor or surety, pledge its credit or properties in any manner, or extend
credit.
<PAGE>
4.11 Not purchase the debt or equity of another person or entity except for
savings accounts and certificates of deposit of Bank, direct U.S. Government
obligations and commercial paper issued by corporations with top ratings of
Moody's or Standard & Poor's, provided that all such permitted investments shall
mature within one year of purchase.
4.12 Not create, assume or suffer to exist any mortgage, encumbrance, security
interest, pledge or lien ("Lien") on Borrower's real or personal property,
whether now owned or hereafter acquired, or upon the income or profits thereof
except the following: (a) Liens in favor Bank, (b) Liens for taxes or other
items not delinquent or contested in good faith and (c) other Liens which do not
exceed in the aggregate $ 25,000,000 at any one time.
4.13 Not sell or discount any account receivable or evidence of indebtedness,
except to Bank; not borrow any money or become contingently liable for money
borrowed, except pursuant to agreements made with Bank.
4.14 Neither liquidate, dissolve, enter into any consolidation, merger,
partnership or other combination; nor convey, sell or lease all or the greater
part of its assets or business; nor purchase or lease all or the greater part
of the assets or business of another.
4.15 Not engage in any business activities or operations substantially different
from or unrelated to Borrower's present business activities and operations.
4.16 Not, in any single fiscal year of Borrower, expend or incur obligations of
more than $ N/A the acquisition of fixed or capital assets.
4.17 Not in any single fiscal year of Borrower, enter into any lease of real or
personal property which would cause Borrower's aggregate annual obligations
under all such real and personal property leases to exceed $ /A
4.18 If Bank creates bankers' acceptances ("Acceptances") they shall be created
only under the following terms:
(a) Borrower agrees to pay to Bank the amount of such Acceptance (and the amount
of all charges and expenses that Bank may incur relating to such Acceptance) no
later than the banking day prior to maturity of the relevant draft, or earlier
upon Bank's demand following an Event of Default. (b) Borrower shall also pay to
Bank, as and when the same would be payable under Bank's standard procedures,
any and all standard fees and commissions payable with respect to the creation
of bankers' acceptances, and shall reimburse Bank, on demand for all of Bank's
out-of-pocket costs and expenses incurred in connection with each Acceptance and
not otherwise covered by such standard fees or commissions. All such standard
fees and commissions shall be computed and paid at Bank's prevailing rates. Bank
shall have no obligation to repay all or any portion of Banks acceptance
commission (or any other amount paid by Borrower with respect to an Acceptance).
(c) If any Acceptance created is, for any reason, subsequently determined to be
ineligible for discount with Federal Reserve Banks, or if there shall be any
change in law or regulation with respect to the creation or discounting of
Acceptances or the maintaining of reserves with respect thereto, Borrower shall,
upon Bank's demand, pay to Bank additional amounts sufficient to indemnify Bank
against any additional costs incurred by Bank in connection with such ineligible
Acceptance or such change in law or regulation. Bank's certificate as to any
such additional amounts. submitted to Borrower, shall he conclusive absent
manifest error.
<PAGE>
(d) Borrower represents and agrees that the creation by Bank of each eligible
Acceptance for Borrower will he deemed an additional representation that each
Acceptance created for Borrower shall (i) arise solely out of transactions for
the current sale and distribution on usual credit terms of imported, exported or
domestically shipped goods, and (ii) have a face amount not in excess of the
amount invoiced to Borrower in connection with such transaction and, with
respect to the creation of each eligible Acceptance, otherwise comply with all
applicable rules and regulations of the Federal Reserve System governing,
bankers' acceptances and meet the requirements for eligibility for discount
with' Federal Reserve Banks. Borrower shall maintain and. at Bank's request
shall provide to Bank or its designee such evidence, certificates and documents
sufficient to establish that Bank's creation of such Acceptance is in compliance
with all applicable laws, regulations and administrative orders., 4.19 Borrower
will promptly, upon demand by Bank, take such further action and execute all
such additional documents and instruments in connection with this Agreement as
Bank in its reasonable discretion deems necessary and promptly supply Bank with
such other information concerning its affairs as Bank may request from time to
time.
5. EVENTS OF DEFAULT
The occurrence of any of the following events ("Events of Default") shall
terminate any obligation on the part of Bank to make or continue the Trade
Facility and automatically, unless otherwise provided under the Loan Documents,
shall make all sums of interest and principal and any other amounts owing under
the Trade Facility immediately due and payable, without notice of default,
presentment or demand for payment, protest or notice of nonpayment or dishonor,
or any other notices or demands:
5.1 Borrower shall default in the due and punctual payment of the principal of
or the interest under any of the Loan Documents; or
5.2 Any default shall occur under any of the Loan Documents; or
5.3 Borrower shall default in the due performance or observance of any covenant
or condition of the Loan Documents; or
5.4 Any guaranty or subordination agreement required hereunder shall be breached
or become ineffective, or any guarantor or subordinating creditor shall die or
disavow or attempt to revoke or terminate such guaranty or subordination
agreement; or
5.5 There shall be a change in ownership or control of ten percent (10%) or more
of the issued and outstanding stock of Borrower or any guarantor, or (if
Borrower is a partnership) there shall be a change in ownership or control of
any general partner's interest.
6. MISCELLANEOUS PROVISIONS
6.1 The rights, powers and remedies given to Bank hereunder shall be cumulative
and not alternative and shall be in addition to all rights, powers and remedies
given to Bank by law against Borrower or any other person, including but not
limited to Bank's rights of setoff and banker's lien.
6.2 Any forbearance or failure or delay by Bank in exercising any right, power
or remedy hereunder shall not be deemed a waiver thereof and any single or
partial exercise of any right, power or remedy shall not preclude the further
exercise thereof. No waiver shall be effective unless it is in writing and
signed by an officer of Bank.
6.3 The benefits of this Agreement shall inure to the successors and assigns of
Bank and the permitted successors and assigns of Borrower, and any assignment by
Borrower without Bank's consent shall be null and void.
6.4 This Agreement and all other agreements and instruments required by Bank in
connection herewith shall be governed by and construed according to the laws of
the State of California.
6.5 Should any one or more provisions of this Agreement be determined to be
illegal or unenforceable, all other provisions nevertheless shall be effective.
In the event of any conflict between the provisions of this Agreement and the
provisions of any note or reimbursement agreement evidencing any indebtedness
hereunder, the provisions of such note or reimbursement agreement shall prevail.
<PAGE>
6.6 Except for documents and instruments specifically referenced herein, this
Agreement the entire agreement between Bank and Borrower regarding the Trade
Facility and all prior communications verbal or written between Borrower and
Bank shall be of no further effect or evidentiary value.
6.7 The section and subsection headings herein are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
6.8 This Agreement may be amended only in writing signed by all parties hereto.
6.9 Borrower and Bank may execute one or more counterparts to this Agreement,
each of which shall be deemed an original, but taken together shall be one and
the same instrument.
6.10 Any notices or other communications provided for or allowed hereunder shall
be effective only when given by one of the following methods and addressed to
the respective party at its address given with the signatures at the end of this
Agreement and shall be considered to have been validly given: (a) upon delivery,
if delivered personally; (b) upon receipt, if mailed, first class postage
prepaid, with the United States Postal Service; (c) on the next business day, if
sent by overnight courier service of recognized standing; and (d) upon
telephoned confirmation of receipt, if telecopied.
<PAGE>
7. ADDITIONAL PROVISIONS
The following additional provisions, if any, are hereby made a part of this
Agreement:
N/A
THIS AGREEMENT is executed on behalf of the parties as of July 24, 1997
Union Bank of California, N.A. ("Bank") (" Borrower ")
By: /S/ Jerry Iwata Information Storage Devices, INC.
Title: Assistant Vice President /S/ Felix Rosengarten
Printed Name: Jerry Iwata By: Felix Rosengarten
Title: Chief Financial Officer
Address where notices to Bank are to be
sent: Address where notices to
Borrower are to be sent:
UNION BANK OF CALIFORNIA, N.A. 2045 HAMILTON AVENUE
495 S. MATHILDA AVENUE SAN JOSE, CA 95125
SUNNYVALE, CA 94086
Attn: Jerry Iwata. Attn: Felix Rosengarten
Fax Number: (408) 738-5353 Fax Number (408) 369-2577
Telephone No. ( 408) 738-4903 Telephone No. (408) 369-2428
<PAGE>
ALTERNATIVE DISPUTE
RESOLUTION AGREEMENT
THIS ALTERNATIVE DISPUTE RESOLUTION AGREEMENT ("Agreement") is made and entered
into as of the 24th day of July , 1997 by and between the undersigned
("Obligor") and United Bank of California. N.A ("Bank")
(Obligor and Bank herein collectively, the "Parties" and individually, a
"Party"). Initially capitalized terms used in this Agreement which are not
otherwise defined herein shall have the respective meanings set forth in
Paragraph 7 of this Agreement.
1. CLAIMS SUBJECT TO ARBITRATION OR JUDICIAL REFERE.N'CE.
(a) Any Claim other than it Claim that arises out of or relates to any
obligation under any Subject Document that is secured in whole or in part,
be an interest in real property shall at the written request of any Party,
be determined by Arbitration.
(b) Any Claim that arises out of or relates to any obligation under any Subject
Document that is secured in whole or in part. by an interest in real
property shall be determined by Arbitration only with the consent of both
Parties. If both Parties do consent to the determination of any such Claim
by Arbitration. then such Claim shall, at the written request of any Party,
be determined by Reference.
(c) The determination as to whether or not a Claim arises out of or relates to
any obligation under any Subject Document that is secured in whole or in
part, by an interest in real property shall be made at the time the
arbitrator or referee is secured pursuant to Paragraph 7 of this Agreement.
2. SELECTION OF ARBITRATOR OR REFEREE. Within 30 days after written demand. or
within 30 days after commencement by any Party, of any lawsuit subject to this
Agreement, the Parties shall select a single neutral arbitrator pursuant to the
Commercial Arbitration Rules of the AAA or a single neutral referee pursuant to
the Judicial Reference Procedures of the AAA. However, the arbitrator or referee
selected must be a retired state or federal court judge with at least five years
of judicial experience in civil matters. In the event that the selection
pursuant to such Commercial Arbitration Rules or Judicial Reference Procedures
does not result in the appointment of a single neutral arbitrator or a single
neutral referee within o 30 days, any such Party may petition the court to
appoint a single neutral arbitrator or single neutral referee with the judicial
experience described above. The Parties shall equally bear the fees and expenses
of the arbitrator or referee unless the arbitrator or referee otherwise provides
in the award or statement of decision.
3. CONDUCT OF ARBITRATION OR REFERENCE
(a) Except as provided in this Agreement, the arbitrator shall have the powers
provided under Applicable State Law and the Commercial Arbitration Rules of
the AAA, and the referee shall have the powers provided under Applicable
State Law and the Judicial Referee Procedures of the AAA.
(b) The arbitrator or referee shall challenge the legality or enforceability of
this Agreement.
(c) The arbitrator or retiree shall apply the rules of existence to the same
extent as they would he applied in a court of law.
(d) A Party may not conduct discovery unless the arbitrator or referee grants
such Party leave to do so upon a showing of good cause. All discovery shall
be completed within 90 days after the appointment of the arbitrator or
referee, except upon a showing of good cause by any Party. The arbitrator or
retiree shall limit discovery to non-privileged material that is relevant to
the issues to be determined by the arbitrator or referee.
<PAGE>
(e) The arbitrator or referee shall determine the time of the hearing and shall
designate its location based upon the convenience of the. arbitrator or
referee, the Parties and any witnesses. However, such hearing shall be
commenced within 30 days after completion of discovery, unless the
arbitrator or referee grants a continuance upon a showing of good cause by
any Party. At least 7 days before the date set for such hearing, the Parties
shall exchange copies of exhibits to be offered as evidence, and lists of
the witnesses who will testify, at such hearing. Once commenced, the hearing
shall proceed day to day until completed, unless the arbitrator or referee
grants a continuance upon a showing of good cause by any Party. Any Party
may cause to be prepared, at its expense, a written transcription or
electronic recordation of such hearing.
(f) Subject to the provisions of this Agreement, the arbitrator may award, or
the referee may report, a statement of decision providing for any remedy or
relief, including without limitation judicial foreclosure, deficiency
judgment and equitable relief, and give effect to all legal and equitable
defenses, including without limitation statutes of limitation, the statute
of frauds, waiver and estoppel.
(g) The award of the arbitrator or the statement of decision of the referee
shall be supported by written findings of' fact and conclusions of law
delivered by the arbitrator or referee to the Parties concurrently with such
award or statement of decision.
(h) In the event that punitive damages are permitted under Applicable State Law,
the award of the arbitrator or the statement of decision of the referee may
provide for recovery of punitive damages provided that the arbitrator or
referee first makes written findings of fact that would satisfy the
requirements for recovery of punitive damages under Applicable State Law.
Any such punitive damages shall not exceed a sum equal to three times the
amount of actual damages as determined by the arbitrator or referee.
(i) The arbitrator shall have the power to award or the referee shall have the
power to report a statement of decision providing for reasonable attorneys'
fees (including a reasonable allocation for the costs of in-house counsel)
and costs to the prevailing party.
(j)In the event that Applicable State Law provides that publications or
communications made in a judicial proceeding are subject to a litigation
privilege, such litigation privilege shall apply to the same extent to
publications or communications made in the Arbitration or Reference.
<PAGE>
4. PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No provision of this
Agreement shall limit the right of any Party (a) to exercise self-help remedies
including, without limitation, set-off, (b) to foreclose against or sell any
collateral, by power of sale or otherwise or (c) to obtain or oppose provisional
or ancillary remedies from a court of competent jurisdiction before, after or
during the pendency of the Arbitration or Reference. The exercise of, or
opposition to, any such remedy does not waive the right of any Party to
Arbitration or Reference pursuant to this Agreement.
5. FINAL, BINDING AND NONAPPEALABLE JUDGMENT. Any court of competent
jurisdiction shall, upon the petition of any Party, confirm the award of the
arbitrator and enter judgment in conformity therewith. Any court of competent
jurisdiction shall, upon the filing of the statement of decision of the referee,
enter judgment thereon. Any such judgment shall be final binding and
nonappealable.
6. MISCELLANEOUS. In the event that multiple claims are asserted, some of which
are found not subject to this Agreement, the Parties agree to stay the
proceedings of the claims not subject to this Agreement until all other claims
are resolved in accordance with this Agreement. In the event that claims are
asserted against multiple parties, some of whom are not subject to this
Agreement, the Parties agree to sever the claims subject to this Agreement and
resolve them in accordance with this Agreement. In the event that any provision
of this Agreement is found to be illegal or unenforceable, the remainder of this
Agreement shall remain in full force and effect. In the event of' any challenge
to the legality or enforceability of this Agreement, the prevailing Party shall
be entitled to recover the costs arid expenses, including reasonable attorneys'
fees incurred by it in connection therewith. Applicable State Law shall govern
the interpretation of this Agreement. This Agreement fully states all of the
terms and conditions of the Parties agreement regarding the matters mentioned
in, or incidental to, this Agreement. This Agreement supersedes all oral
negotiations and prior writings concerning the subject matter hereof.
7. DEFINED TERMS. As used in this Agreement, the following terms shall have the
respective meanings set forth below:
(a) "AAA" shall mean the American Arbitration Association.
(b)"Applicable State Law " shall mean the law of the state in which this
Agreement is executed by Obligor; provided however, that if any Party seeks
(i) to exercise self-help remedies, including without limitation set-off,
(ii) to foreclose against or sell any collateral, by power of sale or
otherwise or (iii) to obtain or oppose provisional or ancillary remedies from
a court of competent jurisdiction before, after or during the pendency of the
Arbitration or Reference, the law of the state where such collateral is
located shall govern the exercise of or opposition to such rights and
remedies.
<PAGE>
(c)"Arbitration" shall mean an arbitration conducted pursuant to this Agreement
in accordance with Applicable State Law, and under the Commercial Arbitration
Rules of the AAA, as in effect at the time the arbitrator is selected
pursuant to paragraph 2 of this Agreement.
(d)"Claim" shall mean any claim, cause of action, action, dispute or controversy
between or among the Parties including any claim, cause of action, action,
dispute or controversy alleged in or subject to a lawsuit between or among
the Parties which arises out of or relates to:
(i) any of' the Subject Documents,
(ii) any negotiations, correspondence or communications relating to any of'
the Subject Documents, whether or not incorporated into the Subject Documents
or any indebtedness evidenced thereby.
(iii) the administration or management of the Subject Documents or any
indebtedness evidenced thereby or
(iv ) any alleged agreements, promises, representations or transactions in
connection therewith, including but not limited to any claim, cause of
action, action, dispute or controversy which arises out of or is based upon
an alleged tort or other breach of legal duty.
(e)"Reference" shall mean a judicial reference conducted pursuant to this
Agreement in accordance with Applicable State Law and under the Judicial
Reference Procedures of the AAA, as in effect at the time the referee is
selected pursuant to paragraph 2 of this Agreement.
(l') "Subject Documents" shall mean any and all documents, instruments and
agreements previously, concurrently or hereafter executed by Obligor in favor
of' Bank, or between Obligor and Bank, which incorporate by reference an
alternative dispute resolution agreement or another agreement providing for
the resolution of Claims between or among the Parties by arbitration or
judicial reference, any and all related documents instruments and agreements,
and any and all extensions, renewals, amendments, substitutions and
replacements of any of the foregoing; and "Subject Document" shall mean any
one of such Subject Documents
8. WAIVER OF RIGHT TO TRIAL BY JURY. In connection with an Arbitration or
Reference or any other action or proceeding, the Parties hereby expressly,
intentionally and deliberately waive any right they may otherwise have to trial
by jury of any Claim.
This Agreement is duly executed by the Parties as of the date first written
above.
INFORMATION STORAGE DEVICES, INC. Union Bank of California, N.A. ("Bank")
By: /S/ Felix Rosengarten /S/ Jerry Iwata
Felix Rosengarten Jerry Iwata
Chief Financial Officer Assistant Vice President
<TABLE> <S> <C>
<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,102
<SECURITIES> 29,706
<RECEIVABLES> 6,577
<ALLOWANCES> 0
<INVENTORY> 7,742
<CURRENT-ASSETS> 56,392
<PP&E> 15,394
<DEPRECIATION> 9,077
<TOTAL-ASSETS> 71,037
<CURRENT-LIABILITIES> 12,038
<BONDS> 0
0
0
<COMMON> 79,429
<OTHER-SE> (254)
<TOTAL-LIABILITY-AND-EQUITY> 71,037
<SALES> 47,950
<TOTAL-REVENUES> 47,950
<CGS> 32,939
<TOTAL-COSTS> 32,939
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 341
<INCOME-PRETAX> (13,528)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,528)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,528)
<EPS-PRIMARY> (1.40)
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</TABLE>
