SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 4, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File No. 0-25502
INFORMATION STORAGE DEVICES, INC.
(Exact name of registrant as specified in its charter)
California 77-0197173
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2045 Hamilton Avenue
San Jose, CA 95125
(Address of principal executive offices, including zip code)
(408) 369-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
As of May 2, 1998, there were outstanding 9,853,216 shares of the Registrant's
Common Stock.
<PAGE>
INDEX
Part I - Financial Information Page
- ------------------------------- ----
Item 1. Financial Statements
Condensed Balance Sheets at December 31, 1997
and April 4, 1998............................................3
Condensed Statements of Operations for the
Three Months Ended March 29, 1997 and April 4, 1998..........4
Condensed Statements of Cash Flows for the
Three Months Ended March 29, 1998 and April 4, 1998..........5
Notes to Condensed Financial Statements.............................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........10
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings....................................................11
Item 6. Exhibits and Reports on Form 8-K.....................................11
Signatures...........................................................12
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED BALANCE SHEETS
------------------------
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
April 4, 1998 December 31, 1997
------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 8,453 $ 10,102
Short-term investments 26,090 29,706
Accounts receivable, net 7,247 6,577
Inventories 12,710 7,742
Other current assets 2,550 2,265
------------ ------------
Total current assets 57,050 56,392
Property and equipment, net 6,834 6,317
Other assets 3,299 2,146
Long-term investments 5,415 6,182
------------ ------------
Total Assets $ 72,598 $ 71,037
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,471 $ 1,591
Accounts payable and accrued liabilities 11,403 9,231
Deferred revenue 1,828 1,216
------------ ------------
Total current liabilities 14,702 12,038
Long-term liabilities 778 994
------------ ------------
Shareholders' equity 57,118 58,005
------------ ------------
Total Liabilities and Shareholders' Equity $ 72,598 $ 71,037
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
CONDENSED STATEMENTS OF OPERATIONS
----------------------------------
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
------------------
April 4, 1998 March 29, 1998
------------- --------------
Net revenues $ 12,154 $ 8,342
Cost of goods sold 7,542 5,653
--------- ---------
Gross margin 4,612 2,689
Operating expenses:
Research and development 3,161 2,300
In-process research and development (1) -- 4,000
Selling, general and administrative 3,259 2,422
--------- ---------
Total operating expenses 6,420 8,722
--------- ---------
Income (loss) from operations (1,808) (6,033)
Interest and other income, net 594 636
--------- ---------
Income (loss) before income taxes (1,214) (5,397)
Provision for income taxes -- --
--------- ---------
Net loss $ (1,214) $ (5,397)
========= =========
Basic net loss per share $ (0.12) $ (0.56)
========= =========
Shares used in computing net loss per share 9,825 9,589
========= =========
</TABLE>
(1) In-process research and development as a result of the CompactSPEECH(TM)
acquisition.
The accompanying notes are an integral part of these balance sheets.
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
------------------
April 4, 1998 March 29, 1997
------------- --------------
Cash flows from operating activities:
Net income (loss) $ (1,214) $ (5,397)
Adjustments to reconcile net income (loss) to net cash
used in operating activities-----
Depreciation and amortization 1,033 651
Compensation costs related to stock and stock option grant 22 17
In-process research and development -- 4,000
Changes in assets and liabilities -----
Accounts receivable (670) (509)
Inventories (4,968) (575)
Prepaid expenses and other assets (285) (1,343)
Accounts payable 1,695 1,513
Accrued liabilities and bonuses 477 78
Deferred revenue 612 294
Other liabilities -- 2,889
---------- ---------
Net cash used in operating activities (3,297) 1,618
Cash flows from investing activities:
Purchase of property and equipment (1,491) (719)
Change in other assets (1,212) 1,075
Purchase of CompactSPEECH -- (5,100)
Purchase of short-term investments (5,391) (13,852)
Proceeds from maturities and sale of short-term investments 9,020 18,311
Purchase of long-term investments 767 (100)
---------- ---------
Net cash provided by investing activities 1,693 (385)
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs 291 222
Payments on capitalized lease obligations (336) (342)
---------- ---------
Net cash used in financing activities (45) (120)
Net increase (decrease) in cash and cash equivalents (1,650) 1,113
Cash and cash equivalents at beginning of period 10,102 21,927
---------- ---------
========== =========
Cash and cash equivalents at end of period $ 8,453 $ 23,040
========== =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
Notes to Condensed Financial Statements
1. Basis of Presentation:
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto for the year ended
December 31, 1997.
The unaudited condensed financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments) that are, in the
opinion of management, necessary to state fairly the financial results for the
periods presented. The results for such periods are not necessarily indicative
of the results to be expected for the full fiscal year.
2. Inventories:
Inventories consist of material, labor and manufacturing overhead and
are stated at the lower of cost (first-in, first-out basis) or market. The
components of inventory are as follows (in thousands):
April 4, 1998 December 31, 1997
------------- -----------------
Work-in-process............................... $ 6,629 $ 4,280
Finished goods................................ 6,081 3,462
----------- -----------
$ 12,710 $ 7,742
=========== ===========
3. Basic Net Loss Per Share:
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. No diluted loss per share information has
been presented in the accompanying statements of operations since potential
common shares from conversion of stock options and warrants is anti-dilutive.
4. Comprehensive Income:
The Company adopted Statement of Financial Accounting Standard No. 130
"Reporting Comprehensive Income" ("SFAS 130") as of January 1, 1998 and has
restated information for all prior periods reported below to conform to this
standard.
Three Months Ended
------------------
April 4, 1998 March 29, 1997
------------- --------------
Net loss...................................... $ (1,214) $ (5,397)
Other Comprehensive Income:
Unrealized holding gains (losses) on
available for sale securities............. 30 3
------------- -------------
Comprehensive income.......................... $ (1,184) $ (5,394)
============= =============
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report includes forward-looking statements that involve a number of
risks and uncertainties. Actual results may differ materially because of a
number of factors, including those set forth under "Other Factors That May
Affect Future Operating Results" on page 16 of the ISD 1997 Form 10-K filed with
the Securities and Exchange Commission.
Overview
Information Storage Devices, Inc. ("ISD" or "The Company") designs,
develops, and markets semiconductor voice solutions based on analog and digital
technologies and mixed signal expertise. ISD's patented ChipCorder(R) and
CompactSPEECH(R) technologies enable solid state voice recording and playback
applications in the communications, consumer, 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 distributes its products through a direct sales organization
and a worldwide network of over 50 sales representatives and distributors. The
Company was incorporated in California in December 1987 and commenced production
shipments in 1992. ISD is an ISO 9001 certified Company.
ISD subcontracts with independent foundries to fabricate the wafers for
all of its products. This approach enables the Company to concentrate its
resources on the design, development, and marketing areas, where the Company
believes it has the greatest competitive advantage, and eliminates the high cost
of owning and operating a semiconductor wafer fabrication facility. The Company
is dependent on these foundries to allocate to the Company a portion of their
foundry capacity sufficient to meet the Company's needs, to produce products of
acceptable quality and with acceptable manufacturing yields, and to deliver
products to the Company on time. Historically, the Company has experienced
difficulties in each of these areas, and the Company expects that it could
experience such difficulties in the future.
Although the Company believes that current foundry capacity is adequate to
meet the Company's anticipated needs, there can be no assurance that the Company
will be able to qualify additional foundry capacity or otherwise obtain needed
quantities of wafers within expected time frames or at all. Moreover, in order
to reduce future manufacturing costs, the Company is designing smaller die sizes
with smaller geometry processes to increase the number of die produced on each
wafer. Despite these trends in the Company's design of its integrated circuits,
there can be no assurance that the Company's foundries will achieve or maintain
acceptable cost reductions, manufacturing yields, and process control in the
future, or that sudden declines in yields will not occur. Failures to improve,
or fluctuations in, manufacturing yields and process controls, particularly at
times when the Company is experiencing severe pricing pressures from its
customers or its competitors, would have a material adverse effect on the
Company's results of operations.
In January 1998, the Company announced the completion of the ISD1500
family of products which consist of single chip, single-message voice record and
playback devices that offer easy integration and added functions such as sound
warping and enable customers to design innovative products. The ISD 1500 family
features and enhanced proprietary multilevel, mixed-signal technology which is
intended to provide improved sound quality and low system cost. The ISD1500
family includes six, ten and 20 second voice record and playback devices that do
not require battery power to retain recorded messages, a feature common to all
ISD devices.
<PAGE>
In March 1998, the Company introduced the ISD-T267 CompactSPEECH series of
digital voice processors with advanced digital telephone answering device (DTAD)
functionality and interface support for flash memories from multiple suppliers.
With the parallel operation of on-chip RISC and speech processing engines, these
devices offer high quality speech processing and a number of telephone features,
a versatile memory interface that includes parallel and serial flash device
support, and telephone memory functions that handle the storing of speed dial
numbers and LCR (lowest cost routing).
Results of Operations
The following table sets forth, as a percentage of net revenues, each line
item in the Company's statements of operations for the periods indicated.
- ---------------------------------------------------------
Three Months Ended
- ---------------------------------------------------------
4-4-98 3-29-97
------ -------
Net revenues 100.0% 100.0%
Cost of goods sold 62.1 67.8
---- ----
Gross margin 37.9 32.2
---- ----
Operating expenses:
Research and development 26.0 27.6
In-process research and development (1) -- 48.0
Selling, general and administrative 26.8 29.0
Total operating expenses 52.8 104.6
---- -----
Income (loss) from operations (14.9) (72.4)
Interest and other income, net 4.9 7.6
---- ----
Income (loss) before income taxes (10.0) (64.8)
Provision for income taxes -- --
------ ------
Net income (loss) (10.0%) (64.8%)
(1) - In-process research and development as a result of the CompactSPEECH(TM)
acquisition.
Net Revenues
During the three months ended April 4, 1998, the Company's net revenues
were principally derived from the sale of integrated circuits for voice
recording and playback. Net revenues for the first quarter of 1998 were $12.2
million compared to $8.3 million for the first quarter of 1997. ChipCorder
products accounted for 78% of the first quarter net revenues, while
CompactSPEECH products comprised the rest. Net revenues for the first quarter of
1998 represented a 47% increase over net revenues for the first quarter of 1997.
This increase was caused by the greater acceptance of the ISD33000 family of
ChipCorder products and the addition of the CompactSPEECH products. The failure
of new or broader applications or markets to develop, or the failure of the
existing market to continue to be receptive to these products, could have a
material effect on net revenues and the Company's results of operations.
During the first quarter of 1998, sales to the Company's top ten customers
accounted for 80% of net revenues compared to 82% in the first quarter of 1997.
In the first quarter of 1998, the Company's top five customers were Motorola,
Marubun, Siemens, Matshusita, and V-tech. These customers accounted for 26%,
15%, 8%, 7% and 5% of first quarter net revenues, respectively. The loss of, or
significant reduction in purchases by, a current major customer would have a
material adverse effect on the Company's financial condition and results of
operations if the Company were unable to obtain the orders from new or existing
customers to offset such losses or reductions.
<PAGE>
The communications market in the first quarter of 1998 accounted for 77%
of net revenues compared to 72% for the first quarter of 1997. The consumer and
industrial markets were 14% and 9%, respectively, of net revenues for the first
quarter of 1998 compared to 15% and 13%, respectively, of net revenues for the
first quarter of 1997. These results reflect ISD's focus on voice solutions for
the communications market. The Company's communications customers represent
products which include telephone answering machines, cellular phones, cordless
phones, personal handy phones and pagers. The failure of new applications or
markets to develop, or the failure of existing markets, particularly the
communications market, to continue to be receptive to the Company's products or
to offset reduced revenues from the consumer market, could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
International sales for the first quarter of 1998 were 86% of total sales,
compared to 71% for the first quarter of 1997. Sales to Europe accounted for 43%
of total sales in the first quarter of 1998, up from 32% in the same period last
year. Sales to Japan were 14% of total sales in the first quarter of 1998, down
from 15% in the first quarter of 1997, and sales to Asia were 29% in the first
quarter of 1998, down from 38% in the first quarter of 1997. North American
sales were 14% in the first quarter of 1998, down from 29% for the same period
last year. The Company is subject to the risk of conducting business
internationally, including foreign government regulation and general
geopolitical risks, such as political and economic instability, potential
hostilities, changes in diplomatic and trade relationships, unexpected changes
in, or imposition of, U.S. or foreign regulatory requirements, tariffs, import
and export restrictions and other barriers and restrictions, potentially adverse
tax consequences, the burdens of complying with a variety of foreign laws and
other factors beyond the Company's control. As is common in the semiconductor
industry, certain of the Company's sales are made to distributors under
agreements allowing certain rights of return and price protection on unsold
products. Accordingly, the Company defers recognition of such sales until the
distributor sells the product.
Gross Margin
The Company's gross margin for the first quarter of 1998 was $4.6 million,
or 38% compared to a 32% gross margin for the first quarter of 1997.
This improvement in margin reflects the continued effort in manufacturing cost
reduction as well as improved yields compared to the first quarter of 1997. The
Company could continue to experience fluctuations in manufacturing yields, which
could adversely affect gross margins, particularly if higher yields and reduced
costs are not achieved. Additionally, the Company could experience variations in
gross margins as a result of declines in its average selling prices or shifts in
product and customer mix.
Research and Development
Research and development expenses were $3.2 million, or 26% of net
revenues in the first quarter of 1998, compared to $6.3 million, or 76% of net
revenues in the same period of 1997. The first quarter of 1997 includes the $4
million write-off for the in-process R&D associated with the acquisition of the
CompactSPEECH product line. Research and development expenses could increase as
a result of the Company's technology and new product activity associated with
the technology announcements disclosed in the "Overview" section. However, there
can be no assurance that new products will be successfully developed or achieve
market acceptance, that yield problems on new or existing products utilizing new
foundry processes will not arise in the future, or that product yields can be
improved with respect to new or existing products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $3.3 million, or 27% of
net revenues in the first quarter of 1998, compared to $2.4 million, or 29% of
net revenues in the first quarter of 1997. Selling, general and administrative
expenses were higher than last year's equivalent quarter because of commissions
associated with increased revenues and legal costs incurred related to the Atmel
claim. Selling, general and administrative expenses could increase as a result
of sales and marketing activities, or legal expenses incurred in connection with
the Atmel litigation matter. (See Part II, Item 1.)
<PAGE>
Interest and Other Income, Net
Interest and other income was $0.6 million for the first quarters of 1998
and 1997. Interest income relates to investment earnings from the proceeds of
the Company's public offerings of common stock.
Provision for Income Taxes
Because of the loss incurred in the first quarter of 1998, the Company has
made no provisions for income taxes. Provision for income tax was handled in the
same manner for the first quarter on 1997.
Liquidity and Capital Resources
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. As of April 4, 1998, 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 $3.3 million in the
first three months of 1998, due to the Company's net loss and to an increase in
inventory of $5.0 million compared to the end of the previous quarter. Capital
purchases were $1.5 million for the first three months of 1998. The Company has
entered into a new operating lease agreement of $1.2 million of which $0.7
million is available over the three quarters, beginning April 5, 1998.
At April 4, 1998, the Company had cash, cash equivalents, short-term and
long term investments of $40 million, and working capital of $42 million. The
Company believes its existing cash, cash equivalents and investments, together
with its available line of credit and current equipment lease lines, will be
sufficient to satisfy the Company's projected working capital and capital
expenditure requirements through at least the next twelve months.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Company is in the process of planning, identifying, and eliminating
any problems and uncertainties associated with making the Company's software and
hardware applications compliant with the Year 2000. Although management does not
expect Year 2000 issues to have any material impact on its business or future
results of operations, there can be no assurance that there will not be
interruptions of operations or other limitations of system functionality or that
the Company will not incur significant costs to avoid such interruptions or
limitations.
<PAGE>
PART II
OTHER INFORMATION
Item 1. 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 discovery relating to
the liability issues. On February 27, 1998, the Court issued a decision
regarding the construction of the patent claims. The Company believes that this
decision is at least in part favorable to the Company. On April 14, 1998, the
Court issued a decision holding one of three patents invalid. 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 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith.
Exhibit
Number Exhibit Title
27.01 - Financial Data Schedule
(b) The Company did not file a report on Form 8-K during the period ended
April 4, 1998.
<PAGE>
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INFORMATION STORAGE DEVICES, INC.
(Registrant)
Date: May 18, 1998
/S/ Felix J. Rosengarten
Felix J. Rosengarten
Vice President, Finance and
Administration
and Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> APR-04-1998
<CASH> 8,453
<SECURITIES> 26,090
<RECEIVABLES> 7,247
<ALLOWANCES> 0
<INVENTORY> 12,710
<CURRENT-ASSETS> 57,050
<PP&E> 16,884
<DEPRECIATION> 10,050
<TOTAL-ASSETS> 72,598
<CURRENT-LIABILITIES> 14,702
<BONDS> 0
0
0
<COMMON> 79,720
<OTHER-SE> (233)
<TOTAL-LIABILITY-AND-EQUITY> 72,598
<SALES> 12,154
<TOTAL-REVENUES> 12,154
<CGS> 7,542
<TOTAL-COSTS> 7,542
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (70)
<INCOME-PRETAX> (1,214)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,214)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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