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1996 Q1 Information Storage Devices, Inc.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
COMMISSION FILE NO. 0-25502
INFORMATION STORAGE DEVICES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0197173
(State or other jurisdiction of (IRS 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 3, 1996, there were outstanding 9,777,433 shares of the Registrant's
Common Stock.
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1996 Q1 Information Storage Devices, Inc.
INFORMATION STORAGE DEVICES, INC.
INDEX
PART I - FINANCIAL INFORMATION Page
- - ------------------------------- ----
Item 1. Financial Statements
Condensed Balance Sheets at December 31, 1995
and March 31, 1996 ............................................................... 3
Condensed Statements of Operations for the
Three Months Ended March 31, 1995 and 1996........................................ 4
Condensed Statements of Cash Flows for the
Three Months Ended March 31, 1995 and 1996........................................ 5
Notes to Condensed Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................... 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................. 12
Signatures....................................................................... 12
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1996 Q1 Information Storage Devices, Inc.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(In thousands)
DECEMBER 31, MARCH 31,
1995 1996
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 29,202 $ 37,608
Short-term investments 45,892 18,637
Accounts receivable, net 7,554 6,940
Inventories 9,809 10,827
Other current assets 1,841 3,390
--------- ---------
Total current assets 94,298 77,402
Net property and equipment 5,244 5,463
Patents and other assets, net 1,355 1,785
Long-term investments 4,533 11,011
--------- ---------
Total Assets $ 105,430 $ 95,661
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,784 $ 10,530
Current portion of capitalized lease obligations 1,089 1,093
Accrued liabilities 2,312 1,503
Deferred revenue 1,834 1,904
--------- ---------
Total current liabilities 15,019 15,030
Long-term Liabilities:
Capitalized lease obligations, net of current portion 2,630 2,465
Deferred rent 183 164
Other non-current liabilities 145 145
--------- ---------
Total long-term liabilities 2,958 2,774
Shareholders' Equity:
Common stock 86,256 78,695
Deferred compensation (116) (208)
Retained earnings (deficit) 1,313 (663)
Unrealized gain on investments -- 33
--------- ---------
Total shareholders' equity 87,453 77,857
Total Liabilities and Shareholders' Equity $ 105,430 $ 95,661
========= =========
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1996 Q1 Information Storage Devices, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
THREE MONTHS ENDED MARCH 31,
1995 1996
---- ----
Net revenues $ 13,005 $ 12,335
Cost of goods sold 8,288 9,427
-------- --------
Gross margin 4,717 2,907
Operating Expenses:
Research and development 1,407 4,120
Selling, general and administrative 1,768 2,609
-------- --------
Total operating expenses 3,175 6,729
Income (loss) from operations 1,542 (3,822)
Interest and other income, net 133 781
-------- --------
Income (loss) before income taxes 1,675 (3,041)
Provision (benefit) for income taxes 586 (1,064)
-------- --------
Net income (loss) $ 1,089 $ (1,977)
======== ========
Earnings (loss) per share $ 0.14 $ (0.19)
======== ========
Shares used in computing earnings per share 7,680 10,235
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1996 Q1 Information Storage Devices, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1995 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,089 $ (1,977)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-----
Depreciation and amortization 427 597
Amortization of investment discount -- 36
Compensation costs related to stock and stock option grant 11 49
Provision for allowance for doubtful accounts and returns 55 --
Changes in assets and liabilities -----
Accounts receivable (1,922) 614
Inventories (530) (1,018)
Prepaid expenses and other assets 219 (1,530)
Accounts payable 962 747
Accrued liabilities and bonuses (155) (716)
Other current liabilities -- (92)
Deferred revenue 737 69
Deferred rent 66 (19)
-------- --------
Net cash provided by (used for) operating activities 959 (3,240)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (141) (620)
Change in other assets 16 (467)
Purchase of investments (13,682) (16,640)
Proceeds from maturities of investments -- 37,395
-------- --------
Net cash provided by (used for) investing activities (13,807) 19,668
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of issuance costs 23,954 236
Repurchase of common stock -- (7,938)
Payments on capitalized lease obligations (283) (320)
-------- --------
Net cash provided by (used for) financing activities 23,671 (8,022)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,823 8,406
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,605 29,202
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,428 $ 37,608
======== ========
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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,
1995.
The unaudited condensed financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments) that are, in the
opinion of management, necessary to state fairly the results for the periods
presented. The results for such periods are not necessarily indicative of the
results to be expected for the full fiscal year.
2. Inventories:
Inventories consist of material, labor and manufacturing overhead and are stated
at the lower of cost (first-in, first-out basis) or market. The components of
inventory are as follows (in thousands):
December 31, 1995 March 31, 1996
Work-in-process .......... $ 5,706 $ 7,422
Finished goods ........... 4,103 3,405
------- -------
$ 9,809 $10,827
======= =======
3. Earnings (Loss) Per Share:
Earnings (loss) per share has been computed using the weighted average number of
shares of common stock, and, when dilutive, common equivalent shares from
convertible preferred stock and common equivalent shares from stock options
outstanding (using the treasury stock method). Pursuant to the Securities and
Exchange Commissions Staff Accounting Bulletins, common and common equivalent
shares issued during the twelve-month period prior to the Company's initial
public offering in 1995 have been included in the 1995 calculation as if they
were outstanding for all periods prior to the public offering (using the
treasury stock method and the initial offering price).
4. Repurchase of Common Stock:
In January 1996, the Company's Board of Directors approved a stock repurchase
plan of up to one million shares of common stock. During the quarter ended March
31, 1996, the Company repurchased 835,000 shares on the open market at prices
ranging from $8.125 to $12.000 for a total of $7.9 million.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report includes forward looking statements that involve a number
of risks and uncertainties. The following includes a discussion of factors that,
among other factors, could cause actual results to differ materially. For
reference, see "Other Factors That May Affect Operating Results" for discussion
of such factors on page 16 of the ISD 1995 Annual Report.
OVERVIEW
ISD designs, develops, and markets single-chip integrated circuit
products for voice recording and playback, using its proprietary ChipCorder
high-density multilevel storage technology and its mixed signal expertise. The
Company directs its marketing and product development efforts toward the
consumer, communications and industrial markets. The Company distributes its
products through a direct sales organization and a worldwide network of sales
representatives and distributors. The Company was incorporated in California in
December 1987 and introduced its first product in February 1991.
ISD subcontracts with independent foundries to fabricate the wafers for
all of its products. This approach enables the Company to concentrate its
resources on the design and test areas, where the Company believes it has the
greatest competitive advantage, and eliminates the high cost of owning and
operating a semiconductor wafer fabrication facility. The Company 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 and with acceptable manufacturing yields and to deliver those products
to the Company on time. The Company has restructured the supply agreement with
Samsung, its largest supplier, from a wafer purchasing agreement to a die
purchasing agreement; however, there can be no assurance that the company will
be able to obtain the required die quantities and to meet customer schedules.
Because of the demand for the Company's products and because of long
lead times necessary to secure additional foundry capacity, the Company is
planning to complete qualification of another foundry supplier by the middle of
1996. Although the Company believes that current capacity is adequate to meet
the Company's current anticipated needs, there can be no assurance that the
Company will be able to qualify additional foundry capacity or otherwise obtain
needed quantities within expected time frames or at all.
Moreover, in order to reduce future manufacturing costs, the Company is
designing smaller die sizes with smaller geometry processes to increase the
number of die produced on each wafer. The Company's ability to remain
competitive depends on migrating its manufacturing to smaller geometries, in
particular certain of its products to the 0.8 micron geometry. A problem was
encountered with such a transition in the first quarter of 1996, resulting in a
write-off of in-line product and of a write-down of certain finished goods
inventory, as well as a delay in the conversion. Although management believes
the problems that delayed the 0.8 micron conversion have been identified and
solutions are being implemented, there can be no assurance that the Company's
foundries will achieve or maintain acceptable 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
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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.
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
March 31,
- - ---------------------------------------------------------------
1995 1996
---- ----
Net revenues 100.0% 100.0%
Cost of net revenues 63.7 76.4
----- -----
Gross margin 36.3 23.6
----- -----
Operating expenses:
Research and development 10.8 33.4
Sales, general and administrative 13.6 21.2
----- -----
Total operating expenses 24.4 54.6
----- -----
Income from operations 11.9 (31.0)
Other income (expense), net 1.0 6.4
----- -----
Income (loss) before income taxes 12.9 (24.6)
Provision (benefit) for income taxes 4.5 (8.6)
----- -----
Net income (loss) 8.4% (16.0%)
----- -----
- - ---------------------------------------------------------------
NET REVENUES
During the three months ended March 31, 1996, 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 1996 were $12.3 million or 5%
lower than the $13.0 million of net revenues for the first quarter of 1995.
Sales to the Company's top ten customers accounted for 89% of net revenues
compared to 72% in the first quarter of 1995. During the first quarter of 1996,
the top customers were Motorola at 36%, Marubun (the Company's Japanese
distributor) at 21% and Sanyo at 10% compared to Sanyo at 15%, Motorola at 10%
and Voice It at 10% for the same
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period of 1995. 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 operation if the Company is unable to obtain the orders
from new customers to offset such losses or reductions.
The overall decrease in net revenues for the three months ending March
31, 1996, was primarily due to a softening in the consumer market for products
incorporating the Company's products. The breakdown of net revenues by market
segment for the first quarter was 19% consumer, 75% communications, and 6%
industrial. During the three months ended March 31, 1995, the breakdown was
approximately 55% consumer, 40% communications and 5% industrial. The Company's
consumer customers in the first quarter continued purchasing the Company's
products primarily for use in personal memo recorders, cameras, photo frames,
books, educational toys and novelties. The communications customers represented
products consisting primarily of telephone answering machines, cellular phones,
pagers and personal handy phones. The failure of new applications or markets to
develop or the failure of existing markets to continue 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.
International sales for the first quarter of 1996 were 56% compared to
64% in the first quarter of 1995. Sales to Asia were 46% in the first quarter of
1996, down from 59% in 1995, and sales to Europe were 10% in the first quarter
of 1996, versus 5% in the first quarter of 1995. Japan accounted for 30% of
total sales in the first quarter of 1996, up from 21% in the previous year.
North American sales were 44% in the first quarter of 1996, up from 36% for the
same period last year. The United States accounted for 44% of total sales in the
first quarter of 1996. The decrease in sales to Asia in 1996 is a result of the
softening in the consumer market, as mentioned above. The increase in sales to
North America is a reflection of the continued growth in the communications
market. Due to its reliance on export sales and its dependence on foundries
outside the United States, the Company is subject to the risks of conducting
business internationally, including foreign government regulation and general
geopolitical risk such as political and economic instability, potential
hostilities, changes in diplomatic and trade relationships, and currency
fluctuation, any of which could have a material effect on the Company's
financial conditions or results of operations.
GROSS MARGIN
The Company's gross margin for the first quarter of 1996 was $2.9
million or 23.6% of net revenues. This was a 38% decrease from the $4.7 million
gross margin for the first quarter of 1995. Gross margin as a percentage of
sales for the first quarter for 1996 decreased by 35%, down from 36.3% for the
first quarter of 1995. The reduction in gross margins is the result of a
write-off of product in the 0.8_micron line as well as for the write-down in the
value of certain finished goods inventory items, resulting from a reduction in
the sales price for those items. The reduction in gross margin can also be
attributed to the lower new revenues in the first quarter of 1996.
The Company is subject to a number of factors which may have an adverse
impact on gross margin, including the availability and cost of product from the
Company's suppliers, changes in the mix of products sold, and the timing of new
product introductions and volume shipments. In addition, the markets for the
Company's products are characterized by intense
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price competition. 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 financial condition and results of operations.
RESEARCH AND DEVELOPMENT
Research and development expenses were $4.1 million or 33.4% of net
revenues in the first quarter of 1996, compared to $1.4 million or 10.8% of net
revenues in the same period of 1995. The increase in research and development
expenses were primarily due to the write-off of pre-production wafers in the 0.8
micron line as discussed earlier. There were also increased expenses caused by
more than a doubling of personnel for new product development and enhancement of
existing products. In addition, there were increased expenditures for materials,
including wafers and masks, related to such development activities. The Company
has also made a significant investment to strengthen its technology capability
by the creation of a technology department which is now staffed with six
Ph.D.'s. There can be no assurance that new product will be successfully
developed or achieve market acceptance, that yield problems will not arise in
the future, or that the need to improve product yields might not recur with
existing or new products or fabrication processes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $2.6 million or 21.1%
of net revenues in the first quarter of 1996, compared to $1.8 million or 13.6%
of net revenues in the first quarter of 1995. The increase in selling expenses
for the first quarter of 1996 came as a result of the Company's commitment to
expanding its marketing efforts with participation in public relations,
tradeshows, advertising, web site development, to name a few, and the addition
of more sales and marketing personnel. Selling expenses are expected to continue
to increase with net revenue growth due to more commissions and additional
personnel. The increases in general and administrative costs come from
additional professional fees, including legal and accounting, and office rent
and insurance.
OTHER INCOME, NET
Net other income was $0.8 million for the first quarter of 1996
compared to net other income of approximately $0.1 million for the same period
of 1995. Net other income for 1996 primarily represents interest income earned
on the proceeds of the Company's initial and secondary public offerings of
common stock.
PROVISION FOR INCOME TAXES
The Company recorded an income tax benefit for the first quarter of
1996, using an effective income tax rate of 35%. The benefit is included in
other assets in the accompanying balance sheet. The effective tax rate of 35%
for the first quarter of 1995 represents applicable statutory rates, partially
offset by research and development tax credits and net operating loss carry
forwards.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has a line of credit with a commercial bank under which the
Company may borrow up to $9 million, based on eligible accounts receivable and
$7.0 million based on eligible investments, with a term through June 30, 1996.
At March 31, 1996, the Company's borrowing base was approximately $12.4 million
and there were no borrowings outstanding under this line of credit, but it is
being used to guarantee letters of credit. The line of credit does not restrict
the Company from paying cash dividends on its capital stock but does require
that the Company maintain a ratio of total indebtedness to tangible net worth of
not more than 1.25 to 1 and a ratio of current assets to current liabilities of
not less than 1.5 to 1. The Company is currently in compliance with all
financial covenants in the line of credit agreement. As of March 31, 1996, the
amount of unrestricted equity available for distribution as a result of these
covenants was $54.9 million.
The Company's operating activities used net cash of $3.2 million in the
first three months of 1996, primarily due to a loss from operations and an
increase in inventory. The Company's repurchase of common stock, discussed in
Note 4 to Condensed Financial Statements, also used $7.9 million of net cash.
Capital purchases were $0.8 million in the first three months of 1996. The
Company's capital equipment needs, including wafer sort and final test
equipment, computer hardware and software and other office related items, are
currently budgeted at approximately $3.8 million through the end of 1996. The
Company has agreements with three capital equipment leasing companies providing
aggregate lease lines of $4.0 million of which $3.2 million was available on
March 31, 1996.
At March 31, 1996, the Company had cash, cash equivalents and
short-term investments of $56.2 million, long-term investments (tax free bonds
maturing in more than one year) of $11.0 million, and working capital of $62.4
million. The Company believes its existing cash, cash equivalents and short-term
investments and its available line of credit and current equipment lease lines,
will satisfy the Company's projected working capital and capital expenditure
requirements through the next twelve months. To the extent that funds generated
from operations are insufficient to meet the Company's capital requirements, and
the Company is required to raise additional funds, no assurance can be given
that additional financing will be available or, if available, that it will be
available on acceptable terms.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith.
Exhibit
Number Exhibit Title
10.01 - 1987 Stock Option Plan, as amended, and related documents.
10.02 - 1994 Equity Incentive Plan, as amended, and related documents.
10.03 - 1994 Directors Stock Option Plan, as amended, and related documents.
10.23 - Form of Employment Agreement dated January 19, 1996 between
Registrant and all of the Company's Executive Officers and certain
key employees.
11.01 - Statement regarding computation of per share earnings.
27.01 - Financial Data Schedule
(b) The Company filed a report on Form 8-K during the period ended
March 31, 1996 with regard to a Shareholder Rights Plan on January 5, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INFORMATION STORAGE DEVICES, INC.
(Registrant)
Date: May 10, 1996
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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