<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
/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 1943
For the transition period from to
-------------------- -------------------------
Commission file number 000-23084 .
INTEGRATED SILICON SOLUTION, INC.
DELAWARE 77-0199971 .
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
680 ALMANOR AVENUE, SUNNYVALE, CALIFORNIA 94086 .
(Address of principal executive offices) zip code
Registrant's telephone number, including area code (408) 733-4774 .
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
--- ---
The number of outstanding shares of the registrant's Common Stock as of
May 8, 1996 was 17,514,768.
<PAGE> 2
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- -----------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $36,353 $25,043 $81,404 $44,145
Cost of sales 21,390 12,823 45,313 23,863
------- ------- ------- -------
Gross Profit 14,963 12,220 36,091 20,282
------- ------- ------- -------
Operating Expenses:
Research and development 5,635 3,176 10,562 6,010
Selling, general and administrative 3,666 2,631 7,718 4,885
------- ------- ------- -------
Total operating expenses 9,301 5,807 18,280 10,895
------- ------- ------- -------
Operating income 5,662 6,413 17,811 9,387
Other income, net 1,340 312 2,544 523
------- ------- ------- -------
Income before income taxes and
minority interest 7,002 6,725 20,355 9,910
Provision for income taxes 1,961 1,344 5,032 1,982
------- ------- ------- -------
Net income before minority interest 5,041 5,381 15,323 7,928
Minority interest in net loss of
consolidated subsidiary (23) (13) (35) (23)
------- ------- ------- -------
Net income $ 5,064 $ 5,394 $15,358 $ 7,951
======= ======= ======= =======
Net income per share $ 0.28 $ 0.34 $ 0.83 $ 0.53
======= ======= ======= =======
Shares used in per share calculation 18,320 15,668 18,397 14,894
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 3
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
---------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,501 $ 29,452
Restricted cash 4,537 986
Short-term investments 84,300 80,300
Accounts receivable 18,154 18,746
Inventories 29,985 11,114
Other current assets 13,343 11,822
-------- --------
Total current assets 174,820 152,420
Property, equipment, and leasehold improvements, net 25,568 17,946
Other assets 33,458 34,075
-------- --------
Total assets $233,846 $204,441
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,019 $ --
Accounts payable 26,035 15,370
Accrued compensation and benefits 3,972 5,632
Accrued expenses 1,484 1,719
Income tax payable 1,909 3,535
Current portion of long-term obligations 5,532 5,325
-------- --------
Total current liabilities 40,951 31,581
Income tax payable - non-current 4,298 4,298
Long-term obligations 30,198 28,563
Minority interest in consolidated subsidiary 55 90
Stockholders' equity:
Convertible preferred stock -- --
Common stock 2 2
Additional paid-in capital 105,870 102,376
Retained earnings 54,295 38,937
Cumulative translation adjustment (1,740) (1,302)
Unearned compensation (83) (104)
-------- --------
Total stockholders' equity 158,344 139,909
-------- --------
Total liabilities and stockholders' equity $233,846 $204,441
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 4
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
-------------------
1996 1995
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 15,358 $ 7,951
Charges to net income not affecting cash 2,904 1,882
Net effect of changes in current and other assets and current liabilities (10,677) 4,251
-------- -------
Cash provided by operating activities 7,585 14,084
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (10,428) (10,743)
Purchases of available-for-sale securities (101,025) (41,150)
Sales of available-for-sale securities 97,025 15,300
-------- -------
Cash used in investing activities (14,428) (36,593)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under notes payable and long-term obligations 9,800 3,186
Proceeds from issuance of common stock 1,698 26,771
Principal payments on notes payable and long-term obligations (5,939) (1,569)
Decrease (increase) in restricted cash (3,551) 379
-------- -------
Cash provided by financing activities 2,008 28,767
-------- -------
Effect of exchange rate changes on cash and cash equivalents (116) 32
-------- -------
Net increase (decrease) in cash and cash equivalents (4,951) 6,290
Cash and cash equivalents at beginning of period 29,452 9,416
-------- -------
Cash and cash equivalents at end of period $ 24,501 $15,706
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 5
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
Integrated Silicon Solution, Inc. (the Company) and its consolidated majority
owned subsidiaries, after elimination of all significant intercompany accounts
and transactions, and have been prepared in accordance with generally accepted
accounting principles for interim financial information and with Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included.
Operating results for the six months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 1996.
2. CUSTOMER CONCENTRATION
Sales to one customer accounted for approximately 28% of total net
sales for the quarter ended March 31, 1996 and approximately 19% of total net
sales for the six months ended March 31, 1996.
3. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS
Cash, cash equivalents, restricted cash, and short-term investments
consisted of the following:
<TABLE>
<CAPTION>
(In thousands)
March 31 September 30
1996 1995
---- ----
<S> <C> <C>
Cash ................................... $ 10,128 $ 9,275
Money market instruments............... 2,393 4,698
Certificates of deposit................. 16,517 16,465
Auction instruments..................... 84,300 80,300
======== ========
$113,338 $110,738
======== ========
</TABLE>
4. INVENTORIES
The following is a summary of inventories by major category:
<TABLE>
<CAPTION>
(In thousands)
March 31 September 30
1996 1995
---- ----
<S> <C> <C>
Raw materials ...................... $10,555 $ 3,993
Work-in-process...................... 7,875 4,305
Finished goods....................... 11,555 2,816
======= ========
$29,985 $ 11,114
======= ========
</TABLE>
4
<PAGE> 6
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The income tax provisions for the six-month periods ended March 31,
1996 and 1995 have been calculated at the estimated annual effective rates of
25% and 20%, respectively. The effective tax rate for the six months ended March
31, 1996 and 1995 differ from the federal statutory rate of 34% primarily due to
a lower effective income tax rate in Taiwan.
6. LITIGATION
On December 13, 1995, a securities class action lawsuit was filed in
the United States District Court for the Northern California District of
California against the Company. The lawsuit, which names the Company and several
of its officers and directors as defendants, alleges various violations of the
federal securities laws. The Company believes that the allegations of the
complaint are without merit, and the Company intends to vigorously defend
itself. The Company believes that the ultimate resolution of this matter will
not have a material adverse effect on its financial position, results of
operations, or cash flow.
5
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934. The forward looking statements contained herein are
subject to certain factors that could cause actual results to differ materially
from those projected in the forward-looking statements. Such factors include but
are not limited to the risk factors set forth below in this report on Form 10-Q.
BACKGROUND
The Company designs, develops and markets high performance SRAM and
nonvolatile memory integrated circuits used in personal computers, data
communications, telecommunications, instrumentation and consumer products.
Growth in the high speed SRAM market over the past few years has been driven by
the increasing speed requirements of personal computers and other electronic
systems such as modems and networks. The Company leverages its SRAM design and
advanced CMOS process technology expertise to establish collaborative
relationships with emerging Asian wafer foundries. Although the Company believes
that these relationships differentiate it from traditional fabless companies and
allow it to secure a committed, low cost supply of wafers processed with leading
edge process technology, there are also certain risks associated with dependence
on foundries for wafer manufacturing. See "Dependence on Independent Wafer
Foundries". The Company's principal manufacturing relationship is with Taiwan
Semiconductor Manufacturing Corporation ("TSMC"), with which it jointly develops
process technology for producing the Company's SRAM and nonvolatile memories.
The Company also has a collaborative program with Chartered Semiconductor
Manufacturing ("Chartered") in Singapore and with Belling Semiconductor
("Belling") in the People's Republic of China. In addition, the Company has
received wafers in 1996 from United Microelectronics Corporation ("UMC") and
Vanguard International Semiconductor ("Vanguard") under non-collaborative
foundry agreements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
Net Sales. Net sales increased by 45% to $36.4 million in the three
months ended March 31, 1996, from $25.0 million in the three months ended March
31, 1995. The increase in sales was principally due to increased unit shipments
of 256K and 1MB SRAM products and nonvolatile memory products, specifically
EPROMs and FLASH. The increased units were a result of increased wafer supply
from TSMC as well as increased wafers from other foundries. The increased
revenue resulting from increased unit shipments more than offset the generally
lower average selling prices the Company received for its products. The Company
experienced significantly lower average selling prices for a majority of its
SRAM products in the March 1996 quarter as compared to the same quarter of the
prior year. Compared to the December 1995 quarter, in the March 1996 quarter,
the Company continued to experience deterioration in the average selling prices
of its product lines, especially for the SRAM product line. The deterioration in
average selling prices and general market sluggishness resulted in a decrease in
quarterly revenue from $45.1 in the December 1995 quarter to $36.4 million in
the March 1996 quarter. The Company anticipates that the deterioration in
average selling prices will continue in the June 1996 quarter and in subsequent
quarters. See "Certain Factors - Quarterly Fluctuations and Declines in Average
Selling Prices".
Sales to one customer accounted for approximately 28% of total net
sales for the quarter ended March 31, 1996 and approximately 19% of total net
sales for the six months ended March 31, 1996.
Gross Profit. Gross profit increased 22% to $15.0 million in the three
months ended March 31, 1996, from $12.2 million in the three months ended March
31, 1995. As a percentage of net sales, gross profit decreased to 41.2% in the
three months ended March 31, 1996 from 48.8% in the three months ended March
6
<PAGE> 8
31, 1995. The increase in absolute dollars was primarily due to increased
shipments of the Company's 256K and 1MB SRAM products, as well as increased
shipments of EPROM and FLASH nonvolatile memory products. The decrease in gross
profit as a percentage of net sales was primarily a result of generally lower
average selling prices for the Company's products in the March 1996 quarter as
compared to the same quarter of the prior year. The Company continued to
experience deterioration in the average selling prices of its SRAM product line
in the March 1996 quarter and anticipates that this deterioration will continue
in the June 1996 quarter and in subsequent quarters. The Company is unable to
predict when or if such declines in price will moderate. Any significant
decrease in average selling prices will result in a material decline in the
Company's gross margins unless the Company is able to reduce its cost per unit
to the extent necessary to offset such declines.
Research and Development. Research and development expenses increased
by 77% to $5.6 million in the three months ended March 31, 1996, from $3.2
million in the three months ended March 31, 1995. As a percentage of net sales,
research and development expenses increased to 15.5% in the three months ended
March 31, 1996, from 12.7% in the three months ended March 31, 1995. The
increase in absolute dollars was primarily the result of an increase in
engineering personnel and payroll related expenses and increased expenses
related to the development of new products. During the three months ended March
31,1996, the Company's development efforts principally focused on advanced
design of the synchronous burst SRAM, Flash memory devices, geometry reductions
for selected SRAM and EPROM products and Voice EPROMs. The Company anticipates
that its research and development expenses will continue to increase
substantially in absolute dollars in future periods, although such expenses may
fluctuate as a percentage of net sales.
Selling, General and Administrative. Selling, general and
administrative expenses increased by 39% to $3.7 million in the three months
ended March 31, 1996 from $2.6 million in the three months ended March 31, 1995.
As a percentage of net sales, selling, general and administrative expenses
decreased to 10.1% in the three months ended March 31, 1996, from 10.5% in the
three months ended March 31, 1995. The increase in absolute dollars was
primarily the result of increased selling commissions and the addition of
marketing and sales personnel and payroll related expenses. The Company expects
its selling, general and administrative expenses to increase in absolute dollars
in future periods as it continues to expand its sales and marketing efforts,
although such expenses may fluctuate as a percentage of net sales.
Other income, Net. Other income increased to $1.3 million in the three
months ended March 31, 1996 from $0.3 million in the three months ended March
31, 1995, primarily due to increased net interest earnings as a result of higher
cash and short-term investment balances.
Provision for Income Taxes. For the three months ended March 31, 1996,
the Company increased its provision for income taxes to 28% as compared to 20%
for the comparable period in the prior year, primarily reflecting increased
operating income attributable to the Company's U.S. operations resulting from
increased sales to OEM customers.
SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO SIX MONTHS ENDED MARCH 31, 1995
Net Sales. Net sales increased by 84% to $81.4 million in the six
months ended March 31, 1996, from $44.1 million in the six months ended March
31, 1995. The increase in sales was principally due to increased unit shipments
of SRAM products and, to a lesser extent, nonvolatile memory products, as well
as changes in product mix to higher density products. The increased units were a
result of increased wafer supply from TSMC as well as increased wafers from
other foundries. During the six months ended March 31, 1996, the Company
experienced significant deterioration in the average selling prices of its SRAM
product line and the Company anticipates that this deterioration will continue
in the June 1996 quarter and in subsequent quarters. See "Certain Factors -
Quarterly Fluctuations and Declines in Average Selling Prices".
Sales to one customer accounted for approximately 19% of total net
sales for the six months ended March 31, 1996.
7
<PAGE> 9
Gross Profit. Gross profit increased 78% to $36.1 million in the six
months ended March 31, 1996, from $20.3 million in the six months ended March
31, 1995. As a percentage of net sales, gross profit decreased to 44.3% in the
six months ended March 31, 1996 from 45.9% in the six months ended March 31,
1995. This increase in absolute dollars was primarily due to increased shipments
of the Company's SRAM products and, to a lesser extent, nonvolatile memory
products. The decrease in gross profit as a percentage of net sales was
primarily a result of generally lower average selling prices for the Company's
3.3V 256K SRAM product in the six months ended March 31, 1996 as compared to the
period of the prior year. The Company experienced deterioration in the average
selling prices of its SRAM product line in the six months ended March 31, 1996
and anticipates that this deterioration will continue in the June 1996 quarter
and in subsequent quarters. The Company is unable to predict when or if such
declines in price will moderate. Any significant decrease in average selling
prices will result in a material decline in the Company's gross margins unless
the Company is able to reduce its cost per unit to the extent necessary to
offset such declines.
Research and Development. Research and development expenses increased
by 76% to $10.6 million in the six months ended March 31, 1996, from $6.0
million in the six months ended March 31, 1995. As a percentage of net sales,
research and development expenses decreased to 13.0% in the six months ended
March 31, 1996, from 13.6% in the six months ended March 31, 1995. The increase
in absolute dollars was primarily the result of an increase in engineering
personnel and payroll related expenses and increased expenses related to the
development of new products. During the six months ended March 31,1996, the
Company's development efforts principally focused on geometry reductions for its
SRAM products, synchronous SRAMs, Flash memories and Voice EPROMs. The Company
anticipates that its research and development expenses will increase
substantially in absolute dollars in future periods, although such expenses may
fluctuate as a percentage of net sales.
Selling, General and Administrative. Selling, general and
administrative expenses increased by 58% to $7.7 million in the six months ended
March 31, 1996 from $4.9 million in the six months ended March 31, 1995. As a
percentage of net sales, selling, general and administrative expenses decreased
to 9.5% in the six months ended March 31, 1996, from 11.1% in the six months
ended March 31, 1995. The increase in absolute dollars was primarily the result
of increased selling commissions and the addition of marketing and sales
personnel and payroll related expenses. The Company expects its selling, general
and administrative expenses to increase in absolute dollars in future periods,
as it continues to expand its sales and marketing efforts, although such
expenses may fluctuate as a percentage of net sales.
Other income, Net. Other income increased to $2.5 million in the six
months ended March 31, 1996 from $0.5 million in the six months ended March 31,
1995, primarily due to increased net interest earnings as a result of higher
cash and short-term investment balances.
Provision for Income Taxes. For the six months ended March 31, 1996,
the Company increased its provision for income taxes to approximately 25% as
compared to 20% for the comparable period in the prior year, primarily
reflecting increased operating income attributable to the Company's U.S.
operations resulting from increased sales to OEM customers.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of fiscal 1996, the Company's principal
source of liquidity was cash flows from operations of approximately $7.6
million. During the first six months of fiscal 1996, cash flow from operations
was primarily due to net income and increases in accounts payable partially
offset by increases in inventory. As of March 31, 1996, the Company's principal
sources of liquidity included cash, cash equivalents, restricted cash and
short-term investments of approximately $113.3 million, of which approximately
$17.1 million are held by ISSI-Taiwan. Approximately $4.5 million of the cash
held by ISSI-Taiwan is restricted as of March 31, 1996 for purposes of securing
available short-term lines of credit.
The Company made capital expenditures of approximately $10.4 million
for the first six months of fiscal 1996, primarily for the purchase of test
equipment and design and engineering tools. The Company
8
<PAGE> 10
expects to spend approximately $10 million to purchase capital equipment during
the next twelve months, principally for the purchase of additional test
equipment, design and engineering tools, and computer hardware and software.
Additionally, the Company is planning the construction of a building in the
Hsinchu Science-based Industrial Park for approximately $18 million to house its
Taiwan operations. Construction of the building is expected to begin in July
1996.
In fiscal 1995, the Company entered into an agreement with TSMC
pursuant to which the Company has agreed to acquire specified wafer capacity
through 2001. In exchange for wafer capacity commitments by TSMC, the Company
has agreed to make certain annual advance payments to TSMC which commenced in
June 1995. The first payment in June 1995 was approximately $2.4 million and
will be credited towards the purchase of wafers in 1996. The additional required
prepayments totaling approximately $31.2 million over the next 4 years are
reflected in short-term and long-term obligations and, to the extent these
obligations have been recorded, an offsetting short-term or long-term asset has
been recorded. In June 1996, the next payment under this agreement,
approximately $4.8 million, is due. Additionally, in fiscal 1995, the Company
entered into a manufacturing agreement and joint venture agreement with UMC.
Under the terms of these agreements, the Company received a supply of wafers
from UMC beginning with the December 1995 quarter and the Company agreed to
invest $30 million in cash for 5% equity in a joint manufacturing venture of
which UMC retains 55% ownership. As of March 31, 1996, approximately $7.0
million has been paid to UMC for the joint venture. Based on the completion of
certain milestones, the Company is committed to future payments to UMC of
approximately an additional $23.0 million. The next payments of approximately
$15.0 million and $8.0 million are expected to be made in December 1996 and July
1997, respectively, subject to certain milestone completions.
The Company has $19.1 million available through a number of short-term
lines of credit with various financial institutions in Taiwan. As of March 31,
1996, the Company had borrowings of approximately $2.0 million under one of
these short-term lines of credit.
The Company has a number of long-term lines of credit with the Bank of
Communication in Taiwan to finance the purchase of machinery, equipment and
building construction in Taiwan. Total obligations from these borrowings as of
March 31, 1996 was $4.5 million, of which $0.7 million is included in the
current portion of long-term obligations. These obligations bear interest at
rates of from 6.70% to 6.825% and are payable in quarterly installments through
2002. As of March 31, 1996, the Company had available long-term lines of credit
of approximately $20.3 million of which approximately $11.0 million is for
construction financing.
The Company believes that its existing funds and funds expected to be
generated from operations will satisfy the Company's anticipated working capital
and other cash requirements through at least the next 12 months. The Company may
also use bank borrowings and capital leases depending on the terms available.
In addition to the above agreements, the Company is currently
evaluating various arrangements with wafer manufacturers in an attempt to
further diversify its manufacturing base and maintain an adequate supply of
wafers. These arrangements may include prepayments on future wafer purchases,
minority equity investments in, or other financial commitments to, wafer
manufacturers in exchange for production capacity, or the use of contracts which
firmly commit the Company to purchase specified quantities of wafers over
extended periods. To the extent the Company pursues such transactions with
existing and potential foundry partners, any such transactions could require the
Company to seek additional equity or debt financings to fund such activities
and, in certain circumstances, to provide product or technology rights in return
for production capacity. There can be no assurance that any such additional
financing could be obtained on terms acceptable to the Company.
9
<PAGE> 11
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS OR FUTURE OPERATING
RESULTS
QUARTERLY FLUCTUATIONS AND DECLINES IN AVERAGE SELLING PRICES
The Company's future quarterly and annual operating results are subject
to fluctuations due to a wide variety of factors, many of which are outside of
its control, including declines in average selling prices of the Company's
products, failure to introduce new products and to implement technologies on a
timely basis, the inability to obtain adequate supplies of wafers or finished
die from the Company's manufacturing sources, market acceptance of the Company's
and its customers' products, the failure to anticipate changing customer product
requirements, and the timing and announcement of new product introductions by
the Company and its competitors. Other factors include changes in product mix or
fluctuations in manufacturing yield, seasonal fluctuations in customer demand
for the Company's products, the timing of significant orders, increased expenses
associated with new product introductions or process changes, the ability of
customers to make payments to the Company, increases in material costs,
increases in costs associated with the expansion of sales channels, increases in
general and administrative expenses and certain production and other risks
associated with using independent manufacturers. In this regard, in the quarter
ended March 31, 1996, the Company experienced a drop in revenues and gross
profit from the prior quarter as a result of intense price pressure in the SRAM
market. The Company's future operating results will also depend in part on
general economic conditions in Asia, the United States and its other markets. In
addition, there can be no assurance that the markets for the Company's products
will continue to grow.
Although average selling prices for the Company's SRAM products
generally increased in fiscal 1995, competitive pricing pressures resulted in
significant price decreases for 256K SRAM products in September 1995. These
pricing pressures impacted the majority of the Company's SRAM product line in
the six months ended March 31, 1996 and have continued in the current quarter.
The Company is unable to predict when or if such declines in prices will
moderate. Historically, average selling prices for semiconductor memory products
have declined and the Company expects that average selling prices will decline
in the future. Accordingly, the Company's ability to maintain or increase
revenues will be highly dependent upon its ability to increase unit sales volume
of existing products and to introduce and sell new products which compensate for
the anticipated declines in the average selling prices of its products.
Declining average selling prices will also adversely affect the Company's gross
margins unless the Company is able to reduce its cost per unit to the extent
necessary to offset declines in average selling prices. There can be no
assurance that the Company will be able to increase unit sales volumes,
introduce and sell new products or reduce its cost per unit.
PRODUCT CONCENTRATION AND DEPENDENCE ON PERSONAL COMPUTER INDUSTRY
In the second fiscal quarter ended March 31, 1996, a majority of the
Company's net sales were derived from the sale of SRAM products. A substantial
portion of the Company's products are incorporated into computer-related
products such as modems or networks and into personal computers. The PC industry
has from time to time experienced cyclical, depressed business conditions, often
in connection with, or in anticipation of, a decline in general economic
conditions. Such industry downturns have resulted in reduced product demand and
declining average selling prices. The Company's business and operating results
would be materially and adversely affected by any future downturns in the PC
industry or in computer-related industries using its products.
DEPENDENCE ON INDEPENDENT WAFER FOUNDRIES
The Company has adopted a fabless manufacturing strategy with the
objective of establishing collaborative manufacturing relationships with
selected semiconductor manufacturers. To date, the Company's principal
manufacturing relationship has been with TSMC, and in fiscal 1995, the Company
obtained substantially all of its wafers from TSMC. Although in the first
quarter of fiscal 1996, the Company began to expand its wafer supply base by
adding production wafers from Chartered and UMC, the Company remains dependent
on TSMC for a significant majority of its wafer supply. Each of the Company's
wafer suppliers also fabricates for other integrated circuit companies,
including certain of the Company's
10
<PAGE> 12
competitors. UMC also manufacturers its own SRAMs. The Company has written
commitments from certain of its foundries specifying increasing wafer
quantities, but the Company would have little recourse if its wafer suppliers
experienced manufacturing failures or yield shortfalls, chose to prioritize
capacity for other use or reduced deliveries to the Company. There can be no
assurance that the Company's foundries will produce wafers at acceptable
specifications and yields or will allocate sufficient wafer capacity to satisfy
its wafer requirements. Moreover, there can be no assurance that the Company
would be able to qualify alternative manufacturing sources for existing or new
products in a timely manner or that such alternative manufacturing sources would
be able to produce an adequate supply of wafers. If the Company were unable to
obtain an adequate supply of wafers from its current or any alternative sources
in a timely manner, its business and operating results would be materially and
adversely affected.
INCREASED COMPETITION
The semiconductor memory market is intensely competitive and has been
characterized by price erosion, rapid technological change, short product life
cycles, cyclical market patterns and heightened foreign and domestic
competition. The Company competes with a number of major domestic and
international suppliers of high speed SRAMs, including Alliance Semiconductor,
Cypress Semiconductor, Integrated Device Technology, Inc. ("IDT"), Micron
Technology, Motorola, Samsung, Toshiba Semiconductor, UMC, and Winbond
Electronics. The Company also competes with new and emerging companies that have
recently entered or may in the future enter the market. The Company may also
face significant competition from other domestic and foreign integrated circuit
manufacturers that have advanced technological capabilities and have not
previously participated in the SRAM market sector or from companies that may
develop products or technologies that might replace SRAMs or any other products
offered by the Company. Another source of competition may come from companies
with both SRAM and DRAM capabilities that may choose to increase their
production of SRAMs if the DRAM market deteriorates. Increased competition could
materially and adversely affect the financial results of the Company. For
example, in the September 1995 quarter, UMC reduced its prices for SRAMs and
this resulted in a declines in the Company's selling prices for its SRAM
products and lower gross margins in the first six months of fiscal 1996.
MANAGEMENT OF GROWTH
The Company has grown rapidly over the last several years. This growth
has resulted in a significant increase in responsibilities for existing
management which has placed, and may continue to place, a significant strain on
the Company's limited personnel and other resources. The Company's ability to
manage its growth effectively will require it to continue to improve its
operational, financial and management systems and to successfully train,
motivate and manage its employees. If the Company's management is unable to
manage growth effectively and properly execute its strategies, the Company's
business and operating results could be materially and adversely affected.
INTERNATIONAL OPERATIONS
Sales to international customers represent a significant percentage of
the Company's net sales. This percentage may fluctuate over time in response to
worldwide market demand for the Company's products. The Company's Taiwan
subsidiary employs over fifty percent of the Company's total workforce. In
addition, substantially all of the Company's foundries and assembly and test
operations are located in Asia. This concentration of sales, manufacturing,
assembly and test operations in Asia subjects the Company to the risks of
conducting business internationally, including economic conditions in Asia,
particularly Taiwan, changes in trade policy and regulatory requirements,
tariffs and other trade barriers and restrictions, the burdens of complying with
foreign laws and, possibly, political instability. The Company transacts
business predominately in U.S. and New Taiwan ("NT") dollars. Such transactions
expose the Company to the risk of exchange rate fluctuations. Although the
Company's business and results of operations have not been materially and
adversely impacted by exchange rate fluctuations, there can be no assurance that
future fluctuations in the currency exchange rates will not materially and
adversely affect its business and operating results.
11
<PAGE> 13
PATENTS AND LICENSES
The Company's success depends in part on its ability to obtain patents,
licenses and other intellectual property rights covering its products. The
process of seeking patent protection can be long and expensive and there can be
no assurance patents will be issued. As is typical in the semiconductor
industry, the Company has been and may from time to time continue to be notified
of claims that it may be infringing certain patents, maskwork rights or
copyrights owned by third parties. If it appears necessary or desirable, the
Company may seek licenses under patents that it is alleged to be infringing.
Although patent holders commonly offer such licenses, no assurance can be given
that any licenses will be offered or that the terms of any offered licenses will
be acceptable to the Company. The failure to obtain a license under a key patent
or intellectual property right from a third party for technology used by the
Company could cause the Company to incur substantial liabilities and to suspend
the manufacture of the products utilizing the invention or to attempt to develop
non-infringing products, which could materially and adversely affect the
Company's business and operating results. Furthermore, there can be no assurance
that the Company will not become involved in protracted litigation regarding the
alleged infringement by the Company of third party intellectual property rights
or which may be necessary to protect patents or other intellectual property
rights of the Company. Any litigation relating to patent infringement or other
intellectual property matters could result in substantial cost and diversion of
resources by the Company, which could materially and adversely affect the
Company's business and operating results.
RISK OF INCREASED TAXES
The Company's tax rate could increase for a number of reasons. For
example, if the proportions of taxable income shifted such that a greater
proportion of taxable income is earned by U.S. operations, the Company's
effective tax rate may increase. It is possible that the Taiwan tax holiday
applicable to the earnings of ISSI-Taiwan could be modified by changes in law or
otherwise reduced. In addition, the Company's taxes would increase if all or a
portion of the earnings of ISSI-Taiwan were to become subject to U.S. tax as the
result of actual dividends or through U.S. rules for taxing controlled foreign
corporations. Further, if profits of ISSI-Taiwan are distributed to the Company
as dividends they become subject to Taiwan withholding tax as well as U.S. tax
(with an offset for underlying Taiwan taxes paid) and the tax rate would
increase. It is not the Company's intention to cause ISSI-Taiwan to distribute
dividends.
ISSI-Taiwan is a controlled foreign corporation ("CFC") for U.S. income
tax purposes. Under U.S. rules for taxing CFCs, all or a portion of the earnings
of ISSI-Taiwan may become subject to U.S. tax as inclusions in the U.S. taxable
income of the Company (with a credit for foreign taxes paid by ISSI-Taiwan) if
one or more of a number of events occur. Such events include, but are not
limited to: ISSI-Taiwan accumulating cash and other passive assets in excess of
25% of its total assets; ISSI-Taiwan lending funds to the Company or otherwise
investing in certain proscribed assets; and ISSI-Taiwan engaging in various
types of transactions defined in the Subpart F provisions of the U.S. Internal
Revenue Code. If cash is accumulated through operations and not otherwise
invested in non-passive assets such as capital equipment, such amounts in excess
of 25% of total assets would cause the Company's effective tax rate to increase.
The Company believes that its existing plans will minimize the impact of the CFC
rules for the immediate future, subject to such changes in U.S. tax laws as may
occur. However, over time the CFC rules may cause the Company's tax rate to
increase.
VOLATILITY OF STOCK PRICE
The trading price of the Common Stock increased substantially after the
Company's initial public offering in February 1995, subsequently declined, and
is expected to be subject to wide fluctuations in response to quarter-to-quarter
variations in operating results, decreases in the selling prices of its
products, future announcements by the Company or its competitors, increases or
decreases in wafer capacity, general conditions in the semiconductor or computer
industries, governmental regulations, litigation, new or revised earnings
estimates, comments or recommendations issued by analysts who follow the
Company, its
12
<PAGE> 14
competitors or the semiconductor industry and other events or
factors. In addition, stock markets have experienced extreme price and trading
volume volatility in recent years. This volatility has had a substantial effect
on the market prices of securities of many high technology companies for reasons
frequently unrelated to the operating performance of the specific companies.
These broad market fluctuations may adversely affect the market price of the
Company's Common Stock.
13
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEEDINGS
Please see Part I Financial Information, Item 1, Note 6 to the
Condensed Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on Thursday February 15,
1996 at 1:30 p.m., local time, in San Jose, California.
(a) The following nominees for Directors were elected. Each person
elected as a Director will serve until the next annual meeting of stockholders
or until such person's successor is elected and qualified:
<TABLE>
<CAPTION>
Votes Votes Against
Name of Nominee in Favor or Withheld
--------------- -------- -----------
<S> <C> <C>
Jimmy S.M. Lee 14,259,466 113,423
Diosdado P. Banatao 14,355,741 17,148
Lip-Bu Tan 14,352,059 20,830
Kong-Yeu Han 14,361,866 11,023
Hou-Teng Lee 14,350,359 22,530
Chun Win Wong 14,350,934 21,955
</TABLE>
(b) An amendment to the Company's 1989 Stock Plan to increase by
1,000,000 the number of shares reserved for grant thereunder was approved with
7,161,103 votes in favor, 609,533 votes against, and 9,599,563 representing
abstentions and broker non-votes.
(c) An amendment to the Company's 1993 Employee Stock Purchase Plan to
increase by 250,000 to an aggregate of 450,000 the number of shares reserved for
grant thereunder was approved with 7,407,988 votes in favor, 360,979 votes
against, and 9,601,232 representing abstentions and broker non-votes.
(d) An amendment to the Company's Certificate of Incorporation Plan to
increase by 35,000,000 to an aggregate of 70,000,000 the number of authorized
shares was approved with 13,630,295 votes in favor, 537,857 votes against, and
3,202,047 representing abstentions and broker non-votes.
(e) The ratification and appointment of Ernst & Young, LLP as
independent auditors of the Company for the fiscal year ending September 30,
1996 was approved with 14,261,099 votes in favor, 69,691 votes against, and
3,039,409 representing abstentions and broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report.
Exhibit 11.1 Computation of Earnings Per Share. (page 16)
Exhibit 27 Financial Data Schedule
(b) The registrant did not file any reports on Form 8-K during the
quarter ended December 31, 1995.
14
<PAGE> 16
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.
INTEGRATED SILICON SOLUTION, INC .
(Registrant)
Dated: May 15, 1996 /s/ Gary L. Fischer
---------------------------------
Gary L. Fischer
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
<PAGE> 17
EXHIBIT INDEX
Exhibit 11.1 Statements of Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11.1
INTEGRATED SILICON SOLUTION, INC.
STATEMENTS OF COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
-------------------- ----------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income .................................... $ 5,064 $ 5,394 $15,358 $ 7,951
======= ======= ======= =======
Computation of weighted average common and
common equivalent shares outstanding:
Weighted average common shares
outstanding ............................ 17,418 10,636 17,372 7,710
Common equivalent shares from dilutive
preferred stock ........................ -- 3,392 -- 5,611
Common equivalent shares from dilutive
common stock options and warrants ...... 902 1,640 1,025 1,311
Common equivalent shares from stock and
stock options granted during the twelve-
month period prior to the Company's
proposed initial public offering ....... -- -- -- 262
------- ------- ------- -------
Shares used in per share calculations ......... 18,320 15,668 18,397 14,894
======= ======= ======= =======
Net income per share .......................... $ 0.28 $ 0.34 $ 0.83 $ 0.53
======= ======= ======= =======
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 29,038
<SECURITIES> 84,300
<RECEIVABLES> 18,154
<ALLOWANCES> 0
<INVENTORY> 29,985
<CURRENT-ASSETS> 13,343
<PP&E> 36,771
<DEPRECIATION> 11,203
<TOTAL-ASSETS> 233,846
<CURRENT-LIABILITIES> 40,951
<BONDS> 30,198
0
0
<COMMON> 2
<OTHER-SE> 158,342
<TOTAL-LIABILITY-AND-EQUITY> 233,846
<SALES> 81,404
<TOTAL-REVENUES> 81,404
<CGS> 45,313
<TOTAL-COSTS> 45,313
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> 20,355
<INCOME-TAX> 5,032
<INCOME-CONTINUING> 15,358
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,358
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
</TABLE>
