<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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to_______________________
Commission file number 000-23084
---------------------------------------------------------
.
INTEGRATED SILICON SOLUTION, INC.
Delaware 77-0199971
------------------------------ --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2231 Lawson Lane, Santa Clara, California 95054
--------------------------------------------------------------
(Address of principal executive offices) zip code
Registrant's telephone number, including area code (408) 588-0800
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 April 30, 1997 was 17,759,184
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INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 25,794 $ 36,353 $ 49,404 $ 81,404
Cost of sales 18,225 21,390 35,196 45,313
-------- -------- -------- --------
Gross Profit 7,569 14,963 14,208 36,091
-------- -------- -------- --------
Operating Expenses:
Research and development 5,977 5,635 11,652 10,562
Selling, general and administrative 3,861 3,666 7,422 7,718
-------- -------- -------- --------
Total operating expenses 9,838 9,301 19,074 18,280
-------- -------- -------- --------
Operating income (loss) (2,269) 5,662 (4,866) 17,811
Other income, net 625 1,340 1,356 2,544
-------- -------- -------- --------
Income (loss) before income taxes and
minority interest (1,644) 7,002 (3,510) 20,355
Provision (benefit) for income taxes (156) 1,961 (342) 5,032
-------- -------- -------- --------
Net income (loss) before minority interest (1,488) 5,041 (3,168) 15,323
Minority interest in net loss of
consolidated subsidiary -- (23) (18) (35)
-------- -------- -------- --------
Net income (loss) $ (1,488) $ 5,064 $ (3,150) $ 15,358
======== ======== ======== ========
Net income (loss) per share $ (0.08) $ 0.28 $ (0.18) $ 0.83
======== ======== ======== ========
Shares used in per share calculation 17,701 18,320 17,658 18,397
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
--------- ---------
(unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,782 $ 12,237
Restricted cash 5,203 7,023
Short-term investments 34,350 62,200
Accounts receivable 13,365 11,316
Inventories 25,961 22,469
Other current assets 9,417 13,777
--------- ---------
Total current assets 106,078 129,022
Property, equipment, and leasehold improvements, net 32,096 31,129
Other assets 40,155 17,888
--------- ---------
Total assets $ 178,329 $ 178,039
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 3,617
Accounts payable 15,921 8,912
Accrued compensation and benefits 3,298 3,994
Accrued expenses 3,705 3,298
Income tax payable 481 550
Current portion of long-term obligations 720 722
--------- ---------
Total current liabilities 24,125 21,093
Income tax payable - non-current 4,298 4,298
Long-term obligations 9,845 10,195
Minority interest in consolidated subsidiary - 18
Stockholders' equity:
Convertible preferred stock - -
Common stock 2 2
Additional paid-in capital 105,670 104,788
Retained earnings 36,802 39,952
Cumulative translation adjustment (2,373) (2,246)
Unearned compensation (40) (61)
--------- ---------
Total stockholders' equity 140,061 142,435
--------- ---------
Total liabilities and stockholders' equity $ 178,329 $ 178,039
========= =========
</TABLE>
(1) Derived from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
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INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,150) $ 15,358
Charges to net income not affecting cash 5,066 2,904
Net effect of changes in current and other assets and current liabilities 5,403 (10,677)
--------- ---------
Cash provided by operating activities 7,319 7,585
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (6,025) (10,428)
Purchases of available-for-sale securities (116,075) (101,025)
Sales of available-for-sale securities 143,925 97,025
Investment in Wafertech, LLC (9,360) -
Investment in United Integrated Circuits Corp (12,983) -
--------- ---------
Cash used in investing activities (518) (14,428)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under notes payable and long-term obligations 5,851 9,800
Proceeds from issuance of common stock 903 1,698
Principal payments on notes payable and long-term obligations (9,820) (5,939)
Decrease (increase) in restricted cash 1,820 (3,551)
--------- ---------
Cash provided by (used in) financing activities (1,246) 2,008
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (10) (116)
--------- ---------
Net increase (decrease) in cash and cash equivalents 5,545 (4,951)
Cash and cash equivalents at beginning of period 12,237 29,452
--------- ---------
Cash and cash equivalents at end of period $ 17,782 $ 24,501
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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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, 1997 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 1997.
2. CUSTOMER CONCENTRATION
Sales to one customer accounted for approximately 25% and 28% of total
net sales for the quarter ended March 31, 1997 and March 31,1996, respectively,
and approximately 24% and 19% of total net sales for the six months ended March
31, 1997 and March 31, 1996, respectively.
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
1997 1996
------- -------
<S> <C> <C>
Cash ............................................. $12,471 $ 9,989
Money market instruments ......................... 592 3,189
Certificates of deposit .......................... 9,922 6,082
Auction preferred stock .......................... 23,650 42,500
Municipal bonds due in more than 3 years ......... 10,700 19,700
------- -------
$57,335 $81,460
======= =======
</TABLE>
4. INVENTORIES
The following is a summary of inventories by major category:
<TABLE>
<CAPTION>
(In thousands)
March 31 September 30
1997 1996
------- -------
<S> <C> <C>
Raw materials .......................... $ 5,643 $10,123
Work-in-process ........................ 7,929 2,826
Finished goods ......................... 12,389 9,520
------- -------
$25,961 $22,469
======= =======
</TABLE>
4
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INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The income tax benefit for the six month period ended March 31, 1997
and the income tax provision for the six month period ended March 31, 1996 have
been calculated at the estimated annual effective rates of 10% and 25%,
respectively. The effective tax rate for the six months ended March 31, 1997
and 1996 differ from the federal statutory rate of 34% primarily due to a lower
effective income tax rate in Taiwan and earnings from investments which are
exempt from federal income taxes.
6. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
7. 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 named the Company and
several of its officers and directors as defendants, alleged various violations
of the federal securities laws. The case was dismissed without prejudice on
December 23,1996.
On March 21, 1997, the U.S. Department of Commerce "DOC" initiated an
antidumping investigation of SRAMs from Taiwan and Korea. The Company exports
and imports SRAMs from Taiwan. The Company currently is participating in that
case as an interested party. The preliminary determination in this
investigation is scheduled for August 4, 1997, but could be extended. If the
preliminary determination is affirmative, the Company will be required to post
a bond covering potential antidumping duties on its import of SRAMs, if any,
from these countries from that date forward. A final determination by DOC
likely will not be made until early 1998. If that decision if affirmative,
there will be subsequent investigation by the International Trade Commission
"ITC" into the impact of imports of SRAMs from Taiwan and Korea in the U.S.
market, with a final decision likely in Spring 1998. Affirmative final
decisions by both DOC and the ITC are required before an antidumping order is
applicable to imports of SRAMs, if any, by the Company from either of these
countries.
The Company maintains that it has not been engaged in "dumping" of
SRAMs in the United States market and the Company has retained legal counsel in
the antidumping proceedings before DOC, and if necessary, the ITC.
8. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact of
Statement 128 on the calculation of primary and fully diluted earnings per
share for the three month and six month periods ended March 31, 1997 is not
expected to be material.
5
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report on Form 10-Q may contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934. All 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 related factors set forth in
this report on Form 10-Q.
BACKGROUND
The Company designs, develops and markets high performance SRAM and
nonvolatile memory integrated circuits used in networking applications,
telecommunications, personal computers, disk drives, data communications,
office automation, instrumentation and consumer products. The high speed SRAM
market over the past few years has been impacted 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 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 a manufacturing program with United Microelectronics Corporation
("UMC") in Taiwan. The Company has made an equity investment in a joint
venture with TSMC and an equity investment in a joint venture with UMC.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Net Sales. Net sales decreased by 29% to $25.8 million in the three
months ended March 31, 1997, from $36.4 million in the three months ended March
31, 1996. The decrease in sales was principally due to significant
deterioration in the average selling prices of the Company's SRAM and
nonvolatile memory products. The decreased revenue resulting from lower
average selling prices was partially offset by increased unit shipments of SRAM
products, specifically the Company's 256K, 512K, and 256K module products. The
Company experienced lower average selling prices for its products in the March
1997 quarter compared to the same quarter of the prior year and the December
1996 quarter. Quarterly revenue increased from $23.6 in the December 1996
quarter to $25.8 million in the March 1997 quarter as the Company was able to
offset the decline in average selling prices with higher volumes for its 256K
and 256K module products. The Company anticipates that the average selling
prices of its existing products will continue to decline, although the rate of
decline may decrease for certain products. There can be no assurance that such
declines will be offset by higher volumes or by higher prices on newer
products. See "Certain Factors - Quarterly Fluctuations and Declines in
Average Selling Prices". Sales to one customer accounted for approximately
25% and 28% of total net sales for the quarter ended March 31, 1997 and March
31, 1996, respectively, and approximately 24% and 19% of total net sales for
the six months ended March 31, 1997 and March 31, 1996, respectively.
Gross Profit. Gross profit decreased 49% to $7.6 million in the three
months ended March 31, 1997, from $15.0 million in the three months ended March
31, 1996. As a percentage of net sales, gross profit decreased to 29.3% in the
three months ended March 31, 1997 from 41.2% in the three months ended March
31, 1996. The decrease in gross profit was primarily the result of
significantly lower average selling prices for the Company's SRAM and
nonvolatile memory products in the March 1997 quarter compared to the same
6
<PAGE> 8
quarter of the prior year. Although product unit costs were lower in the March
1997 quarter compared to the March 1996 quarter, such reductions did not offset
the declines in average selling prices resulting in lower gross margins. Cost
of sales for the March 1997 quarter reflect a $4.1 million benefit related to
inventory sold during the quarter that had been partially written-down in the
second half of fiscal 1996. The Company believes that the average selling price
of its products will continue to decline and, unless the Company is able to
reduce its cost per unit to the extent necessary to offset such declines, the
decline in average selling prices will result in a decline in the Company's
gross margin. Although the Company has product cost reduction programs in
place, there can be no assurance that product cost reductions will continue or
that such reductions will be sufficient to offset the expected declines in
average selling prices.
Research and Development. Research and development expenses increased
by 6% to $6.0 million in the three months ended March 31, 1997, from $5.6
million in the three months ended March 31, 1996. As a percentage of net
sales, research and development expenses increased to 23.2% in the three months
ended March 31, 1997, from 15.5% in the three months ended March 31, 1996. 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, 1997, the Company's development efforts principally focused on
wider bus width SRAMs such as the 64K x 32, 64K x 16 and 32K x 16
configurations, 2MB Flash memory, geometry reductions for its memory products,
Voice EPROMs, and other memory related devices. In this regard, the Company has
developed a specialty high speed 4MB and 2MB DRAM. This product is currently
being sampled. The Company anticipates that its research and development
expenses will increase 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 5% to $3.9 million in the three months
ended March 31, 1997 from $3.7 million in the three months ended March 31,
1996. As a percentage of net sales, selling, general and administrative
expenses increased to 15.0% in the three months ended March 31, 1997, from
10.1% in the three months ended March 31, 1996. The increase in absolute
dollars was primarily the result of 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, net decreased to $0.6 million in the
three months ended March 31, 1997 from $1.3 million in the three months ended
March 31, 1996, primarily due to decreased net interest earnings as a result of
lower cash and short-term investment balances.
Provision (benefit) for Income Taxes. For the three months ended March
31, 1997, the Company recorded a benefit for income taxes of approximately 10%
compared to a provision of 28% for the comparable period in the prior year,
primarily reflecting decreased operating income attributable to the Company's
U.S. operations.
SIX MONTHS ENDED MARCH 31, 1997 COMPARED TO SIX MONTHS ENDED MARCH 31, 1996
Net Sales. Net sales decreased by 39% to $49.4 million in the six
months ended March 31, 1997, from $81.4 million in the six months ended March
31, 1996. The decrease in sales was principally due to significant
deterioration in the average selling prices of the Company's SRAM and
nonvolatile memory products. The decreased revenue resulting from lower
average selling prices was partially offset by increased unit shipments of SRAM
products specifically the Company's 256K, 512K, and 256K module products, and
nonvolatile memory products. The Company anticipates that the average selling
prices of its existing products will continue to decline although the rate of
decline may decrease for certain products. There can be no assurance that such
declines will be offset by higher volumes or by higher prices on newer
products. See "Certain Factors - Quarterly Fluctuations and Declines in
Average Selling Prices". Sales to one customer accounted for approximately 24%
and 19% of total net sales for the six months ended March 31, 1997 and March
31, 1996, respectively.
7
<PAGE> 9
Gross Profit. Gross profit decreased 61% to $14.2 million in the six
months ended March 31, 1997, from $36.1 million in the six months ended March
31, 1996. As a percentage of net sales, gross profit decreased to 28.8% in the
six months ended March 31, 1997 from 44.3% in the six months ended March 31,
1996. The decrease in gross profit was primarily the result of significantly
lower average selling prices for the Company's SRAM and nonvolatile memory
products in the six months ended March 31, 1997 compared to the same period of
the prior year. Although product unit costs were lower in the six months ended
March 31, 1997 compared to the same period of the prior year, such reductions
did not offset the declines in average selling prices resulting in lower gross
margins. Cost of sales for the six months ended March 31, 1997 reflect a $9.0
million benefit related to inventory sold during the period that had been
partially written-down in the second half of fiscal 1996. The Company believes
that the average selling price of its products will continue to decline and,
unless the Company is able to reduce its cost per unit to the extent necessary
to offset such declines, the decline in average selling prices will result in a
material decline in the Company's gross margin. Although the Company has
product cost reduction programs in place, there can be no assurance that
product cost reductions will continue or that such reductions will be
sufficient to offset the expected declines in average selling prices.
Research and Development. Research and development expenses increased
by 10% to $11.7 million in the six months ended March 31, 1997, from $10.6
million in the six months ended March 31, 1996. As a percentage of net sales,
research and development expenses increased to 23.6% in the six months ended
March 31, 1997, from 13.0% in the six months ended March 31, 1996. 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
31,1997, the Company's development efforts principally focused on wider
bus width SRAMs such as the 64K x 32, 64K x 16 and 32K x 16 configurations,
2MB Flash memory, geometry reductions for its memory products, Voice EPROMs,
and other memory related devices. In this regard, the Company has developed a
specialty high speed 4MB and 2MB DRAM. This product is currently being
sampled. 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 decreased by 4% to $7.4 million in the six months ended
March 31, 1997 from $7.7 million in the six months ended March 31, 1996. As a
percentage of net sales, selling, general and administrative expenses increased
to 15.0% in the six months ended March 31, 1997, from 9.5% in the six months
ended March 31, 1996. The decrease in absolute dollars was primarily the result
of decreased selling commissions associated with lower revenues partially
offset by increased payroll related expenses from the addition of marketing and
sales personnel. 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, net decreased to $1.4 million in the
six months ended March 31, 1997 from $2.5 million in the six months ended March
31, 1996, primarily due to decreased net interest earnings as a result of lower
cash and short-term investment balances.
Provision (benefit) for Income Taxes. For the six months ended March
31, 1997, the Company recorded a benefit for income taxes of approximately 10%
compared to a provision of 25% for the comparable period in the prior year,
primarily reflecting decreased operating income attributable to the Company's
U.S. operations.
8
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company's principal sources of liquidity
included cash, cash equivalents, restricted cash and short-term investments of
approximately $57.3 million, of which approximately $10.3 million was held by
ISSI-Taiwan. Approximately $5.2 million of the cash held by the Company is
restricted as of March 31, 1997 for purposes of securing available short-term
lines of credit and letters of credit. During the first six months of fiscal
1997, operating activities generated cash of approximately $7.3 million. Cash
generated by operations was primarily due to an increase in accounts payable, a
decrease in other current assets, and net loss adjusted for depreciation and
other non-cash items, partially offset by increases in inventory and accounts
receivable.
The Company made capital expenditures of approximately $6.0 million in
the first six months of fiscal 1997, of which approximately $3.0 million was
for the construction of the Company's facility in the Hsinchu Science-Based
Industrial Park to house its Taiwan operations and $3.0 million was for the
purchase of test equipment and design and engineering tools. The Company
expects to spend approximately $6 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 expects to spend approximately $17.0 million during
the next twelve months for the construction of the Taiwanese facility. A
portion of this construction cost will be financed through loans. The building
is expected to be completed in late 1997.
In June 1996, the Company entered into a joint venture "WaferTech,
LLC" with TSMC, Altera, Analog Devices, and private investors to build a wafer
fabrication facility in Camas, Washington. The Company will invest $31.2
million for a 4% equity interest in the venture and as of March 31, 1997, $18.7
million had been paid by the Company to WaferTech in this regard. The next
payment by the Company of $12.5 million is expected to be made in November
1997. In fiscal 1995, the Company entered into an agreement with TSMC pursuant
to which the Company agreed to acquire specified wafer capacity through 2001.
In exchange for wafer capacity commitments by TSMC, the Company agreed to make
certain annual payments to TSMC which commenced in June 1995. The first
payment in June 1995 was approximately $2.4 million and was credited towards
the purchase of wafers in 1996. The additional required payments totaling
approximately $31.2 million over the next four years represent annual increases
in capacity which must be purchased by the Company, a portion of which is
secured by a letter of credit for $4.8 million. 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 approximately $27 million (subject to fluctuations in the New
Taiwanese Dollar) for a 5% equity interest in a joint manufacturing venture
"United Integrated Circuits Corp." of which UMC retains 55% ownership. As of
March 31, 1997, approximately $20.0 million has been paid by the Company to UMC
for the joint venture. The final payment of approximately $7.0 million is
expected to be made in July 1997 subject to certain milestone completions.
The Company has $40.0 million available through a number of short-term
lines of credit with various financial institutions in Taiwan. As of March 31,
1997, the Company had no borrowings under 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 related to these borrowings
as of March 31, 1997 were $10.6 million, of which $0.7 million is included in
the current portion of long-term obligations. These obligations bear interest
at rates of from 6.45% to 8.45% and are payable in quarterly installments
through 2003. As of March 31, 1997, the Company had available long-term lines
of credit of approximately $13.2 million of which approximately $10.8 million
is for the construction financing of the Company's new facility in the Hsinchu
Science-Based Industrial Park.
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<PAGE> 11
The Company believes that its existing funds 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.
The Company, from time to time, evaluates potential acquisitions and
equity investments complementary to its memory expertise and market strategy.
To the extent the Company pursues such transactions, any such transactions
could require the Company to seek additional equity or debt financings to fund
such activities. There can be no assurance that any such additional financing
could be obtained on terms acceptable to the Company, if at all.
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, oversupply of memory products in the market, failure to
introduce new products and to implement technologies on a timely basis, the
timing and announcement of new product introductions by the Company and its
competitors, market acceptance of the Company's and its customers' products,
the failure to anticipate changing customer product requirements, availability
of wafer fabrication capacity and fluctuations in manufacturing yield. Other
factors include changes in product mix, 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,
the Company experienced quarterly sequential declines in revenue in the
quarters ending March, June and September, 1996 principally due to declines in
the average selling prices of its products and the inability to offset these
declines by sufficient increases in unit shipments. While revenue has
increased sequentially in the March 1997 and the December 1996 quarters from
the September 1996 quarter, there can be no assurance that the Company will not
experience further declines in quarterly revenue. Such revenue declines have
had a material adverse impact on the Company's gross profit and net income.
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, which are highly cyclical, will continue to grow.
Competitive pricing pressures resulted in significant price decreases
for the Company's products during 1996 and these price decreases have continued
into fiscal 1997. 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 and profits unless the Company is able to
reduce its cost per unit to offset declines in average selling prices.
Declining average selling prices may also result in write downs in the value of
inventory due to excess inventory or inventory values that exceed selling
prices. In this regard, in the June 1996 quarter, the Company recorded a $15
million write-down of inventory. 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 first six months of fiscal 1997, a substantial majority of the
Company's net sales was derived from the sale of SRAM products, primarily 256K
products. Substantially all of the Company's products are incorporated into
computer and computer-peripheral products such as modems, disk drives and
networks. In recent periods, the PC industry has experienced strong unit sales
growth, which has increased demand for
10
<PAGE> 12
integrated circuits, including memory products offered by the Company. The PC
and PC peripherals 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 or PC peripherals industry.
CUSTOMER CONCENTRATION
The Company's sales are concentrated within a limited customer base.
In the quarter and the six months ended March 31, 1997, one customer accounted
for approximately 25% and 24% of net sales, respectively. The Company expects
a significant portion of its future sales to remain concentrated within a
limited number of strategic customers. There can be no assurance that the
Company will be able to retain its strategic customers or that such customers
will not otherwise cancel or reschedule orders, or in the event of canceled
orders, that such orders will be replaced by other sales. In addition, sales
to any particular customer may fluctuate significantly from quarter to quarter.
The occurrence of any such events could have a material adverse effect on the
Company's business and operating results.
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 the first six months of
fiscal 1997, the Company obtained a substantial majority of its wafers from
TSMC. The Company also receives wafers from Chartered Semiconductor and UMC.
Each of the Company's wafer suppliers also fabricates for other integrated
circuit companies, including certain of the Company's competitors. Although
the Company has written commitments specifying increasing wafer quantities, the
Company would have little or no recourse if its wafer suppliers experienced
manufacturing failures or yield shortfalls, chose to prioritize capacity for
other use or reduced or eliminated deliveries to the Company. There can be no
assurance that the Company would be able to qualify additional manufacturing
sources for existing or new products in a timely manner or that such additional
manufacturing sources would agree to deliver 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.
The Company has agreed to certain minimum wafer purchase commitments
with its foundry partners in exchange for wafer capacity commitments. The
Company also agreed to make certain annual payments to TSMC for capacity
increases. Additional required payments to TSMC totaling approximately $31.2
million over the next four years represent annual increases in capacity which
must be purchased by the Company. The Company also has minimum purchase
obligations for its joint venture with UMC and WaferTech LLC. Although the
Company has rights to re-schedule or assign capacity to another party, there
can be no assurance that such re-scheduling or assignment would be successfully
accomplished. Should the Company fail to re-schedule or assign unneeded
capacity, the Company's business and operating results would be materially and
adversely affected.
CLAIMS REGARDING INTELLECTUAL PROPERTY
In the semiconductor industry it is typical for companies to receive
notices from time to time alleging infringement of patents or other
intellectual property rights of others. The Company has been, and may from
time to time continue to be, notified of claims that it may be infringing
patents, maskwork rights or copyrights owned by third parties. Although none of
these companies have pursued a claim against the Company, there is no assurance
that these or other companies will not in the future pursue claims against the
Company with respect to the alleged infringement. 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, there is no
assurance 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
11
<PAGE> 13
for technology used by the Company could result in protracted, costly
litigation and 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, any of which could materially and adversely
effect the Company's business and operating results.
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, to successfully attract new
employees and to properly train, motivate and manage its employees. If the
Company's management is unable to manage growth effectively, the Company's
business and operating results could be materially and adversely affected.
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 could be subject to wide fluctuations in response to quarter-to-quarter
variations in operating results, 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 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.
12
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 named the Company and several
of its officers and directors as defendants, alleged various violations of the
federal securities laws. The case was dismissed without prejudice on December
23, 1996.
On March 21, 1997, the U.S. Department of Commerce "DOC" initiated an
antidumping investigation of SRAMs from Taiwan and Korea. The Company exports
and imports SRAMs from Taiwan. The Company currently is participating in that
case as an interested party. The preliminary determination in this investigation
is scheduled for August 4, 1997, but could be extended. If the preliminary
determination is affirmative, the Company will be required to post a bond
covering potential antidumping duties on its import of SRAMs, if any, from these
countries from that date forward. A final determination by DOC likely will not
be made until early 1998. If that decision if affirmative, there will be
subsequent investigation by the International Trade Commission "ITC" into the
impact of imports of SRAMs from Taiwan and Korea in the U.S. market, with a
final decision likely in Spring 1998. Affirmative final decisions by both DOC
and the ITC are required before an antidumping order is applicable to imports of
SRAMs, if any, by the Company from either of these countries. The Company
maintains that it has not been engaged in "dumping" of SRAMs in the United
States market and the Company has retained legal counsel in the antidumping
proceedings before DOC, and if necessary, the ITC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on Tuesday February 4,
1997 at 2:00 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 14,254,073 215,112
Diosdado P. Banatao 14,251,636 217,549
Lip-Bu Tan 14,252,358 216,827
Kong-Yeu Han 14,253,098 216,087
Hou-Teng Lee 14,251,108 218,077
Chun Win Wong 14,181,158 288,027
</TABLE>
(b) The ratification and appointment of Ernst & Young, LLP as
independent auditors of the Company for the fiscal year ending September 30,
1997 was approved with 14,330,447 votes in favor, 87,197 votes against, and
288,027 abstentions.
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.
Exhibit 27 Financial Data Schedule.
(b) The registrant did not file any reports on Form 8-K during the
quarter ended March 31, 1997.
13
<PAGE> 15
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, 1997 /s/ Gary L. Fischer
----------------------------
Gary L. Fischer
Executive Vice President,
Office of the President, and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
14
<PAGE> 16
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
11.1 Statements of Computation of Earnings per Share
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,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) ......................... $ (1,488) $ 5,064 $ (3,150) $ 15,358
======== ======== ======== ========
Computation of weighted average common and
common equivalent shares outstanding:
Weighted average common shares
outstanding ..................... 17,701 17,418 17,658 17,372
Common equivalent shares from dilutive
common stock options and warrants -- 902 -- 1,025
-------- -------- -------- --------
Shares used in per share calculations ..... 17,701 18,320 17,658 18,397
======== ======== ======== ========
Net income (loss) per share ............... $ (0.08) $ 0.28 $ (0.18) $ 0.83
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDING MARCH 31, 1997
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 22,985
<SECURITIES> 34,350
<RECEIVABLES> 15,072
<ALLOWANCES> 1,707
<INVENTORY> 25,961
<CURRENT-ASSETS> 106,078
<PP&E> 51,744
<DEPRECIATION> 19,648
<TOTAL-ASSETS> 178,329
<CURRENT-LIABILITIES> 24,125
<BONDS> 9,845
0
0
<COMMON> 2
<OTHER-SE> 140,059
<TOTAL-LIABILITY-AND-EQUITY> 178,329
<SALES> 49,404
<TOTAL-REVENUES> 49,404
<CGS> 35,196
<TOTAL-COSTS> 35,196
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 387
<INCOME-PRETAX> (3,510)
<INCOME-TAX> (342)
<INCOME-CONTINUING> (3,150)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,150)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
