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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 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 0-23084
INTEGRATED SILICON SOLUTION, INC.
---------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0199971
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2231 Lawson Lane, Santa Clara, California 95054.
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(Address of principal executive offices) zip code
Registrant's telephone number, including area code (408) 588-0800
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
COMMON STOCK, PAR VALUE $0.0001 PER SHARE NASDAQ NATIONAL MARKET
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Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of such stock on November 28, 1997,
as reported by the Nasdaq National Market, was approximately $159.5 million.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant's Common Stock on
November 28, 1997 was 17,965,831.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting
of Stockholders to be held January 30, 1998 are incorporated by reference in
Part III of this Form 10-K.
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TABLE OF CONTENTS
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PART I
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Item 1. Business.................................................................1
Item 2. Properties...............................................................9
Item 3. Legal Proceedings........................................................9
Item 4. Submission of Matters to a Vote of Security Holders......................9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters..................................................................10
Item 6. Selected Consolidated Financial Data.....................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................11
Item 8. Financial Statements and Supplementary Data..............................18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.....................................................41
PART III
Item 10. Directors and Executive Officers of the Registrant.......................41
Item 11. Executive Compensation...................................................41
Item 12. Security Ownership of Certain Beneficial Owners and Management...........41
Item 13. Certain Relationships and Related Transactions...........................41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........41
SIGNATURES......................................................................... 44
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When used in this Report, the words "expects," "anticipates," "believes,"
"estimates" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements, which include statements concerning the timing
of new product introductions; the functionality and availability of products
under development; trends in the networking, telecommunications, personal
computer and instrumentation markets, in particular as they may affect demand
for or pricing of the Company's products; the percentage of export sales and
sales to strategic customers; the percentage of revenue by product line; and the
availability and cost of products from the Company's suppliers; are subject to
risks and uncertainties, including those set forth in Item 1 of Part I and in
Item 7 of Part II hereof entitled "Certain Factors Which May Affect the
Company's Business or Future Operating Results" and elsewhere in this Report,
that could cause actual results to differ materially from those projected in the
forward-looking statements. These forward-looking statements speak only as of
the date of this Report. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in the Company's expectations
with regard thereto or to reflect any change in events, conditions or
circumstances on which any such forward-looking statement is based, in whole or
in part.
PART I
ITEM 1. BUSINESS
GENERAL
Integrated Silicon Solution, Inc. ("ISSI" or the "Company") designs,
develops and markets high performance memory devices including static random
access memory ("SRAM"), nonvolatile memory ("NVM") and specialty dynamic random
access memory ("DRAM"). The Company's memory devices are used in networking
applications, telecommunications, personal computers ("PC"), disk drives, data
communications, office automation, instrumentation and consumer products. SRAM
products include both asynchronous and synchronous devices ranging in densities
from 64K to 4 megabit. Nonvolatile memory products include Flash memories,
EPROMs (erasable programmable read only memories) and EEPROMs (electrically
erasable programmable read only memories) The Company also designs, develops and
markets embedded memory devices which include voice recording chips and certain
microcontroller devices. The Company has its headquarters in Santa Clara,
California and markets its products on a worldwide basis.
The primary function of SRAMs is to improve overall system performance
by compensating for the disparity in the speeds of other integrated circuits
within the system architecture. As a result, speed is a key performance
characteristic for SRAMs. In certain mobile or portable applications the need
for low power is also critical. In addition, when designing systems with SRAMs,
customers regard cost as a critical factor. For these reasons, in order to
continually improve product performance and reduce costs, the Company must have
access to state-of-the-art process technology for wafer manufacturing and be
able to implement design improvements, such as reduced geometries, quickly
through short product design cycles.
The Company leverages its SRAM design and advanced complimentary metal
oxide semiconductor ("CMOS") process technology expertise to establish
collaborative manufacturing relationships with Asian semiconductor manufacturers
which use the Company's memory products as a vehicle for the development of
advanced process technology. The Company believes that these relationships
differentiate it from traditional fabless companies and allow it to secure
access to leading edge process technology and a committed source for wafer
processing. The Company's principal collaborative manufacturing relationship is
with Taiwan Semiconductor Manufacturing Corporation ("TSMC"), with which it
jointly develops process technology for producing the Company's SRAMs and
nonvolatile memories. The Company also has a collaborative program with
Chartered Semiconductor Manufacturing ("Chartered") in Singapore. In addition,
the Company has a manufacturing program with United Microelectronics Corporation
("UMC") in Taiwan. To further strengthen its manufacturing relationships, the
Company has made an equity investment in a joint venture with TSMC and an equity
investment in a joint venture with UMC.
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ISSI was founded in 1988. The Company has its headquarters in Santa Clara,
California. This facility focuses on research and development, product
definition, quality assurance and marketing and sales. The Company has a wholly
owned subsidiary in Taiwan. This subsidiary, located in the Hsinchu
Science-Based Industrial Park and near several of the Company's wafer
manufacturing partners, focuses on manufacturing coordination, quality
assurance, product test and regional sales in the Asian market. The Company also
has smaller subsidiaries in Hong Kong and China.
PRODUCTS
The Company designs and markets a family of high performance, low cost
SRAMs, as well as NVM products, including high speed EPROMS, serial EEPROMs,
FLASH and Voice EPROMs. In 1997 the Company began initial shipments of its high
speed DRAM and its first microcontroller. To date the Company has derived
substantially all of its revenues from the sale of SRAM products.
SRAMS
The Company offers a family of CMOS SRAMs in various densities, speeds and
packaging configurations. SRAM densities include 64K (8K x 8), 256K (32K x 8),
512K (64K x 8 and 32K x 16), 1 megabit (128K x 8, 64K x 16, 32K x 32), 2 megabit
(64K x 32) and 4 megabit (64K x 64). The Company produces both asynchronous
SRAMs and synchronous SRAMs. The Company's 2 megabit 64K x 32 synchronous SRAM
currently achieves 5 nanosecond access time. Leading speeds for the Company's
asynchronous SRAMs vary according to density. The 1 megabit 128K x 8 SRAM
currently achieves 10 nanoseconds. The 256K SRAM achieves as low as an 8
nanosecond access time.
The Company's synchronous SRAMs are used primarily in PC cache
applications. The Company's asynchronous SRAMs are used in applications such as
modems, LANs, telecommunications, bridges, routers, multimedia products and
industrial instrumentation. Additional SRAM products are under development and
are expected to include performance-leading features in configuration, power
levels, density and packaging. In addition, in the first half of calendar 1998,
the Company expects to introduce embedded memory products, which will combine
certain logic functions with SRAM.
DRAMS
The Company introduced its first DRAM products in April 1997. The
Company's DRAMs are specialty DRAMs and are not aimed at the main memory DRAM
market. The Company introduced two low density products, a 2 megabit and 4
megabit DRAM that operate at more than twice the normal speed for DRAM devices.
Initial applications for the Company's DRAMs are in the 3D graphics and disk
drive markets. Revenue to date from such products has been immaterial.
NONVOLATILE MEMORY PRODUCTS
The Company's NVM products include high performance FLASH, EPROMS and
serial EEPROMs. FLASH and EPROMs are typically used in electronic systems which
require permanent storage of data or program control code since NVM devices do
not lose their memory content when power is turned off. In December 1995, the
Company entered into a cross license agreement for FLASH technology with Intel.
This enables the Company to design its own FLASH products and FLASH process
technology with Intel-compatible architecture. The Company produces a high speed
45 nanosecond 1-megabit FLASH and a 55 nanosecond 2 megabit FLASH. The Company's
EPROM development program focuses on high-speed products. The Company's 1
megabit EPROM achieves a read cycle of 30 nanoseconds. In addition to its 256K,
512K and 1 megabit EPROM, the Company is developing 2, 4 and 8 megabit EPROMs.
High-speed EPROM and FLASH applications include modems, printers, digital phones
and industrial instrumentation.
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The Company's serial EEPROM devices are low density and are used in
applications that require nonvolatile storage of data or code and allow the
information to be modified during system operation. Applications for serial
EEPROMs include pagers, networking systems, modems, telephone sets, security
systems, smart cards, video games and other consumer products.
In the third quarter of fiscal 1997, the Company began initial shipments
of a memory intensive 8051 microcontroller. Microcontrollers are used in a broad
array of electronic equipment for the command and control logic of appliances,
toys or cellular phones. The Company also produces a voice-recording chip that
combines voice algorithm technology in a Flash based recording chip. Initial
applications for this device are in consumer electronics such as voice recorded
greeting cards. Revenue from both of these products has, to date, been
immaterial.
DESIGN AND PROCESS TECHNOLOGY
The Company has invested heavily in advanced process technology that
allows it to design at leading edge geometries such as .25 micron for SRAMs.
Memory products are particularly well suited for the development of advanced
process technology. The Company's technology development engineers work closely
with the Company's design engineers and manufacturing partners, such as TSMC, to
develop new process technologies, refine existing process technologies and to
reduce the circuit geometries of its products. During 1997, the Company and TSMC
began development of 0.30 micron and 0.25 micron, 3.3-volt high speed SRAM
process technology. The Company currently has several development programs with
TSMC for advanced SRAM process technology and for a high-speed FLASH memory
technology. The Company has a similar technology development program for SRAM
and Flash with Chartered Semiconductor.
The Company's design efforts focus on product specification, memory cell
and array structure, logic and circuit design, simulation and layout. The
Company has invested in advanced computer aided design ("CAD") systems to ensure
that the design team has state-of-the-art design tools and employs innovative
and rigorous design methodologies. The Company leverages its memory expertise to
design embedded memory products that combine memory and logic. In addition, the
Company has developed proprietary product test software that allows it to test
products accurately and cost effectively in large volumes.
MANUFACTURING
The Company combines its process technology expertise, foundry
partnership strategy and equity investment arrangements with TSMC and UMC to
form a hybrid of the fab and fabless business models which it calls
Fab-Lite(TM). The Company does not own or operate its own wafer foundry but
because memory products are particularly well suited for the development of
advanced process technology, the Company actively participates in developing and
refining the process technology used to manufacture its specific products. The
Company believes that this strategy enables it to achieve the early introduction
of advanced geometries for its high performance memory products which results in
increased performance and lowers manufacturing costs. To date, the Company's
principal manufacturing relationship has been with TSMC, whereby the Company
provides TSMC with design and process expertise in return for access to advanced
process technology and committed wafer capacity at TSMC's wafer fabrication
facilities. The Company also has a collaborative technology development
relationship with Chartered for SRAM and FLASH products.
In 1995, the Company entered into a joint venture, "United Integrated
Circuits Corp." ("UICC") with UMC and other investors to build a wafer
fabrication facility in Hsinchu, Taiwan. The joint venture is now expected to
result in the delivery of wafers to the Company beginning in 1999. The joint
venture agreement requires an equity investment by the Company of approximately
$26 million (subject to fluctuations in the New Taiwanese Dollar) of which
approximately $20.0 million had been paid as of September 30, 1997. The UICC
facility was severely damaged by fire in October 1997 resulting in a delay in
wafer production of approximately 12 months. UICC has informed the Company that
the damages incurred are covered by insurance.
In 1996, the Company entered into a joint venture agreement with Altera
Inc., Analog Devices Inc. and TSMC wherein TSMC, as the general partner, will
construct a wafer fabrication facility in the state of Washington. The
fabrication facility is intended to be a very advanced process technology
facility capable of 0.35, 0.25 and 0.18
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micron process technology. The joint venture, named WaferTech LLC, is expected
to reach full production in approximately 1999/2000. The joint venture agreement
requires an equity investment by the Company of $31.2 million of which, at
September 30, 1997, $18.7 million had been paid.
The manufacturing of the Company's products is coordinated by
ISSI-Taiwan, which is located in close proximity to TSMC and UMC in the Hsinchu
Science-Based Industrial Park, a government-sponsored technology development
zone. The Science Park location provides certain advantages, including close
communication with its manufacturing partners, streamlined customs
administration and preferential tax treatment.
After receiving wafers from its independent wafer foundry partners, the
Company performs its own wafer probe testing, laser repair, and final testing in
its product test facility at ISSI-Taiwan, which operates on a multiple shift
basis. The Company's U.S. headquarters develops and debugs test programs and
tests procedures used in Taiwan. Both the Taiwan and U.S. facilities have clean
rooms that are equipped for the wafer probe segment of the testing process.
Packaging and assembly operations are performed by subcontractors, principally
in Taiwan. A comprehensive quality control program is in place in both
facilities. The Company has adopted ISO 9000 as its quality management standard.
The Company's U.S. facility has received certification under ISO 9001 standards
and the Company's Taiwan facility has received certification under ISO 9002
standards.
Each of the Company's wafer suppliers also fabricates for other
integrated circuit companies, including certain of the Company's competitors. In
addition, UMC manufactures integrated circuits, including SRAMs, for its own
account. Although the Company has written commitments specifying wafer
capacities, if a wafer supplier chose to prioritize capacity for other use or
reduce or eliminate deliveries to the Company, there can be no assurance that
the Company could enforce fulfillment of the delivery commitments. The equity
investment arrangements and related purchase agreements by the Company with TSMC
and UMC will provide the Company with guaranteed capacity, and thus are expected
to mitigate this delivery risk in the future. However, these fabrication
facilities are not yet operational. Since the construction of a wafer
fabrication facility is a lengthy and complex endeavor, there can be no
assurance that the TSMC joint venture fabrication facility or the UMC joint
venture fabrication facility will be successfully completed and successfully
enter into production. In this regard, the UMC joint venture facility was
severely damaged by fire in October 1997 resulting in a delay in wafer
production of approximately 12 months.
There can be no assurance that the Company's foundries will not encounter
construction or production difficulties or that they will allocate sufficient
wafer capacity to satisfy the Company's wafer requirements, especially in times
of wafer capacity shortages. Moreover, 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 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.
Although the Company's policy is to work closely with its manufacturing
sources there are certain risks associated with the use of independent
foundries, including the absence of a controlled source of supply, or delays in
obtaining adequate wafer supplies. In addition, the manufacture of integrated
circuits is a highly complex and technically demanding process. Production
yields can be affected by a large number of factors. As is typical in the
semiconductor industry, the Company's outside foundries have from time to time
experienced lower than anticipated manufacturing yields, particularly in
connection with the introduction of new products and changes in such foundry's
processing steps. There can be no assurance that the Company's foundries will
not experience lower than expected manufacturing yields in the future, which
could materially and adversely affect the Company's business and operating
results.
The Company has certain minimum wafer purchasing commitments to its
foundry partners in exchange for wafer capacity commitments. The Company agreed
to make certain annual payments to TSMC for capacity increases. Additional
required payments to TSMC totaling approximately $26.4 million over the next
four years represent annual increases in capacity which must be purchased by the
Company. The Company has minimum purchase obligations with UICC 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-schedule or assignment
would be successfully accomplished. Should the Company fail to re-schedule or
assign unneeded capacity, the Company's business and operating results could be
adversely affected.
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CUSTOMERS AND MARKETING
The Company's customers include a broad range of electronic system
manufacturers such as Cisco, 3Com, IBM, Motorola, and Seagate. The Company's
SRAM products are used primarily in high-speed modems, local area networks,
bridges and routers, PC cache, disk drives, cellular phones and adapter cards.
The Company's NVM products have a wide range of memory applications including
high-speed modems, local area networks, adaptor cards, cellular telephones and
electronic games. In fiscal 1997 and 1996, one customer, 3Com/U.S. Robotics,
accounted for approximately 19% and 22% of the Company's net sales,
respectively. In fiscal 1995 no customer accounted for more than 10% of net
sales.
In the United States, the Company markets its products through a direct
sales force and independent sales representatives. The Company engaged a U.S.
distributor in 1995, and added a second U.S. distributor in 1996. The Company is
continuing to expand its marketing and sales activity in Europe. The Company has
sales offices in the United States, Europe, Japan, Hong Kong, Taiwan and the
Peoples Republic of China.
The Company has a direct sales and marketing organization based in
Taipei, Taiwan that is primarily responsible for the Asian market. To date, a
majority of the Company's Asian sales have been to Taiwan customers. The Company
markets and distributes its products on a worldwide basis. In fiscal 1997,
approximately 45% of the Company's net sales were attributable to customers
located in the United States, 13% was attributable to customers located in
Europe and 42% was attributable to customers located in Asia. In fiscal 1996,
approximately 53% of the Company's net sales were attributable to customers
located in the United States, 10% was attributable to customers located in
Europe and 37% was attributable to customers located in Asia. In fiscal 1995,
approximately 35% of the Company's net sales were attributable to customers
located in the United States, 9% was attributable to customers located in Europe
and 56% was attributable to customers located in Asia. In fiscal 1997, 1996, and
1995, international sales (sales by ISSI-Taiwan and export sales by ISSI-U.S.)
comprised approximately 55%, 47% and 65% of the Company's net sales,
respectively. See Note 12 of Notes to Consolidated Financial Statements.
The Company is subject 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 anticipates that sales to
international customers will continue to represent a significant percentage of
net sales. The Company's Taiwan subsidiary employs over one-half of the
Company's total work force. In addition, substantially all of the Company's
foundries and assembly and test operations are located in Asia. 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. The
Company periodically monitors its exposure to foreign currency fluctuations, and
has from time to time taken action to hedge against such exposure, but has not
to date adopted any formal hedging strategy. 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 exchange rate
fluctuations will not materially and adversely affect its business and operating
results in the future.
The Company manufactures and markets primarily standard products that
are designed to provide advanced performance and features such as speed, power,
density or packaging. Sales are generally made pursuant to standard purchase
orders, which can be revised during the agreement term to reflect changes in the
customer's requirements. Generally, purchase orders and OEM agreements allow
customers to reschedule delivery dates and cancel purchase orders without
significant penalties. For these reasons, the Company believes that its backlog,
while useful for scheduling production, is not necessarily a reliable indicator
of future revenues.
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 ability of the Company to compete successfully in the high
performance memory market depends on factors both within and outside of its
control, including imbalances in supply and demand, product pricing, the rate at
which OEM customers incorporate the Company's products into their systems,
access to advance process technologies at competitive prices, product
functionality and performance, successful and timely product
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development, wafer supply, wafer costs, achievement of acceptable yields of
functional die, the gain or loss of significant customers, the nature of its
competitors and general economic conditions. There can be no assurance that the
Company will be able to compete successfully in the future as to any of these
factors. The failure of the Company to compete successfully in these or other
areas could materially and adversely affect the Company's business and operating
results. In addition, the Company is vulnerable to technology advances utilized
by competitors to manufacture higher performance or lower cost products.
The high performance SRAM market is generally a fragmented market and
specific competitors and competitive factors vary based on geographic regions
and market segments. In the high performance SRAM market, the Company competes
with several major domestic and international semiconductor companies including
Cypress Semiconductor, Integrated Device Technology ("IDT"), Mitsubishi,
Motorola, Samsung, Sony, Toshiba, UMC and Winbond. The Company also competes
with new and emerging companies which have recently entered or may in the future
enter the market. The Company also may face significant competition from other
domestic and foreign integrated circuit manufacturers which have advanced
technological capabilities but have not previously participated in the SRAM
market sector. There can be no assurance that the Company will be able to
compete successfully against any of these competitors.
In the high speed DRAM area, the Company competes primarily with Silicon
Magic and Mosel-Vitelic. Other main memory DRAM companies could potentially
enter the high-speed market in the future. There can be no assurance that the
Company will be able to compete successfully against any of these competitors.
In the nonvolatile memory market, the Company's primary competitors
include Advanced Micro Devices ("AMD"), Atmel, Intel and SGS-Thomson
Microelectronics. The Company also competes with many small to medium-sized
companies in one or more segments of the market. Certain of the Company's
competitors offer broader product lines and have greater financial, technical,
marketing, distribution and other resources than the Company. There can be no
assurance that the Company will be able to compete successfully against any of
these competitors.
The process technology used by the Company's manufacturing sources,
including process technology that the Company has developed with its foundries,
can be used by such manufacturers to produce products for other companies,
including the Company's competitors. Although the Company believes that its
participation in the development of the processes provides it the advantage of
early access to such processes, there can be no assurance that the knowledge of
the manufacturer will not be used to benefit the Company's competitors.
PRODUCT WARRANTY
Consistent with semiconductor memory industry practice, the Company
generally provides a limited warranty that its semiconductor memory devices are
in compliance with specifications existing at the time of delivery. Liability
for a stated warranty period is usually limited to replacement of defective
items or return of amounts paid.
RESEARCH AND DEVELOPMENT
Rapid technological change and continuing price competition require
research and development efforts on both new products and advanced processes
employing smaller geometries. The Company's research and development activities
are focused primarily on the development of advanced process technologies and
new memory circuit designs. The Company currently designs most of its high
performance memory products and jointly develops advanced process technology
with its manufacturing partners from its headquarters in Santa Clara,
California. The Company's Taiwan and Hong Kong subsidiaries are responsible for
the development of the Company's microcontroller products, voice products and
certain EEPROM products.
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The Company is currently designing new SRAM, DRAM, Embedded Memory and
NVM products. SRAM products under development include higher density products
such as the 4-megabit SRAM, low power SRAMs and specialty configurations. DRAM
products under development include higher density DRAMs such as the 8-megabit
and 16 megabit DRAM and synchronous graphics DRAMs. Nonvolatile memory programs
include the development of higher density FLASH and lower power products.
Several new product families are also under development. The Company's
technology and product development expenditures in fiscal 1997, 1996 and 1995
were $26.2 million, $21.4 million and $14.9 million, respectively.
PATENTS
As of September 30, 1997, the Company held eight U.S. patents. These
patents expire between 2010 and 2014. The Company has approximately twenty
additional patent applications pending and expects to continue to file patent
applications where appropriate to protect its proprietary technologies. The
Company believes that its continued success depends primarily on factors such as
the technological skills and innovation of its personnel rather than on its
patents. The process of seeking patent protection can be expensive and time
consuming. There can be no assurance that patents will be issued from pending or
future applications or that, if patents are issued, they will not be challenged,
invalidated or circumvented, or that rights granted thereunder will provide
meaningful protection or other commercial advantage to the Company. Moreover,
there can be no assurance that any patent rights will be upheld in the future or
that the Company will be able to preserve any of its other intellectual property
rights.
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 of patents, maskwork rights, copyrights or
other intellectual property 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, 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 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, any of 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.
ACQUISITION OF NEXCOM TECHNOLOGY, INC.
On December 3, 1997, the Company completed its acquisition of Nexcom
Technology, Inc. ("Nexcom") in exchange for the issuance of 772,693 shares of
Common Stock and $500,000 in cash (total consideration of approximately $7.2
million). The Nexcom shareholders are also eligible to receive certain
contingent payments based on future license revenue. The transaction will be
accounted for as a purchase and is expected to result in an in-process
technology charge of approximately $6 to $7 million in the Company's December
31, 1997 quarter. Nexcom was formed in 1990 and has been engaged primarily in
the research and development of non-volatile flash memory technology. As a
result of the merger, the Company acquired 13 patents which were held by Nexcom.
Nexcom has approximately 30 employees and is located in Sunnyvale, California.
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EMPLOYEES
As of September 30, 1997, the Company had approximately 450 employees,
of which 250 were based in Taiwan, 194 in the U.S., 7 in the People's Republic
of China and 19 in Hong Kong. The Company's future success will largely be
dependent on its ability to attract, retain and motivate highly qualified
technical and management personnel. The employment market for such personnel is
extremely competitive and there can be no assurance that the Company will
successfully staff all necessary positions. The Company's employees are not
represented by any collective bargaining agreements and the Company has never
experienced a work stoppage. The Company believes that its employee relations
are good.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of September 30,
1997 are as follows:
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<CAPTION>
Name Age Position
<S> <C> <C>
Jimmy S.M. Lee 42 Chairman, Chief Executive Officer, President, and
Director
Kong-Yeu Han 42 Executive Vice President, Office of the President,
General Manager-Taiwan and Director
Gary L. Fischer 46 Executive Vice President, Office of the President and
Chief Financial Officer
</TABLE>
BACKGROUND OF EXECUTIVE OFFICERS
Jimmy S.M. Lee has served as Chief Executive Officer, President and a
director of the Company since he co-founded the Company in October 1988. He has
also served as a director of ISSI-Taiwan since September 1990. From 1985 to
1988, Mr. Lee was engineering manager at International CMOS Technology, Inc., a
semiconductor company, and from 1983 to 1985, he was a design manager at
Signetics Corporation, a semiconductor company. Prior thereto, Mr. Lee was a
project manager at Toshiba Semiconductor Corporation and a design engineer at
National Semiconductor Corporation. Mr. Lee holds an M.S. degree in electrical
engineering from Texas Tech University and a B.S. degree in electrical
engineering from National Taiwan University.
Kong-Yeu Han has served as the Company's Executive Vice President since
April 1995, as General Manager, ISSI-Taiwan since September 1990 and as a
director of the Company since he co-founded the Company in October 1988. He has
also served as a director of ISSI-Taiwan since September 1990. From October 1988
to September 1990, he also served as Vice President, Engineering of the Company.
From 1985 to 1988, Mr. Han was design engineering manager at Vitelic
Corporation, a semiconductor company, and from 1984 to 1985 he was a staff
engineer at Signetics Corporation. From 1980 to 1984, Mr. Han was a senior
engineer at AMD and its subsidiary Monolithic Memories, Inc. ("MMI"), both of
which are semiconductor companies. Mr. Han holds an M.S. degree in electrical
engineering from the University of California, Santa Barbara and a B.S. degree
in electrical engineering from National Taiwan University.
Gary L. Fischer has served as the Company's Executive Vice President
since April 1995 and as Vice President and Chief Financial Officer since June
1993. He also served as Vice President, Finance and Administration from December
1993 to April 1995. From December 1992 to April 1993, Mr. Fischer was Vice
President, Finance and Chief Financial Officer of Shaman Pharmaceuticals, Inc.,
a pharmaceutical company. From January 1989 to December 1992, Mr. Fischer was
Chief Financial Officer of Synergy Semiconductor Corporation, a manufacturer of
high performance SRAM and logic integrated circuits. Mr. Fischer holds an M.B.A.
degree from the University of Santa Clara and a B.A. degree from the University
of California, Santa Barbara.
Officers serve at the discretion of the Board and are appointed
annually. There are no family relationships between the directors or officers of
the Company.
8
<PAGE> 11
ITEM 2. PROPERTIES
The Company's U.S. headquarters occupies a two story building, totaling
approximately 93,400 square feet, in Santa Clara, California in which its
executive offices, technology, product development groups and some R&D testing
facilities are located. The lease on this building expires in February 2007. The
Company subleases approximately 24,000 square feet to a third party. The
sublease expires in March 2000. ISSI-Taiwan occupies two leased facilities
totaling approximately 48,000 square feet in the Hsinchu Science-Based
Industrial Park in Hsinchu, Taiwan. These leases expire in April and September
1998 and are subject to annual renewal. The Company also leases sales offices in
five states, Taipei, Taiwan and China and engineering offices in Hong Kong.
The Company needs additional space in Taiwan to accommodate its growth.
In this regard, the Company has begun the construction of a building of
approximately 225,000 square feet in the Hsinchu Science-Based Industrial Park
to house its Taiwan operation at a cost of approximately $22 million. Occupancy
is expected to begin in mid 1998. The Company intends to sublease a portion of
the new building to other companies.
ITEM 3. LEGAL PROCEEDINGS
On March 21, 1997, the U.S. Department of Commerce ("DOC") initiated an
antidumping investigation of SRAMs from Taiwan and Korea. The Company currently
imports a majority of its SRAMs from Taiwan. The Company is participating in
this investigation as an interested party and has been assigned a preliminary
duty deposit rate of 10.96 percent. A final report by the DOC is scheduled for
January 1998. There will be a subsequent investigation by the International
Trade Commission ("ITC") into the impact of imports of SRAMs from Taiwan and
Korea on the U.S. market, with a final decision likely in March or April 1998.
Affirmative final decisions by both the DOC and the ITC are required before an
antidumping duty deposit is applicable to imports of SRAMs by the Company from
either of these countries. If an affirmative decision is reached, the Company
would be required to post a duty deposit for SRAM wafers or devices imported
from Taiwan. This duty deposit could be subsequently returned to the Company or
forfeited as duty to the U.S. Customs depending on subsequent measurements, the
results of which are made available by the Department Of Commerce in the year
2000.
The Company has retained legal counsel to defend its interests in the
antidumping proceedings before the DOC and the ITC. There can be no assurance,
however, that the government will not impose duties on the Company's imports of
SRAM products into the United States. Duties, if any, imposed by the government
could have a material adverse affect on the Company's gross margins and profits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
9
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
The Company's common stock has been quoted on the Nasdaq National Market
under the symbol ISSI since the Company's initial public offering on February 3,
1995 at $13.00 per share. Prior to such date, there was no public market for the
common stock. The following table sets forth, for the fiscal quarters indicated,
the high and low sale prices per share for the Common Stock as reported on the
Nasdaq National Market.
<TABLE>
<CAPTION>
Fiscal Year ending September 30, 1997 High Low
------------- --------------
<S> <C> <C>
Fourth quarter $ 16.375 $ 7.5625
Third quarter 9.875 6.50
Second quarter 10.625 8.03125
First quarter 12.375 8.00
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year ending September 30, 1996 High Low
------------- -------------
<S> <C> <C>
Fourth quarter $ 13.375 $ 8.00
Third quarter 19.125 10.625
Second quarter 18.75 11.375
First quarter 38.00 15.00
</TABLE>
HOLDERS OF RECORD
As of December 1, 1997, there were approximately 10,900 beneficial
holders of the Company's common stock.
DIVIDENDS
The Company has never declared or paid cash dividends. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying any cash dividends on its capital stock in the foreseeable
future. The Company is subject to legal restrictions related to distribution of
earnings of its Taiwan subsidiary. See Note 10 of Notes to Consolidated
Financial Statements.
RECENT SALES OF UNREGISTERED SECURITIES
On December 3, 1997, in connection with the merger of Nexcom with and
into the Company, the Company issued an aggregate of 772,693 shares of its
Common Stock to the Nexcom shareholders. The shares were issued pursuant to
Section 4(2) and Rule 506 of Regulation D promulgated under the Securities Act
of 1933, as amended.
10
<PAGE> 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
1997 1996 1995 1994 1993
----------- ------------- ----------- --------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 108,261 $ 132,039 $ 123,201 $ 60,836 $ 52,662
Gross margin 32,156 31,855 62,252 20,553 15,671
Operating income (loss) (10,776) (4,683) 34,476 4,994 5,755
Net income (loss) (7,686) 1,015 29,653 4,612 5,782
Net income (loss) per share (1) (0.43) 0.06 1.79 0.34 -
Working capital 75,544 107,929 120,839 16,648 11,957
Total assets 195,596 178,039 204,441 33,243 28,883
Total long-term obligations,
notes payable, and current
portion of long-term
obligations 20,101 14,534 33,888 1,526 2,963
Stockholders' equity 134,567 142,435 139,909 21,187 15,963
Dividends paid - - - - -
</TABLE>
- -------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the basis used to calculate net income (loss) per share. Prior to 1994,
Statements of Operations omit net income per share as it was not presented in
the Company's initial public offering registration statement. Pro forma income
per share is presented for fiscal 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1996
Net Sales. Net sales consist principally of total product sales less
estimated sales returns. Net sales decreased by 18% to $108.3 million in fiscal
1997 from $132.0 million in fiscal 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, 1024K products, cache module
products, and nonvolatile memory products. The Company anticipates that the
average selling prices of its existing products will continue to decline over
time, although the rate of decline may fluctuate 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 "Quarterly Fluctuations and Declines in Average
Selling Prices". Sales to one customer accounted for approximately 19% and 22%
of total net sales for fiscal 1997 and fiscal 1996, respectively.
Gross Profit. The Company's cost of revenues includes die cost from the
wafers acquired from foundries, subcontracted package and assembly costs and
costs associated with in-house product testing and quality assurance. Gross
profit increased 1% to $32.2 million in fiscal 1997, from $31.9 million in
fiscal 1996. As a percentage of net sales, gross profit increased to 29.7% in
fiscal 1997 from 24.1% in fiscal 1996. Fiscal 1996 included a $15.0 million
write-down of inventory. Excluding the $15.0 million inventory write-down, gross
profit was $46.9 million or 35.5% of net sales in fiscal 1996. Excluding the
inventory write-down in the 1996 period, 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 fiscal 1997 compared to fiscal
1996. Although product unit costs were lower in fiscal 1997 compared to fiscal
1996, such reductions did not offset the declines in average selling prices
resulting in lower gross margins. Cost of sales for fiscal 1997 reflects a $13.9
million benefit related to inventory sold during fiscal 1997 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
11
<PAGE> 14
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 costs will be reduced 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
23% to $26.2 million in fiscal 1997, from $21.4 million in fiscal 1996. As a
percentage of net sales, research and development expenses increased to 24.2% in
fiscal 1997, from 16.2% in fiscal 1996. These increases were primarily the
result of an increase in engineering personnel, increased payroll related
expenses and increased expenses related to the development of new products and,
to a lesser extent, the write-off of obsolete engineering equipment and
software. During fiscal 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, 2 megabit Flash memory, geometry reductions for its memory
products, EPROMs, and other memory related devices. In this regard, the Company
developed its initial DRAM devices, specialty high speed 4 megabit and 2 megabit
DRAMs. These products are currently being sampled by several customers. 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 10% to $16.8 million in fiscal 1997 from $15.2 million in
fiscal 1996. As a percentage of net sales, selling, general and administrative
expenses increased to 15.5% in fiscal 1997, from 11.5% in fiscal 1996. These
increases were primarily the result of increases in bad debt reserves and legal
expenses associated with antidumping proceedings and increased payroll related
expenses from the addition of marketing and sales personnel, partially offset by
decreased selling commissions associated with lower revenues. 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.
Interest and other income, Net. Interest and other income, net decreased
to $1.9 million in fiscal 1997 from $4.5 million in fiscal 1996, primarily due
to decreased net interest earnings as a result of lower cash and short-term
investment balances.
Benefit for Income Taxes. The Company recorded a tax benefit of $1.1
million for fiscal 1997 which was primarily attributable to investment tax
credits generated by the Company's Taiwan subsidiary during the year ended
September 30, 1997. The Company recorded a tax benefit of $1.2 million for
fiscal 1996 which was primarily attributable to lower than expected profit
before income taxes and tax benefits relating to tax-exempt interest income and
the dividends deduction. In addition, the Company's Taiwan subsidiary generated
significant investment tax credits during the year ended September 30, 1996.
As a result of its location in the Hsinchu Science-Based Industrial Park
in Taiwan, ISSI-Taiwan has received a tax exemption for taxable income beginning
October 1, 1992. This tax exemption is extended each time ISSI-Taiwan expands
its capital assets and uses the capital to purchase qualified machinery. The
precise amount of the exemption is calculated annually based upon the extent of
ISSI-Taiwan's net operating taxable income and measured by certain factors,
including use of qualified manufacturing equipment, self-manufacturing costs and
qualified sales revenue. The portion of ISSI-Taiwan's taxable income which is
not subject to exemption is taxed at a flat 20% tax rate. In addition, the
Company recognized benefits from investment tax credits in Taiwan of
approximately $968,000 in fiscal 1997. There can be no assurance that the
Company's current tax status in Taiwan will not change in the future due to
changes in the regulatory environment, the inability to qualify for exempt
status or other factors.
Under Statement of Financial Accounting Standards No. 109 (FAS 109),
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company has established a valuation allowance
covering a portion of the gross deferred tax assets based on management's
expectations of future taxable income and the actual taxable income during the
three years ended September 30, 1997. Realization of deferred tax assets is
dependent on generating sufficient taxable income prior to expiration of the
carryforwards. Although realization is not assured, management believes that it
is more likely than not that the deferred tax asset will be realized. The amount
of the deferred tax asset considered realizable, however,
12
<PAGE> 15
could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced Approximately $2.0 million of the valuation
allowance at September 30, 1997 is attributable to tax benefits of stock option
deductions which will be credited to paid in capital when realized.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1995
Net Sales. Net sales increased by 7% to $132.0 million in fiscal 1996 from
$123.2 million in fiscal 1995. The Company's SRAM product family accounted for a
substantial majority of total net sales in fiscal 1996 and 1995. During fiscal
1996, there was a significant drop in the average selling prices of SRAM
products due to worldwide over capacity. Although the Company increased its unit
shipments of SRAM products in fiscal 1996 from fiscal 1995, this increase in
unit shipments was generally offset by lower average selling prices. The
increase in total sales of approximately 7% was primarily attributable to growth
in the Company's NVM product line sales which more than doubled in fiscal 1996
compared to fiscal 1995. During fiscal 1996 and 1995, the Company's 256K SRAM
products accounted for a majority of its net sales.
Gross Profit. Gross profit decreased 49% to $31.9 million in fiscal 1996
from $62.3 million in fiscal 1995. As a percentage of net sales, gross profit
decreased to 24.1% for fiscal 1996 from 50.5% for fiscal 1995. The decline in
gross margin includes a $15.0 million write-down of inventory recorded in the
June 1996 quarter. The general decrease in gross profit was primarily the result
of lower average selling prices for the Company's SRAM products in fiscal 1996
compared to fiscal 1995. The Company experienced a significant drop in the
average selling prices of its SRAM products in fiscal 1996 and, to a lesser
extent, a decline in the average selling prices of its NVM products. Although
product costs were also generally lower in fiscal 1996, the significant drop in
average selling prices resulted in lower gross margins.
Research and Development. Research and development expenses increased by
44% to $21.4 million in fiscal 1996 from $14.9 million in fiscal 1995. As a
percentage of net sales, research and development expenses increased to 16.2% in
fiscal 1996, from 12.1% in fiscal 1995. The increase 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 fiscal 1996, the
Company's development efforts principally focused on geometry reductions for its
memory products, synchronous SRAMs, wider bus width SRAMs such as 64K x 32 and
32K x 16 configurations, Flash memories, Voice EPROMs, and other memory related
products.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 18% to $15.2 million in fiscal 1996 from $12.9 million in
fiscal 1995. As a percentage of net sales, selling, general and administrative
expenses increased to 11.5% in fiscal 1996, from 10.5% in fiscal 1995. The
increase was primarily the result of the addition of marketing and sales
personnel, payroll related expenses and increased selling commissions.
Interest and other income, Net. Interest and other income, net increased
to $4.5 million in fiscal 1996 from $2.5 million in fiscal 1995, primarily due
to increased net interest earnings as a result of higher cash and short-term
investment balances.
Benefit for Income Taxes. The Company recorded a tax benefit of $1,158,000
for fiscal year 1996 which was primarily attributable to a net loss before
income taxes, the Company's Taiwan tax exemption and investment tax credits
earned in Taiwan.
For fiscal 1996, the Company was able to reduce current taxes payable by
approximately $1,510,000 ($0.08 per share) related to the Company's Taiwan tax
exemption. In addition, the Company recognized benefits from investment tax
credits in Taiwan of approximately $1,018,000 in the fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company's principal sources of liquidity
included cash, cash equivalents, restricted cash and short-term investments of
approximately $53.1 million, of which approximately $12.1 million was held by
ISSI-Taiwan. Approximately $5.2 million of the cash held by the Company is
restricted as of September 30, 1997 for purposes of securing available
short-term lines of credit and letters of credit. During fiscal
13
<PAGE> 16
1997, operating activities utilized cash of approximately $4.6 million. Cash
utilized by operations was primarily due to increases in inventories and
accounts receivable partially offset by an increase in accounts payable, a
decrease in other assets and net loss adjusted for depreciation and other
non-cash items.
The Company made capital expenditures of approximately $14.0 million in
fiscal 1997, of which approximately $6.0 million was for the construction of the
Company's facility in the Hsinchu Science-Based Industrial Park to house its
Taiwan operations and $8.0 million was for the purchase of test equipment and
design and engineering tools. The Company expects to spend approximately $12
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 $16.0 million during the next twelve months for the construction
of its Taiwanese facility. A portion of this construction cost will be financed
through loans. The building is expected to be completed in mid 1998.
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 agreed to invest $31.2
million for a 4% equity interest in the venture and as of June 30, 1997, $18.7
million had been paid by the Company to WaferTech in this regard. The last
scheduled payment by the Company of $12.5 million was 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. For wafer
increases over 1994, the base year, the Company is obligated to pay a portion of
the cost for the increased number of wafers even if the allocated annual
increase is not purchased in that year. The Company's future commitments for the
years 1998-2001 are approximately $26.4 million and the Company has established
a letter of credit for $4.8 million covering a portion of this amount.
Additionally, in fiscal 1995, the Company entered into a joint venture "United
Integrated Circuits Corp" ("UICC") with UMC and other investors to build a wafer
fabrication facility in Hsinchu, Taiwan. The Company agreed to invest
approximately $26 million (subject to fluctuations in the New Taiwanese Dollar)
for a 5% equity interest in the venture of which UMC retains 55% ownership. As
of September 30, 1997, approximately $20.0 million has been paid by the Company
to UICC in this regard. The final payment of approximately $6.0 million is
expected to be made in December 1997. The UICC facility was severely damaged by
fire in October 1997 resulting in a delay in wafer production of approximately
12 months. UICC has informed the Company that the damages incurred are covered
by insurance.
The Company generated $9.2 million from financing activities during
fiscal 1997, which were derived primarily from $5.6 million in net borrowings
under short-term and long-term lines of credit. The Company has $28.4 million
available through a number of short-term lines of credit with various financial
institutions in Taiwan. As of September 30, 1997, the Company had borrowings of
approximately $6.2 million under these short-term lines of credit.
The Company has a number of long-term lines of credit with the various
financial institutions in Taiwan to finance the purchase of machinery, equipment
and building construction in Taiwan. Total obligations related to these
borrowings as of September 30, 1997 were $13.9 million, of which $2.3 million is
included in the current portion of long-term obligations. These obligations bear
interest at rates from 6.45% to 8.45% and are payable in quarterly installments
through 2004. As of September 30, 1997, the Company had available long-term
lines of credit of approximately $15.4 million of which approximately $9.2
million is for the construction financing of the Company's new facility in the
Hsinchu Science-Based Industrial Park.
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 financing 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.
14
<PAGE> 17
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, fluctuations in manufacturing
yield, disruption in delivery and order fulfillment and shortages in the supply
of wafers or assembly capacity. 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. Although the Company has since experienced quarterly sequential
revenue growth, there can be no assurance that the Company will not experience
future 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 this regard, several Asian
countries including Korea, Japan and Thailand, have recently experienced
significant economic downturns and significant declines in the value of their
currencies relative to the U.S. dollar. The Company is unable to predict what
effect, if any, these factors will have on its ability to maintain or increase
its sales in these 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 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 to increase unit sales volume of existing products and introduce
and sell new products which compensate for the anticipated declines in the
average selling prices of its existing products. Declining average selling
prices will also adversely affect the Company's gross margins and profits unless
the Company is able to introduce new products with higher margins or reduce its
cost per unit 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.
Shifts in industry-wide wafer capacity from shortages to oversupply or
from oversupply to shortages may also result in significant fluctuations in the
Company's quarterly or annual operating results. Excess capacity may result in
declining average selling prices or 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.
PRODUCT CONCENTRATION AND DEPENDENCE ON PERSONAL COMPUTER INDUSTRY
In fiscal 1997, substantially all of the Company's net sales were
derived from the sale of SRAM products. A majority of the Company's products are
incorporated into products such as modems, networking equipment, disk drives and
PC cache. In recent periods, the PC industry has experienced strong unit sales
growth, which has increased demand for 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
peripherals industry or in PCs.
15
<PAGE> 18
CUSTOMER CONCENTRATION
The Company's sales are concentrated within a limited customer base. In
fiscal 1997 and 1996, one customer accounted for approximately 19% and 22% 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 combined its fabless manufacturing strategy with
technology partnerships and equity investments. This hybrid approach, which the
Company calls "Fab-Lite(TM)", has provided advanced process technology and a
committed wafer supply. To date, the Company's principal manufacturing
relationship has been with TSMC, and in 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
wafer capacities from its suppliers, if these 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 could enforce fulfillment of the delivery
commitments. 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 $26.4
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-schedule 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 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 in certain 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, MIS systems, product delivery systems and other resources. The
Company's ability
16
<PAGE> 19
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 exemption
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 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. 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, trade laws and
import duties, 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.
17
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial StatementS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors....................................................19
Financial Statements:
Consolidated Statements of Operations
For Fiscal Years Ended September 30, 1997,
September 30, 1996, and September 30, 1995...............................20
Consolidated Balance Sheets
As of September 30, 1997, and September 30, 1996.........................21
Consolidated Statements of Stockholders' Equity
For Fiscal Years Ended September 30, 1997,
September 30, 1996, and September 30, 1995...............................22
Consolidated Statements of Cash Flows
For Fiscal Years Ended September 30, 1997................................23
September 30, 1996, and September 30, 1995
Notes to Consolidated Financial Statements...................................24
</TABLE>
18
<PAGE> 21
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Integrated Silicon Solution, Inc.
We have audited the accompanying consolidated balance sheets of
Integrated Silicon Solution, Inc. as of September 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Integrated Silicon Solution, Inc. at September 30, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
San Jose, California
October 27, 1997,
except for Note 17
as to which the date is
December 3, 1997
19
<PAGE> 22
Integrated Silicon Solution, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 108,261 $ 132,039 $ 123,201
Cost of sales (other than item below) 76,105 85,184 60,949
Inventory write-down -- 15,000 --
--------- --------- ---------
Total cost of sales 76,105 100,184 60,949
--------- --------- ---------
Gross profit 32,156 31,855 62,252
--------- --------- ---------
Operating expenses:
Research and development 26,179 21,350 14,852
Selling, general and administrative 16,753 15,188 12,924
--------- --------- ---------
Total operating expenses 42,932 36,538 27,776
--------- --------- ---------
Operating income (loss) (10,776) (4,683) 34,476
Interest and other income 2,535 4,803 2,631
Interest expense (607) (335) (88)
--------- --------- ---------
Income (loss) before income taxes and
minority interest (8,848) (215) 37,019
Provision (benefit) for income taxes (1,144) (1,158) 7,404
--------- --------- ---------
Income (loss) before minority interest (7,704) 943 29,615
Minority interest in net loss of
consolidated subsidiary (18) (72) (38)
--------- --------- ---------
Net income (loss) $ (7,686) $ 1,015 $ 29,653
========= ========= =========
Net income (loss) per share $ (0.43) $ 0.06 $ 1.79
========= ========= =========
Shares used in per share calculation 17,748 18,356 16,534
========= ========= =========
</TABLE>
See the accompanying notes to consolidated financial statements
20
<PAGE> 23
Integrated Silicon Solution, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30,
--------------------------
1997 1996
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,334 $ 12,237
Restricted cash 5,202 7,023
Short-term investments 25,600 62,200
Accounts receivable, net of allowance for doubtful
accounts of $2,268 in 1997 and $2,002 in 1996 18,478 11,316
Inventories 40,730 22,469
Other current assets 7,472 13,777
---------- ---------
Total current assets 119,816 129,022
Property, equipment, and leasehold improvements, net 27,693 30,795
Construction in progress 6,343 334
Other assets 41,744 17,888
---------- ---------
Total assets $195,596 $178,039
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 6,152 $ 3,617
Accounts payable 23,138 8,912
Accrued compensation and benefits 3,424 3,994
Accrued expenses 8,725 3,298
Income tax payable 582 550
Current portion of long-term obligations 2,251 722
---------- ---------
Total current liabilities 44,272 21,093
Income tax payable - noncurrent 5,059 4,298
Long-term obligations 11,698 10,195
Minority interest in consolidated subsidiary -- 18
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value: Authorized shares -
5,000 in 1997 and 1996. No shares outstanding -- --
Common stock, $0.0001 par value: Authorized shares -
70,000 in 1997 and 1996. Issued and outstanding shares -
17,938 in 1997 and 17,607 in 1996. 2 2
Additional paid-in capital 106,769 104,788
Retained earnings 32,266 39,952
Cumulative translation adjustment (4,248) (2,246)
Unearned compensation (222) (61)
---------- ---------
Total stockholders' equity 134,567 142,435
---------- ---------
Total liabilities and stockholders' equity $195,596 $178,039
========== =========
</TABLE>
See the accompanying notes to consolidated financial statements
21
<PAGE> 24
Integrated Silicon Solution, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Cumulative
---------------------- --------------------- Paid-In Retained Translation Unearned
Shares Amount Shares Amount Capital Earnings Adjustment Compensation
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 31,314 $ 3 4,797 $ -- $ 11,838 $ 9,284 $ 97 $ (35)
Stock options exercised -- -- 517 -- 1,008 -- -- --
Issuance of common stock
in public offering and
exercise of warrant -- -- 4,082 1 85,979 -- -- --
Conversion to common
stock (31,314) (3) 7,829 1 2 -- -- --
Unearned compensation -- -- -- -- 131 -- -- (131)
Amortization of unearned
compensation -- -- -- -- -- -- -- 32
Cancellation of stock
options -- -- -- -- (30) -- -- 30
Tax benefits from sale
of common stock -- -- -- -- 3,448 -- -- --
Translation adjustment -- -- -- -- -- -- (1,399) --
Net income -- -- -- -- -- 29,653 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1995 -- -- 17,225 2 102,376 38,937 (1,302) (104)
Stock options exercised -- -- 253 -- 952 -- -- --
Shares issued under
stock purchase plan -- -- 129 -- 1,357 -- -- --
Amortization of unearned
compensation -- -- -- -- -- -- -- 43
Tax benefits from sale
of common stock -- -- -- -- 103 -- -- --
Translation adjustment -- -- -- -- -- -- (944) --
Net income -- -- -- -- -- 1,015 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1996 -- -- 17,607 2 104,788 39,952 (2,246) (61)
Stock options exercised -- -- 197 -- 665 -- -- --
Shares issued under
stock purchase plan -- -- 134 -- 1,112 -- -- --
Unearned compensation -- -- -- -- 204 -- -- (204)
Amortization of unearned
compensation -- -- -- -- -- -- -- 43
Translation adjustment -- -- -- -- -- -- (2,002) --
Net loss -- -- -- -- -- (7,686) -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1997 -- $ -- 17,938 $ 2 $ 106,769 $ 32,266 $ (4,248) $ (222)
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
Balance at September 30, 1994 $ 21,187
Stock options exercised 1,008
Issuance of common stock
in public offering and
exercise of warrant 85,980
Conversion to common
stock --
Unearned compensation --
Amortization of unearned
compensation 32
Cancellation of stock
options --
Tax benefits from sale
of common stock 3,448
Translation adjustment (1,399)
Net income 29,653
---------
Balance at September 30, 1995 139,909
Stock options exercised 952
Shares issued under
stock purchase plan 1,357
Amortization of unearned
compensation 43
Tax benefits from sale
of common stock 103
Translation adjustment (944)
Net income 1,015
---------
Balance at September 30, 1996 142,435
Stock options exercised 665
Shares issued under
stock purchase plan 1,112
Unearned compensation --
Amortization of unearned
compensation 43
Translation adjustment (2,002)
Net loss (7,686)
---------
Balance at September 30, 1997 $ 134,567
=========
</TABLE>
See the accompanying notes to consolidated financial statements
23
<PAGE> 25
Integrated Silicon Solution, Inc.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (7,686) $ 1,015 $ 29,653
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 11,408 7,586 3,816
Provision for losses on accounts receivable 675 714 1,185
Net foreign currency transaction (gains) losses 17 (311) 225
Minority interest in net loss of consolidated subsidiary (18) (72) (38)
Changes in operating assets and liabilities:
Accounts receivable (8,007) 6,581 (11,694)
Inventories (19,446) (11,592) (3,725)
Other assets 4,328 (7,710) (3,141)
Accounts payable 13,939 (6,721) 7,288
Accrued expenses 227 (3,104) 13,367
--------- --------- ---------
Net cash provided by (used in) operating activities (4,563) (13,614) 36,936
Cash flows from investing activities:
Acquisition of property, equipment, and leasehold improvements (13,985) (20,423) (17,411)
Purchases of available-for-sale securities (174,400) (197,800) (184,650)
Sales of available-for-sale securities 211,000 215,900 104,350
Investment in WaferTech, LLC (9,360) (9,360) --
Investment in United Integrated Circuits Corp. (12,983) -- (7,500)
Proceeds from employees for UICC shares 5,345 -- --
--------- --------- ---------
Net cash provided by (used in) investing activities 5,617 (11,683) (105,211)
Cash flows from financing activities:
Proceeds from issuance of stock 1,820 2,352 87,020
Borrowings under notes payable and long-term obligations 28,659 28,018 4,317
Principal payments of notes payable and long-term obligations (23,092) (16,172) (3,155)
Decrease (increase) in restricted cash 1,821 (6,037) 355
--------- --------- ---------
Net cash provided by financing activities 9,208 8,161 88,537
Effect of exchange rate changes on cash and cash equivalents (165) (79) (226)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 10,097 (17,215) 20,036
Cash and cash equivalents at beginning of year 12,237 29,452 9,416
--------- --------- ---------
Cash and cash equivalents at end of year $ 22,334 $ 12,237 $ 29,452
========= ========= =========
</TABLE>
See the accompanying notes to consolidated financial statements.
23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Integrated Silicon Solution, Inc. (the "Company") was incorporated in
California on October 27, 1988 and reincorporated in Delaware on August 9, 1993.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Integrated Silicon Solution, Inc. and its majority owned subsidiaries, after
elimination of all significant intercompany accounts and transactions.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
Under Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" all affected debt
securities must be classified as held-to-maturity, trading, or
available-for-sale and equity securities must be classified as trading or
available-for-sale. Management determines the appropriate classification of debt
and equity securities at the time of purchase and reevaluates such designation
as of each balance sheet date.
At September 30, 1997 and 1996, all debt and equity securities were
designated as available-for-sale. Available-for-sale securities are carried at
fair value, with unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. The amortized cost for available-for-sale
debt securities is adjusted for the amortization of premiums and accretion of
discounts to maturity. Such amortization is included in investment income.
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in investment
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in investment income. At September 30, 1997 and 1996, the cost of
these securities approximated the fair value and the amount of unrealized gain
or loss was not significant. There were no gains or losses on the sale of
securities for the twelve months ended September 30, 1997 and 1996.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The Company's inventory valuation process is done on a part-by-part
basis. Lower of cost to market adjustments, specifically identified on a
part-by-part basis, reduce the carrying value of the related inventory and take
into consideration reductions in sales prices, excess inventory levels and
obsolete inventory. Once established, these adjustments are considered permanent
and are not reversed until the related inventory is sold or disposed.
PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment, and leasehold improvements are stated at cost.
Equipment under capital leases is stated at the present value of minimum lease
payments at the beginning of the lease term. Depreciation and amortization are
computed using the straight-line method, based upon the shorter of the estimated
useful lives ranging from three to seven years, or the lease term of the
respective assets, if applicable.
24
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION
The Company recognizes revenue to non-distributor customers upon
shipment. The Company provides for estimated sales returns on sales to these
customers. Sales made to distributors, under terms allowing certain rights of
return and price protection on unsold merchandise held by the distributor, are
deferred until the merchandise is sold by the distributor.
FOREIGN CURRENCY TRANSLATION
The Company uses the local currency as its functional currency for all
foreign subsidiaries. Translation adjustments, which result from the process of
translating foreign currency financial statements into U.S. dollars, are
included as a separate component of stockholders' equity.
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.
CONCENTRATION OF CREDIT RISK
The Company operates in one business segment, which is to design,
develop, and market high performance SRAM and nonvolatile memory integrated
circuits. The Company markets and distributes its products on a worldwide basis,
primarily to original equipment manufacturers and personal computer motherboard
manufacturers. The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral. In fiscal 1997 and
1996, one customer accounted for approximately 19% and 22% of net sales,
respectively. In fiscal 1995, no customer exceeded 10% of total net sales.
The Company maintains cash, cash equivalents, and short-term investments
with various financial institutions. The Company's investment policy is designed
to limit exposure to any one institution. The Company performs periodic
evaluations of the relative credit standing of those financial institutions that
are considered in the Company's investment strategy. To date, the Company has
not incurred losses related to these investments.
SEMICONDUCTOR INDUSTRY RISKS
To date the Company has derived substantially all of its revenues from
the sale of SRAM products. The Company is undertaking efforts to diversify into
other product areas such as NVM products, speciality DRAMs and embedded
memories. If the market for SRAM products should decline and the Company has not
successfully diversified, such decline would have a material adverse affect on
the Company's financial performance.
The semiconductor industry is characterized by rapid technological
change, intense competitive pressure and cyclical market patterns. The Company's
results of operations are affected by a wide variety of factors, 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 and fluctuations in manufacturing yields. Other
factors include potential inventory write-downs, changes in product mix, changes
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
25
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and certain production and other risks associated with using independent
manufacturers. As a result, the Company may experience substantial
period-to-period fluctuations in future operating results due to the factors
mentioned above or other factors.
NET INCOME (LOSS) PER SHARE
Net income per share is computed using the weighted average number of
shares of common stock outstanding and common equivalent shares, when dilutive,
from convertible preferred stock (using the if-converted method) and from stock
options and warrants (using the treasury stock method). Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common equivalent
shares issued by the Company at prices below the initial public offering price
of the Company's common stock during the twelve-month period prior to the
Company's initial public offering in February 1995, have been included in the
calculation as if they were outstanding for all periods presented prior to the
initial public offering (using the treasury stock method at the initial public
offering price).
Net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board (FASB) released
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (FAS
128), 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 net income per share (basic earnings per share), the
dilutive effect of stock options will be excluded. The Company's basic and
diluted earnings (loss) per share as calculated according to FAS 128 would have
been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Basic $(0.43) $0.06 $1.99
Diluted $(0.43) $0.06 $1.79
</TABLE>
RECLASSIFICATION OF PRIOR YEAR BALANCES
Certain reclassifications have been made to prior year's financial
statements to conform to the current year presentation.
26
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS
Cash, cash equivalents, restricted cash, and short-term investments
consisted of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Cash $21,953 $ 9,989
Money market instruments 480 3,189
Certificates of deposit 5,103 6,082
Auction preferred stock 13,200 42,500
Municipal bonds due in more than 3 years 12,400 19,700
------- -------
Total $53,136 $81,460
======= =======
</TABLE>
NOTE 3. INVENTORIES
Inventories consisted of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Purchased components $10,444 $10,123
Work-in-process 10,199 2,826
Finished goods 20,087 9,520
------- -------
$40,730 $22,469
======= =======
</TABLE>
During the third quarter of fiscal 1996, the Company recorded an
inventory write-down of $15.0 million.
NOTE 4. OTHER CURRENT ASSETS AND OTHER ASSETS
Other current assets and other assets consisted of the following at
September 30:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Advance payment TSMC (see Note 7) $ -- $ 2,326
Deferred tax asset 1,137 4,615
Other 6,335 6,836
------- -------
$ 7,472 $13,777
======= =======
Investment in United Integrated Circuits Corp. (see Note 13) $19,012 $ 6,821
Investment in WaferTech LLC. (see Note 13) 18,720 9,360
Other 4,012 1,707
------- -------
$41,744 $17,888
======= =======
</TABLE>
27
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment, and leasehold improvements consisted of the following
at September 30:
<TABLE>
<CAPTION>
1997 1996
--------------- ------------
<S> <C> <C>
(In thousands)
Machinery and equipment $ 49,463 $ 43,209
Furniture and fixtures 1,409 1,174
Leasehold improvements 2,050 1,763
--------------- ------------
52,922 46,146
Less accumulated depreciation and 25,229 15,351
amortization
=============== ============
$ 27,693 $ 30,795
=============== ============
</TABLE>
NOTE 6. ACCRUED EXPENSES
Accrued liabilities consisted of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
(In thousands)
UICC shares due employees $5,345 $ --
Other 3,380 3,298
------ ------
$8,725 $3,298
====== ======
</TABLE>
The Company has an equity investment commitment of approximately $26
million (subject to fluctuations in the New Taiwanese Dollar) in UICC, a wafer
fabrication joint venture led by UMC. Through September 30, 1997, the Company
had invested approximately $20 million of such amount. In fiscal 1997, the
Company elected to re-sell a portion of this investment to its employees at
cost, which approximates fair value, generating a cash inflow to the Company of
approximately $5,345,000. The UICC shares will be transferred to the employees
pending final approval by UICC and the government of the Republic of China.
NOTE 7. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
At September 30, 1997, ISSI-Taiwan had short-term lines of credit with
various financial institutions whereby it could borrow in aggregate up to
approximately $28,385,000 denominated in a combination of U.S. and New Taiwan
dollars. As of September 30, 1997, the Company had borrowings of approximately
$6,152,000 outstanding under these lines of credit. These lines of credit expire
at various times through August 1998. These lines of credit are secured by time
deposits of approximately $402,000, which are recorded as restricted cash.
Commitment fees relating to these lines are not material. At September 30, 1997,
the weighted average interest rate on borrowing under these lines was 7.1%.
In fiscal 1995, the Company's primary foundry partner, TSMC, committed
to provide the Company with annual wafer capacity increases for each year
through 2001. For wafer increases over 1994, the base year, the Company is
obligated to pay a portion of the cost for the increased number of wafers even
if the allocated annual increase is not purchased in that year. The Company's
future commitments for the years 1998-2001 are approximately $26.4 million. The
Company has established a letter of credit for $4.8 million covering a portion
of this amount.
28
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term obligations consisted of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Notes payable to bank, due in quarterly installments
through 2004 with interest at 6.45% to 8.45% and
secured by the Company's property and equipment $13,949 $10,917
Less current portion 2,251 722
------- -------
$11,698 $10,195
======= =======
</TABLE>
At September 30, 1997, future minimum principal payments on notes
payable and long-term obligations were as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 2,251
1999 2,834
2000 2,511
2001 2,408
2002 2,408
Thereafter 1,537
--------
Total $ 13,949
========
</TABLE>
Interest of $280,000, $235,000 and $136,000 was capitalized in 1997,
1996 and 1995, respectively, and is included in fixed assets.
NOTE 8. CAPITAL STOCK
The Company's Restated Certificate of Incorporation provides for
70,000,000 authorized shares of Common Stock and 5,000,000 authorized shares of
preferred stock. The terms of the preferred stock may be fixed by the Board of
Directors, who have the right to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders of the Company. The rights of the
holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future.
NOTE 9. STOCK PLANS
1989 STOCK OPTION PLAN
During 1989, the Company adopted a stock option plan (the "Plan") that
provides for incentive stock options for employees and nonstatutory stock
options for employees, consultants and nonemployee directors of the Company.
Incentive stock options and nonstatutory options granted under the Plan
have five or ten-year terms. All incentive stock option grants and nonstatutory
stock option grants must be at prices of at least 100% and 85%, respectively, of
the fair market value of the stock on the date of grant, as determined by the
Board of Directors.
29
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The options are exercisable as determined by the Board of Directors.
Generally, the stock options vest ratably over a four-year period. The options
expire upon the earlier of five or ten years from the date of grant or 30 days
following termination of employment. Options to purchase 1,164,000 shares,
791,000 shares and 432,000 shares were exercisable as of September 30, 1997,
1996, and 1995, respectively.
In the event of certain changes in control of the Company, the Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; however, if such successor refuses to
assume the then outstanding options, the Plan provides for the full acceleration
of the exercisability of all outstanding options.
1996 STOCK OPTION PLAN
On October 18, 1996, the Company adopted a stock option plan (the "1996
Plan") that provides for non-statutory stock options for non-executive employees
and consultants of the Company.
Under the terms of the plan, the exercise price and exercise period of
non-statutory stock option grants is determined by the Board of Directors on the
date of grant. Generally, the stock options vest ratably over a four year
period. The options expire upon the earlier of ten years from the date of grant
or 30 days following termination of employment or consultantcy. Options to
purchase 33,000 shares were exercisable as of September 30, 1997.
In the event of certain changes in control of the Company, the 1996 Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; however, if such successor refuses to
assume the then outstanding options, the 1996 Plan provides for the full
acceleration of the exercisability of all outstanding options.
1995 DIRECTOR STOCK OPTION PLAN
The Board of Directors and stockholders approved the 1997 Director Stock
Option Plan ("Director Plan") in December 1995 and January 1996, respectively.
Under the terms of the Plan, 50,000 shares of Common Stock were authorized for
issuance. Each director who has been a non-employee director for at least six
months will automatically receive a non-statutory option to purchase 2,500
shares of Common Stock upon such director's annual reelection to the Board by
the stockholders. Options to purchase 13,000 shares and 6,000 shares were
exercisable at September 30, 1997 and 1996, respectively.
30
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity of the 1989, 1996 and Director
Plans:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------------------
Options Number Weighted-
Available Of Price Average
For Grant Shares Per Share Exercise Price
--------- ------ -------------- --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Balance at September 30, 1994 646 1,764 $0.12-$4.00 $ 2.85
Authorized 500 -- -- --
Granted (929) 929 $5.00-$59.50 30.63
Exercised -- (517) $0.12-$9.00 1.95
Canceled 125 (125) $0.20-$13.00 4.56
------ ------ -------------- --------------
Balance at September 30, 1995 342 2,051 $0.20-$59.50 15.56
Authorized 1,050 -- -- --
Granted (1,609) 1,609 $9.625-$26.00 18.73
Exercised -- (253) $0.20-$13.00 3.76
Canceled 907 (907) $0.28-$59.50 33.42
------ ------ -------------- --------------
Balance at September 30, 1996 690 2,500 $0.20-$27.50 12.31
Authorized 775 -- -- --
Granted (2,340) 2,340 $5.00-$10.125 8.72
Exercised -- (197) $0.20-$12.25 3.37
Canceled 1,095 (1,095) $0.20-$27.50 19.98
------ ------ -------------- --------------
Balance at September 30, 1997 220 3,548 $0.28-$26.00 $ 8.07
====== ====== ============== ==============
</TABLE>
For certain options granted in 1997, 1995 and 1994, the Company
recognized as unearned compensation the excess of the deemed value for
accounting purposes of the common stock issuable upon exercise of such options
over the aggregate price of such options. The deemed value for accounting
purposes represents the fair value at the date of grant. The compensation
expense is being amortized ratably over the vesting period of the option.
Compensation expense amounting to $43,000, $43,000 and $32,000 was recognized
for the years ending September 30, 1997, 1996, and 1995, respectively.
Outstanding and exercisable options presented by price range at
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------- ---------------------------------------------
Number of Wtd. Average Number of
Range of Options Remaining Life Wtd. Average Options Wtd. Average
Exercise Prices Outstanding (Years) Exercise Price Exercisable Exercise Price
- --------------- ----------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.28 - 5.00 797,000 3.68 $ 3.56 645,000 $ 3.32
7.13 - 8.56 795,000 9.69 8.02 1,000 7.13
9.00 - 9.38 1,231,000 9.16 9.22 269,000 9.23
9.63 -14.50 720,000 8.51 11.03 293,000 11.16
26.00 5,000 8.04 26.00 2,000 26.00
- --------------- --------- --------- --------- --------- ---------
$ 0.28 -26.00 3,548,000 7.91 $ 8.07 1,210,000 $ 6.58
=============== ========= ========= ========= ========= =========
</TABLE>
31
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE STOCK PURCHASE PLAN
In March 1993, the Company adopted an Employee Stock Purchase Plan
("Purchase Plan") under Section 423 of the Internal Revenue Code. Under the
Company's Purchase Plan, eligible employees may purchase shares of the Company's
common stock through payroll deductions. The shares are purchased at a price
equal to 85% of the lesser of the fair value of the Company's common stock as of
the first day of the 24-month offering period or the last day of each six-month
purchase period. A total of 450,000 shares of common stock is reserved for
issuance under the plan, of which 263,000 had been issued as of September 30,
1997.
STOCK-BASED COMPENSATION
As permitted under FAS 123, the Company has elected to follow APB 25 and
related Interpretations, in accounting for stock-based awards to employees.
Under APB 25, the Company generally recognized no compensation expense with
respect to such awards.
Pro forma information regarding net income (loss) and earnings (loss)
per share is required by FAS 123 for awards granted or modified after September
30, 1995 as if the Company had accounted for its stock-based awards to employees
under the fair value method of FAS 123. The fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model. The Black-Scholes model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock-based awards to employees have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's stock-based awards to employees was estimated assuming no
expected dividends and the following weighted-average assumptions:
<TABLE>
<CAPTION>
Stock Options ESPP
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Expected life (years) 5.0 5.0 0.5 0.5
Expected volatility .70 .70 .53 .73
Risk-free interest rate 6.43 6.11 5.50 5.34
</TABLE>
The weighted-average fair value of options granted at market value
during fiscal 1997 and 1996 was $4.02 and $9.75 per share, respectively. The
weighted-average fair value of employee stock purchase rights during fiscal 1997
and 1996 was $5.33 and $5.20 per share, respectively.
For proforma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period
(for options) and the six-month purchase period (for stock purchases under the
ESPP). The Company's pro forma information for the years ended September 30, is
as follows (in thousands, except for income (loss) per share information):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net income (loss):
As reported $ (7,686) $ 1,015
Pro forma $ (14,814) $ (4,754)
Net income (loss) per share:
As reported $ (0.43) $ 0.06
Pro forma $ (0.83) $ (0.27)
</TABLE>
32
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Because FAS 123 is applicable only to awards granted subsequent to
September 30, 1995, its pro forma effect will not be fully reflected until
fiscal 1999 and is not expected to be indicative of the effects on net income
(loss) and net income (loss) per share in future years.
NOTE 10. STOCKHOLDERS' EQUITY
The Company is subject to legal restrictions related to its distribution
of ISSI-Taiwan earnings. In accordance with the Corporate Law of the Republic of
China, before ISSI-Taiwan declares any part of net income as dividends and/or
bonuses, ISSI-Taiwan must transfer 10% of its statutory net income to a legal
reserve until such reserve is equal to ISSI-Taiwan's capital. At September 30,
1997, such restricted equity amounted to approximately $4,503,000. The legal
reserve is not available for distribution; however, when the reserve exceeds 50%
of ISSI-Taiwan's capital, 50% of the legal reserve in excess of 50% of
ISSI-Taiwan's capital may be distributed in the form of stock. The reserve may
be utilized at any time to offset a deficit. In addition, any distribution of
equity of ISSI-Taiwan must allocate 1% of the related distribution to employees
of ISSI-Taiwan.
NOTE 11. INCOME TAXES
The provision (benefit) for income taxes consisted of the following for the
years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ (2,558) $ 3,137 $ 7,989
State 1 335 1,411
Foreign 116 200 693
-------- -------- --------
Total current $ (2,441) $ 3,672 $ 10,093
Deferred:
Federal 2,584 (3,062) (2,257)
State -- (614) (432)
Foreign (1,287) (1,154) --
-------- -------- --------
Total deferred 1,297 (4,830) (2,689)
-------- -------- --------
Total provision (benefit) $ (1,144) $ (1,158) $ 7,404
======== ======== ========
</TABLE>
Pretax income from foreign operations was approximately $9,207,000,
$153,000 and $28,320,000 for 1997, 1996, and 1995, respectively.
33
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's provision (benefit) for income taxes differs from the amount
computed by applying the U.S. federal statutory rate of (35%) to income before
taxes and minority interest as follows for the years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
(In thousands)
Income taxes computed at the U.S. federal
statutory rate $ (3,097) $ (75) $ 12,957
Valuation of deferred tax assets 6,546 1,104 (1,153)
Lower effective income tax rate of Taiwan (4,368) (1,006) (4,392)
Tax exempt interest income (328) (694) (470)
State tax (net of federal effect) 1 (184) 636
Other individually immaterial items 102 (303) (174)
-------- -------- --------
$ (1,144) $ (1,158) $ 7,404
======== ======== ========
</TABLE>
As of September 30, 1997, the Company has federal and state net operating
loss carryforwards of approximately $16,000,000 and $12,000,000, respectively.
The Company has federal research and development credit carryforwards and
alternative minimum tax credit carryforwards of approximately $1,130,000 and
$350,000, respectively. The Company also has state manufacturers' investment tax
credit carryforwards of approximately $500,000. The net operating losses,
research credit carryforwards and state manufacturers' investment tax credit
carryforwards will expire at various dates beginning in 2002 through 2012, if
not utilized. In addition, ISSI-Taiwan has investment tax credit carryforwards
of approximately $4,480,000 that will expire at various dates beginning in 1999
through 2001, if not utilized.
Utilization of the net operating loss carryforwards and credits may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating losses and credits before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred taxes consisted of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
(In thousands)
Deferred tax assets:
Depreciation $ 607 $ 321
Inventory and other valuation reserves 3,159 6,319
Accrued expenses 2,053 2,509
Taiwan - investment tax credit carryforwards 4,480 3,516
Federal and state credit carryforwards 2,040 --
Federal and state net operating loss
carryforwards 6,236 --
Other, net 13 525
-------- --------
Total deferred tax assets 18,588 13,190
Valuation allowance (13,858) (7,163)
-------- --------
Net deferred tax assets $ 4,730 $ 6,027
======== ========
</TABLE>
34
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management has determined, based on the Company's history of prior
operating earnings and its expectations of future taxable income, that a partial
valuation allowance for deferred tax assets should be provided. The valuation
allowance for deferred tax asset increased $6,695,000 during 1997 and $7,163,000
during 1996. Realization of deferred tax assets is dependent on generating
sufficient taxable income prior to expiration of the carryforwards. Although
realization is not assured, management believes that it is more likely than not
that the deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
Approximately $2,010,000 of the valuation allowance is attributable to tax
benefits of stock option deductions which will be credited to paid in capital
when realized.
As a result of its Hsinchu Science-based Industrial park in Taiwan,
ISSI-Taiwan has received a tax exemption for taxable income beginning October 1,
1992. ISSI-Taiwan continuously extends this 4 year exemption each time it
expands its capital assets and uses the capital to purchase qualified machinery.
The precise amount of the exemption is calculated annually based upon the extent
of ISSI-Taiwan's net operating taxable income and measured by certain factors,
including use of qualified manufacturing equipment, self-manufacturing costs and
qualified sales revenue. The portion of ISSI-Taiwan's taxable income which is
not subject to exemption is taxed at a flat 20% tax rate. In addition, the
Company recognized benefits from investment tax credits in Taiwan of
approximately $968,000 in the current fiscal year.
Cumulative net undistributed earnings of ISSI-Taiwan for which no income
taxes have been provided aggregated approximately $24,000,000 at September 30,
1997. These earnings are considered to be permanently invested in non-U.S.
operations. Upon distribution of those earnings in the form of dividends or
otherwise, the Company would be subject to both U.S. income taxes and
withholding tax payable to the foreign country. Determination of the amount of
unrecognized deferred U.S. tax liability is not practical because of the
complexities associated with its hypothetical calculation. However, a U.S.
foreign tax credit for the withholding tax payable on the distribution would be
available to reduce U.S. taxes.
35
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. GEOGRAPHIC AND SEGMENT INFORMATION
The Company operates in one business segment, which is to design,
develop, and market high-performance SRAM and nonvolatile memory integrated
circuits. The following table summarizes the Company's operations in different
geographic areas:
<TABLE>
<CAPTION>
Year Ended September 30, 1997
---------------------------------------------------------------------
United Taiwan Adjustments/
States Eliminations Consolidated
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
(In thousands)
Sales to unaffiliated customers $ 63,247 $ 45,014 $ -- $ 108,261
Transfers between geographic areas 3,586 69,795 (73,381) --
--------- --------- ----------- ---------
Total net sales $ 66,833 $ 114,809 $ (73,381) $ 108,261
========= ========= =========== =========
Operating income (loss) $ (20,504) $ 8,995 $ 733 $ (10,776)
========= ========= =========== =========
Identifiable assets $ 115,477 $ 123,676 $ (43,557) $ 195,596
========= ========= =========== =========
Cash, cash equivalents, restricted
cash and short-term investments $ 40,737 $ 12,399 $ - $ 53,136
========= ========= =========== =========
Accounts receivable from third-party
customers $ 10,705 $ 7,773 $ -- $ 18,478
========= ========= =========== =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30, 1996
--------------------------------------------------------------------
United Taiwan Adjustments/
States Eliminations Consolidated
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(In thousands)
Sales to unaffiliated customers $ 85,676 $ 46,363 $ -- $ 132,039
Transfers between geographic areas 6,250 70,450 (76,700) --
--------- --------- --------- ---------
Total net sales $ 91,926 $ 116,813 $ (76,700) $ 132,039
========= ========= ========= =========
Operating loss $ (3,751) $ (615) $ (317) $ (4,683)
========= ========= ========= =========
Identifiable assets $ 115,331 $ 76,976 $ (14,268) $ 178,039
========= ========= ========= =========
Cash, cash equivalents, restricted
cash and short-term investments $ 74,498 $ 6,962 $ -- $ 81,460
========= ========= ========= =========
Accounts receivable from third-party
customers $ 6,910 $ 4,406 $ -- $ 11,316
========= ========= ========= =========
</TABLE>
36
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended September 30, 1995
-----------------------------------------------------------------
United Taiwan Adjustments/
States Eliminations Consolidated
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
(In thousands)
Sales to unaffiliated customers $ 59,677 $ 63,524 $ - $123,201
Transfers between geographic areas 1,648 35,487 (37,135) --
-------- -------- ----------- --------
Total net sales $ 61,325 $ 99,011 $ (37,135) $123,201
======== ======== =========== ========
Operating income (loss) $ 10,462 $ 24,470 $ (456) $ 34,476
======== ======== =========== ========
Identifiable assets $116,604 $ 98,286 $ (10,449) $204,441
======== ======== =========== ========
Cash, cash equivalents and
restricted cash $ 93,083 $ 17,655 $ -- $110,738
======== ======== =========== ========
Accounts receivable from
third-party customers $ 11,220 $ 7,526 $ -- $ 18,746
======== ======== =========== ========
</TABLE>
Transfers between geographic areas are accounted for at amounts which
are generally above cost and consistent with rules and regulations of governing
tax authorities. Such transfers are eliminated in the consolidated financial
statements.
Identifiable assets by geographic area are those assets used in the
Company's operations in each area.
Total assets and liabilities for ISSI-Taiwan amounted to approximately
$123,676,000 and $70,801,000, respectively, at September 30, 1997. Included in
the assets and liabilities of ISSI-Taiwan were intercompany receivables
amounting to approximately $21,236,000 at September 30, 1997. Pre-tax income for
ISSI-Taiwan for the year ended September 30, 1997 was approximately $8,669,000.
Export sales by the U.S. operating company were approximately
$14,125,000, $15,741,000, and $17,854,000 for the years ended September 30,
1997, 1996, and 1995, respectively.
Net foreign currency transaction gains (losses) of approximately
$(17,000), $311,000, and $(225,000) for the years ended September 30, 1997, 1996
and 1995, respectively, were primarily the result of the settlement of
intercompany transactions and are included in the determination of net income.
NOTE 13. COMMITMENTS AND CONTINGENCIES
PATENTS AND LICENSES
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, mask work
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 of patents, mask work rights, copyrights or
other intellectual property 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, 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 for
technology used by the Company could cause the
37
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
LITIGATION
On March 21, 1997, the U.S. Department of Commerce ("DOC") initiated an
antidumping investigation of SRAMs from Taiwan and Korea. The Company currently
imports a majority of its SRAMs from Taiwan. The Company is participating in
this investigation as an interested party and has been assigned a preliminary
duty deposit rate of 10.96 percent. A final report by the DOC is scheduled for
January 1998. There will be a subsequent investigation by the International
Trade Commission ("ITC") into the impact of imports of SRAMs from Taiwan and
Korea on the U.S. market, with a final decision likely in March or April 1998.
Affirmative final decisions by both the DOC and the ITC are required before an
antidumping duty deposit is applicable to imports of SRAMs by the Company from
either of these countries. If an affirmative decision is reached, the Company
would be required to post a duty deposit for SRAM wafers or devices imported
from Taiwan. This duty deposit could be subsequently returned to the Company or
forfeited as duty to the U.S. Customs depending on subsequent measurements, the
results of which are made available by the Department Of Commerce in the year
2000.
The Company has retained legal counsel to defend its interests in the
antidumping proceedings before the DOC and the ITC. There can be no assurance,
however, that the government will not impose duties on the Company's imports of
SRAM products into the United States. Duties, if any, imposed by the government
could have a material adverse affect on the Company's gross margins and profits.
LEASES
The Company leases its facilities and the land upon which it is
constructing its new Taiwan facility under operating lease agreements that
expire at various dates through 2016. The Company entered into a ten year lease
effective December 1, 1996 for its headquarters facility in Santa Clara,
California. The Company has subleased approximately 25% of the Santa Clara
facility and the sublease expires in March 2000. Minimum rental commitments
under these leases are as follows (in thousands):
<TABLE>
<S> <C>
1998 (net of sublease income of $300) $ 1,103
1999 (net of sublease income of $308) 1,063
2000 (net of sublease income of $156) 1,273
2001 1,384
2002 1,440
Thereafter 7,960
--------
Total minimum rental commitments $ 14,223
========
</TABLE>
Total rental expense for the years ended September 30, 1997, 1996, and
1995 was approximately $1,372,000 (net of sublease income of $148,000), $637,000
and $620,000, respectively.
38
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS TO WAFER FABRICATION FACILITIES
In June 1996, the Company entered into a joint venture "WaferTech, LLC"
with TSMC, Altera, Analog Devices and private investors for the construction of
a wafer fabrication facility in Camas, Washington. Under the terms of the
agreement, the Company agreed to invest $31.2 million for a 4% equity interest
in the venture and will receive access to wafers manufactured using advanced
process technology. As of September 30, 1997, $18.7 million had been paid by the
Company to WaferTech. The last scheduled payment by the Company of $12.5 million
was made in November 1997. The Company is accounting for this investment on the
cost basis.
In 1995, the Company entered into a joint venture "United Integrated
Circuits Corp." ("UICC") with United Microelectronics Corporation ("UMC") and
other investors to build a wafer fabrication facility in Hsinchu, Taiwan. The
Company agreed to invest approximately $26 million (subject to fluctuations in
the New Taiwanese Dollar) for a 5% equity interest in the manufacturing venture
of which UMC retains 55% ownership. As of September 30, 1997, approximately
$20.0 million has been paid to UICC in this regard. The next payment of
approximately $6.0 million is expected to be made in December 1997. The Company
is accounting for this investment on the cost basis. The UICC facility was
severely damaged by fire in October 1997. UICC has informed the Company that the
damages incurred are covered by insurance.
The Company has certain minimum wafer purchasing commitments to its
foundry partners in exchange for wafer capacity commitments. The Company agreed
to make certain annual payments to TSMC for capacity increases. Additional
required payments to TSMC totaling approximately $26.4 million over the next
four years represent annual increases in capacity which must be purchased by the
Company. The Company has minimum purchase obligations with UICC 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-schedule or assignment
would be successfully accomplished. Should the Company fail to re-schedule or
assign unneeded capacity, the Company's business and operating results could be
adversely affected.
NOTE 14. EMPLOYEE BENEFIT PLAN
In August 1992, the Company established a defined contribution
retirement plan with 401(k) plan features. The plan covers all United States
employees 18 years and older. Employees may make contributions by a percentage
reduction in their salaries, up to $9,500 for 1997. The Company elected to make
no contributions during the years ended September 30, 1997, 1996 and 1995.
Administrative expenses relating to the plan are insignificant.
NOTE 15. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years Ended September 30,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
(In thousands)
Cash paid for interest $ 1,431 $ 478 $ 214
Cash paid (refunded) for income taxes (5,004) 8,603 7
Notes payable issued for other assets -- (31,200) 31,200
Tax benefit from sale of common stock -- 103 3,448
</TABLE>
39
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. RELATED PARTY TRANSACTIONS
For the year ended September 30, 1995, the Company sold approximately
$605,000 of SRAM products to Wearnes Automation and Wearnes affiliates, whose
vice chairman is a member of the Company's Board of Directors. At September 30,
1995, the Company had a trade receivables balance from Wearnes and its
affiliates of approximately $49,000.
For the years ended September 30, 1996 and 1995, the Company purchased
approximately $1,342,000 and $2,985,000, respectively, of services from Taicera
Electronics Company, an assembly plant that is an affiliate of the Fu Sheng
Industrial Group, whose chairman was a member of the Company's Board of
Directors until April 1997. At September 30, 1996 and 1995, the Company owed
Taicera Electronics Company approximately $0 and $558,000, respectively.
NOTE 17. SUBSEQUENT EVENT
On December 3, 1997, the Company completed its acquisition of Nexcom
Technology, Inc. ("Nexcom") in exchange for the issuance of 772,693 shares of
Common Stock and $500,000 in cash (total consideration of approximately $7.2
million). The Nexcom shareholders are also eligible to receive certain
contingent payments based on future license revenue. The transaction will be
accounted for as a purchase and is expected to result in an in-process
technology charge of approximately $6 to $7 million in the Company's December
31, 1997 quarter. Nexcom was formed in 1990 and has been engaged primarily in
the research and development of non-volatile flash memory technology.
NOTE 18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the quarterly results of operations for
the years ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Dec. 31 Mar. 31 June 30 Sept. 30
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
1997
Net sales $ 23,610 $ 25,794 $ 26,509 $ 32,348
Gross profit 6,639 7,569 8,244 9,704
Operating loss (2,597) (2,269) (4,153) (1,757)
Net loss (1,662) (1,488) (3,919) (617)
Net loss per share $ (0.09) $ (0.08) $ (0.22) $ (0.03)
1996
Net sales $ 45,051 $ 36,353 $ 27,579 $ 23,056
Gross profit (loss) 21,128 14,963 (5,756) 1,520
Operating income (loss) 12,149 5,662 (14,994) (7,500)
Net income (loss) 10,294 5,064 (10,550) (3,793)
Net income (loss) per share $ 0.56 $ 0.28 $ (0.60) $ (0.22)
</TABLE>
40
<PAGE> 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders to be held on January 30, 1998, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers - See the section entitled "Executive Officers"
in Part I, Item 1 hereof.
(b) Directors - The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the
Proxy Statement
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
sections entitled "Principal Share Ownership" and "Security Ownership of
Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report.
41
<PAGE> 44
1. FINANCIAL STATEMENTS
The following consolidated financial statements of Integrated Silicon
Solution, Inc. are contained in Part II, Item 8 of this Report on Form 10-K:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule of Integrated Silicon Solution,
Inc. is contained in Part IV, Item 14(d) of this report on Form 10-K:
Schedule II-Valuation and Qualifying Accounts
All other schedules for which provision is made in the Applicable
Accounting Regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
3. EXHIBITS
Exhibit
Number Description of Document
------ -----------------------
2.1 Agreement and Plan of Reorganization dated November 5, 1997 by
and among the Company, Nexcom Technology, Inc. and certain
shareholders of Nexcom Technology, Inc.
++ 3.1 Restated Certificate of Incorporation of Registrant.
+ 3.3 Bylaws of Registrant.
+ 4.2 Form of Common Stock Certificate.
+ 10.1 Form of Indemnification Agreement.
+ 10.2*** Form of 1993 Employee Stock Purchase Plan, as amended, and
form of Subscription Agreement.
+ 10.3*** Form of 1989 Stock Plan, as amended, and form of Stock Option
Agreements.
+ 10.4 Information and Registration Rights Agreement dated as of
March 17, 1993 among the Registrant and certain holders of the
Registrant's Common Stock, as amended.
+ 10.5* Letter Agreement dated September 14, 1994 between Taiwan
Semiconductor Manufacturing Company, Ltd. ("TSMC") and the
Registrant.
+ 10.6 Industrial Lease dated November 7, 1989 between Aetna Life
Insurance Company and the Registrant related to premises at
680 Almanor Avenue, as amended by First Addendum dated
November 7, 1989 and First Amendment dated February 9,1993.
+ 10.7* Joint Development Contract between TSMC and the Registrant
dated February 5, 1993.
+ 10.8* Joint Development Contract between TSMC and the Registrant
dated October , 1992.
+ 10.9* Agreement for Contract Manufacturing dated July 12, 1993
between Mitsui Plastics Inc., Rohm Co., Ltd. and the
Registrant.
+ 10.10 Lease for ISSI-Taiwan facilities at No. 10 Prosperity dated
November 8, 1993.
+ 10.11 Facility Lease Agreement for second ISSI-Taiwan facility
located at No. 9 Prosperity I Road, Hsinchu, Taiwan.
+ 10.12 Wafer Production Agreement between TSMC and the Registrant
dated November 8, 1993.
+ 10.13* Joint Development Contract of 0.45(u) process between TSMC
and the Registrant dated November 15, 1994.
42
<PAGE> 45
+ 10.14* Joint Development Contract between Chartered Semiconductor
Manufacturing Pte.Ltd. and the Registrant dated July 21, 1994.
+ 10.15 Office Lease for facilities located at 675 Almanor Avenue,
Sunnyvale, California.
+ 10.16 Subscription and Shareholders Agreement Relating to Valery
Limited dated March 30, 1994.
+ 10.17 Long term line of credit between Bank of Communication and
Registrant.
+ 10.18 Short term line of credit between International Commercial
Bank of China and Registrant.
+ 10.19*** 1995 Director Stock Option Plan.
++ 10.20* Option I Agreement between the Registrant and TSMC dated April
21, 1995.
++ 10.21* Option II Agreement between the Registrant and TSMC dated
April 21, 1995.
+++ 10.22* UMC/ISSI-Taiwan Foundry Venture Agreement dated August 31,
1995.
+++ 10.23* UMC/ISSI-Taiwan Fabven Foundry Capacity Agreement dated August
31, 1995.
++++ 10.24** Amended and Restated Limited Liability Company Agreement of
WaferTech, LLC, dated as of August 9, 1996.
++++ 10.25** Purchase Agreement by and between Taiwan Semiconductor
Manufacturing Corporation, as Seller, and Analog Devices,
Inc., Altera Corporation and Integrated Silicon Solution,
Inc., as Buyers.
+++++ 10.26* Amendment to Option I and Option II Agreement between
the Company and TSMC dated September 23, 1996.
+++++ 10.27 Sublease Agreement for facility located at 2231 Lawson Lane,
Santa Clara, California.
11.1 Statements of Computation of Earnings Per Share
+ 21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 43).
27.1 Financial Data Schedule
- ----------
* Confidential treatment granted for certain portions of this exhibit.
** Confidential treatment requested for certain portions of this exhibit.
The portions of this exhibit for which confidential treatment is being
requested have been blacked out in the copies filed with the related
report and the confidential portions so omitted have been filed
separately with the Securities and Exchange Commission.
*** Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Report on Form 10-K pursuant to form 14(c)
of this report.
+ Incorporated by reference to the Company's Registration Statement on
Form S-1, as amended (file no. 33-72960).
++ Incorporated by reference to the Company's Registration Statement on
Form S-1, as amended (file no. 33-91520)
+++ Incorporated by reference to the Company's Annual Report on Form 10-K
for the period ended September 30, 1995.
++++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1996.
+++++ Incorporated by reference to the Company's Annual Report on Form 10-K
for the period ended ended September 30, 1996
(b) Reports on Form 8-K
The registrant did not file any Reports on Form 8-K during the
quarter ended September 30, 1996.
(c) Exhibits
See (a) above
(d) Financial statement schedules
See (a) above
43
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Santa Clara, State of California, on the 12th day of December, 1997.
INTEGRATED SILICON SOLUTION, INC.
By /s/ Gary L. Fischer
Gary L. Fischer
Executive Vice President,
Office of the President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Jimmy S.M. Lee and Gary L.
Fischer, and each of them acting individually, as his or her attorney-in-fact,
each with full power of substitution, for him or her in any and all capacities,
to sign any and all amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and all amendments
to said Report.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below on December 12, 1997 by
the following persons on behalf of the Registrant and in the capacities
indicated.
<TABLE>
<CAPTION>
Signature Title
- ------------------------------ -------------------------------------------------
<S> <C>
/s/ Jimmy S.M. Lee Chairman of the Board, Chief Executive Officer,
- ------------------------------ and President (Principal Executive Officer)
(Jimmy S.M. Lee)
/s/ Kong-Yeu Han Executive Vice President, General Manager,
- ------------------------------ Taiwan and Director
(Kong-Yeu Han)
/s/ Gary L. Fischer Executive Vice President, Office of the President
- ------------------------------ and Chief Financial Officer (Principal Financial
(Gary L. Fischer) and Accounting Officer)
/s/ Diosdado P. Banatao Director
- ------------------------------
(Diosdado P. Banatao)
/s/ Pauline L. Alker Director
- ------------------------------
(Pauline L. Alker)
/s/ Lip-Bu Tan Director
- ------------------------------
(Lip-Bu Tan)
/s/ Chun Win Wong Director
- ------------------------------
(Chun Win Wong)
Director
- ------------------------------
(Hide Tanigami)
</TABLE>
44
<PAGE> 47
ITEM 14(D). FINANCIAL STATEMENT SCHEDULE
INTEGRATED SILICON SOLUTION, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Addition
Balance at Charged to Balance
Beginning Costs and at End
of Period Expenses Deductions of Period
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended September 30, 1995:
Allowance for doubtful accounts .. 504 1,185 (392)(1) 1,297
Sales returns reserve ............ 545 2,851 (695) 2,701
Year ended September 30, 1996:
Allowance for doubtful accounts .. 1,297 714 (9)(1) 2,002
Sales returns reserve ............ 2,701 665 (1,133) 2,233
Year ended September 30, 1997:
Allowance for doubtful accounts .. 2,002 675 (409)(1) 2,268
Sales returns reserve ............ 2,233 1,713 (1,510) 2,436
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
45
<PAGE> 48
EXHIBIT
INDEX
Exhibit
Number Description of Document
------ -----------------------
2.1 Agreement and Plan of Reorganization dated November 5, 1997 by
and among the Company, Nexcom Technology, Inc. and certain
shareholders of Nexcom Technology, Inc.
++ 3.1 Restated Certificate of Incorporation of Registrant.
+ 3.3 Bylaws of Registrant.
+ 4.2 Form of Common Stock Certificate.
+ 10.1 Form of Indemnification Agreement.
+ 10.2*** Form of 1993 Employee Stock Purchase Plan, as amended, and
form of Subscription Agreement.
+ 10.3*** Form of 1989 Stock Plan, as amended, and form of Stock Option
Agreements.
+ 10.4 Information and Registration Rights Agreement dated as of
March 17, 1993 among the Registrant and certain holders of the
Registrant's Common Stock, as amended.
+ 10.5* Letter Agreement dated September 14, 1994 between Taiwan
Semiconductor Manufacturing Company, Ltd. ("TSMC") and the
Registrant.
+ 10.6 Industrial Lease dated November 7, 1989 between Aetna Life
Insurance Company and the Registrant related to premises at
680 Almanor Avenue, as amended by First Addendum dated
November 7, 1989 and First Amendment dated February 9,1993.
+ 10.7* Joint Development Contract between TSMC and the Registrant
dated February 5, 1993.
+ 10.8* Joint Development Contract between TSMC and the Registrant
dated October , 1992.
+ 10.9* Agreement for Contract Manufacturing dated July 12, 1993
between Mitsui Plastics Inc., Rohm Co., Ltd. and the
Registrant.
+ 10.10 Lease for ISSI-Taiwan facilities at No. 10 Prosperity dated
November 8, 1993.
+ 10.11 Facility Lease Agreement for second ISSI-Taiwan facility
located at No. 9 Prosperity I Road, Hsinchu, Taiwan.
+ 10.12 Wafer Production Agreement between TSMC and the Registrant
dated November 8, 1993.
+ 10.13* Joint Development Contract of 0.45(u) process between TSMC
and the Registrant dated November 15, 1994.
+ 10.14* Joint Development Contract between Chartered Semiconductor
Manufacturing Pte.Ltd. and the Registrant dated July 21, 1994.
+ 10.15 Office Lease for facilities located at 675 Almanor Avenue,
Sunnyvale, California.
+ 10.16 Subscription and Shareholders Agreement Relating to Valery
Limited dated March 30, 1994.
+ 10.17 Long term line of credit between Bank of Communication and
Registrant.
+ 10.18 Short term line of credit between International Commercial
Bank of China and Registrant.
+ 10.19*** 1995 Director Stock Option Plan.
++ 10.20* Option I Agreement between the Registrant and TSMC dated April
21, 1995.
++ 10.21* Option II Agreement between the Registrant and TSMC dated
April 21, 1995.
+++ 10.22* UMC/ISSI-Taiwan Foundry Venture Agreement dated August 31,
1995.
+++ 10.23* UMC/ISSI-Taiwan Fabven Foundry Capacity Agreement dated August
31, 1995.
++++ 10.24** Amended and Restated Limited Liability Company Agreement of
WaferTech, LLC, dated as of August 9, 1996.
++++ 10.25** Purchase Agreement by and between Taiwan Semiconductor
Manufacturing Corporation, as Seller, and Analog Devices,
Inc., Altera Corporation and Integrated Silicon Solution,
Inc., as Buyers.
+++++ 10.26* Amendment to Option I and Option II Agreement between
the Company and TSMC dated September 23, 1996.
+++++ 10.27 Sublease Agreement for facility located at 2231 Lawson Lane,
Santa Clara, California.
11.1 Statements of Computation of Earnings Per Share
+ 21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 43).
27.1 Financial Data Schedule
- ----------
* Confidential treatment granted for certain portions of this exhibit.
** Confidential treatment requested for certain portions of this exhibit.
The portions of this exhibit for which confidential treatment is being
requested have been blacked out in the copies filed with the related
report and the confidential portions so omitted have been filed
separately with the Securities and Exchange Commission.
*** Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Report on Form 10-K pursuant to form 14(c)
of this report.
+ Incorporated by reference to the Company's Registration Statement on
Form S-1, as amended (file no. 33-72960).
++ Incorporated by reference to the Company's Registration Statement on
Form S-1, as amended (file no. 33-91520)
+++ Incorporated by reference to the Company's Annual Report on Form 10-K
for the period ended September 30, 1995.
++++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1996.
+++++ Incorporated by reference to the Company's Annual Report on Form 10-K
for the period ended ended September 30, 1996
<PAGE> 1
Exhibit 2.1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
INTEGRATED SILICON SOLUTION, INC.,
NEXCOM TECHNOLOGY, INC.
AND CERTAIN SHAREHOLDERS OF
NEXCOM TECHNOLOGY, INC.
NOVEMBER 5, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Certain Definitions...............................................................................1
2. The Merger........................................................................................3
2.1 Merger; Effective Time of the Merger....................................................3
2.2 Closing.................................................................................3
2.3 Effect of the Merger....................................................................3
2.4 Tax-Free Reorganization.................................................................3
3. Effect of Merger on the Capital Stock of the Constituent Corporations; Exchange of
Certificates; Additional Payments.................................................................4
3.1 Exchange of Stock; Rights to Additional Payments........................................4
3.2 Dissenters' Rights......................................................................4
3.3 Fractional Shares.......................................................................4
3.4 Exchange of Certificates................................................................5
3.5 Taking of Necessary Action; Further Action..............................................6
3.6 Additional Payments.....................................................................6
3.7 Escrow Agreement........................................................................8
4. Securities Act Compliance.........................................................................8
4.1 Securities Act Exemption................................................................8
4.2 Stock Restrictions......................................................................8
4.3 Continuity of Interest Certificates.....................................................8
5. Representations and Warranties of Nexcom..........................................................9
5.1 Organization, Qualification, and Corporate Power........................................9
5.2 Authorization...........................................................................9
5.3 Capitalization..........................................................................9
5.4 Noncontravention.......................................................................10
5.5 Fees...................................................................................10
5.6 Financial Statements...................................................................10
5.7 Subsidiaries...........................................................................11
5.8 Title to Assets........................................................................11
5.9 Events Subsequent to Most Recent Fiscal Period End.....................................11
5.10 Undisclosed Liabilities................................................................13
5.11 Legal Compliance.......................................................................13
5.12 Tax Matters............................................................................14
5.13 Properties.............................................................................15
5.14 Intellectual Property..................................................................15
5.15 Tangible Assets........................................................................17
</TABLE>
-i-
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
5.16 Inventory..............................................................................17
5.17 Contracts..............................................................................17
5.18 Notes and Accounts Receivable..........................................................18
5.19 Power of Attorney......................................................................19
5.20 Insurance..............................................................................19
5.21 Litigation.............................................................................19
5.22 Product Warranty.......................................................................19
5.23 Product Liability......................................................................19
5.24 Employees..............................................................................19
5.25 Employee Benefits......................................................................20
5.26 Guaranties.............................................................................21
5.27 Environment, Health, and Safety........................................................22
5.28 Certain Business Relationships With Nexcom.............................................23
5.29 No Adverse Developments................................................................23
5.30 Full Disclosure........................................................................23
6. Representations and Warranties of ISSI...........................................................24
6.1 Organization, Qualification, and Corporate Power.......................................24
6.2 Authorization..........................................................................24
6.3 Capitalization.........................................................................24
6.4 Noncontravention.......................................................................25
6.5 SEC Filings............................................................................25
6.6 Brokers' Fees..........................................................................25
7. Pre-Closing Covenants............................................................................25
7.1 General................................................................................26
7.2 Notices and Consents...................................................................26
7.3 Operation of Business..................................................................26
7.4 Preservation of Business...............................................................26
7.5 Access to Information..................................................................26
7.6 Notice of Developments.................................................................26
7.7 Preparation of the Information Statement...............................................27
7.8 Solicitation of Written Consents.......................................................27
7.9 Exclusivity............................................................................27
8. Post-Closing Covenants...........................................................................27
8.1 General................................................................................27
8.2 Litigation Support.....................................................................27
8.3 Transition.............................................................................28
</TABLE>
-ii-
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
8.4 Confidentiality........................................................................28
8.5 Nexcom Employees.......................................................................28
8.6 Restrictions on Sales of ISSI Common Stock.............................................28
9. Conditions to Obligations to Close...............................................................29
9.1 Conditions to ISSI's Obligation to Close...............................................29
9.2 Conditions to Nexcom's Obligation......................................................31
10. Survival of Representations, Warranties and Covenants; Escrow....................................32
10.1 Survival of Representations and Warranties.............................................32
10.2 Escrow Arrangements....................................................................32
10.3 Exclusivity of Remedy..................................................................38
11. Termination......................................................................................38
11.1 Termination of the Agreement...........................................................38
11.2 Effect of Termination..................................................................38
12. Miscellaneous....................................................................................38
12.1 Press Releases and Public Announcements................................................38
12.2 No Third-Party Beneficiaries...........................................................39
12.3 Entire Agreement.......................................................................39
12.4 Succession and Assignment..............................................................39
12.5 Counterparts...........................................................................39
12.6 Headings...............................................................................39
12.7 Notices................................................................................39
12.8 Governing Law..........................................................................40
12.9 Forum Selection; Consent to Jurisdiction...............................................40
12.10 Amendments and Waivers.................................................................40
12.11 Severability...........................................................................41
12.12 Expenses...............................................................................41
12.13 Construction...........................................................................41
12.14 Incorporation of Exhibits and Schedules................................................41
12.15 Attorneys' Fees........................................................................41
</TABLE>
-iii-
<PAGE> 5
TABLE OF CONTENTS
(CONTINUED)
EXHIBITS
Exhibit A Agreement and Plan of Merger
Exhibit B Escrow Agreement
Exhibit C Nexcom Disclosure Schedule
Exhibit D ISSI Disclosure Schedule
Exhibit E Non Competition Agreement
Exhibit F Opinion of Counsel for Nexcom
Exhibit G List of Nexcom Employees
Exhibit H Opinion of Counsel for ISSI
Exhibit I Employee Bonus Plan
Exhibit J Registration Rights Agreement
SCHEDULES
3.6 List of Operating Expenses
-iv-
<PAGE> 6
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "AGREEMENT") is entered
into as of November 5, 1997, by and among Integrated Silicon Solution, Inc., a
Delaware corporation ("ISSI"), Nexcom Technology, Inc., a California corporation
("NEXCOM") and Nagesh Challa and Michael Gannage (collectively, the "MAJORITY
SHAREHOLDERS"). ISSI, Nexcom and the Majority Shareholders are sometimes
referred to herein individually as a "PARTY" and collectively as the "PARTIES."
RECITALS
A. Pursuant to the Agreement and Plan of Merger in the form attached
hereto as Exhibit A (the "MERGER AGREEMENT") providing for the merger of Nexcom
with and into ISSI pursuant to the California General Corporation Law and the
Delaware General Corporation Law, the shares of Common Stock of Nexcom, no par
value, issued and outstanding immediately prior to the effective time of the
Merger will be converted into (i) an aggregate of 772,710 shares of Common Stock
of ISSI, (ii) cash in the aggregate amount of $500,000 and (iii) the contingent
right to receive cash pursuant to Section 3.6 hereof.
B. The Parties desire to enter into this Agreement for the purpose of
setting forth certain representations, warranties and covenants made by each to
the other as an inducement to the execution and delivery of this Agreement, and
to serve as conditions precedent to the consummation of the merger of Nexcom
with and into ISSI.
C. The respective Boards of Directors of ISSI and Nexcom have approved
and adopted this Agreement, and the Agreement is intended to be a plan of
reorganization under the provisions of Section 368(a) of the Internal Revenue
Code of 1986, as amended.
NOW, THEREFORE, in consideration of these premises and of the mutual
agreements, representations, warranties and covenants herein contained, the
parties hereto do hereby agree as follows:
AGREEMENT
1. Certain Definitions. As used in this Agreement, the following terms
have the following meanings (terms defined in the singular to have a correlative
meaning when used in the plural and vice versa). Certain other terms are defined
in the text of this Agreement.
"AFFILIATE" of a Person means any other Person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with such Person.
"BUSINESS CONDITION" means the current business, financial
condition, results of operations and assets of such corporate entity.
<PAGE> 7
"EMPLOYEE BENEFIT PLAN" means any (a) nonqualified deferred
compensation, retirement plan, severance plan or similar plan or arrangement;
(b) Employee Pension Benefit Plan; (c) Employee Welfare Benefit Plan; and (d)
any other nonqualified plan providing welfare benefits, including but not
limited to medical, dental, life insurance and disability benefits.
"EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in ERISA
Sec. 3(2).
"EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in ERISA
Sec. 3(1).
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"GROSS NEGLIGENCE" consists of an intentional act, or the failure to
perform a duty, with reckless disregard for the consequences of such act or
failure.
"INTELLECTUAL PROPERTY" means (a) all inventions (whether patentable
or unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures, together
with all reissuances, continuations, continuations-in- part, revisions,
extensions, and reexaminations thereof, (b) all trademarks, service marks, trade
dress, logos, trade names, and corporate names, together with all translations,
adaptations, derivations, and combinations thereof and including all goodwill
associated therewith, (c) all copyrightable works, all copyrights, and all
applications, registrations, and renewals in connection therewith, (d) all trade
secrets and confidential business information (including ideas, research and
development, know-how, formulas, compositions, drawings, specifications,
customer and supplier lists, pricing and cost information, financial
information, and business and marketing plans and proposals), and (e) all
computer software (including data and related documentation).
"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on
the Business Condition of the corporate entity and its subsidiaries, taken as a
whole, other than as a result of (i) general economic or industry conditions, or
(ii) performance by such corporate entity of its obligations under this
Agreement.
"MULTIEMPLOYER PLAN" has the meaning set forth in ERISA Sec. 3(37)
and Code Sec. 414(f).
"NEXCOM SHAREHOLDERS" shall mean the shareholders of record of
Nexcom immediately prior to the Effective Time of the Merger (other than the
holders of Dissenting Shares).
"ORDINARY COURSE OF BUSINESS" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"PERSON" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
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"SECURITY INTEREST" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's, materialmen's,
and similar liens, (b) liens for taxes not yet due and payable, (c) purchase
money liens and liens securing rental payments under capital lease arrangements,
and (d) other liens arising in the Ordinary Course of Business and not incurred
in connection with the borrowing of money.
2. The Merger.
2.1 Merger; Effective Time of the Merger. Subject to the terms and
conditions of this Agreement, Nexcom will be merged with and into ISSI (the
"MERGER") in accordance with the California General Corporation Law (the "CGCL")
and the Delaware General Corporation Law ("DCGL"). In accordance with the
provisions of this Agreement, the Merger Agreement shall be filed with the
California Secretary of State in accordance with the CGCL and with the Delaware
Secretary of State in accordance with the DCGL on the Closing Date (as defined
in Section 2.2) and each issued and outstanding share of Common Stock, no par
value, of Nexcom ("NEXCOM COMMON STOCK"), shall be converted into shares of
Common Stock, $.0001 par value, of ISSI ("ISSI COMMON STOCK") in the manner
contemplated by Section 3. The Merger shall become effective at the time of the
filing of the Merger Agreement with the California Secretary of State and the
Delaware Secretary of State (the date of such filing being hereinafter referred
to as the "EFFECTIVE DATE OF THE MERGER" and the time of such filing being
hereinafter referred to as the "EFFECTIVE TIME OF THE MERGER").
2.2 Closing. The closing of the Merger (the "CLOSING") will take
place as soon as practicable after satisfaction or waiver of the latest to occur
of the conditions set forth in Section 9 (the "CLOSING DATE"), at the offices of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road,
Palo Alto, California 94304-1050.
2.3 Effect of the Merger. At the Effective Time of the Merger, (i)
the separate existence of Nexcom shall cease and Nexcom shall be merged with and
into ISSI (ISSI and Nexcom are sometimes referred to herein as the "CONSTITUENT
CORPORATIONS" and ISSI after the Merger is sometimes referred to herein as the
"SURVIVING CORPORATION"), (ii) the Certificate of Incorporation of ISSI shall be
the Certificate of Incorporation of the Surviving Corporation, (iii) the Bylaws
of ISSI shall be the Bylaws of the Surviving Corporation, (iv) the directors of
ISSI shall be the directors of the Surviving Corporation and (v) the Merger
shall, from and after the Effective Time of the Merger, have all the effects
provided by applicable law.
2.4 Tax-Free Reorganization. The Merger is intended to qualify as
a tax free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "CODE").
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3. Effect of Merger on the Capital Stock of the Constituent
Corporations; Exchange of Certificates; Additional Payments.
3.1 Exchange of Stock; Rights to Additional Payments. As of the
Effective Time of the Merger, each share of Nexcom Common Stock that is issued
and outstanding immediately prior to the Effective Time of the Merger (other
than shares, if any, held by persons exercising dissenters' rights in accordance
with Chapter 13 of the California General Corporation Law ("DISSENTING SHARES")
as provided for in Section 3.2 below), shall, by virtue of the Merger and
without any action on the part of Nexcom shareholders, be converted into (i)
0.07752 of a share of ISSI Common Stock (the "EXCHANGE RATIO"), plus (ii) cash
in the amount of $0.05 (less any reduction effected in accordance with Section
12.12 hereof) plus (iii) the right to receive Additional Payments as provided in
Section 3.6 hereof (the consideration to be paid pursuant to (i), (ii) and (iii)
above is hereinafter referred to as the "MERGER CONSIDERATION").
3.2 Dissenters' Rights. If holders of Nexcom Common Stock are
entitled to dissenters' rights at the Effective Time of the Merger under Section
1300 et seq. of the California General Corporation Law, the shares as to which
dissenters' rights are available ("DISSENTING SHARES") shall not be converted
into the Merger Consideration on or after the Effective Time of the Merger, but
shall instead be converted into the right to receive from the Surviving
Corporation such consideration as may be determined to be due with respect to
such Dissenting Shares pursuant to the California General Corporation Law. Each
holder of Dissenting Shares (a "DISSENTING SHAREHOLDER") who, pursuant to the
provisions of Section 1300 et seq. of the California General Corporation Law,
becomes entitled to payment of the value of shares of Nexcom Common Stock held
by such Dissenting Shareholder shall receive payment therefor (but only after
the value therefor shall have been agreed upon or finally determined pursuant to
such provisions). In the event of the legal obligation, after the Effective Time
of the Merger, to deliver the Merger Consideration to any Dissenting Shareholder
who shall have failed to make an effective demand for appraisal or shall have
lost his status as a Dissenting Shareholder, the Surviving Corporation shall
issue and deliver, upon surrender by such Dissenting Shareholder of his
certificate or certificates representing shares of Nexcom Common Stock, the
Merger Consideration to which such Dissenting Shareholder is then entitled under
this Section 3.2 and Section 1300 et seq. of the California General Corporation
Law. To the extent that ISSI or Nexcom makes any payment or payments in respect
of any Dissenting Shares, ISSI shall be entitled to recover under the terms of
Section 10 hereof (by surrender of shares of ISSI Common Stock) (i) the
aggregate amount by which such payment or payments exceed the aggregate Merger
Consideration that otherwise would have been payable in respect of such shares
plus (ii) the aggregate fees and expenses (including reasonable attorneys' fees
and expenses) incurred by ISSI or the Surviving Corporation in connection with
calculating, settling or litigating the amount of, or making, any such payment.
3.3 Fractional Shares. No fractional shares of ISSI Common Stock
shall be issued in the Merger. In lieu thereof, each holder of shares of Nexcom
Common Stock who would otherwise be entitled to receive a fraction of a share of
ISSI Common Stock shall receive from ISSI an amount of cash (rounded to the
nearest whole cent) equal to the product of the fraction of a share of ISSI
Common Stock to which such holder would otherwise be entitled, multiplied by
$10.375.
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For the purpose of determining fractional shares, all shares of ISSI Common
Stock to be issued to any Nexcom shareholder shall be aggregated.
3.4 Exchange of Certificates.
(a) Exchange Agent. Prior to the Closing Date, ISSI shall
appoint itself or ChaseMellon Shareholder Services, L.L.C. to act as the
exchange agent (the "EXCHANGE AGENT") in the Merger.
(b) ISSI to Provide ISSI Common Stock. Promptly after the
Effective Date of the Merger, ISSI shall make available for exchange in
accordance with this Section 3, through such reasonable procedures as ISSI may
adopt, the shares of ISSI Common Stock issuable pursuant to Section 3.1 in
exchange for outstanding shares of Nexcom Common Stock.
(c) Exchange Procedures. Within ten (10) days after the
Effective Date of the Merger, the Exchange Agent shall mail to each holder of
record of a certificate or certificates which immediately prior to the Effective
Date of the Merger represented outstanding shares of Nexcom Common Stock (the
"CERTIFICATES") whose shares are being converted into the Merger Consideration
pursuant to Section 3.1 hereof (less any shares held in escrow pursuant to
Section 3.7 hereof), (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent and which
shall be in such form and have such other provisions as ISSI may reasonably
specify, including appropriate investment representations to be made by each
such shareholder) (the "LETTER OF TRANSMITTAL") and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for the Merger
Consideration (less any shares held in escrow pursuant to Section 3.7 hereof).
Upon surrender of a Certificate for cancellation to the Exchange Agent or to
such other agent or agents as may be appointed by ISSI, together with such
letter of transmittal, duly executed, the holder of such Certificate shall be
entitled to receive in exchange therefor the number of shares of ISSI Common
Stock (less any shares held in escrow pursuant to Section 3.7 hereof) and other
Merger Consideration to which the holder of Nexcom Common Stock is entitled
pursuant to Section 3.1 hereof. The Certificate so surrendered shall forthwith
be canceled. No interest will accrue or be paid to the holder of any outstanding
Nexcom Common Stock. From and after the Effective Date of the Merger, until
surrendered as contemplated by this Section 3.4, each Certificate shall be
deemed for all corporate purposes to evidence the number of shares of ISSI
Common Stock and other Merger Consideration into which the shares of Nexcom
Common Stock represented by such Certificate have been converted.
Notwithstanding the foregoing procedures, ISSI shall use its reasonable efforts
to provide the form of Letter of Transmittal to Nexcom as soon as practical
after the date hereof, and Nexcom shall provide such Letter of Transmittal to
each Nexcom Shareholder. The parties agree that in the event ISSI makes such
Letter of Transmittal available to Nexcom, any Exchange Agent shall not be
obligated to mail such Letter of Transmittal to the Nexcom Shareholders. ISSI
agrees that to the extent a Nexcom Shareholder provides a fully executed and
completed Letter of Transmittal together with the related Certificates held by
such shareholder to ISSI at least two (2) business days prior to the Closing,
then ISSI will provide to such Nexcom Shareholder at the Closing a certificate
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representing the shares of ISSI Common Stock to which such shareholder is
entitled pursuant to the terms hereof.
(d) No Further Ownership Rights in Capital Stock of Nexcom.
The Merger Consideration delivered upon the surrender for exchange of shares of
Nexcom Common Stock in accordance with the terms hereof shall be deemed to have
been delivered in full satisfaction of all rights pertaining to such Nexcom
Common Stock. There shall be no further registration of transfers on the stock
transfer books of the Surviving Corporation of Nexcom Common Stock which were
outstanding immediately prior to the Effective Date of the Merger. If, after the
Effective Date of the Merger, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Section 3.4, provided that the presenting holder is listed on Nexcom's
shareholder list as a holder of Nexcom Common Stock.
3.5 Taking of Necessary Action; Further Action. ISSI, Nexcom and
the Majority Shareholders shall take all such actions as may be necessary or
appropriate in order to effect the Merger as promptly as possible. If, at any
time after the Effective Date of the Merger, any further action is necessary or
desirable to carry out the purposes of this Agreement and to vest the Surviving
Corporation with full right, title and possession to all assets, property,
rights, privileges, powers and franchises of Nexcom, the officers and directors
of such corporation are fully authorized in the name of the corporation or
otherwise to take, and shall take, all such action.
3.6 Additional Payments.
(a) Computation of Additional Payments. Subject to Section
3.6(b) below, ISSI shall pay to the Nexcom Shareholders additional cash payments
(each, an "ADDITIONAL PAYMENT") calculated in accordance with this Section 3.6.
The Additional Payments shall equal fifty percent (50%) of the Near Term Net
Licensing Revenues (as defined in this Section 3.6) accrued prior to October 1,
1998 (and shall not include any amounts otherwise payable pursuant to the Bonus
Program contemplated by Section 9.2(h) hereof). For purposes of this Section
3.6, "NEAR TERM NET LICENSING REVENUE" means (i) gross licensing and design
service revenue, including royalties and fees for design services, related to
agreements with OKI Electric Industry Co. Ltd., Asahi Kasei Microsystems Co.
Ltd., Hyundai Electronics Industry Co./Hyundai Electronics America, Nippon Steel
Corporation/NPNX Semiconductor, Advanced Micro Devices and Motorola, so long as
such agreements are signed by ISSI within 180 days of Closing and the agreements
between Nexcom and OKI Electric Industry Co. Ltd. and Nexcom and Novatec
existing on the date of Closing and listed on the Nexcom Disclosure Schedule,
(ii) less the operating expenses related to such licensing revenue (iii) less an
amount equal to the severance payments, COBRA payments and all other payments to
Anthony Nassar and Marty Zimmerman in connection with the termination of their
employment, including amounts payable pursuant to the Employment Agreement
between Nexcom and Anthony Nassar dated July 21, 1997 and the Employment
Agreement between Nexcom and Marty Zimmerman dated July 21, 1997 (the
"TERMINATION PAYMENTS"). Operating expenses means the operating expenses
identified and agreed to by ISSI and Nagesh Challa which will be attached hereto
as Schedule 3.6 or if no such agreement is reached, as determined by ISSI's
independent accounting firm based on customary industry practice. The
calculation of the licensing revenue and the calculation and
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determination of the operating expenses shall be made in accordance with
Generally Accepted Accounting Principles ("GAAP") as used by ISSI consistently
for the two fiscal years prior to Closing except that a standard cost accounting
system shall be used to account for manufacturing costs instead of the actual
cost system ISSI has previously used but standard wafer cost will be based on
the actual foundry price, negotiated in good faith, for any wafer costs
associated with Near Term Net Licensing Revenues.
The Additional Payments shall be determined by ISSI, and shall be set
forth in a statement (the "Additional Payment Statement"). A copy of each such
Additional Payments Statement shall be delivered to the Nexcom Shareholders no
later than 45 days after September 30, 1998. ISSI shall, upon request of fifty
percent (50%) of the Nexcom Shareholders (measured by voting power as of the
Closing), provide the cost accounting and sales information used to calculate
the Additional Payments. Upon request of fifty percent (50%) of the Nexcom
Shareholders (measured by voting power as of the Closing) ISSI's independent
accounting firm shall audit the Additional Payments calculation. The costs of
such review shall be paid by ISSI if the Additional Payments calculation
determined by the independent accounting firm is at least $10,000 greater than
the Additional Payments calculated by ISSI, otherwise, the cost of the
independent accounting firm's audit of the Additional Payments calculations
shall be deducted from the Additional Payments amount paid to the Nexcom
Shareholders.
(b) Deduction from Additional Payments. In the event that
the aggregate amount of all Additional Payments is less than the amount of the
Termination Payments then ISSI shall be entitled to make a claim against the
Escrow Fund for the amount equal to the difference between the amount of the
Termination Payments and such aggregate Additional Payments. Any such claim
against the Escrow Fund may be made at the sole discretion of ISSI and shall not
be subject to the procedures set forth in Section 10.2(d), Section 10.2(e) or
the $100,000 limitation set forth in Section 10.2(a) of this Agreement.
(c) Maximum Amount of Additional Payments. Notwithstanding
anything to the contrary in this Section 3.6, in no event shall the aggregate
amount of Additional Payments exceed $5,000,000.
(d) Nature of Additional Payments. All such amounts
constituting the Additional Payments shall be deposited with the Escrow Account
and shall be paid to the Nexcom Shareholders as provided in the Escrow
Agreement.
(e) Mechanics of Payment. Each Additional Payment shall be
made to the Nexcom Shareholders as follows: each such holder of Nexcom Common
Stock shall receive in respect of such Nexcom Common Stock an amount in cash
equal to the aggregate Additional Payment multiplied by a fraction, the
numerator of which is the number of shares of Nexcom Common Stock held by such
holder immediately prior to the Effective Time of the Merger, and the
denominator of which is the total number of shares of Nexcom Common Stock
outstanding immediately prior to the Effective Time of the Merger.
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(f) Conduct of ISSI's Business. Nothing in this Agreement
shall affect ISSI's ability to operate its business and the business of the
Surviving Corporation in a manner that ISSI deems advisable. Without limiting
the foregoing, nothing in this Agreement shall obligate ISSI to operate its
business or the businesses of the Surviving Corporation in such a manner as to
generate or maximize the amount of Additional Payments. Each Nexcom shareholder
acknowledges that the amount of Additional Payments is contingent upon the
occurrence of future events as set forth in Section 3.6(a) hereof and that ISSI
makes no guarantee or representation as to the amount, if any, of any Additional
Payments; provided that ISSI represents that it will negotiate Near Term License
contracts in good faith.
3.7 Escrow Agreement. The parties hereto agree that ten percent
(10%) of the shares of ISSI Common Stock to be issued to the shareholders of
Nexcom in the Merger (the "ESCROW AMOUNT") shall be held in escrow pursuant to
the terms of an escrow agreement in substantially the form attached hereto as
Exhibit B (the "ESCROW AGREEMENT"). Notwithstanding anything to the contrary in
this Agreement, no shareholder of Nexcom shall receive certificates for any
shares of ISSI Common Stock held in escrow unless and until permitted under the
terms of the Escrow Agreement.
4. Securities Act Compliance.
4.1 Securities Act Exemption. The issuance of the ISSI Common
Stock in the Merger shall not be registered under the Securities Act of 1933, as
amended (the "SECURITIES ACT"), in reliance upon Section 4(2) and/or Rule 506
under Regulation D of the Securities Act.
4.2 Stock Restrictions. The certificates representing the shares
of ISSI Common Stock issued pursuant to this Agreement shall bear a restrictive
legend (and stop transfer orders shall be placed against the transfer thereof
with ISSI's transfer agent), stating substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH
SHARES MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED,
ASSIGNED OR OTHERWISE DISPOSED OF EXCEPT (I) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (II) IN
COMPLIANCE WITH RULE 144 OR (III) PURSUANT TO AN OPINION OF
COUNSEL FOR ISSI THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933."
4.3 Continuity of Interest Certificates. A sufficient number of
the Nexcom shareholders as is necessary to permit the rendering of the opinions
set forth in Section 9.1(i) and Section 9.2(f) (other than any shareholders who
are eligible to become Dissenting Shareholders as described in Section 3.2 of
this Agreement and who elect not to enter into such an agreement as described
herein) shall duly execute and deliver to ISSI on or before the Closing Date, a
continuity of
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interest certificate in form and substance reasonably satisfactory to ISSI (the
"CONTINUITY OF INTEREST CERTIFICATE"), setting forth representations in
connection with the continuity of interest requirement under the Code.
5. Representations and Warranties of Nexcom. Nexcom hereby represents
and warrants to ISSI that the statements contained in this Section 5 are correct
and complete as of the date of this Agreement and will be correct and complete
as of the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 5), except as
set forth in the disclosure schedule delivered by Nexcom to ISSI on the date
hereof (and initialed by ISSI), a copy of which is attached hereto as Exhibit C
(referred to herein as the "NEXCOM DISCLOSURE SCHEDULE"). The Nexcom Disclosure
Schedule will be arranged in paragraphs corresponding to the lettered and
numbered paragraphs contained in this Section 5.
5.1 Organization, Qualification, and Corporate Power. Nexcom is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of California. Nexcom is duly authorized to conduct business
and is in good standing under the laws of each other jurisdiction where such
qualification is required. There is no state, other than California, in which
Nexcom owns any property or in which it has any employees, offices or
operations. Nexcom has full corporate power and authority, and has all necessary
licenses and permits, to carry on the businesses in which it is engaged and to
own and use the properties owned and used by it. Section 5 of the Nexcom
Disclosure Schedule lists the directors and officers of Nexcom. The operations
now being conducted by Nexcom have not been conducted under any other name
during the past five (5) years.
5.2 Authorization. Nexcom has full power and authority to execute
and deliver this Agreement and the Merger Agreement, and, subject to receipt of
the requisite approval of its shareholders, to consummate the transactions
contemplated hereunder and to perform its obligations hereunder and no other
proceedings on the part of Nexcom are necessary to authorize the execution,
delivery and performance of this Agreement and the Merger Agreement. This
Agreement and the Merger Agreement and the transactions contemplated thereby
have been approved by the unanimous vote of Nexcom's Board of Directors. This
Agreement and the Merger Agreement constitute the valid and legally binding
obligations of Nexcom, enforceable against Nexcom in accordance with their
respective terms and conditions. Nexcom need not give any notice to, make any
filing with, or obtain any authorization, consent, or approval of any government
or governmental agency in order to consummate the transactions contemplated by
this Agreement.
5.3 Capitalization.
(a) Capital Stock. As of the date of this Agreement, the
entire authorized capital stock of Nexcom consists of 10,000,000 shares of
Common Stock, 7,582,505 of which are issued and outstanding. All of the issued
and outstanding shares of capital stock have been duly authorized, are validly
issued, fully paid, and non-assessable, and are held of record by the respective
shareholders as set forth in Section 5.3(a) of the Nexcom Disclosure Schedule.
All of the outstanding shares of capital stock have been offered, issued and
sold by Nexcom in compliance with applicable Federal and state securities laws.
As of the Closing Date, the entire authorized capital stock of
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Nexcom shall consist of 10,000,000 shares of Common Stock, 9,967,880 of which
shall be issued and outstanding. As of the Closing Date, all of the then issued
and outstanding shares of capital stock shall have been duly authorized, shall
be validly issued, fully paid, and non-assessable, and shall be held of record
by the respective shareholders as set forth in Section 5.3(a) of the Nexcom
Disclosure Schedule. As of the Closing Date, all of the then outstanding shares
of capital stock shall have been offered, issued and sold by Nexcom in
compliance with applicable Federal and state securities laws.
(b) No Other Rights or Agreements. As of the date of this
Agreement, Section 5.3(b) of the Nexcom Disclosure Schedule lists all of the
holders of options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights and other rights that could require Nexcom to issue,
sell or otherwise cause to become outstanding any of its capital stock (the
"STOCK RIGHTS"), and the number of shares of Nexcom Common Stock subject to such
Stock Rights. Except as set forth in Section 5.3(b) of the Nexcom Disclosure
Schedule, there are no other out standing or authorized Stock Rights. There are
no outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to Nexcom. There are no voting
trusts, proxies, or other agreements or understandings with respect to the
voting of the capital stock of Nexcom. All of the Nexcom Stock Rights will be
fully exercised or canceled prior to the Closing Date. As of the Closing Date,
there will be (i) no outstanding or authorized Stock Rights, (ii) no outstanding
or authorized stock appreciation, phantom stock, profit participation, or
similar rights with respect to Nexcom and (iii) no voting trusts, proxies, or
other agreements or understandings with respect to the voting of the capital
stock of Nexcom.
5.4 Noncontravention. Neither the execution and the delivery of
this Agreement by Nexcom nor the consummation by Nexcom of the transactions
contemplated hereby, will (A) violate any constitution, statute, regulation,
rule, injunction, judgment, order, decree, ruling, charge, or other restriction
of any government, governmental agency, or court to which Nexcom is subject or
any provision of its Articles of Incorporation or bylaws, or (B) (i) conflict
with, (ii) result in a breach of, (iii) constitute a default under, (iv) result
in the acceleration of, (v) create in any party the right to accelerate,
terminate, modify, or cancel, or (vi) require any notice under, any agreement,
contract, lease, license, instrument, franchise permit or other arrangement to
which Nexcom is a party or by which it is bound or to which any of its assets is
subject (or result in the imposition of any Security Interest upon any of its
assets).
5.5 Fees. Nexcom has no liability or obligation to pay any fees or
commissions to any broker, finder, agent or attorney with respect to the
transactions contemplated by this Agreement.
5.6 Financial Statements. Section 5.6 of the Nexcom Disclosure
Schedule contains the following financial statements (collectively the
"FINANCIAL STATEMENTS"): (i) audited balance sheets and statements of income and
cash flows as of and for the fiscal years ended December 31, 1995 and December
31, 1996 (the "MOST RECENT FISCAL YEAR END") for Nexcom; and (ii) an unaudited
balance sheet and statements of income and cash flows (the "MOST RECENT
FINANCIAL STATEMENTS") as of and for the nine month period ended September 30,
1997 (the "MOST RECENT FISCAL PERIOD END") for Nexcom. The Financial Statements
(including the notes thereto) have been prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a
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consistent basis throughout the periods covered thereby and present fairly the
financial condition of Nexcom as of such dates and the results of operations of
Nexcom for such periods; provided, however, that the Most Recent Financial
Statements lack footnotes and certain other presentation items and are subject
to normal year end adjustments. The books of account of Nexcom reflect as of the
dates shown thereon all items of income and expenses, and all assets,
liabilities and accruals of Nexcom required to be reflected therein.
5.7 Subsidiaries. Nexcom has no subsidiaries and has not been a
subsidiary of another company.
5.8 Title to Assets. Except as set forth in Section 5.8 of the
Nexcom Disclosure Schedule, Nexcom has good and marketable title to, or a valid
leasehold interest in, the properties and assets (including, without limitation,
all Intellectual Property) used by it, located on its premises, or shown on the
balance sheet contained within the Most Recent Financial Statements (the "MOST
RECENT BALANCE SHEET") or acquired after the date thereof, free and clear of all
Security Interests, except for properties and assets disposed of in the Ordinary
Course of Business since the date of the Most Recent Balance Sheet. No Person
other than Nexcom will own at the time of the Closing any assets or properties
currently utilized in or necessary to the operations or business of Nexcom or
situated on any of the premises of Nexcom. There are no existing contracts,
agreements, commitments or arrangements with any Person to acquire any of the
assets or properties of Nexcom (or any interest therein) except for this
Agreement.
5.9 Events Subsequent to Most Recent Fiscal Period End. Since the
Most Recent Fiscal Period End, there has not been any material adverse change in
the Business Condition of Nexcom. Without limiting the generality of the
foregoing, since that date:
(a) Nexcom has not sold, leased, transferred, or assigned
any assets or properties, tangible or intangible, outside the Ordinary Course of
Business;
(b) except for those agreements, contracts, leases and
commitments identified in Section 5.17 of the Nexcom Disclosure Schedule, Nexcom
has not entered into, assumed or become bound under or obligated by any
agreement, contract, lease or commitment (collectively a "NEXCOM AGREEMENT") or
extended or modified the terms of any Nexcom Agreement which (i) involves the
payment of greater than $25,000 per annum or which extends for more than one (1)
year, (ii) involves any payment or obligation to any Affiliate of Nexcom other
than in the Ordinary Course of Business, (iii) involves the sale of any material
assets, (iv) involves any OEM relationship, or (v) involves any license of
Nexcom's technology;
(c) no party (including Nexcom) has accelerated, terminated,
made modifications to, or canceled any agreement, contract, lease, or license to
which Nexcom is a party or by which it is bound and Nexcom has not modified,
canceled or waived or settled any debts or claims held by it, outside the
Ordinary Course of Business, or waived or settled any rights or claims of a
substantial value, whether or not in the Ordinary Course of Business;
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(d) none of the assets of Nexcom, tangible or intangible,
has become subject to any Security Interest;
(e) Nexcom has not made any capital expenditures except in
the Ordinary Course of Business and not exceeding $25,000 in the aggregate of
all such capital expenditures;
(f) Nexcom has not made any capital investment in, or any
loan to, any other Person;
(g) Nexcom has not created, incurred, assumed, prepaid or
guaranteed any indebtedness for borrowed money and capitalized lease
obligations, or extended or modified any existing indebtedness;
(h) Nexcom has not granted any license or sublicense of any
rights under or with respect to any Intellectual Property;
(i) there has been no change made or authorized in the
Articles of Incorporation or bylaws of Nexcom;
(j) Nexcom has not declared, set aside, or paid any dividend
or made any distribution with respect to its capital stock (whether in cash or
in kind) or redeemed, purchased, or otherwise acquired any of its capital stock;
(k) Nexcom has not experienced any damage, destruction, or
loss (whether or not covered by insurance) to its property in excess of $10,000
in the aggregate of all such damage, destruction and losses;
(l) Nexcom has not suffered any repeated, recurring or
prolonged shortage, cessation or interruption of inventory shipments, supplies
or utility services;
(m) Nexcom has not made any loan to, or entered into any
other transaction with, or paid any bonuses in excess of an aggregate of $10,000
to, any of its Affiliates, directors, officers, or employees or their
Affiliates, and, in any event, any such transaction was on fair and reasonable
terms no less favorable to Nexcom than would be obtained in a comparable arm's
length transaction with a Person which is not such a director, officer or
employee or Affiliate thereof;
(n) Nexcom has not entered into any employment contract or
collective bargaining agreement, written or oral, or modified the terms of any
existing such contract or agreement;
(o) Nexcom has not granted any increase in the base
compensation of any of its directors or officers, or, except in the Ordinary
Course of Business, any of its employees;
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(p) Nexcom has not adopted, amended, modified, or terminated
any bonus, profit-sharing, incentive, severance, or other plan, contract, or
commitment for the benefit of any of its directors, officers, or employees (or
taken any such action with respect to any other Employee Benefit Plan);
(q) Nexcom has not made any other change in employment terms
for any of its directors or officers, and Nexcom has not made any other change
in employment terms for any other employees outside the Ordinary Course of
Business;
(r) Nexcom has not suffered any adverse change or any threat
of any adverse change in its relations with, or any loss or threat of loss of,
any of its major customers, distributors or dealers;
(s) Nexcom has not suffered any adverse change or any threat
of any adverse change in its relations with, or any loss or threat of loss of,
any of it major suppliers;
(t) Nexcom has not received notice or had knowledge of any
actual or threatened labor trouble or strike, or any other occurrence, event or
condition of a similar character;
(u) Nexcom has not changed any of the accounting principles
followed by it or the method of applying such principles;
(v) Nexcom has not made a change in any of its banking or
safe deposit arrangements;
(w) Nexcom has not entered into any transaction other than
in the Ordinary Course of Business; and
(x) Nexcom is not obligated to do any of the foregoing.
5.10 Undisclosed Liabilities. To Nexcom's knowledge, Nexcom has no
liability (whether asserted or unasserted, whether absolute or contingent,
whether accrued or unaccrued, whether liquidated or unliquidated, and whether
due or to become due, including any liability for taxes) of a character which,
under GAAP, should be accrued, shown or disclosed on a balance sheet of Nexcom,
except for (i) liabilities set forth on the Most Recent Balance Sheet and (ii)
liabilities which have arisen after the Most Recent Fiscal Period End in the
Ordinary Course of Business.
5.11 Legal Compliance. Nexcom has complied with all applicable laws
(including rules, regulations, codes, plans, injunctions, judgments, orders,
decrees, rulings, and charges thereunder) of federal, state, local, and foreign
governments (and all agencies thereof). No action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, notice or inquiry has been
filed or commenced against, or received by, any governmental body alleging any
failure to so comply. Nexcom has all licenses, permits, approvals,
registrations, qualifications, certificates and other
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governmental authorizations that are necessary for the operations of Nexcom as
they are presently conducted.
5.12 Tax Matters.
(a) For purposes of this Agreement, "TAXES" means all
federal, state, municipal, local or foreign income, gross receipts, windfall
profits, severance, property, production, sales, use, value added, license,
excise, franchise, employment, withholding, capital stock, levies, imposts,
duties, transfer and registration fees or similar taxes or charges imposed on
the income, payroll, properties or operations of Nexcom, together with any
interest, additions or penalties, defi ciencies or assessments with respect
thereto and any interest in respect of such additions or penalties.
(b) Nexcom has filed all reports and returns with respect to
any Taxes ("TAX RETURNS") that it was required to file. All such Tax Returns
were correct and complete in all respects, and no such Tax Returns are currently
the subject of audit. All Taxes owed by Nexcom (whether or not shown on any Tax
Return) were paid in full when due or are being contested in good faith and are
supported by adequate reserves on the Most Recent Financial Statements. Nexcom
has provided adequate reserves on its Financial Statements for the payment of
any taxes accrued but not yet due and payable. Nexcom is not currently the
beneficiary of any extension of time within which to file any Tax Return, and
Nexcom has not waived any statute of limitations in respect of Taxes or agreed
to any extension of time with respect to any Tax assessment or deficiency.
(c) There is no dispute or claim concerning any Tax
liability of Nexcom either (A) claimed or raised by any authority in writing or
(B) based upon personal contact with any agent of such authority. There are no
tax liens of any kind upon any property or assets of Nexcom, except for inchoate
liens for taxes not yet due and payable.
(d) Nexcom has not filed a consent under Sec. 341(f) of the
Internal Revenue Code of 1986, as amended (the "CODE") concerning collapsible
corporations. Nexcom has not made any payments, is not obligated to make any
payments, and is not a party to any agreement that under any circumstances could
obligate it to make any payments as a result of the consummation of the Merger
that will not be deductible under Code Sec. 280G. Nexcom has not been a United
States real property holding corporation within the meaning of Code Sec.
897(c)(2) during the applicable period specified in Code Sec. 897(c)(1)(A)(ii).
Nexcom is not a party to any tax allocation or sharing agreement. Nexcom (A) has
not been a member of any affiliated group within the meaning of Code Sec. 1504
or any similar group defined under a similar provision of state, local, or
foreign law (an "AFFILIATED GROUP") filing a consolidated federal Income Tax
Return (other than a group the common parent of which was Nexcom) and (B) has no
any liability for the taxes of any Person (other than any of Nexcom) under
Treas. Reg. Section 1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
(e) The unpaid Taxes of Nexcom (A) did not, as of the Most
Recent Fiscal Period End, exceed by any amount the reserve for Tax liability
(other than any reserve for deferred taxes established to reflect timing
differences between book and tax income) set forth on the
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face of the Most Recent Balance Sheet (rather than in any notes thereto) and (B)
will not exceed that reserve as adjusted for operations and transactions through
the Closing Date in accordance with the past custom and practice of Nexcom in
filing its Tax Returns.
5.13 Properties.
(a) Nexcom does not currently own and has never previously
owned any real property.
(b) Section 5.13 of the Nexcom Disclosure Schedule lists and
describes briefly all real property leased or subleased to Nexcom. Nexcom has
delivered to ISSI correct and complete copies of the leases and subleases listed
in Section 5.13 of the Nexcom Disclosure Schedule (as amended to date). With
respect to each lease and sublease listed in Section 5.13 of the Nexcom
Disclosure Schedule:
(i) the lease or sublease is legal, valid, binding,
enforceable, and in full force and effect in all respects against Nexcom and, to
Nexcom's knowledge, the other parties thereto;
(ii) neither Nexcom nor, to Nexcom's knowledge, any
other party thereto is in breach or default, and no event has occurred which,
with notice or lapse of time, would constitute a breach or default or permit
termination, modification, or acceleration thereunder;
(iii) neither Nexcom nor, to Nexcom's knowledge, any
other party thereto has repudiated any provision thereof;
(iv) to Nexcom's knowledge, there are no disputes, oral
agreements, or forbearance programs in effect as to the lease or sublease: and
(v) Nexcom has not assigned, transferred, conveyed,
mortgaged, deeded in trust, or encumbered any interest in the leasehold or
subleasehold.
5.14 Intellectual Property.
(a) To Nexcom's knowledge, after reasonable investigation,
Nexcom has not interfered with, infringed upon, misappropriated or violated any
Intellectual Property rights of third parties, and has not received since its
inception any charge, complaint, claim, demand, or notice alleging any such
interference, infringement, misappropriation, or violation (including any claim
that any of Nexcom must license or refrain from using any Intellectual Property
rights of any third party). To Nexcom's knowledge, no third party has interfered
with, infringed upon, misappropriated, or violated any Intellectual Property
rights of Nexcom.
(b) Section 5.14(b) of the Nexcom Disclosure Schedule
identifies each patent or registration which has been issued to Nexcom or any
Affiliate of Nexcom and identifies each
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pending patent application or application for registration which Nexcom or any
Affiliate of Nexcom has made. Nexcom has delivered to ISSI correct and complete
copies of all such patents, registrations and applications. Section 5.14(b) of
the Nexcom Disclosure Schedule also identifies (i) each trade name or
unregistered trademark of Nexcom or any Affiliate of Nexcom and (ii) each
unregistered copyright owned by Nexcom or any Affiliate of Nexcom. With respect
to each item of Intellectual Property required to be identified in Section
5.14(b) of the Nexcom Disclosure Schedule, to Nexcom's knowledge, after
reasonable investigation:
(i) Nexcom possesses all right, title, and interest in
and to the item, free and clear of any Security Interest, license, or other
restriction;
(ii) the item is legal and valid and in full force and
effect and is not subject to any outstanding injunction, judgment, order,
decree, ruling, or charge;
(iii) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending or threatened in
writing which challenges the legality, validity, enforceability, use or
ownership of the item; and
(iv) other than pursuant to the contracts listed in
Section 5.17 of the Nexcom Disclosure Schedule, Nexcom has never agreed to
indemnify any Person for or against any interference, infringement,
misappropriation, or other conflict with respect to the item.
(c) Section 5.14(c) of the Nexcom Disclosure Schedule
identifies each item of Intellectual Property material to the operation of
Nexcom's business that any third party owns and that Nexcom uses pursuant to
license, sublicense, agreement, or permission. Nexcom has delivered to ISSI
correct and complete copies of all such licenses, sublicenses, agreements, and
permissions (as amended to date). With respect to each item of Intellectual
Property required to be identified in Section 5.14(c) of the Nexcom Disclosure
Schedule:
(i) the license, sublicense, agreement or permission
covering the item is legal, valid, binding, enforceable, and in full force and
effect in all respects against Nexcom and, to Nexcom's knowledge, the other
parties thereto;
(ii) neither Nexcom nor, to Nexcom's knowledge, any
other party thereto, is in breach or default, and no event has occurred which
with notice or lapse of time would constitute a breach or default or permit
termination, modification or acceleration thereunder;
(iii) neither Nexcom nor, to Nexcom's knowledge, any
other party thereto, has repudiated any provision thereof; and
(iv) Nexcom has not granted any sublicense or similar
right with respect to the license, sublicense, agreement, or permission covering
the item.
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5.15 Tangible Assets. The buildings, machinery, equipment, and
other tangible assets that Nexcom owns and leases have been maintained in
accordance with normal industry practice, and are in good operating condition
and repair (subject to normal wear and tear) and are usable in the Ordinary
Course of Business.
5.16 Inventory. All of the inventory of Nexcom, which consists of
raw materials and supplies, manufactured and processed parts, work in process,
and finished goods, is usable, merchantable and fit for the purpose for which it
was procured or manufactured, and none of such inventory is slow-moving,
obsolete, damaged, or defective, subject only to the reserve for inventory write
down set forth on the face of the Most Recent Balance Sheet as adjusted for
operations and transactions through the Closing Date in accordance with the past
custom and practice of Nexcom.
5.17 Contracts. Section 5.17 of the Nexcom Disclosure Schedule
lists the following contracts, agreements, commitments and other arrangements to
which Nexcom is a party or by which Nexcom or any of its assets is bound:
(a) any agreement (or group of related agreements) for the
lease of personal property to or from any Person that involves aggregate annual
payments of more than $10,000;
(b) any agreement (or group of related agreements) for the
purchase or sale of raw materials, commodities, supplies, products, or other
personal property, or for the furnishing or receipt of services, the performance
of which will extend over a period of more than one year or involve
consideration in excess of $25,000;
(c) any agreement for the purchase of supplies, components,
products or services from single source suppliers, custom manufacturers or
subcontractors that involves aggregate annual payments of more than $25,000;
(d) any agreement concerning a partnership or joint venture;
(e) any agreement (or group of related agreements) under
which it has created, incurred, assumed, or guaranteed any indebtedness for
borrowed money or any capitalized lease obligation in excess of $25,000 or under
which a Security Interest has been imposed on any of its assets, tangible or
intangible;
(f) any agreement concerning noncompetition or restraint of
trade;
(g) any agreement with any Nexcom shareholder or any of such
shareholder's Affiliates (other than Nexcom) or with any Affiliate of Nexcom;
(h) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other plan or arrangement for
the benefit of its current or former directors, officers or employees;
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(i) any collective bargaining agreement;
(j) any agreement for the employment (other than employment
agreements that are terminable at will by Nexcom) of any individual on a
full-time, part-time, consulting, or other basis;
(k) any executory agreement under which it has advanced or
loaned any amount to any of its directors, officers, and employees;
(l) any agreement under which the consequences of a default
or termination could have a Material Adverse Effect;
(m) any executory agreement with any original equipment
manufacturer entered into or performed by Nexcom;
(n) any executory agreement pursuant to which Nexcom is
obligated to provide maintenance, support or training for its products;
(o) any agreement pursuant to which any of Nexcom's products
are manufactured which involves aggregate annual payments of more than $25,000;
and
(p) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $25,000 or which is
expected to continue for more than one (1) year from the date hereof.
Nexcom has delivered to ISSI a correct and complete copy of each written
agreement listed in Section 5.17 of the Nexcom Disclosure Schedule (as amended
to date) and a written summary setting forth the terms and conditions of each
oral agreement referred to in Section 5.17 of the Nexcom Disclosure Schedule.
With respect to each such agreement: (A) the agreement is legal, valid, binding,
enforceable, and in full force and effect in all respects; (B) neither Nexcom
nor, to Nexcom's knowledge, any other party is in breach or default, and no
event has occurred, which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; (C) no party has repudiated any provision of the agreement; and (D)
Nexcom does not have any reason to believe that the service called for
thereunder cannot be supplied in accordance with its terms and without resulting
in a loss to any of Nexcom.
5.18 Notes and Accounts Receivable. All notes and accounts
receivable of Nexcom, all of which are reflected properly on the books and
records of Nexcom, are valid receivables subject to no setoffs, defenses or
counterclaims, are current and, to Nexcom's knowledge, collectible subject in
each case only to the reserve for bad debts set forth on the face of the Most
Recent Balance Sheet as adjusted for operations and transactions through the
Closing Date in accordance with the past custom and practice of Nexcom.
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5.19 Power of Attorney. There are no outstanding powers of attorney
executed on behalf of Nexcom.
5.20 Insurance. Nexcom has delivered to ISSI copies of each
insurance policy (including policies providing property, casualty, liability,
and workers' compensation coverage and bond and surety arrangements) with
respect to which Nexcom is a party, a named insured, or otherwise the
beneficiary of coverage. With respect to each such insurance policy: (A) the
policy is legal, valid, binding, enforceable, and in full force and effect (and
there has been no notice of cancellation or nonrenewal of the policy received);
(B) neither Nexcom nor any other party to the policy is in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination, modification, or
acceleration, under the policy; (C) no party to the policy has repudiated any
provision thereof; and (D) there has been no failure to give any notice or
present any claim under the policy in due and timely fashion. Section 5.20 of
the Nexcom Disclosure Schedule describes any self-insurance arrangements
presently maintained by Nexcom.
5.21 Litigation. Section 5.21 of the Nexcom Disclosure Schedule
sets forth each instance in which Nexcom (or any of its assets) (i) is subject
to any outstanding injunction, judgment, order, decree, ruling, or charge or
(ii) is or has been since its inception a party, or, to the knowledge of Nexcom,
is threatened to be made a party, to any action, suit, proceeding, hearing,
arbitration, or investigation of, in, or before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator. To the knowledge of Nexcom, there are no facts or
circumstances which would form the basis of any claim against Nexcom.
5.22 Product Warranty. Substantially all of the products licensed,
manufactured, sold, leased, and delivered by Nexcom have conformed in all
material respects with all applicable con tractual commitments and all express
warranties, and Nexcom has no liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become due)
for replacement or repair thereof or other damages in connection therewith,
other than in the Ordinary Course of Business in an aggregate amount not
exceeding $25,000.
5.23 Product Liability. Section 5.23 of the Nexcom Disclosure
Schedule contains a description of all product liability claims and similar
claims, actions, litigation and other proceedings relating to Nexcom products
that are presently pending or which, to the knowledge of Nexcom, are threatened,
or which have been asserted or commenced against Nexcom within the last five (5)
years, in which a party thereto either requests injunctive relief (whether
temporary or permanent) or alleges damages (whether or not covered by
insurance).
5.24 Employees. No executive, key employee, or significant group of
employees has advised any executive officer of Nexcom that he, she or they plan
to terminate employment with Nexcom during the next 12 months. Nexcom is not a
party to or bound by any collective bargaining agreement, nor has it experienced
any strike or grievance, claim of unfair labor practices, or other
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collective bargaining dispute. To Nexcom's knowledge, there is no organizational
effort presently being made or threatened by or on behalf of any labor union
with respect to employees of Nexcom.
5.25 Employee Benefits.
(a) Section 5.25(a) of the Nexcom Disclosure Schedule lists
each Employee Benefit Plan that Nexcom maintains or to which Nexcom contributes
or is obligated to contribute.
(i) Each such Employee Benefit Plan (and each related
trust, or fund established by Nexcom) complies in form and in operation in all
respects with their terms, the applicable requirements of ERISA, the Code, and
other applicable laws.
(ii) All required reports and descriptions (including
Form 5500 Annual Reports, Summary Annual Reports, PBGC-1's, and Summary Plan
Descriptions) have been filed or distributed appropriately with respect to each
such Employee Benefit Plan. The requirements of Code Sec. 4980B have been met in
all respects with respect to each such Employee Benefit Plan which is an
Employee Welfare Benefit Plan. No event has occurred and no condition exists
with respect to any Employee Benefit Plan that would subject Nexcom to any tax
under Code Sections 4972, 4976 or 4979 or to a fine under ERISA Sections 502(i)
or 502(l).
(iii) All contributions, premiums or other payments
(including all employer contributions and employee salary reduction
contributions) which are due have been paid to each Employee Benefit Plan and
all contributions, premiums or other payments for any period ending on or before
the Closing Date which are not yet due shall been paid to each such Employee
Benefit Plan or shall be accrued in accordance with the custom and practice of
Nexcom.
(iv) Each such Employee Benefit Plan which is an
Employee Pension Benefit Plan and which is intended to qualify under Code Sec.
401(a), has received a favorable determination letter from the Internal Revenue
Service with respect to the qualification of the plan under Code Section 401(a)
and the exemption of any corresponding trust under Code Section 501, unless the
Internal Revenue Service is deemed to have approved the form of such Plan under
applicable IRS Revenue Procedures. A copy of such determination letters have
been provided to ISSI and nothing has occurred since the date of each such
determination letter that would cause such Employee Pension Benefit Plan to lose
its ability to rely on such letter. Each Employee Pension Benefit Plan has been
restated to comply with the 1986 Tax Reform Act and subsequent applicable tax
legislation to the extent required by governing tax law. A copy of any
determination letters applicable to such restatement which have been received by
Nexcom has been provided to ISSI.
(v) Neither Nexcom nor any other Person or entity
under common control with Nexcom within the meaning of Section 414(b), (c) or
(m) of the Code and the regulations thereunder has now or at any previous time,
maintained, established, sponsored, participated in, or contributed to, any
Employee Pension Benefit Plan that is subject to Part 3 of Subtitle B of Title I
of ERISA, Title IV of ERISA or Section 412 of the Code. No Employee
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Welfare Benefit Plan or other Employee Benefit Plan providing welfare benefits
is funded with a trust or other funding vehicle, other than insurance policies
or contracts with a health maintenance organization or similar health care
delivery entity.
(vi) Nexcom has delivered to ISSI correct and complete
copies of the plan documents and summary plan descriptions, the most recent
determination letter received from the Internal Revenue Service, if any, the
most recent Form 5500 Annual Report, and all related trust agreements, insurance
contracts, and other funding agreements which implement each maintained Employee
Benefit Plan. The terms of any such documentation or other communication do not
prohibit ISSI from amending or terminating any such Employee Benefit Plan.
(b) With respect to each Employee Benefit Plan that Nexcom,
and/or any controlled group of corporations within the meaning of Code Sec. 1563
(a "CONTROLLED GROUP OF CORPORATIONS") which includes Nexcom, maintains or ever
has maintained or to which any of them contributes, ever contributed, or ever
has been required to contribute:
(i) There have been no prohibited transactions within
the meaning of ERISA Sec 406 and Code Sec. 4975 with respect to any such
Employee Benefit Plan. No fiduciary within the meaning of ERISA Sec. 3(21) (a
"FIDUCIARY"), has any liability for breach of fiduciary duty or any other
failure to act or comply in connection with the administration or invest ment of
the assets of any such Employee Benefit Plan. No action, suit, proceeding,
hearing, or investigation with respect to the administration or the investment
of the assets of any such Employee Benefit Plan (other than routine claims for
benefits) is pending or threatened.
(c) Except as disclosed in Schedule 5.25(c) of the Nexcom
Disclosure Schedule, Nexcom does not maintain or contribute to, has never
maintained or contributed to, and has never been required to contribute to, any
Employee Welfare Benefit Plan or any other Employee Benefit Plan providing
medical, health, or life insurance or other welfare-type benefits for current or
future retired or terminated employees, their spouses, or their dependents
(other than in accordance with Code Sec. 4980B or Part 6 of Subtitle B of Title
I of ERISA).
(d) There is no liability in connection with any Employee
Benefit Plan that is not fully disclosed or provided for on the Most Recent
Balance Sheet for which disclosure would be required under generally accepted
accounting principles.
(e) No Employee Benefit Plan or Nexcom has any liability to
any plan participant, beneficiary or other person by reason of the payment of
benefits or the failure to pay benefits with respect to benefits under or in
connection with any such Employee Benefit Plan, other than claims in the normal
administration of such plans.
5.26 Guaranties. Nexcom is not a guarantor or otherwise responsible
for any liability or obligation (including indebtedness) of any other Person.
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5.27 Environment, Health, and Safety.
(a) For purposes of this Agreement, the following terms have
the following meanings:
"ENVIRONMENTAL, HEALTH, AND SAFETY LAWS" means any and all
federal, state, local or municipal laws, rules, orders, regulations, statutes,
ordinances, codes, plans, injunctions, judgments, decrees, requirements or
rulings now or hereafter in effect, imposed by any governmental authority
regulating, relating to, or imposing liability or standards of conduct relating
to pollution or protection of the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata),
public health and safety, or employee health and safety, concerning any
Hazardous Materials or Extremely Hazardous Substances, as such terms as defined
herein, or otherwise regulated, under any Environmental, Health and Safety Laws.
The term "ENVIRONMENTAL, HEALTH AND SAFETY LAWS" shall include, without
limitation, the Clean Water Act (also known as the Federal Water Pollution
Control Act), 33 U.S.C. Section 1251 et seq., the Toxic Substances Control Act,
15 U.S.C. Section 2601 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et
seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Section
136 et seq., the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq., the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601 et seq., the Superfund Amendment and Reauthorization Act of 1986,
Public Law 99-4, 99, 100 Stat. 1613, the Emergency Planning and Community Right
to Know Act, 42 U.S.C. Section 11001 et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901 et seq., and the Occupational Safety and
Health Act, 29 U.S.C. Section 651 et seq., all as amended, together with any
amendments thereto, regulations promulgated thereunder and all substitutions
thereof.
"EXTREMELY HAZARDOUS SUBSTANCE" means a substance on the list
described in Section 302 (42 U.S.C. Section 11002(a)(2)) of the Emergency
Planning and Community Right to Know Act, 42 U.S.C. Section 11001 et seq., as
amended.
"HAZARDOUS MATERIAL" means any material or substance that,
whether by its nature or use, is now or hereafter defined as a pollutant,
dangerous substance, toxic substance, hazardous waste, hazardous material,
hazardous substance or contaminant under any Environmental, Health and Safety
Laws, or which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and which is now or
hereafter regulated under any Environmental, Health and Safety Laws, or which is
or contains petroleum, gasoline, diesel fuel or other petroleum hydrocarbon
product.
(b) Each of Nexcom and its predecessors and Affiliates (A)
has complied with the Environmental, Health, and Safety Laws (and no action,
suit, proceeding, hearing, investigation, charge, complaint, claim, demand,
directive or notice has been filed or commenced against any of them alleging any
such failure to comply), (B) has obtained and been in substantial compliance
with all of the terms and conditions of all permits, licenses, certificates and
other authorizations which are required under the Environmental, Health, and
Safety Laws, and (C) has complied in all material respects with all other
limitations, restrictions, conditions, standards,
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prohibitions, requirements, obligations, schedules, and timetables which are
contained in the Environmental, Health, and Safety Laws.
(c) To Nexcom's knowledge, Nexcom has no liability (whether
known or unknown, whether asserted or unasserted, whether absolute or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due), and none of Nexcom and its predecessors and
Affiliates has handled or disposed of any Hazardous Materials or extremely
Hazardous Substances, arranged for the disposal of any Hazardous Materials or
Extremely Hazardous Substances, exposed any employee or other individual to any
Hazardous Materials or Extremely Hazardous Substances, or owned or operated any
property or facility in any manner that could give rise to any liability, for
damage to any site, location, surface water, groundwater, land surface or
subsurface strata, for any illness of or personal injury to any employee or
other individual, or for any reason under any Environmental, Health, and Safety
Law.
(d) To Nexcom's knowledge, no Extremely Hazardous Substances
are currently, or have been, located at, on, in, under or about all properties
and equipment used in the business of Nexcom and its predecessors and
Affiliates.
(e) No Hazardous Materials are currently located at, on, in,
under or about all properties and equipment used in the business of Nexcom and
its predecessors and Affiliates in a manner which violates any Environmental,
Health and Safety Laws or which requires cleanup or corrective action of any
kind under any Environmental, Health and Safety Laws.
5.28 Certain Business Relationships With Nexcom. Neither the
shareholders of Nexcom nor any director or officer of Nexcom, nor any member of
their immediate families, nor any Affiliate of any of the foregoing, owns,
directly or indirectly, or has an ownership interest in (a) any business
(corporate or otherwise) which is a party to, or in any property which is the
subject of, any business arrangement or relationship of any kind with Nexcom, or
(b) any business (corporate or otherwise) which conducts the same business as,
or a business similar to, that conducted by Nexcom.
5.29 No Adverse Developments. There is no development (exclusive of
general economic factors affecting business in general) or, to Nexcom's
knowledge, threatened development affecting Nexcom (or affecting customers,
suppliers, employees, and other Persons which have relationships with Nexcom)
that (i) is having or is reasonably likely to have a Material Adverse Effect on
Nexcom, or (ii) would prevent ISSI from conducting the business of the Surviving
Corporation following the Closing in the manner in which it was conducted by
Nexcom prior to the Closing.
5.30 Full Disclosure. No representation or warranty in this Section
5 or in any document delivered by any Majority Shareholder or Nexcom pursuant to
the transactions contemplated by this Agreement, and no statement, list,
certificate or instrument furnished to ISSI pursuant hereto or in connection
with this Agreement, when taken as a whole, contains any untrue statement of a
material fact, or omits to state any fact necessary to make any statement herein
or therein not materially misleading. There is no fact, development or
threatened development (excluding general economic factors affecting business in
general and developments resulting from
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Nexcom's performance of its obligations under this Agreement) which Nexcom has
not disclosed to ISSI in writing and which is having or may have a Material
Adverse Effect on Nexcom. Nexcom has delivered to ISSI true, correct and
complete copies of all documents, including all amendments, supplements and
modifications thereof or waivers currently in effect thereunder, described in
the Nexcom Disclosure Schedule.
6. Representations and Warranties of ISSI. ISSI represents and warrants
to Nexcom that the statements contained in this Section 6 are correct and
complete as of the date of this Agreement and will be correct and complete as of
the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 6), except as
set forth in the disclosure schedule delivered by ISSI to Nexcom on the date
hereof (and initialed by ISSI and Nexcom), a copy of which is attached hereto as
Exhibit D (referred to herein as the "ISSI DISCLOSURE SCHEDULE"). The ISSI
Disclosure Schedule will be arranged in paragraphs corresponding to the numbered
paragraphs contained in this Section 6.
6.1 Organization, Qualification, and Corporate Power. ISSI is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware. ISSI is duly authorized to conduct business and
is in good standing under the laws of each other jurisdiction where such
qualification is required. ISSI has full corporate power and authority, and has
all necessary licenses and permits, to carry on the businesses in which it is
engaged and to own and use the properties owned and used by it.
6.2 Authorization. ISSI has full power and authority to execute
and deliver this Agreement and the Merger Agreement, and to consummate the
transactions contemplated hereunder and to perform its obligations hereunder,
and no other proceedings on the part of ISSI are necessary to authorize the
execution, delivery and performance of this Agreement and the Merger Agreement.
This Agreement and the Merger Agreement and the transactions contemplated
thereby have been approved by the unanimous vote of ISSI's Board of Directors.
This Agreement and the Merger Agreement constitute the valid and legally binding
obligations of ISSI, enforceable against ISSI in accordance with their
respective terms and conditions. ISSI need not give any notice to, make any
filing with, or obtain any authorization, consent, or approval of any government
or governmental agency in order to consummate the transactions contemplated by
this Agreement.
6.3 Capitalization.
(a) As of September 30, 1997, the authorized capital stock
of ISSI consisted of (i) 5,000,000 shares of Preferred Stock, $0.0001 par value,
none of which are issued or outstanding and (ii) 70,000,000 shares of Common
Stock, $0.0001 par value of which 17,898,009 shares were issued and outstanding.
All of the outstanding shares of ISSI's capital stock have been duly authorized
and validly issued and are fully paid and nonassessable. Except as set forth in
this Section 6.3 or as described in the ISSI SEC Reports (as defined herein),
there are no options, warrants or other rights, agreements, arrangements or
commitments of any character relating to the issued or unissued capital stock of
ISSI or obligating ISSI to issue or sell any shares of capital stock of, or
other equity interests in, ISSI.
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(b) The shares of ISSI Common Stock to be issued pursuant to
Section 3.1 of this Agreement are duly authorized and reserved for issuance, and
upon issuance thereof will be validly issued, fully paid and nonassessable.
6.4 Noncontravention. Neither the execution and the delivery of
this Agreement nor the consummation of the transactions contemplated hereby,
will (A) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which ISSI is subject or any provision of its
charter or bylaws, or (B) (i) conflict with, (ii) result in a breach of, (iii)
constitute a default under, (iv) result in the acceleration of, (v) create in
any party the right to accelerate, terminate, modify, or cancel, or (vi) require
any notice under, any agreement, contract, lease, license, instrument, or other
arrangement to which ISSI is a party or by which its is bound or to which any of
its assets is subject.
6.5 SEC Filings. ISSI has filed all forms, reports and documents
required to be filed with the SEC since December 31, 1996, and has heretofore
made available to Nexcom, in the form filed with the SEC, (i) its Annual Report
on Form 10-K for the fiscal year ended September 30, 1996, (ii) its Quarterly
Reports on Form 10-Q for the periods ended December 31, 1996, March 31, 1997 and
June 30, 1997, (iii) the proxy statement relating to ISSI's annual meeting of
stockholders held on February 4, 1997, and (iv) all other reports filed by ISSI
with the SEC since September 30, 1996 (collectively, the "ISSI SEC REPORTS").
The ISSI SEC Reports (i) were prepared in accordance with the requirements of
the Securities Act or the Exchange Act, as the case may be, and (ii) did not at
the time they were filed (or if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
6.6 Brokers' Fees. Except for the fee payable to Soundview
Financial, ISSI does not have any liability or obligation to pay any fees or
commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement.
6.7 Absence of Certain Changes. Since September 30, 1997 (the
"ISSI BALANCE SHEET DATE"), ISSI has conducted its business in the ordinary
course and there has not occurred: (i) any Material Adverse Effect to ISSI; (ii)
any acquisition, sale or transfer of any material asset of ISSI other than in
the ordinary course of business; (iii) any change in accounting methods or
practices by ISSI; or (iv) any material contract entered into by ISSI, other
than as provided to Nexcom, or any termination of any material contract to which
ISSI is a party.
7. Pre-Closing Covenants. With respect to the period between the
execution of this Agreement and the earlier of the termination of this Agreement
and the Effective Time of the Merger:
7.1 General. Each of the Parties will use their reasonable best
efforts to take all action and to do all things necessary, proper, or advisable
in order to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions set
forth in Section 9 below).
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7.2 Notices and Consents. Nexcom will give any notices to third
parties and will use its reasonable best efforts to obtain any third party
consents that are required in connection with the matters identified in Section
5.4 of the Nexcom Disclosure Schedule. Each of the Parties will give any notices
to, make any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental agencies
in connection with the matters identified in Section 5.4 of the Nexcom
Disclosure Schedule.
7.3 Operation of Business. Nexcom will not engage in any practice,
take any action, or enter into any transaction outside the Ordinary Course of
Business. Without limiting the generality of the foregoing, Nexcom will not (i)
cause or permit any amendment to its Articles of Incorporation or Bylaws, (ii)
issue any capital stock or issue or grant any options, warrants or rights to
acquire any capital stock (other than in connection with the exercise of stock
options outstanding on the date of this Agreement) or (iii) declare, set aside,
or pay any dividend or make any distribution with respect to its capital stock
or redeem, purchase, or otherwise acquire any of its capital stock, (iv) pay any
bonuses or increase the amount of compensation otherwise payable to any
employee, consultant or director (other than bonuses in the aggregate amount of
up to $360,000 which may be paid to Nexcom employees other than the Majority
Shareholders) or (v) otherwise engage in any practice, take any action, or enter
into any transaction of the sort described in Section 5.9 above. In addition,
Nexcom will comply with all laws, statutes, ordinances, rules, regulations and
orders applicable to it or to the conduct of its business, except for violations
that would not subject Nexcom to a penalty or loss that would constitute a
Material Adverse Effect on Nexcom.
7.4 Preservation of Business. Nexcom will use its best efforts to
keep its business and properties substantially intact, including its present
operations, physical facilities, working conditions, and relationships with
lessors, licensors, suppliers, customers, and employees.
7.5 Access to Information. Nexcom will permit ISSI and its
representatives to have access at all reasonable times, and in a manner so as
not to interfere with the normal business operations of Nexcom, to the business
and operations of Nexcom. Neither such access, inspection and furnishing of
information to ISSI and its representatives, nor any investigation by ISSI and
its representatives, shall in any way diminish or otherwise effect ISSI's right
to rely on any representation or warranty made by Nexcom or the Majority
Shareholders hereunder.
7.6 Notice of Developments. Each Party will give prompt written
notice to the others of any material adverse development causing a breach of any
of its own representations and warranties in Section 5 or Section 6 above. No
disclosure by any Party pursuant to this Section 7.6, however, shall be deemed
to amend or supplement the Nexcom Disclosure Schedule or the ISSI Disclosure
Schedule or to prevent or cure any misrepresentation, breach of warranty, or
breach of covenant.
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7.7 Preparation of the Information Statement. As promptly as
practicable after the date hereof, Nexcom will prepare an information statement
to be delivered to the shareholders and option holders of Nexcom for purposes of
soliciting their consent to the Merger (the "INFORMATION STATEMENT"). The
Information Statement shall be in form reasonably satisfactory to ISSI and its
counsel.
7.8 Solicitation of Written Consents. Nexcom will solicit the
written consent to the Merger from each of the shareholders and option holders
of Nexcom as soon as practicable following the execution of this Agreement, and
shall use its best efforts to obtain such consent. The Board of Directors of
Nexcom will recommend unanimously in the Information Statement the approval of
the Merger by the Nexcom shareholders.
7.9 Exclusivity. None of the Majority Shareholders nor Nexcom will
(i) solicit, initiate, or encourage the submission of any proposal or offer from
any Person relating to the acquisition of any capital stock or other voting
securities, or any portion of the assets, of Nexcom or its subsidiaries
(including any acquisition structured as a merger, consolidation, or share
exchange) or (ii) participate in any discussions or negotiations regarding,
furnish any information with respect to, assist or participate in, or facilitate
in any other manner any effort or attempt by any Person to do or seek any of the
foregoing. None of the Majority Shareholders will transfer or offer to transfer
any of their Nexcom Common Stock. None of the Majority Shareholders will vote
their Nexcom Common Stock in favor of any such acquisition structured as a
merger, consolidation, or share exchange.
8. Post-Closing Covenants. With respect to the period following the
Effective Time of the Merger:
8.1 General. In case at any time after the Effective Time of the
Merger any further action is necessary to carry out the purposes of this
Agreement, each of the Parties will take such further action (including the
execution and delivery of such further instruments and documents) as any other
Party reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor under
Section 10 below).
8.2 Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction (A) on or
prior to the Effective Time of the Merger involving Nexcom or (B) arising out of
ISSI's operation of the business of the Surviving Corporation following the
Effective Time of the Merger in the manner in which it is presently conducted
and planned to be conducted, each of the other Parties will cooperate with the
party, its counsel in the contest or defense, make available their personnel,
and provide such testimony and access to their books and records as shall be
reasonably necessary in connection with the contest or defense, all at the sole
cost and expense of the contesting or defending Party (unless the contesting or
defending Party is entitled to indemnification therefor under Section 10 below).
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8.3 Transition. None of the Majority Shareholders will take any
action that is designed or intended to have the effect of discouraging any
lessor, licensor, customer, supplier, or other business associate of Nexcom from
maintaining the same business relationships with the Surviving Corporation after
the Effective Time of the Merger as it maintained with Nexcom prior to the
Effective Time of the Merger.
8.4 Confidentiality. Each of the parties hereto hereby agrees to
keep such information or knowledge obtained in any due diligence or other
investigation pursuant to the negotiation and execution of this Agreement or the
effectuation of the transactions contemplated hereby, confidential, except to
the extent that such information is or becomes publicly known or available or is
independently acquired or developed. In this regard, Nexcom and its employees
(including the Majority Shareholders) and agents acknowledge that ISSI's Common
Stock is publicly traded and that any information obtained during the course of
its due diligence could be considered to be material non-public information
within the meaning of federal and state securities laws. Accordingly, Nexcom its
employees and agents, and the Majority Shareholders acknowledge and agree not to
engage in any transactions in ISSI's Common Stock in violation of applicable
insider trading laws.
8.5 Nexcom Employees. All employees of Nexcom that are employees
of the Surviving Corporation following the Closing will be subject to ISSI's
standard employment terms and practices and will be eligible to participate in
all standard ISSI benefit plans based upon seniority determined by their
respective dates of hire by Nexcom.
8.6 Restrictions on Sales of ISSI Common Stock.
(a) Each Majority Shareholder agrees that, without the prior
written consent of ISSI, he will not, for a period of one hundred eighty (180)
days subsequent to the Closing Date (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of ISSI Common Stock or any
securities convertible into or exercisable or exchangeable for ISSI Common Stock
or (ii) enter into any swap or similar agreement that transfers, in whole or in
part, the economic risk of ownership of the ISSI Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of ISSI Common Stock or such other securities, in cash or otherwise; provided,
however, that such restrictions shall not apply to an aggregate of up to 100,000
shares of ISSI Common Stock to be sold or otherwise disposed of within any
period of sixty (60) consecutive trading days, provided that no more than 20,000
shares of ISSI Common Stock may be sold or disposed of on any one (1) trading
day.
(b) Each Majority Shareholder also agrees, if requested by
ISSI, not to sell or otherwise transfer or dispose of any ISSI Common Stock (or
other securities) of ISSI held by the Majority Shareholder during a period of
time determined by ISSI and its underwriters (not to exceed ninety (90) days)
following the effective date of a registration statement of ISSI filed under the
Securities Act. Such agreement shall be in writing in a form satisfactory to
ISSI and such
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underwriter. The provisions of this Section 8.6(b) shall terminate as to any
Majority Shareholder at such time as the Majority Shareholder beneficially owns
less than 100,000 shares (as adjusted for stock splits and like events) of ISSI
Common Stock.
(c) Each Majority Shareholder further agrees and consents to
the entry of stop-transfer instructions with ISSI's transfer agent against the
transfer of shares of ISSI Common Stock held by the undersigned except in
compliance with this Section 8.6.
9. Conditions to Obligations to Close.
9.1 Conditions to ISSI's Obligation to Close. The obligations of
ISSI to consummate the transactions to be performed by them in connection with
the Closing is subject to satisfaction of the following conditions:
(a) the representations and warranties set forth in Section
5 above shall be true and correct in all material respects at and as of the
Closing Date;
(b) Nexcom and the Majority Shareholders shall have
performed and complied with all of their respective covenants hereunder in all
respects through the Closing;
(c) Nexcom shall have procured all of the third party
consents specified in Section 7.2 above (other than any consents under the
agreements between Nexcom and OKI listed on the Nexcom Disclosure Schedule);
(d) no action, suit, or proceeding shall be pending before
any court or quasi-judicial or administrative agency of any federal, state,
local, or foreign jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (A) prevent
consummation of any of the transactions contemplated by this Agreement, (B)
cause any of the transactions contemplated by this Agreement to be rescinded
following consummation, (C) affect materially and adversely the right of ISSI to
control Nexcom following the Effective Time of the Merger, or (D) affect
materially and adversely the right of Nexcom to own its assets (including
without limitation its intellectual property assets) and to operate its
businesses (and no such injunction, judgment, order, decree, ruling or charge
shall be in effect) and no law, statute, ordinance, rule, regulation or order
shall have been enacted, enforced or entered which has caused any of the effects
under clause (A), (B), (C), or (D) of this Section 9.1(d) to occur.
(e) the President and the Secretary of Nexcom shall have
delivered to ISSI a certificate to the effect that each of the conditions
specified above in Section 9.1(a) to 9.1(d) (inclusive) is satisfied in all
respects;
(f) the Parties shall have received all authorizations,
consents and approvals of governments and governmental agencies referred to in
Section 5.4 above or disclosed in a corresponding section in the Nexcom
Disclosure Schedule.
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(g) each of the Majority Shareholders shall have executed
and delivered a Non Competition Agreement in the form attached hereto as Exhibit
E, and each such agreement shall be in full force and effect;
(h) ISSI shall have received from counsel to Nexcom an
opinion in form and substance as set forth in Exhibit F attached hereto,
addressed to ISSI, and dated as of the Closing Date;
(i) ISSI and Nexcom shall have received substantially
identical written opinions of Wilson Sonsini Goodrich & Rosati, P.C., and Cooley
Godward LLP, in form and substance reasonably satisfactory to them, to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and such opinions shall not have been withdrawn. In
rendering such opinions, counsel shall be entitled to rely upon representations
of ISSI and Nexcom and certain shareholders of Nexcom.
(j) this Agreement and the Merger shall have been approved
by the vote of the holders of at least 90% of the outstanding Common Stock of
Nexcom, and the holders of no more than 5% of the outstanding Common Stock of
Nexcom shall have exercised or be eligible to exercise any dissenters' rights
with respect to the Merger;
(k) the Nexcom shareholders as a group and ISSI shall have
entered into sufficient Continuity of Interest Certificates to permit the
rendering of the opinions as to tax matters described in Section 9.2(i) above;
(l) Nexcom shall have terminated the employment of each of
Anthony Nassar, Marty Zimmerman, Donna Shelton and John Santillan, all severance
and other payments to such persons shall have been made and each of such
individuals shall have executed a general release of all claims against Nexcom
and its successors reasonably satisfactory to ISSI;
(m) All of the outstanding options to purchase an aggregate
of 2,385,375 shares of the Common Stock of Nexcom held by the optionees and in
the amounts set forth in Section 5.3 of the Nexcom Disclosure Schedule shall
have been exercised in full or terminated.
(n) no fewer than ten (10) of the employees of Nexcom listed
on Exhibit G hereto shall have accepted employment with ISSI; and
(o) Nexcom and ISSI shall have entered into an Escrow
Agreement substantially in the form attached hereto as Exhibit B and such
agreement shall be in full force and effect.
ISSI may waive any condition (in whole or in part) specified in this
Section 9.1 if it executes a writing so stating at or prior to the Closing.
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9.2 Conditions to Nexcom's Obligation. The obligation of Nexcom to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(a) the representations and warranties set forth in Section
6 above shall be true and correct in all material respects at and as of the
Closing Date;
(b) ISSI shall have performed and complied with all of its
covenants hereunder in all respects through the Closing;
(c) no action, suit, or proceeding shall be pending before
any court or quasi-judicial or administrative agency of any federal, state,
local, or foreign jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (A) prevent
consummation of any of the transactions contemplated by this Agreement or (B)
cause any of the transactions contemplated by this Agreement to be rescinded
following consummation (and no such injunction, judgment, order, decree, ruling,
or charge shall be in effect;
(d) the Chief Financial Officer or other duly authorized
officer of ISSI shall have delivered to Nexcom a certificate to the effect that
each of the conditions specified above in Section 9.2(a) to 9.2(c) (inclusive)
is satisfied in all respects;
(e) Nexcom shall have received from counsel to ISSI an
opinion in form and substance as set forth in Exhibit H attached hereto,
addressed to Nexcom, and dated as of the Closing Date;
(f) ISSI and Nexcom shall have received substantially
identical written opinions of Wilson Sonsini Goodrich & Rosati, P.C., and Cooley
Godward LLP, in form and substance reasonably satisfactory to them, to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and such opinions shall not have been withdrawn. In
rendering such opinions, counsel shall be entitled to rely upon representations
of ISSI and Nexcom and certain shareholders of Nexcom.
(g) Nexcom and ISSI shall have entered into an Escrow
Agreement substantially in the form attached hereto as Exhibit B and such
agreement shall be in full force and effect;
(h) ISSI shall have adopted an Employee Bonus Plan in the
form attached hereto as Exhibit I and such plan shall be in full force and
effect; and
(i) ISSI shall have entered into the Registration Rights
Agreement in the form attached hereto as Exhibit J and such agreement shall be
in full force and effect.
Nexcom may waive any condition (in whole or in part) specified in
this Section 9.2 if it executes a writing so stating at or prior to the Closing.
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10. Survival of Representations, Warranties and Covenants; Escrow.
10.1 Survival of Representations and Warranties. All covenants of
Nexcom and the Majority Shareholders to be performed prior to the Effective
Time, and all representations and warranties of Nexcom in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Merger for
a period of twelve (12) months from the Effective Time; provided that all such
covenants, representations and warranties shall survive for a period of eighteen
(18) months from the Effective Time with respect to any Losses (as defined
herein) arising out of any claim asserted by any shareholder of Nexcom.
Following the Effective Time, the remedies of ISSI for breach of any of the
foregoing shall be as set forth in Section 10.2. All representations and
warranties of ISSI in this Agreement or in any instrument delivered pursuant to
this Agreement shall survive the Merger for a period of twelve (12) months from
the Effective Time.
10.2 Escrow Arrangements.
(a) Escrow Fund. As soon as practicable after the Effective
Time, shares of ISSI Common Stock which comprise the Escrow Amount, without any
act of any Nexcom shareholder, will be deposited with an escrow agent selected
by ISSI (which shall be reasonably acceptable to Nexcom) as Escrow Agent (the
"ESCROW AGENT"), such deposit to constitute an escrow fund (the "ESCROW FUND")
to be governed by the terms set forth herein and at a cost and expense to be
borne by ISSI. The portion of the Escrow Amount contributed on behalf of each
holder of Nexcom Common Stock shall be in proportion to the aggregate Merger
Consideration which such holder would otherwise be entitled under Section 3.1.
The Escrow Agent shall not be responsible for confirming that the shares
contributed to the Escrow Fund comprise the Escrow Amount or that the portion
contributed on behalf of each holder of Nexcom Common Stock is in the proper
proportion, which determination shall be made by ISSI. The Escrow Fund shall be
available to compensate ISSI and its Affiliates for any and all actions, suits,
proceedings, hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages, dues, penalties,
fines, costs, reasonable amounts paid in settlement, liabilities, obligations,
taxes, liens, losses, expenses, and fees, including court costs and reasonable
attorneys' fees and expenses in connection with any action, suit or proceeding
to the extent of the amount of such actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, reasonable
amounts paid in settlement, liabilities, obligations, taxes, liens, losses,
expenses or fees (collectively "LOSSES") that ISSI or any of its Affiliates has
incurred by reason of the breach by Nexcom or the Majority Shareholders of any
representation, warranty, covenant or agreement of Nexcom or either of the
Majority Shareholders contained herein, or by reason of any misrepresentation by
Nexcom or either of the Majority Shareholders made herein; ISSI, Nexcom and the
Majority Shareholders each acknowledge that such Losses, if any, would relate to
unresolved contingencies existing at the Effective Time, which if resolved at
the Effective Time would have led to a reduction in the aggregate Merger
Consideration. Resort to the Escrow Fund shall be the exclusive contractual
remedy of ISSI and its Affiliates against Nexcom or any of its directors,
officers, representatives, agents or shareholders or either of the Majority
Shareholders for any such breaches and misrepresentations if the Merger does
close; provided, however, that nothing herein shall limit any remedy for fraud.
In addition, notwithstanding
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the foregoing and except for amounts recoverable pursuant to Section 3.2, ISSI
may not receive any Escrow Amounts from the Escrow Fund unless and until
Officer's Certificates (as defined in paragraph (d) below) identifying Losses,
the aggregate amount of which exceed $100,000, have been delivered to the Escrow
Agent as provided in paragraph (e). In such case ISSI may recover from the
Escrow Fund the total of its Losses including the first $100,000, provided that
ISSI shall use its reasonable efforts to mitigate its Losses hereunder.
(b) Escrow Period; Distribution upon Termination of Escrow
Periods. Subject to the following requirements, the Escrow Fund shall remain in
existence during the period following the Closing for eighteen (18) months (the
"ESCROW PERIOD"). At the expiration of the Escrow Period a portion of the Escrow
Fund shall be released from Escrow to the appropriate persons who, prior to the
Merger, were shareholders of Nexcom, in an amount equal to the initial Escrow
Fund less an amount equal to the sum of (i) all amounts theretofore distributed
out of the Escrow Fund to ISSI and its Affiliates pursuant to this Section 10
and (ii) an amount equal to such portion of the Escrow Fund which, in the
reasonable judgment of ISSI, subject to the objection of the Agent (as defined
below) and the subsequent arbitration of the matter in the manner provided in
Section 10.2(f) hereof, is necessary to satisfy any unsatisfied claims specified
in any Officer's Certificate theretofore delivered to the Escrow Agent prior to
the end of the Escrow Period, which amount shall remain in the Escrow Fund (and
the Escrow Fund shall remain in existence) until such claims have been resolved.
As soon as all such claims have been resolved (such resolution to be evidenced
by the written agreement of ISSI and Agent (as defined below) or the written
decision of the arbitrators as described in Section 10.2(f)), the Escrow Agent
shall deliver to the appropriate persons who, prior to the Merger, were
shareholders of Nexcom the remaining portion of the Escrow Fund not required to
satisfy such claims. Deliveries of Escrow Amounts to the shareholders of Nexcom
pursuant to this Section 10.2(b) and 10.2(d)(iii) shall be made in proportion to
their respective original contributions to the Escrow Fund, as calculated by the
Agent (as defined below).
(c) Protection of Escrow Fund. The Escrow Agent shall hold
and safeguard the Escrow Fund during the Escrow Period, shall treat such fund as
a trust fund in accordance with the terms of this Agreement and not as the
property of ISSI and shall hold and dispose of the Escrow Fund only in
accordance with the terms hereof.
(d) Distributions; Voting; Claims Upon Escrow Fund.
(i) Any shares of ISSI Common Stock or other equity
securities issued or distributed by ISSI (including shares issued upon a stock
split) ("NEW SHARES") in respect of ISSI Common Stock in the Escrow Fund which
have not been released from the Escrow Fund, shall be added to the Escrow Fund
and become a part thereof. Any cash dividends paid on ISSI Common Stock in the
Escrow Fund, shall be paid to the persons who, prior to the Merger, were
shareholders in accordance with their respective contributions to the Escrow
Fund. New Shares and cash dividends issued in respect of ISSI Common Stock which
have been released from the Escrow Fund shall not be added to the Escrow Fund,
but shall be distributed to the record holders thereof.
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(ii) Each person who, prior to the Merger was a
shareholder of Nexcom shall have voting rights with respect to the shares of
ISSI Common Stock contributed to the Escrow Fund on behalf of such shareholder
(and on any voting securities added to the Escrow Fund in respect of such shares
of ISSI Common Stock) so long as such shares of ISSI Common Stock or other
voting securities are held in the Escrow Fund.
(iii) Upon receipt by the Escrow Agent at any time on or
before the last day of the Escrow Period of a certificate signed by any officer
of ISSI (an "OFFICER'S CERTIFICATE"): (A) stating that ISSI has incurred and
paid or properly accrued Losses, or reasonably anticipates that it may have to
pay or accrue Losses, (B) specifying in reasonable detail the individual items
of Losses included in the amount so stated, the date each such item was incurred
and paid or properly accrued, or the basis for such anticipated liability, and
the nature of the misrepresentation, breach of warranty or claim to which such
item is related, and (C) indicating the number of shares of ISSI Common Stock to
be disbursed to ISSI out of the Escrow Fund, the Escrow Agent shall, subject to
the provisions of Section 10.2(e) hereof, deliver to ISSI out of the Escrow
Fund, as promptly as practicable, such amounts held in the Escrow Fund equal to
such Losses.
(iv) For the purposes of determining the number of
shares of ISSI Common Stock to be disbursed to ISSI out of the Escrow Fund, the
shares of ISSI Common Stock shall be valued at the Fair Market Value of such
shares. For purposes hereof, the "FAIR MARKET VALUE" of the ISSI Common Stock
shall be determined by using the average closing price of the ISSI Common Stock
as reported in the Wall Street Journal, for the ten (10) consecutive trading
days ending five (5) days prior to the date that the shares of ISSI Common Stock
are disbursed to ISSI out of the Escrow Fund.
(e) Objections to Claims. At the time of delivery of any
Officer's Certificate to the Escrow Agent, a duplicate copy of such certificate
shall be delivered to the Agent (as defined in Section 10.2(g)), and for a
period of thirty (30) days after such delivery the Escrow Agent shall make no
delivery to ISSI of any Escrow Amount specified in such Officer's Certificate
unless the Escrow Agent shall have received written authorization from the Agent
to make such delivery. After the expiration of such thirty (30) day period, the
Escrow Agent shall make delivery of an amount from the Escrow Fund in accordance
with such Officer's Certificate and Section 10.2(d) hereof, provided that no
such payment or delivery may be made if the Agent shall object in a written
statement to the claim made in the Officer's Certificate, and such statement
shall have been delivered to the Escrow Agent prior to the expiration of such
thirty (30) day period.
(f) Resolution of Conflicts; Arbitration.
(i) In case the Agent shall so object in writing to
any claim or claims made in any Officer's Certificate, the Agent and ISSI shall
attempt in good faith to agree upon the rights of the respective parties with
respect to each of such claims. If the Agent and ISSI should so agree, a
memorandum setting forth such agreement shall be prepared and signed by both
parties and shall be furnished to the Escrow Agent. The Escrow Agent shall be
entitled to rely on any such memorandum and distribute amounts from the Escrow
Fund in accordance with the terms thereof.
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<PAGE> 40
(ii) If no such agreement can be reached after good
faith negotiation, either ISSI or the Agent may demand arbitration of the matter
unless the amount of the damage or loss is at issue in pending litigation with a
third party, in which event arbitration shall not be commenced until such amount
is ascertained or both parties agree to arbitration; and in either such event
the matter shall be settled by arbitration conducted by three (3) arbitrators.
ISSI and the Agent shall each select one (1) arbitrator, and the two (2)
arbitrators so selected shall select a third arbitrator. The arbitrators shall,
within ten (10) business days after the last day of any hearings on any motion,
issue a definitive ruling on such motion. The arbitrators shall also, within
twenty (20) business days from the last day of any hearings regarding the
imposition of sanctions or the issuance of any awards, issue a definitive ruling
on the imposition of any such sanctions or the issuance of any such award in
such arbitration. The arbitrators shall also establish procedures designed to
reduce the cost and time for discovery while allowing the parties an
opportunity, adequate in the sole judgement of the arbitrators, to discover
relevant information from the opposing parties about the subject matter of the
dispute. The arbitrators shall rule upon motions to compel or limit discovery
and shall have the authority to impose sanctions, including attorneys fees and
costs, to the same extent as a court of competent law or equity, should the
arbitrators determine that discovery was sought without substantial
justification or that discovery was refused or objected to without substantial
justification. The decision of a majority of the three (3) arbitrators as to the
validity and amount of any claim in such Officer's Certificate shall be binding
and conclusive upon the parties to this Agreement, and notwithstanding anything
in Section 10.2(e) hereof, the Escrow Agent shall be entitled to act in
accordance with such decision and make or withhold payments out of the Escrow
Fund in accordance therewith. Such decision shall be written and shall be
supported by written findings of fact and conclusions which shall set forth the
award, judgment, decree or order awarded by the arbitrators. In the event that
the Escrow Agent has not received evidence of resolution under either Section
10.2(f)(i) or this Section 10.2(f)(ii), Escrow Agent shall continue to hold the
Escrow Funds in accordance herewith.
(iii) Judgment upon any award rendered by the
arbitrators may be entered in any court having jurisdiction. Any such
arbitration shall be held in Santa Clara County, California under the rules then
in effect of the American Arbitration Association. Each party to any arbitration
pursuant to this Section 10.2(f) shall pay its own expenses; the fees of each
arbitrator and the administrative fee of the American Arbitration Association
shall be borne equally by ISSI, on the one hand and the Majority Shareholders,
on the other. Neither the expenses that the Agent incurs in the course of any
arbitration pursuant to this Section 10.2(f) nor the Agent's portion of the fees
of the arbitrators or the administrative fees for the American Arbitration
Association shall be deducted from any amounts held in the Escrow Fund.
(g) Agent of the Shareholders; Power of Attorney.
(i) In the event that the Merger is approved by the
shareholders of Nexcom, effective upon such vote, and without further act of any
shareholder, Nagesh Challa is appointed as agent and attorney-in-fact (together,
the "AGENT") for each shareholder of Nexcom on whose behalf shares were
deposited into escrow, for and on behalf of shareholders of Nexcom, to give and
receive notices and communications, to authorize delivery to ISSI of shares from
the Escrow
-35-
<PAGE> 41
Fund in satisfaction of claims by ISSI, to object to such deliveries, to agree
to, negotiate, enter into settlements and compromises of, and demand arbitration
and comply with orders of courts and awards of arbitrators with respect to such
claims, and to take all actions necessary or appropriate in the judgment of
Agent for the accomplishment of the foregoing. Such agency may be changed by the
shareholders of Nexcom from time to time upon not less than thirty (30) days'
prior written notice to ISSI and Escrow Agent; provided that the Agent may not
be removed unless holders of a two-thirds interest of the Escrow Amount in the
Escrow Fund agree to such removal and to the identity of the substituted agent.
No bond shall be required of the Agent, and the Agent shall not receive
compensation for his or her services. Notices or communications to or from the
Agent shall constitute notice to or from each of the shareholders of Nexcom.
(ii) The Agent shall not be liable for any act done or
omitted hereunder as Agent while acting in good faith and in the exercise of
reasonable judgment. The shareholders of Nexcom on whose behalf the Escrow
Amount was contributed to the Escrow Fund shall severally indemnify the Agent
and hold the Agent harmless against any loss, liability or expense incurred
without negligence or bad faith on the part of the Agent and arising out of or
in connection with the acceptance or administration of the Agent's duties
hereunder, including the reasonable fees and expenses of any legal counsel
retained by the Agent.
(h) Actions of the Agent. A decision, act, consent or
instruction of the Agent shall constitute a decision of all the shareholders for
whom a portion of the Escrow Amount otherwise issuable to them are deposited in
the Escrow Fund and shall be final, binding and conclusive upon each of such
shareholders, and the Escrow Agent and ISSI may rely upon any such decision,
act, consent or instruction of the Agent as being the decision, act, consent or
instruction of each every such shareholder of Nexcom. The Escrow Agent and ISSI
are hereby relieved from any liability to any person for any acts done by them
in accordance with such decision, act, consent or instruction of the Agent.
(i) Third-Party Claims. In the event ISSI becomes aware of a
third-party claim which ISSI believes may result in a demand against the Escrow
Fund, ISSI shall notify the Agent of such claim, and the Agent and the
shareholders of Nexcom who have monies in the escrow shall be entitled, at their
expense, to participate in any defense of such claim. ISSI shall have the right
in its sole discretion to settle any such claim; provided, however, that except
with the consent of the Agent, no settlement of any such claim with third-party
claimants shall alone be determinative of the amount of any claim against the
Escrow Fund. In the event that the Agent has consented to any such settlement,
the Agent shall have no power or authority to object under any provision of this
Section 10 to the amount of any claim by ISSI against the Escrow Fund with
respect to such settlement to the extent that such amount is consistent with the
terms of such settlement.
(j) Escrow Agent's Duties.
(i) The Escrow Agent shall be obligated only for the
performance of such duties as are specifically set forth in this Agreement, the
Escrow Agreement and as set forth in any additional written escrow instructions
which the Escrow Agent may receive after the date of
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<PAGE> 42
this Agreement which are signed by an officer of ISSI and the Agent, and may
rely and shall be protected in relying or refraining from acting on any
instrument reasonably believed to be genuine and to have been signed or
presented by the proper party or parties. The Escrow Agent shall not be liable
for any act done or omitted hereunder as Escrow Agent while acting in good faith
and in the exercise of reasonable judgment, and any act done or omitted pursuant
to the advice of counsel shall be conclusive evidence of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to
disregard any and all warnings given by any of the parties hereto or by any
other person, excepting only orders or process of courts of law, and is hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case the Escrow Agent obeys or complies with any such order, judgment
or decree of any court, the Escrow Agent shall not be liable to any of the
parties hereto or to any other person by reason of such compliance,
notwithstanding any such order, judgment or decree being subsequently reversed,
modified, annulled, set aside, vacated or found to have been entered without
jurisdiction.
(iii) The Escrow Agent shall not be liable in any
respect on account of the identity, authority or rights of the parties executing
or delivering or purporting to execute or deliver this Agreement or any
documents or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the
expiration of any rights under any statute of limitations with respect to this
Agreement or any documents deposited with the Escrow Agent.
(v) The Escrow Agent may resign as Escrow Agent at any
time with or without cause by giving at least thirty (30) days' prior written
notice to each of ISSI and the Agent, such resignation to be effective thirty
(30) days following the date such notice is given. In addition, ISSI and Agent
may jointly remove the Escrow Agent as escrow agent at any time with or without
cause, by an instrument (which may be executed in counterparts) given to the
Escrow Agent, which instrument shall designate the effective date of such
removal. In the event of any such resignation or removal, a successor escrow
agent which shall be a bank or trust company organized under the laws of the
United States of America or any state thereof having a combined capital and
surplus of not less than $100,000,000, shall be appointed by ISSI with the
approval of Agent, which approval shall not be unreasonably withheld. Any such
successor escrow agent shall deliver to ISSI and the Agent a written instrument
accepting such appointment, and thereupon it shall succeed to all the rights and
duties of the Escrow Agent hereunder and shall be entitled to receive the Escrow
Fund. Thereafter, the predecessor Escrow Agent shall be discharged for any
further duties and liabilities under this Agreement.
(vi) The parties hereto, and their respective
shareholders, successors and assigns hereby agree that, to the extent that the
matters addressed in the Escrow Agreement, including with respect to the
liability of the Escrow Agent and indemnification of the Escrow Agent are not
otherwise addressed herein, such Escrow Agreement shall be deemed to be
incorporated by reference herein.
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<PAGE> 43
10.3 Exclusivity of Remedy. ISSI's sole recourse following the
Closing for any breach by Nexcom or the Majority Shareholders of any
representation, warranty, agreement or covenant contained herein shall be to
proceed against the shares of ISSI Common Stock held in escrow pursuant to the
terms of the Escrow Agreement.
11. Termination.
11.1 Termination of the Agreement. Certain of the Parties may
terminate this Agreement as provided below:
(a) ISSI and Nexcom may terminate this Agreement as to all
Parties by mutual written consent at any time prior to the Closing;
(b) ISSI may terminate this Agreement by giving written
notice to Nexcom and the Majority Shareholders at any time prior to the Closing
(A) in the event either of Nexcom or the Majority Shareholders has materially
breached any representation, warranty, or covenant contained in this Agreement
and ISSI has notified Nexcom and the Majority Shareholders of the breach or (B)
if the Closing shall not have occurred on or before December 15, 1997, by reason
of the failure of any condition precedent under Section 9.1 hereof (unless the
failure results primarily from ISSI itself breaching any representation,
warranty, or covenants contained in this Agreement); and
(c) Nexcom may terminate this Agreement by giving written
notice to ISSI at any time prior to the Closing (A) in the event ISSI has
materially breached any representation, warranty, or covenant contained in this
Agreement and Nexcom has notified ISSI of the breach, or (B) if the Closing
shall not have occurred on or before December 15, 1997, by reason of the failure
of any condition precedent under Section 9.2 hereof (unless the failure results
primarily from Nexcom or either of the Majority Shareholders breaching any
representation, warranty, or covenants contained in this Agreement).
11.2 Effect of Termination. If any Party terminates this Agreement
pursuant to Section 11 above, all rights and obligations of the Parties
hereunder shall terminate without any liability of any Party to any other Party
(except for any liability of any Party then in breach); provided, however, that
the confidentiality provisions contained in Section 8.4 above shall survive
termination.
12. Miscellaneous.
12.1 Press Releases and Public Announcements. No Party shall issue
any press release or make any public announcement relating to the subject matter
of this Agreement prior to the Closing without the prior written approval of
ISSI and Nexcom; provided, however, that ISSI may make any public disclosure it
believes in good faith is required by applicable law or any listing or trading
agreement concerning its publicly-traded securities (in which case ISSI will use
its reasonable best efforts to advise the other Parties prior to making the
disclosure).
-38-
<PAGE> 44
12.2 No Third-Party Beneficiaries. This Agreement shall not confer
any rights or remedies upon any Person other than the Parties, the shareholders
of Nexcom and their respective successors and permitted assigns.
12.3 Entire Agreement. This Agreement (including the exhibits
hereto) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
12.4 Succession and Assignment. This Agreement shall be binding
upon and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of the other Parties; provided, however, that ISSI may (i) assign any
or all of its rights and interests hereunder to one or more of its Affiliates
and (ii) designate one or more of its Affiliates to perform its obligations
hereunder.
12.5 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original but all of which together will
constitute one and the same instrument.
12.6 Headings. The Section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
12.7 Notices. All notices and other communications required or
permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given upon receipt or, if earlier, (a) five
(5) days after deposit with the U.S. Postal Service or other applicable postal
service, if delivered by first class mail, postage prepaid, (b) upon delivery,
if delivered by hand, (c) one business day after the business day of deposit
with Federal Express or similar overnight courier, freight prepaid or (d) one
business day after the business day of facsimile transmission, if delivered by
facsimile transmission with copy by first class mail, postage prepaid, and shall
be addressed to the intended recipient as set forth below:
If to ISSI:
Integrated Silicon Solution, Inc.
2231 Lawson Lane
Santa Clara, CA 95054
Attention: Jimmy S. M. Lee, President
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<PAGE> 45
Copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Jeffrey D. Saper, Esq.
If to Nexcom or the Majority Shareholders:
Nexcom Technology, Inc.
532 Mercury Drive
Sunnyvale, CA 94086
Attention: Nagesh Challa
Copy to:
Cooley Godward LLP
2595 Canyon Boulevard, Suite 250
Boulder, CO 80302
Attention: Michael L. Platt, Esq.
Any Party may change the address to which notices, requests, demands, claims,
and other communications hereunder are to be delivered by giving the other
Parties ten (10) days' advance written notice to the other parties pursuant to
the provisions above.
12.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the domestic laws of the State of California
without giving effect to any choice or conflict of law provision or rule
(whether of the State of California or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of
California.
12.9 Forum Selection; Consent to Jurisdiction. All disputes arising
out of or in connection with this Agreement shall be solely and exclusively
resolved by a court of competent jurisdiction in the State of California. The
Parties hereby consent to the jurisdiction of the Superior Court of the State of
California and the United States District Courts of California and waive any
objections or rights as to forum nonconvenience, lack of personal jurisdiction
or similar grounds with respect to any dispute relating to this Agreement.
12.10 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by ISSI,
Nexcom and the Majority Shareholders. No waiver by any Party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior to subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent
occurrence.
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<PAGE> 46
12.11 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
12.12 Expenses. Each of ISSI, Nexcom and the Majority Shareholders
will bear its or their own costs and expenses (including legal and accounting
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby; provided, however, that the $500,000 cash
portion of the Merger Consideration shall be reduced by the amount of (i) any
brokers', finders' or advisory fees payable on behalf of Nexcom in connection
with the Agreement and the transactions contemplated hereby, and (ii) any legal
or accounting fees undertaken on behalf of Nexcom in connection with the
Agreement and the transactions contemplated hereby in excess of $76,600. The
parties agree that ISSI shall be responsible for the fees payable to Soundview
Financial.
12.13 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
12.14 Incorporation of Exhibits and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
12.15 Attorneys' Fees. If any legal proceeding or other action
relating to this Agreement is brought or otherwise initiated, the prevailing
party shall be entitled to recover reasonable attorneys fees, costs and
disbursements (in addition to any other relief to which the prevailing party may
be entitled).
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<PAGE> 47
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on as
of the date first above written.
NEXCOM TECHNOLOGY
Company: By: /s/ NAGESH CHALLA
-------------------------------------
Nagesh Challa, President
ISSI: INTEGRATED SILICON SOLUTION, INC.
By: /s/ JIMMY S.M. LEE
-------------------------------------
Jimmy S. M. Lee,
Chief Executive Officer
Majority Shareholders: /s/ NAGESH CHALLA
-----------------------------------------
Nagesh Challa
/s/ MICHAEL GANNAGE
-----------------------------------------
Michael Gannage
[AGREEMENT AND PLAN OF REORGANIZATION SIGNATURE PAGE]
<PAGE> 1
Exhibit 11.1
INTEGRATED SILICON SOLUTION, INC.
STATEMENTS OF COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
September 30,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) ................................ $ (7,686) $ 1,015 $ 29,653
======== ======== ========
Computation of weighted average common and common
equivalent shares outstanding:
Weighted average common shares
Outstanding ............................ 17,748 17,457 12,128
Common equivalent shares from dilutive
preferred stock ........................ - - 2,805
Common equivalent shares from dilutive
common stock options and warrants ...... - 899 1,470
Common equivalent shares from stock and stock
options granted during the
twelve-month period prior to the
Company's initial public offering ......... - - 131
-------- -------- --------
Shares used in per share calculations ............ 17,748 18,356 16,534
======== ======== ========
Net income (loss) per share ...................... $ (0.43) $ 0.06 $ 1.79
======== ======== ========
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (including registration of shares for resale by means of a Form S-3
prospectus) Nos. 33-95282 and 333-3438 and 333-26135 pertaining to the 1993
Employee Stock Purchase Plan, the 1995 Director Stock Option Plan, the 1989
Stock Plan and the Nonstatutory Stock Plan of Integrated Silicon Solution, Inc.
of our report dated October 27, 1997, except for Note 17 as to which the date is
December 3, 1997, with respect to the consolidated financial statements and
schedule of Integrated Silicon Solution, Inc. included in its Annual Report
(Form 10-K) for the year ended September 30, 1997.
Ernst & Young LLP
San Jose, California
December 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 27,536
<SECURITIES> 25,600
<RECEIVABLES> 20,746
<ALLOWANCES> 2,268
<INVENTORY> 40,730
<CURRENT-ASSETS> 119,816
<PP&E> 59,265
<DEPRECIATION> 25,229
<TOTAL-ASSETS> 195,596
<CURRENT-LIABILITIES> 44,272
<BONDS> 11,698
0
0
<COMMON> 2
<OTHER-SE> 134,565
<TOTAL-LIABILITY-AND-EQUITY> 195,596
<SALES> 108,261
<TOTAL-REVENUES> 108,261
<CGS> 76,105
<TOTAL-COSTS> 76,105
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 675
<INTEREST-EXPENSE> 607
<INCOME-PRETAX> (8,848)
<INCOME-TAX> (1,144)
<INCOME-CONTINUING> (7,686)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,686)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
