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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-23084.
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INTEGRATED SILICON SOLUTION, INC.
Delaware 77-0199971
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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.
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of outstanding shares of the registrant's Common Stock as of
July 31, 1997 was 17,907,166
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INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 26,509 $ 27,579 $ 75,913 $ 108,983
Cost of sales (other than item below) 18,265 18,335 53,461 63,648
Inventory write-down - 15,000 - 15,000
--------- --------- --------- ---------
Total cost of sales 18,265 33,335 53,461 78,648
--------- --------- --------- ---------
Gross profit (loss) 8,244 (5,756) 22,452 30,335
--------- --------- --------- ---------
Operating Expenses:
Research and development 7,088 5,513 18,740 16,075
Selling, general and administrative 5,309 3,725 12,731 11,443
--------- --------- --------- ---------
Total operating expenses 12,397 9,238 31,471 27,518
--------- --------- --------- ---------
Operating income (loss) (4,153) (14,994) (9,019) 2,817
Other income, net 234 1,150 1,590 3,694
--------- --------- --------- ---------
Income (loss) before income taxes and
minority interest (3,919) (13,844) (7,429) 6,511
Provision (benefit) for income taxes - (3,274) (342) 1,758
--------- --------- --------- ---------
Net income (loss) before minority interest (3,919) (10,570) (7,087) 4,753
Minority interest in net loss of
consolidated subsidiary - (20) (18) (55)
--------- --------- --------- ---------
Net income (loss) $ (3,919) $ (10,550) $ (7,069) $ 4,808
========= ========= ========= =========
Net income (loss) per share $ (0.22) $ (0.60) $ (0.40) $ 0.26
========= ========= ========= =========
Shares used in per share calculation 17,790 17,515 17,702 18,400
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1997 1996
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(unaudited) (1)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,131 $ 12,237
Restricted cash 5,199 7,023
Short-term investments 33,100 62,200
Accounts receivable 15,165 11,316
Inventories 40,534 22,469
Other current assets 8,849 13,777
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Total current assets 119,978 129,022
Property, equipment, and leasehold improvements, net 33,455 31,129
Other assets 39,928 17,888
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Total assets $ 193,361 $ 178,039
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 4,405 $ 3,617
Accounts payable 27,195 8,912
Accrued compensation and benefits 3,649 3,994
Accrued expenses 4,640 3,298
Income tax payable 453 550
Current portion of long-term obligations 713 722
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Total current liabilities 41,055 21,093
Income tax payable - non-current 4,298 4,298
Long-term obligations 12,275 10,195
Minority interest in consolidated subsidiary - 18
Stockholders' equity:
Convertible preferred stock - -
Common stock 2 2
Additional paid-in capital 105,702 104,788
Retained earnings 32,883 39,952
Cumulative translation adjustment (2,825) (2,246)
Unearned compensation (29) (61)
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Total stockholders' equity 135,733 142,435
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Total liabilities and stockholders' equity $ 193,361 $ 178,039
========= =========
</TABLE>
(1) Derived from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
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INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (7,069) $ 4,808
Charges to net income not affecting cash 8,475 4,938
Net effect of changes in current and other assets and
current liabilities 1,853 (11,834)
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Cash provided by (used in) operating activities 3,259 (2,088)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (10,702) (17,439)
Purchases of available-for-sale securities (151,300) (150,675)
Sales of available-for-sale securities 180,400 156,375
Investment in Wafertech, LLC (9,360) (9,360)
Investment in United Integrated Circuits Corp (12,983) -
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Cash used in investing activities (3,945) (21,099)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under notes payable and long-term obligations 13,397 17,970
Proceeds from issuance of common stock 946 1,804
Principal payments on notes payable and long-term obligations (10,538) (7,707)
Decrease (increase) in restricted cash 1,824 (2,781)
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Cash provided by financing activities 5,629 9,286
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Effect of exchange rate changes on cash and cash equivalents (49) (124)
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Net increase (decrease) in cash and cash equivalents 4,894 (14,025)
Cash and cash equivalents at beginning of period 12,237 29,452
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Cash and cash equivalents at end of period $ 17,131 $ 15,427
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
Integrated Silicon Solution, Inc. ("the Company") and its consolidated majority
owned subsidiaries, after elimination of all significant intercompany accounts
and transactions, and have been prepared in accordance with generally accepted
accounting principles for interim financial information and with Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included.
Operating results for the nine months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 1997.
2. CUSTOMER CONCENTRATION
Sales to one customer accounted for approximately 10% and 32% of total
net sales for the quarter ended June 30, 1997 and June 30,1996, respectively,
and approximately 19% and 23% of total net sales for the nine months ended June
30, 1997 and June 30, 1996, respectively.
3. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS
Cash, cash equivalents, restricted cash, and short-term investments
consisted of the following:
<TABLE>
<CAPTION>
(In thousands)
June 30, September 30,
1997 1996
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<S> <C> <C>
Cash $16,704 $ 9,989
Money market instruments 205 3,189
Certificates of deposit 5,421 6,082
Auction preferred stock 19,200 42,500
Municipal bonds due in more than 3 years 13,900 19,700
======= =======
$55,430 $81,460
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</TABLE>
4. INVENTORIES
The following is a summary of inventories by major category:
<TABLE>
<CAPTION>
(In thousands)
June 30, September 30,
1997 1996
-------- -------------
<S> <C> <C>
Raw materials $12,944 $10,123
Work-in-process 9,635 2,826
Finished goods 17,955 9,520
======= =======
$40,534 $22,469
======= =======
</TABLE>
4
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INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The income tax benefit for the nine month period ended June 30, 1997
and the income tax provision for the nine month period ended June 30, 1996 have
been calculated at the estimated annual effective rates of 5% and 27%,
respectively. The effective tax rate for the nine months ended June 30, 1997
differs from the federal statutory rate primarily as a result of a valuation
allowance established to cover a portion of the current year net operating loss
based on management's expectations of future taxable income and actual taxable
income for the prior three years. The effective tax rate for the nine months
ended June 30, 1996 differs from the federal statutory rate primarily due to a
lower effective income tax rate in Taiwan and earnings from investments which
are exempt from federal income taxes.
6. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
7. LITIGATION
On March 21, 1997, the U.S. Department of Commerce ("DOC") initiated an
antidumping investigation of SRAMs from Taiwan and Korea. The Company imports a
majority of its SRAMs from Taiwan. The Company currently is participating in
this investigation as an interested party. The preliminary determination in this
investigation is scheduled for September 23, 1997, but could be extended. If the
preliminary determination is affirmative, the Company will be required to post a
bond covering potential antidumping duties on its import of SRAMs from these
countries from that date forward. A final determination by the DOC likely will
not be made until early 1998. If that decision is affirmative, there will be
subsequent investigation by the International Trade Commission ("ITC") into the
impact of imports of SRAMs from Taiwan and Korea in the U.S. market, with a
final decision likely in Spring 1998. Affirmative final decisions by both the
DOC and the ITC are required before an antidumping order is applicable to
imports of SRAMs by the Company from either of these countries.
The Company has retained legal counsel to defend its interests in the
antidumping proceedings before the DOC, and if necessary, 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.
8. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
128 on the calculation of primary and fully diluted earnings per share for the
three month and nine month periods ended June 30, 1997 is not expected to be
material.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report on Form 10-Q may contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934. All forward looking statements contained herein are
subject to certain factors that could cause actual results to differ materially
from those projected in the forward-looking statements. Such factors include but
are not limited to the risk related factors set forth in this report on Form
10-Q.
BACKGROUND
The Company designs, develops and markets high performance SRAM and
nonvolatile memory integrated circuits used in networking applications,
telecommunications, personal computers, disk drives, data communications, office
automation, instrumentation and consumer products. The high speed SRAM market
over the past few years has been impacted by the increasing speed requirements
of personal computers and other electronic systems such as modems and networks.
The Company leverages its SRAM design and advanced CMOS process technology
expertise to establish collaborative relationships with Asian semiconductor
wafer foundries. Although the Company believes that these relationships
differentiate it from traditional fabless semiconductor companies and allow it
to secure a committed, low cost supply of wafers processed with leading edge
process technology, there are also certain risks associated with dependence on
foundries for wafer manufacturing. See "Dependence on Independent Wafer
Foundries". The Company's principal manufacturing relationship is with Taiwan
Semiconductor Manufacturing Corporation ("TSMC"), with which it jointly develops
process technology for producing the Company's SRAM and nonvolatile memories.
The Company also has a collaborative program with Chartered Semiconductor
Manufacturing ("Chartered") in Singapore and with Belling Semiconductor
("Belling") in the People's Republic of China. In addition, the Company has a
manufacturing program with United Microelectronics Corporation ("UMC") in
Taiwan. The Company has made an equity investment in a joint venture with TSMC
and an equity investment in a joint venture with UMC.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Net Sales. Net sales decreased by 4% to $26.5 million in the three
months ended June 30, 1997, from $27.6 million in the three months ended June
30, 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 and 256K module products, as well as shipments of
newer products such as the 64K x 16 and 64K x 32 SRAMs. The Company experienced
lower average selling prices for its products in the June 1997 quarter compared
to the same quarter of the prior year and the March 1997 quarter although the
rate of decline has decreased for certain 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 10%
and 32% of total net sales for the quarter ended June 30, 1997 and June 30,
1996, respectively.
Gross Profit (loss). Gross profit increased to $8.2 million in the
three months ended June 30, 1997, from $(5.8) million in the three months ended
June 30, 1996. The June 1996 period included a $15.0 million write-down of
inventory. As a percentage of net sales, gross profit increased to 31.1% in the
three months ended June 30, 1997 from (20.9)% in the three months ended June 30,
1996. Excluding the $15.0 million inventory write-down, gross profit was $9.2
million or 33.5% of net sales in the June 1996 quarter. Excluding the inventory
write-down in the June 1996 quarter, the decrease in gross profit was primarily
the result of significantly lower average selling prices for the Company's SRAM
and nonvolatile memory products in the
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June 1997 quarter compared to the same quarter of the prior year. Although
product unit costs were lower in the June 1997 quarter compared to the June 1996
quarter, such reductions did not offset the declines in average selling prices
resulting in lower gross margins. Cost of sales for the June 1997 quarter
reflect a $3.7 million benefit related to inventory sold during the quarter that
had been partially written-down in the second half of fiscal 1996. The Company
believes that the average selling price of its products will continue to decline
and, unless the Company is able to reduce its cost per unit to the extent
necessary to offset such declines, the decline in average selling prices will
result in a material decline in the Company's gross margin. Although the Company
has product cost reduction programs in place, there can be no assurance that
product cost reductions will continue or that such reductions will be sufficient
to offset the expected declines in average selling prices.
Research and Development. Research and development expenses increased
by 29% to $7.1 million in the three months ended June 30, 1997, from $5.5
million in the three months ended June 30, 1996. As a percentage of net sales,
research and development expenses increased to 26.7% in the three months ended
June 30, 1997, from 20.0% in the three months ended June 30, 1996. The increases
were primarily the result of an increase in engineering personnel and payroll
related expenses, increased expenses related to the development of new products
and the write-off of obsolete engineering equipment and software. During the
three months ended June 30, 1997, the Company's development efforts principally
focused on wider bus width SRAMs such as the 64K x 32, 64K x 16 and 32K x 16
configurations, 2MB Flash memory, geometry reductions for its memory products,
EPROMs, and other memory related devices. In this regard, the Company developed
its initial DRAM devices, a specialty high speed 4MB and 2MB DRAM. This product
is currently being sampled. The Company anticipates that its research and
development expenses will increase in absolute dollars in future periods,
although such expenses may fluctuate as a percentage of net sales.
Selling, General and Administrative. Selling, general and
administrative expenses increased by 43% to $5.3 million in the three months
ended June 30, 1997 from $3.7 million in the three months ended June 30, 1996.
As a percentage of net sales, selling, general and administrative expenses
increased to 20.0% in the three months ended June 30, 1997, from 13.5% in the
three months ended June 30, 1996. The increases were primarily the result of
increases in bad debt reserves and legal expenses associated with antidumping
proceedings totaling $1.2 million, as well as the addition of marketing and
sales personnel and payroll related expenses. The Company expects its selling,
general and administrative expenses to decrease slightly in absolute dollars in
the September quarter as the charges associated with bad debt reserves and legal
expenses for antidumping proceedings are expected to decline.
Other income, Net. Other income, net decreased to $0.2 million in the
three months ended June 30, 1997 from $1.2 million in the three months ended
June 30, 1996, primarily due to decreased net interest earnings as a result of
lower cash and short-term investment balances.
Provision (benefit) for Income Taxes. For the three months ended June
30, 1997, the Company recorded no benefit for income taxes compared to a benefit
of 24% for the comparable period in the prior year, primarily resulting from a
valuation allowance established during the current year to cover a portion of
the current year net operating loss based on management's expectations of future
taxable income and actual taxable income for the prior three years.
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO NINE MONTHS ENDED JUNE 30, 1996
Net Sales. Net sales decreased by 30% to $75.9 million in the nine
months ended June 30, 1997, from $109.0 million in the nine months ended June
30, 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 and 256K 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
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newer products. See "Quarterly Fluctuations and Declines in Average Selling
Prices". Sales to one customer accounted for approximately 19% and 23% of total
net sales for the nine months ended June 30, 1997 and June 30, 1996,
respectively.
Gross Profit. Gross profit decreased 26% to $22.5 million in the nine
months ended June 30, 1997, from $30.3 million in the nine months ended June 30,
1996. As a percentage of net sales, gross profit increased to 29.6% in the nine
months ended June 30, 1997 from 27.8% in the nine months ended June 30, 1996.
The June 1996 period included a $15.0 million write-down of inventory. Excluding
the $15.0 million inventory write-down, gross profit was $45.3 million or 41.6%
of net sales in the nine months ended June 30, 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 the nine months ended June 30, 1997 compared to
the same period of the prior year. Although product unit costs were lower in the
nine months ended June 30, 1997 compared to the same period of the prior year,
such reductions did not offset the declines in average selling prices resulting
in lower gross margins. Cost of sales for the nine months ended June 30, 1997
reflect a $11.7 million benefit related to inventory sold during the period that
had been partially written-down in the second half of fiscal 1996. The Company
believes that the average selling price of its products will continue to decline
and, unless the Company is able to reduce its cost per unit to the extent
necessary to offset such declines, the decline in average selling prices will
result in a material decline in the Company's gross margin. Although the Company
has product cost reduction programs in place, there can be no assurance that
product cost reductions will continue or that such reductions will be sufficient
to offset the expected declines in average selling prices.
Research and Development. Research and development expenses increased
by 17% to $18.7 million in the nine months ended June 30, 1997, from $16.1
million in the nine months ended June 30, 1996. As a percentage of net sales,
research and development expenses increased to 24.7% in the nine months ended
June 30, 1997, from 14.7% in the nine months ended June 30, 1996. These
increases were primarily the result of an increase in engineering personnel and
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 the nine months ended June 30, 1997, the
Company's development efforts principally focused on wider bus width SRAMs such
as the 64K x 32, 64K x 16 and 32K x 16 configurations, 2MB Flash memory,
geometry reductions for its memory products, EPROMs, and other memory related
devices. In this regard, the Company developed its initial DRAM devices, a
specialty high speed 4MB and 2MB DRAM. This product is currently being sampled.
The Company anticipates that its research and development expenses will increase
in absolute dollars in future periods, although such expenses may fluctuate as a
percentage of net sales.
Selling, General and Administrative. Selling, general and
administrative expenses increased by 11% to $12.7 million in the nine months
ended June 30, 1997 from $11.4 million in the nine months ended June 30, 1996.
As a percentage of net sales, selling, general and administrative expenses
increased to 16.8% in the nine months ended June 30, 1997, from 10.5% in the
nine months ended June 30, 1996. These increases were primarily the result of
increases in bad debt reserves and legal expenses associated with antidumping
proceedings totaling $1.2 million 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.
Other income, Net. Other income, net decreased to $1.6 million in the
nine months ended June 30, 1997 from $3.7 million in the nine months ended June
30, 1996, primarily due to decreased net interest earnings as a result of lower
cash and short-term investment balances.
Provision (benefit) for Income Taxes. For the nine months ended June
30, 1997, the Company recorded a benefit for income taxes of approximately 5%
compared to a provision of 27% for the comparable period in the prior year,
primarily resulting from a valuation allowance established during the current
year to
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cover a portion of the current year net operating loss based on management's
expectations of future taxable income and actual taxable income for the prior
three years.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company's principal sources of liquidity
included cash, cash equivalents, restricted cash and short-term investments of
approximately $55.4 million, of which approximately $10.7 million was held by
ISSI-Taiwan. Approximately $5.2 million of the cash held by the Company is
restricted as of June 30, 1997 for purposes of securing available short-term
lines of credit and letters of credit. During the first nine months of fiscal
1997, operating activities generated cash of approximately $3.3 million. Cash
generated by operations was primarily due to an increase in accounts payable, a
decrease in other current assets, and the net loss adjusted for depreciation and
other non-cash items, partially offset by increases in inventories and accounts
receivable.
The Company made capital expenditures of approximately $10.7 million in
the first nine months of fiscal 1997, of which approximately $4.5 million was
for the construction of the Company's facility in the Hsinchu Science-Based
Industrial Park to house its Taiwan operations and $6.2 million was for the
purchase of test equipment and design and engineering tools. The Company expects
to spend approximately $6 million to purchase capital equipment during the next
twelve months, principally for the purchase of additional test equipment, design
and engineering tools, and computer hardware and software. Additionally, the
Company expects to spend approximately $17.0 million during the next twelve
months for the construction of its Taiwanese facility. A portion of this
construction cost will be financed through loans. The building is expected to be
completed in late calendar 1997.
In June 1996, the Company entered into a joint venture "WaferTech, LLC"
with TSMC, Altera, Analog Devices, and private investors to build a wafer
fabrication facility in Camas, Washington. The Company will invest $31.2 million
for a 4% equity interest in the venture and as of June 30, 1997, $18.7 million
had been paid by the Company to WaferTech in this regard. The next payment by
the Company of $12.5 million is expected to be made in November 1997. In fiscal
1995, the Company entered into an agreement with TSMC pursuant to which the
Company agreed to acquire specified wafer capacity through 2001. In exchange for
wafer capacity commitments by TSMC, the Company agreed to make certain annual
payments to TSMC which commenced in June 1995. The first payment in June 1995
was approximately $2.4 million and was credited towards the purchase of wafers
in 1996. The additional required payments totaling approximately $31.2 million
over the next four years represent annual increases in capacity which must be
purchased by the Company, a portion of which is secured by a letter of credit
for $4.8 million. Additionally, in fiscal 1995, the Company entered into a
manufacturing agreement and joint venture agreement with UMC. Under the terms of
these agreements, the Company received a supply of wafers from UMC beginning
with the December 1995 quarter and the Company agreed to invest approximately
$27 million (subject to fluctuations in the New Taiwanese Dollar) for a 5%
equity interest in a joint manufacturing venture "United Integrated Circuits
Corp." "UICC" of which UMC retains 55% ownership. As of June 30, 1997,
approximately $20.0 million has been paid by the Company to UMC for the joint
venture. The final payment of approximately $7.0 million was expected to be made
in July 1997, however the Company has been notified by UMC that it does not
anticipate the need for any additional payments. UMC and UICC have also
committed that they will give at least four months advance notice should any
additional payments become necessary.
The Company has $27.2 million available through a number of short-term
lines of credit with various financial institutions in Taiwan. As of June 30,
1997, the Company had borrowings of approximately $4.4 million under these
short-term lines of credit.
The Company has a number of long-term lines of credit with the Bank of
Communication in Taiwan to finance the purchase of machinery, equipment and
building construction in Taiwan. Total obligations related to these borrowings
as of June 30, 1997 were $13.0 million, of which $0.7 million is included in the
current portion of long-term obligations. These obligations bear interest at
rates of from 6.45% to 8.45% and are payable in quarterly installments through
2003. As of June 30, 1997, the Company had available long-
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term lines of credit of approximately $10.4 million of which approximately $9.5
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.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS OR FUTURE OPERATING
RESULTS
QUARTERLY FLUCTUATIONS AND DECLINES IN AVERAGE SELLING PRICES
The Company's future quarterly and annual operating results are subject
to fluctuations due to a wide variety of factors, many of which are outside of
its control, including declines in average selling prices of the Company's
products, oversupply of memory products in the market, failure to introduce new
products and to implement technologies on a timely basis, the timing and
announcement of new product introductions by the Company and its competitors,
market acceptance of the Company's and its customers' products, the failure to
anticipate changing customer product requirements, availability of wafer
fabrication capacity and fluctuations in manufacturing yield. Other factors
include changes in product mix, seasonal fluctuations in customer demand for the
Company's products, the timing of significant orders, increased expenses
associated with new product introductions or process changes, the ability of
customers to make payments to the Company, increases in material costs,
increases in costs associated with the expansion of sales channels, increases in
general and administrative expenses and certain production and other risks
associated with using independent manufacturers. In this regard, the Company
experienced quarterly sequential declines in revenue in the quarters ending
March, June and September, 1996 principally due to declines in the average
selling prices of its products and the inability to offset these declines by
sufficient increases in unit shipments. While the Company's revenue has
increased sequentially in the past three quarters, 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 addition, there can be no assurance that the markets for the
Company's products, which are highly cyclical, will continue to grow.
Competitive pricing pressures resulted in significant price decreases
for the Company's products during 1996 and these price decreases have continued
into fiscal 1997. Historically, average selling prices for semiconductor memory
products have declined and the Company expects that average selling prices will
decline in the future. Accordingly, the Company's ability to maintain or
increase revenues will be highly dependent upon its ability to increase unit
sales volume of existing products and to introduce and sell new products which
compensate for the anticipated declines in the average selling prices of its
products. Declining average selling prices will also adversely affect the
Company's gross margins and profits unless the Company is able to reduce its
cost per unit to offset declines in average selling prices. Declining average
selling prices may also result in write downs in the value of inventory due to
excess inventory or inventory values that exceed selling prices. In this regard,
in the June 1996 quarter, the Company recorded a $15 million write-down of
inventory. There can be no assurance that the Company will be able to increase
unit sales volumes, introduce and sell new products or reduce its cost per unit.
10
<PAGE> 12
PRODUCT CONCENTRATION AND DEPENDENCE ON PERSONAL COMPUTER INDUSTRY
In the first nine months of fiscal 1997, a substantial majority of the
Company's net sales was derived from the sale of SRAM products, primarily 256K
products. Substantially all of the Company's products are incorporated into
computer and computer-peripheral products such as modems, disk drives and
networks. In recent periods, the PC industry has experienced strong unit sales
growth, which has increased demand for integrated circuits, including memory
products offered by the Company. The PC and PC peripherals industry has from
time to time experienced cyclical, depressed business conditions, often in
connection with, or in anticipation of, a decline in general economic
conditions. Such industry downturns have resulted in reduced product demand and
declining average selling prices. The Company's business and operating results
would be materially and adversely affected by any future downturns in the PC or
PC peripherals industry.
CUSTOMER CONCENTRATION
The Company's sales are concentrated within a limited customer base. In
the quarter and the nine months ended June 30, 1997, one customer accounted for
approximately 10% and 19% of net sales, respectively. The Company expects a
significant portion of its future sales to remain concentrated within a limited
number of strategic customers. There can be no assurance that the Company will
be able to retain its strategic customers or that such customers will not
otherwise cancel or reschedule orders, or in the event of canceled orders, that
such orders will be replaced by other sales. In addition, sales to any
particular customer may fluctuate significantly from quarter to quarter. The
occurrence of any such events could have a material adverse effect on the
Company's business and operating results.
DEPENDENCE ON INDEPENDENT WAFER FOUNDRIES
The Company has adopted a fabless manufacturing strategy with the
objective of establishing collaborative manufacturing relationships with
selected semiconductor manufacturers. To date, the Company's principal
manufacturing relationship has been with TSMC, and in the first nine months of
fiscal 1997, the Company obtained a substantial majority of its wafers from
TSMC. The Company also receives wafers from Chartered Semiconductor and UMC.
Each of the Company's wafer suppliers also fabricates for other integrated
circuit companies, including certain of the Company's competitors. Although the
Company has written commitments specifying increasing wafer quantities, the
Company would have little or no recourse if its wafer suppliers experienced
manufacturing failures or yield shortfalls, chose to prioritize capacity for
other use or reduced or eliminated deliveries to the Company. There can be no
assurance that the Company would be able to qualify additional manufacturing
sources for existing or new products in a timely manner or that such additional
manufacturing sources would agree to deliver an adequate supply of wafers. If
the Company were unable to obtain an adequate supply of wafers from its current
or any alternative sources in a timely manner, its business and operating
results would be materially and adversely affected.
The Company has agreed to certain minimum wafer purchase commitments
with its foundry partners in exchange for wafer capacity commitments. The
Company also agreed to make certain annual payments to TSMC for capacity
increases. Additional required payments to TSMC totaling approximately $31.2
million over the next four years represent annual increases in capacity which
must be purchased by the Company. The Company also has minimum purchase
obligations for its joint venture with UMC and WaferTech LLC. Although the
Company has rights to re-schedule or assign capacity to another party, there can
be no assurance that such re-scheduling or assignment would be successfully
accomplished. Should the Company fail to re-schedule or assign unneeded
capacity, the Company's business and operating results would be materially and
adversely affected.
CLAIMS REGARDING INTELLECTUAL PROPERTY
In the semiconductor industry it is typical for companies to receive
notices from time to time alleging infringement of patents or other intellectual
property rights of others. The Company has been, and may from time to time
continue to be, notified of claims that it may be infringing patents, maskwork
rights or copyrights
11
<PAGE> 13
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.
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 its U.S. operations, the Company's
effective tax rate may increase. It is possible that the Taiwan tax holiday
applicable to the earnings of ISSI-Taiwan could be modified by changes in law or
otherwise reduced. In addition, the Company's taxes would increase if all or a
portion of the earnings of ISSI-Taiwan were to become subject to U.S. tax as the
result of actual dividends or through U.S. rules for taxing controlled foreign
corporations. Further, if profits of ISSI-Taiwan are distributed to the Company
as dividends they become subject to Taiwan withholding tax as well as U.S. tax
(with an offset for underlying Taiwan taxes paid) and the tax rate would
increase. It is not the Company's intention to cause ISSI-Taiwan to distribute
dividends.
ISSI-Taiwan is a controlled foreign corporation ("CFC") for U.S. income
tax purposes. Under U.S. rules for taxing CFCs, all or a portion of the earnings
of ISSI-Taiwan may become subject to U.S. tax as inclusions in the U.S. taxable
income of the Company (with a credit for foreign taxes paid by ISSI-Taiwan) if
one or more of a number of events occur. Such events include, but are not
limited to: ISSI-Taiwan accumulating cash and other passive assets in excess of
25% of its total assets; ISSI-Taiwan lending funds to the Company or otherwise
investing in certain proscribed assets; and ISSI-Taiwan engaging in various
types of transactions defined in the Subpart F provisions of the U.S. Internal
Revenue Code. If cash is accumulated through operations and not otherwise
invested in non-passive assets such as capital equipment, such amounts in excess
of 25% of total assets would cause the Company's effective tax rate to increase.
The Company believes that its existing plans will minimize the impact of the CFC
rules for the immediate future, subject to such changes in U.S. tax laws as may
occur. However, over time the CFC rules may cause the Company's tax rate to
increase.
VOLATILITY OF STOCK PRICE
The trading price of the Common Stock increased substantially after the
Company's initial public offering in February 1995, subsequently declined, and
could be subject to wide fluctuations in response to quarter-to-quarter
variations in operating results, future announcements by the Company or its
competitors, increases or decreases in wafer capacity, general conditions in the
semiconductor or computer industries, governmental regulations, litigation, new
or revised earnings estimates, comments or recommendations issued by analysts
who follow the Company, its competitors or the semiconductor industry and other
events or factors. In addition, stock markets have experienced extreme price and
trading volume volatility in recent years. This volatility has had a substantial
effect on the market prices of securities of many high technology companies for
reasons frequently unrelated to the operating performance of the specific
companies. These broad market fluctuations may adversely affect the market price
of the Company's Common Stock.
12
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. 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 imports a
majority of its SRAMs from Taiwan. The Company currently is participating in
this investigation as an interested party. The preliminary determination in this
investigation is scheduled for September 23, 1997, but could be extended. If the
preliminary determination is affirmative, the Company will be required to post a
bond covering potential antidumping duties on its import of SRAMs from these
countries from that date forward. A final determination by the DOC likely will
not be made until early 1998. If that decision is affirmative, there will be
subsequent investigation by the International Trade Commission ("ITC") into the
impact of imports of SRAMs from Taiwan and Korea in the U.S. market, with a
final decision likely in Spring 1998. Affirmative final decisions by both the
DOC and the ITC are required before an antidumping order is applicable to
imports of SRAMs by the Company from either of these countries.
The Company has retained legal counsel to defend its interests in the
antidumping proceedings before the DOC, and if necessary, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report.
Exhibit 11.1 Computation of Earnings Per Share.
Exhibit 27 Financial Data Schedule.
(b) The registrant did not file any reports on Form 8-K during the
quarter ended June 30, 1997.
13
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Integrated Silicon Solution, Inc.
(Registrant)
Dated: August 14, 1997 /s/ GARY L. FISCHER
---------------------------------
Gary L. Fischer
Executive Vice President,
Office of the President, and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
14
<PAGE> 16
INDEX TO EXHIBITS
Exhibit
Number Exhibits
- ------- --------
11.1 Computation of Earnings Per share
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11.1
INTEGRATED SILICON SOLUTION, INC.
STATEMENTS OF COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
-------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ (3,919) $(10,550) $ (7,069) $ 4,808
======== ======== ======== ========
Computation of weighted average common and
common equivalent shares outstanding:
Weighted average common shares
outstanding 17,790 17,515 17,702 17,419
Common equivalent shares from dilutive
common stock options and warrants - - - 981
-------- -------- -------- --------
Shares used in per share calculations 17,790 17,515 17,702 18,400
======== ======== ======== ========
Net income (loss) per share $ (0.22) $ (0.60) $ (0.40) $ 0.26
======== ======== ======== ========
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDING JUNE 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 22,330
<SECURITIES> 33,100
<RECEIVABLES> 17,544
<ALLOWANCES> 2,379
<INVENTORY> 40,534
<CURRENT-ASSETS> 119,978
<PP&E> 56,234
<DEPRECIATION> 22,779
<TOTAL-ASSETS> 193,361
<CURRENT-LIABILITIES> 41,055
<BONDS> 12,275
0
0
<COMMON> 2
<OTHER-SE> 135,731
<TOTAL-LIABILITY-AND-EQUITY> 193,361
<SALES> 75,913
<TOTAL-REVENUES> 75,913
<CGS> 53,461
<TOTAL-COSTS> 53,461
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 546
<INCOME-PRETAX> (7,429)
<INCOME-TAX> (342)
<INCOME-CONTINUING> (7,069)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,069)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
