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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 December 31, 1996
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1943
For the transition period from ______________________ to _______________________
Commission file number 000-23084
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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
- -------------------------------------------------------------------------------
(Address of principal executive offices) zip code
Registrant's telephone number, including area code (408) 588-0800
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
----- -----
The number of outstanding shares of the registrant's Common Stock as
of January 31, 1997 was 17,723,687
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INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------
1996 1995
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(Unaudited)
<S> <C> <C>
Net sales $23,610 $45,051
Cost of sales 16,971 23,923
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Gross Profit 6,639 21,128
------- -------
Operating Expenses:
Research and development 5,675 4,927
Selling, general and administrative 3,561 4,052
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Total operating expenses 9,236 8,979
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Operating income (loss) (2,597) 12,149
Other income, net 731 1,204
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Income (loss) before income taxes and
minority interest (1,866) 13,353
Provision (benefit) for income taxes (186) 3,071
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Net income (loss) before minority interest (1,680) 10,282
Minority interest in net loss of
consolidated subsidiary (18) (12)
------- -------
Net income (loss) ($1,662) $10,294
======= =======
Net income (loss) per share ($0.09) $0.56
======= =======
Shares used in per share calculation 17,614 18,474
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</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>
December 31, September 30,
1996 1996
------------ -------------
(unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $26,978 $12,237
Restricted cash 8,840 7,023
Short-term investments 40,200 62,200
Accounts receivable 13,395 11,316
Inventories 21,518 22,469
Other current assets 9,104 13,777
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Total current assets 120,035 129,022
Property, equipment, and leasehold improvements, net 31,370 31,129
Other assets 27,245 17,888
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Total assets $178,650 $178,039
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $3,619 $3,617
Accounts payable 11,233 8,912
Accrued compensation and benefits 4,324 3,994
Accrued expenses 3,170 3,298
Income tax payable 404 550
Current portion of long-term obligations 722 722
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Total current liabilities 23,472 21,093
Income tax payable - non-current 4,298 4,298
Long-term obligations 10,047 10,195
Minority interest in consolidated subsidiary -- 18
Stockholders' equity:
Convertible preferred stock -- --
Common stock 2 2
Additional paid-in capital 104,855 104,788
Retained earnings 38,290 39,952
Cumulative translation adjustment (2,263) (2,246)
Unearned compensation (51) (61)
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Total stockholders' equity 140,833 142,435
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Total liabilities and stockholders' equity $178,650 $178,039
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</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>
Three Months Ended
December 31,
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) ($1,662) $10,294
Charges to net income (loss) not affecting cash 2,536 1,362
Net effect of changes in current and other assets and
current liabilities 5,888 (5,802)
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Cash provided by operating activities 6,762 5,854
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (2,773) (5,289)
Purchases of available-for-sale securities (77,225) (56,125)
Sales of available-for-sale securities 99,225 49,800
Investment in Wafertech, LLC (9,360) -
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Cash provided by (used in) investing activities 9,867 (11,614)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under notes payable and long-term obligations 5,852 3,212
Proceeds from issuance of common stock 77 883
Principal payments on notes payable and long-term obligations (5,998) (1,124)
Increase in restricted cash (1,817) (3,323)
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Cash used in financing activities (1,886) (352)
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Effect of exchange rate changes on cash and cash equivalents (2) (139)
------- -------
Net increase (decrease) in cash and cash equivalents 14,741 (6,251)
Cash and cash equivalents at beginning of period 12,237 29,452
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Cash and cash equivalents at end of period $26,978 $23,201
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</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 three months ended December 31, 1996 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 22% of total net
sales for the quarter ended December 31, 1996.
3. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS
Cash, cash equivalents, restricted cash, and short-term investments
consisted of the following: (In thousands)
<TABLE>
<CAPTION>
December 31 September 30
1996 1996
--------- ---------
<S> <C> <C>
Cash.............................................. $ 24,145 $ 9,989
Money market instruments.......................... 359 3,189
Certificates of deposit........................... 11,314 6,082
Auction preferred stock........................... 27,000 42,500
Municipal bonds due in more than 3 years.......... 13,200 19,700
--------- ---------
$ 76,018 $ 81,460
========== =========
</TABLE>
4. INVENTORIES
The following is a summary of inventories by major category:
(In thousands)
<TABLE>
<CAPTION>
December 31 September 30
1996 1996
-------- ---------
<S> <C> <C>
Raw materials..................................... $ 5,578 $ 10,123
Work-in-process................................... 5,353 2,826
Finished goods.................................... 10,587 9,520
-------- ---------
$ 21,518 $ 22,469
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</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 three month period ended December 31,
1996 and the income tax provision for the three month period ended December 31,
1995 have been calculated at the estimated annual effective rates of 10% and
23%, respectively. The effective tax rate for the three months ended December
31, 1996 and 1995 differ from the federal statutory rate of 34% primarily due
to a lower effective income tax rate in Taiwan and earnings from investments
which are exempt from federal income taxes.
6. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
7. LITIGATION
On December 13, 1995, a securities class action lawsuit was filed in
the United States District Court for the Northern California District of
California against the Company. The lawsuit, which names the Company and
several of its officers and directors as defendants, alleges various violations
of the federal securities laws. The Company believes that the allegations of
the complaint are without merit, and the Company intends to vigorously defend
itself. The Company believes that the ultimate resolution of this matter will
not have a material adverse effect on its financial position, results of
operations or cash flow.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934. The forward looking statements contained herein are
subject to certain factors that could cause actual results to differ
materially from those projected in the forward-looking statements. Such
factors include but are not limited to the risk related factors set forth in
this report on Form 10-Q.
BACKGROUND
The Company designs, develops and markets high performance SRAM and
nonvolatile memory integrated circuits used in networking applications,
telecommunications, personal computers, disk drives, data communications,
office automation, instrumentation and consumer products. The high speed SRAM
market over the past few years has been impacted by the increasing speed
requirements of personal computers and other electronic systems such as modems
and networks. The Company leverages its SRAM design and advanced CMOS process
technology expertise to establish collaborative relationships with Asian wafer
foundries. Although the Company believes that these relationships
differentiate it from traditional fabless companies and allow it to secure a
committed, low cost supply of wafers processed with leading edge process
technology, there are also certain risks associated with dependence on
foundries for wafer manufacturing. See "Dependence on Independent Wafer
Foundries". The Company's principal manufacturing relationship is with Taiwan
Semiconductor Manufacturing Corporation ("TSMC"), with which it jointly
develops process technology for producing the Company's SRAM and nonvolatile
memories. The Company also has a collaborative program with Chartered
Semiconductor Manufacturing ("Chartered") in Singapore and with Belling
Semiconductor ("Belling") in the People's Republic of China. In addition, the
Company has a manufacturing program with United Microelectronics Corporation
("UMC") in Taiwan. The Company has made an equity investment in a joint
venture with TSMC and an equity investment in a joint venture with UMC.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1995
Net Sales. Net sales decreased by 48% to $23.6 million in the three
months ended December 31, 1996, from $45.1 million in the three months ended
December 31, 1995. 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 and 512K products, and nonvolatile
memory products. The Company experienced lower average selling prices for its
products in the December 1996 quarter compared to the same quarter of the prior
year and the September 1996 quarter. Quarterly revenue increased from $23.1 in
the September 1996 quarter to $23.6 million in the December 1996 quarter as the
Company was able to offset the decline in average selling prices with higher
volumes for its nonvolatile memory products and its 256K and 1MB SRAMs. The
Company anticipates that the average selling prices of its existing products
will continue to decline although the rate of decline may decrease for certain
products. There can be no assurance that such declines will be offset by higher
volumes or by higher prices on newer products. See "Certain Factors -
Quarterly Fluctuations and Declines in Average Selling Prices". Sales to one
customer accounted for approximately 22% of total net sales for the quarter
ended December 31, 1996.
Gross Profit. Gross profit decreased 69% to $6.6 million in the three
months ended December 31, 1996, from $21.1 million in the three months ended
December 31, 1995. As a percentage of net sales, gross profit decreased to
28.1% in the three months ended December 31, 1996 from 46.9% in the three
months ended December 31, 1995. The decrease in gross profit was primarily the
result of significantly lower average
6
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selling prices for the Company's SRAM products in the December 1996 quarter
compared to the same quarter of the prior year. Although product unit costs
were lower in the December 1996 quarter compared to the December 1995 quarter,
such reductions did not offset the declines in average selling prices resulting
in lower gross margins. Cost of sales for the December 1996 quarter reflect a
$4.9 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. The Company has product cost
reduction programs in place and believes that the excess wafer capacity at its
suppliers will result in reduced wafer costs. However, there can be no
assurance that product cost reductions will occur or that such possible
reductions will be sufficient to offset the expected declines in average
selling prices.
Research and Development. Research and development expenses increased
by 15% to $5.7 million in the three months ended December 31, 1996, from $4.9
million in the three months ended December 31, 1995. As a percentage of net
sales, research and development expenses increased to 24.0% in the three months
ended December 31, 1996, from 10.9% in the three months ended December 31,
1995. The increase in absolute dollars was primarily the result of an increase
in engineering personnel and payroll related expenses and increased expenses
related to the development of new products. During the three months ended
December 31, 1996, the Company's development efforts principally focused
on wider bus width SRAMs such as the 64K x 32, 64K x 16 and 32K x 16
configurations, 2MB Flash memory, geometry reductions for its memory products,
Voice EPROMs, and other memory related devices. 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 decreased by 12% to $3.6 million in the three months
ended December 31, 1996 from $4.1 million in the three months ended December
31, 1995. As a percentage of net sales, selling, general and administrative
expenses increased to 15.1% in the three months ended December 31, 1996, from
9.0% in the three months ended December 31, 1995. The decrease in absolute
dollars was primarily the result of decreased selling commissions associated
with lower revenues partially offset by increased payroll related expenses from
the addition of marketing and sales personnel. The Company expects its
selling, general and administrative expenses to increase in absolute dollars in
future periods as it continues to expand its sales and marketing efforts,
although such expenses may fluctuate as a percentage of net sales.
Other income, Net. Other income decreased to $0.7 million in the
three months ended December 31, 1996 from $1.2 million in the three months
ended December 31, 1995, 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
December 31, 1996, the Company recorded a benefit for income taxes of
approximately 10% compared to a provision of 23% for the comparable period in
the prior year, primarily reflecting decreased operating income attributable to
the Company's U.S. operations.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company's principal sources of liquidity
included cash, cash equivalents, restricted cash and short-term investments of
approximately $76.0 million, of which approximately $25.5 million was held by
ISSI-Taiwan. Approximately $8.8 million of the cash held by the Company is
restricted as of December 31, 1996 for purposes of securing available
short-term lines of credit and letters of credit. During the first three
months of fiscal 1997, operating activities generated cash of approximately
$6.8 million. Cash generated by operations was primarily due to decreases in
other current assets and inventory, an increase in accounts payable, and net
loss adjusted for charges to net loss not affecting cash, partially offset by
an increase in accounts receivable.
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The Company made capital expenditures of approximately $2.8 million in
the first three months of fiscal 1997, of which approximately $2.1 million was
for the construction of the Company's facility in the Hsinchu Science-Based
Industrial Park to house its Taiwan operations and $0.7 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 $18.0 million during
the next twelve months for the construction of the Taiwanese facility. The
building is expected to be completed in late 1997.
In June 1996, the Company entered into a joint venture "WaferTech,
LLC" with TSMC, Altera, Analog Devices, and private investors to build a wafer
fabrication facility in Camas, Washington. The Company will invest $31.2
million for a 4% equity interest in the venture and as of December 31, 1996,
$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 of which UMC retains 55% ownership. As of December 31,
1996, approximately $7.0 million has been paid by the Company to UMC for the
joint venture. The next payment of approximately $13.0 million was made in
January 1997 and the final payment of approximately $7.0 million is expected to
be made in July 1997 subject to certain milestone completions.
The Company has $40.1 million available through a number of short-term
lines of credit with various financial institutions in Taiwan. As of December
31, 1996, the Company had borrowings of approximately $3.6 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 December 31, 1996 were $10.8 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 December 31, 1996, the Company had available
long-term lines of credit of approximately $13.3 million of which approximately
$10.9 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 financings to fund
such activities. There can be no assurance that any such additional financing
could be obtained on terms acceptable to the Company, if at all.
8
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CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS OR FUTURE OPERATING
RESULTS
QUARTERLY FLUCTUATIONS AND DECLINES IN AVERAGE SELLING PRICES
The Company's future quarterly and annual operating results are
subject to fluctuations due to a wide variety of factors, many of which are
outside of its control, including declines in average selling prices of the
Company's products, oversupply of memory products in the market, failure to
introduce new products and to implement technologies on a timely basis, the
timing and announcement of new product introductions by the Company and its
competitors, market acceptance of the Company's and its customers' products, the
failure to anticipate changing customer product requirements, availability of
wafer fabrication capacity and fluctuations in manufacturing yield. Other
factors include changes in product mix, seasonal fluctuations in customer demand
for the Company's products, the timing of significant orders, increased expenses
associated with new product introductions or process changes, the ability of
customers to make payments to the Company, increases in material costs,
increases in costs associated with the expansion of sales channels, increases in
general and administrative expenses and certain production and other risks
associated with using independent manufacturers. In this regard, the Company
experienced quarterly sequential declines in revenue in the quarters ending
March, June and September, 1996 principally due to declines in the average
selling prices of its products and the inability to offset these declines by
sufficient increases in unit shipments. While revenue increased in the December
1996 quarter from the September 1996 quarter, there can be no assurance that the
Company will not experience further declines in quarterly revenue. Such revenue
declines have had a material adverse impact on the Company's gross profit and
net income. The Company's future operating results will also depend in part on
general economic conditions in Asia, the United States and its other markets.
In addition, there can be no assurance that the markets for the Company's
products, which are highly cyclical, will continue to grow.
Competitive pricing pressures resulted in significant price decreases
for the Company's products during 1996. Historically, average selling prices
for semiconductor memory products have declined and the Company expects that
average selling prices will decline in the future. Accordingly, the Company's
ability to maintain or increase revenues will be highly dependent upon its
ability to increase unit sales volume of existing products and to introduce and
sell new products which compensate for the anticipated declines in the average
selling prices of its products. Declining average selling prices will also
adversely affect the Company's gross margins and profits unless the Company is
able to reduce its cost per unit to offset declines in average selling prices.
Declining average selling prices may also result in write downs in the value of
inventory due to excess inventory or inventory values that exceed selling
prices. In this regard, in the June 1996 quarter, the Company recorded a $15
million write-down of inventory. There can be no assurance that the Company
will be able to increase unit sales volumes, introduce and sell new products or
reduce its cost per unit.
PRODUCT CONCENTRATION AND DEPENDENCE ON PERSONAL COMPUTER INDUSTRY
In the first quarter 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.
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CUSTOMER CONCENTRATION
The Company's sales are concentrated within a limited customer base.
In the first quarter of fiscal 1997, one customer accounted for approximately
22% of net sales. 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 quarter of
fiscal 1997, the Company obtained a substantial majority of its wafers from
TSMC. The Company also receives wafers from Chartered Semiconductor and UMC.
Each of the Company's wafer suppliers also fabricates for other integrated
circuit companies, including certain of the Company's competitors. Although
the Company has written commitments specifying increasing wafer quantities, the
Company would have little or no recourse if its wafer suppliers experienced
manufacturing failures or yield shortfalls, chose to prioritize capacity for
other use or reduced or eliminated deliveries to the Company. There can be no
assurance that the Company would be able to qualify additional manufacturing
sources for existing or new products in a timely manner or that such additional
manufacturing sources would agree to deliver an adequate supply of wafers. If
the Company were unable to obtain an adequate supply of wafers from its current
or any alternative sources in a timely manner, its business and operating
results would be materially and adversely affected.
The Company has agreed to certain minimum wafer purchase commitments
with its foundry partners in exchange for wafer capacity commitments. The
Company also agreed to make certain annual payments to TSMC for capacity
increases. Additional required payments to TSMC totaling approximately $31.2
million over the next four years represent annual increases in capacity which
must be purchased by the Company. The Company also has minimum purchase
obligations for its joint venture with UMC and WaferTech LLC. Although the
Company has rights to re- schedule or assign capacity to another party, there
can be no assurance that such re-scheduling or assignment would be successfully
accomplished. Should the Company fail to re-schedule or assign unneeded
capacity, the Company's business and operating results would be materially and
adversely affected.
CLAIMS REGARDING INTELLECTUAL PROPERTY
In the semiconductor industry it is typical for companies to receive
notices from time to time alleging infringement of patents or other
intellectual property rights of others. The Company has been, and may from
time to time continue to be, notified of claims that it may be infringing
patents, maskwork rights or copyrights owned by third parties. Although none of
these companies have pursued a claim against the Company, there is no assurance
that these or other companies will not in the future pursue claims against the
Company with respect to the alleged infringement. If it appears necessary or
desirable, the Company may seek licenses under patents that it is alleged to be
infringing. Although patent holders commonly offer such licenses, there is no
assurance that any licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license
under a key patent or intellectual property right from a third party 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.
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MANAGEMENT OF GROWTH
The Company has grown rapidly over the last several years. This
growth has resulted in a significant increase in responsibilities for existing
management which has placed, and may continue to place, a significant strain on
the Company's limited personnel and other resources. The Company's ability to
manage its growth effectively will require it to continue to improve its
operational, financial and management systems, to successfully attract new
employees and to properly train, motivate and manage its employees. If the
Company's management is unable to manage growth effectively, the Company's
business and operating results could be materially and adversely affected.
RISK OF INCREASED TAXES
The Company's tax rate could increase for a number of reasons. For
example, if the proportions of taxable income shifted such that a greater
proportion of taxable income is earned by U.S. operations, the Company's
effective tax rate may increase. It is possible that the Taiwan tax holiday
applicable to the earnings of ISSI-Taiwan could be modified by changes in law
or otherwise reduced. In addition, the Company's taxes would increase if all
or a portion of the earnings of ISSI-Taiwan were to become subject to U.S. tax
as the result of actual dividends or through U.S. rules for taxing controlled
foreign corporations. Further, if profits of ISSI-Taiwan are distributed to
the Company as dividends they become subject to Taiwan withholding tax as well
as U.S. tax (with an offset for underlying Taiwan taxes paid) and the tax rate
would increase. It is not the Company's intention to cause ISSI-Taiwan to
distribute dividends.
ISSI-Taiwan is a controlled foreign corporation ("CFC") for U.S.
income tax purposes. Under U.S. rules for taxing CFCs, all or a portion of the
earnings of ISSI-Taiwan may become subject to U.S. tax as inclusions in the
U.S. taxable income of the Company (with a credit for foreign taxes paid by
ISSI-Taiwan) if one or more of a number of events occur. Such events include,
but are not limited to: ISSI-Taiwan accumulating cash and other passive assets
in excess of 25% of its total assets; ISSI-Taiwan lending funds to the Company
or otherwise investing in certain proscribed assets; and ISSI-Taiwan engaging
in various types of transactions defined in the Subpart F provisions of the
U.S. Internal Revenue Code. If cash is accumulated through operations and not
otherwise invested in non-passive assets such as capital equipment, such
amounts in excess of 25% of total assets would cause the Company's effective
tax rate to increase. The Company believes that its existing plans will
minimize the impact of the CFC rules for the immediate future, subject to such
changes in U.S. tax laws as may occur. However, over time the CFC rules may
cause the Company's tax rate to increase.
VOLATILITY OF STOCK PRICE
The trading price of the Common Stock increased substantially after the
Company's initial public offering in February 1995, subsequently declined, and
could be subject to wide fluctuations in response to quarter-to-quarter
variations in operating results, future announcements by the Company or its
competitors, increases or decreases in wafer capacity, general conditions in
the semiconductor or computer industries, governmental regulations, litigation,
new or revised earnings estimates, comments or recommendations issued by
analysts who follow the Company, its competitors or the semiconductor industry
and other events or factors. In addition, stock markets have experienced
extreme price and trading volume volatility in recent years. This volatility
has had a substantial effect on the market prices of securities of many high
technology companies for reasons frequently unrelated to the operating
performance of the specific companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
11
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 13, 1995, a securities class action lawsuit was filed in
the United States District Court for the Northern California District of
California against the Company. The lawsuit, which names the Company and
several of its officers and directors as defendants, alleges various violations
of the federal securities laws. The Company believes that the allegations of
the complaint are without merit, and the Company intends to vigorously defend
itself. The Company believes that the ultimate resolution of this matter will
not have a material adverse effect on its financial position, results of
operations or cash flow.
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 December 31, 1996.
12
<PAGE> 14
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: February 13, 1997 /s/ Gary L. Fischer
-------------------------------------
Gary L. Fischer
Executive Vice President,
Office of the President, and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
13
<PAGE> 15
EXHIBIT INDEX
EX 11.1 Computation of Earnings Per Share
EX 27.1 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
December 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Net income (loss)................................. $ (1,662) $ 10,294
======== ========
Computation of weighted average common and
common equivalent shares outstanding:
Weighted average common shares
outstanding................................ 17,614 17,326
Common equivalent shares from dilutive
common stock options and warrants.......... - 1,148
-------- --------
Shares used in per share calculations............. 17,614 18,474
======== ========
Net income (loss) per share....................... $ (0.09) $ 0.56
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDING DECEMBER 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 35,818
<SECURITIES> 40,200
<RECEIVABLES> 15,108
<ALLOWANCES> 1,713
<INVENTORY> 21,518
<CURRENT-ASSETS> 120,035
<PP&E> 49,031
<DEPRECIATION> 17,661
<TOTAL-ASSETS> 178,650
<CURRENT-LIABILITIES> 23,472
<BONDS> 10,047
0
0
<COMMON> 2
<OTHER-SE> 140,831
<TOTAL-LIABILITY-AND-EQUITY> 178,650
<SALES> 23,610
<TOTAL-REVENUES> 23,610
<CGS> 16,971
<TOTAL-COSTS> 16,971
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 223
<INCOME-PRETAX> (1,866)
<INCOME-TAX> (186)
<INCOME-CONTINUING> (1,662)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,662)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
