<PAGE> 1
FORM 10-Q/A
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, 1998
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission file number 000-23084
-------------------------------------------------
INTEGRATED SILICON SOLUTION, INC.
Delaware 77-0199971
------------------------------- --------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
2231 Lawson Lane, Santa Clara, California 95054
------------------------------------------ ----------
(Address of principal executive offices) zip code
Registrant's telephone number, including area code (408) 588-0800
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of outstanding shares of the registrant's Common Stock as of
July 31, 1998 was 19,408,372
AMENDED FILING OF FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 1998 TO REFLECT
CHANGES TO CERTAIN INFORMATION.
This form 10-Q/A is being filed to correct the Company's financial
statements for the three and nine months periods ended June 30, 1998 resulting
from having incorrectly omitted the impact of the cumulative translation
adjustment in calculating the Company's gain from the partial sale of its
subsidiary during the June 1998 quarter (see the last paragraph of Note 1 to
the Consolidated Financial Statements). General information in the originally
filed Form 10-Q was presented as the original filing date or earlier, as
indicated in such filing. Financial statements and related disclosures
contained in this amended filing reflect, where appropriate, the corrected
information.
<PAGE> 2
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,
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
As restated As restated
<S> <C> <C> <C> <C>
Net sales $ 25,032 $ 26,509 $ 105,098 $ 75,913
Cost of sales 30,566 18,265 89,003 53,461
------------- ------------- ------------- -------------
Gross profit (loss) (5,534) 8,244 16,095 22,452
------------- ------------- ------------- -------------
Operating Expenses:
Research and development 7,885 7,088 23,656 18,740
Selling, general and administrative 4,616 5,309 13,843 12,731
In-process technology charge -- -- 7,078 --
------------- ------------- ------------- -------------
Total operating expenses 12,501 12,397 44,577 31,471
------------- ------------- ------------- -------------
Operating loss (18,035) (4,153) (28,482) (9,019)
Gain on sale of investment 10,506 -- 10,506 --
Other income (loss), net (1,991) 234 (914) 1,590
------------- ------------- ------------- -------------
Loss before income taxes and
minority interest (9,520) (3,919) (18,890) (7,429)
Provision (benefit) for income taxes 2,150 -- 2,505 (342)
------------- ------------- ------------- -------------
Net loss before minority interest (11,670) (3,919) (21,395) (7,087)
Minority interest in net loss of
consolidated subsidiary -- -- -- (18)
------------- ------------- ------------- -------------
Net loss $ (11,670) $ (3,919) $ (21,395) $ (7,069)
============= ============= ============= =============
Basic and diluted loss per share $ (0.61) $ (0.22) $ (1.14) $ (0.40)
============= ============= ============= =============
Shares used in basic and diluted
per share calculation 19,204 17,790 18,800 17,702
============= ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
-------------- --------------
(unaudited) (1)
As restated
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 43,791 $ 22,334
Restricted cash 43 5,202
Short-term investments 5,100 25,600
Accounts receivable 25,901 18,478
Inventories 67,242 40,730
Other current assets 6,931 7,472
--------- ---------
Total current assets 149,008 119,816
Property, equipment, and leasehold improvements, net 24,318 27,693
Construction in progress 13,848 6,343
Other assets 54,868 41,744
--------- ---------
Total assets $ 242,042 $ 195,596
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 20,330 $ 6,152
Accounts payable 52,067 23,138
Accrued compensation and benefits 3,637 3,424
Accrued expenses 3,168 8,725
Income tax payable 2,868 582
Current portion of long-term obligations 1,120 2,251
--------- ---------
Total current liabilities 83,190 44,272
Income tax payable - non-current 4,996 5,059
Long-term obligations 14,051 11,698
Minority interest in consolidated subsidiary 20,462 --
Stockholders' equity:
Preferred stock -- --
Common stock 2 2
Additional paid-in capital 115,463 106,769
Retained earnings 10,871 32,266
Cumulative translation adjustment (6,827) (4,248)
Unearned compensation (166) (222)
--------- ---------
Total stockholders' equity 119,343 134,567
--------- ---------
Total liabilities and stockholders' equity $ 242,042 $ 195,596
========= =========
</TABLE>
(1) Derived from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
2
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INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
--------------------------
1998 1997
----------- ---------
As restated
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (21,395) $ (7,069)
In-process technology charge 7,078 --
Gain on partial sale of ISSI-Taiwan (10,506) --
Other charges to net loss not affecting cash 7,699 8,475
Net effect of changes in current and other assets and current liabilities (10,299) 1,853
--------- ---------
Cash provided by (used in) operating activities (27,423) 3,259
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (14,156) (10,702)
Purchases of available-for-sale securities (28,550) (151,300)
Sales of available-for-sale securities 49,050 180,400
Minority interest in consolidated subsidiary 37,642 --
Investment in Wafertech, LLC (12,480) (9,360)
Investment in United Integrated Circuits Corp (4,730) (12,983)
Acquisition of Nexcom (869) --
--------- ---------
Cash provided by (used in) investing activities 25,907 (3,945)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under notes payable and long-term obligations 55,146 13,397
Proceeds from issuance of common stock 2,373 946
Principal payments on notes payable and long-term obligations (37,647) (10,538)
Decrease (increase) in restricted cash 5,090 1,824
--------- ---------
Cash provided by financing activities 24,962 5,629
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (1,989) (49)
--------- ---------
Net increase (decrease) in cash and cash equivalents 21,457 4,894
Cash and cash equivalents at beginning of period 22,334 12,237
--------- ---------
Cash and cash equivalents at end of period $ 43,791 $ 17,131
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 5
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
Integrated Silicon Solution, Inc. (the "Company") and its consolidated majority
owned subsidiaries, after elimination of all significant intercompany accounts
and transactions, and have been prepared in accordance with generally accepted
accounting principles for interim financial information and with Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included. Operating results for the nine months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 1998.
In February 1999, the Company became aware that the financial
statements for the three and nine months ended June 30, 1998 had incorrectly
omitted the impact of the cumulative translation adjustment from the
calculation of its gain on sale of investment (related to the partial sale of
its Taiwan Subsidiary) during the June 1998 quarter. Accordingly, the Company's
financial statements for the year ended September 30, 1998 have been restated.
The effect of this adjustment on previously reported consolidated financial
statements as of June 30, 1998 and for the three- and nine-month periods ended
June 30, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, 1998 June 30, 1998
----------------------- -----------------------
As Reported Restated As Reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Gain on sale of investment $ 17,180 $ 10,506 $ 17,180 $ 10,506
Loss before income taxes
and minority interest (2,846) (9,520) (12,216) (18,890)
Net loss before minority interest (4,996) (11,670) (14,721) (21,395)
Net Income (loss) (4,996) (11,670) (14,721) (21,395)
Basic and diluted loss per share $ (0.26) $ (0.61) $ (0.78) $ (1.14)
As of June 30, 1998:
Retained Earnings $ 17,545 $ 10,871
Cumulative translation adjustment (13,501) (6,827)
Total stockholders' equity 119,343 119,343
</TABLE>
2. CUSTOMER CONCENTRATION
Sales to one customer accounted for approximately 19% and 10% of total
net sales for the quarter ended June 30, 1998 and June 30, 1997, respectively,
and approximately 21% and 19% of total net sales for the nine months ended June
30, 1998 and June 30, 1997, 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
------- ------------
1998 1997
<S> <C> <C>
Cash ............................................. $39,687 $21,953
Money market instruments ......................... 354 480
Certificates of deposit .......................... 3,793 5,103
Auction preferred stock .......................... 2,000 13,200
Municipal bonds due in more than 3 years ......... 3,100 12,400
------- -------
$48,934 $53,136
======= =======
</TABLE>
4. INVENTORIES
<TABLE>
<CAPTION>
The following is a summary of inventories
by major category: (In thousands)
June 30 September 30
------- ------------
1998 1997
<S> <C> <C>
Raw materials .................................... $16,232 $10,444
Work-in-process .................................. 13,362 10,199
Finished goods ................................... 37,648 20,087
------- -------
$67,242 $40,730
======= =======
</TABLE>
4
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INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The income tax provision for the nine month period ended June 30, 1998
is based on an annual estimate of Taiwan taxable income after the exemption for
the Taiwan tax holiday, withholding taxes primarily associated with the sale of
ISSI-Taiwan shares and U.S. alternative minimum taxes. The estimated annual
effective tax rate for 1998 differs from the federal statutory rate primarily as
a result of the utilization of federal and state net operating losses which will
be realized on a current basis as a result of the taxable gain recognized on the
sale of ISSI-Taiwan shares and the in-process technology charge related to the
acquisition of Nexcom, which is not deductible for tax purposes. In addition,
the Company has incurred Taiwan withholding taxes related to the stock sale for
which a valuation allowance has been set up.
6. NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share". Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Earnings per share amounts for all periods have been
restated to conform to the Statement No. 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
----------- -------- ----------- --------
As restated As restated
<S> <C> <C> <C> <C>
Net loss $(11,670) $ (3,919) $(21,395) $ (7,069)
======== ======== ======== ========
Weighted average common shares outstanding 19,204 17,790 18,800 17,702
Denominator for basic loss per share 19,204 17,790 18,800 17,702
-------- -------- -------- --------
Dilutive stock options -- -- -- --
-------- -------- -------- --------
Denominator for diluted loss per share 19,204 17,790 18,800 17,702
======== ======== ======== ========
Basic loss per share $ (0.61) $ (0.22) $ (1.14) $ (0.40)
======== ======== ======== ========
Diluted loss per share $ (0.61) $ (0.22) $ (1.14) $ (0.40)
======== ======== ======== ========
</TABLE>
The above diluted calculation for the three months ended June 30, 1998
and 1997, does not include approximately 2,175,000 and 2,233,000 shares
attributable to options as of June 30, 1998 and 1997, respectively, as their
impact would be anti-dilutive. The above diluted calculation for the nine months
ended June 30, 1998 and 1997, does not include approximately 825,000 and
1,889,000 shares attributable to options as of June 30, 1998 and 1997,
respectively, as their impact would be anti-dilutive.
5
<PAGE> 7
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. 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.
8. LITIGATION
On July 31, 1998, the Lemelson Foundation Partnership filed a lawsuit
in the United States District Court in Phoenix, Arizona against the Company and
twenty-five (25) other United States semiconductor companies for infringement of
certain of its patent rights. The Company is conferring with its patent
attorneys in regards to its possible actions to this claim and may collaborate
with other named companies regarding a response to this claim. There can be no
assurance that the outcome of this matter will not have a material adverse
impact on the Company's business or financial results.
On April 22, 1998, the U.S. Department of Commerce ("DOC") published
an amended antidumping duty order on imports of SRAMs from Taiwan from where the
Company currently imports a majority of its SRAMs. As a consequence of this
antidumping duty order, the Company is required to post a cash deposit on
imports of Taiwan fabricated SRAM wafers or devices, at the ad valorem rate of
7.56%. The cash deposits subsequently could be returned to the Company or,
alternatively, the Company could owe duties and interest in addition to the
amounts deposited, depending on whether the DOC conducts an administrative
review of imports entered after the imposition of the antidumping order, and if
so, on the results of the DOC review. The decision on whether to conduct a
review will be made in 1999, and the results of the review would be issued in
the year 2000.
The Company has retained legal counsel to defend its interests in the
antidumping proceedings. In addition, certain aspects of the affirmative
antidumping determination are being challenged in federal court proceedings by
some of the respondents to the investigation, and these proceedings could result
in the termination of this antidumping case, although the prospects of these
legal appeals, if undertaken, are not known. Duties, if any, calculated and
assessed by the government could have a material adverse affect on the Company's
gross margins and profits.
9. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" (FAS No. 130) and Statement No. 131
"Disclosures About Segments of An Enterprise and Related Information" (FAS No.
131). FAS No. 130 establishes rules for reporting and displaying comprehensive
income. FAS No. 131 will require the Company to use the "management approach" in
disclosing segment information. Both statements are effective for the Company
during fiscal 1999. The Company does not believe that the adoption of either FAS
No. 130 or FAS No. 131 will have a material impact on the Company's results of
operations, cash flows, or financial position. However, comprehensive income
will differ from net income.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
is required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of the Company. Given the complexity of the new Standard and
that the impact hinges on market values at the date of adoption, it is extremely
difficult to estimate the impact of adoption unless adoption is imminent.
6
<PAGE> 8
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. 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. In addition, the Company
incurred approximately $400,000 in other costs related to this transaction. The
transaction was accounted for as a purchase and resulted in an in-process
technology charge of $7.1 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.
11. PARTIAL SALE OF INTEGRATED SILICON SOLUTION (TAIWAN) INC.
On June 29, 1998, the Company sold approximately 46% of Integrated
Silicon Solution (Taiwan) Inc. ("ISSI-Taiwan") to a group of private investors
pursuant to a Common Stock Purchase Agreement dated June 19, 1998. The price was
privately negotiated between the parties. Cash proceeds from the transaction
totaled $35.5 million net of withholding and transaction taxes. The transaction
resulted in a pre-tax gain of $10.5 million which is recorded in the Company's
June 30, 1998 quarter.
7
<PAGE> 9
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. 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.
As a result of the restatement of the Company's financial statements
for the third quarter ended June 30, 1998, certain information contained in
this item has been changed from that which appeared in the Company's
originally filed Form 10-Q for such quarter. Readers should carefully review the
"Gain on Sale of Investment" and "Liquidity and Capital Resources" sections
included herein to reflect the modified numbers.
BACKGROUND
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. The Company's 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 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 access to leading edge process technology and a committed
source for wafer processing, 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. 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.
On June 29, 1998, the Company sold approximately 46% of Integrated
Silicon Solution (Taiwan) Inc. ("ISSI-Taiwan") to a group of private investors
pursuant to a Common Stock Purchase Agreement dated June 19, 1998. The price was
privately negotiated between the parties. Cash proceeds from the transaction
totaled $35.5 million net of withholding and transaction taxes. The transaction
resulted in a pre-tax gain of $10.5 million which is recorded in the Company's
June 30, 1998 quarter. The Company plans to continue to use ISSI-Taiwan to
perform testing and manufacturing logistics services.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Net Sales. Net sales decreased by 6% to $25.0 million in the three
months ended June 30, 1998 from $26.5 million in the three months ended June 30,
1997. The decrease in sales was principally due to a decline in unit shipments
of the Company's 256K SRAM, 256K modules and 1024K EPROM products combined with
a general decrease in the average selling prices of the Company's products.
These decreases in revenue were partially offset by increased unit shipments of
the Company's 64K x 16 and 64K x 64 SRAMs and its 256K x 16 DRAM. The Company
experienced lower average selling prices for its products in the June 1998
quarter compared to the same quarter of the prior year and the March 1998
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
8
<PAGE> 10
products. There can be no assurance that such declines will be offset by higher
volumes or by higher prices on newer products. In this regard, net sales in the
June 1998 quarter decreased by 38% from March 1998 quarter net sales of $40.7
million principally due to a decrease in units shipments of the Company's SRAM
and DRAM products. See "Quarterly Fluctuations in Operating Results". Sales to
3Com/U.S. Robotics accounted for approximately 19% and 10% of total net sales
for the quarters ended June 30, 1998 and June 30, 1997, respectively. As sales
to this customer are executed pursuant to purchase orders and no purchasing
contract exists, the customer can cease doing business with the Company at any
time.
Gross Profit (loss). Gross profit decreased to $(5.5) million in the
three months ended June 30, 1998, from $8.2 million in the three months ended
June 30, 1997. The June 1998 period included a $10.8 million inventory
write-down for lower of cost or market issues on certain of the Company's
products primarily SRAMs. As a percentage of net sales, gross profit decreased
to (22.1)% in the three months ended June 30, 1998 from 31.1% in the three
months ended June 30, 1997. Excluding the $10.8 million inventory write-down,
gross profit was $5.3 million or 21.0% of net sales in the June 1998 quarter.
Excluding the inventory write-down in the June 1998 quarter, the decrease in
gross profit was primarily the result of a decline in unit shipments of the
Company's 256K SRAM, 256K modules and 1024K EPROM products combined with a
general decrease in the average selling prices of the Company's products.
Although product unit costs were lower in the June 1998 quarter compared to the
June 1997 quarter, such reductions did not offset the declines in average
selling prices resulting in lower gross margins. 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 for certain products that involve efforts to reduce
internal costs and supplier costs, 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. The Company does not believe that
such cost reduction efforts are likely to have a material adverse impact on the
quality of its products or the level of service provided by the Company.
Research and Development. Research and development expenses increased
by 11% to $7.9 million in the three months ended June 30, 1998, from $7.1
million in the three months ended June 30, 1997. As a percentage of net sales,
research and development expenses increased to 31.5% in the three months ended
June 30, 1998, from 26.7% in the three months ended June 30, 1997. The 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. During the three months ended June 30, 1998, the Company's development
efforts principally focused on specialty EDO DRAM, serial Flash products, wider
bus width SRAMs such as the 64K x 64, 64K x 32, 64K x 36 and 128K x 64
configurations, and other memory related devices. The Company anticipates that
its research and development expenses will remain fairly constant in the near
future, although such expenses may fluctuate as a percentage of net sales.
Selling, General and Administrative. Selling, general and
administrative expenses decreased by 13% to $4.6 million in the three months
ended June 30, 1998 from $5.3 million in the three months ended June 30, 1997.
As a percentage of net sales, selling, general and administrative expenses
decreased to 18.4% in the three months ended June 30, 1998, from 20.0% in the
three months ended June 30, 1997. The decreases were primarily the result of
decreases in bad debt reserves and legal expenses associated with antidumping
proceedings 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.
Gain on sale of investment. On June 29, 1998, the Company sold
approximately 46% of ISSI-Taiwan to a group of private investors pursuant to a
Common Stock Purchase Agreement dated June 19, 1998. The price was privately
negotiated between the parties. Cash proceeds from the transaction totaled $35.5
million net of withholding and transaction taxes. The transaction resulted in a
pre-tax gain of $10.5 million which is recorded in the Company's June 30, 1998
quarter.
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<PAGE> 11
Other income (loss), Net. Other income (loss), net decreased to $(2.0)
million in the three months ended June 30, 1998 from $0.2 million in the three
months ended June 30, 1997, primarily due to exchange losses and to a lesser
extent decreased interest income resulting from lower cash and short-term
investment balances.
Provision (benefit) for Income Taxes. The income tax provision for the
three month period ended June 30, 1998 is based on an annual estimate of Taiwan
taxable income after the exemption for the Taiwan tax holiday, withholding taxes
primarily associated with the sale of ISSI-Taiwan shares and U.S. alternative
minimum taxes. The effective tax rate for the three months ended June 30, 1998
increased as compared to the same period for 1997, primarily due to withholding
taxes related to the ISSI-Taiwan stock sale. Based on revised forecasts, the
Company has decided to establish a valuation allowance for the foreign tax
credits realized in the current year.
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
Net Sales. Net sales increased by 38% to $105.1 million in the nine
months ended June 30, 1998 from $75.9 million in the nine months ended June 30,
1997. The increase in sales was principally due to shipments of the Company's
newer products, specifically its 64K x 16, 64K x 32, and 64K x 64 SRAMs and its
256K x 16 DRAM. Additionally, shipments of the Company's more mature 128K x 8
SRAM product increased, more than offsetting its lower average selling price and
shipments of the more mature 32K x32 SRAM increased while its average selling
price increased. Shipments of certain of the Company's NVM products, principally
its EPROMs and EEPROMs, declined significantly in the nine months ended June 30,
1998 compared to the nine months ended June 30, 1997. The Company anticipates
that the average selling prices of its existing products will continue to
decline 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 "Certain Factors - Declines in Average
Selling Prices". Sales to 3Com/U.S. Robotics accounted for approximately 21% and
19% of total net sales for the nine months ended June 30, 1998 and June 30,
1997, respectively. As sales to this customer are executed pursuant to purchase
orders and no purchasing contract exists, the customer can cease doing business
with the Company at any time.
Gross Profit. Gross profit decreased 28% to $16.1 million in the nine
months ended June 30, 1998 from $22.5 million in the nine months ended June 30,
1997. As a percentage of net sales, gross profit decreased to 15.3% in the nine
months ended June 30, 1998 from 29.6% in the nine months ended June 30, 1997. In
the June 1998 quarter, the Company recorded a $10.8 million inventory write-down
for lower of cost or market issues on certain of the Company's products
primarily SRAMs. In the December 1997 quarter, the Company recorded a $2.6
million inventory write-down, of which $1.8 million related to lower of cost or
market issues on certain of the Company's NVM products. In addition, in the
December 1997 quarter, the Company wrote-off $0.8 million worth of a specific
DRAM product, for which the Company's six month forecast showed minimal demand
at December 31, 1997 and for which the Company has had minimal sales to date. It
is the Company's practice to write-down to zero carrying value inventory on hand
in excess of six months estimated sales volumes to cover estimated exposures
unless adjustments are made to the forecast based on management's judgments for
newer products, end of life products or planned inventory increases.
Management's judgments take into account the product life cycles which can range
from 6 to 24 months, the maturity of the product as to whether it is newly
introduced or is approaching its end of life, the impact of competitor
announcements and product introductions on the Company's products and purchasing
opportunities due to excess wafer capacity. Excluding the inventory write-downs
of $13.4 million for the nine months ended June 30, 1998, the increase in gross
profit dollars was primarily the result of shipments of the Company's newer
products, specifically its 64K x 16, 64K x 32, and 64K x 64 SRAMs and its 256K x
16 DRAM and increased unit shipments of the Company's more mature 128K x 8 and
32K x 32 SRAM products. 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
for certain products that involve efforts to reduce internal costs and supplier
costs, there can be no assurance that product costs will be reduced or that such
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reductions will be sufficient to offset the expected declines in average selling
prices. The Company does not believe that such cost reduction efforts are likely
to have a material adverse impact on the quality of its products or the level of
service provided by the Company.
Research and Development. Research and development expenses increased
by 26% to $23.7 million in the nine months ended June 30, 1998 from $18.7
million in the nine months ended June 30, 1997. As a percentage of net sales,
research and development expenses decreased to 22.5% in the nine months ended
June 30, 1998 from 24.7% in the nine months ended June 30, 1997. 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 nine months ended June 30, 1998, the
Company's development efforts principally focused on wider bus width SRAMs such
as the 64K x 64, 64K x 32, 64K x 36 and 128K x 64 configurations, specialty EDO
DRAMs, specialty DSP support SRAMs, serial Flash and other memory related
devices. The Company anticipates that its research and development expenses will
remain fairly constant in the near future, although such expenses may fluctuate
as a percentage of net sales.
Selling, General and Administrative. Selling, general and
administrative expenses increased by 9% to $13.8 million in the nine months
ended June 30, 1998 from $12.7 million in the nine months ended June 30, 1997.
As a percentage of net sales, selling, general and administrative expenses
decreased to 13.2% in the nine months ended June 30, 1998, from 16.8% in the
nine months ended June 30, 1997. The increase in absolute dollars was primarily
the result of increased payroll related expenses from the addition of marketing
and sales personnel and increased selling commissions associated with higher
revenues partially offset by decreases in bad debt reserves and legal expenses
associated with antidumping proceedings. 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.
In-process Technology. On December 3, 1997, the Company completed its
acquisition of 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. In addition, the Company incurred approximately
$400,000 in other costs related to this transaction. The transaction was
accounted for as a purchase and resulted in an in-process technology charge of
$7.1 million in the Company's December 31, 1997 quarter.
Gain on sale of investment. On June 29, 1998, the Company sold
approximately 46% of ISSI-Taiwan to a group of private investors pursuant to a
Common Stock Purchase Agreement dated June 19, 1998. The price was privately
negotiated between the parties. Cash proceeds from the transaction totaled $35.5
million net of withholding and transaction taxes. The transaction resulted in a
pre-tax gain of $10.5 million which is recorded in the Company's June 30, 1998
quarter.
Other income (loss), Net. Other income (loss), net decreased to $(0.9)
million in the nine months ended June 30, 1998 from $1.6 million in the nine
months ended June 30, 1998, primarily due to exchange losses as well as
decreased interest earnings as a result of lower cash and short-term investment
balances.
Provision (benefit) for Income Taxes. The income tax provision for the
nine month period ended June 30, 1998 is based on an annual estimate of Taiwan
taxable income after the exemption for the Taiwan tax holiday, withholding taxes
primarily associated with the sale of ISSI-Taiwan shares and U.S. alternative
minimum taxes. In addition, the in-process technology charge related to the
acquisition of Nexcom will not be deductible for tax purposes. The effective tax
rate for the nine months ended June 30, 1998 increased as compared to the same
period for 1997, primarily due to withholding taxes related to the ISSI-Taiwan
stock sale. Based on revised forecasts, the Company has decided to establish a
valuation allowance for the foreign tax credits realized in the current year.
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LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company's principal sources of liquidity
included cash, cash equivalents, restricted cash and short-term investments of
approximately $48.9 million, of which approximately $25.9 million was held by
ISSI-Taiwan. Approximately $0.1 million of the cash held by the Company is
restricted as of June 30, 1998 for purposes of securing available short-term
lines of credit and letters of credit. During the first nine months of fiscal
1998, operating activities utilized cash of approximately $27.4 million. Cash
utilized by operations was primarily due to increases in inventory and accounts
receivable and decreases in accrued liabilities partially offset by increases in
accounts payable and net loss adjusted for depreciation, in-process technology
charge, gain on partial sale of ISSI-Taiwan and other non-cash items.
Inventory increased to $67.2 million at June 30, 1998 from $40.7
million at September 30, 1997. The increase in inventory was predominately due
to increases in the Company's newer SRAM products in anticipation of future
demand and increases in the inventory of wafers which were purchased by the
Company to take advantage of lower prices offered by its foundry partners
because of excess wafer capacity at their facilities.
Accounts payable increased to $52.1 million at June 30, 1998 from $23.1
million at September 30, 1997. The increase in accounts payable is principally
related to increases in inventory.
The Company made capital expenditures of approximately $14.2 million in
the first nine months of fiscal 1998, of which approximately $8.6 million was
for the construction of the Company's new Taiwan facility and $5.6 million was
for the purchase of test equipment and design and engineering tools. The Company
expects to spend approximately $7.0 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 $8.0 million during the
next twelve months for the completion of construction of its Taiwanese facility.
A portion of this construction cost is expected to be financed through loans.
Although construction is still continuing, the Company took occupancy of the
building in August 1998.
On June 29, 1998, the Company sold approximately 46% of ISSI-Taiwan to
a group of private investors pursuant to a Common Stock Purchase Agreement dated
June 19, 1998. The price was privately negotiated between the parties. Cash
proceeds from the transaction totaled $35.5 million net of withholding and
transaction taxes. The transaction resulted in a pre-tax gain of $10.5 million
which is recorded in the Company's June 30, 1998 quarter.
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 March 31, 1998 all of
this amount had been paid. The last scheduled payment to WaferTech by the
Company of $12.5 million was made in November 1997. The Company has also agreed
to certain minimum wafer purchase commitments with its foundry partners in
exchange for wafer capacity commitments. In fiscal 1995, the Company entered
into an agreement with TSMC pursuant to which the Company agreed to acquire
specified wafer capacity through 2001. The Company also agreed to make certain
annual payments totaling approximately $26.4 million through 2001 to TSMC for
additional capacity above the annual base capacity. Wafer purchases in any given
year are first applied to the base capacity and then to the Company's $26.4
million obligation. As a result, the $26.4 million may be subject to forfeiture
if the Company does not purchase the base capacity and additional capacity for
which it has contracted. The Company also has minimum purchase obligations to
TSMC related to WaferTech LLC. The Company is obligated to purchase a minimum of
3.4% of WaferTech's installed capacity. Initial wafer outs are expected in the
second half of calendar 1998 and full capacity is expected in the year 2000.
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 $25 million (subject to fluctuations in the
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New Taiwanese Dollar) for a 5% equity interest in the venture of which UMC
retains 55% ownership. As of June 30, 1998, all of the committed amount had been
paid by the Company to UICC. The final payment of approximately $4.7 million was
made to UICC in December 1997. The UICC facility was severely damaged by fire in
October 1997 and production is not expected to ramp up until the fourth quarter
of 1999.
The Company was provided $25.0 million from financing activities during
the first nine months of fiscal 1998, of which $17.5 million was for net
borrowings under short-term and long-term lines of credit, $5.1 million resulted
from the decrease in restricted cash and $2.4 million was for proceeds from the
issuance of common stock under stock option and stock purchase plans. The
Company has $24.9 million available through a number of short-term lines of
credit with various financial institutions in Taiwan. As of June 30, 1998, the
Company had outstanding borrowings of approximately $20.2 million under these
short-term lines of credit.
The Company has a number of long-term lines of credit with 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 June 30, 1998 were $15.0 million, of which $1.0 million is
included in the current portion of long-term obligations. These obligations bear
interest at rates from 6.85% to 8.85% and are payable in quarterly installments
through 2004. As of June 30, 1998, the Company had available long-term lines of
credit of approximately $8.8 million of which approximately $3.8 million is for
the construction financing of the Company's new facility in the Hsinchu
Science-Based Industrial Park.
On April 22, 1998, the U.S. Department of Commerce ("DOC") published an
amended antidumping duty order on imports of SRAMs from Taiwan from where the
Company currently imports a majority of its SRAMs. As a consequence of this
antidumping duty order, the Company is required to post a cash deposit on
imports of Taiwan fabricated SRAM wafers or devices, at the ad valorem rate of
7.56%. The cash deposits subsequently could be returned to the Company or,
alternatively, the Company could owe duties and interest in addition to the
amounts deposited, depending on whether the DOC conducts an administrative
review of imports entered after the imposition of the antidumping order, and if
so, on the results of the DOC review. The decision on whether to conduct a
review will be made in 1999, and the results of the review would be issued in
the year 2000.
The Company has retained legal counsel to defend its interests in the
antidumping proceedings. In addition, certain aspects of the affirmative
antidumping determination is being challenged in federal court proceedings by
some of the respondents to the investigation, and these proceedings could result
in the termination of this antidumping case, although the prospects of these
legal appeals, if undertaken, are not known. Duties, if any, calculated and
assessed by the government could have a material adverse affect on the Company's
gross margins and profits.
The Company believes that its existing funds together with current and
anticipated available financing will satisfy the Company's anticipated working
capital and other cash requirements through at least the next 12 months. The
Company may evaluate actions to further increase its cash position such as bank
borrowings, the disposition of certain assets, equity financing, and debt
financing.
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.
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CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS OR FUTURE
OPERATING RESULTS
DEPENDENCE ON SRAM PRODUCTS; DECLINE IN AVERAGE SELLING PRICES FOR
SRAM PRODUCTS
In the first nine months of fiscal 1998 and in fiscal 1997, a
substantial majority of the Company's net sales were derived from the sale of
SRAM products. In the June 1998 quarter, the Company's net sales decreased by
38% to $25.0 million from $40.7 million in the March 1998 quarter principally
due to a decrease in units shipments of the Company's SRAM products. In fiscal
1997, the Company's net sales decreased by 18% to $108.3 million from $132.0
million in fiscal 1996. This decrease in sales was principally due to
significant deterioration in the average selling prices of the Company's SRAM
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.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
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
yields, 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, in the June 1998 quarter, the Company's net sales
decreased by 38% to $25.0 million from $40.7 million in the March 1998 quarter
principally due to a decrease in units shipments of the Company's SRAM products.
In addition, 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. 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. In the first nine months of fiscal 1998, approximately
46% of the Company's net sales were attributable to customers located in the
United States, 19% was attributable to customers located in Europe and 35% was
attributable to customers located in Asia. 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 the first nine months of fiscal
1998 and in fiscal 1997, international sales (sales by ISSI-Taiwan and export
sales by ISSI-U.S.) comprised approximately 54% and 55% of the Company's net
sales, respectively. Accordingly, 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, since late 1997 several Asian countries,
including Korea, Japan and Thailand, have 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.
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DECLINES IN AVERAGE SELLING PRICES
Competitive pricing pressures resulted in significant price decreases
for the Company's products during 1996, 1997 and 1998. 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 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. In this regard, the Company has a cost
reduction program in place in an effort to reduce its cost per unit for certain
products. This program involves efforts to reduce internal costs and supplier
costs. The Company does not believe that such cost reduction efforts are likely
to have a material adverse impact on the quality of its products or the level of
service provided by the Company.
RISK OF INVENTORY WRITE-DOWNS
Shifts in industry-wide capacity from shortages to oversupply or from
oversupply to shortages may result in significant fluctuations in the Company's
quarterly or annual operating results. The semiconductor industry is highly
cyclical and is subject to significant downturns resulting from excess capacity,
overproduction, reduced demand or technological obsolescence. These factors can
result in a decline in average selling prices and the stated value of inventory.
In the June 1998 quarter, the Company recorded a $10.8 million inventory
write-down for lower of cost or market issues on certain of the Company's
products. In the December 1997 quarter, the Company recorded a $2.6 million
inventory write-down, of which $1.8 million related to lower of cost or market
issues on certain of the Company's NVM products. In addition, in the December
1997 quarter, the Company wrote-off $0.8 million worth of a specific DRAM
product, for which the Company's six month forecast showed minimal demand at
December 31, 1997 and for which the Company has had minimal sales to date. It is
the Company's practice to write-down to zero carrying value inventory on hand in
excess of six months estimated sales volumes to cover estimated exposures unless
adjustments are made to the forecast based on management's judgments for newer
products, end of life products or planned inventory increases. Management's
judgments take into account the product life cycles which can range from 6 to 24
months, the maturity of the product as to whether it is newly introduced or is
approaching its end of life, the impact of competitor announcements and product
introductions on the Company's products and purchasing opportunities due to
excess wafer capacity. The Company believes that six months is an appropriate
period because it is difficult to accurately forecast for a specific product
beyond this time frame due to potential introduction of products by competitors,
technology obsolescence or fluctuations in demand. In this regard, in the June
1996 quarter, the Company recorded a $15 million write-down for various SRAM and
non-volatile memory products that the Company's forecast indicated would not be
sold in the next six months. The Company did not expect to sell the excess
inventory at the time because the volume and price declines from the December
1995 quarter to the June 1996 quarter resulted in a decrease in revenues of 38%.
During this period, market conditions were extremely uncertain. Furthermore,
during the fourth fiscal quarter of 1996 ended September 30, 1996, the Company
experienced a continued decline in revenue of 16% from the June 1996 quarter.
While the Company continued to focus on the selling of this product, sales
reached the bottom of its decline in the September 1996 quarter and stayed
relatively flat in the December 1996 quarter. Subsequently, as market conditions
improved in the latter part of the December 1996 quarter, the Company was able
to sell certain of these products. As a result, of improving market conditions
during fiscal 1997, the Company was able to sell $13.9 million of the
written-off product. However, the Company considers such sales unusual and there
can be no assurance that in the future written-off inventory can be sold.
Historically, the Company has consistently applied this practice in valuing
inventory and, until the events that transpired in the first through third
quarters of fiscal 1996, had never recorded material write-downs or recoveries.
The Company believes that based on the factors noted above, its six month
write-off policy is still appropriate as a method to identify and estimate
inventory exposure. There can be no assurance that in the future additional
inventory write-downs will not occur.
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PRODUCT CONCENTRATION AND DEPENDENCE ON PERSONAL COMPUTER INDUSTRY
In the first nine months of fiscal 1998 and in fiscal 1997, a
substantial majority 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. 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.
CUSTOMER CONCENTRATION
The Company's sales are concentrated within a limited customer base. In
the first nine months of fiscal 1998 and in fiscal 1997, one customer accounted
for approximately 21% and 19% of net sales, respectively. As sales to this
customer are executed pursuant to purchase orders and no purchasing contract
exists, the customer can cease doing business with the Company at any time. 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 the first nine months of fiscal 1998 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 experience manufacturing failures or yield shortfalls, choose
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. 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 totaling approximately $26.4
million through 2001 to TSMC for additional capacity above the annual base
capacity. Wafer purchases in any given year are first applied to the base
capacity and then to the Company's $26.4 million obligation. As a result, the
$26.4 million may be subject to forfeiture if the Company does not purchase the
base capacity and additional capacity for which it has contracted. The Company
also has minimum purchase obligations to TSMC related to WaferTech LLC, a joint
venture in which the Company is an investor. The Company is obligated to
purchase a minimum of 3.4% of WaferTech's installed capacity. Initial wafer outs
are expected in the second half of calendar 1998 and full capacity is expected
in the year 2000. 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 will be required to make
payments for the unused capacity and its business and operating results would be
materially and adversely affected.
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INTERNATIONAL OPERATIONS
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 unstability. 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 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. The Company's business and results of
operations have been negatively impacted by exchange rate fluctuations in the
past and there can be no assurance that exchange rate fluctuations will not
materially and adversely affect its business and operating results in the
future.
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 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.
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. In this regard, on July 31, 1998,
the Lemelson Foundation Partnership filed a lawsuit in the United States
District Court in Phoenix, Arizona against the Company and twenty-five (25)
other United States semiconductor companies for infringement of certain of its
patent rights. The Company is conferring with its patent attorneys in regards to
its possible actions to this claim and may collaborate with other named
companies regarding a response to this claim. There can be no assurance that the
outcome of this matter will not have a material adverse impact on the Company's
business or financial results. There can be no assurance that other companies
will not in the future pursue claims against the Company with respect to any
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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RISK OF INCREASED TAXES
The Company's tax rate could fluctuate 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.
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.
YEAR 2000 ISSUES
As the millennium approaches, the Company is preparing all of its
computer operations to be year 2000 compliant. The Company has conducted an
internal review of its systems to ensure that they do not malfunction as a
result of the year 2000. Based on the results of this review, the expenses to be
incurred by the Company to be year 2000 compliant are not expected to be
material. The Company is evaluating whether the systems used by each of its
customers and suppliers are year 2000 compliant and there can be no assurance
that the year 2000 issues experienced by such entities will not in turn have an
adverse impact on the Company.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has in the past and is
expected in the future to 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.
18
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 31, 1998, the Lemelson Foundation Partnership filed a lawsuit
in the United States District Court in Phoenix, Arizona against the Company and
twenty-five (25) other United States semiconductor companies for infringement of
certain of its patent rights. The Company is conferring with its patent
attorneys in regards to its possible actions to this claim and may collaborate
with other named companies regarding a response to this claim. There can be no
assurance that the outcome of this matter will not have a material adverse
impact on the Company's business or financial results.
On April 22, 1998, the U.S. Department of Commerce ("DOC") published an
amended antidumping duty order on imports of SRAMs from Taiwan from where the
Company currently imports a majority of its SRAMs. As a consequence of this
antidumping duty order, the Company is required to post a cash deposit on
imports of Taiwan fabricated SRAM wafers or devices, at the ad valorem rate of
7.56%. The cash deposits subsequently could be returned to the Company or,
alternatively, the Company could owe duties and interest in addition to the
amounts deposited, depending on whether the DOC conducts an administrative
review of imports entered after the imposition of the antidumping order, and if
so, on the results of the DOC review. The decision on whether to conduct a
review will be made in 1999, and the results of the review would be issued in
the year 2000.
The Company has retained legal counsel to defend its interests in the
antidumping proceedings. In addition, certain aspects of the affirmative
antidumping determination are being challenged in federal court proceedings by
some of the respondents to the investigation, and these proceedings could result
in the termination of this antidumping case, although the prospects of these
legal appeals, if undertaken, are not known. Duties, if any, calculated and
assessed 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 27 Financial Data Schedule.
(b) Reports on Form 8-K
On April 10, 1998, the Company filed a Form 8-K solely for the
purpose of disclosing the effect of adoption of FAS 128, "Earnings
per Share", on its Annual Report on Form 10-K for the fiscal year
ended September 30, 1997 and the related statement of earnings per
share thereon, so that such information may be incorporated by
reference into future filings.
On July 14, 1998, the Company filed a Form 8-K for the purpose of
disclosing the sale of approximately 42 to 47 percent of
ISSI-Taiwan to a group of private investors. On July 31, 1998, the
Company amended the filing to include pro forma financial
statements.
19
<PAGE> 21
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 12, 1999 /s/ Gary L. Fischer
--------------------------------
Gary L. Fischer
Executive Vice President,
Office of the President, and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20
<PAGE> 22
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH (B) UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDING JUNE 30, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 43,834
<SECURITIES> 5,100
<RECEIVABLES> 22,604
<ALLOWANCES> 1,916
<INVENTORY> 67,242
<CURRENT-ASSETS> 149,008
<PP&E> 66,641
<DEPRECIATION> 28,475
<TOTAL-ASSETS> 242,042
<CURRENT-LIABILITIES> 83,190
<BONDS> 14,051
0
0
<COMMON> 2
<OTHER-SE> 119,341
<TOTAL-LIABILITY-AND-EQUITY> 242,042
<SALES> 105,098
<TOTAL-REVENUES> 105,098
<CGS> 89,003
<TOTAL-COSTS> 89,003
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 791
<INCOME-PRETAX> (18,890)
<INCOME-TAX> 2,505
<INCOME-CONTINUING> (21,395)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,395)
<EPS-PRIMARY> (1.14)
<EPS-DILUTED> (1.14)
</TABLE>
