<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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
August 6, 1999 was 19,893,561
<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,
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 19,029 $ 25,032 $ 63,196 $ 105,098
Cost of sales 15,031 30,566 51,521 89,003
--------- --------- --------- ---------
Gross profit (loss) 3,998 (5,534) 11,675 16,095
--------- --------- --------- ---------
Operating Expenses:
Research and development 4,786 7,885 14,729 23,656
Selling, general and administrative 2,812 4,616 9,138 13,843
In-process technology charge -- -- -- 7,078
--------- --------- --------- ---------
Total operating expenses 7,598 12,501 23,867 44,577
--------- --------- --------- ---------
Operating loss (3,600) (18,035) (12,192) (28,482)
Gain on sale of investment 1,846 10,506 2,658 10,506
Other income (loss), net 175 (1,991) 796 (914)
--------- --------- --------- ---------
Loss before income taxes,
minority interest and equity in
net income of affiliated companies (1,579) (9,520) (8,738) (18,890)
Provision for income taxes -- 2,150 858 2,505
--------- --------- --------- ---------
Net loss before minority interest
and equity in net income of
affiliated companies (1,579) (11,670) (9,596) (21,395)
Minority interest in net loss of
consolidated subsidiary -- -- (472) --
Equity in net income of
affiliated companies 667 -- 302 --
--------- --------- --------- ---------
Net loss $ (912) $ (11,670) $ (8,822) $ (21,395)
========= ========= ========= =========
Basic and diluted loss per share $ (0.05) $ (0.61) $ (0.45) $ (1.14)
========= ========= ========= =========
Shares used in per share calculation 19,586 19,204 19,508 18,800
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 3
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
--------- -------------
(unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,013 $ 27,776
Restricted cash -- 333
Short-term investments 8,050 7,800
Accounts receivable 10,633 19,069
Inventories 28,929 46,484
Other current assets 1,355 4,938
--------- ---------
Total current assets 70,980 106,400
Property, equipment, and leasehold improvements, net 4,903 44,316
Other assets 46,310 51,452
--------- ---------
Total assets $ 122,193 $ 202,168
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 100 $ 18,325
Accounts payable 19,185 40,642
Accrued compensation and benefits 2,127 2,945
Accrued expenses 8,169 8,036
Income tax payable 443 524
Current portion of long-term obligations -- 3,379
--------- ---------
Total current liabilities 30,024 73,851
Income tax payable - non-current 4,996 4,996
Long-term obligations -- 12,087
Minority interest in consolidated subsidiary -- 20,314
Stockholders' equity:
Preferred stock -- --
Common stock 2 2
Additional paid-in capital 118,919 116,199
Accumulated deficit (27,163) (18,341)
Accumulated comprehensive income (4,515) (6,787)
Unearned compensation (70) (153)
--------- ---------
Total stockholders' equity 87,173 90,920
--------- ---------
Total liabilities and stockholders' equity $ 122,193 $ 202,168
========= =========
</TABLE>
(1) Derived from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 4
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (8,822) $(21,395)
In-process technology charge -- 7,078
Net gain on sale of investments (2,658) (10,506)
Other charges to net loss not affecting cash 2,565 7,699
Net effect of changes in current and other assets and current liabilities (5,570) (10,299)
-------- --------
Cash used in operating activities (14,485) (27,423)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (3,134) (14,156)
Purchases of available-for-sale securities (15,450) (28,550)
Sales of available-for-sale securities 15,200 49,050
Proceeds from partial sale of ISSI-Taiwan 4,957 37,642
Cash impact of deconsolidation of ISSI-Taiwan (12,818) --
Investment in Wafertech, LLC -- (12,480)
Proceeds from partial sale of Wafertech 10,000
Investment in UICC -- (4,730)
Proceeds from sale of UICC 9,217
Investment in NexFlash (1,000) --
Investment in DynaChip (500) --
Acquisition of Nexcom -- (869)
-------- --------
Cash provided by investing activities 6,472 25,907
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under notes payable and long-term obligations 33,435 55,146
Proceeds from issuance of common stock 781 2,373
Principal payments on notes payable and long-term obligations (32,293) (37,647)
Decrease in restricted cash -- 5,090
-------- --------
Cash provided by financing activities 1,923 24,962
-------- --------
Effect of exchange rate changes on cash and cash equivalents 327 (1,989)
-------- --------
Net increase (decrease) in cash and cash equivalents (5,763) 21,457
Cash and cash equivalents at beginning of period 27,776 22,334
-------- --------
Cash and cash equivalents at end of period $ 22,013 $ 43,791
======== ========
</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 (See note 13), 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, 1999 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 1999.
2. CONCENTRATIONS
Sales to one customer accounted for approximately 22% and 19% of total
net sales for the quarter ended June 30, 1999 and June 30, 1998, respectively,
and approximately 22% and 21% of total net sales for the nine months ended June
30, 1999 and June 30, 1998, respectively.
The Company uses Integrated Circuit Solution, Inc. ("ICSI") (formerly
Integrated Silicon Solution Taiwan Inc.) for coordinating wafer purchases,
assembly, and testing for substantially all of its inventory.
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
1999 1998
------- ------------
<S> <C> <C>
Cash $21,824 $23,893
Money market instruments 189 195
Certificates of deposit -- 4,021
Auction preferred stock 1,200 1,000
Municipal bonds due in more than 3 years 6,850 6,800
------- -------
$30,063 $35,909
======= =======
</TABLE>
Investments are carried at cost which approximates fair value.
4
<PAGE> 6
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
The following is a summary of inventories by major category:
<TABLE>
<CAPTION>
(In thousands)
June 30 September 30
1999 1998
------- ------------
<S> <C> <C>
Raw materials $ 7,881 $ 5,447
Work-in-process 7,665 14,868
Finished goods 13,383 26,169
------- -------
$28,929 $46,484
======= =======
</TABLE>
5. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
(In thousands)
June 30 September 30
1999 1998
------- ------------
<S> <C> <C>
Investment in WaferTech LLC $20,800 $31,200
Investment in United Integrated Circuits Corp. -- 16,486
Investment in ICSI 20,557 --
Investment in NexFlash 1,895 --
Other 3,058 3,766
------- -------
$46,310 $51,452
======= =======
</TABLE>
6. INCOME TAXES
The Company recorded no provision for income taxes for the three month
period ended June 30, 1999 due to its net operating loss position. The provision
for income taxes for the nine month period ended June 30, 1999 is primarily
based on foreign withholding taxes related to the sale of ICSI stock in the
first quarter and other foreign withholding taxes in the second quarter of
fiscal 1999. Due to U.S. losses, there is no U.S. tax provision. The tax for the
three and nine months ended June 30, 1999 differs from the federal statutory
rate primarily as a result of a valuation allowance established to cover federal
net operating losses and foreign withholding taxes which will not be realized on
a current basis based on management's expectations of future taxable income and
actual taxable income for the prior years.
5
<PAGE> 7
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NET INCOME (LOSS) PER SHARE
The Company calculates earnings per share in accordance with the
Financial Accounting Standards Board Statement No. 128, "Earnings Per Share."
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,
------------------------ ------------------------
1999 1998 1999 1998
------ --------- ------- --------
<S> <C> <C> <C> <C>
Numerator for basic and diluted loss per share:
Net loss $ (912) $ (11,670) $(8,822) $(21,395)
====== ========= ======= ========
Denominator for basis and diluted loss per share:
Weighted average of common shares 19,586 19,204 19,508 18,800
====== ========= ======= ========
Basic and diluted loss per share $(0.05) $ (0.61) $ (0.45) $ (1.14)
====== ========= ======= ========
</TABLE>
The above diluted calculation for the three months ended June 30, 1999
and 1998 does not include the impact from approximately 3,663,000 and 3,887,000
shares attributable to options outstanding as of June 30, 1999 and 1998,
respectively, as their impact would be anti-dilutive. The above diluted
calculation for the nine months ended June 30, 1999 and 1998, does not include
the impact from approximately 3,498,000 and 3,891,000 shares attributable to
options outstanding as of June 30, 1999 and 1998, respectively, as their impact
would be anti-dilutive.
8. 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.
9. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," (FAS No. 130) as of the beginning of the
three month period ended December 31, 1998. However, it has no impact on the
Company's net income or total stockholders' equity.
6
<PAGE> 8
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of comprehensive income, net of related tax, are as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss $ (912) $(11,670) $ (8,822) $(21,395)
Change in cumulative translation 535 5,549 2,272 (2,579)
adjustment
-------- -------- -------- --------
Comprehensive loss $ (377) $ (6,121) $ (6,550) $(23,974)
======== ======== ======== ========
</TABLE>
10. LITIGATION
In April 1998, the U.S. Department of Commerce ("DOC") published
an 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%. For entries after March 31, 1999, the cash deposits subsequently could be
returned to the Company or, alternatively, the Company could forfeit amounts
deposited and owe duties and interest in addition to the amounts deposited. The
outcome is dependent on whether the DOC conducts an administrative review of
imports entered, between April 1, 1999 and March 31, 2000 and if so, on the
results of the DOC review. The decision on whether to conduct a review will be
made in May of 2000 and the results of the review will likely be issued in the
year 2001. The Company will pay duty deposits on Taiwan SRAM entries before that
date at the deposit rate.
The Company has retained legal counsel to defend its interests in the
antidumping proceedings. In addition, certain aspects of the 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.
Duties calculated and assessed by the government could have a material
adverse affect on the Company's gross margins and profits. There can be no
assurance that any reviews or proceedings will mitigate or eliminate antidumping
duties.
On October 22, 1998, Micron Technology filed an anti-dumping petition
against DRAMs fabricated in Taiwan. Currently, the Company's DRAM products are
fabricated in Taiwan. The case is expected to take from 12 to 18 months to
complete. If an antidumping order is imposed, the Company could face DRAM duties
unless it is able to secure DRAMs from outside of Taiwan. The DOC preliminary
determination was issued on May 28, 1999 and bond or cash deposit requirements
apply to DRAM entries after that date. The preliminary general rate applicable
to Taiwan DRAM imports is 16.41%. Currently, DRAMs account for less than 20% of
the Company's revenue.
7
<PAGE> 9
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131 "Disclosures About Segments of An Enterprise and Related Information"
(FAS No. 131). FAS No. 131 will require the Company to use the "management
approach" in disclosing segment information. FAS No. 131 became effective for
the Company during fiscal 1999. The Company does not believe that the adoption
of FAS No. 131 will have a material impact on the Company's results of
operations, cash flows, or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133 "Accounting for Derivative Instruments and Hedging Activities" (FAS No.
133). FAS No. 133 will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The change in a derivative's fair
value related to the ineffective portion of a hedge, if any will be immediately
recognized in earnings. The Company expects to adopt FAS No. 133 as of the
beginning of its fiscal year 2001. The Company does not believe that the
adoption of FAS No. 133 will have a material impact on the Company's results of
operations, cash flows, or financial position.
12. SPIN-OFF OF NEXFLASH TECHNOLOGIES, INC.
Effective October 1, 1998, the Company transferred certain employees and
joint ownership of certain patents and related Flash technology to a newly
formed company, NexFlash Technologies, Inc. The Company and NexFlash jointly own
existing Flash related patents, and NexFlash will continue development of Flash
products. The Company owns approximately 32% of NexFlash, and ICSI owns
approximately 17%. ISSI's President is Chairman of NexFlash.
In connection with the NexFlash transaction, the Company issued warrants
to purchase an aggregate of 981,659 shares of ISSI Common Stock at an exercise
price of $3.76 per share to the NexFlash investors. The warrants expire on
November 4, 2000.
13. PARTIAL SALE OF INTEGRATED CIRCUIT SOLUTION INC.
In December 1998, the Company sold an additional 20% of its holdings in
ICSI to a group of private investors resulting in a pre-tax gain of $1.2
million. Proceeds from the transaction net of withholding and transaction taxes
totaled $6.6 million (including cash of $4.3 million and notes receivable of
$2.3 million). Effective December 31, 1998, the Company owned approximately 43%
of ICSI and accounted for ICSI on the equity basis.
ICSI was consolidated in the accompanying statement of operations until
December 31, 1998 when the additional 20% of the Company's holdings were sold.
The accompanying consolidated balance sheet as of June 30, 1999 reflects ICSI as
an investment accounted for on the equity basis.
8
<PAGE> 10
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESTATEMENT
The Company's retained earnings as reported in its Form 10-K for the
year ended September 30, 1998 was restated. The impact of the restatement was to
increase accumulated deficit and decrease cumulative translation adjustment by
$6.7 million. The income reported for the periods presented herein reflect the
restatement.
15. PARTIAL SALE OF INVESTMENT IN WAFERTECH, LLC.
In December 1998, the Company agreed to sell approximately 33% of its
investment in WaferTech to TSMC for approximately $10.0 million. The transaction
was completed in January 1999, and the Company retains a 2.67% interest in
WaferTech. The Company recorded a loss of approximately $0.4 million in the
March 1999 quarter related to this transaction.
16. SALE OF INVESTMENT IN UICC
In April 1999, the Company agreed to sell its investment in UICC to UMC
for its original acquisition cost. The Company recorded a gain of approximately
$1.8 million in the June 1999 quarter related to this transaction. The gain
results from adjustments to the original acquisition value for fluctuations in
the New Taiwanese Dollar.
9
<PAGE> 11
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.
BACKGROUND
The Company designs, develops and markets high performance memory
devices including static random access memory ("SRAM"), specialty dynamic random
access memory ("DRAM"), and electrically erasable programmable read only
memories ("EEPROMs"). The Company also designs, develops and markets embedded
memory devices which include voice recording chips and certain microcontroller
devices. The Company's products are used in telecommunications, data
communications, networking systems, personal computers ("PCs"), instrumentation
and consumer products. The Company's SRAM products include both asynchronous and
synchronous devices ranging in densities from 64K to 4 megabit. The Company's
DRAM products focus on high speed, low density devices with densities of 2, 4,
and 16 megabits. 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 complimentary metal
oxide semiconductor ("CMOS") process technology expertise to establish
collaborative manufacturing relationships with Asian semiconductor manufacturers
which use the Company's memory products as a vehicle for the development of
advanced process technology. Although the Company believes that these
relationships assist in securing 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 collaborative
manufacturing relationship is with Taiwan Semiconductor Manufacturing
Corporation ("TSMC"), with which it jointly develops process technology for
producing the Company's SRAMs. 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 Wafertech, LLC, a business venture with
TSMC.
RESULTS OF OPERATIONS
The Company's financial results for fiscal 1998 are presented on a
consolidated basis and include the results of the operations which were
transferred to NexFlash as well as those of Integrated Circuit Solution Inc.
("ICSI") (formerly Integrated Silicon Solution Taiwan Inc.). Effective November
1998, the Company's financial results no longer consolidate the results of
NexFlash, as the Company's ownership of NexFlash became less than 50%. Effective
November 1998, the Company accounts for NexFlash on the equity basis and
includes in its financial statements its percentage share of NexFlash's results
of operations. This change has had a minimal effect on the Company's
consolidated revenue and has resulted in a decrease in the Company's
consolidated research and development expenses. In late December 1998, the
Company sold an additional 20% of its interest in ICSI and, as a result, reduced
its ownership interest in ICSI to approximately 43%. The Company's Balance Sheet
as of June 30, 1999 reflects the accounting for ICSI on the equity basis.
Beginning with the second quarter of fiscal 1999, the Company's Statement of
Operations no longer consolidate the results of ICSI, but instead accounts for
ICSI on the equity basis and includes its percentage share of ICSI's results of
operations. Beginning in the second quarter of fiscal 1999, as the Company's
consolidated results no longer include ICSI, there has been a significant
decline in the Company's consolidated revenue and operating expenses.
10
<PAGE> 12
The following proforma financial results for fiscal 1998 are presented
with the results of ICSI for the three and nine month periods ended June 30,
1999 and 1998 included in equity in net income (loss) in affiliated companies.
Those operations that were transferred to NexFlash are included in the results
of fiscal 1998. For management discussion purposes, comparisons will be made to
the results presented below.
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Proforma Proforma
<S> <C> <C> <C> <C>
Net sales $ 19,029 $ 16,437 $ 63,196 $ 84,516
Cost of sales 15,031 23,679 51,521 75,489
-------- -------- -------- --------
Gross Profit 3,998 (7,242) 11,675 9,027
-------- -------- -------- --------
Research and development 4,786 5,616 14,729 19,092
Selling, general and administrative 2,812 3,580 9,138 11,775
In-process technology charge -- -- -- 7,078
-------- -------- -------- --------
Total operating expenses 7,598 9,196 23,867 37,945
-------- -------- -------- --------
Operating loss (3,600) (16,438) (12,192) (28,918)
Gain on sale of investment 1,846 10,506 2,658 10,506
Other income, net 175 141 796 968
-------- -------- -------- --------
Loss before income taxes, minority interest and
equity in net income (loss) of affiliated companies (1,579) (5,791) (8,738) (17,444)
Provision for income taxes -- 2,298 858 2,501
-------- -------- -------- --------
Net loss before minority interest and equity
in net income (loss) of affiliated companies (1,579) (8,089) (9,596) (19,945)
Minority interest in net loss of
consolidated subsidiary -- -- (472) --
Equity in net income (loss) of affiliated companies 667 (3,581) 302 (1,450)
-------- -------- -------- --------
Net loss $ (912) $(11,670) $ (8,822) $(21,395)
======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Net Sales. Net sales consist principally of total product sales less
estimated sales returns. Net sales increased by 16% to $19.0 million in the
three months ended June 30, 1999, from $16.4 million in the three months ended
June 30, 1998. The increase in sales was principally due to an increase in unit
shipments of the Company's 8 megabit and 16 megabit DRAM products. Additionally,
unit shipments of the Company's higher density SRAM products increased
significantly in the three months ended June 30, 1999 compared to the three
months ended June 30, 1998 which more than offset a decline in their average
selling prices. The Company anticipates that the average selling prices of its
existing products will continue to decline over time, although the rate of
decline may fluctuate for certain products. There can be no assurance that such
declines will be offset by higher volumes or by higher prices on newer products.
See "Quarterly Fluctuations in Operating Results" and "Declines in Average
Selling Prices." Net sales includes approximately $0.3 million of licensing
revenue. Additionally, net sales include approximately $0.4 million in sales to
ICSI and approximately $0.1 million to NexFlash in the three months ended June
30, 1999.
Sales to 3Com accounted for approximately 22% and 29% of total net sales
for the quarters ended June 30, 1999 and June 30, 1998, 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.
11
<PAGE> 13
Gross Profit. The Company's cost of sales includes die cost from the
wafers acquired from foundries, subcontracted package and assembly costs, costs
associated with in-house product testing, quality assurance and import duties.
Gross profit increased to $4.0 million in the three months ended June 30,1999
from $(7.2) million in the three months ended June 30, 1998. As a percentage of
net sales, gross profit increased to 21.0% in the three months ended June 30,
1999 from (44.1)% in the three months ended June 30, 1998. The June 1998 period
included a $10.0 million inventory write-down for lower of cost or market issues
on certain of the Company's products, primarily SRAMs. Excluding the $10.0
million inventory write-down, gross profit was $2.8 million or 16.8% of net
sales in the June 1998 quarter. The increase in gross profit in the three months
ended June 30, 1999 was primarily due to an increase in unit shipments of the
Company's 8 megabit and 16 megabit DRAM products. Additionally, unit shipments
of the Company's higher density SRAM products increased significantly in the
three months ended June 30, 1999, compared to the three months ended June 30,
1998, which more than offset a decline in their average selling prices. In
addition, reductions in product unit costs in the June 1999 quarter compared to
the June 1998 quarter offset the declines in average selling prices resulting in
higher 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 decreased by
15% to $4.8 million in the three months ended June 30, 1999, from $5.6 million
in the three months ended June 30, 1998. The three months ended June 30, 1999
includes a charge of $0.9 million for the write-off of certain licensed products
and technologies which have been replaced by the Company's internally developed
products. As a percentage of net sales, research and development expenses
decreased to 25.2% in the three months ended June 30, 1999, from 34.2% in the
three months ended June 30, 1998. The decreases in absolute dollars were
primarily the result of the Company's transfer of its Flash development efforts
to NexFlash, as well as reduced payroll related expenses associated with
headcount reductions, and limitations on discretionary spending during fiscal
1999. The Company anticipates that its research and development expenses will
decrease in absolute dollars in the September 1999 quarter, although such
expenses may fluctuate as a percentage of net sales.
Selling, General and Administrative. Selling, general and administrative
expenses decreased by 21% to $2.8 million in the three months ended June 30,
1999 from $3.6 million in the three months ended June 30, 1998. As a percentage
of net sales, selling, general and administrative expenses decreased to 14.8% in
the three months ended June 30, 1999, from 21.8% in the three months ended June
30, 1998. The decrease in absolute dollars was primarily the result of a
reduction in discretionary spending in fiscal 1999 and to a lesser extent
decreased payroll resulting from the spin-off of NexFlash offset by increased
selling commissions associated with higher revenues. The Company expects its
selling, general and administrative expenses will increase in absolute dollars
in future periods, although such expenses may fluctuate as a percentage of net
sales.
Gain on sale of investment. The gain on sale of investment decreased to
$1.8 million in the three months ended June 30, 1999 from $10.5 million in the
three months ended June 30, 1998. In April 1999, the Company agreed to sell its
investment in UICC to UMC for its original acquisition cost. The Company
recorded a gain of approximately $1.8 million in the June 1999 quarter related
to this transaction. The gain results from adjustments to the original
acquisition value for fluctuations in the New Taiwanese Dollar. In June 1998,
the Company sold approximately 46% of ICSI to a group of private investors. The
Company recorded a pre-tax gain of approximately $10.5 million in the June 1998
quarter related to this transaction.
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Other income, Net. Other income, net increased slightly to $0.2 million
in the three months ended June 30, 1999 from $0.1 million in the three months
ended June 30, 1998 and primarily represents net interest income.
Provision for Income Taxes. The Company recorded no provision for income
taxes for the three month period ended June 30, 1999 due to its net operating
loss position. The tax for the three months ended June 30, 1999 is lower than
for the same period for 1998 because the 1998 tax provision provided for foreign
withholding taxes, whereas no foreign withholding taxes were recorded for the
1999 period.
NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS ENDED JUNE 30, 1998
Net Sales. Net sales decreased by 25% to $63.2 million in the nine
months ended June 30, 1999, from $84.5 million in the nine months ended June 30,
1998. The decrease in sales was principally due to a decrease in the average
selling prices of the Company's SRAM products, as well as a significant decline
in unit shipments of the Company's 256K and 256K module SRAM products.
Additionally, unit shipments of the Company's 4 megabit DRAM product declined
significantly in the nine months ended June 30, 1999 compared to the nine months
ended June 30, 1998. The Company anticipates that the average selling prices of
its existing products will continue to decline over time, although the rate of
decline may fluctuate for certain products. There can be no assurance that such
declines will be offset by higher volumes or by higher prices on newer products.
See "Quarterly Fluctuations in Operating Results" and "Declines in Average
Selling Prices." Net sales include approximately $1.5 million of licensing
revenue in the nine months ended June 30, 1999. Additionally net sales include
approximately $1.2 million in sales to ICSI and approximately $1.4 million in
sales to NexFlash in the nine months ended June 30, 1999. Effective January 1,
1999, the Company's financial results no longer consolidate the sales of ICSI.
Sales to one customer, 3Com, accounted for approximately 22% and 26% of
total net sales for the nine months ended June 30, 1999 and June 30, 1998,
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 increased 29% to $11.7 million in the nine
months ended June 30, 1999, from $9.0 million in the nine months ended June 30,
1998. As a percentage of net sales, gross profit increased to 18.5% in the nine
months ended June 30, 1999 from 10.7% in the nine months ended June 30, 1998.
The Company's gross profit for the nine months ended June 30, 1999 benefited
from $1.5 million in licensing revenue. The nine months ended June 30, 1998
includes a $10.0 million inventory write-down for lower of cost or market issues
on certain of the Company's products, primarily SRAMs recorded in the June 1998
quarter, as well as a $2.6 million inventory write-down recorded in the December
1997 quarter, of which $1.8 million related to lower of cost or market issues on
certain of the Company's non-volatile memory products and $0.8 million related
to the write-down of a specific DRAM product, for which the Company's six month
forecast showed minimal demand at December 31, 1997. Excluding the inventory
write-downs of $12.6 million for the nine months ended June 30, 1998, the
decrease in gross profit in the nine months ended June 30, 1999 was primarily
due to a decrease in the average selling prices of the Company's SRAM products,
as well as a significant decline in unit shipments of the Company's 256K and
256K module SRAM products. Additionally, shipments and average selling prices of
the Company's 4 megabit DRAM product declined significantly in the nine months
ended June 30, 1999 compared to the nine months ended June 30, 1998. Although
product unit costs were lower in the nine months ended June 30, 1999 compared to
the nine months ended June 30, 1998, 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
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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 decreased by
23% to $14.7 million in the nine months ended June 30, 1999, from $19.1 million
in the nine months ended June 30, 1998. The nine months ended June 30, 1999
includes a charge of $0.9 million in the June 1999 quarter for the write-off of
certain licensed products and technologies which have been replaced by the
Company's internally developed products. As a percentage of net sales, research
and development expenses increased to 23.3% in the nine months ended June 30,
1999, from 22.6% in the nine months ended June 30, 1998. The decreases in
absolute dollars were primarily the result of the Company's transfer of its
Flash development efforts to NexFlash, as well as reduced payroll related
expenses associated with headcount reductions, and limitations on discretionary
spending during fiscal 1999.
Selling, General and Administrative. Selling, general and administrative
expenses decreased by 22% to $9.1 million in the nine months ended June 30, 1999
from $11.8 million in the nine months ended June 30, 1998. As a percentage of
net sales, selling, general and administrative expenses increased to 14.5% in
the nine months ended June 30, 1999, from 13.9% in the nine months ended June
30, 1998. The decrease in absolute dollars was primarily the result of decreased
selling commissions associated with lower revenues and, to a lesser extent,
decreased payroll resulting from the spin-off of NexFlash and a reduction in
discretionary spending in fiscal 1999.
In-process Technology. In December 1997, the Company completed its
acquisition of Nexcom in exchange for the issuance of 772,693 shares of Common
Stock, $0.5 million in cash, and the assumption of $1.2 million of net
liabilities (total consideration of approximately $8.5 million). 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. The gain on sale of investment decreased to
$2.6 million in the nine months ended June 30, 1999 from $10.5 million in the
nine months ended June 30, 1998. The nine months ended June 30, 1999 includes a
gain of approximately $1.8 million in the June 1999 quarter related to the sale
of the Company's investment in UICC to UMC, a pre-tax gain of $1.2 million
resulting from the sale of 20% of the Company's holdings in ICSI in the December
1998 quarter offset by the loss of approximately $0.4 million in the March 1999
quarter related to the sale of approximately 33% of the Company's investment in
Wafertech LLC. In June 1998, the Company sold approximately 46% of ICSI to a
group of private investors. The Company recorded a pre-tax gain of approximately
$10.5 million in the June 1998 quarter related to this transaction.
Other income, Net. Other income, net decreased to $0.8 million in the
nine months ended June 30, 1999 from $1.0 million in the nine months ended June
30, 1998, primarily due to increased interest expense incurred by ICSI during
the December 1998 quarter.
Provision (benefit) for Income Taxes. The provision for income taxes for
the nine month period ended June 30, 1999 is based primarily on foreign
withholding taxes. The tax for the nine months ended June 30, 1999 is lower than
the tax for the same period for 1998 because less foreign withholding taxes
related to the sale of ICSI stock were recorded during the 1999 period.
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LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company's principal sources of liquidity
included cash, cash equivalents and short-term investments of approximately
$30.1 million. During the first nine months of fiscal 1999, operating activities
used cash of approximately $14.5 million. Cash used by operations was primarily
due to net losses and a decrease in accounts payable partially offset by
decreases in inventory, other assets and accounts receivable.
In the first nine months of fiscal 1999, the Company was provided with
$6.5 million from investing activities compared to $25.9 million in the first
nine months of fiscal 1998. The cash provided from investing activities was
primarily the result of $10.0 million received for the sale of approximately 33%
of the Company's interest in Wafertech to TSMC and $9.2 million received from
the sale of UICC offset by a net cash outflow of $7.9 million from the partial
sale of ICSI which represents the pre-tax cash received from the partial sale
net of the cash excluded from the balance sheet as a result of accounting for
ICSI on the equity basis. In addition, $3.1 million was used for the acquisition
of fixed assets, $1.0 million invested by ICSI in NexFlash, and $0.5 million was
invested in Dynachip which includes $0.3 million invested by ICSI.
In the first nine months of fiscal 1999, the Company made capital
expenditures of approximately $3.1 million which includes $2.2 million by ICSI
for the purchase of test equipment. The Company expects to spend approximately
$2.5 million to purchase capital equipment during the next twelve months,
principally for the purchase of computer software and hardware, design and
engineering tools and additional test equipment.
In June 1998, the Company sold approximately 46% of ICSI to a group of
private investors. In December 1998, the Company sold an additional 20% of its
holdings in ICSI to a group of private investors resulting in a pre-tax gain of
$1.2 million. Proceeds from the transaction net of withholding and transaction
taxes totaled $6.6 million (including cash of $4.3 million and notes receivable
of $2.3 million). After completion of this transaction the Company owns
approximately 43% of ICSI and will account for ICSI on the equity basis.
In June 1996, the Company entered into a business 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 September 30, 1998,
all of this amount had been paid. In December 1998, the Company agreed to sell
approximately 33% of its investment in WaferTech to TSMC for $10.0 million. The
transaction was completed in January 1999, and the Company retains a 2.67%
interest in WaferTech. 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 $19.2 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 $19.2 million obligation. As a
result, the $19.2 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 from WaferTech or TSMC a minimum of
2.3% of WaferTech's installed capacity. Initial wafer outs occurred in the
second half of calendar 1998.
The Company generated $1.9 million from financing activities during the
first nine months of fiscal 1999 compared to $25.0 million in the first nine
months of fiscal 1998. The major source of financing for the first nine months
of fiscal 1999 was from net borrowings under short-term and long-term lines of
credit.
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In April 1998, the U.S. Department of Commerce ("DOC") published an
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%. For entries
after March 31, 1999, the cash deposits subsequently could be returned to the
Company or, alternatively, the Company could forfeit amounts deposited and owe
duties and interest in addition to the amounts deposited. The outcome is
dependent on whether the DOC conducts an administrative review of imports
entered, between April 1, 1999 and March 31, 2000 and if so, on the results of
the DOC review. The decision on whether to conduct a review will be made in May
of 2000 and the results of the review will likely be issued in the year 2001.
The Company will pay duty deposits on Taiwan SRAM entries before that date at
the deposit rate.
The Company has retained legal counsel to defend its interests in the
antidumping proceedings. In addition, certain aspects of the 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.
Duties calculated and assessed by the government could have a material
adverse affect on the Company's gross margins and profits. There can be no
assurance that any reviews or proceedings will mitigate or eliminate antidumping
duties.
On October 22, 1998, Micron Technology filed an anti-dumping petition
against DRAMs fabricated in Taiwan. Currently, the Company's DRAM products are
fabricated in Taiwan. The case is expected to take from 12 to 18 months to
complete. If an antidumping order is imposed, the Company could face DRAM duties
unless it is able to secure DRAMs from outside of Taiwan. The DOC preliminary
determination was issued on May 28, 1999 and bond or cash deposit requirements
apply to DRAM entries after that date. The preliminary general rate applicable
to Taiwan DRAM imports is 16.41%. Currently, DRAMs account for less than 20% of
the Company's revenue.
The Company believes that its existing funds together with available
financing will satisfy the Company's anticipated working capital and other cash
requirements through the next 12 months. The Company may from time to time take
actions to further increase its cash position such as bank borrowings, sales of
additional shares of ICSI, the disposition of certain assets, equity financing,
and debt financing.
The Company, from time to time, also 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
A substantial majority of the Company's net sales are derived from the
sale of SRAM products, which are subject to unit volume fluctuations and
declines in average selling prices. For example, 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 unit 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 non-volatile 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 disruption in the
supply of wafers or assembly services. 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 antidumping duties,
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 unit
shipments of the Company's SRAM products. In addition, 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
non-volatile memory products. In the first nine months of fiscal 1999,
approximately 55% of the Company's net sales was attributable to customers
located in the United States, 19% was attributable to customers located in
Europe and 26% was attributable to customers located in Asia. In fiscal 1998,
approximately 43% of the Company's net sales was attributable to customers
located in the United States, 18% was attributable to customers located in
Europe and 39% was attributable to customers located in Asia. In the first nine
months of fiscal 1999 and in fiscal 1998, international sales (sales by ICSI and
export sales by ISSI-U.S.) comprised approximately 44% and 57% 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 addition, there can be no assurance that the
markets for the Company's products, which are highly cyclical, will continue to
grow.
In late December 1998, the Company sold an additional 20% of its
interest in ICSI and, as a result, reduced its ownership interest in ICSI to
approximately 43%. Beginning with the second quarter of fiscal 1999, the
Company's Statement of Operations no longer consolidates the results of ICSI,
but instead accounts for ICSI on the equity basis and includes its percentage
share of ICSI's results of operations. Beginning in the second quarter of fiscal
1999, as the Company's consolidated results no longer include ICSI, there was a
significant decline in the Company's consolidated revenue and operating
expenses, and there may be an increase in the Company's effective tax rate.
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DECLINES IN AVERAGE SELLING PRICES
Competitive pricing pressures due to an industry-wide oversupply of
wafer capacity resulted in significant price decreases for the Company's
products during the past four years. 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, which involves efforts to reduce internal costs and
supplier costs, in an effort to reduce its cost per unit for certain products.
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 fiscal 1998, the Company recorded inventory write-downs of $23.0 million,
including $9.6 million in the September 1998 quarter. The inventory write-downs
were predominately for lower of cost or market issues on certain of the
Company's products, primarily SRAMs. The September 1998 quarter included a $2.9
million write-down of certain of the Company's Flash inventories due to
obsolescence resulting from the Company's decision to spin off the Flash product
business to form NexFlash. 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. There can be no assurance
that in the future additional inventory write-downs will not occur.
PRODUCT CONCENTRATION AND DEPENDENCE ON PERSONAL COMPUTER INDUSTRY
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.
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CUSTOMER CONCENTRATION
The Company's sales are concentrated within a limited customer base.
Sales to one customer, 3Com, accounted for approximately 22% and 19% of total
net sales for the quarter ended June 30, 1999 and June 30, 1998, respectively,
and approximately 22% and 21% of total net sales for the nine months ended June
30, 1999 and June 30, 1998, 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, from which the Company has obtained a
substantial majority of its wafers. 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 certain minimum wafer purchase commitments with its
foundry partners in exchange for wafer capacity commitments. The Company has
agreed to make certain annual purchases totaling, in aggregate, approximately
$19.2 million through 2001 from 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 $19.2 million obligation. As a result, the
$19.2 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
has minimum purchase obligations to TSMC related to WaferTech LLC, a business
venture in which the Company is an investor. The Company is obligated to
purchase from WaferTech or TSMC a minimum of 2.3% of WaferTech's installed
capacity. 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.
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 instability. The Company anticipates that sales to
international customers will continue to represent a significant percentage of
net sales. 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 dollars. Such transactions expose the
Company to the risk of exchange rate fluctuations. The Company
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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 an oversupply of product, 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, performance, and reliability,
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 from time-to-time expects
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 can be no assurance that other companies will
not in the future pursue claims against the Company with respect to the alleged
infringement of patents, maskwork rights, copyrights or other intellectual
property owned by third parties. If it appears necessary or desirable, the
Company may seek licenses under patents that it is alleged to be infringing.
Although patent holders commonly offer such licenses, there is no assurance that
any licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license under a key patent or
intellectual property right from a third party for technology used by the
Company could cause the Company to incur substantial liabilities and to suspend
the manufacture of the products utilizing the invention or to attempt to develop
non-infringing products, any of which could materially and adversely affect the
Company's business and operating results.
YEAR 2000 READINESS DISCLOSURE
The Company is aware of the issues associated with computer systems as
the Year 2000 approaches. The Year 2000 issues are the result of common computer
programming techniques that result in systems that do not function properly when
manipulating dates later than December 31, 1999. The problem may affect internal
information technology (IT) systems used by the Company for product design,
product test, accounting, distribution and planning. The problem may also affect
non-IT systems such as security systems, communication equipment and other
equipment.
The Company has completed its assessment of its critical IT systems and
has identified at least one area (accounting software) that is not Year 2000
compliant. The Company is in the process of implementing an alternative software
package and intends to have implementation completed by October 1999. However,
there can be no assurance that there will not be a delay in the implementation
of such systems. It is estimated that the cost of implementing the new software
will range between $0.3 million to $0.6 million. With respect to critical non-IT
systems, the Company has assessed the compliance of these systems and believes
that these systems are Year 2000 compliant. There can be no assurance that the
Company has successfully identified all
20
<PAGE> 22
its internal Year 2000 issues. The failure to identify and address internal Year
2000 issues in a timely fashion could have a material adverse affect on the
Company's business and results of operations.
The Company could possibly be adversely impacted by Year 2000 issues
faced by major suppliers, subcontractors, and customers. The Company has
surveyed its major suppliers and subcontractors and they have all indicated that
they are Year 2000 compliant or will be by January 1, 2000. The Company has not
surveyed the Year 2000 readiness of its customers and their failure to address
Year 2000 issues could have an impact on the Company's operations and financial
results. The extent of this impact, if any, is not known at this time.
The above discussion regarding costs, risks and estimated completion
dates for the Year 2000 is based on the Company's best estimates given
information that is currently available, and is subject to change. As the
Company proceeds with this project, it may discover that actual results will
differ materially from these estimates.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
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.
21
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1998, the U.S. Department of Commerce ("DOC") published an
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%. For entries
after March 31, 1999, the cash deposits subsequently could be returned to the
Company or, alternatively, the Company could forfeit amounts deposited and owe
duties and interest in addition to the amounts deposited. The outcome is
dependent on whether the DOC conducts an administrative review of imports
entered, between April 1, 1999 and March 31, 2000 and if so, on the results of
the DOC review. The decision on whether to conduct a review will be made in May
of 2000 and the results of the review will likely be issued in the year 2001.
The Company will pay duty deposits on Taiwan SRAM entries before that date at
the deposit rate.
The Company has retained legal counsel to defend its interests in the
antidumping proceedings. In addition, certain aspects of the 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.
Duties calculated and assessed by the government could have a material
adverse affect on the Company's gross margins and profits. There can be no
assurance that any reviews or proceedings will mitigate or eliminate antidumping
duties.
On October 22, 1998, Micron Technology filed an anti-dumping petition
against DRAMs fabricated in Taiwan. Currently, the Company's DRAM products are
fabricated in Taiwan. The case is expected to take from 12 to 18 months to
complete. If an antidumping order is imposed, the Company could face DRAM duties
unless it is able to secure DRAMs from outside of Taiwan. The DOC preliminary
determination was issued on May 28, 1999 and bond or cash deposit requirements
apply to DRAM entries after that date. The preliminary general rate applicable
to Taiwan DRAM imports is 16.41%. Currently, DRAMs account for less than 20% of
the Company's revenue.
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.
The registrant did not file any reports on Form 8-K during the
quarter ended June 30, 1999.
ITEM 7A. FINANCIAL MARKET RISK
The Company's principal financial market risk relates to the interest
rates associated with our available-for-sale securities. At June 30, 1999, our
market risk related to these investments was immaterial.
22
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Integrated Silicon Solution, Inc.
---------------------------------
(Registrant)
Dated: August 13, 1999 /s/ Gary L. Fischer
----------------------------------------
Gary L. Fischer
Executive Vice President,
Office of the President, and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
23
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document Description
- ----------- --------------------
<S> <C>
Exhibit 27 Financial Data Schedule.
</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 JUNE 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-30-1998
<PERIOD-END> JUN-30-1999
<CASH> 22,013
<SECURITIES> 8,050
<RECEIVABLES> 12,129
<ALLOWANCES> 1,496
<INVENTORY> 28,929
<CURRENT-ASSETS> 70,980
<PP&E> 23,386
<DEPRECIATION> (18,483)
<TOTAL-ASSETS> 122,193
<CURRENT-LIABILITIES> (30,024)
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 87,171
<TOTAL-LIABILITY-AND-EQUITY> 122,193
<SALES> 63,196
<TOTAL-REVENUES> 63,196
<CGS> 51,521
<TOTAL-COSTS> 51,521
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,011
<INCOME-PRETAX> (8,738)
<INCOME-TAX> 858
<INCOME-CONTINUING> (8,822)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,822)
<EPS-BASIC> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
