<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 March 31, 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
May 7, 1999 was 19,574,841
<PAGE> 2
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 17,366 $ 40,652 $ 44,167 $ 80,066
Cost of sales 13,694 28,219 36,490 58,437
-------- -------- -------- --------
Gross Profit 3,672 12,433 7,677 21,629
-------- -------- -------- --------
Operating Expenses:
Research and development 4,170 8,370 9,943 15,771
Selling, general and administrative 2,704 4,577 6,326 9,227
In-process technology charge -- -- -- 7,078
-------- -------- -------- --------
Total operating expenses 6,874 12,947 16,269 32,076
-------- -------- -------- --------
Operating loss (3,202) (514) (8,592) (10,447)
Other income (loss), net (236) 822 1,433 1,077
-------- -------- -------- --------
Income (loss) before income taxes,
minority interest and equity in net income
(loss) of affiliated companies (3,438) 308 (7,159) (9,370)
Provision for income taxes 225 297 858 355
-------- -------- -------- --------
Net income (loss) before minority interest
and equity in net income (loss) of
affiliated companies (3,663) 11 (8,017) (9,725)
Minority interest in net loss of
consolidated subsidiary -- -- (472) --
Equity in net income (loss) of
affiliated companies (282) -- (365) --
-------- -------- -------- --------
Net income (loss) $ (3,945) $ 11 $ (7,910) $ (9,725)
======== ======== ======== ========
Basic income (loss) per share $ (0.20) $ 0.00 $ (0.41) $ (0.52)
======== ======== ======== ========
Shares used in basic per share calculation 19,521 18,996 19,469 18,598
======== ======== ======== ========
Diluted income (loss) per share $ (0.20) $ 0.00 $ (0.41) $ (0.52)
======== ======== ======== ========
Shares used in diluted per share calculation 19,521 19,626 19,469 18,598
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
----------- -------------
(unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,707 $ 27,776
Restricted cash -- 333
Short-term investments 8,000 7,800
Accounts receivable 11,777 19,069
Inventories 28,950 46,484
Other current assets 4,453 4,938
--------- ---------
Total current assets 69,887 106,400
Property, equipment, and leasehold improvements, net 4,980 44,316
Other assets 52,287 51,452
--------- ---------
Total assets $ 127,154 $ 202,168
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 100 $ 18,325
Accounts payable 23,028 40,642
Accrued compensation and benefits 1,716 2,945
Accrued expenses 9,655 8,036
Income tax payable 476 524
Current portion of long-term obligations -- 3,379
--------- ---------
Total current liabilities 34,975 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 118,559 116,199
Accumulated deficit (26,251) (18,341)
Cumulative translation adjustment (5,050) (6,787)
Unearned compensation (77) (153)
--------- ---------
Total stockholders' equity 87,183 90,920
--------- ---------
Total liabilities and stockholders' equity $ 127,154 $ 202,168
========= =========
</TABLE>
(1) Derived from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,910) $ (9,725)
In-process technology charge -- 7,078
Net gain on partial sale of investments (812) --
Other charges to net loss not affecting cash 2,446 3,843
Net effect of changes in current and other assets
and current liabilities (4,691) (5,201)
-------- --------
Cash used in operating activities (10,967) (4,005)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (2,431) (8,930)
Purchases of available-for-sale securities (15,400) (25,550)
Sales of available-for-sale securities 15,200 43,050
Proceeds from partial sale of ISSI-Taiwan 4,957 --
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)
Investment in NexFlash (1,000) --
Investment in DynaChip (500) --
Acquisition of Nexcom -- (869)
-------- --------
Cash used in investing activities (1,992) (9,509)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under notes payable and long-term obligations 33,435 32,666
Proceeds from issuance of common stock 421 1,535
Principal payments on notes payable and long-term obligations (32,293) (21,512)
-------- --------
Cash provided by financing activities 1,563 12,689
-------- --------
Effect of exchange rate changes on cash and cash equivalents 327 (1,426)
-------- --------
Net decrease in cash and cash equivalents (11,069) (2,251)
Cash and cash equivalents at beginning of period 27,776 22,334
-------- --------
Cash and cash equivalents at end of period $ 16,707 $ 20,083
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<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 14), 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 six months ended March 31, 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 32% and 24% of total
net sales for the quarter ended March 31, 1999 and March 31,1998, respectively,
and approximately 22% and 25% of total net sales for the six months ended March
31, 1999 and March 31, 1998, respectively. Revenue recognized for one
distributor accounted for 16% of total net sales for the quarter ended March 31,
1999 and 10% of total net sales for the six months ended March 31, 1999. For the
three and six month periods ended March 31, 1998, revenue recognized for this
distributor was less than 10%.
The Company uses ISSI-Taiwan for coordinating wafer purchases, assembly,
and testing for substantially all 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)
March 31 September 30
1999 1998
------- -------
<S> <C> <C>
Cash $16,395 $23,893
Money market instruments 128 195
Certificates of deposit 184 4,021
Auction preferred stock 1,200 1,000
Municipal bonds due in more than 3 years 6,800 6,800
------- -------
$24,707 $35,909
======= =======
</TABLE>
5
<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)
March 31 September 30
1999 1998
---- ----
<S> <C> <C>
Raw materials $ 5,044 $ 5,447
Work-in-process 10,943 14,868
Finished goods 12,963 26,169
------- -------
$28,950 $46,484
======= =======
</TABLE>
5. OTHER ASSETS
Other assets consisted of the following: (In thousands)
<TABLE>
<CAPTION>
March 31 September 30
1999 1998
---- ----
<S> <C> <C>
Investment in WaferTech LLC $20,800 $31,200
Investment in United Integrated Circuits Corp. 7,371 16,486
Investment in ISSI-Taiwan 19,034 --
Investment in NexFlash 2,151 --
Other 2,931 3,766
------- -------
$52,287 $51,452
======= =======
</TABLE>
6. INCOME TAXES
The provision for income taxes for the three and six month periods ended
March 31, 1999 is primarily based on foreign withholding taxes related to the
sale of ISSI-Taiwan 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 six months ended March 31, 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.
6
<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 Six Months Ended
March 31, March 31,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ (3,945) $ 11 $ (7,910) $ (9,725)
======== ======== ======== ========
Weighted average common shares outstanding 19,521 18,996 19,469 18,598
Denominator for basic income (loss) per share 19,521 18,996 19,469 18,598
-------- -------- -------- --------
Dilutive stock options -- 630 -- --
-------- -------- -------- --------
Denominator for diluted income (loss) per share 19,521 19,626 19,469 18,598
======== ======== ======== ========
Basic income (loss) per share $ (0.20) $ 0.00 $ (0.41) $ (0.52)
======== ======== ======== ========
Diluted income (loss) per share $ (0.20) $ 0.00 $ (0.41) $ (0.52)
======== ======== ======== ========
</TABLE>
The above diluted calculation for the three months ended March 31, 1999
and 1998, does not include approximately 3,309,000 and 821,000 shares
attributable to options as of March 31, 1999 and 1998, respectively, as their
impact would be anti-dilutive. The above diluted calculation for the six months
ended March 31, 1999 and 1998, does not include approximately 3,416,000 and
3,893,000 shares attributable to options as of March 31, 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 ending December 31, 1998. FAS No. 130 establishes new rules
for the reporting and display of comprehensive income and its components.
However, it has no impact on the Company's net income or total stockholders'
equity.
7
<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 Six Months Ended
March 31, March 31,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ (3,945) $ 11 $ (7,910) $ (9,725)
Change in cumulative translation adjustment (585) 2 1,737 (8,128)
-------- -------- -------- --------
Comprehensive income (loss) $ (4,530) $ 13 $ (6,173) $(17,853)
======== ======== ======== ========
</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 be issued in the year
2001. The Company will pay duties on Taiwan SRAM entries before that date at the
bond or deposit rate.
The Company has retained legal counsel to defend and assist 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 DRAM from outside of Taiwan. The DOC preliminary
determination is due on May 21, 1999 and bond or cash deposit requirements will
apply to DRAM entries after that date. Currently, DRAMs accounts for less than
15% of the Company's revenue.
8
<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 2000. 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 ISSI-Taiwan owns
approximately 17%, which includes approximately 6% of NexFlash purchased for
$1,000,000. 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.
As a result of this transaction and after recording its equity in the
net loss of NexFlash of $0.9 million for the six months ended March 31, 1999,
the Company is carrying an equity investment in NexFlash of $2.2 million.
9
<PAGE> 10
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. OTHER TRANSACTIONS
1998 ISSI-TAIWAN STOCK PLAN
On October 29, 1998, the Company adopted the 1998 ISSI-Taiwan Stock Plan
("Taiwan Stock Plan") that provides for non-statutory stock options in the
common stock of ISSI-Taiwan to be granted to employees, consultants, and
directors of the Company. Upon exercise, if any, the Company would sell its
shares in ISSI-Taiwan to the optionee. Under terms of the Taiwan Stock Plan, the
maximum aggregate number of shares of ISSI-Taiwan stock which may be optioned
and sold is 12,000,000. This represents approximately 10% of the outstanding
shares of ISSI-Taiwan and approximately 25% of the Company's ownership. At March
31, 1999, options to purchase 11,999,000 shares were outstanding under the
ISSI-Taiwan Stock Plan.
Under the terms of the Taiwan Stock Plan, the exercise price, which is
deemed to be fair value, and the exercise period of the non-statutory stock
option grants are determined by the Board of Directors on the date of grant.
Generally, the stock options vest one-third annually on the anniversary of the
date of grant. The options expire upon the earlier of ten years from the date of
grant or 30 days following termination of employment or consultancy.
In the event of an optionee's termination of status as an employee or
consultant of the Company, without cause, within twelve months of certain
changes of control of the Company, the Taiwan Stock Plan provides for full
acceleration of the exercisability of all outstanding options held by such
optionee.
REPRICE OF STOCK OPTIONS
On December 2, 1998, the Board of Directors approved the repricing of
certain options outstanding previously granted to employees of the Company.
Approximately 2,007,000 shares with an aggregate exercise price of approximately
$17.3 million were repriced to an exercise price of $3.1562 per share. In
connection with the repricing, certain vesting and exercise rights were
surrendered.
14. PARTIAL SALE OF INTEGRATED SILICON SOLUTION (TAIWAN) INC.
In December 1998, the Company sold an additional 20% of its holdings in
ISSI-Taiwan 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). Effective December 31,
1998, the Company owned approximately 43% of ISSI-Taiwan and accounted for
ISSI-Taiwan on the equity basis.
ISSI-Taiwan 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 March 31, 1999 reflects
ISSI-Taiwan as an investment accounted for on the equity basis.
15. 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. There was no impact on income reported for any of the periods
presented herein.
10
<PAGE> 11
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. 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.
17. SUBSEQUENT EVENT
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 will record 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.
11
<PAGE> 12
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 nonvolatile memory ("NVM"). The Company also
designs, develops and markets embedded memory devices which include voice
recording chips and certain microcontroller devices. The Company's memory
devices are used in networking applications, telecommunications, personal
computers ("PCs"), disk drives and other peripherals, 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. The Company's DRAM products focus on high speed, low
density devices with densities of 2, 4, and 16 megabits. The Company's
nonvolatile memory products include EEPROMs (electrically erasable programmable
read only memories) and EPROMs (erasable programmable read only memories). 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 ISSI-Taiwan. 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 is expected to have a minimal effect on the Company's
consolidated revenue and will result 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 ISSI-Taiwan and, as a result, reduced its
ownership interest in ISSI-Taiwan to approximately 43%. The Company's Balance
Sheet as of March 31, 1999 reflects the accounting for ISSI-Taiwan on the equity
basis. Beginning with the second quarter of fiscal 1999, the Company's Statement
of Operations no longer consolidate the results of ISSI-Taiwan, but instead
account for ISSI-Taiwan on the equity basis and includes its percentage share of
ISSI-Taiwan's results of operations. Beginning in the second quarter of fiscal
1999, as the Company's consolidated results will no longer include ISSI-Taiwan,
there will be a significant decline in the Company's consolidated revenue and
operating expenses.
12
<PAGE> 13
The following proforma financial results for fiscal 1998 are presented
with the results of ISSI-Taiwan for the three month periods ended March 31, 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 Six Months Ended
March 31, March 31,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Proforma Proforma
<S> <C> <C> <C> <C>
Net sales $ 17,366 $ 28,665 $ 44,167 $ 68,079
Cost of sales 13,694 21,592 36,743 51,810
-------- -------- -------- --------
Gross Profit 3,672 7,073 7,677 16,269
-------- -------- -------- --------
Research and development 4,170 6,075 9,943 13,476
Selling, general and administrative 2,704 3,545 6,326 8,195
In-process technology charge -- -- -- 7,078
-------- -------- -------- --------
Total operating expenses 6,874 9,620 16,269 28,749
-------- -------- -------- --------
Operating loss (3,202) (2,547) (8,592) (12,480)
Other income (loss), net (236) 572 1,433 827
-------- -------- -------- --------
Loss before income taxes, minority interest and
equity in net income (loss) of affiliated companies (3,438) (1,975) (7,159) (11,653)
Provision for income taxes 225 145 858 203
-------- -------- -------- --------
Net loss before minority interest and equity
in net income (loss) of affiliated companies (3,663) (2,120) (8,017) (11,856)
Minority interest in net loss of consolidated
subsidiary -- -- (472) --
Equity in net income (loss) of affiliated
companies (282) 2,131 (365) 2,131
-------- -------- -------- --------
Net income (loss) $ (3,945) $ 11 $ (7,910) $ (9,725)
======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net Sales. Net sales consist principally of total product sales less
estimated sales returns. Net sales decreased by 39% to $17.4 million in the
three months ended March 31, 1999, from $28.7 million in the three months ended
March 31, 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, 64K x 16, and 256K module SRAM
products. Additionally, unit shipments of the Company's 2 megabit DRAM product
declined significantly in the three months ended March 31, 1999 compared to the
three months ended March 31, 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 includes approximately $1.0
million of deferred licensing revenue in the three months ended March 31, 1999,
which is not expected to occur in future quarters. Additionally, net sales
includes approximately $0.8 million in sales to ISSI-Taiwan and approximately
$0.1 million in sales to NexFlash in the three months ended March 31, 1999.
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Sales to 3Com, accounted for approximately 32% and 24% of total net
sales for the quarters ended March 31, 1999 and March 31,1998, 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. Revenue recognized for one distributor accounted for 16% of
total net sales for the quarter ended March 31, 1999. For the quarter ended
March 31, 1998, revenue recognized for this distributor was less than 10%.
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 decreased 48% to $3.7 million in the three months ended March
31,1999 from $7.1 million in the three months ended March 31, 1998. As a
percentage of net sales, gross profit decreased to 21.1% in the three months
ended March 31, 1999 from 24.7% in the three months ended March 31, 1998. The
Company's gross profit for the three months ended March 31, 1999 benefited from
$1.0 in licensing revenue, which is not expected to occur in future quarters.
The decrease in gross profit in the three months ended March 31, 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, 64K x 16, and 256K module SRAM products. Additionally, shipments and
average selling prices of the Company's 2 megabit DRAM product declined
significantly in the three months ended March 31, 1999 compared to the three
months ended March 31, 1998. Although product unit costs were lower in the March
1999 quarter compared to the March 1998 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 decreased by
31% to $4.2 million in the three months ended March 31, 1999, from $6.1 million
in the three months ended March 31, 1998. As a percentage of net sales, research
and development expenses increased to 24.0% in the three months ended March 31,
1999, from 21.2% in the three months ended March 31, 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 the Company's expense
reduction efforts, which include a reduction in workforce during fiscal 1998,
salary cuts, and limitations on discretionary spending. The Company anticipates
that its research and development expenses will increase in absolute dollars in
future periods, although such expenses may fluctuate as a percentage of net
sales.
Selling, General and Administrative. Selling, general and administrative
expenses decreased by 24% to $2.7 million in the three months ended March 31,
1999 from $3.5 million in the three months ended March 31, 1998. As a percentage
of net sales, selling, general and administrative expenses increased to 15.6% in
the three months ended March 31, 1999, from 12.4% in the three months ended
March 31, 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. 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.
Other income (loss), Net. Other income (loss), net decreased to $(0.2)
million in the three months ended March 31, 1999 from $0.6 million in the three
months ended March 31, 1998. 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 recorded a loss of approximately $0.4 million
in the March 1999 quarter related to this transaction.
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Provision for Income Taxes. The provision for income taxes for the three
month period ended March 31, 1999 is based on foreign withholding taxes. The tax
for the three months ended March 31, 1999 is higher than for the same period for
1998 due to higher foreign withholding taxes.
SIX MONTHS ENDED MARCH 31, 1999 COMPARED TO SIX MONTHS ENDED MARCH 31, 1998
Net Sales. Net sales decreased by 35% to $44.2 million in the six months
ended March 31, 1999, from $68.1 million in the six months ended March 31, 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, 256K module and 64K x 16 SRAM products.
Additionally, unit shipments of the Company's 2 megabit DRAM product declined
significantly in the six months ended March 31, 1999 compared to the six months
ended March 31, 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 includes approximately $1.0 million of deferred
licensing revenue in the six months ended March 31, 1999, which is not expected
to occur in future quarters. Additionally net sales includes approximately $0.8
million in sales to ISSI-Taiwan and approximately $1.3 million in sales to
NexFlash in the six months ended March 31, 1999. Effective January 1, 1999, the
Company's financials results no longer consolidate the sales of ISSI-Taiwan.
Sales to one customer, 3Com, accounted for approximately 22% and 25% of
total net sales for the six months ended March 31, 1999 and March 31, 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. Revenue recognized for one distributor accounted for
10% of total net sales for the six months ended March 31, 1999. For the six
month period ended March 31, 1998, revenue recognized for this distributor was
less than 10%.
Gross Profit. Gross profit decreased 53% to $7.7 million in the six
months ended March 31, 1999, from $16.7 million in the six months ended March
31, 1998. As a percentage of net sales, gross profit decreased to 17.4% in the
six months ended March 31, 1998 from 23.9% in the six months ended March 31,
1998. The Company's gross profit for the six months ended March 31, 1999
benefited from $1.2 in licensing revenue, which is not expected to occur in
future quarters. The December 31, 1997 quarter included 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 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. The decrease in gross profit in the six
months ended March 31, 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, 64K x 16, and 256K module SRAM
products. Additionally, shipments and average selling prices of the Company's 2
megabit DRAM product declined significantly in the three months ended March 31,
1999 compared to the three months ended March 31, 1998. Although product unit
costs were lower in the six months ended March 31, 1999 compared to the six
months ended March 31, 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 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
26% to $9.9 million in the six months ended March 31, 1999, from $13.5 million
in the six months ended March 31, 1998. As a
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<PAGE> 16
percentage of net sales, research and development expenses increased to 22.5% in
the six months ended March 31, 1999, from 19.8% in the six months ended March
31, 1998. The decrease in absolute dollars was primarily the result of the
Company's transfer of its Flash development efforts to NexFlash, as well as the
Company's expense reduction efforts, which included a reduction in workforce
during fiscal 1998, salary cuts, and limitations on discretionary spending. The
Company anticipates that its research and development expenses will increase in
absolute dollars in future periods, although such expenses may fluctuate as a
percentage of net sales.
Selling, General and Administrative. Selling, general and administrative
expenses decreased by 23% to $6.3 million in the six months ended March 31, 1999
from $8.2 million in the six months ended March 31, 1998. As a percentage of net
sales, selling, general and administrative expenses increased to 14.3% in the
six months ended March 31, 1998, from 12.0% in the six months ended March 31,
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. 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.
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.
Other income (loss), Net. Other income (loss), net increased to $1.4
million in the six months ended March 31, 1999 from $0.8 million in the six
months ended March 31, 1998, primarily due to a pre-tax gain of $1.2 million
resulting from the sale of 20% of the Company's holdings in ISSI-Taiwan 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.
Provision (benefit) for Income Taxes. The provision for income taxes for
the six month period ended March 31, 1999 is based primarily on foreign
withholding taxes. The tax for the six months ended March 31, 1999 is higher
than for the same period for 1998 due to higher withholding taxes related to the
sale of ISSI-Taiwan stock.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company's principal sources of liquidity
included cash, cash equivalents and short-term investments of approximately
$24.7 million. During the first six months of fiscal 1999, operating activities
used cash of approximately $11.0 million. Cash used by operations was primarily
due to net loss and a decrease in accounts payable partially offset by decreases
in inventory and other assets and increases in accrued liabilities.
Inventory decreased to $29.0 million at March 31, 1999 from $46.5
million at September 30, 1998. The decrease in inventory was primarily the
result of accounting for ISSI-Taiwan on the equity basis.
Accounts payable decreased to $23.0 million at March 31, 1999 from $40.6
million at September 30, 1998. The balance of accounts payable is principally
related to inventory purchases.
In the first six months of fiscal 1999, the Company used $2.0 million
for investing activities compared to $9.5 million in the first six months of
fiscal 1998. The cash used for investing activities was primarily the result of
a net cash outflow of $7.9 million from the partial sale of ISSI-Taiwan which
represents the pre-tax cash received from the partial sale net of the cash
excluded from the balance sheet as a result of
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<PAGE> 17
accounting for ISSI-Taiwan on the equity basis. In addition, $2.4 million was
used for the acquisition of fixed assets, $1.0 million invested by ISSI-Taiwan
in NexFlash, and $0.5 million was invested in Dynachip which includes $0.3
million invested by ISSI-Taiwan. Additionally, the Company received $10.0
million for the sale of approximately 33% of its interest in Wafertech to TSMC.
In the first six months of fiscal 1999, the Company made capital
expenditures of approximately $2.4 million, of which substantially all was by
ISSI-Taiwan 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 ISSI-Taiwan to a
group of private investors. In December 1998, the Company sold an additional 20%
of its holdings in ISSI-Taiwan 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).
After completion of this transaction the Company owns approximately 43% of
ISSI-Taiwan and will account for ISSI-Taiwan 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. The last scheduled payment to WaferTech by the
Company of $12.5 million was made in November 1997. 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 recorded a loss of
approximately $0.4 million in the March 1999 quarter related to this
transaction. 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. Additionally, in fiscal 1995, the Company entered
into a business venture "United Integrated Circuits Corp" ("UICC") with UMC and
other investors to build a wafer fabrication facility in Hsinchu, Taiwan. The
Company has invested approximately $7.4 million for approximately a 1.7% equity
interest and ISSI-Taiwan has invested approximately $9.8 million (subject to
fluctuations in the New Taiwanese Dollar) for approximately a 2.1% equity
interest in the venture of which UMC retains 55% ownership. The final payment of
approximately $4.7 million was made to UICC in December 1997. In April 1999, the
Company agreed to sell its investment in UICC to UMC for its original
acquisition cost. The Company will record 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.
The Company generated $1.6 million from financing activities during the
first six months of fiscal 1999 compared to $12.7 million in the first six
months of fiscal 1998. The major source of financing for the first six months of
fiscal 1999 was from net borrowings under short-term and long-term lines of
credit.
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
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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
be issued in the year 2001. The Company will pay duties on Taiwan SRAM entries
before that date at the bond or deposit rate.
The Company has retained legal counsel to defend and assist 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 DRAM from outside of Taiwan. The DOC preliminary
determination is due on May 21, 1999 and bond or cash deposit requirements will
apply to DRAM entries after that date. Currently, DRAMs accounts for less than
15% 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 evaluate actions to
further increase its cash position such as bank borrowings, sales of additional
shares of ISSI-Taiwan, 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.
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 NVM 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
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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 NVM products. In the first six months of fiscal 1999,
approximately 50% of the Company's net sales was attributable to customers
located in the United States, 19% was attributable to customers located in
Europe and 31% 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 six
months of fiscal 1999 and in fiscal 1998, international sales (sales by
ISSI-Taiwan and export sales by ISSI-U.S.) comprised approximately 50% 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 this regard, since late 1997
many 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
future 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.
In late December 1998, the Company sold an additional 20% of its
interest in ISSI-Taiwan and, as a result, reduced its ownership interest in
ISSI-Taiwan to approximately 43%. Beginning with the second quarter of fiscal
1999, the Company's Statement of Operations no longer consolidates the results
of ISSI-Taiwan, but instead accounts for ISSI-Taiwan on the equity basis and
includes its percentage share of ISSI-Taiwan's results of operations. Beginning
in the second quarter of fiscal 1999, as the Company's consolidated results no
longer include ISSI-Taiwan, 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.
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 1996, 1997, 1998 and 1999. 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.
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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. In this regard, in the June
1996 quarter, the Company recorded a $15 million write-down for various SRAM and
NVM 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 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 a bottom in 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.
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.
CUSTOMER CONCENTRATION
The Company's sales are concentrated within a limited customer base.
Sales to one customer, 3Com, accounted for approximately 32% and 24% of total
net sales for the quarter ended March 31,
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1999 and March 31,1998, respectively, and approximately 22% and 25% of total net
sales for the six months ended March 31, 1999 and March 31, 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. Revenue recognized for one distributor accounted for 16% of
total net sales for the quarter ended March 31, 1999 and 10% of total net sales
for the six months ended March 31, 1999. For the three and six month periods
ended March 31, 1998, revenue recognized for this distributor was less than 10%.
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 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
21
<PAGE> 22
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 done an initial assessment of its critical IT systems
and has identified at least one area (accounting software) that is not Year 2000
compliant. The Company has selected 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 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.
22
<PAGE> 23
The Company could possibly be adversely impacted by Year 2000 issues
faced by major suppliers, subcontractors, and customers. The Company is in the
process of determining the potential impact on its operations as a result of the
Year 2000 readiness of these third parties. 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.
23
<PAGE> 24
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 be issued in the year 2001. The
Company will pay duties on Taiwan SRAM entries before that date at the bond or
deposit rate.
The Company has retained legal counsel to defend and assist 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 DRAM from outside of Taiwan. The DOC preliminary
determination is due on May 21, 1999 and bond or cash deposit requirements will
apply to DRAM entries after that date. Currently, DRAMs accounts for less than
15% of the Company's revenue.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on Friday January 29, 1999
at 2:00 p.m., local time, in San Jose, California.
(a) The following nominees for Directors were elected. Each person
elected as a Director will serve until the next annual meeting of stockholders
or until such person's successor is elected and qualified:
<TABLE>
<CAPTION>
Votes Votes Against
Name of Nominee in Favor or Withheld
- --------------- -------- -------------
<S> <C> <C>
Jimmy S.M. Lee 14,757,396 261,641
Kong-Yeu Han 14,765,168 253,869
Pauline Lo Alker 14,771,233 247,804
Lip-Bu Tan 14,766,563 252,474
Hide L. Tanigami 14,766,183 252,854
Chun Win Wong 14,766,663 252,374
</TABLE>
(b) The ratification of the Company's 1998 Stock Plan with 500,000
shares reserved for issuance thereunder, plus certain shares of common stock
previously reserved under the Company's prior stock option plan was approved
with 12,665,625 votes in favor, 2,289,844 votes against, and 63,868 representing
abstentions and broker non-votes.
24
<PAGE> 25
(c) An amendment to the Company's 1995 Director Stock Option Plan to
increase by 75,000 to an aggregate of 125,000 the number of shares reserved for
grant thereunder was approved with 12,866,119 votes in favor, 2,082,155 votes
against, and 70,763 representing abstentions and broker non-votes.
(d) The ratification and appointment of Ernst & Young, LLP as
independent auditors of the Company for the fiscal year ending September 30,
1999 was approved with 14,892,942 votes in favor, 81,043 votes against, and
45,052 representing abstentions and broker non-votes.
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 March 31, 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 March 31, 1999, our
market risk related to these investments was immaterial.
25
<PAGE> 26
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: May 14, 1999 /s/ Gary L. Fischer
-------------------------------
Gary L. Fischer
Executive Vice President,
Office of the President, and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
26
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
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 MARCH 31, 1999
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 16,707
<SECURITIES> 8,000
<RECEIVABLES> 13,273
<ALLOWANCES> 1,496
<INVENTORY> 28,950
<CURRENT-ASSETS> 69,887
<PP&E> 22,683
<DEPRECIATION> 17,703
<TOTAL-ASSETS> 127,154
<CURRENT-LIABILITIES> 34,975
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 87,181
<TOTAL-LIABILITY-AND-EQUITY> 127,154
<SALES> 44,167
<TOTAL-REVENUES> 44,167
<CGS> 36,490
<TOTAL-COSTS> 36,490
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 981
<INCOME-PRETAX> (7,159)
<INCOME-TAX> 858
<INCOME-CONTINUING> (7,910)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,910)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
