<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, 2000
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.
---------------------------------
<TABLE>
<S> <C>
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
</TABLE>
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 5, 2000 was 25,216,194
<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,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales (See Note 12) $ 30,032 $ 17,366 $ 53,283 $ 44,167
Cost of sales (See Note 12) 21,232 13,694 38,203 36,490
------------ ------------ ------------ ------------
Gross Profit 8,800 3,672 15,080 7,677
------------ ------------ ------------ ------------
Operating Expenses:
Research and development 4,197 4,170 7,816 9,943
Selling, general and administrative 3,422 2,704 6,629 6,326
------------ ------------ ------------ ------------
Total operating expenses 7,619 6,874 14,445 16,269
------------ ------------ ------------ ------------
Operating income (loss) 1,181 (3,202) 635 (8,592)
Other income (loss), net 516 (236) 460 1,433
------------ ------------ ------------ ------------
Income (loss) before income taxes,
minority interest and equity in net income
(loss) of affiliated companies 1,697 (3,438) 1,095 (7,159)
Provision for income taxes 150 225 200 858
------------ ------------ ------------ ------------
Net income (loss) before minority interest
and equity in net income (loss) of
affiliated companies 1,547 (3,663) 895 (8,017)
Minority interest in net loss of
consolidated subsidiary - - - (472)
Equity in net income (loss) of
affiliated companies 1,838 (282) 2,984 (365)
------------ ------------ ------------ ------------
Net income (loss) $ 3,385 $ (3,945) $ 3,879 $ (7,910)
============ ============ ============ ============
Basic income (loss) per share $ 0.15 $ (0.20) $ 0.18 $ (0.41)
============ ============ ============ ============
Shares used in basic per share calculation 21,992 19,521 21,185 19,469
============ ============ ============ ============
Diluted income (loss) per share $ 0.14 $ (0.20) $ 0.16 $ (0.41)
============ ============ ============ ============
Shares used in diluted per share calculation 24,946 19,521 23,722 19,469
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 3
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 3,385 $ (3,945) $ 3,879 $ (7,910)
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment 777 (585) 1,070 1,737
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 4,162 $ (4,530) $ 4,949 $ (6,173)
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
------------ ------------
(unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 59,175 $ 15,975
Short-term investments 43,650 7,650
Accounts receivable 20,390 11,970
Accounts receivable from related parties (See Note 12) 1,158 3,206
Inventories 37,926 29,681
Other current assets 1,246 1,639
------------ ------------
Total current assets 163,545 70,121
Property, equipment, and leasehold improvements, net 6,330 4,563
Other assets 54,384 47,147
------------ ------------
Total assets $ 224,259 $ 121,831
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,804 $ 10,370
Accounts payable to related parties (See Note 12) 12,293 9,231
Accrued compensation and benefits 1,957 1,933
Accrued expenses 7,679 6,068
Income tax payable 440 455
Current portion of long-term obligations 133 -
------------ ------------
Total current liabilities 30,306 28,057
Income tax payable - non-current 4,996 4,996
Long-term obligations 385 -
Stockholders' equity:
Preferred stock - -
Common stock 3 2
Additional paid-in capital 215,687 120,852
Accumulated deficit (23,973) (27,852)
Accumulated comprehensive income (3,118) (4,188)
Unearned compensation (27) (36)
------------ ------------
Total stockholders' equity 188,572 88,778
------------ ------------
Total liabilities and stockholders' equity $ 224,259 $ 121,831
============ ============
</TABLE>
(1) Derived from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,879 $ (7,910)
Net gain on partial sale of investments - (812)
Depreciation and amortization 1,531 3,132
Minority interest in consolidated subsidiary - (472)
Equity in net income of affiliated companies (2,984) 366
Net foreign currency transaction (gains) losses - (596)
Other charges to net loss not affecting cash 200 16
Net effect of changes in current and other assets and current liabilities (11,463) (4,691)
------------ ------------
Cash used in operating activities (8,837) (10,967)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (2,698) (2,431)
Purchases of available-for-sale securities (46,650) (15,400)
Sales of available-for-sale securities 10,650 15,200
Proceeds from partial sale of ICSI (formerly ISSI-Taiwan) - 4,957
Cash impact of deconsolidation of ICSI - (12,818)
Investment in Wafertech, LLC (2,667) -
Proceeds from partial sale of Wafertech - 10,000
Investment in NexFlash (1,361) (1,000)
Investment in DynaChip - (500)
------------ ------------
Cash used in investing activities (42,726) (1,992)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under notes payable and long-term obligations - 33,435
Proceeds from issuance of common stock 94,845 421
Principal payments on notes payable and long-term obligations (82) (32,293)
------------ ------------
Cash provided by financing activities 94,763 1,563
------------ ------------
Effect of exchange rate changes on cash and cash equivalents - 327
------------ ------------
Net increase (decrease) in cash and cash equivalents 43,200 (11,069)
Cash and cash equivalents at beginning of period 15,975 27,776
------------ ------------
Cash and cash equivalents at end of period $ 59,175 $ 16,707
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 6
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
Integrated Silicon Solution, Inc. (the "Company") and its consolidated majority
owned subsidiaries, after elimination of all significant intercompany accounts
and transactions and have been prepared in accordance with generally accepted
accounting principles for interim financial information and with Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included.
Operating results for the six months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2000.
2. CONCENTRATIONS
Sales to 3Com accounted for approximately 11% and 32% of total net sales
for the three months ended March 31, 2000 and March 31, 1999, respectively, and
approximately 11% and 22% of total net sales for the six months ended March 31,
2000 and March 31, 1999, respectively. Sales to Flextronics International
accounted for approximately 14% of total net sales for the three months ended
March 31, 2000 and approximately 13% of total net sales for the six months ended
March 31, 2000. For the three and six months ended March 31, 1999, sales to
Flextronics were less than 10% of total net sales. 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, 2000, revenue recognized for this
distributor was less than 10%.
The Company uses Integrated Circuit Solution Incorporation ("ICSI")
(formerly known as ISSI-Taiwan) for coordinating wafer purchases, assembly, and
testing for a substantial majority of its inventory.
3. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS
Cash, cash equivalents and short-term investments consisted of the
following:
<TABLE>
<CAPTION>
March 31 September 30
2000 1999
------------ ------------
(In thousands)
<S> <C> <C>
Cash $ 33,971 $ 13,732
Money market instruments 25,204 660
Certificates of deposit - 1,583
Auction preferred stock 1,500 5,200
Municipal bonds due in more than 3 years 42,150 2,450
------------ ------------
$ 102,825 $ 23,625
============ ============
</TABLE>
5
<PAGE> 7
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>
March 31 September 30
2000 1999
------------ ------------
(In thousands)
<S> <C> <C>
Raw materials $ 8,330 $ 5,168
Work-in-process 10,834 6,807
Finished goods 18,762 17,706
------------ ------------
$ 37,926 $ 29,681
============ ============
</TABLE>
5. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
March 31 September 30
2000 1999
------------ ------------
(In thousands)
<S> <C> <C>
Investment in ICSI $ 25,712 $ 21,886
Investment in WaferTech LLC 23,467 20,800
Other 5,205 4,461
------------ ------------
$ 54,384 $ 47,147
============ ============
</TABLE>
6. INCOME TAXES
The provision for income taxes for the six month period ended March 31,
2000 is comprised of taxes on foreign earnings and foreign withholding taxes.
The provision for income taxes for the six month period ended March 31, 1999 is
primarily based on foreign withholding taxes related to the sale of ICSI stock
and other foreign withholding taxes. The income tax provisions for each period
differs from the federal statutory rate primarily as a result of a valuation
allowance established for U.S. federal net operating losses not utilized in the
current period and foreign 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> 8
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,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted net
income (loss) per share:
Net income (loss) $ 3,385 $ (3,945) $ 3,879 $ (7,910)
============ ============ ============ ============
Denominator for basic net income (loss) per share:
Weighted average common shares outstanding 21,992 19,521 21,185 19,469
------------ ------------ ------------ ------------
Denominator for basic net income (loss) per share 21,992 19,521 21,185 19,469
Dilutive stock options 2,433 - 2,048 -
Dilutive warrants 521 - 489 -
------------ ------------ ------------ ------------
Denominator for diluted net income (loss)
per share 24,946 19,521 23,722 19,469
============ ============ ============ ============
Basic net income (loss) per share $ 0.15 $ (0.20) $ 0.18 $ (0.41)
============ ============ ============ ============
Diluted net income (loss) per share $ 0.14 $ (0.20) $ 0.16 $ (0.41)
============ ============ ============ ============
</TABLE>
The above diluted calculation for the three months ended March 31, 1999
does not include approximately 3,309,000 shares attributable to options as of
March 31, 1999 and 981,659 shares attributable to warrants as of March 31, 1999
as their impact would be anti-dilutive. The above diluted calculation for the
six months ended March 31, 2000 and 1999, does not include approximately 13,000
and 3,416,000 shares attributable to options as of March 31, 2000 and 1999,
respectively, and 981,659 shares attributable to warrants as of March 31, 1999
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. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition", which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. We believe that our revenue recognition
policy is in compliance with the provisions of SAB 101 and that the adoption of
SAB 101 had no material effect on our financial position or results of
operations.
7
<PAGE> 9
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 we currently
import a majority of our SRAMs. As a consequence of this antidumping duty order,
we were required to post a cash deposit on imports of Taiwan fabricated SRAM
wafers or devices, at the ad valorem rate of 7.56%.
On April 28, 2000, Micron Technology Inc. ("Micron") requested an
administrative review of our Taiwan fabricated SRAMs for the period from April
1, 1999 through March 31, 2000. For entries during this period, the cash
deposits could be returned to us or, alternatively, we could forfeit amounts
deposited and owe duties and interest in addition to the amounts deposited,
depending on results of the DOC administrative review. The final results of the
review, expected in the year 2001 will set a new deposit rate for subsequent
entries, which may be higher or lower than the current rate. We will pay duties
on Taiwan SRAMs entered before April 1, 1999 at the deposit rate. For entries
after March 31, 2000, duties will depend upon whether the DOC conducts an
administrative review of imports entered between April 1, 2000 and March 31,
2001, and if so depending on the results of the DOC review.
We have retained legal counsel to defend our interests in the
antidumping proceedings. In addition, certain aspects of the antidumping
determination are being challenged in federal court proceedings by 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 our 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 filed an antidumping petition against DRAMs
fabricated in Taiwan. Currently, our DRAM products are fabricated in Taiwan.
Subsequent to the petition filing the DOC established a general dumping duty
deposit rate of 21.35% which would have applied to us. On December 2, 1999, the
International Trade Commission ("ITC") informed the DOC that it had issued a
negative final determination in the DRAM investigation. The DRAM investigation
has, therefore, been terminated and there is presently no antidumping duty
required. In January 2000, Micron filed a summons with the U.S. Court of
International Trade appealing the ITC determination. In March 2000, pursuant to
a motion by Micron, the Court dismissed Micron's appeal. The termination of the
antidumping investigation of Taiwan DRAMs therefore is final.
11. LONG TERM OBLIGATIONS
The Company leases certain of its equipment under a capital lease. The
lease is collateralized by the underlying assets. At March 31, 2000, property
and equipment with a cost of $600,000 was subject to this financing arrangement.
Related accumulated amortization at March 31, 2000 amounted to $50,000. Under
the terms of the lease, the Company owes monthly payments of $15,108 through
September 1, 2003. Remaining principle and interest payments were $518,365 and
$101,164, respectively, at March 31, 2000.
8
<PAGE> 10
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. GEOGRAPHIC AND SEGMENT INFORMATION
The Company operates in one business segment, which is to design,
develop, and market high-performance SRAM, DRAM, and NVM integrated circuits.
The following table summarizes the Company's operations in different geographic
areas:
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31, 1999
--------------------------------------------------------------------
ADJUSTMENTS/
UNITED STATES HONG KONG TAIWAN ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales ............... $ 34,274 $ 2,050 $ 34,932 $ (27,089) $ 44,167
============ ============ ============ ============ ============
Operating loss .......... (7,174) (63) (1,349) (6) (8,592)
============ ============ ============ ============ ============
Long-lived assets ....... 4,832 148 -- -- 4,980
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31, 2000
------------------------------------------------
ADJUSTMENTS/
UNITED STATES HONG KONG ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales ............... $ 53,246 $ 7,905 $ (7,868) $ 53,283
============ ============ ============ ============
Operating income (loss) . 200 901 (466) 635
============ ============ ============ ============
Long-lived assets ....... 6,182 148 -- 6,330
============ ============ ============ ============
</TABLE>
13. RELATED PARTY TRANSACTIONS
As of September 30, 1999, the Company had an accounts receivable balance
from ICSI of approximately $1,915,000. For the six months ended March 31, 2000,
the Company sold approximately $718,000 of memory products to ICSI, in which it
has approximately 43% ownership. The Company had an accounts receivable balance
from ICSI at March 31, 2000 of approximately $636,000.
As of September 30, 1999, the Company had an accounts payable balance to
ICSI of approximately $9,231,000. The Company purchases goods and contract
manufacturing services from ICSI. Purchases of goods and services in the six
months ended March 31, 2000 were approximately $32,506,000. The Company had an
accounts payable balance to ICSI at March 31, 2000 of approximately $12,151,000.
As of September 30, 1999, the Company had an accounts receivable balance
from NexFlash of approximately $1,291,000. For the six months ended December 31,
1999, the Company sold approximately $212,000 of memory products to NexFlash, in
which it has approximately 32% ownership. In addition, the Company received
approximately $83,000 in sublease income from NexFlash. The Company had an
accounts receivable balance from NexFlash at March 31, 2000 of approximately
$522,000.
As of September 30, 1999, the Company had an accounts payable balance to
NexFlash of $0. The Company purchases goods and services from NexFlash.
Purchases of goods and services in the six months ended March 31, 2000 were
approximately $127,000. The Company had an accounts payable balance to NexFlash
at March 31, 2000 of approximately $142,000.
In addition, the Company has guaranteed purchase orders to a wafer
foundry for NexFlash in an amount not to exceed $1,142,000. This guarantee does
not apply to any product shipped under these purchase orders after July 31,
2000.
9
<PAGE> 11
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INVESTMENT IN INTEGRATED CIRCUIT SOLUTION INCORPORATION ("ICSI")
The following summaries financial information for ICSI as March 31, 2000
and for the three and six month periods ended March 31, 2000. (In thousands)
<TABLE>
<CAPTION>
March 31, 2000
--------------
<S> <C>
Current assets $74,994
Property, plant, and equipment and other 47,618
assets
Current liabilities 44,602
Long-term debt 15,600
</TABLE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
March 31, 2000 March 31, 2000
-------------- --------------
<S> <C> <C>
Net sales $ 32,557 $ 59,674
Gross profit 8,819 15,825
Net income 5,391 8,526
</TABLE>
15. FOLLOW-ON PUBLIC STOCK OFFERING
In the three month ended March 31, 2000, the Company completed a
follow-on public offering of its Common Stock whereby it sold 3,795,000 shares
(including 495,000 shares pursuant to the underwriters over-allotment option) at
a public offering price of $25.50 per share. Proceeds from this offering, net of
commissions, discounts and expenses, were $90.6 million.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We have made forward-looking statements in this report on Form 10-Q that
are subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future results of our operations.
Also, when we use such words as "believe," "expect," "anticipate," or similar
expressions, we are making forward-looking statements. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth below and elsewhere in
this report on Form 10-Q.
BACKGROUND
We were founded in October 1988 and focused our initial development
efforts on high performance, low cost SRAMs for PC cache memory applications. We
introduced our first SRAM products in 1990 and from 1990 through 1995 we derived
a majority of our sales from PC motherboard manufacturers. Due to adverse market
conditions resulting primarily from over capacity for our products and a general
downturn in the semiconductor industry, we experienced reduced revenues and
gross margins and inventory write-downs in fiscal 1996, 1997 and 1998. In
response to these conditions, we began to target our product development and
sales and marketing efforts on the networking, internet access and
telecommunications markets. In 1997, we also introduced our first DRAM devices
which focus on very high speed and low to medium density applications. Our DRAMs
are targeted at the same customers that purchase our SRAMs. As a result of our
new focus, in fiscal 1999, sales of SRAMs and DRAMs to the networking, internet
access and telecommunications markets represented a substantial majority of our
net sales.
In 1998, we began to reduce our ownership in Integrated Circuit Solution
Incorporation ("ICSI") (formerly known as ISSI-Taiwan) in order to outsource our
testing operations, focus on our core business in the U.S., raise capital and
position ICSI for the possibility of an eventual public offering in Taiwan. We
intend to continue to use ICSI for testing of wafers and testing of our memory
devices, but we are also now utilizing testing services provided by other firms
in Singapore and Taiwan. We expect to expand utilization of testing services
from these other companies in fiscal 2000. In 1998, we also transferred our
Flash memory business to a newly formed company, NexFlash, in an effort to focus
on our core SRAM and DRAM operations and to reduce our expenses by obtaining
outside funding for the Flash development efforts. We and NexFlash jointly own
related Flash intellectual property. We intend that future development of Flash
products and the sale of such products will be done through NexFlash.
RESULTS OF OPERATIONS
Our financial results for fiscal 2000 reflect accounting for ICSI and
NexFlash on the equity basis and include our percentage share of the results of
ICSI's and NexFlash's respective operations. In December 1998, we sold an
additional 20% of our remaining interest in ICSI and, as a result, reduced our
ownership interest in ICSI to approximately 43%. As a result, our balance sheet
as of December 31, 1998 and our statement of operations beginning with the
second quarter of fiscal 1999 reflects the accounting for ICSI on the equity
basis and reflects our percentage share of ICSI's results of operations. As a
result of no longer consolidating ICSI, there has been a significant decline in
our consolidated revenue and operating expenses.
Effective November 1998, our financial results no longer consolidate the
results of NexFlash, as our ownership of NexFlash became less than 50%, and we
began accounting for NexFlash on the equity basis. This change has had a minimal
effect on our consolidated revenue and has resulted in a decrease in our
consolidated research and development expenses.
11
<PAGE> 13
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Net Sales. Net sales consist principally of total product sales less
estimated sales returns. Net sales increased by 73% to $30.0 million in the
three months ended March 31, 2000, from $17.4 million in the three months ended
March 31, 1999. The increase in sales was principally due to an increase in unit
shipments of our DRAM products, specifically our 4, 8 and 16 megabit DRAM
products, as well as increased unit shipments of 1024K, 256K, 32K x 32, and
recently introduced 128K x 24 SRAM products. In addition, the average selling
prices of our DRAM and SRAM products generally increased in the three months
ended March 31, 2000 compared to the three months ended March 31, 1999. We
anticipate that the average selling prices of our existing products will
generally 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.
Sales to 3Com, accounted for approximately 11% and 32% of total net
sales for the three months ended March 31, 2000 and March 31, 1999,
respectively. Sales to Flextronics International accounted for approximately 14%
of total net sales for the three months ended March 31, 2000. Substantially all
of the sales to Flextronics were for products to be delivered to Cisco Systems
Inc. As sales to these customers are executed pursuant to purchase orders and no
purchasing contract exists, these customers can cease doing business with us at
any time. Revenue recognized for one distributor, Bell Industries, accounted for
16% of total net sales for the three months ended March 31, 1999. For the three
months ended March 31, 2000, revenue recognized for this distributor was less
than 10%. Net sales included licensing revenue of approximately $0.1 million and
$1.0 million in the three months ended March 31, 2000 and March 31, 1999,
respectively. Net sales included sales of approximately $0.2 million and $0.8
million to ICSI in the three months ended March 31, 2000 and March 31, 1999,
respectively. Additionally, net sales include sales of approximately $0.1 to
NexFlash in the three months ended March 31, 2000 and March 31, 1999.
Gross Profit. Cost of sales includes the cost of wafers acquired from
foundries, subcontracted package and assembly costs, costs associated with
product testing, quality assurance and import duties. Gross profit increased
140% to $8.8 million in the three months ended March 31, 2000 from $3.7 million
in the three months ended March 31, 1999. As a percentage of net sales, gross
profit increased to 29.3% in the three months ended March 31, 2000 from 21.1% in
the three months ended March 31, 1999. The increase in gross profit was
principally due to an increase in unit shipments of our DRAM products,
specifically our 4, 8 and 16 megabit DRAM products, as well as increased unit
shipments of 1024K, 256K, 32K x 32, and recently introduced 128K x 24 SRAM
products. In addition, increases in the average selling prices of our DRAM and
SRAM products in the three months ended March 31, 2000 compared to the three
months ended March 31, 1999 more than offset any increases in product costs
resulting in higher gross margins. Our gross profit benefited from $0.1 million
and $1.0 million of licensing revenue for the three months ended March 31, 2000
and March 31, 1999, respectively. We believe that the average selling price of
our products will generally decline over time and, unless we are able to reduce
our cost per unit to the extent necessary to offset such declines, the decline
in average selling prices will result in a material decline in our gross margin.
In addition, product unit costs could increase if suppliers raise prices, which
could result in a material decline in our gross margin. Although we have 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. We do not believe that such cost
reduction efforts are likely to have a material adverse impact on the quality of
our products or the level of service provided by us.
Research and Development. Research and development expenses remained
constant at $4.2 million in the three months ended March 31, 2000 and March 31,
1999. As a percentage of net sales, research and development expenses decreased
to 14.0% in the three months ended March 31, 2000, from 24.0% in the three
months ended March 31, 1999. We were able to maintain research and development
expenses at the $4.2 million dollar level by controlling discretionary spending
and headcount additions. We anticipate that our research and development
expenses will increase in absolute dollars in future periods, although such
expenses may fluctuate as a percentage of net sales.
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Selling, General and Administrative. Selling, general and administrative
expenses increased by 27% to $3.4 million in the three months ended March 31,
2000 from $2.7 million in the three months ended March 31, 1999. As a percentage
of net sales, selling, general and administrative expenses decreased to 11.4% in
the three months ended March 31, 2000, from 15.6% in the three months ended
March 31, 1999. The increase in absolute dollars was primarily the result of
increased selling commissions associated with higher revenues in the three
months ended March 31, 2000 compared to the three months ended March 31, 1999.
We expect our selling, general and administrative expenses may increase in
future quarters although such expenses may fluctuate as a percentage of net
sales.
Other income (loss), Net. Other income (loss), net increased by $0.7
million to $0.5 million in the three months ended March 31, 2000 from $(0.2)
million in the three months ended March 31, 1999. Interest income increased by
$0.3 million in the three months ended March 31, 2000 as a result of higher cash
balances from our follow-on public stock offering in February 2000. In January
1999, we sold approximately 33% of our investment in WaferTech to TSMC for $10.0
million. We recorded a loss of approximately $0.4 million in the March 1999
quarter related to this transaction.
Provision for Income Taxes. The provision for income taxes for the three
month period ended March 31, 2000 is comprised of taxes on foreign earnings. The
provision for income taxes for the three month period ended March 31, 1999 is
primarily based on foreign withholding taxes.
SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO SIX MONTHS ENDED MARCH 31, 1999
Net Sales. Net sales increased by 21% to $53.3 million in the six months
ended March 31, 2000, from $44.2 million in the six months ended March 31, 1999.
Net sales increased by $19.1 million to $53.3 million in the six months ended
March 31, 2000 from $34.2 million in the six months ended March 31, 1999,
excluding the $9.7 million in sales from ICSI and the $0.3 million in sales from
NexFlash in the December 31, 1998 period. The increase in sales was principally
due to an increase in unit shipments of our DRAM products, specifically our 4, 8
and 16 megabit DRAM products, as well as increased unit shipments of 1024K,
256K, 32K x 32, and recently introduced 128K x 24 SRAM products. In addition,
the average selling prices of our DRAM and SRAM products generally increased in
the six months ended March 31, 2000 compared to the six months ended March 31,
1999. We anticipate that the average selling prices of our existing products
will generally 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.
Sales to one customer, 3Com, accounted for approximately 11% and 22% of
total net sales for the six months ended March 31, 2000 and March 31, 1999,
respectively. Sales to Flextronics International accounted for approximately 13%
of total net sales for the six months ended March 31, 2000. Substantially all of
the sales to Flextronics were for products to be delivered to Cisco Systems Inc.
As sales to these customers are executed pursuant to purchase orders and no
purchasing contract exists, these customers can cease doing business with us at
any time. Revenue recognized for one distributor , Bell Industries, accounted
for 10% of total net sales for the six months ended March 31, 1999. For the six
month period ended March 31, 2000, revenue recognized for this distributor was
less than 10%. Net sales includes licensing revenue of approximately $0.7
million and $1.2 million in the six months ended March 31, 2000 and March 31,
1999, respectively. Net sales include sales of approximately $0.7 million and
$0.8 million to ICSI in the six months ended March 31, 2000 and March 31, 1999,
respectively. Additionally, net sales include sales of approximately $0.2
million and $1.3 million in sales to NexFlash in the six months ended March 31,
2000 and March 31, 1999, respectively.
Gross Profit. Gross profit increased 96% to $15.1 million in the six
months ended March 31, 2000, from $7.7 million in the six months ended March 31,
1999. As a percentage of net sales, gross profit increased to 28.3% in the six
months ended March 31, 2000 from 17.4% in the six months ended March 31, 1999.
The increase in gross profit was principally due to an increase in unit
shipments of our DRAM products, specifically our 4, 8 and 16 megabit DRAM
products, as well as increased unit shipments of 1024K, 256K, 32K x 32, and
recently introduced 128K x 24 SRAM products. In addition, increases in the
average selling prices of our DRAM and SRAM products in the six months ended
March 31, 2000 compared to the six months ended March
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31, 1999 more than offset any increases in product costs while certain product
costs declined resulting in higher gross margins. Our gross profit also
benefited from $0.7 million and $1.2 million of licensing revenue for the six
months ended March 31, 2000 and March 31, 1999, respectively. We believe that
the average selling price of our products will generally decline over time and,
unless we are able to reduce our cost per unit to the extent necessary to offset
such declines, the decline in average selling prices will result in a material
decline in our gross margin. In addition, product unit costs could increase if
suppliers raise prices, which could result in a material decline in our gross
margin. Although we have 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. We
do not believe that such cost reduction efforts are likely to have a material
adverse impact on the quality of our products or the level of service provided
by us.
Research and Development. Research and development expenses decreased by
21% to $7.8 million in the six months ended March 31, 2000, from $9.9 million in
the six months ended March 31, 1999. As a percentage of net sales, research and
development expenses decreased to 14.7% in the six months ended March 31, 2000,
from 22.5% in the six months ended March 31, 1999. The decrease in absolute
dollars was primarily the result of a $1.0 million reduction attributable to the
deconsolidation of ICSI and $0.3 million attributable of the spin-off of
NexFlash. In addition, other research and development expenses, including
payroll related expenses, masks, and depreciation decreased in the six months
ended March 31, 2000, compared to the six months ended March 31, 1999. We
anticipate that our research and development expenses will increase in absolute
dollars in future periods, although such expenses may fluctuate as a percentage
of net sales.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 5% to $6.6 million in the six months ended March 31, 2000
from $6.3 million in the six months ended March 31, 1999. As a percentage of net
sales, selling, general and administrative expenses decreased to 12.4% in the
six months ended March 31, 2000, from 14.3% in the six months ended March 31,
1999. The increase in absolute dollars was primarily the result of increased
selling commissions associated with higher revenues in the six months ended
March 31, 2000 compared to the six months ended March 31, 1999, offset by a $1.2
million reduction attributable to the deconsolidation of ICSI and $0.1 million
attributable to the spin-off of NexFlash. We expect our selling, general and
administrative expenses may increase in future quarters although such expenses
may fluctuate as a percentage of net sales.
Other income (loss), Net. Other income (loss), net decreased by $0.9
million to $0.5 million in the six months ended March 31, 2000 from $1.4 million
in the six months ended March 31, 1999. The six months ended March 31, 1999
included a pre-tax gain of $1.2 million resulting from the sale of 20% of our
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 our investment in Wafertech LLC.
Provision (benefit) for Income Taxes. The provision for income taxes for
the six month period ended March 31, 2000 is comprised of taxes on foreign
earnings and foreign withholding taxes. The provision for income taxes for the
six month period ended March 31, 1999 is primarily based on foreign withholding
taxes related to the sale of ICSI stock and other foreign withholding taxes. The
tax for the six months ended March 31, 1999 is higher than for the same period
for fiscal 2000 due to withholding taxes related to the sale of ICSI stock.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, our principal sources of liquidity included cash,
cash equivalents and short-term investments of approximately $102.8 million.
During the six months ended March 31, 2000, operating activities used cash of
approximately $8.8 million. Cash used by operations was primarily due to
increases in inventories of $8.2 million and in accounts receivable of $6.4
million in support of higher sales levels partially offset by net income and
increases in accrued liabilities of $1.6 million.
In the six months ended March 31, 2000, we used $42.7 million for
investing activities compared to $2.0 million in the six months ended March 31,
1999. The cash used for investing activities was primarily the result
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of net purchases of available-for-sale securities of $36.0 million. In addition,
we made additional investments of $2.7 million in WaferTech and $1.4 million in
NexFlash.
In the six months ended March 31, 2000, we made capital expenditures of
approximately $2.7 million for engineering tools and computer software. In
addition, we acquired $0.6 million of test equipment under a capital lease. We
expect to spend approximately $3.0 million to purchase capital equipment during
the next twelve months, principally for the purchase of design and engineering
tools, additional test equipment and computer software and hardware.
We generated $94.8 million from financing activities during the six
months ended March 31, 2000 compared to $1.6 million in the six months ended
March 31, 1999. The primary source of financing for the six month ended March
31, 2000 was net proceeds from our follow-on public stock offering in the March
2000 quarter of $90.6 million and proceeds from the issuance of common stock of
$4.2 million from option exercises and sales under our employee stock purchase
plan.
In June 1998, we sold approximately 46% of ICSI to a group of private
investors. In December 1998, we sold an additional 20% of our 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, we owned approximately 43% of
ICSI and now account for ICSI on the equity basis.
In June 1996, we entered into a business venture "WaferTech, LLC" with
TSMC, Altera, Analog Devices, and private investors to build a wafer fabrication
facility in Camas, Washington. We 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 January 1999, we sold approximately 33% of our investment in
WaferTech to TSMC for $10.0 million. We retain a 2.67% interest in WaferTech. In
October 1999, the major investors in WaferTech made an additional pro-rata
investment in WaferTech. Our pro-rata amount of $2.7 million was invested along
with the other partners. Our investment in WaferTech as of March 31, 2000 was
$23.5 million. We also agreed to certain minimum wafer purchase commitments with
our foundry partners in exchange for wafer capacity commitments. In fiscal 1995,
we entered into an agreement with TSMC pursuant to which we agreed to acquire
specified wafer capacity through 2001. We also agreed to make certain annual
payments, the remaining amount of which totals approximately $9.6 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 our $9.6 million obligation. As a result, the $9.6 million may be
subject to forfeiture if we do not purchase the base capacity and additional
capacity for which we have contracted. We also have minimum purchase obligations
to TSMC related to WaferTech. We are obligated to purchase from WaferTech or
TSMC a minimum of 2.3% of WaferTech's installed capacity. We do not currently
expect to forfeit any amounts or incur any losses associated with these capacity
agreements. Although we have 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 we fail to re-schedule or assign unneeded
capacity, our business and operating results could be adversely affected.
In April 1998, the U.S. Department of Commerce ("DOC") published an
antidumping duty order on imports of SRAMs from Taiwan, from where we currently
import a majority of our SRAMs. As a consequence of this antidumping duty order,
we were required to post a cash deposit on imports of Taiwan fabricated SRAM
wafers or devices, at the ad valorem rate of 7.56%.
On April 28, 2000, Micron Technology Inc. ("Micron") requested an
administrative review of our Taiwan fabricated SRAMs for the period from April
1, 1999 through March 31, 2000. For entries during this period, the cash
deposits could be returned to us or, alternatively, we could forfeit amounts
deposited and owe duties and interest in addition to the amounts deposited,
depending on results of the DOC administrative review. The final results of the
review, expected in the year 2001 will set a new deposit rate for subsequent
entries, which may be higher or lower than the current rate. We will pay duties
on Taiwan SRAMs entered before April 1, 1999 at the deposit rate. For entries
after March 31, 2000, duties will depend upon whether the DOC conducts an
administrative review of imports entered between April 1, 2000 and March 31,
2001, and if so depending on the results of the DOC review.
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We have retained legal counsel to defend our interests in the
antidumping proceedings. In addition, certain aspects of the antidumping
determination are being challenged in federal court proceedings by 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 our 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 filed an antidumping petition against DRAMs
fabricated in Taiwan. Currently, our DRAM products are fabricated in Taiwan.
Subsequent to the petition filing the DOC established a general dumping duty
deposit rate of 21.35% which would have applied to us. On December 2, 1999, the
International Trade Commission ("ITC") informed the DOC that it had issued a
negative final determination in the DRAM investigation. The DRAM investigation
has, therefore, been terminated and there is presently no antidumping duty
required. In January 2000, Micron filed a summons with the U.S. Court of
International Trade appealing the ITC determination. In March 2000, pursuant to
a motion by Micron, the Court dismissed Micron's appeal. The termination of the
antidumping investigation of Taiwan DRAMs therefore is final.
We believe our existing funds and available financing will satisfy our
anticipated working capital and other cash requirements through at least the
next 12 months. We may from time to time take actions to further increase our
cash position through bank borrowings, sales of additional shares of ICSI, the
disposition of certain assets, equity financing or debt financing. We, from time
to time, also evaluate potential acquisitions and equity investments
complementary to our memory expertise and market strategy, including investments
in wafer fabrication foundries. To the extent we pursue such transactions, any
such transactions could require us 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 us, if at all.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS OR FUTURE OPERATING
RESULTS
OUR OPERATING RESULTS ARE EXPECTED TO CONTINUE TO FLUCTUATE AND MAY NOT MEET
PUBLISHED ANALYST FORECASTS. THIS MAY CAUSE THE PRICE OF OUR COMMON STOCK TO
DECLINE.
Our future quarterly and annual operating results are subject to
fluctuations due to a wide variety of factors, including:
- the cyclicality of the semiconductor industry;
- declines in average selling prices of our products;
- oversupply of memory products in the market;
- our failure to introduce new products and to implement
technologies on a timely basis;
- market acceptance of our and our customers' products;
- the failure to anticipate changing customer product
requirements;
- fluctuations in manufacturing yields;
- failure to deliver products on a timely basis;
- disruption in the supply of wafers or assembly services;
- changes in product mix;
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- the timing of significant orders;
- increased expenses associated with new product introductions or
process changes;
- the ability of customers to make payments to us; and
- increases in antidumping duties.
WE HAVE A RECENT HISTORY OF LOSSES, AND THERE CAN BE NO ASSURANCE THAT WE WILL
BE ABLE TO SUSTAIN PROFITABILITY IN THE FUTURE.
We incurred losses of $7.7 million, $50.6 million and $9.5 million in
fiscal 1997, 1998 and 1999, respectively. We were profitable for the first two
quarters of fiscal 2000. Our ability to maintain profitability on a quarterly
basis in the future will depend on a variety of factors, including our ability
to increase our net sales, introduce new products on a timely basis, secure
sufficient wafer fabrication capacity and control our operating expenses.
Adverse developments with respect to these or other factors could result in
quarterly or annual operating losses in the future.
OUR SALES DEPEND ON SRAM PRODUCTS, AND A DECLINE IN AVERAGE SELLING PRICES OR
REDUCED DEMAND FOR THESE PRODUCTS COULD HARM OUR BUSINESS.
A majority of our net sales are derived from the sale of SRAM products,
which are subject to unit volume fluctuations and declines in average selling
prices which could harm our business. For example, in the three months ended
June 31, 1998, our net sales decreased by 38% to $25.0 million from $40.7
million in the three months ended March 31, 1998, principally due to a decrease
in unit shipments of our SRAM products. Further, we anticipate that the average
selling prices of our existing products will decline over time, although the
rate of decline may fluctuate for certain products. Such declines may not be
offset by higher volumes or by higher prices on newer products.
WE MAY NOT BE ABLE TO COMPENSATE FOR PRICE DECREASES IN OUR PRODUCTS.
Competitive pricing pressures due to an industry-wide oversupply of
wafer capacity resulted in significant price decreases for our products during
the past four years. Historically, average selling prices for semiconductor
memory products have declined, and we expect that average selling prices will
decline in the future. Our ability to maintain or increase revenues will depend
upon our 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 our existing products.
Declining average selling prices will also adversely affect our gross
margins and profits unless we are able to introduce new products with higher
margins or reduce our cost per unit. We may not be able to increase unit sales
volumes, introduce and sell new products or reduce our cost per unit.
SHIFTS IN INDUSTRY-WIDE CAPACITY MAY CAUSE OUR RESULTS TO FLUCTUATE. IN THE
PAST, SUCH SHIFTS HAVE RESULTED IN SIGNIFICANT INVENTORY WRITE-DOWNS.
Shifts in industry-wide capacity from shortages to oversupply or from
oversupply to shortages may result in significant fluctuations in our 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, we recorded inventory write-downs of $23.0 million. The
inventory write-downs were predominately for lower of cost or market accounting
on certain of our products, primarily SRAMs, and, to a lesser extent, excess
inventory.
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We also 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. In making such
judgments to write down inventory, management takes into account the product
life cycles which can range from 6 to 24 months, the stage in the life cycle of
the product, the impact of competitor's announcements and product introductions
on our products, and purchasing opportunities due to excess wafer capacity.
We believe that six months is an appropriate period because it is
difficult to accurately forecast for a specific product beyond this time frame
due to the potential introduction of products by competitors, technology
obsolescence or fluctuations in demand. Our policy regarding excess inventory
has resulted in inventory write-downs for excess inventory of approximately $0,
$5.4 million, and $0 for fiscal year 1999, 1998 and 1997, respectively, and
recoveries of written-down inventory of approximately $0, $0, and $13.9 million
in fiscal 1999, 1998 and 1997, respectively. Future additional inventory
write-downs may occur due to lower of cost or market accounting, excess
inventory or inventory obsolescence.
IF WE ARE UNABLE TO OBTAIN AN ADEQUATE SUPPLY OF WAFERS, OUR BUSINESS WILL BE
HARMED.
If we are unable to obtain an adequate supply of wafers from our current
or any alternative sources in a timely manner, our business would be harmed. To
date, our principal manufacturing relationship has been with TSMC, from which we
have obtained a substantial majority of our wafers. We also receive wafers from
Chartered Semiconductor and UMC. Each of our wafer foundries also supplies
wafers to other integrated circuit companies, including certain of our
competitors. Although we have written commitments specifying wafer capacities
from our suppliers, if these suppliers experience manufacturing failures or
yield shortfalls, choose to prioritize capacity for other uses or reduce or
eliminate deliveries to us, we may not be able to enforce fulfillment of the
delivery commitments. Additionally, we may not be able to qualify additional
manufacturing sources for existing or new products in a timely manner. Moreover,
it is uncertain whether additional manufacturing sources would agree to deliver
an adequate supply of wafers to us.
FOUNDRY CAPACITY IS LIMITED AND WE MAY BE REQUIRED TO ENTER INTO COSTLY
LONG-TERM SUPPLY ARRANGEMENTS TO SECURE FOUNDRY CAPACITY.
If we are not able to obtain additional foundry capacity as required,
our relationships with our customers would be harmed and our future sales would
likely be adversely impacted. In order to secure additional foundry capacity, we
have entered into and expect to enter into various arrangements with suppliers,
which could include:
- contracts that commit us to purchase specified quantities of
silicon wafers over extended periods;
- investments in foundries;
- joint ventures;
- other partnership relationships with foundries;
- option payments or other prepayments to a foundry; or
- nonrefundable deposits with or loans to foundries in exchange
for capacity commitments.
We may not be able to make any such arrangements in a timely fashion or
at all, and such arrangements, if any, may not be on terms favorable to us.
Moreover, if we are able to secure foundry capacity, we may be obligated to
utilize all of that capacity or incur penalties. Such penalties may be expensive
and could harm our financial results.
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ANY DOWNTURN IN THE MARKETS WE SERVE WOULD HARM OUR BUSINESS.
A majority of our products are incorporated into products such as
internet access devices, networking equipment, telecommunications equipment and
PC peripherals. These markets have 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. Our business
would be harmed by any future downturns in the markets that we serve.
WE DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR A HIGH PERCENTAGE OF OUR SALES, AND
THE LOSS OF A SIGNIFICANT CUSTOMER COULD CAUSE A DECLINE IN OUR PROFITS.
Sales to 3Com accounted for approximately 11%, 20% and 19% of total net
sales for the six months ended March 31, 2000 and for fiscal 1999 and fiscal
1998, respectively. Sales to Flextronics International accounted for 13% of
total net sales for the six months ended March 31, 2000. As sales to these
customers are executed pursuant to purchase orders and no purchasing contract
exists, these customers can cease doing business with us at any time. We expect
a significant portion of our future sales to remain concentrated within a
limited number of strategic customers. We may not be able to retain our
strategic customers, such customers may cancel or reschedule orders, or in the
event of canceled orders, such orders may not be replaced by other sales. In
addition, sales to any particular customer may fluctuate significantly from
quarter to quarter which could harm our business.
OUR PRODUCTS ARE COMPLEX AND COULD CONTAIN DEFECTS, WHICH COULD REDUCE SALES OF
THOSE PRODUCTS OR RESULT IN CLAIMS AGAINST US.
We develop complex and evolving products. Despite testing by us and our
customers, errors may be found in existing or new products. This could result in
a delay in recognition or loss of revenues, loss of market share or failure to
achieve market acceptance. These defects may also cause us to incur significant
warranty, support and repair costs, divert the attention of our engineering
personnel from our product development efforts and harm our relationships with
our customers. The occurrence of these problems could result in the delay or
loss of market acceptance of our products and would likely harm our business.
Defects, integration issues or other performance problems in our products could
result in financial or other damages to our customers or could lessen market
acceptance of our products. Our customers could also seek and obtain damages
from us for their losses. A product liability claim brought against us, even if
unsuccessful, would likely be time consuming and costly to defend.
STRONG COMPETITION IN THE SEMICONDUCTOR MEMORY MARKET MAY HARM OUR BUSINESS.
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. Certain of our competitors offer broader
product lines and have greater financial, technical, marketing, distribution and
other resources than us. There can be no assurance that we will be able to
compete successfully against any of these competitors. Our ability to compete
successfully in the high performance memory market depends on factors both
within and outside of our control, including:
- real or perceived imbalances in supply and demand;
- product pricing;
- the rate at which OEM customers incorporate our products into
their systems;
- the success of our customers' products;
- access to advanced process technologies at competitive prices;
- product functionality, performance and reliability;
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- successful and timely product development;
- the supply and cost of wafers;
- achievement of acceptable yields of functional die;
- the gain or loss of significant customers; and
- the nature of our competitors and general economic conditions.
In addition, we are vulnerable to technology advances utilized by
competitors to manufacture higher performance or lower cost products. There can
be no assurance that we will be able to compete successfully in the future as to
any of these factors. Our failure to compete successfully in these or other
areas could harm our business.
POTENTIAL INTELLECTUAL PROPERTY CLAIMS AND LITIGATION COULD SUBJECT US TO
SIGNIFICANT LIABILITY FOR DAMAGES AND COULD INVALIDATE OUR PROPRIETARY RIGHTS.
In the semiconductor industry, it is not unusual for companies to
receive notices alleging infringement of patents or other intellectual property
rights of others. We have been, and from time-to-time expect to be, notified of
claims that we may be infringing patents, maskwork rights or copyrights owned by
third parties. For example, for a number of years we have been corresponding
with a large international semiconductor company regarding potential
infringement of certain of their patents by us and certain of our patents by
them. Other companies may pursue claims against us 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, we may
seek licenses under patents that we are alleged to be infringing. Although
patent holders commonly offer such licenses, licenses may not be offered and the
terms of any offered licenses may not be acceptable to us.
The failure to obtain a license under a key patent or intellectual
property right from a third party for technology used by us could cause us 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 our business and operating results.
Furthermore, we may become involved in protracted litigation regarding the
alleged infringement by us of third party intellectual property rights or
litigation to assert and protect our patents or other intellectual property
rights. Any litigation relating to patent infringement or other intellectual
property matters could result in substantial cost and diversion of our resources
which could harm our business.
WE HAVE SIGNIFICANT INTERNATIONAL SALES AND RISKS OF OUR INTERNATIONAL
OPERATIONS COULD HARM OUR OPERATING RESULTS.
In the six months ended March 31, 2000, approximately 57% of our net
sales was attributable to customers located in the United States, 21% was
attributable to customers located in Europe and 22% was attributable to
customers located in Asia. In fiscal 1999, approximately 52% of our net sales
was attributable to customers located in the United States, 20% was attributable
to customers located in Europe and 28% was attributable to customers located in
Asia. Accordingly, our future operating results will also depend on general
economic conditions in Asia, the United States and our other markets. In
addition, the markets for our products, which are highly cyclical, may not
continue to grow. We anticipate that sales to international customers will
continue to represent a significant percentage of net sales.
We are subject to the risks of conducting business internationally,
including:
- economic conditions in Asia, particularly Taiwan;
- changes in trade policy and regulatory requirements;
20
<PAGE> 22
- duties, tariffs and other trade barriers and restrictions;
- the burdens of complying with foreign laws;
- foreign currency fluctuations; and
- political instability.
IF WE NEED TO MAKE PAYMENTS FOR UNUSED WAFER CAPACITY, OUR BUSINESS WILL BE
HARMED.
We have minimum wafer purchase commitments with our foundry partners in
exchange for wafer capacity commitments. Should we fail to reschedule or assign
unneeded capacity, we will be required to make payments for the unused capacity
and our business would be harmed. We have agreed to make certain annual
purchases totaling, in aggregate, approximately $9.6 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 our $9.6
million obligation. As a result, we could be forced to pay up to $9.6 million
even if we do not purchase the base capacity and additional capacity for which
we have contracted. We also have minimum purchase obligations to TSMC related to
WaferTech LLC, a business venture in which we are an investor. We are obligated
to purchase from WaferTech or TSMC a minimum of 2.3% of WaferTech's installed
capacity. Although we have rights to reschedule or assign capacity to other
parties, we may not be able to successfully do so.
WE DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN OUR KEY TECHNICAL AND MANAGEMENT
PERSONNEL.
Our success depends upon the continued service of key technical and
management personnel, including Jimmy S.M. Lee, Chairman and Chief Executive
Officer, and on our ability to continue to attract, retain and motivate
qualified personnel, particularly experienced circuit designers and process
engineers. The competition for such employees is intense. We have no employment
contracts or key person life insurance policies with or for any of our executive
officers. The loss of the service of one or more of our key personnel could
materially and adversely affect our business and operating results.
OUR STOCK PRICE IS EXPECTED TO BE VOLATILE.
The trading price of our common stock has been and is expected to be
subject to wide fluctuations in response to:
- quarter-to-quarter variations in our operating results;
- announcements of new products, strategic relationships or
acquisitions by us or our competitors;
- increases or decreases in wafer capacity;
- general conditions or cyclicality in the semiconductor industry
or the end markets that we serve;
- governmental regulations, trade laws and import duties;
- litigation;
- new or revised earnings estimates;
- comments or recommendations issued by analysts who follow us,
our competitors or the semiconductor industry and other events
or factors;
- announcements of technological innovations by us or our
competitors;
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<PAGE> 23
- additions or departures of senior management; and
- other events or factors many of which are beyond our control.
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 our
common stock.
YEAR 2000 COMPLIANCE
As of the date hereof, we had not experienced any material problems as a
result of the Year 2000. We incurred approximately $0.6 million in total
software, hardware, and system related costs in connection with remediation of
Year 2000 issues. These costs are primarily costs associated with the
implementation of our new information system and have generally been capitalized
as fixed assets.
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 we currently
import a majority of our SRAMs. As a consequence of this antidumping duty order,
we were required to post a cash deposit on imports of Taiwan fabricated SRAM
wafers or devices, at the ad valorem rate of 7.56%.
On April 28, 2000, Micron Technology Inc. ("Micron") requested an
administrative review of our Taiwan fabricated SRAMs for the period from April
1, 1999 through March 31, 2000. For entries during this period, the cash
deposits could be returned to us or, alternatively, we could forfeit amounts
deposited and owe duties and interest in addition to the amounts deposited,
depending on results of the DOC administrative review. The final results of the
review, expected in the year 2001 will set a new deposit rate for subsequent
entries, which may be higher or lower than the current rate. We will pay duties
on Taiwan SRAMs entered before April 1, 1999 at the deposit rate. For entries
after March 31, 2000, duties will depend upon whether the DOC conducts an
administrative review of imports entered between April 1, 2000 and March 31,
2001, and if so depending on the results of the DOC review.
We have retained legal counsel to defend our interests in the
antidumping proceedings. In addition, certain aspects of the antidumping
determination are being challenged in federal court proceedings by 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 our 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 filed an antidumping petition against DRAMs
fabricated in Taiwan. Currently, our DRAM products are fabricated in Taiwan.
Subsequent to the petition filing the DOC established a general dumping duty
deposit rate of 21.35% which would have applied to us. On December 2, 1999, the
International Trade Commission ("ITC") informed the DOC that it had issued a
negative final determination in the DRAM investigation. The DRAM investigation
has, therefore, been terminated and there is presently no antidumping duty
required. In January 2000, Micron filed a summons with the U.S. Court of
International Trade appealing the ITC determination. In March 2000, pursuant to
a motion by Micron, the Court dismissed Micron's appeal. The termination of the
antidumping investigation of Taiwan DRAMs therefore is final.
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<PAGE> 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on Monday, February 7,
2000 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 18,063,209 110,440
Pauline Lo Alker 18,059,528 114,121
Lip-Bu Tan 18,062,728 110,921
Hide L. Tanigami 18,062,228 111,421
Chun Win Wong 15,670,229 2,503,402
</TABLE>
(b) An amendment to the Company's 1993 Employee Stock Purchase Plan to
increase by 250,000 to an aggregate of 1,700,000 the number of shares reserved
for grant thereunder was approved with 15,509,579 votes in favor and 2,608,521
votes against.
(c) The ratification and appointment of Ernst & Young, LLP as
independent auditors of the Company for the fiscal year ending September 30,
2000 was approved with 18,102,967 votes in favor, and 19,645 votes against.
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, 2000.
ITEM 7A. FINANCIAL MARKET RISK
Our principal financial market risk relates to the interest rates
associated with our investment portfolio. All of our cash equivalents and
short-term investments are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with unrealized gains and losses, net of
tax, reported in a separate component of stockholders' equity. The amortized
cost for available-for-sale debt securities is adjusted for the amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in investment income. Realized gains and losses and declines in value judged to
be other-than-temporary on available-for-sale securities are included in
investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in investment income. At March 31, 2000 and
September 30, 1999, the cost of these securities approximated the fair value
(quoted market price) and the amount of unrealized gain or loss was not
significant. There were no gains or losses on the sale of securities for the
three and six months ended March 31, 2000 and 1999.
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<PAGE> 25
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 12, 2000 /s/ Gary L. Fischer
---------------------
Gary L. Fischer
Executive Vice President,
Office of the President, and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
24
<PAGE> 26
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27 Financial Data Schedule
<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, 2000.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 59,175
<SECURITIES> 43,650
<RECEIVABLES> 23,045
<ALLOWANCES> 1,497
<INVENTORY> 37,926
<CURRENT-ASSETS> 163,545
<PP&E> 27,009
<DEPRECIATION> 20,679
<TOTAL-ASSETS> 224,259
<CURRENT-LIABILITIES> 30,306
<BONDS> 385
0
0
<COMMON> 3
<OTHER-SE> 188,569
<TOTAL-LIABILITY-AND-EQUITY> 224,259
<SALES> 53,283
<TOTAL-REVENUES> 53,283
<CGS> 38,203
<TOTAL-COSTS> 38,203
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> 1,095
<INCOME-TAX> 200
<INCOME-CONTINUING> 3,879
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,879
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.16
</TABLE>
