<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 2000
REGISTRATION NO. 333-95837
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INTEGRATED SILICON SOLUTION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 77-0199971
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
2231 LAWSON LANE
SANTA CLARA, CALIFORNIA 95054
(408) 588-0800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GARY L. FISCHER
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
INTEGRATED SILICON SOLUTION, INC.
2231 LAWSON LANE
SANTA CLARA, CALIFORNIA 95054
(408) 588-0800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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J. ROBERT SUFFOLETTA, ESQ. PETER T. HEALY, ESQ.
DAVID R. KING, ESQ. O'MELVENY & MYERS LLP
WILSON SONSINI GOODRICH & ROSATI 275 BATTERY STREET
PROFESSIONAL CORPORATION SAN FRANCISCO, CA 94111
650 PAGE MILL ROAD (415) 984-8833
PALO ALTO, CA 94304
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is
not an offer to sell these securities and we are not soliciting offers to
buy these securities in any state where the offer or sale is not
permitted.
Prospectus (not complete)
Issued February 24, 2000
3,300,000 SHARES
LOGO
COMMON STOCK
-------------------------
Integrated Silicon Solution, Inc. is offering 3,300,000 shares of its
common stock in a firmly underwritten offering.
Our common stock is traded on the Nasdaq National Market under the symbol
"ISSI." The last reported sale price of our common stock on the Nasdaq National
Market on February 4, 2000 was $15.50 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Offering Price...................................... $ $
Discounts and Commissions to Underwriters........... $ $
Offering Proceeds to ISSI........................... $ $
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We have granted the underwriters the right to purchase up to an additional
495,000 shares of common stock to cover any over-allotments. The underwriters
can exercise this right at any time within thirty days after this offering. Banc
of America Securities LLC expects to deliver the shares of common stock to
investors on , 2000.
BANC OF AMERICA SECURITIES LLC WIT SOUNDVIEW
GERARD KLAUER MATTISON & CO., INC.
-------------------------
, 2000
<PAGE> 3
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY
SHARES OF INTEGRATED SILICON SOLUTION, INC. COMMON STOCK ONLY IN JURISDICTIONS
WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE
TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF THE INTEGRATED SILICON
SOLUTION COMMON STOCK.
TABLE OF CONTENTS
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Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Special Note Regarding Forward-Looking Statements........... 15
Use of Proceeds............................................. 16
Price Range of Common Stock................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Selected Consolidated Financial Data........................ 18
Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................. 20
Business.................................................... 32
Management.................................................. 43
Principal Stockholders...................................... 45
Underwriting................................................ 47
Indemnification of Directors and Officers................... 49
Where You Can Find More Information......................... 50
Legal Matters............................................... 50
Experts..................................................... 51
Index to Financial Statements............................... F-1
</TABLE>
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information that you should
consider before making an investment decision. This prospectus contains
forward-looking statements which involve risks and uncertainties. Our results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth in "Risk
Factors" and elsewhere in this prospectus. Except as otherwise indicated, all
information in this prospectus assumes no exercise of the underwriters'
over-allotment option. References to "we," "us," "our" and "ISSI" mean
Integrated Silicon Solution, Inc. and all entities owned or controlled by
Integrated Silicon Solution, Inc.
INTEGRATED SILICON SOLUTION, INC.
We design, develop and market high performance memory semiconductors used
in internet access devices, networking equipment, telecom and mobile
communications equipment and computer peripherals. Our high speed and low power
SRAMs and our low to medium density DRAMs enable customers to design products
that meet the demanding connectivity and portability requirements of the data
communications and wireless communications markets. Our objective is to
capitalize on major trends such as the expansion of the communications and
Internet infrastructure, the proliferation of wireless devices and other trends
in electronics technologies.
The ever-expanding performance requirements in electronic systems place
increasing pressure on manufacturers to use sophisticated semiconductor memory
architecture within their systems. Manufacturers of leading-edge internet access
devices, ISP servers and networking routers and switches require high speed
memory architecture and devices within their systems to meet demands for faster
speed and response times. Similarly, the advent of handheld wireless
communications devices, such as cellular phones and personal digital assistants,
has necessitated the development of high performance memories that reduce power
consumption, increase battery life and reduce size in order to maximize
portability. Our goal is to be a focused supplier of high performance memories
targeting the growing connectivity and communications markets.
Our customers include industry leaders such as 3Com, Alcatel, Cisco,
Ericsson, Hewlett Packard, IBM, Lexmark, Motorola, Nokia and Seagate. Due to
their size and influence, these customers generally drive memory volumes in
their market segment and help define the direction of future memory products.
Our products offer our customers numerous benefits, including:
- high performance and functionality;
- high quality and reliability;
- leading-edge designs that facilitate the development of new, advanced
systems; and
- access to advanced process technology.
We believe our close relationship with leading silicon wafer foundries
gives us access to the advanced wafer process technology required to design and
manufacture high performance memories. We entered into our first development
program with Taiwan Semiconductor Manufacturing Corporation (TSMC) in 1990 and
with Chartered Semiconductor in 1994 and have also worked closely with United
Microelectronics Corporation (UMC) since 1995. Through this collaborative
strategy, we have been in the
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forefront in utilizing the most advanced process technology and in securing
access to wafer capacity.
We believe our ability to design and develop high performance,
cost-effective products, and our collaborative development with our
manufacturing partners utilizing state-of-the-art process technology gives us a
competitive advantage. Our strategy is to:
- target high growth markets and applications;
- further penetrate industry leading customers;
- build collaborative relationships with leading edge foundries; and
- continually develop high performance products.
We were founded in 1988. We own approximately 43% of a privately-held
company in Taiwan (ISSI-Taiwan) which focuses on manufacturing coordination,
quality assurance, product test and regional sales in the Asian market. Prior to
the quarter ended March 31, 1999, our ownership of ISSI-Taiwan exceeded 50% and
our financial results were consolidated with those of ISSI-Taiwan. Effective
with the quarter ending March 31, 1999, we accounted for ISSI-Taiwan on the
equity basis and included in our financial statements our percentage share of
ISSI-Taiwan's financial results. In October 1998, we transferred our Flash
memory business to a newly formed company, NexFlash Technologies, Inc.
(NexFlash), and presently own approximately 33% of that company. In fiscal 1999,
we accounted for NexFlash on the equity basis and included in our financial
statements our percentage share of NexFlash's financial results. We also have a
wholly-owned subsidiary in Hong Kong that primarily focuses on research and
development and a subsidiary in China that focuses on marketing.
We were incorporated in California in October 1988 and changed our state of
incorporation to Delaware in August 1993. Our principal executive offices are
located at 2231 Lawson Lane, Santa Clara, California 95054 and our telephone
number is (408) 588-0800. We maintain a website on the Internet at
"www.issi.com." Our website, and the information contained therein, is not a
part of this prospectus.
4
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THE OFFERING
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Common stock offered by ISSI.......... 3,300,000 shares
Common stock to be outstanding after
this offering....................... 23,794,564 shares
Use of proceeds....................... For general corporate purposes, principally
working capital, capital expenditures and
potential investments in semiconductor wafer
foundries.
Nasdaq National Market Symbol......... ISSI
</TABLE>
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The number of shares of our common stock to be outstanding after this
offering is based on the number of shares outstanding as of December 31, 1999
and does not include the following:
- 3,211,400 shares of common stock issuable upon exercise of outstanding
stock options with a weighted average exercise price of approximately
$4.47 per share;
- 732,329 shares of common stock issuable upon exercise of outstanding
warrants with an exercise price of $3.76 per share;
- 5,367,333 shares of common stock reserved for future issuance under our
stock option plans; and
- 706,822 shares of common stock reserved for sale under our employee stock
purchase plan.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables present our summary consolidated statement of
operations data for fiscal 1995 through 1999 and the three months ended December
31, 1998 and 1999, as well as our summary consolidated balance sheet data as of
December 31, 1999. Consolidated balance sheet data is presented on an actual
basis and as adjusted to reflect the sale of 3,300,000 shares of common stock
offered by us in this offering at an assumed public offering price of $15.50 per
share after deducting the estimated underwriting discounts and commissions and
the estimated offering expenses.
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<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------------------------------ -------------------
1995 1996 1997 1998 1999 1998 1999
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(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................ $123,201 $132,039 $108,261 $131,132 $ 83,309 $26,801 $23,251
Gross profit............. 62,252 31,855 32,156 4,338 16,493 4,005 6,280
Operating income
(loss)................. 34,476 (4,683) (10,776) (53,053) (14,184) (5,390) (546)
Net income (loss)........ $ 29,653 $ 1,015 $ (7,686) $(50,607) $ (9,511) $(3,965) $ 494
======== ======== ======== ======== ======== ======= =======
Basic net income (loss)
per share.............. $ 1.98 $ 0.06 $ (0.43) $ (2.67) $ (0.48) $ (0.20) $ 0.02
======== ======== ======== ======== ======== ======= =======
Diluted net income (loss)
per share.............. $ 1.80 $ 0.06 $ (0.43) $ (2.67) $ (0.48) $ (0.20) $ 0.02
======== ======== ======== ======== ======== ======= =======
Shares used in computing:
Basic net income (loss)
per share............ 14,945 17,457 17,748 18,940 19,633 19,418 20,378
Diluted net income
(loss) per share..... 16,447 18,356 17,748 18,940 19,633 19,418 22,498
</TABLE>
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<CAPTION>
AS OF DECEMBER 31, 1999
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ACTUAL AS ADJUSTED
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(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 16,569 $ 64,407
Working capital............................................. 40,455 88,293
Total assets................................................ 125,294 173,132
Long-term debt, including current portion................... 550 550
Stockholders' equity........................................ 90,513 138,351
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RISK FACTORS
You should carefully consider the risks described below, together with all
of the other information included in or incorporated by reference into this
prospectus, before making an investment decision. The risks and uncertainties
described below are not the only ones we face. If any of the following risks
actually occur, our business could be harmed. In such case, the trading price of
our common stock could decline, and you may lose all or part of your investment.
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;
- 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 had net income of $494,000 for the
first quarter ended December 31, 1999. 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.
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OUR SALES DEPEND ON SRAM PRODUCTS, AND A DECLINE IN AVERAGE SELLING PRICES OR
REDUCED DEMAND FOR THESE PRODUCTS COULD HARM OUR BUSINESS.
A substantial 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.
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
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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.
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
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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 12%, 20% and 19% of total net
sales for the three months ended December 31, 1999 and for fiscal 1999 and
fiscal 1998, respectively. Sales to Flextronics International accounted for 12%
of total net sales for the three months ended December 31, 1999. 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;
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- 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;
- 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. In addition,
an international company purchased the patents of a defunct memory technology
company and, approximately three years ago, asserted that we infringe one or
more of those patents. Since that time, this company has pursued a patent claim
against another memory technology company with respect to the same patents. It
is unknown whether this company will reassert its claim against us at some time
in the future. 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.
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WE HAVE SIGNIFICANT INTERNATIONAL SALES AND RISKS OF OUR INTERNATIONAL
OPERATIONS COULD HARM OUR OPERATING RESULTS.
In the three months ended December 31, 1999, approximately 53% of our net
sales was attributable to customers located in the United States, 22% was
attributable to customers located in Europe and 25% 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;
- 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, Chief Executive Officer and
President, 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
12
<PAGE> 14
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.
YOU WILL BE RELYING ON THE JUDGMENT OF OUR MANAGEMENT REGARDING OUR USE OF NET
PROCEEDS.
We have not designated any specific uses for the net proceeds from our sale
of the common stock described in this prospectus. Rather, we expect to use the
net proceeds for working capital, capital expenditures, general corporate
purposes and potential investments in wafer fabrication facilities.
Consequently, our management will have significant flexibility in applying the
net proceeds of this offering. You will be relying on the judgment of our
management regarding the application of the net proceeds. Our management will
have the ability to change the application of the net proceeds of this offering
without stockholder approval.
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.
All of our outstanding shares are freely tradeable without restriction or
further registration. Affiliates must sell all shares they own in compliance
with the volume and other requirements of Rule 144, except for the holding
period requirements. Our directors and executive officers have agreed that for a
period of 90 days after the date of this prospectus, they will not directly or
indirectly sell any shares of common stock without the consent of Banc of
America Securities LLC. Sales of substantial amounts of common stock by our
stockholders may have a depressive effect on the market price of our common
stock and could impair our ability to raise capital through the sale of our
equity securities.
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;
- additions or departures of senior management; and
- other events or factors, many of which are beyond our control.
13
<PAGE> 15
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.
14
<PAGE> 16
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus (and in the
documents that are incorporated by reference) 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. You should note that an investment in our securities
involves certain risks and uncertainties that could affect our future financial
results. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including those
set forth in "Risk Factors" and elsewhere in this prospectus.
We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. The risk factors listed
above, as well as any cautionary language in this prospectus, provide examples
of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our common stock, you should be aware that the occurrence
of the events described in these risk factors and elsewhere in this prospectus
could materially and adversely affect our business, operating results and
financial condition.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds from the sale of the 3,300,000 shares of common stock
offered by us are estimated to be $47.8 million at an assumed public offering
price of $15.50 per share, after deducting the underwriting discounts and
commissions and estimated offering expenses ($55.1 million if the over-allotment
option is exercised in full.) We expect to use the net proceeds from this
offering for working capital and general corporate purposes. We may also use a
portion of the net proceeds to invest in wafer fabrication facilities with our
foundry partners or to make equity investments in our foundry partners, related
joint ventures or other companies. In addition, we may use a portion of the net
proceeds to acquire complementary products, technologies or businesses; however,
we currently have no commitments or agreements and are not involved in any
negotiations with respect to any such transactions. Pending use of the net
proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol ISSI since our initial public offering in February 1995. The following
table sets forth, for the periods indicated, the high and low sale prices per
share of the common stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year 1998
First Quarter............................................. $14.50 $ 7.00
Second Quarter............................................ $12.25 $ 7.31
Third Quarter............................................. $10.75 $ 6.66
Fourth Quarter............................................ $ 7.13 $ 2.75
Fiscal Year 1999
First Quarter............................................. $ 4.81 $ 2.50
Second Quarter............................................ $ 4.38 $ 2.28
Third Quarter............................................. $ 6.09 $ 2.25
Fourth Quarter............................................ $12.00 $ 4.72
Fiscal Year 2000
First Quarter............................................. $17.69 $ 5.47
Second Quarter (through February 4, 2000)................. $18.44 $12.81
</TABLE>
On February 4, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $15.50 per share. As of December 10, 1999, there
were approximately 10,300 beneficial holders of our common stock.
DIVIDEND POLICY
We have never declared or paid cash dividends. We currently intend to
retain any earnings for use in our business and do not anticipate paying any
cash dividends on our capital stock in the foreseeable future.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999
(a) on an actual basis and (b) on an as adjusted basis to give effect to the
receipt by us of the estimated net proceeds from the sale of 3,300,000 shares of
common stock offered by us at an assumed public offering price of $15.50 per
share:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, less current portion.................... $ 420 $ 420
Stockholders' equity:
Preferred Stock: $0.0001 par value; authorized:
5,000,000; no shares issued and outstanding........ -- --
Common Stock: $0.0001 par value; authorized:
70,000,000; issued and outstanding: 20,494,564,
actual; 23,794,564, as adjusted(1)................. 2 2
Additional paid-in capital.............................. 121,795 169,633
Accumulated deficit..................................... (27,358) (27,358)
Accumulated comprehensive income........................ (3,895) (3,895)
Unearned compensation................................... (31) (31)
-------- --------
Total stockholders' equity....................... 90,513 138,351
-------- --------
Total capitalization............................. $ 90,933 $138,771
======== ========
</TABLE>
- -------------------------
(1) Based on shares outstanding as of December 31, 1999 and does not include the
following:
- 3,211,400 shares of common stock issuable upon exercise of outstanding
stock options with a weighted average exercise price of approximately
$4.47 per share;
- 732,329 shares of common stock issuable upon exercise of outstanding
warrants with an exercise price of $3.76 per share;
- 5,367,333 shares of common stock reserved for future issuance under our
stock option plans; and
- 706,822 shares of common stock reserved for sale under our employee stock
purchase plan.
17
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our Consolidated Financial Statements and the
Notes thereto included elsewhere in this prospectus or incorporated herein by
reference. The consolidated statement of operations data and consolidated
balance sheet data set forth below for each of the three years in the period
ended September 30, 1999 and as of September 30, 1998 and 1999 have been derived
from the audited financial statements of ISSI included elsewhere in this
prospectus or incorporated herein by reference, which have been audited by Ernst
& Young LLP, independent auditors. The consolidated statements of operations
data and balance sheet data for the years ended September 30, 1995 and 1996 and
as of September 30, 1995, 1996 and 1997 have been derived from audited financial
statements not included or incorporated by reference herein. The statement of
operations data and balance sheet data for the three months ended December 31,
1998 and 1999 and as of December 31, 1999 are derived from unaudited financial
statements included elsewhere herein. In the opinion of management, the
unaudited financial statements include all adjustments (consisting only of
normal accruals) necessary for a fair presentation. The historical results are
not necessarily indicative of results to be expected for any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31,
---------------------------------------------------- -----------------
1995 1996 1997 1998 1999(3) 1998 1999(3)
-------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales.................. $123,201 $132,039 $108,261 $131,132 $ 83,309 $26,801 $23,251
Cost of sales.............. 60,949 100,184 76,105 126,794 66,816 22,796 16,971
Gross profit............... 62,252 31,855 32,156 4,338 16,493 4,005 6,280
Total operating
expenses(1).............. 27,776 36,538 42,932 57,395 30,677 9,395 6,826
Operating income (loss).... 34,476 (4,683) (10,776) (53,053) (14,184) (5,390) (546)
Net income (loss).......... $ 29,653 $ 1,015 $ (7,686) $(50,607) $ (9,511) $(3,965) $ 494
======== ======== ======== ======== ======== ======= =======
Basic net income (loss) per
share(2)................. $ 1.98 $ 0.06 $ (0.43) $ (2.67) $ (0.48) $ (0.20) $ 0.02
======== ======== ======== ======== ======== ======= =======
Diluted net income (loss)
per share(2)............. $ 1.80 $ 0.06 $ (0.43) $ (2.67) $ (0.48) $ (0.20) $ 0.02
======== ======== ======== ======== ======== ======= =======
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------------------------------------------- ------------
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- -------- ------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash, cash equivalents,
restricted cash and
short-term investments(4).... $110,738 $ 81,460 $ 53,136 $ 35,909 $ 23,625 $ 16,569
Working capital................ 120,839 107,929 75,544 32,549 42,064 40,455
Total assets................... 204,441 178,039 195,596 202,168 121,831 125,294
Long term debt, including
current portion.............. 33,888 14,534 20,101 15,466 -- 550
Stockholders' equity........... 139,909 142,435 134,567 90,920 88,778 90,513
</TABLE>
- -------------------------
(1) Total operating expenses for fiscal 1998 includes $7,078 for acquired
in-process technology charge.
(2) See Note 1 of "Notes to Consolidated Financial Statements" for an
explanation of the basis used to calculate net income (loss) per share.
(3) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations" for discussion regarding
comparability of our fiscal 1999 and three months ended December 31, 1999
results.
(4) Includes restricted cash of $986, $7,023, $5,202 and $333 for the fiscal
years ended September 30, 1995, 1996, 1997 and 1998, respectively.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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 ISSI-Taiwan in order to
outsource our testing operations, focus on our core business in the U.S., raise
capital and position ISSI-Taiwan for the possibility of an eventual public
offering in Taiwan. We intend to continue to use ISSI-Taiwan 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.
Our financial results for fiscal 1998 are presented on a consolidated basis
and include the results of the operations of ISSI-Taiwan and NexFlash. In
December 1998, we sold an additional 20% of our remaining interest in
ISSI-Taiwan and, as a result, reduced our ownership interest in ISSI-Taiwan to
approximately 43%. As a result, our balance sheet as of December 31, 1998 and
our statement of operations beginning with the quarter ending March 31, 1999
reflects the accounting for ISSI-Taiwan on the equity basis and reflects our
percentage share of ISSI-Taiwan's results of operations. As a result of no
longer consolidating ISSI-Taiwan, 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.
20
<PAGE> 22
The following table sets forth our reported revenue from sales to
unaffiliated customers by ISSI, ISSI-Taiwan and NexFlash for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------- --------------
1997 1998 1999 1998 1999
------ ------ ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
ISSI................................ $ 66.2 $ 86.2 $73.3 $16.8 $23.3
ISSI-Taiwan......................... 42.1 44.9 9.7 9.7 --
NexFlash............................ -- -- 0.3 0.3 --
------ ------ ----- ----- -----
Total............................. $108.3 $131.1 $83.3 $26.8 $23.3
====== ====== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Our historical operating results for the periods indicated as a percentage
of net sales are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
----------------------- --------------
1997 1998 1999 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 70.3 96.7 80.2 85.1 73.0
----- ----- ----- ----- -----
Gross profit.......................... 29.7 3.3 19.8 14.9 27.0
Operating expenses:
Research and development......... 24.2 24.3 22.5 21.5 15.6
Selling, general and
administrative................. 15.5 14.1 14.3 13.5 13.8
In-process technology charge..... -- 5.4 -- -- --
----- ----- ----- ----- -----
Total operating expenses.............. 39.7 43.8 36.8 35.0 29.4
----- ----- ----- ----- -----
Income (loss) from operations......... (10.0) (40.5) (17.0) (20.1) (2.4)
Interest and other income, net........ 1.8 (2.6) 1.5 1.4 (0.2)
Gain on sale of investments, net...... -- 8.0 3.1 4.5 --
----- ----- ----- ----- -----
Income (loss) before income taxes and
minority interests.................. (8.2) (35.1) (12.4) (14.2) (2.6)
Provision (benefit) for income
taxes............................... (1.1) 3.6 0.7 2.4 0.2
----- ----- ----- ----- -----
Loss before minority interest......... (7.1) (38.7) (13.1) (16.6) (2.8)
Minority interest in net loss of
consolidated subsidiary............. -- 0.1 0.6 1.8 --
Equity in net income of affiliated
companies........................... -- -- 1.1 -- 4.9
----- ----- ----- ----- -----
Net income (loss)..................... (7.1)% (38.6)% (11.4)% (14.8)% 2.1%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1998
Net sales. Net sales consist principally of total product sales less
estimated sales returns. Net sales decreased by $3.6 million to $23.3 million in
the three months ended December 31, 1999 from $26.8 million in the three months
ended December 31, 1998. Net
21
<PAGE> 23
sales increased by $6.5 million to $23.3 million in the three months ended
December 31, 1999 from $16.8 million in the three months ended December 31,
1998, excluding the $9.7 million in sales from ISSI-Taiwan 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 SRAM products,
specifically our 256K, 1024K, 32K x 32, and recently introduced 128K x 24
products, as well as increased unit shipments of 4, 8 and 16 megabit DRAM
products. In addition, the average selling prices of our SRAM products generally
increased in the three months ended December 31, 1999 compared to the three
months ended December 31, 1998. 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 12% and 15% of total net sales
for the three months ended December 31, 1999 and December 31, 1998,
respectively. Sales to Flextronics accounted for approximately 12% of total net
sales for the three months ended December 31, 1999. 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. Net sales for the
three months ended December 31, 1999 include approximately $0.6 million of
licensing revenue. Net sales include sales of approximately $0.1 million and
$1.2 million to NexFlash in the three months ended December 31, 1999 and
December 31, 1998, respectively. Net sales include sales of approximately $0.5
million to ISSI-Taiwan in the three months ended December 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 57%
to $6.3 million in the three months ended December 31, 1999, from $4.0 million
in the three months ended December 31, 1998. As a percentage of net sales, gross
profit increased to 27.0% in the three months ended December 31, 1999 from 14.9%
in the three months ended December 31, 1998. The increase in gross profit was
principally due to an increase in unit shipments of our SRAM products,
specifically our 256K, 1024K, 32K x 32, and recently introduced 128K x 24
products, as well as increased unit shipments of 4, 8 and 16 megabit DRAM
products. Our gross profit for the three months ended December 31, 1999
benefited from $0.6 million of licensing revenue. In addition, the average
selling prices of our SRAM products generally increased and product unit costs
for certain SRAM products decreased in the three months ended December 31, 1999
compared to the three months ended December 31, 1998, resulting in higher gross
margins. 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
37% to $3.6 million in the three months ended December 31, 1999 from $5.8
million in the three
22
<PAGE> 24
months ended December 31, 1998. As a percentage of net sales, research and
development expenses decreased to 15.6% in the three months ended December 31,
1999, from 21.5% in the three months ended December 31, 1998. The decrease in
absolute dollars was primarily the result of a $1.0 million reduction
attributable to the deconsolidation of ISSI-Taiwan 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 three months ended December 31, 1999, compared to the three months ended
December 31, 1998. We anticipate that our research and development expenses will
remain fairly constant in fiscal 2000 although such expenses may fluctuate as a
percentage of net sales.
Selling, general and administrative. Selling, general and administrative
expenses decreased by 11% to $3.2 million in the three months ended December 31,
1999 from $3.6 million in the three months ended December 31, 1998. As a
percentage of net sales, selling, general and administrative expenses increased
to 13.8% in the three months ended December 31, 1999 from 13.5% in the three
months ended December 31, 1998. The decrease in absolute dollars was primarily
the result of a $1.2 million reduction attributable to the deconsolidation of
ISSI-Taiwan and $0.1 million attributable to the spin-off of NexFlash. These
decreases were offset by increased selling commissions associated with higher
revenues in the three months ended December 31, 1999 compared to the three
months ended December 31, 1998. 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 $1.6
million to approximately $(0.1) million in the three months ended December 31,
1999 from $1.6 million in the three months ended December 31, 1998. In December
1998, we sold an additional 20% of our holdings in ISSI-Taiwan to a group of
private investors which resulted in a pre-tax gain of $1.2 million. In addition,
exchange gains were $0 in the three months ended December 31, 1999 compared to
$0.6 million in the three months ended December 31, 1998.
Provision (benefit) for income taxes. The income tax provision for the
three month period ended December 31, 1999 is a result of foreign withholding
taxes. The provision for income taxes for the three months ended December 31,
1999 is lower than for the same period for 1998 which included foreign
withholding taxes related to the sale of ISSI-Taiwan stock.
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1998
Net sales. Net sales decreased by 36% to $83.3 million in fiscal 1999 from
$131.1 million in fiscal 1998. Approximately $32.9 million of the decrease is
attributable to the deconsolidation of ISSI-Taiwan effective January 1, 1999.
Excluding the effect of the deconsolidation of ISSI-Taiwan, the decrease in
sales was principally due to a decrease in the average selling prices of our
SRAM products, as well as a significant decline in unit shipments of our 256K
and 256K module SRAM products. Additionally, revenue from shipments of newer 8
megabit and 16 megabit DRAM products more than offset the decline in revenue
from 4 megabit DRAM products. 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. There can be no assurance that such declines
will be offset
23
<PAGE> 25
by higher volumes or by higher prices on newer products. Net sales included
approximately $1.9 million of licensing revenue in fiscal 1999. Additionally,
net sales included approximately $1.4 million in sales to ISSI-Taiwan and
approximately $1.5 million in sales to NexFlash in fiscal 1999. Sales to one
customer, 3Com, accounted for approximately 20% and 19% of total net sales for
fiscal 1999 and fiscal 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 us at any time.
Gross profit. Gross profit increased 280% to $16.5 million in fiscal 1999
from $4.3 million in fiscal 1998. As a percentage of net sales, gross profit
increased to 19.8% in fiscal 1999 from 3.3% in fiscal 1998. Our gross profit for
fiscal 1999 benefited from $1.9 million in licensing revenue. In fiscal 1998, we
recorded inventory write-downs of $23.0 million predominately for lower of cost
or market accounting on certain of our products, primarily SRAMs. Excluding the
inventory write-downs of $23.0 million for fiscal 1998, the decrease in gross
profit dollars was principally due to a decrease in the average selling prices
of our SRAM products, as well as a significant decline in unit shipments of our
256K and 256K module SRAM products. Additionally, shipments and average selling
prices of our 4 megabit DRAM product declined significantly in fiscal 1999
compared to fiscal 1998. Although product unit costs were generally lower in
fiscal 1999 compared to fiscal 1998, such reductions did not offset the declines
in average selling prices resulting in lower gross margins. We believe that the
average selling price of our products will 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. 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
41% to $18.8 million in fiscal 1999 from $31.9 million in fiscal 1998. As a
percentage of net sales, research and development expenses decreased to 22.5% in
fiscal 1999 from 24.3% in fiscal 1998. The decreases in absolute dollars were
primarily the result of the transfer of our Flash development efforts to
NexFlash, as well as reduced payroll related expenses associated with headcount
reductions, and limitations on discretionary spending during fiscal 1999. In
addition, a $5.1 million reduction in research and development expenses is
attributable to the deconsolidation of ISSI-Taiwan. Fiscal 1999 includes a
charge of $0.9 million in the June 1999 quarter for the write-off of certain
licensed products and technologies which have been replaced by our internally
developed products. During fiscal 1999, we concentrated our development efforts
on SRAM and DRAM. SRAM projects focused on the development of a family of
ultra-low power products based on our six transistor memory cell. DRAM projects
included the 16 megabit EDO DRAM. We anticipate that our research and
development expenses will remain fairly constant in fiscal 2000 although such
expenses may fluctuate as a percentage of net sales.
Selling, general and administrative. Selling, general and administrative
expenses decreased by 35% to $11.9 million in fiscal 1999 from $18.4 million in
fiscal 1998. As a percentage of net sales, selling, general and administrative
expenses increased slightly to 14.3% in fiscal 1999, from 14.0% in fiscal 1998.
The decrease in absolute dollars was primarily the result of a $3.1 million
reduction attributable to the deconsolidation of ISSI-
24
<PAGE> 26
Taiwan. Additional reductions were the result of decreased selling commissions
associated with lower revenues, decreased payroll resulting from the spin-off of
NexFlash and a reduction in discretionary spending in fiscal 1999. We expect our
selling, general and administrative expenses may increase slightly in fiscal
2000 although such expenses may fluctuate as a percentage of net sales.
In-process technology. In December 1997, we completed our acquisition of
Nexcom Technology, Inc. in exchange for the issuance of 772,693 shares of our
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, we
incurred approximately $0.4 million 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 our December 31, 1997 quarter.
Gain on sale of investment. The gain on sale of investment decreased to
$2.7 million in fiscal 1999 from $10.5 million in fiscal 1998. Fiscal 1999
includes a gain of approximately $1.8 million in the June 1999 quarter related
to the sale of our investment in UICC to UMC, a pre-tax gain of $1.2 million
resulting from the sale of 20% of our remaining 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 our investment in
Wafertech LLC. In June 1998, we sold approximately 46% of ISSI-Taiwan to a group
of private investors. We recorded a pre-tax gain of approximately $10.5 million
in the June 1998 quarter related to this transaction.
Interest and other income (expense), net. Other income (expense), net
increased by $4.7 million to $1.2 million in fiscal 1999 from $(3.5) million in
fiscal 1998. This is primarily due to exchange gains in fiscal 1999 of $0.6
million compared to exchange losses in fiscal 1998 of $3.2 million as well as
interest expense of $1.8 million 1998 compared to $1.0 million in 1999.
Provision (benefit) for income taxes. The income tax provision for fiscal
1999 is comprised primarily of foreign withholding taxes related to the sale of
ISSI-Taiwan stock. The income tax provision for fiscal 1998 is comprised mainly
of foreign withholding taxes related to the sale of ISSI-Taiwan stock and a
reversal of previously recorded federal deferred tax assets which management has
determined should be subject to a valuation allowance based on historical and
future earnings trends.
Under Statement of Financial Accounting Standards No. 109 (FAS 109),
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Management has established a valuation allowance
covering the net deferred tax assets based on management's belief that the
realization of the deferred tax assets is not realizable on a more likely than
not basis.
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1997
Net sales. Net sales increased by 21% to $131.1 million in fiscal 1998 from
$108.3 million in fiscal 1997. The increase in sales was principally due to
shipments of our newer products, specifically our 64K x 16, 64K x 32, and 64K x
64 SRAMs and our 256K x 16 DRAM. Additionally, shipments of our more mature 128K
x 8 SRAM product
25
<PAGE> 27
increased, more than offsetting the lower average selling price for such product
and shipments of the more mature 32K x 32 SRAM increased while our average
selling price increased. Shipments of certain of our NVM products, principally
EPROMs and EEPROMs, declined significantly in fiscal 1998 compared to fiscal
1997. Sales to 3Com accounted for approximately 19% of total net sales for both
fiscal 1998 and fiscal 1997.
Gross profit. Gross profit decreased 87% to $4.3 million in fiscal 1998
from $32.2 million in fiscal 1997. As a percentage of net sales, gross profit
decreased to 3.3% in fiscal 1998 from 29.7% in fiscal 1997. In fiscal 1998, we
recorded inventory write-downs of $23.0 million, including $9.6 million in the
September quarter. 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. The September 1998 quarter included a $2.9
million write-down of certain Flash inventories due to obsolescence resulting
from the decision to spin off our Flash product business to form NexFlash. In
addition, in the December 1997 quarter, we wrote off $0.8 million worth of a
specific DRAM product, for which our six month forecast showed minimal demand at
December 31, 1997 and for which we have had minimal sales to date. It is our
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. 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 announcements and product introductions on our
products, and purchasing opportunities due to excess wafer capacity. We believe
that six months is an appropriate period for sales forecasts and inventory
exposure calculations 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. The
policy has resulted in inventory write-downs for excess inventory of
approximately $5.4 million, $0, and $15 million for fiscal year 1998, 1997 and
1996, respectively, and recoveries of written-down inventory of approximately
$0, $13.9 million, and $0.3 million in fiscal 1998, 1997 and 1996, respectively.
Excluding the inventory write-downs of $23.0 million for fiscal 1998, the
decrease in gross profit dollars was primarily the result of a continuing
decline in the average selling prices of our products without a commensurate
decline in product cost, particularly in the second half of the fiscal year.
Future additional inventory write-downs may occur due to lower of cost or market
accounting, excess inventory or inventory obsolescence.
Research and development. Research and development expenses increased by
22% to $31.9 million in fiscal 1998 from $26.2 million in fiscal 1997. As a
percentage of net sales, research and development expenses increased to 24.3% in
fiscal 1998 from 24.2% in fiscal 1997. The increase in absolute dollars was
primarily the result of an increase in engineering personnel and payroll related
expenses and increased expenses related to the development of new products.
During fiscal 1998, our development efforts principally focused on wider width
SRAMs such as the 64K x 64, 64K x 32, 64K x 36 and 128K x 64 configurations,
specialty EDO DRAMs, specialty DSP support SRAMs, serial Flash and other memory
related devices.
Selling, general and administrative. Selling, general and administrative
expenses increased by 10% to $18.4 million in fiscal 1998 from $16.8 million in
fiscal 1997. As a percentage of net sales, selling, general and administrative
expenses decreased to 14.0% in
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<PAGE> 28
fiscal 1998, from 15.5% in fiscal 1997. The increase in absolute dollars was
primarily the result of increased payroll related expenses from the addition of
marketing and sales personnel and increased selling commissions associated with
higher revenues partially offset by decreases in bad debt expenses and legal
expenses associated with antidumping proceedings.
In-process technology. In December 1997, we completed our 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, we incurred
approximately $0.4 million 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 our December 31, 1997 quarter.
Gain on sale of investment. In June 1998, we sold approximately 46% of
ISSI-Taiwan to a group of private investors. The price was privately negotiated
between the parties. Cash proceeds from the transaction totaled $35.5 million
net of withholding and transaction taxes. The transaction resulted in a pre-tax
gain of $10.5 million which is recorded in our June 30, 1998 quarter.
Interest and other income (expense), net. Other income (expense), net
decreased to $(3.5) million in fiscal 1998 from $1.9 million in fiscal 1997,
primarily due to exchange losses as well as decreased interest earnings as a
result of lower cash and short-term investment balances and increased interest
expense as a result of increased short-term and long-term borrowings.
Provision (benefit) for income taxes. The income tax provision for fiscal
1998 was comprised mainly of foreign withholding taxes related to the sale of
ISSI-Taiwan stock and a reversal of previously recorded federal deferred tax
assets which management determined should be subject to a valuation allowance
based on historical and future earnings trends. The income tax benefit for
fiscal 1997 was the result of losses which were carried back for refunds of
prior federal taxes paid and Taiwan tax credits offset by a partial valuation
allowance set up for U.S. deferred tax assets.
27
<PAGE> 29
QUARTERLY OPERATING RESULTS
The following table presents our historical unaudited quarterly results of
operations for our most recent five fiscal quarters. This data is derived from
our annual and quarterly financial statements. In the opinion of management,
such quarterly financial information has been prepared on the same basis as our
annual financial statements and includes all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial results
set forth therein. Results of operations for any previous quarter are not
necessarily indicative of results for any future period. The following
discussion is qualified by the more detailed discussion of these quarterly
results by management which are contained in our quarterly filings for the
respective periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
DECEMBER MARCH JUNE SEPTEMBER DECEMBER
1998 1999 1999 1999 1999
-------- ------- ------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales.................... $26,801 $17,366 $19,029 $20,113 $23,251
Gross profit................. 4,005 3,672 3,998 4,818 6,280
Operating loss............... (5,390) (3,202) (3,600) (1,992) (546)
Net income (loss)............ $(3,965) $(3,945) $ (912) $ (689) $ 494
======= ======= ======= ======= =======
Basic net income (loss) per
share(1)................... $ (0.20) $ (0.20) $ (0.05) $ (0.03) $ 0.02
======= ======= ======= ======= =======
Diluted net income (loss) per
share(1)................... $ (0.20) $ (0.20) $ (0.05) $ (0.03) $ 0.02
======= ======= ======= ======= =======
</TABLE>
- -------------------------
(1) See Note 1 of "Notes to Consolidated Financial Statements" for an
explanation of the basis used to calculate net income (loss) per share.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, our principal sources of liquidity included cash,
cash equivalents and short-term investments of approximately $16.6 million.
During the three months ended December 31, 1999, operating activities used cash
of approximately $4.9 million. Cash used by operations was primarily due to
increases in inventories of $4.7 million and in accounts receivable of $2.4
million in support of higher sales levels partially offset by increases in
accounts payable of $1.8 million.
In the three months ended December 31, 1999, we used $0.5 million for
investing activities compared to $11.5 million in the first three months of
fiscal 1999. The cash used for investing activities was primarily the result of
an additional investment of $2.7 million in WaferTech offset by sales of
available-for-sale securities of $2.5 million.
In the three months ended December 31, 1999, we made capital expenditures
of approximately $0.4 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 $0.9 million from financing activities during the three months
ended December 31, 1999 compared to using $1.1 million in the first three months
of fiscal 1999.
28
<PAGE> 30
The source of financing for the current quarter was proceeds from the issuance
of common stock of $0.9 million from option exercises.
In June 1998, we sold approximately 46% of ISSI-Taiwan to a group of
private investors. In December 1998, we 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 and notes receivable
of $2.3 million). After completion of this transaction, we owned approximately
43% of ISSI-Taiwan and now account for ISSI-Taiwan 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 December 31, 1999 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. As of December 31, 1999, we have
purchased our base capacity and additional capacity as contracted such that none
of the $9.6 million has been forfeited. 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. Initial
wafer outs occurred in the second half of calendar 1998. 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%. For entries after March 31,
1999, 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 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. We will pay duty deposits on Taiwan SRAM entries
before that date at the deposit rate.
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.
29
<PAGE> 31
Duties calculated and assessed by the government could have a material
adverse effect 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 Technology 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.
We believe that the net proceeds from this offering, together with 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 ISSI-Taiwan, 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.
MARKET RISK DISCLOSURES
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 September 30, 1999 and
1998 and December 31, 1999 and 1998, 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 years ended September 30, 1999, 1998 and 1997 and the quarters ended
December 31, 1999 and 1998.
YEAR 2000 COMPLIANCE
We are aware of the issues associated with computer systems due to the Year
2000. 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 us for product design, product test,
accounting, order entry, planning, and
30
<PAGE> 32
distribution. The problem may also affect non-IT systems such as security
systems, communication equipment, and other equipment.
We completed our assessment of our critical IT systems and identified at
least one area (accounting software) that was not Year 2000 compliant. As a
result, we implemented a new enterprise management information system in
September 1999. We have been advised that the new enterprise management
information system is Year 2000 compliant. The new system significantly affects
many areas of our business, including accounting, order entry, planning,
shipping/distribution, manufacturing, and sales and marketing. The successful
utilization of this system is important in managing and operating the company.
With respect to critical non-IT systems, we have assessed the compliance of
these systems and believe that these systems are Year 2000 compliant. As of
January 31, 2000, we have not experienced any problem indicating that our IT
systems are not Year 2000 compliant. There can be no assurance that we have
successfully identified all of our internal Year 2000 issues or that the new
enterprise management information system will function without interruption to
our daily operations. The failure to identify and address internal Year 2000
issues in a timely fashion could have a material adverse affect on our business
and results of operations.
We could possibly be adversely impacted by Year 2000 issues faced by major
suppliers, subcontractors, and customers. We have surveyed our major suppliers
and subcontractors and they have all indicated that they are Year 2000
compliant. We have not surveyed the Year 2000 readiness of our customers and
their failure to address Year 2000 issues could have an impact on our operations
and financial results. The extent of this impact, if any, is not known at this
time. As of January 31, 2000, we have not experienced any problems or received
any notification that any major supplier, subcontractor or customer is not Year
2000 compliant.
We have currently 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.
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<PAGE> 33
BUSINESS
OVERVIEW
We design, develop and market high performance memory semiconductors used
in internet access devices, networking equipment, telecom and mobile
communications equipment and computer peripherals. Our high speed and low power
SRAMs and our low to medium density DRAMs enable customers to design products
that meet the demanding connectivity and portability requirements of the data
communications and wireless communications markets. Our objective is to
capitalize on major trends such as the expansion of the communications and
Internet infrastructure, the proliferation of wireless devices and other trends
in electronics technologies. Our customers include industry leaders such as
3Com, Alcatel, Cisco, Ericsson, Hewlett Packard, IBM, Lexmark, Motorola, Nokia
and Seagate. We believe our close relationship with leading silicon wafer
foundries gives us access to the advanced wafer process technology required to
design and manufacture high performance memories.
MARKET BACKGROUND
Virtually all electronic systems incorporate semiconductor memory chips to
enable and enhance system performance. Active memory, which includes SRAM and
DRAM, were designed into mainframe computers decades ago to increase the speed
of calculations and temporarily store data not being processed by the
microprocessors. With the advent of stand-alone PCs, the use of SRAM and DRAM in
system architecture expanded and demand increased. Faster chips and larger
memory densities, termed high performance memories, supported the ever-advancing
microprocessor.
Today, manufacturers of electronic systems such as internet access devices,
ISP servers, networking routers and switches, wireless base stations, cellular
phones and computer peripherals use sophisticated semiconductor memory
architecture within their systems. This architecture includes memory devices
such as SRAMs and DRAMs which have proliferated into numerous and complex
applications driven by the dramatic increase in connectivity requirements in the
telecommunication and data communication markets. The expanding diversity and
increasing demand for high performance memory provides a substantial opportunity
for a focused supplier of high performance memories.
High performance memories have historically focused on speed as the key
measure of performance. Today internet access devices and intranet connectivity
devices are especially speed sensitive. However, escalating demand for hand-held
units, such as cellular telephones and personal digital assistants, has created
a new category of high performance memories which focus on low power consumption
to prolong battery life. When designing high performance memories there is
generally a trade-off between speed and power. Very high speed devices utilize
more power and very low power memories, called ultra low power, operate at
slower speeds. The high performance memory market today includes both high speed
and very low power memories.
To meet the demands for high performance memories a supplier must have
access to advanced wafer process technology. Process technology is critical in
achieving leading edge speeds or ultra low power. Process technology
improvements allow design line widths to be reduced, which in turn allows the
integrated circuit design to contain more memory cells and have increased memory
density. Memory suppliers compete on the basis of speed, power consumption, and
density, all of which are a function of process technology and
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<PAGE> 34
design expertise. To meet these challenges and maintain competitiveness, a
memory supplier must have a wafer fabrication strategy allowing it to migrate to
the newest generation of process technology on a timely basis. Process
technology shifts occur frequently and are developed in high end wafer
fabrication facilities that typically cost over $1 billion.
The need for high speed memories in the internet driven connectivity
markets and for low power memories in the wireless communications markets
provides a significant growth opportunity for a focused memory company to become
a strategic supplier to leading edge manufacturers of electronic systems.
High Performance SRAM Market. System designers use SRAM in the most
performance sensitive portions of their memory architecture. SRAMs are faster
and typically more expensive than DRAMS. High performance SRAMs operate at very
fast speed or very low power and are characterized by higher average selling
prices. Fast asynchronous SRAMs achieve speeds between 6 nanoseconds and 15
nanoseconds. Fast synchronous SRAMs operate at speeds of 100 megahertz to 200
megahertz with access times as low as 3 nanoseconds. Ultra low power SRAMs have
stand-by current of 5 microamps to 15 microamps.
Low and Medium Density DRAM Market. Low and medium density DRAMs are
typically used where speed performance is less critical or total memory size is
most important. These DRAMs are often used by the same equipment manufacturers
that use high performance SRAMs, and they can be sold through the same channels
by a focused memory supplier as a complement to high performance SRAM devices.
Low and medium density DRAMs range from 2 megabits to 16 megabits. Most large
DRAM producers focus on the 64 megabit and 126 megabit densities which creates
an opportunity for a supplier of lower density devices. Customers in the low and
medium density DRAM market seek to secure a long term, steady supply of these
products.
STRATEGY
We are a focused memory supplier targeting high growth memory markets in
which we believe our ability to design and develop high performance,
cost-effective memory products, and our collaborative development with our
manufacturing partners utilizing state-of-the-art process technology, gives us a
competitive advantage. Key elements of our strategy include:
Target High Growth Markets and Applications. We focus our development
efforts on products that address high growth and large volume markets such as
internet access devices, networking equipment, cellular phones and computer
peripherals. Our strategy is to provide a family of products to these markets
that are complementary and synergistic. Our current product focus is on high
speed SRAMs, low power SRAMs and low and medium density DRAMs.
Further Penetrate Industry Leading Customers. Our strategy is to leverage
our proven expertise in producing high quality memories to penetrate leading
accounts in each market segment, such as Cisco and 3Com in the networking market
and Motorola and Nokia in the wireless communications market. We target these
accounts because we believe they drive the volume in their market segment and
define the direction of future memory products. Our success with market leaders
also enables us to attract other new customers.
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<PAGE> 35
Build Collaborative Relationships with Leading Edge Foundries. Our strategy
is to work in a collaborative mode with our principal foundries and to
participate in developing leading edge process technology that is critical in
advanced memories. We entered our first development program with TSMC in 1990
and with Chartered Semiconductor in 1994. Through this collaborative strategy,
we have been able to repeatedly be in the forefront as process technology has
advanced to 0.18 micron geometries. As part of this strategy, we have also made
equity investments in foundries. We believe our collaborative development
efforts and equity investments have enabled us to have more secure access to
wafer capacity.
Continually Develop High Performance Products. Our strategy is to work with
our customers to identify the memory needs of their next generation products and
then focus our development efforts on achieving new performance standards in
process technology, speed or power consumption. We strive to introduce new
products with the highest performance characteristics and then increase sales of
such products as product acceptance occurs. We also seek to develop multiple
product lines within the SRAM and DRAM markets that are synergistic and
complementary.
PRODUCTS
We are a focused supplier of a family of both high speed and ultra low
power SRAMs, complementary low and medium density DRAMs and other complementary
memory products. To date we have derived substantially all of our revenues from
the sale of SRAM products.
SRAMs. Our high performance SRAM products generally focus on either very
high speed or very low power. Our first high speed SRAMs were shipped in 1990.
More recently, our low power family of products, driven by increasing demand in
the hand-held and mobile markets such as cellular phones, has been expanded.
Our asynchronous SRAMs are used in applications such as LANs,
telecommunication equipment, bridges, routers, modems, multimedia products and
industrial instrumentation. Our synchronous SRAMs are used in a variety of
networking and telecommunications applications. Additional SRAM products are
under development and are expected to include performance-leading features in
speed, configuration, power levels, density and packaging.
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<PAGE> 36
The following table illustrates our principal SRAM products:
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION CONFIGURATION DENSITY
- ------------------------------------------------------------------------------
<S> <C> <C>
High Speed Asynchronous 5Volt (3.3Volt) 32K x 8 256 Kilobit
- ------------------------------------------------------------------------------
High Speed Asynchronous 5Volt (3.3Volt) 128K x 8 1 Megabit
- ------------------------------------------------------------------------------
High Speed Asynchronous 5Volt (3.3Volt) 64K x 16 1 Megabit
- ------------------------------------------------------------------------------
High Speed Asynchronous 5Volt (3.3Volt) 128K x 16 2 Megabit
- ------------------------------------------------------------------------------
Low Power Asynchronous 32K x 8 256 Kilobit
- ------------------------------------------------------------------------------
Low\Ultra Low Power Asynchronous 128K x 8 1 Megabit
- ------------------------------------------------------------------------------
Low\Ultra Low Power Asynchronous 64K x 16 1 Megabit
- ------------------------------------------------------------------------------
Low\Ultra Low Power Asynchronous 128K x 16 2 Megabit
- ------------------------------------------------------------------------------
Synchronous Pipeline Burst 32K x 32 1 Megabit
- ------------------------------------------------------------------------------
Synchronous Pipeline Burst\FlowThru\NoWait 64K x 32 2 Megabit
- ------------------------------------------------------------------------------
Synchronous Pipeline Burst\FlowThru 128K x 32\36 4 Megabit
- ------------------------------------------------------------------------------
Synchronous Pipeline Burst\FlowThru 256K x 16\18 4 Megabit
- ------------------------------------------------------------------------------
Synchronous Pipeline Burst 64K x 64 4 Megabit
- ------------------------------------------------------------------------------
</TABLE>
DRAMs. Our low and medium density DRAM products complement our high
performance SRAM products. Applications for our DRAMs include telecommunications
base stations, set top boxes, networking equipment, disk drives, tape drives and
printers. We currently offer 4, 8, and 16 megabit Fast Page Mode (FPM), Extended
Data Out (EDO), plus 4 and 16 megabit SDRAM devices. Additional DRAM products
are under development. Our DRAM products are not targeted at the main memory
DRAM market.
The following table illustrates our principal DRAM products:
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION CONFIGURATION DENSITY
- -----------------------------------------------------------------------------
<S> <C> <C>
Extended Data Out\Fast Page DRAM 5Volt 256K x 16 4 Megabit
(3.3Volt)
- -----------------------------------------------------------------------------
Extended Data Out \Fast Page DRAM 5Volt 1M x 16 16 Megabit
(3.3Volt)
- -----------------------------------------------------------------------------
Extended Data Out \Fast Page DRAM 5Volt 4M x 4 16 Megabit
(3.3Volt)
- -----------------------------------------------------------------------------
Synchronous DRAM 3.3Volt 256K x 16 4 Megabit
- -----------------------------------------------------------------------------
Synchronous DRAM 3.3Volt 1M x 16 16 Megabit
- -----------------------------------------------------------------------------
</TABLE>
Other Memory Products. Our other products include serial EEPROMs, EPROMS
and voice recording chips. Applications for these products include pagers,
networking systems, modems, telephone sets, security systems, smart cards, video
games and other consumer products. Revenue from these products was less than 10%
of our total revenue in fiscal 1999.
35
<PAGE> 37
Design and Process Technology. We have invested in advanced process
technology that enables us to design at leading edge geometries such as 0.18
micron for SRAMs. Memory products are particularly well suited for the
development of advanced process technology. Our technology development engineers
work closely with our design engineers and manufacturing partners, such as TSMC
and Chartered Semiconductor, to develop new process technologies, refine
existing process technologies and to reduce the circuit geometries of our
products. We and TSMC are currently developing 0.18 micron, 2.5-volt high speed
SRAM process technology. In addition, we developed a six-transistor cell SRAM
for our low power applications. SRAMs that do not require low power typically
use four transistor cell structures. With the development of its six-transistor
cell for low power applications, we have now demonstrated proven technology and
design capabilities in both four and six transistor cells.
Our design efforts focus on product specification, memory cell and array
structure, circuit design, simulation and layout. We have invested in advanced
computer aided design (CAD) systems to ensure that the design team has
state-of-the-art design tools and employs innovative and rigorous design
methodologies. We utilize focused design teams for new product development and
can efficiently migrate proprietary design features to new generation products.
Product Warranty. Consistent with semiconductor memory industry practice,
we generally provide a limited warranty that our semiconductor memory devices
are in compliance with specifications existing at the time of delivery.
Liability for a stated warranty period is usually limited to replacement of
defective items or return of amounts paid.
CUSTOMERS AND MARKETING
We have focused our marketing efforts on the internet access devices,
networking, telecom/mobile communications and computer peripherals markets. We
market our products through a direct sales force, independent sales
representatives, and distributors. We have four distributors in North America
and distributors in most of the countries of Western Europe. We continue to
expand our marketing and sales activity in Europe. We have sales offices in the
United States, Europe, Hong Kong, and the People's Republic of China and,
through our affiliate ISSI-Taiwan, in Taiwan and Japan. Our customers include a
broad range of electronic system manufacturers as illustrated in the following
table:
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERNET ACCESS TELECOM/ MOBILE
DEVICES NETWORKING COMMUNICATIONS COMPUTER PERIPHERALS
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
3Com Cisco Alcatel Hewlett Packard
- -------------------------------------------------------------------------------------
Motorola IBM Ericsson Lexmark
- -------------------------------------------------------------------------------------
Sagem Nortel Motorola Seagate
- -------------------------------------------------------------------------------------
Nokia
- -------------------------------------------------------------------------------------
</TABLE>
In the three months ended December 31, 1999 and in fiscal 1999, 1998 and
1997, 3Com accounted for approximately 12%, 20%, 19%, and 19% of our net sales,
respectively. In the first quarter of fiscal 2000, Flextronics accounted for
approximately 12% of our net sales.
36
<PAGE> 38
Our sales and marketing efforts focusing on North America, Europe, South
America and China are directed from our Santa Clara headquarters. Our affiliate,
ISSI-Taiwan, has a direct sales and marketing organization based in Taipei,
Taiwan, which focuses on the Asian market. In the three months ended December
31, 1999, approximately 53% of our net sales were attributable to customers
located in the United States, 22% were attributable to customers located in
Europe, and 25% were attributable to customers located in Asia. In fiscal 1999,
approximately 52% of our net sales were attributable to customers located in the
United States, 20% were attributable to customers located in Europe, and 28%
were attributable to customers located in Asia. These percentages exclude net
sales by ISSI-Taiwan occurring after December 31, 1998, the last date on which
we consolidated ISSI-Taiwan results. In fiscal 1998, approximately 43% of our
net sales were attributable to customers located in the United States, 18% were
attributable to customers located in Europe, and 39% were attributable to
customers located in Asia. In fiscal 1997, approximately 45% of our net sales
were attributable to customers located in the United States, 13% were
attributable to customers located in Europe, and 42% were attributable to
customers located in Asia. The percentages for fiscal 1998 and fiscal 1997
include net sales by ISSI-Taiwan.
Our sales are generally made pursuant to standard purchase orders, which
can be revised to reflect changes in the customer's requirements. Generally,
purchase orders and OEM agreements allow customers to reschedule delivery dates
and cancel purchase orders without significant penalties. For these reasons, we
believe that our backlog, while useful for scheduling production, is not
necessarily a reliable indicator of future revenues.
MANUFACTURING
We combine our process technology expertise, foundry partnership strategy
and equity investment arrangements to form a hybrid of the fab and fabless
business models which we call Fab-Lite(TM). We do not own or operate our own
wafer foundry but, because memory products are particularly well suited for the
development of advanced process technology, we actively participate in
developing and refining the process technology used to manufacture many of our
products. We believe that this strategy enables us to achieve the early
introduction of advanced geometries for our high performance memory products,
which results in increased performance and lower manufacturing costs. To date
our principal manufacturing relationships have been with TSMC in Taiwan,
Chartered Semiconductor in Singapore and UMC in Taiwan.
In 1996, we entered into a business venture agreement with Altera Inc.,
Analog Devices Inc., and TSMC wherein TSMC, as the general partner, would
construct a wafer fabrication facility in the state of Washington. The
fabrication facility is a very advanced process technology facility capable of
0.25 and 0.18 micron process technology. The joint venture, named WaferTech LLC,
began production in 1998. As of September 30, 1999, we had an investment in the
business venture of $20.8 million. An additional investment of $2.7 million was
made in October 1999, bringing the total to $23.5 million.
The manufacturing of our products is coordinated jointly between our Santa
Clara headquarters and ISSI-Taiwan, which is located in close proximity to TSMC
and UMC in the Hsinchu Science-Based Industrial Park, a government-sponsored
technology development zone. When the independent wafer foundry partners
complete processed wafers, the wafers move next to wafer testing. They are then
sawed or cut into individual memory chips and the chips are inserted into final
packages and tested. Our U.S. headquarters
37
<PAGE> 39
develops and debugs test programs and tests procedures used for testing. Both
the Taiwan and U.S. facilities have clean rooms that are equipped for the wafer
probe segment of the testing process. Third party subcontractors in Taiwan and
Singapore perform packaging and assembly operations. A comprehensive quality
control program is in place. We have adopted ISO 9000 as our quality management
standard. Our U.S. facility has received certification under ISO 9001 standards.
ISSI-Taiwan has received certification under ISO 9002 standards.
Each of our wafer suppliers also fabricates for other integrated circuit
companies, including certain of our competitors. In addition, UMC subsidiaries
manufacture integrated circuits, including SRAMs, for their own account.
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 use or reduce or eliminate
deliveries to us, there can be no assurance that we could enforce fulfillment of
the delivery commitments. Our equity investment in WaferTech and the technology
development partnerships are believed by us to mitigate such risk.
There can be no assurance that the foundries used by us will not encounter
production difficulties or that they will allocate sufficient wafer capacity to
satisfy our wafer requirements, especially in times of wafer capacity shortages.
Moreover, there can be no assurance that we would be able to qualify additional
manufacturing sources for existing or new products in a timely manner or that
such additional manufacturing sources would be able to produce an adequate
supply of wafers. If we were unable to obtain an adequate supply of wafers from
our current or any alternative sources in a timely manner, our business and
operating results would be materially and adversely affected.
Although our policy is to work closely with our manufacturing sources,
there are certain risks associated with the use of independent foundries,
including the absence of a controlled source of supply, or delays in obtaining
adequate wafer supplies. In addition, the manufacture of integrated circuits is
a highly complex and technically demanding process. Production yields and device
reliability can be affected by a large number of factors. As is typical in the
semiconductor industry, our outside foundries have from time to time experienced
lower than anticipated manufacturing yields and device reliability problems,
particularly in connection with the introduction of new products and changes in
such foundry's processing steps. There can be no assurance that our foundries
will not experience lower than expected manufacturing yields or device
reliability problems in the future, which could materially and adversely affect
our business and operating results.
We have certain minimum wafer purchasing commitments to our foundry
partners in exchange for wafer capacity commitments. 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.
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 foreign and
domestic competition. The ability to
38
<PAGE> 40
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;
- 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.
We may not 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.
The SRAM market is generally a fragmented market and specific competitors
and competitive factors vary based on geographic regions and market segments. In
the SRAM market, we compete with several major domestic and international
semiconductor companies including Alliance Semiconductor, Cypress Semiconductor,
Integrated Device Technology, Mitsubishi, Motorola, Samsung and Winbond.
We also compete with new and emerging companies, such as Giga
Semiconductor. We also may face significant competition from other domestic and
foreign integrated circuit manufacturers, which have advanced technological
capabilities but have not previously participated in the SRAM market sector.
There can be no assurance that we will be able to compete successfully against
any of these competitors.
In the low to medium density DRAM area, we compete with Alliance,
Mosel-Vitelic and Oki. Other main memory DRAM companies could address this
market in the future. There can be no assurance that we will be able to compete
successfully against any of these competitors.
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.
The process technology used by our manufacturing sources, including process
technology that we have developed with our foundries, can be used by such
manufacturers to produce products for other companies, including our
competitors. Although we believe that our participation in the development of
the processes provides us the advantage of early access to such processes, there
can be no assurance that the knowledge of the manufacturer will not be used to
benefit our competitors.
39
<PAGE> 41
RESEARCH AND DEVELOPMENT
Rapid technological change and continuing price competition require
research and development efforts on both new products and advanced processes
employing smaller geometries. Our research and development activities are
focused primarily on the development of advanced process technologies and new
memory circuit designs. We currently design most of our high performance memory
products and jointly develop advanced process technology with our manufacturing
partners from our headquarters in Santa Clara, California.
We are currently designing new SRAM and DRAM products. SRAM products under
development include ultra low power SRAMs and additional memory configurations.
DRAM products under development include synchronous graphics DRAMs. Our research
and development expenditures in fiscal 1999, 1998, and 1997 were $18.8 million,
$31.9 million, and $26.2 million, respectively. Our research and development
expenses for the three months ended December 31, 1998 and for fiscal 1998 and
1997 included expenses related to ISSI-Taiwan and NexFlash.
PATENTS AND INTELLECTUAL PROPERTY
As of December 31, 1999, we held 51 U.S. patents. These patents expire
between 2010 and 2019. We have approximately 19 additional patent applications
pending and expect to continue to file patent applications where appropriate to
protect our proprietary technologies. Although patents are an important element
of our intellectual property, we believe that our continued success depends
primarily on factors such as the technological skills and innovation of our
personnel rather than on our patents. The process of seeking patent protection
can be expensive and time consuming. There can be no assurance that patents will
be issued from pending or future applications or that, if patents are issued,
they will not be challenged, invalidated or circumvented, or that rights granted
thereunder will provide meaningful protection or other commercial advantage to
us. Moreover, there can be no assurance that any patent rights will be upheld in
the future or that we will be able to preserve any of our other intellectual
property rights.
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. 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. In addition, an international company purchased the patents of
a defunct memory technology company and, approximately three years ago, asserted
that we infringe one or more of those patents. Since that time, this company has
pursued a patent claim against another memory technology company with respect to
the same patents. It is unknown whether this company will reassert its claim
against us at some time in the future. There can be no assurance that other
companies will not in the future 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, there is no
assurance that any licenses will be offered or that the terms of any offered
licenses will be acceptable to us. The failure to obtain a license under a key
patent or intellectual property right from a third
40
<PAGE> 42
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, there can be
no assurance that we will not 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 materially and adversely affect our business and operating results.
EMPLOYEES
As of December 31, 1999, we had approximately 136 employees in the U.S., 9
in the People's Republic of China and 12 in Hong Kong. Our affiliates,
ISSI-Taiwan and NexFlash, employed approximately 343 and 29 people,
respectively, as of December 31, 1999. Our future success will largely be
dependent on our ability to attract, retain and motivate highly qualified
technical and management personnel. The employment market for such personnel is
extremely competitive and there can be no assurance that we will successfully
staff all necessary positions. Our employees are not represented by any
collective bargaining agreements and we have never experienced a work stoppage.
We believe that our employee relations are good.
PROPERTIES
Our U.S. headquarters occupy a two story building, totaling approximately
93,400 square feet, in Santa Clara, California in which our executive offices,
marketing, technology, product development groups and some research and
development testing facilities are located. The lease on this building expires
in February 2007. We sublease to NexFlash approximately 9,000 square feet. The
sublease expires in September 2000. Additionally, we sublease approximately
24,000 square feet to a third party. The sublease expires in March 2003. Our
Hong Kong subsidiary leases approximately 5,000 square feet in Hong Kong under a
lease which expires in April 2003.
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 are 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 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 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. We will pay duty deposits on Taiwan SRAM entries
before that date at the deposit rate.
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.
41
<PAGE> 43
Duties calculated and assessed by the government could have a material
adverse effect on our gross margin 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 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 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.
42
<PAGE> 44
MANAGEMENT
Our executive officers and directors, and their ages as of December 31,
1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jimmy S.M. Lee...................... 44 Chairman, Chief Executive Officer,
President and Director
Gary L. Fischer..................... 48 Executive Vice President, Office of
the President and Chief Financial
Officer
Thomas Doczy........................ 45 Vice President, Sales and Marketing
Paul Song........................... 44 Vice President, Engineering
Pauline Lo Alker.................... 57 Director
Lip-Bu Tan.......................... 40 Director
Hide L. Tanigami.................... 49 Director
Chun Win Wong....................... 64 Director
</TABLE>
Set forth below is certain information relating to our executive officers
and directors.
Jimmy S.M. Lee has served as our Chief Executive Officer, President and a
director since he co-founded ISSI in October 1988. He has also served as a
director of ISSI-Taiwan since September 1990, and as a director of NexFlash
since October 1998. From 1985 to 1988, Mr. Lee was an engineering manager at
International CMOS Technology, Inc., a semiconductor company, and from 1983 to
1985, he was a design manager at Signetics Corporation, a semiconductor company.
Prior thereto, Mr. Lee was a project manager at Toshiba Semiconductor
Corporation and a design engineer at National Semiconductor Corporation. Mr. Lee
holds an M.S. degree in Electrical Engineering from Texas Tech University and a
B.S. degree in Electrical Engineering from National Taiwan University.
Gary L. Fischer has served as our Executive Vice President, Office of the
President, since April 1995 and as Vice President and Chief Financial Officer
since June 1993. From December 1992 to April 1993, Mr. Fischer was Vice
President, Finance and Chief Financial Officer of Shaman Pharmaceuticals, Inc.,
a pharmaceutical company. From January 1989 to December 1992, Mr. Fischer was
Chief Financial Officer of Synergy Semiconductor Corporation, a manufacturer of
high performance SRAM and logic integrated circuits. Mr. Fischer holds an M.B.A.
degree from the University of Santa Clara and a B.A. degree from the University
of California, Santa Barbara.
Thomas Doczy has served as our Vice President, Sales and Marketing since
April 1999. He also served as Vice President and General Manager, Memory Product
Division from October 1996 to April 1999 and as Senior Director, Memory
Marketing from October 1995 to October 1996. He served as Director of Sales from
March 1994 to October 1995. Mr. Doczy was International Marketing Manager and
Strategic Accounts Manager at Cypress Semiconductor prior to joining us in March
1994. Previously, he was Director of Worldwide Sales for Austek Microsystems and
held field sales management positions in Boston and Minneapolis with AMD. Mr.
Doczy holds a B.S. degree in Electrical Engineering from the Illinois Institute
of Technology.
Paul Song has served as our Vice President, Engineering since April 1999.
He also served as Vice President, Design Engineering from July 1996 to April
1999. He joined ISSI in July 1990 as Director, Nonvolatile Memory Design
Engineering. Previously he held design engineering positions at ICT, Exel
Microelectronics, Inc. and AMD. Dr. Song
43
<PAGE> 45
holds a Ph.D. degree in Electrical Engineering from Stanford University, an M.S.
degree in Electrical Engineering from the University of California, Santa
Barbara, and a B.S. degree in Electrical Engineering from National Taiwan
University.
Pauline Lo Alker has served as a member of our board of directors since
April 1997. Since June 1998, Ms. Alker has been President, Chief Executive
Officer and Chairman of the Board of Amplify.net, Inc., a start-up company
specializing in software solutions for internet/intranet providers. From 1991
until 1998, Ms. Alker was President and Chief Executive Officer of Network
Peripherals, Inc., a workgroup networking solutions company. In 1984, she
founded Counterpoint Computers, Inc., a developer and manufacturer of
high-performance UNIX multiprocessor computers, which was acquired by Acer, Inc.
in 1987. She served first as President of Acer's Network Computing Division
Counterpoint, then became President of Acer America's Sales and Marketing. Ms.
Alker holds B.A. degrees in Mathematics and Music from Arizona State University.
She also serves as a director of Tektronix Corporation, a test equipment
company.
Lip-Bu Tan has served as a member of our board of directors since March
1990. Mr. Tan was also a director of Integrated Silicon Solution-Taiwan, Inc.
from July 1992 until July 1993. Mr. Tan is a General Partner of the Walden Group
of venture capital funds and serves as President of International Venture
Capital Investment Corporation. Mr. Tan holds an M.S. degree in Business
Administration from the University of San Francisco and a B.S. degree from
Nanyang University. He has also served as a director of Creative Technology
Ltd., a multimedia products company, since 1990.
Hide L. Tanigami was appointed to serve as a member of our board of
directors on December 3, 1997. Since January 1996, Mr. Tanigami has been
President and Chief Executive Officer of Marubun USA Corporation, an electronic
components trading company. Since July 1998, he has also been President and
Chief Executive Officer of Global Sourcing, Inc., a consulting company. From
October 1985 until March 1994, Mr. Tanigami was a co-founder and Vice President
of Corporate Development at Catalyst Semiconductor, Inc. He also serves as a
director of Catalyst Semiconductor, Inc. and was a director of Nexcom
Technology, Inc. until we acquired it in December 1997. Mr. Tanigami also serves
as a director of NexFlash Technologies, Inc. and as a director of Integrated
Silicon Solution-Taiwan, Inc., both since October 1998. Mr. Tanigami holds an
M.A. degree in Applied Linguistics from San Francisco State University and a
B.A. degree from Kansai University of Foreign Studies.
Chun Win Wong has served as a member of our board of directors since
December 1994. Mr. Wong was also a member of our board of directors from March
1991 to May 1994 and a director of ISSI-Taiwan from March 1991 until July 1993.
Since April 1994, Mr. Wong has been Vice Chairman of Wearnes Technology Pte,
Ltd. (Wearnes) and since 1983, he has been Group General Manager of Wearnes
Brothers, Limited, Singapore, the parent company of Wearnes, both of which are
multinational electronics companies. He was also Managing Director of Wearnes
from 1983 to 1994. From 1970 to 1980, Mr. Wong was Chief Executive Officer of
Industrial Electronics and Engineers Limited, an electronics company which he
founded. Mr. Wong holds a degree in Electrical and Control Engineering from the
Royal Melbourne Institution of Technology in Australia.
44
<PAGE> 46
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of December 10, 1999 with respect to:
- each person or group of affiliated persons known by us to own
beneficially more than 5% of the outstanding shares of common stock;
- each of our directors;
- each of our executive officers; and
- all directors and executive officers as a group.
Except as otherwise indicated in the footnotes to the table, each of the
stockholders has sole voting and investment power with respect to the shares
beneficially owned by such stockholders, subject to community property laws
where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
NUMBER OF SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED
------------------------ ------------------ -------------
<S> <C> <C>
Dimensional Fund Advisors....................... 1,129,400 5.5%
1299 Ocean Avenue, 11th floor
Santa Monica, CA 90401-1038
Jimmy S. M. Lee(1).............................. 470,639 2.3
Kong-Yeu Han(2)................................. 457,091 2.2
Gary L. Fischer(3).............................. 11,792 *
Tom Doczy(4).................................... 60,192 *
Paul Jei-Zen Song(5)............................ 48,632 *
Pauline Lo Alker(6)............................. 20,417 *
Lip-Bu Tan(7)................................... 360,256 1.8
Hide L. Tanigami(8)............................. 13,779 *
Chun Win Wong(9)................................ 566,336 2.8
All directors and executive officers as a group
(9 persons)(10)............................... 2,009,134 9.7
</TABLE>
- -------------------------
* Less than 1%
This table is based upon information supplied by officers, directors and
principal shareholders and schedules 13D and 13G filed with the Securities and
Exchange Commission. Unless otherwise indicated in the footnotes to this table
and subject to community property laws where applicable, we believe that each of
the shareholders named in this table has sole voting and investment power with
respect to the shares indicated as beneficially owned. Applicable percentages
are based on 20,407,713 shares outstanding on December 10, 1999, adjusted as
required by rules promulgated by the Securities and Exchange Commission.
(1) Includes 128,828 shares issuable upon exercise of options which are
exercisable within 60 days of December 10, 1999. Also includes 51,000
shares held by Mr. Lee as custodian for his minor children.
45
<PAGE> 47
(2) Includes 114,326 shares issuable upon exercise of options which are
exercisable within 60 days of December 10, 1999. Also includes 40,000
shares held by Mr. Han as custodian for his minor children.
(3) Includes 11,792 shares issuable upon exercise of options which are
exercisable within 60 days of December 10, 1999.
(4) Includes 59,730 shares issuable upon exercise of options which are
exercisable within 60 days of December 10, 1999.
(5) Includes 9,665 shares issuable upon exercise of options which are
exercisable within 60 days of December 10, 1999.
(6) Represents 20,417 shares issuable upon exercise of options which are
exercisable within 60 days of December 10, 1999.
(7) Includes 14,791 shares issuable upon exercise of options held by Mr. Tan
which are exercisable within 60 days of December 10, 1999. Also includes
152,100 shares held by Walden Capital Partners II and 183,333 shares held
by IVCIC. Mr. Tan is a General Partner of Walden Group and President of
IVCIC and may be deemed to be a beneficial owner of the shares held by such
entity.
(8) Represents 7,500 shares issuable upon exercise of options which are
exercisable within 60 days of December 10, 1999.
(9) Includes 18,958 shares issuable upon exercise of options held by Mr. Wong
which are exercisable within 60 days of December 10, 1999. Also includes an
aggregate of 537,378 shares held by Wearnes Technology Pte. Ltd. and United
Wearnes Technology Pte. Ltd. Mr. Wong is the Managing Director of Wearnes
and may be deemed to be a beneficial owner of the shares held by such
entities.
(10) Includes 386,007 shares issuable upon the exercise of options which are
exercisable within 60 days of December 10, 1999. See notes 1 through 9
above.
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<PAGE> 48
UNDERWRITING
We are offering the shares of common stock described in this prospectus
through a number of underwriters. Banc of America Securities LLC, SoundView
Technology Group, Inc. and Gerard Klauer Mattison & Co., Inc. are the
representatives of the underwriters. We have entered into an underwriting
agreement with the representatives. Subject to the terms and conditions of the
underwriting agreement, we have agreed to sell to the underwriters, and each
underwriter has severally agreed to purchase, the number of shares of common
stock listed next to its name below at the public offering price, less the
underwriting discount and commissions on the cover page of the prospectus:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Banc of America Securities LLC..............................
SoundView Technology Group, Inc.............................
Gerard Klauer Mattison & Co., Inc...........................
---------
Total..................................................... 3,300,000
=========
</TABLE>
The underwriting agreement is subject to a number of terms and conditions
and provides that the underwriters must buy all of the shares if they buy any of
them. The underwriters will sell the shares to the public when and if the
underwriters buy the shares from us.
The underwriters initially will offer shares to the public at the price
specified on the cover page of this prospectus. The underwriters may allow to
selected dealers a concession of not more than $ per share. The underwriters
may also allow, and any other dealers may reallow, a concession of not more than
$ per share to some other dealers. If all the shares are not sold at the
public offering price, the underwriters may change the public offering price and
the other selling terms. No change in the selling terms will vary the proceeds
to be received by us as specified on the cover page to the prospectus. The
common stock is offered subject to a number of conditions, including:
- receipt and acceptance of the common stock by the underwriters; and
- the right on the part of the underwriters to reject orders in whole or in
part.
We have granted the underwriters an option to buy up to 495,000 additional
shares of common stock. These additional shares would cover sales of shares by
the underwriters that exceed the number of shares specified in the table above.
The underwriters may exercise this option at any time within 30 days after the
date of this prospectus. If the underwriters exercise this option, they will
each purchase, subject to a number of terms and conditions, additional shares
approximately in proportion to the amounts specified in the table above. If
purchased, the underwriters will offer such additional shares on the same terms
as those on which the 3,300,000 shares are being offered.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters. These amounts are shown assuming
no exercise and full exercise of the underwriters' option to purchase additional
shares.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share underwriting discounts and commissions...... $ $
Total underwriting discounts and commissions
to be paid by us.................................... $ $
</TABLE>
47
<PAGE> 49
The expenses of this offering, not including discounts and commissions, are
estimated to be approximately $550,000 and will be paid by us. Expenses of the
offering, exclusive of underwriting discounts and commissions, include the SEC
filing fee, printing expenses, transfer agent and registration and other
miscellaneous fees.
We and our executive officers and directors have entered into lock-up
agreements with the underwriters. Under these agreements, subject to exceptions,
we may not issue any new shares of common stock, and our executive officers and
directors, certain of our shareholders may not offer, sell, contract to sell, or
otherwise dispose of or hedge any common stock or securities convertible into or
exchangeable for shares of common stock. These restrictions will be in effect
for a period of 90 days after the date of this prospectus. At any time and
without notice, Banc of America Securities LLC may, in its sole discretion,
release all or some of the securities from these lock-up agreements.
We will indemnify the underwriters against some liabilities, including some
liabilities under the Securities Act. If we are unable to provide this
indemnification, we will contribute to payments the underwriters may be required
to make in respect of those liabilities.
In connection with this offering, the underwriters may engage in activities
that stabilize, maintain or otherwise affect the price of the common stock.
These transactions may include:
- short sales;
- over-allotment;
- purchases to cover positions created by short sales; and
- stabilizing transactions.
Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. An order to cover a
short position, the underwriters may bid for and purchase shares of common stock
in the open market or may exercise their over-allotment option. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while this offering
is in progress.
The underwriter may also impose a penalty bid. This means that if the
representatives purchase shares in the open market in stabilizing transactions
or to cover short sales, the representatives can require the underwriters that
sold those shares as part of this offering to repay the underwriting discount
received by them.
As a result of these activities, the price of the common stock may be
higher than the price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue them at any time.
The underwriters may carry out these transactions on the Nasdaq National Market,
in the over-the-counter market or otherwise.
In connection with this offering, some underwriters who are qualified
market makers on the Nasdaq National Market may engage in passive market making
transactions in the common stock on the Nasdaq National Market in accordance
with Rule 103 of Regulation M. Rule 103 permits passive market making during the
period when Regulation M would otherwise prohibit market making activity by the
participants in this offering. Passive market making may occur during the
business day before the pricing of
48
<PAGE> 50
this offering, before the commencement of offers or sales of the common stock.
Passive market makers must comply with applicable volume and price limitations
and must be identified as a passive market maker. In general, a passive market
maker must display its bid at a price not in excess of the highest independent
bid for the security. If all independent bids are lowered below the passive
market maker's bid, however, the bid must then be lowered when purchase limits
are exceeded. Net purchases by a passive market maker on each day are limited to
a specified percentage of the passive market maker's average daily trading
volume in the common stock during a specified period and must be discontinued
when such limit is reached. Underwriters and dealers are not required to engage
in passive market making and may end passive market activities at any time.
A prospectus in electronic format is being made available on an Internet
web site maintained by Wit SoundView's affiliate, Wit Capital Corporation. Other
than the prospectus in electronic format, the information on Wit Capital's web
site and any information contained on any other web site maintained by Wit
Capital is not part of the prospectus or the registration statement of which
this prospectus forms a part, has not been approved and/or endorsed by us or any
underwriter in its capacity as underwriter and should not be relied upon by
investors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Restated Certificate of Incorporation limits, to the maximum extent
permitted by Delaware law, the personal liability of directors for monetary
damages for breach of their fiduciary duties as a director. Our Bylaws provide
that we shall indemnify our officers and directors and may indemnify our
employees and other agents to the fullest extent permitted by Delaware law. We
have entered into indemnification agreements with our officers and directors
containing provisions which are in some respects broader than the specific
indemnification provisions contained in the Delaware General Corporation Law.
The indemnification agreements require us, among other things to indemnify such
officers and directors against certain liabilities that may arise by reason of
their status or service as directors or officers (other than liabilities arising
from willful misconduct of a culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' insurance, if available on
reasonable terms. We believe that these agreements are necessary to attract and
retain qualified persons as directors and officers.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify a director, officer, employee or agent made a party to
an action by reason of that fact that he or she was a director, officer,
employee or agent of the corporation or was serving at the request of the
corporation against expenses actually and reasonably incurred by him or her in
connection with such action if he or she acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best interests of
the corporation and with respect to any criminal action, had no reasonable cause
to believe his or her conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
49
<PAGE> 51
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You can inspect and
copy the Registration Statement on Form S-3 of which this prospectus is a part,
as well as reports, proxy statements and other information filed by us, at the
public reference facilities maintained by the Securities and Exchange Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Securities and Exchange Commission: 7 World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can obtain copies of
such material from the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. You can call the Securities and Exchange Commission at 1-800-732-0330 for
information regarding the operations of its Public Reference Room. The
Securities and Exchange Commission also maintains a World Wide Web site at
www.sec.gov that contains reports, proxy and information statements, and other
information regarding registrants (like ISSI) that file electronically.
The Securities and Exchange Commission allows this Prospectus to
"incorporate by reference" certain other information that we file with them
(File No. 000-23084), which means that we can disclose important information to
you by referring to those documents. The information incorporated by reference
is an important part of this prospectus, and information that we file later with
the Securities and Exchange Commission will automatically update and replace
this information. We incorporate by reference the documents listed below and any
future filings made by us with the Securities and Exchange Commission under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until
we have sold all of the securities that we have registered.
1. Our Annual Report on Form 10-K for the year ended September 30,
1999;
2. Our Quarterly Report on Form 10-Q for the period ended December 31,
1999; and
3. The description of our capital stock contained in a Registration
Statement on Form 8-A filed on January 7, 1995, including any amendments or
reports filed for the purpose of updating such descriptions.
If you make a request for such information in writing or by telephone, we
will provide you without charge, a copy of any or all of the information
incorporated by reference in the registration statement of which this prospectus
is a part. Requests for such information should be submitted in writing to us at
the following address: Investor Relations, Integrated Silicon Solution, Inc.,
2231 Lawson Lane, Santa Clara, California 95054, or by telephone at (408)
588-0800.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for ISSI
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters will be passed upon for the underwriters by
O'Melveny & Myers LLP, San Francisco, California.
50
<PAGE> 52
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at September 30, 1999 and 1998, and for each of the three
years in the period ended September 30, 1999, as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
51
<PAGE> 53
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Financial Statements:
Consolidated Statements of Operations for Fiscal Years
Ended September 30, 1997, September 30, 1998, and
September 30, 1999..................................... F-3
Consolidated Statements of Comprehensive Loss for Fiscal
Years Ended September 30, 1997, September 30, 1998, and
September 30, 1999..................................... F-4
Consolidated Balance Sheets as of September 30, 1998 and
September 30, 1999..................................... F-5
Consolidated Statements of Stockholders' Equity for Fiscal
Years Ended September 30, 1997, September 30, 1998, and
September 30, 1999..................................... F-6
Consolidated Statements of Cash Flows for Fiscal Years
Ended September 30, 1997, September 30, 1998, and
September 30, 1999..................................... F-7
Notes to Consolidated Financial Statements................ F-8
Condensed Consolidated Statements of Operations for the
Three Months Ended December 31, 1998 and 1999
(Unaudited)............................................ F-28
Condensed Consolidated Statements of Comprehensive Income
for the Three Months Ended December 31, 1998 and 1999
(Unaudited)............................................ F-29
Condensed Consolidated Balance Sheets at September 30,
1999 and December 31, 1999 (Unaudited)................. F-30
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 1998 and 1999
(Unaudited)............................................ F-31
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................ F-32
</TABLE>
F-1
<PAGE> 54
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Integrated Silicon Solution, Inc.
We have audited the accompanying consolidated balance sheets of Integrated
Silicon Solution, Inc. as of September 30, 1998 and 1999, and the related
consolidated statements of operations, comprehensive loss, stockholders' equity,
and cash flows for each of the three years in the period ended September 30,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Integrated Silicon Solution, Inc. at September 30, 1998 and 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
San Jose, California
October 29, 1999
F-2
<PAGE> 55
INTEGRATED SILICON SOLUTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales (See Note 19)........................... $108,261 $131,132 $ 83,309
Cost of sales (other than item below) (See Note
19)............................................. 76,105 103,794 66,816
Inventory write-down.............................. -- 23,000 --
-------- -------- --------
Total cost of sales............................... 76,105 126,794 66,816
-------- -------- --------
Gross profit...................................... 32,156 4,338 16,493
-------- -------- --------
Operating expenses
Research and development........................ 26,179 31,911 18,778
Selling, general and administrative............. 16,753 18,402 11,899
In-process technology charge.................... -- 7,078 --
-------- -------- --------
Total operating expenses..................... 42,932 57,391 30,677
-------- -------- --------
Operating loss.................................... (10,776) (53,053) (14,184)
Interest and other income (expense)............... 2,535 (1,697) 2,256
Interest expense.................................. (607) (1,795) (1,039)
Gain on sale of investments, net.................. -- 10,494 2,658
-------- -------- --------
Loss before income taxes and minority interest.... (8,848) (46,051) (10,309)
Provision (benefit) for income taxes.............. (1,144) 4,668 608
-------- -------- --------
Net loss before minority interest................. (7,704) (50,719) (10,917)
Minority interest in net loss of consolidated
subsidiary...................................... (18) (112) (472)
Equity in net income of affiliated companies...... -- -- 934
-------- -------- --------
Net loss.......................................... $ (7,686) $(50,607) $ (9,511)
======== ======== ========
Basic and diluted net loss per share.............. $ (0.43) $ (2.67) $ (0.48)
======== ======== ========
Shares used in per share calculation.............. 17,748 18,940 19,633
======== ======== ========
</TABLE>
See the accompanying notes to consolidated financial statements.
F-3
<PAGE> 56
INTEGRATED SILICON SOLUTION, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1997 1998 1999
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss........................................ $(7,686) $(50,607) $(9,511)
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment... (2,002) (2,539) 2,599
------- -------- -------
Comprehensive loss.............................. $(9,688) $(53,146) $(6,912)
======= ======== =======
</TABLE>
See the accompanying notes to consolidated financial statements.
F-4
<PAGE> 57
INTEGRATED SILICON SOLUTION, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1998 1999
------------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 27,776 $ 15,975
Restricted cash..................................... 333 --
Short-term investments.............................. 7,800 7,650
Accounts receivable, net of allowance for doubtful
accounts of $1,804 in 1998 and $1,496 in 1999.... 19,069 11,970
Accounts receivable from related parties (See Note
19).............................................. -- 3,206
Inventories......................................... 46,484 29,681
Other current assets................................ 4,938 1,639
-------- --------
Total current assets........................... 106,400 70,121
Property, equipment, and leasehold improvements,
net................................................. 44,316 4,563
Other assets.......................................... 51,452 47,147
-------- --------
Total assets................................... $202,168 $121,831
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable....................................... $ 18,325 $ --
Accounts payable.................................... 40,642 10,370
Accounts payable to related parties (See Note 19)... -- 9,231
Accrued compensation and benefits................... 2,945 1,933
Accrued expenses.................................... 8,036 6,068
Income tax payable.................................. 524 455
Current portion of long-term obligations............ 3,379 --
-------- --------
Total current liabilities...................... 73,851 28,057
Income tax payable -- noncurrent...................... 4,996 4,996
Long-term obligations................................. 12,087 --
Minority interest in consolidated subsidiary.......... 20,314 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value: authorized
shares -- 5,000 in 1998 and 1999. No shares
outstanding...................................... -- --
Common stock, $0.0001 par value: authorized
shares -- 70,000 in 1998 and 1999. Issued and
outstanding shares -- 19,417 in 1998 and 20,294
in 1999.......................................... 2 2
Additional paid-in capital.......................... 116,199 120,852
Accumulated deficit................................. (18,341) (27,852)
Accumulated comprehensive income.................... (6,787) (4,188)
Unearned compensation............................... (153) (36)
-------- --------
Total stockholders' equity..................... 90,920 88,778
-------- --------
Total liabilities and stockholders' equity..... $202,168 $121,831
======== ========
</TABLE>
See the accompanying notes to consolidated financial statements.
F-5
<PAGE> 58
INTEGRATED SILICON SOLUTION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL EARNINGS COMPREHENSIVE TOTAL
--------------- PAID-IN (ACCUMULATED INCOME UNEARNED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) (LOSS) COMPENSATION EQUITY
------ ------ ---------- ------------ ------------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996........ 17,607 $2 $104,788 $ 39,952 $(2,246) $ (61) $142,435
Stock options exercised............ 197 -- 665 -- -- -- 665
Shares issued under stock purchase
plan............................. 134 -- 1,112 -- -- -- 1,112
Unearned compensation.............. -- -- 204 -- -- (204) --
Amortization of unearned
compensation..................... -- -- -- -- -- 43 43
Translation adjustment............. -- -- -- -- (2,002) -- (2,002)
Net loss........................... -- -- -- (7,686) -- -- (7,686)
------ -- -------- -------- ------- ----- --------
Balance at September 30, 1997........ 17,938 2 106,769 32,266 (4,248) (222) 134,567
Stock options exercised............ 461 -- 1,674 -- -- -- 1,674
Shares issued under stock purchase
plan............................. 245 -- 1,379 -- -- -- 1,379
Amortization of unearned
compensation..................... -- -- -- -- -- 69 69
Shares issued for purchase of
Nexcom Technology, Inc........... 773 -- 6,377 -- -- -- 6,377
Translation adjustment............. -- -- -- -- (2,539) -- (2,539)
Net loss........................... -- -- -- (50,607) -- -- (50,607)
------ -- -------- -------- ------- ----- --------
Balance at September 30, 1998........ 19,417 2 116,199 (18,341) (6,787) (153) 90,920
Stock options exercised............ 556 -- 2,064 -- -- -- 2,064
Shares issued under stock purchase
plan............................. 235 -- 699 -- -- -- 699
Amortization of unearned
compensation..................... -- -- -- -- -- 8 8
Cancellation of stock options...... -- -- (109) -- -- 109 --
Warrants issued in connection with
NexFlash Technologies spin-off... -- -- 1,999 -- -- -- 1,999
Shares issued for exercise of
warrant.......................... 86 -- -- -- -- -- --
Translation adjustment............. -- -- -- -- 2,599 -- 2,599
Net loss........................... -- -- -- (9,511) -- -- (9,511)
------ -- -------- -------- ------- ----- --------
Balance at September 30, 1999........ 20,294 $2 $120,852 $(27,852) $(4,188) $ (36) $ 88,778
====== == ======== ======== ======= ===== ========
</TABLE>
See the accompanying notes to consolidated financial statements.
F-6
<PAGE> 59
INTEGRATED SILICON SOLUTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (7,686) $(50,607) $ (9,511)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization........................ 11,408 9,065 4,608
In-process technology charge......................... -- 7,078 --
Net gain on sale of investments...................... -- (10,494) (2,658)
Provision for losses on accounts receivable.......... 675 -- --
Net foreign currency transaction (gains) losses...... 17 3,188 (594)
Equity in net income of affiliated companies......... -- -- (934)
Minority interest in net loss of consolidated
subsidiary........................................ (18) (112) (472)
Changes in operating assets and liabilities:
Accounts receivable and accounts receivable from
related parties (See Note 19)................... (8,007) (386) (1,719)
Inventories....................................... (19,446) (13,515) (21,912)
Other assets...................................... 4,328 7,458 11,549
Accounts payable and accounts payable to related
parties (See Note 19)........................... 13,939 16,350 149
Accrued expenses.................................. 227 (2,553) (963)
-------- -------- --------
Net cash used in operating activities........... (4,563) (34,528) (22,457)
Cash flows from investing activities:
Acquisition of property, equipment, and leasehold
improvements........................................... (13,985) (19,218) (3,490)
Purchases of available-for-sale securities................ (174,400) (42,750) (26,450)
Sales of available-for-sale securities.................... 211,000 60,550 26,600
Cash impact of deconsolidation of ISSI-Taiwan............. -- -- (12,818)
Proceeds from partial sale of ISSI-Taiwan................. -- 37,594 4,957
Investment in WaferTech, LLC........................... (9,360) (12,480) --
Proceeds from partial sale of Wafertech................... -- -- 10,000
Investment in United Integrated Circuits Corp.......... (12,983) (4,730) --
Proceeds from sale of United Integrated Circuits Corp..... -- -- 9,217
Investment in NexFlash Technologies, Inc.................. -- -- (1,000)
Investment in Dynachip.................................... -- -- (500)
Investment in Nexcom Technology, Inc...................... -- (869) --
Proceeds from employees for UICC shares................... 5,345 -- --
-------- -------- --------
Net cash provided by investing activities....... 5,617 18,097 6,516
Cash flows from financing activities:
Proceeds from issuance of stock........................... 1,820 3,122 2,771
Borrowings under notes payable and long-term
obligations............................................ 28,659 81,816 33,435
Principal payments of notes payable and long-term
obligations............................................ (23,092) (65,884) (32,393)
Decrease in restricted cash............................... 1,821 4,800 --
-------- -------- --------
Net cash provided by financing activities....... 9,208 23,854 3,813
Effect of exchange rate changes on cash and cash
equivalents............................................... (165) (1,981) 327
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 10,097 5,442 (11,801)
Cash and cash equivalents at beginning of year.............. 12,237 22,334 27,776
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 22,334 $ 27,776 $ 15,975
======== ======== ========
</TABLE>
See the accompanying notes to consolidated financial statements.
F-7
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Integrated Silicon Solution, Inc. (the "Company") was incorporated in
California on October 27, 1988 and reincorporated in Delaware on August 9, 1993.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Integrated Silicon Solution, Inc. and its majority owned subsidiaries, after
elimination of all significant intercompany accounts and transactions.
The Company's financial results for fiscal year 1998 are presented on a
consolidated basis and include the results of the operations of NexFlash and
Integrated Silicon Solution Taiwan Inc. ("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. 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 September
30, 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 accounts for
ISSI-Taiwan on the equity basis and reflects its percentage share of
ISSI-Taiwan's results of operations.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
Under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" all affected debt securities
must be classified as held-to-maturity, trading, or available-for-sale and
equity securities must be classified as trading or available-for-sale.
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date.
At September 30, 1998 and 1999, all debt and equity securities were
designated 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 September 30, 1998 and 1999, the cost of
these securities approximated the fair value (quoted market price) and the
amount of unrealized gain or loss was not significant.
F-8
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Except for the gains (losses) recognized on the sales of securities of
ISSI-Taiwan, WaferTech, and UICC (see Note 18), there were no gains or losses on
the sale of securities for the years ended September 30, 1997, 1998 and 1999.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The Company's inventory valuation process is done on a part-by-part
basis. Lower of cost or market adjustments, specifically identified on a
part-by-part basis, reduce the carrying value of the related inventory and take
into consideration reductions in sales prices, excess inventory levels and
obsolete inventory. Once established, these adjustments are considered permanent
and are not reversed until the related inventory is sold or disposed.
PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment, and leasehold improvements are stated at cost.
Equipment under capital leases is stated at the present value of minimum lease
payments at the beginning of the lease term. Depreciation and amortization are
computed using the straight-line method, based upon the shorter of the estimated
useful lives ranging from three to seven years, or the lease term of the
respective assets, if applicable.
ACCUMULATED COMPREHENSIVE INCOME (LOSS)
The accumulated comprehensive income (loss) component within the
stockholders' equity section of the Balance Sheet is comprised entirely of
foreign currency translation adjustments.
REVENUE RECOGNITION
The Company recognizes revenue to non-distributor customers upon shipment.
The Company provides for estimated sales returns on sales to these customers.
Sales made to distributors, under terms allowing certain rights of return and
price protection on unsold merchandise held by the distributor, are deferred
until the merchandise is sold by the distributor.
FOREIGN CURRENCY TRANSLATION
The Company uses the local currency as its functional currency for all
foreign subsidiaries. Translation adjustments, which result from the process of
translating foreign currency financial statements into U.S. dollars, are
included in the Accumulated comprehensive income component of stockholder's
equity.
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.
F-9
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company operates in one business segment, which is to design, develop,
and market high performance SRAM, DRAM, and NVM integrated circuits. The Company
markets and distributes its products on a worldwide basis, primarily to original
equipment manufacturers, contract manufacturers, and distributors. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally requires no collateral. In fiscal 1997, 1998 and 1999, one customer,
3Com, accounted for approximately 19%, 19%, and 20% of net sales, respectively.
The Company maintains cash, cash equivalents, and short-term investments
with various financial institutions. The Company's investment policy is designed
to limit exposure to any one institution. The Company performs periodic
evaluations of the relative credit standing of those financial institutions that
are considered in the Company's investment strategy. The Company is exposed to
credit risk in the event of default by the financial institutions or issuers of
investments to the extent of the amount recorded on the balance sheet. To date,
the Company has not incurred losses related to these investments.
SEMICONDUCTOR INDUSTRY RISKS
To date the Company has derived substantially all of its revenues from the
sale of SRAM products. The Company has diversified into other product areas such
as low and medium density DRAMs, and NVM products. However, a substantial
majority of the Company's revenue is still derived from SRAM products and, if
the market for SRAM products should decline and the Company has not successfully
diversified, such decline would have a material adverse affect on the Company's
financial performance.
The semiconductor industry is characterized by rapid technological change,
intense competitive pressure and cyclical market patterns. The Company's results
of operations are affected by a wide variety of factors, including declines in
average selling prices of the Company's products, oversupply of memory products
in the market, failure to introduce new products and to implement technologies
on a timely basis, the timing and announcement of new product introductions by
the Company and its competitors, market acceptance of the Company's and its
customers' products, the failure to anticipate changing customer product
requirements, fluctuations in manufacturing yields, disruption in delivery and
order fulfillment, and disruption in the supply of wafers or assembly services.
Other factors include changes in product mix, seasonal fluctuations in customer
demand for the Company's products, the timing of significant orders, increased
expenses associated with new product introductions or process changes, the
ability of customers to make payments to the Company, increases in material
costs, increases in antidumping duties, increases in costs associated with the
expansion of sales channels, increases in general and administrative expenses,
and certain production and other risks associated with using independent
manufacturers. As a result, the Company may experience substantial period-
to-period fluctuations in future operating results due to the factors mentioned
above or other factors.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted number of
common shares outstanding during the period. Diluted net income per share is
computed using the
F-10
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the shares
issuable upon the exercise of stock options and warrants under the treasury
stock method.
Basic and diluted net loss per share for each of the three years presented
is computed using the weighted average number of shares of common stock
outstanding during the period, as all other common equivalent shares are
anti-dilutive.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 "Accounting for Derivative Instruments and Hedging Activities" (FAS No.
133). FAS No. 133 will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The change in a derivative's fair
value related to the ineffective portion of a hedge, if any will be immediately
recognized in earnings. The Company expects to adopt FAS No. 133 as of the
beginning of its fiscal year 2001. The Company does not believe that the
adoption of FAS No. 133 will have a material impact on the Company's results of
operations, cash flows, or financial position.
NOTE 2 CASH, CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS
Cash, cash equivalents, restricted cash, and short-term investments
consisted of the following at September 30:
<TABLE>
<CAPTION>
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash............................................... $23,893 $13,732
Money market instruments........................... 195 660
Certificates of deposit............................ 4,021 1,583
Auction preferred stock............................ 1,000 5,200
Municipal bonds due in more than 3 years........... 6,800 2,450
------- -------
Total.............................................. $35,909 $23,625
======= =======
</TABLE>
NOTE 3. INVENTORIES
Inventories consisted of the following at September 30:
<TABLE>
<CAPTION>
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Purchased components............................... $ 5,447 $ 5,168
Work-in-process.................................... 14,868 6,807
Finished goods..................................... 26,169 17,706
------- -------
$46,484 $29,681
======= =======
</TABLE>
F-11
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In fiscal 1998, the Company recorded inventory write-downs of $23.0
million, including $9.6 million in the September quarter. The inventory
write-downs were predominately for lower of cost or market issues on certain of
the Company's products, primarily SRAMs.
NOTE 4. OTHER ASSETS
Other assets consisted of the following at September 30:
<TABLE>
<CAPTION>
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Investment in ISSI-Taiwan (see Notes 1 and 18)..... $ -- $21,886
Investment in WaferTech LLC. (see Notes 15 and
21).............................................. 31,200 20,800
Investment in United Integrated Circuits Corp. (see
Note 18)......................................... 16,486 --
Other.............................................. 3,766 4,461
------- -------
$51,452 $47,147
======= =======
</TABLE>
NOTE 5. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment, and leasehold improvements consisted of the following
at September 30:
<TABLE>
<CAPTION>
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment............................ $52,462 $21,996
Furniture and fixtures............................. 1,969 860
Building and improvements.......................... 19,205 886
------- -------
73,636 23,742
Less accumulated depreciation and amortization..... 29,320 19,179
------- -------
$44,316 $ 4,563
======= =======
</TABLE>
NOTE 6. ACCRUED EXPENSES
Accrued liabilities consisted of the following at September 30:
<TABLE>
<CAPTION>
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accrued antidumping duties (see Note 15)............. $1,574 $1,574
Other................................................ 6,462 4,494
------ ------
$8,036 $6,068
====== ======
</TABLE>
NOTE 7. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
At September 30, 1999, the Company had no lines of credit. At September 30,
1998, ISSI - Taiwan had short-term lines of credit with various financial
institutions whereby it could borrow in aggregate up to approximately
$23,510,000 denominated in a combination
F-12
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of U.S. and New Taiwan dollars. As of September 30, 1998, ISSI-Taiwan had
borrowings of approximately $18,225,000 outstanding under these lines of credit.
These lines of credit were secured by time deposits of approximately $333,000,
which were recorded as restricted cash, as well as approximately $5.8 million at
cost of UICC stock. Commitment fees relating to these lines were not material.
At September 30, 1998, the weighted average interest rate on borrowing under
these lines was 8.4%.
Long-term obligations consisted of the following at September 30:
<TABLE>
<CAPTION>
1998 1999
------- ----
(IN THOUSANDS)
<S> <C> <C>
Notes payable to bank, due in quarterly installments
through 2004 with interest at 6.82% to 8.82% and
secured by the Company's property and equipment....... $15,466 $--
Less current portion.................................... 3,379 --
------- --
$12,087 $--
======= ==
</TABLE>
Interest of $280,000, $913,000, and $0 was capitalized in fiscal 1997,
1998, and 1999, respectively.
NOTE 8. CAPITAL STOCK
The Company's Restated Certificate of Incorporation provides for 70,000,000
authorized shares of Common Stock and 5,000,000 authorized shares of preferred
stock. The terms of the preferred stock may be fixed by the Board of Directors,
who have the right to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders of the Company. The rights of the holders of
common stock are subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future.
As of September 30, 1999, shares of common stock were reserved for future
issuance as follows:
<TABLE>
<S> <C>
Common shares reserved under Employee Stock Purchase Plan... 707,000
Common shares reserved under stock option plans............. 5,544,000
Common shares reserved for exercise of warrants............. 848,000
</TABLE>
NOTE 9. STOCK PLANS
1989 STOCK OPTION PLAN
During 1989, the Company adopted a stock option plan (the "Plan") that
provides for the grant of incentive stock options to employees and nonstatutory
stock options to employees, consultants and nonemployee directors of the
Company.
Incentive stock options and nonstatutory options granted under the Plan
have five or ten-year terms. All incentive stock option grants and nonstatutory
stock option grants must be at prices of at least 100% and 85%, respectively, of
the fair market value of the stock on the date of grant, as determined by the
Board of Directors.
F-13
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The options are exercisable as determined by the Board of Directors.
Generally, the stock options vest ratably over a four-year period. The options
expire upon the earlier of five or ten years from the date of grant or 30 days
following termination of employment. Options to purchase 1,164,000 shares,
1,120,000 shares, and 920,000 shares were exercisable as of September 30, 1997,
1998, and 1999, respectively.
In the event of certain changes in control of the Company, the Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; however, if such successor refuses to
assume the then outstanding options, the Plan provides for the full acceleration
of the exercisability of all outstanding options.
1996 STOCK OPTION PLAN
On October 18, 1996, the Company adopted a stock option plan (the "1996
Plan") that provides for the grant of non-statutory stock options to
non-executive employees and consultants of the Company.
Under the terms of the plan, the exercise price and exercise period of
stock option grants is determined by the Board of Directors on the date of
grant. Generally, the stock options vest ratably over a four year period. The
options expire upon the earlier of ten years from the date of grant or 30 days
following termination of employment or consultancy. Options to purchase, 33,000
shares, 430,000 shares, and 493,000 shares were exercisable as of September 30,
1997, 1998 and 1999, respectively.
In the event of certain changes in control of the Company, the 1996 Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; however, if such successor refuses to
assume the then outstanding options, the 1996 Plan provides for the full
acceleration of the exercisability of all outstanding options.
1998 STOCK OPTION PLAN
The Board of Directors and stockholders approved the 1998 Stock Option Plan
("1998 Plan") in October 1998 and January 1999, respectively. The 1998 Plan
provides for the grant of incentive stock options to employees and nonstatutory
stock options to employees, consultants and nonemployee directors of the
Company. Stock purchase rights may also be granted under the 1998 Plan.
Under the terms of the plan, the exercise price and exercise period of
non-statutory stock option grants is determined by the Board of Directors on the
date of grant. All incentive stock option grants must be at prices of at least
100% of the fair market value of the stock on the date of grant, as determined
by the Board of Directors. Generally, the stock options vest ratably over a four
year period. The options expire upon the earlier of ten years from the date of
grant or 90 days following termination of employment or consultancy, unless
specified otherwise in the option agreement. No options to purchaseshares were
exercisable as of September 30, 1999.
In the event of certain changes in control of the Company, the 1998 Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; however, if such successor refuses to
assume the then outstanding
F-14
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
options, the 1998 Plan provides for the full acceleration of the exercisability
of all outstanding options.
1995 DIRECTOR STOCK OPTION PLAN
The Board of Directors and stockholders approved the 1995 Director Stock
Option Plan ("Director Plan") in December 1995 and January 1996, respectively.
Under the terms of the Director Plan, 125,000 shares of Common Stock were
authorized for issuance. Each director who has been a non-employee director for
at least six months will automatically receive a non-statutory option to
purchase 2,500 shares of Common Stock upon such director's annual reelection to
the Board by the stockholders. Options to purchase 13,000 shares, 26,000 shares,
and 38,000 shares were exercisable at September 30, 1997, 1998 and 1999,
respectively.
The following table summarizes activity of the 1989, 1996, 1998 and
Director Stock Option Plans (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------
OPTIONS WEIGHTED-
AVAILABLE NUMBER PRICE AVERAGE
FOR GRANT OF SHARES PER SHARE EXERCISE PRICE
--------- --------- --------------- --------------
<S> <C> <C> <C> <C>
Balance at September 30, 1996.......... 690 2,500 $0.20 - $27.50 $12.31
Authorized........................... 775 -- -- --
Granted.............................. (2,340) 2,340 $5.00 - $10.125 $ 8.72
Exercised............................ -- (197) $0.20 - $12.25 $ 3.37
Canceled............................. 1,095 (1,095) $0.20 - $27.50 $19.98
------ ------
Balance at September 30, 1997.......... 220 3,548 $0.28 - $26.00 $ 8.07
Authorized........................... 2,218 -- -- --
Granted.............................. (1,463) 1,463 $3.00 - $11.00 $ 8.08
Exercised............................ -- (461) $0.28 - $10.48 $ 3.63
Canceled............................. 1,254 (1,254) $3.00 - $26.00 $ 8.39
------ ------
Balance at September 30, 1998.......... 2,229 3,296 $3.00 - $14.50 $ 8.57
Authorized........................... 575 -- -- --
Granted.............................. (3,157) 3,157 $2.56 - $ 6.50 $ 3.06
Exercised............................ -- (556) $2.81 - $ 9.25 $ 3.68
Canceled............................. 2,811 (2,811) $2.56 - $13.00 $ 7.92
------ ------
Balance at September 30, 1999.......... 2,458 3,086 $2.56 - $14.50 $ 4.42
====== ======
</TABLE>
For certain options granted in 1994, 1995 and 1997, the Company recognized
as unearned compensation the excess of the deemed value for accounting purposes
of the common stock issuable upon exercise of such options over the aggregate
exercise price of such options. The deemed value for accounting purposes
represents the fair value at the date of grant. The compensation expense is
being amortized ratably over the vesting period of the option. Compensation
expense amounting to, $43,000, $69,000, and $8,000 was recognized for the years
ending September 30, 1997, 1998, and 1999, respectively.
F-15
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Outstanding and exercisable options presented by price range at September
30, 1999 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
NUMBER OF WTD. AVERAGE NUMBER OF WTD. AVERAGE
RANGE OF OPTIONS REMAINING LIFE WTD. AVERAGE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE PRICE
--------------- ----------- -------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
$ 2.56 - $ 3.00............. 881,000 9.36 $ 2.68 94,000 $ 2.81
$ 3.16 - $ 3.16............. 1,341,000 9.17 $ 3.16 805,000 $ 3.16
$ 3.25 - $ 5.38............. 155,000 8.27 $ 4.69 58,000 $ 3.91
$ 6.50 - $ 8.00............. 316,000 8.26 $ 7.76 158,000 $ 7.79
$ 8.56 - $ 9.75............. 291,000 7.84 $ 9.21 245,000 $ 9.22
$10.00 - $14.50............. 102,000 6.92 $11.67 91,000 $11.73
---------- ---------
$ 2.56 - $14.50............. 3,086,000 8.89 $ 4.42 1,451,000 $ 5.23
========== =========
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In March 1993, the Company adopted an Employee Stock Purchase Plan
("Purchase Plan") under Section 423 of the Internal Revenue Code. Under the
Company's Purchase Plan, eligible employees may purchase shares of the Company's
common stock through payroll deductions. The shares are purchased at a price
equal to 85% of the lesser of the fair value of the Company's common stock as of
the first day of the 24-month offering period or the last day of each six-month
purchase period. A total of 1,450,000 shares of common stock is reserved for
issuance under the plan, of which 743,000 had been issued as of September 30,
1999.
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 1,949,000 shares with an aggregate exercise price of approximately
$17.0 million were repriced to an exercise price of $3.1562 per share. In
connection with the repricing, certain vesting and exercise rights were
surrendered.
STOCK-BASED COMPENSATION
As permitted under FAS 123, the Company has elected to follow APB 25 and
related Interpretations, in accounting for stock-based awards to employees.
Under APB 25, the Company generally recognized no compensation expense with
respect to such awards.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by FAS 123 for awards granted or modified after September 30,
1995 as if the Company had accounted for its stock-based awards to employees
under the fair value method of FAS 123. The fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model. The Black-Scholes model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock-based awards to employees have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion,
F-16
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the existing models do not necessarily provide a reliable single measure of the
fair value of its stock-based awards to employees. The fair value of the
Company's stock-based awards to employees was estimated assuming no expected
dividends and the following weighted-average assumptions:
<TABLE>
<CAPTION>
STOCK OPTIONS ESPP
-------------------- --------------------
1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (years).............. 5.0 5.0 5.0 0.5 0.5 0.5
Expected volatility................ 0.70 0.76 0.85 0.53 0.72 1.16
Risk-free interest rate............ 6.43% 5.50% 5.12% 5.50% 5.33% 4.84%
</TABLE>
The weighted-average fair value of options granted at market value during
fiscal 1997, 1998 and 1999 was $4.02, $3.81 and $1.54 per share, respectively.
The weighted-average fair value of employee stock purchase rights during fiscal
1997, 1998 and 1999 was $5.33, $3.89, and $3.04 per share, respectively.
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period
(for options) and the six-month purchase period (for stock purchases under the
ESPP). The Company's pro forma information for the years ended September 30, is
as follows (in thousands, except for income (loss) per share information):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss
As reported............................. $ (7,686) $(50,607) $ (9,511)
Pro forma............................... (14,814) (55,564) (14,203)
Basic and diluted loss per share
As reported............................. (0.43) (2.67) (0.48)
Pro forma............................... (0.83) (2.93) (0.72)
</TABLE>
Because FAS 123 is applicable only to awards granted subsequent to
September 30, 1995, its pro forma effect was not fully reflected until fiscal
1999. Due to the subjective nature of the assumptions used in the Black-Scholes
model, the pro forma net loss and pro forma net loss per share may not be
indicative of the effects on net income (loss) and net income (loss) per share
in future years.
NOTE 10. 1998 ISSI-TAIWAN STOCK PLAN
On October 29, 1998, the Company adopted the 1998 ISSI-Taiwan Stock Plan
("Taiwan Stock Plan") that provides for the grant of non-statutory stock options
in the common stock of ISSI-Taiwan to the 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 12.0 million. This represents approximately 10% of the outstanding shares of
ISSI-Taiwan.
Under the terms of the plan, the exercise price, which is deemed to be the
fair value of ISSI-Taiwan at the date of grant, 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
F-17
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of employment or consultancy. At September 30, 1999, options to purchase
10,374,000 shares of ISSI-Taiwan stock were outstanding, none of which were
exercisable.
If within twelve months of certain changes of control of the Company an
optionee's status as an employee or consultant of the Company is terminated
without cause, the Taiwan Stock Plan provides for full acceleration of the
exercisability of all outstanding options.
NOTE 11. STOCKHOLDERS' EQUITY
At September 30, 1998, the Company was subject to legal restrictions
related to its distribution of ISSI-Taiwan earnings. In accordance with the
Corporate Law of the Republic of China, before ISSI-Taiwan declares any part of
net income as dividends and/or bonuses, ISSI-Taiwan must transfer 10% of its
statutory net income to a legal reserve until such reserve is equal to
ISSI-Taiwan's capital. At September 30, 1998, such restricted equity amounted to
approximately $5,022,000. The legal reserve is not available for distribution;
however, when the reserve exceeds 50% of ISSI-Taiwan's capital, 50% of the legal
reserve in excess of 50% of ISSI-Taiwan's capital may be distributed in the form
of stock. The reserve may be utilized at any time to offset a deficit. In
addition, any distribution of equity of ISSI-Taiwan must allocate 1% of the
related distribution to employees of ISSI-Taiwan.
NOTE 12. INCOME TAXES
The provision (benefit) for income taxes consisted of the following for the
years ended September 30:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal.................................. $(2,558) $ 114 $(250)
State.................................... 1 36 --
Foreign.................................. 116 2,377 858
------- ------ -----
Total current......................... (2,441) 2,527 608
Deferred:
Federal.................................. 2,584 2,289 --
State.................................... -- -- --
Foreign.................................. (1,287) (148) --
------- ------ -----
Total deferred........................ 1,297 2,141 --
------- ------ -----
Total provision (benefit)............. $(1,144) $4,668 $ 608
======= ====== =====
</TABLE>
Pretax income (loss) from foreign operations was approximately, $9,207,000,
$200,000, and $(516,000) for 1997, 1998 and 1999, respectively.
F-18
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's provision (benefit) for income taxes differs from the amount
computed by applying the U.S. federal statutory rate (35%) to income before
taxes and minority interest as follows for the years ended September 30:
<TABLE>
<CAPTION>
1997 1998 1999
------- -------- -------
AS ADJUSTED (IN THOUSANDS)
<S> <C> <C> <C>
Income taxes computed at the U.S.
federal statutory rate................ $(3,097) $(16,118) $(3,821)
Valuation of deferred tax assets........ 6,546 11,105 --
Net operating loss (utilized), not
utilized.............................. -- (2,898) 2,088
Foreign earnings taxed at lower than
U.S. rate............................. (4,368) (62) --
Foreign withholding taxes............... -- 2,373 858
Tax exempt interest income.............. (328) (93) --
Gain on sale of ISSI-Taiwan stock....... -- 7,890 1,733
In-process research and development..... -- 2,477 --
Other individually immaterial items..... 103 (6) (250)
------- -------- -------
Total provision (benefit).......... $(1,144) $ 4,668 $ 608
======= ======== =======
</TABLE>
As of September 30, 1999 the Company has federal and state net operating
loss carryforwards of approximately $27,000,000 and $7,000,000, respectively.
The Company has federal research and development credit carryforwards, foreign
tax credits and alternative minimum tax credit carryforwards of approximately
$3,040,000, $3,820,000 and $350,000, respectively. The Company also has state
research and manufacturers' investment tax credit carryforwards of approximately
$1,350,000 and $650,000. The net operating losses, research credit
carryforwards, foreign tax credit carryforwards and state manufacturers'
investment tax credit carryforwards will expire at various dates beginning in
2001 through 2019, if not utilized.
Utilization of the net operating loss carryforwards and credits may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating losses and credits before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount
F-19
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
used for income tax purposes. Significant components of deferred taxes consisted
of the following at September 30:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Depreciation................................... $ 577 $ 955
Inventory and other valuation reserves......... 11,961 5,078
Accrued expenses................................. 2,983 2,280
Taiwan -- investment tax credit carryforwards.... 5,383 --
Federal and state credit carryforwards......... 6,548 8,552
Federal and state net operating loss
carryforwards............................... 3,204 9,509
Other, net..................................... 1,185 1,690
-------- --------
Subtotal......................................... 31,841 28,064
Valuation allowance............................ (29,667) (20,686)
-------- --------
Total deferred tax assets................... $ 2,174 $ 7,378
Deferred tax liabilities:
Investments tax/book basis differences......... -- (7,378)
-------- --------
Net deferred tax assets..................... $ 2,174 $ 0
======== ========
</TABLE>
Management has established a valuation allowance for the net deferred tax
assets based on management's belief that the realization of the deferred tax
assets is not realizable on a more likely than not basis. The net deferred tax
asset at September 30, 1998 was on ISSI-Taiwan's balance sheet and, as a result
of deconsolidation of ISSI-Taiwan, there is no net deferred tax asset at
September 30, 1999 for ISSI. The valuation allowance for deferred tax assets
increased by $15,809,000 during 1998 and decreased by $8,981,000 during 1999.
The decrease in the valuation allowance for 1999 resulted from the
deconsolidation of ISSI-Taiwan and the resulting adjustment for the book/tax
difference in the basis of the investment in ISSI-Taiwan. Approximately
$3,250,000 of the valuation allowance is attributable to tax benefits of stock
option deductions which will be credited to paid in capital when recognized.
F-20
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. PER SHARE DATA
The calculations of basic and diluted net loss per share for each of the
three years ended September 30, 1999 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1997 1998 1999
---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss................................ $(7,686) $(50,607) $(9,511)
======= ======== =======
Denominator for basic net loss per
share:
Weighted average common shares
outstanding........................ 17,748 18,940 19,633
Denominator for basic and diluted net
loss per share........................ 17,748 18,940 19,633
======= ======== =======
Basic and diluted net loss per share.... $ (0.43) $ (2.67) $ (0.48)
======= ======== =======
</TABLE>
The above diluted calculation for the years ended September 30, 1997, 1998
and 1999, does not include approximately, 1,418,000, 2,497,000, and 2,000,000
shares attributable to options as of September 30, 1997, 1998 and 1999,
respectively, as their impact would be anti-dilutive. The above diluted
calculation for the year ended September 30, 1999, does not include
approximately 175,000 shares attributable to warrants as of September 30, 1999,
as their impact would be anti-dilutive.
NOTE 14. GEOGRAPHIC AND SEGMENT INFORMATION
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 requires the Company to use the "management approach" in
disclosing segment information. FAS No. 131 became effective for the Company
during fiscal 1999.
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>
YEAR ENDED SEPTEMBER 30, 1997
-----------------------------------------
ADJUSTMENTS/
UNITED STATES TAIWAN ELIMINATIONS CONSOLIDATED
------------- -------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales.................. $ 66,833 $114,809 $(73,381) $108,261
======== ======== ======== ========
Operating income (loss).... $(20,504) $ 8,995 $ 733 $(10,776)
======== ======== ======== ========
Long-lived assets.......... $ 8,817 $ 25,219 $ -- $ 34,036
======== ======== ======== ========
</TABLE>
F-21
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
-----------------------------------------
ADJUSTMENTS/
UNITED STATES TAIWAN ELIMINATIONS CONSOLIDATED
------------- -------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales.................. $ 85,378 $117,404 $(71,650) $131,132
======== ======== ======== ========
Operating income (loss).... $(56,374) $ 3,266 $ 55 $(53,053)
======== ======== ======== ========
Long-lived assets.......... $ 6,366 $ 37,950 $ -- $ 44,316
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999
---------------------------------------------------------------------
ADJUSTMENTS/
UNITED STATES HONG KONG TAIWAN ELIMINATIONS CONSOLIDATED
------------- --------- ------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales............ $ 70,687 $9,133 $34,932 $(31,443) $ 83,309
======== ====== ======= ======== ========
Operating loss....... $(12,450) $ (191) $(1,349) $ (194) $(14,184)
======== ====== ======= ======== ========
Long-lived assets.... $ 4,428 $ 135 $ -- $ -- $ 4,563
======== ====== ======= ======== ========
</TABLE>
Transfers between geographic areas are accounted for at amounts which are
generally above cost and consistent with rules and regulations of governing tax
authorities. Such transfers are eliminated in the consolidated financial
statements.
Long-lived assets by geographic area are those assets used in the Company's
operations in each area.
Export sales by the U.S. operating company were approximately, $14,125,000,
$26,393,000, and $21,587,000 for the years ended September 30, 1997, 1998, and
1999, respectively.
Net foreign currency transaction gains (losses) of approximately,
$(17,000), $(3,188,000), and $594,000 for the years ended September 30, 1997,
1998 and 1999, respectively, were primarily the result of the settlement of
intercompany transactions and are included in the determination of net income.
NOTE 15. COMMITMENTS AND CONTINGENCIES
PATENTS AND LICENSES
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. 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
F-22
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Furthermore, there can be no assurance that the Company will not become
involved in protracted litigation regarding the alleged infringement by the
Company of third party intellectual property rights or litigation to assert and
protect patents or other intellectual property rights of the Company. Any
litigation relating to patent infringement or other intellectual property
matters could result in substantial cost and diversion of resources by the
Company which could materially and adversely affect the Company's business and
operating results.
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 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, depending 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 Company will pay
duty deposits on Taiwan SRAM entries before that date at the deposit rate.
The Company has retained legal counsel to defend its interests in the
antidumping proceedings. In addition, certain aspects of the antidumping
determination are being challenged in federal court proceedings by 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. Subsequent to the petition filing the DOC established a
general dumping duty deposit rate of 21.35% which would have applied to the
Company. 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. The ITC ruling can be appealed in
federal court, but as of December 6, 1999, no such appeal has been filed.
LEASES
The Company leases its facilities under operating lease agreements that
expire at various dates through 2006. The Company entered into a ten year lease
effective December 1, 1996 for its headquarters facility in Santa Clara,
California. The Company subleases to NexFlash approximately 9,000 square feet.
The sublease expires in September
F-23
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2000. Additionally, the Company subleases approximately 24,000 square feet to a
third party. The sublease expires in March 2000. Minimum rental commitments
under these leases are as follows (in thousands):
<TABLE>
<S> <C>
2000 (net of sublease income of $452)....................... $ 983
2001........................................................ 1,356
2002........................................................ 1,401
2003........................................................ 1,431
2004........................................................ 1,451
Thereafter.................................................. 3,739
-------
Total minimum rental commitments....................... $10,361
=======
</TABLE>
Total rental expense for the years ended September 30, 1997, 1998, and 1999
was approximately, $1,372,000 (net of sublease income of $148,000), $1,078,000
(net of sublease income of $375,000), and $1,050,000 (net of sublease income of
$630,000), respectively.
COMMITMENTS TO WAFER FABRICATION FACILITIES
In June 1996, the Company entered into a business venture "WaferTech, LLC"
with TSMC, Altera, Analog Devices, and private investors to build a wafer
fabrication facility in Camas, Washington. The Company agreed to invest $31.2
million for a 4% equity interest in the venture and, as of September 30, 1998,
all of this amount had been paid. In December 1998, the Company agreed to sell
approximately 33% of its investment in WaferTech to TSMC for $10.0 million. The
transaction was completed in January 1999, and the Company retains a 2.67%
interest in WaferTech.
The Company has also agreed to certain minimum wafer purchase commitments
with its foundry partners in exchange for wafer capacity commitments. In fiscal
1995, the Company entered into an agreement with TSMC pursuant to which the
Company agreed to acquire specified wafer capacity through 2001. The Company
also agreed to make certain annual payments, 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 the Company's $9.6 million obligation.
As a result, the $9.6 million may be subject to forfeiture if the Company does
not purchase the base capacity and additional capacity for which it has
contracted. To date, the Company has never forfeited any amounts under this
agreement. 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. 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's business
and operating results could be adversely affected.
F-24
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. EMPLOYEE BENEFIT PLAN
In August 1992, the Company established a defined contribution retirement
plan with 401(k) plan features. The plan covers all United States employees 18
years and older. Employees may make contributions by a percentage reduction in
their salaries, up to $10,000 for 1999. The Company elected to make no
contributions during the years ended September 30, 1997, 1998 and 1999.
Administrative expenses relating to the plan are insignificant.
NOTE 17. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------
1997 1998 1999
------- ------------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid for interest.................... $ 1,431 $2,896 $ 1,234
Cash paid (refunded) for income taxes..... (5,004) 2,561 (1,986)
Fixed assets acquired for accounts
payable................................. -- 4,440 --
Stock issued in acquisition of Nexcom..... -- 6,377 --
Assets acquired from Nexcom............... -- 2,515 --
Liabilities assumed from Nexcom........... -- 3,762 --
</TABLE>
NOTE 18. TRANSACTIONS
On December 3, 1997, the Company completed its acquisition of Nexcom
Technology, Inc. ("Nexcom") in exchange for the issuance of 772,693 shares of
Common Stock, $0.5 million in cash, and the assumption of $1.2 million of net
liabilities (total consideration of approximately $8.5 million). The transaction
was accounted for as a purchase and resulted in an in-process technology charge
of approximately $7.1 million in the Company's December 31, 1997 quarter. Nexcom
was formed in 1990 and was engaged primarily in the research and development of
non-volatile flash memory technology.
On June 29, 1998, the Company sold approximately 46% of ISSI-Taiwan to a
group of private investors. The price was privately negotiated between the
parties. Cash proceeds from the transaction totaled $35.5 million net of
withholding and transaction taxes. The transaction resulted in a pre-tax gain of
$10.5 million which is recorded in the Company's June 30, 1998 quarter.
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%. 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 Company determined the fair value of the warrants
using the Black-Scholes valuation model assuming a fair value of the common
stock of $4.44 per share, risk free interest rate of 4.43%, volatility factor of
70%, and a life of two years. The warrants expire on November 4, 2000.
F-25
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 and notes receivable of
$2.3 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 September 30, 1999 reflects
ISSI-Taiwan as an investment accounted for on the equity basis.
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.
In April 1999, the Company agreed to sell its investment in UICC to UMC for
its original acquisition cost. The Company recorded a gain of approximately $1.8
million in the June 1999 quarter related to this transaction. The gain results
from adjustments to the original acquisition value for fluctuations in the New
Taiwanese Dollar.
NOTE 19. RELATED PARTY TRANSACTIONS
As of December 31, 1998, at the time of deconsolidation, the Company had an
accounts receivable balance of approximately $8,783,000, which included advances
to ISSI-Taiwan against future inventory purchases. For the nine months ended
September 30, 1999, the Company sold approximately $1,412,000 of memory products
to ISSI-Taiwan, in which it has approximately 43% ownership. The Company had an
accounts receivable balance from ISSI-Taiwan at September 30, 1999 of
approximately $1,915,000.
The Company purchases goods and contract manufacturing services from ISSI-
Taiwan. As of December 31, 1998, at the time of deconsolidation, the Company had
an accounts payable balance to ISSI-Taiwan of approximately $1,947,000.
Purchases of goods and services in the nine months ended September 30, 1999 were
approximately $55,840,000. The Company had an accounts payable balance to
ISSI-Taiwan at September 30, 1999 of approximately $9,231,000.
For the eleven months ended September 30, 1999, the Company sold
approximately $1,542,000 of memory products to NexFlash, in which it has
approximately 32% ownership. In addition, the Company received approximately
$167,000 in sublease income from NexFlash (See Note 15). The Company had an
accounts receivable balance from NexFlash at September 30, 1999 of approximately
$1,291,000.
F-26
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20. INVESTMENT IN ISSI-TAIWAN
The following summarizes financial information for ISSI-Taiwan, as of
September 30, 1999 and for the period from January 1, 1999 through September 30,
1999.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
---------------------
(IN THOUSANDS)
<S> <C>
Current assets............................. $59,629
Property, plant, and equipment and other
assets................................... 45,294
Current liabilities........................ 39,449
Long-term debt............................. 13,900
</TABLE>
<TABLE>
<CAPTION>
FROM JANUARY 1, 1999
THROUGH
SEPTEMBER 30, 1999
---------------------
(IN THOUSANDS)
<S> <C>
Net sales.................................. $82,381
Gross profit............................... 12,494
Net income................................. 4,764
</TABLE>
NOTE 21. SUBSEQUENT EVENT
ADDITIONAL INVESTMENT WAFERTECH
On October 13, 1999, the major investors in WaferTech, which include TSMC,
Altera, Analog Devices, and ISSI, made pro-rata investments in WaferTech. The
Company's pro-rata amount of $2.7 million was invested along with the other
partners. The Company's investment in WaferTech as of September 30, 1999 was
$20.8 million. After the October 1999 additional investment, the Company's total
investment in WaferTech is $23.5 million.
F-27
<PAGE> 80
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
----------------------
1998 1999
--------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net sales (See Note 12).................................... $26,801 $23,251
Cost of sales.............................................. 22,796 16,971
------- -------
Gross profit............................................... 4,005 6,280
------- -------
Operating expenses:
Research and development................................. 5,773 3,619
Selling, general and administrative...................... 3,622 3,207
------- -------
Total operating expenses.............................. 9,395 6,826
------- -------
Operating loss............................................. (5,390) (546)
Other income (loss), net................................... 1,586 (56)
------- -------
Loss before income taxes, minority interest and equity in
net income of affiliated companies....................... (3,804) (602)
Provision for income taxes................................. 633 50
------- -------
Net loss before minority interest and equity in net income
of affiliated companies.................................. (4,437) (652)
Minority interest in net loss of consolidated subsidiary... (472) --
Equity in net income of affiliated companies............... -- 1,146
------- -------
Net income (loss).......................................... $(3,965) $ 494
======= =======
Basic net income (loss) per share.......................... $ (0.20) $ 0.02
======= =======
Shares used in basic per share calculation................. 19,418 20,378
======= =======
Diluted net income (loss) per share........................ $ (0.20) $ 0.02
======= =======
Shares used in diluted per share calculation............... 19,418 22,498
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-28
<PAGE> 81
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------------------
1998 1999
-------- -----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Net income (loss)........................................... $(3,965) $494
Other comprehensive income, net of tax:
Change in cumulative translation adjustment............... 2,322 293
------- ----
Comprehensive income (loss)................................. $(1,643) $787
======= ====
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-29
<PAGE> 82
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 15,975 $ 11,419
Short-term investments............................ 7,650 5,150
Accounts receivable............................... 11,970 15,282
Accounts receivable from related parties (See
Note 12)....................................... 3,206 2,256
Inventories....................................... 29,681 34,423
Other current assets.............................. 1,639 1,290
-------- --------
Total current assets........................... 70,121 69,820
Property, equipment, and leasehold improvements,
net............................................... 4,563 4,798
Other assets........................................ 47,147 50,676
-------- --------
Total assets................................... $121,831 $125,294
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 10,370 $ 9,772
Accounts payable to related parties (See Note
12)............................................ 9,231 11,646
Accrued compensation and benefits................. 1,933 1,517
Accrued expenses.................................. 6,068 6,010
Income tax payable................................ 455 290
Current portion of long-term obligations.......... -- 130
-------- --------
Total current liabilities...................... 28,057 29,365
Income tax payable -- non-current................... 4,996 4,996
Long-term obligations............................... -- 420
Commitments and contingencies
Stockholders' equity:
Preferred stock................................... -- --
Common stock...................................... 2 2
Additional paid-in capital........................ 120,852 121,795
Accumulated deficit............................... (27,852) (27,358)
Accumulated comprehensive income.................. (4,188) (3,895)
Unearned compensation............................. (36) (31)
-------- --------
Total stockholders' equity..................... 88,778 90,513
-------- --------
Total liabilities and stockholders' equity..... $121,831 $125,294
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-30
<PAGE> 83
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------------------
1998 1999
-------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................... $ (3,965) $ 494
Gain on partial sale of ISSI-Taiwan..................... (1,211) --
Depreciation and amortization........................... 2,274 725
Minority interest in consolidated subsidiary............ (472) --
Equity in net income of affiliated companies............ 83 (1,146)
Net foreign currency transaction (gains) losses......... (596) --
Other charges to net income (loss) not affecting cash... 8 200
Net effect of changes in current and other assets and
current liabilities.................................. (503) (5,200)
-------- -------
Cash used in operating activities.................... (4,382) (4,927)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................................... (2,250) (360)
Purchases of available-for-sale securities.............. (13,900) --
Sales of available-for-sale securities.................. 14,000 2,500
Partial sale of ISSI-Taiwan............................. 4,957 --
Deconsolidation of ISSI-Taiwan.......................... (12,818) --
Investment in Wafertech, LLC............................ -- (2,667)
Investment in NexFlash.................................. (1,000) --
Investment in DynaChip.................................. (500) --
-------- -------
Cash used in investing activities.................... (11,511) (527)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under notes payable and long-term
obligations.......................................... 33,435 --
Proceeds from issuance of common stock.................. 2 948
Principal payments on notes payable and long-term
obligations.......................................... (32,293) (50)
-------- -------
Cash provided by financing activities................ 1,144 898
-------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................. 327 --
-------- -------
Net decrease in cash and cash equivalents................. (14,422) (4,556)
Cash and cash equivalents at beginning of period.......... 27,776 15,975
-------- -------
Cash and cash equivalents at end of period................ $ 13,354 $11,419
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-31
<PAGE> 84
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
Integrated Silicon Solution, Inc. (the "Company") and its consolidated majority
owned subsidiaries, after elimination of all significant intercompany accounts
and transactions and have been prepared in accordance with generally accepted
accounting principles for interim financial information and with Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included.
Operating results for the three months ended December 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2000.
2. CONCENTRATIONS
Sales to 3 Com accounted for approximately 15% and 12% of total net sales
for the quarters ended December 31, 1998 and December 31, 1999, respectively.
Sales to Flextronics International accounted for approximately 12% of total net
sales for the quarter ended December 31, 1999. For the quarter ended December
31, 1998, sales to Flextronics were less than 10% of total net sales.
The Company uses 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>
SEPTEMBER 30, DECEMBER 31,
1999 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash........................................ $13,732 $10,043
Money market instruments.................... 660 1,247
Certificates of deposit..................... 1,583 129
Auction preferred stock..................... 5,200 4,200
Municipal bonds due in more than 3 years.... 2,450 950
------- -------
$23,625 $16,569
======= =======
</TABLE>
F-32
<PAGE> 85
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>
SEPTEMBER 30, DECEMBER 31,
1999 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................... $ 5,168 $ 7,705
Work-in-process............................. 6,807 3,890
Finished goods.............................. 17,706 22,828
------- -------
$29,681 $34,423
======= =======
</TABLE>
5. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Investment in ISSI-Taiwan................... $21,886 $23,148
Investment in WaferTech LLC................. 20,800 23,467
Other....................................... 4,461 4,061
------- -------
$47,147 $50,676
======= =======
</TABLE>
On October 13, 1999, the major investors in WaferTech, which include TSMC,
Altera, Analog Devices, and ISSI, made additional pro-rata investments in
WaferTech. The Company's pro-rata amount of $2.7 million was invested along with
the other partners.
6. INCOME TAXES
The income tax provision for the three month period ended December 31, 1998
was based on an annual estimate of Taiwan taxable income after the exemption for
the Taiwan tax holiday plus withholding taxes primarily related to the sale of
ISSI-Taiwan stock. The income tax provision for the three month period ended
December 31, 1999 is based on foreign withholding taxes. Due to U.S. operating
losses, there is no U.S. tax provision. The effective tax rate for the three
months ended December 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.
F-33
<PAGE> 86
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
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Numerator for basic and diluted net income (loss) per
share:
Net income (loss).......................................... $(3,965) $ 494
======= =======
Denominator for basic net income (loss) per share:
Weighted average common shares outstanding................. 19,418 20,378
------- -------
Denominator for basic net income (loss) per share.......... 19,418 20,378
Dilutive stock options..................................... -- 1,664
Dilutive warrants.......................................... -- 456
------- -------
Denominator for diluted net income (loss) per share........ 19,418 22,498
======= =======
Basic net income (loss) per share.......................... $ (0.20) $ 0.02
======= =======
Diluted net income (loss) per share........................ $ (0.20) $ 0.02
======= =======
</TABLE>
The above diluted calculation does not include approximately 3,492,000 and
346,000 shares attributable to options as of December 31, 1998 and 1999,
respectively, and 981,659 shares attributable to warrants as of December 31,
1998 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. 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 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, depending 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
F-34
<PAGE> 87
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
review. The Company will pay duty deposits on Taiwan SRAM entries before that
date at the deposit rate.
The Company has retained legal counsel to defend its interests in the
antidumping proceedings. In addition, certain aspects of the antidumping
determination are being challenged in federal court proceedings by 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 antidumping petition
against DRAMs fabricated in Taiwan. Currently, the Company's 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 the
Company. 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.
10. LONG TERM OBLIGATIONS
The Company leases certain of its equipment under a capital lease. The
lease is collateralized by the underlying assets. At December 31, 1999, property
and equipment with a cost of $600,000 was subject to this financing arrangement.
Related accumulated amortization at December 31, 1999 amounted to $12,500. Under
the terms of the lease, the Company owes monthly payments of $15,108 through
September 1, 2003. Remaining principle and interest payments are $559,679 and
$120,282, respectively at December 31, 1999.
11. GEOGRAPHIC AND SEGMENT INFORMATION
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 requires the Company to use the "management approach" in
disclosing segment information. FAS No. 131 became effective for the Company
during fiscal 1999.
F-35
<PAGE> 88
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
THREE MONTHS ENDED DECEMBER 31, 1998
--------------------------------------------------
ADJUSTMENTS/
UNITED STATES HONG KONG TAIWAN ELIMINATIONS CONSOLIDATED
------------- --------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.................... $17,558 $894 $34,932 $(26,583) $26,801
======= ==== ======= ======== =======
Operating income (loss)...... (4,065) 30 (1,349) (6) (5,390)
======= ==== ======= ======== =======
Long-lived assets............ 5,495 162 -- -- 5,657
======= ==== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1999
----------------------------------------
ADJUSTMENTS/
UNITED STATES HONG KONG ELIMINATIONS CONSOLIDATED
------------- --------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales............................. $23,130 $4,012 $(3,891) $23,251
======= ====== ======= =======
Operating income (loss)............... (404) 462 (604) (546)
======= ====== ======= =======
Long-lived assets..................... 4,665 133 -- 4,798
======= ====== ======= =======
</TABLE>
12. RELATED PARTY TRANSACTIONS
As of September 30, 1999, the Company had an accounts receivable balance
from ISSI-Taiwan of approximately $1,915,000. For the three months ended
December 31, 1999, the Company sold approximately $520,000 of memory products to
ISSI-Taiwan, in which it has approximately 43% ownership. The Company had an
accounts receivable balance from ISSI-Taiwan at December 31, 1999 of
approximately $1,272,000.
As of September 30, 1999, the Company had an accounts payable balance to
ISSI-Taiwan of approximately $9,231,000. The Company purchases goods and
contract manufacturing services from ISSI-Taiwan. Purchases of goods and
services in the three months ended December 31, 1999 were approximately
$16,319,000. The Company had an accounts payable balance to ISSI-Taiwan at
December 31, 1999 of approximately $11,628,000.
As of September 30, 1999, the Company had an accounts receivable balance
from NexFlash of approximately $1,291,000. For the three months ended December
31, 1999, the Company sold approximately $115,000 of memory products to
NexFlash, in which it has approximately 33% ownership. In addition, the Company
received approximately $42,000 in sublease income from NexFlash. The Company had
an accounts receivable balance from NexFlash at December 31, 1999 of
approximately $984,000.
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 three months ended December 31, 1999 were
approximately $18,000. The Company had an accounts payable balance to NexFlash
at December 31, 1999 of approximately $18,000.
F-36
<PAGE> 89
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,300,000 Shares
LOGO
-------------------------
Prospectus
, 2000
-------------------------
BANC OF AMERICA SECURITIES LLC
WIT SOUNDVIEW
GERARD KLAUER MATTISON & CO., INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 90
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The fees and expenses incurred by the Company in connection with the
offering are payable by the Company and, other than filing fees, are estimated
as follows:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
SEC Registration Fee................................. $ 13,808
NASD Filing Fee...................................... 5,730
Nasdaq National Market Fee........................... 17,500
Printing............................................. 100,000
Legal Fees and Expenses.............................. 225,000
Accounting Fees and Expenses......................... 100,000
Miscellaneous........................................ 87,962
--------
Total.............................................. $550,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation law ("DGCL") empowers a
Delaware corporation to indemnify any persons who are, or are threatened to be
made, parties to any threatened, pending or completed legal action, suit or
proceedings, whether civil, criminal, administrative or investigative (other
than action by or in the right of such corporation), by reason of the fact that
such person was an officer or director of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided that such officer or director acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interest, and, for criminal proceedings, had no reasonable cause to believe his
conduct was illegal. A Delaware corporation may indemnify officers and directors
in an action by or in the right of the corporation under the same conditions,
except that no indemnification is permitted without judicial approval if the
officer or director is adjudged to be liable to the corporation in the
performance of his duty. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred.
In accordance with the DGCL, ISSI's Restated Certificate of Incorporation
("Certificate"), contains a provision to limit the personal liability of the
directors of the Registrant for violations of their fiduciary duty. This
provision eliminates each director's liability to the Registrant or its
stockholders for monetary damages except (i) for any breach of the director's
duty of loyalty to the Registrant or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL providing for liability of
directors for unlawful payment of dividends or unlawful stock purchases or
redemptions, or (iv) for any transaction from which a director derived an
improper personal benefit. The effect of this provision is to eliminate the
personal liability of directors for monetary damages for actions involving a
breach of their fiduciary duty of care, including any such actions involving
gross negligence.
II-1
<PAGE> 91
Article Nine of ISSI's Certificate and Article VI, Section 6.1 of ISSI's
Bylaws provide for indemnification of the officers and directors of the
Registrant to the fullest extent permitted by applicable law.
The Registrant has entered into indemnification agreements with each
director and executive officer which provide indemnification to such directors
and executive officers under certain circumstances for acts or omissions which
may not be covered by directors' and officers' liability insurance.
ITEM 16. EXHIBITS
The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
21.1 Subsidiaries of Registrant.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
24.1* Power of Attorney (see page II-4 of this Registration
Statement).
</TABLE>
- -------------------------
* Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by section 10(a)(3) of the Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) (Section 230.424(b) of this chapter) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and (iii) to include any material information with respect to
the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement; provided, however, that (i) and (ii) do not apply if the
Registration Statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by (i)
and (ii) is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration
II-2
<PAGE> 92
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 15 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against liabilities (other than the payment of the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 93
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Santa Clara, State of California on
this 24th day of February 2000.
INTEGRATED SILICON SOLUTION, INC.
By: /s/ JIMMY S.M. LEE
--------------------------------------
Jimmy S.M. Lee
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on February 24, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JIMMY S.M. LEE Chairman of the Board, Chief Executive
- --------------------------------------------- Officer, and President
(Jimmy S.M. Lee)
/s/ GARY L. FISCHER* Executive Vice President, Office of the
- --------------------------------------------- President and Chief Financial Officer
(Gary L. Fischer) (Principal Financial and Accounting
Officer)
/s/ PAULINE L. ALKER* Director
- ---------------------------------------------
(Pauline L. Alker)
/s/ LIP-BU TAN* Director
- ---------------------------------------------
(Lip-Bu Tan)
/s/ HIDE TANIGAMI* Director
- ---------------------------------------------
(Hide Tanigami)
/s/ CHUN WIN WONG* Director
- ---------------------------------------------
(Chun Win Wong)
* /s/ JIMMY S.M. LEE
------------------------------------------
Jimmy S.M. Lee
Attorney-in-fact
</TABLE>
II-4
<PAGE> 94
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
21.1 Subsidiaries of Registrant.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
24.1* Power of Attorney (see page II-4 of this Registration
Statement).
</TABLE>
- -------------------------
* Previously filed.
<PAGE> 1
EXHIBIT 1.1
3,300,000 SHARES
INTEGRATED SILICON SOLUTION, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
DATED FEBRUARY __, 2000
BANC OF AMERICA SECURITIES LLC
SOUNDVIEW TECHNOLOGY GROUP, INC.
GERARD KLAUER MATTISON & CO., INC.
<PAGE> 2
UNDERWRITING AGREEMENT
February __, 2000
BANC OF AMERICA SECURITIES LLC
SOUNDVIEW TECHNOLOGY GROUP, INC.
GERARD KLAUER MATTISON & CO., INC.
As Representatives of the several Underwriters
c/o Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
INTRODUCTORY. Integrated Silicon Solution, Inc., a Delaware
corporation (the "Company"), proposes to issue and sell to the several
underwriters named in Schedule A (the "Underwriters") an aggregate of 3,300,000
shares (the "Firm Common Shares") of its Common Stock, par value $.0001 per
share (the "Common Stock"). In addition, the Company has granted to the
Underwriters an option to purchase up to an additional 495,000 shares (the
"Optional Common Shares") of Common Stock, as provided in Section 2. The Firm
Common Shares and, if and to the extent such option is exercised, the Optional
Common Shares are collectively called the "Common Shares." Banc of America
Securities LLC, SoundView Technology Group, Inc. and Gerard Klauer Mattison &
Co., Inc. have agreed to act as representatives of the several Underwriters (in
such capacity, the "Representatives") in connection with the offering and sale
of the Common Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-3 (File No.
333-95837), which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration statement,
as amended, including the financial statements, exhibits and schedules thereto,
in the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), all documents incorporated or deemed to be
incorporated by reference therein, including any information deemed to be a part
thereof at the time of effectiveness pursuant to Rule 430A or Rule 434 under the
Securities Act or the Securities Exchange Act of 1934 and the rules and
regulations promulgated thereunder (collectively, the "Exchange Act"), is called
the "Registration Statement." Any registration statement filed by the Company
pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b)
Registration Statement," and from and after the date and time of filing of the
Rule 462(b) Registration Statement the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. Such prospectus, in the form
first used by the Underwriters to confirm sales of the Common Shares, is called
the "Prospectus;" provided, however, if the Company has, with the consent of
Banc of America Securities LLC, elected to rely upon Rule 434 under the
Securities Act, the term "Prospectus" shall mean the Company's prospectus
subject to completion (each, a "preliminary prospectus") dated February 4, 2000
(such preliminary prospectus is called the "Rule 434 preliminary prospectus"),
together with the applicable term sheet (the "Term Sheet") prepared and filed by
the Company with the Commission under Rules 434 and 424(b) under the Securities
Act and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. All references in this Agreement to the
Registration Statement, the Rule 462(b) Registration Statement, a preliminary
prospectus, the Prospectus or the Term Sheet, or any amendments or supplements
to any of the foregoing, shall include any copy thereof filed
<PAGE> 3
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval System ("EDGAR"). All references in this Agreement to financial
statements and schedules and other information which is "contained," "included"
or "stated" in the Registration Statement or the Prospectus (and all other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is or is deemed
to be incorporated by reference in the Registration Statement or the Prospectus,
as the case may be; and all references in this Agreement to amendments or
supplements to the Registration Statement or the Prospectus shall be deemed to
mean and include the filing of any document under the Exchange Act which is or
is deemed to be incorporated by reference in the Registration Statement or the
Prospectus, as the case may be.
The Company hereby confirms its agreements with the Underwriters as
follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the
Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the best knowledge of
the Company, are contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed
complied in all material respects with the Securities Act and, if filed
by electronic transmission pursuant to EDGAR (except as may be permitted
by Regulation S-T under the Securities Act), was identical to the copy
thereof delivered to the Underwriters for use in connection with the
offer and sale of the Common Shares. Each of the Registration Statement,
any Rule 462(b) Registration Statement and any post-effective amendment
thereto, at the time it became effective and at all subsequent times,
complied and will comply in all material respects with the Securities
Act and did not and will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus,
as amended or supplemented, as of its date and at all subsequent times
during which the Prospectus is required to be delivered pursuant to the
Securities Act, did not and will not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading. The representations and warranties
set forth in the two immediately preceding sentences do not apply to
statements in or omissions from the Registration Statement, any Rule
462(b) Registration Statement, or any post-effective amendment thereto,
or the Prospectus, or any amendments or supplements thereto, made in
reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representatives
expressly for use therein. There are no contracts or other documents
required to be described in the Prospectus or to be filed as exhibits to
the Registration Statement which have not been described or filed as
required.
(b) Offering Materials Furnished to Underwriters. The Company
has delivered to the Representatives one photocopy of the manually
signed signature page counterparts to the Registration Statement and of
each consent and certificate of experts filed as a part thereof, and
conformed copies of the Registration Statement (without exhibits) and
preliminary prospectuses and the Prospectus, as amended or supplemented,
in such quantities and at such places as the Representatives have
reasonably requested for each of the Underwriters.
2
<PAGE> 4
(c) Distribution of Offering Material By the Company. The
Company has not distributed and will not distribute, prior to the later
of the Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Common Shares, any offering material
in connection with the offering and sale of the Common Shares other than
a preliminary prospectus, the Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding
agreement of, the Company, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by
general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized
for issuance and sale pursuant to this Agreement and, when issued and
delivered by the Company pursuant to this Agreement, will be validly
issued, fully paid and nonassessable.
(f) No Applicable Registration or Other Similar Rights. There
are no persons with registration or other similar rights to have any
equity or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by this Agreement,
except for such rights as have been duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed in
the Prospectus, subsequent to the respective dates as of which
information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to
result in a material adverse change, in the condition, financial or
otherwise, or in the earnings, business or operations, whether or not
arising from transactions in the ordinary course of business, of the
Company and its Subsidiaries (as defined below), considered as one
entity (any such change is called a "Material Adverse Change"); (ii) the
Company and its Subsidiaries, considered as one entity, have not
incurred any material liability or obligation, indirect, direct or
contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of
business; and (iii) there has been no dividend or distribution of any
kind declared, paid or made by the Company or, except for dividends paid
to the Company or other Subsidiaries, any of its Subsidiaries on any
class of capital stock or repurchase or redemption by the Company or any
of its Subsidiaries of any class of capital stock.
(h) Independent Accountants. Ernst & Young LLP, who have
expressed their opinion with respect to the financial statements (which
term as used in this Agreement includes the related notes thereto) and
supporting schedules filed with the Commission as a part of the
Registration Statement and included in the Prospectus, are independent
public or certified public accountants as required by the Securities Act
and the Exchange Act.
(i) Preparation of the Financial Statements. The financial
statements filed with the Commission as a part of the Registration
Statement and included in the Prospectus present fairly the consolidated
financial position of the Company and its Subsidiaries as of and at the
dates indicated and the results of their operations and cash flows for
the periods specified. The supporting schedules included in the
Registration Statement present fairly the information required to be
stated therein. Such financial statements and supporting schedules have
been prepared in conformity with generally accepted accounting
principles as applied in the United States applied on a consistent basis
throughout the periods involved, except as may be expressly
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<PAGE> 5
stated in the related notes thereto. No other financial statements or
supporting schedules are required to be included in the Registration
Statement. The financial data set forth in the Prospectus under the
captions "Prospectus Summary--Summary Consolidated Financial Data,"
"Selected Consolidated Financial Data" and "Capitalization" fairly
present the information set forth therein on a basis consistent with
that of the audited financial statements contained in the Registration
Statement.
(j) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company and its Subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation and has
corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectus and, in the
case of the Company, to enter into and perform its obligations under
this Agreement. The Company is duly qualified as a foreign corporation
to transact business and is in good standing in the State of California
and each of the Company and each Subsidiary is qualified in each other
jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business,
except for such jurisdictions (other than the State of California) where
the failure to so qualify or to be in good standing would not,
individually or in the aggregate, result in a Material Adverse Change.
All of the issued and outstanding capital stock of each Subsidiary has
been duly authorized and validly issued, is fully paid and
nonassessable. All of the capital stock of Integrated Silicon Solution,
Inc. (Hong Kong Limited) and at least 85% of the capital stock of
Integrated Silicon Solution, Inc. (Suzhou) is owned by the Company,
directly or through Subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance or claim. The Company does
not own or control, directly or indirectly, any corporation, association
or other entity other than Integrated Silicon Solution, Inc. (Hong Kong
Limited) and Integrated Silicon Solution, Inc. (Suzhou) (each a
"Subsidiary" and, collectively, the "Subsidiaries").
(k) Capitalization and Other Capital Stock Matters. The
authorized, issued and outstanding capital stock of the Company is as
set forth in the Prospectus under the caption "Capitalization" (other
than for subsequent issuances, if any, pursuant to employee benefit
plans described in the Prospectus or upon exercise of outstanding
options described in the Prospectus). The Common Stock (including the
Common Shares) conforms in all material respects to the description
thereof contained in the Prospectus. All of the issued and outstanding
shares of Common Stock have been duly authorized and validly issued, are
fully paid and nonassessable and have been issued in compliance with
federal and state securities laws. None of the outstanding shares of
Common Stock were issued in violation of any preemptive rights, rights
of first refusal or other similar rights to subscribe for or purchase
securities of the Company. There are no authorized or outstanding
options, warrants, preemptive rights, rights of first refusal or other
rights to purchase, or equity or debt securities convertible into or
exchangeable or exercisable for, any capital stock of the Company or any
of its Subsidiaries other than those described in the Prospectus. The
description of the Company's stock option, stock bonus and other stock
plans or arrangements, and the options or other rights granted
thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to such plans,
arrangements, options and rights.
(l) Stock Exchange Listing. The Common Stock (including the
Common Shares) is registered pursuant to Section 12(g) of the Securities
Exchange Act of 1934 (the "Exchange Act") and is listed on the Nasdaq
National Market, and the Company has taken no action designed to, or
likely to have the effect of, terminating the registration of the Common
Stock under the Exchange Act or delisting the Common Stock from the
Nasdaq National Market, nor has the Company
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received any notification that the Commission or the National
Association of Securities Dealers, Inc. (the "NASD") is contemplating
terminating such registration or listing.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor any of its
Subsidiaries is in violation of its charter or by-laws or is in default
(or, with the giving of notice or lapse of time, would be in default)
("Default") under any indenture, mortgage, loan or credit agreement,
note, contract, franchise, lease or other instrument to which the
Company or any of its Subsidiaries is a party or by which it or any of
them may be bound, or to which any of the property or assets of the
Company or any of its Subsidiaries is subject (each, an "Existing
Instrument"), except for such Defaults as would not, individually or in
the aggregate, result in a Material Adverse Change. The Company's
execution, delivery and performance of this Agreement and consummation
of the transactions contemplated hereby and by the Prospectus (i) have
been duly authorized by all necessary corporate action and will not
result in any violation of the provisions of the charter or by-laws of
the Company or any Subsidiary, (ii) will not conflict with or constitute
a breach of, or Default or a Debt Repayment Triggering Event (as defined
below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
of its Subsidiaries pursuant to, or require the consent of any other
party to, any Existing Instrument, except for such conflicts, breaches,
Defaults, liens, charges or encumbrances as would not, individually or
in the aggregate, result in a Material Adverse Change and (iii) will not
result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company or any
Subsidiary, except for such violations as would not, individually or in
the aggregate, result in a Material Adverse Change. No consent,
approval, authorization or other order of, or registration or filing
with, any court or other governmental or regulatory authority or agency,
is required for the Company's execution, delivery and performance of
this Agreement and consummation of the transactions contemplated hereby
and by the Prospectus, except such as have been obtained or made by the
Company and are in full force and effect under the Securities Act,
applicable state securities or blue sky laws and from the National
Association of Securities Dealers, Inc. (the "NASD"). As used herein, as
"Debt Repayment Triggering Event" means any event or condition which
gives, or with the giving of notice or lapse of time would give, the
holder of any note, debenture or other evidence of indebtedness (or any
person acting on such holder's behalf) the right to require the
repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any of its Subsidiaries.
(n) No Material Actions or Proceedings. There is no legal or
governmental action, suit or proceeding pending or, to the best of the
Company's knowledge, threatened (i) against the Company or any of its
Subsidiaries, (ii) which has as its subject any officer or director of,
or any material property owned or leased by, the Company or any of its
Subsidiaries or (iii) against or affecting the Company or any of its
Subsidiaries relating to environmental or discrimination matters, where
in any such case (A) there is a reasonable possibility that such action,
suit or proceeding might be determined adversely to the Company or such
Subsidiary and (B) any such action, suit or proceeding, if so determined
adversely, would reasonably be expected to result in a Material Adverse
Change or adversely affect the consummation of the transactions
contemplated by this Agreement. No material labor dispute exists with
the employees of the Company or any of its Subsidiaries or, to the best
of the Company's knowledge, with the employees of any principal supplier
of the Company; and, to the best of the Company's knowledge, no such
labor dispute is threatened or imminent.
(o) Intellectual Property Rights. The Company and its
Subsidiaries own or possess sufficient trademarks, trade names, patent
rights, copyrights, licenses, approvals, trade secrets and other similar
rights (collectively, "Intellectual Property Rights") reasonably
necessary to conduct
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<PAGE> 7
their businesses as now conducted; and the expected expiration of any of
such Intellectual Property Rights would not result in a Material Adverse
Change. Except as described in the Prospectus, neither the Company nor
any of its Subsidiaries has received any notice of infringement or
conflict with asserted Intellectual Property Rights of others, which
infringement or conflict, if the subject of an unfavorable decision,
would result in a Material Adverse Change.
(p) All Necessary Permits, etc. The Company and each Subsidiary
possess such valid and current certificates, authorizations or permits
issued by the appropriate state, federal or foreign regulatory agencies
or bodies necessary to conduct their respective businesses, and neither
the Company nor any Subsidiary has received any notice of proceedings
relating to the revocation or modification of, or non-compliance with,
any such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
could result in a Material Adverse Change.
(q) Title to Properties. The Company and each of its
Subsidiaries has good and marketable title to all the properties and
assets reflected as owned in the financial statements referred to in
Section 1(i) above (or elsewhere in the Prospectus), in each case free
and clear of any security interests, mortgages, liens, encumbrances,
equities, claims and other defects, except such as do not materially and
adversely affect the value of such property and do not materially
interfere with the use made or proposed to be made of such property by
the Company or such Subsidiary. The real property, improvements,
equipment and personal property held under lease by the Company or any
Subsidiary are held under valid and enforceable leases, with such
exceptions as are not material and do not materially interfere with the
use made or proposed to be made of such real property, improvements,
equipment or personal property by the Company or such Subsidiary.
(r) Tax Law Compliance. The Company and its consolidated
Subsidiaries have filed all necessary federal, state and foreign income
and franchise tax returns and have paid all taxes shown as due thereon
to the extent due to be paid prior to the date hereof and, to the extent
not so due, have made adequate reserves on their financial statements;
and the Company has no knowledge of any tax deficiency that has been or
might be asserted or threatened against the Company or its consolidated
Subsidiaries that could result in a Material Adverse Change.
(s) Company Not an "Investment Company". The Company has been
advised of the rules and requirements under the Investment Company Act
of 1940, as amended (the "Investment Company Act"). The Company is not,
and after receipt of payment for the Common Shares will not be, an
"investment company" within the meaning of Investment Company Act and
will conduct its business in a manner so that it will not become subject
to the Investment Company Act.
(t) Exchange Act Compliance. The documents incorporated by
reference in the Prospectus, at the time they were or hereafter are
filed with the Commission, complied and will comply in all material
respects with the requirements of the Exchange Act, and, when read
together with the other information in the Prospectus, at the time of
the Registration Statement and any amendments thereto become effective
and at the First Closing Date and the Second Closing Date, as the case
may be, will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements herein, in the light of the circumstances under
which they were made, not misleading.
(u) Insurance. Each of the Company and its Subsidiaries are
insured by recognized, financially sound and reputable institutions with
policies in such amounts and with such
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deductibles and covering such risks as are generally deemed adequate and
customary for their businesses including, but not limited to, policies
covering real and personal property owned or leased by the Company and
its Subsidiaries against theft, damage, destruction, acts of vandalism
and earthquakes. The Company has no reason to believe that it or any
Subsidiary will not be able (i) to renew its existing insurance coverage
as and when such policies expire or (ii) to obtain comparable coverage
from similar institutions as may be necessary or appropriate to conduct
its business as now conducted and at a cost that would not result in a
Material Adverse Change.
(v) No Price Stabilization or Manipulation. The Company has not
taken and will not take, directly or indirectly, any action designed to
or that might be reasonably expected to cause or result in stabilization
or manipulation of the price of the Common Stock to facilitate the sale
or resale of the Common Shares.
(w) Related Party Transactions. There are no business
relationships or related-party transactions involving the Company or any
Subsidiary or any other person required to be described in the
Prospectus which have not been described as required.
(x) No Unlawful Contributions or Other Payments. Neither the
Company nor any of its Subsidiaries nor, to the best of the Company's
knowledge, any employee or agent of the Company or any Subsidiary, has
made any contribution or other payment to any official of, or candidate
for, any federal, state or foreign office in violation of any law or of
the character required to be disclosed in the Prospectus.
(y) Company's Accounting System. The Company maintains a system
of accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles as applied in the United States and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(z) Compliance with Environmental Laws. Except as would not,
individually or in the aggregate, result in a Material Adverse Change
(i) neither the Company nor any of its Subsidiaries is in violation of
any federal, state, local or foreign law or regulation relating to
pollution or protection of human health or the environment (including,
without limitation, ambient air, surface water, groundwater, land
surface or subsurface strata) or wildlife, including without limitation,
laws and regulations relating to emissions, discharges, releases or
threatened releases of chemicals, pollutants, contaminants, wastes,
toxic substances, hazardous substances, petroleum and petroleum products
(collectively, "Materials of Environmental Concern"), or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environment
Concern (collectively, "Environmental Laws"), which violation includes,
but is not limited to, noncompliance with any permits or other
governmental authorizations required for the operation of the business
of the Company or its Subsidiaries under applicable Environmental Laws,
or noncompliance with the terms and conditions thereof, nor has the
Company or any of its Subsidiaries received any written communication,
whether from a governmental authority, citizens group, employee or
otherwise, that alleges that the Company or any of its Subsidiaries is
in violation of any Environmental Law; (ii) there is no claim, action or
cause of action filed with a court or governmental authority, no
investigation with respect to which the Company has received written
notice, and no written notice by any person or entity alleging potential
liability for investigatory costs, cleanup costs,
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governmental responses costs, natural resources damages, property
damages, personal injuries, attorneys' fees or penalties arising out of,
based on or resulting from the presence, or release into the
environment, of any Material of Environmental Concern at any location
owned, leased or operated by the Company or any of its Subsidiaries, now
or in the past (collectively, "Environmental Claims"), pending or, to
the best of the Company's knowledge, threatened against the Company or
any of its Subsidiaries or any person or entity whose liability for any
Environmental Claim the Company or any of its Subsidiaries has retained
or assumed either contractually or by operation of law; and (iii) to the
best of the Company's knowledge, there are no past or present actions,
activities, circumstances, conditions, events or incidents, including,
without limitation, the release, emission, discharge, presence or
disposal of any Material of Environmental Concern, that reasonably could
result in a violation of any Environmental Law or form the basis of a
potential Environmental Claim against the Company or any of its
Subsidiaries or against any person or entity whose liability for any
Environmental Claim the Company or any of its Subsidiaries has retained
or assumed either contractually or by operation of law.
(aa) Periodic Review of Costs of Environmental Compliance. From
time to time, the Company monitors the effect of Environmental Laws on
the business, operations and properties of the Company and its
Subsidiaries, in the course of which it identifies and evaluates
associated costs and liabilities. On the basis of such review and the
amount of its established reserves, the Company has reasonably concluded
that such associated costs and liabilities would not, individually or in
the aggregate, result in a Material Adverse Change.
(bb) ERISA Compliance. The Company and its Subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or
maintained by the Company, its Subsidiaries or their "ERISA Affiliates"
(as defined below) are in compliance in all material respects with
ERISA. "ERISA Affiliate" means, with respect to the Company or a
Subsidiary, any member of any group of organizations described in
Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986,
as amended, and the regulations and published interpretations thereunder
(the "Code") of which the Company or such Subsidiary is a member. No
"reportable event" (as defined under ERISA) has occurred or is
reasonably expected to occur with respect to any "employee benefit plan"
established or maintained by the Company, its Subsidiaries or any of
their ERISA Affiliates. No "employee benefit plan" established or
maintained by the Company, its Subsidiaries or any of their ERISA
Affiliates, if such "employee benefit plan" were terminated, would have
any "amount of unfunded benefit liabilities" (as defined under ERISA).
Neither the Company, its Subsidiaries nor any of their ERISA Affiliates
has incurred or reasonably expects to incur any liability under (i)
Title IV of ERISA with respect to termination of, or withdrawal from,
any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of
the Code. Each "employee benefit plan" established or maintained by the
Company, its Subsidiaries or any of their ERISA Affiliates that is
intended to be qualified under Section 401(a) of the Code is so
qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
(cc) Year 2000. The Company has not and will not incur
additional significant operating expenses or costs to ensure that its
information systems will continue to be year 2000 complaint, other than
as disclosed in the Prospectus.
Any certificate signed by an officer of the Company and
delivered to the Representatives shall be deemed to be a representation and
warranty by the Company to each Underwriter as to the matters set forth therein.
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SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
(a) The Firm Common Shares. The Company agrees to issue and sell
to the several Underwriters the Firm Common Shares upon the terms herein
set forth. On the basis of the representations, warranties and
agreements herein contained, and upon the terms but subject to the
conditions herein set forth, the Underwriters agree, severally and not
jointly, to purchase from the Company the respective number of Firm
Common Shares set forth opposite their names on Schedule A. The purchase
price per Firm Common Share to be paid by the several Underwriters to
the Company shall be $___ per share.
(b) The First Closing Date. Delivery of certificates for the
Firm Common Shares to be purchased by the Underwriters and payment
therefor shall be made at the offices of Banc of America Securities LLC,
600 Montgomery Street, San Francisco, California (or such other place as
may be agreed to by the Company and the Representatives) at 6:00 a.m.
San Francisco time, on March __, 2000, or such other time and date not
later than 10:30 a.m. San Francisco time, on March __, 2000 as the
Representatives shall designate by notice to the Company (the time and
date of such closing are called the "First Closing Date"). The Company
hereby acknowledges that circumstances under which the Representatives
may provide notice to postpone the First Closing Date as originally
scheduled include, but are in no way limited to, any determination by
the Company or the Representatives to recirculate to the public copies
of an amended or supplemented Prospectus or a delay as contemplated by
the provisions of Section 10.
(c) The Optional Common Shares; the Second Closing Date. In
addition, on the basis of the representations, warranties and agreements
herein contained, and upon the terms but subject to the conditions
herein set forth, the Company hereby grants an option to the several
Underwriters to purchase, severally and not jointly, up to an aggregate
of 495,000 Optional Common Shares from the Company at the purchase price
per share to be paid by the Underwriters for the Firm Common Shares. The
option granted hereunder is for use by the Underwriters solely in
covering any over-allotments in connection with the sale and
distribution of the Firm Common Shares. The option granted hereunder may
be exercised at any time (but not more than once) upon notice by the
Representatives to the Company, which notice may be given at any time
within 30 days from the date of this Agreement. Such notice shall set
forth (i) the aggregate number of Optional Common Shares as to which the
Underwriters are exercising the option, (ii) the names and denominations
in which the certificates for the Optional Common Shares are to be
registered and (iii) the time, date and place at which such certificates
will be delivered (which time and date may be simultaneous with, but not
earlier than, the First Closing Date; and in such case the term "First
Closing Date" shall refer to the time and date of delivery of
certificates for the Firm Common Shares and the Optional Common Shares).
Such time and date of delivery, if subsequent to the First Closing Date,
is called the "Second Closing Date" and shall be determined by the
Representatives and shall not be earlier than three nor later than five
full business days after delivery of such notice of exercise. If any
Optional Common Shares are to be purchased, each Underwriter agrees,
severally and not jointly, to purchase the number of Optional Common
Shares (subject to such adjustments to eliminate fractional shares as
the Representatives may determine) that bears the same proportion to the
total number of Optional Common Shares to be purchased as the number of
Firm Common Shares set forth on Schedule A opposite the name of such
Underwriter bears to the total number of Firm Common Shares. The
Representatives may cancel the option at any time prior to its
expiration by giving written notice of such cancellation to the Company.
(d) Public Offering of the Common Shares. The Representatives
hereby advise the Company that the Underwriters intend to offer for sale
to the public, as described in the
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Prospectus, their respective portions of the Common Shares as soon after
this Agreement has been executed and the Registration Statement has been
declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.
(e) Payment for the Common Shares. Payment for the Common Shares
shall be made at the First Closing Date (and, if applicable, at the
Second Closing Date) by wire transfer of immediately available funds to
the order of the Company.
It is understood that the Representatives have been
authorized, for its own account and the accounts of the several
Underwriters, to accept delivery of and receipt for, and make payment of
the purchase price for, the Firm Common Shares and any Optional Common
Shares the Underwriters have agreed to purchase. Banc of America
Securities LLC, individually and not as the Representatives of the
Underwriters, may (but shall not be obligated to) make payment for any
Common Shares to be purchased by any Underwriter whose funds shall not
have been received by the Representatives by the First Closing Date or
the Second Closing Date, as the case may be, for the account of such
Underwriter, but any such payment shall not relieve such Underwriter
from any of its obligations under this Agreement.
(f) Delivery of the Common Shares. The Company shall deliver, or
cause to be delivered, to the Representatives for the accounts of the
several Underwriters certificates for the Firm Common Shares at the
First Closing Date, against the irrevocable release of a wire transfer
of immediately available funds for the amount of the purchase price
therefor. The Company shall also deliver, or cause to be delivered, to
the Representatives for the accounts of the several Underwriters,
certificates for the Optional Common Shares the Underwriters have agreed
to purchase at the First Closing Date or the Second Closing Date, as the
case may be, against the irrevocable release of a wire transfer of
immediately available funds for the amount of the purchase price
therefor. The certificates for the Common Shares shall be in definitive
form and registered in such names and denominations as the
Representatives shall have requested at least two full business days
prior to the First Closing Date (or the Second Closing Date, as the case
may be) and shall be made available for inspection on the business day
preceding the First Closing Date (or the Second Closing Date, as the
case may be) at a location in New York City as the Representatives may
designate. Time shall be of the essence, and delivery at the time and
place specified in this Agreement is a further condition to the
obligations of the Underwriters.
(g) Delivery of Prospectus to the Underwriters. Not later than
12:00 p.m. on the second business day following the date the Common
Shares are released by the Underwriters for sale to the public, the
Company shall deliver or cause to be delivered copies of the Prospectus
in such quantities and at such places as the Representatives shall
request.
SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY. The Company further
covenants and agrees with each Underwriter as follows:
(a) Representatives' Review of Proposed Amendments and
Supplements. During such period beginning on the date hereof and ending
on the later of the First Closing Date or such date, as in the opinion
of counsel for the Underwriters, the Prospectus is no longer required by
law to be delivered in connection with sales by an Underwriter or dealer
(the "Prospectus Delivery Period"), prior to amending or supplementing
the Registration Statement (including any registration statement filed
under Rule 462(b) under the Securities Act) or the Prospectus (including
any amendment or supplement through incorporation by reference of any
report filed under the Exchange Act), the Company shall furnish to the
Representatives for review a copy of
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each such proposed amendment or supplement, and the Company shall not
file any such proposed amendment or supplement to which the
Representatives reasonably object.
(b) Securities Act Compliance. After the date of this Agreement,
the Company shall promptly advise the Representatives (i) of the receipt
of any comments of, or requests for additional or supplemental
information from, the Commission, (ii) of the time and date of any
filing of any post-effective amendment to the Registration Statement or
any amendment or supplement to any preliminary prospectus or the
Prospectus, (iii) of the time and date that any post-effective amendment
to the Registration Statement becomes effective and (iv) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or of any
order preventing or suspending the use of any preliminary prospectus or
the Prospectus, or of any proceedings to remove, suspend or terminate
from listing or quotation the Common Stock from any securities exchange
upon which the Common Stock is listed for trading or included or
designated for quotation, or of the threatening or initiation of any
proceedings for any of such purposes. If the Commission shall enter any
such stop order at any time, the Company will use its best efforts to
obtain the lifting of such order at the earliest possible moment.
Additionally, the Company agrees that it shall comply with the
provisions of Rules 424(b), 430A and 434, as applicable, under the
Securities Act and will use its reasonable efforts to confirm that any
filings made by the Company under such Rule 424(b) were received in a
timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other
Securities Act Matters. If, during the Prospectus Delivery Period, any
event shall occur or condition exist as a result of which it is
necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if in the
opinion of the Representatives or counsel for the Underwriters it is
otherwise necessary to amend or supplement the Prospectus to comply with
law, the Company agrees promptly to prepare (subject to Section 3(A)(a)
hereof), file with the Commission and furnish at its own expense to the
Underwriters and to dealers, amendments or supplements to the Prospectus
so that the statements in the Prospectus as so amended or supplemented
will not, in the light of the circumstances when the Prospectus is
delivered to a purchaser, be misleading or so that the Prospectus, as
amended or supplemented, will comply with law.
(d) Copies of any Amendments and Supplements to the Prospectus.
The Company agrees to furnish the Representatives, without charge,
during the Prospectus Delivery Period, as many copies of the Prospectus
and any amendments and supplements thereto (including any documents
incorporated or deemed incorporated by reference therein) as the
Representatives may reasonably request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register
the Common Shares for sale under (or obtain exemptions from the
application of) the state securities or blue sky laws or Canadian
provincial securities laws or securities laws of those jurisdictions
designated by the Representatives, shall comply with such laws and shall
continue such qualifications, registrations and exemptions in effect so
long as required for the distribution of the Common Shares. The Company
shall not be required to qualify as a foreign corporation or to take any
action that would subject it to general service of process in any such
jurisdiction where it is not presently qualified or where it would be
subject to taxation as a foreign corporation. The Company will advise
the Representatives promptly of the suspension of the qualification or
registration of (or any such exemption relating to) the Common Shares
for offering, sale or trading in any jurisdiction or any
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initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification,
registration or exemption, the Company shall use its best efforts to
obtain the withdrawal thereof at the earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds
from the sale of the Common Shares sold by it in the manner described
under the caption "Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at
its expense, a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company will
make generally available to its security holders and to the
Representatives an earnings statement (which need not be audited)
covering the twelve-month period ending March 31, 2001 that satisfies
the provisions of Section 11(a) of the Securities Act.
(i) Periodic Reporting Obligations. During the Prospectus
Delivery Period the Company shall file, on a timely basis, with the
Commission and the Nasdaq National Market all reports and documents
required to be filed under the Exchange Act.
(j) Company to Provide Copy of the Prospectus in Form That May
be Downloaded from the Internet. The Company shall cause to be prepared
and delivered, at its expense, within one business day from the
effective date of this Agreement, to SoundView Technology Group, Inc. an
"electronic Prospectus" to be used by such Underwriter in connection
with the offering and sale of the Common Shares. As used herein, the
term "electronic Prospectus" means a form of Prospectus, and any
amendment or supplement thereto, that meets each of the following
conditions: (i) it shall be encoded in an electronic format, reasonably
satisfactory to Banc of America Securities LLC and SoundView Technology
Group, Inc., that may be transmitted electronically by SoundView
Technology Group, Inc. to offerees and purchasers of the Common Shares
for at least the Prospectus Delivery Period; (ii) it shall disclose the
same information as the paper Prospectus and Prospectus filed pursuant
to EDGAR, except to the extent that graphic and image material cannot be
disseminated electronically, in which case such graphic and image
material shall be replaced in the electronic Prospectus with a fair and
accurate narrative description or tabular representation of such
material, as appropriate; and (iii) it shall be in or convertible into a
paper format or an electronic format, reasonably satisfactory to Banc of
America Securities LLC and SoundView Technology Group, Inc., that will
allow investors to store and have continuously ready access to the
Prospectus at any future time, without charge to investors (other than
any fee charged for subscription to the system as a whole and for
on-line time). Such electronic Prospectus may consist of a Rule 434
preliminary prospectus, together with the applicable Term Sheet,
provided that it otherwise satisfies the format and conditions described
in the immediately preceding sentence. The Company hereby confirms that
it has included or will include in the Prospectus filed pursuant to
EDGAR or otherwise with the Commission and in the Registration Statement
at the time it was declared effective an undertaking that, upon receipt
of a request by an investor or his or her representative within the
Prospectus Delivery Period, the Company shall transmit or cause to be
transmitted promptly, without charge, a paper copy of the Prospectus.
(k) Agreement Not To Offer or Sell Additional Securities. During
the period of 90 days following the date of the Prospectus, the Company
will not, without the prior written consent of Banc of America
Securities LLC (which consent may be withheld at the sole discretion of
Banc of America Securities LLC), directly or indirectly, sell, offer,
contract or grant
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any option to sell, pledge, transfer or establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the
Exchange Act, or otherwise dispose of or transfer, or announce the
offering of, or file any registration statement under the Securities Act
in respect of, any shares of Common Stock, options or warrants to
acquire shares of the Common Stock or securities exchangeable or
exercisable for or convertible into shares of Common Stock (other than
as contemplated by this Agreement with respect to the Common Shares);
provided, however, that the Company may issue shares of its Common Stock
or options to purchase its Common Stock, or Common Stock upon exercise
of options, pursuant to any stock option, stock bonus, employee stock
purchase or other stock plan or arrangement described in the Prospectus.
(l) Future Reports to the Representatives. During the period of
five years hereafter the Company will furnish to the Representatives at
600 Montgomery Street, San Francisco, CA 94111, and to O'Melveny & Myers
LLP at the address set forth in Section 13: (i) as soon as practicable
after the end of each fiscal year, copies of the Annual Report of the
Company containing the balance sheet of the Company as of the close of
such fiscal year and statements of income, stockholders' equity and cash
flows for the year then ended and the opinion thereon of the Company's
independent public or certified public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement,
Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current
Report on Form 8-K filed by the Company with the Commission, the NASD or
any securities exchange; and (iii) as soon as available, copies of any
report or communication of the Company mailed generally to holders of
its capital stock.
(m) Exchange Act Compliance. During the Prospectus Delivery
Period, the Company will file all documents required to be filed with
the Commission pursuant to Section 13, 14 or 15 of the Exchange Act in
the manner and within the time periods required by the Exchange Act.
Banc of America Securities LLC, on behalf of the several
Underwriters, may, in its sole discretion, waive in writing the performance by
the Company of any one or more of the foregoing covenants or extend the time for
their performance.
SECTION 4. PAYMENT OF EXPENSES. The Company agrees to pay all costs,
fees and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of
the Company's counsel, independent public or certified public accountants and
other advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Common Shares for offer
and sale under the state securities or blue sky laws or the provincial
securities laws of Canada, and, if requested by the Representatives, preparing
and printing a "Blue Sky Survey" or memorandum, and any supplements thereto,
advising the Underwriters of such qualifications, registrations and exemptions,
(vii) the filing fees incident to, and the reasonable fees and expenses of
counsel for the Underwriters in connection with, the NASD's review and approval
of the Underwriters' participation in the offering and distribution of the
Common Shares, (viii) the fees and expenses associated with listing the Common
Shares on the Nasdaq National Market, and (ix) all other fees, costs and
expenses referred to in Item 14 of Part II of the
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<PAGE> 15
Registration Statement. Except as provided in this Section 4, Section 6, Section
8 and Section 9 hereof, the Underwriters shall pay their own expenses, including
the fees and disbursements of their counsel.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company set
forth in Section 1 hereof as of the date hereof and as of the First Closing Date
as though then made and, with respect to the Optional Common Shares, as of the
Second Closing Date as though then made, to the timely performance by the
Company of its covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the
Representatives shall have received from Ernst & Young LLP, independent
public or certified public accountants for the Company, a letter dated
the date hereof addressed to the Underwriters, in form and substance
satisfactory to the Representatives, containing statements and
information of the type ordinarily included in accountant's "comfort
letters" to underwriters, delivered according to Statement of Auditing
Standards No. 72 (or any successor bulletin), with respect to the
audited and unaudited financial statements and certain financial
information contained in the Registration Statement and the Prospectus
(and the Representatives shall have received one additional conformed
copy of such accountants' letter for each of the several Underwriters).
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A
under the Securities Act) in the manner and within the time
period required by Rule 424(b) under the Securities Act; or the
Company shall have filed a post-effective amendment to the
Registration Statement containing the information required by
such Rule 430A, and such post-effective amendment shall have
become effective; or, if the Company elected to rely upon Rule
434 under the Securities Act and obtained the Representatives'
consents thereto, the Company shall have filed a Term Sheet with
the Commission in the manner and within the time period required
by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement,
or any post-effective amendment to the Registration Statement,
shall be in effect and no proceedings for such purpose shall
have been instituted or threatened by the Commission; and
(iii) the NASD shall have raised no objection to the
fairness and reasonableness of the underwriting terms and
arrangements.
(c) No Material Adverse Change or Ratings Agency Change. For the
period from and after the date of this Agreement and prior to the First
Closing Date and, with respect to the Optional Common Shares, the Second
Closing Date:
(i) in the judgment of the Representatives there shall not
have occurred any Material Adverse Change; and
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<PAGE> 16
(ii) there shall not have occurred any downgrading, nor
shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not
indicate the direction of the possible change, in the rating
accorded any securities of the Company or any of its
Subsidiaries by any "nationally recognized statistical rating
organization" as such term is defined for purposes of Rule
436(g)(2) under the Securities Act.
(d) Opinion of Counsel for the Company. On each of the First
Closing Date and the Second Closing Date the Representatives shall have
received the opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, counsel for the Company, dated as of such Closing Date, the
form of which is attached as Exhibit A (and the Representatives shall
have received one additional conformed copy of such counsel's legal
opinion for each of the several Underwriters).
(e) Opinion of Patent Counsel for the Company. On each of the
First Closing Date and the Second Closing Date the Representatives shall
have received the opinion of intellectual property counsel for the
Company, in form and substance reasonably satisfactory to the
Representatives (and the Representatives shall have received one
additional conformed copies of such counsel's legal opinion for each of
the several Underwriters).
(f) Opinion of Counsel for the Underwriters. On each of the
First Closing Date and the Second Closing Date the Representatives shall
have received the favorable opinion of O'Melveny & Myers LLP, counsel
for the Underwriters, dated as of such Closing Date, with respect to the
matters set forth in paragraphs (i), (vii) (with respect to subparagraph
(i) only), (viii), (ix), (x), (xi) and (xiii) (with respect to the
caption "Underwriting" under subparagraph (i) only), and the
next-to-last paragraph of Exhibit A (and the Representatives shall have
received one additional conformed copy of such counsel's legal opinion
for each of the several Underwriters).
(g) Officers' Certificate. On each of the First Closing Date and
the Second Closing Date the Representatives shall have received a
written certificate executed by the Chairman of the Board, Chief
Executive Officer or President of the Company and the Chief Financial
Officer or Chief Accounting Officer of the Company, dated as of such
Closing Date, to the effect set forth in subsections (b)(ii) and (c)(ii)
of this Section 5, and further to the effect that:
(i) for the period from and after the date of this Agreement
and prior to such Closing Date, there has not occurred any
Material Adverse Change;
(ii) the representations, warranties and covenants of the
Company set forth in Section 1 of this Agreement are true and
correct with the same force and effect as though expressly made
on and as of such Closing Date; and
(iii) the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or
satisfied at or prior to such Closing Date.
(h) Bring-down Comfort Letter. On each of the First Closing Date
and the Second Closing Date the Representatives shall have received from
Ernst & Young LLP, independent public or certified public accountants
for the Company, a letter dated such date, in form and substance
satisfactory to the Representatives, to the effect that they reaffirm
the statements made in the letter furnished by them pursuant to
subsection (a) of this Section 5, except that the specified date
referred to therein for the carrying out of procedures shall be no more
than three business days prior to the First Closing Date or Second
Closing Date, as the case may be (and the
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<PAGE> 17
Representatives shall have received one additional conformed copy of
such accountants' letter for each of the several Underwriters).
(i) Lock-Up Agreement from Certain Stockholders of the Company.
On the date hereof, the Company shall have furnished to the
Representatives an agreement in the form of Exhibit B hereto from each
director and executive officer of the Company, and such agreement shall
be in full force and effect on each of the First Closing Date and the
Second Closing Date.
(j) Additional Documents. On or before each of the First Closing
Date and the Second Closing Date, the Representatives and counsel for
the Underwriters shall have received such information, documents and
opinions as they may reasonably require for the purposes of enabling
them to pass upon the issuance and sale of the Common Shares as
contemplated herein, or in order to evidence the accuracy of any of the
representations and warranties, or the satisfaction of any of the
conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied
when and as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Common Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 4, Section 6, Section
8 and Section 9 shall at all times be effective and shall survive such
termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is
terminated by the Representatives pursuant to Section 5, Section 7, Section 10
or Section 11, or if the sale to the Underwriters of the Common Shares on the
First Closing Date is not consummated because of any refusal, inability or
failure on the part of the Company to perform any agreement herein or to comply
with any provision hereof, the Company agrees to reimburse the Representatives
and the other Underwriters (or such Underwriters as have terminated this
Agreement with respect to themselves), severally, upon demand for all
out-of-pocket expenses that shall have been reasonably incurred by the
Representatives and the Underwriters in connection with the proposed purchase
and the offering and sale of the Common Shares, including but not limited to
fees and disbursements of counsel, printing expenses, travel expenses, postage,
facsimile and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company of the effectiveness of the Registration Statement
under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part (a) of the Company to any Underwriter,
except that the Company shall be obligated to reimburse the expenses of the
Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of
any Underwriter to the Company, or (c) of any party hereto to any other party
except that the provisions of Section 8 and Section 9 shall at all times be
effective and shall survive such termination.
SECTION 8. INDEMNIFICATION.
(a) Indemnification of the Underwriters. The Company agrees to
indemnify and hold harmless each Underwriter, its officers and
employees, and each person, if any, who controls any Underwriter within
the meaning of the Securities Act and the Exchange Act against any loss,
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<PAGE> 18
claim, damage, liability or expense, as incurred, to which such
Underwriter or such controlling person may become subject, under the
Securities Act, the Exchange Act or other federal or state statutory law
or regulation, or at common law or otherwise (including in settlement of
any litigation, if such settlement is effected with the written consent
of the Company), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out
of or is based (i) upon any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement, or any
amendment thereto, including any information deemed to be a part thereof
pursuant to Rule 430A or Rule 434 under the Securities Act, or the
omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not
misleading; or (ii) upon any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the omission
or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; or (iii) in whole or in part upon
any inaccuracy in the representations and warranties of the Company
contained herein; or (iv) in whole or in part upon any failure of the
Company to perform its obligations hereunder or under law; or (v) any
act or failure to act or any alleged act or failure to act by any
Underwriter in connection with, or relating in any manner to, the Common
Stock or the offering contemplated hereby, and which is included as part
of or referred to in any loss, claim, damage, liability or action
arising out of or based upon any matter covered by clause (i) or (ii)
above, provided that the Company shall not be liable under this clause
(v) to the extent that a court of competent jurisdiction shall have
determined by a final judgment that such loss, claim, damage, liability
or action resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such Underwriter through its gross
negligence or willful misconduct; and to reimburse each Underwriter and
each such controlling person for any and all reasonable expenses
(including the reasonable fees and disbursements of counsel chosen by
Banc of America Securities LLC) as such expenses are reasonably incurred
by such Underwriter or such controlling person in connection with
investigating, defending, settling, compromising or paying any such
loss, claim, damage, liability, expense or action; provided, however,
that the foregoing indemnity agreement shall not apply to any loss,
claim, damage, liability or expense to the extent, but only to the
extent, arising out of or based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon
and in conformity with written information furnished to the Company by
the Representatives expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); and provided, further, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the
benefit of any Underwriter from whom the person asserting any loss,
claim, damage, liability or expense purchased Common Shares, or any
person controlling such Underwriter, if copies of the Prospectus were
timely delivered to the Underwriter pursuant to Section 2 and a copy of
the Prospectus (as then amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) was not sent or
given by or on behalf of such Underwriter to such person, if required by
law so to have been delivered, at or prior to the written confirmation
of the sale of the Common Shares to such person, and if the Prospectus
(as so amended or supplemented) would have cured the defect giving rise
to such loss, claim, damage, liability or expense. The indemnity
agreement set forth in this Section 8(a) shall be in addition to any
liabilities that the Company may otherwise have.
(b) Indemnification of the Company, its Directors and Officers.
Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, each of its directors, each of its officers
who signed the Registration Statement and each person, if any, who
controls the Company within the meaning of the Securities Act or the
Exchange Act, against any loss, claim, damage, liability or expense, as
incurred, to which the Company, or any such director,
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officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of
any litigation, if such settlement is effected with the written consent
of such Underwriter), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out
of or is based upon any untrue or alleged untrue statement of a material
fact contained in the Registration Statement, any preliminary prospectus
or the Prospectus (or any amendment or supplement thereto), or arises
out of or is based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent,
but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the Prospectus (or any amendment
or supplement thereto), in reliance upon and in conformity with written
information furnished to the Company by the Representatives expressly
for use therein; and to reimburse the Company, or any such director,
officer or controlling person for any legal and other expense reasonably
incurred by the Company, or any such director, officer or controlling
person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense
or action. The Company hereby acknowledges that the only information
that the Underwriters have furnished to the Company expressly for use in
the Registration Statement, any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto) are the statements set forth in
the table in the first paragraph and as the third, ninth, tenth,
eleventh, twelfth, thirteenth [and fourteenth] paragraphs under the
caption "Underwriting" in the Prospectus; and the Underwriters confirm
that such statements are correct. The indemnity agreement set forth in
this Section 8(b) shall be in addition to any liabilities that each
Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly
after receipt by an indemnified party under this Section 8 of notice of
the commencement of any action, such indemnified party will, if a claim
in respect thereof is to be made against an indemnifying party under
this Section 8, notify the indemnifying party in writing of the
commencement thereof, but the omission so to notify the indemnifying
party will not relieve it from any liability hereunder to the extent it
is not materially prejudiced as a proximate result of such failure and
in any event shall not relieve it from any liability which it may have
otherwise than on account of this indemnity agreement. In case any such
action is brought against any indemnified party and such indemnified
party seeks or intends to seek indemnity from an indemnifying party, the
indemnifying party will be entitled to participate in, and, to the
extent that it shall elect, jointly with all other indemnifying parties
similarly notified, by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified
party, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably
concluded that a conflict may arise between the positions of the
indemnifying party and the indemnified party in conducting the defense
of any such action or that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional
to those available to the indemnifying party, the indemnified party or
parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of
notice from the indemnifying party to such indemnified party of such
indemnifying party's election so to assume the defense of such action
and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for
any legal or other expenses subsequently incurred by such indemnified
party in connection with the defense thereof unless (i) the indemnified
party shall have employed separate counsel in accordance with the
proviso to the next preceding
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sentence (it being understood, however, that the indemnifying party
shall not be liable for the expenses of more than one separate counsel
(together with local counsel), approved by the indemnifying party (Banc
of America Securities LLC in the case of Section 8(b) and Section 9),
representing the indemnified parties who are parties to such action) or
(ii) the indemnifying party shall not have employed counsel satisfactory
to the indemnified party to represent the indemnified party within a
reasonable time after notice of commencement of the action, in each of
which cases the fees and expenses of counsel shall be at the expense of
the indemnifying party.
(d) Settlements. The indemnifying party under this Section 8
shall not be liable for any settlement of any proceeding effected
without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party
agrees to indemnify the indemnified party against any loss, claim,
damage, liability or expense by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified
party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by
Section 8(c) hereof, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written
consent if (i) such settlement is entered into more than 60 days after
receipt by such indemnifying party of the aforesaid request and (ii)
such indemnifying party shall not have reimbursed the indemnified party
in accordance with such request prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement, compromise or consent to the
entry of judgment in any pending or threatened action, suit or
proceeding in respect of which any indemnified party is or could have
been a party and indemnity was or could have been sought hereunder by
such indemnified party, unless such settlement, compromise or consent
includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding.
SECTION 9. CONTRIBUTION.
If the indemnification provided for in Section 8 is for any
reason held to be unavailable to or otherwise insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount paid or payable by such indemnified party, as incurred, as
a result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, on the one hand, and the Underwriters, on the
other hand, from the offering of the Common Shares pursuant to this Agreement or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company, on the one hand, and the Underwriters, on the other hand, in
connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company, on the one hand,
and the Underwriters, on the other hand, in connection with the offering of the
Common Shares pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the Common
Shares pursuant to this Agreement (before deducting expenses) received by the
Company, and the total underwriting discount received by the Underwriters, in
each case as set forth on the front cover page of the Prospectus (or, if Rule
434 under the Securities Act is used, the corresponding location on the Term
Sheet) bear to the aggregate initial public offering price of the Common Shares
as set forth on such cover. The relative fault of the Company, on the one hand,
and the Underwriters, on the other hand, shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact or any
such inaccurate or alleged inaccurate representation or warranty relates to
information supplied by the Company, on the one hand, or the Underwriters, on
the other hand,
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and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 8(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 8(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 9; provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 8(c) for purposes of indemnification.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter
shall be required to contribute any amount in excess of the underwriting
commissions received by such Underwriter in connection with the Common Shares
underwritten by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Common
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Representatives with the consent of the non-defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Common Shares and the
aggregate number of Common Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Common Shares to be purchased on such
date, and arrangements satisfactory to the Representatives and the Company for
the purchase of such Common Shares are not made within 48 hours after such
default, this Agreement shall terminate without liability of any party to any
other party except that the provisions of Section 4, Section 6, Section 8 and
Section 9 shall at all times be effective and shall survive such termination. In
any such case either the Representatives or the Company shall have the right to
postpone the First Closing Date or the Second Closing Date, as the case may be,
but in no event for longer than seven days in order that the required
20
<PAGE> 22
changes, if any, to the Registration Statement and the Prospectus or any other
documents or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing
Date this Agreement may be terminated by the Representatives by notice given to
the Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq Stock Market, or trading in securities generally on either the Nasdaq
Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been generally established on
any of such stock exchanges by the Commission or the NASD; (ii) a general
banking moratorium shall have been declared by any of federal, New York,
Delaware or California authorities; (iii) there shall have occurred any outbreak
or escalation of national or international hostilities or any crisis or
calamity, or any change in the United States or international financial markets,
or any substantial change or development involving a prospective substantial
change in United States' or international political, financial or economic
conditions, as in the judgment of the Representatives is material and adverse
and makes it impracticable to market the Common Shares in the manner and on the
terms described in the Prospectus or to enforce contracts for the sale of
securities; (iv) in the judgment of the Representatives there shall have
occurred any Material Adverse Change; or (v) the Company shall have sustained a
loss by strike, fire, flood, earthquake, accident or other calamity of such
character as in the judgment of the Representatives may interfere materially
with the conduct of the business and operations of the Company regardless of
whether or not such loss shall have been insured. Any termination pursuant to
this Section 11 shall be without liability on the part of (a) the Company to any
Underwriter, except that the Company shall be obligated to reimburse the
expenses of the Representatives and the Underwriters pursuant to Sections 4 and
6 hereof, (b) any Underwriter to the Company, or (c) of any party hereto to any
other party except that the provisions of Section 8 and Section 9 shall at all
times be effective and shall survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Common Shares sold hereunder and any termination of this Agreement.
SECTION 13. NOTICES. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5558
Attention: Senior Managing Director, Syndicate
21
<PAGE> 23
with a copy to:
Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: Jeffrey Lapic, Esq.
and
SoundView Technology Group, Inc.
One Embarcadero Center, Suite 2700
San Francisco, California 94111
Facsimile: (415) 217-5501
Attention: Mr. Jonathan Meyers
and
Gerard Klauer Mattison & Co., Inc.
529 Fifth Avenue, 3rd Floor
New York, New York 10017
Facsimile: (212) 338-8991
Attention: Mr. David Stetson
and
O'Melveny & Myers LLP
Embarcadero Center West
275 Battery Street, Suite 2600
San Francisco, California 94111-3305
Facsimile: (415) 984-8701
Attention: Peter T. Healy, Esq.
If to the Company:
Integrated Silicon Solution, Inc.
2231 Lawson Lane
Santa Clara, California 95054
Facsimile: (408) 588-0805
Attention: Mr. Gary L. Fischer
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Facsimile: (650) 496-4086
Attention: J. Robert Suffoletta
22
<PAGE> 24
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and no other person will have any right
or obligation hereunder. The term "successors" shall not include any purchaser
of the Common Shares as such from any of the Underwriters merely by reason of
such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
SECTION 16. GOVERNING LAW PROVISIONS.
(a) Choice of Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
(b) Consent to Jurisdiction. Any legal suit, action or
proceeding arising out of or based upon this Agreement or the
transactions contemplated hereby ("Related Proceedings") may be
instituted in the federal courts of the United States of America located
in the City and County of San Francisco or the courts of the State of
California in each case located in the City and County of San Francisco
(collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted
in regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such
courts in any such suit, action or proceeding. Service of any process,
summons, notice or document by mail to such party's address set forth
above shall be effective service of process for any suit, action or
other proceeding brought in any such court. The parties irrevocably and
unconditionally waive any objection to the laying of venue of any suit,
action or other proceeding in the Specified Courts and irrevocably and
unconditionally waive and agree not to plead or claim in any such court
that any such suit, action or other proceeding brought in any such court
has been brought in an inconvenient forum.
(c) Waiver of Immunity. With respect to any Related Proceeding,
each party irrevocably waives, to the fullest extent permitted by
applicable law, all immunity (whether on the basis of sovereignty or
otherwise) from jurisdiction, service of process, attachment (both
before and after judgment) and execution to which it might otherwise be
entitled in the Specified Courts, and with respect to any Related
Judgment, each party waives any such immunity in the Specified Courts or
any other court of competent jurisdiction, and will not raise or claim
or cause to be pleaded any such immunity at or in respect of any such
Related Proceeding or Related Judgment, including, without limitation,
any immunity pursuant to the United States Foreign Sovereign Immunities
Act of 1976, as amended.
23
<PAGE> 25
SECTION 17. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
[Signature page follows.]
24
<PAGE> 26
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
INTEGRATED SILICON SOLUTION, INC.
By:
-------------------------------
Jimmy S.M. Lee
Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and
accepted by the Representatives in San Francisco, California as of the date
first above written.
BANC OF AMERICA SECURITIES LLC
SOUNDVIEW TECHNOLOGY GROUP, INC.
GERARD KLAUER MATTISON & CO., INC.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By: BANC OF AMERICA SECURITIES LLC
By:
--------------------------------
Managing Director
S-1
<PAGE> 27
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
FIRM COMMON
SHARES
UNDERWRITERS TO BE PURCHASED
<S> <C>
Banc of America Securities LLC ....................................[___]
SoundView Technology Group, Inc....................................[___]
Gerard Klauer Mattison & Co., Inc..................................[___]
Total ...........................................[___]
</TABLE>
<PAGE> 28
EXHIBIT A
OPINION OF COMPANY COUNSEL
Opinion of counsel for the Company to be delivered pursuant to
Section 5(d) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any
supplements thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware.
(ii) The Company has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in
the Prospectus and to enter into and perform its obligations under the
Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in the States of California.,
Illinois and New Hampshire and, to such counsel's knowledge (based on
statements of the Company in an officers' certificate attached to such
opinion), in each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or
the conduct of business, except for such jurisdictions (other than the
State of California) where the failure to so qualify or to be in good
standing would not, individually or in the aggregate, result in a
Material Adverse Change.
(iv) The authorized capital stock of the Company (including the
Common Stock) conforms to the description thereof set forth or
incorporated by reference in the Prospectus. The form of certificate
used to evidence the Common Stock is in due and proper form and complies
in all material respects with all applicable requirements of the charter
and by-laws of the Company and the General Corporation Law of the State
of Delaware.
(v) Except as may be described in the Prospectus, no stockholder
of the Company or any other person has any preemptive right, right of
first refusal or other similar right to subscribe for or purchase
securities of the Company arising (i) by operation of the charter or
by-laws of the Company or the General Corporation Law of the State of
Delaware or (ii) to the knowledge of such counsel, otherwise.
(vi) The Underwriting Agreement has been duly authorized,
executed and delivered by the Company.
(vii) The Common Shares to be purchased by the Underwriters from
the Company have been duly authorized for issuance and sale pursuant to
the Underwriting Agreement and, when issued and delivered by the Company
pursuant to the Underwriting Agreement against payment of the
consideration set forth therein, will be validly issued, fully paid and
nonassessable.
(viii) Each of the Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the
Commission under the Securities Act. To the knowledge of such counsel,
no stop order suspending the effectiveness of either of the Registration
Statement
A-1
<PAGE> 29
or the Rule 462(b) Registration Statement, if any, has been issued under
the Securities Act and no proceedings for such purpose have been
instituted or are pending or are contemplated or threatened by the
Commission. Any required filing of the Prospectus and any supplement
thereto pursuant to Rule 424(b) under the Securities Act has been made
in the manner and within the time period required by such Rule 424(b).
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus including any document
incorporated by reference therein, and each amendment or supplement to
the Registration Statement and the Prospectus including any document
incorporated by reference therein, as of their respective effective or
issue dates (other than the financial statements and supporting
schedules included or incorporated by reference therein and other
financial data derived therefrom or in exhibits to or excluded from the
Registration Statement, as to which no opinion need be rendered) comply
as to form in all material respects with the applicable requirements of
the Securities Act and the Exchange Act.
(x) The Common Shares have been approved for listing on the
Nasdaq National Market.
(xi) The statements (i) in or incorporated by reference in the
Prospectus under the captions "Description of Capital Stock," and
"Indemnification of our Directors and Officers" and (ii) in Item 15 of
the Registration Statement, insofar as such statements constitute
matters of law, summaries of legal matters, the Company's charter or
by-law provisions, documents or legal proceedings, or legal conclusions,
has been reviewed by such counsel and fairly present and summarize, in
all material respects, the matters referred to therein.
(xii) To the knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened against
the Company which are required to be disclosed in the Registration
Statement, other than those disclosed therein.
(xiii) To the knowledge of such counsel, there is no indenture,
mortgage, loan or credit agreement, note, contract, franchise, lease or
other instrument (each, a "Material Agreement") required to be described
or referred to in the Registration Statement or to be filed as exhibits
thereto other than those described or referred to therein or filed or
incorporated by reference as exhibits thereto; and the descriptions
thereof and references thereto are correct in all material respects.
(xiv) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority
or agency, is required for the Company's execution, delivery and
performance of the Underwriting Agreement and consummation of the
transactions contemplated thereby and by the Prospectus, except as
required under the Securities Act, applicable state securities or blue
sky laws and from the NASD.
(xv) The execution and delivery of the Underwriting Agreement by
the Company and the performance by the Company of its obligations
thereunder (other than performance by the Company of its obligations
under the indemnification section of the Underwriting Agreement, as to
which no opinion need be rendered) (i) have been duly authorized by all
necessary corporate action on the part of the Company; (ii) will not
result in any violation of the provisions of the charter or by-laws of
the Company; (iii) will not, to the knowledge of such counsel,
constitute a breach of, or Default or a Debt Repayment Triggering Event
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company pursuant to any
Material Agreement included or incorporated by reference as an exhibit
to the
A-2
<PAGE> 30
Company's most recent Annual Report on Form 10-K; or (iv) to the
knowledge of such counsel, will not result in any violation of any law,
administrative regulation or administrative or court decree applicable
to the Company.
(xvi) The Company is not, and after receipt of payment for the
Common Shares will not be, an "investment company" within the meaning of
Investment Company Act.
(xvii) Except as disclosed in the Prospectus, to the knowledge
of such counsel, there are no persons with registration or other similar
rights to have any equity or debt securities registered for sale under
the Registration Statement or included in the offering contemplated by
the Underwriting Agreement, except for such rights as have been duly
waived.
In addition, such counsel shall state that they have
participated in conferences with officers and other representatives of
the Company, representatives of the independent public or certified
public accountants for the Company and with representatives of the
Underwriters and their counsel at which the contents of the Registration
Statement and the Prospectus, and any supplements or amendments thereto,
and related matters were discussed and, although such counsel is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus (other than as specified above), and any
supplements or amendments thereto, on the basis of the foregoing,
nothing has come to their attention which would lead them to believe
that either the Registration Statement or any amendments thereto, at the
time the Registration Statement or such amendments became effective,
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as of its date
or at the First Closing Date or the Second Closing Date, as the case may
be, contained an untrue statement of a material fact or omitted to state
a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no belief
as to the financial statements or schedules or other financial or
statistical data derived therefrom, included or incorporated by
reference in the Registration Statement or the Prospectus or any
amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than the
General Corporation Law of the State of Delaware, the General Corporation Law of
the State of California or the federal law of the United States, to the extent
they deem proper and specified in such opinion, upon the opinion (which shall be
dated the First Closing Date or the Second Closing Date, as the case may be,
shall be satisfactory in form and substance to the Underwriters, shall expressly
state that the Underwriters may rely on such opinion as if it were addressed to
them and shall be furnished to the Representatives) of other counsel of good
standing whom they believe to be reliable and who are satisfactory to counsel
for the Underwriters; provided, however, that such counsel shall further state
that they believe that they and the Underwriters are justified in relying upon
such opinion of other counsel, and (B) as to matters of fact, to the extent they
deem proper, on certificates of responsible officers of the Company and public
officials.
A-3
<PAGE> 31
EXHIBIT B
FORM OF LOCK-UP AGREEMENT
February 16, 2000
Banc of America Securities LLC
SoundView Technology Group, Inc.
Gerard Klauer Mattison & Co., Inc.
As Representatives of the Several Underwriters
c/o Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Re: Integrated Silicon Solution, Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain
shares of Common Stock of the Company ("Common Stock") or securities convertible
into or exchangeable or exercisable for Common Stock. The Company proposes to
carry out a public offering of Common Stock (the "Offering") for which you will
act as the representatives of the underwriters. The undersigned recognizes that
the Offering will be of benefit to the undersigned and will benefit the Company
by, among other things, raising additional capital for its operations. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees
that the undersigned will not, without the prior written consent of Banc of
America Securities LLC (which consent may be withheld in its sole discretion),
directly or indirectly, sell, offer, contract or grant any option to sell
(including without limitation any short sale), pledge, transfer, establish an
open "put equivalent position" within the meaning of Rule 16a-1(h) under the
Securities Exchange Act of 1934, or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock, or securities
exchangeable or exercisable for or convertible into shares of Common Stock
currently or hereafter owned either of record or beneficially (as defined in
Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the
undersigned, or publicly announce the undersigned's intention to do any of the
foregoing, for a period commencing on the date hereof and continuing through the
close of trading on the date 90 days after the date of the Prospectus; provided,
however, that if the Offering has not commenced by March 31, 2000, this
agreement shall terminate. The undersigned also agrees and consents to the entry
of stop transfer instructions with the Company's transfer agent and registrar
against the transfer of shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock held by the undersigned except in
compliance with the foregoing restrictions.
In addition, notwithstanding the foregoing, the undersigned may
transfer the shares of Common Stock (i) as a bona fide gift or gifts, provided
that the donee or donees thereof agree to be bound in writing by the
restrictions set forth herein, (ii) to any trust for the direct or indirect
benefit of the undersigned or the immediate family of the undersigned, provided
that the trustee of the trust agrees to be bound in writing by the restrictions
set forth herein, and provided further that any such transfer shall not
B-1
<PAGE> 32
involve a disposition for value, or (iii) with the prior written consent of Banc
of America Securities, LLC on behalf of the Underwriters. For purposes of this
agreement, "immediate family" shall mean any relationship by blood, marriage or
adoption, not more remote than first cousin.
With respect to the Offering only, the undersigned waives any
registration rights relating to registration under the Securities Act of any
Common Stock owned either of record or beneficially by the undersigned,
including any rights to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned
and the respective successors, heirs, personal representatives, and assigns of
the undersigned.
-----------------------------------------
Printed Name of Holder
By:
-----------------------------------------
Signature
-----------------------------------------
Printed Name of Person Signing*
*(and indicate capacity of person signing
if signing as custodian, trustee, or on
behalf of an entity)
B-2
<PAGE> 1
EXHIBIT 5.1
February 24, 2000
Integrated Silicon Solution, Inc.
2231 Lawson Lane
Santa Clara, California 95054
RE: REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We have examined the registration statement on Form S-3 (333-95837), as
amended, filed by Integrated Silicon Solution, Inc., a Delaware corporation (the
"Company"), with the Securities and Exchange Commission in connection with the
registration under the Securities Act of 1933, as amended, of up to 3,795,000
shares of the Company's common stock (including an over-allotment of up to
495,000 shares of the Company's common stock granted to the underwriters) (the
"Shares"). The Shares are to be sold to the underwriters for resale to the
public as described in the registration statement and pursuant to the
underwriting agreement filed as an exhibit thereto.
As legal counsel to the Company, we have examined the proceedings proposed
to be taken in connection with said sale and issuance of the Shares. Based upon
the foregoing, we are of the opinion that the Shares, when issued in the manner
described in the registration statement, will be duly authorized, validly
issued, fully paid and non-assessable. We consent to the use of this opinion as
an exhibit to the registration statement, and further consent to the use of our
name wherever appearing in the registration statement, including the prospectus
constituting a part thereof, and any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of Registrant
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- ---- -----------------------------
<S> <C>
Integrated Silicon Solution, Inc. Hong Kong
(Hong Kong Limited)
Integrated Silicon Solution, Inc. People's Republic of China
(Suzhou)
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
October 29, 1999, in the Registration Statement (Amendment No. 1 to Form S-3,
No. 333-95837) and related Prospectus of Integrated Silicon Solution, Inc. for
the registration of 3,795,000 shares of its common stock.
We also consent to the incorporation by reference therein of our report
dated October 29, 1999 with respect to the financial statements and the
financial statement schedule of Integrated Silicon Solution, Inc. included in
the Annual Report (Form 10-K) for the year ended September 30, 1999 filed with
the Securities and Exchange Commission.
/s/ Ernst & Young LLP
San Jose, California
February 24, 2000