<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number: 000-23084.
INTEGRATED SILICON SOLUTION, INC.
Delaware 77-0199971
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
2231 Lawson Lane, Santa Clara, California 95054
(Address of principal executive offices) zip code
Registrant's telephone number, including area code (408) 588-0800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
The number of outstanding shares of the registrant's Common Stock as of
January 28, 2000 was 20,552,653
<PAGE> 2
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.
1
<PAGE> 3
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 (loss), 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.
2
<PAGE> 4
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.
3
<PAGE> 5
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.
4
<PAGE> 6
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
Integrated Silicon Solution, Inc. (the "Company") and its consolidated majority
owned subsidiaries, after elimination of all significant intercompany accounts
and transactions and have been prepared in accordance with generally accepted
accounting principles for interim financial information and with Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included.
Operating results for the 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 3Com 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>
5
<PAGE> 7
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
The following is a summary of inventories by major category:
<TABLE>
<CAPTION>
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.
6
<PAGE> 8
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NET INCOME (LOSS) PER SHARE
The Company calculates earnings per share in accordance with the Financial
Accounting Standards Board Statement No. 128, "Earnings Per Share."
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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
7
<PAGE> 9
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 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. 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.
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:
8
<PAGE> 10
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934. All forward looking statements contained herein are
subject to certain factors that could cause actual results to differ materially
from those projected in the forward-looking statements. Such factors include,
but are not limited to the risk related factors set forth in this report on Form
10-Q.
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.
RESULTS OF OPERATIONS
Our financial results for fiscal 2000 reflect accounting for ISSI-Taiwan
and NexFlash on the equity basis and include our percentage share of the results
of ISSI-Taiwan's and NexFlash's respective operations. 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 second quarter of fiscal 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.
<PAGE> 12
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 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.
<PAGE> 13
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 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.
<PAGE> 14
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. 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.
<PAGE> 15
In April 1998, the U.S. Department of Commerce (DOC) published an
anti-dumping duty order on imports of SRAMs from Taiwan, from where we currently
import a majority of our SRAMs. As a consequence of this anti-dumping 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 anti-dumping
proceedings. In addition, certain aspects of the anti-dumping determination are
being challenged in federal court proceedings by respondents to the
investigation, and these proceedings could result in the termination of this
anti-dumping case.
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 anti-dumping duties.
On October 22, 1998, Micron Technology filed an anti-dumping 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
anti-dumping duty required. In January 2000, Micron filed a summons with the
U.S. Court of International Trade appealing the ITC determination.
We believe our existing funds and available financing will satisfy our
anticipated working capital and other cash requirements through at least the
next 12 months. We may from time to time take actions to further increase our
cash position through bank borrowings, sales of additional shares of
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.
<PAGE> 16
Certain Factors Which May Affect Our Business or Future Operating Results
OUR OPERATING RESULTS ARE EXPECTED TO CONTINUE TO FLUCTUATE AND MAY NOT MEET
PUBLISHED ANALYST FORECASTS. THIS MAY CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE.
Our future quarterly and annual operating results are subject to
fluctuations due to a wide variety of factors, including:
- the cyclicality of the semiconductor industry;
- declines in average selling prices of our products;
- oversupply of memory products in the market;
- our failure to introduce new products and to implement technologies on a
timely basis;
- market acceptance of our and our customers' products;
- the failure to anticipate changing customer product requirements;
- fluctuations in manufacturing yields;
- failure to deliver products on a timely basis;
- disruption in the supply of wafers or assembly services;
- changes in product mix;
- 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.
<PAGE> 17
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
<PAGE> 18
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
<PAGE> 19
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;
<PAGE> 20
- 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. Other
companies may pursue claims against us with respect to the alleged infringement
of patents, maskwork rights, copyrights or other intellectual property owned by
third parties. If it appears necessary or desirable, we may seek licenses under
patents that we are alleged to be infringing. Although patent holders commonly
offer such licenses, licenses may not be offered and the terms of any offered
licenses may not be acceptable to us.
The failure to obtain a license under a key patent or intellectual property
right from a third party for technology used by us could cause us to incur
substantial liabilities and to suspend the manufacture of the products utilizing
the invention or to attempt to develop non-infringing products, any of which
could materially and adversely affect our business and operating results.
Furthermore, we may become involved in protracted litigation regarding the
alleged infringement by us of third party intellectual property rights or
litigation to assert and protect our patents or other intellectual property
rights. Any litigation relating to patent infringement or other intellectual
property matters could result in substantial cost and diversion of our resources
which could harm our business.
WE HAVE SIGNIFICANT INTERNATIONAL SALES AND RISKS OF OUR INTERNATIONAL
OPERATIONS COULD HARM OUR OPERATING RESULTS.
In the 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
<PAGE> 21
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 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.
<PAGE> 22
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.
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.
<PAGE> 23
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 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.
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1998, the U.S. Department of Commerce ("DOC") published an
antidumping duty order on imports of SRAMs from Taiwan, from where 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.
Duties calculated and assessed by the government could have a material
adverse affect on our gross margins and profits. There can be no assurance that
any reviews or proceedings will mitigate or eliminate antidumping duties.
On October 22, 1998, Micron 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K during the
quarter ended December 31, 1999.
<PAGE> 25
ITEM 7A. FINANCIAL MARKET RISK
Our principal financial market risk relates to the interest rates
associated with our investment portfolio. All of our cash equivalents and
short-term investments are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with unrealized gains and losses, net of
tax, reported in a separate component of stockholders' equity. The amortized
cost for available-for-sale debt securities is adjusted for the amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in investment income. Realized gains and losses and declines in value judged to
be other-than-temporary on available-for-sale securities are included in
investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in investment income. At September 30, 1999 and
December 31, 1999, the cost of these securities approximated the fair value
(quoted market price) and the amount of unrealized gain or loss was not
significant. There were no gains or losses on the sale of securities for the
three months ended December 31, 1999 and 1998.
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Integrated Silicon Solution, Inc.
---------------------------------
(Registrant)
Dated: February 1, 2000 /s/ Gary L.Fischer
---------------------------------
Gary L. Fischer
Executive Vice President,
Office of the President, and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit no. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDING DECEMBER 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 11,419
<SECURITIES> 5,150
<RECEIVABLES> 19,035
<ALLOWANCES> 1,497
<INVENTORY> 34,423
<CURRENT-ASSETS> 69,820
<PP&E> 24,702
<DEPRECIATION> 19,904
<TOTAL-ASSETS> 125,294
<CURRENT-LIABILITIES> 29,365
<BONDS> 420
0
0
<COMMON> 2
<OTHER-SE> 90,511
<TOTAL-LIABILITY-AND-EQUITY> 125,294
<SALES> 23,251
<TOTAL-REVENUES> 23,251
<CGS> 16,971
<TOTAL-COSTS> 16,971
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> (602)
<INCOME-TAX> 50
<INCOME-CONTINUING> 494
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 494
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
