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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
-----------------------
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1998
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 0-23841
-----------------------
INTEGRATED SENSOR SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0212047
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
625 River Oaks Parkway, San Jose, California 95134
(Address of principal executive offices) (Zip code)
(408) 324-1044
(Registrant's telephone number, including area code)
------------------------
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 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 [ ]
Outstanding shares of registrant's common stock, $.001 par value, as of
November 11, 1998: 7,628,060
This Report on Form 10-QSB includes 34 pages with the Index to Exhibits
located on pages 19 to 20.
<PAGE> 1
INTEGRATED SENSOR SOLUTIONS, INC.
REPORT ON FORM 10-QSB
FOR QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - September 30,
1998 and March 31, 1998................................ 3
Condensed Consolidated Statements of Operations - Three
and Six Months Ended September 30, 1998 and 1997....... 4
Condensed Consolidated Statements of Cash Flows - Six
Months Ended September 30, 1998 and 1997............... 5
Notes to Condensed Consolidated Financial Statements..... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 18
Item 4. Submission of Matters to a Vote of Security Holders...... 18
Item 5. Other Information........................................ 19
Item 6. Exhibits and Reports on Form 8-K......................... 19
Signature................................................ 21
</TABLE>
2
<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS
INTEGRATED SENSOR SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998 (1)
------------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,920 $ 17,610
Short-term investments 9,137 --
Accounts receivable, net 3,561 3,720
Accounts receivable from related parties 1,561 802
Inventories 4,612 3,120
Prepaid expenses and other current assets 1,034 255
--------- ---------
Total current assets 23,825 25,507
PROPERTY AND EQUIPMENT, NET 4,008 2,254
--------- ---------
TOTAL ASSETS $ 27,833 $ 27,761
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 400 $ 900
Accounts payable-trade 1,632 3,279
Accounts payable to related parties 916 1,144
Current portion of capital lease obligations 244 358
Other current liabilities 951 659
--------- ---------
Total current liabilities 4,143 6,340
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS 221 108
MINORITY INTEREST IN SUBSIDIARY 64 78
STOCKHOLDERS' EQUITY:
Common stock 8 7
Additional paid-in capital 33,838 31,064
Accumulated deficit (10,237) (9,429)
Cumulative translation adjustment 110 (32)
Deferred compensation (314) (375)
--------- ---------
Total stockholders' equity 23,405 21,235
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,833 $ 27,761
========= =========
(1) Derived from the March 31, 1998 audited balance sheet included in
the 1998 Annual Report on Form 10-KSB of Integrated Sensor Solutions,
Inc.
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 3
INTEGRATED SENSOR SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Product revenue $ 4,881 $ 2,415 $ 9,241 $ 4,968
Contract revenue 777 1,095 1,281 2,043
------- ------- ------- -------
Total revenues (related party
revenues of $2,567, $1,873, $373
and $765 for the three and six
months ended September 30, 1998
and 1997, respectively) 5,658 3,510 10,522 7,011
------- ------- ------- -------
COST OF REVENUES:
Cost of product revenue 3,501 1,607 6,854 3,445
Cost of contract revenue 913 889 1,505 1,578
------- ------- ------- -------
Total cost of revenues 4,414 2,496 8,359 5,033
------- ------- ------- -------
GROSS PROFIT 1,244 1,014 2,163 1,978
------- ------- ------- -------
OPERATING EXPENSES:
Research and development 1,007 484 2,031 839
Sales, general, and administrative 789 496 1,420 934
------- ------- ------- -------
Total operating expenses 1,796 980 3,451 1,773
------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS (552) 34 (1,288) 205
INTEREST EXPENSE (29) (51) (74) (105)
INTEREST INCOME 183 -- 394 --
OTHER INCOME 176 61 146 65
MINORITY INTEREST IN NET (INCOME)
LOSS OF CONSOLIDATED SUBSIDIARY (3) (31) 14 (61)
------- ------- ------- -------
NET INCOME (LOSS) $ (225) $ 13 $ (808) $ 104
======= ======= ======= =======
Basic and diluted net income (loss)
per share (pro forma for 1997) $ (0.03) $ 0.00 $ (0.11) $ 0.02
======= ======= ======= =======
Shares used in computing basic net
income (loss) per share (pro forma
for 1997) 7,601 4,556 7,580 4,526
======= ======= ======= =======
Shares used in computing diluted net
income (loss) per share (pro forma
for 1997) 7,601 4,882 7,580 4,842
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 4
INTEGRATED SENSOR SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Operating activities
Net income (loss) $ (808) $ 104
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 606 419
Amortization of deferred compensation 62 56
Minority interest in net income of subsidiary 14 61
Foreign currency gains (239) (35)
Changes in operating assets and liabilities:
Accounts receivable, net (389) (533)
Inventories (1,477) (885)
Prepaid expenses (575) (191)
Accounts payable (2,070) (60)
Accrued payroll and related expenses 75 (3)
Other accrued liabilities 292 186
-------- --------
Net cash used in operating activities (4,509) (881)
Investing activities
Purchases of short-term investments (9,137) --
Purchase of property and equipment (2,242) (354)
Proceeds from sale of property and equipment -- 46
-------- --------
Net cash used in investing activities (11,379) (308)
Financing activities
Payments on line of credit (500) --
Payments of principal on notes payable -- (432)
Payments of principal on capital lease obligations (86) (96)
Net proceeds from issuance of common stock 2,784 36
-------- --------
Net cash provided by (used in) financing
activities 2,198 (492)
-------- --------
Decrease in cash and cash equivalents (13,690) (1,681)
Cash and cash equivalents at beginning of period 17,610 2,059
-------- --------
Cash and cash equivalents at end of period $ 3,920 $ 378
======== ========
Supplemental disclosure of cash flow information
Interest paid $ 74 $ 64
======== ========
Schedule of noncash financing activities
Equipment acquired under capital leases $ 86 $ 41
======== ========
Accounts payable converted to capital leases $ 79 $ --
======== ========
Issuance of preferred stock for payment of
notes payable $ -- $ 400
======== ========
Issuance of preferred stock for payment of
interest on notes payable $ -- $ 37
======== ========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE> 5
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The accompanying condensed consolidated financial statements of
Integrated Sensor Solutions, Inc. and its majority-owned subsidiary ("ISS"
or the "Company") as of September 30, 1998 and for the three and six months
ended September 30, 1998 and 1997 are unaudited. In the opinion of
management, the condensed consolidated financial statements include all
adjustments (consisting only of normal recurring accruals) that management
considers necessary for a fair presentation of its financial position,
operating results and cash flows for the interim periods presented.
Operating results and cash flows for interim periods are not necessarily
indicative of results for the entire year.
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.
This financial data should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended March 31, 1998.
Net Income (Loss) Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share. Statement No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. In February 1998 the Securities
and Exchange Commission issued Staff Accounting Bulletin No. 98, Earnings
Per Share. Staff Accounting Bulletin No. 98 affected the treatment of
certain stock and warrants ("cheap stock") issued within a one-year period
prior to an initial public offering. Earnings per share amounts presented
have been restated to conform to requirements of Statement No. 128 and Staff
Accounting Bulletin No. 98.
Pro Forma Net Loss Per Share
Pro forma net loss per share has been computed as described above and
also gives effect even if antidilutive to the conversion of convertible
preferred shares not included above that automatically converted upon
completion of the Company's initial public offering (using the if-converted
method) from the original date of issuance.
Major Customers and Concentration of Credit Risks
Many of the Company's customers are primarily involved in the
automotive market. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses, and such losses have been within
management's expectations.
Significant customers accounted for the following percentages of
revenues:
<TABLE>
<CAPTION>
Six Months
Ended September 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Robert Bosch GmbH 45.2% 26.4%
Nagano Keiki Co., Ltd. 17.4% 10.9%
Echlin Corporation 14.7% --%
Masco Tech --% 23.6%
</TABLE>
6
<PAGE> 6
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
----------- -----------
<S> <C> <C>
Finished goods $ 425 $ 310
Work-in-process 1,279 1,166
Raw materials 2,908 1,644
--------- ---------
$ 4,612 $ 3,120
========= =========
</TABLE>
3. LINE OF CREDIT/TERM LOAN
The Company has a bank line of credit agreement, which was renewed on
August 21, 1998, and expires on August 20, 1999. The line allows the
Company to borrow the lesser of $3,500,000 or 80% of eligible accounts
receivable. Eligible accounts receivable are defined as those outstanding
less than 90 days from date of invoice. Borrowings under the line of credit
bear interest at the bank's prime rate plus 0.75% (9.00% at September 30,
1998) and are secured by the assets of the Company. As of September 30 and
March 31, 1998, the Company had borrowings outstanding totaling $400,000 and
$900,000, respectively, under the line of credit. The Company also has a
$1,500,000 term loan facility for equipment that bears interest at the
bank's prime rate plus 1.50% (9.75% at September 30, 1998). As of September
30, 1998, the Company had borrowings outstanding of approximately $296,000
on its term loan which are included with capital leases on the balance
sheet. These agreements require the Company to maintain certain financial
covenants on a quarterly basis. At September 30, 1998, the Company was in
compliance with these convenants.
4. COMPREHENSIVE INCOME
Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires an enterprise to report, by major components and as a
single total, the change in net assets during the period from non-owner
sources. Comprehensive income includes all changes in equity during a period
except those resulting from investments by and distributions to the
Company's stockholders. For the three and six months ended September 30,
1998 and 1997, comprehensive income, which was comprised of the Company's
net income (loss) for the periods and cumulative translation adjustment, was
approximately ($170,000) and ($666,000), respectively. For the comparable
periods in 1997, comprehensive income was approximately $18,000 and
$254,000, respectively.
5. GEOGRAPHIC AND SEGMENT INFORMATION
The Company operates in one business segment, which is to design,
manufacture, and sell end-market specific integrated subsystems and perform
nonrecurring engineering projects for the sensor control applications
market. The following table summarizes the Company's operations in different
geographic areas (in thousands):
<TABLE>
<CAPTION>
Six Months ended September 30, 1998
---------------------------------------------------
Adjustments/
United States Germany Eliminations Consolidated
------------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues to unaffiliated
customers $ 4,918 $ 5,604 $ -- $ 10,522
Transfers between
geographic areas 1,644 722 (2,365) --
-------- ------- -------- ---------
Total net revenues $ 6,561 $ 6,326 $ (2,365) $ 10,522
======== ======= ======== =========
Loss from operations $ (1,244) $ (48) $ 4 $ (1,288)
======== ======= ======== =========
Identifiable assets $ 26,639 $ 7,399 $ (6,205) $ 27,833
======== ======= ======== =========
</TABLE>
7
<PAGE> 7
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Six Months ended September 30, 1997
---------------------------------------------------
Adjustments/
United States Germany Eliminations Consolidated
------------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues to unaffiliated
Customers $ 4,810 $ 2,201 $ -- $ 7,011
Transfers between
geographic areas 677 282 (959) --
-------- ------- -------- ---------
Total net revenues $ 5,487 $ 2,483 $ ( 959) $ 7,011
======== ======= ======== =========
Income from operations $ 322 $ (39) $ (78) $ 205
======== ======= ======== =========
Identifiable assets $ 8,277 $ 2,783 $ (2,317) $ 8,743
======== ======= ======== =========
</TABLE>
Export revenues consisting of sales from the Company's U.S. operations
to nonaffiliated customers were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Canada $ 88 $ 45 $ 161 $ 241
Japan and Korea 353 730 1,977 1,188
-------- -------- -------- --------
Total $ 441 $ 775 $ 2,138 $ 1,429
======== ======== ======== ========
</TABLE>
6. STOCKHOLDERS' EQUITY
On March 13, 1998, the Company completed its initial public offering of
stock through the issuance of 2,500,000 shares of common stock at a price of
$8.00 per share, resulting in net proceeds to the Company of $17,661,000. On
April 8, 1998, the Company's underwriters exercised their over-allotment
option in full by purchasing 375,000 shares at $8.00 per share resulting in
net proceeds to the Company of $2,790,000.
7. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Six Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator for basic and diluted:
net income (loss) $ (225) $ 13 $ ( 808) $ 104
Denominator:
Weighted average common
shares outstanding 7,601 3,138 7,580 3,114
Conversion of weighted average
preferred stock outstanding
(pro forma) -- 1,418 -- 1,412
------- ------- ------- -------
Denominator for basic net income
(loss) per share (pro forma
for 1997) 7,601 4,556 7,580 4,526
======= ======= ======= =======
Effective dilutive securities:
employee stock options -- 326 -- 316
======= ======= ======= =======
Denominator for diluted net
income (loss) per share 7,601 4,882 7,580 4,842
======= ======= ======= =======
Basic and diluted net income
(loss) per share (pro forma
for 1997) $ (0.03) $ 0.00 $ (0.11) $ 0.02
======= ======= ======= =======
</TABLE>
8
<PAGE> 8
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Options to purchase 534,653 shares of common stock at prices ranging
from $1.125 to $8.313 and warrants to purchase 58,566 shares of common stock
at prices ranging from $6.125 to $6.375 were outstanding as of September 30,
1998, but were not included in the computation of diluted earnings (loss)
per share for the three and six months ended September 30, 1998 because to
do so would have been anti-dilutive.
9
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis includes a number of forward-
looking statements which reflect the Company's current views with respect to
future events and financial performance. These forward-looking statements
are subject to certain risks and uncertainties, including those discussed in
the "Factors that May Affect Operating Results" section of this Item 2 and
elsewhere in this Form 10-QSB that could cause actual results to differ
materially from historical results or those anticipated. In this report, the
words "anticipates," "believes," "expects," "future," "intends," and similar
expressions identify forward-looking statements. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak
only as of the date hereof.
Overview
ISS designs, manufactures and markets high performance, intelligent
sensor products that are used in electronic control systems by customers in
the automotive and industrial markets. The Company was incorporated in March
1989 and was principally engaged in research and development through fiscal
1993. In fiscal 1991, the Company shipped its first product, an application
specific integrated circuit ("ASIC") designed for use with a very low-
pressure sensor used in industrial flow measurements. In fiscal 1992, the
Company introduced its first integrated sensor device ("ISD"), an
aftermarket product for manifold absolute pressure ("MAP") sensor
applications for General Motors automobile engines. The Company subsequently
developed and introduced a variety of other ASICs and ISDs. Principally as a
result of an increase in product sales, the Company's total revenues have
increased to $5.7 million and $10.5 million for the three and six months
ended September 30, 1998 from approximately $3.5 million and $7.0 million
for the comparable periods in 1997, respectively. The Company has
experienced operating losses in each year since its inception and had an
accumulated deficit of $10.2 million as of September 30, 1998.
Results of Operations
The following table sets forth for the periods indicated selected
consolidated statements of operations data as a percentage of total
revenues:
<TABLE>
<CAPTION>
Three Months Six Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product revenue 86.3% 68.8% 87.8% 70.9%
Contract revenue 13.7 31.2 12.2 29.1
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product revenue 61.9 45.8 65.1 49.3
Cost of contract revenue 16.1 25.3 14.3 22.5
------ ------ ------ ------
Total cost of revenues 78.0 71.1 79.4 71.8
------ ------ ------ ------
Gross profit 22.0 28.9 20.6 28.2
Operating expenses:
Research and development 17.8 13.8 19.3 12.0
Sales, general and
administration 13.9 14.1 13.5 13.3
------ ------ ------ ------
Total operating expenses 31.7 27.9 32.8 25.3
------ ------ ------ ------
Income (loss) from operations (9.7) 1.0 (12.2) 2.9
Interest expense (0.5) (1.5) (0.7) (1.5)
Interest income 3.2 -- 3.7 --
Other income 3.1 1.8 1.4 0.9
Minority interest in net (income)
loss of consolidated subsidiary (0.1) (0.9) 0.1 (0.8)
------ ------ ------ ------
Net income (loss) (4.0)% 0.4% (7.7)% 1.5%
====== ====== ====== ======
</TABLE>
10
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Comparison of Three and Six Months Ended September 30, 1998 and 1997
Revenues
The Company derives its revenues from sales of ASICs and ISDs and from
fees earned under product development contracts. The Company recognizes
revenues from product sales upon shipment. Contract revenues are recognized
only when applicable customer milestones, including deliverables, have been
met, but not in excess of the amount that would be recognized using the
percentage of completion method.
Total revenues increased for the three and six months ended September
30, 1998 as compared to the similar periods in 1997. Total revenues were
$5.7 million and $10.5 million for the quarter and six months ended
September 30, 1998, respectively, increases of 61.2% and 50.1% over revenues
of $3.5 million and $7.0 million for the comparable 1997 periods. The growth
in total revenues on a quarterly and year-to-date basis is due to higher
product revenue.
Product Revenue: Product revenue was $4.9 million for the three months
ended September 30, 1998 which represented an increase of $2.5 million or
102.1% over the $2.4 million recognized for the comparable period in 1997.
For the six months ended September 30, 1998 product revenue was $9.2 million
which represented an increase of approximately $4.2 million or 86.0% over
the $5.0 million for the comparable 1997 period. These increases resulted
from continued growth in the Company's product offerings, which were
principally due to increased shipments of ISDs for Common Rail Diesel
Injection and Vehicle Stability Control Systems. Reflecting the Company's
long-term strategy, product revenue increased to 86.3% and 87.8% of total
revenues for the three and six months ended September 30, 1998 from 68.8%
and 70.9% for the comparable periods in the prior year. The Company
believes that product revenue is likely to increase as a percent of total
revenue.
Contract Revenue: Contract revenue decreased to approximately $800,000
and $1.3 million for the three and six months ended September 30, 1998 from
$1.1 million and $2.0 million for the comparable periods in 1997. This
decrease was primarily due to the completion of fewer contractual milestones
during the three months and six months ended September 30, 1998 as compared to
the same periods in 1997. Contract revenue as a percentage of total revenues
for the three and six months ended September 30, 1998 decreased to 13.7% from
31.2% and to 12.2% from 29.1% for the similar periods in 1997, respectively.
The Company expects contract revenue to continue to decrease as a percentage
of total revenues.
International revenues (export revenues and revenues of the Company's
majority-owned subsidiary, ISS-Nagano GmbH, ("ISS-Nagano")) for the three
and six months ended September 30, 1998 were $3.9 million and $7.7 million,
increases of $1.7 million or 77.3% and $3.6 million or 85.8% over the three
and six months ended September 30, 1997. As a percentage of total revenues,
international sales increased to 69.9% from 61.7% and to 73.6% from 59.5%
for the three and six months ended September 30, 1998 compared to 1997,
respectively. These increases were primarily the result of increased sales
of media compatible ISDs in Germany and increased sales of ASICs to Japan.
All of the Company's sales in Europe are denominated in Deutsche Marks.
Accordingly, a portion of the Company's international revenues is subject to
foreign currency fluctuation risks.
Cost of Revenues
Cost of Product Revenue: The Company's product revenue gross margin
decreased 5.2% to 28.3% for the three months ended September 30, 1998 from
33.5% for the similar period in 1997. For the six months ended September 30,
1998, the Company's product gross margin decreased 4.9% to 25.8% from 30.7%
for the similar period in 1997. These decreases primarily were due to yield
problems associated with the production ramp-up of its HVP and FDR media-
compatible ISDs, which materially adversely affected gross margin and
operating results during the three and six months ended September 30, 1998.
Cost of Contract Revenue: The Company's contract revenue gross margin
decreased to (17.5%) for the three and six months ended September 30, 1998
from 18.8% and 22.8% for the similar periods in 1997. Cost of contract
revenue remained stable at approximately $900,000 and $1.5 million for
the three and six months ended September 30, 1998 and 1997, respectively,
while contract revenue declined to approximately $800,000 and $1.3 million
from $1.1 million and
11
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
$2.0 million for the comparable periods in 1997. The decrease in contract
revenue margins was primarily due to the completion of fewer contractual
milestones in the three and six months ending September 30, 1998 compared to
the similar periods in 1997. Expenses related to contracts are recorded as
incurred, while recognition of revenues occurs when contractual milestones
are reached. The Company does not anticipate that the gross margin on contract
revenues will grow or even be positive in future periods.
Operating Expenses
Research and Development: Research and development expense consists
primarily of personnel expenses, including salary and benefits, and other
product development related engineering expenses not associated with contract
revenue. Research and development expenses were $1.0 million and $2.0 million
for the three and six months ended September 30, 1998 as compared to
approximately $500,000 and $800,000 for the similar periods in 1997,
respectively. This higher level of expenses for the three months and six
months reflects an overall increase in resources at the operations of ISS-
Nagano and in its ASIC product test development department to support future
production. Research and development expenses as a percentage of total
revenues increased to 17.8% and 19.3% percent for the three and six months
ended September 30, 1998 from 13.8% and 12.0% for the similar periods in the
prior year, respectively. The Company believes that research and development
is essential to the Company's ability to increase revenues. Accordingly, the
Company expects research and development expenses to increase in absolute
dollars but expects such expenses to decrease as a percentage of total revenues.
Sales, General and Administrative: Sales, general and administrative
expense consists primarily of personnel expenses, including salary and
benefits, and professional fees. Sales, general and administrative expenses
were approximately $800,000 and $1.4 million for the three and six months ended
September 30, 1998 as compared to approximately $500,000 and $900,000 for the
similar 1997 periods, respectively. This higher level of expense reflects an
increase in personnel and professional fees necessary to manage the financial,
legal and administrative aspects of operating as a public company. Sales,
general and administrative expense remained relatively stable at 13.9% and
13.5% as a percentage of total revenues for the three and six months ended
September 30, 1998 as compared to 14.1% and 13.3% in the year earlier period.
The Company expects sales, general and administrative expenses to increase in
absolute dollars, reflecting growth in operations and costs associated with
being a public entity, but to be stable or decline as a percentage of total
revenues.
Interest Expense
Interest expense decreased to $29,000 and $74,000 for the three and six
months ended September 30, 1998 from $51,000 and $105,000 for the comparable
periods in 1997, respectively, due to lower average borrowings resulting
from the conversion and repayment of debt.
Interest Income
Interest income was $183,000 and $394,000 for the three and six months
ended September 30, 1998. The Company recorded no interest income during the
three and six months ended September 30, 1997. The increase in interest
income was the result of higher interest-bearing cash balances resulting
from the Company's initial public offering in March of 1998.
Other Income
Other income increased to $176,000 and $146,000 for the three and six
months ended September 30, 1998 from $61,000 and $65,000 for the comparable
periods in 1997. Other income increased primarily due to foreign currency
exchange gains of $227,000 and $239,000 for the three and six months ended
September 30, 1998.
Minority Interest in Net (Income) Loss of ISS-Nagano
Minority interest in net income of ISS-Nagano for the three months
ended September 30, 1998 was $3,000 compared to $31,000 of minority
interest in net income of ISS-Nagano for three months ended September 30,
1997.
12
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Minority interest in net loss of ISS-Nagano for the six months ended
September 30, 1998 was $13,000 compared to $61,000 of minority interest in
net income of ISS-Nagano for six months ended September 30, 1997.
Liquidity and Capital Resources
Since inception, the Company has financed its operations principally
through sales of equity securities, product revenues and contract revenues.
At September 30, 1998, the Company had cash, cash equivalents and short-term
investments of $13.1 million and working capital of $19.7 million. The
Company also had available a $3.5 million bank line of credit agreement
secured by the assets of the Company that permits borrowings of the lesser
of $3.5 million or 80% of eligible accounts receivable for each of these
periods. Eligible accounts receivable are defined as those outstanding less
than 90 days from date of invoice. Borrowings under the line of credit bear
interest at the bank's prime rate plus 0.75%. At September 30, 1998, the
Company also had available a $1,500,000 term loan facility for capital
equipment that bears interest at the bank's prime rate plus 1.50%. The bank
line of credit agreement and term loan facility, which were renewed on
August 21, 1998, have an expiration date of August 21, 1999. At September
30, 1998, the Company had outstanding borrowings of $400,000 under the line
of credit agreement and $296,000 under various capital equipment lease
financing arrangements.
Net cash used in operating activities was approximately $4.5 million and
$900,000 in the six months ended September 30, 1998 and 1997, respectively. For
the six months ended September 30, 1998, net cash used in operations was
primarily attributable to a decrease in accounts payable, an increase in
inventory levels in anticipation of higher sales demand, and an increase in
prepaid expenses, and the Company's net loss. For the six months ended
September 30, 1997, net cash used in operations was primarily attributable to
an increase in inventory levels and an increase in accounts receivable.
Net cash used in investing activities was $11.4 million and $308,000 in
the six months ended September 30, 1998 and 1997, respectively. Cash used in
investing activities for the six months ended September 30, 1998 was
related to the Company's purchase of $9.1 million in short-term investments
and $2.2 million in purchases of equipment. Cash used in investing
activities for the six months ended September 30, 1997 was entirely due to
the purchase of equipment.
Net cash provided by financing activities was $2.2 million and $492,000
for the six months ended September 30, 1998 and 1997, respectively. Cash
provided by financing activities was primarily due to the sale of common
stock upon exercise of the over allotment option held by the underwriters of
the Company's initial public offering. The Company also repaid $500,000
outstanding under its line of credit. For the six months ended September
30, 1997 the Company repaid $432,000 in notes payable.
To date, the Company has not invested in derivative securities or any
other financial instruments that involve a high degree of risk. The Company
expects that, in the future, cash in excess of current requirements will be
invested in short-term, investment grade, interest-bearing securities.
The Company plans to finance its working capital and other capital
resource needs with its current cash and cash equivalents, and cash
generated from future operations, if any. The Company believes that these
resources will be sufficient to satisfy its working capital and other
capital needs for at least the next 24 months.
Factors That May Affect Operating Results
The statements contained in this Report on Form 10-QSB that are not
purely historical are forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding the Company's
expectations, hopes, intentions or strategies regarding the future. Forward-
looking statements include but are not limited to: statements regarding
future products or product development; statements regarding future research
and development spending and the Company's product development strategy;
statements regarding the levels of international sales; and statements
regarding future expenditures. All forward-looking statements included in
this document are based on information available to the Company on the date
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
hereof, and the Company assumes no obligation to update any such forward-
looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking
statements. Some of the factors that could cause actual results to differ
materially are set forth below. In addition to the other information in this
Form 10-QSB, the following factors should be considered carefully in evaluating
the Company and its business.
Limited Profitability; History of Operating Losses. The Company was
founded in 1989 and commenced shipments of its initial product in 1990. The
Company has never achieved profitability on an annual basis. There can be no
assurance that the Company will be profitable in the future on a quarterly
basis or that it will achieve profitability on an annual basis. As of
September 30, 1998, the Company had an accumulated deficit of approximately
$10.2 million.
Dependence on Customer Specific Products; Lengthy Sales and Development
Cycle. A substantial portion of the Company's products is designed to
address the specific needs of individual customers. As a result, the sales
and development cycle for these products can be lengthy, with the
development cycle alone ranging up to thirty months for new products in new
applications in the automotive industry and up to eighteen months for new
products in new applications in the industrial market. Because customer
specific products are developed for particular customers' applications, some
of the Company's current and future customer specific products may never be
produced in high volume, or at all, due to the Company's inability to
introduce custom products in a timely manner, delays in the introduction of
the Company's customers' products, the failure of the Company's customers'
products to achieve and sustain commercial success or the discontinuation of
a customer's product line. Any of these occurrences could have a material
adverse effect on the Company's business, financial condition or operating
results.
Fluctuations in Operating Results. The Company's revenues and
operating results have varied on a quarterly and an annual basis in the past
and may vary significantly in the future. The Company's revenues and
operating results are difficult to forecast and could be materially
adversely affected by many factors, some of which are outside the control of
the Company, including, among others, fluctuations in yields, the relatively
long sales and development cycle for the Company's products, the ability to
obtain product development contracts and the amount and timing of
recognition of product development contract revenue and expense associated
with such contracts, the Company's ability to introduce new products and
technologies on a timely basis, market acceptance of the Company's and its
customers' products, the timing, deferral or cancellation of customer orders
and related shipments, competitive pressures on selling prices, availability
of foundry capacity, availability of raw materials, changes in product mix,
changes in the lead time required to ship products after receipt of an
order, introduction of products and technologies by the Company's
competitors and customers, quality control of products sold, personnel
changes and difficulties in attracting and retaining qualified technical
personnel, foreign currency exchange rates and economic conditions generally
and in the automotive and industrial markets.
Variability of Manufacturing Yields. Manufacturing yields of the
Company's ASICs and ISDs may vary significantly depending on a variety of
factors. ASIC yields can be adversely affected by the level of contaminants
in the manufacturing environment, impurities in the materials used and the
performance of fabrication personnel and equipment, all of which are outside
the control of the Company. ISD yields can be adversely affected by
defective sensing elements, component quality and performance of assembly
personnel and equipment. Historically, the Company has experienced
fluctuations in yields of its products, particularly during initial
production of new products, which have adversely affected product gross
margin.
Significant Customer Concentration. Historically, a relatively small
number of customers have accounted for a significant percentage of the
Company's total revenues, and the Company expects that this trend will
continue. In the six months ended September 30, 1998, the Company had three
customers which accounted for 45.2%, 17.4% and 14.7% of total revenues,
respectively. In the six months ended September 30, 1997, the Company had
three customers which accounted for 26.4%, 23.6%, and 10.9% of total
revenues, respectively. As a result, any cancellation, reduction,
rescheduling or delay in orders by or shipments to any customer or the
discontinuation or redesign by any customer of its products which currently
incorporate one or more of the Company's products would have a material
adverse effect on the Company's business, financial condition or operating
results.
Dependence on Automotive Industry; Need to Penetrate New Markets. The
Company has historically derived approximately 88% of its total revenues
from products sold for applications in the automotive industry. Accordingly,
improvement in the Company's future operating results will depend in part on
its ability to increase its market share in the
14
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
automotive industry and to penetrate new markets. Further, the Company
believes that its operating results may be affected by the cyclical nature of
the automotive industry. Any downturn in any customer's business or the economy
in general maycause purchases of the Company's products to be deferred, reduced
or canceled resulting in a material adverse effect on the Company's business,
financial condition or operating results. If the Company were unable to
successfully penetrate new markets or to expand its penetration of the
automotive market, its business, financial condition or operating results
would be materially adversely affected.
Declining Average Selling Prices. The Company sells a substantial
portion of its products pursuant to exclusive contracts which typically
contain volume-pricing provisions that require the Company to reduce its per
unit price as certain volume levels are achieved. If the Company is unable
to make corresponding product cost reductions, the resulting decline in the
average selling prices of the products sold pursuant to such contracts may
reduce the Company's product gross margin. If the Company is unable to
sufficiently reduce its costs on existing products or introduce new products
with higher margins in a timely manner, the Company's business, financial
condition or operating results will be materially adversely affected.
Dependence on Sensing Element Suppliers. The Company is currently
dependent upon a small number of third party vendors for substantially all
of the sensing elements incorporated into its ISDs. For example, the Company
currently purchases a pressure-sensing element incorporated in certain of
its ISDs from a single source, Nagano Keiki Co., Ltd. ("Nagano"). The
Company believes that Nagano is currently the only high volume supplier of
this type of sensing element. Any failure of the Company to maintain its
existing relationships with sensing element suppliers or to identify and
work with new sensing element suppliers could have a material adverse effect
on the Company's business, financial condition or operating results.
Narrow Product Base. The Company currently depends upon the sale and
success of a limited number of product lines. Because the Company's primary
source of revenue is dependent upon a narrow product base, any interruption
or reduction in these sales due to production problems, lack of adequate
demand, replacement by new technologies or other internal or external
problems resulting in the failure of such product lines to win broad
acceptance in the marketplace would have a material adverse effect on the
Company's business, financial condition or operating results.
Rapid Technological Change; Need to Develop New Products. The markets
for the Company's products are characterized by rapid technological change
as well as evolving industry standards that may render existing products
obsolete. As a result, the success of new products depends on a variety of
factors, including effective definition of products that meet evolving
market needs, successful and timely completion of development and
introduction of these products, successful design wins in new systems and
the ability to offer products at competitive prices. A failure in any of
these areas could have a material adverse effect on the Company's business,
financial condition or operating results.
Competition. The markets in which the Company competes are highly
competitive and characterized by diverse industry requirements and severe
pricing pressure in many applications. In the ASIC market, the Company
competes with analog and mixed signal semiconductor companies such as
Motorola, Inc. ("Motorola"), Texas Instruments Incorporated ("TI") and
Analog Devices, Inc. The Company's products also compete indirectly with
conventional hybrid circuits and standard analog and mixed signal ICs. In
the ISD market, the Company competes with Delco, a subsidiary of General
Motors ("GM"), Motorola, TI, Kavlico and Denso Corporation ("Denso"). These
companies all have substantially greater financial, technical,
manufacturing, marketing, distribution, personnel and other resources than
the Company.
The Company also anticipates that additional competitors may enter the
Company's markets, resulting in even greater competition. Many of the
Company's current or prospective competitors own or have investments in
wafer foundries, which provide dedicated capacity to these competitors and
enable them to influence or control costs more effectively than the Company.
There can be no assurance that the Company will be able to compete
successfully with existing or new competitors. Increased competition could
result in significant price reductions or the loss of current or potential
customers or design wins which could materially adversely affect the
Company's business, financial condition or operating results.
Dependence on Key Personnel; Need for Additional Technical Personnel.
The Company is substantially dependent upon the services of its executive
officers. The Company's future success depends on the continued
contributions
15
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
of such officers, including the maintenance, enhancement and establishment of
key customer relationships and the management of operations. The loss of the
services of any of these officers by the Company could have a material adverse
effect on the Company's business, financial condition or operating results.
Such officers have not entered into employment agreements with the Company.
The Company believes that its future success will be heavily dependent upon
its ability to attract and retain qualified design, technical and management
personnel. There can be no assurance that the Company will be able to
continue to attract and retain these personnel, and the failure to do so
could have a material adverse effect on the Company's business, financial
condition or operating results.
Dependence on Sole Source Suppliers. Certain components of the
Company's current products, such as fabricated wafers, sensing elements,
packages and PC boards, are acquired from single source suppliers. The
Company purchases these components on a purchase order basis and may not
carry significant inventories. The Company currently has no supply contracts
with any of its assembly contractors.
The Company's reliance on independent contractors to assemble and
package its products involves significant risks, including reduced control
over quality and delivery schedules, the potential lack of adequate capacity
and discontinuance or phase-out of such contractors' assembly processes.
Historically, due to a lack of significant volumes, the Company has
experienced difficulty ensuring that independent assembly contractors would
continue to assemble or package the Company's products and that alternative
independent assembly contractors would be available in such instances.
Dependence on Independent Wafer Suppliers. The Company relies on a
small number of independent foundries for the manufacture of all of its
ASICs, including those incorporated into its ISDs. Although the Company has
initiated efforts to qualify second sources for certain of its key
components, none of the Company's ASICs is currently fabricated by more than
one foundry. Although processed wafer capacity in the semiconductor industry
is currently widely available, there can be no assurance that the Company's
foundries will continue to provide the Company an adequate supply of wafers
to meet its customers' demands.
The Company believes that as a result of fluctuations in demand and
changing technologies, processed wafer capacity may become limited from time
to time, resulting in greater difficulty in obtaining adequate supplies of
wafers, increased prices and increased lead times. Any increase in the
demand for processed wafers over expected levels or any failure of processed
wafer supply in the industry to grow at anticipated rates will magnify these
shortages. There can be no assurance that the Company will be able to
complete qualification of products fabricated by Symbios, or any other new
wafer supplier, in a timely manner or at all, and any such failure could
have a material adverse effect on the Company's business, financial
condition or operating results.
The use of independent wafer foundries entails certain other risks,
including reduced control over manufacturing yields and production costs.
The Company has from time to time experienced lower than anticipated
manufacturing yields in connection with the introduction of new products.
For instance, the Company encountered a substantial yield problem with
certain of its ISD products during the quarter ended March 31, 1998 due to a
limitation of an ASIC design with respect to a particular variation in the
foundry wafer process. These yield losses had a material adverse effect on
the Company's operating results. There can be no assurance that the
Company's wafer foundries will not produce wafers with lower than expected
manufacturing yields in the future, which could materially adversely affect
the Company's business, financial condition or operating results.
Dependence on Patents and Proprietary Rights. The Company relies on a
combination of patents, maskwork rights, trade secret laws, copyrights,
trademarks and employee and third party non-disclosure agreements to protect
its intellectual property rights. The Company has been issued four patents
and has filed two additional patent applications in the United States and
one foreign patent application relating to ASIC designs. In addition, the
Company has filed one patent application in the United States relating to
package design. There can be no assurance that any patents will issue from
any of the Company's pending applications or that claims allowed from
pending applications will be of sufficient scope or strength, or be issued
in all countries where the Company's products can be sold, to provide
meaningful protection or any commercial advantage to the Company.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions which have resulted in
significant and often protracted and expensive litigation. Although there is
currently no
16
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
pending intellectual property litigation against the Company, the Company may
from time to time be notified of claims that the Company may be infringing
patents or other intellectual property rights owned by third parties. If it
is necessary or desirable, the Company may seek licenses under such patents or
other intellectual property rights. However, there can be no assurance that
licenses will be offered or that the terms of any licenses will be
acceptable to the Company. A failure to obtain a license from a third party
for technology used by the Company could cause the Company to incur
substantial liabilities and to suspend the manufacture of products requiring
the technology.
Dependence on International Sales and Suppliers. The Company's sales to
customers outside the United States are subject to a variety of risks,
including those arising from fluctuations in currency exchange rates,
tariffs, import restrictions and other trade barriers, unexpected changes in
regulatory and governmental licensing requirements, longer accounts
receivable payment cycles and potentially adverse tax consequences. Because
a significant portion of the Company's international sales and in particular
its European sales have to date been made through its German subsidiary and
have been denominated in Deutsche Marks, fluctuations in the value of the
Deutsche Mark relative to the U.S. Dollar or other currencies could
adversely affect the pricing of the Company's products in foreign markets
and make the Company's products relatively more expensive. In addition,
fluctuations in the Deutsche Mark could adversely affect the profitability
of sales made in Europe and therefore materially adversely affect the
Company's business, financial condition or operating results.
Several Asian countries including South Korea, Japan and Thailand, have
recently experienced significant economic downturns and significant declines
in the value of their currencies relative to the U.S. dollar. Due to these
conditions, it is possible that certain of the Company's customers will
delay, reschedule or cancel significant current or future orders for the
Company's products. If any such orders are delayed, rescheduled or canceled,
the Company's business, financial condition and results of operations would
be adversely affected.
Year 2000 Compliance
Many computer systems were not designed to properly handle dates beyond
the year 1999. Additionally, these systems may not properly handle certain
dates in 1999. Failure to process dates properly could result in failure or
disruption of the Company's information systems and/or processing equipment.
To be Year 2000 ("Y2K") compliant, computer systems must correctly process
dates before and after the year 2000, recognize the year 2000 as a leap
year, accept and display dates unambiguously and correctly process dates for
non-date functions such as archiving. Disruptions to the Company's
operations may also occur if key suppliers or customers experience
disruptions in their ability to purchase, supply or transact with the
Company due to Y2K issues. The Company's global operations rely heavily on
the infrastructures within the countries in which it does business. The Y2K
readiness within infrastructure suppliers (utilities, government agencies
such as customs, and shipping organizations) will be critical to the
Company's ability to avoid disruption of its operations. The Company is
currently assessing its systems, equipment, facilities and processing to
determine its Y2K readiness and has committed personnel and resources to
resolve potential Y2K issues. Further, the Company is in the process of
contacting its critical suppliers to determine that the suppliers'
operations and the products and services they provide are Y2K compliant.
The Company also is working with industry trade associations to evaluate
the Y2K readiness of infrastructure suppliers. In the event that suppliers
are not Y2K compliant, it could have a material adverse effect on the
Company's results or financial condition. The Company plans to complete the
assessment of its Y2K readiness by the end of the first quarter of 1999.
The Company will perform remediation procedures concurrent with its
assessment planning. The Company currently believes that the remediation
costs of the Y2K issue will not be material to the Company's results of
operations or financial position. Cumulatively through September 30, 1998
the Company has incurred remediation expenses of less the $10,000. While
the Company currently expects that the Y2K issue will not pose significant
operational problems, delays in adequately addressing Y2K issues, or a
failure to fully identify all Y2K dependencies in the Company's systems and
in the systems of its suppliers, customers and financial institutions, it
could have material adverse consequences, including delays in the
productions, delivery or sale of products. Therefore, the Company is
developing contingency plans for continuing operations in the event such
problems arise. The Company intends to complete the contingency planning
phase of its Y2K readiness in the first half of 1999.
17
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date hereof, to the Company's knowledge, there are no legal
proceedings in which the Company is involved or litigation pending against
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 14, 1998, the Annual Meeting of Stockholders of the Company was
held in San Jose, California. Three matters were submitted to the
stockholders for action or approval.
Matter No. 1
The stockholders elected two (2) Class I directors to hold office for a
three-year term and until their respective successors are elected and qualified.
The votes for the Class I directors are set forth below.
<TABLE>
<CAPTION>
Total Vote For Total Vote Withheld
Name Each Director From Each Director
---- ------------- ------------------
<S> <C> <C>
Manher D. Naik 6,140,034 145,099
Vinod K. Sood 6,141,034 144,099
</TABLE>
These terms of office of the following four directors in Classes II and
III continued after the meeting:
Gerald F. Taylor
Y. S. Fu
Stuart D. Boyd
Shigeru Miyashita
Other matters voted upon and approved by the stockholders at the
meeting, and the number of votes cast with respect to each such matter, were
as follows:
Matter No. 2
The stockholders approved a proposal to amend the Company's 1997 Stock
Plan to increase the maximum number of shares of Common Stock of the Company
authorized for issuance thereunder from 800,000 shares to 1,150,000 shares,
to provide for automatic annual increases in the number of shares reserved
for issuance thereunder and to establish a limit on the number of shares
which may be granted to any employee during a fiscal year.
<TABLE>
<CAPTION>
For Against Abstain No Vote
--- ------- ------- -------
<S> <C> <C> <C>
4,991,168 1,129,115 164,850 --
</TABLE>
Matter No. 3
The stockholders approved a proposal to ratify the appointment of Ernst
& Young LLP as the Company's independent public accountants for the year
ending March 31, 1999.
<TABLE>
<CAPTION>
For Against Abstain No Vote
--- ------- ------- -------
<S> <C> <C> <C>
6,281,683 1,100 2,350 --
</TABLE>
18
<PAGE> 18
ITEM 5. OTHER INFORMATION
Use of Proceeds
The net proceeds to the Company from the sale of the 2,875,000 shares
of Common Stock in the Company's initial public offering (Registration
Statement No. 333-41351 and No. 333-47885), effective March 13, 1998,
including the underwriter's exercise of their over-allotment on April 8,
1998, were approximately $20,451,000 after deducting underwriting discounts
and commissions, the Representatives' non-accountable expense allowance and
other offering expenses. From the date of the closing of the initial public
offering through September 30, 1998, the Company applied the net proceeds as
follows: $766,347 was used to pay indebtedness to a related party,
approximately $2,489,000 was used to purchase capital equipment, $801,275
was used to pay indebtedness to another related party, $500,000 was used to
pay down the line of credit at the bank, approximately $13.3 million was used
for operating expenses and the balance has been invested in short-term
interest bearing securities.
Stockholder Proposals
Proposals of stockholders intended to be presented at the next Annual
Meeting of the Stockholders of the Company (other than proposals made under
Rule 14a-8 of the Securities Exchange Act of 1934, as amended) must be
received by the Company at its principal executive offices at 625 River Oaks
Parkway, San Jose, California by March 25, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits.
Exhibit
Number Description
------ ---------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation of Registrant dated October 26,
1998.
3.2** Bylaws of Registrant.
4.1* Restated Registration Rights Agreement.
10.1* 1989 Stock Option Plan and form of option agreement thereunder.
10.2* 1997 Stock Option Plan and form of option agreement thereunder.
10.3*** 1997 Employee Stock Purchase Plan and form of subscription agreement
thereunder.
10.4** Form of Indemnity Agreement for Officers and Directors.
10.5+** Development Agreement between ISS-GmbH and Robert Bosch GmbH dated
May 25, 1995.
10.6+** Development Agreement among ISS-Nagano GmbH, Integrated Sensor
Solutions, Inc. and Robert Bosch GmbH dated May 17, 1996.
10.7+** Supply Agreement between Integrated Sensor Solutions, Inc.
ISS-Nagano GmbH and Robert Bosch GmbH dated November 18, 1996.
10.8** Lease between Montague Oaks Associates Phase III and Integrated
Sensor Solutions, Inc. dated June 2, 1994, as amended.
10.9** Continuous Sales and Purchase Agreement by and between Nagano Keiki
Seisakusho, Ltd. and Integrated Sensor Solutions, Inc. dated
December 1, 1996.
10.10** Continuous Sales and Purchase Agreement by and between Nagano Keiki
Seisakusho, Ltd. and Integrated Sensor Solutions, Inc. dated June 1,
1997.
10.11** Security Agreement by and between Integrated Sensor Solutions, Inc.
and Silicon Systems, Inc. dated December 1, 1995.
10.12** Credit Agreement between Integrated Sensor Solutions, Inc. and
Silicon Systems, Inc. dated December 1, 1995.
10.13** Loan and Security Agreement by and between Silicon Valley Bank and
Integrated Sensor Solutions, Inc. dated July 10, 1996, as amended.
10.14 Loan Modification Agreement by and between the Registrant and Silicon
Valley Bank dated August 21, 1998 amending the Loan and Security
Agreement dated July 10, 1996, as amended.
19
<PAGE> 19
10.15** Lease Agreement between Geschaftsraum-Mietvertrag and ISS-Integrated
Sensor Solutions GmbH dated September 12, 1994.
10.16* Agreement relating to change in equity ownership of ISS-Nagano GmbH
dated July 30, 1997.
21.1** List of Subsidiaries of the Registrant.
24.1** Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
- -------------
* Filed as an exhibit to Amendment No. 1 to Registration Statement on
Form SB-2 (File No. 333-41351) on February 5, 1998.
** Filed as an exhibit to Registration Statement on Form SB-2 (File No. 333-
41351) on December 2, 1997.
*** Filed as an exhibit to Annual Report on Form 10-KSB on June 30, 1998.
+ Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission pursuant to orders for
confidential treatment under 17 C.F.R. Sections 200.80(b)(4), 200.83 and
230.46.
</TABLE>
(b) Reports on Form 8-K. The Company did not file any Reports on Form
8-K during the quarter ended September 30, 1998.
20
<PAGE> 20
SIGNATURE
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 SENSOR SOLUTIONS, INC.
---------------------------------
(Registrant)
Date: November 16, 1998 By: /s/ DAVID SATTERFIELD
---------------------------------
David Satterfield
Vice President Finance & Administration,
Corporate Secretary
(Authorized Officer and
Principal Financial and Accounting Officer)
21
<PAGE> 21
EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
INTEGRATED SENSOR SOLUTIONS, INC.
(Pursuant to Section 245 of the General Corporation Law of the State of
Delaware)
INTEGRATED SENSOR SOLUTIONS, INC., a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Integrated Sensor Solutions, Inc.
2. The original name of the corporation was Integrated Sensor
Solutions Delaware Corporation.
3. The date of filing of its original Certificate of Incorporation
with the Secretary of State of the State of Delaware was July 18, 1997.
4. This Restated Certificate of Incorporation was duly adopted by
the Board of Directors by unanimous written consent in accordance with the
provisions of Section 245 of the Delaware General Corporation Law. This
Restated Certificate of Incorporation only restates and integrates and does
not further amend the provisions of the corporation's certificate of
incorporation as heretofore amended, and there is no discrepancy between
those provisions and the provisions of this Restated Certificate.
5. This Restated Certificate of Incorporation restates and
integrates the Certificate of Incorporation of this corporation as herein
set forth in full:
FIRST: The name of the corporation is Integrated Sensor Solutions,
-----
Inc. (hereinafter sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
------
State of Delaware is Incorporating Services, Ltd., 15 East
North Street, in the City of Dover, County of Kent. The name
of the registered agent at that address is Incorporating
Services, Ltd.
THIRD: The purpose of the Corporation is to engage in any lawful act
-----
or activity for which a corporation may be organized under the
General Corporation Law of Delaware.
1
<PAGE> 22
FOURTH:
------
STOCK
-----
The Corporation is authorized to issue two classes of stock to
be designated, respectively, "Preferred Stock" and "Common
Stock." The total number of shares of Preferred Stock the
Corporation shall have authority to issue is 7,000,000, $0.001
par value per share, and the total number of shares of Common
Stock the Corporation shall have authority to issue is
50,000,000, $0.001 par value per share. The shares of
Preferred Stock shall initially be undesignated as to series.
The Board of Directors is authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or
imposed upon a wholly unissued series of Preferred Stock, and
within the limitations or restrictions stated in any
resolution or resolutions of the Board of Directors originally
fixing the number of shares constituting any series, to
increase or decrease (but not below the number of shares of
any such series then outstanding) the number of shares of any
such series subsequent to the issue of shares of that series,
to determine the designation of any series, and to fix the
number of shares of any series.
FIFTH: The following provisions are inserted for the management of
-----
the business and the conduct of the affairs of the
Corporation, and for further definition, limitation and
regulation of the powers of the Corporation and of its
directors and stockholders:
A. The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors. In
addition to the powers and authority expressly conferred upon
them by statute or by this Certificate of Incorporation or the
Bylaws of the Corporation, the directors are hereby empowered
to exercise all such powers and do all such acts and things as
may be exercised or done by the Corporation.
B. The directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide.
C. Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly
called annual or special meeting of stockholders of the
Corporation and may not be effected by any consent in writing
by such stockholders.
D. Special meetings of stockholders of the Corporation may be
called only (1) by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies
in previously authorized directorships at the time any such
resolution is presented to the Board for adoption) or (2) by
the holders of not less than ten percent (10%) of all of the
shares entitled to cast votes at the meeting.
2
<PAGE> 23
SIXTH:
-----
A. The number of directors shall initially be set at seven (7)
and, thereafter, shall be fixed from time to time exclusively
by the Board of Directors pursuant to a resolution adopted by
a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is
presented to the Board for adoption). The directors shall be
divided into three classes with the term of office of the
first class (Class I) to expire at the 1998 annual meeting of
the stockholders; the term of office of the second class
(Class II) to expire at the 1999 annual meeting of
stockholders; the term of office of the third class (Class
III) to expire at the annual meeting of stockholders to be
held in the year 2000; and thereafter for each such term to
expire at each third succeeding annual meeting of stockholders
after such election. Subject to the rights of the holders of
any series of Preferred Stock then outstanding, a vacancy
resulting from the removal of a director by the stockholders
as provided in Article SIXTH, Section C below may be filled at
a special meeting of the stockholders held for that purpose.
All directors shall hold office until the expiration of the
term for which elected, and until their respective successors
are elected, except in the case of the death, resignation, or
removal of any director.
B. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, newly created directorships
resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting
from death, resignation or other cause (other than removal
from office by a vote of the stockholders) may be filled only
by a majority vote of the directors then in office, though
less than a quorum, and directors so chosen shall hold office
for a term expiring at the next annual meeting of stockholders
at which the term of office of the class to which they have
been elected expires, and until their respective successors
are elected, except in the case of the death, resignation, or
removal of any director. No decrease in the number of
directors constituting the Board of Directors shall shorten
the term of any incumbent director.
C. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, any directors, or the entire
Board of Directors, may be removed from office at any time,
with or without cause, but only by the affirmative vote of the
holders of at least a majority of the voting power of all of
the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of
directors, voting together as a
3
<PAGE> 24
single class. Vacancies in the Board of Directors resulting
from such removal may be filled by a majority of the directors
then in office, though less than a quorum, or by the
stockholders as provided in Article SIXTH, Section A above.
Directors so chosen shall hold office for a term expiring at
the next annual meeting of stockholders at which the term of
office of the class to which they have been elected expires,
and until their respective successors are elected, except in
the case of the death, resignation, or removal of any
director.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend
-------
or repeal Bylaws of the Corporation. Any adoption, amendment
or repeal of Bylaws of the Corporation by the Board of
Directors shall require the approval of a majority of the
total number of authorized directors (whether or not there
exist any vacancies in previously authorized directorships at
the time any resolution providing for adoption, amendment or
repeal is presented to the Board). The stockholders shall
also have power to adopt, amend or repeal the Bylaws of the
Corporation. Any adoption, amendment or repeal of Bylaws of
the Corporation by the stockholders shall require, in addition
to any vote of the holders of any class or series of stock of
the Corporation required by law or by this Certificate of
Incorporation, the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power
of all of the then outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
EIGHTH: A director of the Corporation shall not be personally liable
------
to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involved intentional
misconduct or a knowing violation of law, (iii) under Section
174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper
personal benefit.
If the Delaware General Corporation Law is hereafter amended
to authorize the further elimination or limitation of the
liability of a director, then the liability of a director of
the Corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as
so amended.
Any repeal or modification of the foregoing provisions of this
Article EIGHTH by the stockholders of the Corporation shall
not adversely affect any right or protection of a director of
the Corporation existing at the time of such repeal or
modification.
4
<PAGE> 25
NINTH: The Corporation reserves the right to amend or repeal any
-----
provision contained in this Certificate of Incorporation in
the manner prescribed by the laws of the State of Delaware and
all rights conferred upon stockholders are granted subject to
this reservation; provided, however, that, notwithstanding any
other provision of this Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or
no vote, but in addition to any vote of the holders of any
class or series of the stock of this Corporation required by
law or by this Certificate of Incorporation, the affirmative
vote of the holders of at least 66-2/3% of the voting power of
all of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be
required to amend or repeal this Article NINTH, Article FIFTH,
Article SIXTH, Article SEVENTH or Article EIGHTH.
5
<PAGE> 26
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
executed on behalf of the Corporation by its President and Chief Executive
Officer and attested by David Satterfield, its Secretary, this 26th day of
October, 1998.
INTEGRATED SENSOR SOLUTIONS, INC.
By: /s/ MANHER D. NAIK
------------------------------
Manher D. Naik, President and
Chief Executive Officer
Attest:
By: /s/ DAVID SATTERFIELD
-----------------------------
David Satterfield, Secretary
6
<PAGE> 27
EXHIBIT 10.1
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of August 21, 1998,
by and between Integrated Sensor Solutions, Inc. ("Borrower") and Silicon
Valley Bank ("Bank").
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which
may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to,
among other documents, a Loan and Security Agreement, dated July 10, 1996,
as may be amended from time to time, (the "Loan Agreement"). The Loan
Agreement provided for, among other things, a Committed Line in the original
principal amount of One Million Dollars ($1,000,000)(the "Revolving
Facility"). The Loan Agreement has been modified pursuant to, among other
documents, a Amendment to Loan and Security Agreement dated August 22, 1997,
pursuant to, among other things, the Committed Line was increased to Two
Million Dollars ($2,000,000). Defined terms used but not otherwise defined
herein shall have the same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to
as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the
Indebtedness is secured by the Collateral as described in the Loan
Agreement. In addition, Borrower has agreed not to pledge any of its
Patents, Copyrights and Trademarks to a third party, pursuant to a Negative
Pledge Agreement, dated August 22, 1997, by and between Borrower and Bank.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security
Documents, together with all other documents evidencing or securing the
Indebtedness shall be referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. Modification(s) to Loan Agreement
1. The following definitions are hereby amended and/or
incorporated into Section 1.1 entitled "Definitions":
"Committed Equipment 2 Line" means One Million Five
Hundred Thousand Dollars ($1,500,000).
"Committed Line" means Three Million Five Hundred
Thousand Dollars ($3,500,000).
"Credit Extension" is each Advance, Equipment Advance,
Equipment 2 Advance, Letter of Credit, Exchange
Contract or any other extension of credit by Bank for
Borrower's benefit.
Item "(e)" under "Eligible Accounts" shall read as:
Accounts with respect to which the account debtor is an
Affiliate of Borrower, except, up to 40% of inter-
company accounts shall be deemed Eligible Accounts;
Item "(i)" under "Eligible Accounts" shall read as:
Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to
Borrower exceed twenty-five percent (25%) of all
Accounts, to the extent such obligations exceed the
aforementioned percentage, except, (i) Accounts with
respect to BLD Products, Inc., Breed Technologies,
Inc., IC Sensors, Inc. and Michelin N.A., for which the
applicable percentage shall be thirty-five percent
(35%), (ii) intercompany Accounts, for which the
1
<PAGE> 28
applicable percentage shall be forty percent (40%), and
(iii) as approved in writing by Bank;
"Eligible Foreign Accounts" means Accounts with respect
to which the account debtor does not have its principal
place of business in the United States and (i) that
Bank approves on a case-by-case basis, or (ii) that are
Accounts with respect to which the account debtor is
Omron Corporation, Nagano Keiki Seisakusho and Nippon
Precision Device Corporation.
"Equipment 2 Advance" is defined in Section 2.1.6.
"Equipment 2 Availability End Date" is defined in
Section 2.1.6.
"Equipment 2 Loan Maturity Date" is defined in Section
2.1.6.
"Revolving Maturity Date" means August 20, 1999.
2. Section 2.1.1 entitled "Advances" is hereby amended to
read as follows:
Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Advances to Borrower in
an aggregate amount not to exceed the Committed Line
minus (a) the Cash Management Services minus (b) the
amount of all outstanding Letters of Credit (including
drawn but unreimbursed Letters of Credit), and minus
(c) the Foreign Exchange Reserve, provided, however,
that if the aggregate outstanding Advances plus (a) the
Cash Management Services plus (b) the amount of all
outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit), and plus (c) the
Foreign Exchange Reserve equal to or exceed $1,000,000,
then the Aggregate outstanding Advances shall not
exceed the lesser of either the Committed Line minus
the Cash Management Services Sublimit or the Borrowing
Base, whichever is less, minus (i) the amount of all
outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit), and minus (ii) the
Foreign Exchange Reserve. For purposes of this
Agreement, "Borrowing Base" shall mean an amount equal
to eighty percent (80%) of Eligible Accounts. Amounts
borrowed under this Section may be repaid and
reborrowed during the term of this Agreement.
To Obtain an Advance, Borrower must notify Bank by
facsimile or telephone by 3:00 p.m. Pacific time on the
Business Day the Advance is to be made. Borrower must
promptly confirm the notification by delivering to Bank
the Payment/Advance Form. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances
under this Agreement based on instructions from a
Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet
Obligations which have become due. Bank may rely on
any telephone notice given by a person whom Bank
believes is a Responsible Officer or designee. Borrower
will indemnify Bank for any loss Bank suffers due to
that reliance.
The Committed Line terminates on the Revolving Maturity
Date, when all Advances are immediately payable.
3. The reference to "Two Million Dollars ($2,000,000)" in
Section 2.1.2 entitled "Letters of Credit" is hereby
amended to read "Three Million Five Hundred Thousand
Dollars ($3,500,000)".
4. The second sentence of Section 2.1.2 (a) entitled
"Letters of Credit" is amended to read as follows:
2
<PAGE> 29
Each such Letter of Credit shall have an expiry date
not later than the Revolving Maturity Date.
5. The following Sections are hereby incorporated into the
Loan Agreement:
2.1.4 Foreign Exchange Contract; Foreign Exchange
Settlements.
Borrower may enter foreign exchange contracts (the
"Exchange Contracts") not exceeding an aggregate amount
of $3,500,000 (the "Contract Limit"), under which Bank
will sell to or purchase from Borrower foreign currency
on a spot or future basis. Borrower may not request
any Exchange Contracts if it is out of compliance with
any provision of this Agreement. Exchange Contracts
must provide for delivery of settlement on or before
the Revolving Maturity Date. The amount available
under the Committed Line is reduced by the following
(the "Foreign Exchange Reserve") on any given day (the
"Determination Date"): (i) on all outstanding Exchange
Contracts on which delivery is to be effected or
settlement allowed more than two business days after
the Determination Date, 10% of the gross amount of the
Exchange Contracts; plus (ii) on all outstanding
Exchange Contracts on which delivery is to be effected
or settlement allowed within two business days after
the Determination Date, 100% of the gross amount of the
Exchange Contracts.
Bank may terminate the Exchange Contracts if (a) an
Event of Default occurs or (b) there is not sufficient
availability under the Committed Line and Borrower does
not have available funds in its deposit account for the
Foreign Exchange Reserve. If Bank terminates the
Exchange Contracts, Borrower will reimburse Bank for
all fees, costs and expenses in connection with the
Exchange Contracts.
Borrower may not permit the total of all Exchange
Contracts on which delivery is to be effected and
settlement allowed in any two business day period to be
more than $3,500,000 (the "Settlement Limit") nor may
Borrower permit the total of all Exchange Contracts
outstanding at any one time, to exceed the Contract
Limit. However, the amount which may be settled in any
2 business day period may be increased above the
Settlement Limit if:
(i) there is sufficient availability under the
Committed Line in the amount of the Foreign Exchange
Reserve for each Determination Date, provided that Bank
in advance shall reserve the full amount of the Foreign
Exchange Reserve against the Committed Line; or
(ii) there is insufficient availability under the
Committed Line for settlements within any 2 business
day period, but Bank: (A) verifies good funds overseas
before crediting Borrower's deposit account (in the
case of Borrower's sale of foreign currency); or (B)
debits Borrower's deposit account before delivering
foreign currency overseas (in the case of Borrower's
purchase of foreign currency).
If Borrower purchases foreign currency, Borrower must
in advance instruct Bank either to treat the settlement
as an advance under the Committed Line, or to debit
Borrower's account for the amount settled.
Borrower will execute all Bank's standard applications
and agreements in connection with the Exchange
Contracts and pay all Bank's standard fees and charges.
Borrower will indemnify Bank and hold it harmless from
all claims, liabilities, demands, obligations, actions,
costs and expenses (including reasonable attorneys'
fees) which it
3
<PAGE> 30
incurs arising out of or in any way relating to any of
the Exchange Contracts or any contemplated
transactions.
2.1.5 Cash Management Sublimit. Borrower may use
up to $500,000 for Bank's Cash Management Services,
which may include merchant services, direct deposit of
payroll, business credit card, and check cashing
services identified in the Cash Management Services
Agreement (the "Cash Management Services"). All
amounts Bank pays for any Cash Management Services will
be treated as an Advance under the Line of Credit.
2.1.6 Equipment 2 Advances.
(a) Through September 28, 1999 (the "Equipment 2
Availability End Date"), Bank will make advances
("Equipment 2 Advance" and, collectively,"Equipment
2 Advances") not exceeding the Committed Equipment
2 Line. The Equipment 2 Advances may only be used
to purchase Equipment, software licenses and
leasehold improvements and may not exceed 100% of
the equipment, software and leaseholds, excluding
taxes, shipping, warranty charges, freight
discounts and installation expense. Notwithstanding
the foregoing, up to $1,000,000 in Equipment 2
Advances may be used to purchase Equipment and
software licenses which will be domiciled outside
the United States.
(b) Except as set forth in Section 2.3(b),
interest accrues from the date of each Equipment 2
Advance at a floating rate equal to the Prime Rate
plus one and one quarter (1.250) percentage points
per annum and is payable monthly until the
Equipment 2 Availability End Date occurs.
Equipment 2 Advances outstanding on the Equipment 2
Availability End Date are payable in 36 equal
monthly installments of principal, plus accrued
interest, beginning on the 21st of each month
following the Equipment 2 Availability End Date and
ending on September 28, 2002 (the "Equipment 2 Loan
Maturity Date"). Equipment 2 Advances when repaid
may not be reborrowed.
(c) To obtain an Equipment 2 Advance, Borrower
must notify Bank (the notice is irrevocable) by
facsimile no later than 3:00 p.m. Pacific time 1
Business Day before the day on which the Equipment
2 Advance is to be made. The notice in the form of
a Payment/Advance Form and must be signed by a
Responsible Officer or designee and include a copy
of the invoice for the Equipment, or software
licenses being financed or the leasehold
improvements being made.
6. Section 2.2 entitled "Overadvances" is hereby amended
to read as follows:
If, at any time or for any reason,
(A) the amount of Advances plus (a) the Cash Management
Services plus (b) the amount of all outstanding Letters
of Credit (including drawn but unreimbursed Letters of
Credit), and plus (c) the Foreign Exchange Reserve owed
by Borrower to Bank, is greater than the Committed Line,
or;
(B) the amount of Advances plus (i) the amount of all
outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit), and plus (ii) the
Foreign Exchange Reserve owed by Borrower to Bank, is
greater than the Borrowing Base (provided that the
amount of Advances plus (a) the Cash Management Services
plus (b) the amount of all outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit),
and plus (c) the Foreign Exchange Reserve owed by
Borrower to Bank, is greater than $1,000,000),
then Borrower shall immediately pay to Bank, in cash,
the amount of such excess.
4
<PAGE> 31
7. Effective as of the date of this Loan Modification
Agreement, Section 2.3(a) entitled "Interest Rate" is
hereby amended to read as follows:
Except as set forth in Section 2.3(b), any Advances
shall bear interest, on the average Daily Balance, at a
rate equal to one half of one (0.500) percentage point
above the Prime Rate.
8. Section 6.3 entitled "Financial Statements, Reports,
Certificates" is hereby amended to read as follows:
(a) Borrower will deliver to Bank: (i) as soon as
available, but no later than 30 days after the last day
of each quarter, company prepared consolidating balance
sheet and income statement covering Borrower's
consolidated operations during the period, in a form
acceptable to Bank and certified by a Responsible
Officer; (ii) within 5 days of filing, copies of all
statements, reports and notices made available to
Borrower's security holders or to any holders of
Subordinated Debt and all reports on Form 10-K, 10-Q and
8-K filed with the Securities and Exchange Commission;
(iii) a prompt report of any legal actions pending or
threatened against Borrower or any Subsidiary that could
result in damages or costs to Borrower or any Subsidiary
of $100,000 or more; and (iv) budgets, sales
projections, operating plans or other financial
information Bank requests.
(b) Immediately prior to Borrower's Obligations under
the Committed Line exceeding $1,000,000 and within 20
days after the last day of each month at such time as
Borrower's Obligations under the Committed Line exceed
$1,000,000, Borrower will deliver to Bank a Borrowing
Base Certificate signed by a Responsible Officer, with
aged listings of accounts receivable and accounts
payable.
(c) Within 30 days after the last day of each quarter,
Borrower will deliver to Bank with the quarterly
financial statements a Compliance Certificate signed by
a Responsible Officer.
(d) Bank has the right to audit Borrower's Accounts at
Borrower's expense. Such audits will be conducted prior
to Borrower's Obligations under the Committed Line
exceeding $1,000,000 and no more often than once every
year at such times as Borrower's Obligations under the
Committed Line exceed $1,000,000 unless an Event of
Default has occurred and is continuing.
9. Section 6.8 entitled "Quick Ratio" is hereby amended to
read as follows:
Beginning with the fiscal quarter ending September 30,
1998, Borrower shall maintain, as of the last day of
each fiscal quarter, a ratio of Quick Assets to Current
Liabilities of at least 2.00 to 1.00.
10. Section 6.9 entitled "Quick Ratio (Consolidated)" is
hereby deleted and replaced with the term,
"Intentionally left blank".
11. Section 6.10 entitled "Debt-Net Worth Ratio" is hereby
amended to read as follows:
Beginning with the fiscal quarter ending September 30,
1998, Borrower shall maintain, as of the last day of
each fiscal quarter, a ratio of Total Liabilities to
Tangible Net Worth plus Subordinated Debt of not more
than 1.00 to 1.00.
12. Section 6.11 entitled "Tangible Net Worth" is hereby
deleted and replaced with the term, "Intentionally left
blank".
5
<PAGE> 32
13. Section 6.12 entitled "Profitability" is hereby amended
to read as follows:
Borrower shall achieve minimum profitability of $1.00
for each fiscal quarter, provided, however, Borrower
shall be allowed a loss for the fiscal quarter ending
September 30, 1998, provided that such loss shall not
exceed $1,000,000.
14. Section 6.16 entitled "Debt Service Coverage" is hereby
amended to read as follows:
Beginning with the fiscal quarter ending September 30,
1998, Borrower shall maintain a minimum cash and cash
equivalents equal to or greater than two (2) times of
the aggregate outstanding Equipment Advances and
Equipment 2 Advances (the "Liquidity Ratio"). Upon two
(2) consecutive quarters of a Debt Service Coverage of
1.50 to 1.00, the Liquidity Ratio shall be replaced with
Borrower's requirement to maintain, as of the last day
of each fiscal quarter, a Debt Service Coverage of at
least 1.50 to 1.00. "Debt Service Coverage" means net
income plus depreciation and amortization plus interest
expense for the preceding fiscal quarter, divided by the
current portion of long term debt plus interest expense.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay to Bank a fee in the amount
of Twelve Thousand Five Hundred Dollars ($12,500) (the "Committed Line Loan
Fee") plus Six Thousand Dollars ($6,000) (the "Equipment 2 Line Loan Fee")
plus all out-of-pocket expenses.
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor
signing below) agrees that, as of the date hereof, it has no defenses
against the obligations to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor
signing below) understands and agrees that in modifying the existing
Indebtedness, Bank is relying upon Borrower's representations, warranties,
and agreements, as set forth in the Existing Loan Documents. Except as
expressly modified pursuant to this Loan Modification Agreement, the terms
of the Existing Loan Documents remain unchanged and in full force and
effect. Bank's agreement to modifications to the existing Indebtedness
pursuant to this Loan Modification Agreement in no way shall obligate Bank
to make any future modifications to the Indebtedness. Nothing in this Loan
Modification Agreement shall constitute a satisfaction of the Indebtedness.
It is the intention of Bank and Borrower to retain as liable parties all
makers and endorsers of Existing Loan Documents, unless the party is
expressly released by Bank in writing. No maker, endorser, or guarantor
will be released by virtue of this Loan Modification Agreement. The terms
of this paragraph apply not only to this Loan Modification Agreement, but
also to all subsequent loan modification agreements.
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Borrower's payment of the Committed Line Loan Fee and the
Equipment 2 Line Loan Fee.
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: BANK:
INTEGRATED SENSOR SOLUTIONS, INC. SILICON VALLEY BANK
By: By:
----------------------------- ---------------------------
Name: Name:
--------------------------- --------------------------
Title: Title:
-------------------------- -------------------------
6
<PAGE> 33
<TABLE> <S> <C>
<S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-
QSB FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998
<PERIOD-START> APR-01-1998 APR-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 3,920 17,610
<SECURITIES> 9,137 0
<RECEIVABLES> 5,122 <F1> 4,522 <F1>
<ALLOWANCES> 0 0
<INVENTORY> 4,612 3,120
<CURRENT-ASSETS> 23,825 25,507
<PP&E> 4,008 <F1> 2,254 <F1>
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 27,833 27,761
<CURRENT-LIABILITIES> 4,143 6,340
<BONDS> 221 108
0 0
0 0
<COMMON> 8 7
<OTHER-SE> 23,398 21,228
<TOTAL-LIABILITY-AND-EQUITY> 27,833 27,761
<SALES> 4,881 2,415
<TOTAL-REVENUES> 5,658 3,510
<CGS> 3,501 1,607
<TOTAL-COSTS> 4,414 2,496
<OTHER-EXPENSES> 1,007 <F2> 484 <F2>
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 29 51
<INCOME-PRETAX> (225) 13
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (225) 13
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (225) 13
<EPS-PRIMARY> (0.03) <F3> (0.00) <F3>
<EPS-DILUTED> (0.03) (0.00)
<FN>
<F1> Item shown net of allowance, consistent with the balance sheet
presentation.
<F2> Item consists of research and development.
<F3> Item consists of basic earnings per share.
</FN>
</TABLE>
