==============================================================================
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 June 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
------------------- ------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
----------------------------
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 August
7, 1998: 7,597,028
This Report on Form 10-QSB includes 21 pages with the Index to Exhibits
located on page 18.
<PAGE> 1
INTEGRATED SENSOR SOLUTIONS, INC.
REPORT ON FORM 10-QSB
FOR QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - June 30, 1998
and March 31, 1998 .................................... 3
Condensed Consolidated Statements of Operations - Three
Months Ended June 30, 1998 and 1997 ................... 4
Condensed Consolidated Statements of Cash Flows - Three
Months Ended June 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 5. Other Information ....................................... 18
Item 6. Exhibits and Reports on Form 8-K ........................ 18
Signatures .............................................. 19
</TABLE>
2
<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INTEGRATED SENSOR SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, March 31,
1998 1998 (1)
---------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,954 $ 17,610
Short-term investments 9,006 --
Accounts receivable, net 2,821 3,720
Accounts receivable from related parties 1,719 802
Inventories 3,638 3,120
Prepaid expenses and other current assets 559 255
--------- ---------
Total current assets 24,697 25,507
PROPERTY AND EQUIPMENT, NET 2,612 2,254
--------- ---------
TOTAL ASSETS $ 27,309 $ 27,761
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 400 $ 900
Accounts payable-trade 1,611 3,279
Accounts payable to related parties 557 1,144
Current portion of capital lease obligations 365 358
Other current liabilities 643 659
-------- ---------
Total current liabilities 3,576 6,340
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS 152 108
MINORITY INTEREST IN SUBSIDIARY 61 78
STOCKHOLDERS' EQUITY:
Noncumulative convertible preferred stock -- --
Common stock 8 7
Additional paid-in capital 33,808 31,064
Accumulated deficit (10,012) (9,429)
Cumulative translation adjustment 55 (32)
Deferred compensation (339) (375)
-------- ---------
Total stockholders' equity 23,520 21,235
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,309 $ 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
<TABLE>
<CAPTION>
INTEGRATED SENSOR SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended
June 30,
------------------------
1998 1997
--------- --------
<S> <C> <C>
REVENUES:
Product revenue $ 4,360 $ 2,553
Contract revenue 504 948
-------- --------
Total revenues (related party revenues of
$1,595, and $400 for 1998 and 1997,
respectively) 4,864 3,501
-------- --------
COST OF REVENUES:
Cost of product revenue 3,353 1,848
Cost of contract revenue 592 689
-------- --------
Total cost of revenues 3,945 2,537
-------- --------
GROSS PROFIT 919 964
-------- --------
OPERATING EXPENSES:
Research and development 1,024 355
Sales, general, and administrative 631 438
-------- --------
Total operating expenses 1,655 793
-------- --------
INCOME (LOSS) FROM OPERATIONS (736) 171
INTEREST EXPENSE (45) (54)
INTEREST INCOME 211 -
OTHER INCOME (EXPENSE) (30) 4
MINORITY INTEREST IN NET (INCOME)
LOSS OF CONSOLIDATED SUBSIDARY 17 (30)
-------- --------
NET INCOME (LOSS) $ (583) $ 91
======== ========
Basic and diluted net income (loss) per share
(pro forma for 1997) $ (0.08) $ 0.02
======== ========
Shares used in computing basic net income (loss)
per share (pro forma for 1997) 7,559 4,496
======== ========
Shares used in computing diluted net income (loss)
per share (pro forma for 1997) 7,559 4,802
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 4
<TABLE>
<CAPTION>
INTEGRATED SENSOR SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
June 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating activities
Net loss $ (583) $ 91
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 280 206
Amortization of deferred compensation 36 26
Minority interest in net income (loss) of
Subsidiary 17 (30)
Foreign currency (gains) losses (12) (4)
Gain on sale of interest in joint venture -- (172)
Changes in operating assets and liabilities:
Accounts receivable, net (18) (513)
Inventories (518) (262)
Prepaid expenses (304) (37)
Accounts payable (2,255) (562)
Accrued payroll and related expenses (14) (8)
Other accrued liabilities (2) (85)
--------- ---------
Net cash used in operating activities (3,373) (1,350)
Investing activities
Purchases of short-term investments (9,006) --
Purchase of property and equipment (487) (247)
--------- ---------
Net cash provided by (used in) investing activities (9,493) (247)
Financing activities
Payments on line of credit (500) --
Payments of principal on notes payable -- (436)
Payments of principal on capital lease obligations (35) (27)
Issuance of convertible preferred stock, net of
issuance costs -- 430
Net proceeds from issuance of common stock 2,745 --
--------- ---------
Net cash provided by (used in) financing activities 2,210 (33)
--------- ---------
Decrease in cash and cash equivalents (10,656) (1,630)
Cash and cash equivalents at beginning of period 17,610 2,059
--------- ---------
Cash and cash equivalents at end of period $ 6,954 $ 429
========= =========
Supplemental disclosure of cash flow information
Interest paid $ 45 $ 54
========= =========
Schedule of noncash financing activities
Equipment acquired under capital leases $ 86 $ 23
========= =========
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 $ -- $ 29
========= =========
</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 June 30, 1998 and for the three months ended June 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>
Three Months
Ended June 30,
--------------------------
1998 1997
----------- ----------
<S> <C> <C>
Robert Bosch GmbH 35 % 37 %
Nagano Keiki Co., Ltd. 32 % 11 %
Echlin Corporation 17 % -- %
MascoTech -- % 19 %
EG&G/IC Sensors -- % 13 %
</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>
June 30, March 31,
1998 1998
----------- -----------
<S> <C> <C>
Finished goods $ 385 $ 310
Work-in-process 1,089 1,166
Raw materials 2,164 1,644
-------- --------
$ 3,638 $ 3,120
======== ========
</TABLE>
3. LINE OF CREDIT/TERM LOAN
The Company has a bank line of credit agreement that expires on August
21, 1998. The line, which is currently in the process of being renewed,
allows the Company to borrow the lesser of $2,000,000 or 75% 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% (9.25% at June 30,
1998) and are secured by the assets of the Company. As of June 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
$500,000 term loan facility for equipment that bears interest at the bank's
prime rate plus 1.50% (10.0% at June 30, 1998). As of June 30, 1998, the
Company had borrowings 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
June 30, 1998, the Company was out of compliance with its profitability
covenant and has obtained a waiver through that date.
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 months ended June 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 ($496,000) and
$251,000, 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>
Three Months ended June 30, 1998
--------------------------------------------------
Adjustments/
United States Germany Eliminations Consolidated
------------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues to unaffiliated
Customers $ 2,774 $ 2,090 $ -- $ 4,864
Transfers between geographic
areas 665 328 (993) --
--------- -------- --------- ----------
Total revenues $ 3,439 $ 2,418 $ (993) $ 4,864
========= ======== ========= ==========
Loss from operations $ (713) $ (22) $ (1) $ (736)
========= ======== ========= ==========
Identifiable assets $ 27,018 $ 4,909 $ (4,618) $ 27,309
========= ======== ========= ==========
</TABLE>
7
<PAGE> 7
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended June 30, 1997
--------------------------------------------------
Adjustments/
United States Germany Eliminations Consolidated
------------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues to unaffiliated
Customers $ 2,510 $ 991 $ -- $ 3,501
Transfers between geographic
Areas 241 179 (420) --
--------- ------- -------- ---------
Total revenues $ 2,751 $ 1,170 $ (420) $ 3,501
========= ======= ======== =========
Income from operations $ 84 $ 63 $ 24 $ 171
========= ======= ======== =========
Identifiable assets $ 8,385 $ 3,195 $ (3,072) $ 8,508
========= ======= ======== =========
</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
Ended June 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Canada $ 73 $ 196
Japan and Korea 1,625 458
------- -------
Total $ 1,698 $ 654
======= =======
</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 Ended June 30,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Numerator for basic and diluted:
Net income (loss) $ (583) $ 91
========= =========
Denominator:
Weighted average common shares outstanding 7,559 3,090
Conversion of weighted average preferred
stock outstanding (pro forma) -- 1,406
--------- ---------
Denominator for basic net income (loss) per
share (pro forma for 1997) 7,559 4,496
========= =========
Effective dilutive securities:
Employee stock options -- 306
========= =========
Denominator for diluted net income (loss)
per share $ 7,559 $ 4,802
========= =========
Basic and diluted net income (loss) per share
(pro forma for 1997) $ (0.08) $ 0.02
========= =========
</TABLE>
8
<PAGE> 8
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Options to purchase 549,710 shares of common stock at prices ranging from
$1.125 to $8.313 were outstanding as of June 30, 1998, but were not included
in the computation of diluted earnings (loss) per share for the three months
ended June 30, 1998 because to do so would have been anti-dilutive.
Securities (including options and warrants) that could potentially dilute
basic EPS in the future were not included in the computation of diluted EPS
for the three months ended June 30, 1998 because to do so would have been
antidilutive for the period presented.
Pro forma net loss per share has been computed as described in Note 1
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.
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
Risk Factors 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 $4.9 million for
the three months ended June 30, 1998 from approximately $3.5 million for the
comparable period in 1997. The Company has experienced operating losses in
each year since its inception and had an accumulated deficit of $10.0 million
as of June 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 Ended
June 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Product revenues 89.6% 72.9%
Contract revenues 10.4 27.1
------- -------
Total revenues 100.0 100.0
------- -------
Cost of revenues:
Cost of product revenue 68.9 52.8
Cost of contract revenue 12.2 19.7
------- -------
Total cost of revenues 81.1 72.5
------- -------
Gross profit 18.9 27.5
------- -------
Operating expenses:
Research and development 21.0 10.1
Sales, general and administration 13.0 12.5
------- -------
Total operating expenses 34.0 22.6
------- -------
Income (loss) from operations (15.1) 4.9
Interest expense (0.9) (1.5)
Interest income 4.3 --
Other Income (expense) (0.6) 0.1
Minority interest in net (income) loss of ISS-Nagano 0.3 ( 0.9)
------- -------
Net income (loss) (12.0)% 2.6%
======= =======
</TABLE>
10
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Comparison of Three Months Ended June 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.
Product Revenues: Product revenues were $4.4 million for the three
months ended June 30, 1998, an increase of $1.8 million or 70.8% over the
$2.6 million for three months ended June 30, 1997. This increase reflects
growth in the Company's product offerings. The Company's two product lines,
ASICs and ISDs, grew with increased shipments of the Company's SCA2095 ASIC,
primarily used in the gasoline direct injection system, the SCA2235 ASIC, used
in the industrial gas metering system, and the HVP ISD produced at the
Company's German operations for use in the common rail diesel fuel injections
system.
Contract Revenues: Contract revenue decreased to $504,000 for the three
months ended June 30, 1998 from $948,000 for the comparable period in 1997
primarily due to the fewer number of milestones completed during the three
months ended June 30, 1988 compared to the same period in 1997. Contract
revenues as a percentage of total revenue decrease from 27.1% to 10.4%. The
Company expects contract revenues will 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
months ended June 30, 1998 were $3.8 million, an increase of $2.1 million or
130% growth over the three months ended June 30, 1997. As a percentage of
total revenues, international sales increased from 47.0% to 77.9% for the
three months ended June 30, 1998. This increase was primarily the result of
increased sales of media compatible ISDs in Germany. 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 gross margin decreased
4.5% to 23.1% for the three months ended June 30, 1998 from 27.6% for three
months ended June 30, 1997. The Company experienced yield problems associated
with the production ramp of its HVP media-compatible ISDs, which materially
affected gross margin and operating results during the quarter ended June 30,
1998.
Cost of Contract Revenue: Cost of contract revenue was $592,000 for the
three months ended June 30, 1998. This represents a $97,000 decrease from the
three months ended June 30, 1997. This decrease was primarily a result of
lower contract costs associated with fewer contracts in the three month period
ending June 30, 1998 compared to the three months ended June 30, 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 gross margin on contract revenues will grow or even remain
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 $355,000 for
the three months ended June 30, 1998 and 1997, respectively. This higher
level of expenses reflects an overall increase in resources at the Company's
German operations and in its ASIC product test development department to
support future production. Research and development expenses as a percentage
of revenues increased 10.9% to 21.1% for the three months ended June 30, 1998.
The Company expects research and development expenses to increase in absolute
dollars but decrease as a percentage of increasing revenue.
11
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 $631,000 and $438,000 for the three months ended June 30, 1998 and 1997
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 as a percentage of revenue increased to 13.0% for the
three months ended June 30, 1998 from 12.5% in the year earlier period as a
result of the increased expenditure level. The Company expects sales, general
and administrative expenses to increase in dollars amount, reflecting growth
in operations and costs associated with being a public entity, but to decline
as a percentage of revenue.
Interest Expense
Interest expense decreased from $54,000 for the three months ended June
30, 1997 to $45,000 for the three months ended June 30, 1998 due to lower
average borrowings resulting from the conversion and repayment of debt.
Interest Income
Interest income was $211,000 for the three months ended June 30, 1998.
This was primarily the result of higher cash balances resulting from the
Company's initial public offering in March of 1998. There was no interest
income during the three months ended June 30, 1997.
Other Income (Expense)
Other income (expense) decreased from $4,000 income for the three months
ended June 30, 1997 to $30,000 expense for the three months ended June 30,
1998.
Minority Interest in Net (Income) Loss of ISS-Nagano
Minority interest in net loss of ISS-Nagano for the three months ended
June 30, 1998 was $17,000 compared to $30,000 of minority interest in net
income of ISS-Nagano for three months ended June 30, 1998 due to the net loss
of ISS-Nagano for the quarter ended June 30, 1998.
Liquidity and Capital Resources
Since inception, the Company has financed its operations principally
through sales of equity securities, product revenues and contract revenues. At
June 30, 1998, the Company had cash, cash equivalents and short-term
investments of $17.6 million and working capital of $21.1 million. The
Company also had available a $2.0 million bank line of credit agreement
secured by the assets of the Company that permits borrowings of the lesser of
$2.0 million or 75% 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 June 30, 1998, the Company also had
available a $500,000 term loan facility for capital equipment that bears
interest at the bank's prime rate plus 1.5%. The bank line of credit agreement
and term loan facility have an expiration date of August 21, 1998 and are
currently in the process of being renewed. At June 30, 1998, the Company had
outstanding borrowings of $400,000 under the line of credit agreement and
$517,057 under various capital equipment lease financing arrangements. At
June 30, 1998, the Company was out of compliance with its profitability
covenant and obtained a waiver through that date.
Net cash used in operating activities was $3.4 million and $1.4 million
in three months ended June 30, 1998 and 1997, respectively. For the three
months ended June 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 the
12
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Company's net loss. For three months ended June 30, 1997, net cash used in
operations was primarily attributable to an increase in accounts receivable
and an increase in inventory levels.
Net cash used in investing activities was $9.5 million, and $247,000 in
three months ended June 30, 1998 and 1997, respectively. Cash used in
investing activities for the three months ended June 30, 1998 was primarily
related to the Company's purchase of $9.0 million in short-term investments.
Cash used in investing activities for the three months ended June 30, 1997 was
entirely due to the purchase of equipment.
Net cash provided by financing activities was $2.2 million for the three
months ended June 30, 1998. 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 during the
three months ended June 30, 1998. For the three months ended June 30, 1997 the
Company repaid $436,000 in notes payable and converted $429,000 to convertible
preferred stock.
In June 1998, the Company committed approximately $3.6 million to the set
up of a manufacturing line for ISDs related to the vehicle chassis control
systems at ISS-Nagano.
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 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 did not achieve profitability on a quarterly basis until the quarter
ended June 30, 1997 and 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 June 30, 1998, the Company had an accumulated deficit of approximately
$10.0 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
13
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 three months ended June 30, 1998, the Company had three
customers which accounted for 35%, 32% and 17% of total revenues,
respectively. In the three months ended June 30, 1997, the Company had four
customers which accounted for 37%, 19%, 13%, and 11% 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 automotive industry. 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 may cause 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.
14
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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
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.
15
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 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,
16
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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
The Company is aware of the issues associated with the programming code
in existing computer systems as the year 2000 approaches. The "year 2000
problem" is pervasive and complex as virtually every computer operation will
be affected in some way by the rollover of the two-digit year value to 00.
This issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. Management is in the process of working with its software vendors to
assure that the Company is prepared for the year 2000. The Company may also be
affected by year 2000 issues at its vendors. Management does not anticipate
that the Company will incur material operating expenses or be required to make
any material investment in computer systems improvements to be year 2000
compliant. However, uncertainty exists concerning the potential costs and
effects associated with any year 2000 compliance. The Company is currently
implementing an upgrade to its management information system that the Company
believes is year 2000 compliant. Any year 2000 compliance problem of either
the Company or its customers or vendors could materially adversely affect the
Company's business, financial condition or operating results.
17
<PAGE> 1
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 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 June 30, 1998, the Company applied the net proceeds as follows:
$766,347 was used to pay indebtedness to a related party, approximately
$734,000 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 $3,800,000 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>
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K. The Company did not file any Reports on Form
8-K during the quarter ended June 30, 1998.
18
<PAGE> 1
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: August 14, 1998 By /s/ DAVID SATTERFIELD
-----------------------------
David Satterfield
Vice President Finance & Administration,
Corporate Secretary
(Authorized Officer and
Principal Financial Officer)
19
<PAGE> 19
<TABLE> <S> <C>
<S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-
QSB FOR THE PERIOD ENDED JUNE 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> JUN-30-1998 JUN-30-1997
<CASH> 6,954 17,610
<SECURITIES> 9,006 0
<RECEIVABLES> 4,540 <F1> 3,721 <F1>
<ALLOWANCES> 0 0
<INVENTORY> 3,638 3,120
<CURRENT-ASSETS> 24,697 25,507
<PP&E> 2,612 <F1> 2,254
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 27,309 27,761
<CURRENT-LIABILITIES> 3,576 6,340
<BONDS> 152 108
0 0
0 0
<COMMON> 8 7
<OTHER-SE> 23,512 21,228
<TOTAL-LIABILITY-AND-EQUITY> 27,309 21,235
<SALES> 4,360 2,553
<TOTAL-REVENUES> 4,864 3,501
<CGS> 3,353 1,848
<TOTAL-COSTS> 3,945 2,537
<OTHER-EXPENSES> 1,024 <F2> 355 <F2>
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 45 54
<INCOME-PRETAX> (583) 91
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (583) 91
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (583) 91
<EPS-PRIMARY> (0.08)<F3> 0.02 <F2>
<EPS-DILUTED> (0.08) 0.02
<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>
