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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
--------------------------
FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-23841
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INTEGRATED SENSOR SOLUTIONS, INC.
(Name of small business issuer in its charter)
DELAWARE 77-0212047
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
625 RIVER OAKS PARKWAY, SAN JOSE, CA 95134
(Address of principal executive offices) (Zip code)
(408) 324-1044
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
--------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
/ /
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. Yes /X/ No / /
The issuer's revenues for its most recent fiscal year were $15,225,000.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of the Registrant's Common Stock on
March 31, 1998 was approximately $60,404,000. Shares of voting stock held by
each officer and director and by each person who on that date owned 5% or more
of the outstanding voting stock have been excluded for purposes of the preceding
computation, in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 31, 1998, Registrant had 7,212,406 shares of Common Stock
outstanding.
The number of shares outstanding of the issuer's common stock as of June 26,
1998 was 7,595,916.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for the issuer's 1998 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Report on Form
10-KSB.
Transitional Small Business Disclosure Format. Yes / / No /X/
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INTEGRATED SENSOR SOLUTIONS, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PART I
Item 1. Description of Business........................................... 1
Item 2. Description of Property........................................... 12
Item 3. Legal Proceedings................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders............... 13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.......... 13
Item 6. Management's Discussion and Analysis or Plan of Operation......... 14
Item 7. Financial Statements.............................................. 28
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................ 46
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................... 47
Item 10. Executive Compensation........................................... 48
Item 11. Security Ownership of Certain Beneficial Owners and Management... 48
Item 12. Certain Relationships and Related Transactions................... 48
Item 13. Exhibits and Reports on Form 8-K................................. 48
</TABLE>
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PART I
FORWARD LOOKING STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-KSB ARE MADE
PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. SUCH STATEMENTS REFLECT THE COMPANY'S CURRENT VIEWS WITH
RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS AND FINANCIAL
POSITION TO DIFFER MATERIALLY. STOCKHOLDERS ARE CAUTIONED THAT ALL
FORWARD-LOOKING STATEMENTS PERTAINING TO THE COMPANY INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, THOSE CONTAINED IN ITEM 6 OF THIS
REPORT UNDER THE CAPTION ENTITLED, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION" AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S
PERIODIC REPORTS AND OTHER INFORMATION FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
ITEM 1. DESCRIPTION OF BUSINESS
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's objective is to become a
leading supplier of ASICs and ISDs for electronic control systems in these
markets. Currently, ISS has over 20 customers worldwide, including market
leaders such as Bosch, John Deere, Echlin, Honda, Knorr-Bremse, Michelin, Nagano
and Sumitomo. Through these and other customers, the Company's products have
been designed into the vehicles of leading manufacturers such as Fiat, Ford,
Honda, Mercedes Benz, Mitsubishi, Nissan and Peugeot as well as into industrial
systems manufactured by companies such as Tokyo Gas and Eaton Corporation.
The Company's core competencies are its (i) ASIC design technology, (ii)
behavioral simulation software, (iii) calibration software, (iv) package design
technology and (v) manufacturing processes. The ASIC design and software
technologies, together with the Company's packaging expertise, enable ISS to
design ASICs and ISDs that meet customer requirements for integration with
diverse and rugged systems and to manufacture them efficiently and cost
effectively with relatively low capital expenditures.
The Company has established strategic alliances with a number of significant
manufacturers such as Bosch, Nagano and Michelin. These strategic alliances are
intended to be long term, mutually beneficial relationships focusing on joint
technology and product development, manufacturing and exclusive or preferred
supply arrangements. The Company believes that OEM technical partnering
arrangements with its customers allow the Company to combine its technology with
the systems expertise of its customers and to rapidly introduce new products
based on the technology developed through these alliances.
INDUSTRY BACKGROUND
According to industry sources (including Dataquest, Intechno AG, Prognosis
and Selantek), the high performance automotive and industrial segments of the
market for electronic sensor products were estimated to be approximately $2.1
billion in 1996, and these segments are expected to grow to over $5.0 billion by
2001. Companies in the automotive and industrial markets are increasingly
incorporating electronic sensors into their products to respond to developments
in the competitive global marketplace. For example, a typical automobile
manufactured today contains approximately 20 electronic sensors with some
vehicles having as many as 60 electronic sensors. Electronic sensors can enable
manufacturers to satisfy customer demands for longer warranties, increased
product performance, reliability and energy efficiency and to comply with
environmental, safety and other governmental regulations.
Sensors rely on sensing elements that convert physical variables such as
pressure, speed, acceleration and temperature into electrical signals that
provide information that can be the basis of action such as deploying an airbag,
sounding an alarm or changing the amount of fuel supplied to an engine. The
first widely used sensors were electro-mechanical devices that provided only
basic on/off functions. Recent technological advances have enabled the
deployment of electronic sensing elements with outputs that
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continuously vary in proportion to the sensed variable. These electronic sensing
elements can be combined with electronic circuits to provide dramatic reductions
in size and weight compared to older electro-mechanical devices. With these
improvements, companies in the automotive industry increasingly use electronic
sensors in new and enhanced applications such as safety, emissions control,
engine management and other systems. Similarly, companies in industrial markets
are incorporating electronic sensors into new and enhanced applications such as
process control, test and measurement, refrigeration, utility metering and HVAC
systems.
Electronic sensing elements require substantial electronics to process or
condition their outputs in order to make them useful over varying operating
conditions and to convert the signals into a form that is compatible with the
processor or computer controlling the system. Conventional signal conditioning
electronics make use of precision analog bipolar integrated circuits to
interface with the sensing element. These ICs are commonly used in conjunction
with discrete components mounted on a ceramic substrate. This hybrid circuit
configuration results in relatively large size, high cost and reduced
reliability due to the large component count required. In addition, the
analog-only nature of these circuits is not compatible with the single-chip
integration of complex system functions that manufacturers are demanding in
sensor products to facilitate wide deployment of advanced systems. These
features include self and system diagnostics, fault detection and communications
capabilities. The Company believes that these needs create a significant market
opportunity for its ASICs and ISDs.
THE ISS SOLUTION
To meet the emerging needs of this market, ISS designs, manufactures and
sells proprietary ASICs and ISDs which enable customers in the automotive and
industrial markets to deploy advanced, high performance electronic control
systems. The ASICs are designed using commercially available CMOS processes
which enable all functions from interface with sensing element to signal
conditioning as well as system functions to be implemented in a single ASIC.
Further, these ASICs work with the Company's proprietary software for sensor
calibration. The Company's ASICs are also packaged with commercially available
sensing elements to produce ISDs that meet each customer's specifications. The
Company's products have been designed into a broad range of high performance,
high volume automotive control systems such as fuel injection and transmission
systems, automotive safety systems such as air bags, anti-lock brakes and
suspension systems, and industrial systems such as gas flow, refrigeration and
hydraulic control systems.
The Company's core competencies are its (i) ASIC design technology, (ii)
behavioral simulation software, (iii) calibration software, (iv) package design
technology and (v) manufacturing processes. The Company's mixed signal ASIC
design technology, consisting of its Intelligent Sensing Architecture and its
advanced macrocell library tailored for sensor applications, enables ISS to
rapidly develop products in which multiple system functions are integrated into
a single IC. The Company uses its behavioral simulation software during the
development process to create and assess alternative designs to optimize the
performance of its products within the customer's system. The Company uses its
calibration software during the manufacturing process to correct for variances
in sensing elements and system environments. In addition to its ASIC design and
software technology, the Company has substantial experience in designing
packages that meet customer requirements for integration with diverse and rugged
systems. The ASIC design and software technologies, together with the Company's
packaging expertise, enable ISS to design and manufacture intelligent sensor
products efficiently and cost effectively with relatively low capital
expenditures.
An integral part of the ISS solution is its customer approach and strategy.
The Company's strategy is to identify leading manufacturers within each of its
target market segments, work with these customers to understand their needs and
develop jointly with these customers product solutions that offer a combination
of high performance, increased functionality and cost savings. By combining its
technology with its
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customers' systems expertise, ISS and its customers can achieve concurrent
engineering, system partitioning and optimum product definition. The Company
believes that providing its customers access to highly trained ISS engineers,
who assist in defining, designing and qualifying customer systems, fosters
shared goals and shared responsibilities for making these customers' systems
successful. The Company has entered into such relationships with a number of
companies including Bosch, Michelin and Sumitomo in the automotive market and
Nagano in the industrial market. An additional benefit of working with leading
manufacturers is the ability to gain insight into their next generation product
requirements. The Company believes that its relationships with market leaders
position the Company to sell products to other significant market participants.
STRATEGY
The Company's objective is to be a leading supplier of innovative and
proprietary ASICs and ISDs for high performance electronic control systems. The
key elements of the Company's strategy to achieve this objective are:
EXPAND AND LEVERAGE STRATEGIC ALLIANCES. An important element of the
Company's strategy is to form alliances and joint development arrangements
with suppliers and customers to create ASICs and ISDs that are designed into
high performance, high volume products and systems. The Company believes
that strong strategic alliances enable it to sell multiple products to
select manufacturers in the automotive and industrial markets. By working
with such customers, the Company gains an understanding of the customers'
product development strategies and insight into their future needs. Forming
alliances with industry leaders also increases the Company's visibility and
acceptance of the Company's products and technologies in the marketplace.
LEVERAGE LOW COST ISD MANUFACTURING PROCESSES. The Company's technologies
enable it to manufacture its ISDs on automated, high volume, low cost
assembly lines. Because of the relatively low capital expenditures required
to construct these facilities, the Company can locate them in close
proximity to its customers. The Company has established one such facility in
Dresden, Germany which has enhanced the Company's relationships with its
German customers by enabling the Company to provide them with quick response
and effective technical support. The Company intends to establish additional
manufacturing operations near other customer bases in North America, Asia
and Europe.
MAINTAIN TECHNOLOGICAL LEADERSHIP. The Company's Intelligent Sensing
Architecture, advanced macrocell library, behavioral simulation software,
calibration software and ISD package design technology and manufacturing
know-how enable it to develop and manufacture ASICs and ISDs with high
levels of accuracy, functionality and performance. The Company plans to
continue to enhance its core technologies and to integrate them with new
generations of sensing elements, such as fiber optic and chemical sensing
elements. The Company is entering the production phase with its low power
ASICs, wireless sensing products and single chip sensor solutions in which
the sensing element is integrated into the Company's ASIC. The Company is
also exploring technologies to enable in-system programmability and to
extend the range of operating conditions for electronic control systems
incorporating its ISDs.
INCREASE PRODUCT OFFERINGS AND PENETRATE NEW MARKETS. The Company intends
to develop and introduce new ASICs and ISDs for the automotive, industrial,
office and consumer markets. Building on the technology developed for custom
products, the Company can shorten the development time of similar products
for new applications and markets and rapidly introduce standard products.
ISS believes that continuously developing and introducing new ASICs and ISDs
will enable the Company to enter markets at a competitive price point with
opportunities for future cost reductions to strengthen the Company's
competitive position. The Company also believes that it can expand into new
industrial applications and identify and exploit office and consumer markets
with new products based on its proprietary technology.
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CAPITALIZE ON FABLESS SEMICONDUCTOR MODEL. ISS does not own or operate a
semiconductor fabrication facility and relies on third parties for the
manufacture of its ASICs. The Company's fabless business model allows it to
focus its resources on developing new technologies and products, while
minimizing capital and operating infrastructure requirements. The Company
seeks to leverage the flexibility of its fabless semiconductor business
model to lower technology and production risks and increase profitability.
In addition, the Company's reliance on mainstream semiconductor
manufacturing technologies rather than newer, more expensive manufacturing
processes reduces the risks inherent in newer, less proven process
technologies.
PRODUCT DEVELOPMENT
A principal element of the Company's business strategy is to work closely
with its customers to develop custom ASICs and ISDs. The Company's joint
development arrangements generally provide that the customer funds a portion of
the Company's development efforts and obtains an exclusive right to the
resulting product subject to certain limitations and provided that the customer
satisfies certain minimum volume requirements. The Company retains intellectual
property rights to the underlying technology and frequently retains the right to
sell the products for use in non-competing applications.
The development cycle for a new product in a new application in the
automotive industry begins with a three to six month period during which the
Company and the customer engage in technical and business discussions about
capabilities and requirements. Following this, the Company and the customer
enter a three to twelve month product development period followed by a six to
twelve month period for field trials and qualification. At the other extreme,
the development cycle of an existing product in a new application in the
industrial market can be as short as four to six months. Once ASICs or ISDs are
designed into systems, the production life is quite long. For example, in the
automotive industry, a product's production life typically ranges from five to
seven years, and customers rarely request retooling or redesign during this
time. Because of the complexity, length and cost of the product development
cycle for both the Company and its customers, competitors cannot replace the
Company's product unless both the competitor and the customer make significant
investments of time and resources. Therefore, achieving a design win that leads
to a production release can enable the Company to enjoy the supply position for
the duration of the production phase.
The majority of the Company's standard products have been derived from
custom products for other markets or applications. The Company has also
developed standard products without customer assistance to address particular
markets, sensing elements or types of electronic control systems. The Company's
standard products help it address a broader market and can provide a platform
for rapidly developing custom products with similar features.
Because the Company's existing products address the functional requirements
of a variety of electronic control systems, the Company is often able to shorten
the product development cycle for similar products addressing new applications.
For example, if one of the Company's existing ASICs satisfies most but not all
of a customer's requirements, the Company can modify the product to create a new
ASIC that specifically addresses that customer's needs. Similarly, if an
existing ISD addresses most but not all of the requirements of an application
that does not compete with the principal application of the ISD, the Company can
use the existing ISD design to create a new modified ISD. The Company believes
that its ability to shorten product development times by leveraging existing
product designs increases its ability to develop and introduce new products
rapidly and cost-effectively.
PRODUCTS
The Company's two product lines are application specific integrated circuits
("ASICs") and integrated sensor devices ("ISDs"). These product lines include
both standard products and customized solutions that have been developed to
address the needs of a broad range of specific applications and to enhance the
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value of customer systems. The Company develops its custom products by working
closely with its customers and builds on this experience to create standard
products.
APPLICATION SPECIFIC INTEGRATED CIRCUITS
The Company designs, manufactures and markets ASICs for individual sale and
ISDs that incorporate its ASICs. ASICs incorporated into the Company's ISDs
complement selected sensing elements and integrate signal conditioning,
calibration, diagnostics, fault detection and other system functions. In this
way the Company leverages its ASICs and design, manufacturing and packaging
processes into proprietary value-added products.
The Company's ASICs are sold to manufacturers that integrate these ASICs
into their own ISDs and electronic control systems. Custom ASICs are developed
pursuant to arrangements with specific customers for incorporation into
particular electronic control systems. For example, the Company has developed
custom ASICs for use in gas flow meters that detect leaks and measure gas flow
for certain Japanese utility companies. These ASICs are designed to work with
very low power consumption battery powered systems. These ASICs amplify, correct
and filter very low level analog signals from the sensing elements and convert
them to digital form for processing by the meter. Another custom ASIC is used
with accelerometers in air bag systems. This ASIC amplifies and corrects the
accelerometer sensing element signal and performs diagnostics to alert the
electronic control computer in the event of a sensing element problem.
The Company's standard ASICs are sold to a variety of customers, including
sensing element manufacturers and systems integrators, for use in a broad range
of electronic control systems. For example, the Company's SCA2095 is a signal
conditioning ASIC used by manufacturers of resistive sensing elements such as
pressure transducers, strain gauges and accelerometers. Because the SCA2095 is a
single chip that permits digital calibration of sensor variances, it is less
expensive and easier to integrate with a variety of sensing elements than
conventional sensor electronics. The average selling prices of the Company's
ASICs range from approximately $1.50 to $8.00 per unit depending on the volume.
The Company has a variety of ASIC products in production, in qualification
and under development, including those shown in the following table:
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MARKET APPLICATION STATUS
Automotive Airbag crash sensor In Production
Oil pressure sensor In Production
Vehicle Stability In Production
Pressure sensor for electronic braking In Qualification
Navigation In Qualification
Automotive accelerometer Under Development
Vehicle Stability-Next Generation System Under Development
Brake System Under Development
Industrial Hydraulic control system In Production
OEM pressure sensors--version a In Production
Industrial pressure sensor In Production
Low power pressure monitoring for gas meter In Production
Low power gas flow monitor for propane In Qualification
Low power gas flow monitor for natural gas In Qualification
OEM pressure sensor--version b Under Development
</TABLE>
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INTEGRATED SENSOR DEVICES
The Company's ISDs consist of commercially available or custom sensing
elements that are packaged together with the Company's proprietary ASICs. The
Company sells ISDs to customers in the automotive and industrial markets for
incorporation into a wide variety of electronic control systems in vehicles and
industrial systems. The Company has several families of ISDs, examples of which
are manifold absolute pressure ("MAP") sensors, tire pressure sensors and media
compatible pressure sensors for fuel systems. The MAP ISDs are sold into the
aftermarket for use in engine control in Ford, Chrysler and GM automobile
engines to measure the vacuum in the intake manifold enabling the engine control
computer to measure and adjust the air/fuel ratio.
Certain of the media compatible ISDs are incorporated into a new generation
of diesel fuel injection systems known as "common rail." In these systems, the
diesel fuel is pumped into a manifold at very high pressures (over 20,000 psi).
This pressurized fuel is then delivered along a common rail through the fuel
injectors into each cylinder. The Company's ISD measures the common rail
pressure and communicates this information to the system control computer which
then adjusts the pressure. Engines incorporating common rail injection systems
with the Company's ISDs are quieter, produce more power, use less fuel and emit
less carbon monoxide than conventional diesel engines. The average selling
prices of the Company's ISDs range from approximately $9.00 to $50.00 per unit
depending on the volume.
The Company has a number of ISDs in production, in qualification and under
development, including those shown in the following table:
<TABLE>
<S> <C> <C>
MARKET APPLICATION STATUS
Automotive MAP for automotive engine management In Production
XKP pressure sensor for natural gas engine control In Production
Dual pressure sensor for pneumatic braking system In Production
XKP pressure sensor for common rail diesel fuel injection In Production
Pressure sensor for vehicle chassis control In Production
HVP pressure sensor for common rail diesel fuel injection In Production
Tire performance monitor valve stem-mounted In Qualification
HVP pressure sensor for braking systems In Qualification
Tire performance monitor in-tire installation Under Development
Gasoline direct injection pressure sensor Under Development
Pressure sensor for electronic hydraulic braking system Under Development
Tire performance monitor offroad vehicles Under Development
Combined pressure and temperature sensor Under Development
Industrial XKP pressure sensor for industrial applications including In Production
hydraulic control, agricultural sprayers, compressor
control, and others
HVP pressure sensor for refrigeration control system In Qualification
Industrial pressure sensor Under Development
XKP pressure sensor with built-in temperature sensor Under Development
</TABLE>
CUSTOMERS
The Company sells its ASICs and ISDs to customers in North America, Europe
and Asia. Although the majority of the Company's customers are suppliers in the
automotive industry, the Company's customer base also includes industrial system
manufacturers, sensing element manufacturers and vehicle
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manufacturers. Most of the Company's customers are suppliers that purchase
components and subassemblies such as ASICs and ISDs and perform system
integration functions for vehicle makers and industrial equipment manufacturers.
To establish a supply relationship with a customer, the Company typically
must satisfy exacting product requirements and qualify its manufacturing lines.
Although this process is lengthy and can be costly for the Company and the
customer, it often results in a long-term supply arrangement and can create a
barrier to entry for other suppliers. To improve its ability to satisfy
customers' product and manufacturing requirements, the Company works closely
with its customers' engineering teams to develop and implement advanced
manufacturing processes. The Company has undertaken programs to implement ISO
9001 and QS-9000 quality systems in order to minimize the time required to
qualify its products and manufacturing lines with customers.
The Company's customers include the following companies:
<TABLE>
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Allied Signal Freightliner Michelin
Bosch GFI Control Systems Nagano
Daimler/Benz Hokoriku Denki Omron
John Deere Honda Sumitomo
Eaton Corporation Hydraulic Ring
Echlin Johnson Controls
EG&G/IC Sensors Knorr-Bremse
Lucas Diesel Systems
</TABLE>
The Company's revenues in any period are substantially dependent upon a
relatively small number of large customer orders. The Company expects that this
trend will continue.
STRATEGIC ALLIANCES
The Company considers strategic alliances a key part of its overall business
strategy and plans to maintain and strengthen its existing relationships and to
develop additional relationships to accomplish its business objectives. Examples
of the Company's strategic alliances include the following.
ROBERT BOSCH GMBH
Robert Bosch GmbH is a Germany-based multi-national supplier of automobile
systems and subsystems with annual revenues in excess of $27 billion. In 1995,
Bosch contracted with ISS to design an ISD with the ability to measure very high
pressures in a common rail diesel fuel injection system. The Company worked
closely with Bosch system designers and used its behavioral simulation software,
ASIC design technology and macrocell library to develop a customized ISD that
satisfied Bosch's specifications. The Company was able to solve problems Bosch
had encountered with previous development attempts and now manufactures the ISDs
used in Bosch's common rail diesel fuel injection systems. As a result of the
successful development of the diesel injection ISD, Bosch requested that ISS
compete for the design of an ISD for a vehicle stability system and ultimately
selected the Company to design and manufacture the ISD for this system.
Following these successful programs, Bosch has expanded its involvement with the
Company and engaged ISS to design and supply ISDs for both an electronic
hydraulic brake system and a gasoline direct fuel injection system. The Company
believes that its strong relationship with Bosch may result in design wins in
more of Bosch's widely distributed products.
To enhance the relationship with Bosch, the Company encourages its
management, engineers and sales and marketing personnel to work closely with
Bosch managers, system designers and sales and marketing executives. Further,
because these efforts have lead to an alliance which goes beyond that of a
typical customer or supplier, the Company has attained a level of market
credibility and access to significant system expertise that would otherwise be
unavailable to the Company. The Company intends to
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build additional relationships modeled on the Bosch alliance with manufacturers
that do not directly compete with Bosch.
NAGANO KEIKI CO., LTD.
Nagano Keiki Co., Ltd. is a Japan-based supplier of sensors and ISDs with
annual revenues in excess of $200 million. In calendar years 1990 and 1991, the
Company developed two custom ASICs for Nagano for industrial and automotive
applications. During the course of working with Nagano to develop these ASICs,
the Company became familiar with Nagano's proprietary stainless steel pressure
sensing element technology and developed ISDs integrating the Company's ASICs
with Nagano's sensing elements for automotive applications. The resulting ISDs
are compatible with a wide range of harsh media such as gasoline, diesel fuel,
refrigerants and hydraulic fluids. These media-compatible ISDs are an important
strategic element of the Company's product portfolio.
The Company has developed six custom ASICs for Nagano, including the two
initial products, and Nagano has become a major customer of the Company. Nagano
also purchases standard ASICs from the Company. The relationship between the
Company and Nagano has facilitated Nagano's entry into the Japanese automotive
market as a supplier of high performance ISDs.
As a result of these successful collaborations, Nagano has expanded its
relationship with the Company through equity investments in the Company and its
German subsidiary. The subsidiary is focused on the manufacture of ISDs that
incorporate Nagano's sensing elements and the Company's ASICs. Finally, the
Company and Nagano are currently engaged in joint product development and
marketing efforts. Through this arrangement, Nagano manufactures and markets the
resulting products in Japan, while ISS manufactures and markets these products
in North America and Europe.
MICHELIN
Michelin is a multi-national tire manufacturer with significant North
American operations and annual revenues of approximately $14 billion. The
Company has entered into an agreement with Michelin of North America for the
development and supply of a new product for Earthmover tire performance
monitoring. This product measures and transmits tire pressure, temperature and
identification to a remote transceiver over a wireless link for tire performance
monitoring and trend analysis. The Company's relationship with Michelin is
expanding through close engineering cooperation involving programs in which the
Company's core competencies are combined with Michelin's complementary
expertise.
COMPETITION
The markets in which the Company competes are highly competitive and
characterized by diverse industry requirements and severe pricing pressure in
many applications. The Company believes that the principal competitive factors
affecting its markets include price, supply assurance, product performance and
quality, flexibility and responsiveness. The Company believes that it competes
favorably with respect to these competitive factors. The Company's technology
and products have been well accepted by leaders in the automotive and industrial
markets. Through strategic alliances the Company is uniquely positioned to
address the emerging needs of the market. Finally, the singular focus on sensor
applications enables the Company to respond quickly to meet the customers'
needs. See "Risk Factors--Competition."
TECHNOLOGY
The Company's technology is driven by the demands of the automotive and high
volume industrial markets for high performance, electronic sensor products. The
Company is committed to maintaining leading edge technology in the areas of
mixed signal ASIC design, behavioral simulation software, calibration software,
package design and manufacturing know-how. The Company's technologies facilitate
cost-effective development and timely introduction of products designed to
address customer needs.
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The Company's mixed signal ASIC design technology, based on its Intelligent
Sensing Architecture, enables the Company to integrate signal conditioning,
calibration, diagnostics, networking and other system functions into a single
IC. The use of a single IC results in a "one sensor-one ASIC" structure, forming
an intelligent sensor that can interface with a variety of control devices in
high performance electronic control systems. The Company designs its ASICs using
its proprietary macrocell library which contains proven circuit blocks optimized
to perform sensor signal conditioning functions such as amplification, error
correction and filtering. The macrocell library also contains system level
functions including diagnostics, analog-to-digital conversion and output
formatting. The Company's ASICs utilize CMOS fabrication processes to combine
high performance analog sensor interfaces with digital system functions and
nonvolatile memory, eliminating the need for bipolar ICs, ceramic substrates,
thick film networks and laser trimming that are characteristic of traditional
hybrid circuits.
The Company uses its behavioral simulation software during the product
development process to create and assess alternative designs to optimize the
performance of its products within the customer's system. In addition, the
software demonstrates how potential configurations can be achieved with
different architectures, development times, manufacturing methods and costs.
This process provides the opportunity to identify the product features that
address the technical and time-to-market requirements of the customer's specific
application.
The Company uses its proprietary calibration software to correct for errors
associated with various sensing elements and system environmental conditions. As
a result, the Company can construct its ISDs using ASICs combined with low cost
sensing elements that have broad variances, while increasing system accuracy.
This software is embedded in the Company's automated test and calibration
systems which can simultaneously calibrate and characterize hundreds of ISDs
over specified operating conditions.
In addition to its ASIC design and software technology, the Company has
substantial package design expertise and manufacturing know-how. The Company
designs the packages that house its ISDs to meet customer requirements for
integration with diverse and rugged systems such as engines, tires, brakes and
compressors. The Company's packaging process consists of assembling the sensing
element with the ASIC, enclosing these components in a metal or plastic housing,
and establishing an electrical connector to interface with the customer's
control system. Packaging is a critical element in ISD design because packaging
can affect the sensing element, thereby affecting the performance of the ISD.
Package design also has a significant impact on product reliability, durability
and assembly costs. The Company's advanced packaging techniques enable it to
produce reliable, durable products in a cost effective manner.
The Company's ASIC design, software and package design are brought together
in the Company's proprietary ISD manufacturing process, which includes sensing
element assembly and automated calibration and testing. The Company's
manufacturing lines in Germany are automated to implement a zero defect
philosophy and enable it to satisfy customer demands rapidly and efficiently.
Further, the automated manufacturing lines have low labor costs and leverage the
Company's calibration software to reduce capital equipment requirements.
Therefore the Company has the ability to establish manufacturing sites near its
customer base with relatively low capital investments.
MANUFACTURING
The Company focuses its capital and human resources on those operations that
leverage its proprietary technology, provide significant added value or are key
determinants of product quality. The Company complements its internal operations
with products and services from a small base of strategic, long-term suppliers.
The Company outsources widely available, commodity services to benefit from
economies of scale.
The Company has adopted the "fabless" model in its approach to ASIC
manufacturing. Consistent with this approach, the Company does not own or
operate a semiconductor manufacturing facility. Instead, the Company has
established relationships with three CMOS wafer foundries that supply the bulk
of its
9
<PAGE>
semiconductor needs. In addition, the Company manages ASIC package assembly
through leading suppliers in the Philippines and Hong Kong. The Company conducts
most of its ASIC wafer sort and all of its ASIC final product testing and
outgoing quality assurance at its facility in San Jose, California. This
approach enables the Company to concentrate its resources on product development
and technology where it believes it has significant competitive advantages,
eliminating the high cost of owning and operating a semiconductor wafer
fabrication facility.
The Company currently relies on American Microsystems, Inc., Micrel
Semiconductor, Inc. and Silicon Systems, Inc. for the fabrication of essentially
all of its ASICs, including those incorporated into its ISDs. The Company is
currently qualifying products from a fourth foundry, Symbios, Inc., a division
of LSI Logic. The Company's ASIC design technology does not rely on
state-of-the-art or specialty semiconductor processes and instead uses CMOS
wafer fabrication processes that are a generation behind the leading edge
processes in high demand by the computer and communications industries. As a
result, fluctuations in the supply and demand for wafer fabrication capacity
have less impact on the Company than on companies whose products require the
more advanced, small geometry processes. Nonetheless, continued access to high
quality wafer foundry capacity is critical to the Company's ability to meet
customer demands. The Company has from time to time experienced lower than
anticipated manufacturing yields and long supply lead times from its foundry
suppliers.
The Company's ISDs incorporate electronic subassemblies in which the
Company's ASICs are assembled together with sensing elements. This PC
board-level assembly is performed by an independent vendor in Thailand that
ships the subassemblies to ISS for ISD product-level assembly, calibration, test
and final quality assurance monitoring. These latter operations are carried out
in-house by ISS personnel. These operations are critical, value-added steps that
use proprietary ISS manufacturing technology necessary for the control of
outgoing product quality, production yields and delivery to customers.
The Company's ISDs are assembled, calibrated and tested at the Company's
facilities in California and Germany. The Company's calibration software and its
automated manufacturing lines in Germany are designed to enable a much
simplified manufacturing flow, lowering product cost and reducing the capital
requirements for establishing and expanding manufacturing facilities. In a fully
automated test and calibration system operating under control of the Company's
software, hundreds of ISDs can be simultaneously measured, calibrated and
characterized over specified operating conditions.
ISD packaging and assembly technologies are key determinants of both
performance and cost in ISDs. The Company's ISDs utilize standard PC board
substrates and widely available surface mount and chip-on-board technologies,
replacing the costly ceramics and thick film printing operations commonly used.
In the assembly of its ISDs, the Company employs variations on standard product
assembly technologies such as wirebonding, soldering, dispense/cure and
crimping. The use of standard assembly technologies has permitted the Company to
focus on the development and implementation of technologies that define critical
performance parameters such as sensing element mounting and passivation,
materials selection and automated white light soldering. The Company has also
developed techniques in the areas of design for manufacturability and zero
defect philosophy assembly. ISS maintains significant in-house expertise in
mechanical and electrical design, including insert injection molded plastics, PC
board design and layout, automated manufacturing and production tools and
fixtures.
The Company's technology brings significant benefits to the manufacturing
process. ISDs, which leverage the Company's ASIC design and software technology,
require relatively low capital expenditures in the manufacturing process due to
low component count, automated calibration and innovative package design. The
relatively low capital intensity of the manufacturing lines makes it possible to
locate manufacturing operations close to customer bases to meet just-in-time
delivery requirements and to enhance customer relationships.
The Company has been a qualified supplier to various automotive
manufacturers for a number of years and has commenced the process to obtain ISO
9001 and QS-9000 certification. ISO 9001 is a quality
10
<PAGE>
assurance model that is used by companies in the course of the design,
production, inspection, test, installation and service processes. The ISO
quality specifications are comprehensive and internationally supported. QS-9000
is the Quality Management System that automakers are increasingly requiring of
their suppliers. QS-9000 is an ISO 9001-based system that incorporates industry
specific features agreed upon by Chrysler, Ford and GM. These quality systems
are designed to reduce errors and cost while improving design control and
productivity. The Company has targeted completion of the ISO and QS
accreditation processes in calendar 1998 and 1999, respectively.
RESEARCH AND DEVELOPMENT
As of March 31, 1998, the Company's research and development organization
consisted of 43 full-time employees. During fiscal years 1998, 1997 and 1996,
research and development expenses were approximately $1.9 million, $1.4 million
and $742,000, respectively. In addition, during fiscal years 1998, 1997 and
1996, the Company had $4.0 million, $2.7 million and $2.1 million of costs
related to contract revenue.
The Company has committed, and expects to continue to commit in the future,
substantial resources to research and development in areas including wireless
communications, next generation ASIC designs, software, package design,
manufacturing automation, test systems and standard product development. In
particular, the Company's research and development focus areas include
monolithic sensors, multiple sensing elements in a single ISD and system level
products. Concurrently, the Company intends to continue research and development
efforts pursuant to joint development arrangements for custom products where the
customer provides significant funding. In addition to the advantages it gains by
working closely with its customers, its joint development strategy allows the
Company to commit substantial resources to research and development without
diverting a significant portion of its capital resources. The Company intends to
continue to follow this strategy in the future.
The Company's future success will depend in part upon its ability to develop
new products on a timely basis that keep pace with technological developments,
emerging industry standards and increasingly sophisticated needs of its
customers. There can be no assurance that the Company will be successful in
developing new products that respond to technological change or evolving
industry standards or that the Company will not experience difficulties that
could delay or prevent the successful development of these products. If the
Company is unable, for technological or other reasons, to develop new products,
the Company's business, financial condition or operating results could be
materially adversely affected.
SALES AND MARKETING
The Company focuses its marketing efforts on potential and existing
customers that are leaders in selected segments of the automotive and industrial
markets. The objective is to develop and maintain long-term, strategic customer
partnerships that lead to multiple programs across a range of applications. This
is achieved, in part, by establishing and maintaining close ties at all levels,
including strong management and engineering relationships which complement the
traditional marketing and sales purchasing interface. Marketing personnel work
closely with customers to identify high volume opportunities which require high
performance products that leverage the Company's technology. The Company's
marketing and sales staff has the requisite technical expertise and industry
knowledge in order to support the lengthy and complex design-in process. To
complement its sales and marketing staff, the Company utilizes its engineering
staff to assist customers in defining, designing and qualifying the Company's
products in the context of the customer's system. Company engineers provide
continuous customer support from pre-sales activities to applications and
product definition through product development, qualification and
post-production technical support. The Company believes that the depth and
quality of this technical support are key to improving customers' time to
market, maintaining a high level of customer satisfaction and encouraging
customers to provide additional product opportunities to ISS as an exclusive or
preferred supplier. Furthermore, the Company has established a program
management function in which ISS provides a single point customer contact for
all key customer program issues. The Company plans to extend and expand this
11
<PAGE>
program management concept as a means to further improve focus and coordination
between the customer and all Company departments.
Typically, the Company sells more than one product to the same customer to
address multiple applications. Because of this marketing approach, the Company
expects that its customer base will remain relatively small consisting of large,
well known companies. A substantial majority of the Company's sales are made
through direct sales without commission. This trend is expected to continue.
Further, the Company expects that advertising and promotional activities will
remain limited, with primary focus on standard products and corporate awareness
and positioning. For standard products, the Company relies on marketing
techniques such as press releases and public relations, trade shows, technical
conferences and a web site.
Consistent with this strategy, the Company employed five marketing and sales
personnel as of March 31, 1998. The Company has also retained eight independent
sales representative organizations in selected U.S. regions. Sales
representatives/distributors in France, Germany, Italy and Switzerland as well
as Japan and Korea, also support the Company's sales efforts with targeted
accounts. The Company expects that its marketing and sales expenses will remain
a relatively small percentage of total revenues.
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. In addition, the Company
limits the access of its wafer fabrication suppliers to information necessary to
process the wafers and does not allow access to the proprietary circuit designs.
The software used for the behavioral simulation and calibration is proprietary
to the Company and resides only in systems developed by the Company. Further,
the Company believes that its technology is not easily duplicated and is
difficult to reverse engineer due to limited access to system know-how and the
coupling of its ASICs with software.
The Company has been issued four patents and has three patent applications
in the United States and one foreign patent application relating to ASIC
designs. In addition, the Company has one patent application in the United
States relating to package design.
EMPLOYEES
As of March 31, 1998, the Company had 116 full-time employees, including 51
employees in Germany. Of its total work force, 43 are engaged in research and
development activities, 40 are engaged in manufacturing operations, 14 are
engaged in manufacturing engineering and quality assurance and 19 are engaged in
sales, marketing, support and administrative activities. None of the Company's
employees is represented by a labor union with respect to his or her employment
by the Company. The Company has experienced no work stoppages and believes that
its relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal administrative, sales, marketing, engineering,
research and development facility is located in 18,000 square feet of space in
San Jose, California. The space is leased by the Company through June 1999. The
Company also leases a 12,000 square foot manufacturing and sales facility in
Dresden, Germany. The Dresden facility is occupied under a lease that expires
August 1, 2000. In May 1998, the Company's German subsidiary entered a lease
agreement for a new 28,000 square foot facility. This lease expires in 2009.
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<PAGE>
ITEM 3. 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
No matters were submitted to a vote of security holders during the quarter
ended March 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company effected an initial public offering ("IPO") on March 13, 1998
with its common stock traded on the Nasdaq National Market under the symbol
"ISNR." As of March 31, 1998, there were 110 stockholders of record of the
Company's common stock. Because many of such shares are held by brokers and
other institutions on behalf of stockholders, the Company is unable to estimate
the total number of stockholders represented by these record holders. The
following table sets forth, for the quarter indicated, the high and low sales
price per share of the Company's common stock as reported on the Nasdaq National
Market:
<TABLE>
<CAPTION>
PRICE RANGE
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1998
Fourth Quarter (since March 13, 1998)....................................... $ 9.063 $ 8.00
--------- ---------
</TABLE>
The Company has never paid cash dividends on its capital stock. The Company
currently expects that it will retain its future earnings, if any, for use in
the operation and expansion of its business and does not anticipate paying any
cash dividends in the foreseeable future.
Since March 31, 1997, the Registrant or its predecessors has sold and issued
the following unregistered securities:
1. In August 1997, the Registrant issued warrants to purchase an aggregate
of 12,240 shares of Series F Preferred Stock at an exercise price of $6.375 per
share to an accredited investor in connection with a commercial lending
transaction.
2. In October 1997, the Registrant issued 12,111 shares of Series E
Preferred Stock to an accredited corporate investor in exchange for cancellation
of indebtedness equal to $45,719.78.
3. From March 31, 1997 to March 31, 1998, the Registrant issued options to
purchase an aggregate of 109,390 shares of Common Stock under the 1997 Option
Plan, of which options to purchase 250 shares of Common Stock have been
exercised.
The issuances of securities described in number 1 and 2 above were deemed to
be exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as transactions by an issuer not involving any public
offering. The issuances of securities described in number 3 were deemed to be
exempt from registration under the Securities Act in reliance on Rule 701
promulgated thereunder as transactions pursuant to a compensatory benefit plan
or a written contract relating to compensation.
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 overallotment on April 8, 1998, were
approximately $20,451,000 after deducting underwriting discounts and
commissions, the Representatives'
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<PAGE>
non accountable expense allowance and other offering expenses. From the date of
the closing of the initial public offering through May 31, 1998, the Company
applied the net proceeds as follows: $766,347 was used to pay indebtness to a
related party, $247,511 was used to purchase capital equipment, $801,275 was
used to pay indebtness to another related party, approximately $2,741,000 was
used for operating expenses and the balance has been invested in short term
interest bearing securities.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 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 6 AND ELSEWHERE IN THIS FORM
10-KSB 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 ASIC designed for use
with a very low-pressure sensor used in industrial flow measurements. In fiscal
1992, the Company introduced its first ISD, an aftermarket product for manifold
absolute pressure ("MAP") sensor applications for General Motors automobile
engines. One of the major objectives in introducing the MAP ISDs was to
demonstrate the viability of the Company's technology in the rugged, "under the
hood" environment. 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 from approximately $8.3
million in fiscal 1996 to $15.2 million in fiscal 1998. The Company has
experienced operating losses in each year since its inception and had an
accumulated deficit of $9.4 million as of March 31, 1998.
The Company derives its revenues from sales of its ASICs and ISDs and from
product development contracts. Beginning in fiscal 1995, product sales have
accounted for a significant majority of the Company's revenues, and the Company
anticipates that the percentage will increase in the future. The Company sells a
substantial portion of its products pursuant to long-term, exclusive contracts
that 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 Company's products sold pursuant to such
contracts will reduce the Company's product gross margin. The Company
anticipates that all of its products will experience declining average selling
prices over their life cycles with a similar potential impact on product gross
margin if the Company is unable to reduce corresponding costs or introduce new
products with higher gross margins. The Company's strategy is to improve its
product gross margin despite the declining average selling prices by reducing
cost of product revenues, introducing new products with higher gross margins and
addressing new markets. See "Risk Factors--Declining Average Selling Prices."
The Company's cost of product revenues includes the costs of wafer
fabrication, raw materials, third party assembly and direct and indirect costs
of procurement, scheduling, testing, calibration of ISDs, housing assembly for
ISDs and quality assurance. The Company is actively attempting to reduce these
costs by, among other things, improving yields on existing products, fabricating
its ASICs on larger wafers using smaller geometries and performing more
manufacturing, assembly and test operations in-house. In addition, to the extent
that the volume of product shipments increases, the Company may be able to
obtain volume discounts to lower its costs of raw materials, components and
services. Higher volumes may also result in allocation of fixed costs over a
larger revenue base and a corresponding reduction in per unit
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<PAGE>
product costs. Nonetheless, the Company's ability to reduce product costs may be
adversely affected by a number of factors outside the Company's control
including, among other things, fluctuations in manufacturing yields and
availability and cost of manufacturing and assembly capacity and of raw
materials. In the past, the Company has experienced significant, unanticipated
price increases for wafer fabrication and significant assembly supply
disruptions which materially adversely affected the Company's operating results.
In addition to its efforts to reduce cost of product revenues, the Company
believes it can mitigate the effects of declining average selling prices by
continually introducing new products and addressing new markets with existing
and new products. The Company has made significant investments in its product
development resources to address these issues. There can be no assurance,
however, that the Company will be able to reduce its product costs or introduce
new products in a timely manner to maintain or increase its current product
gross margin levels. Any failure to maintain such gross margins could have a
material adverse effect on the Company's business, financial condition or
operating results. See "Risk Factors-- Declining Average Selling Prices."
The Company's revenues in any period are substantially dependent upon sales
to and product development contracts with a small number of customers. Revenues
from customers that represented at least 10% of total revenues in each of fiscal
1998, 1997 and 1996 accounted for 68%, 75% and 71% of total revenues,
respectively. The Company expects that this trend will continue for the
foreseeable future.
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<PAGE>
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>
YEAR ENDED MARCH 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Product revenues.............................................................. 73.4% 78.1% 64.1%
Contract revenues............................................................. 26.6 21.9 35.9
--------- --------- ---------
Total revenues.................................................................. 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues...................................................... 54.8 70.8 63.0
Cost of contract revenues..................................................... 26.6 26.5 25.8
--------- --------- ---------
Total cost of revenues.......................................................... 81.4 97.3 88.8
--------- --------- ---------
Gross margin.................................................................... 18.6 2.7 11.2
Operating expenses:
Research and development...................................................... 12.1 13.9 8.9
Sales, general and administrative............................................. 13.8 17.1 16.7
--------- --------- ---------
Total operating expenses........................................................ 25.9 31.0 25.6
--------- --------- ---------
Loss from operations............................................................ (7.3) (28.3) (14.4)
Interest expense................................................................ (1.5) (2.5) (2.7)
Other income.................................................................... 0.7 0.3 4.4
Minority interest in net (income) loss of ISS-Nagano GmbH....................... (0.2) 5.0 3.7
--------- --------- ---------
Net loss........................................................................ (8.3)% (25.5)% (9.0)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
COMPARISON OF YEARS ENDED MARCH 31, 1996, 1997 AND 1998
REVENUES
PRODUCT REVENUES. Product revenues increased by 38.8% from $8.0 million in
fiscal 1997 to $11.2 million in fiscal 1998. This increase was principally the
result of an increase in ISD product revenues at the ISS-Nagano GmbH, the
Company's majority owned subsidiary ("ISS-Nagano"). Product revenues increased
by 50.8% from $5.3 million in fiscal 1996 to $8.0 million in fiscal 1997. This
increase was principally the result of shipments of new custom ASICs and ISDs
for fiscal 1997 and increased unit shipments of existing custom products. The
increase in product revenues in fiscal 1997 was also the result of the
introduction of the Company's first standard products.
CONTRACT REVENUES. Contract revenues increased by 79.7% from $2.3 million
in fiscal 1997 to $4.1 million in fiscal 1998. This increase was due to several
new product development programs initiated during the year as well as meeting
milestones from contracts initiated during fiscal 1997. Contract revenues
decreased by 24.7% from $3.0 million in fiscal 1996 to $2.3 million in fiscal
1997. This decrease was due to the significant number of product development
contracts which were initiated in fiscal 1996 that continued through fiscal
1997. Based on completed milestones, most of the revenue under these contracts
was recognized in fiscal 1996.
International revenues (export revenues and revenues of ISS-Nagano) were
$3.2 million, $4.7 million and $8.6 million in fiscal 1996, 1997 and 1998,
respectively, representing 38.6%, 46.0% and 56.8% of total revenues,
respectively, in each fiscal year. The increase in international revenues from
fiscal 1996 to fiscal 1997 and fiscal 1997 to fiscal 1998 was principally the
result of increased sales 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, and
fluctuations in the value of the Deutsche Mark could adversely affect the
profitability of sales made in Europe and therefore materially
16
<PAGE>
adversely affect the Company's business, financial condition or operating
results. The Company has not engaged in any hedging transactions to minimize its
risk to foreign currency fluctuations. The Company may, however, engage in such
transactions in the future.
COST OF REVENUES
COST OF PRODUCT REVENUES. The Company's product gross margin increased from
9.4% in fiscal 1997 to 25.3% in fiscal 1998 primarily as a result of improved
production yields, lower material costs and higher unit volumes. The Company's
gross margin decreased significantly in the fourth quarter from prior quarters
in fiscal 1998 largely due to the ramping up of manufacturing capacity and lower
production yields at ISS-Nagano. For instance, the Company experienced yield
problems associated with the production ramp of its HVP media-compatible ISDs
which materially adversely affected the product gross margin and operating
results during the quarter ended March 31, 1998. The Company's product gross
margin improved from 1.6% in fiscal 1996 to 9.4% in fiscal 1997 primarily as a
result of a reduction in material costs and improved yields of the MAP ISDs
during the fourth quarter of fiscal 1997. These improvements were partially
offset by an increase in manufacturing support costs in fiscal 1997 related to
implementation of in-house test capabilities, product and process engineering to
support yield enhancement programs and qualification of an offshore assembly
vendor.
COST OF CONTRACT REVENUES. Cost of contract revenues increased from $2.7
million in fiscal 1997 to $4.0 million in fiscal 1998 primarily as a result of
certain costs incurred in connection with several new development programs
initiated during the year. Cost of contract revenues increased from $2.1 million
in fiscal 1996 to $2.7 million in fiscal 1997.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by 28.6% from $1.4 million in fiscal 1997 to $1.9 million in fiscal
1998. The Company's research and development expenses increased in fiscal 1998
primarily as a result of adding resources throughout the fiscal year in its
German operations and in its ASIC product test development department in order
to support future production. Research and development expenses increased by
93.9% from $742,000 in fiscal 1996 to $1.4 million in fiscal 1997. The Company's
research and development expenses increased in fiscal 1997 as a result of
implementing in-house test capabilities and expanding research and development
activities in Germany.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses increased by 19.2% from $1.8 million in fiscal 1997 to
$2.1 million in fiscal 1998. This increase was principally due to increase in
personnel and additional costs relating to the growth of the Company's business
during the fiscal year. Sales, general and administrative expenses as a
percentage of revenues decreased from 17.1% in fiscal 1997 to 13.8% in fiscal
1998, primarily due to the increase in revenues and the Company's ability to
leverage its base of resources to support a larger organization. Sales, general
and administrative expenses increased by 26.6% from $1.4 million in fiscal 1996
to $1.8 million in fiscal 1997. This increase was principally due to increased
personnel, sales commission and travel expenses associated with the increased
level of operations. Sales, general and administrative expenses as a percentage
of revenues for fiscal 1996 and fiscal 1997 were relatively constant.
INTEREST EXPENSE
Interest expense decreased from $260,000 in fiscal 1997 to $232,000 in
fiscal 1998 due to lower average borrowings resulting from the conversion and
repayment of debt during fiscal 1998. Interest expense increased from $226,000
in fiscal 1996 to $260,000 in fiscal 1997 due to higher average borrowings.
OTHER INCOME (EXPENSE)
Other income increased from $27,000 in fiscal 1997 to $111,000 in fiscal
1998. Other income in fiscal 1998 consisted primarily of interest income of
$47,000 and $54,000 of foreign exchange gains on trade payables and notes to
related parties denominated in foreign currencies. Other income decreased from
17
<PAGE>
$366,000 in fiscal 1996 to $27,000 in fiscal 1997. Other income in fiscal 1996
consisted primarily of $235,000 of gain recognized from the second and third
installments of the sale of a minority interest in ISS-Nagano and a $165,000
foreign exchange gain on trade payables and notes to related parties denominated
in foreign currencies. Other income in fiscal 1997 consisted primarily of
$172,000 of gain recognized from the fourth installment of the sale of a
minority interest in ISS-Nagano which was partially offset by a $144,000 foreign
exchange loss on trade payables and notes to related parties denominated in
foreign currencies.
MINORITY INTEREST IN NET (INCOME) LOSS OF ISS-NAGANO GMBH
Minority interest for 1998 reflects $23,000 of income attributable to
profitable operations during fiscal 1998 at ISS-Nagano. Minority interest in net
loss of ISS-Nagano increased from $311,000 in fiscal 1996 to $521,000 in fiscal
1997 due to increased net losses of ISS-Nagano.
INCOME TAXES
Due to the Company's loss position, there was no provision for income taxes
in fiscal 1996, 1997 or 1998. For federal tax purposes as of March 31, 1998, the
company has net operating loss and research and development carryforwards of
approximately $7,600,000 and $162,000 respectively, which will expire in fiscal
years 2005 through 2013. For California tax purposes, at March 31, 1998 the
Company has net operating loss and credit carryforwards of approximately
$2,000,000 and $108,000, respectively, which will expire in the years 1999
through 2003. The Company also has net operating loss carryforwards of $523,000
at ISS-Nagano at March 31, 1998.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in the expiration of net operating loss
carryforwards and credits before utilization.
At March 31, 1998, the Company had net deferred tax assets of $3.5 million
relating principally to net operating loss carryforwards and capitalized
research costs. Realization of deferred tax assets is dependent on future
earnings, if any, the timing of which is uncertain. A valuation allowance has
been recorded for the entire net deferred tax asset as a result of uncertainties
regarding the realization of the assets due to the lack of earnings history of
the Company.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, REPORTING COMPREHENSIVE INCOME (FAS No. 130), and Statement No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (FAS No.
131). FAS No. 130 establishes rules for reporting and displaying comprehensive
income. FAS No. 131 will require the Company to use the "management approach" in
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disclosing segment information. Both statements are effective for the Company
during fiscal year 1999. The Company does not believe that the adoption of
either FAS No. 130 or FAS No. 131 will have material impact on the Company's
business, financial condition or operating results.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations principally through
sales of equity securities, product revenues and contract revenues. The Company
completed its initial public offering on March 13, 1998, in which it raised
approximately $20,451,000, including the underwriter's exercise of their
overallotment option on April 8, 1998, after deducting costs associated with the
initial public offering. At March 31, 1998, the Company had cash and cash
equivalents of $17.6 million and working capital of $19.2 million. The Company
also has 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. 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%. The Company
also has available a $500,000 term loan facility for capital equipment that
bears interest at the bank's prime rate plus 1.5%. At March 31, 1998, the
Company had outstanding borrowings of approximately $900,000 and $217,000 under
the line of credit agreement and its capital equipment lease line. These
agreements require the Company to maintain certain financial covenants on a
quarterly basis. At March 31, 1998, the Company was out of compliance with its
quarterly profitability covenant and obtained a waiver through that date. The
Company further believes that it will be in violation of this covenant in the
quarter ending June 30, 1998. In June 1998, the Company repaid $500,000 under
the line of credit. See Notes 4 and 5 of Notes to Consolidated Financial
Statements. In June 1998, the Company repaid $500,000 under its line of credit
agreement.
Net cash used in operating activities was $0.7 million, $2.7 million and
$1.7 million in fiscal 1998, 1997 and 1996, respectively. For fiscal 1998, cash
used in operating activities was primarily attributable to increases in accounts
receivable, inventories and net loss adjusted for non-cash items partially
offset by an increase in accounts payable. The increase in accounts receivable
at March 31, 1998 was due, primarily, to an increase in product shipments.
Inventory levels increased at March 31, 1998 in order to meet expected customer
demands. For fiscal 1997, net cash used in operations was primarily attributable
to the net loss adjusted for non-cash items, an increase in accounts receivable
partially offset by an increase in accounts payable and other accrued
liabilities.
Net cash used in investing activities was $1.0 million, $1.1 million and
$974,000 in fiscal 1998, 1997 and 1996, respectively. Cash used in investing
activities was primarily for the purchase of equipment.
Net cash provided by financing activities was $17.2 million, $5.4 million
and $2.3 million in fiscal 1998, 1997 and 1996, respectively. In fiscal 1998,
the Company raised cash from financing activities of approximately $17.7
million, primarily through the issuance of stock in connection with the
Company's initial public offering, which was partially offset by payments on
notes payable and capital lease obligations. In fiscal 1997, cash provided by
financing activities was primarily due to the sale of convertible preferred
stock and proceeds from the issuance of notes payable.
In June 1998, the Company committed approximately $3.6 million to the set up
of a manufacturing line for sensors 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.
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS FORM 10-KSB, 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 March 31, 1998,
the Company had an accumulated deficit of approximately $9.4 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.
Significant portions of the Company's product sales are made pursuant to
standard purchase orders that are cancelable without significant penalties. In
addition, purchase orders are often subject to price renegotiations and to
changes in quantities of products and delivery schedules to reflect changes in
customers' requirements and manufacturing availability. For instance, shipments
to three of the Company's major customers were delayed in the quarter ended
December 31, 1996 which materially adversely affected the Company's operating
results for the quarter, and there can be no assurance that a similar incident
will not occur in the future. The Company's actual shipments depend in part on
the manufacturing capacity of the Company's suppliers and the availability of
products from such suppliers. The Company's expense levels are based, in part,
on its expectations as to future revenues and to a large extent are fixed in the
short term. Accordingly, the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in revenues, and any
significant shortfall of demand in relation to the Company's expectations or any
material delay or deferral of customer orders would have a material adverse
effect on the Company's business, financial condition or operating results.
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As a result of the foregoing and other factors, it is likely that in some
future period the Company's operating results will fail to meet the expectations
of public market analysts or investors. In such event or in the event that
adverse conditions prevail or are perceived to prevail generally or with respect
to the Company's business, the trading price of the Company's Common Stock could
drop significantly.
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. For instance, the Company experienced
yield problems associated with the production ramp of it HVP media-compatible
ISDs which materially adversely affected the product gross margin and operating
results during the quarter ended March 31, 1998. The Company believes that any
new product lines or manufacturing processes that it undertakes may create
difficulties in achieving acceptable yields, and, as a result, the Company may
experience production problems or shipment delays which could have a material
adverse effect on the Company's business, financial condition or operating
results. Regardless of the process technology used, the manufacturing of ASICs
and ISDs is a highly complex and precise process, and there can be no assurance
that the Company will be able to achieve or maintain acceptable yields on its
products in the future. Any such failure could have a material adverse effect on
the Company's business, financial condition or operating results.
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 each of
fiscal 1996, 1997 and 1998, the Company has had two or more customers, which
each accounted for more than 10% of total revenues. In fiscal 1996, four
customers accounted for 71% of total revenues; in fiscal 1997, four customers
accounted for 75% of total revenues; and in fiscal 1998, three customers
accounted for 68% of total revenues. The Company's ability to achieve sales in
the future will depend upon its ability to obtain orders from, maintain
relationships with and provide support to a small number of existing and new
customers. 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. The Company's
future operating results will also depend on its ability to continue to
penetrate the industrial market and to penetrate new markets such as the
consumer and office products markets. While the Company may devote substantial
resources to penetrate new markets in the future, it has not committed a
material amount of resources to such effort to date, and there can be no
assurance that the Company will commit significant resources to this effort, or
if committed, that the revenues generated from these efforts, if any, will
exceed the costs of such efforts. To the extent that the Company is unable to
penetrate new markets, its future success will be dependent upon its ability to
further penetrate the automotive industry and on the continued growth of that
industry. 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.
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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. The Company has experienced declining average
selling prices on certain of its products in the past when shipments have
reached specified volume levels, and the Company anticipates that all of its
products will eventually experience declining average selling prices over their
life cycles. Declining average selling prices may have a material adverse effect
on gross margins in the future if the Company is unable to reduce corresponding
costs or introduce new products with higher gross margins. 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. 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. The
Company also manufactures ISDs that incorporate sensing elements purchased
solely from Lucas NovaSensor. The Company historically has not manufactured
sensing elements and anticipates that it will continue to obtain sensing
elements from third parties for the foreseeable future. The Company's future
success will be dependent upon its ability to identify and work closely with
manufacturers who are able to provide high volume, technologically advanced and
cost-effective sensing elements. 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. The development of new mixed signal integrated circuits is highly
complex, and from time to time the Company has experienced delays in developing
and introducing new products. There can be no assurance that the Company will be
able to define new products successfully and develop and bring to market new and
enhanced products on a timely and cost effective basis, develop or access new
process technologies, secure design wins or respond effectively to new
technological changes or new product announcements by others. 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,
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Kavlico and Denso Corporation ("Denso"). These companies all have substantially
greater financial, technical, manufacturing, marketing, distribution, personnel
and other resources than the Company. In addition, in the industrial market, the
Company competes with many small companies that have developed specialized
electronic sensor products and formed close relationships with their customers.
The Company also competes with the in-house development staff of certain of its
current and potential customers.
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.
MANAGEMENT OF GROWTH. The Company has recently experienced and may continue
to experience growth in the number of its employees and scope of its operating
and financial systems needs, resulting in increased responsibilities for the
Company's existing personnel and the need to hire additional personnel. To
manage future growth effectively, the Company will need to continue to implement
and improve its operational, financial and management information systems,
particularly those of its German subsidiary, and to hire, train, motivate,
manage and retain its employees. There can be no assurance that the Company will
be able to manage such growth effectively, and failure to do so could have a
material adverse effect on 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 a key factor for competing successfully in the
mixed signal integrated circuit business is to attract and retain creative and
knowledgeable complementary metal oxide semiconductor ("CMOS") mixed signal
designers. The number of design engineers who have the training, creativity and
experience to design complex mixed signal integrated circuits is very limited,
and the competition for such personnel is intense. The Company's 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.
If the Company were required to change any sole source component vendor or to
add vendors, the Company could be required to requalify its products
incorporating the new components with its existing customers. The
requalification process could prevent or delay product shipments which could
have a material adverse effect on the Company's business, financial condition or
operating results. In addition, the Company's reliance on sole source component
vendors involves several risks, including reduced control over the price, timely
delivery, performance, reliability and quality of the components. Any inability
of the Company to obtain timely deliveries of components of acceptable quality
or any significant increase in the prices of components for which the Company
does not have alternative sources could result in delays,
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cancellations or reductions in product shipments which would have a material
adverse effect on the Company's business, financial condition or operating
results.
DEPENDENCE ON INDEPENDENT ASSEMBLY CONTRACTORS. All of the Company's ASICs,
other than those incorporated in its ISDs, are packaged by one of two
independent contractors, one in Hong Kong, and the other in the Philippines. In
addition, the Company relies on an independent contractor in Thailand for PC
board level assembly of the electronic portion of the Company's ISDs. The
Company selects its contractors on the basis of a number of factors, including
technical capabilities, size and capacity, end-markets served, customer
references, quality certification status and economic competitiveness. The
Company negotiates prices for assembly services based on unit volumes and does
business on a purchase order basis. 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. In 1994, the
independent contractor responsible for the Company's PC board level assembly
ceased its operations on very short notice which materially adversely affected
the Company's operating results for fiscal 1994 and 1995. There can be no
assurance that the Company's current or future contractors will continue to
assemble and package products for the Company or that alternate contractors will
be available to assemble or package the Company's products as necessary.
Further, because the Company's assembly contractors are located in foreign
countries, the Company is subject to certain risks generally associated with
contracting with foreign suppliers, including currency exchange fluctuations,
political and economic instability, trade restrictions and changes in tariff and
freight rates. There can be no assurance that the Company will not experience
problems in timeliness, adequacy or quality of product deliveries, any of which
could have a material adverse affect on the Company's business, financial
condition or operating results.
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. The
Company currently receives fabricated wafers from American Microsystems, Inc.,
Micrel Semiconductor, Inc. and Silicon Systems, Inc. In an effort to secure a
second source for certain ASICs, the Company has recently begun to receive
fabricated wafers from Symbios, Inc. ("Symbios") and is in the process of
qualifying products manufactured by Symbios. 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. Although the Company receives supply
assurances from its foundry partners, the Company obtains all of its wafers on a
purchase order basis, and, as a result, there can be no assurance that wafer
foundries will allocate sufficient capacity or any capacity to the Company to
meet its processed wafer supply needs. In the event that the Company's foundry
partners are unable or unwilling to continue supplying wafers to the Company,
there can be no assurance that the Company will be able to identify and qualify
additional manufacturing sources in a
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timely manner, that any such additional manufacturing sources would be able to
produce wafers with acceptable manufacturing yields or that the Company would
not experience delays in product availability, quality problems, increased costs
or disruption in product development activities. The Company is engaged in an
ongoing and continuous program to reduce its product costs by increasing the
number of functional die per wafer by utilizing smaller geometry processes and
improving designs. As a result of this program, the Company believes that it
will be required to shift the fabrication of its wafers to new semiconductor
processes or potentially to new foundries. The Company expects that the shift to
new fabrication processes and foundries will occur on a product by product basis
in response to customer requests and as part of the Company's product cost
reduction strategy, and that the cost of such shift may be borne wholly or in
part by the Company. Shifting the manufacture of its wafers to new processes or
to new foundries is a highly complex undertaking requiring substantial
commitments of engineering personnel and other resources, which could materially
adversely affect 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. Also, competitors of the Company may be able to design
around the Company's patents. The laws of certain foreign countries in which the
Company's products are or may be developed, manufactured or sold, including
various countries in Asia, may not protect the Company's products or
intellectual property rights to the same extent as the laws of the United States
and thus make the possibility of piracy of the Company's technology and products
more likely. There can be no assurance that the steps taken by the Company to
protect its proprietary information will be adequate to prevent misappropriation
of its technology or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology.
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.
Furthermore, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Litigation by or against the
Company could result in significant expense to the Company and divert the
efforts of the Company's
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technical and management personnel, whether or not such litigation results in a
favorable determination for the Company. In the event of any adverse result in
any such litigation against the Company, the Company could be required to pay
substantial damages, cease the manufacture, use and sale of infringing products,
expend significant resources to develop noninfringing technology, discontinue
the use of certain processes or obtain licenses to the infringing technology.
There can be no assurance that the Company would be successful in such
development or that such licenses would be available on commercially reasonable
terms or at all, and any such development or license could require expenditures
by the Company of substantial time and resources. In the event that a third
party makes a successful claim against the Company or its customers and a
license is not made available to the Company on commercially reasonable terms,
or at all, the Company's business, financial condition or operating results
could be materially adversely affected.
DEPENDENCE ON INTERNATIONAL SALES AND SUPPLIERS. Sales to customers located
outside the United States accounted for approximately 56.8%, 46.0% and 38.6% of
the Company's total revenues in fiscal 1998, 1997 and 1996, respectively. 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.
As a result of conducting business internationally, the Company is subject
to general geopolitical risks, such as political and economic instability and
changes in diplomatic and trade relationships. There can be no assurance that
such factors will not have a material adverse effect on the Company's business,
financial condition or operating results or require the Company to modify its
current business practices.
NEED FOR ISO 9001 AND QS-9000 CERTIFICATION. The Company currently does not
have either ISO 9001 or QS-9000 certification, which increasingly are being
required by motor vehicle manufacturers. The Company has invested significant
financial and other resources to obtain such certifications, but there can be no
assurance that the Company will be successful in obtaining such certifications
in a timely manner, or at all. Although the Company has not lost any sales to
date as a result of its lack of ISO 9001 or QS-9000 certification, the lack of
such certification may make it more difficult or impossible for the Company to
qualify its products with new customers or to continue to sell products to
existing customers, either of which could have a material adverse effect on the
Company's business, financial condition or operating results.
RISKS OF PRODUCT LIABILITY. The automotive industry is characterized by
potential risks of product liability. The use of the Company's products in
various industrial or consumer applications in the future may also subject the
Company to potential risks of product liability claims. The Company's agreements
with its customers typically contain provisions designed to limit the Company's
exposure to product liability claims, and, although the Company has not
experienced any product liability claims to date, the sale of products by the
Company may entail the risk of such claims. Further, notwithstanding liability
limitation provisions in
26
<PAGE>
its agreements with its customers, due to various industry or business practices
or the need to maintain good customer relationships, the Company may be placed
in a position whereby it may make payments related to such product liability
claims. The Company currently maintains product liability insurance, but there
can be no assurance that product liability claims will be covered by such
insurance or will not exceed insurance coverage limits or that such insurance
will continue to be available on commercially reasonable terms or at all.
Notwithstanding the provisions in the agreements with its customers, a product
liability claim brought against the Company could have a material adverse effect
upon the Company's reputation, business, financial condition or operating
results.
RISKS OF PRODUCT RECALLS. The automotive industry is heavily regulated by
government agencies which establish various vehicle safety standards that are
often indirectly related to the components and subcomponents in their vehicles.
To the extent that any vehicles or any parts therein are required to be or are
voluntarily recalled and the recall involves vehicles or parts that are directly
or indirectly related to any of the Company's products, the Company may be
required to repair or replace its products, redesign or reproduce its products
or halt production or shipment of its products. Further, any recall of vehicles
or parts directly or indirectly related to any of the Company's products may
have the effect of damaging the Company's reputation. Although no such recall
has involved the Company or its products in the past, there can be no assurance
that such a recall will not occur in the future or that if such a recall does
occur that the Company's reputation, business, financial condition or operating
results will not be materially adversely affected.
27
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Attached to this Form 10-KSB are the Company's financial statements for the
year ended March 31, 1998, which include the following items:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................................................... 29
Consolidated Balance Sheets................................................................................ 30
Consolidated Statements of Operations...................................................................... 31
Consolidated Statements of Stockholders' Equity............................................................ 32
Consolidated Statements of Cash Flows...................................................................... 33
Notes to Consolidated Financial Statements................................................................. 34
</TABLE>
28
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Integrated Sensor Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Integrated
Sensor Solutions, Inc. as of March 31, 1998 and 1997, and the related
consolidated statements of operations, stockholder's equity, and cash flows for
each of the three years in the period ended March 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Integrated Sensor Solutions, Inc. at March 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1998, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Jose, California
July 9, 1998
29
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................... $ 17,609,761 $ 2,059,050
Accounts receivable--trade, net of allowance for
doubtful accounts of $50,000 and $164,000 at
March 31, 1998 and 1997, respectively......... 3,720,691 2,225,548
Accounts receivable from related parties........ 801,737 884,295
Inventories..................................... 3,120,015 1,679,107
Prepaid expenses................................ 254,584 63,730
------------- -------------
Total current assets.......................... 25,506,788 6,911,730
Property and equipment, at cost:
Machinery and equipment......................... 4,467,120 3,535,424
Furniture and fixtures.......................... 125,776 219,387
Leasehold improvements.......................... 188,973 131,009
Software........................................ 274,425 234,345
------------- -------------
5,056,294 4,120,165
Less accumulated depreciation and amortization.... 2,801,844 2,323,196
------------- -------------
2,254,450 1,796,969
------------- -------------
Total assets.................................. $ 27,761,238 $ 8,708,699
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.................................. $ 900,000 $ 600,000
Notes payable to related parties................ -- 1,515,365
Accounts payable--trade......................... 3,278,549 1,245,521
Accounts payable to related parties............. 1,144,424 684,634
Accrued payroll and related expenses............ 238,974 131,421
Other accrued liabilities....................... 419,543 436,652
Current portion of capital lease obligations.... 358,158 158,772
------------- -------------
Total current liabilities..................... 6,339,648 4,772,365
Long-term portion of capital lease obligations.... 108,496 197,149
Minority interest in subsidiary................... 77,744 56,028
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value
Authorized Shares--7,000,000 at March 31, 1998
Issued and outstanding shares--none at March
31, 1998..................................... -- --
Noncumulative convertible preferred stock,
$0.001 par value issuable in series
Authorized shares--none at March 31, 1998 and
3,400,000 at March 31, 1997
Issued and outstanding shares--none at March
31, 1998 and 3,066,317 at March 31, 1997..... -- 3,066
Common stock, $0.001 par value:
Authorized shares--50,000,000 at March 31,
1998 and 6,200,000 at March 31, 1997
Issued and outstanding shares--7,212,406 at
March 31, 1998 and 1,390,680 at March 31,
1997......................................... 7,213 1,391
Additional paid-in capital...................... 31,064,238 12,199,411
Accumulated deficit............................. (9,428,471) (8,170,843)
Cumulative translation adjustment............... (32,554) (68,758)
Deferred compensation........................... (375,076) (281,110)
------------- -------------
Total stockholders' equity.................. 21,235,350 3,683,157
------------- -------------
Total liabilities and stockholders'
equity.................................... $ 27,761,238 $ 8,708,699
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
30
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Product revenue................................. $ 11,173,194 $ 8,049,359 $ 5,336,771
Contract revenue................................ 4,052,257 2,254,720 2,993,319
------------- ------------- -------------
Total revenues (related party revenues of
$1,893,000, $1,506,000, and $2,404,000 for
1998, 1997 and 1996)........................ 15,225,451 10,304,079 8,330,090
Cost of revenues:
Cost of product revenue (Note 9)................ 8,349,274 7,292,491 5,250,504
Cost of contract revenue........................ 4,041,264 2,731,063 2,149,917
------------- ------------- -------------
Total cost of revenues........................ 12,390,538 10,023,554 7,400,421
------------- ------------- -------------
Gross profit...................................... 2,834,913 280,525 929,669
Operating expenses:
Research and development........................ 1,850,145 1,438,212 741,577
Sales, general and administrative............... 2,098,511 1,759,774 1,389,894
------------- ------------- -------------
Total operating expenses...................... 3,948,656 3,197,986 2,131,471
------------- ------------- -------------
Loss from operations.............................. (1,113,743) (2,917,461) (1,201,802)
Interest expense.................................. (231,762) (259,735) (225,957)
Other income...................................... 110,724 27,525 366,129
Minority interest in net (income) loss of
consolidated subsidiary......................... (22,847) 520,826 311,000
------------- ------------- -------------
Net loss.......................................... $ (1,257,628) $ (2,628,845) $ (750,630)
------------- ------------- -------------
------------- ------------- -------------
Basic and diluted net loss per share.............. $ (0.72) $ (2.06) $ (0.70)
------------- ------------- -------------
------------- ------------- -------------
Shares used in computing basic and diluted net
loss per share.................................. 1,748,195 1,275,535 1,074,984
------------- ------------- -------------
------------- ------------- -------------
Pro forma basic and diluted net loss per share.... $ (0.27) $ (0.72)
------------- -------------
------------- -------------
Shares used in computing pro forma basic and
diluted net loss per share...................... 4,722,466 3,631,727
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
31
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NONCUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE
---------------------- ---------------------- PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
--------- ----------- --------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995................ 2,121,497 $ 2,122 1,110,558 $ 1,111 $6,519,396 $(4,791,368) $ 117,655
Issuance of common stock upon exercise
of stock options..................... -- -- 103,400 103 29,009 -- --
Issuance of common stock for extension
of payment terms..................... -- -- 66,955 67 103,906 -- --
Translation adjustment................. -- -- -- -- -- -- (90,650)
Net loss............................... -- -- -- -- -- (750,630) --
--------- ----------- --------- ----------- ---------- ------------ -----------
Balance at March 31, 1996................ 2,121,497 2,122 1,280,913 1,281 6,652,311 (5,541,998) 27,005
Issuance of common stock upon exercise
of stock options..................... -- -- 109,767 110 76,430 -- --
Issuance of preferred stock for notes
payable, accrued interest, and cash,
net of $11,959 of issuance costs..... 944,820 944 -- -- 5,189,560 -- --
Deferred compensation.................. -- -- -- -- 281,110 -- --
Translation adjustment................. -- -- -- -- -- -- (95,763)
Net loss............................... -- -- -- -- -- (2,628,845) --
--------- ----------- --------- ----------- ---------- ------------ -----------
Balance at March 31, 1997................ 3,066,317 3,066 1,390,680 1,391 12,199,411 (8,170,843) (68,758)
Issuance of common stock upon exercise
of stock options..................... -- -- 102,706 103 82,743 -- --
Issuance of preferred stock............ 152,703 153 -- -- 911,937 -- --
Conversion of preferred stock into
common............................... (3,219,020) (3,219) 3,219,020 3,219 -- -- --
Issuance of Common Stock in IPO, net of
$2,088,928 of issuance costs......... -- -- 2,500,000 2,500 17,658,572 -- --
Deferred compensation.................. -- -- -- -- 211,575 -- --
Amortization of deferred
compensation......................... -- -- -- -- -- -- --
Translation adjustment................. -- -- -- -- -- -- 36,204
Net loss............................... -- -- -- -- -- (1,257,628) --
--------- ----------- --------- ----------- ---------- ------------ -----------
Balance at March 31, 1998................ -- $ -- 7,212,406 $ 7,213 $31,064,238 $(9,428,471) $ (32,554)
--------- ----------- --------- ----------- ---------- ------------ -----------
--------- ----------- --------- ----------- ---------- ------------ -----------
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------- ------------
<S> <C> <C>
Balance at March 31, 1995................ $ -- $1,848,916
Issuance of common stock upon exercise
of stock options..................... -- 29,112
Issuance of common stock for extension
of payment terms..................... -- 103,973
Translation adjustment................. -- (90,650)
Net loss............................... -- (750,630)
------------- ------------
Balance at March 31, 1996................ -- 1,140,721
Issuance of common stock upon exercise
of stock options..................... -- 76,540
Issuance of preferred stock for notes
payable, accrued interest, and cash,
net of $11,959 of issuance costs..... -- 5,190,504
Deferred compensation.................. (281,110) --
Translation adjustment................. -- (95,763)
Net loss............................... -- (2,628,845)
------------- ------------
Balance at March 31, 1997................ (281,110) 3,683,157
Issuance of common stock upon exercise
of stock options..................... -- 82,846
Issuance of preferred stock............ -- 912,090
Conversion of preferred stock into
common............................... -- --
Issuance of Common Stock in IPO, net of
$2,088,928 of issuance costs......... -- 17,661,072
Deferred compensation.................. (211,575) --
Amortization of deferred
compensation......................... 117,609 117,609
Translation adjustment................. -- 36,204
Net loss............................... -- (1,257,628)
------------- ------------
Balance at March 31, 1998................ $(375,076) $21,235,350
------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
32
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
1998 1997 1996
------------- ------------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.............................................................. $ (1,257,628) $ (2,628,845) $ (750,630)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization..................................... 822,695 1,025,892 769,743
Amortization of deferred compensation............................. 117,609 -- --
Minority interest in net income (loss) of subsidiary.............. 22,847 (520,826) (311,000)
Gain on sale of interest in subsidiary............................ -- (171,618) (235,472)
Foreign currency (gains) losses................................... (54,238) 143,921 (165,000)
Changes in operating assets and liabilities:
Accounts receivable............................................... (1,412,585) (1,358,435) (79,700)
Inventories....................................................... (1,440,908) (95,289) (163,988)
Prepaid expenses.................................................. (190,854) 92,228 (70,522)
Accounts payable.................................................. 2,547,056 577,743 (862,773)
Accrued payroll and related expenses.............................. 107,553 (3,017) 18,518
Deferred revenue.................................................. -- (3,568) (53,732)
Other accrued liabilities......................................... 65,240 219,480 210,254
------------- ------------- -----------
Net cash used in operating activities................................. (673,213) (2,722,334) (1,694,302)
INVESTING ACTIVITIES
Purchase of property and equipment.................................... (1,033,337) (1,092,413) (1,124,317)
Proceeds from sale of property and equipment.......................... 46,205 -- --
Proceeds from sale of short-term investment........................... -- -- 150,000
------------- ------------- -----------
Net cash used in investing activities................................. (987,132) (1,092,413) (974,317)
FINANCING ACTIVITIES
Borrowings under line of credit....................................... 300,000 600,000 600,000
Proceeds from notes payable........................................... -- 1,086,681 1,757,377
Payments on line of credit............................................ -- (600,000) --
Payments of principal on notes payable................................ (1,115,365) -- (750,000)
Payments of principal on capital lease obligations.................... (147,238) (126,922) (9,890)
Issuance of convertible preferred stock, net of issuance costs........ 429,741 3,988,043 --
Net proceeds from issuance of common stock............................ 17,743,918 76,540 29,112
Net proceeds from investment in subsidiary............................ -- 328,947 715,199
------------- ------------- -----------
Net cash provided by financing activities............................. 17,211,056 5,353,289 2,341,798
------------- ------------- -----------
Increase (decrease) in cash and cash equivalents...................... 15,550,711 1,538,542 (326,821)
Cash and cash equivalents at beginning of year........................ 2,059,050 520,508 847,329
------------- ------------- -----------
Cash and cash equivalents at end of year.............................. $ 17,609,761 $ 2,059,050 $ 520,508
------------- ------------- -----------
------------- ------------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid......................................................... $ 214,955 $ 118,135 $ 164,255
SCHEDULE OF NONCASH FINANCING ACTIVITIES
Capital asset additions under capital leases.......................... 257,971 $ 298,197 $ 9,272
Accounts payable converted to capital leases.......................... $ -- $ 153,874 $ --
Issuance of preferred stock for payment of notes payable.............. $ 400,000 $ 1,067,321 $ --
Issuance of preferred stock for payment of interest on notes
payable............................................................. $ 82,349 $ 135,140 $ 103,973
</TABLE>
See accompanying notes.
33
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Integrated Sensor Solutions, Inc. (ISS or the Company) 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 1993.
BASIS OF PRESENTATION
The consolidated financial statements through March 31, 1998 include the
accounts of the Company and ISS-Nagano GmbH, its majority owned subsidiary (see
Note 2), after elimination of all intercompany accounts and transactions.
Prior to July 31, 1997 the Company owned 52% of ISS-Nagano GmbH. On July 31,
1997, the Company entered into an agreement to increase its ownership of
ISS-Nagano GmbH by converting approximately $1,000,000 in long-term intercompany
indebtedness owed by ISS-Nagano GmbH into an increased equity interest.
Accordingly, the Company now owns 74% of the equity of ISS-Nagano GmbH. For
periods subsequent to July 31, 1997, 26% of ISS-Nagano GmbH's net income (loss)
has been attributed to the minority shareholders' interest.
FOREIGN CURRENCY TRANSLATION
The financial statements of ISS-Nagano GmbH are denominated in Deutsche
Marks which is its functional currency in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation" (FAS 52). All assets
and liabilities in the balance sheets of ISS-Nagano GmbH are translated into
U.S. Dollar equivalents at exchange rates as follows: (1) balance sheet accounts
at year-end rates and (2) statement of operations accounts at weighted average
exchange rates for the year. Translation gains or losses are recorded in
stockholders' equity, and the transaction gains and losses are included in other
income. The Company has not undertaken hedging transactions to cover its
currency transaction exposure. In fiscal 1998, 1997 and 1996, the Company
recognized a transaction gain of $54,000, a transaction loss of $144,000 and a
transaction gain of $165,000, respectively, on trade payables and notes to
related parties denominated in foreign currencies.
CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid financial instruments
that are readily convertible to cash and have original maturities of three
months or less at the time of acquisition.
ADVERTISING EXPENSE
The cost of advertising is generally expensed as incurred. The Company's
advertising costs through March 31, 1998 have been immaterial.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's long-term debt is estimated using a
discounted cash flow analysis based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements.
34
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
actual cost on a first-in, first-out basis) or market. The major components of
inventory are as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
<S> <C> <C>
1998 1997
------------ ------------
Raw materials..................................................... $ 1,643,260 $ 1,422,396
Work-in-process................................................... 1,166,367 123,813
Finished goods.................................................... 310,388 132,898
------------ ------------
$ 3,120,015 $ 1,679,107
------------ ------------
------------ ------------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment under capital leases is
stated at the present value of minimum lease payments at the beginning of the
lease term. Property and equipment are depreciated over the estimated useful
lives of the assets (generally three to five years) using the straight-line
method. Equipment under capital leases and leasehold improvements are amortized
using the straight-line method, based on the shorter of the estimated useful
lives of the assets or the term of the lease.
REVENUES
Revenues from product shipments are recognized as products are shipped. The
Company performs research and product development work under development
contracts. Due to technological risk factors, the costs of these contracts are
expensed as incurred and revenues are recognized when applicable customer
milestones have been met, including deliverables, and in any case, not in excess
of the amount that would be recognized using the percentage of completion
method. Costs incurred under development contracts are included in cost of
contract revenues in the consolidated statements of operations.
STOCK SPLIT
In October 1997, the Board of Directors and stockholders approved a
one-for-two and one-half reverse split of the Company's common and preferred
stock and reincorporation of the Company into the State of Delaware. All share
and per share amounts in the accompanying consolidated financial statements have
been adjusted retroactively.
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
35
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 net
revenues:
<TABLE>
<CAPTION>
FISCAL YEARS
ENDED MARCH 31,
-------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----- ----- -----
MascoTech................................................................ 20% 22% 31%
Breed Technologies, Inc.................................................. -- < >10% 13%
Nagano Keiki Co., Ltd.................................................... 12% 11% < >10%
Robert Bosch GmbH........................................................ 36% 22% 17%
EG&G/IC Sensors.......................................................... < >10% 20% 10%
</TABLE>
LONG-LIVED ASSETS
In 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (FAS 121). FAS 121 requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undiscounted cash flows attributable to such
assets. FAS 121 was effective for the fiscal year ended March 31, 1997. The
adoption of FAS 121 did not have a material impact on the Company's financial
position or results of operations.
ACCOUNTING FOR EMPLOYEE STOCK OPTIONS
The Company accounts for its employee stock compensation plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25). In October
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123), which the Company adopted in fiscal 1997. Under FAS 123, companies may
elect, but are not required, to use a
36
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
fair value methodology to recognize compensation expense for all stock-based
awards. In 1997, the Company implemented the disclosure-only provisions of FAS
123 (see Note 7).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, REPORTING COMPREHENSIVE INCOME (FAS No. 130) and Statement No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (FAS No.
131). FAS No. 130 establishes rules for reporting and displaying comprehensive
income. FAS No. 131 will require the Company to use the "management approach" in
disclosing segment information. Both statements are effective for the Company
during fiscal 1999. The Company does not believe that the adoption of either FAS
No. 130 or FAS No. 131 will have a material impact on the Company's results of
operations, cash flows, or financial position.
2. ISS-NAGANO GMBH
In July 1993, the Company organized a German entity, ISS-Nagano GmbH, in
which ISS retained a 79% interest. In December 1994, Nagano Keiki Company, Ltd.
purchased 34% of ISS-Nagano GmbH for approximately $1,290,000 (2,000,000
Deutsche Marks). As a result of this transaction, the entity was renamed
ISS-Nagano GmbH, and the Company's ownership interest therein was reduced to
52%. Under the terms of the purchase arrangement, the related party was
obligated to pay for the stock in four installments of 500,000 Deutsche Marks
each. The sale has resulted in ISS recognizing a gain of approximately $172,000,
and $235,000 in fiscal 1997, and 1996, respectively, which is included in other
income in the accompanying consolidated statement of operations. ISS-Nagano GmbH
is engaged in the manufacturing and marketing of integrated sensor devices
(ISDs).
In July 1997, the Company increased its ownership of ISS-Nagano GmbH by
converting approximately $1.0 million in long-term intercompany indebtness owed
by ISS-Nagano GmbH into an increased equity interest. Accordingly, the Company
now owns 74% of the equity of ISS-Nagano. For periods subsequent to July 1997,
26% of ISS-Nagano's net income (loss) has been attributed to minority
stockholders' interest.
From fiscal 1994 through fiscal 1997, the Company received approximately
$1,961,000 in research grants from two divisions of the German government as
part of the organization of ISS-Nagano GmbH. The grants have been provided to
support the research and development of ISS-Nagano GmbH and have been applied
against its operating expenditures and fixed asset purchases. The subsidiary
must maintain certain employment levels as part of the agreements and have
restrictions related to the purchasing of fixed assets. Management believes the
Company has maintained operations in compliance with the guidelines of the
agreements. Penalties that may arise related to the restrictions would not have
a material impact on the consolidated statement of operations.
The Company received $189,000 and $45,000 in grant revenue for the fiscal
years ended March 31, 1997 and 1996, respectively, as reimbursement for
operating expenses incurred related primarily to
37
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ISS-NAGANO GMBH (CONTINUED)
research and development expenses. This grant revenue has been offset against
research and development expenses for presentation in these financial
statements.
38
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NOTES PAYABLE TO RELATED PARTIES
<TABLE>
<S> <C>
Notes payable consisted of the following at March 31, 1997:
Promissory note with related party, subordinated to the bank
line, bearing interest at 10% per annum; with principal and
interest due and payable upon the earlier of an initial public
offering by the Company or June 30, 1998 All principal and
accumulated interest were repaid in March 1998................ $ 678,684
Promissory note with related party, subordinated to the bank
line, denominated in Yen, bearing interest at 10% per annum;
with principal plus interest due on April 30, 1997. This note
was repaid on May 30, 1997.................................... 436,681
Promissory notes with related party, subordinated to the bank
line, bearing interest at 9.75% per annum; with principal due
and payable on June 15, 1997. All principal and accumulated
interest were converted to Series F Preferred Stock upon
maturity of the note at $6.13 per share....................... 400,000
---------
$1,515,365
---------
---------
</TABLE>
4. LINE OF CREDIT/TERM LOAN
The Company has a bank line of credit agreement that expires on August 21,
1998 and allows for 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 March 31,
1998) and are secured by the assets of the Company. As of March 31, 1998 and
1997, the Company had borrowings totalling $900,000 and $600,000 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
March 31, 1998). As of March 31, 1998, the Company had borrowings of
approximately $217,000 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 March 31, 1998, the Company was out
of compliance with its profitability covenant and obtained a waiver through that
date. The Company further believes that it will be in violation of this covenant
in the quarter ending June 30, 1998. In June 1998, the Company repaid $500,000
under the line of credit.
5. CAPITAL LEASES
At March 31, 1998 and 1997, equipment under capital leases amounted to
$753,867, and $495,896, respectively. Lease terms ranged from three to five
years. Accumulated amortization on these assets at March 31, 1998 and 1997 was
$279,961, and $104,357, respectively. At March 31, 1998 approximately $283,000,
remained available under the bank's term loan facility.
38
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL LEASES (CONTINUED)
The following is a schedule of future minimum fiscal lease payments under
capital leases:
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C>
1999.......................................................................... $ 263,139
2000.......................................................................... 174,500
2001.......................................................................... 90,624
2002.......................................................................... 34,545
--------------
Total minimum lease payments.................................................. 562,808
Amount representing interest.................................................. 96,154
--------------
466,654
Less current portion.......................................................... 358,158
--------------
$ 108,496
--------------
--------------
</TABLE>
6. COMMITMENTS
The Company has facility operating leases that expire through fiscal 2009.
Future fiscal minimum lease and maintenance payments including the Company's new
lease obligation entered in Germany in May 1998 are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C>
1999.......................................................................... $ 371,851
2000.......................................................................... 473,302
2001.......................................................................... 327,272
2002.......................................................................... 290,517
2003.......................................................................... 290,517
Thereafter.................................................................... 1,718,890
--------------
$ 3,472,349
--------------
--------------
</TABLE>
Total rent expense for the years ended March 31, 1998, 1997 and 1996 was
approximately $277,000, $246,000 and $261,000, respectively.
As of March 31, 1998 the Company had outstanding noncancelable purchase
orders of approximately $2,700,000, primarily relating to inventory purchases.
In addition, in June 1998 the Company committed approximately $3,600,000 to
the set up of a manufacturing line for sensors related to the vehicle chassis
control systems at the Company's German subsidiary.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
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.
39
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes 7,000,000 shares of
preferred stock. The Board of Directors has the authority, without further
action by the stockholders, to issue up to 7,000,000 shares of preferred stock
in one or more series and determine or alter the designation, powers,
preferences, privileges and relative participating, optional or special rights
and the qualifications, limitations or restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights of common stock.
CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock at March 31, 1997 is as follows:
<TABLE>
<CAPTION>
SHARES
AUTHORIZED ISSUED AND
SERIES SHARES OUTSTANDING
- --------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
A...................................................................................... 800,000 800,000
B...................................................................................... 271,465 271,459
C...................................................................................... 536,000 520,000
D...................................................................................... 530,038 530,038
E...................................................................................... 261,729 249,616
F...................................................................................... 960,732 695,204
Undesignated........................................................................... 640,036 --
----------- -----------
Total Stock............................................................................ 4,000,000 3,066,317
----------- -----------
----------- -----------
</TABLE>
All shares of convertible preferred stock outstanding at March 31, 1997 or
issued in fiscal 1998 were converted in connection with the Company's initial
public offering in March 1998.
WARRANTS
In connection with the issuance of Series C Preferred Stock, the Company
granted warrants to purchase 16,326 shares of Series C Preferred Stock. The
warrants are exercisable at $6.13 per share and have an expiration date of June
1, 2001. In connection with the issuance of Series F Preferred Stock, the
Company granted warrants to purchase 68,978 shares of Series F Preferred Stock.
During November 1997, these warrants were exercised. In connection with the
Company's capital lease line, the Company issued warrants to purchase 30,000
shares of Series F Preferred Stock. The warrants are exercisable at $6.25 per
share and have an expiration date of May 21, 2006. On August 22, 1997 in
connection with the renewal of its line of credit, the Company issued warrants
to purchase 12,240 shares of Series F Preferred Stock at an exercise price of
$6.38 per share which expire on August 21, 2001. In addition, in connection with
the Company's initial public offering, the Company agreed to issue warrants for
up to 250,000 shares of Common Stock at a price of $9.60 per share expiring on
March 13, 2003.
The fair value of the warrants issued in conjunction with the Company's line
of credit and capital lease line was immaterial.
In connection with the Company's initial public offering all outstanding
warrants to purchase preferred stock were converted into warrants to purchase an
equivalent number of shares of common stock.
40
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires the use of option valuation models that are not developed for use
in valuing employee stock options. Under APB Opinion No. 25, when the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the grant date, there is no compensation expense recognized.
Pro forma information regarding net income (loss) is required by FAS 123,
which also requires that the information be determined as if the Company has
accounted for its employee stock options granted subsequent to March 31, 1995
under the fair value method of that statement. The fair value for these options
was estimated at the date of grant using the minimum value method (as the
Company was privately owned through March 13, 1998) with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield.................................... 0.00% 0.00% 0.00%
Risk-free interest rate.................................... 5.96% 6.30% 5.96%
Weighted average expected life............................. 4 years 4 years 4 years
</TABLE>
Option valuation models were developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The pro forma
effect of applying FAS 123 was not material to the Company's reported net loss
in fiscal 1998, 1997 or 1996. Because FAS 123 is applicable only to options
granted subsequent to March 31, 1995, its pro forma effect will not be fully
reflected until fiscal 1999 and thereafter.
During fiscal 1990, the Company adopted a stock option plan (the 1990 Plan)
whereby a committee, as appointed by the Board of Directors, may grant incentive
and nonstatutory stock options. The options granted under the 1990 Plan are
exercisable, vest at the discretion of the committee, and expire no later than
ten years from the date of grant. Such options may be granted at an exercise
price of not less than 100% or 85% of fair market value as determined by the
committee for incentive stock options and nonstatutory stock options,
respectively.
During fiscal 1997, the Company adopted a stock option plan (the 1997 Plan).
The provisions of the 1997 Plan are similar to those of the 1990 Plan.
41
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
Activity under the stock option plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
RANGE OF EXERCISE AVERAGE
OPTIONS AVAILABLE PRICES PER SHARE EXERCISE
FOR GRANT NUMBER OF SHARES OUTSTANDING OPTIONS PRICE
----------------- ---------------- ------------------- -------------
<S> <C> <C> <C> <C>
Balance at March 31, 1995............ 560,770 518,983 $0.15-$1.125
Options granted.................... (94,400) 94,400 $1.125
Options exercised.................. -- (103,400) $0.275
Options canceled................... 65,283 (65,283) $0.825
-------- -------- -------------
Balance at March 31, 1996............ 531,653 444,700 $0.95
Authorized......................... 307,313 -- $--
Options granted.................... (183,520) 183,520 $1.45
Options exercised.................. -- (109,767) $0.70
Options canceled................... 44,036 (44,036) $1.05
-------- -------- -------------
Balance at March 31, 1997............ 699,482 474,417 $1.20
Options granted.................... (109,390) 109,390 $4.317
Options exercised.................. -- (102,706) $0.807
Options canceled................... 13,017 (21,692) $3.248
-------- -------- -------------
Balance at March 31, 1998............ 603,109 459,409 $1.911
-------- -------- -------------
-------- -------- -------------
</TABLE>
Outstanding and exercisable options presented by price range at March 31,
1998 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ------------------------------
NUMBER OF WEIGHTED AVERAGE NUMBER OF
OPTIONS REMAINING LIFE WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
RANGE OF EXERCISE PRICE OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------------------------- ----------- ------------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$0.75-$1.125.................... 286,819 2.07 $ 1.119 204,378 $ 1.116
$2.00........................... 135,000 3.80 $ 2.000 33,475 $ 2.000
$6.00-$8.00..................... 37,590 4.70 $ 7.636 670 $ 6.000
----------- --- ------ ----------- ------
$0.75-$8.00..................... 459,409 2.79 $ 1.911 238,523 $ 1.254
----------- --- ------ ----------- ------
----------- --- ------ ----------- ------
</TABLE>
The weighted average fair value of grants made in fiscal 1998, 1997 and 1996
was $1.58, $0.30 and $0.25, respectively.
STOCK PURCHASE PLAN
On August 8, 1997, the Company's Board of Directors approved an employee
stock purchase plan. A total of 250,000 shares of the Company's common stock
have been reserved for issuance under the Company's 1997 Employee Stock Purchase
Plan (the Purchase Plan). The Purchase Plan permits eligible employees to
purchase common stock at a discount, but only through payroll deductions, during
concurrent 24-month offering periods. Each offering period will be divided into
four consecutive six-month purchase periods. The price at which stock is
purchased under the Purchase Plan is equal to 85% of the fair market value of
the common stock on the first day of the offering period or the last day of the
purchase period, whichever is lower. The initial offering period commenced on
April 1, 1998.
42
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
DEFERRED COMPENSATION
For certain options granted in late fiscal 1997 and the first half of fiscal
1998, the Company recognized as deferred compensation the excess of the deemed
value for accounting purposes of the common stock issuable upon exercise of such
options over the aggregate price of such options. The deemed value for
accounting purposes represents the fair value at the date of grant. The
compensation expense will be amortized ratably over the vesting period of the
option.
SHARES RESERVED
Common Stock reserved for future issuance was as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C>
Stock purchase plan........................................................... 250,000
Stock option plans:
Outstanding................................................................. 459,409
Reserved for future grants.................................................. 603,109
--------------
1,062,518
Common Stock warrants......................................................... 308,566
--------------
1,621,084
--------------
--------------
</TABLE>
8. INCOME TAXES
Due to the Company's loss position, there was no provision for income taxes
for fiscal 1998, 1997, or 1996.
Deferred income taxes reflect the net tax effects of operating loss and
credit carryforwards and temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the Company's deferred tax assets
are as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............................. $ 2,936,000 $ 2,630,000
Research credit carryforwards................................. 233,000 159,000
Capitalized research costs.................................... 175,000 236,000
Other temporary differences................................... 125,000 7,000
------------- -------------
Total deferred tax assets....................................... 3,469,000 3,032,000
Valuation allowance for deferred tax assets..................... (3,469,000) (3,032,000)
------------- -------------
Net deferred tax assets......................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
The change in the valuation allowance was a net increase of $437,000,
$1,257,000 and $85,000 for fiscal 1998, 1997, and 1996, respectively.
43
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
For federal tax purposes at March 31, 1998, the Company has net operating
loss and research and development credit carryforwards of approximately
$7,600,000 and $162,000, respectively, which will expire in the fiscal years
2005 through 2013. For California tax purposes at March 31, 1998, the Company
has net operating loss and research and development credit carryforwards of
approximately $2,000,000 and $108,000, respectively, which will expire in the
fiscal years 1999 through 2003. The Company also has at March 31, 1998 net
operating loss carryforwards of approximately $523,000 in its German subsidiary.
Utilization of the federal net operating losses and credits may be subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization.
9. RELATED PARTY TRANSACTIONS
During the years ended March 31, 1998, 1997 and 1996 the Company made sales
of approximately $0, $181,000, and $1,233,000 respectively, to a related party
of which none is included in the accounts receivable balance at March 31, 1997,
and 1998, respectively.
In addition, at March 31, 1998, and 1997, the accounts payable balance
includes approximately $138,000, and $304,000 due to a related party on
purchases of $375,000, $2,323,000 and $2,005,000 respectively, during the years
ended March 31, 1998, 1997 and 1996. Included in the notes payable balance at
March 31, 1997 is approximately $679,000, due the related party. All accrued
interest and principal was paid in full to the related party in March 1998.
During the years ended March 31, 1998, 1997 and 1996, the Company made sales
of approximately $1,766,000, $1,119,000, and $692,000, respectively, to another
related party of which approximately $802,000, and $709,000 is included in the
accounts receivable balance at March 31, 1998 and March 31, 1997, respectively.
Included in the accounts payable balance at March 31, 1998 and 1997, is
approximately $988,000, and $381,000, respectively, due to the related party.
The Company purchased $2,136,000, $630,000, and $376,000 of materials from the
related party in fiscal 1998, 1997 and 1996, respectively. In addition, included
in the notes payable balance at March 31, 1997 is approximately $437,000 due the
related party.
During the years ended March 31, 1998, 1997 and 1996, the Company made sales
of approximately $127,000, $206,000, $479,000, respectively, to another related
party of which approximately none and $175,000 is included in the accounts
receivable balance at March 31, 1998 and 1997, respectively. In addition, the
Company had an accounts payable balance to this related party of approximately
$19,000 at March 31, 1998.
44
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. 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:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1998
---------------------------------------------------------
ADJUSTMENTS/
UNITED STATES GERMANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers....................... $ 9,186,019 $ 6,039,432 $ -- $ 15,225,451
Transfers between geographic areas.................... 1,639,217 593,523 (2,232,740) --
------------- ------------ ------------- -------------
Total net sales....................................... $ 10,825,236 $ 6,632,955 $ (2,232,740) $ 15,225,451
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Loss from operations.................................. $ (931,508) $ (208,585) $ 26,350 $ (1,113,743)
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Identifiable assets................................... $ 25,699,712 $ 5,011,562 $ (2,950,036) $ 27,761,238
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
<CAPTION>
YEAR ENDED MARCH 31, 1997
---------------------------------------------------------
ADJUSTMENTS/
UNITED STATES GERMANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers....................... $ 7,685,002 $ 2,619,077 $ -- $ 10,304,079
Transfers between geographic areas.................... 1,668,258 594,861 (2,263,119) --
------------- ------------ ------------- -------------
Total net sales....................................... $ 9,353,260 $ 3,213,938 $ (2,263,119) $ 10,304,079
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Loss from operations.................................. $ (1,921,330) $ (893,303) $ (102,828) $ (2,917,461)
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Identifiable assets................................... $ 9,169,204 $ 2,290,287 $ (2,750,792) $ 8,708,699
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
<CAPTION>
YEAR ENDED MARCH 31, 1996
---------------------------------------------------------
ADJUSTMENTS/
UNITED STATES GERMANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers....................... $ 6,921,837 $ 1,408,253 $ -- $ 8,330,090
Transfers between geographic areas.................... 687,277 230,519 (917,796) --
------------- ------------ ------------- -------------
Total net sales....................................... $ 7,609,114 $ 1,638,772 $ (917,796) $ 8,330,090
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Loss from operations.................................. $ (633,708) $ (712,763) $ 144,669 $ (1,201,802)
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Identifiable assets................................... $ 5,317,132 $ 1,906,090 $ (1,536,347) $ 5,686,875
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>
Export revenues consisting of sales from the Company's U.S. operating
subsidiary to nonaffiliated customers were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Canada.............................................. $ 261,000 $ 188,000 $ 299,000
Japan and Korea..................................... 2,344,000 1,936,000 1,509,000
------------ ------------ ------------
Total............................................... $ 2,605,000 $ 2,124,000 $ 1,808,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
45
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Numerator for basic, diluted and pro forma:
Net loss............................................................ $ (1,257,628) $ (2,628,845) $ (750,630)
------------- ------------- ------------
Denominator:
Denominator for basic and diluted loss per share-weighted average
common shares outstanding......................................... 1,748,195 1,275,535 1,074,984
------------- ------------- ------------
Conversion of weighted average preferred stock outstanding not
included above (pro forma).......................................... 2,974,271 2,356,192
------------- -------------
Denominator for pro forma basic and diluted loss per share............ 4,722,466 3,631,727
------------- -------------
------------- -------------
Basic and diluted loss per share...................................... $ (0.72) $ (2.06) $ (0.70)
------------- ------------- ------------
------------- ------------- ------------
Pro forma basic and diluted loss per share............................ $ (0.27) $ (0.72)
------------- -------------
------------- -------------
</TABLE>
Securities (including options and warrants) that could potentially dilute
basic EPS in the future were not included in the computation of diluted EPS
because to do so would have been antidilutive for the periods presented.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
46
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the executive officers of the Company as of
March 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ---------------------------------------------------------
<S> <C> <C>
Manher D. Naik.................................. 55 President, Chief Executive Officer and Chairman of the
Board of Directors
Donald E. Paulus................................ 41 Chief Operating Officer
Ramesh Sirsi, Ph.D.............................. 53 Executive Vice President, Marketing and Sales
David Satterfield............................... 45 Vice President, Finance and Administration
</TABLE>
- ------------------------
Manher D. Naik founded the Company in March 1989 and has served as
President, Chief Executive Officer and Chairman of the Board of Directors since
March 1989. From August 1979 through March 1989 Mr. Naik served as Vice
President of Strategic Marketing of National Semiconductor Corporation, a
semiconductor manufacturer. Mr. Naik received a BS in Mechanical Engineering
from the Indian Institute of Technology, an MS degree in Industrial Engineering
from Cornell University, and an MBA degree from Pepperdine University.
Donald E. Paulus joined the Company as Vice President of Engineering
Operations in December 1990 and currently serves as Chief Operating Officer.
Prior to joining the Company, beginning in January 1989, Mr. Paulus served as
Product Line Director at Sierra Semiconductor Corporation, now known as
PMC-Sierra, Inc., a company specializing in mixed signal integrated circuits.
From December 1984 to January 1989, Mr. Paulus served as a Design Manager with
Honeywell Inc.'s Solid State Electronics Division. From June 1979 to December
1984, Mr. Paulus served as a Member of the Technical Staff and as an Engineering
Supervisor at AT&T Bell Laboratories. Mr. Paulus received a BSEE degree from
Lehigh University, an MSEE degree from Stanford University and an MBA from the
University of Colorado.
Ramesh Sirsi, Ph.D. joined the Company in September 1994 and has served as
Executive Vice President, Marketing and Sales since September 1994. Prior to
joining the Company, beginning in March 1989, Dr. Sirsi served as Director of
Marketing at Siemens Components, Inc., an electronic component manufacturer.
From October 1984 to July 1988, Dr. Sirsi served as a Product Line Director at
Honeywell Inc. From January 1978 to October 1984, Dr. Sirsi served as Director
of Telecommunications IC product development at Harris Corporation. From June
1973 to December 1977, he was employed by Bell Northern Research as a Member of
the Technical Staff. Dr. Sirsi received his BSEE degree from Bangalore
University and his MSEE and Ph.D. degrees from Carleton University.
David Satterfield joined the Company in April 1994 and has served as Vice
President, Finance and Administration and Secretary since April 1994. Prior to
joining the Company, beginning in June 1992, Mr. Satterfield served as Corporate
Controller of Austek Microsystems Limited, Inc., a semiconductor manufacturer.
From April 1991 to June 1992, Mr. Satterfield served as Corporate Controller of
Free-Flow Packaging Corporation, a packaging company. From June 1985 to April
1991, Mr. Satterfield served as Corporate Controller of Micro Power Systems,
Inc., a semiconductor manufacturer. Mr. Satterfield holds a BS degree in
accounting from San Jose State University.
The information regarding directors required by this item is incorporated by
reference into information set forth in the 1998 Proxy Statement under the
heading "Directors, Executive Officers, Promoters, and Control Persons."
47
<PAGE>
The information required by this item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to information set forth in the 1998 Proxy Statement under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 10. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference to
the information set forth in the 1998 Proxy Statement under the caption
"Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the information set forth in the 1998
Proxy Statement under the caption "Principal Stockholders and Share Ownership by
Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated by reference to the information set forth in the 1998 Proxy
Statement under the caption "Certain Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- ---------- ---------------------------------------------------------------------------------------- -------------
<C> <S> <C>
3.1* Certificate of Incorporation of Registrant.
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.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- ---------- ---------------------------------------------------------------------------------------- -------------
<C> <S> <C>
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** Lease Agreement between Geschaftsraum-Mietvertrag and ISS-Integrated Sensor Solutions
GmbH dated September 12, 1994.
10.15* Agreement relating to change in equity ownership of ISS-Nagano GmbH dated July 30, 1997.
21.1** List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1** Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* 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.
+ 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.
49
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<S> <C> <C>
INTEGRATED SENSOR SOLUTIONS, INC.
By: /s/ MANHER NAIK
-----------------------------------------
Manher Naik
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: July 14, 1998
</TABLE>
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature appears
below constitutes and appoints Manher Naik and David Satterfield his
attorneys-in-fact and agents, each with the power of substitution and
resubstitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-KSB, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary, to be done in connection therewith, as fully as to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitute may do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<S> <C> <C>
/s/ MANHER NAIK Chairman, President and July 14, 1998
- ------------------------------ Chief Executive Officer
Manher Naik
/s/ DAVID SATTERFIELD Vice President Finance & July 14, 1998
- ------------------------------ Administration
David Satterfield (Principal Financial and
Accounting Officer)
/s/ SHIGERU MIYASHITA Director July 14, 1998
- ------------------------------
Shigeru Miyashita
/s/ GERALD F. TAYLOR Director July 14, 1998
- ------------------------------
Gerald F. Taylor
/s/ VINOD K. SOOD Director July 14, 1998
- ------------------------------
Vinod K. Sood
/s/ Y.S. FU Director July 14, 1998
- ------------------------------
Y.S. Fu
/s/ STUART D. BOYD Director July 14, 1998
- ------------------------------
Stuart D. Boyd
</TABLE>
50
<PAGE>
GRAY CARY WARE & FREIDENRICH
M E M O R A N D U M
TO: Integrated Sensor Solutions, Inc.
FROM: Gray Cary Ware & Freidenrich
DATE: February 19, 1998
RE: Administration of Employee Stock Purchase Plan
- --------------------------------------------------------------------------------
The purpose of this memorandum is to describe some of the typical issues
and requirements involved in administering the Company's Employee Stock
Purchase Plan (the "Plan") that are not covered in the Plan document itself.
I. INITIAL EMPLOYEE SUBSCRIPTION PACKAGE.
The first offering under the Plan is scheduled to commence upon the
effective date of the Company's initial public offering. Subscription
packages should be distributed to eligible employees before the effective
date to allow them to decide whether to participate in the Plan.
The subscription packages should be distributed to all employees
eligible to participate in the Plan and should include the following:
- Plan announcement letter
- Subscription and Withdrawal forms
- Questions and Answers pamphlet
Copies of these documents are enclosed. The form of Plan announcement letter
enclosed is simply a suggested format which you should feel free to alter as
you wish. You will probably want to print this letter on Company letterhead.
Prior to the first purchase date under the Plan (October 31, 1998), a
Form S-8 registration statement must be filed with the Securities and
Exchange Commission (the "SEC") on behalf of the Company to register the sale
of shares reserved for issuance pursuant to the Plan under the Securities Act
of 1933, as amended (the "Securities Act"). In connection with the
registration on Form S-8, we will prepare a Prospectus for the Plan, and as
discussed in Section II below, the Prospectus must be distributed to all
employees eligible to participate in the Plan. However, to provide
prospective participants with basic information about the Plan in an easy to
understand format before the Prospectus becomes available for distribution,
we have enclosed a Questions and Answers pamphlet covering the most commonly
asked questions. It should be distributed as a part of the initial
subscription package.
1
<PAGE>
Please note that the sale of shares pursuant to the Plan must be
registered under the Securities Act regardless of whether the shares are
newly issued shares or treasury shares that the Company has repurchased on
the open market.
II. PROSPECTUS DELIVERY REQUIREMENT.
Following the filing of the Form S-8 registration statement for the
Plan, each employee eligible to participate in the Plan must be provided with:
- The Prospectus for the Plan.
- Whichever of the following documents contains audited financial
statements for the Company's most recently completed fiscal year:
- The latest final prospectus filed with the SEC in connection with
a public offering (e.g., the final prospectus filed in connection
with the Company's initial public offering).
- The Company's Annual Report to Stockholders.
- The Company's Form 10-K filed with the SEC.
As new employees join the Company and become eligible to participate in
the Plan, you should provide them with the Plan subscription packet described
in Section I above, along with the Plan Prospectus and the appropriate
document containing the Company's most recent audited financial statements.
You will probably also wish to continue to distribute the Questions and
Answers pamphlet for the Plan. While it may not be used as a substitute for
the Prospectus required by federal securities law, it answers many of the
basic questions a prospective participant may have.
If any material amendments are subsequently made to the Plan, each
eligible employee must be provided with a written update to the Prospectus.
The original Prospectus need not be redelivered, however, unless requested by
the employee. In addition, the form of Prospectus to be provided to newly
eligible employees should be revised to reflect the Plan's amended terms.
While the Plan's Prospectus is not filed with the SEC, the Company must
maintain it (and any other document forming a part of the Prospectus, such as
any future Prospectus update) in a file for a period of five years after the
Prospectus is last used in connection with shares offered and sold under the
Plan. Upon request, the Company must provide copies of the documents
comprising the Prospectus to the SEC.
III. EMPLOYEE PURCHASES AND COMPANY'S ISSUANCE OF SHARES.
A. NO FEDERAL INCOME TAX WITHHOLDING REQUIRED UPON PURCHASE.
As long as the Plan qualifies under Section 423 of the Internal
Revenue Code (the "Code"), Section 421 of the Code provides that Plan
participants realize no taxable income on the purchase date as a result of
the discount from the market price they receive by purchasing stock under the
2
<PAGE>
Plan. Since the participants have no taxable income at the time of the
purchase, the Company has no income tax withholding obligation at that time.
The participant will recognize taxable income in the year shares are sold or
legal title to the shares is otherwise transferred (as discussed below).
B. WITHHOLDING OF EMPLOYMENT TAXES UPON PURCHASE IS UNCERTAIN.
Since, under Section 421 of the Code, the discount an employee
realizes by purchasing shares under a Section 423 employee stock purchase
plan is not "wages" for federal income tax purposes, many, if not most,
employers do not withhold FICA and FUTA employment taxes at the time shares
are purchased. Recently, however, the IRS has indicated informally and in at
least one private letter ruling that it believes that FICA and FUTA
withholding is required at the time shares are purchased at a discount under
a Section 423 plan. The IRS bases this position on an ambiguous statement
added to Section 3121(a) of the Code by the Social Security Amendments of
1983 to the effect that a statutory exclusion from "wages" for federal income
tax purposes does not REQUIRE a similar exclusion from "wages" for purposes
of FICA and FUTA. However, IRS private letter rulings are binding only upon
the party to whom they are addressed, and federal courts have stated that
without clear notice of tax withholding obligations, an employer is not
required to withhold. Thus, until the IRS gives generally applicable notice
that FICA and FUTA withholding is required at the time that shares are
purchased at a discount under a Section 423 plan, employers should be able to
take the position that such withholding is not required. If and when such
formal notice is given by the IRS, employers would be required to begin
withholding FICA and FUTA to the extent that the purchase price discount
realized by an employee upon the purchase of shares under a Section 423 plan
(along with other wages) does not exceed the respective wage bases for such
employment taxes. (Note: presently, there is no cap on wages subject to the
Medicare tax.)
C. FINANCIAL ACCOUNTING CONSEQUENCES.
Currently, Section 423 employee stock purchase plans are generally
treated as noncompensatory plans for financial accounting purposes under APB
Opinion No. 25 where (1) substantially all full-time employees may
participate in the plan, (2) stock is offered to eligible employees based on
a uniform percentage of compensation (subject to a limit on the number of
shares purchasable), (3) the time permitted for the exercise of a purchase
right is limited to a reasonable period, and (4) the discount from the market
price of the stock is no greater than reasonably required to interest
employees in participation. The transfer of shares under a Section 423 plan
meeting the above requirements does not generally REQUIRE the Company to
record a compensation cost on its books for financial reporting purposes.
Please note however, that the Emerging Issues Task Force of the
Financial Accounting Standards Board has recently issued new guidance
regarding the accounting treatment of additional shares that are authorized
for issuance under an employee stock purchase plan. Generally, the new rule
provides that under APB 25, if the Company approves a share reserve increase
for the Plan and the additional shares are later purchased by participants
under offerings which BEGAN prior to the date on which the stockholders
approve the share reserve increase, a compensation expense may need to be
recorded. Because the Plan is implemented through 24 month offerings, the
potential charge could be significant. Therefore, in the event that the
Company, at a subsequent date, will need to increase the share reserve of the
Plan, the Company may wish to also change the offering structure to minimize
the
3
<PAGE>
potential impact of such a charge (i.e. by using 6 month offerings on a
prospective basis) or by adopting a new plan which begins after the date of
stockholder approval.
In addition, under Statement of Financial Accounting Standards No.
123 (October 1995) ("FAS 123"), companies that maintain employee stock
purchase plans such as the Plan must elect to either (1) treat as
compensation expense for financial reporting purposes certain amounts with
respect to the Plan as determined under FAS 123 or (2) disclose in the
footnotes to the financial statements the amounts so computed that otherwise
would be recognized as a compensation expense. We recommend that you consult
with your accountants regarding the accounting treatment of Plan transactions.
D. COMPANY'S TRANSFER AGENT SHOULD CODE SHARES ISSUED UNDER PLAN.
Shares issued under the Plan must be identifiable as such for at
least two purposes. First, as further discussed below, the Company has an
obligation under Section 6039 of the Code to report certain information to an
employee who transfers shares acquired under the Plan. Second, the Company
is entitled to a deduction for income tax purposes equal to the amount of
ordinary income recognized by a Plan participant who transfers shares in a
"disqualifying disposition" (i.e., a transfer of legal title to the shares
within either one year from the date of purchase of the shares or two years
from the first day of the offering period in which the shares were
purchased). Consequently, the Company must have a means of determining when
shares issued under the Plan have been transferred by an employee or former
employee. In fact, Section 6039 of the Code requires that the Company
identify shares issued under the Plan in a manner adequate to carry out the
reporting obligation under that section.
In order to track shares issued under the Plan, the Company should
instruct its transfer agent to assign a unique code in its record-keeping
system to all certificates representing shares issued under the Plan. Upon
the Company's request, the transfer agent should then be able to produce a
report containing information about all Plan shares transferred during a
given period. This report will enable the Company to determine how long the
shares were held prior to their transfer and the information required for
Section 6039 statements. The report will also indicate possible
disqualifying dispositions for which the Company may be allowed a deduction
(as further discussed below). The Company should request such a report from
its transfer agent no less than annually.
If the Company desires, the transfer agent may also be able to produce
the required Section 6039 statements, as well as provide tracking of
disqualifying dispositions. You may wish to discuss with your transfer agent
account representative the services they can provide in connection with
employee stock purchase plan share tracking and reporting.
Please note, however, that if the Company establishes an arrangement
with a designated brokerage firm to have Plan shares credited to
participants' brokerage accounts, as discussed below, individual stock
certificates will generally not be issued to participants. In that case, the
transfer agent will not be able to track and report on share transfers by
individuals participating in the designated broker program because the shares
allocated to participants' brokerage accounts will be held in street name.
The Company will then need to arrange with the broker to obtain adequate
reporting on the disposition of Plan shares by participants.
4
<PAGE>
E. DESIGNATED BROKER PROGRAMS.
A number of our clients have established programs through designated
brokerage firms under which shares purchased by employees under the employee
stock purchase plan are credited to their brokerage account. These programs
may exclude (1) employees who are executive officers subject to the reporting
and "short-swing" profit recovery provisions of Section 16 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), (2) "affiliates"
subject to Rule 144 under the Securities Act, and (3) other employees who are
subject to the Company's Rule 10b-5 insider trading window policy, in order
to avoid trading in Company stock by such persons without the Company's prior
approval. If such employees are not excluded from the program, the Company
must determine that the designated broker's internal procedures are adequate
to ensure that trading activity by officers and other affiliates will be
pre-cleared with the Company and will not violate securities laws.
Under a typical program, on each purchase date under the plan the
company instructs its transfer agent to issue a single certificate to the
designated brokerage firm representing all shares purchased by non-excluded
plan participants and advises the brokerage firm of the number of shares to
be allocated to each participant. The broker maintains an account for each
plan participant, which is credited with the number of shares the employee
acquires on a purchase date. The employee may then instruct the broker to
either sell the shares, retain the shares in the account or issue a
certificate for the shares. Brokerage firms are often willing to provide the
company's employees with very favorable commission rates to obtain this
business. We recommend that you review any proposed designated brokerage
arrangement with your accountants to verify that they will not view the
program as being equivalent to a stock appreciation rights plan for which
variable plan accounting treatment is required.
F. RECORDKEEPING.
The Company will need to establish a recordkeeping system to
administer the Plan. The system must be able to track Plan enrollments and
withdrawals from an offering or from the Plan. It must account for
participants' payroll deductions and refunds, the application of participant
account balances to acquire shares, and the carry-over to the next offering
period of amounts insufficient to purchase one additional share in the prior
period. It should provide for computation of the number of shares each
participant is to acquire on each purchase date. Your recordkeeping system
should provide a warning to ensure that a participant does not exceed any of
the limits under the Plan, such as the limit on payroll deductions to 10% of
compensation, the limit on the number of shares that may be acquired in an
offering, and the $25,000 per calendar year purchase limitation imposed by
the Code. You will also need to track the aggregate number of shares issued
under the Plan and the rate of issuance to provide sufficient lead time to
obtain approval of the Board of Directors and the shareholders to increase
the Plan's share reserve when necessary.
For a plan with few participants, the recordkeeping tasks may be
accomplished with a spreadsheet program. For anything beyond a small plan,
commercial employee stock purchase plan administration software is available.
A recent survey conducted by the National Association of Stock Plan
Professionals found that 59% of respondents used vender-provided software,
33% used in-house developed software and 8% used a spreadsheet program. One
of the major providers of stock plan administration software, ShareData, Inc.
is located in Sunnyvale (408-746-3666).
5
<PAGE>
IV. ANNUAL REPORTING OBLIGATIONS.
A. WRITTEN STATEMENT UNDER CODE SECTION 6039 DUE BY JANUARY 31.
Section 6039 of the Code requires that the Company provide in
writing certain basic information about the shares acquired under the Plan to
each participant who transfers legal title to such shares during a calendar
year. The information must be provided on or before January 31 of the year
following the year of transfer and must include (1) the name and address of
the Company, (2) the name, address and social security number of the
participant, (3) the purchase date on which the shares were initially
transferred to the participant, (4) the number of shares to which title has
been transferred, and (5) the type of plan under which the shares were
acquired (i.e., an employee stock purchase plan as defined in Section 423 of
the Code). A statement is considered to have been furnished to the
participant if it is mailed to the person at his or her last known address.
The reporting obligation only applies on the first transfer of any given Plan
shares by their owner. If the SAME shares are subsequently transferred to
another person, the Company is not required to provide additional information
statements. However, if the participant subsequently transfers additional
shares in a subsequent calendar year, an additional statement would be
required. For example, if a participant purchases 1,000 Plan shares in 1998
and sells 300 of such shares in 1998 and 200 shares in 1999, statements under
Section 6039 would be required for this participant for both 1998 (due by
January 31, 1999) and 1999 (due by January 31, 2000). The IRS does not
currently require companies to file a copy of the statement with the
government. An example of a form of statement to be furnished in compliance
with Section 6039 is enclosed.
In order to monitor transfers of Plan shares, the Company should arrange
with its transfer agent to code shares issued under the Plan with a unique
symbol in its recordkeeping system (as discussed in Section III.D above).
Section 6722 of the Code imposes a penalty of $50 on each failure to
furnish a correct Section 6039 statement (up to a maximum of $100,000 per
calendar year). "Failure" is defined as either (1) failure to furnish a
timely statement or (2) failure to include all of the information required or
inclusion of incorrect information. For intentional disregard of the
reporting requirement, the penalty is $100 per failure, and the $100,000
maximum does not apply.
B. REPORTING UPON DISQUALIFYING DISPOSITIONS.
A "disqualifying disposition" is a transfer of legal title to Plan
shares within two years of the first day of the offering period in which the
shares were purchased or within one year of the date on which the shares were
purchased. For purposes of this rule, a transfer of legal title includes
sales, certain exchanges and gifts, but does not include a change in title
into joint tenancy or community property form or transfer to the
participant's spouse. If you have any unusual share transfer situations,
such as the transfer of shares to a trust, please contact us. The Company
must report the ordinary income realized by a participant upon a
disqualifying disposition as follows:
- On Form W-2 as "other compensation" if the participant (or former
participant) was an employee at any time during the calendar year
of the disposition and the participant's ordinary income from the
disposition and wages subject to withholding is $600 or more. As
discussed below in greater detail, the amount
6
<PAGE>
reported should not currently be subject to tax withholding.
However, the IRS has indicated that it may change its position in
the future.
- On Form 1099-MISC if the participant (or former participant) was not
an employee in the calendar year of the disposition, the
participant's ordinary income from the disposition is $600 or more,
and the information necessary to determine the amount of income is
available to the Company.
C. FURNISHING OF STOCKHOLDER COMMUNICATIONS.
The Company must provide to all Plan participants who do not
otherwise receive such material, copies of all reports, proxy statements and
other communications distributed to the Company's shareholders generally.
This material must be sent to the Plan participants no later than the time it
is sent to shareholders.
V. FEDERAL TAX CONSEQUENCES OF THE PLAN.
As long as the Plan meets all of the requirements of Section 423(b) of
the Code, then the federal tax consequences to a participant who purchases
shares under the Plan and to the Company are as follows:
A. PLAN PARTICIPATION.
The participant will not recognize taxable income either at the
beginning of an offering under the Plan or at the time of exercise of his or
her purchase right on a purchase date. Instead, the participant's income tax
consequences will be determined upon his or her disposition of the Plan
shares. As discussed in Section III.A. above, FICA and FUTA tax obligations
may arise at the time of the exercise of a purchase right under the Plan if
and when the IRS publishes a generally applicable notice of such requirement.
B. TRANSFER OF SHARES IN QUALIFYING DISPOSITION.
If the participant's transfer of Plan shares is a "qualifying
disposition," that is, a disposition in which the holding period requirements
of Section 423(a) have been satisfied, the participant will recognize
ordinary income equal to the LESSER of (1) the 15% discount calculated on the
first day of the offering in which the shares were acquired or (2) the
difference between the fair market value of the shares on the date of
disposition and their purchase price. Any additional gain recognized by the
participant on the disposition of the shares is a capital gain. If the fair
market value of the shares on the date of disposition is less than the
participant's purchase price, the participant will have no ordinary income,
and the loss is a capital loss. The holding period required for a qualifying
disposition is at least one year from the date on which the participant
purchased the Plan shares AND at least two years from the first day of the
offering period in which the participant purchased the Plan shares.
C. TRANSFER OF SHARES IN A DISQUALIFYING DISPOSITION.
If the participant's transfer of Plan shares is a "disqualifying
disposition," that is, a disposition in which the holding period requirements
of Section 423(a) have not been satisfied, the
7
<PAGE>
participant will recognize ordinary income equal to the excess, if any, of
the fair market value of the shares at the time of purchase over the purchase
price. The participant's adjusted basis in the shares will be the sum of his
or her purchase price plus the amount of ordinary income recognized. Any
additional gain or resulting loss recognized by the participant after
deducting the adjusted basis from the sale proceeds is a capital gain or loss.
D. TAX CONSEQUENCES TO THE COMPANY.
If Plan shares are transferred in a disqualifying disposition, the
Company generally may take an income tax deduction for compensation expense
equal to the amount of ordinary income recognized by the participant on the
disqualifying disposition. In all other cases, no deduction is allowed the
Company. (Please note that Section 162(m) of the Code disallows a deduction
for otherwise deductible compensation paid to the chief executive officer or
one of the other four highest compensated officers which is in excess of
$1,000,000, unless an exception applies. Ordinary income realized by an
officer under the Plan will not qualify for an exception under Section
162(m).)
One recurring question is whether the Company is required to withhold
income tax from the participant's pay at the time of a disqualifying
disposition of Plan shares in order to take a compensation expense deduction.
Based on a 1971 IRS revenue ruling, we believe that there is adequate legal
authority to support the position that the Company is currently not required
to withhold. This position covers FICA and FUTA withholding as well as
federal income tax withholding. However, you should be aware that in recent
years, the IRS has issued some private letter rulings (binding only on the
parties to whom issued) denying the deductibility of compensation expense in
connection with a participant's disqualifying disposition of Section 423 plan
shares in the absence of income tax withholding by the employer and has
threatened to modify or repeal its 1971 revenue ruling.
As noted in Section IV.B above, the Company does have an obligation to
report the ordinary income recognized by the participant upon a disqualifying
disposition on Form W-2 or Form 1099-MISC, as appropriate.
VI. SECURITIES LAW CONSIDERATIONS.
A. FEDERAL SECURITIES REGISTRATION.
As with any offering of securities, there are securities law
considerations which must be addressed in connection with a Section 423 plan
both at the federal and state levels. Employee stock purchase plans are
employee benefit plans whose shares can be registered with the SEC under the
Securities Act on a Form S-8 registration statement. A Form S-8 registration
statement for the Plan's initial share reserve must be filed prior to the
first purchase date. Any future increase in the share reserve under the Plan
must similarly be registered. A registration statement covering a share
reserve increase must be filed prior to the purchase date on which any
portion of the additional shares will be issued. Please keep in mind that
advance shareholder approval of any share reserve increase will also be
required.
B. STATE SECURITIES LAW REQUIREMENTS.
8
<PAGE>
Each state has its own securities regulations governing shares
offered and sold to its residents. In general, shares to be issued under the
Plan to a participant must either be registered in the participant's state of
residence, or must be exempt from registration. Most states, including
California, provide an exemption from registration of shares that are
designated for listing on the National Market System of NASDAQ (the "NASDAQ
Exemption"), such as the Company's shares. Some states that do not have a
NASDAQ Exemption provide an exemption for shares issuable under an employee
benefit plan, and some states may not have any applicable exemption. Even if
an exemption from registration is available, a state may require that an
application for the exemption be filed and approved by the state's securities
law department.
Please advise us of the other states in which employees eligible to
participate in the Plan reside, so that we can review the securities laws of
those states to determine whether any action may be required.
C. FOREIGN SECURITIES AND TAX LAW REQUIREMENTS.
If the Company wishes to permit participation in the Plan by
employees of foreign subsidiary CORPORATIONS, the Board of Directors must
expressly designate the foreign subsidiaries as participating companies whose
employees will be eligible to participate in the Plan (note that no special
designation is required if the foreign employees are employed by a branch
office of the Company, and not by a separate subsidiary). In addition, the
offer and sale of shares to foreign employees is likely to be subject to the
foreign jurisdiction's securities laws, which may or may not require filings
with the jurisdiction's securities law authorities or impose certain
conditions on the operation of the Plan. Also, the tax consequences to a
foreign employee participating in the Plan may be different than the tax
consequences to United States employees. Please contact us if the Company
wishes to permit employees of foreign subsidiary corporations to participate
in the Plan.
D. RULE 144 COMPLIANCE FOR SALES BY AFFILIATES.
Unless they possess material, nonpublic information about the
Company, participants acquiring shares under the Plan will be free to resell
such shares without restriction, except for those persons who are
"affiliates" of the Company and/or are subject to Section 16 of the Exchange
Act. In general, persons with the power to manage and direct the policies of
the Company, relatives of such persons and trusts, estates, corporations, or
other organizations controlled by any of the foregoing persons may be deemed
to be "affiliates" of the Company.
Affiliates generally will be obligated to resell their shares in
compliance with Rule 144 promulgated under the Securities Act, which requires
sales to be effected in "broker's transactions," as defined in Rule 144.
Rule 144 also limits the number of shares of stock which may be sold in any
three-month period by an affiliate to no more than the greater of (i) 1% of
the outstanding shares of the common stock of the Company or (ii) the average
weekly reported trading volume in shares of the common stock of the Company
during the four calendar weeks preceding the filing of the required notice on
Form 144 of the proposed sale.
Since the shares issuable under the Plan will have been registered on
Form S-8 under the Securities Act, affiliates reselling Plan shares in
compliance with Rule 144 are not subject to the holding period requirement of
Rule 144. Affiliates will be required, nevertheless, to file three copies of
a notice on Form 144 with the SEC and one copy with NASDAQ concurrently with
placing an order with a broker
9
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to sell shares acquired under the Plan unless the aggregate amount of the
Company's securities sold by the affiliate (including the sale in question)
during the preceding three months does not exceed either 500 shares or an
aggregate sale price of $10,000.
E. SECTION 16 COMPLIANCE FOR PARTICIPANTS WHO ARE EXECUTIVE OFFICERS OR
DIRECTORS.
Plan participants who are executive officers or directors of the
Company ("insiders") are subject to Section 16 of the Exchange Act, which
requires the recovery by the Company of any profit realized by any such
corporate insider from each purchase and subsequent sale, or sale and
subsequent purchase, of shares of the Company's common stock within any
period of less than six months ("short-swing profit"). However, under the
final Section 16 rules effective August 15, 1996, as long as the Plan
continues to qualify under Section 423 of the Code, the purchase of shares
under the Plan will be exempt from the short-swing profit recovery provisions
of Section 16(b). Accordingly, a sale of the Company's shares (including
shares acquired under the Plan) by an insider within a period of less than
six months either before or after the date of purchase of shares under the
Plan should not be subject to short-swing profit recovery as long as the
insider does not otherwise acquire shares of the Company's stock in a
non-exempt purchase within the short-swing period.
Under the final Section 16(a) reporting rules effective August 15, 1996,
purchases of shares under a Section 423 employee stock purchase plan will NO
LONGER BE REPORTED AT ALL on either Form 4 or Form 5. However, shares
acquired under the Plan and still held will be included in the column for
"Amount of Securities Beneficially Owned" in any otherwise required Form 4 or
Form 5. Insiders may choose, but are not required, to include footnote
disclosure indicating the date and nature of the purchase transaction under
the Plan that was not required to be reported.
F. RULE 10b-5 COMPLIANCE FOR PLAN PARTICIPANTS.
As in the case of any other transaction in the Company's stock by
employees or other corporate insiders, an employee acquiring shares under the
Plan must refrain from selling such shares while in possession of material,
nonpublic information until that information has been adequately disclosed to
the public. Generally, "material" information is that which would be
expected to affect the investment decisions of a reasonable investor or the
market price of the stock. Because it is often difficult to determine
whether undisclosed information is significant enough to cause a securities
transaction which occurs prior to the information's release to violate the
insider trading prohibition, the Company will adopt a trading policy for its
corporate insiders to prevent inadvertent violations. Those employees
subject to this policy may trade the Company's shares only during a specified
window period following the Company's release of quarterly financial results
(and even then only after clearance by the Company's compliance officer).
Your periodic reminders to Company insiders about securities law compliance
should point out that the insider trading rules apply to the sale of shares
acquired under the Plan.
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March 30, 1998
To Integrated Sensor Solutions Employees:
Re: New Employee Stock Purchase Plan
I am pleased to announce that the Company has adopted a new Employee Stock
Purchase Plan. The Plan permits you to purchase Company stock through
payroll deductions at a discount of 15% off the market price on each
purchase date. You are eligible to participate in the initial offering under
the Plan, and if you elect to participate, payroll deductions will commence
on the first pay day after APRIL 1, 1998.
Your subscription packet includes a Questions and Answers pamphlet that
should help you to understand how the Plan will operate. If you choose to
participate in the initial offering under the Plan, please complete the
enclosed Subscription Agreement and return it to LINDA YEE no later than
APRIL 9, 1998.
Sincerely,
Manher D. Naik
Chairman,
President & CEO
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Integrated Sensor Solutions, Inc. 1997
Employee Stock Purchase Plan (the "Plan") is hereby established effective as
of the effective date of the initial registration by the Company of its Stock
under Section 12 of the Securities Exchange Act of 1934, as amended (the
"Effective Date").
1.2 PURPOSE. The purpose of the Plan is to advance the interests
of Company and its stockholders by providing an incentive to attract, retain
and reward Eligible Employees of the Participating Company Group and by
motivating such persons to contribute to the growth and profitability of the
Participating Company Group. The Plan provides such Eligible Employees with
an opportunity to acquire a proprietary interest in the Company through the
purchase of Stock. The Company intends that the Plan qualify as an "employee
stock purchase plan" under Section 423 of the Code (including any amendments
or replacements of such section), and the Plan shall be so construed.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the
shares of Stock available for issuance under the Plan have been issued.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Any term not expressly defined in the Plan but
defined for purposes of Section 423 of the Code shall have the same
definition herein. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If
one or more Committees have been appointed by the Board to administer the
Plan, "Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly appointed
to administer the Plan and having such powers as shall be specified by the
Board. Unless the powers of the Committee have been specifically limited,
the Committee shall have all of the powers of the Board granted herein,
including, without limitation, the power to amend or terminate the Plan at
any time, subject to the terms of the Plan and any applicable limitations
imposed by law.
(d) "COMPANY" means Integrated Sensor Solutions, Inc., a
Delaware corporation, or any successor corporation thereto.
<PAGE>
(e) "COMPENSATION" means, with respect to any Offering
Period, base wages or salary, commissions, overtime, bonuses, annual awards,
other incentive payments, shift premiums, and all other compensation paid in
cash during such Offering Period before deduction for any contributions to
any plan maintained by a Participating Company and described in Section
401(k) or Section 125 of the Code. Compensation shall not include
reimbursements of expenses, allowances, long-term disability, workers'
compensation or any amount deemed received without the actual transfer of
cash or any amounts directly or indirectly paid pursuant to the Plan or any
other stock purchase or stock option plan, or any other compensation not
included above.
(f) "ELIGIBLE EMPLOYEE" means an Employee who meets the
requirements set forth in Section 5 for eligibility to participate in the
Plan.
(g) "EMPLOYEE" means a person treated as an employee of a
Participating Company for purposes of Section 423 of the Code. A Participant
shall be deemed to have ceased to be an Employee either upon an actual
termination of employment or upon the corporation employing the Participant
ceasing to be a Participating Company. For purposes of the Plan, an
individual shall not be deemed to have ceased to be an Employee while such
individual is on any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event an
individual's leave of absence exceeds ninety (90) days, the individual shall
be deemed to have ceased to be an Employee on the ninety-first (91st) day of
such leave unless the individual's right to reemployment with the
Participating Company Group is guaranteed either by statute or by contract.
The Company shall determine in good faith and in the exercise of its
discretion whether an individual has become or has ceased to be an Employee
and the effective date of such individual's employment or termination of
employment, as the case may be. For purposes of an individual's
participation in or other rights, if any, under the Plan as of the time of
the Company's determination, all such determinations by the Company shall be
final, binding and conclusive, notwithstanding that the Company or any
governmental agency subsequently makes a contrary determination.
(h) "FAIR MARKET VALUE" means, as of any date, if there is then a
public market for the Stock, the closing price of a share of Stock (or the
mean of the closing bid and asked prices if the Stock is so quoted instead)
as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such
other national or regional securities exchange or market system constituting
the primary market for the Stock, as reported in THE WALL STREET JOURNAL or
such other source as the Company deems reliable. If the relevant date does
not fall on a day on which the Stock has traded on such securities exchange
or market system, the date on which the Fair Market Value shall be
established shall be the last day on which the Stock was so traded prior to
the relevant date, or such other appropriate day as shall be determined by
the Board, in its sole discretion. If there is then no public market for the
Stock, the Fair Market Value on any relevant date shall be as determined by
the Board. Notwithstanding the foregoing, the Fair Market Value per share of
Stock on the Effective Date shall be deemed to be the public offering price
set forth in the final prospectus filed with the Securities and Exchange
Commission in connection with the initial public offering of the Stock.
(i) "OFFERING" means an offering of Stock as provided in
Section 6.
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(j) "OFFERING DATE" means, for any Offering, the first day of
the Offering Period with respect to such Offering.
(k) "OFFERING PERIOD" means a period established in
accordance with Section 6.1.
(l) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(m) "PARTICIPANT" means an Eligible Employee who has become a
participant in an Offering Period in accordance with Section 7 and remains a
participant in accordance with the Plan.
(n) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation designated by the Board as a
corporation the Employees of which may, if Eligible Employees, participate in
the Plan. The Board shall have the sole and absolute discretion to determine
from time to time which Parent Corporations or Subsidiary Corporations shall
be Participating Companies.
(o) "PARTICIPATING COMPANY GROUP" means, at any point in
time, the Company and all other corporations collectively which are then
Participating Companies.
(p) "PURCHASE DATE" means, for any Purchase Period, the last
day of such period.
(q) "PURCHASE PERIOD" means a period established in
accordance with Section 6.2.
(r) "PURCHASE PRICE" means the price at which a share of
Stock may be purchased under the Plan, as determined in accordance with
Section 9.
(s) "PURCHASE RIGHT" means an option granted to a Participant
pursuant to the Plan to purchase such shares of Stock as provided in Section
8, which the Participant may or may not exercise during the Offering Period
in which such option is outstanding. Such option arises from the right of a
Participant to withdraw any accumulated payroll deductions of the Participant
not previously applied to the purchase of Stock under the Plan and to
terminate participation in the Plan at any time during an Offering Period.
(t) "STOCK" means the common stock of the Company, as
adjusted from time to time in accordance with Section 4.2.
(u) "SUBSCRIPTION AGREEMENT" means a written agreement in
such form as specified by the Company, stating an Employee's election to
participate in the Plan and authorizing payroll deductions under the Plan
from the Employee's Compensation.
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(v) "SUBSCRIPTION DATE" means the last business day prior to
the Offering Date of an Offering Period or such earlier date as the Company
shall establish.
(w) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular.
Use of the term "or" is not intended to be exclusive, unless the context
clearly requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered
by the Board. All questions of interpretation of the Plan, of any form of
agreement or other document employed by the Company in the administration of
the Plan, or of any Purchase Right shall be determined by the Board and shall
be final and binding upon all persons having an interest in the Plan or the
Purchase Right. Subject to the provisions of the Plan, the Board shall
determine all of the relevant terms and conditions of Purchase Rights granted
pursuant to the Plan; provided, however, that all Participants granted
Purchase Rights pursuant to the Plan shall have the same rights and
privileges within the meaning of Section 423(b)(5) of the Code. All expenses
incurred in connection with the administration of the Plan shall be paid by
the Company.
3.2 AUTHORITY OF OFFICERS. Any officer of the Company shall have
the authority to act on behalf of the Company with respect to any matter,
right, obligation, determination or election that is the responsibility of or
that is allocated to the Company herein, provided that the officer has
apparent authority with respect to such matter, right, obligation,
determination or election.
3.3 POLICIES AND PROCEDURES ESTABLISHED BY THE COMPANY. The
Company may, from time to time, consistent with the Plan and the requirements
of Section 423 of the Code, establish, change or terminate such rules,
guidelines, policies, procedures, limitations, or adjustments as deemed
advisable by the Company, in its sole discretion, for the proper
administration of the Plan, including, without limitation, (a) a minimum
payroll deduction amount required for participation in an Offering, (b) a
limitation on the frequency or number of changes permitted in the rate of
payroll deduction during an Offering, (c) an exchange ratio applicable to
amounts withheld in a currency other than United States dollars, (d) a
payroll deduction greater than or less than the amount designated by a
Participant in order to adjust for the Company's delay or mistake in
processing a Subscription Agreement or in otherwise effecting a Participant's
election under the Plan or as advisable to comply with the requirements of
Section 423 of the Code, and (e) determination of the date and manner by
which the Fair Market Value of a share of Stock is determined for purposes of
administration of the Plan.
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4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be two hundred fifty thousand (250,000)
and shall consist of authorized but unissued or reacquired shares of Stock,
or any combination thereof. If an outstanding Purchase Right for any reason
expires or is terminated or canceled, the shares of Stock allocable to the
unexercised portion of such Purchase Right shall again be available for
issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of
the Company, or in the event of any merger (including a merger effected for
the purpose of changing the Company's domicile), sale of assets or other
reorganization in which the Company is a party, appropriate adjustments shall
be made in the number and class of shares subject to the Plan and each
Purchase Right and in the Purchase Price. If a majority of the shares which
are of the same class as the shares that are subject to outstanding Purchase
Rights are exchanged for, converted into, or otherwise become (whether or not
pursuant to an Ownership Change Event) shares of another corporation (the
"New Shares"), the Board may unilaterally amend the outstanding Purchase
Rights to provide that such Purchase Rights are exercisable for New Shares.
In the event of any such amendment, the number of shares subject to, and the
Purchase Price of, the outstanding Purchase Rights shall be adjusted in a
fair and equitable manner, as determined by the Board, in its sole
discretion. Notwithstanding the foregoing, any fractional share resulting
from an adjustment pursuant to this Section 4.2 shall be rounded down to the
nearest whole number, and in no event may the Purchase Price be decreased to
an amount less than the par value, if any, of the stock subject to the
Purchase Right. The adjustments determined by the Board pursuant to this
Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY.
5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Each Employee of a
Participating Company is eligible to participate in the Plan and shall be
deemed an Eligible Employee, except the following:
(a) Any Employee who is customarily employed by the
Participating Company Group for less than twenty (20) hours per week; or
(b) Any Employee who is customarily employed by the
Participating Company Group for not more than five (5) months in any calendar
year.
5.2 EXCLUSION OF CERTAIN STOCKHOLDERS. Notwithstanding any
provision of the Plan to the contrary, no Employee shall be granted a
Purchase Right under the Plan if, immediately after such grant, such Employee
would own or hold options to purchase stock of the Company or of any Parent
Corporation or Subsidiary Corporation possessing five percent (5%) or more of
the total combined voting power or value of all classes of stock of such
corporation, as determined in accordance with Section 423(b)(3) of the Code.
For purposes of this Section
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5.2, the attribution rules of Section 424(d) of the Code shall apply in
determining the stock ownership of such Employee.
6. OFFERINGS.
6.1 OFFERING PERIODS. Except as otherwise set forth below, the
Plan shall be implemented by sequential Offerings of approximately
twenty-four (24) months duration (an "Offering Period"); provided, however,
that the first Offering Period shall commence on the Effective Date and end
on April 30, 2000 (the "Initial Offering Period"). Subsequent Offerings
shall commence on the first day of May and November of each year and end on
the last day of the second April and October, respectively, occurring
thereafter. Notwithstanding the foregoing, the Board may establish a
different duration for one or more future Offering Periods or different
commencing or ending dates for such Offering Periods; provided, however, that
no Offering Period may have a duration exceeding twenty-seven (27) months.
If the first or last day of an Offering Period is not a day on which the
national securities exchanges or Nasdaq Stock Market are open for trading,
the Company shall specify the trading day that will be deemed the first or
last day, as the case may be, of the Offering Period.
6.2 PURCHASE PERIODS. Each Offering Period shall consist of four
(4) consecutive Purchase Periods of approximately six (6) months duration, or
such other number or duration as the Board shall determine. The Purchase
Period commencing on the Offering Date of the Initial Offering Period shall
end on October 31, 1998. A Purchase Period commencing on or about May 1
shall end on or about the next October 31. A Purchase Period commencing on
or about November 1 shall end on or about the next April 30. Notwithstanding
the foregoing, the Board may establish a different duration for one or more
future Purchase Periods or different commencing or ending dates for such
Purchase Periods. If the first or last day of a Purchase Period is not a day
on which the national securities exchanges or Nasdaq Stock Market are open
for trading, the Company shall specify the trading day that will be deemed
the first or last day, as the case may be, of the Purchase Period.
7. PARTICIPATION IN THE PLAN.
7.1 INITIAL PARTICIPATION. An Eligible Employee may become a
Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the office designated by the Company not later than
the close of business for such office on the Subscription Date established by
the Company for such Offering Period. An Eligible Employee who does not
deliver a properly completed Subscription Agreement to the Company's
designated office on or before the Subscription Date for an Offering Period
shall not participate in the Plan for that Offering Period or for any
subsequent Offering Period unless such Eligible Employee subsequently
delivers a properly completed Subscription Agreement to the appropriate
office of the Company on or before the Subscription Date for such subsequent
Offering Period. An Employee who becomes an Eligible Employee after the
Offering Date of an Offering Period shall not be eligible to participate in
such Offering Period but may participate in any subsequent Offering Period
provided such Employee is still an Eligible Employee as of the Offering Date
of such subsequent Offering Period.
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7.2 CONTINUED PARTICIPATION. A Participant shall automatically
participate in the next Offering Period commencing immediately after the
final Purchase Date of each Offering Period in which the Participant
participates provided that such Participant remains an Eligible Employee on
the Offering Date of the new Offering Period and has not either (a) withdrawn
from the Plan pursuant to Section 12.1 or (b) terminated employment as
provided in Section 13. A Participant who may automatically participate in a
subsequent Offering Period, as provided in this Section, is not required to
deliver any additional Subscription Agreement for the subsequent Offering
Period in order to continue participation in the Plan. However, a
Participant may deliver a new Subscription Agreement for a subsequent
Offering Period in accordance with the procedures set forth in Section 7.1 if
the Participant desires to change any of the elections contained in the
Participant's then effective Subscription Agreement. Eligible Employees may
not participate simultaneously in more than one Offering.
8. RIGHT TO PURCHASE SHARES.
8.1 GRANT OF PURCHASE RIGHT. Except as set forth below, on the
Offering Date of each Offering Period, each Participant in such Offering
Period shall be granted automatically a Purchase Right consisting of an
option to purchase the lesser of (a) that number of whole shares of Stock
determined by dividing Fifty Thousand Dollars ($50,000) by the Fair Market
Value of a share of Stock on such Offering Date or (b) five thousand (5,000)
shares of Stock. No Purchase Right shall be granted on an Offering Date to
any person who is not, on such Offering Date, an Eligible Employee.
8.2 PRO RATA ADJUSTMENT OF PURCHASE RIGHT. Notwithstanding the
provisions of Section 8.1, if the Board establishes an Offering Period of any
duration other than twenty-four months, then (a) the dollar amount in Section
8.1 shall be determined by multiplying $2,083.33 by the number of months
(rounded to the nearest whole month) in the Offering Period and rounding to
the nearest whole dollar, and (b) the share amount in Section 8.1 shall be
determined by multiplying 208.33 shares by the number of months (rounded to
the nearest whole month) in the Offering Period and rounding to the nearest
whole share.
8.3 CALENDAR YEAR PURCHASE LIMITATION. Notwithstanding any
provision of the Plan to the contrary, no Participant shall be granted a
Purchase Right which permits his or her right to purchase shares of Stock
under the Plan to accrue at a rate which, when aggregated with such
Participant's rights to purchase shares under all other employee stock
purchase plans of a Participating Company intended to meet the requirements
of Section 423 of the Code, exceeds Twenty-Five Thousand Dollars ($25,000) in
Fair Market Value (or such other limit, if any, as may be imposed by the
Code) for each calendar year in which such Purchase Right is outstanding at
any time. For purposes of the preceding sentence, the Fair Market Value of
shares purchased during a given Offering Period shall be determined as of the
Offering Date for such Offering Period. The limitation described in this
Section 8.3 shall be applied in conformance with applicable regulations under
Section 423(b)(8) of the Code.
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9. PURCHASE PRICE.
The Purchase Price at which each share of Stock may be acquired in
an Offering Period upon the exercise of all or any portion of a Purchase
Right shall be established by the Board; provided, however, that the Purchase
Price shall not be less than eighty-five percent (85%) of the lesser of (a)
the Fair Market Value of a share of Stock on the Offering Date of the
Offering Period or (b) the Fair Market Value of a share of Stock on the
Purchase Date. Unless otherwise provided by the Board prior to the
commencement of an Offering Period, the Purchase Price for that Offering
Period shall be eighty-five percent (85%) of the lesser of (a) the Fair
Market Value of a share of Stock on the Offering Date of the Offering Period,
or (b) the Fair Market Value of a share of Stock on the Purchase Date.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION.
Shares of Stock acquired pursuant to the exercise of all or any
portion of a Purchase Right may be paid for only by means of payroll
deductions from the Participant's Compensation accumulated during the
Offering Period for which such Purchase Right was granted, subject to the
following:
10.1 AMOUNT OF PAYROLL DEDUCTIONS. Except as otherwise provided
herein, the amount to be deducted under the Plan from a Participant's
Compensation on each payday during an Offering Period shall be determined by
the Participant's Subscription Agreement. The Subscription Agreement shall
set forth the percentage of the Participant's Compensation to be deducted on
each payday during an Offering Period in whole percentages of not less than
one percent (1%) (except as a result of an election pursuant to Section 10.3
to stop payroll deductions made effective following the first payday during
an Offering) or more than ten percent (10%). Notwithstanding the foregoing,
the Board may change the limits on payroll deductions effective as of any
future Offering Date.
10.2 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions shall
commence on the first payday following the Offering Date and shall continue
to the end of the Offering Period unless sooner altered or terminated as
provided herein.
10.3 ELECTION TO CHANGE OR STOP PAYROLL DEDUCTIONS. During an
Offering Period, a Participant may elect to increase or decrease the rate of
or to stop deductions from his or her Compensation by delivering to the
Company's designated office an amended Subscription Agreement authorizing
such change on or before the "Change Notice Date." The "Change Notice Date"
shall be a date prior to the beginning of the first pay period for which such
election is to be effective as established by the Company from time to time
and announced to the Participants. A Participant who elects to decrease the
rate of his or her payroll deductions to zero percent (0%) shall nevertheless
remain a Participant in the current Offering Period unless such Participant
withdraws from the Plan as provided in Section 12.1.
10.4 ADMINISTRATIVE SUSPENSION OF PAYROLL DEDUCTIONS. The Company
may, in its sole discretion, suspend a Participant's payroll deductions under
the Plan as the Company deems advisable to avoid accumulating payroll
deductions in excess of the amount that could
8
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reasonably be anticipated to purchase the maximum number of shares of Stock
permitted during a calendar year under the limit set forth in Section 8.3.
Payroll deductions shall be resumed at the rate specified in the
Participant's then effective Subscription Agreement at the beginning of the
next Purchase Period the Purchase Date of which falls in the following
calendar year.
10.5 PARTICIPANT ACCOUNTS. Individual bookkeeping accounts shall
be maintained for each Participant. All payroll deductions from a
Participant's Compensation shall be credited to such Participant's Plan
account and shall be deposited with the general funds of the Company. All
payroll deductions received or held by the Company may be used by the Company
for any corporate purpose.
10.6 NO INTEREST PAID. Interest shall not be paid on sums
deducted from a Participant's Compensation pursuant to the Plan.
10.7 VOLUNTARY WITHDRAWAL FROM PLAN ACCOUNT. A Participant may
withdraw all or any portion of the payroll deductions credited to his or her
Plan account and not previously applied toward the purchase of Stock by
delivering to the Company's designated office a written notice on a form
provided by the Company for such purpose. A Participant who withdraws the
entire remaining balance credited to his or her Plan account shall be deemed
to have withdrawn from the Plan in accordance with Section 12.1. Amounts
withdrawn shall be returned to the Participant as soon as practicable after
the withdrawal and may not be applied to the purchase of shares in any
Offering under the Plan. The Company may from time to time establish or
change limitations on the frequency of withdrawals permitted under this
Section, establish a minimum dollar amount that must be retained in the
Participant's Plan account, or terminate the withdrawal right provided by
this Section.
11. PURCHASE OF SHARES.
11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date of an
Offering Period, each Participant who has not withdrawn from the Plan and
whose participation in the Offering has not terminated before such Purchase
Date shall automatically acquire pursuant to the exercise of the
Participant's Purchase Right the number of whole shares of Stock determined
by dividing (a) the total amount of the Participant's payroll deductions
accumulated in the Participant's Plan account during the Offering Period and
not previously applied toward the purchase of Stock by (b) the Purchase
Price. However, in no event shall the number of shares purchased by the
Participant during an Offering Period exceed the number of shares subject to
the Participant's Purchase Right. No shares of Stock shall be purchased on a
Purchase Date on behalf of a Participant whose participation in the Offering
or the Plan has terminated before such Purchase Date.
11.2 PRO RATA ALLOCATION OF SHARES. In the event that the number
of shares of Stock which might be purchased by all Participants in the Plan
on a Purchase Date exceeds the number of shares of Stock available in the
Plan as provided in Section 4.1, the Company shall make a pro rata allocation
of the remaining shares in as uniform a manner as shall be practicable and as
the Company shall determine to be equitable. Any fractional share resulting
from such pro rata allocation to any Participant shall be disregarded.
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11.3 DELIVERY OF CERTIFICATES. As soon as practicable after each
Purchase Date, the Company shall arrange the delivery to each Participant, as
appropriate, of a certificate representing the shares acquired by the
Participant on such Purchase Date; provided that the Company may deliver such
shares to a broker that holds such shares in street name for the benefit of
the Participant. Shares to be delivered to a Participant under the Plan
shall be registered in the name of the Participant, or, if requested by the
Participant, in the name of the Participant and his or her spouse, or, if
applicable, in the names of the heirs of the Participant.
11.4 RETURN OF CASH BALANCE. Any cash balance remaining in a
Participant's Plan account following any Purchase Date shall be refunded to
the Participant as soon as practicable after such Purchase Date. However, if
the cash to be returned to a Participant pursuant to the preceding sentence
is an amount less than the amount that would have been necessary to purchase
an additional whole share of Stock on such Purchase Date, the Company may
retain such amount in the Participant's Plan account to be applied toward the
purchase of shares of Stock in the subsequent Purchase Period or Offering
Period, as the case may be.
11.5 TAX WITHHOLDING. At the time a Participant's Purchase Right
is exercised, in whole or in part, or at the time a Participant disposes of
some or all of the shares of Stock he or she acquires under the Plan, the
Participant shall make adequate provision for the foreign, federal, state and
local tax withholding obligations of the Participating Company Group, if any,
which arise upon exercise of the Purchase Right or upon such disposition of
shares, respectively. The Participating Company Group may, but shall not be
obligated to, withhold from the Participant's compensation the amount
necessary to meet such withholding obligations.
11.6 EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering Period to
which the Purchase Right relates shall expire immediately upon the end of the
Offering Period.
11.7 REPORTS TO PARTICIPANTS. Each Participant who has exercised
all or part of his or her Purchase Right shall receive, as soon as
practicable after the Purchase Date, a report of such Participant's Plan
account setting forth the total payroll deductions accumulated prior to such
exercise, the number of shares of Stock purchased, the Purchase Price for
such shares, the date of purchase and the cash balance, if any, remaining
immediately after such purchase that is to be refunded or retained in the
Participant's Plan account pursuant to Section 11.4. The report required by
this Section may be delivered in such form and by such means, including by
electronic transmission, as the Company may determine.
12. WITHDRAWAL FROM OFFERING OR PLAN.
12.1 VOLUNTARY WITHDRAWAL FROM THE PLAN. A Participant may
withdraw from the Plan by signing and delivering to the Company's designated
office a written notice of withdrawal on a form provided by the Company for
such purpose. Such withdrawal may be elected at any time prior to the end of
an Offering Period; provided, however, that if a Participant withdraws from
the Plan after the Purchase Date of a Purchase Period, the withdrawal shall
not affect shares of Stock acquired by the Participant on such Purchase Date.
A Participant who
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voluntarily withdraws from the Plan is prohibited from resuming participation
in the Plan in the same Offering from which he or she withdrew, but may
participate in any subsequent Offering by again satisfying the requirements
of Sections 5 and 7.1. The Company may impose, from time to time, a
requirement that the notice of withdrawal from the Plan be on file with the
Company's designated office for a reasonable period prior to the
effectiveness of the Participant's withdrawal.
12.2 AUTOMATIC WITHDRAWAL FROM AN OFFERING. If the Fair Market
Value of a share of Stock on a Purchase Date of an Offering Period (other
than the final Purchase Date of such offering) is less than the Fair Market
Value of a share of Stock on the Offering Date for such Offering Period, then
every Participant shall automatically be (a) withdrawn from such Offering
Period after the acquisition of shares of Stock on the Purchase Date and (b)
enrolled in the new Offering Period effective on its Offering Date. A
Participant may elect not to be automatically withdrawn from an Offering
Period pursuant to this Section 12.2 by delivering to the Company's
designated office not later than the close of business on Offering Date new
Offering Period a written notice indicating such election.
12.3 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's voluntary
withdrawal from the Plan pursuant to Sections 12.1 or automatic withdrawal
from an Offering pursuant to Section 12.2, the Participant's accumulated
payroll deductions which have not been applied toward the purchase of shares
of Stock (except, in the case of an automatic withdrawal pursuant to Section
12.2, for an amount necessary to purchase an additional whole share as
provided in Section 11.4) shall be refunded to the Participant as soon as
practicable after the withdrawal, without the payment of any interest, and
the Participant's interest in the Plan or the Offering, as applicable, shall
terminate. Such accumulated payroll deductions to be refunded in accordance
with this Section may not be applied to any other Offering under the Plan.
13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY.
Upon a Participant's ceasing, prior to a Purchase Date, to be an
Employee of the Participating Company Group for any reason, including
retirement, disability or death, or the failure of a Participant to remain an
Eligible Employee, the Participant's participation in the Plan shall
terminate immediately. In such event, the payroll deductions credited to the
Participant's Plan account since the last Purchase Date shall, as soon as
practicable, be returned to the Participant or, in the case of the
Participant's death, to the Participant's legal representative, and all of
the Participant's rights under the Plan shall terminate. Interest shall not
be paid on sums returned pursuant to this Section 13. A Participant whose
participation has been so terminated may again become eligible to participate
in the Plan by again satisfying the requirements of Sections 5 and 7.1.
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<PAGE>
14. CHANGE IN CONTROL.
14.1 Definitions.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent
(50%) of the voting stock of the Company; (ii) a merger or consolidation in
which the Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting
stock immediately before the Transaction, direct or indirect beneficial
ownership of more than fifty percent (50%) of the total combined voting power
of the outstanding voting stock of the Company or the corporation or
corporations to which the assets of the Company were transferred (the
"TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the
preceding sentence, indirect beneficial ownership shall include, without
limitation, an interest resulting from ownership of the voting stock of one
or more corporations which, as a result of the Transaction, own the Company
or the Transferee Corporation(s), as the case may be, either directly or
through one or more subsidiary corporations. The Board shall have the right
to determine whether multiple sales or exchanges of the voting stock of the
Company or multiple Ownership Change Events are related, and its
determination shall be final, binding and conclusive.
14.2 EFFECT OF CHANGE IN CONTROL ON PURCHASE RIGHTS. In the event of a
Change in Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "Acquiring
Corporation"), may assume the Company's rights and obligations under the
Plan. If the Acquiring Corporation elects not to assume the Company's rights
and obligations under outstanding Purchase Rights, the Purchase Date of the
then current Purchase Period shall be accelerated to a date before the date
of the Change in Control specified by the Board, but the number of shares of
Stock subject to outstanding Purchase Rights shall not be adjusted. All
Purchase Rights which are neither assumed by the Acquiring Corporation in
connection with the Change in Control nor exercised as of the date of the
Change in Control shall terminate and cease to be outstanding effective as of
the date of the Change in Control.
15. NONTRANSFERABILITY OF PURCHASE RIGHTS.
A Purchase Right may not be transferred in any manner otherwise
than by will or the laws of descent and distribution and shall be exercisable
during the lifetime of the Participant only by the Participant.
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<PAGE>
16. COMPLIANCE WITH SECURITIES LAW.
The issuance of shares under the Plan shall be subject to
compliance with all applicable requirements of federal, state and foreign law
with respect to such securities. A Purchase Right may not be exercised if
the issuance of shares upon such exercise would constitute a violation of any
applicable federal, state or foreign securities laws or other law or
regulations or the requirements of any securities exchange or market system
upon which the Stock may then be listed. In addition, no Purchase Right may
be exercised unless (a) a registration statement under the Securities Act of
1933, as amended, shall at the time of exercise of the Purchase Right be in
effect with respect to the shares issuable upon exercise of the Purchase
Right, or (b) in the opinion of legal counsel to the Company, the shares
issuable upon exercise of the Purchase Right may be issued in accordance with
the terms of an applicable exemption from the registration requirements of
said Act. The inability of the Company to obtain from any regulatory body
having jurisdiction the authority, if any, deemed by the Company's legal
counsel to be necessary to the lawful issuance and sale of any shares under
the Plan shall relieve the Company of any liability in respect of the failure
to issue or sell such shares as to which such requisite authority shall not
have been obtained. As a condition to the exercise of a Purchase Right, the
Company may require the Participant to satisfy any qualifications that may be
necessary or appropriate, to evidence compliance with any applicable law or
regulation, and to make any representation or warranty with respect thereto
as may be requested by the Company.
17. RIGHTS AS A STOCKHOLDER AND EMPLOYEE.
A Participant shall have no rights as a stockholder by virtue of
the Participant's participation in the Plan until the date of the issuance of
a certificate for the shares purchased pursuant to the exercise of the
Participant's Purchase Right (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company).
No adjustment shall be made for dividends, distributions or other rights for
which the record date is prior to the date such certificate is issued, except
as provided in Section 4.2. Nothing herein shall confer upon a Participant
any right to continue in the employ of the Participating Company Group or
interfere in any way with any right of the Participating Company Group to
terminate the Participant's employment at any time.
18. LEGENDS.
The Company may at any time place legends or other identifying
symbols referencing any applicable federal, state or foreign securities law
restrictions or any provision convenient in the administration of the Plan on
some or all of the certificates representing shares of Stock issued under the
Plan. The Participant shall, at the request of the Company, promptly present
to the Company any and all certificates representing shares acquired pursuant
to a Purchase Right in the possession of the Participant in order to carry
out the provisions of this Section. Unless otherwise specified by the
Company, legends placed on such certificates may include but shall not be
limited to the following:
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<PAGE>
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN
EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL
REVENUE CODE OF 1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES
EVIDENCED HEREBY SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF
THE SHARES BY THE REGISTERED HOLDER HEREOF. THE REGISTERED HOLDER SHALL HOLD
ALL SHARES PURCHASED UNDER THE PLAN IN THE REGISTERED HOLDER'S NAME (AND NOT
IN THE NAME OF ANY NOMINEE)."
19. NOTIFICATION OF SALE OF SHARES.
The Company may require the Participant to give the Company prompt
notice of any disposition of shares acquired by exercise of a Purchase Right
within two years from the date of granting such Purchase Right or one year
from the date of exercise of such Purchase Right. The Company may require
that until such time as a Participant disposes of shares acquired upon
exercise of a Purchase Right, the Participant shall hold all such shares in
the Participant's name (or, if elected by the Participant, in the name of the
Participant and his or her spouse but not in the name of any nominee) until
the lapse of the time periods with respect to such Purchase Right referred to
in the preceding sentence. The Company may direct that the certificates
evidencing shares acquired by exercise of a Purchase Right refer to such
requirement to give prompt notice of disposition.
20. NOTICES.
All notices or other communications by a Participant to the Company
under or in connection with the Plan shall be deemed to have been duly given
when received in the form specified by the Company at the location, or by the
person, designated by the Company for the receipt thereof.
21. INDEMNIFICATION.
In addition to such other rights of indemnification as they may
have as members of the Board or officers or employees of the Participating
Company Group, members of the Board and any officers or employees of the
Participating Company Group to whom authority to act for the Board or the
Company is delegated shall be indemnified by the Company against all
reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection with the defense of any action, suit or proceeding, or
in connection with any appeal therein, to which they or any of them may be a
party by reason of any action taken or failure to act under or in connection
with the Plan, or any right granted hereunder, and against all amounts paid
by them in settlement thereof (provided such settlement is approved by
independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60)
days after the institution of such action, suit or
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<PAGE>
proceeding, such person shall offer to the Company, in writing, the
opportunity at its own expense to handle and defend the same.
22. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may at any time amend or terminate the Plan, except that
(a) such termination shall not affect Purchase Rights previously granted
under the Plan, except as permitted under the Plan, and (b) no amendment may
adversely affect a Purchase Right previously granted under the Plan (except
to the extent permitted by the Plan or as may be necessary to qualify the
Plan as an employee stock purchase plan pursuant to Section 423 of the Code
or to obtain qualification or registration of the shares of Stock under
applicable federal, state or foreign securities laws). In addition, an
amendment to the Plan must be approved by the stockholders of the Company
within twelve (12) months of the adoption of such amendment if such amendment
would authorize the sale of more shares than are authorized for issuance
under the Plan or would change the definition of the corporations that may be
designated by the Board as Participating Companies.
IN WITNESS WHEREOF, the undersigned Secretary of the Company
certifies that the foregoing Integrated Sensor Solutions, Inc. 1997 Employee
Stock Purchase Plan was duly adopted by the Board of Directors of the Company
on August 8, 1997.
-------------------------------
Secretary
15
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PLAN HISTORY
August 8, 1997 Board adopts the Plan, with an initial reserve of 250,000
shares.
October 13, 1997 Stockholders approve Plan, with an initial reserve of
250,000 shares.
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
NAME (Please print): _________________________________________________________
(Last) (First) (Middle)
/ / Original Application for the Offering Period beginning
____________________, 199__.
/ / Change in Payroll Deduction rate effective with the pay period ending
___________________, 199__.
I hereby elect to participate in the 1997 Employee Stock Purchase Plan
(the "PLAN") of Integrated Sensor Solutions, Inc. (the "COMPANY") and
subscribe to purchase shares of the Company's Stock in accordance with this
Subscription Agreement and the Plan.
I hereby authorize payroll deductions in the amount of ________ percent
(in whole percentages not less than 1% (unless an election to stop deductions
is being made) or more than 10%) of my "COMPENSATION" on each payday
throughout the "OFFERING PERIOD" in accordance with the Plan. I understand
that these payroll deductions will be accumulated for the purchase of shares
of Stock at the applicable purchase price determined in accordance with the
Plan. I understand that, except as otherwise provided by the Plan, I will
automatically purchase shares on each Purchase Date under the Plan unless I
withdraw from the Plan by giving written notice on a form provided by the
Company or unless my employment terminates.
I understand that I will automatically participate in each subsequent
Offering that commences immediately after the last day of an Offering in
which I am participating until I withdraw from the Plan by giving written
notice on a form provided by the Company or my employment terminates.
Shares I purchase under the Plan should be issued in the name(s) set forth
below. (Shares may be issued in the participant's name alone or together with
the participant's spouse as community property or in joint tenancy.)
NAME(S): _______________________________________________________________
ADDRESS: _______________________________________________________________
MY SOCIAL SECURITY NUMBER: ____________________________________________
I agree to make adequate provision for the federal, state, local and
foreign tax withholding obligations, if any, which may arise upon my purchase
of shares under the Plan and/or my disposition of such shares. The Company
may, but will not be obligated to, withhold from my compensation the amount
necessary to meet such withholding obligations.
I agree that, unless otherwise permitted by the Company, until I dispose
of the shares I purchased under the Plan, I will hold such shares in the
name(s) entered above (and not in the name of any nominee) for at least two
years from the first day of the Offering Period in which, and at least one
year from the Purchase Date on which, I acquired such shares.
I AGREE THAT I WILL NOTIFY THE CHIEF FINANCIAL OFFICER OF THE COMPANY IN
WRITING WITHIN 30 DAYS AFTER ANY SALE, GIFT, TRANSFER OR OTHER DISPOSITION OF
ANY KIND PRIOR TO THE END OF THE PERIODS REFERRED TO IN THE PRECEDING
PARAGRAPH (A "DISQUALIFYING DISPOSITION") OF ANY SHARES I PURCHASED UNDER THE
PLAN. I FURTHER AGREE THAT IF I DO NOT RESPOND WITHIN 30 DAYS OF THE DATE OF
A DISQUALIFYING DISPOSITION SURVEY DELIVERED TO ME BY CERTIFIED MAIL, THE
COMPANY MAY TREAT MY NONRESPONSE AS MY NOTICE TO THE COMPANY OF A
DISQUALIFYING DISPOSITION AND MAY COMPUTE AND REPORT TO THE INTERNAL REVENUE
SERVICE THE ORDINARY INCOME I MUST RECOGNIZE UPON SUCH DISQUALIFYING
DISPOSITION.
I am familiar with the provisions of the Plan and agree to participate
in the Plan subject to all of its provisions. I understand that the Board of
Directors of the Company reserves the right to terminate the Plan or to amend
the Plan and my right to purchase stock under the Plan to the extent provided
by the Plan. I understand that the effectiveness of this Subscription
Agreement is dependent upon my eligibility to participate in the Plan.
<PAGE>
Date: _____________________ Signature:______________________________________
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
NAME (Please print): _________________________________________________________
(Last) (First) (Middle)
I hereby elect to withdraw from the Offering under Integrated Sensor
Solutions, Inc. 1997 Employee Stock Purchase Plan (the "PLAN") which began on
_________________________, 19____ and in which I am currently participating
(the "CURRENT OFFERING").
ELECT EITHER A OR B BELOW:
/ / A. I elect to terminate immediately my participation in the Current
Offering and in the Plan.
I request that the Company cease all further payroll deductions from
my Compensation under the Plan (provided that I have given sufficient
notice prior to the next payday). I request that all payroll
deductions credited to my account under the Plan (if any) not
previously used to purchase shares under the Plan shall NOT be used
to purchase shares on the next Purchase Date of the Current Offering.
Instead, I request that all such amounts be paid to me as soon as
practicable. I understand that this election immediately terminates
my interest in the Current Offering and in the Plan.
/ / B. I elect to terminate my participation in the Current Offering and in
the Plan following my purchase of shares on next Purchase Date of the
Current Offering.
I request that the Company cease all further payroll deductions from
my Compensation under the Plan (provided that I have given sufficient
notice prior to the next payday). I request that all payroll
deductions credited to my account under the Plan (if any) not
previously used to purchase shares under the Plan shall be used to
purchase shares on the next Purchase Date of the Current Offering to
the extent permitted by the Plan. I understand that this election
will terminate my interest in the Current Offering and in the Plan
immediately following such purchase. I request that any cash balance
remaining in my account under the Plan after my purchase of shares be
paid to me as soon as practicable.
I understand that by making this election I am terminating my interest
in the Plan and that no further payroll deductions will be made (provided
that I have given sufficient notice prior to the next payday) unless I elect
in accordance with the Plan to become a participant in another Offering under
the Plan by filing a new Subscription Agreement with the Company.
Date:____________________________ Signature:_______________________________
<PAGE>
THE FOLLOWING STATEMENT IS FURNISHED TO YOU IN COMPLIANCE WITH SECTION 6039
OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE").
TO:___________________________ FROM:__________________________
(the "Company")
______________________________ _________________________
______________________________ _________________________
SSN:__________________________
We have been informed by the transfer agent of the Company's common
stock that on or about _________________, 199_, you transferred legal
title to ______ shares of the Company's common stock (the "Shares") that
were transferred to you on _______________, 199_ upon your exercise of
a purchase right under the Company's 199_ Employee Stock Purchase Plan
(the "Plan"). Such purchase right is an option described in section 423
of the Code.
You purchased the Shares for a price of $_________ per share. The
fair market value per share of the Company's common stock on the date you
purchased the Shares was $____________. The fair market value per share of the
Company's common stock on , 199_, the first day of the offering period under
the Plan in which you purchased the Shares, was $___________.
As a result of your transfer described above, you are subject to income
taxation. You should keep this statement for income tax purposes. Please see
your Plan prospectus for a summary of the federal income tax consequences of
your transfer of the Shares.
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
QUESTIONS AND ANSWERS
Integrated Sensor Solutions, Inc.
625 River Oaks Parkway
San Jose, CA 95134
February 1998
<PAGE>
1. WHY HAS THE COMPANY ESTABLISHED AN EMPLOYEE STOCK PURCHASE PLAN?
To allow employees the opportunity to acquire ownership in the Company by
purchasing Company common stock through accumulated payroll deductions.
2. WHO IS ELIGIBLE TO PARTICIPATE IN THE PLAN?
All employees of the Company, except employees who:
- normally work 20 hours or less per week,
- normally work 5 months or less per year, or
- are 5% or greater stockholders of the Company.
3. HOW DO I ENROLL IN THE PLAN?
Generally, by completing and submitting a Subscription Agreement to the
Company by the close of business on the last business day prior to
commencement of an Offering.
4. HOW MAY I PURCHASE STOCK UNDER THE PLAN?
You may only purchase stock through payroll deductions in accordance with the
terms of the Plan.
5. HOW MUCH MAY I CONTRIBUTE TOWARD THE PURCHASE OF STOCK?
You may elect to have from 1% to 10% (in whole percentages) of your
"compensation" deducted from each paycheck during the Offering to purchase
stock. "Compensation" for purposes of the Plan includes your base salary,
commissions, bonuses, overtime, shift premiums, annual awards or other
incentive payments paid in cash BEFORE any contributions to a Section 401(k)
Plan or a Section 125 Cafeteria Plan. It does not include any expense
reimbursements, allowances, long-term disability payments or any other
compensation not paid in cash, such as compensation income you realize under
the Plan or any stock option plan.
6. ARE MY CONTRIBUTIONS "PRE-TAX" DEDUCTIONS?
No. Your contributions to the Plan do not reduce the amount of your income
subject to tax.
<PAGE>
7. MAY I CHANGE THE AMOUNT OF MY PAYROLL DEDUCTION DURING AN OFFERING?
Yes. You may increase, decrease or stop your contributions during an
Offering by filing a new Subscription Agreement on or before the Change
Notice Date established by the Company. Currently, the Change Notice Date
is the seventh (7th) day before the end of the first pay period in which the
new Subscription Agreement takes effect.
8. IF I WITHDRAW FROM AN OFFERING OR THE PLAN, WHEN WILL I RECEIVE MY REFUND?
Your contributions during the Offering will be repaid to you, without
interest, as soon as practicable following receipt of your written request
for withdrawal and refund on a Notice of Withdrawal form.
9. WHAT HAPPENS IF MY EMPLOYMENT TERMINATES WHILE I AM PARTICIPATING IN THE
PLAN?
Your contributions during the Offering up to that time not previously used
to purchase shares would be refunded to you in full, without interest, as
soon as practicable following termination of your employment.
10. WHEN WILL I PURCHASE STOCK UNDER THE PLAN?
Stock will be purchased for you on each of the four purchase dates of an
Offering in which you participate. Generally, Offerings will be 24-months
long (an "Offering Period"). The first Offering Period will begin on the
date that the Company's initial public offering begins and will end on April
30, 2000. New 24-month Offering Periods will generally begin on May 1 and
November 1 of each year.
Each Offering Period will have four consecutive six-month "Purchase
Periods", although the first Purchase Period under the initial Offering will
begin on the date that the Company's initial public offering begins and end
on October 31, 1998. A Purchase Period beginning on May 1 will end on or
about the next October 31 and a Purchase Period beginning on November 1 will
end on or about the next April 30. The last day of each Purchase Period is
the purchase date for that Purchase Period.
11. HOW IS THE PURCHASE PRICE OF THE STOCK DETERMINED?
The fair market value per share on the first day of the Offering Period
is compared to the fair market value per share on the purchase date.
Unless the Company's Board of Directors notifies you otherwise prior to
the start of the Offering, your purchase price will be 85% of the lower
of these two values.
<PAGE>
12. HOW MANY SHARES MAY I PURCHASE?
Generally, you will purchase the number of whole shares determined by
dividing the cash balance in your Plan account on the purchase date by
the purchase price. However, the maximum number of shares you may
purchase in any 24-month Offering Period is the LESSER OF (a) the number
of shares determined by dividing $50,000 by the fair market value per
share of the Company's common stock on the first day of the Offering
Period, or (b) 5,000 shares. These dollar and share limits will be
prorated if an Offering Period is of a duration other than 24 months.
13. IF THERE IS ANY MONEY REMAINING IN MY ACCOUNT AFTER MY STOCK IS PURCHASED,
WHAT HAPPENS TO THE EXTRA MONEY?
Any excess funds in your account will be refunded to you, without
interest, as soon as practicable after the purchase date. However, if
the excess cash represents only the amount which was not enough to
purchase another whole share on the purchase date, the excess cash will
be carried over to the next Purchase Period or Offering Period.
14. WILL I RECEIVE A STOCK CERTIFICATE?
Yes. You will receive a stock certificate as soon as practicable after
the end of each Purchase Period. However, the Company may establish a
program through which the shares you purchase will be credited to an
account in your name with a designated brokerage firm. (See Q&A 16
below.)
15. WHEN MAY I SELL MY STOCK?
You may generally sell shares any time after the purchase date.
16. HOW DO I SELL MY STOCK?
You may sell your stock through any stockbroker and pay a standard
brokerage commission on the sale. The Company may establish a program
through a brokerage firm designated by the Company in which shares you
purchase under the Plan are credited directly to an account in your name.
If the Company establishes such a program, you would then be able to
direct the designated broker as to the disposition of your shares.
17. IF I MAKE A PROFIT ON THE SALE OF MY STOCK, IS THE PROFIT TAXABLE INCOME?
Yes. Profit you make on the sale of your stock will be taxed in the year
of sale. The Company may be required to withhold tax on your profit from
your subsequent pay, but if it is not required to withhold, you will be
responsible for paying the tax yourself when you file your tax return.
<PAGE>
18. WHAT HAPPENS TO THE MONEY ACCUMULATED UNDER THE PLAN IF I DIE?
In the event of your death, any money accumulated in your name under the
Plan not previously used to purchase shares would be paid to your legal
representative.
19. IF I SIGNED UP TO PARTICIPATE DURING THE PREVIOUS OFFERING PERIOD, WILL MY
PARTICIPATION AUTOMATICALLY CONTINUE OR MUST I SIGN UP AGAIN?
Enrollment is continuous. Your participation will continue into future
Offering Periods at the same rate of payroll deduction until you change
it by filing a new Subscription Agreement or terminate your participation
by filing a Notice of Withdrawal.
20. IF I DID NOT PARTICIPATE IN THE LAST OFFERING OR WITHDREW DURING THE
OFFERING PERIOD, MAY I NOW SIGN UP FOR THE COMING OFFERING PERIOD?
Yes. As long as you remain eligible, you may participate in the next
Offering Period by completing a Subscription Agreement. However, you may
not enroll in an Offering which is already in progress or from which you
previously withdrew.
THESE QUESTIONS AND ANSWERS DO NOT ALTER OR REPLACE ANY PART OF THE PLAN.
THE COMPLETE PLAN DOCUMENT, WHICH YOU MAY OBTAIN FROM THE COMPANY, GOVERNS THE
OPERATION OF THE PLAN.
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-51325) pertaining to the 1997 Stock Plan, 1989 Incentive
Stock Option Plan, the 1997 Employee Stock Purchase Plan and the Individual
Stock Option Agreement of Integrated Sensor Solutions, Inc. of our report
dated July 9, 1998, with respect to the consolidated financial statements of
Integrated Sensor Solutions, Inc. included in this Annual Report (Form
10-KSB) for the year ended March 31, 1998.
ERNST & YOUNG LLP
San Jose, California
July 13, 1998
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