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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
_____________________
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended December 31, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
______________
Commission File Number 0-23841
__________________________
INTEGRATED SENSOR SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0212047
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
625 River Oaks Parkway, San Jose, California 95134
(Address of principal executive offices) (Zip code)
(408) 324-1044
(Registrant's telephone number, including area code)
_______________________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
Outstanding shares of registrant's common stock, $.001 par value, as of
February 12, 1998: 7,669,850
This Report on Form 10-QSB includes 23 pages with the Index to Exhibits
located on pages 19 to 20.
<PAGE> 1
INTEGRATED SENSOR SOLUTIONS, INC.
REPORT ON FORM 10-QSB
FOR QUARTER ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - December 31,
1998 (unaudited) and March 31, 1998.................. 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended December 31, 1998 and
1997 (unaudited) .................................... 4
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended December 31, 1998 and 1997 (unaudited).. 5
Notes to Condensed Consolidated Financial Statements
(unaudited).......................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................... 19
Item 5. Other Information ...................................... 19
Item 6. Exhibits and Reports on Form 8-K ....................... 19
Signature .............................................. 21
2
<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS
INTEGRATED SENSOR SOLUTIONS, INC.
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, March 31,
1998 1998 (1)
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 782 $ 17,610
Short-term investments 9,274 -
Accounts receivable, net 5,166 3,720
Accounts receivable from related parties 1,012 802
Inventories 6,779 3,120
Prepaid expenses and other current assets 538 255
-------- --------
Total current assets 23,551 25,507
PROPERTY AND EQUIPMENT, NET 6,641 2,254
OTHER ASSETS 193 -
-------- --------
TOTAL ASSETS $ 30,385 $ 27,761
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 400 $ 900
Accounts payable-trade 4,315 3,279
Accounts payable to related parties 1,279 1,144
Current portion of capital lease obligations 213 358
Other current liabilities 883 659
-------- --------
Total current liabilities 7,090 6,340
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS 188 108
MINORITY INTEREST IN SUBSIDIARY 49 78
STOCKHOLDERS' EQUITY:
Common stock 8 7
Additional paid-in capital 33,941 31,064
Accumulated deficit (10,698) (9,428)
Cumulative translation adjustment 95 (33)
Deferred compensation (288) (375)
-------- --------
Total stockholders' equity 23,058 21,235
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,385 $ 27,761
======== ========
</TABLE>
(1) Derived from the March 31, 1998 audited balance sheet included in the
1998 Annual Report on Form 10-KSB of Integrated Sensor Solutions, Inc.
See notes to condensed consolidated financial statements.
3
<PAGE> 3
INTEGRATED SENSOR SOLUTIONS, INC.
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Product revenue $ 5,386 $ 2,905 $ 14,627 $ 7,873
Contract revenue 893 1,097 2,174 3,140
-------- -------- -------- --------
Total revenues (related party
revenues of $531, $498, $2,360
and $1,365 for the three and
nine months ended December 31,
1998 and 1997, respectively) 6,279 4,002 16,801 11,013
-------- -------- -------- --------
COST OF REVENUES:
Cost of product revenue 4,146 1,873 11,000 5,328
Cost of contract revenue 840 994 2,345 2,571
-------- -------- -------- --------
Total cost of revenues 4,986 2,867 13,345 7,899
-------- -------- -------- --------
GROSS PROFIT 1,293 1,135 3,456 3,114
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 1,094 426 3,125 1,265
Sales, general, and administrative 746 533 2,166 1,468
-------- -------- -------- --------
Total operating expenses 1,840 959 5,291 2,733
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS (547) 176 (1,835) 381
INTEREST EXPENSE (27) (54) (101) (159)
INTEREST INCOME 160 - 554 -
OTHER INCOME (EXPENSE), NET (45) (76) 101 10)
MINORITY INTEREST IN NET (INCOME)
LOSS OF CONSOLIDATED SUBSIDIARY (3) (55) 11 (117)
-------- -------- -------- --------
NET INCOME (LOSS) $ (462) $ (9) $ (1,270) $ 95
======== ======== ======== ========
Basic and diluted net income (loss)
per share (pro forma for 1997) $ (0.06) $ (0.00) $ (0.17) $ 0.02
======== ======== ======== ========
Shares used in computing basic net
income (loss) per share (pro forma
for 1997) 7,617 4,700 7,593 4,584
======== ======== ======== ========
Shares used in computing diluted
net income (loss) per share (pro
forma for 1997) 7,617 4,700 7,593 5,003
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 4
INTEGRATED SENSOR SOLUTIONS, INC.
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Operating activities
Net income (loss) $ (1,270) $ 95
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 1,037 633
Amortization of deferred compensation 87 87
Minority interest in net income of subsidiary (11) 116
Foreign currency gains (203) (14)
Changes in operating assets and liabilities:
Accounts receivable, net (1,631) (1,677)
Inventories (3,398) (900)
Prepaid expenses (307) (362)
Accounts payable 1,144 480
Accrued payroll and related expenses 85 48
Other accrued liabilities 130 555
-------- --------
Net cash used in operating activities (4,337) (939)
-------- --------
Investing activities
Purchases of short-term investments (9,274) -
Purchase of property and equipment (5,233) ( 721)
Proceeds from sale of property and equipment - 46
Investment in consolidated subsidiary (211) -
-------- --------
Net cash used in investing activities (14,718) (675)
-------- --------
Financing activities
Payments on line of credit (500) 300
Payments of principal on notes payable - (432)
Payments of principal on capital lease obligations (151) (140)
Net proceeds from issuance of preferred
and common stock 2,878 502
-------- --------
Net cash provided by financing activities 2,227 230
-------- --------
Decrease in cash and cash equivalents (16,828) (1,384)
Cash and cash equivalents at beginning of period 17,610 2,059
-------- --------
Cash and cash equivalents at end of period $ 782 $ 675
======== ========
Supplemental disclosure of cash flow information
Interest paid $ 101 $ 100
======== ========
Schedule of non-cash financing activities
Equipment acquired under capital leases $ 86 $ 41
======== ========
Accounts payable converted to capital leases $ 79 $ -
======== ========
Issuance of preferred stock for payment of
notes payable $ - $ 400
======== ========
Issuance of preferred stock for payment of
interest on notes payable $ - $ 82
======== ========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE> 5
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The accompanying condensed consolidated financial statements of
Integrated Sensor Solutions, Inc. and its majority-owned subsidiary ("ISS"
or the "Company") as of December 31, 1998 and for the three and nine months
ended December 31, 1998 and 1997 are unaudited. In the opinion of
management, the condensed consolidated financial statements include all
adjustments (consisting only of normal recurring accruals) that management
considers necessary for a fair presentation of its financial position,
operating results and cash flows for the interim periods presented.
Operating results and cash flows for interim periods are not necessarily
indicative of results for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
This financial data should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended March 31, 1998.
Major Customers and Concentration of Credit Risks
Many of the Company's customers are primarily involved in the
automotive market. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses, and such losses have been within
management's expectations.
Significant customers accounted for the following percentages of
revenues:
<TABLE>
Nine Months
Ended December 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Robert Bosch GmbH 48% 30%
Echlin Corporation 15% -%
Nagano Keiki Co., Ltd. 14% 12%
Masco Tech -% 25%
</TABLE>
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
December 31, March 31,
1998 1998
------------ ---------
<S> <C> <C>
Finished goods $ 724 $ 310
Work-in-process 2,955 1,166
Raw materials 3,100 1,644
-------- --------
$ 6,779 $ 3,120
======== ========
</TABLE>
6
<PAGE> 6
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. LINE OF CREDIT/TERM LOAN
The Company has a bank line of credit agreement, which expires on
August 20, 1999. The line allows the Company to borrow the lesser of
$3,500,000 or 80% of eligible accounts receivable. Eligible accounts
receivable are defined as those outstanding less than 90 days from date of
invoice. Borrowings under the line of credit bear interest at the bank's
prime rate plus 0.75% (8.50% at December 31, 1998) and are secured by the
assets of the Company. As of December 31, 1998 and March 31, 1998, the
Company had borrowings outstanding totaling $400,000 and $900,000,
respectively, under the line of credit. The Company also has a $1,500,000
term loan facility for equipment that bears interest at the bank's prime
rate plus 1.50% (9.25% at December 31, 1998). As of December 31, 1998, the
Company had borrowings outstanding of approximately $264,000 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.
4. COMPREHENSIVE INCOME (LOSS)
Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires an enterprise to report, by major components and as a
single total, the change in net assets during the period from non-owner
sources. Comprehensive income (loss) includes all changes in equity during a
period except those resulting from investments by and distributions to the
Company's stockholders. For the three and nine months ended December 31,
1998, comprehensive income (loss), which was comprised of the Company's net
income (loss) for the periods and cumulative translation adjustment, was
approximately ($477,000) and ($1,142,000), respectively. For the comparable
periods in 1997, comprehensive income (loss) was approximately ($74,000) and
$181,000, respectively.
5. GEOGRAPHIC AND SEGMENT INFORMATION
The Company operates in one business segment, which is to design,
manufacture, and sell end-market specific integrated subsystems and perform
nonrecurring engineering projects for the sensor control applications
market. The following table summarizes the Company's operations in different
geographic areas (in thousands):
<TABLE>
Nine Months Ended December 31, 1998
-----------------------------------------------
Adjustments/
United States Germany Eliminations Consolidated
------------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues to unaffiliated
customers $ 7,095 $ 9,706 $ - $ 16,801
Transfers between geographic
areas 3,257 1,076 (4,333) -
-------- -------- -------- --------
Total net revenues $ 10,352 $ 10,782 $ (4,333) $ 16,801
======== ======== ======== ========
Loss from operations $ (1,851) $ (47) $ 63 $ (1835)
======== ======== ======== ========
Identifiable assets $ 26,552 $ 11,202 $ (7,369) $ 30,385
======== ======== ======== ========
Nine Months Ended December 31, 1997
-----------------------------------------------
Adjustments/
United States Germany Eliminations Consolidated
------------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues to unaffiliated
customers $ 7,130 $ 3,883 $ - $ 11,013
Transfers between geographic
areas 1,061 531 (1,592) -
-------- -------- -------- --------
Total net revenues $ 8,191 $ 4,414 $ (1,592) $ 11,013
======== ======== ======== ========
Income from operations $ 142 $ 249 $ (10) $ 381
======== ======== ======== ========
Identifiable assets $ 9,158 $ 4,064 $ (2,800) $ 10,422
======== ======== ======== ========
</TABLE>
7
<PAGE> 7
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<PAGE> 8
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Export revenues consisting of sales from the Company's U.S. operations
to nonaffiliated customers were as follows (in thousands):
<TABLE>
Three Months Nine Months
Ended December 31, Ended December 31,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Canada $ 29 $ 49 $ 190 $ 289
Japan and Korea 738 602 2,759 1,800
-------- -------- -------- --------
Total $ 767 $ 651 $ 2,949 $ 2,089
======== ======== ======== =======
</TABLE>
6. STOCKHOLDERS' EQUITY
On March 13, 1998, the Company completed its initial public offering of
stock through the issuance of 2,500,000 shares of common stock at a price of
$8.00 per share, resulting in net proceeds to the Company of $17,661,000. On
April 8, 1998, the Company's underwriters exercised their over-allotment
option in full by purchasing 375,000 shares at $8.00 per share resulting in
net proceeds to the Company of $2,790,000.
7. NET INCOME (LOSS) PER SHARE
The Company follows the provisions of SFAS No. 128, "Earnings Per
Share." Basic net income per share is computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted net income per share is calculated using the weighted average number
of outstanding shares of common stock plus dilutive common stock
equivalents.
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.
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share data):
<TABLE>
Three Months Nine Months
Ended December 31, Ended December 31,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
net income (loss) $ (462) $ (9) $ (1,270) $ 95
======== ======== ======== ========
Denominator:
Weighted average common shares
outstanding 7,617 1,455 7,593 1,426
Conversion of weighted average
preferred stock outstanding
(pro forma) - 3,245 - 3,158
-------- -------- -------- --------
Denominator for basic net income
(loss) per share (pro forma for
1997) 7,617 4,700 7,593 4,584
======== ======== ======== ========
Effective dilutive securities:
Employee stock options - - - 419
======== ======== ======== ========
Denominator for diluted net income
(loss) per share 7,617 4,700 7,593 5,003
======== ======== ======== ========
Basic and diluted net income (loss)
per share (pro forma for 1997) $ (0.06) $ (0.00) $ (0.17) $ 0.02
======== ======== ======== ========
</TABLE>
8
<PAGE> 8
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Options to purchase 556,306 shares of common stock at prices ranging
from $1.125 to $8.313 and warrants to purchase 58,566 shares of common stock
at prices ranging from $6.125 to $6.375 were outstanding as of December 31,
1998, but were not included in the computation of diluted earnings (loss)
per share for the three and nine months ended December 31, 1998 because to
do so would have been anti-dilutive. On December 14, 1998, the Company
repriced options to purchase 111,800 shares of common stock held by
employees who were not executive officers at prices ranging from $8.00 to
$8.313 to the closing sale price of the Company's Common Stock as reported
on the Nasdaq National Market on that date, $4.375 per share. Officers of
the Company did not participate in the repricing. In exchange for the
Company's offer to reprice options held by employees, the employees agreed
to relinquish any rights that they may have had or may have acquired in the
future under each canceled option.
8. INCREASED OWNERSHIP OF ISS-NAGANO
Effective November 30, 1998 the Company purchased an additional 7.50%
ownership of ISS-Nagano, its German subsidiary, for approximately $211,000.
As a result of the transaction, the Company's results of operations
subsequent to the effective date reflect 81.5% of ISS-Nagano's net income
(loss).
9
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis includes a number of forward-
looking statements which reflect the Company's current views with respect to
future events and financial performance. These forward-looking statements
are subject to certain risks and uncertainties, including those discussed in
the "Factors that May Affect Operating Results" section of this Item 2 and
elsewhere in this Form 10-QSB that could cause actual results to differ
materially from historical results or those anticipated. In this report, the
words "anticipates," "believes," "expects," "future," "intends," and similar
expressions identify forward-looking statements. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak
only as of the date hereof.
Overview
ISS designs, manufactures and markets high performance, intelligent
sensor products that are used in electronic control systems by customers in
the automotive and industrial markets. The Company was incorporated in March
1989 and was principally engaged in research and development activities
through fiscal 1993. In fiscal 1991, the Company shipped its first product,
an application specific integrated circuit ("ASIC") designed for use with a
very low-pressure sensor used in industrial flow measurements. In fiscal
1992, the Company introduced its first integrated sensor device ("ISD"), an
after-market product for manifold absolute pressure ("MAP") sensor
applications for General Motors automobile engines. The Company subsequently
developed and introduced a variety of other ASICs and ISDs. Principally as a
result of an increase in product sales, the Company's total revenues have
increased to $6.3 million and $16.8 million for the three and nine months
ended December 31, 1998 from approximately $4.0 million and $11.0 million
for the comparable periods in 1997, respectively. The Company has
experienced operating losses in each year since its inception and had an
accumulated deficit of $10.7 million as of December 31, 1998.
Results of Operations
The following table sets forth for the periods indicated selected
consolidated statements of operations data as a percentage of total
revenues:
<TABLE>
Three Months Nine Months
Ended December 31, Ended December 31,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product revenue 85.8% 72.6% 87.1% 71.5%
Contract revenue 14.2 27.4 12.9 28.5
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Cost of product revenue 66.0 46.8 65.4 48.4
Cost of contract revenue 13.4 24.8 14.0 23.3
----- ----- ----- -----
Total cost of revenues 79.4 71.6 79.4 71.7
----- ----- ----- -----
Gross profit 20.6 28.4 20.6 28.3
----- ----- ----- -----
Operating expenses:
Research and development 17.4 10.7 18.6 11.5
Sales, general and administration 11.9 13.3 12.9 13.3
----- ----- ----- -----
Total operating expenses 29.3 24.0 31.5 24.8
----- ----- ----- -----
Income (loss) from operations (8.7) 4.4 (10.9) 3.5
Interest expense (0.4) (1.3) (0.6) (1.4)
Interest income 2.5 - 3.2 -
Other income (expense), net (0.7) (1.9) 0.6 (0.1)
Minority interest in net (income)
loss of consolidated subsidiary (0.1) (1.4) 0.1 (1.1)
----- ----- ----- -----
Net income (loss) (7.4)% (0.2)% (7.6)% 0.9%
===== ===== ===== =====
</TABLE>
10
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Comparison of Three and Nine Months Ended December 31, 1998 and 1997
Revenues
The Company derives its revenues from sales of ASICs and ISDs and from
fees earned under product development contracts. The Company recognizes
revenues from product sales upon shipment. Contract revenues are recognized
only when applicable customer milestones, including deliverables, have been
met, but not in excess of the amount that would be recognized using the
percentage of completion method.
Total revenues increased for the three and nine months ended December
31, 1998 as compared to the similar periods in 1997. Total revenues were
$6.3 million and $16.8 million for the three and nine months ended December
31, 1998, respectively, increases of 57% and 53% over revenues of $4.0
million and $11.0 million for the comparable 1997 periods. The growth in
total revenues on a quarterly and year-to-date basis is due to higher
product revenue.
Product Revenue: Product revenue was $5.4 million for the three months
ended December 31, 1998 which represented an increase of $2.5 million or 85%
over the $2.9 million recognized for the comparable period in 1997. For the
nine months ended December 31, 1998 product revenue was $14.6 million which
represented an increase of approximately $6.7 million or 86% over the $7.9
million for the comparable 1997 period. These increases were principally due
to increased shipments of ISDs for Common Rail Diesel Injection and Vehicle
Stability Control Systems. Reflecting the Company's long-term strategy,
product revenue increased to 85.8% and 87.1% of total revenues for the three
and nine months ended December 31, 1998 from 72.6% and 71.5% for the
comparable periods in the prior year. The Company believes that product
revenue is likely to increase as a percentage of total revenue.
Contract Revenue: Contract revenue decreased to approximately $900,000
and $2.2 million for the three and nine months ended December 31, 1998 from
$1.1 million and $3.1 million for the comparable periods in 1997. This
decrease was primarily due to the smaller number of development contracts
and the completion of fewer contractual milestones during the three months
and nine months ended December 31, 1998 as compared to the same periods in
1997. Contract revenue as a percentage of total revenues for the three and
nine months ended December 31, 1998 decreased to 14.2% from 27.4% and to
12.9% from 28.5% for the similar periods in 1997, respectively. The Company
expects contract revenue to continue to decrease as a percentage of total
revenues.
International revenues (export revenues and revenues of the Company's
majority-owned subsidiary, ISS-Nagano GmbH, ("ISS-Nagano")) for the three
and nine months ended December 31, 1998 were $4.9 million and $12.7 million,
increases of $2.6 million or 113% and $6.7 million or 112% over the three
and nine months ended December 31, 1997. As a percentage of total revenues,
international sales increased to 78% from 58% and to 75% from 54% for the
three and nine months ended December 31, 1998 compared to 1997,
respectively. These increases were primarily the result of increased sales
of media compatible ISDs for Common Rail Diesel Injection and Vehicle
Stability Control Systems in Germany. All of the Company's sales in Europe
are denominated in Deutsche Marks. Accordingly, a portion of the Company's
international revenues is subject to foreign currency fluctuation risks.
Cost of Revenues
Cost of Product Revenue: The Company's product revenue gross margin
decreased 12.5% to 23.0% for the three months ended December 31, 1998 from
35.5% for the similar period in 1997. For the nine months ended December 31
1998, the Company's product gross margin decreased 7.5% to 24.8% from 32.3%
for the similar period in 1997. The decrease in product gross margin for the
three months ended December 31, 1998 was primarily was due to certain
manufacturing inefficiencies due to increased production levels of two products
in the Company's German facility as well as increased writedowns for slow
moving ASIC inventory. These manufacturing inefficiencies resulted from
competing production demands presented by manufacturing two products on one
line and are expected to be minimized by the transition to two manufacturing
lines in calendar 1999. The decline in product gross margin for the nine months
ended December 31, 1998 was due, in part, to increased inventory writedowns and
manufacturing inefficiencies, coupled with yield issues associated with the
production ramp-up of the Company's HVP and FDR media-compatible ISDs, which
materially adversely affected gross margin and operating results.
11
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Cost of Contract Revenue: The Company's contract revenue gross margin
decreased to 5.9% and (7.9%) for the three and nine months ended December
31, 1998 from 9.4% and 18.1% for the similar periods in 1997. Cost of
contract revenue declined to approximately $800,000 and $2.3 million for the
three and nine months ended December 31, 1998 from $1.0 million and $2.6
million for the similar periods in 1997, respectively. The decrease in
contract revenue margins was primarily due to the completion of fewer
contractual milestones in the three and nine months ending December 31, 1998
compared to the similar periods in 1997. Expenses related to contracts are
recorded as incurred, while recognition of revenues occurs when contractual
milestones are reached. The Company does not anticipate that the gross
margin on contract revenues will grow or even be positive in future periods.
Operating Expenses
Research and Development: Research and development expense consists
primarily of personnel expenses, including salary and benefits, and other
product development related engineering expenses not associated with
contract revenue. Research and development expenses were $1.1 million and
$3.1 million for the three and nine months ended December 31, 1998 as
compared to approximately $400,000 and $1.3 million for the similar periods
in 1997, respectively. This higher level of expenses for the three and nine
months ended December 31, 1998 reflects an overall increase in resources at
its ISS-Nagano operations. Research and development expenses as a
percentage of total revenues increased to 17.4% and 18.6% percent for the
three and nine months ended December 31, 1998 from 10.7% and 11.5% for the
similar periods in the prior year, respectively. The Company believes that
research and development is essential to the Company's ability to increase
revenues. The Company expects research and development expenses to increase
in absolute dollars but expects such expenses to decrease as a percentage of
total revenues.
Sales, General and Administrative: Sales, general and administrative
expense consists primarily of personnel expenses, including salary and
benefits, and professional fees. Sales, general and administrative expenses
were approximately $700,000 and $2.2 million for the three and nine months
ended December 31, 1998 as compared to approximately $500,000 and $1.5
million for the similar 1997 periods, respectively. This higher level of
expense reflects an increase in personnel and professional fees necessary to
manage the financial, legal and administrative aspects of operating as a
public company. Sales, general and administrative expense declined slightly
to 11.9% and 12.9% as a percentage of total revenues for the three and nine
months ended December 31, 1998 as compared to 13.3% for both comparable
periods in 1997. The Company expects sales, general and administrative
expenses to increase in absolute dollars, reflecting growth in operations
and costs associated with being a public entity, but to be stable or decline
as a percentage of total revenues.
Interest Expense
Interest expense decreased to $27,000 and $101,000 for the three and
nine months ended December 31, 1998 from $54,000 and $159,000 for the
comparable periods in 1997, respectively, due to lower average borrowings
resulting from the conversion and repayment of debt.
Interest Income
Interest income was $160,000 and $554,000 for the three and nine months
ended December 31, 1998. The Company recorded no interest income during the
three and nine months ended December 31, 1997. The increase in interest
income was the result of higher interest-bearing cash balances resulting
from the Company's initial public offering in March 1998.
Other Income (Expense), Net
Other income (expense), net was ($45,000) and $101,000 for the three
and nine months ended December 31, 1998 compared to ($76,000) and ($10,000)
for the similar periods in 1997. Other income changed primarily due to
foreign currency exchange loss of $36,000 for the three months ended
December 31, 1998 and a foreign currency exchange gain of $203,000 for the
nine months ended December 31, 1998 related to Deutchmark denominated loans
that the Company has with ISS-Nagano_.
12
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Minority Interest in Net (Income) Loss of ISS-Nagano
Minority interest in net income of ISS-Nagano for the three months
ended December 31, 1998 was $3,000 compared to $55,000 of minority interest
in net income of ISS-Nagano for the three months ended December 31, 1997.
Minority interest in net loss of ISS-Nagano for the nine months ended
December 31, 1998 was $11,000 compared to $117,000 of minority interest in
net income of ISS-Nagano for similar period in 1997. Effective November 30,
1998 the Company purchased an additional 7.50% ownership of ISS-Nagano, its
German subsidiary, for approximately $211,000. As a result of the
transaction, the Company's results of operations, subsequent to the effective
date, reflect 81.5% of ISS-Nagano's net income (loss).
Liquidity and Capital Resources
Since inception, the Company has financed its operations principally
through sales of equity securities, product revenues and contract revenues.
At December 31, 1998, the Company had cash, cash equivalents and short-term
investments of $10.1 million and working capital of $16.5 million. The
Company also has a $3.5 million bank line of credit agreement secured by the
assets of the Company that permits borrowings of the lesser of $3.5 million
or 80% of eligible accounts receivable. Eligible accounts receivable are
defined as those outstanding less than 90 days from date of invoice.
Borrowings under the line of credit bear interest at the bank's prime rate
plus 0.75%. At December 31, 1998, the Company also had a $1.5 million term
loan facility for capital equipment that bears interest at the bank's prime
rate plus 1.50%. The bank line of credit agreement and term loan facility
will expire August 21, 1999. At December 31, 1998, the Company had
outstanding borrowings of $400,000 under the line of credit agreement and
$401,000 under various capital equipment lease financing arrangements. At
December 31, 1998, the Company was not in compliance with its profitability
covenant and is in the process of obtaining a waiver through that date.
Net cash used in operating activities was approximately $4.3 million
and $939,000 in the nine months ended December 31, 1998 and 1997,
respectively. For the nine months ended December 31, 1998, net cash used in
operations was primarily attributable to an increase in inventory levels and
accounts receivable to support higher sales demand, partially offset by a
decrease in accounts payable and the Company's net loss. For the nine months
ended December 31, 1997, net cash used in operations was primarily
attributable to an increase in inventory levels and an increase in accounts
receivable.
Net cash used in investing activities was $14.7 million and $675,000 in
the nine months ended December 31, 1998 and 1997, respectively. Cash used in
investing activities for the nine months ended December 31, 1998 was related
to the Company's purchase of $9.3 million in short-term investments and $5.2
million in purchases of equipment. Cash used in investing activities for the
nine months ended December 31, 1997 was entirely due to the purchase of
equipment.
Net cash provided by financing activities was $2.2 million and $230,000
for the nine months ended December 31, 1998 and 1997, respectively. Cash
provided by financing activities was primarily due to the sale of common
stock upon exercise of the over allotment option held by the underwriters of
the Company's initial public offering and by employees who exercised their
stock options. The Company also repaid $500,000 outstanding
13
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
under its line of credit. For the nine months ended December 31, 1997 the
Company repaid $432,000 in notes payable.
To date, the Company has not invested in derivative securities or any
other financial instruments that involve a high degree of risk. The Company
expects that, in the future, cash in excess of current requirements will be
invested in short-term, investment grade, interest-bearing securities.
The Company plans to finance its working capital and other capital
resource needs with its current cash and cash equivalents, and cash
generated from future operations, if any. The Company believes that these
resources will be sufficient to satisfy its working capital and other
capital needs for at least the next 12 months.
Factors That May Affect Operating Results
The statements contained in this Report on Form 10-QSB that are not
purely historical are forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding the Company's
expectations, hopes, intentions or strategies regarding the future. Forward-
looking statements include but are not limited to: statements regarding
future products or product development; statements regarding future research
and development spending and the Company's product development strategy;
statements regarding the levels of international sales; and statements
regarding future expenditures. All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-
looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking
statements. Some of the factors that could cause actual results to differ
materially are set forth below. In addition to the other information in
this Form 10-QSB, the following factors should be considered carefully in
evaluating the Company and its business.
Limited Profitability; History of Operating Losses. The Company was
founded in 1989 and commenced shipments of its initial product in 1990. The
Company 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
December 31, 1998, the Company had an accumulated deficit of approximately
$10.7 million.
Implementation of New Automated Manufacturing Line. The Company is
currently developing a new automated manufacturing line at its German
facility for the manufacture of Vehicle Stability Control System ISDs which
will involve existing technologies currently employed by the Company's
Common Rail Diesel Injection ISD manufacturing line at the same facility.
There can be no assurance that the transition of Vehicle Stability Control
System ISDs processing to the new line will be achieved on schedule without
encountering any delays in the process implementation. Nor can there be any
assurance that the Company will achieve acceptable manufacturing yields or
that the operating income margins on such products will be comparable to
those realized in connection with the Company's current manufacturing line.
Failure to achieve acceptable yields or margins could adversely affect the
Company's financial condition and results of operations.
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
14
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
of products sold, personnel changes and difficulties in attracting and
retaining qualified technical personnel, foreign currency exchange rates
and economic conditions generally and in the automotive and industrial markets.
Variability of Manufacturing Yields. Manufacturing yields of the
Company's ASICs and ISDs may vary significantly depending on a variety of
factors. ASIC yields can be adversely affected by the level of contaminants
in the manufacturing environment, impurities in the materials used and the
performance of fabrication personnel and equipment, all of which are outside
the control of the Company. ISD yields can be adversely affected by
defective sensing elements, component quality and performance of assembly
personnel and equipment. Historically, the Company has experienced
fluctuations in yields of its products, particularly during initial
production of new products, which have adversely affected product gross
margin.
Significant Customer Concentration. Historically, a relatively small
number of customers have accounted for a significant percentage of the
Company's total revenues, and the Company expects that this trend will
continue. In the nine months ended December 31, 1998, the Company had two
customers which accounted for 15% and 14% of total revenues, respectively,
and one customer, Bosch, which accounted for 48% of total revenues. In the
nine months ended December 31, 1997, the Company had one customer that
accounted for 12% of total revenues and two customers, Bosch and Masco Tech,
which accounted for 30% and 25% of total revenues, respectively. As a
result, any cancellation, reduction, rescheduling or delay in orders by or
shipments to any customer or the discontinuation or redesign by any customer
of its products which currently incorporate one or more of the Company's
products would have a material adverse effect on the Company's business,
financial condition or operating results.
Dependence on Automotive Industry; Need to Penetrate New Markets. The
Company has historically derived approximately 88% of its total revenues
from products sold for applications in the automotive industry. Accordingly,
improvement in the Company's future operating results will depend in part on
its ability to increase its market share in the automotive industry and to
penetrate new markets. Further, the Company believes that its operating
results may be affected by the cyclical nature of the automotive industry.
Any downturn in any customer's business or the economy in general may cause
purchases of the Company's products to be deferred, reduced or canceled
resulting in a material adverse effect on the Company's business, financial
condition or operating results. If the Company were unable to successfully
penetrate new markets or to expand its penetration of the automotive market,
its business, financial condition or operating results would be materially
adversely affected.
Declining Average Selling Prices. The Company sells a substantial
portion of its products pursuant to exclusive contracts which typically
contain volume-pricing provisions that require the Company to reduce its per
unit price as certain volume levels are achieved. If the Company is unable
to make corresponding product cost reductions, the resulting decline in the
average selling prices of the products sold pursuant to such contracts may
reduce the Company's product gross margin. If the Company is unable to
sufficiently reduce its costs on existing products or introduce new products
with higher margins in a timely manner, the Company's business, financial
condition or operating results will be materially adversely affected.
Dependence on Sensing Element Suppliers. The Company is currently
dependent upon a small number of third party vendors for substantially all
of the sensing elements incorporated into its ISDs. For example, the Company
currently purchases a pressure-sensing element incorporated in certain of
its ISDs from a single source, Nagano Keiki Co., Ltd. ("Nagano"). The
Company believes that Nagano is currently the only high volume supplier of
this type of sensing element. Any failure of the Company to maintain its
existing relationships with sensing element suppliers or to identify and
work with new sensing element suppliers could have a material adverse effect
on the Company's business, financial condition or operating results.
Narrow Product Base. The Company currently depends upon the sale and
success of a limited number of product lines. Because the Company's primary
source of revenue is dependent upon a narrow product base, any interruption
or reduction in these sales due to production problems, lack of adequate
demand, replacement by new technologies or other internal or external
problems resulting in the failure of such product lines to win broad
acceptance in the marketplace would have a material adverse effect on the
Company's business, financial condition or operating results.
15
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Rapid Technological Change; Need to Develop New Products. The markets
for the Company's products are characterized by rapid technological change
as well as evolving industry standards that may render existing products
obsolete. As a result, the success of new products depends on a variety of
factors, including effective definition of products that meet evolving
market needs, successful and timely completion of development and
introduction of these products, successful design wins in new systems and
the ability to offer products at competitive prices. A failure in any of
these areas could have a material adverse effect on the Company's business,
financial condition or operating results.
Competition. The markets in which the Company competes are highly
competitive and characterized by diverse industry requirements and severe
pricing pressure in many applications. In the ASIC market, the Company
competes with analog and mixed signal semiconductor companies such as
Motorola, Inc. ("Motorola"), Texas Instruments Incorporated ("TI") and
Analog Devices, Inc. The Company's products also compete indirectly with
conventional hybrid circuits and standard analog and mixed signal ICs. In
the ISD market, the Company competes with Delco, a subsidiary of General
Motors ("GM"), Motorola, TI, Kavlico and Denso Corporation ("Denso"). These
companies all have substantially greater financial, technical,
manufacturing, marketing, distribution, personnel and other resources than
the Company.
The Company also anticipates that additional competitors may enter the
Company's markets, resulting in even greater competition. Many of the
Company's current or prospective competitors own or have investments in
wafer foundries, which provide dedicated capacity to these competitors and
enable them to influence or control costs more effectively than the Company.
There can be no assurance that the Company will be able to compete
successfully with existing or new competitors. Increased competition could
result in significant price reductions or the loss of current or potential
customers or design wins which could materially adversely affect the
Company's business, financial condition or operating results.
Dependence on Key Personnel; Need for Additional Technical Personnel.
The Company is substantially dependent upon the services of its executive
officers. The Company's future success depends on the continued
contributions of such officers, including the maintenance, enhancement and
establishment of key customer relationships and the management of
operations. The loss of the services of any of these officers by the Company
could have a material adverse effect on the Company's business, financial
condition or operating results. Such officers have not entered into
employment agreements with the Company. The Company believes that its future
success will be heavily dependent upon its ability to attract and retain
qualified design, technical and management personnel. There can be no
assurance that the Company will be able to continue to attract and retain
these personnel, and the failure to do so could have a material adverse
effect on the Company's business, financial condition or operating results.
Dependence on Sole Source Suppliers. Certain components of the
Company's current products, such as fabricated wafers, sensing elements,
packages and PC boards, are acquired from single source suppliers. The
Company purchases these components on a purchase order basis and may not
carry significant inventories. The Company currently has no supply contracts
with any of its assembly contractors.
The Company's reliance on independent contractors to assemble and
package its products involves significant risks, including reduced control
over quality and delivery schedules, the potential lack of adequate capacity
and discontinuance or phase-out of such contractors' assembly processes.
Historically, due to a lack of significant volumes, the Company has
experienced difficulty ensuring that independent assembly contractors would
continue to assemble or package the Company's products and that alternative
independent assembly contractors would be available in such instances.
Dependence on Independent Wafer Suppliers. The Company relies on a
small number of independent foundries for the manufacture of all of its
ASICs, including those incorporated into its ISDs. Although the Company has
initiated efforts to qualify second sources for certain of its key
components, none of the Company's ASICs is currently fabricated by more than
one foundry. Although processed wafer capacity in the semiconductor industry
is currently widely available, there can be no assurance that the Company's
foundries will continue to provide the Company an adequate supply of wafers
to meet its customers' demands.
The Company believes that as a result of fluctuations in demand and
changing technologies, processed wafer capacity may become limited from time
to time, resulting in greater difficulty in obtaining adequate supplies of
wafers, increased prices and increased lead times. Any increase in the
demand for processed wafers over expected levels or any
16
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
failure of processed wafer supply in the industry to grow at anticipated rates
will magnify these shortages. There can be no assurance that the Company will
be able to complete qualification of products fabricated by Symbios, or any
other new wafer supplier, in a timely manner or at all, and any such failure
could have a material adverse effect on the Company's business, financial
condition or operating results.
The use of independent wafer foundries entails certain other risks,
including reduced control over manufacturing yields and production costs.
The Company has from time to time experienced lower than anticipated
manufacturing yields in connection with the introduction of new products.
Yield losses could have a material adverse effect on the Company's operating
results. There can be no assurance that the Company's wafer foundries will
not produce wafers with lower than expected manufacturing yields in the
future, which could materially adversely affect the Company's business,
financial condition or operating results.
Dependence on Patents and Proprietary Rights. The Company relies on a
combination of patents, maskwork rights, trade secret laws, copyrights,
trademarks and employee and third party non-disclosure agreements to protect
its intellectual property rights. The Company has been issued four patents
and has filed two additional patent applications in the United States and
one foreign patent application relating to ASIC designs. In addition, the
Company has filed one patent application in the United States relating to
package design. There can be no assurance that any patents will issue from
any of the Company's pending applications or that claims allowed from
pending applications will be of sufficient scope or strength, or be issued
in all countries where the Company's products can be sold, to provide
meaningful protection or any commercial advantage to the Company.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions which have resulted in
significant and often protracted and expensive litigation. Although there is
currently no pending intellectual property litigation against the Company,
the Company may from time to time be notified of claims that the Company may
be infringing patents or other intellectual property rights owned by third
parties. If it is necessary or desirable, the Company may seek licenses
under such patents or other intellectual property rights. However, there can
be no assurance that licenses will be offered or that the terms of any
licenses will be acceptable to the Company. A failure to obtain a license
from a third party for technology used by the Company could cause the
Company to incur substantial liabilities and to suspend the manufacture of
products requiring the technology.
Dependence on International Sales and Suppliers. The Company's sales to
customers outside the United States are subject to a variety of risks,
including those arising from fluctuations in currency exchange rates,
tariffs, import restrictions and other trade barriers, unexpected changes in
regulatory and governmental licensing requirements, longer accounts
receivable payment cycles and potentially adverse tax consequences. Because
a significant portion of the Company's international sales and in particular
its European sales have to date been made through its German subsidiary and
have been denominated in Deutsche Marks, fluctuations in the value of the
Deutsche Mark relative to the U.S. Dollar or other currencies could
adversely affect the pricing of the Company's products in foreign markets
and make the Company's products relatively more expensive. In addition,
fluctuations in the Deutsche Mark could adversely affect the profitability
of sales made in Europe and therefore materially adversely affect the
Company's business, financial condition or operating results.
Several Asian countries including South Korea, Japan and Thailand, have
recently experienced significant economic downturns and significant declines
in the value of their currencies relative to the U.S. dollar. Due to these
conditions, it is possible that certain of the Company's customers will
delay, reschedule or cancel significant current or future orders for the
Company's products. If any such orders are delayed, rescheduled or canceled,
the Company's business, financial condition and results of operations would
be adversely affected.
Year 2000 Compliance
Many computer systems were not designed to properly handle dates beyond
the year 1999. Additionally, these systems may not properly handle certain
dates in 1999. Failure to process dates properly could result in failure or
disruption of the Company's information systems and/or processing equipment.
To be Year 2000 ("Y2K") compliant, computer systems must correctly process
dates before and after the year 2000, recognize the year 2000 as a leap
year, accept and display dates unambiguously and correctly process dates for
non-date functions such as archiving. Disruptions to the
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<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Company's operations may also occur if key suppliers or customers experience
disruptions in their ability to purchase, supply or transact with the
Company due to Y2K issues. The Company's global operations rely heavily on
the infrastructures within the countries in which it does business. The Y2K
readiness within infrastructure suppliers (utilities, government agencies
such as customs, and shipping organizations) will be critical to the
Company's ability to avoid disruption of its operations. The Company
continues to assess its systems, equipment, facilities and processing to
determine its Y2K readiness and has committed personnel and resources to
resolve potential Y2K issues. To date, the Company has confirmed the Y2K
compliance of its domestic and international financial systems. Further, the
Company is now focused on manufacturing system compliance and is in the
process of contacting its critical suppliers to determine that the
suppliers' operations and the products and services they provide are Y2K
compliant. The Company also is working with industry trade associations to
evaluate the Y2K readiness of infrastructure suppliers. In the event that
suppliers are not Y2K compliant, it could have a material adverse effect on
the Company's results or financial condition. The Company plans to complete
the assessment of its Y2K readiness by the end of the first quarter of
calendar 1999.
The Company will perform remediation procedures concurrent with its
assessment planning. The Company currently believes that the remediation
costs of the Y2K issue will not be material to the Company's results of
operations or financial position. Cumulatively through December 31, 1998
the Company has incurred remediation expenses of less than $10,000. While
the Company currently expects that the Y2K issue will not pose significant
operational problems, delays in adequately addressing Y2K issues, or a
failure to fully identify all Y2K dependencies in the Company's systems and
in the systems of its suppliers, customers and financial institutions, could
have material adverse consequences, including delays in the production,
delivery or sale of products. Therefore, the Company is developing
contingency plans for continuing operations in the event such problems
arise. The Company intends to complete the contingency planning phase of
its Y2K readiness in the first half of calendar 1999.
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<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date hereof, to the Company's knowledge, there are no legal
proceedings in which the Company is involved or litigation pending against
the Company.
ITEM 5. OTHER INFORMATION
Use of Proceeds
The net proceeds to the Company from the sale of the 2,875,000 shares
of Common Stock in the Company's initial public offering (Registration
Statement No. 333-41351 and No. 333-47885), effective March 13, 1998,
including the underwriter's exercise of their over-allotment on April 8,
1998, were approximately $20,451,000 after deducting underwriting discounts
and commissions, the Representatives' non-accountable expense allowance and
other offering expenses. From the date of the closing of the initial public
offering through December 31, 1998, the Company applied the net proceeds as
follows: $766,347 was used to pay indebtedness to a related party,
approximately $5,480,000 was used to purchase capital equipment, $801,275
was used to pay indebtedness to another related party, $500,000 was used to
pay down the line of credit at the bank, approximately $12.9 million was
used for operating expenses and inventory purchases.
Stockholder Proposals
Proposals of stockholders intended to be presented at the next Annual
Meeting of the Stockholders of the Company (other than proposals made under
Rule 14a-8 of the Securities Exchange Act of 1934, as amended) must be
received by the Company at its principal executive offices at 625 River Oaks
Parkway, San Jose, California by March 25, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
Exhibit
-------
No. Description
--- -----------
3.1**** Restated Certificate of Incorporation of Registrant
dated October 26, 1998.
3.2** Bylaws of Registrant.
4.1* Restated Registration Rights Agreement.
10.1* 1989 Stock Option Plan and form of option agreement
thereunder.
10.2* 1997 Stock Option Plan and form of option agreement
thereunder.
10.3*** 1997 Employee Stock Purchase Plan and form of
subscription agreement thereunder.
10.4** Form of Indemnity Agreement for Officers and Directors.
10.5+** Development Agreement between ISS-GmbH and Robert
Bosch GmbH dated May 25, 1995.
10.6+** Development Agreement among ISS-Nagano GmbH, Integrated
Sensor Solutions, Inc. and Robert Bosch GmbH dated May
17, 1996.
10.7+** Supply Agreement between Integrated Sensor Solutions,
Inc. ISS-Nagano GmbH and Robert Bosch GmbH dated
November 18, 1996.
10.8** Lease between Montague Oaks Associates Phase III and
Integrated Sensor Solutions, Inc. dated June 2, 1994,
as amended.
10.9** Continuous Sales and Purchase Agreement by and between
Nagano Keiki Seisakusho, Ltd. and Integrated Sensor
Solutions, Inc. dated December 1, 1996.
10.10** Continuous Sales and Purchase Agreement by and between
Nagano Keiki Seisakusho, Ltd. and Integrated Sensor
Solutions, Inc. dated June 1, 1997.
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<PAGE> 19
10.11** Security Agreement by and between Integrated Sensor
Solutions, Inc. and Silicon Systems, Inc. dated
December 1, 1995.
10.12** Credit Agreement between Integrated Sensor Solutions,
Inc. and Silicon Systems, Inc. dated December 1, 1995.
10.13** Loan and Security Agreement by and between Silicon
Valley Bank and Integrated Sensor Solutions, Inc. dated
July 10, 1996, as amended.
10.14**** Loan Modification Agreement by and between the
Registrant and Silicon Valley Bank dated August 21,
1998 amending the Loan and Security Agreement dated
July 10, 1996, as amended.
10.15** Lease Agreement between Geschaftsraum-Mietvertrag and
ISS-Integrated Sensor Solutions GmbH dated September
12, 1994.
10.16* Agreement relating to change in equity ownership of
ISS-Nagano GmbH dated July 30, 1997.
21.1** List of Subsidiaries of the Registrant.
24.1** Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
___________
* Filed as an exhibit to Amendment No. 1 to Registration Statement
on Form SB-2 (File No. 333-41351) on February 5, 1998.
** Filed as an exhibit to Registration Statement on Form SB-2 (File No.
333-41351) on December 2, 1997.
*** Filed as an exhibit to Annual Report on Form 10-KSB on June 30,
1998.
**** Filed as an exhibit to Quarterly Report on Form 10-QSB on September 30,
1998.
+ Certain information in this exhibit has been omitted and filed
separately with the Securities and Exchange Commission pursuant to
orders for confidential treatment under 17 C.F.R. Sections
200.80(b)(4), 200.83 and 230.46.
(b) Reports on Form 8-K. The Company did not file any Reports on Form 8-K
during the quarter ended December 31, 1998.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRATED SENSOR SOLUTIONS, INC.
---------------------------------
(Registrant)
Date: February 16, 1999 By: /s/ DAVID SATTERFIELD
--------------------------------
David Satterfield
Vice President Finance & Administration,
Corporate Secretary
(Authorized Officer and
Principal Financial and Accounting Officer)
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<TABLE> <S> <C>
<S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-
QSB FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998
<PERIOD-START> APR-01-1998 APR-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 782 17,610
<SECURITIES> 9,274 0
<RECEIVABLES> 5,166 <F1> 3,720 <F1>
<ALLOWANCES> 0 0
<INVENTORY> 6,779 3,120
<CURRENT-ASSETS> 23,551 25,507
<PP&E> 6,641 <F1> 2,254 <F1>
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 30,385 27,761
<CURRENT-LIABILITIES> 7,090 6,340
<BONDS> 188 108
0 0
0 0
<COMMON> 8 7
<OTHER-SE> 33,941 31,064
<TOTAL-LIABILITY-AND-EQUITY> 30,385 27,761
<SALES> 14,627 7,873
<TOTAL-REVENUES> 16,801 11,013
<CGS> 11,000 5,328
<TOTAL-COSTS> 13,345 7,899
<OTHER-EXPENSES> 3,125 <F2> 1,265 <F2>
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 101 159
<INCOME-PRETAX> (1,270) 95
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,270) 95
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,270) 95
<EPS-PRIMARY> (0.17) <F3> 0.02 <F3>
<EPS-DILUTED> (0.17) 0.02
<FN>
<F1> Item shown net of allowance, consistent with the balance
sheet presentation.
<F2> Item consists of research and development.
<F3> Item consists of basic earnings per share.
</FN>
</TABLE>
<TABLE> <S> <C>
<S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-QSB FOR THE PERIOD ENDED SEPTEMBER 30, 1998 RESTATED TO REPORT SIX MONTH
OPERATING ACTIVITY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998
<PERIOD-START> APR-01-1998 APR-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 3,920 17,610
<SECURITIES> 9,137 0
<RECEIVABLES> 5,122 <F1> 4,522 <F1>
<ALLOWANCES> 0 0
<INVENTORY> 4,612 3,120
<CURRENT-ASSETS> 23,825 25,507
<PP&E> 4,008 <F1> 2,254 <F1>
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 27,833 27,761
<CURRENT-LIABILITIES> 4,143 6,340
<BONDS> 221 108
0 0
0 0
<COMMON> 8 7
<OTHER-SE> 23,398 21,228
<TOTAL-LIABILITY-AND-EQUITY> 27,833 27,761
<SALES> 9,241 4,968
<TOTAL-REVENUES> 10,522 7,011
<CGS> 6,854 3,445
<TOTAL-COSTS> 8,359 5,033
<OTHER-EXPENSES> 2,031 <F2> 839 <F2>
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 74 105
<INCOME-PRETAX> (808) 104
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (808) 104
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (808) 104
<EPS-PRIMARY> (0.11) <F3> 0.02 <F3>
<EPS-DILUTED> (0.11) 0.02
<FN>
<F1> Item shown net of allowance, consistent with the balance sheet
presentation.
<F2> Item consists of research and development.
<F3> Item consists of basic earnings per share.
</FN>
</TABLE>
