Integrated Silicon Solution 10Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________

FORM 10-Q

___________________________________

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-23084

__________________________________________

Integrated Silicon Solution, Inc.

(Exact name of registrant as specified in its charter)

___________________________________________



Delaware		77-0199971
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1623 Buckeye Drive, Milpitas, California		95035
(Address of principal executive offices)		(Zip Code)

(408) 969-6600

(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 Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	¨	Accelerated filer	ý

Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of outstanding shares of the registrant’s Common Stock as of August 2, 2013 was 28,961,206.

TABLE OF CONTENTS



PART I	Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Statements of Income for the three and nine months ended June 30, 2013 and 2012 (Unaudited)	1

	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2013 and 2012 (Unaudited)	2

	Condensed Consolidated Balance Sheets as of June 30, 2013 (Unaudited) and September 30, 2012	3

	Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2013 and 2012 (Unaudited)	4

	Notes to Condensed Consolidated Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	26

PART II	Other Information

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 6.	Exhibits	36

Signatures		37

References in this Quarterly Report on Form 10-Q to “we,” “us,” “our” and “ISSI” mean Integrated Silicon Solution, Inc. and all entities controlled by Integrated Silicon Solution, Inc.

Part I. FINANCIAL INFORMATION


Item 1.	Financial Statements

Integrated Silicon Solution, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

(In thousands, except per share data)



	Three Months Ended June 30,						Nine Months Ended June 30,
	2013			2012			2013			2012
Net sales	$	77,788		$	64,781		$	229,178		$	193,450
Cost of sales	51,741			43,444			153,651			128,794
Gross profit	26,047			21,337			75,527			64,656
Operating expenses:
Research and development	10,583			6,749			30,914			20,856
Selling, general and administrative	10,829			9,392			32,648			28,307
Total operating expenses	21,412			16,141			63,562			49,163
Operating income	4,635			5,196			11,965			15,493
Interest and other income (expense), net	546			405			1,329			424
Gain on sale of investments	7,280			—			9,339			—
Income before income taxes	12,461			5,601			22,633			15,917
Provision for income taxes	5,215			2,454			9,619			5,404
Consolidated net income	7,246			3,147			13,014			10,513
Net (income) loss attributable to noncontrolling interests	(182		)	(10		)	(164		)	15
Net income attributable to ISSI	$	7,064		$	3,137		$	12,850		$	10,528
Basic net income per share	$	0.25		$	0.11		$	0.46		$	0.39
Shares used in basic per share calculation	28,293			27,316			27,988			27,002
Diluted net income per share	$	0.24		$	0.11		$	0.44		$	0.37
Shares used in diluted per share calculation	29,755			29,069			29,427			28,801

See accompanying notes to condensed consolidated financial statements.

Integrated Silicon Solution, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)



	Three Months Ended June 30,						Nine Months Ended June 30,
	2013			2012			2013			2012
Consolidated net income	$	7,246		$	3,147		$	13,014		$	10,513
Other comprehensive income (loss), net of tax:
Available-for-sale investments
Change in net unrealized gains (losses)	7,231			(314		)	17,166			(324		)
Less: Reclassification adjustment for net gains included in net income.	(2,371		)	—			(3,039		)	—
Net change, net of tax effect of $693, $(185), $7,581 and $(190), respectively.	4,860			(314		)	14,127			(324		)
Currency translation adjustments	(1,018		)	(1,176		)	(3,357		)	1,872
Change in retirement plan actuarial losses	168			24			218			71
Change in retirement plan transition obligation	(67		)	(16		)	(97		)	(45		)
Comprehensive income	$	11,189		$	1,665		$	23,905		$	12,087
Comprehensive (income) loss attributable to noncontrolling interest	(182		)	(10		)	(164		)	15
Comprehensive income attributable to ISSI	$	11,007		$	1,655		$	23,741		$	12,102

See accompanying notes to condensed consolidated financial statements.

Integrated Silicon Solution, Inc.

Condensed Consolidated Balance Sheets

(In thousands)



	June 30, 2013			September 30, 2012
	(unaudited)			(1)
ASSETS
Current assets:
Cash and cash equivalents	$	105,226		$	75,497
Short-term investments	33,408			6,541
Accounts receivable, net	48,123			47,710
Inventories	64,606			66,964
Deferred tax assets	3,410			8,940
Other current assets	14,496			12,264
Total current assets	269,269			217,916
Property, equipment and leasehold improvements, net	42,562			29,286
Purchased intangible assets, net	7,035			8,226
Goodwill	9,178			9,178
Deferred tax assets	7,533			13,588
Other assets	16,431			38,877
Total assets	$	352,008		$	317,071
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	46,242		$	44,705
Accrued compensation and benefits	7,656			9,420
Accrued expenses	6,898			11,133
Current portion of long-term debt	195			—
Total current liabilities	60,991			65,258
Long-term debt	4,583			—
Other long-term liabilities	8,644			5,478
Total liabilities	74,218			70,736
Commitments and contingencies
Stockholders’ equity:
Common stock	3			3
Additional paid-in capital	339,528			330,473
Accumulated deficit	(77,196		)	(90,046		)
Accumulated other comprehensive income	13,290			2,399
Total ISSI stockholders’ equity	275,625			242,829
Noncontrolling interest	2,165			3,506
Total stockholders’ equity	277,790			246,335
Total liabilities and stockholders’ equity	$	352,008		$	317,071


(1)	Derived from audited financial statements.

See accompanying notes to condensed consolidated financial statements.

Integrated Silicon Solution, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)



	Nine Months Ended June 30,
	2013			2012
Cash flows from operating activities
Consolidated net income	$	13,014		$	10,513
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	4,152			4,105
Stock-based compensation	4,373			3,730
Amortization of intangibles	1,191			1,449
Gain on sale of investments	(9,339		)	—
Equity in net income of affiliate	222			—
Net foreign currency transaction losses	(538		)	532
Deferred tax assets	7,197			3,802
Other non-cash items	56			102
Net effect of changes in current and other assets and current liabilities	1,582			(6,639		)
Net cash provided by operating activities	21,910			17,594
Cash flows from investing activities
Acquisition of property, equipment and leasehold improvements	(17,883		)	(4,900		)
Acquisition of noncontrolling interest in consolidated subsidiary	(1,614		)	(2,370		)
Investment in joint venture	—			(2,000		)
Payment of holdback related to Si En acquisition	(4,200		)	—
Proceeds from sale of investments	20,386			—
Increase in restricted cash	—			(137		)
Purchases of available-for-sale securities	(4,330		)	(1,081		)
Proceeds from sales of available-for-sale securities	6,507			1,395
Cash used in investing activities	(1,134		)	(9,093		)
Cash flows from financing activities
Repurchases and retirement of common stock	(547		)	(464		)
Proceeds from issuance of common stock	5,338			4,338
Proceeds from borrowings	4,875			—
Principal payments of long-term obligations	(97		)	—
Proceeds from borrowings under short-term lines of credit	4,069			19,446
Principal payments of short-term lines of credit	(4,069		)	(19,446		)
Cash provided by financing activities	9,569			3,874
Effect of exchange rate changes on cash and cash equivalents	(616		)	346
Net increase in cash and cash equivalents	29,729			12,721
Cash and cash equivalents at beginning of period	75,497			83,863
Cash and cash equivalents at end of period	$	105,226		$	96,584

See accompanying notes to condensed consolidated financial statements.

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Integrated Silicon Solution, Inc. (the "Company" or "ISSI") and its consolidated majority owned subsidiaries, after elimination of all significant intercompany accounts and transactions. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (which are of a normal, recurring nature) considered necessary for fair presentation have been included.

On January 31, 2011, the Company acquired Si En Integration Holdings Limited (Si En) and the Company’s financial results reflect accounting for Si En on a consolidated basis from the date of acquisition.

On September 14, 2012, the Company acquired Chingis Technology Corporation (Chingis) and the Company’s financial results reflect accounting for Chingis on a consolidated basis from the date of acquisition.

The Company’s operating results for the nine months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2013 or for any other period. The financial statements included herein should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012.


2.	Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Such estimates include the useful lives of fixed assets, the fair value of investments, allowances for doubtful accounts and customer returns, valuation allowances for deferred tax assets, inventory write-downs, potential reserves relating to litigation matters, accrued liabilities, and other reserves. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions and its beliefs of what could occur in the future, given available information. Actual results may differ from those estimates, and such differences may be material to the financial statements.


3.	Impact of Recently Issued Accounting Pronouncements and Standards

Accounting Pronouncements

The following issued accounting pronouncements are not yet effective for the Company as of June 30, 2013.

Liabilities

In February 2013, the Financial Accounting Standards Board (FASB) issued guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date. Examples of obligations include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The guidance requires an entity to measure such obligations as the sum of the amount that the reporting entity agreed to pay on the basis of its arrangement among its co-obligors in addition to amounts the reporting entity expects to pay on behalf of its co-obligors. The guidance becomes effective for the Company beginning in the first quarter of fiscal 2015 and is not expected to have a material impact on the Company's consolidated financial statements.

Foreign Currency Matters

In March 2013, FASB issued guidance on when foreign currency translation adjustments should be released to net income. When a parent entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, the parent is required to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance becomes effective for the Company beginning in the first quarter of fiscal 2015 and is not expected to have a material impact on the Company's consolidated financial statements.

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Accounting Standards

On October 1, 2012, the Company adopted the following accounting standard, which did not have a material effect on its consolidated results of operations during such period or its financial condition at the end of such period:

Comprehensive Income

In June 2011, FASB amended its guidance on the presentation of comprehensive income. This amendment eliminates the currently available option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. Under this amendment, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company elected to present the items of net income and other comprehensive income in two separate, but consecutive statements. Effective January 1, 2013, the Company adopted the FASB's standard regarding the reporting of reclassifications out of accumulated other comprehensive income. The new standard requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts.


4.	Fair Value Measurements

Under FASB guidance, fair value is defined as the price expected to be received from the sale of an asset or paid to transfer a liability in a transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. The FASB guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that the market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a company’s judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available at that time. The fair value hierarchy is broken down into the following three levels based on the reliability of inputs:


•	Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices which are readily and regularly available in an active market, valuation of these products can be done without a significant degree of judgment.


•	Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments and model-derived valuations in which all significant inputs and significant value drives are observable in active markets.


•	Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

As of June 30, 2013, the Company’s financial assets utilizing Level 1 inputs included investment securities traded on an active securities exchange. The Company did not have any financial assets utilizing Level 2 or Level 3 inputs at June 30, 2013 or September 30, 2012.

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following table represents the Company’s fair value hierarchy for financial assets measured at fair value on a recurring basis:



	June 30, 2013		September 30, 2012
	(Level 1)		(Level 1)
	(In thousands)
Money market instruments (1)	$	19,315	$	34,317
Semiconductor Manufacturing International Corp.
(SMIC) common stock (2)	2,197		1,099
Nanya Technology Corporation (Nanya) common stock (3)	27,939		14,752
	$	49,451	$	50,168


(1)	Included in cash and cash equivalents


(2)	Included in short-term investments


(3)	Included in short-term investments at June 30, 2013 and other assets at September 30, 2012

There were no transfers in or out of Level 1 assets during the three months ended June 30, 2013.

As of June 30, 2013, the Company did not have any liabilities or non-financial assets that are measured at fair value on a recurring basis.

Available-for-sale marketable securities consisted of the following:



June 30, 2013	Amortized Cost			Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
				(In thousands)
Money market instruments	$	19,315		$	—	$	—		$	19,315
Certificates of deposit	12,222			—		—			12,222
SMIC common stock	1,099			1,098		—			2,197
Nanya common stock	9,164			18,775		—			27,939
Total	41,800			19,873		—			61,673
Less: Amounts included in cash and cash
equivalents	(28,265		)	—		—			(28,265		)
	$	13,535		$	19,873	$	—		$	33,408

September 30, 2012	Amortized Cost			Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
				(In thousands)
Money market instruments	$	34,317		$	—	$	—		$	34,317
Certificates of deposit	18,302			—		—			18,302
SMIC common stock	1,099			—		—			1,099
Nanya common stock	16,587			—		(1,835		)	14,752
Total	70,305			—		(1,835		)	68,470
Less: Amounts included in cash and cash
equivalents	(47,177		)	—		—			(47,177		)
	$	23,128		$	—	$	(1,835	)	$	21,293

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

During the three months ended June 30, 2013, the Company sold approximately 69.0 million shares of Nanya common stock for approximately $11.5 million which resulted in a pre-tax gain of approximately $7.0 million. During the nine months ended June 30, 2013, the Company sold approximately 109.5 million shares of Nanya common stock for approximately $16.1 million which resulted in a pre-tax gain of approximately $9.1 million.

As of June 30, 2013 and September 30, 2012, the Company had cash, cash equivalents and short-term investments of $47.6 million ($5.6 million of which was in China and subject to exchange control regulations) and $39.3 million, respectively, in foreign financial institutions.


5.	Stock-based Compensation

Stock-Based Benefit Plans

The Company grants stock-based compensation awards under its 2007 Incentive Compensation Plan (the 2007 Plan) which permits the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units (RSUs), performance shares and performance units. The Company has outstanding grants under its 2012 Inducement Option Plan (the Inducement Plan) and under prior plans, though no further grants can be made under these plans. At June 30, 2013, 2,294,000 shares were available for future grant under the 2007 Plan. Options generally vest ratably over a four-year period with a 6-month or 1-year cliff vest and then vesting ratably over the remaining period. Options granted prior to October 1, 2005 expire ten years after the date of grant; options granted after October 1, 2005 expire seven years after the date of the grant. RSUs generally vest annually over periods ranging from two years to four years based upon continued employment with the Company.

In addition, the Company has an Employee Stock Purchase Plan (ESPP) which permits eligible employees to purchase shares of the Company’s common stock through payroll deductions. As approved by the Board of Directors, effective August 1, 2010, shares under the ESPP will be purchased at a price equal to 85% of the lesser of the fair market value of the Company’s common stock as of the first day or the last day of each six-month offering period. The offering periods under the ESPP commence on approximately February 1 and August 1 of each year. At June 30, 2013, 713,000 shares were available for future issuance under the ESPP.

Stock-Based Compensation

The following table outlines the effects of total stock-based compensation.



	Three Months Ended June 30,				Nine Months Ended June 30,
	2013		2012		2013		2012
	(In thousands)
Stock-based compensation
Cost of sales	$	46	$	35	$	133	$	101
Research and development	566		395		1,665		1,053
Selling, general and administrative	852		853		2,575		2,576
Total stock-based compensation	1,464		1,283		4,373		3,730
Tax effect on stock-based compensation	—		—		—		—
Net effect on net income	$	1,464	$	1,283	$	4,373	$	3,730

As of June 30, 2013, there was approximately $11.1 million of total unrecognized stock-based compensation expense under the Company’s stock option plans that will be recognized over a weighted-average period of approximately 2.62 years. Future stock option grants will add to this total whereas quarterly amortization and the vesting of the existing stock option grants will reduce this total. In addition, as of June 30, 2013, there was approximately $0.1 million of total unrecognized stock-based compensation expense under the Company’s ESPP that will be recognized over a weighted-average period of approximately 1 month.

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The Company uses the Black-Scholes option pricing model to estimate the fair value of the options granted and rights to acquire stock granted under the ESPP. The weighted average estimated fair values of stock option grants and rights granted under the ESPP, as well as the weighted average assumptions used in calculating these values during the three and nine month periods ended June 30, 2013 and 2012 were based on estimates at the date of grant as follows:



	Three Months Ended June 30,						Nine Months Ended June 30,
	2013			2012			2013			2012
Options
Weighted-average fair value of grants	$	4.31		$	5.07		$	4.31		$	4.60
Expected term in years	4.45			4.37			4.45			4.37
Estimated volatility	55		%	59		%	59		%	60		%
Risk-free interest rate	0.62		%	0.58		%	0.53		%	0.66		%
Dividend yield	—		%	—		%	—		%	—		%
ESPP
Weighted-average fair value of grants	$	—		$	—		$	2.30		$	2.98
Expected term in years	—			—			0.49			0.5
Estimated volatility	—		%	—		%	32		%	52		%
Risk-free interest rate	—		%	—		%	0.11		%	0.07		%
Dividend yield	—		%	—		%	—		%	—		%

The Company issues RSUs from time to time. The estimated fair value of RSU awards is calculated based on the market price of the Company’s common stock on the date of grant. The weighted average grant date fair value of RSUs granted in the nine month periods ended June 30, 2013 and June 30, 2012, was $9.14 per share and $9.37 per share, respectively.

During the nine months ended June 30, 2013, employees purchased a total of 105,000 shares for $0.8 million under the Company's ESPP. During the nine months ended June 30, 2012, employees purchased a total of 97,000 shares for $0.7 million under the Company's ESPP.

A summary of the Company’s stock option activity and related information for the nine months ended June 30, 2013 follows (number of shares and aggregate intrinsic value are presented in thousands):



	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding at September 30, 2012	5,477		$	6.81
Granted	1,030		$	9.15
Exercised	(855	)	$	5.27		$	4,203
Cancelled/Expired	(57	)	$	9.68
Outstanding at June 30, 2013	5,595		$	7.45	4.37	$	19,671
Exercisable at June 30, 2013	3,155		$	6.13	3.36	$	15,265
Vested and expected to vest after June 30, 2013	5,439		$	7.39	4.32	$	19,434

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

A summary of the Company’s RSU activity and related information for the nine months ended June 30, 2013 under the 2007 Plan follows (number of shares and aggregate intrinsic value are presented in thousands):



	Number of Shares		Weighted-Average Grant Date Fair Value		Aggregate Intrinsic Value
Outstanding at September 30, 2012	323		$	8.41
Granted	121		$	9.14
Vested	(169	)	$	7.90	$	1,575
Forfeited	(1	)	$	10.64
Outstanding at June 30, 2013	274		$	9.04	$	3,008


6.	Concentrations

In the three and nine months ended June 30, 2013, revenue from the Company's largest distributor accounted for approximately 13% and 14%, respectively, of the Company's total net sales. In the three and nine months ended June 30, 2013, revenue from the Company's second largest distributor accounted for approximately 10% and 11%, respectively, of the Company's total net sales. In the three and nine months ended June 30, 2012, revenue from the Company's largest distributor accounted for approximately 15% and 14%, respectively, of the Company's total net sales. In each of the three and nine months ended June 30, 2012, revenue from the Company's second largest distributor accounted for approximately 13% and 14%, respectively, of the Company's total net sales.


7.	Inventories

The following is a summary of inventories by major category:



	June 30, 2013		September 30, 2012
	(In thousands)
Purchased components	$	12,669	$	17,059
Work-in-process	17,369		28,921
Finished goods	34,568		20,984
	$	64,606	$	66,964

During the three and nine months ended June 30, 2013, the Company recorded inventory write-downs of $1.2 million and $3.5 million, respectively. During the three and nine months ended June 30, 2012, the Company recorded inventory write-downs of $1.8 million and $4.6 million, respectively. The inventory write-downs were predominantly for excess and obsolescence and lower of cost or market issues on certain of the Company's products.

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)


8.	Other Assets

Other assets consisted of the following:



	June 30, 2013		September 30, 2012
	(In thousands)
Restricted assets	$	503	$	239
Deposits to foundry for capacity	—		3,500
Investment in Giantec Semiconductor, Inc. (Giantec)	—		4,025
Other investments	1,778		2,000
Nanya common stock	—		14,752
Nanya private placement shares	10,757		11,042
Other	3,393		3,319
	$	16,431	$	38,877

The Company has various deposits including deposits with suppliers for purchase guarantees and for customs clearance. These deposits are included in restricted assets.

In the three months ended June 30, 2013, the Company sold its investment in Giantec for approximately $4.3 million which resulted in a pre-tax gain of approximately $0.2 million.

In September 2012, the Company invested approximately $27.1 million in Nanya, which was comprised of common shares which are classified as available-for-sale securities and private placement shares which are accounted for on the cost-basis. The Company accounts for the private placement shares it acquired in Nanya on the cost-basis as these securities are restricted and the restrictions do not terminate within one year of the reporting date. In addition, as of June 30, 2013, the Company had pledged $5.3 million of its Nanya private placement shares with Nanya as collateral for the Company's accounts payable. During the nine months ended June 30, 2013, the Company reclassified its common shares in Nanya to short-term investments as the Company's intent is to sell these shares within one year.

In March 2012, the Company made an equity investment of $2.0 million in a private technology company headquartered in Hong Kong. At June 30, 2013, the Company's ownership interest in such company was approximately 31%. This investment is accounted for under the equity method and the Company's results include its percentage share of such company's results of operations in interest and other income, net.

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)


9.	Purchased Intangible Assets

The following tables present details of the Company’s total purchased intangible assets:



	Gross		Accumulated Amortization		Net
	(In thousands)
June 30, 2013
Developed technology	$	5,330	$	1,526	$	3,804
In-process technology (IPR&D)	—		—		—
Customer relationships	3,340		440		2,900
Other	450		119		331
Total	$	9,120	$	2,085	$	7,035
September 30, 2012
Developed technology	$	4,930	$	879	$	4,051
In-process technology (IPR&D)	400		—		400
Customer relationships	3,340		9		3,331
Other	450		6		444
Total	$	9,120	$	894	$	8,226

The following table presents details of the amortization expense of purchased intangible assets as reported in the consolidated statements of income:



	Three Months Ended June 30,				Nine Months Ended June 30,
	2013		2012		2013		2012
	(In thousands)
Reported as:
Cost of sales	$	222	$	267	$	647	$	755
Operating expenses	176		231		544		694
Total	$	398	$	498	$	1,191	$	1,449

The following table presents the estimated future amortization expense of the Company’s purchased intangible assets at June 30, 2013 (in thousands). The weighted-average remaining amortization period for developed technology, customer relationships and other intangibles is 5.04 years, 5.21 years and 2.21 years, respectively. If the Company acquires additional purchased intangible assets in the future, its future amortization may be increased by those assets. Furthermore, upon completion of the IPR&D projects, the Company will amortize the IPR&D over the useful life of the asset. In this regard, in the three and nine months ended June 30, 2013, $0.4 million was transferred from IPR&D to developed technology upon completion of the projects.



Fiscal year
Remainder of 2013	$	409
2014	1,533
2015	1,382
2016	1,238
2017	1,239
Thereafter	1,234
Total	$	7,035

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)


10.	Borrowings

In December 2012, the Company obtained a bank loan in the amount of $4.9 million (the “Loan”), to partially finance the $6.5 million purchase price of approximately 2.85 acres of land and an approximately 55,612 square foot building located at 1623 Buckeye Drive, Milpitas, California for its corporate headquarters. The Loan has a maturity date of November 30, 2017 and is secured by the property and an assignment of all leases and rents relating to the property. The Loan is subject to customary events of default, including defaults in the payment of principal and interest. The Loan bears an interest rate of one percent above LIBOR adjusted on a monthly basis. Principal payments due under the Loan are as follows (in thousands):



Fiscal year
Remainder of 2013	$	49
2014	195
2015	195
2016	195
2017	195
Thereafter	3,949
Total	$	4,778


11.	Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, net of tax, were as follows:



	Unrealized Holding Gains (Losses) on Available-for-Sale Investments			Transition Obligation Credits			Actuarial Losses			Foreign Currency Translation Adjustment			Total
	(In thousands)
September 30, 2012	$	(1,523	)	$	115		$	(2,241	)	$	6,048		$	2,399
Other comprehensive income before reclassifications	17,166			(52		)	142			(3,357		)	13,899
Amounts reclassified out of accumulated other comprehensive income	(3,039		)	(45		)	76			—			(3,008		)
Other comprehensive income (loss)	14,127			(97		)	218			(3,357		)	10,891
June 30, 2013	$	12,604		$	18		$	(2,023	)	$	2,691		$	13,290

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The significant amounts reclassified out of accumulated other comprehensive income into the consolidated condensed statements of income, with presentation location, during the three months and nine months ended June 30, 2013 were as follows:



	Three Months Ended June 30,			Nine Months Ended June 30,
	(In thousands)
Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income						Location
Unrealized holding gains (losses) on available-for -sale investments
	$	4,428		$	5,232		Gain on the sale of investments
	(2,057		)	(2,193		)	Provision for income taxes
	$	2,371		$	3,039

There were no significant reclassifications out of accumulated other comprehensive income in the prior year periods.


12.	Income Taxes

The income tax provision includes U.S. federal, state and local, and foreign income taxes and is based on the application of a forecasted annual income tax rate applied to the current quarter's year-to-date pre-tax income for fiscal 2013. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company's annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the Company's ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates, and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than being included in the estimated annual effective income tax rate.

For the three months and nine months ended June 30, 2013, the Company recorded income tax expense of $5.2 million and $9.6 million, respectively, that represents an effective tax rate of approximately 42% and 42%, respectively. Discrete items were recorded in the three months and nine months ended June 30, 2013 related to a decrease in the valuation allowance of approximately $1.3 million for foreign tax credit carryforwards based on the Company's estimated ability to use these carryforwards in the future as a result of a change in its legal structure and an increase in the valuation allowance for research and development credits of $0.5 million in certain foreign jurisdictions based on the Company's estimated inability to use these credits in the future. The nine months ended June 30, 2013 includes an additional discrete item related to an increase in the valuation allowance of approximately $1.5 million for California net operating loss carryforwards based on the Company's estimated inability to use these carryforwards in the future as a result of a change in the Company's legal structure. The difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the impact of these discrete items, the differential in foreign tax rates, significant foreign inclusions and non-deductible stock-based compensation expense.

For the three months and nine months ended June 30, 2012, the Company recorded an income tax expense of $2.5 million and $5.4 million, respectively, that represents an effective tax rate of approximately 44% and 34%, respectively. The difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the differential in foreign tax rates and non-deductible stock-based compensation expense.

As of June 30, 2013, the Company had no unrecognized tax positions that would impact its effective tax rate.

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)


13.	Per Share Data

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):



	Three Months Ended June 30,				Nine Months Ended June 30,
	2013		2012		2013		2012
Numerator for basic and diluted net income per share:
Net income attributable to ISSI	$	7,064	$	3,137	$	12,850	$	10,528
Denominator for basic net income per share:
Weighted average common shares outstanding	28,293		27,316		27,988		27,002
Dilutive stock options and awards	1,462		1,753		1,439		1,799
Denominator for diluted net income per share	29,755		29,069		29,427		28,801
Basic net income per share	$	0.25	$	0.11	$	0.46	$	0.39
Diluted net income per share	$	0.24	$	0.11	$	0.44	$	0.37

For the three months and nine months ended June 30, 2013, stock options and awards for 2,864,000 shares and 2,849,000 shares, respectively, were excluded from diluted earnings per share by the application of the treasury stock method. For the three months and nine months ended June 30, 2012, stock options and awards for 1,494,000 shares and 1,405,000 shares, respectively, were excluded from diluted earnings per share by the application of the treasury stock method.


14.	Common Stock Repurchase Program

In the nine month period ended June 30, 2013, the Company did not repurchase any shares of its common stock in the open market. As of June 30, 2013, the Company had repurchased and retired an aggregate of 14,179,711 shares of common stock at a cost of approximately $88.5 million since September 2007. As of June 30, 2013, $19.8 million remained available under the Company's existing share repurchase authorization.

The Company issues RSUs as part of its equity incentive plan. For a portion of RSUs granted, the number of shares issued on the date the RSUs vest is net of the statutory withholding requirements that the Company pays on behalf of its employees. During the nine months ended June 30, 2013, the Company withheld 58,755 shares to satisfy approximately $0.5 million of employee tax obligations. Although the shares withheld are not issued, they are treated as common stock repurchases for accounting purposes, as they reduce the number of shares that would have been issued upon vesting.


15.	Commitments and Contingencies

Patents and Licenses

In the semiconductor industry, it is not unusual for companies to receive notices alleging infringement of patents or other intellectual property rights of others. The Company has been, and from time-to-time expects to be, notified of claims that it may be infringing patents, maskwork rights or copyrights owned by third parties. If it appears necessary or desirable, the Company may seek licenses under patents that it is alleged to be infringing. Although patent holders commonly offer such licenses, licenses may not be offered and the terms of any offered licenses may not be acceptable to the Company. The failure to obtain a license under a key patent or intellectual property right from a third party for technology used by the Company could cause it to incur substantial liabilities and to suspend the manufacture of the products utilizing the invention or to attempt to develop non-infringing products, any of which could materially and adversely affect the Company’s business and operating results. Furthermore, there can be no assurance that the Company will not become involved in protracted litigation regarding its alleged infringement of third party intellectual property rights or litigation to assert and protect its patents or other intellectual property rights. Any litigation relating to patent infringement or other intellectual property matters could result in substantial cost and diversion of the Company’s resources.

VAREP GmBH v. Integrated Silicon Solution, Inc.

On August 21, 2012, a lawsuit was filed against the Company in the Superior Court of California, County of Santa Clara by a former independent sales representative based in Germany named Varep GmbH (Varep), for the alleged underpayment of

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

commissions (Case No. 112CV230846). The original complaint alleged 11 causes of action, including, among others, breach of contract, Labor Code violations, and violations of the Independent Wholesale Sales Representatives Contractual Relations Act. A demurrer by the Company challenging the legal sufficiency of the Complaint was sustained with leave to amend and a motion to strike portions of the initial complaint by the Company was granted in part and denied in part. On December 28, 2012, Varep filed a First Amended Complaint (FAC) asserting seven causes of action, including, among others, breach of contract and Labor Code violations. On January 7, 2013, the Company filed a demurrer challenging the legal sufficiency of the FAC and a motion to strike portions of the FAC. On February 19, 2013, the demurrer was sustained without leave to amend as to the causes of action for breach of the implied covenant of good faith and fair dealing and Labor Code violations and overruled with respect to other causes of action, and the motion to strike was granted in part to strike a claim for punitive damages on the cause of action for negligent misrepresentation and denied in other part. On March 4, 2013, the Company filed an answer to the remaining allegations of the FAC. A court-ordered mediation did not result in a resolution of the dispute. Discovery has commenced and is continuing. No trial date has been set. The Company believes it has meritorious defenses to the claims alleged by Varep and intends to defend this suit vigorously.

Other Legal Proceedings

In the ordinary course of its business, the Company has been involved in a limited number of other legal actions, both as plaintiff and defendant, and could incur uninsured liability in any one or more of them. Although the outcome of these actions is not presently determinable, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position, cash flows or results of operations. However, no assurances can be given with respect to the extent or outcome of any such litigation in the future.

Commitments to Wafer Fabrication Facilities and Contract Manufacturers

The Company issues purchase orders for wafers to various wafer foundries. These purchase orders are generally considered to be cancelable. However, to the degree that the wafers have entered into work-in-process at the foundry, as a matter of practice, it becomes increasingly difficult to cancel the purchase order. As of June 30, 2013, the Company had approximately $25.6 million of purchase orders for which the related wafers had been entered into wafer work-in-process (i.e., manufacturing had begun).


16.	Geographic and Segment Information

The Company has one operating segment, which is to design, develop, and market high-performance SRAM, DRAM, and other semiconductor products. The following table summarizes the Company’s operations in different geographic areas:



	Three Months Ended June 30,				Nine Months Ended June 30,
	2013		2012		2013		2012
	(In thousands)
Net sales
United States	$	9,517	$	9,774	$	27,731	$	32,549
China	10,477		3,997		20,579		8,995
Hong Kong	13,638		15,264		50,532		43,358
Japan	8,194		6,826		23,241		21,586
Korea	3,311		3,147		10,064		8,374
Taiwan	11,230		6,663		30,447		19,033
Other Asia Pacific countries	5,880		4,794		18,374		15,706
Europe	14,797		13,893		46,681		42,620
Other	744		423		1,529		1,229
Total net sales	$	77,788	$	64,781	$	229,178	$	193,450

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



	June 30, 2013		September 30, 2012
	(In thousands)
Long-lived assets
United States	$	9,384	$	440
Hong Kong	7		7
China	3,082		558
Taiwan	30,089		28,281
	$	42,562	$	29,286

Revenues are attributed to countries based on the customers' ship-to location.

Long-lived assets by geographic area are those assets used in the Company’s operations in each area.


17.	Related Party Transactions

The Company sells semiconductor products to Chrontel International Ltd. (Chrontel). Jimmy S.M. Lee, the Company’s Executive Chairman, has been a director of Chrontel since July 1995. Sales to Chrontel were $104,000 and $294,000 during the three months and nine months ending June 30, 2013, respectively. Sales to Chrontel were $114,000 and $400,000 during the three months and nine months ended June 30, 2012, respectively. Accounts receivable from Chrontel was approximately $66,000 and $30,000 at June 30, 2013 and September 30, 2012, respectively.

During the three months ended June 30, 2013, the Company sold its investment in Giantec and the Company’s Executive Chairman, Jimmy S.M. Lee, resigned his position as a director of Giantec, therefore Giantec is no longer a related party. The Company purchases ASSP products from Giantec and provides logistic services to Giantec for which it is reimbursed and received certain licensing fees from Giantec. During the three months and nine months ended June 30, 2013, the Company purchased approximately $103,000 and $255,000, respectively, of products from Giantec. During each of the three months and nine months ended June 30, 2012, the Company purchased approximately $31,000 of products from Giantec. Accounts payable to Giantec was approximately $180,000 and $26,000 at June 30, 2013 and September 30, 2012, respectively. During the three months and nine months ended June 30, 2013, the Company provided Giantec services of approximately $17,000 and $53,000, respectively, and received licensing fees from Giantec of approximately $0 and $5,000, respectively. During the three months and nine months ended June 30, 2012, the Company provided Giantec services of approximately $17,000 and $53,000, respectively, and received licensing fees from Giantec of approximately $12,000 and $34,000, respectively. Accounts receivable from Giantec was approximately $6,000 and $12,000 at June 30, 2013 and September 30, 2012, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made forward-looking statements in this report that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of our operations. Also, when we use words such as “believes,” “expects,” “anticipates” or similar expressions, we are making forward-looking statements. You should note that an investment in our securities involves certain risks and uncertainties that could affect our future financial results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in “Risk Factors” and elsewhere in this report.

We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risks described in “Risk Factors” included in this report, as well as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in “Risk Factors” and elsewhere in this report could harm our business and adversely affect our results.

All forward-looking statements made by us or persons acting on our behalf are expressly qualified in their entirety by the "Risk Factors" and other cautionary statements set forth in this report. Except as required by federal securities laws, we are under no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.

Overview

We are a fabless semiconductor company that designs and markets high performance integrated circuits for the following key markets: (i) automotive, (ii) communications, (iii) industrial, medical and military, and (iv) digital consumer. Our primary products are low and medium density DRAM and high speed and low power SRAM. In the first nine months of fiscal 2013 and in fiscal 2012, approximately 87% and 96%, respectively, of our revenue was derived from our DRAM and SRAM products. Sales of our DRAM products have represented a majority of our net sales in each year since fiscal 2003.

On September 14, 2012, we acquired approximately 94.1% of Chingis Technology Corporation (Chingis) for approximately $32 million, or $13 million net of the approximately $19 million in cash and cash equivalents on Chingis' balance sheet at closing. In May 2013, we acquired an additional 4.8% of Chingis for approximately $1.6 million. At June 30, 2013, we owned approximately 98.9% of Chingis. Founded in 1995, Chingis provides a variety of NOR flash memory technologies used in standalone and embedded applications. Chingis is headquartered in HsinChu, Taiwan and has offices in Taiwan, Korea, China and the U.S. Our financial results reflect accounting for Chingis on a consolidated basis beginning September 14, 2012.

On January 31, 2011, we acquired Si En Integration Holdings Limited (Si En), a privately held fabless provider of high performance analog and mixed signal integrated circuits headquartered in Xiamen, China. Si En targets the mobile communications, digital consumer, networking, and automotive markets with high quality analog products. Si En’s current products include audio power amplifiers, LED drivers, voltage converters and temperature sensors.

In order to control our operating expenses, for the past several years we have limited our headcount in the U.S. and maintained much of our operations in Taiwan and China. We believe this strategy has enabled us to limit our operating expenses while simultaneously locating these operations closer to our manufacturing partners and our customers. As a result of these efforts, we currently have significantly more employees in Asia than we do in the U.S. We intend to continue these strategies going forward.

As a fabless semiconductor company, our business model is less capital intensive because we rely on third parties to manufacture, assemble and test our products. Because of our dependence on third-party wafer foundries, our ability to increase our unit sales volumes depends on our ability to increase our wafer capacity allocation from current foundries, add additional foundries and improve yields of good die per wafer. In recent years, it has become more difficult for us to secure long-term foundry capacity (particularly for our DRAM products) due to industry consolidation affecting foundries and adverse financial conditions at foundries. In this regard, in September 2012, we invested approximately $27.1 million in Nanya and entered into an agreement with Nanya to provide us with access to leading edge process technologies and certain wafer volume guarantees. In addition, certain of our foundries have decided from time to time not to produce the type of wafers that we need (especially certain types of DRAM wafers) so we have been forced to rely on alternative sources of supply and to place large last time buy orders which expose us to the risk of inventory obsolescence. Once a product is in production at a particular foundry, it is time consuming and costly to have such product manufactured at a different foundry. Although such matters have not had a material adverse impact

on our business or financial results in recent periods, there can be no assurance as to the future impact that such matters will have on our business, customer relationships or results of operations.

The average selling prices of our DRAM and SRAM products are sensitive to supply and demand conditions in our target markets and have generally declined over time. We experienced declines in the average selling prices for certain of our products in the first nine months of fiscal 2013 and in fiscal 2012. We expect average selling prices for our products to decline in the future, principally due to market demand, market competition and the supply of competitive products in the market. Any future decreases in our average selling prices could have an adverse impact on our revenue growth rate, gross margins and operating margins. Our ability to maintain or increase revenues will be highly dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities sufficient to compensate for the anticipated declines in average selling prices of existing products. Declining average selling prices will adversely affect our gross margins unless we are able to offset such declines with commensurate reductions in per unit costs or changes in product mix in favor of higher margin products.

Revenue from product sales to our direct customers is recognized upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed or determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements and there are no remaining significant obligations. A portion of our sales is made to distributors under agreements that provide for the possibility of certain sales price rebates and limited product return privileges. Given the uncertainties associated with credits that will be issued to these distributors, we defer recognition of such sales until our products are sold by the distributors to their end customers. Revenue from sales to distributors who do not have sales price rebates or product return privileges is recognized at the time our products are sold by us to the distributors.

We market and sell our products in Asia, the U.S., Europe and other locations through our direct sales force, distributors and sales representatives. The percentage of our sales shipped outside the U.S. was approximately 88% in the first nine months of fiscal 2013, approximately 83% in the first nine months of fiscal 2012, approximately 84% in fiscal 2012 and approximately 85% in fiscal 2011. We measure sales location by the shipping destination. We anticipate that sales to international customers will continue to represent a significant percentage of our net sales. The percentages of our net sales by region are set forth in the following table:



	Nine Months Ended June 30,				Fiscal Years Ended September 30,
	2013		2012		2012		2011
Asia	67	%	60	%	62	%	64	%
Europe	20		22		21		20
U.S.	12		17		16		15
Other	1		1		1		1
Total	100	%	100	%	100	%	100	%

Our sales are generally made by purchase orders. Because industry practice allows customers to reschedule or cancel orders on relatively short notice, backlog may not be a good indicator of our future sales. Cancellations of customer orders or changes in product specifications could result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory and operating expenses.

Due to the complex nature of the markets we serve and the broad fluctuations in economic conditions in the U.S. and other countries, it is difficult for us to assess the impact of seasonal factors on our business.

We are subject to the risks of conducting business internationally, including economic conditions in Asia, particularly Taiwan and China, changes in trade policy and regulatory requirements, duties, tariffs and other trade barriers and restrictions, the burdens of complying with foreign laws and, possibly, political instability. Most of our foundries and all of our assembly and test subcontractors are located in Asia. Although our international sales are largely denominated in U.S. dollars, we do have sales transactions in New Taiwan dollars, in Hong Kong dollars and in Chinese renminbi. In addition, we have foreign operations where expenses are generally denominated in the local currency. Such transactions expose us to the risk of exchange rate fluctuations. We monitor our exposure to foreign currency fluctuations, but have not adopted any hedging strategies to date. There can be no assurance that exchange rate fluctuations will not harm our business and operating results in the future.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make difficult and subjective estimates, judgments and assumptions. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The estimates and judgments

that we use in applying our accounting policies have a significant impact on the results we report in our financial statements. We base our estimates and judgments on our historical experience combined with knowledge of current conditions and our beliefs of what could occur in the future, considering the information available at the time. Actual results could differ from those estimates and such differences may be material to our financial statements. We reevaluate our estimates and judgments on an ongoing basis.

Our critical accounting policies which are impacted by our estimates are: (i) the valuation of our inventory, which impacts cost of goods sold and gross profit; (ii) the valuation of our allowance for sales returns and allowances, which impacts net sales; (iii) the valuation of our allowance for doubtful accounts, which impacts general and administrative expense; (iv) accounting for acquisitions and goodwill, which impacts cost of goods sold and operating expense when we record impairments; (v) accounting for stock-based compensation which impacts costs of goods sold, research and development expense and selling, general and administrative expense and (vi) accounting for income taxes. Each of these policies is described in more detail below. We also have other key accounting policies that may not require us to make estimates and judgments that are as subjective or difficult. For instance, our policies with regard to revenue recognition, including the deferral of revenues on sales to distributors with sales price rebates and product return privileges. These policies are described in the notes to our financial statements contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012.

Valuation of inventory. Our inventories are stated at the lower of cost or market value. Determining the market value of inventories on hand and at distributors as of the balance sheet date involves numerous judgments, including projecting average selling prices and sales volumes for future periods and costs to complete products in work in process inventories. When market values are below our costs, we record a charge to cost of goods sold to write down our inventories to their estimated market value in advance of when the inventories are actually sold. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that may adversely affect our operating results. If actual market conditions are more favorable, we may have higher gross margins when the written down products are sold. In addition to lower of cost or market write-downs, we also analyze inventory to determine whether any of it is excess, obsolete or defective. We write down to zero dollars (which is a charge to cost of goods sold) the carrying value of inventory on hand that has aged over one year (two years for wafer and die bank) to cover estimated excess and obsolete exposures, unless adjustments are made based on management’s judgments for newer products, end of life products, planned inventory increases or strategic customer supply. In making such judgments to write down inventory, we take into account the product life cycles which can range from six to 30 months, the stage in the life cycle of the product, and the impact of competitors’ announcements and product introductions on our products. Once established, these write-downs are considered permanent.

Valuation of allowance for sales returns and allowances. Net sales consist principally of total product sales less estimated sales returns and allowances. To estimate sales returns and allowances, we analyze potential customer specific product application issues, potential quality and reliability issues and historical returns. We evaluate quarterly the adequacy of the allowance for sales returns and allowances. This allowance is reflected as a reduction to accounts receivable in our consolidated balance sheets. Increases to the allowance are recorded as a reduction to net sales. Because the allowance for sales returns and allowances is based on our judgments and estimates, particularly as to product application, quality and reliability issues, our allowances may not be adequate to cover actual sales returns and other allowances. If our allowances are not adequate, our net sales could be adversely affected.

Valuation of allowance for doubtful accounts. We maintain an allowance for doubtful accounts for losses that we estimate will arise from our customers’ inability to make required payments for goods and services purchased from us. We make our estimates of the uncollectibility of our accounts receivable by analyzing historical bad debts, specific customer creditworthiness and current economic trends. Once an account is deemed unlikely to be fully collected, we write down the carrying value of the receivable to the estimated recoverable value, which results in a charge to general and administrative expense, which decreases our profitability.

Accounting for acquisitions and goodwill. We account for acquisitions using the purchase accounting method. Under this method, the total consideration paid is allocated over the fair value of the net assets acquired, including in-process research and development, with any excess allocated to goodwill. Goodwill is defined as the excess of the purchase price over the fair value allocated to the net assets. Our judgments as to fair value of the assets will, therefore, affect the amount of goodwill that we record. Management is responsible for the valuation of tangible and intangible assets. For tangible assets acquired in any acquisition, such as plant and equipment, the useful lives are estimated by considering comparable lives of similar assets, past history, the intended use of the assets and their condition. In estimating the useful life of the acquired intangible assets with definite lives, we consider the industry environment and unique factors relating to each product relative to our business strategy and the likelihood of technological obsolescence. Acquired intangible assets primarily include developed and in-process technology (IPR&D), customer relationships, trade names and non-compete agreements. The amounts allocated to IPR&D projects are not expensed until technological feasibility is reached for each project. Upon completion of development for each project, the acquired IPR&D will be amortized over its useful life. We are currently amortizing our acquired intangible assets with definite lives over periods generally ranging from three to six years.

We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances where indicators of impairment may exist. For instance, in response to changes in industry and market conditions, we could be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of tangible and intangible assets, including goodwill. In this regard, in fiscal 2012, we recorded impairment charges of $13.1 million for intangible assets and goodwill from our acquisition of Si En and $1.2 million for the impairment of certain tangible assets.

Accounting for stock-based compensation. Stock option fair value is calculated on the date of grant using the Black-Scholes valuation model. The compensation cost is then recognized on a straight-line basis over the requisite service period of the option, which is generally the option vesting term of four years. The Black-Scholes valuation model requires us to estimate key assumptions such as expected term, volatility, dividend yield and risk-free interest rates that determine the stock option fair value. In addition, we estimate forfeitures at the time of grant. In subsequent periods, if actual forfeitures differ from the estimate, the forfeiture rate may be revised. We estimate our expected forfeitures rate based on our historical activity and judgment regarding trends. We estimate the expected term for option grants based upon historical exercise data. If we determined that another method used to estimate expected life was more reasonable than our current method, or if another method for calculating these input assumptions was prescribed by authoritative guidance, the fair value calculated could change materially.

Accounting for income taxes. We account for income taxes under the asset and liability approach. We record a valuation allowance to reduce our net deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider historical levels of income, projections of future income, expectations and risks associated with estimates of future taxable income, and ongoing prudent and practical tax planning strategies. To the extent we believe it is more likely than not that some portion of our deferred tax assets will not be realized, we would increase the valuation allowance against the deferred tax assets. Realization of our deferred tax assets is dependent primarily upon future U.S. and foreign taxable income. Our judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require possible material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made.

We are subject to income taxes in the U.S. and foreign countries, and we are subject to routine corporate income tax audits in certain of these jurisdictions. We believe that our tax return positions are fully supported, but tax authorities may challenge certain positions, which may not be fully sustained. Our income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges. Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgment and estimates. We evaluate our uncertain tax positions and believe that our provision for uncertain tax positions, including related interest and penalties, is adequate based on information currently available to us. However, the amount ultimately paid upon resolution of audits could be materially different from the amounts previously included in income tax expense and therefore could have a material impact on our tax provision, net income and cash flows. Our overall tax provision requirement could change due to the issuance of new regulations or new case law, management's judgments on undistributed foreign earnings including judgments about and intentions concerning our future operations, negotiations with tax authorities, resolution with respect to individual audit issues, or the entire audit, or the expiration of statutes of limitations.

Accounting Changes and Recent Accounting Pronouncements

For a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated condensed financial statements, see “Note 3: Impact of Recently Issued Accounting Pronouncements and Standards” in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

Results of Operations

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Net Sales. Net sales consist principally of total product sales less estimated sales returns. Net sales increased to $77.8 million in the three months ended June 30, 2013 from $64.8 million in the three months ended June 30, 2012. The increase of $13.0 million in net sales was primarily the result of $8.4 million of NOR Flash revenue from our acquisition of Chingis which closed on September 14, 2012. Our DRAM and SRAM revenue increased by $4.8 million in the three months ended June 30, 2013 compared to the three months ended June 30, 2012 principally as a result of changes in the type of DRAM and SRAM products sold. However, our analog revenue decreased by $0.2 million in the three months ended June 30, 2013 compared to the three months ended June 30, 2012. We anticipate that the average selling prices of our existing products will generally decline over time, although the rate of decline may fluctuate for certain products. There can be no assurance that any future price declines will be offset by higher volumes or by higher prices on newer products.

In the three months ended June 30, 2013, revenue from our largest and second largest distributor accounted for approximately 13% and 10%, respectively, of our total net sales. In the three months ended June 30, 2012, revenue from our largest and second largest distributor accounted for approximately 15% and 13%, respectively, of our total net sales.

Gross profit. Cost of sales includes die cost from wafers acquired from foundries, subcontracted package, assembly and test costs, costs associated with in-house product testing, quality assurance and import duties. Gross profit increased by $4.7 million to $26.0 million in the three months ended June 30, 2013 from $21.3 million in the three months ended June 30, 2012 primarily as a result of sales of our NOR Flash products and a shift in product mix for our DRAM products. Our gross margin was 33.5% in the three months ended June 30, 2013 which included a charge of 1.6% for inventory write-downs compared to 32.9% in the three months ended June 30, 2012 which included a charge of 2.7% for inventory write-downs. Excluding the impact of the inventory write-downs, the decrease in gross margin in the three months ended June 30, 2013 compared to the three months ended June 30, 2012 can be attributed to the unfavorable impact in the current period of lower margin NOR flash products. We believe that the average selling prices of our products will decline over time and, unless we are able to reduce our cost per unit to the extent necessary to offset such declines, the decline in average selling prices could result in a material decline in our gross margin. In addition, our product costs could increase if our suppliers raise prices, which could result in a material decline in our gross margin. Although we have product cost reduction programs in place that involve efforts to reduce internal costs and supplier costs, there can be no assurance that product costs will be reduced or that such reductions will be sufficient to offset the expected declines in average selling prices. We do not believe that such cost reduction efforts are likely to have a material adverse impact on the quality of our products or the level of service provided by us.

Research and Development. Research and development expenses increased by 57% to $10.6 million in the three months ended June 30, 2013 compared to $6.7 million in the three months ended June 30, 2012. As a percentage of net sales, research and development expenses increased to 13.6% in the three months ended June 30, 2013 from 10.4% in the three months ended June 30, 2012. The increase in research and development expenses of $3.9 million was primarily the result of a $2.0 million increase in research and development expenses for our NOR flash products as a result of our acquisition of Chingis. In addition, headcount related and product development costs increased in the three months ended June 30, 2013 compared to the three months ended June 30, 2012. We expect the dollar amount of our research and development expenses to decrease slightly in the September 2013 quarter and expect such expenses to fluctuate as a percentage of net sales depending on our overall level of sales.

Selling, General and Administrative. Selling, general and administrative expenses increased by 15% to $10.8 million in the three months ended June 30, 2013 from $9.4 million in the three months ended June 30, 2012. As a percentage of net sales, selling, general and administrative expenses decreased to 13.9% in the three months ended June 30, 2013 from 14.5% in the three months ended June 30, 2012. The increase in selling, general and administrative expenses of $1.4 million was primarily the result of a $0.9 million increase in expenses as a result of our acquisition of Chingis. In addition, increases in headcount related expenses and sales commissions in the three months ended June 30, 2013 compared to the three months ended June 30, 2012 were partially offset by a reduction in amortization of certain intangible assets from our acquisition of Si En which were written-off in the September 2012 quarter. We expect the dollar amount of our selling, general and administrative expenses to remain relatively flat in the September 2013 quarter and expect such expenses to fluctuate as a percentage of net sales depending on our overall level of sales.

Interest and other income (expense), net. Interest and other income (expense), net was income of $0.5 million in the three months ended June 30, 2013 compared to income of $0.4 million in the three months ended June 30, 2012. The $0.5 million of interest and other income in the three months ended June 30, 2013 is comprised primarily of $0.3 million in rental income from the lease of excess space in our Taiwan facility and an exchange gain of $0.3 million as a result of the appreciation of the U.S. dollar compared to the New Taiwan dollar partially offset by other items. The $0.4 million of interest and other income, net in the three months ended June 30, 2012 is comprised of $0.3 million of rental income from the lease of excess space in our Taiwan facility and $0.1 million of exchange gains as a result of the depreciation of the New Taiwan dollar compared to the U.S. dollar.

Gain on the sale of investments. In the three months ended June 30, 2013, we sold approximately 69.0 million shares of Nanya common stock for approximately $11.5 million which resulted in a pre-tax gain of approximately $7.0 million. In addition, we sold our investment in Giantec for approximately $4.3 million which resulted in a pre-tax gain of approximately $0.2 million.

Provision for income taxes. For the three months ended June 30, 2013, we recorded income tax expense of $5.2 million that represents an effective tax rate of approximately 42%. In the three months June 30, 2013, we recorded a decrease in the valuation allowance of approximately $1.3 million for foreign tax credit carryforwards based on our estimated ability to use these carryforwards in the future as a result of a change in our legal structure and an increase in the valuation allowance for research and development credits of $0.5 million in certain foreign jurisdictions based on our estimated inability to use these credits in the future. The difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the impact of such items, the differential in foreign tax rates, significant foreign inclusions and non-deductible stock-based compensation expense. For the three months ended June 30, 2012, we recorded income tax

expense of $2.5 million that represents an effective tax rate of approximately 44%. The difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the differential in foreign tax rates and non-deductible stock-based compensation expense.

Net (income) loss attributable to noncontrolling interests. The net income attributable to noncontrolling interests was $182,000 in the three months ended June 30, 2013 compared to $10,000 in the three months ended June 30, 2012.

Nine Months Ended June 30, 2013 Compared to Nine Months Ended June 30, 2012

Net Sales. Net sales increased to $229.2 million in the nine months ended June 30, 2013 from $193.5 million in the nine months ended June 30, 2012. The increase in net sales of $35.7 million was primarily the result of $24.6 million of NOR Flash revenue from our acquisition of Chingis which closed on September 14, 2012. Our DRAM and SRAM revenue increased by $12.7 million in the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012 principally as a result of changes in the type of DRAM and SRAM products sold. However, our analog revenue decreased by $1.6 million in the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012.

In the nine months ended June 30, 2013, revenue from our largest and second largest distributor accounted for approximately 14% and 11%, respectively, of our total net sales. In the nine months ended June 30, 2012, revenue from each of our largest and second largest distributor accounted for approximately 14% of our total net sales.

Gross profit. Gross profit increased by $10.8 million to $75.5 million in the nine months ended June 30, 2013 from $64.7 million in the nine months ended June 30, 2012 primarily as a result of sales of our NOR Flash products and a shift in product mix for our DRAM products. Our gross margin was 33.0% in the nine months ended June 30, 2013 which included a charge of 1.5% for inventory write-downs compared to 33.4% in the nine months ended June 30, 2012 which included a 2.4% charge for inventory write-downs. Excluding the impact of the inventory write-downs, the decrease in gross margin in the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012 can be attributed to the unfavorable impact in the current period of lower margin NOR flash products.

Research and development. Research and development expenses increased by 48% to $30.9 million in the nine months ended June 30, 2013 from $20.9 million in the nine months ended June 30, 2012. As a percentage of net sales, research and development expenses increased to 13.5% in the nine months ended June 30, 2013 from 10.8% in the nine months ended June 30, 2012. The increase in research and development expenses of $10.0 million was primarily the result of a $5.7 million increase in research and development expenses for our NOR flash products as a result of our acquisition of Chingis. In addition, headcount related and product development costs increased in the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012.

Selling, general and administrative. Selling, general and administrative expenses increased by 15% to $32.6 million in the nine months ended June 30, 2013 from $28.3 million in the nine months ended June 30, 2012. As a percentage of net sales, selling, general and administrative expenses decreased to 14.2% in the nine months ended June 30, 2013 from 14.6% in the nine months ended June 30, 2012. The increase in selling, general and administrative expenses of $4.3 million was primarily the result of a $2.8 million increase in expenses as a result of our acquisition of Chingis. In addition, increases in headcount related expenses, professional service fees and sales commissions in the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012 were partially offset by a reduction in amortization of certain intangible assets from our acquisition of Si En which were written-off in the September 2012 quarter.

Interest and other income, net. Interest and other income, net was $1.3 million in the nine months ended June 30, 2013 compared to $0.4 million in the nine months ended June 30, 2012. The $1.3 million of interest and other income in the nine months ended June 30, 2013 is comprised primarily of $0.9 million in rental income from the lease of excess space in our Taiwan facility and an exchange gain of $0.5 million as a result of the appreciation of the U.S. dollar compared to the New Taiwan dollar partially offset by other items. The $0.4 million of interest and other income in the nine months ended June 30, 2012 is comprised primarily of $1.0 million in rental income from the lease of excess space in our Taiwan facility partially offset by an exchange loss of $0.5 million as a result of the appreciation of the New Taiwan dollar compared to the U.S. dollar.

Gain on the sale of investments. In the nine months ended June 30, 2013, we sold approximately 109.5 million shares of Nanya common stock for approximately $16.1 million which resulted in a pre-tax gain of approximately $9.1 million. In addition, we sold our investment in Giantec for approximately $4.3 million which resulted in a pre-tax gain of approximately $0.2 million.

Provision for income taxes. For the nine months ended June 30, 2013, we recorded income tax expense of $9.6 million that represents an effective tax rate of approximately 42%. In the nine months ended June 30, 2013, we recorded an increase in the valuation allowance of approximately $1.5 million for California net operating loss carryforwards and a decrease in the valuation allowance of approximately $1.3 million for foreign tax credit carryforwards based on our estimated ability to use these

carryforwards in the future as a result of a change in our legal structure. In addition, we recorded an increase in the valuation allowance for research and development credits of $0.5 million in certain foreign jurisdictions based on our estimated inability to use these credits in the future. The difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the impact of such items, the differential in foreign tax rates, significant foreign inclusions and non-deductible stock-based compensation expense. For the nine months ended June 30, 2012, we recorded income tax expense of $5.4 million that represents an effective tax rate of approximately 34%. The difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the differential in foreign tax rates and non-deductible stock-based compensation expense.

Net (income) loss attributable to noncontrolling interests. The net income attributable to noncontrolling interests was $164,000 in the nine months ended June 30, 2013 compared to a net loss of $15,000 in the nine months ended June 30, 2012.

Liquidity and Capital Resources

As of June 30, 2013, our principal sources of liquidity included cash, cash equivalents and short-term investments of approximately $138.6 million. During the nine months ended June 30, 2013, we generated cash of $21.9 million from operating activities compared to $17.6 million generated in the nine months ended June 30, 2012. The cash provided by operations in the nine months ended June 30, 2013 was primarily due to our net income of $13.0 million adjusted for non-cash items of $7.3 million, increases in accounts payable of $2.2 million, decreases in inventories of $0.9 million and decreases in other assets of $0.7 million. This was partially offset by decreases in accrued liabilities of $1.5 million and increases in accounts receivable of $0.7 million. The cash provided by operations in the nine months ended June 30, 2012 was primarily due to our net income of $10.5 million adjusted for non-cash items of $13.7 million and decreases in inventories of $11.0 million. This was partially offset by increases in other assets of $10.8 million, decreases in accounts payable of $6.6 million and decreases in accrued liabilities of $0.2 million.

In the nine months ended June 30, 2013, we used $1.1 million for investing activities compared to $9.1 million used in the nine months ended June 30, 2012. The cash used in the nine months ended June 30, 2013 included $17.9 million for the acquisition of property, equipment and building improvements including $9.1 million for our new corporate headquarters and $2.4 million for office space in Suzhou, China, $4.2 million for the payment of a holdback related to our acquisition of Si En and $1.6 million to acquire an additional 4.8% of the noncontrolling interest in our Chingis subsidiary. In the nine months ended June 30, 2013, we generated $16.1 million from the sale of approximately 109.5 million shares of Nanya common stock, $4.3 million from the sale of our investment in Giantec and $2.2 million from net sales of available-for-sale securities. The cash used in the nine months ended June 30, 2012 included $4.9 million for the acquisition of property, equipment and leasehold improvements, $2.4 million for the acquisition of the noncontrolling interest in our Wintram subsidiary, $2.0 million for a minority investment in a joint venture and $0.1 million for an increase in restricted cash. In the nine months ended June 30, 2012, we generated $0.3 million from net sales of available-for-sale securities.

In the nine months ended June 30, 2013, we made capital expenditures of approximately $17.9 million which includes $9.1 million for our new corporate headquarters, $2.4 million for office space in Suzhou and the remaining balance for test equipment, engineering tools, and computer hardware and software compared to $4.9 million in the nine months ended June 30, 2012. We expect to spend approximately $6.0 million to $9.0 million to purchase capital equipment during the next twelve months, principally for the purchase of additional test equipment, design and engineering tools, and computer hardware and software. We expect to fund our capital expenditures from our existing cash and cash equivalent balances.

We generated $9.6 million from financing activities during the nine months ended June 30, 2013 compared to $3.9 million during the nine months ended June 30, 2012. Our sources of financing for the nine months ended June 30, 2013 were borrowings of $4.9 million to purchase our new corporate headquarters, borrowing of $4.1 million under short-term lines of credit and proceeds from the issuance of common stock of $5.3 million from stock option exercises and sales under our employee stock purchase plan. In the nine months ended June 30, 2013, we used $4.2 million for the repayment of short-term and long-term borrowings and $0.5 million to settle shares withheld for statutory withholding requirements upon the vesting of RSUs. Our sources of financing for the nine months ended June 30, 2012 were proceeds from the issuance of common stock of $4.4 million from stock option exercises and sales under our employee stock purchase plan and borrowings of $19.4 million under short-term lines of credit. In the nine months ended June 30, 2012, we used $19.4 million for the repayment of short-term borrowings and $0.5 million to settle shares withheld for statutory requirements upon the vesting of RSUs.

At June 30, 2013, we had $22.3 million in borrowings available through a number of short-term lines of credit with various financial institutions in Taiwan. These lines of credit expire at various times through March 2014. As of June 30, 2013, we had no outstanding borrowings under these short-term lines of credit.

On December 4, 2012, we purchased a building in Milpitas, California consisting of approximately 55,612 square feet on approximately 2.85 acres for $6.5 million. We relocated our headquarters to this location in June 2013. We financed a portion of

the purchase price for our new headquarters with a loan for approximately $4.9 million. Outside of the U.S., we have operations in leased sites in China and Hong Kong. In addition to these sites, we lease sales offices in the U.S., Europe and Asia. These leases expire at various dates through 2016. In Taiwan, we own and occupy our building and the land upon which our building is situated is leased under an operating lease that expires in March 2016. Our outstanding commitments under these leases were approximately $1.3 million at June 30, 2013.

We generally warrant our products against defects in materials and workmanship for a period of 12 months. Liability for a stated warranty period is usually limited to the replacement of defective items or return of amounts paid. Warranty expense has historically been immaterial to our financial statements.

Our contractual cash obligations at June 30, 2013 are outlined in the table below:



	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(In thousands)
Operating leases	$	1,260	$	241	$	869	$	150	$	—
Borrowings	4,778		49		390		390		3,949
Purchase obligations with wafer foundries	25,610		25,610		—		—		—
Total contractual cash obligations	$	31,648	$	25,900	$	1,259	$	540	$	3,949

At June 30, 2013, we had outstanding authorization from our Board to purchase up to $19.8 million of our common stock from time to time.

We believe our existing funds will satisfy our anticipated working capital and other cash requirements through at least the next 12 months. We may from time to time take actions to further increase our cash position through equity or debt financings, sales of shares of investments, additional bank borrowings, or the disposition of certain assets. From time to time, we may also commit to acquisitions or equity investments, including strategic investments in or prepayments to wafer fabrication foundries or assembly and test subcontractors. To the extent we enter into such transactions, any such transaction could require us to seek additional equity or debt financing to fund such activities. There can be no assurance that any such additional financing could be obtained on terms acceptable to us, if at all.

Off-Balance Sheet Arrangements

We may be obligated to indemnify certain customers, distributors, suppliers, and subcontractors for attorney fees and damages and costs awarded against these parties in certain circumstances in which our products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. In certain cases, there are limits on and exceptions to our potential liability for indemnification relating to intellectual property infringement claims. In addition, we have entered into indemnification agreements with our officers and directors, and the Company’s bylaws provide that indemnification may be provided to our agents. We have directors’ and officers’ insurance pursuant to which we may be reimbursed for certain indemnity expenses, subject to the terms of the insurance policy. We cannot estimate the amount of potential future indemnity expenses that we may be required to make. The amount of available directors’ and officers’ insurance may not be sufficient to cover our indemnity obligations, which may have a material adverse effect on our results of operations in future periods.

Other than as set forth above, we are not currently party to any off-balance sheet arrangements as defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk. We anticipate that international sales will continue to account for a significant portion of our consolidated revenue. Our international sales are largely denominated in U.S. dollars and therefore are not subject to material foreign currency exchange risk. However, we have operations in China, Europe, Taiwan, Hong Kong, India, Japan, Korea and Singapore where our expenses are denominated in each country’s local currency and are subject to foreign currency exchange risk. In the nine months ended June 30, 2013, we recorded exchange gains of approximately $0.5 million, whereas in fiscal 2012, we recorded exchange losses of approximately $0.6 million. We do not currently engage in any hedging activities. In the future, if we feel our foreign currency exposure has significantly increased, we may consider entering into hedging transactions to help mitigate that risk.

Interest Rate Risk. We had cash, cash equivalents and short-term investments of $138.6 million at June 30, 2013. These funds were primarily invested in money market funds and certificates of deposit. Due to the relatively short-term nature of our

investment portfolio, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. We believe a hypothetical 100 basis point increase in interest rates would not materially affect the fair value of our interest-sensitive financial instruments. Since we believe we have the ability to liquidate this portfolio, we do not expect our operating results or cash flows to be materially affected to any significant degree by a sudden change in market interest rates on our investment portfolio.

Investments in Publicly Traded Companies. We own ordinary shares in SMIC which is classified as an available-for-sale investment and is recorded at fair value with the unrealized gain or loss reported as a component in “Accumulated other comprehensive loss” in our Consolidated Balance Sheets. The original cost basis of our shares in SMIC was approximately $3.4 million and the market value at June 30, 2013 was approximately $2.2 million and is included in short-term investments. The market value of SMIC shares is subject to fluctuations and our carrying value will be subject to adjustments to reflect changes in SMIC’s market value in future periods. The fair value of our SMIC stock would be approximately $2.4 million or $2.0 million, respectively, based on a hypothetical 10 percent increase or 10 percent decrease in SMIC’s stock price. In the event the decline in the market value of our SMIC shares below our cost basis is determined to be other-than-temporary, we would be required to recognize a loss on our investment through our operating results. In this regard, in September 2012, we recorded a $2.3 million charge in our statement of operations as we determined that the decline in the value of our shares in SMIC was other-than temporary.

In September 2012, we invested approximately $27.1 million in Nayna which was comprised of private placement shares which are accounted for on the cost basis and common shares which are classified as an available-for-sale investment and are recorded at fair value with the unrealized gain or loss reported as a component in “Accumulated other comprehensive income” in our Consolidated Balance Sheets. In the nine months ended June 30, 2013, we sold shares with a cost basis of approximately $7.0 million and recognized a gain of $9.1 million. The total cost basis of our common shares in Nanya is approximately $9.2 million and the market value at June 30, 2013 was approximately $27.9 million and is included in short-term investments. The market value of Nanya shares is subject to fluctuations and our carrying value will be subject to adjustments to reflect changes in Nanya’s market value in future periods. The fair value of our Nanya stock would be approximately $30.7 million or $25.1 million, respectively, based on a hypothetical 10 percent increase or 10 percent decrease in Nanya's stock price. However, since June 30, 2013, Nanya's stock price has declined by as much as 35%. In the event the decline in the market value of our Nanya shares below our cost basis is determined to be other-than-temporary, we would be required to recognize a loss on our investment through our operating results.

Item 4.Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer, based on the evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that, as of June 30, 2013, our disclosure controls and procedures were effective to ensure that the information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

Chingis operated under its own set of systems and internal controls. Following our acquisition of Chingis on September 14, 2012, we began to transition certain of Chingis' processes to our internal control processes; however, we are separately maintaining many of Chingis' internal controls until we are able to complete the integration of Chingis' operations into our systems and control environment. We currently expect this transition to be complete by the end of fiscal 2013.

Other than with the respect to our transition of Chingis to our systems and control environment as described above, during the three months ended June 30, 2013, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1.Legal Proceedings

VAREP GmBH v. Integrated Silicon Solution, Inc.

On August 21, 2012, a lawsuit was filed against us in the Superior Court of California, County of Santa Clara by a former independent sales representative based in Germany named Varep GmbH (Varep), for the alleged underpayment of commissions(Case No. 112CV230846). The original complaint alleged 11 causes of action, including, among others, breach of contract, Labor Code violations, and violations of the Independent Wholesale Sales Representatives Contractual Relations Act. A demurrer by us challenging the legal sufficiency of the Complaint was sustained with leave to amend and a motion to strike portions of the initial complaint by us was granted in part and denied in part. On December 28, 2012, Varep filed a First Amended Complaint (FAC) asserting seven causes of action, including, among others, breach of contract and Labor Code violations. On January 7, 2013, we filed a demurrer challenging the legal sufficiency of the FAC and a motion to strike portions of the FAC. On February 19, 2013, the demurrer was sustained without leave to amend as to the causes of action for breach of the implied covenant of good faith and fair dealing and Labor Code violations and overruled with respect to other causes of action, and the motion to strike was granted in part to strike a claim for punitive damages on the cause of action for negligent misrepresentation and denied in other part. On March 4, 2013, we filed an answer to the remaining allegations of the FAC. A court-ordered mediation did not result in a resolution of the dispute. Discovery has commenced and is continuing. No trial date has been set. We believe we have meritorious defenses to the claims alleged by Varep and intend to defend this suit vigorously. We have concluded that it is a remote possibility that this litigation or pending claims will be material to our financial position.

Other Legal Proceedings

In the ordinary course of our business, as is common in the semiconductor industry, we have been involved in a limited number of other legal actions, both as plaintiff and defendant, and could incur uninsured liability in any one or more of them. Although the outcome of these actions is not presently determinable, we believe that the ultimate resolution of these matters will not have a material adverse effect on our financial position, cash flows or results of operations. However, no assurances can be given with respect to the extent or outcome of any such litigation in the future.

Item 1A. Risk Factors

Uncertain economic conditions and any future downturn in the automotive market or other markets we serve are expected to adversely affect our business and financial results.

Substantially all of our products are incorporated into products for the automotive, communications, industrial, medical and military, and digital consumer electronics markets. In particular, in the nine months ended June 30, 2013 and in fiscal 2012, approximately 45% and 41%, respectively, of our sales were to the automotive market and any future downturn in this market would have a material adverse effect on our revenue and profitability. Historically, the automotive, communications, industrial, medical and military, and digital consumer electronics markets have experienced cyclical depressed business conditions, often in connection with, or in anticipation of, a decline in general economic conditions, or due to adverse supply and demand conditions in such markets. Industry downturns have resulted in reduced demand and declining average selling prices for our products which adversely affected our business. During uncertain economic conditions, our current or potential customers may delay or reduce purchases of our products which would adversely affect our revenues and harm our business and financial results. In addition, any uncertainty in the economy may negatively impact the spending patterns of businesses including our current and potential customers. We expect our business to be adversely impacted by any further downturn in the U.S. or global economies.

Our sales depend on DRAM and SRAM products and reduced demand for these products or a decline in average selling prices could harm our business.

In the first nine months of fiscal 2013 and in fiscal 2012, approximately 87% and 96%, respectively, of our net sales were derived from the sale of DRAM and SRAM products, which are subject to unit volume fluctuations and declines in average selling prices that could harm our business. While our total revenue increased in the December 2012 quarter, our DRAM and SRAM revenue declined 4.9% in the December 2012 quarter from the September 2012 quarter due to weakness in the communications market. We also experienced a sequential decline in revenue from $66.2 million in the December 2011 quarter to $62.5 million in the March 2012 quarter primarily as a result of a decrease in unit shipments of our DRAM products. We experienced a sequential decline in revenue from $71.3 million in our September 2011 quarter to $66.2 million in our December 2011 quarter partially as a result of a decrease in unit shipments of our SRAM products. We may not be able to offset any future price declines for our

products by higher volumes or by higher prices on newer products. While we experienced increases in the average selling prices for certain of our products in fiscal 2011, fiscal 2012, and the first nine months of fiscal 2013, historically, average selling prices for semiconductor memory products have declined, and we expect that average selling prices for our products will decline in the future. Although we entered the NOR Flash market with our acquisition of Chingis in September 2012, our NOR Flash business is generally subject to the same types of unit volume fluctuations and declines in average selling prices as our DRAM and SRAM businesses. Our ability to maintain or increase revenues will depend upon our ability to increase unit sales volume of existing products and introduce and sell new products that compensate for the anticipated declines in the average selling prices of our existing products.

If we are unable to obtain an adequate supply of wafers due to industry consolidation involving foundries, financial difficulties at foundries or other reasons, our business will be harmed unless we are able to secure alternative capacity in a timely manner and on reasonable terms.

If we are unable to obtain an adequate supply of wafers from our current suppliers or any alternative sources in a timely manner and on reasonable terms, our business will be severely harmed. For example, our revenue in the March 2013 quarter was adversely affected as we were unable to secure an adequate supply of NOR flash wafers. Our principal manufacturing relationships are with Nanya, Powerchip Semiconductor, SMIC, TSMC, Global Foundries, Hynix and IBM. Each of our wafer foundries also supplies wafers to other semiconductor companies, including certain of our competitors or for their own account. Although we are allocated wafer capacity from our key suppliers, we may not be able to obtain such capacity in periods of tight supply. If any of our suppliers experience manufacturing failures or yield shortfalls, severe financial or operational difficulties, choose to prioritize capacity for other uses, or reduce or eliminate deliveries to us for any other reason, we may not be able to obtain enough wafers to meet the market demand for our products which would adversely affect our revenues. In recent years, it has been more difficult for us to secure long-term foundry capacity (particularly for our DRAM products) due to industry consolidation affecting foundries and adverse financial conditions at foundries. From time to time, certain of our wafer foundries have announced that they will no longer produce a specific type of wafer we may need (especially certain types of DRAM wafers). In such event, we have had to and expect in the future to have to place large last time buy orders which expose us to the risk of inventory obsolescence. In this regard, in the September 2012 quarter, we took delivery of a large quantity of DRAM wafers as the result of a last time buy with one of our foundries. Once a product is in production at a particular foundry, it is time consuming and costly to have such product manufactured at a different foundry. In addition, we may not be able to qualify additional manufacturing sources for existing or new products in a timely manner and we cannot be certain that other manufacturing sources would be able to deliver an adequate supply of wafers to us or at the same cost.

Foundry capacity can be limited, resulting in higher wafer prices, and we have had to enter into special arrangements to secure foundry capacity.

If we are not able to obtain sufficient foundry capacity as required, our relationships with our customers would be harmed and our future sales would be adversely impacted. In order to secure foundry capacity, we have entered into in the past, and will likely enter into in the future, various arrangements with suppliers, which could include:


•	option payments or other prepayments to foundries;


•	increased prices for wafers;


•	purchases of equity or debt securities in foundries;


•	joint ventures;


•	process development relationships with foundries;


•	contracts that commit us to purchase specified quantities of wafers over extended periods; and


•	nonrefundable deposits with, or loans to, foundries in exchange for capacity commitments.

In this regard, in September 2012, we invested approximately $27.1 million in Nanya and entered into an agreement with Nanya to provide us with access to leading edge process technologies and certain wafer volume guarantees.

In the future, we may not be able to make arrangements for needed foundry capacity in a timely fashion or at all, and such arrangements, if any, may not be on terms favorable to us. Once we make commitments to secure foundry capacity, we may incur significant financial penalties if we subsequently determine that we are not able to utilize all of that capacity. Such penalties may be substantial and could harm our financial results. In addition, we must be able to secure sufficient assembly and test capacity from third-party contractors. In order to secure such capacity, we are exposed to some of the same risks we face when securing foundry capacity. In the past, we have purchased testing equipment for use by our contractors to satisfy a portion of our capacity needs. If we are not able to secure required assembly and test capacity, our business and customer relationships would be harmed.

We rely on third-party contractors to fabricate, assemble and test our products. Our business is highly dependent on the continued operations of such contractors and our failure to successfully manage our relationships with these contractors could damage our relationships with our customers, decrease our sales and limit our growth.

We rely on third-party contractors located in Asia to fabricate, assemble and test our products. Any uncertain economic conditions or uncertainty in the U.S. and global credit markets could materially impact the financial condition or operations of our third-party contractors such as our wafer foundries, test contractors and assembly contractors. Our business is highly dependent on the continued operations of such contractors. Any deterioration in the financial condition of our contractors or any disruption in the operations of our contractors could adversely impact the flow of our products to our end customers and materially adversely impact our business and results of operation. In recent years, several foundries (including foundries that we relied on for wafers)experienced financial difficulties and filed for bankruptcy protection, substantially reduced their operations or were acquired by competing companies. There are significant risks associated with our reliance on these third-party contractors, including:


•	potential price increases;


•	possible capacity shortages;


•	foundries ceasing production of wafer types that we need;


•	financial viability of our foundries or other contractors;


•	reduced control over product quality;


•	reduced control over delivery schedules;


•	their inability to increase production and achieve acceptable yields on a timely basis;


•	absence of long-term agreements;


•	limited warranties on products supplied to us;


•	impact of foreign exchange rates on our product costs; and


•	general risks related to conducting business internationally.

If any of these risks are realized, our business and results of operations could be adversely affected until our subcontractor is able to remedy the problem or until we are able to secure an alternative subcontractor.

Our foundries may experience lower than expected yields which could adversely affect our business.

The manufacture of integrated circuits is a highly complex and technically demanding process. Production yields and device reliability can be affected by a large number of factors. As is typical in the semiconductor industry, our foundries have from time to time experienced lower than anticipated manufacturing yields and device reliability problems, particularly in connection with the introduction of new products and changes in such foundry’s processing steps. There can be no assurance that our foundries will not experience lower than expected manufacturing yields or device reliability problems in the future, which could materially and adversely affect our business and operating results.

Our operating results are expected to continue to fluctuate and may not meet our financial guidance or published analyst forecasts. This may cause the price of our common stock to decline significantly.

Our future quarterly and annual operating results are subject to fluctuations due to a wide variety of factors, including:


•	changes in the global economy;


•	changes in business conditions in our key markets especially the automotive market;


•	shortages in foundry, assembly or test capacity;


•	the cyclicality of the semiconductor industry;


•	declines in average selling prices of our products;


•	changes in our product mix which could reduce our gross margins;


•	disruption in the supply of wafers, assembly or test services;


•	changes in the pricing for wafers or assembly or test services;


•	oversupply of memory or analog products in the market;


•	inventory write-downs for lower of cost or market or excess and obsolete;


•	cancellation of existing orders or the failure to secure new orders;


•	excess inventory levels at our customers;


•	a failure to introduce new products and to implement technologies on a timely basis;


•	decreases in the demand for our memory or analog products;


•	our ability to control or reduce our operating expenses;


•	fluctuations in foreign currencies relative to the U.S. dollar


•	increased expenses associated with new product introductions, masks or process changes;


•	the ability of customers to make payments to us;


•	market acceptance of ours and our customers’ products;


•	a failure to anticipate changing customer product requirements;


•	fluctuations in manufacturing yields at our suppliers;


•	fluctuations in product quality resulting in rework, replacement, or loss due to damages;


•	a failure to deliver products to customers on a timely basis;


•	the timing of significant orders;


•	the outcome of any pending or future litigation; and


•	the commencement of any future litigation or antidumping proceedings.

Shifts in industry-wide capacity may cause our results to fluctuate. These shifts may occur quickly with little or no advance notice. Such shifts have historically resulted in significant inventory write-downs.

The semiconductor industry is highly cyclical and is subject to significant downturns resulting from excess capacity, overproduction, reduced demand or technological obsolescence. Shifts in industry-wide capacity from shortages to oversupply or from oversupply to shortages may result in significant fluctuations in our quarterly or annual operating results. These shifts in industry conditions can occur quickly with little or no advance notice to us. Adverse changes in industry conditions are likely to result in a decline in average selling prices and the stated value of our inventory. In the first nine months of fiscal 2013, in fiscal 2012, and in fiscal 2011, we recorded inventory write-downs of $3.5 million, $5.7 million, and $3.5 million, respectively. These inventory write-downs related to adjusting our inventory valuation for certain excess and obsolete products, and valuing our inventory at the lower-of-cost-or-market.

Differences in forecasted average selling prices used in calculating lower of cost or market adjustments can result in significant changes in the estimated net realizable value of inventory and accordingly the amount of write-down recorded. If the estimated market value of products in inventory at quarter-end is below the manufacturing cost of these products, we will recognize charges to write down the carrying value of our inventories to market value. In addition, we write down to zero dollars the carrying value of inventory on hand that has aged over one year (two years for wafer and die bank) to cover estimated excess and obsolete exposures, unless adjustments are made based on management’s judgments for newer products, end of life products, planned inventory increases or strategic customer supply. In making such judgments to write down inventory, management takes into account the product life cycles which can range from six to 30 months, the stage in the life cycle of the product, the impact of competitors’ announcements and product introductions on our products. Future additional inventory write-downs may occur due to lower of cost or market accounting, excess inventory or inventory obsolescence.

Strong competition in the semiconductor market may harm our business.

The semiconductor market is intensely competitive and has been characterized by an oversupply of product, price erosion, rapid technological change, short product life cycles, cyclical market patterns, and heightened foreign and domestic competition. Many of our competitors offer broader product lines and have greater financial, technical, marketing, distribution and other resources than us. We may not be able to compete successfully against any of these competitors. Our ability to compete successfully in our markets depends on factors both within and outside of our control, including:


•	the pricing of our products;


•	the supply and cost of wafers;


•	product design, functionality, performance and reliability;


•	successful and timely product development;


•	the performance of our competitors and their pricing policies;


•	wafer manufacturing over or under capacity;


•	real or perceived imbalances in supply and demand for our products;


•	the rate at which OEM customers incorporate our products into their systems;


•	the gain or loss of significant customers;


•	the success of our customers’ products and end-user demand;


•	access to advanced process technologies at competitive prices;


•	achievement of acceptable yields of functional die;


•	the capacity of our third-party contractors to assemble and test our products;


•	the nature of our competitors;


•	our financial strength and the financial strength of our competitors; and


•	general economic conditions.

In addition, we are vulnerable to technology advances utilized by competitors to manufacture higher performance or lower cost products. We may not be able to compete successfully in the future as to any of these factors. Our failure to compete successfully in these or other areas could harm our business and financial results.

We may encounter difficulties in effectively integrating newly acquired businesses.

From time to time, we have acquired and expect in the future to acquire other companies or assets that we believe to be complementary to our business. In this regard, in September 2012, we acquired Chingis, a provider of NOR flash memory technologies used in standalone and embedded applications headquartered in Taiwan. In addition, in January 2011, we acquired Si En, a privately held fabless provider of high performance analog and mixed signal integrated circuits headquartered in Xiamen, China. Acquisitions may result in the use of our cash resources, potentially dilutive issuances of equity securities, incurrence of debt and contingent liabilities, amortization expenses related to intangible assets, and the possible impairment of goodwill, which could harm our profitability. In addition, acquisitions (including our acquisition of Chingis) involve numerous risks, including:


•	lower than expected sales of any acquired products;


•	the risk that the markets for acquired products do not develop as expected;


•	difficulties in continuing to develop new technologies and deliver products to market on time;


•	the potential loss of key employees and customers as a result of the acquisition;


•	difficulties in successfully assimilating the operations, technologies and personnel of the acquired company;


•	diversion of management’s attention from other business concerns;


•	risks of entering markets in which we have no, or limited, direct prior experience; and


•	higher than estimated acquisition expenses.

There is no assurance that any of our recent or future acquisitions will contribute positively to our business or operating results.

The loss of a significant customer or a reduction in orders from one or more large customers could adversely affect our operating results.

As sales to our customers are executed pursuant to purchase orders and no purchasing contracts typically exist, our customers can cease doing business with us at any time. We may not be able to retain our key customers, such customers may cancel or reschedule orders, and in the event of canceled orders, such orders may not be replaced by other sales. In addition, sales to any particular customer may fluctuate significantly from quarter to quarter, and such fluctuating sales could harm our business and financial results.

We have significant international sales and operations and risks related to our international activities could harm our operating results.

In the nine months ended June 30, 2013, approximately 12% of our net sales was attributable to customers located in the U.S., 20% was attributable to customers located in Europe and 67% was attributable to customers located in Asia. In fiscal 2012, approximately 16% of our net sales was attributable to customers located in the U.S., 21% was attributable to customers located in Europe and 62% was attributable to customers located in Asia. In fiscal 2011, approximately 15% of our net sales was attributable to customers located in the U.S., 20% was attributable to customers located in Europe and 64% was attributable to customers located in Asia. We anticipate that sales to international sites will continue to represent a significant percentage of our net sales. Although our international sales are largely denominated in U.S. dollars, we do have sales transactions in New Taiwan dollars, in Hong Kong dollars and in Chinese renminbi. In addition, our wafer foundries and assembly and test subcontractors are primarily located in Taiwan and China and, while our wafer purchases are denominated in U.S. dollars, most of our assembly and test costs are denominated in New Taiwan dollars. A substantial majority of our employees are located outside of the U.S and the expenses for our foreign operations are generally denominated in local currency. As a result, a devaluation of the U.S. dollar compared to the New Taiwan dollar or Chinese renminbi could substantially increase the cost of our products and our operations in Taiwan or China.

We are subject to the risks of conducting business internationally, including:


•	global economic conditions, particularly in Taiwan and China;


•	foreign currency fluctuations;


•	duties, tariffs and other trade barriers and restrictions;


•	changes in trade policy and regulatory requirements;


•	transportation delays;


•	the burdens of complying with foreign laws;


•	imposition of foreign currency controls;


•	language barriers;


•	difficulties in hiring and retaining experienced engineers in countries such as China and Taiwan;


•	difficulties in collecting foreign accounts receivable;


•	difficulties in protecting our intellectual property rights;


•	political instability, including any changes in relations between China and Taiwan;


•	public health outbreaks such as SARS or avian flu; and


•	earthquakes and other natural disasters.

We depend on our ability to attract and retain our key technical and management personnel.

Our success depends upon the continued service of our key technical and management personnel. Several of our important manufacturing and other subcontractor relationships are based on personal relationships between our senior executive officers and such parties. In particular, our Executive Chairman has long-term relationships with our key foundries. If we were to lose the services of any key executives, it may negatively impact the related business relationships since we typically have no long-term contractual agreements with such parties. Our success also depends on our ability to continue to attract, retain and motivate qualified technical personnel, particularly experienced circuit designers and process engineers. The competition for such employees depends on general economic and industry conditions but such competition has been intense in recent periods. We have no employment contracts or key person life insurance policies with or for any of our employees. The loss of the service of one or more of our key personnel could harm our business.

Adverse changes in our effective tax rate will harm our results of operations.

A number of factors may increase our future effective tax rates, including:


•	changes in the valuation of our deferred tax assets and liabilities, and changes in deferred tax valuation allowances;


•	exhaustion of our existing federal and foreign net operating loss carryforwards and credits;


•	increases in expenses not deductible for tax purposes, including impairments of goodwill in connection with acquisitions;


•	the jurisdictions in which our profits are determined to be earned and taxed;


•	limitations on the utilization of federal net operating loss carryforwards and credits;


•	the resolution of issues arising from tax audits with various tax authorities;


•	adjustments to income taxes upon finalization of various tax returns;


•	changes in available tax credits;


•	changes in tax laws or the interpretation of such tax laws;


•	changes in U.S. generally accepted accounting principles; and


•	our decision to repatriate non-U.S. earnings for which we have not previously provided for U.S. taxes.

Any significant increase in our future effective tax rates will reduce our net income for future periods.

Our revenues and business would be harmed if we are not able to successfully develop, introduce and sell new products and develop and implement new manufacturing technologies in a timely manner. Our research and development expenses could increase and our business could be harmed if the implementation of these new manufacturing technologies is unsuccessful.

We operate in highly competitive, quickly changing markets which are characterized by rapid obsolescence of existing products. As a result, our future success depends on our ability to develop and introduce new products that our customers choose to buy in significant quantities. If we fail to introduce new products in a timely manner or if our customers’ products do not achieve

commercial success, our business and results of operations could be seriously harmed. The design and introduction of new products is challenging as such products typically incorporate more functions and operate at faster speeds than prior products. Increasing complexity generally requires smaller features on a chip. This makes developing new generations of products substantially more difficult than prior generations. The cost to develop products utilizing these new technologies is expensive and requires significant research and development spending and, as a result, our research and development expenses could increase in the future. Further, new products may not work properly in our customers’ applications. If we are unable to design, introduce, manufacture, market and sell new products successfully, our business and financial results would be seriously harmed.

Our products are complex and could contain defects, which could reduce sales of those products or result in claims against us.

We develop complex and evolving products. Despite testing by us and our customers, errors may be found in existing or new products. This could result in a delay in recognition or loss of revenues, loss of market share or failure to achieve market acceptance. The occurrence of defects could also cause us to incur significant warranty, support and repair costs, could divert the attention of our engineering personnel from our product development efforts, and could harm our relationships with our customers. The occurrence of these problems could also result in the delay or loss of market acceptance of our products and would likely harm our business. Defects, integration issues or other performance problems in our products could result in financial or other damages to our customers. Our customers could also seek and obtain damages from us for their losses. From time to time, we have been involved in disputes regarding product warranty issues. Although we seek to limit our liability, a product liability claim brought against us, even if unsuccessful, would likely be time consuming and could be costly to defend.

Potential intellectual property claims and litigation could subject us to significant liability for damages and could invalidate our proprietary rights.

In the semiconductor industry, it is not unusual for companies to receive notices alleging infringement of patents or other intellectual property rights. We have been, and from time-to-time expect to be, notified of claims that we may be infringing patents, maskwork rights or copyrights owned by third-parties. If it appears necessary or desirable, we may seek licenses under patents that we are alleged to be infringing. However, licenses may not be offered and the terms of any offered licenses may not be acceptable to us.

The failure to obtain a license under a key patent or intellectual property right from a third party for technology used by us could cause us to incur substantial liabilities and to suspend the manufacture of the products utilizing the invention or to attempt to develop non-infringing products, any of which could harm our business. Furthermore, we may become involved in protracted litigation regarding the alleged infringement by us of third-party intellectual property rights or litigation to assert and protect our patents or other intellectual property rights. Any litigation relating to patent infringement or other intellectual property matters could result in substantial costs and diversion of our resources, which could harm our business.

We may be unable to effectively protect our intellectual property, which would negatively impact our ability to compete.

We believe that the protection of our intellectual proprietary rights will continue to be important to the success of our business. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants and business partners, and take actions to control access to and distribution of our documentation and other proprietary information. Despite these efforts, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology. Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as do the laws of the U.S. Many U.S. companies have encountered substantial infringement problems in foreign countries, including countries in which we design and sell our products. We cannot be certain that patents will be issued as a result of our pending applications nor can we be certain that any issued patents would protect or benefit us or give us adequate protection from competing products. For example, issued patents may be circumvented or challenged and declared invalid or unenforceable. We also cannot be certain that others will not develop our unpatented proprietary technology or develop competing technologies on their own.

Our results of operations could vary as a result of the methods, estimates, and judgments we use in applying our accounting policies.

The methods, estimates, and judgments we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies” in Part I, Item 2 of this Form 10-Q). Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to change our methods, estimates, and judgments and such changes could significantly affect our results of operations. In particular, the calculation of share-based compensation expense requires us to use valuation methodologies (which were not developed for use in valuing employee stock options) and a number of assumptions, estimates, and conclusions regarding matters such as expected

forfeitures, expected volatility of our share price, the expected dividend rate with respect to our common stock, and the option exercise behavior of our employees. Furthermore, there are no means, under applicable accounting principles, to compare and adjust our expense if and when we learn about additional information that may affect the estimates that we previously made, with the exception of changes in expected forfeitures of share-based awards. In the future, factors may arise that lead us to change our estimates and assumptions with respect to future share-based compensation arrangements, resulting in variability in our share-based compensation expense over time. Changes in forecasted share-based compensation expense could impact our gross margin percentage, research and development expenses, and selling, general and administrative expenses.

Our stock price is expected to continue to be volatile.

The trading price of our common stock has been and is expected to be subject to wide fluctuations in response to:


•	quarter-to-quarter variations in our operating results;


•	general conditions or cyclicality in the semiconductor industry or the end markets that we serve;


•	new or revised earnings estimates or guidance by us or industry analysts;


•	comments or recommendations issued by analysts who follow us, our competitors or the semiconductor industry;


•	aggregate valuations and movement of stocks in the broader semiconductor industry;


•	announcements of new products, strategic relationships or acquisitions by us or our competitors;


•	increases or decreases in available wafer capacity;


•	governmental regulations, trade laws and import duties;


•	announcements related to future or existing litigation involving us or any of our competitors;


•	announcements of technological innovations by us or our competitors;


•	announcements regarding our share repurchase program and the timing and amount of shares we purchase under such program;


•	additions or departures of senior management; and


•	other events or factors, many of which are beyond our control.

In addition, stock markets have from time to time experienced extreme price and trading volume volatility. This volatility has had a substantial effect on the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations have adversely affected the market price of our common stock in the past and are likely to continue to do so in the future.

We have incurred significant losses in certain recent periods, and there can be no assurance that we will be able to sustain profitability in the future.

Though we had been profitable for twelve consecutive quarters beginning with the September 2009 quarter through the June 2012 quarter, we incurred a loss of $13.2 in the September 2012 quarter and a loss of $2.7 million for fiscal 2012, which included a $14.3 million write-down for certain tangible and intangible net assets related to our acquisition of Si En and a charge of $2.3 million to write-down our investment in SMIC due to the decline in fair market value of such shares being considered other than temporary. We incurred a loss of $5.1 million in fiscal 2009, which included a $0.7 million charge for acquired in-process technology. There can be no assurance that we will maintain profitability in future periods. Our ability to maintain profitability on a quarterly or fiscal year basis in the future will depend on a variety of factors, including the need for future inventory write-downs, our ability to increase net sales, maintain or expand gross margins, introduce new products on a timely basis, secure sufficient wafer fabrication and assembly and test capacity and control operating expenses, including stock-based compensation. Adverse developments with respect to these or other factors could result in quarterly or annual operating losses in the future.

We have used and may in the future use a significant amount of our cash resources to repurchase shares of our common stock and such repurchases present potential risks and disadvantages to us and our continuing stockholders.

While we have not repurchased any shares since fiscal 2011, from September 2007 through September 2011, we repurchased and retired an aggregate of 14,179,711 shares of our common stock in the open market under Rule 10b-18 and pursuant to our tender offers at a cost of approximately $88.5 million. At June 30, 2013, we had outstanding authorization from our Board to purchase up to an additional $19.8 million of our common stock from time to time. Although our Board of Directors has determined that these repurchase programs are in the best interests of our stockholders, these repurchases expose us to a number of risks including:


•	the use of a substantial portion of our cash reserves, which may reduce our ability to engage in significant cash acquisitions or to pursue other business opportunities that could create significant value to our stockholders;


•	the risk that we would not be able to replenish our cash reserves by raising debt or equity financing in the future on terms acceptable to us, or at all;


•	the risk that these repurchases have reduced our “public float,” which is the number of our shares owned by non-affiliate stockholders and available for trading in the securities markets, and likely reduced the number of our stockholders, which may reduce the volume of trading in our shares and may result in lower stock prices and reduced liquidity in the trading of our shares; and


•	the risk that our stock price could decline and that we would be able to repurchase shares of our common stock at a lower price per share than the prices we pay in our repurchase programs.

Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our worldwide operations, including the operations of our foundries and other suppliers, could be subject to natural disasters and other business disruptions, which could seriously harm our revenue and financial condition and increase our costs and expenses. Our corporate headquarters, and a portion of our research and development activities, are located in Milpitas, California, and our other critical business operations and many of our suppliers are located in Asia, near major earthquake faults. The ultimate impact on us, our significant suppliers and our general infrastructure of being located near major earthquake faults is unknown, but our revenue, profitability and financial condition could suffer in the event of a major earthquake or other natural disaster. Losses and interruptions could also be caused by earthquakes, power shortages, telecommunications failures, water shortages, tsunamis, floods, typhoons, volcanic eruptions, fires, extreme weather conditions, medical epidemics such as a flu outbreak and other natural or manmade disasters.

Our operations involve the use of hazardous and toxic materials, and we must comply with environmental laws and regulations, which can be expensive, and may adversely affect our business and operating results.

We are subject to federal, state and local regulations relating to the use, handling, storage, disposal and human exposure to hazardous and toxic materials. If we were to violate or become liable under environmental laws in the future as a result of our inability to obtain permits, human error, accident, equipment failure or other causes, we could be subject to fines, costs, or civil or criminal sanctions, face property damage or personal injury claims or be required to incur substantial investigation or remediation costs or experience disruptions in our operations, any of which could have a material adverse effect on our business. In addition, environmental laws could become more stringent over time, imposing greater compliance costs and increasing the risks and penalties associated with violations, which could harm our business.

We also face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and other hazardous substances applicable to specified electronic products placed on the market in the European Union (Restriction on the Use of Hazardous Substances Directive 2002/95/EC, also known as the RoHS Directive). We expect that our operations will be affected by other new environmental laws and regulations on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws and regulations, they will likely result in additional costs, and could require that we change the design or manufacturing of our products, any of which could have a material adverse effect on our business.

We may experience difficulties in complying with Sarbanes-Oxley Section 404 in future periods.

We concluded that our internal control over financial reporting was effective at September 30, 2012. If, in the future, we are unable to conclude that our internal control over financial reporting is effective or we are unable to conclude that our disclosure controls and procedures are effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

Item 6. Exhibits

(a) The following exhibits are filed as a part of this report.



Exhibit 31.1		Certification Pursuant to SEC Release No. 33-8238, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2		Certification Pursuant to SEC Release No. 33-8238, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 101.INS	**	XBRL Instance Document

Exhibit 101.SCH	**	XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL	**	XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.DEF	**	XBRL Taxonomy Extension Definition Linkbase Document

Exhibit 101.LAB	**	XBRL Taxonomy Extension Label Linkbase Document

Exhibit 101.PRE	**	XBRL Taxonomy Extension Presentation Linkbase Document


**	XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		Integrated Silicon Solution, Inc.
		(Registrant)

Dated:	August 9, 2013	/s/ John M. Cobb
		John M. Cobb
		Vice President and Chief Financial Officer
		(Principal Financial and
		Accounting Officer)

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Integrated Silicon Solution (ISSI) Inactive 10-Q2013 Q3 Quarterly report

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