1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1996 .
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1943
For the transition period from to
---------------------- -----------------------
Commission file number 000-23084 .
--------------------------------------------------------
INTEGRATED SILICON SOLUTION, INC.
Delaware 77-0199971
------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
680 Almanor Avenue, Sunnyvale, California 94086 .
------------------------------------------------------------------------
(Address of principal executive offices) zip code
Registrant's telephone number, including area code (408) 733-4774 .
---------------------
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 x No
----- -----
The number of outstanding shares of the registrant's Common Stock as of
August 9, 1996 was 17,581,260
----------
2
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Net sales $ 27,579 $ 35,458 $ 108,983 $ 79,603
Cost of sales (other than item below) 18,335 16,948 63,648 40,811
Inventory write-down 15,000 -- 15,000 --
--------- --------- --------- ---------
Total cost of sales 33,335 16,948 78,648 40,811
--------- --------- --------- ---------
Gross profit (loss) (5,756) 18,510 30,335 38,792
--------- --------- --------- ---------
Operating Expenses:
Research and development 5,513 4,043 16,075 10,053
Selling, general and administrative 3,725 3,802 11,443 8,687
--------- --------- --------- ---------
Total operating expenses 9,238 7,845 27,518 18,740
--------- --------- --------- ---------
Operating income (loss) (14,994) 10,665 2,817 20,052
Other income, net 1,150 888 3,694 1,411
--------- --------- --------- ---------
Income (loss) before income taxes and
minority interest (13,844) 11,553 6,511 21,463
Provision (benefit) for income taxes (3,274) 2,311 1,758 4,293
--------- --------- --------- ---------
Net income (loss) before minority interest (10,570) 9,242 4,753 17,170
Minority interest in net loss of
consolidated subsidiary (20) -- (55) (23)
--------- --------- --------- ---------
Net income (loss) $ (10,550) $ 9,242 $ 4,808 $ 17,193
========= ========= ========= =========
Net income (loss) per share $ (0.60) $ 0.52 $ 0.26 $ 1.09
========= ========= ========= =========
Shares used in per share calculation 17,515 17,661 18,400 15,816
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
3
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, September 30,
1996 1995 (1)
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 15,427 $ 29,452
Restricted cash 3,767 986
Short-term investments 74,600 80,300
Accounts receivable 12,852 18,746
Inventories 26,298 11,114
Other current assets 19,425 11,822
--------- ---------
Total current assets 152,369 152,420
Property, equipment, and leasehold improvements, net 30,340 17,946
Other assets 42,753 34,075
--------- ---------
Total assets $ 225,462 $ 204,441
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,636 $ --
Accounts payable 23,292 15,370
Accrued compensation and benefits 4,193 5,632
Accrued expenses 1,370 1,719
Income tax payable 659 3,535
Current portion of long-term obligations 5,522 5,325
--------- ---------
Total current liabilities 38,672 31,581
Income tax payable - non-current 4,298 4,298
Long-term obligations 34,993 28,563
Minority interest in consolidated subsidiary 35 90
Stockholders' equity:
Convertible preferred stock -- --
Common stock 2 2
Additional paid-in capital 106,046 102,376
Retained earnings 43,745 38,937
Cumulative translation adjustment (2,257) (1,302)
Unearned compensation (72) (104)
--------- ---------
Total stockholders' equity 147,464 139,909
--------- ---------
Total liabilities and stockholders' equity $ 225,462 $ 204,441
========= =========
(1) Derived from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
4
INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
June 30,
--------------------------
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,808 $ 17,193
Charges to net income not affecting cash 4,938 3,033
Net effect of changes in current and other assets and current liabilities (11,834) 1,721
Advance payment to supplier -- (2,400)
--------- ---------
Cash provided (used) by operating activities (2,088) 19,547
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (17,439) (12,339)
Purchases of available-for-sale securities (150,675) (134,149)
Sales of available-for-sale securities 156,375 50,600
Investment in Wafertech, LLC (9,360) --
--------- ---------
Cash used in investing activities (21,099) (95,888)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under notes payable and long-term obligations 17,970 3,341
Proceeds from issuance of common stock 1,804 86,387
Principal payments on notes payable and long-term obligations (7,707) (1,905)
Decrease (increase) in restricted cash (2,781) 373
--------- ---------
Cash provided by financing activities 9,286 88,196
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (124) 81
--------- ---------
Net increase (decrease) in cash and cash equivalents (14,025) 11,936
Cash and cash equivalents at beginning of period 29,452 9,416
--------- ---------
Cash and cash equivalents at end of period $ 15,427 $ 21,352
========= =========
See accompanying notes to condensed consolidated financial statements.
5
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
Integrated Silicon Solution, Inc. (the Company) and its consolidated majority
owned subsidiaries, after elimination of all significant intercompany accounts
and transactions, and have been prepared in accordance with generally accepted
accounting principles 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 generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included.
Operating results for the nine months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 1996.
2. CUSTOMER CONCENTRATION
Sales to one customer accounted for approximately 32% of total net
sales for the quarter ended June 30, 1996 and approximately 23% of total net
sales for the nine months ended June 30, 1996.
3. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS
Cash, cash equivalents, restricted cash, and short-term investments
consisted of the following:
(In thousands)
June 30 September 30
1996 1995
---- ----
Cash ............................. $ 8,782 $ 9,275
Money market instruments ......... 3,636 4,698
Certificates of deposit .......... 6,776 16,465
Auction instruments .............. 74,600 80,300
-------- --------
$ 93,794 $110,738
======== ========
4. INVENTORIES
The following is a summary of inventories by major category:
(In thousands)
June 30 September 30
1996 1995
---- ----
Raw materials .................... $ 9,222 $ 3,993
Work-in-process .................. 5,412 4,305
Finished goods ................... 11,664 2,816
------- -------
$26,298 $11,114
======= =======
4
6
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The income tax provisions for the nine month periods ended June 30,
1996 and 1995 have been calculated at the estimated annual effective rates of
27% and 20%, respectively. The effective tax rate for the nine months ended June
30, 1996 and 1995 differ from the federal statutory rate of 34% primarily due to
a lower effective income tax rate in Taiwan and earnings from investments which
are exempt from federal income taxes.
6. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
7. LITIGATION
On December 13, 1995, a securities class action lawsuit was filed in
the United States District Court for the Northern California District of
California against the Company. The lawsuit, which names the Company and several
of its officers and directors as defendants, alleges various violations of the
federal securities laws. The Company believes that the allegations of the
complaint are without merit, and the Company intends to vigorously defend
itself. The Company believes that the ultimate resolution of this matter will
not have a material adverse effect on its financial position, results of
operations, or cash flow.
5
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934. The forward looking statements contained herein are
subject to certain factors that could cause actual results to differ materially
from those projected in the forward-looking statements. Such factors include but
are not limited to the risk related factors set forth in this report on Form
10-Q.
BACKGROUND
The Company designs, develops and markets high performance SRAM and
nonvolatile memory integrated circuits used in personal computers, data
communications, telecommunications, instrumentation and consumer products. The
high speed SRAM market over the past few years has been impacted by the
increasing speed requirements of personal computers and other electronic systems
such as modems and networks. The Company leverages its SRAM design and advanced
CMOS process technology expertise to establish collaborative relationships with
emerging Asian wafer foundries. Although the Company believes that these
relationships differentiate it from traditional fabless companies and allow it
to secure a committed, low cost supply of wafers processed with leading edge
process technology, there are also certain risks associated with dependence on
foundries for wafer manufacturing. See "Dependence on Independent Wafer
Foundries". The Company's principal manufacturing relationship is with Taiwan
Semiconductor Manufacturing Corporation ("TSMC"), with which it jointly develops
process technology for producing the Company's SRAM and nonvolatile memories.
The Company also has a collaborative program with Chartered Semiconductor
Manufacturing ("Chartered") in Singapore and with Belling Semiconductor
("Belling") in the People's Republic of China. In addition, the Company has
received wafers in 1996 from United Microelectronics Corporation ("UMC") and
Vanguard International Semiconductor ("Vanguard") under non-collaborative
foundry agreements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Net Sales. Net sales decreased by 22% to $27.6 million in the three
months ended June 30, 1996, from $35.5 million in the three months ended June
30, 1995. The decrease in sales was principally due to significant deterioration
in the average selling prices of the Company's SRAM and nonvolatile memory
products. The decreased revenue resulting from lower average selling prices was
partially offset by increased unit shipments of nonvolatile memory products,
specifically EPROMs and FLASH, and 256K and 1MB SRAM products. The Company
experienced significantly lower average selling prices for its SRAM, FLASH, and
EPROM products in the June 1996 quarter compared to the same quarter of the
prior year and the March 1996 quarter. The deterioration in average selling
prices and general market sluggishness resulted in a decrease in quarterly
revenue from $36.4 in the March 1996 quarter to $27.6 million in the June 1996
quarter. The Company anticipates that the deterioration in average selling
prices will continue in the September 1996 quarter and in subsequent quarters.
See "Certain Factors - Quarterly Fluctuations and Declines in Average Selling
Prices".
Sales to one customer accounted for approximately 32% of total net
sales for the quarter ended June 30, 1996 and approximately 23% of total net
sales for the nine months ended June 30, 1996.
Gross Profit (Loss). Gross profit decreased 131% to $(5.8) million in
the in the three months ended June 30, 1996, from $18.5 million in the three
months ended June 30, 1995. As a percentage of net sales, gross profit decreased
to (20.9)% in the three months ended June 30, 1996 from 52.2% in the three
months ended June 30, 1995. In the June 1996 quarter, the Company recorded a
$15.0 million write-down for excess inventory as a result of lower than
anticipated unit sales growth. There can be no assurance that additional
6
8
inventory write-downs will not be needed in the future and future write-downs
could have a material and adverse affect on the Company's future operating
results. Excluding the $15.0 million inventory write-down, gross profit
decreased to $9.2 million, or 33.5% of net sales, in the June 1996 quarter. The
decrease was primarily a result of significantly lower average selling prices
for the Company's SRAM, FLASH, and EPROM products in the June 1996 quarter
compared to the same quarter of the prior year. The Company continued to
experience deterioration in the average selling prices of its product lines in
the June 1996 quarter and anticipates that this deterioration will continue in
the September 1996 quarter and in subsequent quarters. The Company is unable to
predict when or if such declines in price will moderate. Any significant
decrease in average selling prices will result in a material decline in the
Company's gross margins unless the Company is able to reduce its cost per unit
to the extent necessary to offset such declines.
Research and Development. Research and development expenses increased
by 36% to $5.5 million in the three months ended June 30, 1996, from $4.0
million in the three months ended June 30, 1995. As a percentage of net sales,
research and development expenses increased to 20.0% in the three months ended
June 30, 1996, from 11.4% in the three months ended June 30, 1995. The increase
in absolute dollars was primarily the result of an increase in engineering
personnel and payroll related expenses and increased expenses related to the
development of new products. During the three months ended June 30, 1996, the
Company's development efforts principally focused on advanced design of the
synchronous burst SRAM, Flash memory devices, geometry reductions and new memory
configurations for selected SRAM and EPROM products, and Voice EPROMs. The
Company anticipates that its research and development expenses will continue to
increase substantially in absolute dollars in future periods, although such
expenses may fluctuate as a percentage of net sales.
Selling, General and Administrative. Selling, general and
administrative expenses decreased by 2% to $3.7 million in the three months
ended June 30, 1996 from $3.8 million in the three months ended June 30, 1995.
As a percentage of net sales, selling, general and administrative expenses
increased to 13.5% in the three months ended June 30, 1996, from 10.7% in the
three months ended June 30, 1995. The decrease in absolute dollars was primarily
the result of decreased selling commissions associated with lower revenues
partially offset by increased payroll related expenses from the addition of
marketing and sales personnel. The Company expects its selling, general and
administrative expenses to increase in absolute dollars in future periods as it
continues to expand its sales and marketing efforts, although such expenses may
fluctuate as a percentage of net sales.
Other income, Net. Other income increased to $1.2 million in the three
months ended June 30, 1996 from $0.9 million in the three months ended June 30,
1995, primarily due to increased net interest earnings as a result of higher
cash and short-term investment balances.
Provision (Benefit) for Income Taxes. For the three months ended June
30, 1996, the Company increased its provision for income taxes to approximately
24% compared to 20% for the comparable period in the prior year, primarily
reflecting increased operating income attributable to the Company's U.S.
operations resulting from increased sales to OEM customers.
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO NINE MONTHS ENDED JUNE 30, 1995
Net Sales. Net sales increased by 37% to $109.0 million in the nine
months ended June 30, 1996, from $79.6 million in the nine months ended June 30,
1995. The increase in sales was principally due to increased unit shipments of
SRAM products and, to a lesser extent, nonvolatile memory products, as well as
changes in product mix to higher density products. During the nine months ended
June 30, 1996, the Company experienced significant deterioration in the average
selling prices of its SRAM products and, to a lesser extent, its nonvolatile
memory products. The Company anticipates that this deterioration will continue
in the September 1996 quarter and in subsequent quarters. See "Certain Factors -
Quarterly Fluctuations and Declines in Average Selling Prices".
7
9
Sales to one customer accounted for approximately 23% of total net
sales for the nine months ended June 30, 1996.
Gross Profit. Gross profit decreased 22% to $30.3 million in the nine
months ended June 30, 1996, from $38.8 million in the nine months ended June 30,
1995. As a percentage of net sales, gross profit decreased to 27.8% in the nine
months ended June 30, 1996 from 48.7% in the nine months ended June 30, 1995. In
the June 1996 quarter, the Company recorded a $15.0 million write-down for
excess inventory as a result of lower than anticipated unit sales growth. There
can be no assurance that additional inventory write-downs will not be needed in
the future and future write-downs could have a material and adverse affect on
the Company's future operating results. Excluding the $15.0 million inventory
write-down, gross profit increased to $45.3 million, or 41.6% of net sales, in
the nine months ended June 30, 1996. This increase in absolute dollars was
primarily due to increased shipments of the Company's SRAM products and, to a
lesser extent, nonvolatile memory products. The decrease in gross profit as a
percentage of net sales was primarily a result of lower average selling prices
for the Company's SRAM products, especially the 256K SRAM, in the nine months
ended June 30, 1996 compared to the same period of the prior year. The Company
experienced deterioration in the average selling prices of its product lines in
the nine months ended June 30, 1996 and anticipates that this deterioration will
continue in the September 1996 quarter and in subsequent quarters. The Company
is unable to predict when or if such declines in price will moderate. Any
significant decrease in average selling prices will result in a material decline
in the Company's gross margins unless the Company is able to reduce its cost per
unit to the extent necessary to offset such declines.
Research and Development. Research and development expenses increased
by 60% to $16.1 million in the nine months ended June 30, 1996, from $10.1
million in the nine months ended June 30, 1995. As a percentage of net sales,
research and development expenses increased to 14.7% in the nine months ended
June 30, 1996, from 12.6% in the nine months ended June 30, 1995. The increase
in absolute dollars was primarily the result of an increase in engineering
personnel and payroll related expenses and increased expenses related to the
development of new products. During the nine months ended June 30, 1996, the
Company's development efforts principally focused on geometry reductions for its
SRAM products, synchronous SRAMs, Flash memories and Voice EPROMs. The Company
anticipates that its research and development expenses will increase
substantially in absolute dollars in future periods, although such expenses may
fluctuate as a percentage of net sales.
Selling, General and Administrative. Selling, general and
administrative expenses increased by 32% to $11.4 million in the nine months
ended June 30, 1996 from $8.7 million in the nine months ended June 30, 1995. As
a percentage of net sales, selling, general and administrative expenses
decreased to 10.5% in the nine months ended June 30, 1996, from 10.9% in the
nine months ended June 30, 1995. The increase in absolute dollars was primarily
the result of increased selling commissions and the addition of marketing and
sales personnel and payroll related expenses. The Company expects its selling,
general and administrative expenses to increase in absolute dollars in future
periods, as it continues to expand its sales and marketing efforts, although
such expenses may fluctuate as a percentage of net sales.
Other income, Net. Other income increased to $3.7 million in the nine
months ended June 30, 1996 from $1.4 million in the nine months ended June 30,
1995, primarily due to increased net interest earnings as a result of higher
cash and short-term investment balances.
Provision for Income Taxes. For the nine months ended June 30, 1996,
the Company increased its provision for income taxes to 27% compared to 20% for
the comparable period in the prior year, primarily reflecting increased
operating income attributable to the Company's U.S. operations resulting from
increased sales to OEM customers.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of fiscal 1996, the Company's principal
source of liquidity was proceeds from borrowings under short-term and long-term
lines of credit of $18.0 million, less repayments of $7.7
8
10
million. During the first nine months of fiscal 1996, operating activities
utilized cash of approximately $2.1 million. Cash utilized by operations was
primarily due to increases in inventory and prepaid expenses partially offset by
net income, increases in accounts payable and decreases in accounts receivable.
As of June 30, 1996, the Company's principal sources of liquidity included cash,
cash equivalents, restricted cash and short-term investments of approximately
$93.8 million, of which approximately $10.3 million are held by ISSI-Taiwan.
Approximately $3.8 million of the cash held by ISSI-Taiwan is restricted as of
June 30, 1996 for purposes of securing available short-term lines of credit.
The Company made capital expenditures of approximately $17.4 million
for the first nine months of fiscal 1996, primarily for the purchase of test
equipment and design and engineering tools. The Company expects to spend
approximately $6 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. Additionally, the Company
commenced construction, in July 1996, of an $18.0 million facility in the
Hsinchu Science-based Industrial Park to house its Taiwan operations. The
building is expected to be completed in late 1997.
In June 1996, the Company the Company entered into a joint venture
"WaferTech, LLC" with TSMC, Altera, Analog Devices, and private investors to
build a wafer fabrication facility in Camas, Washington. The Company will invest
$31.2 million for a 4% equity interest in the venture. As of June 30, 1996, $9.4
million had been paid by the Company to WaferTech. The next payments by the
Company of $9.4 million and $12.4 million are expected to be made in November
1996 and November 1997, respectively. In fiscal 1995, the Company entered into
an agreement with TSMC pursuant to which the Company has agreed to acquire
specified wafer capacity through 2001. In exchange for wafer capacity
commitments by TSMC, the Company has agreed to make certain annual advance
payments to TSMC which commenced in June 1995. The first payment in June 1995
was approximately $2.4 million and will be credited towards the purchase of
wafers in 1996. The additional required prepayments totaling approximately $31.2
million over the next four years are reflected in short-term and long-term
obligations and, to the extent these obligations have been recorded, an
offsetting short-term or long-term asset has been recorded. Additionally, in
fiscal 1995, the Company entered into a manufacturing agreement and joint
venture agreement with UMC. Under the terms of these agreements, the Company
received a supply of wafers from UMC beginning with the December 1995 quarter
and the Company agreed to invest $30 million in cash for a 5% equity interest in
a joint manufacturing venture of which UMC retains 55% ownership. As of June 30,
1996, approximately $7.0 million has been paid by the Company to UMC for the
joint venture. Based on the completion of certain milestones, the Company is
committed to future payments to UMC of approximately an additional $23.0
million. The next payments of approximately $15.0 million and $8.0 million are
expected to be made in December 1996 and July 1997, respectively, subject to
certain milestone completions.
The Company has $18.9 million available through a number of short-term
lines of credit with various financial institutions in Taiwan. As of June 30,
1996, the Company had borrowings of approximately $3.6 million under one of
these short-term lines of credit.
The Company has a number of long-term lines of credit with the Bank of
Communication in Taiwan to finance the purchase of machinery, equipment and
building construction in Taiwan. Total obligations from these borrowings as of
June 30, 1996 was $9.3 million, of which $0.7 million is included in the current
portion of long-term obligations. These obligations bear interest at rates of
from 6.60% to 6.725% and are payable in quarterly installments through 2003. As
of June 30, 1996, the Company had available long-term lines of credit of
approximately $15.1 million of which approximately $10.9 million is for
construction financing .
The Company believes that its existing funds and funds expected to be
generated from operations will satisfy the Company's anticipated working capital
and other cash requirements through at least the next 12 months. The Company may
also use bank borrowings and capital leases depending on the terms available.
In addition to the above agreements, the Company is currently
evaluating various arrangements with wafer manufacturers in an attempt to
further diversify its manufacturing base and maintain an adequate supply
9
11
of wafers. These arrangements may include prepayments on future wafer purchases,
minority equity investments in, or other financial commitments to, wafer
manufacturers in exchange for production capacity, or the use of contracts which
firmly commit the Company to purchase specified quantities of wafers over
extended periods. To the extent the Company pursues such transactions with
existing and potential foundry partners, any such transactions could require the
Company to seek additional equity or debt financings to fund such activities
and, in certain circumstances, to provide product or technology rights in return
for production capacity. There can be no assurance that any such additional
financing could be obtained on terms acceptable to the Company, if at all.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS OR FUTURE OPERATING
RESULTS
QUARTERLY FLUCTUATIONS AND DECLINES IN AVERAGE SELLING PRICES
The Company's future quarterly and annual operating results are subject
to fluctuations due to a wide variety of factors, many of which are outside of
its control, including declines in average selling prices of the Company's
products, failure to introduce new products and to implement technologies on a
timely basis, the inability to obtain adequate supplies of wafers or finished
die from the Company's manufacturing sources, market acceptance of the Company's
and its customers' products, the failure to anticipate changing customer product
requirements, and the timing and announcement of new product introductions by
the Company and its competitors. Other factors include changes in product mix or
fluctuations in manufacturing yield, seasonal fluctuations in customer demand
for the Company's products, the level of inventory write-downs, the timing of
significant orders, increased expenses associated with new product introductions
or process changes, the ability of customers to make payments to the Company,
increases in material costs, increases in costs associated with the expansion of
sales channels, increases in general and administrative expenses and certain
production and other risks associated with using independent manufacturers. In
this regard, in the quarter ended June 30, 1996, the Company experienced
significant declines in revenues and gross profit from the prior quarter as a
result of intense price pressure in the SRAM market. The Company's future
operating results will also depend in part on general economic conditions in
Asia, the United States and its other markets. In addition, there can be no
assurance that the markets for the Company's products will continue to grow.
Although average selling prices for the Company's SRAM products
generally increased in fiscal 1995, competitive pricing pressures resulted in
significant price decreases for 256K SRAM products in September 1995. These
pricing pressures adversely impacted the majority of the Company's SRAM
products, and to a lesser extent, its nonvolatile memory products in the nine
months ended June 30, 1996 and have continued to have an adverse impact in the
current quarter. The Company is unable to predict when or if such declines in
prices will moderate. Historically, average selling prices for semiconductor
memory products have declined and the Company expects that average selling
prices will decline in the future. Accordingly, the Company's ability to
maintain or increase revenues in future periods will be highly dependent upon
its ability to increase unit sales volume of existing products and to introduce
and sell new products which compensate for the anticipated declines in the
average selling prices of its products. Declining average selling prices will
also adversely affect the Company's gross margins unless the Company is able to
reduce its cost per unit to the extent necessary to offset declines in average
selling prices. There can be no assurance that the Company will be able to
increase unit sales volumes, introduce and sell new products or reduce its cost
per unit.
PRODUCT CONCENTRATION AND DEPENDENCE ON PERSONAL COMPUTER INDUSTRY
In fiscal 1995 and the first three quarters of fiscal 1996, a majority
of the Company's net sales were derived from the sale of SRAM products. A
substantial portion of the Company's products are incorporated into
computer-related products such as modems or networks and into personal
computers. The PC industry has from time to time experienced cyclical, depressed
business conditions, often in connection with, or in anticipation of, a decline
in general economic conditions. Such industry downturns have resulted in reduced
product demand and declining average selling prices. The Company's business and
operating results would be
10
12
materially and adversely affected by any future downturns in the PC industry or
in computer-related industries using its products.
DEPENDENCE ON INDEPENDENT WAFER FOUNDRIES
The Company has adopted a fabless manufacturing strategy with the
objective of establishing collaborative manufacturing relationships with
selected semiconductor manufacturers. To date, the Company's principal
manufacturing relationship has been with TSMC, and in fiscal 1995, the Company
obtained substantially all of its wafers from TSMC. Although in the first
quarter of fiscal 1996, the Company began to expand its wafer supply base by
adding production wafers from Chartered and UMC, the Company remains dependent
on TSMC for a significant majority of its wafer supply. Each of the Company's
wafer suppliers also fabricates for other integrated circuit companies,
including certain of the Company's competitors. UMC also manufacturers its own
SRAMs. The Company has written commitments from certain of its foundries
specifying increasing wafer quantities, but the Company would have little
recourse if its wafer suppliers experienced manufacturing failures or yield
shortfalls, chose to prioritize capacity for other use or reduced deliveries to
the Company. There can be no assurance that the Company's foundries will produce
wafers at acceptable specifications and yields or will allocate sufficient wafer
capacity to satisfy its wafer requirements. Moreover, there can be no assurance
that the Company would be able to qualify alternative manufacturing sources for
existing or new products in a timely manner or that such alternative
manufacturing sources would be able to produce an adequate supply of wafers. If
the Company were unable to obtain an adequate supply of wafers from its current
or any alternative sources in a timely manner, its business and operating
results would be materially and adversely affected.
INCREASED COMPETITION
The semiconductor memory market is intensely competitive and has been
characterized by price erosion, rapid technological change, short product life
cycles, cyclical market patterns and heightened foreign and domestic
competition. The Company competes with a number of major domestic and
international suppliers of high speed SRAMs, including Alliance Semiconductor,
Cypress Semiconductor, Integrated Device Technology, Inc. ("IDT"), Micron
Technology, Motorola, Samsung, Toshiba Semiconductor, UMC, and Winbond
Electronics. The Company also competes with new and emerging companies that have
recently entered or may in the future enter the market. The Company may also
face significant competition from other domestic and foreign integrated circuit
manufacturers that have advanced technological capabilities and have not
previously participated in the SRAM market sector or from companies that may
develop products or technologies that might replace SRAMs or any other products
offered by the Company. Another source of competition may come from companies
with both SRAM and DRAM capabilities that may choose to increase their
production of SRAMs if the DRAM market continues to deteriorate. Increased
competition could materially and adversely affect the financial results of the
Company. For example, in the September 1995 quarter, UMC reduced its prices for
SRAMs and this resulted in declines in the Company's selling prices for its SRAM
products and lower gross margins in the first nine months of fiscal 1996.
MANAGEMENT OF GROWTH
The Company has grown rapidly over the last several years. This growth
has resulted in a significant increase in responsibilities for existing
management which has placed, and may continue to place, a significant strain on
the Company's limited personnel and other resources. The Company's ability to
manage its growth effectively will require it to continue to improve its
operational, financial and management systems and to successfully train,
motivate and manage its employees. If the Company's management is unable to
manage growth effectively and properly execute its strategies, the Company's
business and operating results could be materially and adversely affected.
11
13
INTERNATIONAL OPERATIONS
Sales to international customers represent a significant percentage of
the Company's net sales. This percentage may fluctuate over time in response to
worldwide market demand for the Company's products. The Company's Taiwan
subsidiary employs over 50% percent of the Company's total workforce. In
addition, substantially all of the Company's foundries and assembly and test
operations are located in Asia. This concentration of sales, manufacturing,
assembly and test operations in Asia subjects the Company to the risks of
conducting business internationally, including economic conditions in Asia,
particularly Taiwan, changes in trade policy and regulatory requirements,
tariffs and other trade barriers and restrictions, the burdens of complying with
foreign laws and, possibly, political instability. The Company transacts
business predominately in U.S. and New Taiwan ("NT") dollars. Such transactions
expose the Company to the risk of exchange rate fluctuations. Although the
Company's business and results of operations have not been materially and
adversely impacted by exchange rate fluctuations, there can be no assurance that
future fluctuations in the currency exchange rates will not materially and
adversely affect its business and operating results.
PATENTS AND LICENSES
The Company's success depends in part on its ability to obtain patents,
licenses and other intellectual property rights covering its products. The
process of seeking patent protection can be long and expensive and there can be
no assurance patents will be issued. As is typical in the semiconductor
industry, the Company has been and may from time to time continue to be notified
of claims that it may be infringing certain 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, no assurance can be given
that any licenses will be offered or that the terms of any offered licenses will
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 the Company to incur substantial liabilities and to suspend
the manufacture of the products utilizing the invention or to attempt to develop
non-infringing products, 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 the
alleged infringement by the Company of third party intellectual property rights
or which may be necessary to protect patents or other intellectual property
rights of the Company. Any litigation relating to patent infringement or other
intellectual property matters could result in substantial cost and diversion of
resources by the Company, which could materially and adversely affect the
Company's business and operating results.
RISK OF INCREASED TAXES
The Company's tax rate could increase for a number of reasons. For
example, if the proportions of taxable income shifted such that a greater
proportion of taxable income is earned by U.S. operations, the Company's
effective tax rate may increase. It is possible that the Taiwan tax holiday
applicable to the earnings of ISSI-Taiwan could be modified by changes in law or
otherwise reduced. In addition, the Company's taxes would increase if all or a
portion of the earnings of ISSI-Taiwan were to become subject to U.S. tax as the
result of actual dividends or through U.S. rules for taxing controlled foreign
corporations. Further, if profits of ISSI-Taiwan are distributed to the Company
as dividends they become subject to Taiwan withholding tax as well as U.S. tax
(with an offset for underlying Taiwan taxes paid) and the tax rate would
increase. It is not the Company's intention to cause ISSI-Taiwan to distribute
dividends.
ISSI-Taiwan is a controlled foreign corporation ("CFC") for U.S. income
tax purposes. Under U.S. rules for taxing CFCs, all or a portion of the earnings
of ISSI-Taiwan may become subject to U.S. tax as inclusions in the U.S. taxable
income of the Company (with a credit for foreign taxes paid by ISSI-Taiwan) if
one or more of a number of events occur. Such events include, but are not
limited to: ISSI-Taiwan accumulating cash and other passive assets in excess of
25% of its total assets; ISSI-Taiwan lending funds to the Company or otherwise
investing in certain proscribed assets; and ISSI-Taiwan engaging in various
types of
12
14
transactions defined in the Subpart F provisions of the U.S. Internal Revenue
Code. If cash is accumulated through operations and not otherwise invested in
non-passive assets such as capital equipment, such amounts in excess of 25% of
total assets would cause the Company's effective tax rate to increase. The
Company believes that its existing plans will minimize the impact of the CFC
rules for the immediate future, subject to such changes in U.S. tax laws as may
occur. However, over time the CFC rules may cause the Company's tax rate to
increase.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock increased substantially
after the Company's initial public offering in February 1995, subsequently
declined to below the public offering price, and is expected to be subject to
wide fluctuations in response to quarter-to-quarter variations in operating
results, decreases in the selling prices of its products, future announcements
by the Company or its competitors, increases or decreases in wafer capacity,
general conditions in the semiconductor or computer industries, governmental
regulations, litigation, new or revised earnings estimates, comments or
recommendations issued by analysts who follow the Company, its competitors or
the semiconductor industry and other events or factors. In addition, stock
markets have experienced extreme price and trading volume volatility in recent
years. This volatility has had a substantial effect on the market prices of
securities of many high technology companies for reasons frequently unrelated to
the operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock.
13
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEEDINGS
Please see Part I Financial Information, Item 1, Note 7 to the
Condensed Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report.
Exhibit 11.1 Computation of Earnings Per Share.
* Exhibit 10.1 Amended and Restated Limited Liability Company
Agreement of Wafertech, LLC, dated as of August 9, 1996.
* Exhibit 10.2 Purchase Agreement by and between Taiwan
Semiconductor Manufacturing Corporation, as Seller, and Analog
Devices, Inc., Altera Corporation and Integrated Silicon
Solution, Inc., as Buyers
Exhibit 27 Financial Data Schedule
- ------------
* Confidential treatment has been requested for certain portions
of the exhibit and the confidential portions have been omitted
and filed separately with the Securities and Exchange Commission.
(b) The registrant did not file any reports on Form 8-K during the
quarter ended June 30, 1996.
14
16
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 14, 1996 /s/ Gary L. Fischer.
--------------------
Gary L. Fischer
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15