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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, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission file number 000-23084
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INTEGRATED SILICON SOLUTION, INC.
Delaware 77-0199971
-------------------------------- -----------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
2231 Lawson Lane, Santa Clara, California 95054
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(Address of principal executive offices) zip code
Registrant's telephone number, including area code (408) 588-0800
-------------------------
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 3, 2001 was 26,481,903
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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,
------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net sales (See Note 13) $ 20,013 $ 38,512 $ 137,265 $ 91,795
Cost of sales 23,513 26,173 115,131 64,376
--------- --------- --------- ---------
Gross profit (loss) (3,500) 12,339 22,134 27,419
--------- --------- --------- ---------
Operating Expenses:
Research and development 6,375 4,799 19,704 12,615
Selling, general and administrative 4,399 4,146 16,517 10,775
--------- --------- --------- ---------
Total operating expenses 10,774 8,945 36,221 23,390
--------- --------- --------- ---------
Operating income (loss) (14,274) 3,394 (14,087) 4,029
Other income (expense), net 1,350 1,487 4,702 1,947
Gain on sale of ICSI 1,753 847 8,046 847
Gain on sale of other investments -- -- 22,470 --
--------- --------- --------- ---------
Income (loss) before income taxes and
equity in net income of affiliated companies (11,171) 5,728 21,131 6,823
Provision (benefit) for income taxes (9,163) 400 (1,087) 600
--------- --------- --------- ---------
Net income (loss) before equity in
net income (loss) of affiliated companies (2,008) 5,328 22,218 6,223
Equity in net income (loss) of
affiliated companies (1,695) 4,154 3,623 7,138
--------- --------- --------- ---------
Net income (loss) $ (3,703) $ 9,482 $ 25,841 $ 13,361
========= ========= ========= =========
Basic income (loss) per share $ (0.14) $ 0.37 $ 0.99 $ 0.59
========= ========= ========= =========
Shares used in basic per share calculation 26,337 25,349 26,084 22,573
========= ========= ========= =========
Diluted income (loss) per share $ (0.14) $ 0.34 $ 0.93 $ 0.53
========= ========= ========= =========
Shares used in diluted per share calculation 26,337 28,113 27,699 25,186
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
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INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income (loss) $ (3,703) $ 9,482 $ 25,841 $ 13,361
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment (1,387) (143) (1,921) 927
-------- -------- -------- --------
Comprehensive income (loss) $ (5,090) $ 9,339 $ 23,920 $ 14,288
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 30, SEPTEMBER 30,
2001 2000
----------- -------------
(unaudited) (1)
ASSETS
Current assets:
Cash and cash equivalents $ 10,747 $ 38,778
Short-term investments 109,550 58,800
Accounts receivable 18,830 26,525
Accounts receivable from related parties (See Note 13) 759 1,526
Inventories 62,459 63,217
Other current assets 4,654 1,271
--------- ---------
Total current assets 206,999 190,117
Property, equipment, and leasehold improvements, net 8,067 5,429
Other assets 50,702 65,178
--------- ---------
Total assets $ 265,768 $ 260,724
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,058 $ 20,411
Accounts payable to related parties (See Note 13) 1,928 13,043
Accrued compensation and benefits 2,859 2,424
Accrued expenses 7,640 7,513
Income tax payable 4,019 648
Current portion of long-term obligations 152 140
--------- ---------
Total current liabilities 27,656 44,179
Income tax payable - non-current -- 4,996
Long-term obligations 198 314
Stockholders' equity:
Preferred stock -- --
Common stock 3 3
Additional paid-in capital 220,590 217,845
Retained earnings (accumulated deficit) 23,015 (2,826)
Accumulated comprehensive income (5,690) (3,769)
Unearned compensation (4) (18)
--------- ---------
Total stockholders' equity 237,914 211,235
--------- ---------
Total liabilities and stockholders' equity $ 265,768 $ 260,724
========= =========
(1) Derived from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
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INTEGRATED SILICON SOLUTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
NINE MONTHS ENDED
JUNE 30,
-----------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 25,841 $ 13,361
Gain on sale of investments (30,516) (847)
Depreciation and amortization 2,513 2,377
Equity in net income of affiliated companies (3,623) (7,138)
Other charges to net income not affecting cash -- 200
Net effect of changes in current and other assets and current liabilities (13,750) (20,140)
-------- --------
Cash used in operating activities (19,535) (12,187)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (5,151) (2,951)
Purchases of available-for-sale securities (81,300) (55,450)
Sales of available-for-sale securities 30,550 12,350
Proceeds from partial sale of Integrated Circuit Solution, Inc. ("ICSI") 15,484 3,255
Investment in WaferTech, LLC ("WaferTech") -- (2,667)
Proceeds from the sale of WaferTech 40,669 --
Investment in NexFlash -- (1,361)
Proceeds from partial sale of NexFlash 6,167 --
Investment in Semiconductor Manufacturing International Corp. ("SMIC") (14,250) --
Other investments (3,320) (200)
-------- --------
Cash used in investing activities (11,151) (47,024)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 2,759 96,113
Principal payments on notes payable and long-term obligations (104) (113)
-------- --------
Cash provided by financing activities 2,655 96,000
-------- --------
Net increase (decrease) in cash and cash equivalents (28,031) 36,789
Cash and cash equivalents at beginning of period 38,778 15,975
-------- --------
Cash and cash equivalents at end of period $ 10,747 $ 52,764
======== ========
See accompanying notes to condensed consolidated financial statements.
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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, 2001 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2001.
2. CONCENTRATIONS
In the three months ended June 30, 2001, no individual customer accounted
for over 10% of net sales. Sales to Flextronics International accounted for
approximately 11% of total net sales for the three months ended June 30, 2000,
and approximately 14% and 12% of total net sales for the nine months ended June
30, 2001 and June 30, 2000, respectively. Substantially all of the sales to
Flextronics were for products to be delivered to Cisco Systems, Inc.
3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash, cash equivalents and short-term investments consisted of the
following:
(In thousands)
JUNE 30 SEPTEMBER 30
2001 2000
-------- ------------
Cash $ 5,224 $ 10,624
Money market instruments 5,523 28,154
Municipal bonds due in more than 3 years 109,550 58,800
-------- --------
$120,297 $ 97,578
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INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
The following is a summary of inventories by major category: (In
thousands)
JUNE 30 SEPTEMBER 30
2001 2000
------- ------------
Purchased components $12,025 $17,566
Work-in-process 662 11,737
Finished goods 49,772 33,914
------- -------
$62,459 $63,217
======= =======
5. OTHER ASSETS
Other assets consisted of the following: (In thousands)
JUNE 30 SEPTEMBER 30
2001 2000
------- ------------
Investment in ICSI $26,017 $31,525
Investment in WaferTech, LLC -- 23,467
Investment in SMIC 18,850 4,600
Other 5,835 5,586
------- -------
$50,702 $65,178
======= =======
6. INCOME TAXES
The Company recorded a benefit for income taxes of $9,163,000 for the
three months ended June 30, 2001 and $1,087,000 for the nine months ended June
30, 2001. The income tax provision for the three months and nine months ended
June 30, 2000 was $400,000 and $600,000 respectively, consisting of taxes on
foreign earnings and foreign withholding taxes.
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INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ --------------------
2001 2000 2001 2000
---------- ------- ------- -------
Numerator for basic and diluted net income (loss) per share:
Net income (loss) $ (3,703) $ 9,482 $25,841 $13,361
========== ======= ======= =======
Denominator for basic net income (loss) per share:
Weighted average common shares outstanding 26,337 25,349 26,084 22,573
Dilutive stock options -- 2,461 1,592 2,186
Dilutive warrants -- 303 23 427
---------- ------- ------- -------
Denominator for diluted net income (loss) per share 26,337 28,113 27,699 25,186
========== ======= ======= =======
Basic net income (loss) per share $ (0.14) $ 0.37 $ 0.99 $ 0.59
========== ======= ======= =======
Diluted net income (loss) per share $ (0.14) $ 0.34 $ 0.93 $ 0.53
========== ======= ======= =======
The above diluted calculation for the three months ended June 30, 2001
does not include approximately 4,154,000 shares attributable to options as of
June 30, 2001 as their impact would be anti-dilutive. The above diluted
calculation for the nine months ended June 30, 2001 and 2000 does not include
approximately 826,000 and 107,000 shares attributable to options as of June 30,
2001 and 2000, respectively, as their impact would be anti-dilutive.
8. 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.
9. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition", which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. The Company will be required to adopt
the provisions of SAB 101 in the fourth quarter of fiscal 2001. The Company
believes that its revenue recognition policy is in compliance with the
provisions of SAB 101 and that the adoption of SAB 101 will have no material
effect on its financial position or results of operations.
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INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". The new rules require
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting and goodwill acquired after this date will no
longer be amortized, but will be subject to annual impairment tests. All other
intangible assets will continue to be amortized over their estimated useful
lives. As the Company has not completed any business combinations through June
30, 2001, the Company believes that these standards will not have a material
impact on its financial position or operating results.
10. LITIGATION
In April 1998, the U.S. Department of Commerce ("DOC") published an
antidumping duty order on imports of SRAMs from Taiwan, from where the Company
currently imports a majority of its SRAMs. As a consequence of this antidumping
duty order, the Company is required to post a cash deposit on imports of Taiwan
fabricated SRAM wafers or devices at the ad valorem rate of 7.56%.
On April 28, 2000, Micron Technology Inc. ("Micron") requested an
administrative review of the Company's Taiwan fabricated SRAMs for the period
from April 1, 1999 through March 31, 2000. For entries during this period, the
cash deposits could be returned to the Company or, alternatively, the Company
could forfeit amounts deposited and owe duties and interest in addition to the
amounts deposited, depending on results of the DOC administrative review. The
final results of the review are expected in calendar year 2001 and will
establish a new deposit rate for subsequent entries, which may be higher or
lower than the current rate.
The Company has retained legal counsel to defend its interests in the
antidumping proceedings. In addition, respondents (including ISSI) have
challenged certain aspects of the antidumping determination in federal court
proceedings. On August 29, 2000, pursuant to an appeal by ISSI and other
respondents, the U.S. Court of International Trade affirmed the International
Trade Commission ("ITC") decision to reverse the ITC's earlier ruling supporting
the imposition of antidumping duties and rule instead in favor of respondents.
This decision by the Court of International Trade has been appealed by Micron to
the Federal Circuit Court of Appeals. If such appeal is not successful, the
antidumping case will be terminated, the order will be revoked, and the Company
will be entitled to a full refund of cash deposits. Pending resolution of the
appeal, the DOC will continue to administer the antidumping order.
Duties calculated and assessed by the government could have a material
adverse affect on the Company's gross margins and profits. Any reviews or
proceedings might not mitigate or eliminate antidumping duties.
11. LONG TERM OBLIGATIONS
The Company leases certain of its equipment under a capital lease. The
lease is collateralized by the underlying assets. At June 30, 2001, property and
equipment with a cost of $600,000 was subject to this financing arrangement.
Related accumulated amortization at June 30, 2001 amounted to $237,500. Under
the terms of the lease, the Company owes monthly payments of $15,108 through
September 1, 2003. Remaining principal and interest payments were $349,908 and
$43,000, respectively, at June 30, 2001.
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INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. GEOGRAPHIC AND SEGMENT INFORMATION
The Company has one operating segment, which is to design, develop, and
market high-performance SRAM, DRAM, and other memory products. The following
table summarizes the Company's operations in different geographic areas:
NINE MONTHS ENDED
JUNE 30,
2001 2000
--------- ---------
(IN THOUSANDS)
Net Sales
To customer from U.S. operations $ 122,459 $ 78,828
To customer from Hong Kong operations 14,806 12,967
Intercompany from U.S. 14,965 12,969
Intercompany from Hong Kong 372 1,091
--------- ---------
152,602 105,855
--------- ---------
Eliminations (15,337) (14,060)
--------- ---------
Total net sales $ 137,265 $ 91,795
========= =========
Operating income (loss)
U.S. operations $ (12,997) $ 3,470
Hong Kong operations (938) 1,133
China operations (385) --
--------- ---------
(14,320) 4,603
--------- ---------
Eliminations (233) (574)
--------- ---------
Total operating income $ (14,087) $ 4,029
========= =========
Long-lived assets
U.S. operations $ 7,335 $ 5,510
Hong Kong operations 483 227
China operations 249 --
--------- ---------
Total long-lived assets $ 8,067 $ 5,737
========= =========
13. RELATED PARTY TRANSACTIONS
For the nine months ended June 30, 2001 and June 30, 2000, the Company
sold approximately $189,000 and $916,000, respectively, of memory products to
Integrated Circuit Solution, Inc. ("ICSI") in which the Company currently has
approximately a 31% ownership. The Company also provides services and licenses
certain products to ICSI. At June 30, 2001 and September 30, 2000, the Company
had an accounts receivable balance from ICSI of approximately $179,000 and
$709,000, respectively.
The Company purchases goods and contract manufacturing services from ICSI.
For the nine months ended June 30, 2001 and June 30, 2000, purchases of goods
and services were approximately $12,775,000 and $54,826,000, respectively. At
June 30, 2001 and September 30, 2000, the Company had an accounts payable
balance to ICSI of approximately $1,523,000 and $12,997,000, respectively.
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INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine months ended June 30, 2001 and June 30, 2000, the Company
sold approximately $0 and $212,000, respectively, of memory products to NexFlash
Technology, Inc. ("NexFlash"), in which the Company currently has approximately
a 14% ownership. In addition, the Company received approximately $177,000 and
$139,000 of sublease income from NexFlash in the nine months ended June 30, 2001
and June 30, 2000, respectively. The Company also provides NexFlash various
administrative support services for which it is reimbursed. At June 30, 2001 and
September 30, 2000, the Company had an accounts receivable balance from NexFlash
of approximately $252,000 and $343,000, respectively.
The Company purchases goods and services from NexFlash. For the nine
months ended June 30, 2001 and June 30, 2000, purchases of goods and services
were approximately $0 and $348,000, respectively. At June 30, 2001 and September
30, 2000, the Company had an accounts payable balance to NexFlash of
approximately $0 and $46,000, respectively.
The Company provides goods and services to GetSilicon, Inc.
("GetSilicon"), an equity investee, in which the Company currently has
approximately a 31% ownership. For the nine months ended June 30, 2001 and June
30, 2000, the Company provided goods and services of approximately $519,000 and
$0, respectively, to GetSilicon. At June 30, 2001, the Company had an accounts
receivable balance from GetSilicon of approximately $217,000.
In January 2001, the Company entered into an agreement for
business-to-business data exchange and application services with GetSilicon. For
the nine months ended June 30, 2001, the purchase of services under this
agreement was approximately $140,000. At June 30, 2001, the Company had an
accounts payable balance to GetSilicon of approximately $140,000.
For the nine months ended June 30, 2001, the Company sold approximately
$110,000 of memory products to E-CMOS Technology Corporation ("E-CMOS"), an
equity investee, in which the Company currently has approximately a 22%
ownership. At June 30, 2001, the Company had an accounts receivable balance from
E-CMOS of approximately $110,000.
The Company receives administrative support services and reimburses E-CMOS
for expenses incurred on its behalf. At June 30, 2001, the Company had an
accounts payable balance to E-CMOS of approximately $265,000.
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INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INVESTMENT IN INTEGRATED CIRCUIT SOLUTION INCORPORATION ("ICSI")
The following summarizes financial information for ICSI, an equity
investee. (In thousands)
JUNE 30, SEPTEMBER 30,
2001 2000
--------- ------------
Current assets $ 84,986 $109,428
Property, plant, and equipment and other assets 49,012 45,873
Current liabilities 35,837 53,037
Long-term debt 11,751 15,517
NINE MONTHS ENDED
JUNE 30,
2001 2000
-------- --------
Net sales $ 99,898 $107,991
Gross profit 29,129 32,192
Net income 15,344 19,452
15. TRANSACTIONS
In December 2000, the Company sold its investment of $23.5 million in
WaferTech, LLC to Taiwan Semiconductor Manufacturing Corporation for $40.7
million resulting in a gain of $17.2 million.
On January 16, 2001, ICSI completed an initial public offering in Taiwan.
As a result of shares of ICSI sold by the Company in the initial public offering
and subsequently, the Company recorded gross proceeds of approximately $8.1
million in the March 2001 quarter resulting in a gain of $6.3 million.
In February 2001, the Company, along with other shareholders, sold a
portion of its ownership in NexFlash to Winbond International Corporation for
$6.2 million, resulting in a gain of $5.3 million. As a result of this
transaction, the Company's ownership percentage of NexFlash decreased from
approximately 32% to approximately 14%. Subsequent to the completion of the
transaction, the Company accounts for NexFlash on the cost basis.
In February 2001, the Company invested $2.8 million for approximately 22%
of E-CMOS Technology Corporation ("E-CMOS") located in Hsin-Chu, Taiwan, R.O.C.
The Company is accounting for E-CMOS on the equity basis and recording its
percentage gain or loss on a one quarter lag.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We have made forward-looking statements in this report on Form 10-Q 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 such words as "believe," "expect," "anticipate," or similar
expressions, we are making forward-looking statements. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth below and elsewhere in
this report on Form 10-Q.
BACKGROUND
Integrated Silicon Solution, Inc. was founded in October 1988. We design,
develop and market high performance memory semiconductors used in Internet
access devices, networking equipment, telecom and mobile communications
equipment, and computer peripherals. Our high speed and low power SRAMs and our
low to medium density DRAMs enable customers to design products that meet the
demanding connectivity and portability requirements of the data communications
and wireless communications markets. Our objective is to capitalize on major
trends such as the expansion of the communications and Internet infrastructure,
the proliferation of wireless devices, and other trends in electronics
technologies. Our goal is to be a focused supplier of high performance memories
targeting the growing connectivity and communications markets.
We believe our close relationship with leading silicon wafer foundries
gives us access to the advanced wafer process technology required to design and
manufacture high performance memories. We entered into our first development
program with Taiwan Semiconductor Manufacturing Corporation ("TSMC") in 1990 and
our next development program with Chartered Semiconductor in 1994 and have also
worked closely with United Microelectronics Corporation ("UMC") since 1995.
Through this collaborative strategy, we have been at the forefront in utilizing
the most advanced process technology for memories and in securing access to
wafer capacity. We believe our ability to design and develop high performance,
cost-effective products, and our collaborative development with our
manufacturing partners utilizing state-of-the-art process technology, gives us a
competitive advantage.
RESULTS OF OPERATIONS
Our financial results for fiscal 2001 and fiscal 2000 reflect accounting
for ICSI and GetSilicon on the equity basis and include our percentage share of
the results of their respective operations. Our financial results for fiscal
2001 and for fiscal 2000 through the period ended January 31, 2001 reflect
accounting for NexFlash on the equity basis and include our percentage share of
the results of its operations. Effective February 2001, our ownership of
NexFlash became less than 20%, and we began accounting for NexFlash on the cost
basis. At June 30, 2001, we owned approximately 31% of ICSI, approximately 14%
of NexFlash and approximately 31% of GetSilicon.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Net Sales. Net sales consist principally of total product sales less
estimated sales returns. Net sales decreased by 48% to $20.0 million in the
three months ended June 30, 2001 from $38.5 million in the three months ended
June 30, 2000. The decrease in sales was principally due to a decrease in unit
shipments of our SRAM products, primarily our 256K and 1024K SRAM products. In
addition, the average selling prices of our DRAM products generally decreased in
the three months ended June 30, 2001 compared to the three months ended June 30,
2000. 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. In this regard, we experienced a decline in the average
selling prices for certain of our products in the three months ended June 30,
2001 as compared to the three months ended March 31, 2001. We anticipate a
further decline in the average selling prices for certain of our products in the
three months ended September 30, 2001. There can be no assurance that such
declines will be offset by higher volumes or by higher prices on newer products.
In this
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regard, we experienced a decrease in unit shipments for certain of our products
in the three months ended June 30, 2001 as compared to the three months ended
March 31, 2001.
In the three months ended June 30, 2001, no individual customer accounted
for over 10% of net sales. Sales to Flextronics International accounted for
approximately 11% of total net sales for the three months ended June 30, 2000.
Substantially all of the sales to Flextronics were for products to be delivered
to Cisco Systems, Inc. As sales to this customer are executed pursuant to
purchase orders and no purchasing contract exists, this customer can cease doing
business with us at any time.
Gross profit (loss). Cost of sales includes die cost from the wafers
acquired from foundries, subcontracted package costs, assembly costs and test
costs, costs associated with in-house product testing, quality assurance and
import duties. Gross profit decreased to $(3.5) million in the three months
ended June 30, 2001 from $12.3 million in the three months ended June 30, 2000.
As a percentage of net sales, gross profit decreased to (17.5)% in the three
months ended June 30, 2001 from 32.0% in the three months ended June 30, 2000.
In the three months ended June 30, 2001, we recorded an inventory write-down of
$9.0 million, predominately for lower of cost or market accounting on certain of
our products, primarily DRAMs. Excluding the inventory write-downs in the three
months ended June 30, 2001, gross profit for the period was $5.5 million or
27.5% of net sales. Excluding the inventory write-downs in the three months
ended June 30, 2001, the decrease in gross profit was principally due to a
decrease in unit shipments of our SRAM products, primarily our 256K and 1024K
SRAM products. In addition, while the gross margin percentage for our SRAM
products increased in the three months ended June 30, 2001 compared to the three
months ended June 30, 2000, the gross margin percentage for our DRAM products
declined significantly, resulting in a gross margin percentage that declined
overall. 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. In this regard, we experienced a decline in the average
selling prices for certain of our products in the three months ended June 30,
2001 as compared to the three months ended March 31, 2001. We anticipate a
further decline in the average selling prices for certain of our products in the
three months ending September 30, 2001. In addition, product unit costs could
increase if suppliers raise prices, which could result in a material decline in
our gross margin. Although we have product cost reduction programs in place for
certain products 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
we provide.
Research and Development. Research and development expenses increased by
33% to $6.4 million in the three months ended June 30, 2001 from $4.8 million in
the three months ended June 30, 2000. As a percentage of net sales, research and
development expenses increased to 31.9% in the three months ended June 30, 2001
from 12.5% in the three months ended June 30, 2000. The increase in absolute
dollars was primarily the result of increased expenses related to the
development of new products and, to a lesser extent, an increase in engineering
personnel and payroll related expenses. As a result of expense controls
instituted in light of current economic conditions, we anticipate that our
research and development expenses will remain constant or decrease slightly 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 6% to $4.4 million in the three months ended June 30, 2001
from $4.1 million in the three months ended June 30, 2000. As a percentage of
net sales, selling, general and administrative expenses increased to 22.0% in
the three months ended June 30, 2001 from 10.8% in the three months ended June
30, 2000. The increase in absolute dollars was primarily the result of increased
payroll related expenses as a result of the addition, prior to the economic
slow-down, of marketing, sales and administrative personnel and increased
consulting fees. These increases were partially offset by a decrease in selling
commissions associated with lower revenues in the three months ended June 30,
2001 as compared to the three months ended June 30, 2000. As a result of expense
controls instituted in light of current economic conditions, we expect our
selling, general and
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administrative expenses will remain constant or decrease slightly in absolute
dollars in future periods although such expenses may fluctuate as a percentage
of net sales.
Gain on sale of investments. The gain on sale of investment increased to
$1.8 million in the three months ended June 30, 2001 from $0.8 million in the
three months ended June 30, 2000. In the three months ended June 30, 2001, we
sold shares of ICSI in the public market and received gross proceeds of
approximately $2.3 million resulting in a gain of approximately $1.7 million. In
the three months ended June 30, 2000, we sold shares in ICSI to a group of
private investors for $3.3 million, resulting in a pre-tax gain of $0.8 million.
Other income (expense), net. Other income (expense), net decreased by $0.1
million to approximately $1.4 million in the three months ended June 30, 2001
from $1.5 million in the three months ended June 30, 2000. The decrease resulted
from decreased interest income as the impact of the decline in interest rates
more than offset interest earned on the higher cash balances from the sale of
our investments in WaferTech, NexFlash and ICSI.
Provision (benefit) for income taxes. The Company recorded a benefit for
income taxes of $9.2 million for the three months ended June 30, 2001. The
benefit for income taxes for the three months ended June 30, 2001 includes a
benefit of approximately $5.0 million for the reversal of taxes accrued for
foreign operations for which the statute has now expired. Excluding this
benefit, the Company is recording a tax expense of 18.5% for the nine months
ended June 30, 2001. This tax expense reflects foreign taxes on profits in
foreign jurisdictions and the reversal of valuation allowances previously
established. The 18.5% effective tax rate is based on current tax law, the
current estimate of earnings, and the expected distribution of income among
various tax jurisdictions and is subject to change. The income tax provision for
the three months ended June 30, 2000 was $0.4 million, consisting of taxes on
foreign earnings and foreign withholding taxes.
Equity in net income (loss) of affiliated companies. Equity in net income
(loss) of affiliated companies decreased by $5.8 million to $(1.7) million in
the three months ended June 30, 2001 from $4.2 million in the three months ended
June 30, 2000. This primarily reflects a decrease in income from our percentage
share of ICSI's financial results in the three months ended June 30, 2001
compared to the three months ended June 30, 2000.
NINE MONTHS ENDED JUNE 30, 2001 COMPARED TO NINE MONTHS ENDED JUNE 30, 2000
Net Sales. Net sales increased by 50% to $137.3 million in the nine months
ended June 30, 2001, from $91.8 million in the nine months ended June 30, 2000.
The increase in sales was principally due to an increase in unit shipments of
our SRAM products, specifically our 32K x 32, 128K x 16, 64K x 16, and 256K x 16
SRAM products, as well as increased unit shipments of 16 megabit DRAM products.
In addition, the average selling prices of our SRAM products generally increased
in the nine months ended June 30, 2001 compared to the nine months ended June
30, 2000. 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. In this regard, we experienced a decline in the average
selling prices for certain of our products in the three months ended June 30,
2001 as compared to the three months ended March 31, 2001. We anticipate a
further decline in the average selling prices for certain of our products in the
three months ended September 30, 2001. There can be no assurance that such
declines will be offset by higher volumes or by higher prices on newer products.
In this regard, we experienced a decrease in unit shipments for certain of our
products in the three months ended June 30, 2001 as compared to the three months
ended March 31, 2001.
Sales to Flextronics International accounted for approximately 14% and 12%
of total net sales for the nine months ended June 30, 2001 and June 30, 2000,
respectively. Substantially all of the sales to Flextronics were for products to
be delivered to Cisco Systems, Inc. Shipments for Cisco directly, or indirectly
through subcontractors, accounted for approximately 16% of total net sales for
the nine months ended June 30, 2001. Sales to 3Com for both the nine months
ended June 30, 2001 and 2000, were less than 10% of total net sales. However,
shipments for 3Com directly, or indirectly through subcontractors, accounted for
approximately 11%
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of total net sales for the nine months ended June 30, 2001. As sales to these
customers are executed pursuant to purchase orders and no purchasing contract
exists, these customers can cease doing business with us at any time.
Gross Profit. Gross profit decreased 19% to $22.1 million in the nine
months ended June 30, 2001, from $27.4 million in the nine months ended June 30,
2000. As a percentage of net sales, gross profit decreased to 16.1% in the nine
months ended June 30, 2001 from 29.9% in the nine months ended June 30, 2000. We
recorded inventory write-downs of $9.0 million and $11.7 million in the three
months ended June 30, 2001 and March 31, 2001, respectively. These write-downs
were predominately for lower of cost or market accounting on certain of our
products, primarily DRAMs and low power SRAMs. Excluding the inventory
write-downs in the nine months ended June 30, 2001, gross profit for the period
was $42.8 million or 31.2% of net sales. Excluding the inventory write-downs in
the nine months ended June 30, 2001, the increase in gross profit was
principally due to an increase in unit shipments of our SRAM products,
specifically our 32K x 32, 128K x 16, 64K x 16, and 256K x 16 SRAM products. In
addition, increases in the average selling prices of our SRAM products in the
nine months ended June 30, 2001 compared to the nine months ended June 30, 2001
more than offset any increases in product costs while certain product costs
declined resulting in higher gross margins. We believe that the average selling
price of our products will generally 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 will result in a material decline in our gross
margin. In this regard, we experienced a decline in the average selling prices
for certain of our products in the three months ended June 30, 2001 as compared
to the three months ended March 31, 2001. We anticipate a further decline in the
average selling prices for certain of our products in the three months ending
September 30, 2001. In addition, product unit costs could increase if suppliers
raise prices, which could result in a material decline in our gross margin.
Although we have product cost reduction programs in place for certain products
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
56% to $19.7 million in the nine months ended June 30, 2001, from $12.6 million
in the nine months ended June 30, 2000. As a percentage of net sales, research
and development expenses increased to 14.4% in the nine months ended June 30,
2001, from 13.7% in the nine months ended June 30, 2000. The increase in
absolute dollars was primarily the result of increased expenses related to the
development of new products and an increase in engineering personnel and payroll
related expenses. As a result of expense controls instituted in light of current
economic conditions, we anticipate that our research and development expenses
will remain constant or decrease slightly 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 53% to $16.5 million in the nine months ended June 30,
2001 from $10.8 million in the nine months ended June 30, 2000. As a percentage
of net sales, selling, general and administrative expenses increased to 12.0% in
the nine months ended June 30, 2001, from 11.7% in the nine months ended June
30, 2000. The increase in absolute dollars was primarily the result of increased
payroll related expenses as a result of the addition, prior to the economic
slow-down, of marketing, sales and administrative personnel. In addition,
selling commissions increased as a result of higher revenues in the nine months
ended June 30, 2001 compared to the nine months ended June 30, 2000. As a result
of expense controls instituted in light of current economic conditions, we
expect our selling, general and administrative expenses will remain constant or
decrease slightly in absolute dollars in future periods although such expenses
may fluctuate as a percentage of net sales.
Gain on sale of investments. The gain on sale of investment increased to
$8.0 million in the nine months ended June 30, 2001 from $0.8 million in the
nine months ended June 30, 2000. In the three months ended December 31, 2000, we
sold our interest in WaferTech to TSMC for approximately $40.7 million, which
resulted in a pre-tax gain of $17.2 million. On January 16, 2001, ICSI completed
an initial public offering in Taiwan. As a result of shares of ICSI sold by us
in the initial public offering and subsequently, we
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received gross proceeds of approximately $8.1 million in the March 2001 quarter
resulting in a gain of $6.3 million. In February 2001, we, along with other
shareholders, sold a portion of our ownership in NexFlash to Winbond
International Corporation for $6.2 million resulting in a gain of $5.3 million.
In the three months ended June 30, 2001, we sold shares of ICSI in the public
market and received gross proceeds of approximately $2.3 million resulting in a
gain of approximately $1.7 million. The nine months ended June 30, 2000 includes
a pre-tax gain of approximately $0.8 million in the June 2000 quarter related to
the sale of shares of ICSI.
Other income (expense), net. Other income (expense), net increased by $2.8
million to $4.7 million in the nine months ended June 30, 2001 from $1.9 million
in the nine months ended June 30, 2000. The increase resulted from increased
interest income as a result of higher cash balances from the sale of investments
and our follow-on public stock offering in February 2000.
Equity in net income of affiliated companies. Equity in net income of
affiliated companies decreased by $3.5 million to $3.6 million in the nine
months ended June 30, 2001 from $7.1 million in the nine months ended June 30,
2000. This primarily reflects a decrease in income from our percentage share of
ICSI's financial results in the nine months ended June 30, 2001 compared to the
nine months ended June 30, 2000.
Provision (benefit) for income taxes. The Company recorded a benefit for
income taxes of $1.1 million for the nine months ended June 30, 2001. The
benefit for income taxes for the nine months ended June 30, 2001 includes a
benefit of approximately $5.0 million for the reversal of taxes accrued for
foreign operations for which the statute has now expired. Excluding this
benefit, the Company is recording a tax expense of 18.5% for the nine months
ended June 30, 2001. This tax expense reflects foreign taxes on profits in
foreign jurisdictions and the reversal of valuation allowances previously
established. The 18.5% effective tax rate is based on current tax law, the
current estimate of earnings, and the expected distribution of income among
various tax jurisdictions and is subject to change. The income tax provision for
the nine months ended June 30, 2000 was $0.6 million, consisting of taxes on
foreign earnings and foreign withholding taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, our principal sources of liquidity included cash,
cash equivalents and short-term investments of approximately $120.3 million.
During the nine months ended June 30, 2001, operating activities used cash of
approximately $19.5 million. Cash used by operations was primarily due to
decreases in accounts payable of $20.5 million. In addition, decreases in
accounts receivable of $8.5 million were partially offset by net income of $25.8
million adjusted for the gain on the sale of investments of $30.5 million,
equity in net income of affiliated companies of $3.6 million and depreciation of
$2.5 million.
In the nine months ended June 30, 2001, we used $11.2 million for
investing activities compared to $47.0 million in the nine months ended June 30,
2000. The cash used for investing activities during the nine months ended June
30, 2001 was primarily the result of net purchases of available-for-sale
securities of $50.8 million partially offset by proceeds of $40.7 million from
the sale of our investment in WaferTech to TSMC. We also made an additional
investment of $14.3 million in Semiconductor Manufacturing International Corp
("SMIC"), a foundry currently under construction in Shanghai, China. We made
other investments of $3.3 million, including $2.8 million for a 22% interest in
E-CMOS a semiconductor company located in Hsin-Chu, Taiwan. We also generated
$15.5 million from the sale of shares of ICSI stock and $6.2 million from the
sale of NexFlash shares. The cash used for investing activities for the nine
months ended June 30, 2000 was primarily the result of net purchases of
available-for-sale securities of $43.1 million.
In the nine months ended June 30, 2001, we made capital expenditures of
approximately $5.2 million for engineering tools and computer software. We
expect to spend approximately $10.0 million to purchase capital equipment during
the next twelve months, principally for the purchase of design and engineering
tools, additional test equipment and computer software and hardware.
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We generated $2.7 million from financing activities during the nine months
ended June 30, 2001 compared to $96.0 million in the nine months ended June 30,
2000. Cash generated from financing activities for the nine months ended June
30, 2001 was primarily the result of proceeds from the issuance of common stock
of $2.8 million from option exercises and sales under our employee stock
purchase plan. The cash generated in the nine months ended June 30, 2000
included net proceeds from our follow-on public stock offering in the March 2000
quarter of $90.6 million.
In June 1998, we sold approximately 46% of ICSI to a group of private
investors. In fiscal 1999 and fiscal 2000, we sold more of our holdings in ICSI
to private investors. In the three months ended December 31, 2000, we received
$5.1 million from the sale of shares of ICSI under the 1998 ISSI-Taiwan Stock
Plan. On January 16, 2001, ICSI completed an initial public offering in Taiwan.
As a result of shares of ICSI sold by the Company in the initial public offering
and subsequently, we received gross proceeds of approximately $8.1 million in
the March 2001 quarter resulting in a gain of $6.3 million. The Company sold
additional shares of ICSI in the June 2001 quarter and received gross proceeds
of approximately $2.3 million resulting in a gain of approximately $1.7 million.
As of June 30, 2001, we owned approximately 31% of ICSI.
In August 2000, we entered into a wafer fabrication facility investment
agreement with SMIC. Under the terms of this agreement, we committed to invest
$30.0 million. In April 2001, the Company committed to invest an additional
$10.0 million. We have received certain capacity commitments from SMIC. In the
nine months ended June 30, 2001, we made an investment of $14.3 million in SMIC,
bringing our total investment in this foundry as of June 30, 2001, to $18.9
million. An additional $21.1 million is expected to be invested in fiscal year
2002.
In June 1996, we entered into a business venture called WaferTech, LLC
with TSMC, Altera, Analog Devices, and private investors to build a wafer
fabrication facility in Camas, Washington. In December 2000, we sold our
investment of $23.5 million in WaferTech to TSMC for $40.7 million resulting in
a pre-tax gain of $17.2 million.
In fiscal 1995, we agreed to certain minimum wafer purchase commitments
with TSMC in exchange for wafer capacity commitments through 2001. We also
agreed to make certain annual payments to TSMC, the remaining amount of which
totals approximately $4.8 million through 2001, for additional capacity above
the annual base capacity. Wafer purchases in any given year are first applied to
the base capacity and then to our $4.8 million obligation. As a result, the $4.8
million may be subject to forfeiture if we do not purchase the base capacity and
additional capacity for which we have contracted. We do not currently expect to
forfeit any amounts or incur any losses associated with these capacity
agreements. Although we have rights to re-schedule or assign capacity to another
party, there can be no assurance that such re-schedule or assignment would be
successfully accomplished. Should we fail to re-schedule or assign unneeded
capacity, our business and operating results could be adversely affected.
In April 1998, the U.S. Department of Commerce ("DOC") published an
antidumping duty order on imports of SRAMs from Taiwan, from where we currently
import a majority of our SRAMs. As a consequence of this antidumping duty order,
we are required to post a cash deposit on imports of Taiwan fabricated SRAM
wafers or devices at the ad valorem rate of 7.56%.
On April 28, 2000, Micron Technology Inc. ("Micron") requested an
administrative review of our Taiwan fabricated SRAMs for the period from April
1, 1999 through March 31, 2000. For entries during this period, the cash
deposits could be returned to us or, alternatively, we could forfeit amounts
deposited and owe duties and interest in addition to the amounts deposited,
depending on results of the DOC administrative review. The final results of the
review are expected in calendar year 2001 and will establish a new deposit rate
for subsequent entries, which may be higher or lower than the current rate.
We have retained legal counsel to defend our interests in the antidumping
proceedings. In addition, respondents (including ISSI) have challenged certain
aspects of the antidumping determination in federal court proceedings. On August
29, 2000, pursuant to an appeal by ISSI and other respondents, the U.S. Court
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of International Trade affirmed the International Trade Commission ("ITC")
decision to reverse the ITC's earlier ruling supporting the imposition of
antidumping duties and rule instead in favor of respondents. This decision by
the Court of International Trade has been appealed by Micron to the Federal
Circuit Court of Appeals. If such appeal is not successful, the antidumping case
will be terminated, the order will be revoked, and we will be entitled to a full
refund of cash deposits. Pending resolution of the appeal, the DOC will continue
to administer the antidumping order.
Duties calculated and assessed by the government could have a material
adverse affect on our gross margins and profits. Any reviews or proceedings
might not mitigate or eliminate antidumping duties.
We believe our existing funds and available financing 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 bank borrowings, sales of additional shares of ICSI, the
disposition of certain assets, equity financing or debt financing. From time to
time, we may also evaluate potential acquisitions and equity investments
complementary to our memory expertise and market strategy, including investments
in wafer fabrication foundries. To the extent we pursue 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.
CERTAIN FACTORS WHICH MAY AFFECT OUR BUSINESS OR FUTURE OPERATING RESULTS
OUR OPERATING RESULTS ARE EXPECTED TO CONTINUE TO FLUCTUATE AND MAY NOT MEET
PUBLISHED ANALYST FORECASTS. THIS MAY CAUSE THE PRICE OF OUR COMMON STOCK TO
DECLINE.
Our future quarterly and annual operating results are subject to
fluctuations due to a wide variety of factors, including:
o the cyclicality of the semiconductor industry;
o declines in average selling prices of our products;
o cancellation of existing orders or the failure to secure new orders;
o oversupply of memory products in the market;
o our failure to introduce new products and to implement technologies on a
timely basis;
o market acceptance of ours and our customers' products;
o the failure to anticipate changing customer product requirements;
o fluctuations in manufacturing yields;
o failure to deliver products to customers on a timely basis;
o disruption in the supply of wafers or assembly services;
o changes in product mix;
o the timing of significant orders;
o increased expenses associated with new product introductions or process
changes;
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o the ability of customers to make payments to us; and
o increases in antidumping duties.
WE HAVE A RECENT HISTORY OF LOSSES, AND THERE CAN BE NO ASSURANCE THAT WE WILL
BE ABLE TO SUSTAIN PROFITABILITY IN THE FUTURE.
We incurred a loss of $3.7 million in the three months ended June 30,
2001. We were profitable for fiscal 2000 and the first two quarters of fiscal
2001. We incurred losses of $9.5 million and $50.6 million in fiscal 1999 and
1998, respectively. Our ability to maintain profitability on a quarterly basis
in the future will depend on a variety of factors, including our ability to
increase our net sales, introduce new products on a timely basis, secure
sufficient wafer fabrication capacity and control our operating expenses.
Adverse developments with respect to these or other factors could result in
quarterly or annual operating losses in the future.
OUR SALES DEPEND ON SRAM PRODUCTS, AND A DECLINE IN AVERAGE SELLING PRICES OR
REDUCED DEMAND FOR THESE PRODUCTS COULD HARM OUR BUSINESS.
A majority of our net sales are derived from the sale of SRAM products,
which are subject to unit volume fluctuations and declines in average selling
prices which could harm our business. For example, in the three months ended
June 30, 2001, our net sales decreased by 62% to $20.0 million from $52.0
million in the three months ended March 31, 2001, and decreased 20% in the three
months ended March 31, 2001 from $65.2 million in the three months ended
December 31, 2000, principally due to a decrease in unit shipments of our SRAM
products. Further, we anticipate that the average selling prices of our existing
products will decline over time, although the rate of decline may fluctuate for
certain products. Such declines may not be offset by higher volumes or by higher
prices on newer products.
WE MAY NOT BE ABLE TO COMPENSATE FOR PRICE DECREASES IN OUR PRODUCTS.
Competitive pricing pressures due to an industry-wide oversupply of wafer
capacity resulted in significant price decreases for our products during fiscal
1996 through fiscal 1999. While we experienced increases in average selling
prices in fiscal 2000, historically, average selling prices for semiconductor
memory products have declined, and we expect that average selling prices will
decline in the future. In that regard, we experienced a decline in the average
selling prices for certain of our products in the three months ended June 30,
2001 as compared to the three months ended March 31, 2001. We anticipate a
further decline in the average selling prices for certain of our products in the
three months ended September 30, 2001. 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 which compensate for the
anticipated declines in the average selling prices of our existing products.
Declining average selling prices will also adversely affect our gross
margins and profits unless we are able to introduce new products with higher
margins or reduce our cost per unit. We may not be able to increase unit sales
volumes, introduce and sell new products or reduce our cost per unit.
SHIFTS IN INDUSTRY-WIDE CAPACITY MAY CAUSE OUR RESULTS TO FLUCTUATE. IN THE
PAST, SUCH SHIFTS HAVE RESULTED IN SIGNIFICANT INVENTORY WRITE-DOWNS.
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. The semiconductor industry is highly cyclical and
is subject to significant downturns resulting from excess capacity,
overproduction, reduced demand or technological obsolescence. These factors can
result in a decline in average selling prices and the stated value of inventory.
In the three months ended June 30, 2001 and March 31, 2001, we recorded
inventory write-downs of $9.0 and $11.7 million, respectively. The inventory
write-downs were predominately for lower of cost or market accounting on certain
of our products, primarily DRAMs and low power SRAMs. In fiscal 1998, we
recorded inventory write-downs of $23.0 million. The inventory write-downs were
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predominately for lower of cost or market accounting on certain of our products,
primarily SRAMs, and, to a lesser extent, excess inventory.
We also write down to zero carrying value inventory on hand in excess of
six months' estimated sales volumes to cover estimated exposures, unless
adjustments are made to the forecast based on management's judgments for newer
products, end of life products or planned inventory increases. In making such
judgments to write down inventory, management takes into account the product
life cycles which can range from 6 to 24 months, the stage in the life cycle of
the product, the impact of competitors' announcements and product introductions
on our products, and purchasing opportunities due to excess wafer capacity.
We believe that six months is an appropriate period because it is
difficult to accurately forecast for a specific product beyond this time frame
due to the potential introduction of products by competitors, technology
obsolescence or fluctuations in demand. Our policy regarding excess inventory
resulted in inventory writedowns for excess inventory of approximately $5.4
million for fiscal year 1998. Future additional inventory write-downs may occur
due to lower of cost or market accounting, excess inventory or inventory
obsolescence.
IF WE ARE UNABLE TO OBTAIN AN ADEQUATE SUPPLY OF WAFERS, OUR BUSINESS WILL BE
HARMED.
If we are unable to obtain an adequate supply of wafers from our current
or any alternative sources in a timely manner, our business will be harmed. To
date, our principal manufacturing relationship has been with TSMC, from which we
have obtained a majority of our wafers. We also receive wafers from Chartered
Semiconductor and UMC. Each of our wafer foundries also supplies wafers to other
integrated circuit companies, including certain of our competitors. Although we
have written commitments specifying wafer capacities from our suppliers, if
these suppliers experience manufacturing failures or yield shortfalls, choose to
prioritize capacity for other uses, or reduce or eliminate deliveries to us, we
may not be able to enforce fulfillment of the delivery commitments.
Additionally, 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 agree to deliver an adequate supply of wafers to us.
FOUNDRY CAPACITY CAN BE LIMITED AND WE MAY BE REQUIRED TO ENTER INTO COSTLY
LONG-TERM SUPPLY ARRANGEMENTS TO SECURE FOUNDRY CAPACITY.
If we are not able to obtain additional foundry capacity as required, our
relationships with our customers would be harmed and our future sales would be
adversely impacted. In order to secure additional foundry capacity, we have
entered into and expect to enter into various arrangements with suppliers, which
could include:
o contracts that commit us to purchase specified quantities of silicon
wafers over extended periods;
o investments in foundries;
o joint ventures;
o other partnership relationships with foundries;
o option payments or other prepayments to foundries; or
o nonrefundable deposits with or loans to foundries in exchange for
capacity commitments.
We may not be able to make any such arrangements in a timely fashion or at
all, and such arrangements, if any, may not be on terms favorable to us.
Moreover, if we are able to secure foundry capacity, we may be obligated to
utilize all of that capacity or incur penalties. Such penalties may be expensive
and could harm our financial results.
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ANY DOWNTURN IN THE MARKETS WE SERVE WOULD HARM OUR BUSINESS.
A majority of our products are incorporated into products such as internet
access devices, networking equipment, and telecom/mobile communications devices.
Historically, these markets have 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. These markets
are currently experiencing severely depressed business conditions which are
adversely affecting our business.
WE DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR A HIGH PERCENTAGE OF OUR SALES, AND
THE LOSS OF A SIGNIFICANT CUSTOMER COULD CAUSE A DECLINE IN OUR PROFITS.
Sales to Flextronics International accounted for approximately 14% of
total net sales for the nine months ended June 30, 2001. Substantially all of
the sales to Flextronics were for products to be delivered to Cisco Systems,
Inc. Shipments for Cisco directly, or indirectly through subcontractors,
accounted for approximately 16% of total net sales for the nine months ended
June 30, 2001. Sales to 3Com accounted for approximately 7% of total net sales
for the nine months ended June 30, 2001. Shipments for 3Com directly, or
indirectly through subcontractors, accounted for approximately 11% of total net
sales for the nine months ended June 30, 2001. In fiscal 2000, no single
individual accounted for over 10% of net sales. However, in fiscal 2000,
shipments for Cisco directly, or indirectly through subcontractors, accounted
for approximately 13% of net revenue. In fiscal 1999 and 1998, one customer,
3Com, accounted for approximately 20% and 19% of net sales, respectively. As
sales to these customers are executed pursuant to purchase orders and no
purchasing contract exists, these customers can cease doing business with us at
any time. In this regard, we experienced order cancellations from these
customers in the March 2001 quarter. We expect a significant portion of our
future sales to remain concentrated within a limited number of strategic
customers. We may not be able to retain our strategic customers, such customers
may cancel or reschedule orders, or 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.
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. These defects also may cause us to incur significant
warranty, support and repair costs, may 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 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 or could lessen market
acceptance of our products. Our customers could also seek and obtain damages
from us for their losses. A product liability claim brought against us, even if
unsuccessful, would likely be time consuming and costly to defend.
STRONG COMPETITION IN THE SEMICONDUCTOR MEMORY MARKET MAY HARM OUR BUSINESS.
The semiconductor memory 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. Certain 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 the high
performance memory market depends on factors both within and outside of our
control, including:
o real or perceived imbalances in supply and demand;
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o product pricing;
o the rate at which OEM customers incorporate our products into their
systems;
o the success of our customers' products;
o access to advanced process technologies at competitive prices;
o product functionality, performance and reliability;
o successful and timely product development;
o the supply and cost of wafers;
o achievement of acceptable yields of functional die;
o the gain or loss of significant customers; and
o the nature 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.
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
of others. 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. For example, for a number of years we have been corresponding with a
large international semiconductor company regarding potential infringement of
certain of their patents by us and certain of our patents by them. Other
companies may pursue claims against us with respect to the alleged infringement
of patents, maskwork rights, copyrights or other intellectual property owned by
third parties. If it appears necessary or desirable, we may seek licenses under
patents that we are 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 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 materially and adversely affect our business and operating results.
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 cost and diversion of our resources
which could harm our business.
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WE HAVE SIGNIFICANT INTERNATIONAL SALES AND RISKS OF OUR INTERNATIONAL
OPERATIONS COULD HARM OUR OPERATING RESULTS.
In the nine months ended June 30, 2001, approximately 54% of our net sales
was attributable to customers located in the United States, 24% was attributable
to customers located in Europe and 22% was attributable to customers located in
Asia. In fiscal 2000, approximately 54% of our net sales was attributable to
customers located in the United States, 23% was attributable to customers
located in Europe and 23% was attributable to customers located in Asia. In
fiscal 1999, approximately 52% of our net sales was attributable to customers
located in the United States, 20% was attributable to customers located in
Europe and 28% was attributable to customers located in Asia. Accordingly, our
future operating results will also depend on general economic conditions in
Asia, Europe, and the United States. In addition, the markets for our products,
which are highly cyclical, may not continue to grow. We anticipate that sales to
international customers will continue to represent a significant percentage of
net sales.
We are subject to the risks of conducting business internationally,
including:
o economic conditions in Europe and Asia, particularly Taiwan and China;
o changes in trade policy and regulatory requirements;
o duties, tariffs and other trade barriers and restrictions;
o the burdens of complying with foreign laws;
o foreign currency fluctuations;
o difficulties in collecting foreign accounts receivable; and
o political instability.
IF WE NEED TO MAKE PAYMENTS FOR UNUSED WAFER CAPACITY, OUR BUSINESS WILL BE
HARMED.
We have minimum wafer purchase commitments with some of our foundry
partners in exchange for wafer capacity commitments. Should we fail to
reschedule or assign unneeded capacity, we will be required to make payments for
the unused capacity and our business would be harmed. We have agreed to make
certain annual purchases totaling, in aggregate, approximately $4.8 million
through 2001 from TSMC for additional capacity above the annual base capacity.
Wafer purchases in any given year are first applied to the base capacity and
then to our $4.8 million obligation. As a result, we could be forced to pay up
to $4.8 million even if we do not purchase the base capacity and additional
capacity for which we have contracted.
WE DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN OUR KEY TECHNICAL AND MANAGEMENT
PERSONNEL.
Our success depends upon the continued service of key technical and
management personnel, including Jimmy S.M. Lee, Chairman and Chief Executive
Officer, and Gary L. Fischer, President and Chief Operating Officer, as well as
on our ability to continue to attract, retain and motivate qualified personnel,
particularly experienced circuit designers and process engineers. The
competition for such employees is intense. We have no employment contracts or
key person life insurance policies with or for any of our executive officers.
The loss of the service of one or more of our key personnel could materially and
adversely affect our business and operating results.
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OUR STOCK PRICE IS EXPECTED TO BE VOLATILE.
The trading price of our common stock has been and is expected to be
subject to wide fluctuations in response to:
o quarter-to-quarter variations in our operating results;
o comments or recommendations issued by analysts who follow us, our
competitors or the semiconductor industry and other events or factors;
o aggregate valuations and movement of stocks in the broader semiconductor
industry;
o announcements of new products, strategic relationships or acquisitions
by us or our competitors;
o increases or decreases in wafer capacity;
o general conditions or cyclicality in the semiconductor industry or the
end markets that we serve;
o governmental regulations, trade laws and import duties;
o litigation;
o new or revised earnings estimates;
o announcements of technological innovations by us or our competitors;
o additions or departures of senior management; and
o other events or factors many of which are beyond our control.
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 our
common stock.
ITEM 3. FINANCIAL MARKET RISK
We develop products in the United States and sell them worldwide. As a
result, our financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
Since our sales are currently priced in U.S. dollars and are translated to local
currency amounts, a strengthening of the dollar could make our products less
competitive in foreign markets. Interest income is sensitive to changes in the
general level of U.S. interest rates, particularly since our investments are in
short-term instruments calculated at variable rates.
We established policies and business practices regarding our investment
portfolio to preserve principal while obtaining reasonable rates of return
without significantly increasing risk. We place investments with high credit
quality issuers according to our investment policy. We do not use derivative
financial instruments in our investment portfolio. All investments are carried
at cost, which approximates market value. Due to the short-term nature of our
investments and the immaterial amount of our debt obligation, we believe that
there is no material exposure to interest fluctuation. Therefore, no
accompanying table has been provided.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1998, the U.S. Department of Commerce ("DOC") published an
antidumping duty order on imports of SRAMs from Taiwan, from where we currently
import a majority of our SRAMs. As a consequence of this antidumping duty order,
we are required to post a cash deposit on imports of Taiwan fabricated SRAM
wafers or devices at the ad valorem rate of 7.56%.
On April 28, 2000, Micron Technology Inc. ("Micron") requested an
administrative review of our Taiwan fabricated SRAMs for the period from April
1, 1999 through March 31, 2000. For entries during this period, the cash
deposits could be returned to us or, alternatively, we could forfeit amounts
deposited and owe duties and interest in addition to the amounts deposited,
depending on results of the DOC administrative review. The final results of the
review are expected in calendar year 2001 and will establish a new deposit rate
for subsequent entries, which may be higher or lower than the current rate.
We have retained legal counsel to defend our interests in the antidumping
proceedings. In addition, respondents (including ISSI) have challenged certain
aspects of the antidumping determination in federal court proceedings. On August
29, 2000, pursuant to an appeal by ISSI and other respondents, the U.S. Court of
International Trade affirmed the International Trade Commission ("ITC") decision
to reverse the ITC's earlier ruling supporting the imposition of antidumping
duties and rule instead in favor of respondents. This decision by the Court of
International Trade has been appealed by Micron to the Federal Circuit Court of
Appeals. If such appeal is not successful, the antidumping case will be
terminated, the order will be revoked, and we will be entitled to a full refund
of cash deposits. Pending resolution of the appeal, the DOC will continue to
administer the antidumping order.
Duties calculated and assessed by the government could have a material
adverse affect on our gross margins and profits. Any reviews or proceedings
might not mitigate or eliminate antidumping duties.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report.
None
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K during
the quarter ended June 30, 2001.
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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, 2001 /s/ Michael D. McDonald
------------------------
Michael D. McDonald
Vice President Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
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