-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FE418goOv64q5+zJwlgIW8/vQlqv5SRr+csFTUZxPv1jrt1vsz6L0icwxMqMLrc+ HN35mLDqOghPA2OKxR9V8g== 0000891618-01-502625.txt : 20020413 0000891618-01-502625.hdr.sgml : 20020413 ACCESSION NUMBER: 0000891618-01-502625 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED SILICON SOLUTION INC CENTRAL INDEX KEY: 0000854701 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770199971 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23084 FILM NUMBER: 1815292 BUSINESS ADDRESS: STREET 1: 2231 LAWSON LANE CITY: SANTA CLARA STATE: CA ZIP: 95054-3311 BUSINESS PHONE: 4085880800 MAIL ADDRESS: STREET 1: 680 ALMANOR AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 10-K 1 f77865e10-k.txt FORM 10-K PERIOD ENDING SEPTEMBER 30, 2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to ______________________ Commission file number 0-23084 INTEGRATED SILICON SOLUTION, INC. --------------------------------- (Exact name of Registrant as specified in its charter)
DELAWARE 77-0199971 - ------------------------------------ ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization)
2231 Lawson Lane, Santa Clara, California 95054 - ----------------------------------------- -------- (Address of principal executive offices) zip code Registrant's telephone number, including area code (408) 588-0800 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered COMMON STOCK, PAR VALUE $0.0001 PER SHARE NASDAQ NATIONAL MARKET - ----------------------------------------- ----------------------
Securities registered pursuant to Section 12(g) of the Act: NONE ---------------- (Title of Class) 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of such stock on December 12, 2001, as reported by the Nasdaq National Market, was approximately $245.9 million. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the registrant's Common Stock on December 12, 2001 was 26,623,793. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Registrant's 2001 Annual Meeting of Stockholders to be held on February 6, 2002 are incorporated by reference in Part III of this Form 10-K. TABLE OF CONTENTS PART I Item 1. Business..............................................................................1 Item 2. Properties............................................................................8 Item 3. Legal Proceedings.....................................................................8 Item 4. Submission of Matters to a Vote of Security Holders...................................8 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............9 Item 6. Selected Consolidated Financial Data..................................................10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................10 Item 7a. Market Risk Disclosures...............................................................22 Item 8. Financial Statements and Supplementary Data...........................................23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................................47 PART III Item 10. Directors and Executive Officers of the Registrant....................................47 Item 11. Executive Compensation................................................................47 Item 12. Security Ownership of Certain Beneficial Owners and Management........................47 Item 13. Certain Relationships and Related Transactions........................................47 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................47 SIGNATURES ......................................................................................49
When used in this Report, the words "expects," "anticipates," "believes," "estimates" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements, which include statements concerning the timing of new product introductions; the functionality and availability of products under development; trends in the Internet access devices, networking, and telecommunications markets, in particular as they may affect demand for or pricing of our products; the percentage of export sales and sales to strategic customers; the percentage of revenue by product line; the availability and cost of products from our suppliers; and the funding of the sales of investments, are subject to risks and uncertainties, including those set forth in Item 1 of Part I and in Item 7 of Part II hereof entitled "Certain Factors Which May Affect Our Business or Future Operating Results" and elsewhere in this Report, that could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements speak only as of the date of this Report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or to reflect any change in events, conditions or circumstances on which any such forward-looking statement is based, in whole or in part. References in this report on Form 10-K to "ISSI" and the "Company" refer to Integrated Silicon Solution, Inc. and its subsidiaries. PART I ITEM 1. BUSINESS GENERAL Integrated Silicon Solution, Inc. ("ISSI") designs, develops and markets high performance memory semiconductors used in Internet access devices, networking equipment, telecom and mobile communications equipment, computer peripherals, and other applications. Our high speed and low power static random access memories ("SRAM"), our low to medium density dynamic random access memories ("DRAM"), and our family of electrically erasable programmable read only memories ("EEPROM") enable customers to design products that meet the demanding connectivity and portability requirements of the wireless communications, data communications, and internet infrastructure markets. Our objective is to capitalize on major trends such as the proliferation of wireless devices, the expansion of the communications and Internet infrastructure, and other trends in electronics technologies. The ever-expanding performance requirements in electronic systems place increasing pressure on manufacturers to use sophisticated semiconductor memory architecture within their systems. Manufacturers of leading-edge internet access devices, ISP servers and networking routers and switches require high speed memory architecture and devices within their systems to meet demands for faster speed and response times. Similarly, the advent of handheld wireless communications devices, such as cellular phones and personal digital assistants, has necessitated the development of high performance memories that reduce power consumption, increase battery life, and reduce size in order to maximize portability. Our goal is to be a focused supplier of high performance memories targeting the growing connectivity and communications markets. Our customers include industry leaders such as 3Com, Alcatel, Cisco, Ericsson, Hewlett-Packard, IBM, Lexmark, Motorola, Nokia and Seagate. Due to their size and influence, these customers generally drive memory volumes in their market segment and help define the direction of future memory products. Our products offer our customers numerous benefits, including: - high performance and functionality; - high quality and reliability; - leading-edge designs that facilitate the development of new, advanced systems; and - advanced process technology. 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 with Chartered Semiconductor in 1994 and have also worked closely with United Microelectronics Corporation ("UMC") since 1995. Through this collaborative strategy, we have been in the forefront in utilizing the most advanced process technology for memories and in securing access to wafer capacity. 1 We believe that ISSI is a technology leader and that 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. Our strategy is to: - target high growth markets and applications; - further penetrate industry leading customers; - build collaborative relationships with leading edge foundries; and - continually develop high performance products. BACKGROUND ISSI was incorporated in California in October 1988 and changed its state of incorporation to Delaware in August 1993. Our principal executive offices are located at 2231 Lawson Lane, Santa Clara, California 95054, and our telephone number is (408) 588-0800. We have a wholly owned subsidiary in the People's Republic of China that focuses on sales, marketing and design and a subsidiary in Hong Kong that primarily focuses on research and development. We own approximately 29% of a public company in Taiwan (Integrated Circuit Solution, Inc. "ICSI", formerly known as ISSI-Taiwan). ICSI became a public company in Taiwan in January 2001 and is listed on the Taiwan Stock Exchange. We have periodically sold our shares in ICSI and our ownership was reduced in fiscal year 2001 from 39% to 29%. In October 1998, we transferred our Flash memory business to a newly formed company, NexFlash Technologies, Inc. ("NexFlash"). In February 2001, Winbond purchased approximately 50% of NexFlash stock and our ownership was reduced from 32% to approximately 14%. We own approximately 20% of GetSilicon Inc. ("GetSilicon"), a provider of collaborative supply chain management solutions. We also own approximately 22% of E-CMOS Corporation ("E-CMOS"), a fabless semiconductor company located in Taiwan. PRODUCTS We are a focused supplier of a family of both high speed and ultra low power SRAMs, complementary low and medium density DRAMs, and other complementary memory products. In fiscal year 2001, we derived approximately 67% of our revenue from SRAMs, 27% from DRAMs, and 6% from other products. SRAMS Our high performance SRAM products generally focus on either very high speed or very low power. Our first high speed SRAMs were shipped in 1990. More recently, driven by increasing demand in the hand-held and mobile markets, such as cellular phones, we have developed a low power family of 1.8 volt and 2.7 volt SRAM products for wireless applications. To date we have derived substantially all of our SRAM revenues from the sale of high speed SRAM products. We offer both asynchronous and synchronous high speed SRAMs. Our high speed asynchronous SRAMs are used in applications such as LANs, telecommunication equipment and base stations, bridges, routers, modems, multimedia products, and industrial instrumentation. Current asynchronous SRAM densities include 64K (8K x 8), 256K (32K x 8), 512K (64K x 8 and 32K x 16), 1 megabit (128K x 8, 64K x 16), 2 megabit (128K x 16 and 256K x 8), 3 megabit (128K x 24), 4 megabit (256K x 16 and 512K x 8), and 8 megabit (512K x 16). Our high speed synchronous SRAMs are used in a variety of networking and telecommunications applications. Current synchronous densities include 1 Megabit (32K x 32), 2 Megabit (64K x 32/36), 4 Megabit (256K x 16/18 and 128K x 32/36), 8 Megabit (256K x 32/36 and 512K x 18) and 16 Megabit (512K x 32/36 and 1M x 18). Additional SRAM products are under development and are expected to include performance-leading features in speed, configuration, power levels, density, and packaging. For example, we helped form a consortium of leading SRAM suppliers to define the configuration, performance, and package specifications for a new 18 megabit synchronous SRAM, named SigmaRAM. We are developing a large portfolio of SigmaRAM products including common I/O, separate I/O, and double data rate options to address various application needs. 2 DRAMS Our low and medium density DRAM products complement our high performance SRAM products. They are typically sold through the same channels to the same end customers and enhance ISSI's position as an experienced memory supplier. Applications for our DRAMs include telecommunications base stations, personal digital assistants ("PDA"), set top boxes, networking equipment, disk drives, tape drives, and printers. We currently offer 4, 8, and 16 megabit Fast Page Mode ("FPM"), Extended Data Out ("EDO"), plus 4, 16 and 64 megabit SDRAM devices. Additional DRAM products, including low power SDRAMs, are under development. Our DRAM products are not targeted at the main memory DRAM market. OTHER MEMORY PRODUCTS Our other memory products include high performance serial EEPROMs, embedded EEPROM products, and voice recording chips. Applications for these products include cellular phones, pagers, networking systems, modems, telephone sets, security systems, smart cards, video games, automobiles, and other consumer products. DESIGN AND PROCESS TECHNOLOGY We believe that ISSI is a technology leader. In the semiconductor industry, wafer fabrication facilities often use memories in the development of advanced process technology because memory products are particularly well suited for process research and development. Our process development partnerships with TSMC and Chartered Semiconductor enable us to design memories at leading edge geometries. Currently, we are designing new products utilizing 0.18 micron, 0.15 micron, and 0.13 micron geometries. Our technology development engineers work closely with our manufacturing partners in this effort. The result is that we continue to produce SRAM products at the leading edge of worldwide semiconductor capabilities and we believe that our partnership development strategy gives us a competitive strength. Our design efforts focus on product specification, memory cell and array structure, circuit design, simulation, and layout. We invest in advanced computer aided design ("CAD") systems to ensure that the design team has state-of-the-art design tools and employs innovative and rigorous design methodologies. We utilize focused design teams for new product development and can efficiently migrate proprietary design features to new generation products. We have design organizations in Santa Clara and in three Asian locations. MANUFACTURING We combine our process technology expertise, foundry partnership strategy, and equity investment arrangements to form a hybrid of the fab and fabless business models which we call Fab-Lite. We do not own or operate our own wafer foundry but, because memory products are particularly well suited for the development of advanced process technology, we actively participate in developing and refining the process technology used to manufacture many of our products. We believe that this strategy enables us to achieve the early introduction of advanced geometries for our high performance memory products, which results in increased performance and lower manufacturing costs. To date, our principal manufacturing relationships have been with TSMC in Taiwan and with Chartered Semiconductor in Singapore. In June 1996, ISSI 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. The fabrication facility, which began production in 1998, is an advanced process technology facility capable of 0.35, 0.30, 0.25 and 0.18 micron process technology. In December 2000, we sold our investment of $23.5 million in WaferTech to TSMC for $40.7 million. In 2000, ISSI entered into a wafer fabrication facility investment agreement with Semiconductor Manufacturing International Corporation ("SMIC"), the first 8-inch foundry to be built in the People's Republic of China. Under the terms of this agreement, ISSI has committed to invest $30 million. In April 2001, ISSI committed to invest an additional $10.0 million, raising our total commitment to $40.0 million. ISSI has received certain capacity commitments from SMIC. As of September 30, 2001, ISSI had invested $18.9 million in this foundry, and $21.1 million is expected to be invested in fiscal year 2002. 3 ISSI outsources its manufacturing process. The manufacturing of our products begins at our independent wafer foundry partners, principally TSMC and Chartered Semiconductor. Once the foundry has completed wafer processing, the wafers are then shipped to subcontractors for wafer testing. The wafers are then sawed or cut into individual memory chips and those that passed at wafer test are assembled into final packages. The completed memory device is then tested again at final test. Our U.S. headquarters develops and debugs test programs and test procedures. Third party subcontractors in Taiwan and Singapore perform the wafer sort, assembly and test operations. Our U.S. and Taiwan operations group performs subcontractor management. A comprehensive quality control program is in place. We are certified under ISO 9001 standards and our quality system is periodically reviewed and approved by both ISO certifiers and our customers. We are currently adopting the newest ISO standards, ISO 9000/2001. Each of our wafer suppliers also fabricates for other integrated circuit companies, including certain of our competitors. In addition, UMC subsidiaries manufacture integrated circuits, including SRAMs, for their own account. 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 use or reduce or eliminate deliveries to us, there can be no assurance that we could enforce fulfillment of the delivery commitments. We believe our technology development partnerships mitigate such risk. There can be no assurance that the foundries we use will not encounter construction or production difficulties or that they will allocate sufficient wafer capacity to satisfy our wafer requirements, especially in times of wafer capacity shortages. Moreover, there can be no assurance that we would be able to qualify additional manufacturing sources for existing or new products in a timely manner or that such additional manufacturing sources would be able to produce an adequate supply of wafers. If we were unable to obtain an adequate supply of wafers from our current or any alternative sources in a timely manner, our business and operating results would be materially and adversely affected. Although our policy is to work closely with our manufacturing sources, there are certain risks associated with the use of independent foundries, including the absence of a controlled source of supply, or delays in obtaining adequate wafer supplies. In addition, the manufacture of integrated circuits is a highly complex and technically demanding process. Production yields and device reliability can be affected by a large number of factors. As is typical in the semiconductor industry, our outside foundries have from time to time experienced lower than anticipated manufacturing yields and device reliability problems, particularly in connection with the introduction of new products and changes in such foundry's processing steps. There can be no assurance that our foundries will not experience lower than expected manufacturing yields or device reliability problems in the future, which could materially and adversely affect our business and operating results. CUSTOMERS AND MARKETING We have focused our marketing efforts on three major market segments that include Internet access devices, networking, and telecom/mobile communications. In addition, our memory chips are used in other market segments, including computer peripherals such as printers and automotive applications. We market our products through a direct sales force, independent sales representatives, and distributors. We have four distributors in North America and distributors in most of the countries of Western Europe, Japan and targeted countries in Asia. We continue to expand our marketing and sales activity. We have sales offices in the United States, Europe, Hong Kong, Taiwan, and the People's Republic of China. Our customers include a broad range of electronic system manufacturers such as Alcatel, Cisco Systems, 3Com, Ericsson, Hewlett-Packard, IBM, Lexmark, Motorola, Nokia and Seagate. Sales to Flextronics International accounted for approximately 15% of net sales for fiscal 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 18% of net sales for fiscal 2001. Sales to 3Com accounted for approximately 7% of net sales for fiscal 2001. Shipments for 3Com directly, or indirectly through subcontractors, accounted for approximately 11% of net sales for fiscal 2001. In fiscal 2000, no single customer 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, one customer, 3Com, accounted for approximately 20% of net sales. Our sales and marketing efforts are directed from our Santa Clara headquarters. In fiscal 2001, approximately 52% of our net sales was attributable to customers located in the United States, 25% was attributable to customers located in Europe and 23% was attributable to customers located in Asia. In fiscal 2000, approximately 54% of our 4 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. See Note 13 of Notes to Consolidated Financial Statements. We are subject to the risks of conducting business internationally, including economic conditions in Asia, particularly Taiwan and the People's Republic of China, changes in trade policy and regulatory requirements, duties, tariffs and other trade barriers and restrictions, the burdens of complying with foreign laws and, possibly, political instability. We anticipate that sales to international customers will continue to represent a significant percentage of net sales. Substantially all of our foundries and assembly and test operations are located in Asia. Although we transact business predominately in U.S. dollars, we do have some transactions in New Taiwan ("NT") dollars, in Hong Kong ("HK") dollars and in China Renminbi ("RMB"). Such transactions expose us to the risk of exchange rate fluctuations. We monitor our exposure to foreign currency fluctuations, and from time to time have taken action to hedge against such exposure, but have not to date adopted any formal hedging strategy. There can be no assurance that exchange rate fluctuations will not materially and adversely affect our business and operating results in the future. Our sales are generally made pursuant to standard purchase orders, which can be revised to reflect changes in the customer's requirements. Generally, purchase orders and OEM agreements allow customers to reschedule delivery dates and cancel purchase orders without significant penalties. For these reasons, we believe that our backlog, while useful for scheduling production, is not necessarily a reliable indicator of future revenues. COMPETITION The semiconductor memory market is intensely competitive and has been characterized by cyclical market conditions, an oversupply of product, price erosion, rapid technological change, short product life cycles, and foreign and domestic competition. Our ability to compete successfully in the high performance memory market depends on factors both within and outside of our control, including wafer manufacturing over or under capacity and the resultant imbalances in supply and demand, product pricing, the rate at which OEM customers incorporate our products into their systems, the success of the OEM's products, access to advanced process technologies at competitive prices, product functionality, performance, and reliability, successful and timely product development, wafer supply, wafer costs, achievement of acceptable yields of functional die, the gain or loss of significant customers, the performance of our competitors and general economic conditions. 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 materially and adversely affect our business and operating results. The SRAM market is generally a fragmented market and specific competitors and competitive factors vary based on geographic regions and market segments. In the SRAM market, we compete with several major domestic and international semiconductor companies including Alliance Semiconductor, Cypress Semiconductor, Integrated Device Technology ("IDT"), Mitsubishi, Motorola, Samsung, and Winbond. We also compete with new and emerging companies such as Giga Semiconductor. We also may face significant competition from other domestic and foreign integrated circuit manufacturers which have advanced technological capabilities, but have not previously participated in the SRAM market sector. We may not be able to compete successfully against any of these competitors. In the low to medium density DRAM area, we compete with Alliance, Mosel-Vitelic, Vanguard and Oki. Other main memory DRAM companies could address this market in the future. There can be no assurance that we will be able to compete successfully against any of these competitors. In the EEPROM market, our primary competitors include Atmel and SGS-Thomson Microelectronics. We also compete with many small to medium-sized companies in one or more segments of the market. 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. The process technology used by our manufacturing sources, including process technology that we have developed with our foundries, can be used by such manufacturers to produce products for other companies, including our competitors. Although we believe that our participation in the development of the processes provides 5 us the advantage of early access to such processes, the knowledge of the manufacturer may be used to benefit our competitors. PRODUCT WARRANTY Consistent with semiconductor memory industry practice, we generally provide a limited warranty that our semiconductor memory devices are in compliance with specifications existing at the time of delivery. Liability for a stated warranty period is limited to replacement of defective items or return of amounts paid. RESEARCH AND DEVELOPMENT Rapid technological change and continuing price competition require research and development efforts on both new products and advanced processes employing smaller geometries. Our research and development activities are focused primarily on the development of advanced process technologies and new memory circuit designs. We currently design most of our high performance memory products and jointly develop advanced process technology with our manufacturing partners from our headquarters in Santa Clara, California and three design centers in Asia operated by ISSI. New SRAM products in design include wide voltage (1.8v -- 3.3v) low power 2 meg, 4 meg and 8 meg asynchronous SRAMs, in addition to high speed 18 meg, 32 meg and 36 meg synchronous devices. These new synchronous SRAMs include the new industry-standard Sigma RAMs. We have several 64 meg DRAM devices under design. We are developing our new SRAM and DRAM products on industry leading 0.13, 0.15, and 0.18 micron process technologies. We are presently evaluating 0.10 micron process technology for our next generation products. In nonvolatile memory, our future products are expected to include 128K, 256K, and 512K density serial EEPROM devices. Our research and development expenditures in fiscal 2001, 2000, and 1999 were $25.3 million, $18.3 million, and $18.8 million, respectively. PATENTS As of September 30, 2001, we held 67 U.S. patents. These patents expire between 2010 and 2021. We have four (4) additional patent applications pending and expect to continue to file patent applications where appropriate to protect our proprietary technologies. Although patents are an important element of our intellectual property, we believe that our continued success depends primarily on factors such as the technological skills and innovation of our personnel rather than on our patents. The process of seeking patent protection can be expensive and time consuming. There can be no assurance that patents will be issued from pending or future applications or that, if patents are issued, they will not be challenged, invalidated or circumvented, or that rights granted thereunder will provide meaningful protection or other commercial advantage to us. Moreover, there can be no assurance that any patent rights will be upheld in the future or that we will be able to preserve any of our other intellectual property 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. 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. 6 EMPLOYEES As of September 30, 2001, we had approximately 176 employees in the U.S., 32 in Taiwan, 31 in the People's Republic of China, and 16 in Hong Kong. Total employment, including subsidiaries is approximately 255 people. Our future success will largely be dependent on our ability to attract, retain and motivate highly qualified technical and management personnel. The employment market for such personnel is extremely competitive and there can be no assurance that we will successfully staff all necessary positions. Our employees are not represented by any collective bargaining agreements and we have never experienced a work stoppage. We believe that our employee relations are good. EXECUTIVE OFFICERS Our executive officers and their ages as of September 30, 2001 are as follows:
Name Age Position Jimmy S.M. Lee 46 Chairman, Chief Executive Officer, and Director Gary L. Fischer 50 President, Chief Operating Officer, and Director Michael McDonald 48 Vice President, Chief Financial Officer, and Secretary Paul Song 46 Senior Vice President, Engineering
BACKGROUND OF EXECUTIVE OFFICERS Jimmy S.M. Lee has served as ISSI's Chief Executive Officer and a director since he co-founded the Company in October 1988. He also served as ISSI's president until May 2000. From 1985 to 1988, Mr. Lee was engineering manager at International CMOS Technology, Inc., a semiconductor company, and from 1983 to 1985, he was a design manager at Signetics Corporation, a semiconductor company. Prior thereto, Mr. Lee was a project manager at Toshiba Semiconductor Corporation and a design engineer at National Semiconductor Corporation. Mr. Lee has served as a director of ICSI since September 1990, as a director of NexFlash since October 1998, as chairman of the board of GetSilicon since July 2000, and as chairman of the board of E-CMOS since September 2001. Mr. Lee holds a M.S. degree in electrical engineering from Texas Tech University and a B.S. degree in electrical engineering from National Taiwan University. Gary L. Fischer has served as ISSI's President and Chief Operating Officer since April 2001. He served as Executive Vice President and Chief Financial Officer from April 1995 to March 2001, and as Vice President and Chief Financial Officer from June 1993 to March 1995. From January 1989 to December 1992, Mr. Fischer was Chief Financial Officer of Synergy Semiconductor Corporation, a manufacturer of high performance SRAM and logic integrated circuits. He has also been a director of E-CMOS since November 2001. Mr. Fischer holds an M.B.A. degree from the University of Santa Clara and a B.A. degree from the University of California, Santa Barbara. Michael McDonald has served as Vice President and Chief Financial Officer since June 2001. He was Senior Vice President, Chief Financial Officer, and Secretary at REMEC, Inc., a manufacturer of wireless communications hardware, from 1997 to May 2001. From February 1984 to September 1997, Mr. McDonald was Chief Financial Officer at Magnum Microwave Corporation, a manufacturer of wireless communications hardware. Mr. McDonald holds an MBA degree from California Polytechnic State University, San Luis Obispo and a BS degree in mathematics from the University of San Francisco. Paul Song has served as Senior Vice President, Engineering since April 2000. He served as Vice President, Engineering from April 1999 to April 2000. He also served as Vice President, Design Engineering from July 1996 to April 1999. He joined ISSI in July 1990 as Director, Nonvolatile Memory Design Engineering. Previously he held design engineering positions at ICT, Exel Microelectronics, Inc. and AMD. Dr. Song holds a Ph.D. degree in electrical engineering from Stanford University, a M.S. degree in electrical engineering from the University of California, Santa Barbara, and a B.S. degree in electrical engineering from National Taiwan University. Officers serve at the discretion of the Board and are appointed annually. There are no family relationships between the directors or officers of ISSI. 7 ITEM 2. PROPERTIES Our U.S. headquarters occupy a two story building, totaling approximately 93,400 square feet, in Santa Clara, California in which our executive offices, marketing, technology, product development groups and some research and development ("R&D") testing facilities are located. The lease on this building expires in February 2007. We sublease approximately 24,000 square feet and 9,000 square feet to third parties whose subleases expire in March 2003 and September 2003, respectively. We have additional field sales offices in the U.S. and Europe and sales and engineering offices in Asia. ITEM 3. 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 DOC has suspended that review as a consequence of the court decision described below. 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 the respondents. This decision by the Court of International Trade was appealed by Micron to the U.S. Court of Appeals for the Federal Circuit ("CAFC"). On September 21, 2001, the Federal Circuit upheld the Court of International Trade. This Federal Circuit decision is subject to appeal. If no appeal is taken, or if any such appeal is unsuccessful, the antidumping case will be terminated, the order will be revoked, and we will be entitled to a full refund of our 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 2001. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET FOR COMMON STOCK Our common stock has been quoted on the Nasdaq National Market under the symbol ISSI since our initial public offering in February 1995. Prior to such date, there was no public market for the common stock. The following table sets forth, for the fiscal quarters indicated, the high and low sale prices per share for our common stock as reported on the Nasdaq National Market. These prices are over-the-counter market quotations which reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Fiscal Year ending September 30, 2001 High Low ------- ------ Fourth quarter $16.25 $ 8.55 Third quarter 16.65 11.13 Second quarter 21.25 11.75 First quarter 17.31 7.69 Fiscal Year ending September 30, 2000 High Low ------- ------ Fourth quarter $37.88 $14.13 Third quarter 41.81 15.50 Second quarter 32.06 12.81 First quarter 17.69 5.47
HOLDERS OF RECORD As of December 12, 2001, there were approximately 12,000 beneficial holders of our common stock. DIVIDENDS We have never declared or paid cash dividends. We currently intend to retain any earnings for use in our business and do not anticipate paying any cash dividends on our capital stock in the foreseeable future. 9 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Year Ended September 30, ------------------------------------------------------------------------ 2001 2000(2) 1999(2) 1998 1997 --------- --------- --------- --------- --------- (in thousands, except per share data) Net sales $ 152,048 $ 141,923 $ 83,309 $ 131,132 $ 108,261 Gross margin 7,179 44,164 16,493 4,338 32,156 Operating income (loss) (38,845) 10,250 (14,184) (53,053) (10,776) Net income (loss) 1,115 25,026 (9,511) (50,607) (7,686) Basic net income (loss) per share(1) 0.04 1.07 (0.48) (2.67) (0.43) Diluted net income (loss) per share(1) 0.04 0.96 (0.48) (2.67) (0.43) Working capital 157,849 145,938 42,064 32,549 75,544 Total assets 237,852 260,724 121,831 202,168 195,596 Total long-term obligations and current portion of long-term obligations 314 454 -- 15,466 20,101 Stockholders' equity 214,437 211,235 88,778 90,920 134,567 Dividends paid -- -- -- -- --
- ---------- (1) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the basis used to calculate net income (loss) per share. (2) See Results of Operations section of Management's Discussion and Analysis of Financial Condition and Results of Operations for discussion regarding comparability of the fiscal 1999 and 2000 year-end results. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 reflect accounting for E-CMOS on the equity basis and include our percentage gain or loss of their results of operations on a one quarter lag. Our financial results for fiscal 2001 through the period ended January 31, 2001 and for fiscal 2000 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. Prior to the quarter ended March 31, 1999, our ownership of ICSI exceeded 50% and our financial results were consolidated with those of ICSI. Effective with the quarter ending March 31, 1999, we accounted for ICSI on the equity basis and included in our financial statements our percentage share of ICSI's financial results. In fiscal 1999, we accounted for NexFlash on the equity basis and included in our financial statements our percentage share of NexFlash's financial results. At September 30, 2001, we owned approximately 29% of ICSI, approximately 14% of NexFlash , approximately 22% of E-CMOS and approximately 20% of GetSilicon. FISCAL YEAR ENDED SEPTEMBER 30, 2001 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2000 Net Sales. Net sales consist principally of total product sales less estimated sales returns. Net sales increased by 7% to $152.0 million in fiscal 2001 from $141.9 million in fiscal 2000. The increase in sales was principally due to an increase in unit shipments, partially offset by a decrease in the average selling price, of our 16 megabit DRAM products, as well as increased unit shipments of certain SRAM products, specifically our 32K x 32, 128K x 16, 256K x 16, and 64K x 16 SRAM products. In addition, the average selling prices of our SRAM products generally increased in fiscal 2001 compared to fiscal 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 significant decline in the average selling prices for certain of our products in the three months ended September 30, 2001 as compared to the three months ended June 30, 2001. We anticipate 10 a further decline in the average selling prices for certain of our products in the three months ended December 31, 2001. Such declines may not 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 September 30, 2001 as compared to the three months ended June 30, 2001. Sales to Flextronics International accounted for approximately 15% of net sales for fiscal 2001. Substantially all of our sales to Flextronics were for products to be delivered to Cisco Systems, Inc. Shipments for Cisco directly, or indirectly through subcontractors, accounted for approximately 18% of net sales for fiscal 2001. Sales to 3Com accounted for approximately 7% of net sales for fiscal 2001. Shipments for 3Com directly, or indirectly through subcontractors, accounted for approximately 11% of net sales for fiscal 2001. In fiscal 2000, no single customer 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. 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. Cost of sales includes die cost from the wafers acquired from foundries, subcontracted package, assembly costs and test costs, costs associated with in-house product testing, quality assurance and import duties. Gross profit decreased 84% to $7.2 million in fiscal 2001 from $44.2 million in fiscal 2000. As a percentage of net sales, gross profit decreased to 4.7% in fiscal 2001 from 31.1% in fiscal 2000. In fiscal 2001, we recorded inventory write-downs of $38.3 million, including $17.6 million in the three months ended September 30, 2001. The inventory write-downs were predominately for lower of cost or market accounting on certain of our products, primarily DRAMs and low power SRAMs, and to a lesser extent, excess inventory. Excluding the inventory write-downs in fiscal 2001, gross profit for the period was $45.4 million or 29.9% of net sales. Excluding the inventory write-downs in fiscal 2001, the increase in gross profit dollars was principally due to an increase in unit shipments of our SRAM products, specifically our 32K x 32, 128K x 16, 256K x 16, and 64K x 16 SRAM products. In addition, increases in the average selling prices of our SRAM products in fiscal 2001 compared to fiscal 2000 more than offset any increases in product costs resulting in higher gross margins. The decrease in gross margin percentage in fiscal 2001 is due to a significant decline in the gross margin for DRAM products as a result of declining average selling prices. 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 significant decline in the average selling prices for certain of our products in the three months ended September 30, 2001 as compared to the three months ended June 30, 2001. We anticipate a further decline in the average selling prices for certain of our products in the three months ending December 31, 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 38% to $25.3 million in fiscal 2001 from $18.3 million in fiscal 2000. As a percentage of net sales, research and development expenses increased to 16.6% in fiscal 2001 from 12.9% in fiscal 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. We anticipate that our research and development expenses will increase in absolute dollars in future periods, although such expenses may fluctuate as a percentage of net sales. During fiscal 2001, our developments efforts were focused on ultra low power 4Mb and 8Mb SRAMs, very high speed 8Mb synchronous SRAMs, 16Mb asynchronous DRAMs and 64Mb high speed synchronous DRAMs. Selling, General and Administrative. Selling, general and administrative expenses increased by 33% to $20.7 million in fiscal 2001 from $15.6 million in fiscal 2000. As a percentage of net sales, selling, general and administrative expenses increased to 13.6% in fiscal 2001 from 11.0% in fiscal 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 fiscal 2001 compared to fiscal 2000. We expect our selling, general and administrative expenses may increase in future quarters, although such expenses may fluctuate as a percentage of net sales. 11 Interest and other income (expense), net. Interest and other income, net increased by $3.9 million to $7.7 million in fiscal 2001 from $3.8 million in fiscal 2000. The increase was primarily the result of 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. Gain on sale of investment. The gain on sale of investment increased to $30.7 million in fiscal 2001 from $0.8 million in fiscal 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 the Company in the initial public offering and subsequently, we received gross proceeds of approximately $10.7 million in fiscal 2001 resulting in a pre-tax gain of $8.2 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 pre-tax gain of $5.3 million. Fiscal 2000 includes a pre-tax gain of approximately $0.8 million in the June 2000 quarter related to the sale of shares of ICSI. Provision (benefit) for Income Taxes. The tax provision for the year ended September 30, 2001 of $150,000 includes a benefit of approximately $5.0 million for the reversal of taxes previously provided for foreign operations no longer deemed necessary as the statute has now expired and utilization of net operating losses and tax credits of approximately $11.0 million reduced by a valuation allowance. The tax provision for fiscal 2001 is primarily comprised of U.S. federal income taxes. Under Statement of Financial Accounting Standards No. 109 (FAS 109), deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Management has established a valuation allowance covering the net deferred tax assets based on management's belief that the realization of the deferred tax assets is not realizable on a more likely than not basis. Equity in net income of affiliated companies. Equity in net income of affiliated companies decreased by $9.1 million to $1.7 million in fiscal 2001 from $10.8 million in fiscal 2000. This primarily reflects a decrease in income from our percentage share of ICSI's financial results in fiscal 2001 from fiscal 2000. FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1999 Net Sales. Net sales increased by 70% to $141.9 million in fiscal 2000 from $83.3 million in fiscal 1999. Net sales increased by $68.6 million to $141.9 million in fiscal 2000 from $73.3 million in fiscal 1999, excluding the $9.7 million in sales from ICSI and the $0.3 million in sales from NexFlash in the December 31, 1998 quarter. The increase in sales was principally due to an increase in unit shipments of our 1024K, 256K, and 128K x 24 SRAM products, as well as increased unit shipments of DRAM products, specifically our 4 and 16 megabit DRAM products. In addition, the average selling prices of our SRAM and DRAM products generally increased in fiscal 2000 compared to fiscal 1999. In fiscal 2000 no single customer accounted for over 10% of net sales. However, shipments for Cisco directly, or indirectly through subcontractors, accounted for approximately 13% of net revenue. In fiscal 1999, one customer, 3Com, accounted for approximately 20% of net sales. Net sales include licensing revenue of approximately $1.0 million and $1.9 million in fiscal 2000 and fiscal 1999, respectively. Net sales include sales of approximately $0.9 million and $1.4 million to ICSI in fiscal 2000 and fiscal 1999, respectively. Additionally, net sales include sales of approximately $0.2 million and $1.5 million in sales to NexFlash in fiscal 2000 and fiscal 1999, respectively. Gross Profit. Gross profit increased 168% to $44.2 million in fiscal 2000 from $16.5 million in fiscal 1999. As a percentage of net sales, gross profit increased to 31.1% in fiscal 2000 from 19.8% in fiscal 1999. The increase in gross profit was principally due to an increase in unit shipments of our 1024K, 256K, and 128K x 24 SRAM products, as well as increased unit shipments of DRAM products, specifically our 4 and 16 megabit DRAM products. In addition, increases in the average selling prices of our SRAM and DRAM products in fiscal 2000 compared to fiscal 1999 more than offset any increases in product costs resulting in higher gross margins. Our gross 12 profit also benefited from $1.0 million and $1.9 million of licensing revenue for fiscal 2000 and fiscal 1999, respectively. Research and Development. Research and development expenses decreased by 3% to $18.3 million in fiscal 2000 from $18.8 million in fiscal 1999. As a percentage of net sales, research and development expenses decreased to 12.9% in fiscal 2000 from 22.5% in fiscal 1999. The decrease in absolute dollars was primarily the result of a $1.0 million reduction attributable to the deconsolidation of ICSI and $0.3 million attributable of the spin-off of NexFlash, offset by an increase in payroll related expenses and increased expenses related to the development of new products. Fiscal 1999 included a charge of $0.9 million in the June 1999 quarter for the write-off of certain acquired licensed products and technologies which have been replaced by our internally developed products. Selling, General and Administrative. Selling, general and administrative expenses increased by 31% to $15.6 million in fiscal 2000 from $11.9 million in fiscal 1999. As a percentage of net sales, selling, general and administrative expenses decreased to 11.0% in fiscal 2000 from 14.3% in fiscal 1999. The increase in absolute dollars was primarily the result of increased selling commissions associated with higher revenues in fiscal 2000 compared to fiscal 1999 as well as payroll related expenses, offset by a $1.2 million reduction attributable to the deconsolidation of ICSI and $0.1 million attributable to the spin-off of NexFlash. Interest and other income (expense), net. Interest and other income, net increased by $2.6 million to $3.8 million in fiscal 2000 from $1.2 million in fiscal 1999. The increase results primarily from an increase of $3.1 million in interest income as a result of higher cash balances from our follow-on public stock offering in February 2000, offset by a decrease of $1.3 million in other income attributable to the deconsolidation of ICSI. Gain on sale of investment. The gain on sale of investment decreased to $0.8 million in fiscal 2000 from $2.6 million in fiscal 1999. Fiscal 2000 includes a pre-tax gain of approximately $0.8 million in the June 2000 quarter related to the sale of an additional 8% of our holdings in ICSI. Fiscal 1999 includes a gain of approximately $1.8 million in the June 1999 quarter related to the sale of our investment in UICC to UMC, a pre-tax gain of $1.2 million resulting from the sale of 20% of our holdings in ICSI in the December 1998 quarter, offset by the loss of approximately $0.4 million in the March 1999 quarter related to the sale of approximately 33% of our investment in WaferTech LLC. Provision (benefit) for Income Taxes. The provision for income taxes for fiscal 2000 is comprised of taxes on foreign earnings, foreign withholding taxes and U.S. Federal alternative minimum taxes. The provision for income taxes for fiscal 1999 is primarily based on foreign withholding taxes related to the sale of ICSI stock and other foreign withholding taxes. Equity in net income of affiliated companies. Equity in net income of affiliated companies increased by $9.9 million to $10.8 million in fiscal 2000 from $0.9 million in fiscal 1999. This primarily reflects an increase in income from our percentage share of ICSI's financial results in fiscal 2000 from fiscal 1999. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2001, our principal sources of liquidity included cash, cash equivalents and short-term investments of approximately $122.9 million. During fiscal 2001, operating activities used cash of approximately $19.5 million compared to $13.6 million in fiscal 2000. Cash used by operations was primarily due to net income of $1.1 million adjusted for the gain on sale of investments of $(30.7) million, depreciation of $3.4 million, equity in net income of affiliated companies of $(1.7) million, other non-cash items of $0.2 million, and decreases in accounts payable of $25.3 million, partially offset by decreases in inventories of $18.0 million and accounts receivable of $17.7 million. In fiscal 2001, we used $3.5 million for investing activities compared to $60.5 million in fiscal 2000. The cash used for investing activities in fiscal 2001 primarily resulted from net purchases of available-for-sale securities of $44.8 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 SMIC. We made other investments of $3.5 million, including $3.0 million for a 22% interest in E-CMOS, a semiconductor company located in Hsin-Chu, Taiwan. We generated $15.8 million from the sale of shares of ICSI stock and $6.2 million from the sale of NexFlash shares. We received $2.0 million in dividends from our equity investments. The cash used for investing activities in fiscal 2000 13 was primarily the result of net purchases of available-for-sale securities of $51.1 million. In addition, we used $3.5 million for the acquisition of equipment and other fixed assets, and made investments of $4.6 million in SMIC, $2.7 million in WaferTech, $1.4 million in NexFlash, and other investments of $0.6 million. We generated $3.3 million from the sale of shares of ICSI stock. In fiscal 2001, we made capital expenditures of approximately $5.6 million for engineering tools and computer software. We expect to spend approximately $6.0 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. We generated $3.5 million from financing activities during fiscal 2001 compared to $96.9 million in fiscal 2000. Cash generated from financing activities for fiscal 2001 was primarily the result of proceeds from the issuance of common stock of $3.7 million from option exercises and sales under our employee stock purchase plan. The primary source of financing for fiscal 2000 was net proceeds from our follow-on public stock offering in the March 2000 quarter of $90.7 million and proceeds from the issuance of common stock of $6.3 million from option exercises and sales under our employee stock purchase plan. In fiscal 1999 and fiscal 2000, we sold some 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 $10.7 million in fiscal 2001 resulting in a pre-tax gain of $8.2 million. As of September 30, 2001, we owned approximately 29% 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, we committed to invest an additional $10.0 million. We have received certain capacity commitments from SMIC. In fiscal 2001, we made an investment of $14.3 million in SMIC, bringing our total investment in this foundry as of September 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 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 DOC has suspended that review as a consequence of the court decision described below. 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 the respondents. This decision by the Court of International Trade was appealed by Micron to the U.S. Court of Appeals for the Federal Circuit Court ("CAFC"). On September 21, 2001, the Federal Circuit upheld the Court of International Trade. This Federal Circuit decision is subject to appeal. If no appeal is taken, or if any such appeal is unsuccessful, the antidumping case will be terminated, the order will be revoked, and we will be entitled to a full refund of our 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. 14 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: - the cyclicality of the semiconductor industry; - decreases in the demand for our products; - excess inventory levels at our customers; - declines in average selling prices of our products; - cancellation of existing orders or the failure to secure new orders; - oversupply of memory products in the market; - our failure to introduce new products and to implement technologies on a timely basis; - market acceptance of ours and our customers' products; - the failure to anticipate changing customer product requirements; - fluctuations in manufacturing yields; - failure to deliver products to customers on a timely basis; - disruption in the supply of wafers or assembly services; - changes in product mix; - the timing of significant orders; - increased expenses associated with new product introductions or process changes; - the ability of customers to make payments to us; and - increases in antidumping duties. WE HAVE LOST MONEY IN CERTAIN RECENT PERIODS, AND THERE CAN BE NO ASSURANCE THAT WE WILL BE ABLE TO SUSTAIN PROFITABILITY IN THE FUTURE. We incurred a loss of $24.7 million, including an inventory write-down of $17.6 million, and a loss of $3.7 million in the three months ended September 30, 2001 and June 30, 2001, respectively. We expect to lose money in 15 the December 2001 quarter and may lose money in subsequent quarters. We were profitable for fiscal 2001 and fiscal 2000. 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. ANY CONTINUED 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 are unable to predict how long this current downturn will continue or whether current conditions will worsen. 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 September 30, 2001, our net sales decreased by 26% to $14.8 million from $20.0 million in the three months ended June 30, 2001, principally due to a decline in average selling prices for our products including our SRAM products. In addition, 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 as a result of lower demand for electronic 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 as well as product inventory 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 significant decline in the average selling prices for certain of our products in the three months ended September 30, 2001 as compared to the three months ended June 30, 2001. We anticipate a further decline in the average selling prices for certain of our products in the three months ended December 31, 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 fiscal 2001, we recorded inventory write-downs of $38.3 million, including $17.6 million in the three months ended September 30, 2001. The inventory write-downs were predominately for lower of cost or market 16 accounting on certain of our products, primarily DRAMs and low power SRAMs, and to a lesser extent, excess inventory. We 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 30 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 write-downs for excess inventory of approximately $5.7 million for fiscal year 2001. 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 certain 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: - contracts that commit us to purchase specified quantities of silicon wafers over extended periods; - investments in foundries; - joint ventures; - other partnership relationships with foundries; - option payments or other prepayments to foundries; or - 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. 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 15% of net sales for fiscal 2001. Substantially all of our sales to Flextronics were for products to be delivered to Cisco Systems, Inc. Shipments for Cisco directly, or indirectly through subcontractors, accounted for approximately 18% of net sales for fiscal 2001. Sales to 3Com 17 accounted for approximately 7% of net sales for fiscal 2001. Shipments for 3Com directly, or indirectly through subcontractors, accounted for approximately 11% of net sales for fiscal 2001. In fiscal 2000, no single customer 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, one customer, 3Com, accounted for approximately 20% of net sales. 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. Although we specifically limit our liability to replacement of defective items or return of amounts paid, 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: - real or perceived imbalances in supply and demand; - product pricing; - the rate at which OEM customers incorporate our products into their systems; - the success of our customers' products; - access to advanced process technologies at competitive prices; - product functionality, performance and reliability; - successful and timely product development; - the supply and cost of wafers; - achievement of acceptable yields of functional die; - the gain or loss of significant customers; and - the nature of our competitors and general economic conditions. 18 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. 19 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. 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. WE HAVE SIGNIFICANT INTERNATIONAL SALES AND RISKS RELATED TO OUR INTERNATIONAL OPERATIONS COULD HARM OUR OPERATING RESULTS. In fiscal 2001, approximately 52% of our net sales was attributable to customers located in the United States, 25% was attributable to customers located in Europe and 23% 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 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: - economic conditions in Europe and Asia, particularly Taiwan and the People's Republic of China; - changes in trade policy and regulatory requirements; - duties, tariffs and other trade barriers and restrictions; - the burdens of complying with foreign laws; - foreign currency fluctuations; - difficulties in collecting foreign accounts receivable; and - political instability. WE HAVE MADE STRATEGIC EQUITY INVESTMENTS IN OTHER COMPANIES WITH NO ASSURANCE THAT THEY WILL INCREASE IN VALUE. Over the last few years, we have made several strategic equity investments in other technology companies. There can be no assurance that these investments will increase in value and there is the possibility that they could decrease in value over time, even to the point of becoming completely worthless. These investments are tested for impairment on a recurring basis and any reductions in the carrying value would lower our profitability. 20 WE MAY ENCOUNTER DIFFICULTIES IN EFFECTIVELY INTEGRATING ACQUIRED BUSINESSES. From time to time, we may acquire other companies that would be complementary to our business. Acquisitions may result in potentially dilutive issuances of equity securities, incurrence of debt and contingent liabilities, amortization expenses related to intangible assets and the possible impairment of goodwill, which could harm our profitability. In addition, acquisitions involve numerous risks, including, among other things: higher than estimated acquisition expenses; difficulties in successfully assimilating the operations, technologies and personnel of the acquired company; diversion of management's attention from other business concerns; risks of entering markets in which we have no or limited direct prior experience; and the potential loss of key employees and customers as a result of the acquisition. There can be no assurance as to the effect of future acquisitions on our business or operating results. 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. TERRORIST ATTACKS, THREATS OF FURTHER ATTACKS, THREATS OF WAR, AND ACTS OF WAR MAY NEGATIVELY IMPACT ALL ASPECTS OF OUR OPERATIONS, REVENUES, COSTS AND STOCK PRICE. Recent terrorist attacks in the United States, as well as future events occurring in response or connection to them, including, without limitation, future terrorist attacks against United States targets, rumors or threats of war, actual conflicts involving the United States or its allies, or trade disruptions impacting our domestic or foreign suppliers of merchandise, may impact our operations and may, among other things, cause delays or losses in the delivery of wafers or other products to us and decreased sales of our products. More generally, these events have affected, and will continue to affect, the general economy and customer demand for products sold by our customers. Any of these occurrences could have a significant impact on our operating results, revenues, and costs, which in turn may result in increased volatility in our common stock price and could adversely affect the future price of our common stock. 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: - quarter-to-quarter variations in our operating results; - comments or recommendations issued by analysts who follow us, our competitors or the semiconductor industry and other events or factors; - aggregate valuations and movement of stocks in the broader semiconductor industry; - announcements of new products, strategic relationships or acquisitions by us or our competitors; - increases or decreases in wafer capacity; - general conditions or cyclicality in the semiconductor industry or the end markets that we serve; - governmental regulations, trade laws and import duties; - announcements related to future or existing litigation involving us or any of our competitors; - new or revised earnings estimates; 21 - announcements of technological innovations by us or our competitors; - additions or departures of senior management; and - 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 7a. MARKET RISK DISCLOSURES Our financial market risk includes risks associated with international operations and related foreign currencies. We anticipate that international sales will continue to account for a significant portion of our consolidated revenue. Our international sales are largely denominated in U.S. dollars and therefore are not subject to material foreign currency exchange risk. Expenses of our international operations are denominated in each country's local currency and therefore are subject to foreign currency exchange risk; however, through September 30, 2001 we have not experienced any significant negative impact on our operations as a result of fluctuations in foreign currency exchange rates. We do not currently engage in any hedging activities or use derivative financial instruments. We have short-term investments of $103.6 million at September 30, 2001. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without increasing risk. We invest primarily in high-quality, short-term debt instruments such as municipal auction rate certificates and instruments issued by high quality financial institutions and companies, including money market instruments. A hypothetical one percentage point decrease in interest rates would result in approximately a $1.2 million decrease in interest income. We own approximately 29% of ICSI a public company listed on the Taiwan Stock Exchange. We account for this investment on the equity basis and our investment balance as of September 30, 2001 was approximately $22.8 million. The share price of ICSI is subject to fluctuations. A significant decline in the stock price of ICSI may require us to record a loss related to this investment. We have investments in equity securities of privately held companies for the promotion of business and strategic objectives of approximately $20.5 million at September 30, 2001. These investments are generally in companies in the semiconductor industry. These investments are included in long-term investments and are accounted for using the cost method. In addition, we have an investment of $3.1 million that is accounted for on the equity method. For investments in which no public market exists, our policy is to review the operating performance, recent financing transactions and cash flow forecasts for such companies in assessing the net realizable values of the securities of these companies. Impairment losses on equity investments are recorded when events and circumstances indicate that such assets are impaired and the decline in value is other than temporary. We recorded $150,000 in impairment losses during 2001. 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Report of Independent Auditors.............................................24 Financial Statements: Consolidated Statements of Operations For Fiscal Years Ended September 30, 2001, September 30, 2000, and September 30, 1999..................25 Consolidated Statements of Comprehensive Income For Fiscal Years Ended September 30, 2001, September 30, 2000, and September 30, 1999..................26 Consolidated Balance Sheets As of September 30, 2001 and September 30, 2000.............27 Consolidated Statements of Stockholders' Equity For Fiscal Years Ended September 30, 2001, September 30, 2000, and September 30, 1999..................28 Consolidated Statements of Cash Flows For Fiscal Years Ended September 30, 2001, September 30, 2000, and September 30, 1999..................29 Notes to Consolidated Financial Statements.........................30
23 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Integrated Silicon Solution, Inc. We have audited the accompanying consolidated balance sheets of Integrated Silicon Solution, Inc. as of September 30, 2001 and 2000, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Integrated Silicon Solution, Inc. at September 30, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP San Jose, California October 26, 2001 24 Integrated Silicon Solution, Inc. Consolidated Statements of Operations (In thousands, except per share data)
Years Ended September 30, ----------------------------------------- 2001 2000 1999 --------- --------- --------- Net sales (See Note 18) $ 152,048 $ 141,923 $ 83,309 Cost of sales (See Note 18) 144,869 97,759 66,816 --------- --------- --------- Gross profit 7,179 44,164 16,493 --------- --------- --------- Operating expenses Research and development 25,303 18,287 18,778 Selling, general and administrative 20,721 15,627 11,899 --------- --------- --------- Total operating expenses 46,024 33,914 30,677 --------- --------- --------- Operating income (loss) (38,845) 10,250 (14,184) Interest and other income (expense), net 7,778 3,912 2,256 Interest expense (98) (133) (1,039) Gain on sales of investments, net 30,732 847 2,658 --------- --------- --------- Income (loss) before income taxes, minority interest and equity in net income (loss) of affiliated companies (433) 14,876 (10,309) Provision for income taxes 150 680 608 --------- --------- --------- Income (loss) before minority interest and equity in net income (loss) of affiliated companies (583) 14,196 (10,917) Minority interest in net loss of consolidated subsidiary -- -- (472) Equity in net income (loss) of affiliated companies 1,698 10,830 934 --------- --------- --------- Net income (loss) $ 1,115 $ 25,026 $ (9,511) ========= ========= ========= Basic net income (loss) per share $ 0.04 $ 1.07 $ (0.48) ========= ========= ========= Shares used in basic per share calculation 26,183 23,357 19,633 ========= ========= ========= Diluted net income (loss) per share $ 0.04 $ 0.96 $ (0.48) ========= ========= ========= Shares used in diluted per share calculation 27,788 26,056 19,633 ========= ========= =========
See the accompanying notes to consolidated financial statements 25 Integrated Silicon Solution, Inc. Consolidated Statements of Comprehensive Income (In thousands)
Years Ended September 30, ----------------------------------- 2001 2000 1999 -------- ------- ------- Net income (loss) $ 1,115 $25,026 $(9,511) Other comprehensive income (loss), net of tax: Change in cumulative translation adjustment (1,588) 419 2,599 -------- ------- ------- Comprehensive income (loss) $ (473) $25,445 $(6,912) ======= ======= =======
See the accompanying notes to consolidated financial statements 26 Integrated Silicon Solution, Inc. Consolidated Balance Sheets (In thousands, except per share data)
September 30, ------------------------- 2001 2000 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 19,309 $ 38,778 Short-term investments 103,550 58,800 Accounts receivable, net of allowance for doubtful accounts of $1,352 in 2001 and $1,499 in 2000 9,743 26,525 Accounts receivable from related parties (See Note 18) 597 1,526 Inventories 45,179 63,217 Other current assets 4,689 1,271 --------- --------- Total current assets 183,067 190,117 Property, equipment, and leasehold improvements, net 7,663 5,429 Other assets 47,122 65,178 --------- --------- Total assets $ 237,852 $ 260,724 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,285 $ 20,411 Accounts payable to related parties (See Note 18) 854 13,043 Accrued compensation and benefits 3,510 2,424 Accrued expenses 7,801 7,513 Income tax payable 3,651 648 Current portion of long-term obligations 156 140 --------- --------- Total current liabilities 23,257 44,179 Income tax payable -- noncurrent -- 4,996 Long-term obligations 158 314 Commitments and contingencies Stockholders' equity: Preferred stock, $0.0001 par value: Authorized shares -- 5,000 in 2001 and 2000. No shares outstanding -- -- Common stock, $0.0001 par value: Authorized shares -- 70,000 in 2001 and 2000. Issued and outstanding shares -- 26,539 in 2001 and 25,788 in 2000 3 3 Additional paid-in capital 221,502 217,845 Accumulated deficit (1,711) (2,826) Accumulated comprehensive income (loss) (5,357) (3,769) Unearned compensation -- (18) --------- --------- Total stockholders' equity 214,437 211,235 --------- --------- Total liabilities and stockholders' equity $ 237,852 $ 260,724 ========= =========
See the accompanying notes to consolidated financial statements 27 Integrated Silicon Solution, Inc. Consolidated Statements of Stockholders' Equity (In thousands)
Retained Common Stock Additional Earnings Accumulated Total --------------- Paid-In (Accumulated Comprehensive Unearned Stockholders' Shares Amount Capital Deficit) Income (Loss) Compensation Equity --------------- ---------- ----------- ------------- ------------ ------------ Balance at September 30, 1998 19,417 $ 2 $ 116,199 $ (18,341) $ (6,787) $(153) $ 90,920 Stock options exercised 556 -- 2,064 -- -- -- 2,064 Shares issued under stock purchase plan 235 -- 699 -- -- -- 699 Amortization of unearned compensation -- -- -- -- -- 8 8 Cancellation of stock options -- -- (109) -- -- 109 -- Warrants issued in connection with NexFlash Technologies spin-off -- -- 1,999 -- -- -- 1,999 Shares issued for exercise of warrant 86 -- -- -- -- -- -- Translation adjustment -- -- -- -- 2,599 -- 2,599 Net loss -- -- -- (9,511) -- -- (9,511) --------- ---- --------- --------- --------- ----- --------- Balance at September 30, 1999 20,294 2 120,852 (27,852) (4,188) (36) 88,778 Stock options exercised 1,006 -- 5,461 -- -- -- 5,461 Shares issued under stock purchase plan 235 -- 859 -- -- -- 859 Amortization of unearned compensation -- -- -- -- -- 18 18 Shares issued in connection with follow-on public stock offering 3,795 1 90,673 -- -- -- 90,674 Shares issued for exercise of warrants 458 -- -- -- -- -- -- Translation adjustment -- -- -- -- 419 -- 419 Net income -- -- -- 25,026 -- -- 25,026 --------- ---- --------- --------- --------- ----- --------- Balance at September 30, 2000 25,788 3 217,845 (2,826) (3,769) (18) 211,235 Stock options exercised 556 -- 2,532 -- -- -- 2,532 Shares issued under stock purchase plan 195 -- 1,125 -- -- -- 1,125 Amortization of unearned compensation -- -- -- -- -- 18 18 Translation adjustment -- -- -- -- (1,588) -- (1,588) Net income -- -- -- 1,115 -- -- 1,115 --------- ---- --------- --------- --------- ----- --------- Balance at September 30, 2001 26,539 $ 3 $ 221,502 $ (1,711) $ (5,357) $ -- $ 214,437 ========= ==== ========= ========= ========= ===== =========
See the accompanying notes to consolidated financial statements 28 Integrated Silicon Solution, Inc. Consolidated Statements of Cash Flows (In thousands)
Years Ended September 30, ---------------------------------- 2001 2000 1999 -------- -------- -------- Cash flows from operating activities: Net income (loss) $ 1,115 $ 25,026 $ (9,511) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 3,359 3,223 4,608 Net gain on sale of investments (30,732) (847) (2,658) Loss on impairment of asset 150 200 -- Net foreign currency transaction (gains) losses -- -- (594) Equity in net income of affiliated companies (1,698) (10,830) (934) Minority interest in net loss of consolidated subsidiary -- -- (472) Changes in operating assets and liabilities: Accounts receivable and accounts receivable from related parties (See Note 18) 17,711 (12,875) (1,719) Inventories 18,038 (33,545) (21,912) Other assets (1,473) 99 11,549 Accounts payable and accounts payable to related parties (See Note 18) (25,315) 13,853 149 Accrued expenses (619) 2,129 (963) -------- -------- -------- Net cash used in operating activities (19,464) (13,567) (22,457) Cash flows from investing activities: Acquisition of property, equipment, and leasehold improvements (5,593) (3,489) (3,490) Purchases of available-for-sale securities (82,150) (67,350) (26,450) Sales of available-for-sale securities 37,400 16,200 26,600 Dividends received from equity investee 1,961 -- -- Cash impact of deconsolidation of Integrated Circuit Solution, Inc. ("ICSI") -- -- (12,818) Proceeds from partial sale of ICSI 15,779 3,324 4,957 Investment in WaferTech, LLC -- (2,667) -- Proceeds from sale of WaferTech, LLC 40,669 -- 10,000 Proceeds from sale of United Integrated Circuits Corp. -- -- 9,217 Investment in NexFlash Technologies, Inc. -- (1,361) (1,000) Proceeds from partial sale of NexFlash Technologies, Inc. 6,167 -- -- Investment in Semiconductor Manufacturing International Corp. ("SMIC") (14,250) (4,600) -- Investment in E-CMOS Technology Corporation (3,023) -- -- Other investments (500) (553) (500) -------- -------- -------- Net cash provided by (used in) investing activities (3,540) (60,496) 6,516 Cash flows from financing activities: Proceeds from issuance of stock 3,675 97,012 2,771 Borrowings under notes payable and long-term obligations -- -- 33,435 Principal payments of notes payable and long-term obligations (140) (146) (32,393) -------- -------- -------- Net cash provided by financing activities 3,535 96,866 3,813 Effect of exchange rate changes on cash and cash equivalents -- -- 327 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (19,469) 22,803 (11,801) Cash and cash equivalents at beginning of year 38,778 15,975 27,776 -------- -------- -------- Cash and cash equivalents at end of year $ 19,309 $ 38,778 $ 15,975 ======== ======== ========
See the accompanying notes to consolidated financial statements 29 Notes to Consolidated Financial Statements NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Integrated Silicon Solution, Inc. (the "Company") was incorporated in California on October 27, 1988 and reincorporated in Delaware on August 9, 1993. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Integrated Silicon Solution, Inc. and its majority owned subsidiaries, after elimination of all significant intercompany accounts and transactions. The Company's financial results for fiscal 2001 and fiscal 2000 reflect accounting for Integrated Circuit Solution, Inc., ("ICSI") and GetSilicon, Inc. ("GetSilicon") on the equity basis and include its percentage share of the results of their respective operations. The Company's financial results for fiscal 2001 reflect accounting for E-CMOS Technology Corporation ("E-CMOS") on the equity basis and includes its percentage gain or loss of their results of operations on a one quarter lag. The Company's financial results for fiscal 2001 through the period ended January 31, 2001 and for fiscal 2000 reflect accounting for NexFlash Technologies, Inc. ("NexFlash") on the equity basis and include its percentage share of the results of NexFlash's operations. Effective February 2001, the Company's ownership of NexFlash became less than 20%, and the Company began accounting for NexFlash on the cost basis. Prior to the quarter ended March 31, 1999, the Company's ownership of ICSI exceeded 50% and its financial results were consolidated with those of ICSI. Effective with the quarter ending March 31, 1999, the Company accounted for ICSI on the equity basis and included in its financial statements its percentage share of ICSI's financial results. In fiscal 1999, the Company accounted for NexFlash on the equity basis and included in its financial statements its percentage share of NexFlash's financial results. At September 30, 2001, the Company owned approximately 29% of ICSI, approximately 14% of NexFlash, approximately 22% of E-CMOS and approximately 20% of GetSilicon. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. Under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" all affected debt securities must be classified as held-to-maturity, trading, or available-for-sale and equity securities must be classified as trading or available-for-sale. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date. At September 30, 2001 and 2000, all debt and equity securities were designated as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. The amortized cost for available-for-sale debt securities is adjusted for the amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income. At September 30, 2001 and 2000, the cost of these securities approximated the fair value (quoted market price) and the amount of unrealized gain or loss was not significant. Except for the gains (losses) recognized on the sales of securities of ICSI, WaferTech, NexFlash and UICC (see Note 17), there were no gains or losses on the sale of securities for the years ended September 30, 2001, 2000 and 1999. 30 Notes to Consolidated Financial Statements ACCOUNTS RECEIVABLE The following describes activity in the accounts receivable allowance for doubtful accounts for the years ended September 30, 2001, 2000, and 1999.
Addition Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Deductions of Period - -------------------------------- ---------- ---------- ---------- --------- Accounts receivable -- Allowance for doubtful accounts: 2001 $1,499 $ -- $(147)(1) $1,352 2000 $1,496 $ 3 $ -- $1,499 1999 $1,804 $ -- $(308)(1)(2) $1,496
- ---------- (1) Uncollectible accounts written off, net of recoveries (2) Includes reduction of $302 resulting from the deconsolidation of ICSI INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. The Company's inventory valuation process is done on a part-by-part basis. Lower of cost or market adjustments, specifically identified on a part-by-part basis, reduce the carrying value of the related inventory and take into consideration reductions in sales prices, excess inventory levels and obsolete inventory. Once established, these adjustments are considered permanent. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS Property, equipment, and leasehold improvements are stated at cost. Equipment under capital leases is stated at the present value of minimum lease payments at the beginning of the lease term. Depreciation and amortization are computed using the straight-line method, based upon the shorter of the estimated useful lives ranging from three to seven years, or the lease term of the respective assets, if applicable. ACCUMULATED COMPREHENSIVE INCOME (LOSS) The accumulated comprehensive income (loss) component within the stockholders' equity section of the Balance Sheet is comprised entirely of foreign currency translation adjustments. REVENUE RECOGNITION The Company recognizes revenue to non-distributor customers when persuasive evidence of an arrangement exists including a fixed price to the buyer, delivery has occurred and collectability is reasonably assured. The Company provides for estimated sales returns on sales to these customers. Sales made to distributors, under terms allowing certain rights of return and price protection on unsold merchandise held by the distributor, are deferred until the merchandise is sold by the distributor. FOREIGN CURRENCY TRANSLATION The Company uses the local currency as its functional currency for all foreign subsidiaries. Translation adjustments, which result from the process of translating foreign currency financial statements into U.S. dollars, are included in the accumulated comprehensive income (loss) component of stockholder's equity. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets 31 Notes to Consolidated Financial Statements and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such difference, may be material to the financial statements. CONCENTRATION OF CREDIT RISK The Company operates in one business segment, which is to design, develop, and market high performance SRAM, DRAM, and other memory products. The Company markets and distributes its products on a worldwide basis, primarily to original equipment manufacturers, contract manufacturers, and distributors. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. Sales to Flextronics International accounted for approximately 15% of net sales for fiscal 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 18% of net sales for fiscal 2001. Sales to 3Com accounted for approximately 7% of net sales for fiscal 2001. Shipments for 3Com directly, or indirectly through subcontractors, accounted for approximately 11% of net sales for fiscal 2001. In fiscal 2000 no single customer accounted for over 10% of net sales. However, shipments for Cisco directly, or indirectly through subcontractors, accounted for approximately 13% of net revenue. In fiscal 1999, one customer, 3Com, accounted for approximately 20% of net sales. The Company maintains cash, cash equivalents, and short-term investments with various financial institutions. The Company's investment policy is designed to limit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in its investment strategy. The Company is exposed to credit risk in the event of default by the financial institutions or issuers of investments to the extent of the amount recorded on the balance sheet. To date, the Company has not incurred losses related to these investments. SEMICONDUCTOR INDUSTRY RISKS To date the Company has derived a substantial majority of its revenues from the sale of SRAM products. The Company has diversified into other product areas, such as low and medium density DRAMs, serial EEPROMs, certain microcontrollers, and voice recording chips. However, a substantial majority of the Company's revenue is still derived from SRAM products and, if the market for SRAM products should decline, such decline would have a material adverse affect on the Company's financial performance. The semiconductor industry is characterized by rapid technological change, intense competitive pressure and cyclical market patterns. The Company's results of operations are affected by a wide variety of factors, including declines in average selling prices of its products, cancellation of existing orders or the failure to secure new orders, oversupply of memory products in the market, failure to introduce new products and to implement technologies on a timely basis, the timing and announcement of new product introductions by the Company and its competitors, market acceptance of the Company's and its customers' products, the failure to anticipate changing customer product requirements, fluctuations in manufacturing yields, disruption in delivery and order fulfillment, and disruption in the supply of wafers or assembly services. Other factors include changes in product mix, seasonal fluctuations in customer demand for the Company's products, 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 antidumping duties, 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. As a result, the Company may experience substantial period-to-period fluctuations in future operating results due to the factors mentioned above or other factors. NET INCOME (LOSS) PER SHARE Basic and diluted net loss per share and basic net income per share is computed using the weighted number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding, if applicable, during the period. Common equivalent shares consist of the shares issuable upon the exercise of stock options and warrants under the treasury stock method. 32 Notes to Consolidated Financial Statements IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS 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. The Company will adopt these standards as of October 1, 2001. As the Company has not completed any business combinations through September 30, 2001, the Company believes that these standards will not have a material impact on its financial position or operating results. NOTE 2. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS Cash, cash equivalents, and short-term investments consisted of the following at September 30:
2001 2000 -------- -------- (In thousands) Cash $ 14,280 $ 10,624 Money market instruments 5,029 28,154 Municipal bonds 103,550 58,800 -------- -------- Total $122,859 $ 97,578 ======== ========
NOTE 3. INVENTORIES Inventories consisted of the following at September 30:
2001 2000 -------- -------- (In thousands) Purchased components $12,350 $17,566 Work-in-process 594 11,737 Finished goods 32,235 33,914 ------- ------- $45,179 $63,217 ======= =======
In fiscal 2001, the Company recorded inventory write-downs of $38.3 million. The inventory write-downs were predominately for lower of cost or market issues on certain of its products. NOTE 4. OTHER ASSETS Other assets consisted of the following at September 30:
2001 2000 -------- -------- (In thousands) Investment in ICSI (see Notes 1 and 17) $22,805 $31,525 Investment in WaferTech, LLC. (see Note 17) -- 23,467 Investment in SMIC (see Notes 14 and 17) 18,850 4,600 Other 5,467 5,586 ------- ------- $47,122 $65,178 ======= =======
33 Notes to Consolidated Financial Statements NOTE 5. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS Property, equipment, and leasehold improvements consisted of the following at September 30:
2001 2000 ------- ------- (In thousands) Machinery and equipment $29,554 $25,878 Furniture and fixtures 1,329 859 Building and improvements 1,142 1,063 ------- ------- 32,025 27,800 Less accumulated depreciation and amortization 24,362 22,371 ------- ------- $ 7,663 $ 5,429 ======= =======
NOTE 6. ACCRUED EXPENSES Accrued liabilities consisted of the following at September 30:
2001 2000 ------- ------- (In thousands) Accrued anti-dumping duties (see Note 14) $1,574 $1,574 Deferred distributor margin 1,446 -- Other 4,781 5,939 ------ ------ $7,801 $7,513 ====== ======
NOTE 7. LONG-TERM OBLIGATIONS The Company leases certain of its equipment under a capital lease. The lease is collateralized by the underlying assets. At September 30, 2001, property and equipment with a cost of $600,000 was subject to this financing arrangement. Related accumulated amortization at September 30, 2001 amounted to $275,000. Under the terms of the lease, the Company owes monthly payments of $15,108 through September 1, 2003. Remaining principal and interest payments were $314,000 and $34,000, respectively, at September 30, 2001. At September 30, 2001, future minimum principal payments on long-term obligations were as follows (in thousands): 2002 $156 2003 158 ---- Total $314 ====
No interest was capitalized in 2001, 2000, or 1999. 34 Notes to Consolidated Financial Statements NOTE 8. CAPITAL STOCK The Company's Restated Certificate of Incorporation provides for 70,000,000 authorized shares of Common Stock and 5,000,000 authorized shares of preferred stock. The terms of the preferred stock may be fixed by the Board of Directors, who have the right to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. In the three month period ended March 31, 2000, the Company completed a follow-on public offering of its Common Stock whereby the Company sold 3,795,000 shares (including 495,000 shares pursuant to the underwriters' over-allotment option) at a public offering price of $25.50 per share. Proceeds from this offering, net of commissions, discounts and expenses, were approximately $90.7 million. As of September 30, 2001, shares of common stock were reserved for future issuance as follows: Common shares reserved under Employee Stock Purchase Plan 777,000 Common shares reserved under stock option plans 6,232,000
NOTE 9. STOCK PLANS 1989 STOCK OPTION PLAN During 1989, the Company adopted a stock option plan (the "Plan") that provides for the grant of incentive stock options to employees and nonstatutory stock options to employees, consultants and nonemployee directors. Incentive stock options and nonstatutory options granted under the Plan have five or ten-year terms. All incentive stock option grants and nonstatutory stock option grants must be at prices of at least 100% and 85%, respectively, of the fair market value of the stock on the date of grant, as determined by the Board of Directors. The options are exercisable as determined by the Board of Directors. Generally, the stock options vest ratably over a four-year period. The options expire upon the earlier of five or ten years from the date of grant or 30 days following termination of employment, unless specified otherwise in the option agreement. Options to purchase 714,000 shares, 795,000 shares, and 920,000 shares were exercisable as of September 30, 2001, 2000, and 1999, respectively. In the event of certain changes in control of ISSI, the Plan requires that each outstanding option be assumed or an equivalent option substituted by the successor corporation; however, if such successor refuses to assume the then outstanding options, the Plan provides for the full acceleration of the exercisability of all outstanding options. 1996 STOCK OPTION PLAN On October 18, 1996, the Company adopted a stock option plan (the "1996 Plan") that provides for the grant of non-statutory stock options to non-executive employees and consultants. Under the terms of the plan, the exercise price and exercise period of stock option grants is determined by the Board of Directors on the date of grant. Generally, the stock options vest ratably over a four year period. The options expire upon the earlier of ten years from the date of grant or 30 days following termination of employment or consultancy, unless specified otherwise in the option agreement. Options to purchase 827,000 shares, 286,000 shares, and 493,000 shares were exercisable as of September 30, 2001, 2000, and 1999, respectively. In the event of certain changes in control of ISSI, the 1996 Plan requires that each outstanding option be assumed or an equivalent option substituted by the successor corporation; however, if such successor refuses to assume the then outstanding options, the 1996 Plan provides for the full acceleration of the exercisability of all outstanding options. 35 Notes to Consolidated Financial Statements 1998 STOCK OPTION PLAN The Board of Directors and stockholders approved the 1998 Stock Option Plan (the "1998 Plan") in October 1998 and January 1999, respectively. The 1998 Plan provides for the grant of incentive stock options to employees and nonstatutory stock options to employees, consultants and nonemployee directors of ISSI. Stock purchase rights may also be granted under the 1998 Plan. Under the terms of the 1998 Plan, the exercise price and exercise period of non-statutory stock option grants is determined by the Board of Directors on the date of grant. All incentive stock option grants must be at prices of at least 100% of the fair market value of the stock on the date of grant, as determined by the Board of Directors. Generally, the stock options vest ratably over a four year period. The options expire upon the earlier of ten years from the date of grant or 90 days following termination of employment or consultancy, unless specified otherwise in the option agreement. Options to purchase 205,000 shares, 67,000 shares, and 0 shares were exercisable as of September 30, 2001, 2000, and 1999, respectively. In the event of certain changes in control of ISSI, the 1998 Plan requires that each outstanding option be assumed or an equivalent option substituted by the successor corporation; however, if such successor refuses to assume the then outstanding options, the 1998 Plan provides for the full acceleration of the exercisability of all outstanding options. 1995 DIRECTOR STOCK OPTION PLAN The Board of Directors and stockholders approved the 1995 Director Stock Option Plan (the "Director Plan") in December 1995 and January 1996, respectively. Under the terms of the Director Plan, 125,000 shares of Common Stock were authorized for issuance. Each director who has been a non-employee director for at least six months will automatically receive a non-statutory option to purchase 2,500 shares of Common Stock upon such director's annual reelection to the Board by the stockholders. Options to purchase 30,000 shares, 32,000 shares, and 38,000 shares were exercisable at September 30, 2001, 2000, and 1999, respectively. The following table summarizes activity of the 1989, 1996, 1998 and Director Stock Option Plans:
Options Outstanding ----------------------------------------------------- Options Number Weighted- Available Of Price Average For Grant Shares Per Share Exercise Price --------- ------ ------------ -------------- (In thousands, except per share data) ------------------------------------------------------------------------ Balance at September 30, 1998 2,229 3,296 $3.00-$14.50 8.57 Authorized 575 -- -- -- Granted (3,157) 3,157 $2.56-$ 6.50 3.06 Exercised -- (556) $2.81-$ 9.25 3.68 Canceled 2,811 (2,811) $2.56-$13.00 7.92 ------ ------ ------------ ------ Balance at September 30, 1999 2,458 3,086 $2.56-$14.50 $ 4.42 Authorized -- -- -- -- Granted (1,550) 1,550 $5.63-$30.13 16.21 Exercised -- (1,006) $2.56-$13.81 5.43 Canceled 184 (184) $2.56-$30.13 11.14 ------ ------ ------------ ------ Balance at September 30, 2000 1,092 3,446 $2.56-$24.88 $ 9.07 Authorized 2,250 -- -- -- Granted (1,630) 1,630 $8.06-$17.06 10.68 Exercised -- (556) $2.56-$18.56 4.56 Canceled 413 (413) $2.56-$24.88 18.56 ------ ------ ------------ ------ Balance at September 30, 2001 2,125 4,107 $2.56-$23.38 $ 9.36 ====== ====== ============ ======
36 Notes to Consolidated Financial Statements For certain options granted in 1997, the Company recognized as unearned compensation the excess of the deemed value for accounting purposes of the common stock issuable upon exercise of such options over the aggregate exercise price of such options. The deemed value for accounting purposes represents the fair value at the date of grant. The compensation expense is being amortized ratably over the vesting period of the option. Compensation expense amounting to $18,000, $18,000, and $8,000 was recognized for the years ending September 30, 2001, 2000, and 1999, respectively. Outstanding and exercisable options presented by price range at September 30, 2001 are as follows:
Options Outstanding Options Exercisable ------------------------------------------------------------------------------------- Number of Wtd. Average Number of Range of Options Remaining Life Wtd. Average Options Wtd. Average Exercise Prices Outstanding (Years) Exercise Price Exercisable Exercise Price - -------------------------------------------------------------------------------------------------------- $ 2.56-- 3.25 1,152,000 7.27 $ 2.93 852,000 $ 2.99 4.00-- 8.06 772,000 8.11 6.98 279,000 6.62 8.56--11.30 824,000 9.29 11.09 124,000 8.50 11.54--13.81 728,000 9.26 12.27 86,000 13.97 14.50--23.38 631,000 8.60 18.43 435,000 18.43 - --------------------------------------------------------------------------------------------------- $ 2.56--23.38 4,107,000 8.39 $ 9.36 1,776,000 $ 8.39 ===================================================================================================
EMPLOYEE STOCK PURCHASE PLAN In March 1993, the Company adopted an Employee Stock Purchase Plan (the "Purchase Plan") under Section 423 of the Internal Revenue Code. Under the Company's Purchase Plan, eligible employees may purchase shares of ISSI's common stock through payroll deductions. The shares are purchased at a price equal to 85% of the lesser of the fair value of the Company's common stock as of the first day of the 24-month offering period or the last day of each six-month purchase period. A total of 1,950,000 shares of common stock is reserved for issuance under the plan, of which 1,173,000 had been issued as of September 30, 2001. STOCK-BASED COMPENSATION As permitted under FAS 123, the Company has elected to follow APB 25 and related Interpretations, in accounting for stock-based awards to employees. Under APB 25, the Company generally recognized no compensation expense with respect to such awards. Pro forma information regarding net income (loss) and earnings (loss) per share is required by FAS 123 for awards granted or modified after September 30, 1995, as if the Company had accounted for its stock-based awards to employees under the fair value method of FAS 123. The fair value of the Company's stock-based awards to employees was estimated using a Black-Scholes option pricing model. The Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The fair value of the Company's stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:
STOCK OPTIONS ESPP -------------------------- -------------------------- 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- Expected life (years) 5.0 5.0 5.0 0.5 0.5 0.5 Expected volatility 0.93 0.91 0.85 1.14 1.10 1.16 Risk-free interest rate 4.82% 6.32% 5.12% 4.38% 5.91% 4.84%
The weighted-average fair value of options granted at market value during fiscal 2001, 2000, and 1999 was $6.52, $9.57, and $1.54 per share, respectively. The weighted-average fair value of employee stock purchase rights during fiscal 2001, 2000, and 1999 was $7.42, $4.81, and $3.04 per share, respectively. 37 Notes to Consolidated Financial Statements For pro forma purposes, the estimated fair value of the Company's stock-based awards to employees is amortized over the options' vesting period (for options) and the six-month purchase period (for stock purchases under the ESPP). The Company's pro forma information for the years ended September 30, is as follows (in thousands, except for income (loss) per share information):
2001 2000 1999 ------- ------- -------- Net income (loss) As reported $ 1,115 $25,026 $ (9,511) Pro forma $(5,593) $17,981 $(14,203) Basic income (loss) per share As reported $ 0.04 $ 1.07 $ (0.48) Pro forma $ (0.21) $ 0.77 $ (0.72) Diluted income (loss) per share As reported $ 0.04 $ 0.96 $ (0.48) Pro forma $ (0.21) $ 0.69 $ (0.72)
Due to the subjective nature of the assumptions used in the Black-Scholes model, the proforma net income (loss) and proforma net income (loss) per share may not be indicative of the effects on net income (loss) and net income (loss) per share in future years. NOTE 10. 1998 ISSI-TAIWAN STOCK PLAN On October 29, 1998, the Company adopted the 1998 ISSI-Taiwan Stock Plan (the "Taiwan Stock Plan") that provides for the grant of non-statutory stock options in the common stock of ICSI to the employees, consultants, and directors of the Company. Upon exercise, if any, the Company would sell its shares in ICSI to the optionee. Under terms of the Taiwan Stock Plan, the maximum aggregate number of shares of ICSI stock which may be optioned and sold is 12.0 million. The plan was terminated in January 2001 upon the completion of ICSI's initial public offering in Taiwan. Under the terms of the Taiwan Stock Plan, the exercise price, which is deemed to be the fair value of ICSI at the date of grant, and the exercise period of the non-statutory stock option grants are determined by the Board of Directors on the date of grant. Generally, the stock options vest one-third annually on the anniversary of the date of grant. During fiscal 2001 and fiscal 2000, options to purchase 6,910,000 and 3,110,000 shares of ICSI stock were exercised, respectively. At September 30, 2001, there were no options to purchase shares of ICSI stock outstanding. Options to purchase 6,910,000 shares of ICSI stock were outstanding at September 30, 2000, of which 315,000 were exercisable. Options to purchase 10,374,000 shares of ICSI stock were outstanding, at September 30, 1999, none of which were exercisable. 38 Notes to Consolidated Financial Statements NOTE 11. INCOME TAXES The provision for income taxes consisted of the following for the years ended September 30:
2001 2000 1999 ----- ----- ----- (In thousands) Current: Federal $ 150 $ 300 $(250) State -- -- -- Foreign -- 380 858 ----- ----- ----- Total current $ 150 $ 680 $ 608 Deferred: Federal -- -- -- State -- -- -- Foreign -- -- -- ----- ----- ----- Total deferred -- -- -- ----- ----- ----- Total provision $ 150 $ 680 $ 608 ===== ===== =====
Pretax income (loss) from foreign operations was approximately $(940,000), $572,000, and $(516,000), for 2001, 2000, and 1999, respectively. The Company's provision for income taxes differs from the amount computed by applying the U.S. federal statutory rate (35%) to income before taxes and minority interest as follows for the years ended September 30:
2001 2000 1999 -------- -------- -------- As adjusted (In thousands) Income taxes computed at the U.S. federal Statutory rate $ (152) $ 5,206 $ (3,608) Valuation allowance on deferred tax assets 16,255 -- -- Net operating loss (utilized), not utilized (6,469) (4,802) 1,875 Utilization of R&D and foreign tax credits (4,566) -- -- Reversal of taxes accrued for foreign operations (4,996) -- -- Foreign withholding taxes -- 290 858 Gain on sale of ICSI stock -- -- 1,733 Other individually immaterial items 78 (14) (250) -------- -------- -------- Total provision $ 150 $ 680 $ 608 ======== ======== ========
As of September 30, 2001, the Company had federal net operating loss carryforwards of approximately $6,200,000. The Company has foreign tax credit carryforwards of approximately $600,000. The Company also has manufacturers' investment tax credit carryforwards of approximately $830,000. The state manufacturer's credit carryforwards will expire at various dates beginning in 2002 through 2007, if not utilized. Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. 39 Notes to Consolidated Financial Statements Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Significant components of deferred taxes consisted of the following at September 30:
2001 2000 -------- -------- (In thousands) Deferred tax assets: Depreciation $ 1,068 $ 1,024 Inventory and other valuation reserves 19,985 6,634 Accrued expenses 2,123 2,681 Federal and state credit carryforwards 2,408 8,879 Federal net operating loss carryforwards 2,170 5,638 Other, net 489 1,162 -------- -------- Subtotal 28,243 26,018 Valuation allowance (20,214) (14,291) -------- -------- Total deferred tax assets $ 8,029 $ 11,727 Deferred tax liabilities: Equity investments basis differences (8,029) (11,727) -------- -------- Net deferred tax assets $ 0 $ 0 ======== ========
Management has established a valuation allowance for a portion of the gross deferred tax assets based on management's expectations of future taxable income and the actual taxable income during the three years ended September 30, 2001. The valuation allowance for deferred tax assets increased by $5,923,000 in 2001 and decreased by $6,395,000 in 2000 and by $8,981,000 in 1999. Approximately $6,200,000 of the valuation allowance is attributable to tax benefits of stock option deductions which will be credited to paid in capital when recognized. NOTE 12. PER SHARE DATA The calculations of basic and diluted net income (loss) per share for each of the three years ended September 30, 2001 are as follows:
Years Ended September 30, 2001 2000 1999 -------- -------- -------- In thousands, except per share data Numerator for basic and diluted net income (loss) per share: Net income (loss) $ 1,115 $ 25,026 $ (9,511) ======== ======== ======== Denominator for basic net income (loss) per share: Weighted average common shares outstanding 26,183 23,357 19,633 Dilutive stock options 1,587 2,323 -- Dilutive warrants 18 376 -- -------- -------- -------- Denominator for diluted net income (loss) per share 27,788 26,056 19,633 ======== ======== ======== Basic net income (loss) per share $ 0.04 $ 1.07 $ (0.48) ======== ======== ======== Diluted net income (loss) per share $ 0.04 $ 0.96 $ (0.48) ======== ======== ========
The above diluted calculation for the years ended September 30, 2001, 2000, and 1999, does not include approximately 779,000, 101,000, and 2,000,000, shares attributable to options as of September 30, 2001, 2000, and 1999, respectively, as their impact would be anti-dilutive. The above diluted calculation for the year ended September 30, 1999, does not include approximately 175,000 shares attributable to warrants as of September 30, 1999, as their impact would be anti-dilutive. 40 Notes to Consolidated Financial Statements NOTE 13. 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:
Years Ended September 30, 2001 2000 1999 --------- --------- --------- In thousands Net Sales United States $ 79,207 $ 70,910 $ 44,885 Asia 34,626 32,896 21,316 Europe 38,215 32,117 17,108 --------- --------- --------- Total net sales $ 152,048 $ 141,923 $ 83,309 ========= ========= ========= Long-lived assets U.S. operations $ 6,634 $ 5,338 $ 4,428 Hong Kong operations 566 91 135 China operations 463 -- -- --------- --------- --------- Total long-lived assets $ 7,663 $ 5,429 $ 4,563 ========= ========= =========
Revenues are attributed to countries based on location of customers. Long-lived assets by geographic area are those assets used in the Company's operations in each area. Net foreign currency transaction gains (losses) of approximately $(5,000), $(40,000), and $594,000, for the years ended September 30, 2001, 2000, and 1999, respectively, were primarily the result of the settlement of intercompany transactions and are included in the determination of net income (loss). NOTE 14. COMMITMENTS AND CONTINGENCIES PATENTS AND LICENSES In the semiconductor industry, it is not unusual for companies to receive notices alleging infringement of patents or other intellectual property rights of others. The Company has been, and from time-to-time expects to be, notified of claims that it may be infringing patents, maskwork rights or copyrights owned by third parties. If it appears necessary or desirable, the Company may seek licenses under patents that it is alleged to be infringing. Although patent holders commonly offer such licenses, licenses may not be offered and the terms of any offered licenses may not be acceptable to the Company. The failure to obtain a license under a key patent or intellectual property right from a third party for technology used by the Company could cause it to incur substantial liabilities 41 Notes to Consolidated Financial Statements and to suspend the manufacture of the products utilizing the invention or to attempt to develop non-infringing products, any of which could materially and adversely affect the Company's business and operating results. Furthermore, there can be no assurance that the Company will not become involved in protracted litigation regarding its alleged infringement of third party intellectual property rights or litigation to assert and protect its patents or other intellectual property rights. Any litigation relating to patent infringement or other intellectual property matters could result in substantial cost and diversion of the Company's resources which could materially and adversely affect the Company's business and operating results. 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 DOC has suspended that review as a consequence of the court decision described below. 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 the respondents. This decision by the Court of International Trade was appealed by Micron to the U.S. Court of Appeals for the Federal Circuit ("CAFC"). On September 21, 2001, the Federal Circuit upheld the Court of International Trade. This Federal Circuit decision is subject to appeal. If no appeal is taken, or if any such appeal is unsuccessful, the antidumping case will be terminated, the order will be revoked, and the Company will be entitled to a full refund of its 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. OPERATING LEASES The Company leases its facilities under operating lease agreements that expire at various dates through 2007. The Company entered into a ten year lease effective December 1, 1996 for its headquarters facility in Santa Clara, California. The Company subleases approximately 24,000 square feet and 9,000 square feet to third parties whose subleases expire in March 2003 and September 2003, respectively. Minimum rental commitments under these leases are as follows (in thousands): 2002 (net of sublease income of $509) $1,090 2003 (net of sublease income of $318) 1,253 2004 1,552 2005 1,601 2006 1,600 Thereafter 669 ------ Total minimum rental commitments $7,765 ======
Total rental expense for the years ended September 30, 2001, 2000, and 1999, was approximately $1,164,000 (net of sublease income of $584,000), $1,034,000 (net of sublease income of $634,000), and $1,050,000 (net of sublease income of $630,000), respectively. 42 Notes to Consolidated Financial Statements COMMITMENTS TO WAFER FABRICATION FACILITIES In August 2000, the Company entered into a wafer fabrication facility investment agreement with SMIC, the first 8-inch foundry in the People's Republic of China. Under the terms of this agreement, the Company has committed to invest $30.0 million. In April 2001, the Company committed to invest an additional $10.0 million. The Company has received certain capacity commitments from SMIC. In fiscal 2001, the Company made an investment of $14.3 million in SMIC, bringing its total investment in this foundry as of September 30, 2001, to $18.9 million. An additional $21.1 million is expected to be invested in fiscal year 2002. NOTE 15. EMPLOYEE BENEFIT PLAN In August 1992, the Company established a defined contribution retirement plan with 401(k) plan features. The plan covers all United States employees 18 years and older. Employees may make contributions through payroll withholdings of up to the lesser of $10,500 or 20% of their annual compensation for 2001. The Company elected to make no contributions during the years ended September 30, 2001, 2000, and 1999. Administrative expenses relating to the plan are insignificant. NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended September 30, 2001 2000 1999 ------- ------- ------- (In thousands) Cash paid for interest $ 42 $ 134 $ 1,234 Cash paid (refunded) for income taxes 2,146 354 (1,986) Fixed assets acquired under capital lease -- 600 --
NOTE 17. TRANSACTIONS Effective October 1, 1998, the Company transferred certain employees and joint ownership of certain patents and related Flash technology to NexFlash. In connection with the NexFlash transaction, the Company issued warrants to purchase an aggregate of 981,659 shares of ISSI Common Stock at an exercise price of $3.76 per share, the fair market value at date of grate, to the NexFlash investors. The Company determined the fair value of the warrants using the Black-Scholes valuation model assuming a fair value of the common stock of $4.44 per share, risk free interest rate of 4.43%, volatility factor of 70%, and a life of two years. During fiscal 2000, the Company issued 457,029 shares of its common stock pursuant to the exercise of warrants to purchase 582,660 shares of its common stock. All remaining unexercised warrants expired on November 4, 2000. In December 1998, the Company sold 20% of its holdings in ICSI to a group of private investors resulting in a pre-tax gain of $1.2 million. Proceeds from the transaction, net of withholding and transaction taxes, totaled $6.6 million (including cash of $4.3 million and notes receivable of $2.3 million). Effective December 31, 1998, the Company owned approximately 43% of ICSI and accounted for ICSI on the equity basis. ICSI was consolidated in the accompanying statement of operations until December 31, 1998 when the 20% of the Company's holdings were sold. The accompanying consolidated balance sheets as of September 30, 2001 and September 30, 2000 reflects ICSI as an investment accounted for on the equity basis. In December 1998, the Company agreed to sell approximately 33% of its investment in WaferTech to TSMC for approximately $10.0 million. The transaction was completed in January 1999, and the Company retained a 2.67% interest in WaferTech. The Company recorded a pre-tax loss of approximately $0.4 million in the March 1999 quarter related to this transaction. In April 1999, the Company agreed to sell its investment in UICC to UMC for its original acquisition cost. The Company recorded a pre-tax gain of approximately $1.8 million in the June 1999 quarter related to this transaction. The gain resulted from adjustments to the original acquisition value for fluctuations in the New Taiwanese Dollar. On October 13, 1999, the major investors in WaferTech, which include TSMC, Altera, Analog Devices, and ISSI, made pro-rata investments in WaferTech. The Company's pro-rata amount of $2.7 million was invested 43 Notes to Consolidated Financial Statements along with the other partners. The Company's investment in WaferTech as of September 30, 1999 was $20.8 million. After the October 1999 additional investment, the Company's total investment in WaferTech was $23.5 million. In August 2000, the Company entered into a wafer fabrication facility investment agreement with SMIC. Under the terms of this agreement, the Company has committed to invest $30.0 million. In April 2001, the Company committed to invest an additional $10.0 million. In fiscal 2001, the Company made an investment of $14.3 million in SMIC, bringing its total investment in this foundry as of September 30, 2001, to $18.9 million. An additional $21.1 million is expected to be invested in fiscal year 2002. 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 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 the Company in the initial public offering and subsequently, the Company received gross proceeds of approximately $10.7 million in fiscal 2001 resulting in a pre-tax gain of $8.2 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 pre-tax 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 $3.0 million for approximately 22% of 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 of their results of operations on a one quarter lag. NOTE 18. RELATED PARTY TRANSACTIONS For the years ended September 30, 2001, September 30, 2000 and the nine months ended September 30, 1999, the Company sold approximately $188,000, $921,000 and $1,412,000, respectively, of memory products to ICSI. The Company currently has approximately a 29% ownership interest in ICSI. The Company's Chairman and Chief Executive Officer ("CEO"), Jimmy S.M. Lee, is a director of ICSI. The Company also provides services and licenses certain products to ICSI. At September 30, 2001 and 2000, the Company had an accounts receivable balance from ICSI of approximately $327,000 and $709,000, respectively. The Company purchases goods and contract manufacturing services from ICSI. For the years ended September 30, 2001, September 30, 2000 and the nine months ended September 30, 1999, purchases of goods and services were approximately $12,815,000, $74,001,000 and $55,840,000, respectively. At September 30, 2001 and 2000, the Company had an accounts payable balance to ICSI of approximately $551,000 and $12,997,000, respectively. For the years ended September 30, 2001, September 30, 2000 and the eleven months ended September 30, 1999, the Company sold approximately $0, $208,000 and $1,542,000, respectively, of memory products to NexFlash. The Company currently has approximately a 14% ownership interest in NexFlash. The Company's Chairman and CEO, Jimmy S.M. Lee, is a director of NexFlash. In addition, the Company received approximately $183,000, $180,000 and $167,000 in sublease income from NexFlash in the years ended September 30, 2001, 2000 and 1999, respectively (See Note 14). The Company also provides NexFlash various administrative support services for which it is reimbursed. At September 30, 2001 and 2000, the Company had an accounts receivable balance from NexFlash of approximately $81,000 and $343,000, respectively. The Company purchases goods and services from NexFlash. For the years ended September 30, 2001, September 30, 2000 and the eleven months ended September 30, 1999, purchases of goods and services were approximately $0, $391,000 and $0, respectively. At September 30, 2000 and 1999, the Company had an accounts payable balance to NexFlash of approximately $0 and $46,000, respectively. The Company provides goods and services to GetSilicon in which the Company currently has approximately a 20% ownership interest. The Company's Chairman and CEO, Jimmy S.M. Lee, is the Chairman of GetSilicon. For the year ended September 30, 2001 and September 30, 2000, the Company provided goods and services of 44 Notes to Consolidated Financial Statements approximately $559,000 and $595,000, respectively, to GetSilicon. At September 30, 2001 and 2000, the Company had an accounts receivable balance from GetSilicon of approximately $30,000 and $474,000, respectively. In January 2001, the Company entered into an agreement for business-to-business data exchange and application services with GetSilicon. For the year ended September 30, 2001, the purchase of services under this agreement was approximately $259,000. At September 30, 2001, the Company had an accounts payable balance to GetSilicon of approximately $32,000. For the year ended September 30, 2001, the Company sold approximately $292,000 of memory products to E-CMOS in which the Company currently has approximately a 22% ownership interest. The Company's Chairman and CEO, Jimmy S.M. Lee, is the Chairman of E-CMOS. At September 30, 2001, the Company had an accounts receivable balance from E-CMOS of approximately $159,000. The Company receives administrative support services and reimburses E-CMOS for expenses incurred on its behalf. At September 30, 2001, the Company had an accounts payable balance to E-CMOS of approximately $271,000. NOTE 19. INVESTMENT IN ICSI (UNAUDITED) The following summarizes financial information for ICSI at September 30:
2001 2000 -------- -------- (In thousands) Current assets $ 76,624 $109,428 Property, plant, and equipment and other assets 51,345 45,873 Current liabilities 34,181 53,037 Long-term debt 9,352 15,517
The following summarizes financial information for ICSI, for the twelve months ended September 30, 2001 and September 30, 2000 and for the period from January 1, 1999 through September 30, 1999. The period from October 1, 1998 through December 31, 1998 was included in the Company's consolidated financial statements and is therefore excluded from this presentation.
Twelve Months Twelve Months Nine Months Ended Ended Ended September 30, 2001 September 30, 2000 September 30, 1999 ------------------ ------------------ ------------------- Net sales $113,514 $169,994 $ 82,381 Gross profit 28,446 55,575 12,494 Net income 11,379 37,010 4,764
45 Notes to Consolidated Financial Statements NOTE 20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended September 30, 2001 and 2000.
DEC 31 MAR 31 JUNE 30 SEPT 30 -------- -------- -------- -------- (In thousands, except per share data) (unaudited) FISCAL 2001 Net sales $ 65,229 $ 52,023 $ 20,013 $ 14,783 Gross margin (loss) 22,175 3,459 (3,500) (14,955) Operating income (loss) 9,228 (9,041) (14,274) (24,758) Net income (loss) 25,075 4,469 (3,703) (24,726) Basic net income (loss) per share $ 0.97 $ 0.17 $ (0.14) $ (0.93) Diluted net income (loss) per share $ 0.91 $ 0.16 $ (0.14) $ (0.93) FISCAL 2000 Net sales $ 23,251 $ 30,032 $ 38,512 $ 50,128 Gross margin 6,280 8,800 12,339 16,745 Operating income (loss) (546) 1,181 3,394 6,221 Net income 494 3,385 9,482 11,665 Basic net income per share $ 0.02 $ 0.15 $ 0.37 $ 0.45 Diluted net income per share $ 0.02 $ 0.14 $ 0.34 $ 0.41
46 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Certain information required by Part III is omitted from this Report on Form 10-K in that the Registrant will file its definitive Proxy Statement for its Annual Meeting of Stockholders to be held on February 6, 2002, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy Statement"), not later than 120 days after the end of the fiscal year covered by this Report, and certain information included in the Proxy Statement is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Executive Officers - See the section entitled "Executive Officers" in Part I, Item 1 hereof. (b) Directors - The information required by this Item is incorporated by reference to the section entitled "Election of Directors" in the Proxy Statement. The disclosure required by Item 405 of Regulation S-K is incorporated by reference to the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the sections entitled "Compensation of Executive Officers" and "Compensation of Directors" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the sections entitled "Principal Share Ownership" and "Security Ownership of Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the section entitled "Certain Transactions" in the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of documents filed as part of this Report. 1. FINANCIAL STATEMENTS The following consolidated financial statements of Integrated Silicon Solution, Inc. are contained in Part II, Item 8 of this Report on Form 10-K: Report of Ernst & Young LLP, Independent Auditors Consolidated Statements of Operations Consolidated Statements of Comprehensive Income Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Stockholders' Equity Notes to Consolidated Financial Statements 47 2. FINANCIAL STATEMENT SCHEDULES All other schedules for which provision is made in the Applicable Accounting Regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. EXHIBITS
Exhibit Number Description of Document ------- ----------------------- 2.1 (4) Agreement and Plan of Reorganization dated November 5, 1997 by and among the Company, Nexcom Technology, Inc. and certain shareholders of Nexcom Technology, Inc. 3.1 (2) Restated Certificate of Incorporation of Registrant. 3.3 (1) Bylaws of Registrant. 4.2 (1) Form of Common Stock Certificate. 10.1 (1) Form of Indemnification Agreement. 10.2 (1)* Form of 1993 Employee Stock Purchase Plan, as amended, and form of Subscription Agreement. 10.3 (1)* Form of 1989 Stock Plan, as amended, and form of Stock Option Agreements. 10.4 (1)* 1995 Director Stock Option Plan. 10.5 (3) Sublease Agreement for facility located at 2231 Lawson Lane, Santa Clara, California. 10.6 (5)* Nonstatutory Stock Plan 10.7 (6)* 1998 ISSI-Taiwan Stock Plan 10.8 (7)* 1998 Stock Plan 21.1 (1) Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP, Independent Auditors 24.1 Power of Attorney (see page 49).
- ---------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Report on Form 10-K pursuant to form 14(c) of this report. (1) Incorporated by reference to the Company's Registration Statement on Form S-1, as amended (file no. 33-72960). (2) Incorporated by reference to the Company's Registration Statement on Form S-1, as amended (file no. 33-91520) (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the period ended September 30, 1996. (4) Incorporated by reference to the Company's Annual Report on Form 10-K for the period ended September 30, 1997. (5) Incorporated by reference to the Company's Registration Statement on Form S-8 filed April 30, 1997. (6) Incorporated by reference to the Company's Annual Report on Form 10-K for the period ended September 30, 1998 (7) Incorporated by reference to the Company's Registration Statement on Form S-8 filed April 26, 1999. (b) Reports on Form 8-K (c) Exhibits See (a) above (d) Financial statement schedules See (a) above 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Santa Clara, State of California, on the 13th day of December, 2001. INTEGRATED SILICON SOLUTION, INC. By /s/ Michael McDonald ------------------------------------- Michael McDonald Vice President and Chief Financial Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Jimmy S.M. Lee and Gary L. Fischer, and each of them acting individually, as his or her attorney-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said Report. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below on December 13, 2001 by the following persons on behalf of the Registrant and in the capacities indicated.
Signature Title - --------------------------- ------------------------------------------------- /s/ Jimmy S.M. Lee Chairman of the Board and Chief Executive Officer - --------------------------- (Principal Executive Officer) (Jimmy S.M. Lee) /s/ Gary L. Fischer Director, President, and Chief Operating Officer - --------------------------- (Gary L. Fischer) /s/ Michael McDonald Vice President and Chief Financial Officer - --------------------------- (Principal Financial and Accounting Officer) (Michael McDonald) /s/ Lip-Bu Tan Director - --------------------------- (Lip-Bu Tan) /s/ Hide Tanigami Director - --------------------------- (Hide Tanigami) /s/ Chun Win Wong Director - --------------------------- (Chun Win Wong)
49 EXHIBIT INDEX
Exhibit Number Description of Document ------- ----------------------- 2.1 (4) Agreement and Plan of Reorganization dated November 5, 1997 by and among the Company, Nexcom Technology, Inc. and certain shareholders of Nexcom Technology, Inc. 3.1 (2) Restated Certificate of Incorporation of Registrant. 3.3 (1) Bylaws of Registrant. 4.2 (1) Form of Common Stock Certificate. 10.1 (1) Form of Indemnification Agreement. 10.2 (1)* Form of 1993 Employee Stock Purchase Plan, as amended, and form of Subscription Agreement. 10.3 (1)* Form of 1989 Stock Plan, as amended, and form of Stock Option Agreements. 10.4 (1)* 1995 Director Stock Option Plan. 10.5 (3) Sublease Agreement for facility located at 2231 Lawson Lane, Santa Clara, California. 10.6 (5)* Nonstatutory Stock Plan 10.7 (6)* 1998 ISSI-Taiwan Stock Plan 10.8 (7)* 1998 Stock Plan 21.1 (1) Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP, Independent Auditors 24.1 Power of Attorney (see page 49).
- ---------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Report on Form 10-K pursuant to form 14(c) of this report. (1) Incorporated by reference to the Company's Registration Statement on Form S-1, as amended (file no. 33-72960). (2) Incorporated by reference to the Company's Registration Statement on Form S-1, as amended (file no. 33-91520) (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the period ended September 30, 1996. (4) Incorporated by reference to the Company's Annual Report on Form 10-K for the period ended September 30, 1997. (5) Incorporated by reference to the Company's Registration Statement on Form S-8 filed April 30, 1997. (6) Incorporated by reference to the Company's Annual Report on Form 10-K for the period ended September 30, 1998 (7) Incorporated by reference to the Company's Registration Statement on Form S-8 filed April 26, 1999. EX-23.1 3 f77865ex23-1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-95282, 333-3438, 333-26135, 333-44281, 333-50679, 333-76991, 333-33944 and 333-56800) pertaining to the 1993 Employee Stock Purchase Plan, the 1995 Director Stock Option Plan, the 1989 Stock Plan, the Nonstatutory Stock Plan, and the 1998 Stock Plan of Integrated Silicon Solution, Inc. of our report dated October 26, 2001, with respect to the consolidated financial statements and schedule of Integrated Silicon Solution, Inc. included in this Annual Report (Form 10-K) for the year ended September 30, 2001. /s/ ERNST & YOUNG LLP San Jose, California December 13, 2001 -----END PRIVACY-ENHANCED MESSAGE-----