-----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, MwHS6RGng7P4aa8u2c4pNuWYYtzPfHJxIToR0+NE5sNYU1MicshNXzaYh53ChMOM Vc+LqGlEgcYyKZvXjeQM4Q== 0000891618-02-000699.txt : 20020414 0000891618-02-000699.hdr.sgml : 20020414 ACCESSION NUMBER: 0000891618-02-000699 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23084 FILM NUMBER: 02543824 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-Q 1 f79127e10-q.txt FORM 10-Q FOR PERIOD ENDED 12/31/01 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 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 000-23084. INTEGRATED SILICON SOLUTION, INC. Delaware 77-0199971. (State or other jurisdiction of (I.R.S Employer incorporation or organization) Identification No.) 2231 Lawson Lane, Santa Clara, California 95054. (Address of principal executive offices) zip code Registrant's telephone number, including area code (408) 588-0800. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No The number of outstanding shares of the registrant's Common Stock as of February 6, 2002 was 26,738,721 INTEGRATED SILICON SOLUTION, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data)
Three Months Ended December 31, ----------------------------- 2001 2000 -------- -------- Net sales (See Note 13) $ 15,091 $ 65,229 Cost of sales 12,400 43,054 -------- -------- Gross Profit 2,691 22,175 -------- -------- Operating Expenses: Research and development 6,638 6,717 Selling, general and administrative 3,665 6,230 -------- -------- Total operating expenses 10,303 12,947 -------- -------- Operating income (loss) (7,612) 9,228 Gain on sale of investments 35 17,202 Other income (expense), net 536 1,507 -------- -------- Income (loss) before income taxes, minority interest and equity in net income (loss) of affiliated companies (7,041) 27,937 Provision for income taxes -- 6,985 -------- -------- Income (loss) before minority interest and equity in net income (loss) of affiliated companies (7,041) 20,952 Minority interest in net loss of consolidated subsidiary 9 -- Equity in net income (loss) of affiliated companies (2,906) 4,123 -------- -------- Net income (loss) $ (9,938) $ 25,075 ======== ======== Basic net income (loss) per share $ (0.37) $ 0.97 ======== ======== Shares used in basic per share calculation 26,598 25,822 ======== ======== Diluted net income (loss) per share $ (0.37) $ 0.91 ======== ======== Shares used in diluted per share calculation 26,598 27,407 ======== ========
See accompanying notes to condensed consolidated financial statements. 1 INTEGRATED SILICON SOLUTION, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In thousands)
Three Months Ended December 31, ----------------------------- 2001 2000 -------- -------- Net income (loss) $ (9,938) $ 25,075 Other comprehensive income (loss), net of tax: Change in cumulative translation adjustment (296) (1,011) -------- -------- Comprehensive income (loss) $(10,234) $ 24,064 ======== ========
See accompanying notes to condensed consolidated financial statements. 2 INTEGRATED SILICON SOLUTION, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, September 30, 2001 2001 ----------- ------------- (unaudited) (1) ASSETS Current assets: Cash and cash equivalents $ 25,960 $ 19,309 Short-term investments 91,750 103,550 Accounts receivable 8,014 9,743 Accounts receivable from related parties (See Note 13) 812 597 Inventories 39,741 45,179 Other current assets 3,747 4,689 --------- --------- Total current assets 170,024 183,067 Property, equipment, and leasehold improvements, net 7,649 7,663 Other assets 47,805 47,122 --------- --------- Total assets $ 225,478 $ 237,852 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,830 $ 7,285 Accounts payable to related parties (See Note 13) 1,914 854 Accrued compensation and benefits 3,186 3,510 Accrued expenses 6,366 7,801 Income tax payable 1,167 3,651 Current portion of long-term obligations 160 156 --------- --------- Total current liabilities 20,623 23,257 Long-term obligations 116 158 Minority interest 136 -- Stockholders' equity: Preferred stock -- -- Common stock 3 3 Additional paid-in capital 221,902 221,502 Accumulated deficit (11,649) (1,711) Accumulated comprehensive income (loss) (5,653) (5,357) Total stockholders' equity 204,603 214,437 --------- --------- Total liabilities and stockholders' equity $ 225,478 $ 237,852 ========= =========
(1) Derived from audited financial statements. See accompanying notes to condensed consolidated financial statements. 3 INTEGRATED SILICON SOLUTION, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Three Months Ended December 31, ----------------------------- 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (9,938) $ 25,075 Depreciation and amortization 871 789 Gain on sale of investments (35) (17,202) Loss on impairment of investment 150 -- Equity in (net income) loss of affiliated companies 2,906 (4,123) Minority interest in net loss of consolidated subsidiary (9) -- Net effect of changes in current and other assets and current liabilities 5,023 (1,821) -------- -------- Cash provided by (used in) operating activities (1,032) 2,718 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (857) (397) Purchases of available-for-sale securities (6,600) (15,100) Sales of available-for-sale securities 18,400 16,250 Proceeds from partial sale of Integrated Circuit Solution, Inc. ("ICSI") 64 5,147 Proceeds from joint venture partner 145 -- Investment in Semiconductor Manufacturing International Corp. ("SMIC") (3,750) (6,750) Proceeds from sale of Wafertech, LLC -- 40,669 Other investments (16) -- -------- -------- Cash provided by investing activities 7,386 39,819 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock 400 172 Principal payments on notes payable and long-term obligations (38) (34) -------- -------- Cash provided by financing activities 362 138 -------- -------- Effect of exchange rate changes on cash and cash equivalents (65) -- Net increase in cash and cash equivalents 6,651 42,675 Cash and cash equivalents at beginning of period 19,309 38,778 -------- -------- Cash and cash equivalents at end of period $ 25,960 $ 81,453 ======== ========
See accompanying notes to condensed consolidated financial statements. 4 INTEGRATED SILICON SOLUTION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying condensed financial statements include the accounts of Integrated Silicon Solution, Inc. (the "Company") and its consolidated majority owned subsidiaries, after elimination of all significant intercompany accounts and transactions and have been prepared in accordance with generally accepted accounting principles for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three months ended December 31, 2001 are not necessarily indicative of the results that may be expected for the year ending September 30, 2002. The financial statements included herein should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2001. 2. CONCENTRATIONS In the quarter ended December 31, 2001, no single customer accounted for over 10% of net sales. However, shipments for Cisco Systems Inc. ("Cisco") directly, or indirectly through subcontractors, accounted for approximately 14% of net revenue. Sales to Flextronics International accounted for approximately 9% and 14% of total net sales for the quarters ended December 31, 2001 and December 31, 2000, respectively. Substantially all of the sales to Flextronics were for products to be delivered to Cisco. 3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash, cash equivalents and short-term investments consisted of the following: (In thousands)
December 31 September 30 2001 2001 ----------- -------------- Cash $ 20,873 $ 14,280 Money market instruments 5,087 5,029 Municipal bonds due in more than 3 years 91,750 103,550 -------- -------- $ $117,710 $122,859 ======== ========
4. INVENTORIES The following is a summary of inventories by major category: (In thousands)
December 31 September 30 2001 2001 ----------- -------------- Purchased components $12,875 $12,350 Work-in-process 465 594 Finished goods 26,401 32,235 ------- ------- $39,741 $45,179 ======= =======
5 INTEGRATED SILICON SOLUTION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. OTHER ASSETS Other assets consisted of the following:
(In thousands) December 31 September 30 2001 2001 ----------- ------------ Investment in ICSI $19,638 $22,805 Investment in SMIC 22,600 18,850 Other 5,567 5,467 ------- ------- $47,805 $47,122 ======= =======
6. INCOME TAXES The Company recorded no provision for income taxes for the three month period ended December 31, 2001 due to its net operating loss position. The provision for income taxes for the three month period ended December 31, 2000 is principally comprised of taxes on U.S. earnings and to a lesser extent taxes on foreign earnings. The effective tax rate of 25% for the three months ended December 31, 2000 differs from the federal statutory rate as a result of the reversal of valuation allowances previously established. 7. NET INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share amounts):
Three Months Ended December 31, ------------------------- 2001 2000 ---------- ----------- Numerator for basic and diluted net income (loss) per share: Net income (loss) $(9,938) $25,075 ======= ======= Denominator for basic net income (loss) per share: Weighted average common shares outstanding 26,598 25,822 ======= ======= Denominator for basic net income (loss) per share 26,598 25,822 Dilutive stock options -- 1,514 Dilutive warrants -- 71 ------- ------- Denominator for diluted net income (loss) per share 26,598 27,407 ======= ======= Basic net income (loss) per share $ (0.37) $ 0.97 ======= ======= Diluted net income (loss) per share $ (0.37) $ 0.91 ======= =======
The above diluted calculation does not include approximately 4,730,000 and 1,158,000 shares attributable to options as of December 31, 2001 and 2000, respectively, as their impact would be anti-dilutive. 6 INTEGRATED SILICON SOLUTION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. 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 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. 9. 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 adopted these standards as of October 1, 2001. As the Company had no recorded intangible assets at that date, the adoption of these standards did not have an impact on its financial position or operating results. 10. LITIGATION In April 1998, the U.S. Department of Commerce ("DOC") published an antidumping duty order on imports of SRAMs from Taiwan, from where the Company currently imports a majority of its SRAMs. As a consequence of this antidumping duty order, the Company is required to post a cash deposit on imports of Taiwan fabricated SRAM wafers or devices at the ad valorem rate of 7.56%. These amounts are expensed to cost of goods sold. At December 31, 2001 and September 30, 2001, approximately $1.6 million in amounts owed but not remitted is included in accrued liabilities on the Company's balance sheet. 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. On January 14, 2002, the DOC published a notice revoking the antidumping order and instructing the DOC to refund all cash deposits. 11. LONG TERM OBLIGATIONS The Company leases certain of its equipment under a capital lease. The lease is collateralized by the underlying assets. At December 31, 2001, property and equipment with a cost of $600,000 was subject to this financing arrangement. Related accumulated amortization at December 31, 2001 amounted to $312,500. Under the terms of the lease, the Company owes monthly payments of $15,108 through September 1, 2003. Remaining principle and interest payments were $276,000 and $26,000, respectively, at December 31, 2001. 7 INTEGRATED SILICON SOLUTION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. GEOGRAPHIC AND SEGMENT INFORMATION The Company has one operating segment, which is to design, develop, and market high-performance SRAM, DRAM, and other memory products. The following table summarizes the Company's operations in different geographic areas:
Three Months Ended December 31, 2001 2000 ---------- ----------- (In thousands) Net Sales United States $ 6,928 $34,060 China 1,774 -- Taiwan 1,652 -- Asia other 2,624 11,522 Europe 2,113 19,647 ------- ------- Total net sales $15,091 $65,229 ======= =======
December 31, September 30, 2001 2001 ---------- ----------- (In thousands) Long-lived assets United States $6,324 $6,634 Hong Kong 528 566 China 561 463 Other foreign locations 236 -- ------ ------ $7,649 $7,663 ====== ======
13. RELATED PARTY TRANSACTIONS For the three months ended December 31, 2001 and December 31, 2000, the Company sold approximately $515,000 and $180,000, 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 December 31, 2001 and September 30, 2001, the Company had an accounts receivable balance from ICSI of approximately $657,000 and $327,000, respectively. The Company purchases goods and contract manufacturing services from ICSI. For the three months ended December 31, 2001 and December 31, 2000, purchases of goods and services were approximately $259,000 and $7,441,000, respectively. The Company also pays ICSI for certain product development costs. At December 31, 2001 and September 30, 2001, the Company had an accounts payable balance to ICSI of approximately $1,417,000 and $551,000, respectively. 8 INTEGRATED SILICON SOLUTION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company provides NexFlash various administrative support services for which it is reimbursed. In addition, the Company received approximately $42,000 in sublease income from NexFlash in the three months ended December 31, 2000. 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. At December 31, 2001 and September 30, 2001, the Company had an accounts receivable balance from NexFlash of approximately $29,000 and $81,000, 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 three months ended December 31, 2001 and December 31, 2000, the Company provided goods and services of approximately $44,000 and $468,000, respectively, to GetSilicon. At December 31, 2001 and September 30, 2001, the Company had an accounts receivable balance from GetSilicon of approximately $74,000 and $30,000, respectively. The Company engages GetSilicon for business-to-business data exchange and professional services. For the three months ended December 31, 2001, the purchase of services was approximately $170,000. At December 31, 2001 and September 30, 2001, the Company had an accounts payable balance to GetSilicon of approximately $202,000 and $32,000, respectively. For the three months ended December 31, 2001, the Company sold approximately $96,000 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 December 31, 2001 and September 30, 2001, the Company had an accounts receivable balance from E-CMOS of approximately $7,000 and $159,000, respectively. The Company receives administrative support services and reimburses E-CMOS for expenses incurred on its behalf. At December 31, 2001 and September 30, 2001, the Company had an accounts payable balance to E-CMOS of approximately $295,000 and $271,000, respectively. For the three months ended December 31, 2001, the Company sold approximately $45,000 of memory products to Marubun USA Corporation ("Marubun"). Hide L. Tanigami, a director of the Company, is the president and chief executive officer of Marubun. At December 31, 2001, the Company had an accounts receivable balance from Marubun of approximately $45,000. 9 INTEGRATED SILICON SOLUTION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. INVESTMENT IN INTEGRATED CIRCUIT SOLUTION INC. ("ICSI") The following summarizes financial information for ICSI, an equity investee. (In thousands)
December 31, September 30, 2001 2001 ------------ ------------- Current assets $64,293 $76,624 Property, plant, and equipment and other assets 50,867 51,345 Current liabilities 33,948 34,181 Long-term debt 7,547 9,352
Three Months Ended December 31, -------------------------------- 2001 2000 ---------- ----------- Net sales $ 14,625 $ 53,357 Gross profit (loss) (5,511) 23,380 Net income (loss) (9,984) 14,191
The Company accounts for investments in 50 percent or less owned companies over which it has the ability to exercise significant influence using the equity method of accounting. The Company periodically reviews these investments for other-than-temporary declines in market value and writes these investments to their fair value when an other-than-temporary decline has occurred. 15. SUBSEQUENT EVENT In February 2002, the Company acquired Purple Ray, Inc., a privately held research and development stage company developing network search engine and content addressable memory integrated circuits. Pursuant to this transaction, the Company will issue up to 652,000 shares of its Common Stock in exchange for all outstanding shares, warrants and options of Purple Ray. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We have made forward-looking statements in this report on Form 10-Q that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of our operations. Also, when we use such words as "believe," "expect," "anticipate," or similar expressions, we are making forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this report on Form 10-Q. BACKGROUND Integrated Silicon Solution, Inc. was founded in October 1988. We design, develop and market high performance memory semiconductors used in Internet access devices, networking equipment, telecom and mobile communications equipment, computer peripherals and other applications. Our high speed and low power SRAMs, our low to medium density DRAMs, and our family of EEPROMs 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. Our goal is to be a focused supplier of high performance memories targeting the growing connectivity and communications markets. We believe our close relationship with leading silicon wafer foundries gives us access to the advanced wafer process technology required to design and manufacture high performance memories. We entered into our first development program with Taiwan Semiconductor Manufacturing Corporation ("TSMC") in 1990 and with Chartered Semiconductor in 1994 and have also worked closely with United Microelectronics Corporation ("UMC") since 1995. Through this collaborative strategy, we have been at the forefront in utilizing the most advanced process technology for memories and in securing access to wafer capacity. We believe 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. RESULTS OF OPERATIONS Our financial results for fiscal 2002 and fiscal 2001 reflect accounting for Integrated Circuit Solution, Inc. ("ICSI") on the equity basis and include its percentage share of the results of their operations. Our financial results for fiscal 2002 and fiscal 2001 reflect accounting for E-CMOS Technology Corporation ("E-CMOS") on the equity basis and include its share of their results of operations on a one quarter lag. Effective October 2001, we account for GetSilicon on the cost basis as our ownership became less than 20%. Our financial results for fiscal 2001 reflect accounting for GetSilicon, Inc. ("GetSilicon") on the equity basis and include its percentage share of the results of their operations. Our financial results for fiscal 2001 through the period ended January 31, 2001 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. At December 31, 2001, the Company owned approximately 29% of ICSI, approximately 14% of NexFlash, approximately 22% of E-CMOS and approximately 20% of GetSilicon. THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2000 Net Sales. Net sales consist principally of total product sales less estimated sales returns. Net sales decreased by 77% to $15.1 million in the three months ended December 31, 2001 from $65.2 million in the three months ended December 31, 2000. The decrease in sales was principally due to a decrease in unit shipments of our SRAM products, specifically our 256K, 32K x 32, 1024K and 64K x 16 SRAM products, as well as decreased unit shipments of 16 megabit DRAM products. In addition, there was a significant decline in 11 the average selling prices of our products in the three months ended December 31, 2001 compared to the three months ended December 31, 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 December 31, 2001 as compared to the three months ended September 30, 2001. There can be no assurance that such declines will be offset by higher volumes or by higher prices on newer products. In the three months ended December 31, 2001, no single customer accounted for over 10% of net sales. However, shipments for Cisco directly, or indirectly through subcontractors, accounted for approximately 14% of net revenue. Sales to Flextronics International accounted for approximately 9% and 14% of total net sales for the three months ended December 31, 2001 and December 31, 2000, respectively. Substantially all of the sales to Flextronics were for products to be delivered to Cisco. 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. Net sales included sales of approximately $0.5 million and $0.2 million to ICSI in the three months ended December 31, 2001 and December 31, 2000, respectively. Gross Profit. Cost of sales includes die cost from the wafers acquired from foundries, subcontracted package costs, assembly costs and test costs, costs associated with in-house product testing, quality assurance and import duties. Gross profit decreased 88% to $2.7 million in the three months ended December 31, 2001 from $22.2 million in the three months ended December 31, 2000. As a percentage of net sales, gross profit decreased to 17.8% in the three months ended December 31, 2001 from 34.0% in the three months ended December 31, 2000. The decrease in gross profit was principally due to a decrease in unit shipments of our SRAM products, specifically our 256K, 32K x 32, 1024K and 64K x 16 SRAM products, as well as decreased unit shipments of 16 megabit DRAM products. Although product unit costs were lower in the three months ended December 31, 2001 compared to the three months ended December 31, 2000, such reductions did not offset the significant declines in average selling prices resulting in lower gross margins. We believe that the average selling price of our products will generally decline over time and, unless we are able to reduce our cost per unit to the extent necessary to offset such declines, the decline in average selling prices will result in a material decline in our gross margin. In this regard, we experienced a significant decline in the average selling prices for certain of our products in the three months ended December 31, 2001 as compared to the three months ended September 30, 2001. In addition, product unit costs could increase if our suppliers raise prices, which could result in a material decline in our gross margin. Although we have product cost reduction programs in place 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 remained relatively flat at $6.6 million in the three months ended December 31, 2001 compared to $6.7 million in the three months ended December 31, 2000. As a percentage of net sales, research and development expenses increased to 44.0% in the three months ended December 31, 2001 from 10.3% in the three months ended December 31, 2000. Decreases in payroll related expenses were offset by increased expenses related to the development of new products including approximately $0.8 million in development charges from ICSI. 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. Selling, General and Administrative. Selling, general and administrative expenses decreased by 41% to $3.7 million in the three months ended December 31, 2001 from $6.2 million in the three months ended December 31, 2000. As a percentage of net sales, selling, general and administrative expenses increased to 24.3% in the three months ended December 31, 2001 from 9.6% in the three months ended December 31, 2000. The decrease in absolute dollars was primarily the result of decreased selling commissions associated with lower revenues in the three months ended December 31, 2001 compared to the three months ended December 31, 2000. In addition, payroll related expenses decreased in the three months ended December 31, 2001 compared to the three months ended December 31, 2000 as a result of salary reductions and reductions in headcount due to 12 current economic conditions. We expect our selling, general and administrative expenses may increase in future quarters although such expenses may fluctuate as a percentage of net sales. Gain on sale of investments. The gain on the sale of investments decreased to $35,000 in the three months ended December 31, 2001 from $17.2 million in the three months ended December 31, 2000. In the three months ended December 31, 2001, we sold shares of ICSI for approximately $64,000 resulting in a pre-tax gain of $35,000. 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. Other income (expense), net. Other income (expense), net decreased by $1.0 million to approximately $0.5 million in the three months ended December 31, 2001 from $1.5 million in the three months ended December 31, 2000. The decrease was primarily the result of decreased interest income as the result of the decline in interest rates. In addition, we recorded a charge of $150,000 for the impairment of an investment during the three months ended December 31, 2001. Provision for Income Taxes. We recorded no provision for income taxes for the three month period ended December 31, 2001 due to our net operating loss position. The provision for income taxes for the three month period ended December 31, 2000 is principally comprised of taxes on U.S. earnings and to a lesser extent taxes on foreign earnings. The effective tax rate of 25% for the three months ended December 31, 2000 differs from the federal statutory rate as a result of the reversal of valuation allowances previously established. Equity in net income(loss) of affiliated companies. Equity in net income (loss) of affiliated companies decreased by $7.0 million to $(2.9) million in the three months ended December 31, 2000 from $4.1 million in the three months ended December 31, 2000. This primarily reflects a decrease in income from our percentage share of ICSI's financial results in the three months ended December 31, 2001 compared to the three months ended December 31, 2000. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2001, our principal sources of liquidity included cash, cash equivalents and short-term investments of approximately $117.7 million. During the three months ended December 31, 2001, operating activities used cash of approximately $1.0 million. Cash used by operations was primarily due to net loss of $9.9 million adjusted for equity in net loss of affiliated companies of $2.9 million and depreciation of $0.9 million. In addition, decreases in inventory of $5.4 million and accounts receivable of $1.5 million and increases in accounts payable of $1.6 million were partially offset by a decrease in income tax payable of $2.5 million. In the three months ended December 31, 2001, we generated $7.4 million from investing activities compared to $39.8 million in the three months ended December 31, 2000. The cash generated by investing activities in the three months ended December 31, 2001 primarily resulted from net sales of available-for-sale securities of $11.8 million. In addition, we made an additional investment of $3.8 million in Semiconductor Manufacturing International Corp ("SMIC"). The cash generated from investing activities in the three months ended December 31, 2000 was primarily the result of $40.7 million received from the sale of our investment in WaferTech to TSMC, $5.1 million from the sale of additional shares of ICSI stock and $1.2 million from net sales of available-for-sale securities. In addition, we invested $6.8 million in SMIC. In the three months ended December 31, 2001, we made capital expenditures of approximately $0.9 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 $0.4 million from financing activities during the three months ended December 31, 2001 compared to $0.1 million in the three months ended December 31, 2000. The source of financing for the current quarter was proceeds from the issuance of common stock of $0.4 million from stock option exercises. 13 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 wafer capacity commitments from SMIC. In the three months ended December 31, 2001, we made an investment of $3.8 million in SMIC, bringing our total investment in this foundry as of December 31, 2001, to $22.6 million. An additional $17.4 million is expected to be invested in fiscal year 2002. 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%. These amounts are expensed to cost of goods sold. Approximately $1.6 million in amounts owed but not remitted is included in accrued liabilities on our balance sheets. 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. On January 14, 2002, the DOC published a notice revoking the antidumping order and instructing the DOC to refund all cash deposits. 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 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; 14 - 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 ACHIEVE OR SUSTAIN PROFITABILITY IN THE FUTURE. We incurred losses of $9.9 million, $24.7 million, and $3.7 million in the three months ended December 31, 2001, September 30, 2001 and June 30, 2001, respectively. We expect to lose money in the March 2002 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 achieve or 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. While average selling prices declined in the three months ended December 31, 2001 compared to the 15 three months ended September 30, 2001, this was offset by an increase in units shipped. 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 December 31, 2001 as compared to the three months ended September 30, 2001. Our ability to maintain or increase revenues will depend upon our ability to increase unit sales volume of existing products and introduce and sell new products which compensate for the anticipated declines in the average selling prices of our existing products. Declining average selling prices will also adversely affect our gross margins and profits unless we are able to introduce new products with higher margins or reduce our cost per unit. We may not be able to increase unit sales volumes, introduce and sell new products or reduce our cost per unit. SHIFTS IN INDUSTRY-WIDE CAPACITY MAY CAUSE OUR RESULTS TO FLUCTUATE. IN THE PAST, SUCH SHIFTS HAVE RESULTED IN SIGNIFICANT INVENTORY WRITE-DOWNS. Shifts in industry-wide capacity from shortages to oversupply or from oversupply to shortages may result in significant fluctuations in our quarterly or annual operating results. The semiconductor industry is highly cyclical and is subject to significant downturns resulting from excess capacity, overproduction, reduced demand or technological obsolescence. These factors can result in a decline in average selling prices and the stated value of inventory. In 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. 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 16 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. In the three months ended December 31, 2001, no single customer accounted for over 10% of net sales. However, shipments for Cisco directly, or indirectly through subcontractors, accounted for approximately 14% of net revenue. Sales to Flextronics International accounted for approximately 9% of total net sales for the three months ended December 31, 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. 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. 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 17 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. In addition, we are vulnerable to technology advances utilized by competitors to manufacture higher performance or lower cost products. We may not be able to compete successfully in the future as to any of these factors. Our failure to compete successfully in these or other areas could harm our business. POTENTIAL INTELLECTUAL PROPERTY CLAIMS AND LITIGATION COULD SUBJECT US TO SIGNIFICANT LIABILITY FOR DAMAGES AND COULD INVALIDATE OUR PROPRIETARY RIGHTS. In the semiconductor industry, it is not unusual for companies to receive notices alleging infringement of patents or other intellectual property rights of others. We have been, and from time-to-time expect to be, notified of claims that we may be infringing patents, maskwork rights or copyrights owned by third parties. 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. 18 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 the three months ended December 31, 2001 approximately 46% of our net sales was attributable to customers located in the United States, 14% was attributable to customers located in Europe and 40% was attributable to customers located in Asia. 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. 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. 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 19 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. In this regard, in February 2002, we acquired Purple Ray, Inc., a privately held research and development stage company developing network search engine and content addressable memory integrated circuits. Pursuant to this transaction, the Company will issue up to 652,000 shares of its Common Stock in exchange for all outstanding shares, warrants and options of Purple Ray. There can be no assurance as to the effect of the Purple Ray acquisition or 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. The September 2001 terrorist attacks in the United States, as well as future events occurring in response or connection to them, including, 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 or our customers, 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 are expected to 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; 20 - new or revised earnings estimates; - 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 3. FINANCIAL MARKET RISK 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 December 31, 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 $91.8 million at December 31, 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 December 31, 2001 was approximately $19.6 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 $24.1 million at December 31, 2001. These investments are generally in companies in the semiconductor industry. These investments are included in other assets 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 the three months ended December 31, 2001. 21 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In April 1998, the U.S. Department of Commerce ("DOC") published an antidumping duty order on imports of SRAMs from Taiwan, from where we currently import a majority of our SRAMs. As a consequence of this antidumping duty order, we are required to post a cash deposit on imports of Taiwan fabricated SRAM wafers or devices at the ad valorem rate of 7.56%. These amounts are expensed to cost of goods sold. At December 31, 2001 and September 30, 2001, approximately $1.6 million in amounts owed but not remitted is included in accrued liabilities on our balance sheet. 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. On January 14, 2002, the DOC published a notice revoking the antidumping order and instructing the DOC to refund all cash deposits. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as a part of this report. None. (b)Reports on Form 8-K. The registrant did not file any reports on Form 8-K during the quarter ended December 31, 2001. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Integrated Silicon Solution, Inc. --------------------------------- (Registrant) Dated: February 14, 2002 /s/ Michael D. McDonald --------------------------------- Michael D. McDonald Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 23 -----END PRIVACY-ENHANCED MESSAGE-----