-----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, MUA4ZPPztrNXrqnuH1jEXXyNEvmAqATQjFiWEaOXuNtfRigxDvldSWzoAmbVG51d LwjjQUM7Z3gdu/QrikBNaw== 0000891618-99-005844.txt : 19991230 0000891618-99-005844.hdr.sgml : 19991230 ACCESSION NUMBER: 0000891618-99-005844 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991229 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-K405 SEC ACT: SEC FILE NUMBER: 000-23084 FILM NUMBER: 99782058 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-K405 1 FORM 10-K405 1 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, 1999 --------------------------- 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: Name of each exchange Title of each class 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. [ X ] 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 10, 1999, as reported by the Nasdaq National Market, was approximately $192.0 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 10, 1999 was 20,407,713. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of Stockholders to be held on February 7, 2000 are incorporated by reference in Part III of this Form 10-K. 2 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 7b. Market Risk Disclosures.......................................................................19 Item 8. Financial Statements and Supplementary Data...................................................20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................................................................43 PART III Item 10. Directors and Executive Officers of the Registrant............................................43 Item 11. Executive Compensation........................................................................43 Item 12. Security Ownership of Certain Beneficial Owners and Management................................43 Item 13. Certain Relationships and Related Transactions................................................43 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...............................43 SIGNATURES.............................................................................................46
3 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 networking, telecommunications, personal computer and instrumentation markets, in particular as they may affect demand for or pricing of the Company's products; the percentage of export sales and sales to strategic customers; the percentage of revenue by product line; and the availability and cost of products from the Company's suppliers; 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 the Company's 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. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's 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. PART I ITEM 1. BUSINESS GENERAL Integrated Silicon Solution, Inc. ("ISSI" or the "Company") designs, develops and markets high performance memory devices including static random access memory ("SRAM"), low and medium density dynamic random access memory ("DRAM"), and nonvolatile memory ("NVM"), as well as voice recording devices and certain microcontrollers and embedded memories. The Company's memory devices are used in networking applications, telecommunications, data communications, disk drives and other peripherals, personal computers ("PC"), office automation, instrumentation and consumer products. SRAM products include both asynchronous and synchronous devices ranging in densities from 64K to 4 megabit. DRAM products focus on high speed, low density devices with densities of 2, 4, 8, and 16 megabits. Nonvolatile memory products include primarily EEPROMs (electrically erasable programmable read only memories) and certain EPROMs (erasable programmable read only memories). The Company has its headquarters in Santa Clara, California and markets its products on a worldwide basis. The primary function of high performance SRAMs is to improve the overall performance of an electronic system by compensating for the disparity in the speeds of other integrated circuits within the system architecture. As a result, speed is a key performance characteristic for SRAMs. In hand held or portable applications the need for low power is a key performance characteristic. Customers also regard cost as a critical factor. In order to continually improve product performance and reduce costs, the Company must have access to state-of-the-art process technology for wafer manufacturing and be able to implement design improvements, such as reduced geometries, on a consistent basis. The Company leverages its SRAM design and advanced complimentary metal oxide semiconductor ("CMOS") process technology expertise to establish collaborative manufacturing relationships with Asian semiconductor manufacturers which use the Company's memory products as a vehicle for the development of advanced process technology. In addition, the Company has an equity investment in a wafer fabrication venture, WaferTech, located in the State of Washington, which is led by Taiwan Semiconductor Manufacturing Corporation ("TSMC"). The Company believes that these relationships assist in securing access to leading edge process technology and a committed source for wafer processing. The Company's principal collaborative manufacturing relationship is with TSMC, with which it jointly develops process technology for producing the Company's SRAMs. The Company also has a collaborative process development program with Chartered Semiconductor Manufacturing ("Chartered") in Singapore. In addition, the Company has a manufacturing program with United Microelectronics Corporation ("UMC") in Taiwan. ISSI was founded in 1988. The Company has its headquarters in Santa Clara, California. This facility focuses on research and development, product definition, quality assurance, and marketing and sales. The Company owns approximately 43% of a company in Taiwan ("ISSI-Taiwan"). ISSI-Taiwan focuses on manufacturing coordination, quality assurance, product test and regional sales in the Asian market. The Company also has a subsidiary in Hong Kong that primarily focuses on research and development and a subsidiary in China that focuses on marketing. The 1 4 Company owns approximately 32% of NexFlash Technologies, Inc. ("NexFlash"), a flash memory company located in Santa Clara, California. RECENT DEVELOPMENTS In December 1998, the Company sold approximately 20% of its ownership of ISSI-Taiwan to a group of private investors. Previously, in June 1998, the Company sold approximately 46% of ISSI-Taiwan. As a result, the Company currently owns approximately 43% of ISSI-Taiwan. The Company intends to continue to use ISSI-Taiwan for testing of wafers and testing of its memory devices, but is also utilizing testing services provided by other firms in Singapore and Taiwan. The Company expects to expand utilization of testing services from these other companies in fiscal 2000. As a result of the sale in December 1998, the Company no longer consolidates the results of ISSI-Taiwan and utilizes the equity basis to account for this investment. In October 1998, the Company transferred its Flash memory business to a newly formed company, NexFlash Technologies, Inc. ("NexFlash"). The Company presently owns approximately 32% of NexFlash, ISSI-Taiwan owns approximately 17%, and private investors and management own approximately 51% of NexFlash. The Company and NexFlash jointly own related Flash intellectual property. The Company intends that future development of Flash products and the sale of such products will be done through NexFlash. In fiscal 1999, the Company accounted for NexFlash on the equity basis and includes in its financial statements its percentage share of NexFlash's financial results. PRODUCTS The Company designs and markets a family of both high speed and ultra low power SRAMs, low and medium density DRAMs, and NVM products, including serial EEPROMs, certain EPROMs, as well as voice recording devices, certain microcontrollers and embedded memories. To date the Company has derived substantially all of its revenues from the sale of SRAM products. SRAMS The Company offers a family of CMOS SRAMs in various densities, speeds, voltages, and packaging configurations. 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, 32K x 32), 2 megabit (64K x 32), 3 megabit (128K x 24), and 4 megabit (64K x 64 and 128K x 32). The Company produces both asynchronous SRAMs and synchronous SRAMs. The Company's latest 4 megabit 128K x 32 synchronous SRAM currently achieves clock speeds of 200MHz. Leading speeds for the Company's asynchronous SRAMs vary according to density. The 256K, 1 megabit 128K x 8, 2 megabit 128K x16, and 3 megabit 128K x 24 SRAMs currently achieve 8 nanosecond access times. The Company's SRAM products generally focus on either very high speed or very low power. The Company's low power family of products, driven by increasing demand in the hand held and mobile markets, such as cellular phones, was expanded in FY1999. Current low power products include 1 megabit, 2 megabit, and 4 megabit SRAMs operating at 2.7 volt to 3.3 volt and utilizing stand-by current of 5 microamps. The Company's asynchronous SRAMs are used in applications such as LANs, telecommunications, bridges, routers, modems, multimedia products, and industrial instrumentation. Additional SRAM products are under development and are expected to include performance-leading features in speed, configuration, power levels, density and packaging. The Company's synchronous SRAMs are used primarily in networking applications. DRAMS The Company's DRAM products focus on very high speed and low to medium density devices. The Company currently offers 2, 4, 8, and 16 megabit Fast Page Mode (FPM), Extended Memory Out (EDO), SDRAM and SGRAM. Applications for such devices currently include telecommunications base stations, set top box applications, networking, modems, 3D graphics, and disk drives. The Company's DRAM products are not targeted at the main memory DRAM market. 2 5 NONVOLATILE MEMORY PRODUCTS The Company's NVM products include high performance serial EEPROMs and certain EPROMs. The Company's selection of serial EEPROM devices are used in applications that require nonvolatile storage of data or code and allow the information to be modified during system operation. Applications for serial EEPROMs include pagers, networking systems, modems, telephone sets, security systems, smart cards, video games and other consumer products. The Company's EPROM product offerings include 256K, 512K, 1 megabit, and 2 megabit devices. The Company also produces a voice-recording chip that combines voice algorithm technology in a Flash based recording chip. Initial applications for this device are in consumer electronics such as voice recorded greeting cards. Revenue from this product has been immaterial. DESIGN AND PROCESS TECHNOLOGY The Company has invested in advanced process technology that allows it to design at leading edge geometries such as 0.18 micron for SRAMs. Memory products are particularly well suited for the development of advanced process technology. The Company's technology development engineers work closely with the Company's design engineers and manufacturing partners, such as TSMC and Chartered Semiconductor, to develop new process technologies, refine existing process technologies and to reduce the circuit geometries of its products. During fiscal 1999, the Company and TSMC continued development of 0.18 micron, 3.3-volt high speed SRAM process technology. In addition, the Company developed a six-transistor cell SRAM for its low power applications. SRAMs that do not require low power typically use four transistor cell structures. With the development of its six-transistor cell for low power applications, the Company has now demonstrated proven technology and design capabilities in both four and six transistor cells. The Company's design efforts focus on product specification, memory cell and array structure, circuit design, simulation and layout. The Company has invested 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. The Company utilizes focused design teams for new product development and can efficiently migrate proprietary design features to new generation products. MANUFACTURING The Company combines its process technology expertise, foundry partnership strategy and equity investment arrangements to form a hybrid of the fab and fabless business models which it calls Fab-Lite(TM). The Company does not own or operate its own wafer foundry, but because memory products are particularly well suited for the development of advanced process technology, the Company actively participates in developing and refining the process technology used to manufacture many of its products. The Company believes that this strategy enables it to achieve the early introduction of advanced geometries for its high performance memory products, which results in increased performance and lower manufacturing costs. To date, the Company's principal manufacturing relationships have been with TSMC in Taiwan and with Chartered Semiconductor in Singapore. In 1996, the Company entered into a business venture agreement with Altera Inc., Analog Devices Inc., and TSMC wherein TSMC, as the general partner, would construct a wafer fabrication facility in the state of Washington. The fabrication facility is a very advanced process technology facility capable of 0.35, 0.30, 0.25 and 0.18 micron process technology. The joint venture, named WaferTech LLC, began production in 1998. As of September 30, 1999, the Company had an investment in the business venture of $20.8 million. An additional investment of $2.7 million was made in October 1999, bringing the total to $23.5 million (see Note 21 "Subsequent Events"). The manufacturing of the Company's products is coordinated jointly between the Company's Santa Clara headquarters and ISSI-Taiwan, which is located in close proximity to TSMC and UMC in the Hsinchu Science-Based Industrial Park, a government-sponsored technology development zone. When the independent wafer foundry partners complete processed wafers, they move next to wafer testing. The wafers are then sawed or cut into individual memory chips and the chips are inserted into final packages and tested. The Company's U.S. headquarters develops and debugs test programs and tests procedures used for screening. Both the Taiwan and U.S. facilities have clean rooms that are equipped for the wafer probe segment of the testing process. Third party subcontractors in Taiwan and Singapore perform packaging and assembly operations. A comprehensive quality 3 6 control program is in place. The Company has adopted ISO 9000 as its quality management standard. The Company's U.S. facility has received certification under ISO 9001 standards. ISSI-Taiwan has received certification under ISO 9002 standards. Each of the Company's wafer suppliers also fabricates for other integrated circuit companies, including certain of the Company's competitors. In addition, UMC subsidiaries manufacture integrated circuits, including SRAMs, for their own account. Although the Company has written commitments specifying wafer capacities from its suppliers, if these suppliers experience manufacturing failures or yield shortfalls, choose to prioritize capacity for other use or reduce or eliminate deliveries to the Company, there can be no assurance that the Company could enforce fulfillment of the delivery commitments. The Company's equity investment in WaferTech and the technology development partnerships are believed by the Company to mitigate such risk. There can be no assurance that the foundries used by the Company will not encounter construction or production difficulties or that they will allocate sufficient wafer capacity to satisfy the Company's wafer requirements, especially in times of wafer capacity shortages. Moreover, there can be no assurance that the Company 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 the Company were unable to obtain an adequate supply of wafers from its current or any alternative sources in a timely manner, its business and operating results would be materially and adversely affected. Although the Company's policy is to work closely with its 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, the Company's 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 the Company's foundries will not experience lower than expected manufacturing yields or device reliability problems in the future, which could materially and adversely affect the Company's business and operating results. The Company has certain minimum wafer purchasing commitments to its foundry partners in exchange for wafer capacity commitments. Although the Company has rights to re-schedule or assign capacity to another party, there can be no assurance that such re-schedule or assignment would be successfully accomplished. Should the Company fail to re-schedule or assign unneeded capacity, the Company's business and operating results could be adversely affected. CUSTOMERS AND MARKETING The Company has focused its primary marketing efforts on four major market segments that include networking, telecom/mobile communications, internet access devices, and PC peripherals. The Company markets its products through a direct sales force, independent sales representatives, and distributors. The Company has four distributors in North America and distributors in most of the countries of Western Europe. The Company continues to expand its marketing and sales activity in Europe. The Company has sales offices in the United States, Europe, Hong Kong, and the People's Republic of China and, through its affiliate ISSI-Taiwan, in Taiwan and Japan. The Company's customers include a broad range of electronic system manufacturers such as Alcatel, Cisco Systems, 3Com, Hewlett-Packard, IBM, Motorola, and Seagate. In fiscal 1999, 1998, and 1997, one customer, 3Com, accounted for approximately 20%, 19%, and 19% of the Company's net sales, respectively. Sales and marketing efforts focusing on North America, Europe, and South America are directed from the Company's Santa Clara headquarters. The Company's affiliate, ISSI-Taiwan, has a direct sales and marketing organization based in Taipei, Taiwan, which focuses on the Asian market. In fiscal 1999, approximately 52% of the Company's net sales were attributable to customers located in the United States, 20% were attributable to customers located in Europe, and 28% were attributable to customers located in Asia. These percentages exclude net sales by ISSI-Taiwan occurring after December 31, 1998, the last date on which the Company consolidated ISSI-Taiwan results. In fiscal 1998, approximately 43% of the Company's net sales were attributable to customers located in the United States, 18% were attributable to customers located in Europe, and 39% were attributable to customers located in Asia. In fiscal 1997, approximately 45% of the Company's net sales were attributable to customers 4 7 located in the United States, 13% were attributable to customers located in Europe, and 42% were attributable to customers located in Asia. The percentages for fiscal 1998 and fiscal 1997 include net sales by ISSI-Taiwan. In fiscal 1999, international sales (including export sales by the Company and sales by ISSI-Taiwan for the quarter ending December 31, 1998) comprised approximately 48% of the Company's net sales. In fiscal 1998 and 1997, international sales (export sales by the Company and sales by ISSI-Taiwan) comprised approximately 57% and 55% of the Company's net sales, respectively. See Note 14 of Notes to Consolidated Financial Statements. The Company is subject to the risks of conducting business internationally, including economic conditions in Asia, particularly Taiwan, 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. The Company anticipates that sales to international customers will continue to represent a significant percentage of net sales. Substantially all of the Company's foundries and assembly and test operations are located in Asia. Although the Company transacts business predominately in U.S. dollars, it does have some transactions in New Taiwan ("NT") dollars and in Hong Kong ("HK") dollars. Such transactions expose the Company to the risk of exchange rate fluctuations. The Company monitors its exposure to foreign currency fluctuations, and has from time to time taken action to hedge against such exposure, but has not to date adopted any formal hedging strategy. There can be no assurance that exchange rate fluctuations will not materially and adversely affect its business and operating results in the future. The Company's 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, the Company believes that its 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 an oversupply of product, price erosion, rapid technological change, short product life cycles, cyclical market patterns and foreign and domestic competition. The ability of the Company to compete successfully in the high performance memory market depends on factors both within and outside of its control, including over or under wafer manufacturing capacity and the resultant imbalances in supply and demand, product pricing, the rate at which OEM customers incorporate the Company's 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 nature of its competitors and general economic conditions. There can be no assurance that the Company will be able to compete successfully in the future as to any of these factors. The failure of the Company to compete successfully in these or other areas could materially and adversely affect the Company's 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, the Company competes with several major domestic and international semiconductor companies including Alliance Semiconductor, Cypress Semiconductor, Integrated Device Technology ("IDT"), Mitsubishi, Motorola, Samsung, and Winbond. The Company also competes with new and emerging companies, such as Galvantech and Giga Semiconductor. The Company 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. There can be no assurance that the Company will be able to compete successfully against any of these competitors. In the low to medium density DRAM area, the Company competes 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 the Company will be able to compete successfully against any of these competitors. In the EEPROM market, the Company's primary competitors include Atmel and SGS-Thomson Microelectronics. The Company also competes with many small to medium-sized companies in one or more segments of the market. Certain of the Company's competitors offer broader product lines and have greater financial, technical, marketing, distribution and other resources than the Company. There can be no assurance that the Company will be able to compete successfully against any of these competitors. 5 8 The process technology used by the Company's manufacturing sources, including process technology that the Company has developed with its foundries, can be used by such manufacturers to produce products for other companies, including the Company's competitors. Although the Company believes that its participation in the development of the processes provides it the advantage of early access to such processes, there can be no assurance that the knowledge of the manufacturer will not be used to benefit the Company's competitors. PRODUCT WARRANTY Consistent with semiconductor memory industry practice, the Company generally provides a limited warranty that its semiconductor memory devices are in compliance with specifications existing at the time of delivery. Liability for a stated warranty period is usually 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. The Company's research and development activities are focused primarily on the development of advanced process technologies and new memory circuit designs. The Company currently designs most of its high performance memory products and jointly develops advanced process technology with its manufacturing partners from its headquarters in Santa Clara, California. The Company is currently designing new SRAM and DRAM products. SRAM products under development include ultra low power SRAMs and additional memory configurations. DRAM products under development include synchronous graphics DRAMs. Nonvolatile memory products include the development of additional EEPROM devices. The Company's research and development expenditures in fiscal 1999, 1998, and 1997 were $18.8 million, $31.9 million, and $26.2 million, respectively. PATENTS As of September 30, 1999, the Company held 42 U.S. patents. These patents expire between 2010 and 2019. The Company has approximately 24 additional patent applications pending and expects to continue to file patent applications where appropriate to protect its proprietary technologies. Although patents are an important element of the Company's intellectual property, the Company believes that its continued success depends primarily on factors such as the technological skills and innovation of its personnel rather than on its 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 the Company. Moreover, there can be no assurance that any patent rights will be upheld in the future or that the Company will be able to preserve any of its other intellectual property rights. In the semiconductor industry it is typical for companies to receive notices from time to time 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. There can be no assurance that other companies will not in the future pursue claims against the Company with respect to the alleged infringement of patents, maskwork rights, copyrights or other intellectual property owned by third parties. If it appears necessary or desirable, the Company may seek licenses under patents that it is alleged to be infringing. Although patent holders commonly offer such licenses, there is no assurance that any licenses will be offered or that the terms of any offered licenses will be acceptable to the Company. The failure to obtain a license under a key patent or intellectual property right from a third party for technology used by the Company could cause the Company to incur substantial liabilities and to suspend the manufacture of the products utilizing the invention or to attempt to develop non-infringing products, 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 the alleged infringement by the Company of third party intellectual property rights or litigation to assert and protect patents or other intellectual property rights of the Company. Any litigation relating to patent infringement or other intellectual property matters could result in substantial cost and diversion of resources by the Company which could materially and adversely affect the Company's business and operating results. 6 9 EMPLOYEES As of September 30, 1999, the Company had approximately 131 employees in the U.S., 9 in the People's Republic of China and 13 in Hong Kong. The Company's affiliates, ISSI-Taiwan and NexFlash, employ approximately 323 and 31 people, respectively, as of September 30, 1999. Total employment, including affiliates, is therefore approximately 500 people. The Company's future success will largely be dependent on its 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 the Company will successfully staff all necessary positions. The Company's employees are not represented by any collective bargaining agreements and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. EXECUTIVE OFFICERS The executive officers of the Company and their ages as of September 30, 1999 are as follows:
Name Age Position Jimmy S.M. Lee 44 Chairman, Chief Executive Officer, President, and Director Gary L. Fischer 48 Executive Vice President, Office of the President and Chief Financial Officer Thomas Doczy 45 Vice President, Sales and Marketing Paul Song 44 Vice President, Engineering
BACKGROUND OF EXECUTIVE OFFICERS Jimmy S.M. Lee has served as Chief Executive Officer, President and a director of the Company since he co-founded the Company in October 1988. He has also served as a director of ISSI-Taiwan since September 1990, and as a director of NexFlash since October 1998. 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 holds an 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 the Company's Executive Vice President since April 1995 and as Vice President and Chief Financial Officer since June 1993. From December 1992 to April 1993, Mr. Fischer was Vice President, Finance and Chief Financial Officer of Shaman Pharmaceuticals, Inc., a pharmaceutical company. 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. 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. Thomas Doczy has served as Vice President, Sales and Marketing since April 1999. He also served as Vice President and General Manager, Memory Product Division from October 1996 to April 1999 and as Senior Director, Memory Marketing from October 1995 to October 1996. He served as Director of Sales from March 1994 to October 1995. Mr. Doczy was International Marketing Manager and Strategic Accounts Manager at Cypress Semiconductor prior to joining ISSI in March 1994. Previously, he was Director of Worldwide Sales for Austek Microsystems and held field sales management positions in Boston and Minneapolis with AMD. Mr. Doczy holds a B.S. degree in electrical engineering from the Illinois Institute of Technology. Paul Song has served as Vice President, Engineering since April 1999. 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, an 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. 7 10 Officers serve at the discretion of the Board and are appointed annually. There are no family relationships between the directors or officers of the Company. ITEM 2. PROPERTIES The Company's U.S. headquarters occupy a two story building, totaling approximately 93,400 square feet, in Santa Clara, California in which its executive offices, marketing, technology, product development groups and some R&D testing facilities are located. The lease on this building expires in February 2007. The Company subleases to NexFlash approximately 9,000 square feet. The sublease expires in September 2000. Additionally, the Company subleases approximately 24,000 square feet to a third party. The sublease expires in March 2000. 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 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%. For entries after March 31, 1999, 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 whether the DOC conducts an administrative review of imports entered between April 1, 1999 and March 31, 2000, and if so, on the results of the DOC review. The Company will pay duty deposits on Taiwan SRAM entries before that date at the deposit rate. The Company has retained legal counsel to defend its interests in the antidumping proceedings. In addition, certain aspects of the antidumping determination are being challenged in federal court proceedings by respondents to the investigation, and these proceedings could result in the termination of this antidumping case. Duties calculated and assessed by the government could have a material adverse affect on the Company's gross margins and profits. There can be no assurance that any reviews or proceedings will mitigate or eliminate antidumping duties. On October 22, 1998, Micron Technology filed an anti-dumping petition against DRAMs fabricated in Taiwan. Currently, the Company's DRAM products are fabricated in Taiwan. Subsequent to the petition filing the DOC established a general dumping duty deposit rate of 21.35% which would have applied to the Company. On December 2, 1999, the International Trade Commission ("ITC") informed the DOC that it had issued a negative final determination in the DRAM investigation. The DRAM investigation has, therefore, been terminated and there is presently no antidumping duty required. The ITC ruling can be appealed in federal court, but as of December 16, 1999, no such appeal has been filed. 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 1999. 8 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET FOR COMMON STOCK The Company's common stock has been quoted on the Nasdaq National Market under the symbol ISSI since the Company's 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 the 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.
High Low -------- ------- Fiscal Year ending September 30, 1999 Fourth quarter $ 12.00 $ 4.719 Third quarter 6.094 2.25 Second quarter 4.375 2.281 First quarter 4.813 2.50 Fiscal Year ending September 30, 1998 Fourth quarter $ 7.125 $ 2.75 Third quarter 10.75 6.656 Second quarter 12.25 7.313 First quarter 14.50 7.00
HOLDERS OF RECORD As of December 10, 1999, there were approximately 10,300 beneficial holders of the Company's common stock. DIVIDENDS The Company has never declared or paid cash dividends. The Company currently intends to retain any earnings for use in its business and does not anticipate paying any cash dividends on its capital stock in the foreseeable future. RECENT SALES OF UNREGISTERED SECURITIES On August 27, 1999, the Company issued 85,529 shares of its common stock pursuant to the exercise of 133,333 warrants issued in connection with the spin-off of NexFlash Technologies, Inc. On November 5, 1999, the Company issued 51,142 shares of its common stock pursuant to the exercise of 115,997 warrants issued in connection with the spin-off of NexFlash Technologies, Inc. 9 12 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Year Ended September 30, -------------------------------------------------------------------- 1999(2) 1998 1997 1996 1995 --------- --------- --------- --------- --------- (in thousands, except per share data) Net sales $ 83,309 $ 131,132 $ 108,261 $ 132,039 $ 123,201 Gross margin 16,493 4,338 32,156 31,855 62,252 Operating income (loss) (14,184) (53,053) (10,776) (4,683) 34,476 Net income (loss) (9,511) (50,607) (7,686) 1,015 29,653 Basic income (loss) per share (1) (0.48) (2.67) (0.43) 0.06 1.98 Diluted income (loss) per share (1) (0.48) (2.67) (0.43) 0.06 1.80 Working capital 42,064 32,549 75,544 107,929 120,839 Total assets 121,831 202,168 195,596 178,039 204,441 Total long-term obligations, notes payable, and current portion of long-term obligations - 33,791 20,101 14,534 33,888 Stockholders' equity 88,778 90,920 134,567 142,435 139,909 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 year-end results. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company's financial results for fiscal year 1998 are presented on a consolidated basis and include the results of the operations of NexFlash and Integrated Silicon Solution Taiwan Inc., "ISSI-Taiwan". Effective November 1998, the Company's financial results no longer consolidate the results of NexFlash, as the Company's ownership of NexFlash became less than 50%. Effective November 1998, the Company began accounting for NexFlash on the equity basis and includes in its financial statements its percentage share of NexFlash's results of operations. This change has had a minimal effect on the Company's consolidated revenue and has resulted in a decrease in the Company's consolidated research and development expenses. In late December 1998, the Company sold an additional 20% of its interest in ISSI-Taiwan and, as a result, reduced its ownership interest in ISSI-Taiwan to approximately 43%. The Company's Balance Sheet as of September 30, 1999 reflects the accounting for ISSI-Taiwan on the equity basis. Beginning with the second quarter of fiscal 1999, the Company's Statement of Operations no longer consolidate the results of ISSI-Taiwan, but instead accounts for ISSI-Taiwan on the equity basis and reflects its percentage share of ISSI-Taiwan's results of operations. As a result of no longer consolidating ISSI-Taiwan, there has been a significant decline in the Company's consolidated revenue and operating expenses. 10 13 FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1998 Net Sales. Net sales consist principally of total product sales less estimated sales returns. Net sales decreased by 36% to $83.3 million in fiscal 1999 from $131.1 million in fiscal 1998. Approximately $32.9 million of the decrease is attributable to the deconsolidation of ISSI-Taiwan. Excluding the effect of the deconsolidation of ISSI-Taiwan, the decrease in sales was principally due to a decrease in the average selling prices of the Company's SRAM products, as well as a significant decline in unit shipments of the Company's 256K and 256K module SRAM products. Additionally, revenue from shipments of newer 8 megabit and 16 megabit DRAM products more than offset the decline in revenue from 4 megabit DRAM products. The Company anticipates that the average selling prices of its existing products will decline over time, although the rate of decline may fluctuate for certain products. There can be no assurance that such declines will be offset by higher volumes or by higher prices on newer products. See "Quarterly Fluctuations in Operating Results" and "Declines in Average Selling Prices." Net sales include approximately $1.9 million of licensing revenue in fiscal 1999. Additionally net sales included approximately $1.4 million in sales to ISSI-Taiwan and approximately $1.5 million in sales to NexFlash in fiscal 1999. Effective January 1, 1999, the Company's financial results no longer consolidate the sales of ISSI-Taiwan. Sales to one customer, 3Com, accounted for approximately 20% and 19% of total net sales for fiscal 1999 and fiscal 1998, respectively. As sales to this customer are executed pursuant to purchase orders and no purchasing contract exists, the customer can cease doing business with the Company at any time. Gross Profit. The Company's cost of sales includes die cost from the wafers acquired from foundries, subcontracted package and assembly costs, costs associated with in-house product testing, quality assurance and import duties. Gross profit increased 280% to $16.5 million in fiscal 1999 from $4.3 million in fiscal 1998. As a percentage of net sales, gross profit increased to 19.8% in fiscal 1999 from 3.3% in fiscal 1998. The Company's gross profit for fiscal 1999 benefited from $1.9 million in licensing revenue. In fiscal 1998, the Company recorded inventory write-downs of $23.0 million predominately for lower of cost or market issues on certain of the Company's products, primarily SRAMs. See "Risk of Inventory Write-downs." Excluding the inventory write-downs of $23.0 million for fiscal 1998, the decrease in gross profit dollars was principally due to a decrease in the average selling prices of the Company's SRAM products, as well as a significant decline in unit shipments of the Company's 256K and 256K module SRAM products. Additionally, shipments and average selling prices of the Company's 4 megabit DRAM product declined significantly in fiscal 1999 compared to fiscal 1998. Although product unit costs were generally lower in fiscal 1999 compared to fiscal 1998, such reductions did not offset the declines in average selling prices resulting in lower gross margins. The Company believes that the average selling price of its products will decline over time and, unless the Company is able to reduce its cost per unit to the extent necessary to offset such declines, the decline in average selling prices will result in a material decline in the Company's gross margin. Although the Company has 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. The Company does not believe that such cost reduction efforts are likely to have a material adverse impact on the quality of its products or the level of service provided by the Company. Research and Development. Research and development expenses decreased by 41% to $18.8 million in fiscal 1999 from $31.9 million in fiscal 1998. As a percentage of net sales, research and development expenses decreased to 22.5% in fiscal 1999 from 24.3% in fiscal 1998. The decreases in absolute dollars were primarily the result of the Company's transfer of its Flash development efforts to NexFlash, as well as reduced payroll related expenses associated with headcount reductions, and limitations on discretionary spending during fiscal 1999. In addition, a $5.1 million reduction in research and development expenses is attributable to the deconsolidation of ISSI-Taiwan. Fiscal 1999 includes a charge of $0.9 million in the June 1999 quarter for the write-off of certain licensed products and technologies which have been replaced by the Company's internally developed products. During fiscal 1999, the Company concentrated its development efforts on SRAM and DRAM. SRAM projects focused on the development of a family of ultra-low power products based on the Company's six transistor memory cell. DRAM projects included the 16 megabit EDO DRAM. The Company anticipates that its research and development expenses will remain fairly constant in fiscal 2000 although such expenses may fluctuate as a percentage of net sales. Selling, General and Administrative. Selling, general and administrative expenses decreased by 35% to $11.9 million in fiscal 1999 from $18.4 million in fiscal 1998. As a percentage of net sales, selling, general and administrative expenses increased slightly to 14.3% in fiscal 1999, from 14.0% in fiscal 1998. The decrease in absolute dollars was primarily the result of a $3.1 million reduction attributable to the deconsolidation of ISSI- 11 14 Taiwan. Additional reductions were the result of decreased selling commissions associated with lower revenues, decreased payroll resulting from the spin-off of NexFlash and a reduction in discretionary spending in fiscal 1999. The Company expects its selling, general and administrative expenses may increase slightly in fiscal 2000 although such expenses may fluctuate as a percentage of net sales. In-process Technology. In December 1997, the Company completed its acquisition of Nexcom Technology, Inc. in exchange for the issuance of 772,693 shares of Common Stock, $0.5 million in cash, and the assumption of $1.2 million of net liabilities (total consideration of approximately $8.5 million). In addition, the Company incurred approximately $400,000 in other costs related to this transaction. The transaction was accounted for as a purchase and resulted in an in-process technology charge of $7.1 million in the Company's December 31, 1997 quarter. Gain on sale of investment. The gain on sale of investment decreased to $2.6 million in fiscal 1999 from $10.5 million in fiscal 1998. Fiscal 1999 includes a gain of approximately $1.8 million in the June 1999 quarter related to the sale of the Company's investment in UICC to UMC, a pre-tax gain of $1.2 million resulting from the sale of 20% of the Company's holdings in ISSI-Taiwan 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 the Company's investment in Wafertech LLC. In June 1998, the Company sold approximately 46% of ISSI-Taiwan to a group of private investors. The Company recorded a pre-tax gain of approximately $10.5 million in the June 1998 quarter related to this transaction. Interest and other income (expense), Net. Other income (expense), net increased by $4.0 million to $2.3 million in fiscal 1999 from $(1.7) million in fiscal 1998. This is primarily due to exchange gains in fiscal 1999 of $0.6 million compared to exchange losses in fiscal 1998 of $3.2 million. Provision (benefit) for Income Taxes. The income tax provision for fiscal 1999 is comprised primarily of foreign withholding taxes related to the sale of ISSI-Taiwan stock. The income tax provision for fiscal 1998 is comprised mainly of foreign withholding taxes related to the sale of ISSI-Taiwan stock and a reversal of previously recorded federal deferred tax assets which management has determined should be subject to a valuation allowance based on historical and future earnings trends. 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. FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1997 Net Sales. Net sales increased by 21% to $131.1 million in fiscal 1998 from $108.3 million in fiscal 1997. The increase in sales was principally due to shipments of the Company's newer products, specifically its 64K x 16, 64K x 32, and 64K x 64 SRAMs and its 256K x 16 DRAM. Additionally, shipments of the Company's more mature 128K x 8 SRAM product increased, more than offsetting the lower average selling price for such product and shipments of the more mature 32K x32 SRAM increased while its average selling price increased. Shipments of certain of the Company's NVM products, principally its EPROMs and EEPROMs, declined significantly in fiscal 1998 compared to fiscal 1997. Sales to 3Com/U.S. Robotics accounted for approximately 19% of total net sales for both fiscal 1998 and fiscal 1997. Gross Profit. Gross profit decreased 87% to $4.3 million in fiscal 1998 from $32.2 million in fiscal 1997. As a percentage of net sales, gross profit decreased to 3.3% in fiscal 1998 from 29.7% in fiscal 1997. In fiscal 1998, the Company recorded inventory write-downs of $23.0 million, including $9.6 million in the September quarter. The inventory write-downs were predominately for lower of cost or market issues on certain of the Company's products, primarily SRAMs. The September 1998 quarter included a $2.9 million write-down of certain Flash inventories due to obsolescence resulting from the decision to spin off the Company's Flash product business to form NexFlash. In addition, in the December 1997 quarter, the Company wrote-off $0.8 million worth of a specific DRAM product, for which the Company's six month forecast showed minimal demand at December 31, 1997 and for which the Company has had minimal sales to date. It is the Company's practice to write-down to zero carrying value 12 15 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. Management's judgments take into account the product life cycles which can range from 6 to 24 months, the maturity of the product as to whether it is newly introduced or is approaching its end of life, the impact of competitor announcements and product introductions on the Company's products and purchasing opportunities due to excess wafer capacity. The Company believes that six months is an appropriate period for sales forecasts and inventory exposure calculations because it is difficult to accurately forecast for a specific product beyond this time frame due to potential introduction of products by competitors, technology obsolescence or fluctuations in demand. The policy has resulted in inventory write-downs of approximately $5.4 million, $0, and $15 million for fiscal year 1998, 1997 and 1996, respectively, and recoveries of written-down inventory of approximately $0, $13.9 million, and $0.3 million in fiscal 1998, 1997 and 1996, respectively. Excluding the inventory write-downs of $23.0 million for fiscal 1998, the decrease in gross profit dollars was primarily the result of a continuing decline in the average selling prices of the Company's products without a commensurate decline in product cost, particularly in the second half of the fiscal year. Research and Development. Research and development expenses increased by 22% to $31.9 million in fiscal 1998 from $26.2 million in fiscal 1997. As a percentage of net sales, research and development expenses increased to 24.3% in fiscal 1998 from 24.2% in fiscal 1997. The increase in absolute dollars was primarily the result of an increase in engineering personnel and payroll related expenses and increased expenses related to the development of new products. During fiscal 1998, the Company's development efforts principally focused on wider width SRAMs such as the 64K x 64, 64K x 32, 64K x 36 and 128K x 64 configurations, specialty EDO DRAMs, specialty DSP support SRAMs, serial Flash and other memory related devices. Selling, General and Administrative. Selling, general and administrative expenses increased by 10% to $18.4 million in fiscal 1998 from $16.8 million in fiscal 1997. As a percentage of net sales, selling, general and administrative expenses decreased to 14.0% in fiscal 1998, from 15.5% in fiscal 1997. The increase in absolute dollars was primarily the result of increased payroll related expenses from the addition of marketing and sales personnel and increased selling commissions associated with higher revenues partially offset by decreases in bad debt expenses and legal expenses associated with antidumping proceedings. In-process Technology. In December 1997, the Company completed its acquisition of Nexcom in exchange for the issuance of 772,693 shares of Common Stock, $0.5 million in cash, and the assumption of $1.2 million of net liabilities (total consideration of approximately $8.5 million). In addition, the Company incurred approximately $400,000 in other costs related to this transaction. The transaction was accounted for as a purchase and resulted in an in-process technology charge of $7.1 million in the Company's December 31, 1997 quarter. Gain on sale of investment. In June 1998, the Company sold approximately 46% of ISSI-Taiwan to a group of private investors. The price was privately negotiated between the parties. Cash proceeds from the transaction totaled $35.5 million net of withholding and transaction taxes. The transaction resulted in a pre-tax gain of $10.5 million which is recorded in the Company's June 30, 1998 quarter. Interest and other income (loss), Net. Other income (loss), net decreased to $(3.5) million in fiscal 1998 from $1.9 million in fiscal 1997, primarily due to exchange losses as well as decreased interest earnings as a result of lower cash and short-term investment balances and increased interest expense as a result of increased short-term and long-term borrowings. Provision (benefit) for Income Taxes. The income tax provision for fiscal 1998 is comprised mainly of foreign withholding taxes related to the sale of ISSI-Taiwan stock and a reversal of previously recorded federal deferred tax assets which management determined should be subject to a valuation allowance based on historical and future earnings trends. The income tax benefit for fiscal 1997 was the result of losses which were carried back for refunds of prior federal taxes paid and Taiwan tax credits offset by a partial valuation allowance set up for U.S. deferred tax assets. 13 16 LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1999, the Company's principal sources of liquidity included cash, cash equivalents and short-term investments of approximately $23.6 million. During fiscal 1999, operating activities used cash of approximately $22.5 million. Cash used by operations was primarily due to net losses of $9.5 million and an increase in inventories of $21.9 million partially offset by a decrease in other assets of $11.5 million. In fiscal 1999, the Company was provided with $6.5 million from investing activities compared to $18.1 million in fiscal 1998. The cash provided from investing activities was primarily the result of $10.0 million received for the sale of approximately 33% of the Company's interest in Wafertech to TSMC and $9.2 million received from the sale of UICC offset by a net cash outflow of $7.9 million from the partial sale of ISSI-Taiwan which represents the pre-tax cash received from the partial sale net of the cash excluded from the balance sheet as a result of the deconsolidation of ISSI-Taiwan. In addition, $3.5 million was used for the acquisition of fixed assets, $1.0 million was invested by ISSI-Taiwan in NexFlash prior to deconsolidation, and $0.5 million was invested in Dynachip which includes $0.3 million invested by ISSI-Taiwan prior to deconsolidation. In fiscal 1999, the Company made capital expenditures of approximately $3.5 million which included $2.2 million by ISSI-Taiwan prior to deconsolidation for the purchase of test equipment. The Company expects to spend approximately $2.5 million to purchase capital equipment during the next twelve months, principally for the purchase of computer software and hardware, design and engineering tools and additional test equipment. In June 1998, the Company sold approximately 46% of ISSI-Taiwan to a group of private investors. In December 1998, the Company sold an additional 20% of its holdings in ISSI-Taiwan 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). After completion of this transaction the Company owns approximately 43% of ISSI-Taiwan and now accounts for ISSI-Taiwan on the equity basis. In June 1996, the Company entered into a business venture "WaferTech, LLC" with TSMC, Altera, Analog Devices, and private investors to build a wafer fabrication facility in Camas, Washington. The Company agreed to invest $31.2 million for a 4% equity interest in the venture and, as of September 30, 1998, all of this amount had been paid. In January 1999, the Company sold approximately 33% of its investment in WaferTech to TSMC for $10.0 million. The Company retains a 2.67% interest in WaferTech. In October 1999, the major investors in WaferTech made an additional pro-rata investment in WaferTech. The Company's pro-rata amount of $2.7 million was invested along with the other partners. The Company's investment in WaferTech as of September 30, 1999 and October 31, 1999, was $20.8 and $23.5 million, respectively. The Company has also agreed to certain minimum wafer purchase commitments with its foundry partners in exchange for wafer capacity commitments. In fiscal 1995, the Company entered into an agreement with TSMC pursuant to which the Company agreed to acquire specified wafer capacity through 2001. The Company also agreed to make certain annual payments, the remaining amount of which totals approximately $9.6 million through 2001, to TSMC for additional capacity above the annual base capacity. Wafer purchases in any given year are first applied to the base capacity and then to the Company's $9.6 million obligation. As a result, the $9.6 million may be subject to forfeiture if the Company does not purchase the base capacity and additional capacity for which it has contracted. The Company also has minimum purchase obligations to TSMC related to WaferTech LLC. The Company is obligated to purchase from WaferTech or TSMC a minimum of 2.3% of WaferTech's installed capacity. Initial wafer outs occurred in the second half of calendar 1998. Although the Company has rights to re-schedule or assign capacity to another party, there can be no assurance that such re-schedule or assignment would be successfully accomplished. Should the Company fail to re-schedule or assign unneeded capacity, the Company's business and operating results could be adversely affected. The Company generated $3.8 million from financing activities during fiscal 1999 compared to $23.9 million in fiscal 1998. The major source of financing for fiscal 1999 was proceeds of $2.8 million from the issuance of stock under stock option and stock purchase plans and to a lesser extent net borrowings by ISSI-Taiwan under short-term and long-term lines of credit prior to deconsolidation. 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 14 17 fabricated SRAM wafers or devices, at the ad valorem rate of 7.56%. For entries after March 31, 1999, 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 whether the DOC conducts an administrative review of imports entered between April 1, 1999 and March 31, 2000 and if so, on the results of the DOC review. The Company will pay duty deposits on Taiwan SRAM entries before that date at the deposit rate. The Company has retained legal counsel to defend its interests in the antidumping proceedings. In addition, certain aspects of the antidumping determination are being challenged in federal court proceedings by respondents to the investigation, and these proceedings could result in the termination of this antidumping case. Duties calculated and assessed by the government could have a material adverse affect on the Company's gross margins and profits. There can be no assurance that any reviews or proceedings will mitigate or eliminate antidumping duties. On October 22, 1998, Micron Technology filed an anti-dumping petition against DRAMs fabricated in Taiwan. Currently, the Company's DRAM products are fabricated in Taiwan. Subsequent to the petition filing the DOC established a general dumping duty deposit rate of 21.35% which would have applied to the Company. On December 2, 1999, the International Trade Commission ("ITC") informed the DOC that it had issued a negative final determination in the DRAM investigation. The DRAM investigation has, therefore, been terminated and there is presently no antidumping duty required. The ITC ruling can be appealed in federal court, but as of December 6, 1999, no such appeal has been filed. The Company believes that its existing funds together with available financing will satisfy the Company's anticipated working capital and other cash requirements through the next 12 months. The Company may from time to time take actions to further increase its cash position such as bank borrowings, sales of additional shares of ISSI-Taiwan, the disposition of certain assets, equity financing, and debt financing. The Company, from time to time, also evaluates potential acquisitions and equity investments complementary to its memory expertise and market strategy. To the extent the Company pursues such transactions, any such transactions could require the Company 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 the Company, if at all. CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS OR FUTURE OPERATING RESULTS DEPENDENCE ON SRAM PRODUCTS; DECLINE IN AVERAGE SELLING PRICES FOR SRAM PRODUCTS A substantial majority of the Company's net sales are derived from the sale of SRAM products, which are subject to unit volume fluctuations and declines in average selling prices. For example, in the June 1998 quarter, the Company's net sales decreased by 38% to $25.0 million from $40.7 million in the March 1998 quarter, principally due to a decrease in unit shipments of the Company's SRAM products. Further, the Company anticipates that the average selling prices of its existing products will decline over time, although the rate of decline may fluctuate for certain products. There can be no assurance that such declines will be offset by higher volumes or by higher prices on newer products. QUARTERLY FLUCTUATIONS IN OPERATING RESULTS The Company's future quarterly and annual operating results are subject to fluctuations due to a wide variety of factors, many of which are outside of its control, including declines in average selling prices of the Company's products, 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. In this regard, in the June 1998 quarter, the Company's 15 18 net sales decreased by 38% to $25.0 million from $40.7 million in the March 1998 quarter principally due to a decrease in unit shipments of the Company's SRAM products. In fiscal 1999, approximately 52% of the Company's 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. In fiscal 1998, approximately 43% of the Company's net sales was attributable to customers located in the United States, 18% was attributable to customers located in Europe and 39% was attributable to customers located in Asia. In fiscal 1999 and in fiscal 1998, international sales (sales by ISSI-Taiwan, ISSI-Hong Kong and export sales by ISSI-U.S.) comprised approximately 48% and 57% of the Company's net sales, respectively. Accordingly, the Company's future operating results will also depend in part on general economic conditions in Asia, the United States and its other markets. In addition, there can be no assurance that the markets for the Company's products, which are highly cyclical, will continue to grow. DECLINES IN AVERAGE SELLING PRICES Competitive pricing pressures due to an industry-wide oversupply of wafer capacity resulted in significant price decreases for the Company's products during the past four years. Historically, average selling prices for semiconductor memory products have declined, and the Company expects that average selling prices will decline in the future. Accordingly, the Company's ability to maintain or increase revenues will be highly dependent upon its 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 its existing products. Declining average selling prices will also adversely affect the Company's gross margins and profits unless the Company is able to introduce new products with higher margins or reduce its cost per unit to offset declines in average selling prices. There can be no assurance that the Company will be able to increase unit sales volumes, introduce and sell new products or reduce its cost per unit. In this regard, the Company has a cost reduction program in place, which involves efforts to reduce internal costs and supplier costs, in an effort to reduce its cost per unit for certain products. The Company does not believe that such cost reduction efforts are likely to have a material adverse impact on the quality of its products or the level of service provided by the Company. RISK OF INVENTORY WRITE-DOWNS Shifts in industry-wide capacity from shortages to oversupply or from oversupply to shortages may result in significant fluctuations in the Company's 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 1998, the Company recorded inventory write-downs of $23.0 million, including $9.6 million in the September 1998 quarter. The inventory write-downs were predominately for lower of cost or market issues on certain of the Company's products, primarily SRAMs. The September 1998 quarter included a $2.9 million write-down of certain of the Company's Flash inventories due to obsolescence resulting from the Company's decision to spin off the Flash product business to form NexFlash. It is the Company's practice to 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. Management's judgments take into account the product life cycles which can range from 6 to 24 months, the maturity of the product as to whether it is newly introduced or is approaching its end of life, the impact of competitor announcements and product introductions on the Company's products and purchasing opportunities due to excess wafer capacity. The Company believes that six months is an appropriate period because it is difficult to accurately forecast for a specific product beyond this time frame due to potential introduction of products by competitors, technology obsolescence or fluctuations in demand. The policy has resulted in inventory write-downs of approximately $0, $5.4 million, and $0 for fiscal year 1999, 1998 and 1997, respectively, and recoveries of written-down inventory of approximately $0, $0, and $13.9 million in fiscal 1999, 1998 and 1997, respectively. There can be no assurance that in the future additional inventory write-downs will not occur. DEPENDENCE ON INDEPENDENT WAFER FOUNDRIES The Company has combined its fabless manufacturing strategy with technology partnerships and equity investments. This hybrid approach, which the Company calls "Fab-Lite(TM)", has provided advanced process technology and a committed wafer supply. To date, the Company's principal manufacturing relationship has been with TSMC, from which the Company has obtained a substantial majority of its wafers. The Company also receives wafers from Chartered Semiconductor and UMC. Each of the Company's wafer suppliers also fabricates for other 16 19 integrated circuit companies, including certain of the Company's competitors. Although the Company has written commitments specifying wafer capacities from its suppliers, if these suppliers experience manufacturing failures or yield shortfalls, choose to prioritize capacity for other use or reduce or eliminate deliveries to the Company, there can be no assurance that the Company could enforce fulfillment of the delivery commitments. There can be no assurance that the Company would be able to qualify additional manufacturing sources for existing or new products in a timely manner or that such additional manufacturing sources would agree to deliver an adequate supply of wafers. If the Company were unable to obtain an adequate supply of wafers from its current or any alternative sources in a timely manner, its business and operating results would be materially and adversely affected. The Company has certain minimum wafer purchase commitments with its foundry partners in exchange for wafer capacity commitments. The Company has agreed to make certain annual purchases totaling, in aggregate, approximately $9.6 million through 2001 from TSMC for additional capacity above the annual base capacity. Wafer purchases in any given year are first applied to the base capacity and then to the Company's $9.6 million obligation. As a result, the $9.6 million may be subject to forfeiture if the Company does not purchase the base capacity and additional capacity for which it has contracted. The Company has minimum purchase obligations to TSMC related to WaferTech LLC, a business venture in which the Company is an investor. The Company is obligated to purchase from WaferTech or TSMC a minimum of 2.3% of WaferTech's installed capacity. Although the Company has rights to re-schedule or assign capacity to another party, there can be no assurance that such re-schedule or assignment would be successfully accomplished. Should the Company fail to re-schedule or assign unneeded capacity, the Company will be required to make payments for the unused capacity and its business and operating results would be materially and adversely affected. PRODUCT CONCENTRATION A majority of the Company's products are incorporated into products such as internet access devices, networking equipment, telecommunications equipment, disk drives and other PC peripherals. 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. The Company's business and operating results would be materially and adversely affected by any future downturns in the markets that it serves. CUSTOMER CONCENTRATION The Company's sales are concentrated within a limited customer base. Sales to one customer, 3Com, accounted for approximately 20% and 19% of total net sales for fiscal 1999 and fiscal 1998, respectively. As sales to this customer are executed pursuant to purchase orders and no purchasing contract exists, the customer can cease doing business with the Company at any time. The Company expects a significant portion of its future sales to remain concentrated within a limited number of strategic customers. There can be no assurance that the Company will be able to retain its strategic customers or that such customers will not otherwise cancel or reschedule orders, or in the event of canceled orders, that such orders will be replaced by other sales. In addition, sales to any particular customer may fluctuate significantly from quarter to quarter. The occurrence of any such events could have a material adverse effect on the Company's business and operating results. COMPETITION 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. The ability of the Company to compete successfully in the high performance memory market depends on factors both within and outside of its control, including imbalances in supply and demand, product pricing, the rate at which OEM customers incorporate the Company's products into their systems, the success of the OEM's products, access to advance 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 nature of its competitors and general economic conditions. In addition, the Company is vulnerable to technology advances utilized by competitors to manufacture higher performance or lower cost products. There can be no assurance that the Company will be able to compete successfully in the future as to any of these factors. The failure of the Company to compete successfully in these or other areas could materially and adversely affect the Company's business and operating results. 17 20 CLAIMS REGARDING INTELLECTUAL PROPERTY In the semiconductor industry it is typical for companies to receive notices from time to time 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. There can be no assurance that other companies will not in the future pursue claims against the Company with respect to the alleged infringement of patents, maskwork rights, copyrights or other intellectual property owned by third parties. If it appears necessary or desirable, the Company may seek licenses under patents that it is alleged to be infringing. Although patent holders commonly offer such licenses, there is no assurance that any licenses will be offered or that the terms of any offered licenses will be acceptable to the Company. The failure to obtain a license under a key patent or intellectual property right from a third party for technology used by the Company could cause the Company to incur substantial liabilities and to suspend the manufacture of the products utilizing the invention or to attempt to develop non-infringing products, 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 the alleged infringement by the Company of third party intellectual property rights or litigation to assert and protect patents or other intellectual property rights of the Company. Any litigation relating to patent infringement or other intellectual property matters could result in substantial cost and diversion of resources by the Company which could materially and adversely affect the Company's business and operating results. INTERNATIONAL OPERATIONS The Company is subject to the risks of conducting business internationally, including economic conditions in Asia, particularly Taiwan, 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. The Company anticipates that sales to international customers will continue to represent a significant percentage of net sales. In addition, substantially all of the Company's foundries and assembly and test operations are located in Asia. Although the Company transacts business predominately in U.S. dollars, it does have some transactions in New Taiwan ("NT") dollars and in Hong Kong ("HK") dollars. Such transactions expose the Company to the risk of exchange rate fluctuations. The Company monitors its exposure to foreign currency fluctuations, and has from time to time taken action to hedge against such exposure, but has not to date adopted any formal hedging strategy. The Company's business and results of operations have been negatively impacted by exchange rate fluctuations in the past and there can be no assurance that exchange rate fluctuations will not materially and adversely affect its business and operating results in the future. YEAR 2000 READINESS DISCLOSURE The Company is aware of the issues associated with computer systems as the Year 2000 approaches. The Year 2000 issues are the result of common computer programming techniques that result in systems that do not function properly when manipulating dates later than December 31, 1999. The problem may affect internal information technology (IT) systems used by the Company for product design, product test, accounting, order entry, planning, and distribution. The problem may also affect non-IT systems such as security systems, communication equipment, and other equipment. The Company completed its assessment of its critical IT systems and identified at least one area (accounting software) that was not Year 2000 compliant. As a result, the Company implemented a new enterprise management information system in September 1999. The Company has been advised that the new enterprise management information system is Year 2000 compliant. The new system significantly affects many areas of the Company's business, including accounting, order entry, planning, shipping/distribution, manufacturing, and sales and marketing. The successful utilization of this system is important in managing and operating the Company. With respect to critical non-IT systems, the Company has assessed the compliance of these systems and believes that these systems are Year 2000 compliant. There can be no assurance that the Company has successfully identified all its internal Year 2000 issues or that the new enterprise management information system will function without interruption to the Company's daily operations. The failure to identify and address internal Year 2000 issues in a timely fashion could have a material adverse affect on the Company's business and results of operations. 18 21 The Company could possibly be adversely impacted by Year 2000 issues faced by major suppliers, subcontractors, and customers. The Company has surveyed its major suppliers and subcontractors and they have all indicated that they are Year 2000 compliant or will be by January 1, 2000. The Company has not surveyed the Year 2000 readiness of its customers and their failure to address Year 2000 issues could have an impact on the Company's operations and financial results. The extent of this impact, if any, is not known at this time. The Company has currently incurred approximately $0.5 million in total software, hardware, and system related costs in connection with remediation of Year 2000 issues. These costs are primarily costs associated with the implementation of the Company's new information system and have generally been capitalized as fixed assets. The Company expects to spend approximately an additional $0.1 million before January 1, 2000 to complete the implementation and address any further Year 2000 compliance issues. VOLATILITY OF STOCK PRICE The trading price of the Company's Common Stock has been subject to wide fluctuations in response to quarter-to-quarter variations in operating results, announcements by the Company or its competitors, increases or decreases in wafer capacity, general conditions in the semiconductor or computer industries, governmental regulations, trade laws and import duties, litigation, new or revised earnings estimates, comments or recommendations issued by analysts who follow the Company, its competitors or the semiconductor industry and other events or factors. In addition, stock markets have experienced extreme price and trading volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many high technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. ITEM 7a. MARKET RISK DISCLOSURES The Company's principal financial market risk relates to the interest rates associated with the Company's investment portfolio. All the Company's cash equivalents and short-term investments are classified 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, 1999 and 1998, the cost of these securities approximated the fair value (quoted market price) and the amount of unrealized gain or loss was not significant. There were no gains or losses on the sale of securities for the years ended September 30, 1999, 1998 and 1997. 19 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial StatementS Report of Independent Auditors............................................. 21 Financial Statements: Consolidated Statements of Operations For Fiscal Years Ended September 30, 1999, September 30, 1998, and September 30, 1997...................... 22 Consolidated Statements of Comprehensive Loss For Fiscal Years Ended September 30, 1999, September 30, 1998, and September 30, 1997...................... 23 Consolidated Balance Sheets As of September 30, 1999 and September 30, 1998................. 24 Consolidated Statements of Stockholders' Equity For Fiscal Years Ended September 30, 1999, September 30, 1998, and September 30, 1997...................... 25 Consolidated Statements of Cash Flows For Fiscal Years Ended September 30, 1999, September 30, 1998, and September 30, 1997...................... 26 Notes to Consolidated Financial Statements........................... 27
20 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, 1999 and 1998, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP San Jose, California October 29, 1999 21 24 Integrated Silicon Solution, Inc. Consolidated Statements of Operations (In thousands, except per share data)
Years Ended September 30, --------------------------------------------- 1999 1998 1997 --------- --------- --------- Net sales (See Note 19) $ 83,309 $ 131,132 $ 108,261 Cost of sales (other than item below) (See Note 19) 66,816 103,794 76,105 Inventory write-down - 23,000 - --------- --------- --------- Total cost of sales 66,816 126,794 76,105 --------- --------- --------- Gross profit 16,493 4,338 32,156 --------- --------- --------- Operating expenses Research and development 18,778 31,911 26,179 Selling, general and administrative 11,899 18,402 16,753 In-process technology charge - 7,078 - --------- --------- --------- Total operating expenses 30,677 57,391 42,932 --------- --------- --------- Operating loss (14,184) (53,053) (10,776) Interest and other income (expense) 2,256 (1,697) 2,535 Interest expense (1,039) (1,795) (607) Gain on sale of investments, net 2,658 10,494 - --------- --------- --------- Loss before income taxes and minority interest (10,309) (46,051) (8,848) Provision (benefit) for income taxes 608 4,668 (1,144) --------- --------- --------- Net loss before minority interest (10,917) (50,719) (7,704) Minority interest in net loss of consolidated subsidiary (472) (112) (18) Equity in net income of affiliated companies 934 - - --------- --------- --------- Net loss $ (9,511) $ (50,607) $ (7,686) ========= ========= ========= Basic and diluted net loss per share $ (0.48) $ (2.67) $ (0.43) ========= ========= ========= Shares used in per share calculation 19,633 18,940 17,748 ========= ========= =========
See the accompanying notes to consolidated financial statements 22 25 Integrated Silicon Solution, Inc. Consolidated Statements of Comprehensive Loss (In thousands)
Years Ended September 30, ---------------------------------------- 1999 1998 1997 ------- -------- ------- Net loss $(9,511) $(50,607) $(7,686) Other comprehensive income (loss), net of tax: Change in cumulative translation adjustment 2,599 (2,539) (2,002) ------- -------- ------- Comprehensive loss $(6,912) $(53,146) $(9,688) ======= ======== =======
See the accompanying notes to consolidated financial statements 23 26 Integrated Silicon Solution, Inc. Consolidated Balance Sheets (In thousands, except per share data)
September 30, ---------------------- 1999 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 15,975 $ 27,776 Restricted cash - 333 Short-term investments 7,650 7,800 Accounts receivable, net of allowance for doubtful accounts of $1,496 in 1999 and $1,804 in 1998 11,970 19,069 Accounts receivable from related parties (See Note 19) 3,206 - Inventories 29,681 46,484 Other current assets 1,639 4,938 -------- -------- Total current assets 70,121 106,400 Property, equipment, and leasehold improvements, net 4,563 44,316 Other assets 47,147 51,452 -------- -------- Total assets $121,831 $202,168 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ - $ 18,325 Accounts payable 10,370 40,642 Accounts payable to related parties (See Note 19) 9,231 - Accrued compensation and benefits 1,933 2,945 Accrued expenses 6,068 8,036 Income tax payable 455 524 Current portion of long-term obligations - 3,379 -------- -------- Total current liabilities 28,057 73,851 Income tax payable - noncurrent 4,996 4,996 Long-term obligations - 12,087 Minority interest in consolidated subsidiary - 20,314 Commitments and contingencies Stockholders' equity: Preferred stock, $0.0001 par value: Authorized shares - 5,000 in 1999 and 1998. No shares outstanding - - Common stock, $0.0001 par value: Authorized shares - 70,000 in 1999 and 1998. Issued and outstanding shares - 20,294 in 1999 and 19,417 in 1998 2 2 Additional paid-in capital 120,852 116,199 Accumulated deficit (27,852) (18,341) Accumulated comprehensive income (4,188) (6,787) Unearned compensation (36) (153) -------- -------- Total stockholders' equity 88,778 90,920 -------- -------- Total liabilities and stockholders' equity $121,831 $202,168 ======== ========
See the accompanying notes to consolidated financial statements 24 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, 1996 17,607 $ 2 $104,788 $ 39,952 $ (2,246) $ (61) $142,435 Stock options exercised 197 - 665 - - - 665 Shares issued under stock purchase plan 134 - 1,112 - - - 1,112 Unearned compensation - - 204 - - (204) - Amortization of unearned compensation - - - - - 43 43 Translation adjustment - - - - (2,002) - (2,002) Net loss - - - (7,686) - - (7,686) ------ ---- -------- -------- -------- ----- -------- Balance at September 30, 1997 17,938 2 106,769 32,266 (4,248) (222) 134,567 Stock options exercised 461 - 1,674 - - - 1,674 Shares issued under stock purchase plan 245 - 1,379 - - - 1,379 Amortization of unearned compensation - - - - - 69 69 Shares issued for purchase of Nexcom Technology, Inc. 773 - 6,377 - - - 6,377 Translation adjustment - - - - (2,539) - (2,539) Net loss - - - (50,607) - - (50,607) ------ ---- -------- -------- -------- ----- -------- 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 ====== ==== ======== ======== ========= ===== ========
See the accompanying notes to consolidated financial statements 25 28 Integrated Silicon Solution, Inc. Consolidated Statements of Cash Flows (In thousands)
Years Ended September 30, ------------------------------------- 1999 1998 1997 -------- -------- --------- Cash flows from operating activities: Net loss $ (9,511) $(50,607) $ (7,686) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 4,608 9,065 11,408 In-process technology charge - 7,078 - Net gain on sale of investments (2,658) (10,494) - Provision for losses on accounts receivable - - 675 Net foreign currency transaction (gains) losses (594) 3,188 17 Equity in net income of affiliated companies (934) - - Minority interest in net loss of consolidated subsidiary (472) (112) (18) Changes in operating assets and liabilities: Accounts receivable and accounts receivable from related parties (1,719) (386) (8,007) (See Note 19) Inventories (21,912) (13,515) (19,446) Other assets 11,549 7,458 4,328 Accounts payable and accounts payable to related parties (See Note 19) 149 16,350 13,939 Accrued expenses (963) (2,553) 227 -------- -------- --------- Net cash used in operating activities (22,457) (34,528) (4,563) Cash flows from investing activities: Acquisition of property, equipment, and leasehold improvements (3,490) (19,218) (13,985) Purchases of available-for-sale securities (26,450) (42,750) (174,400) Sales of available-for-sale securities 26,600 60,550 211,000 Cash impact of deconsolidation of ISSI-Taiwan (12,818) - - Proceeds from partial sale of ISSI-Taiwan 4,957 37,594 - Investment in WaferTech, LLC - (12,480) (9,360) Proceeds from partial sale of Wafertech 10,000 - - Investment in United Integrated Circuits Corp. - (4,730) (12,983) Proceeds from sale of United Integrated Circuits Corp. 9,217 - - Investment in NexFlash Technologies, Inc. (1,000) - - Investment in Dynachip (500) - - Investment in Nexcom Technology, Inc. - (869) - Proceeds from employees for UICC shares - - 5,345 -------- -------- --------- Net cash provided by investing activities 6,516 18,097 5,617 Cash flows from financing activities: Proceeds from issuance of stock 2,771 3,122 1,820 Borrowings under notes payable and long-term obligations 33,435 81,816 28,659 Principal payments of notes payable and long-term obligations (32,393) (65,884) (23,092) Decrease (increase) in restricted cash - 4,800 1,821 -------- -------- --------- Net cash provided by financing activities 3,813 23,854 9,208 Effect of exchange rate changes on cash and cash equivalents 327 (1,981) (165) -------- -------- --------- Net increase (decrease) in cash and cash equivalents (11,801) 5,442 10,097 Cash and cash equivalents at beginning of year 27,776 22,334 12,237 -------- -------- --------- Cash and cash equivalents at end of year $ 15,975 $ 27,776 $ 22,334 ======== ======== =========
See the accompanying notes to consolidated financial statements 26 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 year 1998 are presented on a consolidated basis and include the results of the operations of NexFlash and Integrated Silicon Solution Taiwan Inc., "ISSI-Taiwan". Effective November 1998, the Company's financial results no longer consolidate the results of NexFlash, as the Company's ownership of NexFlash became less than 50%. Effective November 1998, the Company accounts for NexFlash on the equity basis and includes in its financial statements its percentage share of NexFlash's results of operations. In late December 1998, the Company sold an additional 20% of its interest in ISSI-Taiwan and, as a result, reduced its ownership interest in ISSI-Taiwan to approximately 43%. The Company's Balance Sheet as of September 30, 1999 reflects the accounting for ISSI-Taiwan on the equity basis. Beginning with the second quarter of fiscal 1999, the Company's Statement of Operations no longer consolidate the results of ISSI-Taiwan, but instead accounts for ISSI-Taiwan on the equity basis and reflects its percentage share of ISSI-Taiwan's results of operations. 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, 1999 and 1998, 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, 1999 and 1998, 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 ISSI-Taiwan, WaferTech, and UICC (see Note 18), there were no gains or losses on the sale of securities for the years ended September 30, 1999, 1998 and 1997. 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 and are not reversed until the related inventory is sold or disposed. 27 30 Notes to Consolidated Financial Statements 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 upon shipment. 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 component of stockholder's equity. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The Company operates in one business segment, which is to design, develop, and market high performance SRAM, DRAM, and NVM integrated circuits. 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. In fiscal 1999, 1998 and 1997, one customer, 3Com, accounted for approximately 20%, 19% and 19% of net sales, respectively. 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 the Company's 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 substantially all of its revenues from the sale of SRAM products. The Company has diversified into other product areas such as low and medium density DRAMs, and NVM products. However, a substantial majority of the Company's revenue is still derived from SRAM products and, if the market for SRAM products should decline and the Company has not successfully diversified, 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 the Company's products, oversupply of memory products in the market, failure 28 31 Notes to Consolidated Financial Statements 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 net income (loss) 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 during the period. Common equivalent shares consist of the shares issuable upon the exercise of stock options and warrants under the treasury stock method. Basic and diluted net loss per share for each of the three years presented is computed using the weighted average number of shares of common stock outstanding during the period, as all other common equivalent shares are anti-dilutive. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" (FAS No. 133). FAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The change in a derivative's fair value related to the ineffective portion of a hedge, if any will be immediately recognized in earnings. The Company expects to adopt FAS No. 133 as of the beginning of its fiscal year 2001. The Company does not believe that the adoption of FAS No. 133 will have a material impact on the Company's results of operations, cash flows, or financial position. RECLASSIFICATION OF PRIOR YEAR BALANCES Certain reclassifications have been made to prior year's financial statements to conform to the current year presentation. NOTE 2. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS Cash, cash equivalents, restricted cash, and short-term investments consisted of the following at September 30:
1999 1998 ------- ------- (In thousands) Cash $13,732 $23,893 Money market instruments 660 195 Certificates of deposit 1,583 4,021 Auction preferred stock 5,200 1,000 Municipal bonds due in more than 3 years 2,450 6,800 ------- ------- Total $23,625 $35,909 ======= =======
29 s 32 Notes to Consolidated Financial Statements NOTE 3. INVENTORIES Inventories consisted of the following at September 30:
1999 1998 ------- ------- (In thousands) Purchased components $ 5,168 $ 5,447 Work-in-process 6,807 14,868 Finished goods 17,706 26,169 ------- ------- $29,681 $46,484 ======= =======
In fiscal 1998, the Company recorded inventory write-downs of $23.0 million, including $9.6 million in the September quarter. The inventory write-downs were predominately for lower of cost or market issues on certain of the Company's products, primarily SRAMs. NOTE 4. OTHER ASSETS Other assets consisted of the following at September 30:
1999 1998 ------- ------- (In thousands) Investment in ISSI-Taiwan (see Notes 1 and 18) $21,886 $ -- Investment in WaferTech LLC. (see Notes 15 and 21) 20,800 31,200 Investment in United Integrated Circuits Corp. (see Note 18) -- 16,486 Other 4,461 3,766 ------- ------- $47,147 $51,452 ======= =======
NOTE 5. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS Property, equipment, and leasehold improvements consisted of the following at September 30:
1999 1998 ------- ------- (In thousands) Machinery and equipment $21,996 $52,462 Furniture and fixtures 860 1,969 Building and improvements 886 19,205 ------- ------- 23,742 73,636 Less accumulated depreciation and amortization 19,179 29,320 ------- ------- $ 4,563 $44,316 ======= =======
NOTE 6. ACCRUED EXPENSES Accrued liabilities consisted of the following at September 30:
1999 1998 ------ ------ (In thousands) Accrued anti-dumping duties (see Note 15) $1,574 $1,574 Other 4,494 6,462 ------ ------ $6,068 $8,036 ====== ======
30 33 Notes to Consolidated Financial Statements NOTE 7. NOTES PAYABLE AND LONG-TERM OBLIGATIONS At September 30, 1999, the Company had no lines of credit. At September 30, 1998, ISSI-Taiwan had short-term lines of credit with various financial institutions whereby it could borrow in aggregate up to approximately $23,510,000 denominated in a combination of U.S. and New Taiwan dollars. As of September 30, 1998, ISSI-Taiwan had borrowings of approximately $18,225,000 outstanding under these lines of credit. These lines of credit were secured by time deposits of approximately $333,000, which were recorded as restricted cash, as well as approximately $5.8 million at cost of UICC stock. Commitment fees relating to these lines were not material. At September 30, 1998, the weighted average interest rate on borrowing under these lines was 8.4%. Long-term obligations consisted of the following at September 30:
1999 1998 ------- ------- (In thousands) Notes payable to bank, due in quarterly installments through 2004 with interest at 6.82% to 8.82% and secured by the Company's property and equipment $ -- $15,466 Less current portion -- 3,379 ------- ------- $ -- $12,087 ======= =======
Interest of $0, $913,000, and $280,000 was capitalized in 1999, 1998, and 1997, respectively. 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 of the Company. 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. As of September 30, 1999, shares of common stock were reserved for future issuance as follows:
Common shares reserved under Employee Stock Purchase Plan 707,000 Common shares reserved under stock option plans 5,544,000 Common shares reserved for exercise of warrants 848,000
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 of the Company. 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. 31 34 Notes to Consolidated Financial Statements 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. Options to purchase 920,000 shares, 1,120,000 shares, and 1,164,000 shares were exercisable as of September 30, 1999, 1998, and 1997, respectively. In the event of certain changes in control of the Company, 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 of the Company. 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. Options to purchase 493,000 shares, 430,000 shares and 33,000 shares were exercisable as of September 30, 1999, 1998 and 1997, respectively. In the event of certain changes in control of the Company, 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. 1998 STOCK OPTION PLAN The Board of Directors and stockholders approved the 1998 Stock Option Plan ("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 the Company. Stock purchase rights may also be granted under the 1998 Plan. Under the terms of the 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. No options to purchase shares were exercisable as of September 30, 1999. In the event of certain changes in control of the Company, 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 ("Director Plan") in December 1995 and January 1996, respectively. Under the terms of the 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 38,000 shares, 26,000 shares and 13,000 shares were exercisable at September 30, 1999, 1998 and 1997, respectively. 32 35 Notes to Consolidated Financial Statements 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, 1996 690 2,500 $0.20 - $27.50 $12.31 Authorized 775 -- - -- Granted (2,340) 2,340 $5.00 - $10.125 8.72 Exercised -- (197) $0.20 - $12.25 3.37 Canceled 1,095 (1,095) $0.20 - $27.50 19.98 ------ ------ --------------- ------ Balance at September 30, 1997 220 3,548 $0.28 - $26.00 8.07 Authorized 2,218 -- - -- Granted (1,463) 1,463 $3.00 - $11.00 8.08 Exercised -- (461) $0.28 - $10.48 3.63 Canceled 1,254 (1,254) $3.00 - $26.00 8.39 ------ ------ --------------- ------ 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 ====== ====== =============== ======
For certain options granted in 1997, 1995 and 1994, 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 $8,000, $69,000 and $43,000 was recognized for the years ending September 30, 1999, 1998, and 1997, respectively. Outstanding and exercisable options presented by price range at September 30, 1999 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 - 3.00 881,000 9.36 $ 2.68 94,000 $ 2.81 3.16 - 3.16 1,341,000 9.17 3.16 805,000 3.16 3.25 - 5.38 155,000 8.27 4.69 58,000 3.91 6.50 - 8.00 316,000 8.26 7.76 158,000 7.79 8.56 - 9.75 291,000 7.84 9.21 245,000 9.22 10.00 - 14.50 102,000 6.92 11.67 91,000 11.73 -------------- --------- ---- ----- --------- ------ $ 2.56 - 14.50 3,086,000 8.89 $ 4.42 1,451,000 $ 5.23 ============== ========= ==== ===== ========= ======
EMPLOYEE STOCK PURCHASE PLAN In March 1993, the Company adopted an Employee Stock Purchase Plan ("Purchase Plan") under Section 423 of the Internal Revenue Code. Under the Company's Purchase Plan, eligible employees may purchase shares of the Company'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 1,450,000 shares of common stock is reserved for issuance under the plan, of which 743,000 had been issued as of September 30, 1999. 33 36 Notes to Consolidated Financial Statements REPRICE OF STOCK OPTIONS On December 2, 1998, the Board of Directors approved the repricing of certain options outstanding previously granted to employees of the Company. Approximately 1,949,000 shares with an aggregate exercise price of approximately $17.0 million were repriced to an exercise price of $3.1562 per share. In connection with the repricing, certain vesting and exercise rights were surrendered. 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 ----------------------------------------- ----------------- 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- Expected life (years) 5.0 5.0 5.0 0.5 0.5 0.5 Expected volatility .85 .76 .70 1.16 .72 .53 Risk-free interest rate 5.12% 5.50% 6.43% 4.84% 5.33% 5.50%
The weighted-average fair value of options granted at market value during fiscal 1999, 1998 and 1997 was $1.54, $3.81 and $4.02 per share, respectively. The weighted-average fair value of employee stock purchase rights during fiscal 1999, 1998 and 1997 was $3.04, $3.89 and $5.33 per share, respectively. 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):
1999 1998 1997 ---- ---- ---- Net loss As reported $ (9,511) $(50,607) $ (7,686) Pro forma $(14,203) $(55,564) $(14,814) Basic and diluted loss per share As reported $ (0.48) $ (2.67) $ (0.43) Pro forma $ (0.72) $ (2.93) $ (0.83)
Because FAS 123 is applicable only to awards granted subsequent to September 30, 1995, its pro forma effect was not fully reflected until fiscal 1999. Due to the subjective nature of the assumptions used in the Black-Scholes model, the proforma net loss and proforma net loss per share may not be indicative of the effects on net income (loss) and net income (loss) per share in future years. 34 37 Notes to Consolidated Financial Statements NOTE 10. 1998 ISSI-TAIWAN STOCK PLAN On October 29, 1998, the Company adopted the 1998 ISSI-Taiwan Stock Plan ("Taiwan Stock Plan") that provides for the grant of non-statutory stock options in the common stock of ISSI-Taiwan to the employees, consultants, and directors of the Company. Upon exercise, if any, the Company would sell its shares in ISSI-Taiwan to the optionee. Under terms of the Taiwan Stock Plan, the maximum aggregate number of shares of ISSI-Taiwan stock which may be optioned and sold is 12.0 million. This represents approximately 10% of the outstanding shares of ISSI-Taiwan. Under the terms of the plan, the exercise price, which is deemed to be the fair value of ISSI-Taiwan 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. The options expire upon the earlier of ten years from the date of grant or 30 days following termination of employment or consultancy. At September 30, 1999, options to purchase 10,374,000 shares of ISSI-Taiwan stock were outstanding, none of which were exercisable. If within twelve months of certain changes of control of the Company an optionee's status as an employee or consultant of the Company is terminated without cause, the Taiwan Stock Plan provides for full acceleration of the exercisability of all outstanding options. NOTE 11. STOCKHOLDERS' EQUITY At September 30, 1998, the Company was subject to legal restrictions related to its distribution of ISSI-Taiwan earnings. In accordance with the Corporate Law of the Republic of China, before ISSI-Taiwan declares any part of net income as dividends and/or bonuses, ISSI-Taiwan must transfer 10% of its statutory net income to a legal reserve until such reserve is equal to ISSI-Taiwan's capital. At September 30, 1998, such restricted equity amounted to approximately $5,022,000. The legal reserve is not available for distribution; however, when the reserve exceeds 50% of ISSI-Taiwan's capital, 50% of the legal reserve in excess of 50% of ISSI-Taiwan's capital may be distributed in the form of stock. The reserve may be utilized at any time to offset a deficit. In addition, any distribution of equity of ISSI-Taiwan must allocate 1% of the related distribution to employees of ISSI-Taiwan. NOTE 12. INCOME TAXES The provision (benefit) for income taxes consisted of the following for the years ended September 30:
1999 1998 1997 ------ ------- ------- (In thousands) Current: Federal $ (250) $ 114 $(2,558) State -- 36 1 Foreign 858 2,377 116 ------- ------- ------- Total current $ 608 $ 2,527 $(2,441) Deferred: Federal -- 2,289 2,584 State -- -- -- Foreign -- (148) (1,287) ------- ------- ------- Total deferred -- 2,141 1,297 ------- ------- ------- Total provision (benefit) $ 608 $ 4,668 $(1,144) ======= ======= =======
Pretax income (loss) from foreign operations was approximately $(516,000), $200,000, and $9,207,000 for 1999, 1998 and 1997, respectively. 35 38 Notes to Consolidated Financial Statements The Company's provision (benefit) 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:
1999 1998 1997 -------- -------- -------- As adjusted (In thousands) Income taxes computed at the U.S. federal statutory rate $ (3,821) $(16,118) $ (3,097) Valuation of deferred tax assets -- 11,105 6,546 Net operating loss (utilized), not utilized 2,088 (2,898) -- Foreign earnings taxed at lower than U.S. rate -- (62) (4,368) Foreign withholding taxes 858 2,373 -- Tax exempt interest income -- (93) (328) Gain on sale of ISSI-Taiwan stock 1,733 7,890 -- In-process research and development -- 2,477 -- Other individually immaterial items (250) (6) 103 -------- -------- -------- Total provision (benefit) $ 608 $ 4,668 $ (1,144) ======== ======== ========
As of September 30, 1999 the Company has federal and state net operating loss carryforwards of approximately $27,000,000 and $7,000,000, respectively. The Company has federal research and development credit carryforwards, foreign tax credits and alternative minimum tax credit carryforwards of approximately $3,040,000, $3,820,000 and $350,000, respectively. The Company also has state research and manufacturers' investment tax credit carryforwards of approximately $1,350,000 and $650,000. The net operating losses, research credit carryforwards, foreign tax credit carryforwards and state manufacturers' investment tax credit carryforwards will expire at various dates beginning in 2001 through 2019, 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. 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:
1999 1998 -------- -------- (In thousands) Deferred tax assets: Depreciation $ 955 $ 577 Inventory and other valuation reserves 5,078 11,961 Accrued expenses 2,280 2,983 Taiwan - investment tax credit carryforwards -- 5,383 Federal and state credit carryforwards 8,552 6,548 Federal and state net operating loss carryforwards 9,509 3,204 Other, net 1,690 1,185 -------- -------- Subtotal 28,064 31,841 Valuation allowance (20,686) (29,667) -------- -------- Total deferred tax assets $ 7,378 $ 2,174 Deferred tax liabilities: Investments tax/book basis differences (7,378) -- -------- -------- Net deferred tax assets $ 0 $ 2,174 ======== ========
Management has established a valuation allowance for 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. The net deferred tax asset at September 30, 1998 was on ISSI-Taiwan's balance sheet and, as a result of deconsolidation of ISSI-Taiwan, there is no net deferred tax asset at September 30, 1999 for ISSI. The valuation allowance for deferred tax 36 39 Notes to Consolidated Financial Statements assets decreased by $8,981,000 during 1999 and increased by $15,809,000 during 1998. The decrease in the valuation allowance for 1999 resulted from the deconsolidation of ISSI-Taiwan and the resulting adjustment for the book/tax difference in the basis of the investment in ISSI-Taiwan. Approximately $3,250,000 of the valuation allowance is attributable to tax benefits of stock option deductions which will be credited to paid in capital when recognized. NOTE 13. PER SHARE DATA The calculations of basic and diluted net loss per share for each of the three years ended September 30, 1999 are as follows:
Years Ended September 30, ------------------------------------ 1999 1998 1997 -------- -------- -------- In thousands, except per share data Net loss $ (9,511) $(50,607) $ (7,686) ======== ======== ======== Denominator for basic net loss per share: Weighted average common shares outstanding 19,633 18,940 17,748 -------- -------- -------- Denominator for basic and diluted net loss per share 19,633 18,940 17,748 ======== ======== ======== Basic and diluted net loss per share $ (0.48) $ (2.67) $ (0.43) ======== ======== ========
The above diluted calculation for the years ended September 30, 1999, 1998 and 1997, does not include approximately 2,000,000, 2,497,000, and 1,418,000 shares attributable to options as of September 30, 1999, 1998 and 1997, 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. NOTE 14. GEOGRAPHIC AND SEGMENT INFORMATION In June 1997, the Financial Accounting Standards Board issued Statement No. 131 "Disclosures About Segments of An Enterprise and Related Information" (FAS No. 131). FAS No. 131 will require the Company to use the "management approach" in disclosing segment information. FAS No. 131 became effective for the Company during fiscal 1999. The Company operates in one business segment, which is to design, develop, and market high-performance SRAM, DRAM, and NVM integrated circuits. The following table summarizes the Company's operations in different geographic areas:
Year Ended September 30, 1999 --------------------------------------------------------------------- Adjustments/ United States Hong Kong Taiwan Eliminations Consolidated ------------- ----------- -------- ------------ ------------ (In thousands) Net sales $ 70,687 $ 9,133 $ 34,932 $(31,443) $ 83,309 ======== ======= ======== ======== ======== Operating loss $(12,450) $ (191) $ (1,349) $ (194) $(14,184) ======== ======= ======== ======== ======== Long-lived assets $ 4,428 $ 135 $ -- $ -- $ 4,563 ======== ======= ======== ======== ========
37 40 Notes to Consolidated Financial Statements
Year Ended September 30, 1998 ----------------------------------------------------- Adjustments/ United States Taiwan Eliminations Consolidated ------------- --------- ------------ ------------ (In thousands) Net sales $ 85,378 $ 117,404 $ (71,650) $ 131,132 ========= ========= ========= ========= Operating income (loss) $ (56,374) $ 3,266 $ 55 $ (53,053) ========= ========= ========= ========= Long-lived assets $ 6,366 $ 37,950 $ -- $ 44,316 ========= ========= ========= =========
Year Ended September 30, 1997 ----------------------------------------------------- Adjustments/ United States Taiwan Eliminations Consolidated ------------- --------- ------------ ------------ (In thousands) Net sales $ 66,833 $ 114,809 $ (73,381) $ 108,261 ========= ========= ========= ========= Operating income (loss) $ (20,504) $ 8,995 $ 733 $ (10,776) ========= ========= ========= ========= Long-lived assets $ 8,817 $ 25,219 $ -- $ 34,036 ========= ========= ========= =========
Transfers between geographic areas are accounted for at amounts which are generally above cost and consistent with rules and regulations of governing tax authorities. Such transfers are eliminated in the consolidated financial statements. Long-lived assets by geographic area are those assets used in the Company's operations in each area. Export sales by the U.S. operating company were approximately $21,587,000, $26,393,000, and $14,125,000, for the years ended September 30, 1999, 1998, and 1997, respectively. Net foreign currency transaction gains (losses) of approximately $594,000, $(3,188,000), and $(17,000) for the years ended September 30, 1999, 1998 and 1997, respectively, were primarily the result of the settlement of intercompany transactions and are included in the determination of net income. NOTE 15. COMMITMENTS AND CONTINGENCIES PATENTS AND LICENSES In the semiconductor industry it is typical for companies to receive notices from time to time 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. There can be no assurance that other companies will not in the future pursue claims against the Company with respect to the alleged infringement of patents, maskwork rights, copyrights or other intellectual property owned by third parties. If it appears necessary or desirable, the Company may seek licenses under patents that it is alleged to be infringing. Although patent holders commonly offer such licenses, there is no assurance that any licenses will be offered or that the terms of any offered licenses will be acceptable to the Company. The failure to obtain a license under a key patent or intellectual property right from a third party for technology used by the Company could cause the Company to incur substantial liabilities and to suspend the manufacture of the products utilizing the invention or to attempt to develop non-infringing products, 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 the alleged infringement by the Company of 38 41 Notes to Consolidated Financial Statements third party intellectual property rights or litigation to assert and protect patents or other intellectual property rights of the Company. Any litigation relating to patent infringement or other intellectual property matters could result in substantial cost and diversion of resources by the Company which could materially and adversely affect the Company's business and operating results. 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%. For entries after March 31, 1999, 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 whether the DOC conducts an administrative review of imports entered, between April 1, 1999 and March 31, 2000 and if so, on the results of the DOC review. The Company will pay duty deposits on Taiwan SRAM entries before that date at the deposit rate. The Company has retained legal counsel to defend its interests in the antidumping proceedings. In addition, certain aspects of the antidumping determination are being challenged in federal court proceedings by respondents to the investigation, and these proceedings could result in the termination of this antidumping case. Duties calculated and assessed by the government could have a material adverse affect on the Company's gross margins and profits. There can be no assurance that any reviews or proceedings will mitigate or eliminate antidumping duties. On October 22, 1998, Micron Technology filed an anti-dumping petition against DRAMs fabricated in Taiwan. Currently, the Company's DRAM products are fabricated in Taiwan. Subsequent to the petition filing the DOC established a general dumping duty deposit rate of 21.35% which would have applied to the Company. On December 2, 1999, the International Trade Commission ("ITC") informed the DOC that it had issued a negative final determination in the DRAM investigation. The DRAM investigation has, therefore, been terminated and there is presently no antidumping duty required. The ITC ruling can be appealed in federal court, but as of December 6, 1999, no such appeal has been filed. LEASES The Company leases its facilities under operating lease agreements that expire at various dates through 2006. The Company entered into a ten year lease effective December 1, 1996 for its headquarters facility in Santa Clara, California. The Company subleases to NexFlash approximately 9,000 square feet. The sublease expires in September 2000. Additionally, the Company subleases approximately 24,000 square feet to a third party. The sublease expires in March 2000. Minimum rental commitments under these leases are as follows (in thousands):
2000 (net of sublease income of $452) $ 983 2001 1,356 2002 1,401 2003 1,431 2004 1,451 Thereafter 3,739 -------- Total minimum rental commitments $ 10,361 ========
Total rental expense for the years ended September 30, 1999, 1998, and 1997 was approximately $1,050,000 (net of sublease income of $630,000), $1,078,000 (net of sublease income of $375,000) and $1,372,000 (net of sublease income of $148,000), respectively. 39 42 Notes to Consolidated Financial Statements COMMITMENTS TO WAFER FABRICATION FACILITIES In June 1996, the Company entered into a business venture "WaferTech, LLC" with TSMC, Altera, Analog Devices, and private investors to build a wafer fabrication facility in Camas, Washington. The Company agreed to invest $31.2 million for a 4% equity interest in the venture and, as of September 30, 1998, all of this amount had been paid. In December 1998, the Company agreed to sell approximately 33% of its investment in WaferTech to TSMC for $10.0 million. The transaction was completed in January 1999, and the Company retains a 2.67% interest in WaferTech. The Company has also agreed to certain minimum wafer purchase commitments with its foundry partners in exchange for wafer capacity commitments. In fiscal 1995, the Company entered into an agreement with TSMC pursuant to which the Company agreed to acquire specified wafer capacity through 2001. The Company also agreed to make certain annual payments, the remaining amount of which totals approximately $9.6 million through 2001, to TSMC for additional capacity above the annual base capacity. Wafer purchases in any given year are first applied to the base capacity and then to the Company's $9.6 million obligation. As a result, the $9.6 million may be subject to forfeiture if the Company does not purchase the base capacity and additional capacity for which it has contracted. To date, the Company has never forfeited any amounts under this agreement. The Company also has minimum purchase obligations to TSMC related to WaferTech LLC. The Company is obligated to purchase from WaferTech or TSMC a minimum of 2.3% of WaferTech's installed capacity. Initial wafer outs occurred in the second half of calendar 1998. Although the Company has rights to re-schedule or assign capacity to another party, there can be no assurance that such re-schedule or assignment would be successfully accomplished. Should the Company fail to re-schedule or assign unneeded capacity, the Company's business and operating results could be adversely affected. NOTE 16. 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 by a percentage reduction in their salaries, up to $10,000 for 1999. The Company elected to make no contributions during the years ended September 30, 1999, 1998 and 1997. Administrative expenses relating to the plan are insignificant. NOTE 17. SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended September 30, --------------------------------- 1999 1998 1997 ------- ------- ------- (In thousands) Cash paid for interest $ 1,234 $ 2,896 $ 1,431 Cash paid (refunded) for income taxes (1,986) 2,561 (5,004) Fixed assets acquired for accounts payable -- 4,440 -- Stock issued in acquisition of Nexcom -- 6,377 -- Assets acquired from Nexcom -- 2,515 -- Liabilities assumed from Nexcom -- 3,762 --
NOTE 18. TRANSACTIONS On December 3, 1997, the Company completed its acquisition of Nexcom Technology, Inc. ("Nexcom") in exchange for the issuance of 772,693 shares of Common Stock, $0.5 million in cash, and the assumption of $1.2 million of net liabilities (total consideration of approximately $8.5 million). The transaction was accounted for as a purchase and resulted in an in-process technology charge of approximately $7.1 million in the Company's December 31, 1997 quarter. Nexcom was formed in 1990 and was engaged primarily in the research and development of non-volatile flash memory technology. On June 29, 1998, the Company sold approximately 46% of ISSI-Taiwan to a group of private investors. The price was privately negotiated between the parties. Cash proceeds from the transaction totaled $35.5 million net of withholding and transaction taxes. The transaction resulted in a pre-tax gain of $10.5 million which is recorded in the Company's June 30, 1998 quarter. 40 43 Notes to Consolidated Financial Statements Effective October 1, 1998, the Company transferred certain employees and joint ownership of certain patents and related Flash technology to a newly formed company, NexFlash Technologies, Inc. The Company and NexFlash jointly own existing Flash related patents, and NexFlash will continue development of Flash products. The Company owns approximately 32% of NexFlash, and ISSI-Taiwan owns approximately 17%. ISSI's President is Chairman of 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 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. The warrants expire on November 4, 2000. In December 1998, the Company sold an additional 20% of its holdings in ISSI-Taiwan 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 ISSI-Taiwan and accounted for ISSI-Taiwan on the equity basis. ISSI-Taiwan was consolidated in the accompanying statement of operations until December 31, 1998 when the additional 20% of the Company's holdings were sold. The accompanying consolidated balance sheet as of September 30, 1999 reflects ISSI-Taiwan 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 retains a 2.67% interest in WaferTech. The Company recorded a 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 gain of approximately $1.8 million in the June 1999 quarter related to this transaction. The gain results from adjustments to the original acquisition value for fluctuations in the New Taiwanese Dollar. NOTE 19. RELATED PARTY TRANSACTIONS As of December 31, 1998, at the time of deconsolidation, the Company had an accounts receivable balance of approximately $8,783,000, which included advances to ISSI-Taiwan against future inventory purchases. For the nine months ended September 30, 1999, the Company sold approximately $1,412,000 of memory products to ISSI-Taiwan, in which it has approximately 43% ownership. The Company had an accounts receivable balance from ISSI-Taiwan at September 30, 1999 of approximately $1,915,000. The Company purchases goods and contract manufacturing services from ISSI-Taiwan. As of December 31, 1998, at the time of deconsolidation, the Company had an accounts payable balance to ISSI-Taiwan of approximately $1,947,000. Purchases of goods and services in the nine months ended September 30, 1999 were approximately $39,054,000. The Company had an accounts payable balance to ISSI-Taiwan at September 30, 1999 of approximately $9,231,000. For the eleven months ended September 30, 1999, the Company sold approximately $1,542,000 of memory products to NexFlash, in which it has approximately 32% ownership. In addition, the Company received approximately $167,000 in sublease income from NexFlash (See Note 15). The Company had an accounts receivable balance from NexFlash at September 30, 1999 of approximately $1,291,000. 41 44 Notes to Consolidated Financial Statements NOTE 20. INVESTMENT IN ISSI-TAIWAN The following summarizes financial information for ISSI-Taiwan, an equity investee, as of September 30, 1999 and for the period from January 1, 1999 through September 30, 1999.
1999 ------------- (In thousands) Current assets $59,629 Property, plant, and equipment and other assets 45,294 Current liabilities 39,449 Long-term debt 13,900 Net sales 82,381 Gross profit 12,494 Net income 4,764
NOTE 21. SUBSEQUENT EVENT ADDITIONAL INVESTMENT WAFERTECH 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 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 is $23.5 million. 42 45 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 7, 2000, 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 Loss Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Stockholders' Equity Notes to Consolidated Financial Statements 43 46 2. FINANCIAL STATEMENT SCHEDULE The following financial statement schedule of Integrated Silicon Solution, Inc. is contained in Part IV, Item 14(d) of this report on Form 10-K: Schedule II-Valuation and Qualifying Accounts 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(6) 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) Information and Registration Rights Agreement dated as of March 17, 1993 among the Registrant and certain holders of the Registrant's Common Stock, as amended. 10.5(1)* Letter Agreement dated September 14, 1994 between Taiwan Semiconductor Manufacturing Company, Ltd. ("TSMC") and the Registrant. 10.6(1)* Joint Development Contract between Chartered Semiconductor Manufacturing Pte. Ltd. and the Registrant dated July 21, 1994. 10.7(1) Subscription and Shareholders Agreement Relating to Valery Limited dated March 30, 1994. 10.8(1) Long term line of credit between Bank of Communication and Registrant. 10.9(1) Short term line of credit between International Commercial Bank of China and Registrant. 10.10(1)*** 1995 Director Stock Option Plan. 10.11(2)* Option I Agreement between the Registrant and TSMC dated April 21, 1995. 10.12(2)* Option II Agreement between the Registrant and TSMC dated April 21, 1995. 10.13(3)* UMC/ISSI-Taiwan Foundry Venture Agreement dated August 31, 1995. 10.14(3)* UMC/ISSI-Taiwan Fabven Foundry Capacity Agreement dated August 31, 1995. 10.15(8) Second Amended and Restated Limited Liability Company Agreement of WaferTech, LLC, a Delaware limited liability company, dated as of October 28, 1997. 10.16(4)** Purchase Agreement by and between Taiwan Semiconductor Manufacturing Corporation, as Seller, and Analog Devices, Inc., Altera Corporation and Integrated Silicon Solution, Inc., as Buyers. 10.17(5)* Amendment to Option I and Option II Agreement between the Company and TSMC dated September 23, 1996. 10.18(5) Sublease Agreement for facility located at 2231 Lawson Lane, Santa Clara, California. 10.19(7)*** Nonstatutory Stock Plan 10.20(8)*** 1998 ISSI-Taiwan Stock Plan 10.21(9)*** 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 46). 27.1 Financial Data Schedule
- ------------------------- 44 47 * Confidential treatment granted for certain portions of this exhibit. ** Confidential treatment requested for certain portions of this exhibit. The portions of this exhibit for which confidential treatment is being requested have been blacked out in the copies filed with the related report and the confidential portions so omitted have been filed separately with the Securities and Exchange Commission. *** 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, 1995. (4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1996. (5) Incorporated by reference to the Company's Annual Report on Form 10-K for the period ended September 30, 1996. (6) Incorporated by reference to the Company's Annual Report on Form 10-K for the period ended September 30, 1997. (7) Incorporated by reference to the Company's Registration Statement on Form S-8 filed April 30, 1997. (8) Incorporated by reference to the Company's Annual Report on Form 10-K for the period ended September 30, 1998 (9) 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 45 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 22nd day of December, 1999. INTEGRATED SILICON SOLUTION, INC. By /s/ Gary L. Fischer ------------------------------------------------- Gary L. Fischer Executive Vice President, Office of the 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 22, 1999 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, Chief Executive Officer, - ------------------------------- (Jimmy S.M. Lee) and President (Principal Executive Officer) /s/ Gary L. Fischer Executive Vice President, Office of the President - ------------------------------- and Chief Financial Officer (Principal Financial (Gary L. Fischer) and Accounting Officer) /s/ Pauline L. Alker Director - ------------------------------- (Pauline L. Alker) /s/ Lip-Bu Tan Director - ------------------------------- (Lip-Bu Tan) /s/ Hide Tanigami Director - ------------------------------- (Hide Tanigami) /s/ Chun Win Wong Director - ------------------------------- (Chun Win Wong)
46 49 ITEM 14(d). FINANCIAL STATEMENT SCHEDULE INTEGRATED SILICON SOLUTION, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Addition Balance at Charged to Balance Beginning Costs and at End of Period Expenses Deductions of Period ----------- ---------- --------- ---------- Year ended September 30, 1997: Allowance for doubtful accounts.. 2,002 675 (409)(1) 2,268 Sales returns reserve............ 2,233 1,713 (1,510) 2,436 Year ended September 30, 1998: Allowance for doubtful accounts.. 2,268 - (464)(1) 1,804 Sales returns reserve............ 2,436 858 (1,419) 1,875 Year ended September 30, 1999: Allowance for doubtful accounts.. 1,804 - (308)(1)(2) 1,496 ............. Sales returns reserve............ 1,875 - (854)(3) 1,021
(1) Uncollectible accounts written off, net of recoveries (2) Includes reduction of $302 resulting from the deconsolidation of ISSI-Taiwan (3) Includes reduction of $58 resulting from the deconsolidation of ISSI-Taiwan 47 50
Exhibit Number Description of Document -------- ----------------------- 2.1(6) 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) Information and Registration Rights Agreement dated as of March 17, 1993 among the Registrant and certain holders of the Registrant's Common Stock, as amended. 10.5(1)* Letter Agreement dated September 14, 1994 between Taiwan Semiconductor Manufacturing Company, Ltd. ("TSMC") and the Registrant. 10.6(1)* Joint Development Contract between Chartered Semiconductor Manufacturing Pte. Ltd. and the Registrant dated July 21, 1994. 10.7(1) Subscription and Shareholders Agreement Relating to Valery Limited dated March 30, 1994. 10.8(1) Long term line of credit between Bank of Communication and Registrant. 10.9(1) Short term line of credit between International Commercial Bank of China and Registrant. 10.10(1)*** 1995 Director Stock Option Plan. 10.11(2)* Option I Agreement between the Registrant and TSMC dated April 21, 1995. 10.12(2)* Option II Agreement between the Registrant and TSMC dated April 21, 1995. 10.13(3)* UMC/ISSI-Taiwan Foundry Venture Agreement dated August 31, 1995. 10.14(3)* UMC/ISSI-Taiwan Fabven Foundry Capacity Agreement dated August 31, 1995. 10.15(8) Second Amended and Restated Limited Liability Company Agreement of WaferTech, LLC, a Delaware limited liability company, dated as of October 28, 1997. 10.16(4)** Purchase Agreement by and between Taiwan Semiconductor Manufacturing Corporation, as Seller, and Analog Devices, Inc., Altera Corporation and Integrated Silicon Solution, Inc., as Buyers. 10.17(5)* Amendment to Option I and Option II Agreement between the Company and TSMC dated September 23, 1996. 10.18(5) Sublease Agreement for facility located at 2231 Lawson Lane, Santa Clara, California. 10.19(7)*** Nonstatutory Stock Plan 10.20(8)*** 1998 ISSI-Taiwan Stock Plan 10.21(9)*** 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 46). 27.1 Financial Data Schedule * Confidential treatment granted for certain portions of this exhibit. ** Confidential treatment requested for certain portions of this exhibit. The portions of this exhibit for which confidential treatment is being requested have been blacked out in the copies filed with the related report and the confidential portions so omitted have been filed separately with the Securities and Exchange Commission. *** 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, 1995. (4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1996. (5) Incorporated by reference to the Company's Annual Report on Form 10-K for the period ended September 30, 1996. (6) Incorporated by reference to the Company's Annual Report on Form 10-K for the period ended September 30, 1997. (7) Incorporated by reference to the Company's Registration Statement on Form S-8 filed April 30, 1997. (8) Incorporated by reference to the Company's Annual Report on Form 10-K for the period ended September 30, 1998 (9) 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 EX-23.1 2 EX-23.1 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, 333-21635, 333-44281, 333-50679, and No. 333-76991) 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 29, 1999, 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, 1999. /s/ ERNST & YOUNG LLP San Jose, California December 28, 1999 EX-27.1 3 EX-27.1
5 1,000 US DOLLARS YEAR SEP-30-1999 OCT-01-1998 SEP-30-1999 1 15,975 7,650 16,672 1,496 29,681 70,121 23,742 19,179 121,831 28,057 0 0 0 2 88,776 121,831 83,309 83,309 66,816 66,816 0 0 1,039 (10,309) 608 (9,511) 0 0 0 (9,511) (0.48) (0.48)
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