-----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, Cw/JT13ZfYYDIH+1bvdFRS1I0iMlY3g+6LFc1Vd3ElEohS0bJ+dS1BR2ZCDHFgHr GOjlmEdhJsv9+T6IhvioQA== 0001095811-01-001149.txt : 20010214 0001095811-01-001149.hdr.sgml : 20010214 ACCESSION NUMBER: 0001095811-01-001149 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED SILICON SOLUTION INC CENTRAL INDEX KEY: 0000854701 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770199971 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23084 FILM NUMBER: 1536667 BUSINESS ADDRESS: STREET 1: 2231 LAWSON LANE CITY: SANTA CLARA STATE: CA ZIP: 95054-3311 BUSINESS PHONE: 4085880800 MAIL ADDRESS: STREET 1: 680 ALMANOR AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 10-Q 1 f69434e10-q.txt FORM 10-Q PERIOD ENDED DECEMBER 31, 2000 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- ----------------------- Commission file number 000-23084 ---------------------------------------------------------- INTEGRATED SILICON SOLUTION, INC. Delaware 77-0199971 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2231 Lawson Lane, Santa Clara, California 95054 - -------------------------------------------------------------------------------- (Address of principal executive offices) zip code Registrant's telephone number, including area code (408) 588-0800 ------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] The number of outstanding shares of the registrant's Common Stock as of January 31, 2001 was 26,095,321 ---------- 2 INTEGRATED SILICON SOLUTION, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data)
THREE MONTHS ENDED DECEMBER 31, ---------------------- 2000 1999 -------- -------- Net sales (See Note 13) $ 65,229 $ 23,251 Cost of sales 43,054 16,971 -------- -------- Gross Profit 22,175 6,280 -------- -------- Operating Expenses: Research and development 6,717 3,619 Selling, general and administrative 6,230 3,207 -------- -------- Total operating expenses 12,947 6,826 -------- -------- Operating income (loss) 9,228 (546) Gain on sale of investments 17,202 - Other income (expense), net 1,507 (56) -------- -------- Income (loss) before income taxes and equity in net income of affiliated companies 27,937 (602) Provision for income taxes 6,985 50 -------- -------- Income (loss) before equity in net income of affiliated companies 20,952 (652) Equity in net income of affiliated companies 4,123 1,146 -------- -------- Net income $ 25,075 $ 494 ======== ======== Basic net income per share $ 0.97 $ 0.02 ======== ======== Shares used in basic per share calculation 25,822 20,378 ======== ======== Diluted net income per share $ 0.91 $ 0.02 ======== ======== Shares used in diluted per share calculation 27,407 22,498 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 INTEGRATED SILICON SOLUTION, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In thousands)
THREE MONTHS ENDED DECEMBER 31, ----------------------- 2000 1999 -------- -------- Net income $ 25,075 $ 494 Other comprehensive income (loss), net of tax: Change in cumulative translation adjustment (1,011) 293 -------- -------- Comprehensive income $ 24,064 $ 787 ======== ========
See accompanying notes to condensed consolidated financial statements. 4 INTEGRATED SILICON SOLUTION, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
DECEMBER 31, SEPTEMBER 30, 2000 2000 ----------- ------------- (unaudited) (1) ASSETS Current assets: Cash and cash equivalents $ 81,453 $ 38,778 Short-term investments 57,650 58,800 Accounts receivable 43,642 26,525 Accounts receivable from related parties (See Note 13) 1,272 1,526 Inventories 64,392 63,217 Other current assets 3,021 1,271 --------- --------- Total current assets 251,430 190,117 Property, equipment, and leasehold improvements, net 5,037 5,429 Other assets 45,832 65,178 --------- --------- Total assets $ 302,299 $ 260,724 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 32,433 $ 20,411 Accounts payable to related parties (See Note 13) 4,823 13,043 Accrued compensation and benefits 3,545 2,424 Accrued expenses 13,206 7,513 Income tax payable 7,405 648 Current portion of long-term obligations 144 140 --------- --------- Total current liabilities 61,556 44,179 Income tax payable - non-current 4,996 4,996 Long-term obligations 276 314 Stockholders' equity: Preferred stock - - Common stock 3 3 Additional paid-in capital 218,012 217,845 Retained earnings (accumulated deficit) 22,249 (2,826) Accumulated comprehensive income (4,780) (3,769) Unearned compensation (13) (18) --------- --------- Total stockholders' equity 235,471 211,235 --------- --------- Total liabilities and stockholders' equity $ 302,299 $ 260,724 ========= =========
- --------------- (1) Derived from audited financial statements. See accompanying notes to condensed consolidated financial statements. 5 INTEGRATED SILICON SOLUTION, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
THREE MONTHS ENDED DECEMBER 31, ----------------------- 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 25,075 $ 494 Gain on sale of investments (17,202) - Depreciation and amortization 789 725 Equity in net income of affiliated companies (4,123) (1,146) Other charges to net income not affecting cash - 200 Net effect of changes in current and other assets and current liabilities (1,821) (5,200) -------- -------- Cash provided by (used in) operating activities 2,718 (4,927) CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (397) (360) Purchases of available-for-sale securities (15,100) - Sales of available-for-sale securities 16,250 2,500 Proceeds from partial sale of Integrated Circuit Solution, Inc. ("ICSI") 5,147 - Investment in Wafertech, LLC - (2,667) Proceeds from sale of Wafertech, LLC 40,669 - Investment in Semiconductor Manufacturing International Corp. ("SMIC") (6,750) - -------- -------- Cash provided by (used in) investing activities 39,819 (527) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock 172 948 Principal payments on notes payable and long-term obligations (34) (50) -------- -------- Cash provided by financing activities 138 898 -------- -------- Net increase (decrease) in cash and cash equivalents 42,675 (4,556) Cash and cash equivalents at beginning of period 38,778 15,975 -------- -------- Cash and cash equivalents at end of period $ 81,453 $ 11,419 ======== ========
See accompanying notes to condensed consolidated financial statements. 6 INTEGRATED SILICON SOLUTION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying condensed financial statements include the accounts of Integrated Silicon Solution, Inc. (the "Company") and its consolidated majority owned subsidiaries, after elimination of all significant intercompany accounts and transactions and have been prepared in accordance with generally accepted accounting principles for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three months ended December 31, 2000 are not necessarily indicative of the results that may be expected for the year ending September 30, 2001. 2. CONCENTRATIONS Sales to 3Com accounted for approximately 9% and 12% of total net sales for the quarters ended December 31, 2000 and December 31, 1999, respectively. Sales to Flextronics International accounted for approximately 14% and 12% of total net sales for the quarters ended December 31, 2000 and December 31, 1999, respectively. Substantially all of the sales to Flextronics were for products to be delivered to Cisco Systems Inc. The Company uses Integrated Circuit Solution Incorporation ("ICSI") for coordinating wafer purchases, assembly, and testing for a majority of its inventory. 3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash, cash equivalents and short-term investments consisted of the following:
(In thousands) DECEMBER 31 SEPTEMBER 30 2000 2000 -------- -------- Cash $ 27,297 $ 10,624 Money market instruments 54,156 28,154 Municipal bonds due in more than 3 years 57,650 58,800 -------- -------- $139,103 $ 97,578 ======== ========
5 7 INTEGRATED SILICON SOLUTION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVENTORIES The following is a summary of inventories by major category:
(In thousands) DECEMBER 31 SEPTEMBER 30 2000 2000 ------- ------- Purchased components $15,525 $17,566 Work-in-process 8,334 11,737 Finished goods 40,533 33,914 ------- ------- $64,392 $63,217 ======= =======
5. OTHER ASSETS Other assets consisted of the following:
(In thousands) DECEMBER 31 SEPTEMBER 30 2000 2000 ------- ------- Investment in ICSI $29,788 $31,525 Investment in WaferTech LLC - 23,467 Investment in SMIC 11,350 4,600 Other 4,694 5,586 ------- ------- $45,832 $65,178 ======= =======
6. INCOME TAXES The provision for income taxes for the three month period ended December 31, 2000 is principally comprised of taxes on U.S. earnings and to a lesser extent taxes on foreign earnings. The income tax provision for the three month period ended December 31, 1999 is primarily foreign withholding taxes. The effective tax rate of 25% for the three months ended December 31, 2000 differs from the federal statutory rate as a result of the reversal of valuation allowances previously established. A portion of the valuation allowance previously established is now being realized as a result of the current taxable income. The 25% effective tax rate is based on current tax law, the current estimate of earnings and the expected distribution of income among various tax jurisdictions, and is subject to change. 6 8 INTEGRATED SILICON SOLUTION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. NET INCOME PER SHARE The Company calculates earnings per share in accordance with the Financial Accounting Standards Board Statement No. 128, "Earnings Per Share." The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
THREE MONTHS ENDED DECEMBER 31, -------------------- 2000 1999 ------- ------- Numerator for basic and diluted net income per share: Net income $25,075 $ 494 ======= ======= Denominator for basic net income per share: Weighted average common shares outstanding 25,822 20,378 Denominator for basic net income per share 25,822 20,378 ======= ======= Dilutive stock options 1,514 1,664 Dilutive warrants 71 456 ------- ------- Denominator for diluted net income per share 27,407 22,498 ======= ======= Basic net income per share $ 0.97 $ 0.02 ======= ======= Diluted net income per share $ 0.91 $ 0.02 ======= =======
The above diluted calculation does not include approximately 1,158,000 and 346,000 shares attributable to options as of December 31, 2000 and 1999, respectively, as their impact would be anti-dilutive. 8. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 9. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition", which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company will be required to adopt the provisions of SAB 101 in the fourth quarter of fiscal 2001. The Company believes that its revenue recognition policy is in compliance with the provisions of SAB 101 and that the adoption of SAB 101 will have no material effect on its financial position or results of operations. 7 9 INTEGRATED SILICON SOLUTION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In June 1998, the Financial Accounting Standards Board issued Statement 133, ("FAS 133") "Accounting for Derivative Instruments and Hedging Activities", which is required to be adopted in fiscal years beginning after June 15, 2000. The Company adopted the provisions of FAS 133 in the first quarter of fiscal 2001. Because the Company's did not use derivatives, the adoption of FAS 133 did not have an impact on the Company's earnings or its financial position. 10. LITIGATION In April 1998, the U.S. Department of Commerce ("DOC") published an antidumping duty order on imports of SRAMs from Taiwan, from where we currently import a majority of our SRAMs. As a consequence of this antidumping duty order, we are required to post a cash deposit on imports of Taiwan fabricated SRAM wafers or devices at the ad valorem rate of 7.56%. On April 28, 2000, Micron Technology Inc. ("Micron") requested an administrative review of our Taiwan fabricated SRAMs for the period from April 1, 1999 through March 31, 2000. For entries during this period, the cash deposits could be returned to us or, alternatively, we could forfeit amounts deposited and owe duties and interest in addition to the amounts deposited, depending on results of the DOC administrative review. The final results of the review are expected in calendar year 2001 and will establish a new deposit rate for subsequent entries, which may be higher or lower than the current rate. We have retained legal counsel to defend our interests in the antidumping proceedings. In addition, respondents (including ISSI) have challenged certain aspects of the antidumping determination in federal court proceedings. On August 29, 2000, pursuant to an appeal by ISSI and other respondents, the U.S. Court of International Trade affirmed the International Trade Commission ("ITC") decision to reverse the ITC's earlier ruling supporting the imposition of antidumping duties and rule instead in favor of respondents. This decision by the Court of International Trade has been appealed by Micron to the Federal Circuit Court of Appeals. If such appeal is not successful, the antidumping case will be terminated, the order will be revoked, and we will be entitled to a full refund of cash deposits. Pending resolution of the appeal, the DOC will continue to administer the antidumping order. Duties calculated and assessed by the government could have a material adverse affect on our gross margins and profits. Any reviews or proceedings might not mitigate or eliminate antidumping duties. 11. LONG TERM OBLIGATIONS The Company leases certain of its equipment under a capital lease. The lease is collateralized by the underlying assets. At December 31, 2000, property and equipment with a cost of $600,000 was subject to this financing arrangement. Related accumulated amortization at December 31, 2000 amounted to $162,500. Under the terms of the lease, the Company owes monthly payments of $15,108 through September 1, 2003. Remaining principle and interest payments were $419,953 and $63,605, respectively, at December 31, 2000. 8 10 INTEGRATED SILICON SOLUTION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. GEOGRAPHIC AND SEGMENT INFORMATION The Company has one operating segment, which is to design, develop, and market high-performance SRAM, DRAM, and other memory products. The following table summarizes the Company's operations in different geographic areas:
THREE MONTHS ENDED DECEMBER 31, ------------------------------- 2000 1999 -------- -------- (In thousands) Net Sales To customer from U.S. operations $ 59,362 $ 19,380 To customer from Hong Kong operations 5,867 3,871 To customer from China operations - - Intercompany from U.S. 7,269 3,750 Intercompany from Hong Kong 96 141 -------- -------- 72,594 27,142 -------- -------- Eliminations (7,365) (3,891) -------- -------- Total net sales $ 65,229 $ 23,251 ======== ======== Operating income (loss) U.S. operations $ 9,726 $ (404) Hong Kong operations 27 462 China operations (156) - -------- -------- 9,597 58 -------- -------- Eliminations (369) (604) -------- -------- Total operating income (loss) $ 9,228 $ (546) ======== ======== Long-lived assets U.S. operations $ 4,723 $ 4,665 Hong Kong operations 91 133 China operations 223 - -------- -------- Total long-lived assets $ 5,037 $ 4,798 ======== ========
13. RELATED PARTY TRANSACTIONS For the three months ended December 31, 2000 and December 31, 1999, the Company sold approximately $180,000 and $520,000, respectively, of memory products to ICSI in which the Company currently has approximately a 33% ownership. At December 31, 2000 and 1999, the Company had an accounts receivable balance from ICSI of approximately $399,000 and $1,272,000, respectively. The Company purchases goods and contract manufacturing services from ICSI. For the three months ended December 31, 2000 and December 31, 1999, purchases of goods and services were approximately $7,441,000 and $16,319,000, respectively. At December 31, 2000 and 1999, the Company had an accounts payable balance to ICSI of approximately $4,823,000 and $11,628,000, respectively. 9 11 For the three months ended December 31, 2000 and December 31, 1999, the Company sold approximately $0 and $115,000, respectively, of memory products to NexFlash, in which the Company currently has approximately a 32% ownership. In addition, the Company received approximately $42,000 in sublease income from NexFlash in the both the three months ended December 31, 2000 and December 31, 1999. The Company also provides NexFlash various administrative support services for which it is reimbursed. At December 31, 2000 and 1999, the Company had an accounts receivable balance from NexFlash of approximately $405,000 and $984,000, respectively. The Company purchases goods and services from NexFlash. For the three months ended December 31, 2000 and December 31, 1999, purchases of goods and services were approximately $0 and $18,000, respectively. At December 31, 2000 and 1999, the Company had an accounts payable balance to NexFlash of approximately $0 and $18,000, respectively. The Company provides goods and services to GetSilicon.Net, an equity investee, in which the Company currently has approximately a 32% ownership. For the three months ended December 31, 2000 and December 31, 1999, the Company provided goods and services of approximately $468,000 and $0, respectively, to GetSilicon.Net. At December 31, 2000 and 1999, the Company had an accounts receivable balance from GetSilicon.Net of approximately $468,000 and $0, respectively. 14. INVESTMENT IN INTEGRATED CIRCUIT SOLUTION INCORPORATION ("ICSI") The following summarizes financial information for ICSI, an equity investee. (In thousands)
DECEMBER 31, SEPTEMBER 30, 2000 2000 -------- -------- Current assets $113,528 $109,428 Property, plant, and equipment and other assets 47,852 45,873 Current liabilities 51,645 53,037 Long-term debt 12,817 15,517
THREE MONTHS ENDED DECEMBER 31, ------------------ 2000 1999 -------- -------- Net sales $ 53,357 $ 27,116 Gross profit 23,380 7,007 Net income 14,191 3,135
15. TRANSACTIONS In December 2000, the Company sold its investment of $23.5 million in WaferTech to Taiwan Semiconductor Manufacturing Corporation for $40.7 million resulting in a gain of $17.2 million. On January 16, 2001, ICSI completed an Initial Public Offering in Taiwan. As a result of shares of ICSI sold by the Company in the IPO, the Company will record gross proceeds of approximately $7.4 million in the March 2001 quarter. 10 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We have made forward-looking statements in this report on Form 10-Q that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of our operations. Also, when we use such words as "believe," "expect," "anticipate," or similar expressions, we are making forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this report on Form 10-Q. BACKGROUND Integrated Silicon Solution, Inc. was founded in October 1988. We design, develop and market high performance memory semiconductors used in Internet access devices, networking equipment, telecom and mobile communications equipment, and computer peripherals. Our high speed and low power SRAMs and our low to medium density DRAMs enable customers to design products that meet the demanding connectivity and portability requirements of the data communications and wireless communications markets. Our objective is to capitalize on major trends such as the expansion of the communications and Internet infrastructure, the proliferation of wireless devices, and other trends in electronics technologies. Our goal is to be a focused supplier of high performance memories targeting the growing connectivity and communications markets. We believe our close relationship with leading silicon wafer foundries gives us access to the advanced wafer process technology required to design and manufacture high performance memories. We entered into our first development program with Taiwan Semiconductor Manufacturing Corporation ("TSMC") in 1990 and our next development program with Chartered Semiconductor in 1994 and have also worked closely with United Microelectronics Corporation ("UMC") since 1995. Through this collaborative strategy, we have been at the forefront in utilizing the most advanced process technology for memories and in securing access to wafer capacity. We believe our ability to design and develop high performance, cost-effective products, and our collaborative development with our manufacturing partners utilizing state-of-the-art process technology, gives us a competitive advantage. RESULTS OF OPERATIONS Our financial results for fiscal 2001 and fiscal 2000 reflect accounting for ICSI, NexFlash and GetSilicon.Net on the equity basis and include our percentage share of the results of their respective operations. At December 31, 2000, we owned approximately 33% of ICSI, approximately 32% of Nexflash and approximately 32% of GetSilicon.Net. THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1999 Net Sales. Net sales consist principally of total product sales less estimated sales returns. Net sales increased by 181% to $65.2 million in the three months ended December 31, 2000 from $23.3 million in the three months ended December 31, 1999. The increase in sales was principally due to an increase in unit shipments of our SRAM products, specifically our 256K, 1024K, 32K x 32 and 64K x 16 SRAM products, as well as increased unit shipments of 16 megabit DRAM products. In addition, the average selling prices of our SRAM and DRAM products generally increased in the three months ended December 31, 2000 compared to the three months ended December 31, 1999. We anticipate that the average selling prices of our existing products will generally decline over time, although the rate of decline may fluctuate for certain products. There can be no assurance that such declines will be offset by higher volumes or by higher prices on newer products. Sales to Flextronics International accounted for approximately 14% and 12% of total net sales for the three months ended December 31, 2000 and December 31, 1999, respectively. Substantially all of the sales to Flextronics were for products to be delivered to Cisco Systems Inc. Sales to 3Com accounted for approximately 9% and 12% of total net sales for the three months ended December 31, 2000 and December 11 13 31, 1999, respectively. As sales to these customers are executed pursuant to purchase orders and no purchasing contract exists, these customers can cease doing business with us at any time. Net sales included licensing revenue of approximately $0.1 million and $0.6 million in the three months ended December 31, 2000 and December 31, 1999, respectively. Net sales included sales of approximately $0.2 million and $0.5 million to ICSI in the three months ended December 31, 2000 and December 31, 1999, respectively. Additionally, net sales include sales of approximately $0.1 million to NexFlash in the three months ended December 31, 1999. Gross Profit. Cost of sales includes die cost from the wafers acquired from foundries, subcontracted package costs, assembly costs and test costs, costs associated with in-house product testing, quality assurance and import duties. Gross profit increased 253% to $22.2 million in the three months ended December 31, 2000 from $6.3 million in the three months ended December 31, 1999. As a percentage of net sales, gross profit increased to 34.0% in the three months ended December 31, 2000 from 27.0% in the three months ended December 31, 1999. The increase in gross profit was principally due to an increase in unit shipments of our SRAM products, specifically our 256K, 1024K, 32K x 32 and 64K x 16 SRAM products, as well as increased unit shipments of 16 megabit DRAM products. In addition, increases in the average selling prices of our SRAM and DRAM products in the three months ended December 31, 2000 compared to the three months ended December 31, 1999 more than offset any increases in product costs resulting in higher gross margins. Our gross profit benefited from $0.1 million and $0.6 million of licensing revenue for the three months ended December 31, 2000 and December 31, 1999, respectively. We believe that the average selling price of our products will generally decline over time and, unless we are able to reduce our cost per unit to the extent necessary to offset such declines, the decline in average selling prices will result in a material decline in our gross margin. In addition, product unit costs could increase if suppliers raise prices, which could result in a material decline in our gross margin. Although we have product cost reduction programs in place for certain products that involve efforts to reduce internal costs and supplier costs, there can be no assurance that product costs will be reduced or that such reductions will be sufficient to offset the expected declines in average selling prices. We do not believe that such cost reduction efforts are likely to have a material adverse impact on the quality of our products or the level of service we provide. Research and Development. Research and development expenses increased by 86% to $6.7 million in the three months ended December 31, 2000 from $3.6 million in the three months ended December 31, 1999. As a percentage of net sales, research and development expenses decreased to 10.3% in the three months ended December 31, 2000 from 15.6% in the three months ended December 31, 1999. 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. We anticipate that our research and development expenses will increase in absolute dollars in future periods, although such expenses may fluctuate as a percentage of net sales. Selling, General and Administrative. Selling, general and administrative expenses increased by 94% to $6.2 million in the three months ended December 31, 2000 from $3.2 million in the three months ended December 31, 1999. As a percentage of net sales, selling, general and administrative expenses decreased to 9.6% in the three months ended December 31, 2000 from 13.8% in the three months ended December 31, 1999. The increase in absolute dollars was primarily the result of increased selling commissions associated with higher revenues in the three months ended December 31, 2000 compared to the three months ended December 31, 1999. In addition, payroll related expenses increased in the three months ended December 31, 2000 compared to the three months ended December 31, 1999 as a result of the addition of marketing, sales and administrative personnel to support our expanding business. We expect our selling, general and administrative expenses may increase in future quarters although such expenses may fluctuate as a percentage of net sales. Gain on sale of investments. In the three months ended December 31, 2000, we sold our interest in WaferTech to TSMC for approximately $40.7, which resulted in a pre-tax gain of $17.2 million. 12 14 Other income (expense), net. Other income (expense), net increased by $1.6 million to approximately $1.5 million in the three months ended December 31, 1999 from $(0.1) million in the three months ended December 31, 1999. The increase resulted from increased interest income as a result of higher cash balances from our follow-on public stock offering in February 2000. Provision for Income Taxes. The income tax provision for the three month period ended December 31, 1999 is primarily foreign withholding taxes. The provision for income taxes for the three month period ended December 31, 2000 is principally comprised of taxes on U.S. earnings and to a lesser extent taxes on foreign earnings. The effective tax rate of 25% for the three months ended December 31, 2000 differs from the federal statutory rate as a result of the reversal of valuation allowances previously established. A portion of the valuation allowance previously established is now being realized as a result of the current taxable income. The 25% effective tax rate is based on current tax law, the current estimate of earnings and the expected distribution of income among various tax jurisdictions, and is subject to change. Equity in net income of affiliated companies. Equity in net income of affiliated companies increased by $3.0 million to $4.1 million in the three months ended December 31, 2000 from $1.1 million in the three months ended December 31, 1999. This primarily reflects an increase in income from our percentage share of ICSI's financial results in the three months ended December 31, 2000 compared to the three months ended December 31, 1999. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2000, our principal sources of liquidity included cash, cash equivalents and short-term investments of approximately $139.1 million. During the three months ended December 31, 2000, operating activities provided cash of approximately $2.7 million. Cash provided by operations was primarily due to net income of $25.1 million adjusted for the gain on the sale of investments of $17.2 million, equity in net income of affiliated companies of $4.1 million and depreciation of $0.8 million. In addition, increases in income tax payable of $6.8 million, accrued liabilities of $5.7 million, and accounts payable of $3.8 million were partially offset by an increase in accounts receivable of $16.9 million. In the three months ended December 31, 2000, we generated $39.8 million from investing activities compared to $0.5 million used by investing activities in the three months ended December 31, 1999. The cash generated by investing activities primarily resulted from $40.7 million received from the sale of our investment in WaferTech to TSMC. We generated $5.1 million from the sale of additional shares of ICSI stock and $1.2 million from net sales of available-for-sale securities. We made an additional investment of $6.8 million in Semiconductor Manufacturing International Corp ("SMIC"), a foundry currently under construction in Shanghai, China. We used $0.4 million for the acquisition of equipment and other fixed assets. In the three months ended December 31, 2000, we made capital expenditures of approximately $0.4 million for engineering tools and computer software. We expect to spend approximately $10.0 million to purchase capital equipment during the next twelve months, principally for the purchase of design and engineering tools, additional test equipment and computer software and hardware. We generated $0.1 million from financing activities during the three months ended December 31, 2000 compared to $0.9 million in the three months ended December 31, 1999. The source of financing for the current quarter was proceeds from the issuance of common stock of $0.2 million from stock option exercises. In June 1998, we sold approximately 46% of ICSI to a group of private investors. In fiscal 1999 and fiscal 2000, we sold more of our holdings in ICSI to private investors. In the three months ended December 31, 2000, we received $5.1 million from the sale of shares of ICSI under the 1998 ISSI-Taiwan Stock Plan. As of December 31, 2000 we owned approximately 33% of ICSI. On January 16, 2001, ICSI completed an Initial 13 15 Public Offering in Taiwan. As a result of shares of ICSI sold by us in the IPO, we will record gross proceeds of approximately $7.4 million in the March 2001 quarter. In August 2000, we entered into a wafer fabrication facility investment agreement with SMIC. Under the terms of this agreement, we have committed to invest $30.0 million. We have received certain capacity commitments from SMIC. In the three months ended December 31, 2000 we made an additional investment of $6.8 million in SMIC. As of December 31, 2000, we had invested $11.4 million in this foundry, and an additional $7.5 million and $11.1 million are expected to be invested in fiscal years 2001 and 2002, respectively. In June 1996, we entered into a business venture called WaferTech, LLC with TSMC, Altera, Analog Devices, and private investors to build a wafer fabrication facility in Camas, Washington. In December 2000, we sold our investment of $23.5 million in WaferTech to TSMC for $40.7 million resulting in a gain of $17.2 million. In fiscal 1995, we agreed to certain minimum wafer purchase commitments with TSMC in exchange for wafer capacity commitments through 2001. We also agreed to make certain annual payments to TSMC, the remaining amount of which totals approximately $4.8 million through 2001, for additional capacity above the annual base capacity. Wafer purchases in any given year are first applied to the base capacity and then to our $4.8 million obligation. As a result, the $4.8 million may be subject to forfeiture if we do not purchase the base capacity and additional capacity for which we have contracted. We do not currently expect to forfeit any amounts or incur any losses associated with these capacity agreements. Although we have rights to re-schedule or assign capacity to another party, there can be no assurance that such re-schedule or assignment would be successfully accomplished. Should we fail to re-schedule or assign unneeded capacity, our business and operating results could be adversely affected. In April 1998, the U.S. Department of Commerce ("DOC") published an antidumping duty order on imports of SRAMs from Taiwan, from where we currently import a majority of our SRAMs. As a consequence of this antidumping duty order, we are required to post a cash deposit on imports of Taiwan fabricated SRAM wafers or devices at the ad valorem rate of 7.56%. On April 28, 2000, Micron Technology Inc. ("Micron") requested an administrative review of our Taiwan fabricated SRAMs for the period from April 1, 1999 through March 31, 2000. For entries during this period, the cash deposits could be returned to us or, alternatively, we could forfeit amounts deposited and owe duties and interest in addition to the amounts deposited, depending on results of the DOC administrative review. The final results of the review are expected in calendar year 2001 and will establish a new deposit rate for subsequent entries, which may be higher or lower than the current rate. We have retained legal counsel to defend our interests in the antidumping proceedings. In addition, respondents (including ISSI) have challenged certain aspects of the antidumping determination in federal court proceedings. On August 29, 2000, pursuant to an appeal by ISSI and other respondents, the U.S. Court of International Trade affirmed the International Trade Commission ("ITC") decision to reverse the ITC's earlier ruling supporting the imposition of antidumping duties and rule instead in favor of respondents. This decision by the Court of International Trade has been appealed by Micron to the Federal Circuit Court of Appeals. If such appeal is not successful, the antidumping case will be terminated, the order will be revoked, and we will be entitled to a full refund of cash deposits. Pending resolution of the appeal, the DOC will continue to administer the antidumping order. Duties calculated and assessed by the government could have a material adverse affect on our gross margins and profits. Any reviews or proceedings might not mitigate or eliminate antidumping duties. We believe our existing funds and available financing will satisfy our anticipated working capital and other cash requirements through at least the next 12 months. We may from time to time take actions to further increase our cash position through bank borrowings, sales of additional shares of ICSI, the disposition of 14 16 certain assets, equity financing or debt financing. From time to time, we also evaluate potential acquisitions and equity investments complementary to our memory expertise and market strategy, including investments in wafer fabrication foundries. To the extent we pursue such transactions, any such transaction could require us to seek additional equity or debt financing to fund such activities. There can be no assurance that any such additional financing could be obtained on terms acceptable to us, if at all. CERTAIN FACTORS WHICH MAY AFFECT OUR BUSINESS OR FUTURE OPERATING RESULTS OUR OPERATING RESULTS ARE EXPECTED TO CONTINUE TO FLUCTUATE AND MAY NOT MEET PUBLISHED ANALYST FORECASTS. THIS MAY CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE. Our future quarterly and annual operating results are subject to fluctuations due to a wide variety of factors, including: o the cyclicality of the semiconductor industry; o declines in average selling prices of our products; o oversupply of memory products in the market; o our failure to introduce new products and to implement technologies on a timely basis; o market acceptance of ours and our customers' products; o the failure to anticipate changing customer product requirements; o fluctuations in manufacturing yields; o failure to deliver products on a timely basis; o disruption in the supply of wafers or assembly services; o changes in product mix; o the timing of significant orders; o increased expenses associated with new product introductions or process changes; o the ability of customers to make payments to us; and o increases in antidumping duties. WE HAVE A RECENT HISTORY OF LOSSES, AND THERE CAN BE NO ASSURANCE THAT WE WILL BE ABLE TO SUSTAIN PROFITABILITY IN THE FUTURE. We incurred losses of $9.5 million and $50.6 million in fiscal 1999 and 1998, respectively. We were profitable for fiscal 2000 and the first quarter of fiscal 2001. Our ability to maintain profitability on a quarterly basis in the future will depend on a variety of factors, including our ability to increase our net sales, introduce new products on a timely basis, secure sufficient wafer fabrication capacity and control our operating expenses. Adverse developments with respect to these or other factors could result in quarterly or annual operating losses in the future. 15 17 OUR SALES DEPEND ON SRAM PRODUCTS, AND A DECLINE IN AVERAGE SELLING PRICES OR REDUCED DEMAND FOR THESE PRODUCTS COULD HARM OUR BUSINESS. A majority of our net sales are derived from the sale of SRAM products, which are subject to unit volume fluctuations and declines in average selling prices which could harm our business. For example, in the three months ended June 31, 1998, our net sales decreased by 38% to $25.0 million from $40.7 million in the three months ended March 31, 1998, principally due to a decrease in unit shipments of our SRAM products. Further, we anticipate that the average selling prices of our existing products will decline over time, although the rate of decline may fluctuate for certain products. Such declines may not be offset by higher volumes or by higher prices on newer products. WE MAY NOT BE ABLE TO COMPENSATE FOR PRICE DECREASES IN OUR PRODUCTS. Competitive pricing pressures due to an industry-wide oversupply of wafer capacity resulted in significant price decreases for our products during fiscal 1996 through fiscal 1999. While we experienced increases in average selling prices in fiscal 2000, historically, average selling prices for semiconductor memory products have declined, and we expect that average selling prices will decline in the future. Our ability to maintain or increase revenues will depend upon our ability to increase unit sales volume of existing products and introduce and sell new products which compensate for the anticipated declines in the average selling prices of our existing products. Declining average selling prices will also adversely affect our gross margins and profits unless we are able to introduce new products with higher margins or reduce our cost per unit. We may not be able to increase unit sales volumes, introduce and sell new products or reduce our cost per unit. SHIFTS IN INDUSTRY-WIDE CAPACITY MAY CAUSE OUR RESULTS TO FLUCTUATE. IN THE PAST, SUCH SHIFTS HAVE RESULTED IN SIGNIFICANT INVENTORY WRITE-DOWNS. Shifts in industry-wide capacity from shortages to oversupply or from oversupply to shortages may result in significant fluctuations in our quarterly or annual operating results. The semiconductor industry is highly cyclical and is subject to significant downturns resulting from excess capacity, overproduction, reduced demand or technological obsolescence. These factors can result in a decline in average selling prices and the stated value of inventory. In fiscal 1998, we recorded inventory write-downs of $23.0 million. The inventory write-downs were predominately for lower of cost or market accounting on certain of our products, primarily SRAMs, and, to a lesser extent, excess inventory. We also write down to zero carrying value inventory on hand in excess of six months' estimated sales volumes to cover estimated exposures, unless adjustments are made to the forecast based on management's judgments for newer products, end of life products or planned inventory increases. In making such judgments to write down inventory, management takes into account the product life cycles which can range from 6 to 24 months, the stage in the life cycle of the product, the impact of competitors' announcements and product introductions on our products, and purchasing opportunities due to excess wafer capacity. We believe that six months is an appropriate period because it is difficult to accurately forecast for a specific product beyond this time frame due to the potential introduction of products by competitors, technology obsolescence or fluctuations in demand. Our policy regarding excess inventory resulted in inventory write-downs for excess inventory of approximately $5.4 million for fiscal year 1998. While we have not had any material inventory write-down since fiscal 1998, future additional inventory write-downs may occur due to lower of cost or market accounting, excess inventory or inventory obsolescence. IF WE ARE UNABLE TO OBTAIN AN ADEQUATE SUPPLY OF WAFERS, OUR BUSINESS WILL BE HARMED. If we are unable to obtain an adequate supply of wafers from our current or any alternative sources in a timely manner, our business will be harmed. To date, our principal manufacturing relationship has been with 16 18 TSMC, from which we have obtained a majority of our wafers. We also receive wafers from Chartered Semiconductor and UMC. Each of our wafer foundries also supplies wafers to other integrated circuit companies, including certain of our competitors. Although we have written commitments specifying wafer capacities from our suppliers, if these suppliers experience manufacturing failures or yield shortfalls, choose to prioritize capacity for other uses, or reduce or eliminate deliveries to us, we may not be able to enforce fulfillment of the delivery commitments. Additionally, we may not be able to qualify additional manufacturing sources for existing or new products in a timely manner and we cannot be certain that other manufacturing sources would agree to deliver an adequate supply of wafers to us. FOUNDRY CAPACITY IS LIMITED AND WE MAY BE REQUIRED TO ENTER INTO COSTLY LONG-TERM SUPPLY ARRANGEMENTS TO SECURE FOUNDRY CAPACITY. If we are not able to obtain additional foundry capacity as required, our relationships with our customers would be harmed and our future sales would be adversely impacted. In order to secure additional foundry capacity, we have entered into and expect to enter into various arrangements with suppliers, which could include: o contracts that commit us to purchase specified quantities of silicon wafers over extended periods; o investments in foundries; o joint ventures; o other partnership relationships with foundries; o option payments or other prepayments to foundries; or o nonrefundable deposits with or loans to foundries in exchange for capacity commitments. We may not be able to make any such arrangements in a timely fashion or at all, and such arrangements, if any, may not be on terms favorable to us. Moreover, if we are able to secure foundry capacity, we may be obligated to utilize all of that capacity or incur penalties. Such penalties may be expensive and could harm our financial results. ANY DOWNTURN IN THE MARKETS WE SERVE WOULD HARM OUR BUSINESS. A majority of our products are incorporated into products such as internet access devices, networking equipment, and telecom/mobile communications devices. 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. Our business would be harmed by any future downturns in the markets that we serve. WE DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR A HIGH PERCENTAGE OF OUR SALES, AND THE LOSS OF A SIGNIFICANT CUSTOMER COULD CAUSE A DECLINE IN OUR PROFITS. Sales to Flextronics International accounted for approximately 14% of total net sales for the three months ended December 31, 2000. Substantially all of the sales to Flextronics were for products to be delivered to Cisco Systems Inc. Sales to 3Com accounted for approximately 9% of total net sales for the three months ended December 31, 2000. In fiscal 2000, no single customer accounted for over 10% of net sales. However, in fiscal 2000, shipments for Cisco directly, or indirectly through subcontractors, accounted for approximately 13% of net revenue. In fiscal 1999 and 1998, one customer, 3Com, accounted for approximately 20% and 19% of net sales, respectively. As sales to these customers are executed pursuant to purchase orders and no purchasing contract exists, these customers can cease doing business with us at any time. We expect a significant portion of our future sales to remain concentrated within a limited number of 17 19 strategic customers. We may not be able to retain our strategic customers, such customers may cancel or reschedule orders, or in the event of canceled orders, such orders may not be replaced by other sales. In addition, sales to any particular customer may fluctuate significantly from quarter to quarter, and such fluctuating sales could harm our business. OUR PRODUCTS ARE COMPLEX AND COULD CONTAIN DEFECTS, WHICH COULD REDUCE SALES OF THOSE PRODUCTS OR RESULT IN CLAIMS AGAINST US. We develop complex and evolving products. Despite testing by us and our customers, errors may be found in existing or new products. This could result in a delay in recognition or loss of revenues, loss of market share or failure to achieve market acceptance. These defects also may cause us to incur significant warranty, support and repair costs, may divert the attention of our engineering personnel from our product development efforts and could harm our relationships with our customers. The occurrence of these problems could result in the delay or loss of market acceptance of our products and would likely harm our business. Defects, integration issues or other performance problems in our products could result in financial or other damages to our customers or could lessen market acceptance of our products. Our customers could also seek and obtain damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend. STRONG COMPETITION IN THE SEMICONDUCTOR MEMORY MARKET MAY HARM OUR BUSINESS. The semiconductor memory market is intensely competitive and has been characterized by an oversupply of product, price erosion, rapid technological change, short product life cycles, cyclical market patterns and heightened foreign and domestic competition. Certain of our competitors offer broader product lines and have greater financial, technical, marketing, distribution and other resources than us. We may not be able to compete successfully against any of these competitors. Our ability to compete successfully in the high performance memory market depends on factors both within and outside of our control, including: o real or perceived imbalances in supply and demand; o product pricing; o the rate at which OEM customers incorporate our products into their systems; o the success of our customers' products; o access to advanced process technologies at competitive prices; o product functionality, performance and reliability; o successful and timely product development; o the supply and cost of wafers; o achievement of acceptable yields of functional die; o the gain or loss of significant customers; and o the nature of our competitors and general economic conditions. In addition, we are vulnerable to technology advances utilized by competitors to manufacture higher performance or lower cost products. We may not be able to compete successfully in the future as to any of these factors. Our failure to compete successfully in these or other areas could harm our business. 18 20 POTENTIAL INTELLECTUAL PROPERTY CLAIMS AND LITIGATION COULD SUBJECT US TO SIGNIFICANT LIABILITY FOR DAMAGES AND COULD INVALIDATE OUR PROPRIETARY RIGHTS. In the semiconductor industry, it is not unusual for companies to receive notices alleging infringement of patents or other intellectual property rights of others. We have been, and from time-to-time expect to be, notified of claims that we may be infringing patents, maskwork rights or copyrights owned by third parties. For example, for a number of years we have been corresponding with a large international semiconductor company regarding potential infringement of certain of their patents by us and certain of our patents by them. Other companies may pursue claims against us with respect to the alleged infringement of patents, maskwork rights, copyrights or other intellectual property owned by third parties. If it appears necessary or desirable, we may seek licenses under patents that we are alleged to be infringing. Although patent holders commonly offer such licenses, licenses may not be offered and the terms of any offered licenses may not be acceptable to us. The failure to obtain a license under a key patent or intellectual property right from a third party for technology used by us could cause us to incur substantial liabilities and to suspend the manufacture of the products utilizing the invention or to attempt to develop non-infringing products, any of which could materially and adversely affect our business and operating results. Furthermore, we may become involved in protracted litigation regarding the alleged infringement by us of third party intellectual property rights or litigation to assert and protect our patents or other intellectual property rights. Any litigation relating to patent infringement or other intellectual property matters could result in substantial cost and diversion of our resources which could harm our business. WE HAVE SIGNIFICANT INTERNATIONAL SALES AND RISKS OF OUR INTERNATIONAL OPERATIONS COULD HARM OUR OPERATING RESULTS. In the three months ended December 31, 2000, approximately 52% of our net sales was attributable to customers located in the United States, 30% was attributable to customers located in Europe and 18% was attributable to customers located in Asia. In fiscal 2000, approximately 54% of our net sales was attributable to customers located in the United States, 23% was attributable to customers located in Europe and 23% was attributable to customers located in Asia. In fiscal 1999, approximately 52% of our net sales was attributable to customers located in the United States, 20% was attributable to customers located in Europe and 28% was attributable to customers located in Asia. Accordingly, our future operating results will also depend on general economic conditions in Asia, Europe, and the United States. In addition, the markets for our products, which are highly cyclical, may not continue to grow. We anticipate that sales to international customers will continue to represent a significant percentage of net sales. We are subject to the risks of conducting business internationally, including: o economic conditions in Asia, particularly Taiwan and China; o changes in trade policy and regulatory requirements; o duties, tariffs and other trade barriers and restrictions; o the burdens of complying with foreign laws; o foreign currency fluctuations; and o political instability. 19 21 IF WE NEED TO MAKE PAYMENTS FOR UNUSED WAFER CAPACITY, OUR BUSINESS WILL BE HARMED. We have minimum wafer purchase commitments with some of our foundry partners in exchange for wafer capacity commitments. Should we fail to reschedule or assign unneeded capacity, we will be required to make payments for the unused capacity and our business would be harmed. We have agreed to make certain annual purchases totaling, in aggregate, approximately $4.8 million through 2001 from TSMC for additional capacity above the annual base capacity. Wafer purchases in any given year are first applied to the base capacity and then to our $4.8 million obligation. As a result, we could be forced to pay up to $4.8 million even if we do not purchase the base capacity and additional capacity for which we have contracted. WE DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN OUR KEY TECHNICAL AND MANAGEMENT PERSONNEL. Our success depends upon the continued service of key technical and management personnel, including Jimmy S.M. Lee, Chairman and Chief Executive Officer, and on our ability to continue to attract, retain and motivate qualified personnel, particularly experienced circuit designers and process engineers. The competition for such employees is intense. We have no employment contracts or key person life insurance policies with or for any of our executive officers. The loss of the service of one or more of our key personnel could materially and adversely affect our business and operating results. OUR STOCK PRICE IS EXPECTED TO BE VOLATILE. The trading price of our common stock has been and is expected to be subject to wide fluctuations in response to: o quarter-to-quarter variations in our operating results; o comments or recommendations issued by analysts who follow us, our competitors or the semiconductor industry and other events or factors; o aggregate valuations and movement of stocks in the broader semiconductor industry; o announcements of new products, strategic relationships or acquisitions by us or our competitors; o increases or decreases in wafer capacity; o general conditions or cyclicality in the semiconductor industry or the end markets that we serve; o governmental regulations, trade laws and import duties; o litigation; o new or revised earnings estimates; o announcements of technological innovations by us or our competitors; o additions or departures of senior management; and o other events or factors many of which are beyond our control. In addition, stock markets have experienced extreme price and trading volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many high technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock. 20 22 ITEM 3. FINANCIAL MARKET RISK We develop products in the United States and sell them worldwide. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Since our sales are currently priced in U.S. dollars and are translated to local currency amounts, a strengthening of the dollar could make our products less competitive in foreign markets. Interest income is sensitive to changes in the general level of U.S. interest rates, particularly since our investments are in short-term instruments calculated at variable rates. We established policies and business practices regarding our investment portfolio to preserve principal while obtaining reasonable rates of return without significantly increasing risk. We place investments with high credit quality issuers according to our investment policy. We do not use derivative financial instruments in our investment portfolio. All investments are carried at cost, which approximates market value. Due to the short-term nature of our investments and the immaterial amount of our debt obligation, we believe that there is no material exposure to interest fluctuation. Therefore, no accompanying table has been provided. 21 23 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In April 1998, the U.S. Department of Commerce ("DOC") published an antidumping duty order on imports of SRAMs from Taiwan, from where we currently import a majority of our SRAMs. As a consequence of this antidumping duty order, we are required to post a cash deposit on imports of Taiwan fabricated SRAM wafers or devices at the ad valorem rate of 7.56%. On April 28, 2000, Micron Technology Inc. ("Micron") requested an administrative review of our Taiwan fabricated SRAMs for the period from April 1, 1999 through March 31, 2000. For entries during this period, the cash deposits could be returned to us or, alternatively, we could forfeit amounts deposited and owe duties and interest in addition to the amounts deposited, depending on results of the DOC administrative review. The final results of the review are expected in calendar year 2001 and will establish a new deposit rate for subsequent entries, which may be higher or lower than the current rate. We have retained legal counsel to defend our interests in the antidumping proceedings. In addition, respondents (including ISSI) have challenged certain aspects of the antidumping determination in federal court proceedings. On August 29, 2000, pursuant to an appeal by ISSI and other respondents, the U.S. Court of International Trade affirmed the International Trade Commission ("ITC") decision to reverse the ITC's earlier ruling supporting the imposition of antidumping duties and rule instead in favor of respondents. This decision by the Court of International Trade has been appealed by Micron to the Federal Circuit Court of Appeals. If such appeal is not successful, the antidumping case will be terminated, the order will be revoked, and we will be entitled to a full refund of cash deposits. Pending resolution of the appeal, the DOC will continue to administer the antidumping order. Duties calculated and assessed by the government could have a material adverse affect on our gross margins and profits. Any reviews or proceedings might not mitigate or eliminate antidumping duties. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as a part of this report. None. (b) Reports on Form 8-K. The registrant did not file any reports on Form 8-K during the quarter ended December 31, 2000. 22 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Integrated Silicon Solution, Inc. --------------------------------- (Registrant) Dated: February 12, 2001 /s/ Gary L. Fischer -------------------------------- Gary L. Fischer Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 23 -----END PRIVACY-ENHANCED MESSAGE-----