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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission file number 0-23084
INTEGRATED SILICON SOLUTION, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 77-0199971
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2231 Lawson Lane, Santa Clara, California 95054
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(Address of principal executive offices) zip code
Registrant's telephone number, including area code (408) 588-0800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, PAR VALUE $0.0001 PER SHARE NASDAQ NATIONAL MARKET
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Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of such stock on December 12, 2001,
as reported by the Nasdaq National Market, was approximately $245.9 million.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant's Common Stock on
December 12, 2001 was 26,623,793.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2001 Annual Meeting of
Stockholders to be held on February 6, 2002 are incorporated by reference in
Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
Item 1. Business..............................................................................1
Item 2. Properties............................................................................8
Item 3. Legal Proceedings.....................................................................8
Item 4. Submission of Matters to a Vote of Security Holders...................................8
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............9
Item 6. Selected Consolidated Financial Data..................................................10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................10
Item 7a. Market Risk Disclosures...............................................................22
Item 8. Financial Statements and Supplementary Data...........................................23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................47
PART III
Item 10. Directors and Executive Officers of the Registrant....................................47
Item 11. Executive Compensation................................................................47
Item 12. Security Ownership of Certain Beneficial Owners and Management........................47
Item 13. Certain Relationships and Related Transactions........................................47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................47
SIGNATURES ......................................................................................49
When used in this Report, the words "expects," "anticipates," "believes,"
"estimates" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements, which include statements concerning the timing
of new product introductions; the functionality and availability of products
under development; trends in the Internet access devices, networking, and
telecommunications markets, in particular as they may affect demand for or
pricing of our products; the percentage of export sales and sales to strategic
customers; the percentage of revenue by product line; the availability and cost
of products from our suppliers; and the funding of the sales of investments, are
subject to risks and uncertainties, including those set forth in Item 1 of Part
I and in Item 7 of Part II hereof entitled "Certain Factors Which May Affect Our
Business or Future Operating Results" and elsewhere in this Report, that could
cause actual results to differ materially from those projected in the
forward-looking statements. These forward-looking statements speak only as of
the date of this Report. We expressly disclaim any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in our expectations with regard thereto
or to reflect any change in events, conditions or circumstances on which any
such forward-looking statement is based, in whole or in part. References in this
report on Form 10-K to "ISSI" and the "Company" refer to Integrated Silicon
Solution, Inc. and its subsidiaries.
PART I
ITEM 1. BUSINESS
GENERAL
Integrated Silicon Solution, Inc. ("ISSI") designs, develops and markets
high performance memory semiconductors used in Internet access devices,
networking equipment, telecom and mobile communications equipment, computer
peripherals, and other applications. Our high speed and low power static random
access memories ("SRAM"), our low to medium density dynamic random access
memories ("DRAM"), and our family of electrically erasable programmable read
only memories ("EEPROM") enable customers to design products that meet the
demanding connectivity and portability requirements of the wireless
communications, data communications, and internet infrastructure markets. Our
objective is to capitalize on major trends such as the proliferation of wireless
devices, the expansion of the communications and Internet infrastructure, and
other trends in electronics technologies.
The ever-expanding performance requirements in electronic systems place
increasing pressure on manufacturers to use sophisticated semiconductor memory
architecture within their systems. Manufacturers of leading-edge internet access
devices, ISP servers and networking routers and switches require high speed
memory architecture and devices within their systems to meet demands for faster
speed and response times. Similarly, the advent of handheld wireless
communications devices, such as cellular phones and personal digital assistants,
has necessitated the development of high performance memories that reduce power
consumption, increase battery life, and reduce size in order to maximize
portability. Our goal is to be a focused supplier of high performance memories
targeting the growing connectivity and communications markets.
Our customers include industry leaders such as 3Com, Alcatel, Cisco,
Ericsson, Hewlett-Packard, IBM, Lexmark, Motorola, Nokia and Seagate. Due to
their size and influence, these customers generally drive memory volumes in
their market segment and help define the direction of future memory products.
Our products offer our customers numerous benefits, including:
- high performance and functionality;
- high quality and reliability;
- leading-edge designs that facilitate the development of new, advanced
systems; and
- advanced process technology.
We believe our close relationship with leading silicon wafer foundries
gives us access to the advanced wafer process technology required to design and
manufacture high performance memories. We entered into our first development
program with Taiwan Semiconductor Manufacturing Corporation ("TSMC") in 1990 and
with Chartered Semiconductor in 1994 and have also worked closely with United
Microelectronics Corporation ("UMC") since 1995. Through this collaborative
strategy, we have been in the forefront in utilizing the most advanced process
technology for memories and in securing access to wafer capacity.
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We believe that ISSI is a technology leader and that our ability to design
and develop high performance, cost-effective products, and our collaborative
development with our manufacturing partners utilizing state-of-the-art process
technology gives us a competitive advantage. Our strategy is to:
- target high growth markets and applications;
- further penetrate industry leading customers;
- build collaborative relationships with leading edge foundries; and
- continually develop high performance products.
BACKGROUND
ISSI was incorporated in California in October 1988 and changed its state
of incorporation to Delaware in August 1993. Our principal executive offices are
located at 2231 Lawson Lane, Santa Clara, California 95054, and our telephone
number is (408) 588-0800.
We have a wholly owned subsidiary in the People's Republic of China that
focuses on sales, marketing and design and a subsidiary in Hong Kong that
primarily focuses on research and development. We own approximately 29% of a
public company in Taiwan (Integrated Circuit Solution, Inc. "ICSI", formerly
known as ISSI-Taiwan). ICSI became a public company in Taiwan in January 2001
and is listed on the Taiwan Stock Exchange. We have periodically sold our shares
in ICSI and our ownership was reduced in fiscal year 2001 from 39% to 29%. In
October 1998, we transferred our Flash memory business to a newly formed
company, NexFlash Technologies, Inc. ("NexFlash"). In February 2001, Winbond
purchased approximately 50% of NexFlash stock and our ownership was reduced from
32% to approximately 14%. We own approximately 20% of GetSilicon Inc.
("GetSilicon"), a provider of collaborative supply chain management solutions.
We also own approximately 22% of E-CMOS Corporation ("E-CMOS"), a fabless
semiconductor company located in Taiwan.
PRODUCTS
We are a focused supplier of a family of both high speed and ultra low
power SRAMs, complementary low and medium density DRAMs, and other complementary
memory products. In fiscal year 2001, we derived approximately 67% of our
revenue from SRAMs, 27% from DRAMs, and 6% from other products.
SRAMS
Our high performance SRAM products generally focus on either very high
speed or very low power. Our first high speed SRAMs were shipped in 1990. More
recently, driven by increasing demand in the hand-held and mobile markets, such
as cellular phones, we have developed a low power family of 1.8 volt and 2.7
volt SRAM products for wireless applications. To date we have derived
substantially all of our SRAM revenues from the sale of high speed SRAM
products.
We offer both asynchronous and synchronous high speed SRAMs. Our high speed
asynchronous SRAMs are used in applications such as LANs, telecommunication
equipment and base stations, bridges, routers, modems, multimedia products, and
industrial instrumentation. Current asynchronous SRAM densities include 64K (8K
x 8), 256K (32K x 8), 512K (64K x 8 and 32K x 16), 1 megabit (128K x 8, 64K x
16), 2 megabit (128K x 16 and 256K x 8), 3 megabit (128K x 24), 4 megabit (256K
x 16 and 512K x 8), and 8 megabit (512K x 16). Our high speed synchronous SRAMs
are used in a variety of networking and telecommunications applications. Current
synchronous densities include 1 Megabit (32K x 32), 2 Megabit (64K x 32/36), 4
Megabit (256K x 16/18 and 128K x 32/36), 8 Megabit (256K x 32/36 and 512K x 18)
and 16 Megabit (512K x 32/36 and 1M x 18). Additional SRAM products are under
development and are expected to include performance-leading features in speed,
configuration, power levels, density, and packaging. For example, we helped form
a consortium of leading SRAM suppliers to define the configuration, performance,
and package specifications for a new 18 megabit synchronous SRAM, named
SigmaRAM. We are developing a large portfolio of SigmaRAM products including
common I/O, separate I/O, and double data rate options to address various
application needs.
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DRAMS
Our low and medium density DRAM products complement our high performance
SRAM products. They are typically sold through the same channels to the same end
customers and enhance ISSI's position as an experienced memory supplier.
Applications for our DRAMs include telecommunications base stations, personal
digital assistants ("PDA"), set top boxes, networking equipment, disk drives,
tape drives, and printers. We currently offer 4, 8, and 16 megabit Fast Page
Mode ("FPM"), Extended Data Out ("EDO"), plus 4, 16 and 64 megabit SDRAM
devices. Additional DRAM products, including low power SDRAMs, are under
development. Our DRAM products are not targeted at the main memory DRAM market.
OTHER MEMORY PRODUCTS
Our other memory products include high performance serial EEPROMs, embedded
EEPROM products, and voice recording chips. Applications for these products
include cellular phones, pagers, networking systems, modems, telephone sets,
security systems, smart cards, video games, automobiles, and other consumer
products.
DESIGN AND PROCESS TECHNOLOGY
We believe that ISSI is a technology leader. In the semiconductor industry,
wafer fabrication facilities often use memories in the development of advanced
process technology because memory products are particularly well suited for
process research and development. Our process development partnerships with TSMC
and Chartered Semiconductor enable us to design memories at leading edge
geometries. Currently, we are designing new products utilizing 0.18 micron, 0.15
micron, and 0.13 micron geometries. Our technology development engineers work
closely with our manufacturing partners in this effort. The result is that we
continue to produce SRAM products at the leading edge of worldwide semiconductor
capabilities and we believe that our partnership development strategy gives us a
competitive strength.
Our design efforts focus on product specification, memory cell and array
structure, circuit design, simulation, and layout. We invest in advanced
computer aided design ("CAD") systems to ensure that the design team has
state-of-the-art design tools and employs innovative and rigorous design
methodologies. We utilize focused design teams for new product development and
can efficiently migrate proprietary design features to new generation products.
We have design organizations in Santa Clara and in three Asian locations.
MANUFACTURING
We combine our process technology expertise, foundry partnership strategy,
and equity investment arrangements to form a hybrid of the fab and fabless
business models which we call Fab-Lite. We do not own or operate our own wafer
foundry but, because memory products are particularly well suited for the
development of advanced process technology, we actively participate in
developing and refining the process technology used to manufacture many of our
products. We believe that this strategy enables us to achieve the early
introduction of advanced geometries for our high performance memory products,
which results in increased performance and lower manufacturing costs. To date,
our principal manufacturing relationships have been with TSMC in Taiwan and with
Chartered Semiconductor in Singapore.
In June 1996, ISSI entered into a business venture called WaferTech, LLC
with TSMC, Altera, Analog Devices, and private investors to build a wafer
fabrication facility in Camas, Washington. The fabrication facility, which began
production in 1998, is an advanced process technology facility capable of 0.35,
0.30, 0.25 and 0.18 micron process technology. In December 2000, we sold our
investment of $23.5 million in WaferTech to TSMC for $40.7 million.
In 2000, ISSI entered into a wafer fabrication facility investment
agreement with Semiconductor Manufacturing International Corporation ("SMIC"),
the first 8-inch foundry to be built in the People's Republic of China. Under
the terms of this agreement, ISSI has committed to invest $30 million. In April
2001, ISSI committed to invest an additional $10.0 million, raising our total
commitment to $40.0 million. ISSI has received certain capacity commitments from
SMIC. As of September 30, 2001, ISSI had invested $18.9 million in this foundry,
and $21.1 million is expected to be invested in fiscal year 2002.
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ISSI outsources its manufacturing process. The manufacturing of our
products begins at our independent wafer foundry partners, principally TSMC and
Chartered Semiconductor. Once the foundry has completed wafer processing, the
wafers are then shipped to subcontractors for wafer testing. The wafers are then
sawed or cut into individual memory chips and those that passed at wafer test
are assembled into final packages. The completed memory device is then tested
again at final test. Our U.S. headquarters develops and debugs test programs and
test procedures. Third party subcontractors in Taiwan and Singapore perform the
wafer sort, assembly and test operations. Our U.S. and Taiwan operations group
performs subcontractor management. A comprehensive quality control program is in
place. We are certified under ISO 9001 standards and our quality system is
periodically reviewed and approved by both ISO certifiers and our customers. We
are currently adopting the newest ISO standards, ISO 9000/2001.
Each of our wafer suppliers also fabricates for other integrated circuit
companies, including certain of our competitors. In addition, UMC subsidiaries
manufacture integrated circuits, including SRAMs, for their own account.
Although we have written commitments specifying wafer capacities from our
suppliers, if these suppliers experience manufacturing failures or yield
shortfalls, choose to prioritize capacity for other use or reduce or eliminate
deliveries to us, there can be no assurance that we could enforce fulfillment of
the delivery commitments. We believe our technology development partnerships
mitigate such risk.
There can be no assurance that the foundries we use will not encounter
construction or production difficulties or that they will allocate sufficient
wafer capacity to satisfy our wafer requirements, especially in times of wafer
capacity shortages. Moreover, there can be no assurance that we would be able to
qualify additional manufacturing sources for existing or new products in a
timely manner or that such additional manufacturing sources would be able to
produce an adequate supply of wafers. If we were unable to obtain an adequate
supply of wafers from our current or any alternative sources in a timely manner,
our business and operating results would be materially and adversely affected.
Although our policy is to work closely with our manufacturing sources,
there are certain risks associated with the use of independent foundries,
including the absence of a controlled source of supply, or delays in obtaining
adequate wafer supplies. In addition, the manufacture of integrated circuits is
a highly complex and technically demanding process. Production yields and device
reliability can be affected by a large number of factors. As is typical in the
semiconductor industry, our outside foundries have from time to time experienced
lower than anticipated manufacturing yields and device reliability problems,
particularly in connection with the introduction of new products and changes in
such foundry's processing steps. There can be no assurance that our foundries
will not experience lower than expected manufacturing yields or device
reliability problems in the future, which could materially and adversely affect
our business and operating results.
CUSTOMERS AND MARKETING
We have focused our marketing efforts on three major market segments that
include Internet access devices, networking, and telecom/mobile communications.
In addition, our memory chips are used in other market segments, including
computer peripherals such as printers and automotive applications. We market our
products through a direct sales force, independent sales representatives, and
distributors. We have four distributors in North America and distributors in
most of the countries of Western Europe, Japan and targeted countries in Asia.
We continue to expand our marketing and sales activity. We have sales offices in
the United States, Europe, Hong Kong, Taiwan, and the People's Republic of
China. Our customers include a broad range of electronic system manufacturers
such as Alcatel, Cisco Systems, 3Com, Ericsson, Hewlett-Packard, IBM, Lexmark,
Motorola, Nokia and Seagate. Sales to Flextronics International accounted for
approximately 15% of net sales for fiscal 2001. Substantially all of the sales
to Flextronics were for products to be delivered to Cisco Systems, Inc.
Shipments for Cisco directly, or indirectly through subcontractors, accounted
for approximately 18% of net sales for fiscal 2001. Sales to 3Com accounted for
approximately 7% of net sales for fiscal 2001. Shipments for 3Com directly, or
indirectly through subcontractors, accounted for approximately 11% of net sales
for fiscal 2001. In fiscal 2000, no single customer accounted for over 10% of
net sales. However, in fiscal 2000, shipments for Cisco directly, or indirectly
through subcontractors, accounted for approximately 13% of net revenue. In
fiscal 1999, one customer, 3Com, accounted for approximately 20% of net sales.
Our sales and marketing efforts are directed from our Santa Clara
headquarters. In fiscal 2001, approximately 52% of our net sales was
attributable to customers located in the United States, 25% was attributable to
customers located in Europe and 23% was attributable to customers located in
Asia. In fiscal 2000, approximately 54% of our
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net sales was attributable to customers located in the United States, 23% was
attributable to customers located in Europe and 23% was attributable to
customers located in Asia. In fiscal 1999, approximately 52% of our net sales
was attributable to customers located in the United States, 20% was attributable
to customers located in Europe and 28% was attributable to customers located in
Asia. See Note 13 of Notes to Consolidated Financial Statements.
We are subject to the risks of conducting business internationally,
including economic conditions in Asia, particularly Taiwan and the People's
Republic of China, changes in trade policy and regulatory requirements, duties,
tariffs and other trade barriers and restrictions, the burdens of complying with
foreign laws and, possibly, political instability. We anticipate that sales to
international customers will continue to represent a significant percentage of
net sales. Substantially all of our foundries and assembly and test operations
are located in Asia. Although we transact business predominately in U.S.
dollars, we do have some transactions in New Taiwan ("NT") dollars, in Hong Kong
("HK") dollars and in China Renminbi ("RMB"). Such transactions expose us to the
risk of exchange rate fluctuations. We monitor our exposure to foreign currency
fluctuations, and from time to time have taken action to hedge against such
exposure, but have not to date adopted any formal hedging strategy. There can be
no assurance that exchange rate fluctuations will not materially and adversely
affect our business and operating results in the future.
Our sales are generally made pursuant to standard purchase orders, which
can be revised to reflect changes in the customer's requirements. Generally,
purchase orders and OEM agreements allow customers to reschedule delivery dates
and cancel purchase orders without significant penalties. For these reasons, we
believe that our backlog, while useful for scheduling production, is not
necessarily a reliable indicator of future revenues.
COMPETITION
The semiconductor memory market is intensely competitive and has been
characterized by cyclical market conditions, an oversupply of product, price
erosion, rapid technological change, short product life cycles, and foreign and
domestic competition. Our ability to compete successfully in the high
performance memory market depends on factors both within and outside of our
control, including wafer manufacturing over or under capacity and the resultant
imbalances in supply and demand, product pricing, the rate at which OEM
customers incorporate our products into their systems, the success of the OEM's
products, access to advanced process technologies at competitive prices, product
functionality, performance, and reliability, successful and timely product
development, wafer supply, wafer costs, achievement of acceptable yields of
functional die, the gain or loss of significant customers, the performance of
our competitors and general economic conditions. We may not be able to compete
successfully in the future as to any of these factors. Our failure to compete
successfully in these or other areas could materially and adversely affect our
business and operating results.
The SRAM market is generally a fragmented market and specific competitors
and competitive factors vary based on geographic regions and market segments. In
the SRAM market, we compete with several major domestic and international
semiconductor companies including Alliance Semiconductor, Cypress Semiconductor,
Integrated Device Technology ("IDT"), Mitsubishi, Motorola, Samsung, and
Winbond. We also compete with new and emerging companies such as Giga
Semiconductor. We also may face significant competition from other domestic and
foreign integrated circuit manufacturers which have advanced technological
capabilities, but have not previously participated in the SRAM market sector. We
may not be able to compete successfully against any of these competitors.
In the low to medium density DRAM area, we compete with Alliance,
Mosel-Vitelic, Vanguard and Oki. Other main memory DRAM companies could address
this market in the future. There can be no assurance that we will be able to
compete successfully against any of these competitors. In the EEPROM market, our
primary competitors include Atmel and SGS-Thomson Microelectronics. We also
compete with many small to medium-sized companies in one or more segments of the
market.
Certain of our competitors offer broader product lines and have greater
financial, technical, marketing, distribution and other resources than us. We
may not be able to compete successfully against any of these competitors.
The process technology used by our manufacturing sources, including process
technology that we have developed with our foundries, can be used by such
manufacturers to produce products for other companies, including our
competitors. Although we believe that our participation in the development of
the processes provides
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us the advantage of early access to such processes, the knowledge of the
manufacturer may be used to benefit our competitors.
PRODUCT WARRANTY
Consistent with semiconductor memory industry practice, we generally
provide a limited warranty that our semiconductor memory devices are in
compliance with specifications existing at the time of delivery. Liability for a
stated warranty period is limited to replacement of defective items or return of
amounts paid.
RESEARCH AND DEVELOPMENT
Rapid technological change and continuing price competition require
research and development efforts on both new products and advanced processes
employing smaller geometries. Our research and development activities are
focused primarily on the development of advanced process technologies and new
memory circuit designs. We currently design most of our high performance memory
products and jointly develop advanced process technology with our manufacturing
partners from our headquarters in Santa Clara, California and three design
centers in Asia operated by ISSI.
New SRAM products in design include wide voltage (1.8v -- 3.3v) low power 2
meg, 4 meg and 8 meg asynchronous SRAMs, in addition to high speed 18 meg, 32
meg and 36 meg synchronous devices. These new synchronous SRAMs include the new
industry-standard Sigma RAMs. We have several 64 meg DRAM devices under design.
We are developing our new SRAM and DRAM products on industry leading 0.13, 0.15,
and 0.18 micron process technologies. We are presently evaluating 0.10 micron
process technology for our next generation products. In nonvolatile memory, our
future products are expected to include 128K, 256K, and 512K density serial
EEPROM devices. Our research and development expenditures in fiscal 2001, 2000,
and 1999 were $25.3 million, $18.3 million, and $18.8 million, respectively.
PATENTS
As of September 30, 2001, we held 67 U.S. patents. These patents expire
between 2010 and 2021. We have four (4) additional patent applications pending
and expect to continue to file patent applications where appropriate to protect
our proprietary technologies. Although patents are an important element of our
intellectual property, we believe that our continued success depends primarily
on factors such as the technological skills and innovation of our personnel
rather than on our patents. The process of seeking patent protection can be
expensive and time consuming. There can be no assurance that patents will be
issued from pending or future applications or that, if patents are issued, they
will not be challenged, invalidated or circumvented, or that rights granted
thereunder will provide meaningful protection or other commercial advantage to
us. Moreover, there can be no assurance that any patent rights will be upheld in
the future or that we will be able to preserve any of our other intellectual
property rights.
In the semiconductor industry, it is not unusual for companies to receive
notices alleging infringement of patents or other intellectual property rights
of others. We have been, and from time-to-time expect to be, notified of claims
that we may be infringing patents, maskwork rights or copyrights owned by third
parties. If it appears necessary or desirable, we may seek licenses under
patents that we are alleged to be infringing. Although patent holders commonly
offer such licenses, licenses may not be offered and the terms of any offered
licenses may not be acceptable to us.
The failure to obtain a license under a key patent or intellectual property
right from a third party for technology used by us could cause us to incur
substantial liabilities and to suspend the manufacture of the products utilizing
the invention or to attempt to develop non-infringing products, any of which
could materially and adversely affect our business and operating results.
Furthermore, we may become involved in protracted litigation regarding the
alleged infringement by us of third party intellectual property rights or
litigation to assert and protect our patents or other intellectual property
rights. Any litigation relating to patent infringement or other intellectual
property matters could result in substantial cost and diversion of our resources
which could harm our business.
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EMPLOYEES
As of September 30, 2001, we had approximately 176 employees in the U.S.,
32 in Taiwan, 31 in the People's Republic of China, and 16 in Hong Kong. Total
employment, including subsidiaries is approximately 255 people. Our future
success will largely be dependent on our ability to attract, retain and motivate
highly qualified technical and management personnel. The employment market for
such personnel is extremely competitive and there can be no assurance that we
will successfully staff all necessary positions. Our employees are not
represented by any collective bargaining agreements and we have never
experienced a work stoppage. We believe that our employee relations are good.
EXECUTIVE OFFICERS
Our executive officers and their ages as of September 30, 2001 are as follows:
Name Age Position
Jimmy S.M. Lee 46 Chairman, Chief Executive Officer, and Director
Gary L. Fischer 50 President, Chief Operating Officer, and Director
Michael McDonald 48 Vice President, Chief Financial Officer, and Secretary
Paul Song 46 Senior Vice President, Engineering
BACKGROUND OF EXECUTIVE OFFICERS
Jimmy S.M. Lee has served as ISSI's Chief Executive Officer and a director
since he co-founded the Company in October 1988. He also served as ISSI's
president until May 2000. From 1985 to 1988, Mr. Lee was engineering manager at
International CMOS Technology, Inc., a semiconductor company, and from 1983 to
1985, he was a design manager at Signetics Corporation, a semiconductor company.
Prior thereto, Mr. Lee was a project manager at Toshiba Semiconductor
Corporation and a design engineer at National Semiconductor Corporation. Mr. Lee
has served as a director of ICSI since September 1990, as a director of NexFlash
since October 1998, as chairman of the board of GetSilicon since July 2000, and
as chairman of the board of E-CMOS since September 2001. Mr. Lee holds a M.S.
degree in electrical engineering from Texas Tech University and a B.S. degree in
electrical engineering from National Taiwan University.
Gary L. Fischer has served as ISSI's President and Chief Operating Officer
since April 2001. He served as Executive Vice President and Chief Financial
Officer from April 1995 to March 2001, and as Vice President and Chief Financial
Officer from June 1993 to March 1995. From January 1989 to December 1992, Mr.
Fischer was Chief Financial Officer of Synergy Semiconductor Corporation, a
manufacturer of high performance SRAM and logic integrated circuits. He has also
been a director of E-CMOS since November 2001. Mr. Fischer holds an M.B.A.
degree from the University of Santa Clara and a B.A. degree from the University
of California, Santa Barbara.
Michael McDonald has served as Vice President and Chief Financial Officer
since June 2001. He was Senior Vice President, Chief Financial Officer, and
Secretary at REMEC, Inc., a manufacturer of wireless communications hardware,
from 1997 to May 2001. From February 1984 to September 1997, Mr. McDonald was
Chief Financial Officer at Magnum Microwave Corporation, a manufacturer of
wireless communications hardware. Mr. McDonald holds an MBA degree from
California Polytechnic State University, San Luis Obispo and a BS degree in
mathematics from the University of San Francisco.
Paul Song has served as Senior Vice President, Engineering since April
2000. He served as Vice President, Engineering from April 1999 to April 2000. He
also served as Vice President, Design Engineering from July 1996 to April 1999.
He joined ISSI in July 1990 as Director, Nonvolatile Memory Design Engineering.
Previously he held design engineering positions at ICT, Exel Microelectronics,
Inc. and AMD. Dr. Song holds a Ph.D. degree in electrical engineering from
Stanford University, a M.S. degree in electrical engineering from the University
of California, Santa Barbara, and a B.S. degree in electrical engineering from
National Taiwan University.
Officers serve at the discretion of the Board and are appointed annually.
There are no family relationships between the directors or officers of ISSI.
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ITEM 2. PROPERTIES
Our U.S. headquarters occupy a two story building, totaling approximately
93,400 square feet, in Santa Clara, California in which our executive offices,
marketing, technology, product development groups and some research and
development ("R&D") testing facilities are located. The lease on this building
expires in February 2007. We sublease approximately 24,000 square feet and 9,000
square feet to third parties whose subleases expire in March 2003 and September
2003, respectively. We have additional field sales offices in the U.S. and
Europe and sales and engineering offices in Asia.
ITEM 3. LEGAL PROCEEDINGS
In April 1998, the U.S. Department of Commerce ("DOC") published an
antidumping duty order on imports of SRAMs from Taiwan, from where we currently
import a majority of our SRAMs. As a consequence of this antidumping duty order,
we are required to post a cash deposit on imports of Taiwan fabricated SRAM
wafers or devices at the ad valorem rate of 7.56%.
On April 28, 2000, Micron Technology Inc. ("Micron") requested an
administrative review of our Taiwan fabricated SRAMs for the period from April
1, 1999 through March 31, 2000. For entries during this period, the cash
deposits could be returned to us or, alternatively, we could forfeit amounts
deposited and owe duties and interest in addition to the amounts deposited,
depending on results of the DOC administrative review. The DOC has suspended
that review as a consequence of the court decision described below.
We have retained legal counsel to defend our interests in the antidumping
proceedings. In addition, respondents (including ISSI) have challenged certain
aspects of the antidumping determination in federal court proceedings. On August
29, 2000, pursuant to an appeal by ISSI and other respondents, the U.S. Court of
International Trade affirmed the International Trade Commission ("ITC") decision
to reverse the ITC's earlier ruling supporting the imposition of antidumping
duties and rule instead in favor of the respondents. This decision by the Court
of International Trade was appealed by Micron to the U.S. Court of Appeals for
the Federal Circuit ("CAFC"). On September 21, 2001, the Federal Circuit upheld
the Court of International Trade. This Federal Circuit decision is subject to
appeal. If no appeal is taken, or if any such appeal is unsuccessful, the
antidumping case will be terminated, the order will be revoked, and we will be
entitled to a full refund of our cash deposits. Pending resolution of the
appeal, the DOC will continue to administer the antidumping order.
Duties calculated and assessed by the government could have a material
adverse affect on our gross margins and profits. Any reviews or proceedings
might not mitigate or eliminate antidumping duties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 2001.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol ISSI since our initial public offering in February 1995. Prior to such
date, there was no public market for the common stock. The following table sets
forth, for the fiscal quarters indicated, the high and low sale prices per share
for our common stock as reported on the Nasdaq National Market. These prices are
over-the-counter market quotations which reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
Fiscal Year ending September 30, 2001 High Low
------- ------
Fourth quarter $16.25 $ 8.55
Third quarter 16.65 11.13
Second quarter 21.25 11.75
First quarter 17.31 7.69
Fiscal Year ending September 30, 2000 High Low
------- ------
Fourth quarter $37.88 $14.13
Third quarter 41.81 15.50
Second quarter 32.06 12.81
First quarter 17.69 5.47
HOLDERS OF RECORD
As of December 12, 2001, there were approximately 12,000 beneficial holders
of our common stock.
DIVIDENDS
We have never declared or paid cash dividends. We currently intend to
retain any earnings for use in our business and do not anticipate paying any
cash dividends on our capital stock in the foreseeable future.
9
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Year Ended September 30,
------------------------------------------------------------------------
2001 2000(2) 1999(2) 1998 1997
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Net sales $ 152,048 $ 141,923 $ 83,309 $ 131,132 $ 108,261
Gross margin 7,179 44,164 16,493 4,338 32,156
Operating income (loss) (38,845) 10,250 (14,184) (53,053) (10,776)
Net income (loss) 1,115 25,026 (9,511) (50,607) (7,686)
Basic net income (loss) per share(1) 0.04 1.07 (0.48) (2.67) (0.43)
Diluted net income (loss) per share(1) 0.04 0.96 (0.48) (2.67) (0.43)
Working capital 157,849 145,938 42,064 32,549 75,544
Total assets 237,852 260,724 121,831 202,168 195,596
Total long-term obligations and
current portion of long-term
obligations 314 454 -- 15,466 20,101
Stockholders' equity 214,437 211,235 88,778 90,920 134,567
Dividends paid -- -- -- -- --
- ----------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the basis used to calculate net income (loss) per share.
(2) See Results of Operations section of Management's Discussion and Analysis
of Financial Condition and Results of Operations for discussion regarding
comparability of the fiscal 1999 and 2000 year-end results.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Our financial results for fiscal 2001 and fiscal 2000 reflect accounting
for ICSI and GetSilicon on the equity basis and include our percentage share of
the results of their respective operations. Our financial results for fiscal
2001 reflect accounting for E-CMOS on the equity basis and include our
percentage gain or loss of their results of operations on a one quarter lag. Our
financial results for fiscal 2001 through the period ended January 31, 2001 and
for fiscal 2000 reflect accounting for Nexflash on the equity basis and include
our percentage share of the results of its operations. Effective February 2001,
our ownership of NexFlash became less than 20%, and we began accounting for
NexFlash on the cost basis. Prior to the quarter ended March 31, 1999, our
ownership of ICSI exceeded 50% and our financial results were consolidated with
those of ICSI. Effective with the quarter ending March 31, 1999, we accounted
for ICSI on the equity basis and included in our financial statements our
percentage share of ICSI's financial results. In fiscal 1999, we accounted for
NexFlash on the equity basis and included in our financial statements our
percentage share of NexFlash's financial results. At September 30, 2001, we
owned approximately 29% of ICSI, approximately 14% of NexFlash , approximately
22% of E-CMOS and approximately 20% of GetSilicon.
FISCAL YEAR ENDED SEPTEMBER 30, 2001 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
2000
Net Sales. Net sales consist principally of total product sales less estimated
sales returns. Net sales increased by 7% to $152.0 million in fiscal 2001 from
$141.9 million in fiscal 2000. The increase in sales was principally due to an
increase in unit shipments, partially offset by a decrease in the average
selling price, of our 16 megabit DRAM products, as well as increased unit
shipments of certain SRAM products, specifically our 32K x 32, 128K x 16, 256K x
16, and 64K x 16 SRAM products. In addition, the average selling prices of our
SRAM products generally increased in fiscal 2001 compared to fiscal 2000. We
anticipate that the average selling prices of our existing products will
generally decline over time, although the rate of decline may fluctuate for
certain products. In this regard, we experienced a significant decline in the
average selling prices for certain of our products in the three months ended
September 30, 2001 as compared to the three months ended June 30, 2001. We
anticipate
10
a further decline in the average selling prices for certain of our products in
the three months ended December 31, 2001. Such declines may not be offset by
higher volumes or by higher prices on newer products. In this regard, we
experienced a decrease in unit shipments for certain of our products in the
three months ended September 30, 2001 as compared to the three months ended June
30, 2001.
Sales to Flextronics International accounted for approximately 15% of net
sales for fiscal 2001. Substantially all of our sales to Flextronics were for
products to be delivered to Cisco Systems, Inc. Shipments for Cisco directly, or
indirectly through subcontractors, accounted for approximately 18% of net sales
for fiscal 2001. Sales to 3Com accounted for approximately 7% of net sales for
fiscal 2001. Shipments for 3Com directly, or indirectly through subcontractors,
accounted for approximately 11% of net sales for fiscal 2001. In fiscal 2000, no
single customer accounted for over 10% of net sales. However, in fiscal 2000,
shipments for Cisco directly, or indirectly through subcontractors, accounted
for approximately 13% of net revenue. As sales to these customers are executed
pursuant to purchase orders and no purchasing contract exists, these customers
can cease doing business with us at any time.
Gross Profit. Cost of sales includes die cost from the wafers acquired from
foundries, subcontracted package, assembly costs and test costs, costs
associated with in-house product testing, quality assurance and import duties.
Gross profit decreased 84% to $7.2 million in fiscal 2001 from $44.2 million in
fiscal 2000. As a percentage of net sales, gross profit decreased to 4.7% in
fiscal 2001 from 31.1% in fiscal 2000. In fiscal 2001, we recorded inventory
write-downs of $38.3 million, including $17.6 million in the three months ended
September 30, 2001. The inventory write-downs were predominately for lower of
cost or market accounting on certain of our products, primarily DRAMs and low
power SRAMs, and to a lesser extent, excess inventory. Excluding the inventory
write-downs in fiscal 2001, gross profit for the period was $45.4 million or
29.9% of net sales. Excluding the inventory write-downs in fiscal 2001, the
increase in gross profit dollars was principally due to an increase in unit
shipments of our SRAM products, specifically our 32K x 32, 128K x 16, 256K x 16,
and 64K x 16 SRAM products. In addition, increases in the average selling prices
of our SRAM products in fiscal 2001 compared to fiscal 2000 more than offset any
increases in product costs resulting in higher gross margins. The decrease in
gross margin percentage in fiscal 2001 is due to a significant decline in the
gross margin for DRAM products as a result of declining average selling prices.
We believe that the average selling price of our products will generally decline
over time and, unless we are able to reduce our cost per unit to the extent
necessary to offset such declines, the decline in average selling prices will
result in a material decline in our gross margin. In this regard, we experienced
a significant decline in the average selling prices for certain of our products
in the three months ended September 30, 2001 as compared to the three months
ended June 30, 2001. We anticipate a further decline in the average selling
prices for certain of our products in the three months ending December 31, 2001.
In addition, product unit costs could increase if suppliers raise prices, which
could result in a material decline in our gross margin. Although we have product
cost reduction programs in place for certain products that involve efforts to
reduce internal costs and supplier costs, there can be no assurance that product
costs will be reduced or that such reductions will be sufficient to offset the
expected declines in average selling prices. We do not believe that such cost
reduction efforts are likely to have a material adverse impact on the quality of
our products or the level of service provided by us.
Research and Development. Research and development expenses increased by
38% to $25.3 million in fiscal 2001 from $18.3 million in fiscal 2000. As a
percentage of net sales, research and development expenses increased to 16.6% in
fiscal 2001 from 12.9% in fiscal 2000. The increase in absolute dollars was
primarily the result of increased expenses related to the development of new
products and an increase in engineering personnel and payroll related expenses.
We anticipate that our research and development expenses will increase in
absolute dollars in future periods, although such expenses may fluctuate as a
percentage of net sales. During fiscal 2001, our developments efforts were
focused on ultra low power 4Mb and 8Mb SRAMs, very high speed 8Mb synchronous
SRAMs, 16Mb asynchronous DRAMs and 64Mb high speed synchronous DRAMs.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 33% to $20.7 million in fiscal 2001 from $15.6 million in
fiscal 2000. As a percentage of net sales, selling, general and administrative
expenses increased to 13.6% in fiscal 2001 from 11.0% in fiscal 2000. The
increase in absolute dollars was primarily the result of increased payroll
related expenses as a result of the addition, prior to the economic slow-down,
of marketing, sales and administrative personnel. In addition, selling
commissions increased as a result of higher revenues in fiscal 2001 compared to
fiscal 2000. We expect our selling, general and administrative expenses may
increase in future quarters, although such expenses may fluctuate as a
percentage of net sales.
11
Interest and other income (expense), net. Interest and other income, net
increased by $3.9 million to $7.7 million in fiscal 2001 from $3.8 million in
fiscal 2000. The increase was primarily the result of increased interest income
as a result of higher cash balances from the sale of investments and our
follow-on public stock offering in February 2000.
Gain on sale of investment. The gain on sale of investment increased to
$30.7 million in fiscal 2001 from $0.8 million in fiscal 2000. In the three
months ended December 31, 2000, we sold our interest in WaferTech to TSMC for
approximately $40.7 million, which resulted in a pre-tax gain of $17.2 million.
On January 16, 2001, ICSI completed an initial public offering in Taiwan. As a
result of shares of ICSI sold by the Company in the initial public offering and
subsequently, we received gross proceeds of approximately $10.7 million in
fiscal 2001 resulting in a pre-tax gain of $8.2 million. In February 2001, we,
along with other shareholders, sold a portion of our ownership in NexFlash to
Winbond International Corporation for $6.2 million resulting in a pre-tax gain
of $5.3 million. Fiscal 2000 includes a pre-tax gain of approximately $0.8
million in the June 2000 quarter related to the sale of shares of ICSI.
Provision (benefit) for Income Taxes. The tax provision for the year ended
September 30, 2001 of $150,000 includes a benefit of approximately $5.0 million
for the reversal of taxes previously provided for foreign operations no longer
deemed necessary as the statute has now expired and utilization of net operating
losses and tax credits of approximately $11.0 million reduced by a valuation
allowance. The tax provision for fiscal 2001 is primarily comprised of U.S.
federal income taxes.
Under Statement of Financial Accounting Standards No. 109 (FAS 109),
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Management has established a valuation allowance
covering the net deferred tax assets based on management's belief that the
realization of the deferred tax assets is not realizable on a more likely than
not basis.
Equity in net income of affiliated companies. Equity in net income of
affiliated companies decreased by $9.1 million to $1.7 million in fiscal 2001
from $10.8 million in fiscal 2000. This primarily reflects a decrease in income
from our percentage share of ICSI's financial results in fiscal 2001 from fiscal
2000.
FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1999
Net Sales. Net sales increased by 70% to $141.9 million in fiscal 2000 from
$83.3 million in fiscal 1999. Net sales increased by $68.6 million to $141.9
million in fiscal 2000 from $73.3 million in fiscal 1999, excluding the $9.7
million in sales from ICSI and the $0.3 million in sales from NexFlash in the
December 31, 1998 quarter. The increase in sales was principally due to an
increase in unit shipments of our 1024K, 256K, and 128K x 24 SRAM products, as
well as increased unit shipments of DRAM products, specifically our 4 and 16
megabit DRAM products. In addition, the average selling prices of our SRAM and
DRAM products generally increased in fiscal 2000 compared to fiscal 1999.
In fiscal 2000 no single customer accounted for over 10% of net sales.
However, shipments for Cisco directly, or indirectly through subcontractors,
accounted for approximately 13% of net revenue. In fiscal 1999, one customer,
3Com, accounted for approximately 20% of net sales. Net sales include licensing
revenue of approximately $1.0 million and $1.9 million in fiscal 2000 and fiscal
1999, respectively. Net sales include sales of approximately $0.9 million and
$1.4 million to ICSI in fiscal 2000 and fiscal 1999, respectively. Additionally,
net sales include sales of approximately $0.2 million and $1.5 million in sales
to NexFlash in fiscal 2000 and fiscal 1999, respectively.
Gross Profit. Gross profit increased 168% to $44.2 million in fiscal 2000
from $16.5 million in fiscal 1999. As a percentage of net sales, gross profit
increased to 31.1% in fiscal 2000 from 19.8% in fiscal 1999. The increase in
gross profit was principally due to an increase in unit shipments of our 1024K,
256K, and 128K x 24 SRAM products, as well as increased unit shipments of DRAM
products, specifically our 4 and 16 megabit DRAM products. In addition,
increases in the average selling prices of our SRAM and DRAM products in fiscal
2000 compared to fiscal 1999 more than offset any increases in product costs
resulting in higher gross margins. Our gross
12
profit also benefited from $1.0 million and $1.9 million of licensing revenue
for fiscal 2000 and fiscal 1999, respectively.
Research and Development. Research and development expenses decreased by 3%
to $18.3 million in fiscal 2000 from $18.8 million in fiscal 1999. As a
percentage of net sales, research and development expenses decreased to 12.9% in
fiscal 2000 from 22.5% in fiscal 1999. The decrease in absolute dollars was
primarily the result of a $1.0 million reduction attributable to the
deconsolidation of ICSI and $0.3 million attributable of the spin-off of
NexFlash, offset by an increase in payroll related expenses and increased
expenses related to the development of new products. Fiscal 1999 included a
charge of $0.9 million in the June 1999 quarter for the write-off of certain
acquired licensed products and technologies which have been replaced by our
internally developed products.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 31% to $15.6 million in fiscal 2000 from $11.9 million in
fiscal 1999. As a percentage of net sales, selling, general and administrative
expenses decreased to 11.0% in fiscal 2000 from 14.3% in fiscal 1999. The
increase in absolute dollars was primarily the result of increased selling
commissions associated with higher revenues in fiscal 2000 compared to fiscal
1999 as well as payroll related expenses, offset by a $1.2 million reduction
attributable to the deconsolidation of ICSI and $0.1 million attributable to the
spin-off of NexFlash.
Interest and other income (expense), net. Interest and other income, net
increased by $2.6 million to $3.8 million in fiscal 2000 from $1.2 million in
fiscal 1999. The increase results primarily from an increase of $3.1 million in
interest income as a result of higher cash balances from our follow-on public
stock offering in February 2000, offset by a decrease of $1.3 million in other
income attributable to the deconsolidation of ICSI.
Gain on sale of investment. The gain on sale of investment decreased to
$0.8 million in fiscal 2000 from $2.6 million in fiscal 1999. Fiscal 2000
includes a pre-tax gain of approximately $0.8 million in the June 2000 quarter
related to the sale of an additional 8% of our holdings in ICSI. Fiscal 1999
includes a gain of approximately $1.8 million in the June 1999 quarter related
to the sale of our investment in UICC to UMC, a pre-tax gain of $1.2 million
resulting from the sale of 20% of our holdings in ICSI in the December 1998
quarter, offset by the loss of approximately $0.4 million in the March 1999
quarter related to the sale of approximately 33% of our investment in WaferTech
LLC.
Provision (benefit) for Income Taxes. The provision for income taxes for
fiscal 2000 is comprised of taxes on foreign earnings, foreign withholding taxes
and U.S. Federal alternative minimum taxes. The provision for income taxes for
fiscal 1999 is primarily based on foreign withholding taxes related to the sale
of ICSI stock and other foreign withholding taxes.
Equity in net income of affiliated companies. Equity in net income of
affiliated companies increased by $9.9 million to $10.8 million in fiscal 2000
from $0.9 million in fiscal 1999. This primarily reflects an increase in income
from our percentage share of ICSI's financial results in fiscal 2000 from fiscal
1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, our principal sources of liquidity included cash,
cash equivalents and short-term investments of approximately $122.9 million.
During fiscal 2001, operating activities used cash of approximately $19.5
million compared to $13.6 million in fiscal 2000. Cash used by operations was
primarily due to net income of $1.1 million adjusted for the gain on sale of
investments of $(30.7) million, depreciation of $3.4 million, equity in net
income of affiliated companies of $(1.7) million, other non-cash items of $0.2
million, and decreases in accounts payable of $25.3 million, partially offset by
decreases in inventories of $18.0 million and accounts receivable of $17.7
million.
In fiscal 2001, we used $3.5 million for investing activities compared to
$60.5 million in fiscal 2000. The cash used for investing activities in fiscal
2001 primarily resulted from net purchases of available-for-sale securities of
$44.8 million partially offset by proceeds of $40.7 million from the sale of our
investment in WaferTech to TSMC. We also made an additional investment of $14.3
million in SMIC. We made other investments of $3.5 million, including $3.0
million for a 22% interest in E-CMOS, a semiconductor company located in
Hsin-Chu, Taiwan. We generated $15.8 million from the sale of shares of ICSI
stock and $6.2 million from the sale of NexFlash shares. We received $2.0
million in dividends from our equity investments. The cash used for investing
activities in fiscal 2000
13
was primarily the result of net purchases of available-for-sale securities of
$51.1 million. In addition, we used $3.5 million for the acquisition of
equipment and other fixed assets, and made investments of $4.6 million in SMIC,
$2.7 million in WaferTech, $1.4 million in NexFlash, and other investments of
$0.6 million. We generated $3.3 million from the sale of shares of ICSI stock.
In fiscal 2001, we made capital expenditures of approximately $5.6 million
for engineering tools and computer software. We expect to spend approximately
$6.0 million to purchase capital equipment during the next twelve months,
principally for the purchase of design and engineering tools, additional test
equipment and computer software and hardware.
We generated $3.5 million from financing activities during fiscal 2001
compared to $96.9 million in fiscal 2000. Cash generated from financing
activities for fiscal 2001 was primarily the result of proceeds from the
issuance of common stock of $3.7 million from option exercises and sales under
our employee stock purchase plan. The primary source of financing for fiscal
2000 was net proceeds from our follow-on public stock offering in the March 2000
quarter of $90.7 million and proceeds from the issuance of common stock of $6.3
million from option exercises and sales under our employee stock purchase plan.
In fiscal 1999 and fiscal 2000, we sold some of our holdings in ICSI to
private investors. In the three months ended December 31, 2000, we received $5.1
million from the sale of shares of ICSI under the 1998 ISSI-Taiwan Stock Plan.
On January 16, 2001, ICSI completed an initial public offering in Taiwan. As a
result of shares of ICSI sold by the Company in the initial public offering and
subsequently, we received gross proceeds of approximately $10.7 million in
fiscal 2001 resulting in a pre-tax gain of $8.2 million. As of September 30,
2001, we owned approximately 29% of ICSI.
In August 2000, we entered into a wafer fabrication facility investment
agreement with SMIC. Under the terms of this agreement, we committed to invest
$30.0 million. In April 2001, we committed to invest an additional $10.0
million. We have received certain capacity commitments from SMIC. In fiscal
2001, we made an investment of $14.3 million in SMIC, bringing our total
investment in this foundry as of September 30, 2001, to $18.9 million. An
additional $21.1 million is expected to be invested in fiscal year 2002.
In June 1996, we entered into a business venture called WaferTech, LLC with
TSMC, Altera, Analog Devices, and private investors to build a wafer fabrication
facility in Camas, Washington. In December 2000, we sold our investment of $23.5
million in WaferTech to TSMC for $40.7 million resulting in a pre-tax gain of
$17.2 million.
In April 1998, the U.S. Department of Commerce ("DOC") published an
antidumping duty order on imports of SRAMs from Taiwan, from where we currently
import a majority of our SRAMs. As a consequence of this antidumping duty order,
we are required to post a cash deposit on imports of Taiwan fabricated SRAM
wafers or devices at the ad valorem rate of 7.56%.
On April 28, 2000, Micron Technology Inc. ("Micron") requested an
administrative review of our Taiwan fabricated SRAMs for the period from April
1, 1999 through March 31, 2000. For entries during this period, the cash
deposits could be returned to us or, alternatively, we could forfeit amounts
deposited and owe duties and interest in addition to the amounts deposited,
depending on results of the DOC administrative review. The DOC has suspended
that review as a consequence of the court decision described below.
We have retained legal counsel to defend our interests in the antidumping
proceedings. In addition, respondents (including ISSI) have challenged certain
aspects of the antidumping determination in federal court proceedings. On August
29, 2000, pursuant to an appeal by ISSI and other respondents, the U.S. Court of
International Trade affirmed the International Trade Commission ("ITC") decision
to reverse the ITC's earlier ruling supporting the imposition of antidumping
duties and rule instead in favor of the respondents. This decision by the Court
of International Trade was appealed by Micron to the U.S. Court of Appeals for
the Federal Circuit Court ("CAFC"). On September 21, 2001, the Federal Circuit
upheld the Court of International Trade. This Federal Circuit decision is
subject to appeal. If no appeal is taken, or if any such appeal is unsuccessful,
the antidumping case will be terminated, the order will be revoked, and we will
be entitled to a full refund of our cash deposits. Pending resolution of the
appeal, the DOC will continue to administer the antidumping order.
Duties calculated and assessed by the government could have a material
adverse affect on our gross margins and profits. Any reviews or proceedings
might not mitigate or eliminate antidumping duties.
14
We believe our existing funds and available financing will satisfy our
anticipated working capital and other cash requirements through at least the
next 12 months. We may from time to time take actions to further increase our
cash position through bank borrowings, sales of additional shares of ICSI, the
disposition of certain assets, equity financing or debt financing. From time to
time, we may also evaluate potential acquisitions and equity investments
complementary to our memory expertise and market strategy, including investments
in wafer fabrication foundries. To the extent we pursue such transactions, any
such transaction could require us to seek additional equity or debt financing to
fund such activities. There can be no assurance that any such additional
financing could be obtained on terms acceptable to us, if at all.
CERTAIN FACTORS WHICH MAY AFFECT OUR BUSINESS OR FUTURE OPERATING RESULTS
OUR OPERATING RESULTS ARE EXPECTED TO CONTINUE TO FLUCTUATE AND MAY NOT MEET
PUBLISHED ANALYST FORECASTS. THIS MAY CAUSE THE PRICE OF OUR COMMON STOCK TO
DECLINE.
Our future quarterly and annual operating results are subject to
fluctuations due to a wide variety of factors, including:
- the cyclicality of the semiconductor industry;
- decreases in the demand for our products;
- excess inventory levels at our customers;
- declines in average selling prices of our products;
- cancellation of existing orders or the failure to secure new orders;
- oversupply of memory products in the market;
- our failure to introduce new products and to implement technologies on
a timely basis;
- market acceptance of ours and our customers' products;
- the failure to anticipate changing customer product requirements;
- fluctuations in manufacturing yields;
- failure to deliver products to customers on a timely basis;
- disruption in the supply of wafers or assembly services;
- changes in product mix;
- the timing of significant orders;
- increased expenses associated with new product introductions or
process changes;
- the ability of customers to make payments to us; and
- increases in antidumping duties.
WE HAVE LOST MONEY IN CERTAIN RECENT PERIODS, AND THERE CAN BE NO ASSURANCE THAT
WE WILL BE ABLE TO SUSTAIN PROFITABILITY IN THE FUTURE.
We incurred a loss of $24.7 million, including an inventory write-down of
$17.6 million, and a loss of $3.7 million in the three months ended September
30, 2001 and June 30, 2001, respectively. We expect to lose money in
15
the December 2001 quarter and may lose money in subsequent quarters. We were
profitable for fiscal 2001 and fiscal 2000. We incurred losses of $9.5 million
and $50.6 million in fiscal 1999 and 1998, respectively. Our ability to maintain
profitability on a quarterly basis in the future will depend on a variety of
factors, including our ability to increase our net sales, introduce new products
on a timely basis, secure sufficient wafer fabrication capacity and control our
operating expenses. Adverse developments with respect to these or other factors
could result in quarterly or annual operating losses in the future.
ANY CONTINUED DOWNTURN IN THE MARKETS WE SERVE WOULD HARM OUR BUSINESS.
A majority of our products are incorporated into products such as internet
access devices, networking equipment, and telecom/mobile communications devices.
Historically, these markets have from time to time experienced cyclical,
depressed business conditions, often in connection with, or in anticipation of,
a decline in general economic conditions. Such industry downturns have resulted
in reduced product demand and declining average selling prices. These markets
are currently experiencing severely depressed business conditions which are
adversely affecting our business. We are unable to predict how long this current
downturn will continue or whether current conditions will worsen.
OUR SALES DEPEND ON SRAM PRODUCTS, AND A DECLINE IN AVERAGE SELLING PRICES OR
REDUCED DEMAND FOR THESE PRODUCTS COULD HARM OUR BUSINESS.
A majority of our net sales are derived from the sale of SRAM products,
which are subject to unit volume fluctuations and declines in average selling
prices which could harm our business. For example, in the three months ended
September 30, 2001, our net sales decreased by 26% to $14.8 million from $20.0
million in the three months ended June 30, 2001, principally due to a decline in
average selling prices for our products including our SRAM products. In
addition, in the three months ended June 30, 2001, our net sales decreased by
62% to $20.0 million from $52.0 million in the three months ended March 31,
2001, and decreased 20% in the three months ended March 31, 2001 from $65.2
million in the three months ended December 31, 2000, principally due to a
decrease in unit shipments of our SRAM products as a result of lower demand for
electronic products. Further, we anticipate that the average selling prices of
our existing products will decline over time, although the rate of decline may
fluctuate for certain products. Such declines may not be offset by higher
volumes or by higher prices on newer products.
WE MAY NOT BE ABLE TO COMPENSATE FOR PRICE DECREASES IN OUR PRODUCTS.
Competitive pricing pressures due to an industry-wide oversupply of wafer
capacity as well as product inventory resulted in significant price decreases
for our products during fiscal 1996 through fiscal 1999. While we experienced
increases in average selling prices in fiscal 2000, historically, average
selling prices for semiconductor memory products have declined, and we expect
that average selling prices will decline in the future. In that regard, we
experienced a significant decline in the average selling prices for certain of
our products in the three months ended September 30, 2001 as compared to the
three months ended June 30, 2001. We anticipate a further decline in the average
selling prices for certain of our products in the three months ended December
31, 2001. Our ability to maintain or increase revenues will depend upon our
ability to increase unit sales volume of existing products and introduce and
sell new products which compensate for the anticipated declines in the average
selling prices of our existing products.
Declining average selling prices will also adversely affect our gross
margins and profits unless we are able to introduce new products with higher
margins or reduce our cost per unit. We may not be able to increase unit sales
volumes, introduce and sell new products or reduce our cost per unit.
SHIFTS IN INDUSTRY-WIDE CAPACITY MAY CAUSE OUR RESULTS TO FLUCTUATE. IN THE
PAST, SUCH SHIFTS HAVE RESULTED IN SIGNIFICANT INVENTORY WRITE-DOWNS.
Shifts in industry-wide capacity from shortages to oversupply or from
oversupply to shortages may result in significant fluctuations in our quarterly
or annual operating results. The semiconductor industry is highly cyclical and
is subject to significant downturns resulting from excess capacity,
overproduction, reduced demand or technological obsolescence. These factors can
result in a decline in average selling prices and the stated value of inventory.
In fiscal 2001, we recorded inventory write-downs of $38.3 million, including
$17.6 million in the three months ended September 30, 2001. The inventory
write-downs were predominately for lower of cost or market
16
accounting on certain of our products, primarily DRAMs and low power SRAMs, and
to a lesser extent, excess inventory.
We write down to zero carrying value inventory on hand in excess of six
months' estimated sales volumes to cover estimated exposures, unless adjustments
are made to the forecast based on management's judgments for newer products, end
of life products or planned inventory increases. In making such judgments to
write down inventory, management takes into account the product life cycles
which can range from 6 to 30 months, the stage in the life cycle of the product,
the impact of competitors' announcements and product introductions on our
products, and purchasing opportunities due to excess wafer capacity.
We believe that six months is an appropriate period because it is difficult
to accurately forecast for a specific product beyond this time frame due to the
potential introduction of products by competitors, technology obsolescence or
fluctuations in demand. Our policy regarding excess inventory resulted in
inventory write-downs for excess inventory of approximately $5.7 million for
fiscal year 2001. Future additional inventory write-downs may occur due to lower
of cost or market accounting, excess inventory or inventory obsolescence.
IF WE ARE UNABLE TO OBTAIN AN ADEQUATE SUPPLY OF WAFERS, OUR BUSINESS WILL BE
HARMED.
If we are unable to obtain an adequate supply of wafers from our current or
any alternative sources in a timely manner, our business will be harmed. To
date, our principal manufacturing relationship has been with TSMC, from which we
have obtained a majority of our wafers. We also receive wafers from Chartered
Semiconductor and UMC. Each of our wafer foundries also supplies wafers to other
integrated circuit companies, including certain of our competitors. Although we
have written commitments specifying wafer capacities from certain suppliers, if
these suppliers experience manufacturing failures or yield shortfalls, choose to
prioritize capacity for other uses, or reduce or eliminate deliveries to us, we
may not be able to enforce fulfillment of the delivery commitments.
Additionally, we may not be able to qualify additional manufacturing sources for
existing or new products in a timely manner and we cannot be certain that other
manufacturing sources would agree to deliver an adequate supply of wafers to us.
FOUNDRY CAPACITY CAN BE LIMITED AND WE MAY BE REQUIRED TO ENTER INTO COSTLY
LONG-TERM SUPPLY ARRANGEMENTS TO SECURE FOUNDRY CAPACITY.
If we are not able to obtain additional foundry capacity as required, our
relationships with our customers would be harmed and our future sales would be
adversely impacted. In order to secure additional foundry capacity, we have
entered into and expect to enter into various arrangements with suppliers, which
could include:
- contracts that commit us to purchase specified quantities of silicon
wafers over extended periods;
- investments in foundries;
- joint ventures;
- other partnership relationships with foundries;
- option payments or other prepayments to foundries; or
- nonrefundable deposits with or loans to foundries in exchange for
capacity commitments.
We may not be able to make any such arrangements in a timely fashion or at
all, and such arrangements, if any, may not be on terms favorable to us.
Moreover, if we are able to secure foundry capacity, we may be obligated to
utilize all of that capacity or incur penalties. Such penalties may be expensive
and could harm our financial results.
WE DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR A HIGH PERCENTAGE OF OUR SALES, AND
THE LOSS OF A SIGNIFICANT CUSTOMER COULD CAUSE A DECLINE IN OUR PROFITS.
Sales to Flextronics International accounted for approximately 15% of net
sales for fiscal 2001. Substantially all of our sales to Flextronics were for
products to be delivered to Cisco Systems, Inc. Shipments for Cisco directly, or
indirectly through subcontractors, accounted for approximately 18% of net sales
for fiscal 2001. Sales to 3Com
17
accounted for approximately 7% of net sales for fiscal 2001. Shipments for 3Com
directly, or indirectly through subcontractors, accounted for approximately 11%
of net sales for fiscal 2001. In fiscal 2000, no single customer accounted for
over 10% of net sales. However, in fiscal 2000, shipments for Cisco directly, or
indirectly through subcontractors, accounted for approximately 13% of net
revenue. In fiscal 1999, one customer, 3Com, accounted for approximately 20% of
net sales. As sales to these customers are executed pursuant to purchase orders
and no purchasing contract exists, these customers can cease doing business with
us at any time. In this regard, we experienced order cancellations from these
customers in the March 2001 quarter. We expect a significant portion of our
future sales to remain concentrated within a limited number of strategic
customers. We may not be able to retain our strategic customers, such customers
may cancel or reschedule orders, or in the event of canceled orders, such orders
may not be replaced by other sales. In addition, sales to any particular
customer may fluctuate significantly from quarter to quarter, and such
fluctuating sales could harm our business.
OUR PRODUCTS ARE COMPLEX AND COULD CONTAIN DEFECTS, WHICH COULD REDUCE SALES OF
THOSE PRODUCTS OR RESULT IN CLAIMS AGAINST US.
We develop complex and evolving products. Despite testing by us and our
customers, errors may be found in existing or new products. This could result in
a delay in recognition or loss of revenues, loss of market share or failure to
achieve market acceptance. These defects also may cause us to incur significant
warranty, support and repair costs, may divert the attention of our engineering
personnel from our product development efforts and could harm our relationships
with our customers. The occurrence of these problems could result in the delay
or loss of market acceptance of our products and would likely harm our business.
Defects, integration issues or other performance problems in our products could
result in financial or other damages to our customers or could lessen market
acceptance of our products. Our customers could also seek and obtain damages
from us for their losses. Although we specifically limit our liability to
replacement of defective items or return of amounts paid, a product liability
claim brought against us, even if unsuccessful, would likely be time consuming
and costly to defend.
STRONG COMPETITION IN THE SEMICONDUCTOR MEMORY MARKET MAY HARM OUR BUSINESS.
The semiconductor memory market is intensely competitive and has been
characterized by an oversupply of product, price erosion, rapid technological
change, short product life cycles, cyclical market patterns and heightened
foreign and domestic competition. Certain of our competitors offer broader
product lines and have greater financial, technical, marketing, distribution and
other resources than us. We may not be able to compete successfully against any
of these competitors. Our ability to compete successfully in the high
performance memory market depends on factors both within and outside of our
control, including:
- real or perceived imbalances in supply and demand;
- product pricing;
- the rate at which OEM customers incorporate our products into their
systems;
- the success of our customers' products;
- access to advanced process technologies at competitive prices;
- product functionality, performance and reliability;
- successful and timely product development;
- the supply and cost of wafers;
- achievement of acceptable yields of functional die;
- the gain or loss of significant customers; and
- the nature of our competitors and general economic conditions.
18
In addition, we are vulnerable to technology advances utilized by
competitors to manufacture higher performance or lower cost products. We may not
be able to compete successfully in the future as to any of these factors. Our
failure to compete successfully in these or other areas could harm our business.
19
POTENTIAL INTELLECTUAL PROPERTY CLAIMS AND LITIGATION COULD SUBJECT US TO
SIGNIFICANT LIABILITY FOR DAMAGES AND COULD INVALIDATE OUR PROPRIETARY RIGHTS.
In the semiconductor industry, it is not unusual for companies to receive
notices alleging infringement of patents or other intellectual property rights
of others. We have been, and from time-to-time expect to be, notified of claims
that we may be infringing patents, maskwork rights or copyrights owned by third
parties. If it appears necessary or desirable, we may seek licenses under
patents that we are alleged to be infringing. Although patent holders commonly
offer such licenses, licenses may not be offered and the terms of any offered
licenses may not be acceptable to us.
The failure to obtain a license under a key patent or intellectual property
right from a third party for technology used by us could cause us to incur
substantial liabilities and to suspend the manufacture of the products utilizing
the invention or to attempt to develop non-infringing products, any of which
could materially and adversely affect our business and operating results.
Furthermore, we may become involved in protracted litigation regarding the
alleged infringement by us of third party intellectual property rights or
litigation to assert and protect our patents or other intellectual property
rights. Any litigation relating to patent infringement or other intellectual
property matters could result in substantial cost and diversion of our resources
which could harm our business.
WE HAVE SIGNIFICANT INTERNATIONAL SALES AND RISKS RELATED TO OUR INTERNATIONAL
OPERATIONS COULD HARM OUR OPERATING RESULTS.
In fiscal 2001, approximately 52% of our net sales was attributable to
customers located in the United States, 25% was attributable to customers
located in Europe and 23% was attributable to customers located in Asia. In
fiscal 2000, approximately 54% of our net sales was attributable to customers
located in the United States, 23% was attributable to customers located in
Europe and 23% was attributable to customers located in Asia. In fiscal 1999,
approximately 52% of our net sales was attributable to customers located in the
United States, 20% was attributable to customers located in Europe and 28% was
attributable to customers located in Asia. Accordingly, our future operating
results will depend on general economic conditions in Asia, Europe, and the
United States. In addition, the markets for our products, which are highly
cyclical, may not continue to grow. We anticipate that sales to international
customers will continue to represent a significant percentage of net sales.
We are subject to the risks of conducting business internationally,
including:
- economic conditions in Europe and Asia, particularly Taiwan and the
People's Republic of China;
- changes in trade policy and regulatory requirements;
- duties, tariffs and other trade barriers and restrictions;
- the burdens of complying with foreign laws;
- foreign currency fluctuations;
- difficulties in collecting foreign accounts receivable; and
- political instability.
WE HAVE MADE STRATEGIC EQUITY INVESTMENTS IN OTHER COMPANIES WITH NO ASSURANCE
THAT THEY WILL INCREASE IN VALUE.
Over the last few years, we have made several strategic equity investments
in other technology companies. There can be no assurance that these investments
will increase in value and there is the possibility that they could decrease in
value over time, even to the point of becoming completely worthless. These
investments are tested for impairment on a recurring basis and any reductions in
the carrying value would lower our profitability.
20
WE MAY ENCOUNTER DIFFICULTIES IN EFFECTIVELY INTEGRATING ACQUIRED BUSINESSES.
From time to time, we may acquire other companies that would be
complementary to our business. Acquisitions may result in potentially dilutive
issuances of equity securities, incurrence of debt and contingent liabilities,
amortization expenses related to intangible assets and the possible impairment
of goodwill, which could harm our profitability. In addition, acquisitions
involve numerous risks, including, among other things: higher than estimated
acquisition expenses; difficulties in successfully assimilating the operations,
technologies and personnel of the acquired company; diversion of management's
attention from other business concerns; risks of entering markets in which we
have no or limited direct prior experience; and the potential loss of key
employees and customers as a result of the acquisition. There can be no
assurance as to the effect of future acquisitions on our business or operating
results.
WE DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN OUR KEY TECHNICAL AND MANAGEMENT
PERSONNEL.
Our success depends upon the continued service of key technical and
management personnel, including Jimmy S.M. Lee, Chairman and Chief Executive
Officer, and Gary L. Fischer, President and Chief Operating Officer, as well as
on our ability to continue to attract, retain and motivate qualified personnel,
particularly experienced circuit designers and process engineers. The
competition for such employees is intense. We have no employment contracts or
key person life insurance policies with or for any of our executive officers.
The loss of the service of one or more of our key personnel could materially and
adversely affect our business and operating results.
TERRORIST ATTACKS, THREATS OF FURTHER ATTACKS, THREATS OF WAR, AND ACTS OF WAR
MAY NEGATIVELY IMPACT ALL ASPECTS OF OUR OPERATIONS, REVENUES, COSTS AND STOCK
PRICE.
Recent terrorist attacks in the United States, as well as future events
occurring in response or connection to them, including, without limitation,
future terrorist attacks against United States targets, rumors or threats of
war, actual conflicts involving the United States or its allies, or trade
disruptions impacting our domestic or foreign suppliers of merchandise, may
impact our operations and may, among other things, cause delays or losses in the
delivery of wafers or other products to us and decreased sales of our products.
More generally, these events have affected, and will continue to affect, the
general economy and customer demand for products sold by our customers. Any of
these occurrences could have a significant impact on our operating results,
revenues, and costs, which in turn may result in increased volatility in our
common stock price and could adversely affect the future price of our common
stock.
OUR STOCK PRICE IS EXPECTED TO BE VOLATILE.
The trading price of our common stock has been and is expected to be
subject to wide fluctuations in response to:
- quarter-to-quarter variations in our operating results;
- comments or recommendations issued by analysts who follow us, our
competitors or the semiconductor industry and other events or factors;
- aggregate valuations and movement of stocks in the broader
semiconductor industry;
- announcements of new products, strategic relationships or acquisitions
by us or our competitors;
- increases or decreases in wafer capacity;
- general conditions or cyclicality in the semiconductor industry or the
end markets that we serve;
- governmental regulations, trade laws and import duties;
- announcements related to future or existing litigation involving us or
any of our competitors;
- new or revised earnings estimates;
21
- announcements of technological innovations by us or our competitors;
- additions or departures of senior management; and
- other events or factors many of which are beyond our control.
In addition, stock markets have experienced extreme price and trading volume
volatility in recent years. This volatility has had a substantial effect on the
market prices of securities of many high technology companies for reasons
frequently unrelated to the operating performance of the specific companies.
These broad market fluctuations may adversely affect the market price of our
common stock.
ITEM 7a. MARKET RISK DISCLOSURES
Our financial market risk includes risks associated with international
operations and related foreign currencies. We anticipate that international
sales will continue to account for a significant portion of our consolidated
revenue. Our international sales are largely denominated in U.S. dollars and
therefore are not subject to material foreign currency exchange risk. Expenses
of our international operations are denominated in each country's local currency
and therefore are subject to foreign currency exchange risk; however, through
September 30, 2001 we have not experienced any significant negative impact on
our operations as a result of fluctuations in foreign currency exchange rates.
We do not currently engage in any hedging activities or use derivative financial
instruments.
We have short-term investments of $103.6 million at September 30, 2001.
The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without increasing risk. We invest
primarily in high-quality, short-term debt instruments such as municipal auction
rate certificates and instruments issued by high quality financial institutions
and companies, including money market instruments. A hypothetical one percentage
point decrease in interest rates would result in approximately a $1.2 million
decrease in interest income.
We own approximately 29% of ICSI a public company listed on the Taiwan
Stock Exchange. We account for this investment on the equity basis and our
investment balance as of September 30, 2001 was approximately $22.8 million. The
share price of ICSI is subject to fluctuations. A significant decline in the
stock price of ICSI may require us to record a loss related to this investment.
We have investments in equity securities of privately held companies for
the promotion of business and strategic objectives of approximately $20.5
million at September 30, 2001. These investments are generally in companies in
the semiconductor industry. These investments are included in long-term
investments and are accounted for using the cost method. In addition, we have an
investment of $3.1 million that is accounted for on the equity method. For
investments in which no public market exists, our policy is to review the
operating performance, recent financing transactions and cash flow forecasts for
such companies in assessing the net realizable values of the securities of these
companies. Impairment losses on equity investments are recorded when events and
circumstances indicate that such assets are impaired and the decline in value is
other than temporary. We recorded $150,000 in impairment losses during 2001.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Auditors.............................................24
Financial Statements:
Consolidated Statements of Operations
For Fiscal Years Ended September 30, 2001,
September 30, 2000, and September 30, 1999..................25
Consolidated Statements of Comprehensive Income
For Fiscal Years Ended September 30, 2001,
September 30, 2000, and September 30, 1999..................26
Consolidated Balance Sheets
As of September 30, 2001 and September 30, 2000.............27
Consolidated Statements of Stockholders' Equity
For Fiscal Years Ended September 30, 2001,
September 30, 2000, and September 30, 1999..................28
Consolidated Statements of Cash Flows
For Fiscal Years Ended September 30, 2001,
September 30, 2000, and September 30, 1999..................29
Notes to Consolidated Financial Statements.........................30
23
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Integrated Silicon Solution, Inc.
We have audited the accompanying consolidated balance sheets of Integrated
Silicon Solution, Inc. as of September 30, 2001 and 2000, and the related
consolidated statements of operations, comprehensive income, stockholders'
equity, and cash flows for each of the three years in the period ended September
30, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Integrated Silicon Solution, Inc. at September 30, 2001 and 2000, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
San Jose, California
October 26, 2001
24
Integrated Silicon Solution, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Years Ended September 30,
-----------------------------------------
2001 2000 1999
--------- --------- ---------
Net sales (See Note 18) $ 152,048 $ 141,923 $ 83,309
Cost of sales (See Note 18) 144,869 97,759 66,816
--------- --------- ---------
Gross profit 7,179 44,164 16,493
--------- --------- ---------
Operating expenses
Research and development 25,303 18,287 18,778
Selling, general and administrative 20,721 15,627 11,899
--------- --------- ---------
Total operating expenses 46,024 33,914 30,677
--------- --------- ---------
Operating income (loss) (38,845) 10,250 (14,184)
Interest and other income (expense), net 7,778 3,912 2,256
Interest expense (98) (133) (1,039)
Gain on sales of investments, net 30,732 847 2,658
--------- --------- ---------
Income (loss) before income taxes, minority
interest and equity in net income (loss) of
affiliated companies (433) 14,876 (10,309)
Provision for income taxes 150 680 608
--------- --------- ---------
Income (loss) before minority interest
and equity in net income (loss) of
affiliated companies (583) 14,196 (10,917)
Minority interest in net loss of
consolidated subsidiary -- -- (472)
Equity in net income (loss) of
affiliated companies 1,698 10,830 934
--------- --------- ---------
Net income (loss) $ 1,115 $ 25,026 $ (9,511)
========= ========= =========
Basic net income (loss) per share $ 0.04 $ 1.07 $ (0.48)
========= ========= =========
Shares used in basic per share calculation 26,183 23,357 19,633
========= ========= =========
Diluted net income (loss) per share $ 0.04 $ 0.96 $ (0.48)
========= ========= =========
Shares used in diluted per share calculation 27,788 26,056 19,633
========= ========= =========
See the accompanying notes to consolidated financial statements
25
Integrated Silicon Solution, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
Years Ended September 30,
-----------------------------------
2001 2000 1999
-------- ------- -------
Net income (loss) $ 1,115 $25,026 $(9,511)
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment (1,588) 419 2,599
-------- ------- -------
Comprehensive income (loss) $ (473) $25,445 $(6,912)
======= ======= =======
See the accompanying notes to consolidated financial statements
26
Integrated Silicon Solution, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
September 30,
-------------------------
2001 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 19,309 $ 38,778
Short-term investments 103,550 58,800
Accounts receivable, net of allowance for doubtful
accounts of $1,352 in 2001 and $1,499 in 2000 9,743 26,525
Accounts receivable from related parties (See Note 18) 597 1,526
Inventories 45,179 63,217
Other current assets 4,689 1,271
--------- ---------
Total current assets 183,067 190,117
Property, equipment, and leasehold improvements, net 7,663 5,429
Other assets 47,122 65,178
--------- ---------
Total assets $ 237,852 $ 260,724
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,285 $ 20,411
Accounts payable to related parties (See Note 18) 854 13,043
Accrued compensation and benefits 3,510 2,424
Accrued expenses 7,801 7,513
Income tax payable 3,651 648
Current portion of long-term obligations 156 140
--------- ---------
Total current liabilities 23,257 44,179
Income tax payable -- noncurrent -- 4,996
Long-term obligations 158 314
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value: Authorized shares --
5,000 in 2001 and 2000. No shares outstanding -- --
Common stock, $0.0001 par value: Authorized shares --
70,000 in 2001 and 2000. Issued and outstanding shares --
26,539 in 2001 and 25,788 in 2000 3 3
Additional paid-in capital 221,502 217,845
Accumulated deficit (1,711) (2,826)
Accumulated comprehensive income (loss) (5,357) (3,769)
Unearned compensation -- (18)
--------- ---------
Total stockholders' equity 214,437 211,235
--------- ---------
Total liabilities and stockholders' equity $ 237,852 $ 260,724
========= =========
See the accompanying notes to consolidated financial statements
27
Integrated Silicon Solution, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands)
Retained
Common Stock Additional Earnings Accumulated Total
--------------- Paid-In (Accumulated Comprehensive Unearned Stockholders'
Shares Amount Capital Deficit) Income (Loss) Compensation Equity
--------------- ---------- ----------- ------------- ------------ ------------
Balance at September 30, 1998 19,417 $ 2 $ 116,199 $ (18,341) $ (6,787) $(153) $ 90,920
Stock options exercised 556 -- 2,064 -- -- -- 2,064
Shares issued under stock purchase
plan 235 -- 699 -- -- -- 699
Amortization of unearned compensation -- -- -- -- -- 8 8
Cancellation of stock options -- -- (109) -- -- 109 --
Warrants issued in connection with
NexFlash Technologies spin-off -- -- 1,999 -- -- -- 1,999
Shares issued for exercise of warrant 86 -- -- -- -- -- --
Translation adjustment -- -- -- -- 2,599 -- 2,599
Net loss -- -- -- (9,511) -- -- (9,511)
--------- ---- --------- --------- --------- ----- ---------
Balance at September 30, 1999 20,294 2 120,852 (27,852) (4,188) (36) 88,778
Stock options exercised 1,006 -- 5,461 -- -- -- 5,461
Shares issued under stock purchase
plan 235 -- 859 -- -- -- 859
Amortization of unearned compensation -- -- -- -- -- 18 18
Shares issued in connection with
follow-on public stock offering 3,795 1 90,673 -- -- -- 90,674
Shares issued for exercise of warrants 458 -- -- -- -- -- --
Translation adjustment -- -- -- -- 419 -- 419
Net income -- -- -- 25,026 -- -- 25,026
--------- ---- --------- --------- --------- ----- ---------
Balance at September 30, 2000 25,788 3 217,845 (2,826) (3,769) (18) 211,235
Stock options exercised 556 -- 2,532 -- -- -- 2,532
Shares issued under stock purchase
plan 195 -- 1,125 -- -- -- 1,125
Amortization of unearned compensation -- -- -- -- -- 18 18
Translation adjustment -- -- -- -- (1,588) -- (1,588)
Net income -- -- -- 1,115 -- -- 1,115
--------- ---- --------- --------- --------- ----- ---------
Balance at September 30, 2001 26,539 $ 3 $ 221,502 $ (1,711) $ (5,357) $ -- $ 214,437
========= ==== ========= ========= ========= ===== =========
See the accompanying notes to consolidated financial statements
28
Integrated Silicon Solution, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Years Ended September 30,
----------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ 1,115 $ 25,026 $ (9,511)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 3,359 3,223 4,608
Net gain on sale of investments (30,732) (847) (2,658)
Loss on impairment of asset 150 200 --
Net foreign currency transaction (gains) losses -- -- (594)
Equity in net income of affiliated companies (1,698) (10,830) (934)
Minority interest in net loss of consolidated subsidiary -- -- (472)
Changes in operating assets and liabilities:
Accounts receivable and accounts receivable from related parties (See Note 18) 17,711 (12,875) (1,719)
Inventories 18,038 (33,545) (21,912)
Other assets (1,473) 99 11,549
Accounts payable and accounts payable to related parties (See Note 18) (25,315) 13,853 149
Accrued expenses (619) 2,129 (963)
-------- -------- --------
Net cash used in operating activities (19,464) (13,567) (22,457)
Cash flows from investing activities:
Acquisition of property, equipment, and leasehold improvements (5,593) (3,489) (3,490)
Purchases of available-for-sale securities (82,150) (67,350) (26,450)
Sales of available-for-sale securities 37,400 16,200 26,600
Dividends received from equity investee 1,961 -- --
Cash impact of deconsolidation of Integrated Circuit Solution, Inc. ("ICSI") -- -- (12,818)
Proceeds from partial sale of ICSI 15,779 3,324 4,957
Investment in WaferTech, LLC -- (2,667) --
Proceeds from sale of WaferTech, LLC 40,669 -- 10,000
Proceeds from sale of United Integrated Circuits Corp. -- -- 9,217
Investment in NexFlash Technologies, Inc. -- (1,361) (1,000)
Proceeds from partial sale of NexFlash Technologies, Inc. 6,167 -- --
Investment in Semiconductor Manufacturing International Corp. ("SMIC") (14,250) (4,600) --
Investment in E-CMOS Technology Corporation (3,023) -- --
Other investments (500) (553) (500)
-------- -------- --------
Net cash provided by (used in) investing activities (3,540) (60,496) 6,516
Cash flows from financing activities:
Proceeds from issuance of stock 3,675 97,012 2,771
Borrowings under notes payable and long-term obligations -- -- 33,435
Principal payments of notes payable and long-term obligations (140) (146) (32,393)
-------- -------- --------
Net cash provided by financing activities 3,535 96,866 3,813
Effect of exchange rate changes on cash and cash equivalents -- -- 327
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (19,469) 22,803 (11,801)
Cash and cash equivalents at beginning of year 38,778 15,975 27,776
-------- -------- --------
Cash and cash equivalents at end of year $ 19,309 $ 38,778 $ 15,975
======== ======== ========
See the accompanying notes to consolidated financial statements
29
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Integrated Silicon Solution, Inc. (the "Company") was incorporated in
California on October 27, 1988 and reincorporated in Delaware on August 9, 1993.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Integrated Silicon Solution, Inc. and its majority owned subsidiaries, after
elimination of all significant intercompany accounts and transactions.
The Company's financial results for fiscal 2001 and fiscal 2000 reflect
accounting for Integrated Circuit Solution, Inc., ("ICSI") and GetSilicon, Inc.
("GetSilicon") on the equity basis and include its percentage share of the
results of their respective operations. The Company's financial results for
fiscal 2001 reflect accounting for E-CMOS Technology Corporation ("E-CMOS") on
the equity basis and includes its percentage gain or loss of their results of
operations on a one quarter lag. The Company's financial results for fiscal 2001
through the period ended January 31, 2001 and for fiscal 2000 reflect accounting
for NexFlash Technologies, Inc. ("NexFlash") on the equity basis and include its
percentage share of the results of NexFlash's operations. Effective February
2001, the Company's ownership of NexFlash became less than 20%, and the Company
began accounting for NexFlash on the cost basis. Prior to the quarter ended
March 31, 1999, the Company's ownership of ICSI exceeded 50% and its financial
results were consolidated with those of ICSI. Effective with the quarter ending
March 31, 1999, the Company accounted for ICSI on the equity basis and included
in its financial statements its percentage share of ICSI's financial results. In
fiscal 1999, the Company accounted for NexFlash on the equity basis and included
in its financial statements its percentage share of NexFlash's financial
results. At September 30, 2001, the Company owned approximately 29% of ICSI,
approximately 14% of NexFlash, approximately 22% of E-CMOS and approximately 20%
of GetSilicon.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
Under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" all affected debt securities
must be classified as held-to-maturity, trading, or available-for-sale and
equity securities must be classified as trading or available-for-sale.
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date.
At September 30, 2001 and 2000, all debt and equity securities were
designated as available-for-sale. Available-for-sale securities are carried at
fair value, with unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. The amortized cost for available-for-sale
debt securities is adjusted for the amortization of premiums and accretion of
discounts to maturity. Such amortization is included in investment income.
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in investment
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in investment income. At September 30, 2001 and 2000, the cost of
these securities approximated the fair value (quoted market price) and the
amount of unrealized gain or loss was not significant. Except for the gains
(losses) recognized on the sales of securities of ICSI, WaferTech, NexFlash and
UICC (see Note 17), there were no gains or losses on the sale of securities for
the years ended September 30, 2001, 2000 and 1999.
30
Notes to Consolidated Financial Statements
ACCOUNTS RECEIVABLE
The following describes activity in the accounts receivable allowance for
doubtful accounts for the years ended September 30, 2001, 2000, and 1999.
Addition
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions of Period
- -------------------------------- ---------- ---------- ---------- ---------
Accounts receivable --
Allowance for doubtful accounts:
2001 $1,499 $ -- $(147)(1) $1,352
2000 $1,496 $ 3 $ -- $1,499
1999 $1,804 $ -- $(308)(1)(2) $1,496
- ----------
(1) Uncollectible accounts written off, net of recoveries
(2) Includes reduction of $302 resulting from the deconsolidation of ICSI
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The Company's inventory valuation process is done on a part-by-part
basis. Lower of cost or market adjustments, specifically identified on a
part-by-part basis, reduce the carrying value of the related inventory and take
into consideration reductions in sales prices, excess inventory levels and
obsolete inventory. Once established, these adjustments are considered
permanent.
PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment, and leasehold improvements are stated at cost.
Equipment under capital leases is stated at the present value of minimum lease
payments at the beginning of the lease term. Depreciation and amortization are
computed using the straight-line method, based upon the shorter of the estimated
useful lives ranging from three to seven years, or the lease term of the
respective assets, if applicable.
ACCUMULATED COMPREHENSIVE INCOME (LOSS)
The accumulated comprehensive income (loss) component within the
stockholders' equity section of the Balance Sheet is comprised entirely of
foreign currency translation adjustments.
REVENUE RECOGNITION
The Company recognizes revenue to non-distributor customers when persuasive
evidence of an arrangement exists including a fixed price to the buyer, delivery
has occurred and collectability is reasonably assured. The Company provides for
estimated sales returns on sales to these customers. Sales made to distributors,
under terms allowing certain rights of return and price protection on unsold
merchandise held by the distributor, are deferred until the merchandise is sold
by the distributor.
FOREIGN CURRENCY TRANSLATION
The Company uses the local currency as its functional currency for all
foreign subsidiaries. Translation adjustments, which result from the process of
translating foreign currency financial statements into U.S. dollars, are
included in the accumulated comprehensive income (loss) component of
stockholder's equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets
31
Notes to Consolidated Financial Statements
and liabilities, and the disclosure of contingent assets and liabilities at the
date of the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates, and such difference, may be material to the financial statements.
CONCENTRATION OF CREDIT RISK
The Company operates in one business segment, which is to design, develop,
and market high performance SRAM, DRAM, and other memory products. The Company
markets and distributes its products on a worldwide basis, primarily to original
equipment manufacturers, contract manufacturers, and distributors. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally requires no collateral. Sales to Flextronics International accounted
for approximately 15% of net sales for fiscal 2001. Substantially all of the
sales to Flextronics were for products to be delivered to Cisco Systems, Inc.
Shipments for Cisco directly, or indirectly through subcontractors, accounted
for approximately 18% of net sales for fiscal 2001. Sales to 3Com accounted for
approximately 7% of net sales for fiscal 2001. Shipments for 3Com directly, or
indirectly through subcontractors, accounted for approximately 11% of net sales
for fiscal 2001. In fiscal 2000 no single customer accounted for over 10% of net
sales. However, shipments for Cisco directly, or indirectly through
subcontractors, accounted for approximately 13% of net revenue. In fiscal 1999,
one customer, 3Com, accounted for approximately 20% of net sales.
The Company maintains cash, cash equivalents, and short-term investments
with various financial institutions. The Company's investment policy is designed
to limit exposure to any one institution. The Company performs periodic
evaluations of the relative credit standing of those financial institutions that
are considered in its investment strategy. The Company is exposed to credit risk
in the event of default by the financial institutions or issuers of investments
to the extent of the amount recorded on the balance sheet. To date, the Company
has not incurred losses related to these investments.
SEMICONDUCTOR INDUSTRY RISKS
To date the Company has derived a substantial majority of its revenues from
the sale of SRAM products. The Company has diversified into other product areas,
such as low and medium density DRAMs, serial EEPROMs, certain microcontrollers,
and voice recording chips. However, a substantial majority of the Company's
revenue is still derived from SRAM products and, if the market for SRAM products
should decline, such decline would have a material adverse affect on the
Company's financial performance.
The semiconductor industry is characterized by rapid technological change,
intense competitive pressure and cyclical market patterns. The Company's results
of operations are affected by a wide variety of factors, including declines in
average selling prices of its products, cancellation of existing orders or the
failure to secure new orders, oversupply of memory products in the market,
failure to introduce new products and to implement technologies on a timely
basis, the timing and announcement of new product introductions by the Company
and its competitors, market acceptance of the Company's and its customers'
products, the failure to anticipate changing customer product requirements,
fluctuations in manufacturing yields, disruption in delivery and order
fulfillment, and disruption in the supply of wafers or assembly services. Other
factors include changes in product mix, seasonal fluctuations in customer demand
for the Company's products, the timing of significant orders, increased expenses
associated with new product introductions or process changes, the ability of
customers to make payments to the Company, increases in material costs,
increases in antidumping duties, increases in costs associated with the
expansion of sales channels, increases in general and administrative expenses,
and certain production and other risks associated with using independent
manufacturers. As a result, the Company may experience substantial
period-to-period fluctuations in future operating results due to the factors
mentioned above or other factors.
NET INCOME (LOSS) PER SHARE
Basic and diluted net loss per share and basic net income per share is
computed using the weighted number of common shares outstanding during the
period. Diluted net income per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding, if
applicable, during the period. Common equivalent shares consist of the shares
issuable upon the exercise of stock options and warrants under the treasury
stock method.
32
Notes to Consolidated Financial Statements
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". The new rules require
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting and goodwill acquired after this date will no
longer be amortized, but will be subject to annual impairment tests. All other
intangible assets will continue to be amortized over their estimated useful
lives. The Company will adopt these standards as of October 1, 2001. As the
Company has not completed any business combinations through September 30, 2001,
the Company believes that these standards will not have a material impact on its
financial position or operating results.
NOTE 2. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
Cash, cash equivalents, and short-term investments consisted of the
following at September 30:
2001 2000
-------- --------
(In thousands)
Cash $ 14,280 $ 10,624
Money market instruments 5,029 28,154
Municipal bonds 103,550 58,800
-------- --------
Total $122,859 $ 97,578
======== ========
NOTE 3. INVENTORIES
Inventories consisted of the following at September 30:
2001 2000
-------- --------
(In thousands)
Purchased components $12,350 $17,566
Work-in-process 594 11,737
Finished goods 32,235 33,914
------- -------
$45,179 $63,217
======= =======
In fiscal 2001, the Company recorded inventory write-downs of $38.3
million. The inventory write-downs were predominately for lower of cost or
market issues on certain of its products.
NOTE 4. OTHER ASSETS
Other assets consisted of the following at September 30:
2001 2000
-------- --------
(In thousands)
Investment in ICSI (see Notes 1 and 17) $22,805 $31,525
Investment in WaferTech, LLC. (see Note 17) -- 23,467
Investment in SMIC (see Notes 14 and 17) 18,850 4,600
Other 5,467 5,586
------- -------
$47,122 $65,178
======= =======
33
Notes to Consolidated Financial Statements
NOTE 5. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment, and leasehold improvements consisted of the following
at September 30:
2001 2000
------- -------
(In thousands)
Machinery and equipment $29,554 $25,878
Furniture and fixtures 1,329 859
Building and improvements 1,142 1,063
------- -------
32,025 27,800
Less accumulated depreciation and amortization 24,362 22,371
------- -------
$ 7,663 $ 5,429
======= =======
NOTE 6. ACCRUED EXPENSES
Accrued liabilities consisted of the following at September 30:
2001 2000
------- -------
(In thousands)
Accrued anti-dumping duties (see Note 14) $1,574 $1,574
Deferred distributor margin 1,446 --
Other 4,781 5,939
------ ------
$7,801 $7,513
====== ======
NOTE 7. LONG-TERM OBLIGATIONS
The Company leases certain of its equipment under a capital lease. The
lease is collateralized by the underlying assets. At September 30, 2001,
property and equipment with a cost of $600,000 was subject to this financing
arrangement. Related accumulated amortization at September 30, 2001 amounted to
$275,000. Under the terms of the lease, the Company owes monthly payments of
$15,108 through September 1, 2003. Remaining principal and interest payments
were $314,000 and $34,000, respectively, at September 30, 2001.
At September 30, 2001, future minimum principal payments on long-term
obligations were as follows (in thousands):
2002 $156
2003 158
----
Total $314
====
No interest was capitalized in 2001, 2000, or 1999.
34
Notes to Consolidated Financial Statements
NOTE 8. CAPITAL STOCK
The Company's Restated Certificate of Incorporation provides for 70,000,000
authorized shares of Common Stock and 5,000,000 authorized shares of preferred
stock. The terms of the preferred stock may be fixed by the Board of Directors,
who have the right to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of common stock are
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future.
In the three month period ended March 31, 2000, the Company completed a
follow-on public offering of its Common Stock whereby the Company sold 3,795,000
shares (including 495,000 shares pursuant to the underwriters' over-allotment
option) at a public offering price of $25.50 per share. Proceeds from this
offering, net of commissions, discounts and expenses, were approximately $90.7
million.
As of September 30, 2001, shares of common stock were reserved for future
issuance as follows:
Common shares reserved under Employee Stock Purchase Plan 777,000
Common shares reserved under stock option plans 6,232,000
NOTE 9. STOCK PLANS
1989 STOCK OPTION PLAN
During 1989, the Company adopted a stock option plan (the "Plan") that
provides for the grant of incentive stock options to employees and nonstatutory
stock options to employees, consultants and nonemployee directors.
Incentive stock options and nonstatutory options granted under the Plan
have five or ten-year terms. All incentive stock option grants and nonstatutory
stock option grants must be at prices of at least 100% and 85%, respectively, of
the fair market value of the stock on the date of grant, as determined by the
Board of Directors.
The options are exercisable as determined by the Board of Directors.
Generally, the stock options vest ratably over a four-year period. The options
expire upon the earlier of five or ten years from the date of grant or 30 days
following termination of employment, unless specified otherwise in the option
agreement. Options to purchase 714,000 shares, 795,000 shares, and 920,000
shares were exercisable as of September 30, 2001, 2000, and 1999, respectively.
In the event of certain changes in control of ISSI, the Plan requires that
each outstanding option be assumed or an equivalent option substituted by the
successor corporation; however, if such successor refuses to assume the then
outstanding options, the Plan provides for the full acceleration of the
exercisability of all outstanding options.
1996 STOCK OPTION PLAN
On October 18, 1996, the Company adopted a stock option plan (the "1996
Plan") that provides for the grant of non-statutory stock options to
non-executive employees and consultants.
Under the terms of the plan, the exercise price and exercise period of
stock option grants is determined by the Board of Directors on the date of
grant. Generally, the stock options vest ratably over a four year period. The
options expire upon the earlier of ten years from the date of grant or 30 days
following termination of employment or consultancy, unless specified otherwise
in the option agreement. Options to purchase 827,000 shares, 286,000 shares, and
493,000 shares were exercisable as of September 30, 2001, 2000, and 1999,
respectively.
In the event of certain changes in control of ISSI, the 1996 Plan requires
that each outstanding option be assumed or an equivalent option substituted by
the successor corporation; however, if such successor refuses to assume the then
outstanding options, the 1996 Plan provides for the full acceleration of the
exercisability of all outstanding options.
35
Notes to Consolidated Financial Statements
1998 STOCK OPTION PLAN
The Board of Directors and stockholders approved the 1998 Stock Option Plan
(the "1998 Plan") in October 1998 and January 1999, respectively. The 1998 Plan
provides for the grant of incentive stock options to employees and nonstatutory
stock options to employees, consultants and nonemployee directors of ISSI. Stock
purchase rights may also be granted under the 1998 Plan.
Under the terms of the 1998 Plan, the exercise price and exercise period of
non-statutory stock option grants is determined by the Board of Directors on the
date of grant. All incentive stock option grants must be at prices of at least
100% of the fair market value of the stock on the date of grant, as determined
by the Board of Directors. Generally, the stock options vest ratably over a four
year period. The options expire upon the earlier of ten years from the date of
grant or 90 days following termination of employment or consultancy, unless
specified otherwise in the option agreement. Options to purchase 205,000 shares,
67,000 shares, and 0 shares were exercisable as of September 30, 2001, 2000, and
1999, respectively.
In the event of certain changes in control of ISSI, the 1998 Plan requires
that each outstanding option be assumed or an equivalent option substituted by
the successor corporation; however, if such successor refuses to assume the then
outstanding options, the 1998 Plan provides for the full acceleration of the
exercisability of all outstanding options.
1995 DIRECTOR STOCK OPTION PLAN
The Board of Directors and stockholders approved the 1995 Director Stock
Option Plan (the "Director Plan") in December 1995 and January 1996,
respectively. Under the terms of the Director Plan, 125,000 shares of Common
Stock were authorized for issuance. Each director who has been a non-employee
director for at least six months will automatically receive a non-statutory
option to purchase 2,500 shares of Common Stock upon such director's annual
reelection to the Board by the stockholders. Options to purchase 30,000 shares,
32,000 shares, and 38,000 shares were exercisable at September 30, 2001, 2000,
and 1999, respectively.
The following table summarizes activity of the 1989, 1996, 1998 and
Director Stock Option Plans:
Options Outstanding
-----------------------------------------------------
Options Number Weighted-
Available Of Price Average
For Grant Shares Per Share Exercise Price
--------- ------ ------------ --------------
(In thousands, except per share data)
------------------------------------------------------------------------
Balance at September 30, 1998 2,229 3,296 $3.00-$14.50 8.57
Authorized 575 -- -- --
Granted (3,157) 3,157 $2.56-$ 6.50 3.06
Exercised -- (556) $2.81-$ 9.25 3.68
Canceled 2,811 (2,811) $2.56-$13.00 7.92
------ ------ ------------ ------
Balance at September 30, 1999 2,458 3,086 $2.56-$14.50 $ 4.42
Authorized -- -- -- --
Granted (1,550) 1,550 $5.63-$30.13 16.21
Exercised -- (1,006) $2.56-$13.81 5.43
Canceled 184 (184) $2.56-$30.13 11.14
------ ------ ------------ ------
Balance at September 30, 2000 1,092 3,446 $2.56-$24.88 $ 9.07
Authorized 2,250 -- -- --
Granted (1,630) 1,630 $8.06-$17.06 10.68
Exercised -- (556) $2.56-$18.56 4.56
Canceled 413 (413) $2.56-$24.88 18.56
------ ------ ------------ ------
Balance at September 30, 2001 2,125 4,107 $2.56-$23.38 $ 9.36
====== ====== ============ ======
36
Notes to Consolidated Financial Statements
For certain options granted in 1997, the Company recognized as unearned
compensation the excess of the deemed value for accounting purposes of the
common stock issuable upon exercise of such options over the aggregate exercise
price of such options. The deemed value for accounting purposes represents the
fair value at the date of grant. The compensation expense is being amortized
ratably over the vesting period of the option. Compensation expense amounting to
$18,000, $18,000, and $8,000 was recognized for the years ending September 30,
2001, 2000, and 1999, respectively.
Outstanding and exercisable options presented by price range at September
30, 2001 are as follows:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------
Number of Wtd. Average Number of
Range of Options Remaining Life Wtd. Average Options Wtd. Average
Exercise Prices Outstanding (Years) Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------------------------------------------
$ 2.56-- 3.25 1,152,000 7.27 $ 2.93 852,000 $ 2.99
4.00-- 8.06 772,000 8.11 6.98 279,000 6.62
8.56--11.30 824,000 9.29 11.09 124,000 8.50
11.54--13.81 728,000 9.26 12.27 86,000 13.97
14.50--23.38 631,000 8.60 18.43 435,000 18.43
- ---------------------------------------------------------------------------------------------------
$ 2.56--23.38 4,107,000 8.39 $ 9.36 1,776,000 $ 8.39
===================================================================================================
EMPLOYEE STOCK PURCHASE PLAN
In March 1993, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan") under Section 423 of the Internal Revenue Code. Under the
Company's Purchase Plan, eligible employees may purchase shares of ISSI's common
stock through payroll deductions. The shares are purchased at a price equal to
85% of the lesser of the fair value of the Company's common stock as of the
first day of the 24-month offering period or the last day of each six-month
purchase period. A total of 1,950,000 shares of common stock is reserved for
issuance under the plan, of which 1,173,000 had been issued as of September 30,
2001.
STOCK-BASED COMPENSATION
As permitted under FAS 123, the Company has elected to follow APB 25 and
related Interpretations, in accounting for stock-based awards to employees.
Under APB 25, the Company generally recognized no compensation expense with
respect to such awards.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by FAS 123 for awards granted or modified after September 30,
1995, as if the Company had accounted for its stock-based awards to employees
under the fair value method of FAS 123. The fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model. The Black-Scholes model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock-based awards to employees have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's stock-based awards to employees was estimated assuming no
expected dividends and the following weighted-average assumptions:
STOCK OPTIONS ESPP
-------------------------- --------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Expected life (years) 5.0 5.0 5.0 0.5 0.5 0.5
Expected volatility 0.93 0.91 0.85 1.14 1.10 1.16
Risk-free interest rate 4.82% 6.32% 5.12% 4.38% 5.91% 4.84%
The weighted-average fair value of options granted at market value during
fiscal 2001, 2000, and 1999 was $6.52, $9.57, and $1.54 per share, respectively.
The weighted-average fair value of employee stock purchase rights during fiscal
2001, 2000, and 1999 was $7.42, $4.81, and $3.04 per share, respectively.
37
Notes to Consolidated Financial Statements
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period
(for options) and the six-month purchase period (for stock purchases under the
ESPP). The Company's pro forma information for the years ended September 30, is
as follows (in thousands, except for income (loss) per share information):
2001 2000 1999
------- ------- --------
Net income (loss)
As reported $ 1,115 $25,026 $ (9,511)
Pro forma $(5,593) $17,981 $(14,203)
Basic income (loss) per share
As reported $ 0.04 $ 1.07 $ (0.48)
Pro forma $ (0.21) $ 0.77 $ (0.72)
Diluted income (loss) per share
As reported $ 0.04 $ 0.96 $ (0.48)
Pro forma $ (0.21) $ 0.69 $ (0.72)
Due to the subjective nature of the assumptions used in the Black-Scholes
model, the proforma net income (loss) and proforma net income (loss) per share
may not be indicative of the effects on net income (loss) and net income (loss)
per share in future years.
NOTE 10. 1998 ISSI-TAIWAN STOCK PLAN
On October 29, 1998, the Company adopted the 1998 ISSI-Taiwan Stock Plan
(the "Taiwan Stock Plan") that provides for the grant of non-statutory stock
options in the common stock of ICSI to the employees, consultants, and directors
of the Company. Upon exercise, if any, the Company would sell its shares in ICSI
to the optionee. Under terms of the Taiwan Stock Plan, the maximum aggregate
number of shares of ICSI stock which may be optioned and sold is 12.0 million.
The plan was terminated in January 2001 upon the completion of ICSI's initial
public offering in Taiwan.
Under the terms of the Taiwan Stock Plan, the exercise price, which is
deemed to be the fair value of ICSI at the date of grant, and the exercise
period of the non-statutory stock option grants are determined by the Board of
Directors on the date of grant. Generally, the stock options vest one-third
annually on the anniversary of the date of grant. During fiscal 2001 and fiscal
2000, options to purchase 6,910,000 and 3,110,000 shares of ICSI stock were
exercised, respectively. At September 30, 2001, there were no options to
purchase shares of ICSI stock outstanding. Options to purchase 6,910,000 shares
of ICSI stock were outstanding at September 30, 2000, of which 315,000 were
exercisable. Options to purchase 10,374,000 shares of ICSI stock were
outstanding, at September 30, 1999, none of which were exercisable.
38
Notes to Consolidated Financial Statements
NOTE 11. INCOME TAXES
The provision for income taxes consisted of the following for the years
ended September 30:
2001 2000 1999
----- ----- -----
(In thousands)
Current:
Federal $ 150 $ 300 $(250)
State -- -- --
Foreign -- 380 858
----- ----- -----
Total current $ 150 $ 680 $ 608
Deferred:
Federal -- -- --
State -- -- --
Foreign -- -- --
----- ----- -----
Total deferred -- -- --
----- ----- -----
Total provision $ 150 $ 680 $ 608
===== ===== =====
Pretax income (loss) from foreign operations was approximately $(940,000),
$572,000, and $(516,000), for 2001, 2000, and 1999, respectively.
The Company's provision for income taxes differs from the amount computed
by applying the U.S. federal statutory rate (35%) to income before taxes and
minority interest as follows for the years ended September 30:
2001 2000 1999
-------- -------- --------
As adjusted
(In thousands)
Income taxes computed at the U.S. federal
Statutory rate $ (152) $ 5,206 $ (3,608)
Valuation allowance on deferred tax assets 16,255 -- --
Net operating loss (utilized), not utilized (6,469) (4,802) 1,875
Utilization of R&D and foreign tax credits (4,566) -- --
Reversal of taxes accrued for foreign
operations (4,996) -- --
Foreign withholding taxes -- 290 858
Gain on sale of ICSI stock -- -- 1,733
Other individually immaterial items 78 (14) (250)
-------- -------- --------
Total provision $ 150 $ 680 $ 608
======== ======== ========
As of September 30, 2001, the Company had federal net operating loss
carryforwards of approximately $6,200,000. The Company has foreign tax credit
carryforwards of approximately $600,000. The Company also has manufacturers'
investment tax credit carryforwards of approximately $830,000. The state
manufacturer's credit carryforwards will expire at various dates beginning in
2002 through 2007, if not utilized.
Utilization of the net operating loss carryforwards and credits may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating losses and credits before utilization.
39
Notes to Consolidated Financial Statements
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
deferred taxes consisted of the following at September 30:
2001 2000
-------- --------
(In thousands)
Deferred tax assets:
Depreciation $ 1,068 $ 1,024
Inventory and other valuation reserves 19,985 6,634
Accrued expenses 2,123 2,681
Federal and state credit carryforwards 2,408 8,879
Federal net operating loss carryforwards 2,170 5,638
Other, net 489 1,162
-------- --------
Subtotal 28,243 26,018
Valuation allowance (20,214) (14,291)
-------- --------
Total deferred tax assets $ 8,029 $ 11,727
Deferred tax liabilities:
Equity investments basis differences (8,029) (11,727)
-------- --------
Net deferred tax assets $ 0 $ 0
======== ========
Management has established a valuation allowance for a portion of the gross
deferred tax assets based on management's expectations of future taxable income
and the actual taxable income during the three years ended September 30, 2001.
The valuation allowance for deferred tax assets increased by $5,923,000 in 2001
and decreased by $6,395,000 in 2000 and by $8,981,000 in 1999. Approximately
$6,200,000 of the valuation allowance is attributable to tax benefits of stock
option deductions which will be credited to paid in capital when recognized.
NOTE 12. PER SHARE DATA
The calculations of basic and diluted net income (loss) per share for each
of the three years ended September 30, 2001 are as follows:
Years Ended September 30,
2001 2000 1999
-------- -------- --------
In thousands, except per share data
Numerator for basic and diluted net income (loss) per share:
Net income (loss) $ 1,115 $ 25,026 $ (9,511)
======== ======== ========
Denominator for basic net income (loss) per share:
Weighted average common shares outstanding 26,183 23,357 19,633
Dilutive stock options 1,587 2,323 --
Dilutive warrants 18 376 --
-------- -------- --------
Denominator for diluted net income (loss) per share 27,788 26,056 19,633
======== ======== ========
Basic net income (loss) per share $ 0.04 $ 1.07 $ (0.48)
======== ======== ========
Diluted net income (loss) per share $ 0.04 $ 0.96 $ (0.48)
======== ======== ========
The above diluted calculation for the years ended September 30, 2001, 2000,
and 1999, does not include approximately 779,000, 101,000, and 2,000,000, shares
attributable to options as of September 30, 2001, 2000, and 1999, respectively,
as their impact would be anti-dilutive. The above diluted calculation for the
year ended September 30, 1999, does not include approximately 175,000 shares
attributable to warrants as of September 30, 1999, as their impact would be
anti-dilutive.
40
Notes to Consolidated Financial Statements
NOTE 13. GEOGRAPHIC AND SEGMENT INFORMATION
The Company has one operating segment, which is to design, develop, and
market high-performance SRAM, DRAM, and other memory products. The following
table summarizes the Company's operations in different geographic areas:
Years Ended September 30,
2001 2000 1999
--------- --------- ---------
In thousands
Net Sales
United States $ 79,207 $ 70,910 $ 44,885
Asia 34,626 32,896 21,316
Europe 38,215 32,117 17,108
--------- --------- ---------
Total net sales $ 152,048 $ 141,923 $ 83,309
========= ========= =========
Long-lived assets
U.S. operations $ 6,634 $ 5,338 $ 4,428
Hong Kong operations 566 91 135
China operations 463 -- --
--------- --------- ---------
Total long-lived assets $ 7,663 $ 5,429 $ 4,563
========= ========= =========
Revenues are attributed to countries based on location of customers.
Long-lived assets by geographic area are those assets used in the Company's
operations in each area.
Net foreign currency transaction gains (losses) of approximately $(5,000),
$(40,000), and $594,000, for the years ended September 30, 2001, 2000, and 1999,
respectively, were primarily the result of the settlement of intercompany
transactions and are included in the determination of net income (loss).
NOTE 14. COMMITMENTS AND CONTINGENCIES
PATENTS AND LICENSES
In the semiconductor industry, it is not unusual for companies to receive
notices alleging infringement of patents or other intellectual property rights
of others. The Company has been, and from time-to-time expects to be, notified
of claims that it may be infringing patents, maskwork rights or copyrights owned
by third parties. If it appears necessary or desirable, the Company may seek
licenses under patents that it is alleged to be infringing. Although patent
holders commonly offer such licenses, licenses may not be offered and the terms
of any offered licenses may not be acceptable to the Company. The failure to
obtain a license under a key patent or intellectual property right from a third
party for technology used by the Company could cause it to incur substantial
liabilities
41
Notes to Consolidated Financial Statements
and to suspend the manufacture of the products utilizing the invention or to
attempt to develop non-infringing products, any of which could materially and
adversely affect the Company's business and operating results. Furthermore,
there can be no assurance that the Company will not become involved in
protracted litigation regarding its alleged infringement of third party
intellectual property rights or litigation to assert and protect its patents or
other intellectual property rights. Any litigation relating to patent
infringement or other intellectual property matters could result in substantial
cost and diversion of the Company's resources which could materially and
adversely affect the Company's business and operating results.
LITIGATION
In April 1998, the U.S. Department of Commerce ("DOC") published an
antidumping duty order on imports of SRAMs from Taiwan, from where the Company
currently imports a majority of its SRAMs. As a consequence of this antidumping
duty order, the Company is required to post a cash deposit on imports of Taiwan
fabricated SRAM wafers or devices at the ad valorem rate of 7.56%.
On April 28, 2000, Micron Technology Inc. ("Micron") requested an
administrative review of the Company's Taiwan fabricated SRAMs for the period
from April 1, 1999 through March 31, 2000. For entries during this period, the
cash deposits could be returned to the Company or, alternatively, the Company
could forfeit amounts deposited and owe duties and interest in addition to the
amounts deposited, depending on results of the DOC administrative review. The
DOC has suspended that review as a consequence of the court decision described
below.
The Company has retained legal counsel to defend its interests in the
antidumping proceedings. In addition, respondents (including ISSI) have
challenged certain aspects of the antidumping determination in federal court
proceedings. On August 29, 2000, pursuant to an appeal by ISSI and other
respondents, the U.S. Court of International Trade affirmed the International
Trade Commission ("ITC") decision to reverse the ITC's earlier ruling supporting
the imposition of antidumping duties and rule instead in favor of the
respondents. This decision by the Court of International Trade was appealed by
Micron to the U.S. Court of Appeals for the Federal Circuit ("CAFC"). On
September 21, 2001, the Federal Circuit upheld the Court of International Trade.
This Federal Circuit decision is subject to appeal. If no appeal is taken, or if
any such appeal is unsuccessful, the antidumping case will be terminated, the
order will be revoked, and the Company will be entitled to a full refund of its
cash deposits. Pending resolution of the appeal, the DOC will continue to
administer the antidumping order.
Duties calculated and assessed by the government could have a material
adverse affect on the Company's gross margins and profits. Any reviews or
proceedings might not mitigate or eliminate antidumping duties.
OPERATING LEASES
The Company leases its facilities under operating lease agreements that
expire at various dates through 2007. The Company entered into a ten year lease
effective December 1, 1996 for its headquarters facility in Santa Clara,
California. The Company subleases approximately 24,000 square feet and 9,000
square feet to third parties whose subleases expire in March 2003 and September
2003, respectively. Minimum rental commitments under these leases are as follows
(in thousands):
2002 (net of sublease income of $509) $1,090
2003 (net of sublease income of $318) 1,253
2004 1,552
2005 1,601
2006 1,600
Thereafter 669
------
Total minimum rental commitments $7,765
======
Total rental expense for the years ended September 30, 2001, 2000, and
1999, was approximately $1,164,000 (net of sublease income of $584,000),
$1,034,000 (net of sublease income of $634,000), and $1,050,000 (net of sublease
income of $630,000), respectively.
42
Notes to Consolidated Financial Statements
COMMITMENTS TO WAFER FABRICATION FACILITIES
In August 2000, the Company entered into a wafer fabrication facility
investment agreement with SMIC, the first 8-inch foundry in the People's
Republic of China. Under the terms of this agreement, the Company has committed
to invest $30.0 million. In April 2001, the Company committed to invest an
additional $10.0 million. The Company has received certain capacity commitments
from SMIC. In fiscal 2001, the Company made an investment of $14.3 million in
SMIC, bringing its total investment in this foundry as of September 30, 2001, to
$18.9 million. An additional $21.1 million is expected to be invested in fiscal
year 2002.
NOTE 15. EMPLOYEE BENEFIT PLAN
In August 1992, the Company established a defined contribution retirement
plan with 401(k) plan features. The plan covers all United States employees 18
years and older. Employees may make contributions through payroll withholdings
of up to the lesser of $10,500 or 20% of their annual compensation for 2001. The
Company elected to make no contributions during the years ended September 30,
2001, 2000, and 1999. Administrative expenses relating to the plan are
insignificant.
NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended September 30,
2001 2000 1999
------- ------- -------
(In thousands)
Cash paid for interest $ 42 $ 134 $ 1,234
Cash paid (refunded) for income taxes 2,146 354 (1,986)
Fixed assets acquired under capital lease -- 600 --
NOTE 17. TRANSACTIONS
Effective October 1, 1998, the Company transferred certain employees and
joint ownership of certain patents and related Flash technology to NexFlash. In
connection with the NexFlash transaction, the Company issued warrants to
purchase an aggregate of 981,659 shares of ISSI Common Stock at an exercise
price of $3.76 per share, the fair market value at date of grate, to the
NexFlash investors. The Company determined the fair value of the warrants using
the Black-Scholes valuation model assuming a fair value of the common stock of
$4.44 per share, risk free interest rate of 4.43%, volatility factor of 70%, and
a life of two years. During fiscal 2000, the Company issued 457,029 shares of
its common stock pursuant to the exercise of warrants to purchase 582,660 shares
of its common stock. All remaining unexercised warrants expired on November 4,
2000.
In December 1998, the Company sold 20% of its holdings in ICSI to a group
of private investors resulting in a pre-tax gain of $1.2 million. Proceeds from
the transaction, net of withholding and transaction taxes, totaled $6.6 million
(including cash of $4.3 million and notes receivable of $2.3 million). Effective
December 31, 1998, the Company owned approximately 43% of ICSI and accounted for
ICSI on the equity basis. ICSI was consolidated in the accompanying statement of
operations until December 31, 1998 when the 20% of the Company's holdings were
sold. The accompanying consolidated balance sheets as of September 30, 2001 and
September 30, 2000 reflects ICSI as an investment accounted for on the equity
basis.
In December 1998, the Company agreed to sell approximately 33% of its
investment in WaferTech to TSMC for approximately $10.0 million. The transaction
was completed in January 1999, and the Company retained a 2.67% interest in
WaferTech. The Company recorded a pre-tax loss of approximately $0.4 million in
the March 1999 quarter related to this transaction.
In April 1999, the Company agreed to sell its investment in UICC to UMC for
its original acquisition cost. The Company recorded a pre-tax gain of
approximately $1.8 million in the June 1999 quarter related to this transaction.
The gain resulted from adjustments to the original acquisition value for
fluctuations in the New Taiwanese Dollar.
On October 13, 1999, the major investors in WaferTech, which include TSMC,
Altera, Analog Devices, and ISSI, made pro-rata investments in WaferTech. The
Company's pro-rata amount of $2.7 million was invested
43
Notes to Consolidated Financial Statements
along with the other partners. The Company's investment in WaferTech as of
September 30, 1999 was $20.8 million. After the October 1999 additional
investment, the Company's total investment in WaferTech was $23.5 million.
In August 2000, the Company entered into a wafer fabrication facility
investment agreement with SMIC. Under the terms of this agreement, the Company
has committed to invest $30.0 million. In April 2001, the Company committed to
invest an additional $10.0 million. In fiscal 2001, the Company made an
investment of $14.3 million in SMIC, bringing its total investment in this
foundry as of September 30, 2001, to $18.9 million. An additional $21.1 million
is expected to be invested in fiscal year 2002.
In December 2000, the Company sold its investment of $23.5 million in
WaferTech, LLC to Taiwan Semiconductor Manufacturing Corporation for $40.7
million resulting in a pre-tax gain of $17.2 million.
On January 16, 2001, ICSI completed an initial public offering in Taiwan.
As a result of shares of ICSI sold by the Company in the initial public offering
and subsequently, the Company received gross proceeds of approximately $10.7
million in fiscal 2001 resulting in a pre-tax gain of $8.2 million.
In February 2001, the Company, along with other shareholders, sold a
portion of its ownership in NexFlash to Winbond International Corporation for
$6.2 million, resulting in a pre-tax gain of $5.3 million. As a result of this
transaction, the Company's ownership percentage of NexFlash decreased from
approximately 32% to approximately 14%. Subsequent to the completion of the
transaction, the Company accounts for NexFlash on the cost basis.
In February 2001, the Company invested $3.0 million for approximately 22%
of E-CMOS located in Hsin-Chu, Taiwan, R.O.C. The Company is accounting for
E-CMOS on the equity basis and recording its percentage gain or loss of their
results of operations on a one quarter lag.
NOTE 18. RELATED PARTY TRANSACTIONS
For the years ended September 30, 2001, September 30, 2000 and the nine
months ended September 30, 1999, the Company sold approximately $188,000,
$921,000 and $1,412,000, respectively, of memory products to ICSI. The Company
currently has approximately a 29% ownership interest in ICSI. The Company's
Chairman and Chief Executive Officer ("CEO"), Jimmy S.M. Lee, is a director of
ICSI. The Company also provides services and licenses certain products to ICSI.
At September 30, 2001 and 2000, the Company had an accounts receivable balance
from ICSI of approximately $327,000 and $709,000, respectively.
The Company purchases goods and contract manufacturing services from ICSI.
For the years ended September 30, 2001, September 30, 2000 and the nine months
ended September 30, 1999, purchases of goods and services were approximately
$12,815,000, $74,001,000 and $55,840,000, respectively. At September 30, 2001
and 2000, the Company had an accounts payable balance to ICSI of approximately
$551,000 and $12,997,000, respectively.
For the years ended September 30, 2001, September 30, 2000 and the eleven
months ended September 30, 1999, the Company sold approximately $0, $208,000 and
$1,542,000, respectively, of memory products to NexFlash. The Company currently
has approximately a 14% ownership interest in NexFlash. The Company's Chairman
and CEO, Jimmy S.M. Lee, is a director of NexFlash. In addition, the Company
received approximately $183,000, $180,000 and $167,000 in sublease income from
NexFlash in the years ended September 30, 2001, 2000 and 1999, respectively (See
Note 14). The Company also provides NexFlash various administrative support
services for which it is reimbursed. At September 30, 2001 and 2000, the Company
had an accounts receivable balance from NexFlash of approximately $81,000 and
$343,000, respectively.
The Company purchases goods and services from NexFlash. For the years ended
September 30, 2001, September 30, 2000 and the eleven months ended September 30,
1999, purchases of goods and services were approximately $0, $391,000 and $0,
respectively. At September 30, 2000 and 1999, the Company had an accounts
payable balance to NexFlash of approximately $0 and $46,000, respectively.
The Company provides goods and services to GetSilicon in which the Company
currently has approximately a 20% ownership interest. The Company's Chairman and
CEO, Jimmy S.M. Lee, is the Chairman of GetSilicon. For the year ended September
30, 2001 and September 30, 2000, the Company provided goods and services of
44
Notes to Consolidated Financial Statements
approximately $559,000 and $595,000, respectively, to GetSilicon. At September
30, 2001 and 2000, the Company had an accounts receivable balance from
GetSilicon of approximately $30,000 and $474,000, respectively.
In January 2001, the Company entered into an agreement for
business-to-business data exchange and application services with GetSilicon. For
the year ended September 30, 2001, the purchase of services under this agreement
was approximately $259,000. At September 30, 2001, the Company had an accounts
payable balance to GetSilicon of approximately $32,000.
For the year ended September 30, 2001, the Company sold approximately
$292,000 of memory products to E-CMOS in which the Company currently has
approximately a 22% ownership interest. The Company's Chairman and CEO, Jimmy
S.M. Lee, is the Chairman of E-CMOS. At September 30, 2001, the Company had an
accounts receivable balance from E-CMOS of approximately $159,000.
The Company receives administrative support services and reimburses E-CMOS
for expenses incurred on its behalf. At September 30, 2001, the Company had an
accounts payable balance to E-CMOS of approximately $271,000.
NOTE 19. INVESTMENT IN ICSI (UNAUDITED)
The following summarizes financial information for ICSI at September 30:
2001 2000
-------- --------
(In thousands)
Current assets $ 76,624 $109,428
Property, plant, and equipment and other assets 51,345 45,873
Current liabilities 34,181 53,037
Long-term debt 9,352 15,517
The following summarizes financial information for ICSI, for the twelve
months ended September 30, 2001 and September 30, 2000 and for the period from
January 1, 1999 through September 30, 1999. The period from October 1, 1998
through December 31, 1998 was included in the Company's consolidated financial
statements and is therefore excluded from this presentation.
Twelve Months Twelve Months Nine Months
Ended Ended Ended
September 30, 2001 September 30, 2000 September 30, 1999
------------------ ------------------ -------------------
Net sales $113,514 $169,994 $ 82,381
Gross profit 28,446 55,575 12,494
Net income 11,379 37,010 4,764
45
Notes to Consolidated Financial Statements
NOTE 20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the quarterly results of operations
for the years ended September 30, 2001 and 2000.
DEC 31 MAR 31 JUNE 30 SEPT 30
-------- -------- -------- --------
(In thousands, except per share data)
(unaudited)
FISCAL 2001
Net sales $ 65,229 $ 52,023 $ 20,013 $ 14,783
Gross margin (loss) 22,175 3,459 (3,500) (14,955)
Operating income (loss) 9,228 (9,041) (14,274) (24,758)
Net income (loss) 25,075 4,469 (3,703) (24,726)
Basic net income (loss) per share $ 0.97 $ 0.17 $ (0.14) $ (0.93)
Diluted net income (loss) per share $ 0.91 $ 0.16 $ (0.14) $ (0.93)
FISCAL 2000
Net sales $ 23,251 $ 30,032 $ 38,512 $ 50,128
Gross margin 6,280 8,800 12,339 16,745
Operating income (loss) (546) 1,181 3,394 6,221
Net income 494 3,385 9,482 11,665
Basic net income per share $ 0.02 $ 0.15 $ 0.37 $ 0.45
Diluted net income per share $ 0.02 $ 0.14 $ 0.34 $ 0.41
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders to be held on February 6, 2002, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers - See the section entitled "Executive Officers" in
Part I, Item 1 hereof.
(b) Directors - The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Proxy
Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
sections entitled "Principal Share Ownership" and "Security Ownership of
Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report.
1. FINANCIAL STATEMENTS
The following consolidated financial statements of Integrated Silicon
Solution, Inc. are contained in Part II, Item 8 of this Report on Form 10-K:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
47
2. FINANCIAL STATEMENT SCHEDULES
All other schedules for which provision is made in the Applicable
Accounting Regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
3. EXHIBITS
Exhibit
Number Description of Document
------- -----------------------
2.1 (4) Agreement and Plan of Reorganization dated November 5, 1997 by and among the Company,
Nexcom Technology, Inc. and certain shareholders of Nexcom Technology, Inc.
3.1 (2) Restated Certificate of Incorporation of Registrant.
3.3 (1) Bylaws of Registrant.
4.2 (1) Form of Common Stock Certificate.
10.1 (1) Form of Indemnification Agreement.
10.2 (1)* Form of 1993 Employee Stock Purchase Plan, as amended, and form of Subscription Agreement.
10.3 (1)* Form of 1989 Stock Plan, as amended, and form of Stock Option Agreements.
10.4 (1)* 1995 Director Stock Option Plan.
10.5 (3) Sublease Agreement for facility located at 2231 Lawson Lane, Santa Clara,
California.
10.6 (5)* Nonstatutory Stock Plan
10.7 (6)* 1998 ISSI-Taiwan Stock Plan
10.8 (7)* 1998 Stock Plan
21.1 (1) Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 49).
- ----------
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Report on Form 10-K pursuant to form 14(c) of
this report.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (file no. 33-72960).
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (file no. 33-91520)
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the period ended September 30, 1996.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the period ended September 30, 1997.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed April 30, 1997.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the period ended September 30, 1998
(7) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed April 26, 1999.
(b) Reports on Form 8-K
(c) Exhibits
See (a) above
(d) Financial statement schedules
See (a) above
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Santa Clara, State of California, on the 13th day of December, 2001.
INTEGRATED SILICON SOLUTION, INC.
By /s/ Michael McDonald
-------------------------------------
Michael McDonald
Vice President
and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Jimmy S.M. Lee and Gary L.
Fischer, and each of them acting individually, as his or her attorney-in-fact,
each with full power of substitution, for him or her in any and all capacities,
to sign any and all amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and all amendments
to said Report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below on December 13, 2001 by the
following persons on behalf of the Registrant and in the capacities indicated.
Signature Title
- --------------------------- -------------------------------------------------
/s/ Jimmy S.M. Lee Chairman of the Board and Chief Executive Officer
- --------------------------- (Principal Executive Officer)
(Jimmy S.M. Lee)
/s/ Gary L. Fischer Director, President, and Chief Operating Officer
- ---------------------------
(Gary L. Fischer)
/s/ Michael McDonald Vice President and Chief Financial Officer
- --------------------------- (Principal Financial and Accounting Officer)
(Michael McDonald)
/s/ Lip-Bu Tan Director
- ---------------------------
(Lip-Bu Tan)
/s/ Hide Tanigami Director
- ---------------------------
(Hide Tanigami)
/s/ Chun Win Wong Director
- ---------------------------
(Chun Win Wong)
49
EXHIBIT INDEX
Exhibit
Number Description of Document
------- -----------------------
2.1 (4) Agreement and Plan of Reorganization dated November 5, 1997 by and among the Company,
Nexcom Technology, Inc. and certain shareholders of Nexcom Technology, Inc.
3.1 (2) Restated Certificate of Incorporation of Registrant.
3.3 (1) Bylaws of Registrant.
4.2 (1) Form of Common Stock Certificate.
10.1 (1) Form of Indemnification Agreement.
10.2 (1)* Form of 1993 Employee Stock Purchase Plan, as amended, and form of Subscription Agreement.
10.3 (1)* Form of 1989 Stock Plan, as amended, and form of Stock Option Agreements.
10.4 (1)* 1995 Director Stock Option Plan.
10.5 (3) Sublease Agreement for facility located at 2231 Lawson Lane, Santa Clara,
California.
10.6 (5)* Nonstatutory Stock Plan
10.7 (6)* 1998 ISSI-Taiwan Stock Plan
10.8 (7)* 1998 Stock Plan
21.1 (1) Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 49).
- ----------
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Report on Form 10-K pursuant to form 14(c) of
this report.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (file no. 33-72960).
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (file no. 33-91520)
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the period ended September 30, 1996.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the period ended September 30, 1997.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed April 30, 1997.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the period ended September 30, 1998
(7) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed April 26, 1999.