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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission file number 0-23084
INTEGRATED SILICON SOLUTION, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0199971
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
680 ALMANOR AVENUE, SUNNYVALE, CALIFORNIA 94086
(Address of principal executive offices) zip code
Registrant's telephone number, including area code (408) 733-4774
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, PAR VALUE $0.0001 PER SHARE NASDAQ NATIONAL MARKET
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing price of such stock on November 22, 1996, as
reported by the Nasdaq National Market, was approximately $174.6 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
November 22, 1996 was 17,610,773.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1997 Annual Meeting of
Stockholders to be held February 4, 1997 are incorporated by reference in Part
III of this Form 10-K.
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TABLE OF CONTENTS
PART I
Item 1. Business..................................................................... 1
Item 2. Properties................................................................... 8
Item 3. Legal Proceedings............................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders.......................... 9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.... 10
Item 6. Selected Consolidated Financial Data......................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 11
Operations................................................................... 11
Item 8. Financial Statements and Supplementary Data.................................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................... 40
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 40
Item 11. Executive Compensation....................................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 40
Item 13. Certain Relationships and Related Transactions............................... 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 40
SIGNATURES............................................................................ 43
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Part I
ITEM 1. BUSINESS
GENERAL
Integrated Silicon Solution, Inc. ("ISSI" or the "Company") designs,
develops and markets high performance static random access memory ("SRAM") and
nonvolatile memory ("NVM") integrated circuits. The Company's memory devices are
used in networking applications, telecommunications, personal computers ("PC"),
disk drives, data communications, office automation, instrumentation and
consumer products. SRAM products include both asynchronous and synchronous
devices ranging in densities from 64K to 1 megabit. Nonvolatile memory products
include EPROMs (erasable programmable read only memories), EEPROMs (electrically
erasable programmable read only memories) and FLASH memories. The Company has
its headquarters in Sunnyvale, California and markets its products on a
worldwide basis.
The primary function of SRAMs is to improve overall system performance by
compensating for the disparity in the speeds of other integrated circuits within
the system architecture. As a result, speed is a key performance characteristic
for SRAMs. In addition, when designing systems with SRAMs, customers regard cost
as a critical factor. For these reasons, in order to continually improve product
performance and reduce costs, the Company must have access to state-of-the-art
process technology and be able to implement design improvements, such as reduced
geometries, quickly through short product design cycles.
The Company leverages its SRAM design and advanced complimentary metal oxide
semiconductor ("CMOS") process technology expertise to establish collaborative
manufacturing relationships with Asian semiconductor manufacturers which use the
Company's memory products as a vehicle for the development of advanced process
technology. The Company believes that these relationships differentiate it from
traditional fabless companies and allow it to secure access to leading edge
process technology and a committed source for wafer processing. The Company's
principal collaborative manufacturing relationship is with Taiwan Semiconductor
Manufacturing Corporation ("TSMC"), with which it jointly develops process
technology for producing the Company's SRAMs and nonvolatile memories. The
Company also has a collaborative program with Chartered Semiconductor
Manufacturing ("Chartered") in Singapore and with Belling Semiconductor
("Belling") in the People's Republic of China. In addition, the Company has a
manufacturing program with United Microelectronics Corporation ("UMC") in
Taiwan. The Company has made an equity investment in a joint venture with TSMC
and an equity investment in a joint venture with UMC.
The Company has its headquarters in Sunnyvale, California. This facility
focuses on research and development, product definition, quality assurance and
marketing and sales. The Company has a wholly owned subsidiary in Taiwan. This
subsidiary, located in the Hsinchu Science-Based Industrial Park, focuses on
manufacturing coordination, quality assurance, product test and regional sales
in the Asian market. The Company also has smaller subsidiaries in Hong Kong and
China.
PRODUCTS
The Company designs and markets a family of high performance, low cost
SRAMs, as well as NVM products, including high speed EPROMS, serial EEPROMs,
FLASH and Voice EPROMs. The Company began shipping its initial SRAM products in
1990 and its first NVM product in 1992. To date the Company has derived
substantially all of its revenues from the sale of SRAM products.
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SRAMS
The Company offers a family of CMOS SRAMs in various densities, speeds and
packaging configurations. SRAM densities include 64K (8K x 8), 256K (32K x 8),
512K (64K x 8), and 1 megabit (128K x 8 and 32K x 32). The Company produces both
asynchronous SRAMs and synchronous SRAMs. Synchronous SRAMs are designed to
operate at a clock speed synchronized to the microprocessor clock speed to
increase speed performance. The Company's 1 megabit 32K x 32 synchronous SRAM
currently achieves 5 nanosecond access time. Leading speeds for the Company's
asynchronous SRAMs vary according to density. The 1 megabit 128K x 8 SRAM
currently achieves 12 nanoseconds. The 256K SRAM achieves as low as a 9
nanosecond access time.
In late 1994, the Company introduced its first 3.3 volt SRAM product, a 256K
configuration. Currently, the Company's 3.3 volt SRAMs are produced in the 32K x
8 asynchronous and 32K x 32 synchronous version and are generally used in PC
cache applications. The Company's 5 volt SRAMs are used in applications such as
modems, LANs, telecommunications, bridges, routers, multimedia products and
industrial instrumentation. Additional SRAM products are under development and
are expected to include higher density products and alternative configurations
allowing for wider bus widths.
NONVOLATILE MEMORY PRODUCTS
The Company's NVM products include high performance FLASH, EPROMS, serial
EEPROMs and voice recording chips. FLASH and EPROMs are typically used in
electronic systems which require permanent storage of data or program control
code. The Company's EPROM development program focuses on high speed products. In
this regard, the Company's 1 megabit EPROM achieves a read cycle of 30
nanoseconds. In December 1995, the Company entered into a cross license
agreement for FLASH technology with Intel. This enables the Company to design
its own FLASH products and FLASH process technology with Intel-compatible
architecture. The Company produces a high speed 45 nanosecond 1 megabit FLASH
and a 55 nanosecond 2 megabit FLASH. FLASH memory combines the low cost and high
density benefits of EPROMs with the in-system programmability of EEPROMs. High
speed EPROM and FLASH applications include modems, printers, digital phones and
industrial instrumentation.
The Company introduced its first serial EEPROM product in 1993. Serial
EEPROMs are used in applications that require nonvolatile storage of data or
code and which also allow the information to be modified during system
operation. Applications for serial EEPROMs include pagers, networking systems,
modems, telephone sets, security systems, smart cards, video games and other
consumer products.
The Company also produces a Voice EPROM product in which voice algorithm
technology is embedded in its EPROM. Initial applications for Voice EPROM
products are in consumer electronics such as voice recorded greeting cards.
DESIGN AND PROCESS TECHNOLOGY
The Company's process technology development efforts concentrate on process
flow architecture, process modules, memory core cell development and
manufacturing yield enhancement. Memory products are particularly well suited
for the development of advanced process technology. The Company's technology
development engineers work closely with the Company's design engineers and
manufacturing partners, such as TSMC, to develop new process technologies,
refine existing process technologies, and to reduce the circuit geometries of
its products. During 1996, the Company and TSMC developed 0.35 micron, 3.3 volt
high speed SRAM process technology. The Company currently has several
development programs with TSMC, including a program based on a 0.25 micron
design for advanced SRAM applications and a 0.5 micron design for a high speed
FLASH memory product. The Company's collaborative efforts with Chartered focus
on 0.35 micron SRAM process technology. In 1995, both TSMC and Chartered began
shipping 8" wafers which employed the Company's SRAM design and process
technology. The Company's collaborative efforts with Belling focus on EEPROM
design and process technology.
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The Company's design efforts focus on product specification, memory cell and
array structure, logic and circuit design, simulation and layout. The Company
has invested in advanced computer aided design ("CAD") systems to ensure that
the design team has state-of-the-art design tools and employs innovative and
rigorous design methodologies. The Company leverages its memory expertise to
develop products in related memory areas including memory embedded into other
functions such as the voice recording chip. In addition, the Company has
developed proprietary product test software that allows it to test products
accurately and cost effectively in high volumes.
MANUFACTURING
The Company has adopted a fabless manufacturing strategy with the objective
of establishing collaborative manufacturing relationships with selected
semiconductor wafer manufacturers. As memory products are particularly well
suited for the development of advanced process technology, the Company targets
partners with which it can actively participate in developing and refining the
process technology used to manufacture its specific products and apply the
technology on an accelerated basis to bring new products to market rapidly. The
Company believes that its fabless strategy enables it to introduce high
performance memory products quickly and at low cost. To date, the Company's
principal manufacturing relationship has been with TSMC, whereby the Company
provides TSMC with design and process expertise in return for access to advanced
process technology and committed wafer capacity at TSMC's wafer fabrication
facilities. The Company also has a collaborative manufacturing relationship with
Chartered for SRAM and FLASH products.
In 1995, the Company entered into a manufacturing joint venture agreement
with UMC that is expected to result in the delivery of wafers to the Company
beginning in late 1997 until 2005. The joint venture agreement requires an
equity investment by the Company of approximately $30 million of which
approximately $7.0 million had been paid as of September 30, 1996.
In 1996, the Company entered into a joint venture agreement with Altera
Inc., Analog Devices Inc. and TSMC wherein TSMC, as the general partner, will
construct a wafer fabrication facility in the state of Washington. The
fabrication facility is intended to be a very advanced process technology
facility capable of 0.35, 0.25 and 0.18 micron process technology. The joint
venture, named WaferTech LLC, is expected to reach full production in
approximately 1999/2000. The joint venture agreement requires an equity
investment by the Company of $31.2 million of which, at September 30, 1996, $9.4
million had been paid.
The Company has a technology transfer program with Belling Semiconductor in
China. The Company has assisted Belling with certain EEPROM process technology
and has begun to receive a limited supply of low cost wafers from Belling.
The manufacturing of the Company's products is coordinated by ISSI-Taiwan,
which is located in close proximity to TSMC and UMC in the Hsinchu Science-Based
Industrial Park, a government-sponsored technology development zone. The Science
Park location provides certain advantages, including preferential tax treatment,
streamlined customs administration and government-subsidized development grants.
After receiving wafers from its independent wafer foundries, the Company
performs its own wafer probe testing, laser repair, and final testing in its
product test facility at ISSI-Taiwan, which operates on a multiple shift basis.
The Company's U.S. headquarters includes a smaller scale, duplicate product test
facility used primarily to develop test programs and test procedures and to
supplement product test capacity in Taiwan. Both the Taiwan and U.S. facilities
have clean rooms that are equipped for the wafer probe segment of the testing
process. Packaging and assembly operations are performed by subcontractors,
principally in Taiwan. A comprehensive quality control program is in place in
both facilities. The Company has adopted ISO 9000 as its quality management
standard. The Company's U.S. facility has received certification under ISO 9001
standards and the Company's Taiwan facility has received certification under ISO
9002 standards.
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Each of the Company's wafer suppliers also fabricates for other integrated
circuit companies, including certain of the Company's competitors. In addition,
UMC manufactures integrated circuits, including SRAMs, for its own account.
During 1995, the semiconductor industry, including the Company, experienced
wafer capacity shortages. In 1996, the industry, including the Company,
experienced a general oversupply of wafers. Although the Company has written
commitments for increasing capacity on a year-to-year basis, the Company would
currently have little or no recourse if a wafer supplier chose to prioritize
capacity for other use or reduce or eliminate deliveries to the Company. The
equity investment arrangements and related purchase agreements by the Company
with TSMC and UMC will provide the Company with guaranteed capacity, and thus
will mitigate this risk in the future. However, these fabrication facilities are
not yet operational. Although currently there is a general oversupply of wafer
capacity, there can be no assurance that the Company's foundries will allocate
sufficient wafer capacity to satisfy the Company's wafer requirements especially
in times of wafer capacity shortages. Moreover, there can be no assurance that
the Company would be able to qualify additional manufacturing sources for
existing or new products in a timely manner or that such additional
manufacturing sources would be able to produce an adequate supply of wafers. If
the Company were unable to obtain an adequate supply of wafers from its current
or any alternative sources in a timely manner, its business and operating
results would be materially and adversely affected. In addition, since the
construction of a wafer fabrication facility is a lengthy and complex endeavor,
there can be no assurance that the TSMC joint venture fabrication facility or
the UMC joint venture fabrication facility will be successfully completed and
successfully enter into production.
Although the Company's policy is to work closely with its manufacturing
sources there are certain risks associated with the use of independent
foundries, including the absence of a controlled source of supply, or delays in
obtaining adequate wafer supplies. In addition, the manufacture of integrated
circuits is a highly complex and technically demanding process. Production
yields can be affected by a large number of factors. As is typical in the
semiconductor industry, the Company's outside foundries have from time to time
experienced lower than anticipated manufacturing yields, particularly in
connection with the introduction of new products and changes in such foundry's
processing steps. There can be no assurance that the Company's foundries will
not experience lower than expected manufacturing yields in the future, which
could materially and adversely affect the Company's business and operating
results.
The Company has certain minimum wafer purchasing commitments to its foundry
partners in exchange for wafer capacity commitments. The Company agreed to make
certain annual payments to TSMC for capacity increases. Additional required
payments to TSMC totaling approximately $31.2 million over the next four years
represent annual increases in capacity which must be purchased by the Company.
The Company has minimum purchase obligations for its joint venture with UMC and
WaferTech LLC. Although the Company has rights to re-schedule or assign capacity
to another party, there can be no assurance that such re-schedule or assignment
would be successfully accomplished. Should the Company fail to re-schedule or
assign unneeded capacity, the Company's business and operating results could be
adversely affected.
CUSTOMERS AND MARKETING
The Company's customers include a broad range of original equipment
manufacturers ("OEM") and PC motherboard manufacturers. The Company's SRAM
products are used primarily in high speed modems, local area networks, bridges
and routers, PC cache, disk drives, cellular phones and adaptor cards. The
Company's nonvolatile memory products have a wide range of memory applications,
including high speed modems, local area networks, adaptor cards, cellular
telephones and electronic games. In fiscal 1996, one customer, U.S. Robotics, a
manufacturer of modems, networking equipment and access hardware for internet
service providers, accounted for approximately 22% of the Company's net sales.
In fiscal 1995 and 1994, no customer accounted for more than 10% of the
Company's net sales.
In the United States, the Company markets its products through a direct
sales force and independent sales representatives. The Company engaged a U.S.
distributor in 1995, and added a second U.S. distributor in 1996. The Company is
continuing to expand its marketing and sales activity in Europe.
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The Company has a direct sales and marketing organization based in Taipei,
Taiwan that is primarily responsible for the Asian market. To date, a majority
of the Company's Asian sales have been to Taiwan customers. In addition, the
Company is in the process of expanding its sales and distribution efforts in
other Asian countries, in particular Japan, Hong Kong, Singapore, Korea and the
People's Republic of China.
The Company markets and distributes its products on a worldwide basis. In
fiscal 1996, approximately 53% of the Company's net sales were attributable to
customers located in the United States, 10% was attributable to customers
located in Europe and 37% was attributable to customers located in Asia. In
fiscal 1995, approximately 35% of the Company's net sales were attributable to
customers located in the United States, 9% was attributable to customers located
in Europe and 56% was attributable to customers located in Asia. In fiscal 1994,
approximately 34% of the Company's net sales were attributable to customers
located in the United States, 1% was attributable to customers located in Europe
and 65% was attributable to customers located in Asia. In fiscal 1996, 1995, and
1994, international sales (sales by ISSI-Taiwan and export sales by ISSI-U.S.)
comprised approximately 47%, 65% and 68% of the Company's net sales,
respectively. See Note 11 of Notes to Consolidated Financial Statements.
The Company is subject to the risks of conducting business internationally,
including economic conditions in Asia, particularly Taiwan, changes in trade
policy and regulatory requirements, tariffs and other trade barriers and
restrictions, the burdens of complying with foreign laws and, possibly,
political instability. The Company anticipates that sales to international
customers will continue to represent a significant percentage of net sales. The
Company's Taiwan subsidiary employs over one-half of the Company's total work
force. In addition, substantially all of the Company's foundries and assembly
and test operations are located in Asia. The Company transacts business
predominately in U.S. and New Taiwan ("NT") dollars. Such transactions expose
the Company to the risk of exchange rate fluctuations. The Company periodically
monitors its exposure to foreign currency fluctuations, and has from time to
time taken action to hedge against such exposure, but has not to date adopted
any formal hedging strategy. Although the Company's business and results of
operations have not been materially and adversely impacted by exchange rate
fluctuations, there can be no assurance that exchange rate fluctuations will not
materially and adversely affect its business and operating results in the
future.
The Company manufactures and markets primarily standard products. Sales are
generally made pursuant to standard purchase orders, which can be revised during
the agreement term to reflect changes in the customer's requirements. The
Company has also entered into master purchase agreements with certain of its OEM
customers. These agreements do not require the OEMs to purchase minimum
quantities of the Company's products. Product deliveries are scheduled upon the
Company's receipt of purchase orders under the related OEM agreements.
Generally, these purchase orders and OEM agreements allow customers to
reschedule delivery dates and cancel purchase orders without significant
penalties. For these reasons, the Company believes that its backlog, while
useful for scheduling production, is not necessarily a reliable indicator of
future revenues.
COMPETITION
The semiconductor memory market is intensely competitive and has been
characterized by price erosion, rapid technological change, short product life
cycles, cyclical market patterns and heightened foreign and domestic
competition. The ability of the Company to compete successfully in the high
performance memory market depends on factors both within and outside of its
control, including product pricing, the rate at which OEM customers incorporate
the Company's products into their systems, access to advance process
technologies at competitive prices, product functionality and performance,
successful and timely product development, wafer supply and achievement of
acceptable yields of functional die, the gain or loss of significant customers,
the nature of its competitors and general economic conditions. There can be no
assurance that the Company will be able to compete successfully in the future as
to any of these factors. The failure of the Company to compete successfully in
these or other areas could materially and
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adversely affect the Company's business and operating results. In addition, the
Company is vulnerable to technology advances utilized by competitors to
manufacture higher performance or lower cost products.
The high performance SRAM market is generally a fragmented market and
specific competitors and competitive factors vary based on geographic regions
and market segments. In the high performance SRAM market, the Company competes
with several major domestic and international semiconductor companies including
Alliance Semiconductor, Cypress Semiconductor, Integrated Device Technology
("IDT"), Micron Technology, Motorola, Samsung, Sony, Toshiba, UMC and Winbond.
The Company also competes with new and emerging companies which have recently
entered or may in the future enter the market. The Company also may face
significant competition from other domestic and foreign integrated circuit
manufacturers which have advanced technological capabilities but have not
previously participated in the SRAM market sector. There can be no assurance
that the Company will be able to compete successfully against any of these
competitors.
In the nonvolatile memory market, the Company's primary competitors include
Advanced Micro Devices ("AMD"), Atmel, Intel and SGS-Thomson Microelectronics.
The Company also competes with many small to medium-sized companies in one or
more segments of the market. Certain of the Company's competitors offer broader
product lines and have greater financial, technical, marketing, distribution and
other resources than the Company. The Company believes that the principal
competitive factor in the market for EPROM and EEPROM is price and speed,
respectively. In the area of FLASH memory, the Company faces competition from
companies that have already established FLASH memory products, particularly
Intel and AMD. There can be no assurance that the Company will be able to
compete successfully against any of these competitors.
The process technology used by the Company's manufacturing sources,
including process technology that the Company has developed with its foundries,
can be used by such manufacturers to produce products for other companies,
including the Company's competitors. Although the Company believes that its
participation in the development of the processes provides it the advantage of
early access to such processes, there can be no assurance that the rights of the
manufacturer will not be used to benefit the Company's competitors.
PRODUCT WARRANTY
Consistent with semiconductor memory industry practice, the Company
generally provides a limited warranty that its semiconductor memory devices are
in compliance with specifications existing at the time of delivery. Liability
for a stated warranty period is usually limited to replacement of defective
items or return of amounts paid.
RESEARCH AND DEVELOPMENT
Rapid technological change and continuing price competition require research
and development efforts on both new products and advanced processes employing
smaller geometries. The Company's research and development activities are
focused primarily on the development of advanced process technologies and new
memory circuit designs. The Company currently designs its high performance
memory products and jointly develops advanced process technology with its
manufacturing partners from its headquarters in Sunnyvale, California. The
Company's Taiwan and Hong Kong subsidiaries are responsible for the development
of application-specific products, such as the Voice EPROM.
The Company is currently designing new SRAM and nonvolatile products. SRAM
products under development include both 3.3 volt and 5 volt designs. Nonvolatile
memory programs include the development of higher density FLASH products.
Several new product families are also under development. The Company's
technology and product development expenditures in fiscal 1996, 1995 and 1994
were $21.4 million, $14.9 million and $8.8 million, respectively.
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PATENTS
As of September 30, 1996, the Company held four U.S. patents and has a fifth
patent allowed but not yet issued. This fifth patent was subsequently issued on
October 22, 1996. These patents expire between 2010 and 2013. The Company
expects to continue to file patent applications where appropriate to protect its
proprietary technologies; however, the Company believes that its continued
success depends primarily on factors such as the technological skills and
innovation of its personnel rather than on its patents. The process of seeking
patent protection can be expensive and time consuming. There can be no assurance
that patents will be issued from pending or future applications or that, if
patents are issued, they will not be challenged, invalidated or circumvented, or
that rights granted thereunder will provide meaningful protection or other
commercial advantage to the Company. Moreover, there can be no assurance that
any patent rights will be upheld in the future or that the Company will be able
to preserve any of its other intellectual property rights.
In the semiconductor industry it is typical for companies to receive notices
from time to time alleging infringement of patents or other intellectual
property rights of others. The Company has been and may from time to time
continue to be notified of claims that it may be infringing patents, maskwork
rights or copyrights owned by third parties. In this regard, the Company has
been notified by several companies that it may be infringing certain patents
with respect to its products and underlying process technology. Although none of
these companies have pursued a claim against the Company, there is no assurance
that these or other companies will not in the future pursue claims against the
Company with respect to the alleged infringement of patents, maskwork rights,
copyrights or other intellectual property owned by third parties. If it appears
necessary or desirable, the Company may seek licenses under patents that it is
alleged to be infringing. Although patent holders commonly offer such licenses,
there is no assurance that any licenses will be offered or that the terms of any
offered licenses will be acceptable to the Company. The failure to obtain a
license under a key patent or intellectual property right from a third party for
technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of the products utilizing the
invention or to attempt to develop non-infringing products, any of which could
materially and adversely affect the Company's business and operating results.
Furthermore, there can be no assurance that the Company will not become involved
in protracted litigation regarding the alleged infringement by the Company of
third party intellectual property rights or which may be necessary to protect
patents or other intellectual property rights of the Company. Any litigation
relating to patent infringement or other intellectual property matters could
result in substantial cost and diversion of resources by the Company which could
materially and adversely affect the Company's business and operating results.
EMPLOYEES
As of September 30, 1996, the Company had approximately 380 employees, of
which 219 were based in Taiwan, 149 in the U.S., 7 in the People's Republic of
China and 5 in Hong Kong. The Company's future success will largely be dependent
on its ability to attract, retain and motivate highly qualified technical and
management personnel. The employment market for such personnel is extremely
competitive and there can be no assurance that the Company will successfully
staff all necessary positions. The Company's employees are not represented by
any collective bargaining agreements and the Company has never experienced a
work stoppage. The Company believes that its employee relations are good.
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EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of September 30,
1996 are as follows:
Name Age Position
Jimmy S.M. Lee 41 Chairman, Chief Executive Officer, President, and Director
Kong-Yeu Han 41 Executive Vice President, Office of the President, General
Manager-Taiwan and Director
Gary L. Fischer 45 Executive Vice President, Office of the
President and Chief Financial Officer
BACKGROUND OF EXECUTIVE OFFICERS
Jimmy S.M. Lee has served as Chief Executive Officer, President and a
director of the Company since he co-founded the Company in October 1988. He has
also served as a director of ISSI-Taiwan since September 1990. From 1985 to
1988, Mr. Lee was engineering manager at International CMOS Technology, Inc., a
semiconductor company, and from 1983 to 1985, he was a design manager at
Signetics Corporation, a semiconductor company. Prior thereto, Mr. Lee was a
project manager at Toshiba Semiconductor Corporation and a design engineer at
National Semiconductor Corporation. Mr. Lee holds an M.S. degree in electrical
engineering from Texas Tech University and a B.S. degree in electrical
engineering from National Taiwan University.
Kong-Yeu Han has served as the Company's Executive Vice President since
April 1995, as General Manager, ISSI-Taiwan since September 1990 and as a
director of the Company since he co-founded the Company in October 1988. He has
also served as a director of ISSI-Taiwan since September 1990. From October 1988
to September 1990, he also served as Vice President, Engineering of the Company.
From 1985 to 1988, Mr. Han was design engineering manager at Vitelic
Corporation, a semiconductor company, and from 1984 to 1985 he was a staff
engineer at Signetics Corporation. From 1980 to 1984, Mr. Han was a senior
engineer at AMD and its subsidiary Monolithic Memories, Inc. ("MMI"), both of
which are semiconductor companies. Mr. Han holds an M.S. degree in electrical
engineering from the University of California, Santa Barbara and a B.S. degree
in electrical engineering from National Taiwan University.
Gary L. Fischer has served as the Company's Executive Vice President since
April 1995 and as Chief Financial Officer since June 1993. He also served as
Vice President, Finance and Administration from December 1993 to April 1995 and
as Vice President, Finance from June 1993 to December 1993. From December 1992
to April 1993, Mr. Fischer was Vice President, Finance and Chief Financial
Officer of Shaman Pharmaceuticals, Inc., a pharmaceutical company. From January
1989 to December 1992, Mr. Fischer was Chief Financial Officer of Synergy
Semiconductor Corporation, a manufacturer of high performance SRAM and logic
integrated circuits. Mr. Fischer holds an M.B.A. degree from the University of
Santa Clara and a B.A. degree from the University of California, Santa Barbara.
Officers serve at the discretion of the Board and are appointed annually.
There are no family relationships between the directors or officers of the
Company.
ITEM 2. PROPERTIES
The Company's U.S. headquarters occupies two leased facilities, totaling
approximately 43,000 square feet, in Sunnyvale, California in which its
executive offices, technology and product development groups and some testing
facilities are located. The leases on these facilities expire in May 1997.
ISSI-Taiwan occupies two leased facilities totaling approximately 48,000 square
feet in the Hsinchu Science-Based Industrial Park in Hsinchu, Taiwan. These
leases expire in October and November 1997 and are
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subject to annual renewal. The Company also leases sales offices in five states,
Taipei, Taiwan and China and engineering offices in Hong Kong.
The Company entered into a ten year lease effective December 1, 1996 for a
facility in Santa Clara, California totaling 93,000 square feet. The lease
expires in February 2007. The Company intends to sublease approximately 23,000
square feet of this space to a third party. The Company plans to vacate its two
leased facilities in Sunnyvale, California and relocate to the Santa Clara
facility in late December 1996. The Company needs additional space in Taiwan to
accommodate its growth. In this regard, the Company has begun the construction
of a building of approximately 225,000 square feet in the Hsinchu Science-Based
Industrial Park to house its Taiwan operation at a cost of approximately $18
million. Occupancy is expected to begin in late 1997.
ITEM 3. LEGAL PROCEEDINGS
On December 13, 1995, a securities class action lawsuit was filed in the
United States District Court for the Northern District of California against the
Company, certain of its officers and directors, and the co-lead underwriters for
the company's initial public offering and secondary offering, on behalf of all
persons who purchased the Company's common stock between February 3, 1995, and
December 5, 1995 (the "Lawsuit"). The Lawsuit asserts claims under Section 11 of
the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities and
Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The Lawsuit seeks
damages in an unspecified amount. The Company believes it has meritorious
defenses to the Lawsuit and intends to defend the case vigorously.
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 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
The Company's common stock has been quoted on the Nasdaq National Market
under the symbol ISSI since the Company's initial public offering on February 3,
1995 at $13.00 per share. Prior to such date, there was no public market for the
common stock. The following table sets forth, for the fiscal quarters indicated,
the high and low sale prices per share for the Common Stock as reported on the
Nasdaq National Market.
Fiscal Year ending September 30, 1996 High Low
------- -------
Fourth quarter $13.375 $ 8.00
Third quarter 19.125 10.625
Second quarter 18.75 11.375
First quarter 38.00 15.00
Fiscal Year ending September 30, 1995 High Low
------ ------
Fourth quarter $73.25 $31.50
Third quarter 58.25 31.75
Second quarter (from February 3, 1995) 43.50 16.75
HOLDERS OF RECORD
As of November 22, 1996, there were approximately 321 stockholders of record
for the Company's common stock.
DIVIDENDS
The Company has never declared or paid cash dividends. The Company currently
intends to retain any earnings for use in its business and does not anticipate
paying any cash dividends on its capital stock in the foreseeable future. The
Company is subject to legal restrictions related to distribution of earnings of
its Taiwan subsidiary. See Note 9 of Notes to Consolidated Financial Statements.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Year Ended September 30,
1996 1995 1994 1993 1992
--------- -------- ------- ------- -------
(in thousands, except per share data)
Net sales $ 132,039 $123,201 $60,836 $52,662 $29,140
Gross margin 31,855 62,252 20,553 15,671 6,084
Operating income (loss) (4,683) 34,476 4,994 5,755 494
Net income 1,015 29,653 4,612 5,782 555
Net income per share (1) 0.06 1.79 0.34 -- --
Working capital 107,929 120,839 16,648 11,957 7,404
Total assets 178,039 204,441 33,243 28,883 21,435
Total long-term obligations,
notes payable, and current
portion of long-term obligations 14,534 33,888 1,526 2,963 2,940
Stockholders' equity 142,435 139,909 21,187 15,963 10,615
Dividends paid -- -- -- -- --
- - ---------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the basis used to calculate net income per share. Prior to 1994, Statements
of Income omit the historical net income per share as it was not presented in
the Company's initial public offering registration statement. Pro forma income
per share is presented for fiscal 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1995
Net Sales. Net sales consist principally of total product sales less
estimated sales returns. Net sales increased by 7% to $132.0 million in fiscal
1996 from $123.2 million in fiscal 1995. The Company's SRAM product family
accounted for a substantial majority of total net sales in fiscal 1996 and 1995.
During fiscal 1996, there was a significant drop in the average selling prices
of SRAM products due to worldwide over capacity. Although the Company increased
its unit shipments of SRAM products in fiscal 1996 from fiscal 1995, this
increase in unit shipments was generally offset by lower average selling prices.
The increase in total sales of approximately 7% was primarily attributable to
growth in the Company's NVM product line sales which more than doubled in fiscal
1996 compared to fiscal 1995. During fiscal 1996 and 1995, the Company's 256K
SRAM products accounted for a majority of its net sales. Although the Company
anticipates that its 256K SRAM products will continue to account for a
significant portion of sales, the proportion of such sales is expected to
decline as demand shifts to higher density products, particularly the 512K and 1
megabit products. The Company believes that the average selling prices of its
existing products will continue to decline for the next several quarters. There
can be no assurance that such declines will be offset by higher volumes or by
higher prices on newer products. See "Certain Factors - Quarterly Fluctuations
and Declines in Average Selling Prices".
Gross Profit. The Company's cost of revenues includes die cost from the
wafers acquired from foundries, subcontracted package and assembly costs and
costs associated with in-house product testing and quality assurance. Gross
profit decreased 49% to $31.9 million in fiscal 1996 from $62.3 million in
fiscal 1995. As a percentage of net sales, gross profit decreased to 24.1% for
fiscal 1996 from 50.5% for fiscal 1995. The decline in gross margin includes a
$15.0 million write-down of inventory recorded in the June 1996 quarter. There
can be no assurance that additional inventory write-downs will not be needed in
the future and such write-downs could have a material adverse affect on the
Company's future operating
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results. The general decrease in gross profit was primarily the result of lower
average selling prices for the Company's SRAM products in fiscal 1996 compared
to fiscal 1995. The Company experienced a significant drop in the average
selling prices of its SRAM products in fiscal 1996 and, to a lesser extent, a
decline in the average selling prices of its NVM products. Although product
costs were also generally lower in fiscal 1996, the significant drop in average
selling prices resulted in lower gross margins. The Company believes that the
average selling price of its products will continue to decline and, unless the
Company is able to reduce its cost per unit to the extent necessary to offset
such declines, the decline in average selling prices will result in a material
decline in the Company's gross margin. The Company has product cost reduction
programs in place and believes that the excess wafer capacity at its suppliers
will result in reduced wafer costs. However, there can be no assurance that
product cost reductions will occur or that such possible reductions will be
sufficient to offset the expected declines in average selling prices.
Research and Development. Research and development expenses increased by 44%
to $21.4 million in fiscal 1996 from $14.9 million in fiscal 1995. As a
percentage of net sales, research and development expenses increased to 16.2% in
fiscal 1996, from 12.1% in fiscal 1995. The increase was primarily the result of
an increase in engineering personnel and payroll related expenses and increased
expenses related to the development of new products. During fiscal 1996, the
Company's development efforts principally focused on geometry reductions for its
memory products, synchronous SRAMs, wider bus width SRAMs such as 64K x 32 and
32K x 16 configurations, Flash memories, Voice EPROMs, and other memory related
products. The Company anticipates that its research and development expenses
will increase in absolute dollars in future periods, although such expenses may
fluctuate as a percentage of net sales.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 18% to $15.2 million in fiscal 1996 from $12.9 million in
fiscal 1995. As a percentage of net sales, selling, general and administrative
expenses increased to 11.5% in fiscal 1996, from 10.5% in fiscal 1995. The
increase was primarily the result of the addition of marketing and sales
personnel, payroll related expenses and increased selling commissions. The
Company expects its selling, general and administrative expenses to increase in
absolute dollars in future periods as it continues to expand its sales and
marketing efforts, although such expenses may fluctuate as a percentage of net
sales.
Interest and other income, Net. Interest and other income, net increased to
$4.5 million in fiscal 1996 from $2.5 million in fiscal 1995, primarily due to
increased net interest earnings as a result of higher cash and short-term
investment balances.
Benefit for Income Taxes. The Company recorded a tax benefit of $1,158,000
for fiscal year 1996 which was primarily attributable to a net loss before
income taxes, the Company's Taiwan tax exemption and investment tax credits
earned in Taiwan.
As a result of its location in the Hsinchu Science-Based Industrial Park in
Taiwan, ISSI-Taiwan receives a significant tax exemption for taxable income from
October 1, 1992 through September 30, 1997. The precise amount of the exemption
is calculated annually based upon the extent of ISSI-Taiwan's net operating
taxable income and measured by certain factors, including use of qualified
manufacturing equipment, self-manufacturing costs and qualified sales revenue.
The portion of ISSI-Taiwan's taxable income which is not subject to exemption is
taxed at a flat 20% tax rate. For fiscal 1996, the Company was able to reduce
current taxes payable by approximately $1,510,000 ($0.08 per share) related to
this exemption. In addition, the Company recognized benefits from investment tax
credits in Taiwan of approximately $1,018,000 in the current fiscal year. There
can be no assurances that the Company's current tax status in Taiwan will not
change in the future due to changes in the regulatory environment, the inability
to qualify for exempt status or other factors.
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The Company has established a valuation allowance covering 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,
1996. Approximately $1,832,000 of the valuation allowance at September 30, 1996
is attributable to tax benefits of stock option deductions which will be
credited to paid in capital when realized.
FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1994
Net Sales. Net sales increased by 103% to $123.2 million in fiscal 1995 from
$60.8 million in fiscal 1994. The increase in sales was principally due to
increased unit shipments of SRAM products and, to a lesser extent, nonvolatile
memory products, changes in product mix to lower voltage (3.3v) and higher
density products, and higher average selling prices for the Company's SRAM
products. The increased units were a result of increased wafer allocation from
the Company's primary outside foundry, TSMC, and design improvements which
resulted in more die per wafer. The Company generally experienced increasing
average selling prices for its SRAM products in fiscal 1995 compared to fiscal
1994 due to a general shortage of wafer capacity in the industry.
Gross Profit. Gross profit increased 203% to $62.3 million in fiscal 1995
from $20.6 million in fiscal 1994. As a percentage of net sales, gross profit
increased to 50.5% for fiscal 1995 from 33.8% for fiscal 1994. This change was a
result of increased shipments in fiscal 1995 of higher margin products such as
the 3.3 volt 256K SRAM and the higher density 512K and 1 Meg SRAMs, higher
average selling prices for SRAM products in general, and reduced die costs as a
result of advances in design geometries from 0.64 and 0.60 micron to 0.5 micron
for the Company's primary products.
Research and Development. Research and development expenses increased by 70%
to $14.9 million in fiscal 1995 from $8.8 million in fiscal 1994. As a
percentage of net sales, research and development expenses decreased to 12.1% in
fiscal 1995 from 14.4% in fiscal 1994. The increase in absolute dollars was
primarily the result of an increase in engineering personnel, including the
establishment of an engineering group in the People's Republic of China, and
increased expenses related to the development of new products.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 90% to $12.9 million in fiscal 1995 from $6.8 million in
fiscal 1994. As a percentage of net sales, selling, general and administrative
expenses decreased to 10.5% in fiscal 1995 from 11.2% in fiscal 1994. The
increase in absolute dollars was primarily the result of increased sales
commissions as the Company expanded its network of manufacturing representatives
and added marketing and sales personnel.
Interest and other income, Net. Interest and other income, net increased to
$2.5 million in fiscal 1995 from $0.4 million in fiscal 1994, primarily due to
increased net interest income as a result of higher cash and short-term
investment balances.
Provision for Income Taxes. As a result of its location in the Hsinchu
Science-Based Industrial Park in Taiwan, ISSI-Taiwan receives a significant tax
exemption for taxable income from October 1, 1992 through September 30, 1997.
For fiscal 1995, the Company recognized a tax benefit of approximately $5.0
million ($0.30 per share) related to this exemption.
For fiscal 1995, the Company increased its provision for income taxes to 20%
of income before income taxes and minority interest as compared to 15% for
fiscal 1994, primarily reflecting increased operating income attributable to the
Company's U.S. operations. The Company's consolidated effective tax rate for any
given period is calculated by dividing the total provision for income taxes
incurred by the Company and each of its subsidiaries by consolidated pre-tax
income before minority interest in net loss of consolidated subsidiary. Losses
incurred by one subsidiary generally are not deductible by another subsidiary in
calculation of their respective taxes. Therefore, the relative earnings of the
Company and its subsidiaries would affect the Company's consolidated effective
tax rate.
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company's principal sources of liquidity
included cash, cash equivalents, restricted cash and short-term investments of
approximately $81.5 million, of which approximately $6.5 million are held by
ISSI-Taiwan. Approximately $7.0 million of the cash held by the Company is
restricted as of September 30, 1996 for purposes of securing available
short-term lines of credit and letters of credit. During fiscal 1996, operating
activities utilized cash of approximately $13.6 million. Cash utilized by
operations was primarily due to increases in inventory and prepaid and other
assets and decreases in accounts payable, partially offset by decreases in
accounts receivable and net income adjusted for non-cash items. In addition, the
Company received net proceeds from borrowings under short-term and long-term
lines of credit of $11.8 million.
The Company made capital expenditures of approximately $20.4 million in
fiscal 1996, primarily for the purchase of test equipment and design and
engineering tools. The Company expects to spend approximately $6 million to
purchase capital equipment during the next twelve months, principally for the
purchase of additional test equipment, design and engineering tools, and
computer hardware and software. Additionally, the Company commenced
construction, in July 1996, of an $18.0 million facility in the Hsinchu
Science-Based Industrial Park to house its Taiwan operations. The building is
expected to be completed in late 1997.
In June 1996, the Company entered into a joint venture "WaferTech, LLC" with
TSMC, Altera, Analog Devices, and private investors to build a wafer fabrication
facility in Camas, Washington. The Company will invest $31.2 million for a 4%
equity interest in the venture and as of September 30, 1996, $9.4 million had
been paid by the Company to WaferTech in this regard. The next payments by the
Company of $9.4 million and $12.4 million are expected to be made in December
1996 and November 1997, respectively. In fiscal 1995, the Company entered into
an agreement with TSMC pursuant to which the Company agreed to acquire specified
wafer capacity through 2001. In exchange for wafer capacity commitments by TSMC,
the Company agreed to make certain annual payments to TSMC which commenced in
June 1995. The first payment in June 1995 was approximately $2.4 million and is
being credited towards the purchase of wafers in 1996. The additional required
payments totaling approximately $31.2 million over the next four years represent
annual increases in capacity which must be purchased by the Company, a portion
of which is secured by a letter of credit for $4.8 million. Additionally, in
fiscal 1995, the Company entered into a manufacturing agreement and joint
venture agreement with UMC. Under the terms of these agreements, the Company
received a supply of wafers from UMC beginning with the December 1995 quarter
and the Company agreed to invest approximately $30 million for a 5% equity
interest in a joint manufacturing venture of which UMC retains 55% ownership. As
of September 30, 1996, approximately $7.0 million has been paid by the Company
to UMC for the joint venture. Based on the completion of certain milestones, the
Company is committed to future payments to UMC of approximately $23.0 million.
The next payments of approximately $15.0 million and $8.0 million are expected
to be made in January 1997 and July 1997, respectively, subject to certain
milestone completions.
The Company has $23.8 million available through a number of short-term lines
of credit with various financial institutions in Taiwan. As of September 30,
1996, the Company had borrowings of approximately $3.6 million under these
short-term lines of credit.
The Company has a number of long-term lines of credit with the Bank of
Communication in Taiwan to finance the purchase of machinery, equipment and
building construction in Taiwan. Total obligations related to these borrowings
as of September 30, 1996 were $10.9 million, of which $0.7 million is included
in the current portion of long-term obligations. These obligations bear interest
at rates of from 6.50% to 6.625% and are payable in quarterly installments
through 2003. As of September 30, 1996, the Company had available long-term
lines of credit of approximately $13.3 million of which approximately $10.9
million is for construction financing for the Company's new facility in the
Hsinchu Science-Based Industrial Park.
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The Company believes that its existing funds will satisfy the Company's
anticipated working capital and other cash requirements through at least the
next 12 months. The Company may also use bank borrowings and capital leases
depending on the terms available.
The Company, from time to time, evaluates potential acquisitions and equity
investments complementary to its memory expertise and market strategy. To the
extent the Company pursues such transactions, any such transactions could
require the Company to seek additional equity or debt financings to fund such
activities and, in certain circumstances, to provide product or technology
rights. There can be no assurance that any such additional financing could be
obtained on terms acceptable to the Company, if at all.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS OR FUTURE OPERATING
RESULTS
QUARTERLY FLUCTUATIONS AND DECLINES IN AVERAGE SELLING PRICES
The Company's future quarterly and annual operating results are subject to
fluctuations due to a wide variety of factors, many of which are outside of its
control, including declines in average selling prices of the Company's products,
oversupply of memory products in the market, failure to introduce new products
and to implement technologies on a timely basis, the timing and announcement of
new product introductions by the Company and its competitors, market acceptance
of the Company's and its customers' products, the failure to anticipate changing
customer product requirements and fluctuations in manufacturing yield. 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 costs associated with the expansion of sales channels, increases in
general and administrative expenses and certain production and other risks
associated with using independent manufacturers. In this regard, the Company
experienced quarterly sequential declines in revenue in the quarters ending
March, June and September, 1996 principally due to declines in the average
selling prices of its products and the inability to offset these declines by
sufficient increases in unit shipments. There can be no assurance that the
Company will not experience further declines in quarterly revenue. Such revenue
declines have had a material adverse impact on the Company's gross profit and
net income. The Company's future operating results will also depend in part on
general economic conditions in Asia, the United States and its other markets. In
addition, there can be no assurance that the markets for the Company's products,
which are highly cyclical, will continue to grow.
Competitive pricing pressures resulted in significant price decreases for
the Company's products during 1996. Historically, average selling prices for
semiconductor memory products have declined and the Company expects that average
selling prices will decline in the future. Accordingly, the Company's ability to
maintain or increase revenues will be highly dependent upon its ability to
increase unit sales volume of existing products and to introduce and sell new
products which compensate for the anticipated declines in the average selling
prices of its products. Declining average selling prices will also adversely
affect the Company's gross margins and profits unless the Company is able to
reduce its cost per unit to offset declines in average selling prices. There can
be no assurance that the Company will be able to increase unit sales volumes,
introduce and sell new products or reduce its cost per unit.
Shifts in industry-wide wafer capacity from shortages to oversupply or from
oversupply to shortages may also result in significant fluctuations in the
Company's quarterly or annual operating results. Excess capacity may result in
declining average selling prices or write downs in the value of inventory due to
excess inventory or inventory values that exceed selling prices. In this regard,
in the June 1996 quarter, the Company recorded a $15 million write-down of
inventory.
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PRODUCT CONCENTRATION AND DEPENDENCE ON PERSONAL COMPUTER INDUSTRY
In fiscal 1996, substantially all of the Company's net sales were derived
from the sale of SRAM products, primarily 256K products. Substantially all of
the Company's products are incorporated into computer and computer-peripheral
products such as modems, disk drives and networks. In recent periods, the PC
industry has experienced strong unit sales growth, which has increased demand
for integrated circuits, including memory products offered by the Company. The
PC and PC peripherals industry has from time to time experienced cyclical,
depressed business conditions, often in connection with, or in anticipation of,
a decline in general economic conditions. Such industry downturns have resulted
in reduced product demand and declining average selling prices. The Company's
business and operating results would be materially and adversely affected by any
future downturns in the PC or PC peripherals industry.
CUSTOMER CONCENTRATION
The Company's sales are concentrated within a limited customer base. In
fiscal 1996, one customer accounted for approximately 22% of net sales. The
Company expects a significant portion of its future sales to remain concentrated
within a limited number of strategic customers. There can be no assurance that
the Company will be able to retain its strategic customers or that such
customers will not otherwise cancel or reschedule orders, or in the event of
canceled orders, that such orders will be replaced by other sales. In addition,
sales to any particular customer may fluctuate significantly from quarter to
quarter. The occurrence of any such events could have a material adverse effect
on the Company's business and operating results.
DEPENDENCE ON INDEPENDENT WAFER FOUNDRIES
The Company has adopted a fabless manufacturing strategy with the objective
of establishing collaborative manufacturing relationships with selected
semiconductor manufacturers. To date, the Company's principal manufacturing
relationship has been with TSMC, and in fiscal 1996, the Company obtained a
substantial majority of its wafers from TSMC. The Company also receives wafers
from Chartered Semiconductor and UMC. Each of the Company's wafer suppliers also
fabricates for other integrated circuit companies, including certain of the
Company's competitors. Although the Company has written commitments specifying
increasing wafer quantities, the Company would have little or no recourse if its
wafer suppliers experienced manufacturing failures or yield shortfalls, chose to
prioritize capacity for other use or reduced or eliminated deliveries to the
Company. There can be no assurance that the Company would be able to qualify
additional manufacturing sources for existing or new products in a timely manner
or that such additional manufacturing sources would agree to deliver an adequate
supply of wafers. If the Company were unable to obtain an adequate supply of
wafers from its current or any alternative sources in a timely manner, its
business and operating results would be materially and adversely affected.
The Company has agreed to certain minimum wafer purchase commitments with
its foundry partners in exchange for wafer capacity commitments. The Company
also agreed to make certain annual payments to TSMC for capacity increases.
Additional required payments to TSMC totaling approximately $31.2 million over
the next four years represent annual increases in capacity which must be
purchased by the Company. The Company also has minimum purchase obligations for
its joint venture with UMC and WaferTech LLC. Although the Company has rights to
re-schedule or assign capacity to another party, there can be no assurance that
such re-schedule or assignment would be successfully accomplished. Should the
Company fail to re-schedule or assign unneeded capacity, the Company's business
and operating results would be materially and adversely affected.
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CLAIMS REGARDING INTELLECTUAL PROPERTY
In the semiconductor industry it is typical for companies to receive notices
from time to time alleging infringement of patents or other intellectual
property rights of others. The Company has been, and may from time to time
continue to be, notified of claims that it may be infringing patents, maskwork
rights or copyrights owned by third parties. Although none of these companies
have pursued a claim against the Company, there is no assurance that these or
other companies will not in the future pursue claims against the Company with
respect to the alleged infringement. If it appears necessary or desirable, the
Company may seek licenses under patents that it is alleged to be infringing.
Although patent holders commonly offer such licenses, there is no assurance that
any licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license under a key patent or
intellectual property right from a third party for technology used by the
Company could result in protracted, costly litigation and cause the Company to
incur substantial liabilities and to suspend the manufacture of the products
utilizing the invention or to attempt to develop non-infringing products, any of
which could materially and adversely effect the Company's business and operating
results.
MANAGEMENT OF GROWTH
The Company has grown rapidly over the last several years. This growth has
resulted in a significant increase in responsibilities for existing management
which has placed, and may continue to place, a significant strain on the
Company's limited personnel and other resources. The Company's ability to manage
its growth effectively will require it to continue to improve its operational,
financial and management systems, to successfully attract new employees and to
properly train, motivate and manage its employees. If the Company's management
is unable to manage growth effectively, the Company's business and operating
results could be materially and adversely affected.
RISK OF INCREASED TAXES
The Company's tax rate could increase for a number of reasons. For example,
if the proportions of taxable income shifted such that a greater proportion of
taxable income is earned by U.S. operations, the Company's effective tax rate
may increase. It is possible that the Taiwan tax holiday applicable to the
earnings of ISSI-Taiwan could be modified by changes in law or otherwise
reduced. In addition, the Company's taxes would increase if all or a portion of
the earnings of ISSI-Taiwan were to become subject to U.S. tax as the result of
actual dividends or through U.S. rules for taxing controlled foreign
corporations. Further, if profits of ISSI-Taiwan are distributed to the Company
as dividends they become subject to Taiwan withholding tax as well as U.S. tax
(with an offset for underlying Taiwan taxes paid) and the tax rate would
increase. It is not the Company's intention to cause ISSI-Taiwan to distribute
dividends.
ISSI-Taiwan is a controlled foreign corporation ("CFC") for U.S. income tax
purposes. Under U.S. rules for taxing CFCs, all or a portion of the earnings of
ISSI-Taiwan may become subject to U.S. tax as inclusions in the U.S. taxable
income of the Company (with a credit for foreign taxes paid by ISSI-Taiwan) if
one or more of a number of events occur. Such events include, but are not
limited to: ISSI-Taiwan accumulating cash and other passive assets in excess of
25% of its total assets; ISSI-Taiwan lending funds to the Company or otherwise
investing in certain proscribed assets; and ISSI-Taiwan engaging in various
types of transactions defined in the Subpart F provisions of the U.S. Internal
Revenue Code. If cash is accumulated through operations and not otherwise
invested in non-passive assets such as capital equipment, such amounts in excess
of 25% of total assets would cause the Company's effective tax rate to increase.
The Company believes that its existing plans will minimize the impact of the CFC
rules for the immediate future, subject to such changes in U.S. tax laws as may
occur. However, over time the CFC rules may cause the Company's tax rate to
increase.
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VOLATILITY OF STOCK PRICE
The trading price of the Common Stock increased substantially after the
Company's initial public offering in February 1995, subsequently declined, and
could be subject to wide fluctuations in response to quarter-to-quarter
variations in operating results, future announcements by the Company or its
competitors, increases or decreases in wafer capacity, general conditions in the
semiconductor or computer industries, governmental regulations, litigation, new
or revised earnings estimates, comments or recommendations issued by analysts
who follow the Company, its competitors or the semiconductor industry and other
events or factors. In addition, stock markets have experienced extreme price and
trading volume volatility in recent years. This volatility has had a substantial
effect on the market prices of securities of many high technology companies for
reasons frequently unrelated to the operating performance of the specific
companies. These broad market fluctuations may adversely affect the market price
of the Company's Common Stock.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial StatementS
Page
Report of Independent Auditors.................................... 20
Financial Statements:
Consolidated Statements of Income
for Fiscal Years Ended September 30, 1996,
September 30, 1995, and September 30, 1994................ 21
Consolidated Balance Sheets
as of September 30, 1996, and September 30, 1995.......... 22
Consolidated Statements of Stockholders' Equity
for Fiscal Years Ended September 30, 1996,
September 30, 1995, and September 30, 1994................ 23
Consolidated Statements of Cash Flows
for Fiscal Years Ended September 30, 1996,
September 30, 1995, and September 30, 1994................ 24
Notes to Consolidated Financial Statements.................... 25
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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, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Integrated Silicon Solution, Inc. at September 30, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 1996, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
San Jose, California
October 28, 1996
20
23
Integrated Silicon Solution, Inc.
Consolidated Statements of Income
(In thousands, except per share data)
Years Ended September 30,
------------------------------------
1996 1995 1994
--------- --------- --------
Net sales $ 132,039 $ 123,201 $ 60,836
Cost of sales (other than item below) 85,184 60,949 40,283
Inventory write-down 15,000 -- --
--------- --------- --------
Total cost of sales 100,184 60,949 40,283
--------- --------- --------
Gross profit 31,855 62,252 20,553
--------- --------- --------
Operating expenses:
Research and development 21,350 14,852 8,750
Selling, general and administrative 15,188 12,924 6,809
--------- --------- --------
Total operating expenses 36,538 27,776 15,559
--------- --------- --------
Operating income (loss) (4,683) 34,476 4,994
Interest and other income 4,803 2,631 605
Interest expense (335) (88) (218)
--------- --------- --------
Income (loss) before income taxes and
minority interest (215) 37,019 5,381
Provision (benefit) for income taxes (1,158) 7,404 807
--------- --------- --------
Income before minority interest 943 29,615 4,574
Minority interest in net loss of
consolidated subsidiary (72) (38) (38)
--------- --------- --------
Net income $ 1,015 $ 29,653 $ 4,612
========= ========= ========
Net income per share $ 0.06 $ 1.79 $ 0.34
========= ========= ========
Shares used in per share calculation 18,356 16,534 13,747
========= ========= ========
See the accompanying notes to consolidated financial statements
21
24
Integrated Silicon Solution, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
September 30,
-----------------------
1996 1995
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 12,237 $ 29,452
Restricted cash 7,023 986
Short-term investments 62,200 80,300
Accounts receivable, net of allowance for doubtful
accounts of $2,002 in 1996 and $1,297 in 1995 11,316 18,746
Inventories 22,469 11,114
Other current assets 13,777 11,822
--------- ---------
Total current assets 129,022 152,420
Property, equipment, and leasehold improvements, net 31,129 17,946
Other assets 17,888 34,075
========= =========
Total assets $ 178,039 $ 204,441
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,617 $ --
Accounts payable 8,912 15,370
Accrued compensation and benefits 3,994 5,632
Accrued expenses 3,298 1,719
Income tax payable 550 3,535
Current portion of long-term obligations 722 5,325
--------- ---------
Total current liabilities 21,093 31,581
Income tax payable - noncurrent 4,298 4,298
Long-term obligations 10,195 28,563
Minority interest in consolidated subsidiary 18 90
Stockholders' equity:
Convertible preferred stock, $0.0001 par value: Authorized shares -
5,000 in 1996 and 1995. No shares outstanding -- --
Common stock, $0.0001 par value: Authorized shares -
70,000 in 1996 and 35,000 in 1995. Issued and outstanding shares -
17,607 in 1996 and 17,225 in 1995 2 2
Additional paid-in capital 104,788 102,376
Retained earnings 39,952 38,937
Cumulative translation adjustment (2,246) (1,302)
Unearned compensation (61) (104)
--------- ---------
Total stockholders' equity 142,435 139,909
========= =========
Total liabilities and stockholders' equity $ 178,039 $ 204,441
========= =========
See the accompanying notes to consolidated financial statements
22
25
Integrated Silicon Solution, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands)
Convertible
Preferred Stock Common Stock Additional
------------------- ----------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings
-------------------------------------------------------------------------
Balance at September 30, 1993 31,314 $ 3 4,669 $- $ 11,731 $ 4,672
Stock options exercised -- -- 123 - 52 --
Issuance of common stock -- -- 5 - 20 --
Unearned compensation -- -- -- - 35 --
Translation adjustment -- -- -- - -- --
Net income -- -- -- - -- 4,612
-------------------------------------------------------------------------
Balance at September 30, 1994 31,314 3 4,797 - 11,838 9,284
Stock options exercised -- -- 517 - 1,008 --
Issuance of common stock in public
offering and exercise of warrant -- -- 4,082 1 85,979 --
Conversion to common stock (31,314) (3) 7,829 1 2 --
Unearned compensation -- -- -- - 131 --
Amortization of unearned
compensation -- -- -- - -- --
Cancellation of stock options -- -- -- - (30) --
Tax benefits from sale of common
stock -- -- -- - 3,448 --
Translation adjustment -- -- -- - -- --
Net income -- -- -- - -- 29,653
-------------------------------------------------------------------------
Balance at September 30, 1995 -- -- 17,225 2 102,376 38,937
Stock options exercised -- -- 253 - 952 --
Shares issued under stock purchase
plan -- -- 129 - 1,357 --
Amortization of unearned
compensation -- -- -- - -- --
Tax benefits from sale of common
stock -- -- -- - 103 --
Translation adjustment -- -- -- - -- --
Net income -- -- -- - -- 1,015
=========================================================================
Balance at September 30, 1996 -- $-- 17,607 $2 $ 104,788 $39,952
=========================================================================
Cumulative Total
Translation Unearned Stockholders'
Adjustment Compensation Equity
----------------------------------------
Balance at September 30, 1993 $ (443) $ -- $ 15,963
Stock options exercised -- -- 52
Issuance of common stock -- -- 20
Unearned compensation -- (35) --
Translation adjustment 540 -- 540
Net income -- -- 4,612
----------------------------------------
Balance at September 30, 1994 97 (35) 21,187
Stock options exercised -- -- 1,008
Issuance of common stock in public
offering and exercise of warrant -- -- 85,980
Conversion to common stock -- -- --
Unearned compensation -- (131) --
Amortization of unearned
compensation -- 32 32
Cancellation of stock options -- 30 --
Tax benefits from sale of common
stock -- -- 3,448
Translation adjustment (1,399) -- (1,399)
Net income -- -- 29,653
----------------------------------------
Balance at September 30, 1995 (1,302) (104) 139,909
Stock options exercised -- -- 952
Shares issued under stock purchase
plan -- -- 1,357
Amortization of unearned
compensation -- 43 43
Tax benefits from sale of common
stock -- -- 103
Translation adjustment (944) -- (944)
Net income -- -- 1,015
========================================
Balance at September 30, 1996 $(2,246) $ (61) $ 142,435
========================================
See the accompanying notes to consolidated financial statements
23
26
Integrated Silicon Solution, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Years Ended September 30,
------------------------------------
1996 1995 1994
--------- --------- --------
Cash flows from operating activities:
Net income $ 1,015 $ 29,653 $ 4,612
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 7,586 3,816 2,436
Provision for losses on accounts receivable 714 1,185 1,333
Net foreign currency transaction (gains) losses (311) 225 50
Minority interest in net loss of consolidated subsidiary (72) (38) (38)
Changes in operating assets and liabilities:
Accounts receivable 6,581 (11,694) (2,436)
Inventories (11,592) (3,725) (1,040)
Other assets (7,710) (10,641) (948)
Accounts payable (6,721) 7,288 (360)
Accrued expenses (3,104) 13,367 805
--------- --------- --------
Net cash provided by (used in) operating activities (13,614) 29,436 4,414
Cash flows from investing activities:
Acquisition of property, equipment, and leasehold improvements (20,423) (17,411) (2,843)
Purchases of available-for-sale securities (197,800) (184,650) --
Sales of available-for-sale securities 215,900 104,350 --
Investment in WaferTech, LLC (9,360) -- --
--------- --------- --------
Net cash used in investing activities (11,683) (97,711) (2,843)
Cash flows from financing activities:
Proceeds from issuance of stock 2,352 87,020 72
Borrowings under notes payable and long-term obligations 28,018 4,317 11,178
Principal payments of notes payable and long-term obligations (16,172) (3,155) (12,650)
Proceeds from joint venture partner -- -- 166
Decrease (increase) in restricted cash (6,037) 355 1,078
--------- --------- --------
Net cash provided by (used in) financing activities 8,161 88,537 (156)
Effect of exchange rate changes on cash and cash equivalents (79) (226) 376
--------- --------- --------
Net increase (decrease) in cash and cash equivalents (17,215) 20,036 1,791
Cash and cash equivalents at beginning of year 29,452 9,416 7,625
========= ========= ========
Cash and cash equivalents at end of year $ 12,237 $ 29,452 $ 9,416
========= ========= ========
See the accompanying notes to consolidated financial statements
24
27
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.
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, 1996 and 1995, 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, 1996 and 1995, the cost of
these securities approximated the fair value and the amount of unrealized gain
or loss was not significant. There were no gains or losses on the sale of
securities for the twelve months ended September 30, 1996 and 1995.
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 to market adjustments, specifically identified on a
part-by-part basis, reduce the carrying value of the related inventory and take
into consideration reductions in sales prices, excess inventory levels and
obsolete inventory. Once established, these adjustments are considered permanent
and are not reversed until the related inventory is sold or disposed.
25
28
Notes to Consolidated Financial Statements
PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment, and leasehold improvements are stated at cost.
Equipment under capital leases is stated at the present value of minimum lease
payments at the beginning of the lease term. Depreciation and amortization are
computed using the straight-line method, based upon the shorter of the estimated
useful lives ranging from three to seven years, or the lease term of the
respective assets, if applicable.
REVENUE RECOGNITION
The Company recognizes revenue to non-distributor customers upon
shipment. The Company provides for estimated sales returns on sales to these
customers. A portion of the Company's sales is made to distributors under terms
allowing certain rights of return and price protection on unsold merchandise
held by the distributor. These agreements can be canceled by either party upon
written notice, at which time the Company would repurchase unsold inventory.
Accordingly, recognition of sales to these distributors has been deferred until
the merchandise is resold.
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 as a separate component of stockholders' equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company operates in one business segment, which is to design, develop,
and market high performance SRAM and nonvolatile memory integrated circuits. The
Company markets and distributes its products on a worldwide basis, primarily to
original equipment manufacturers and personal computer motherboard
manufacturers. The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral. In 1994, the Company
incurred a specific write-off of approximately $1.0 million as a result of the
bankruptcy proceeding of one of its principal customers. In fiscal year 1996,
sales to one customer were $29,021,000, or 22% of total net sales. In fiscal
years 1995 and 1994, no customer exceeded 10% of total net sales.
The Company maintains cash, cash equivalents, and short-term
investments with various financial institutions. The Company's policy is
designed to limit exposure to any one institution. The Company performs periodic
evaluations of the relative credit standing of those financial institutions that
are considered in the Company's investment strategy. To date, the Company has
not incurred losses related to these investments.
26
29
Notes to Consolidated Financial Statements
SEMICONDUCTOR INDUSTRY RISKS
To date the Company has derived substantially all of its revenues from
the sale of SRAM products. The Company is undertaking efforts to diversify into
other product areas such as NVM products. If the market for SRAM products should
decline and the Company has not successfully diversified, such decline would
have a material adverse affect on the Company's financial performance.
The semiconductor industry is characterized by rapid technological
change, intense competitive pressure and cyclical market patterns. The Company's
results of operations are affected by a wide variety of factors, including
declines in average selling prices of the Company's products, oversupply of
memory products in the market, failure 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 and fluctuations in manufacturing yield. Other
factors include potential inventory write-downs, changes in product mix, 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 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 PER SHARE
Net income per share is computed using the weighted average number of
shares of common stock and common equivalent shares, when dilutive, from
convertible preferred stock (using the if-converted method) and from stock
options and warrants (using the treasury stock method). Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common equivalent
shares issued by the Company at prices below the initial public offering price
of the Company's common stock during the twelve-month period prior to the
Company's initial public offering in February 1995, have been included in the
calculation as if they were outstanding for all periods presented prior to the
initial public offering (using the treasury stock method at the initial public
offering price).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting for
Stock-Based Compensation," which provides an alternative to APB Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for stock-based
compensation issued to employees. FAS 123 allows for a fair value-based method
of accounting for employee stock options and similar equity instruments.
However, for companies that continue to account for employee stock-based
compensation arrangements under APB Opinion No. 25, FAS 123 requires disclosures
of the pro forma effect on net income and earnings per share of its fair
value-based accounting for those arrangements. These disclosure requirements are
effective for fiscal years beginning after December 15, 1995. The Company plans
to continue to account for employee stock-based compensation under APB Opinion
No. 25.
27
30
Notes to Consolidated Financial Statements
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(FAS 121), which requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets carrying amounts. FAS 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company will adopt
FAS 121 in the first quarter of fiscal 1997 and, based on current circumstances,
does not believe the effect of this adoption will have a material impact on its
financial condition or results of operations.
RECLASSIFICATION OF PRIOR YEAR BALANCES
Certain reclassifications have been made to prior year's financial
statements to conform to the current year presentation.
NOTE 2. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS
Cash, cash equivalents, restricted cash, and short-term investments
consisted of the following at September 30:
1996 1995
-------- --------
(In thousands)
Cash $ 9,989 $ 9,275
Money market instruments 3,189 4,698
Certificates of deposit 6,082 16,465
Auction preferred stock 42,500 66,800
Municipal bonds due in more than 3 years 19,700 13,500
-------- --------
Total $ 81,460 $110,738
======== ========
NOTE 3. INVENTORIES
Inventories consisted of the following at September 30:
1996 1995
------- -------
(In thousands)
Purchased components $10,123 $ 3,993
Work-in-process 2,826 4,305
Finished goods 9,520 2,816
------- -------
$22,469 $11,114
======= =======
During the third quarter of fiscal 1996, the Company recorded an
inventory write-down of $15.0 million.
28
31
Notes to Consolidated Financial Statements
NOTE 4. OTHER CURRENT ASSETS AND OTHER ASSETS
Other current assets and other assets consisted of the following at
September 30:
1996 1995
------- -------
(In thousands)
Advance payment TSMC (see note 6) $ 2,326 $ 7,200
Deferred tax asset 4,615 3,029
Other 6,836 1,593
------- -------
$13,777 $11,822
======= =======
Advance payment TSMC (see note 6) $ -- $26,400
Capacity investment UMC (see note 12) 6,821 7,500
Investment WaferTech LLC. (see Note 12) 9,360 --
Other 1,707 175
------- -------
$17,888 $34,075
======= =======
NOTE 5. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment, and leasehold improvements consisted of the
following at September 30:
1996 1995
------- -------
(In thousands)
Machinery and equipment $43,209 $24,038
Furniture and fixtures 1,174 845
Leasehold improvements 1,763 1,470
Construction in progress 334 --
------- -------
46,480 26,353
Less accumulated depreciation and amortization 15,351 8,407
======= =======
$31,129 $17,946
======= =======
NOTE 6. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
At September 30, 1996, ISSI-Taiwan had short-term lines of credit with
various financial institutions whereby it could borrow in aggregate up to
approximately $23,751,000 denominated in a combination of U.S. and New Taiwan
dollars. As of September 30, 1996, the Company had borrowings of approximately
$3,617,000 outstanding under these lines of credit. These lines of credit expire
at various times through July 1997. These lines of credit are secured by time
deposits of approximately $2,223,000, which are recorded as restricted cash.
Commitment fees relating to these lines are not material. At September 30, 1996,
the weighted average interest rate on borrowing under these lines was 6.7%.
In fiscal 1995, the Company's primary foundry partner, TSMC, committed
to provide the Company with annual wafer capacity increases for each year
through 2001. For wafer increases over 1994, the base year, the Company is
obligated to pay a portion of the cost for the increased number of wafers even
if the allocated annual increase is not purchased in that year. At September 30,
1995, this obligation was evidenced by approximately $31.2 million in promissory
notes and a prepayment of $2.4 million. To the extent these obligations were
recorded, an offsetting short-term and long-term asset was recorded. During
fiscal 1996, the promissory notes were canceled (which also led to the
elimination of the corresponding
29
32
Notes to Consolidated Financial Statements
asset), however, the Company's future commitments for the years 1997-2001
remained at approximately $31.2 million and the Company has established a letter
of credit for $4.8 million covering the next capacity increase. At September 30,
1996, the Company's $2.4 million prepayment remained in short-term assets.
Long-term obligations consisted of the following at September 30:
1996 1995
------- -------
(In thousands)
Capitalized lease obligations $ -- $ 6
Notes payable to bank, due in quarterly installments through 2000
with interest at 6.5% to 6.625% and secured by the Company's
property and equipment 10,917 2,682
Notes payable to TSMC for additional capacity -- 31,200
------- -------
10,917 33,888
Less current portion 722 5,325
------- -------
$10,195 $28,563
======= =======
At September 30, 1996, future minimum principal payments on notes
payable and long-term obligations were as follows (in thousands):
1997 $ 722
1998 1,978
1999 2,249
2000 1,781
2001 1,675
Thereafter 2,512
-----------------
Total $10,917
=================
Interest of $235,000, $136,000 and $0 was capitalized in 1996, 1995 and
1994, respectively, and is included in fixed assets.
NOTE 7. CAPITAL STOCK
The Company's Restated Certificate of Incorporation provides for
70,000,000 authorized shares of Common Stock and 5,000,000 shares of authorized
but unissued preferred stock, the terms of which may be fixed by the Board of
Directors, who have the right to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders of the Company. The rights of the
holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future.
30
33
Notes to Consolidated Financial Statements
NOTE 8. STOCK PLANS
1989 STOCK OPTION PLAN
During 1989, the Company adopted a stock option plan (the "Plan") that
provides for incentive stock options for employees and nonstatutory stock
options for employees, consultants and nonemployee directors of the Company.
Incentive stock options and nonstatutory options granted under the Plan
have five or ten-year terms. All incentive stock option grants and nonstatutory
stock option grants must be at prices of at least 100% and 85%, respectively, of
the fair market value of the stock on the date of grant, as determined by the
Board of Directors.
The options are exercisable as determined by the Board of Directors.
Generally, the stock options vest ratably over a four-year period. The options
expire upon the earlier of five or ten years from the date of grant or 30 days
following termination of employment. Options to purchase 791,000 shares, 432,000
shares and 525,000 shares were exercisable as of September 30, 1996, 1995, and
1994, respectively.
In the event of certain changes in control of the Company, the Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; however, if such successor refuses to
assume the then outstanding options, the Plan provides for the full acceleration
of the exercisability of all outstanding options.
`The following table summarizes activity under the Plan:
Options Outstanding
---------------------------------------------------------
Options Number Aggregate
Available of Price Exercise
For Grant Shares Per Share Price
----------------- ---------------------------------------------------------
(In thousands, except per share data)
Balance at September 30, 1993 1,200 1,333 $ 0.12 - $ 4.00 $ 2,574
Granted (767) 767 $ 4.00 3,068
Exercised -- (123) $ 0.12 - $ 1.60 (52)
Canceled 213 (213) $ 0.20 - $ 4.00 (554)
----------------- ---------------------------------------------------------
Balance at September 30, 1994 646 1,764 $ 0.12 - $ 4.00 5,036
Granted (929) 929 $ 5.00 - $59.50 28,458
Exercised -- (517) $ 0.12 - $ 9.00 (1,008)
Canceled 125 (125) $ 0.20 - $13.00 (570)
Authorized 500 -- - --
----------------- ----------------- ------------------- -----------------
Balance at September 30, 1995 342 2,051 $ 0.20 - $59.50 31,916
Granted (1,599) 1,599 $9.625 - $26.00 29,986
Exercised -- (253) $ 0.20 - $13.00 (952)
Canceled 907 (907) $ 0.28 - $59.50 (30,316)
Authorized 1,000 -- - --
----------------- ----------------- ------------------- -----------------
Balance at September 30, 1996 650 2,490 $ 0.20 - $27.50 $ 30,634
================= ================= =================== =================
31
34
Notes to Consolidated Financial Statements
For certain options granted in 1995 and 1994, the Company recognized as
unearned compensation the excess of the deemed value for accounting purposes of
the common stock issuable upon exercise of such options over the aggregate 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
$43,000, $32,000 and $0 was recognized for the years ending September 30, 1996,
1995, and 1994, respectively.
EMPLOYEE STOCK PURCHASE PLAN
In March 1993, the Company adopted an Employee Stock Purchase Plan
("Purchase Plan") under Section 423 of the Internal Revenue Code. Under the
Company's Purchase Plan, eligible employees may purchase shares of the Company's
common stock through payroll deduction. The shares can be 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 450,000 shares of common stock are reserved for
issuance under the plan, of which 129,000 had been issued as of September 30,
1996.
1995 DIRECTOR STOCK OPTION PLAN
The Board of Directors and stockholders approved the 1995 Director
Stock Option Plan ("Director Plan") in December 1994 and January 1995,
respectively. Under the terms of the Plan, 50,000 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. At September 30, 1996, 10,000 options (5,800 of
which were vested) with an exercise price of $14.50 were outstanding.
NOTE 9. STOCKHOLDERS' EQUITY
The Company is subject to legal restrictions related to its
distribution of ISSI-Taiwan earnings. In accordance with the Corporate Law of
the Republic of China, before ISSI-Taiwan declares any part of net income as
dividends and/or bonuses, ISSI-Taiwan must transfer 10% of its statutory net
income to a legal reserve until such reserve is equal to ISSI-Taiwan's capital.
At September 30, 1996, such restricted equity amounted to approximately
$4,119,000. The legal reserve is not available for distribution; however, when
the reserve exceeds 50% of ISSI-Taiwan's capital, 50% of the legal reserve in
excess of 50% of ISSI-Taiwan's capital may be distributed in the form of stock.
The reserve may be utilized at any time to offset a deficit. In addition, any
distribution of equity of ISSI-Taiwan must allocate 1% of the related
distribution to employees of ISSI-Taiwan.
32
35
Notes to Consolidated Financial Statements
NOTE 10. INCOME TAXES
The provision (benefit) for income taxes consisted of the following for
the years ended September 30:
1996 1995 1994
-------- -------- --------
(In thousands)
Current:
Federal $ 3,137 $ 7,989 $ 781
State 335 1,411 11
Foreign 200 693 355
-------- -------- --------
Total Current 3,672 10,093 1,147
Deferred:
Federal (3,062) (2,257) (340)
State (614) (432) --
Foreign (1,154) -- --
-------- -------- --------
Total Deferred (4,830) (2,689) (340)
-------- -------- --------
Total Provision (Benefit) $ (1,158) $ 7,404 $ 807
======== ======== ========
Pretax income from foreign operations was approximately $153,000, $28,320,000
and $6,330,000 for 1996, 1995, and 1994, respectively.
A reconciliation of the income tax provision (benefit) at the U.S. federal
statutory rate (35%) to the income tax provision (benefit) at the effective tax
rate is as follows for the years ended September 30:
1996 1995 1994
-------- -------- --------
(In thousands)
Income taxes computed at the U.S. federal statutory
rate $ (75) $ 12,957 $ 1,883
Operating losses with no current benefit -- 89 --
Valuation of U.S. temporary differences 1,104 (1,242) 165
Lower effective income tax rate of Taiwan (1,006) (4,392) (1,248)
Tax exempt interest income (694) (470) --
State tax (net of federal effect) (184) 636 7
Other individually immaterial items (303) (174) --
-------- -------- --------
$ (1,158) $ 7,404 $ 807
======== ======== ========
33
36
Notes to Consolidated Financial Statements
The components of deferred taxes consisted of the following at
September 30:
1996 1995
-------- --------
(In thousands)
Deferred tax assets:
Depreciation $ 321 $ 142
Inventory and other valuation reserves 6,319 1,957
Accrued expenses 2,509 784
Taiwan - investment tax credit carryforwards 3,516 --
Other, net 525 146
-------- --------
Total deferred tax assets 13,190 3,029
Valuation allowance (7,163) --
-------- --------
Net deferred tax assets $ 6,027 $ 3,029
======== ========
The Company has established a valuation allowance covering 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, 1996. The valuation allowance for deferred tax assets increased by
$7,163,000 during fiscal 1996. Approximately $1,832,000 of the valuation
allowance is attributable to tax benefits of stock option deductions which will
be credited to paid in capital when recognized.
As a result of its location in the Hsinchu Science-Based Industrial
Park in Taiwan, ISSI-Taiwan receives a significant tax exemption for taxable
income from October 1, 1992 through September 30, 1997. The precise amount of
the tax exemption is calculated annually based upon the extent of ISSI-Taiwan's
net operating taxable income and measured by certain factors, including use of
qualified manufacturing equipment, self-manufacturing costs and qualified sales
revenue. The portion of ISSI-Taiwan's taxable income which is not subject to
exemption is taxed at a flat 20% tax rate. For fiscal 1996, the Company was able
to reduce current taxes payable by approximately $1,510,000 ($0.08 per share)
related to this exemption. In addition, the Company recognized benefits from
investment tax credits in Taiwan of approximately $1,018,000 in fiscal 1996.
Cumulative net undistributed earnings of ISSI-Taiwan for which no
income taxes have been provided aggregated approximately $13,000,000 at
September 30, 1996. These earnings are considered to be permanently invested in
non-U.S. operations. Upon distribution of those earnings in the form of
dividends or otherwise, the Company would be subject to both U.S. income taxes
and withholding tax payable to the foreign country. Determination of the amount
of unrecognized deferred U.S. tax liability is not practical because of the
complexities associated with its hypothetical calculation. However, a U.S.
foreign tax credit for the withholding tax payable on the distribution would be
available to reduce U.S. taxes.
In the event that ISSI-Taiwan's retained earnings, after deducting the
legal reserve as described in Note 9, exceeds 200% of its capital, this excess
retained earnings amount, if not distributed, is subject to a 10% tax. At
September 30, 1996, ISSI-Taiwan's retained earnings, less the legal reserve, was
approximately $49,700,000 below the amount represented by 200% of its capital.
34
37
Notes to Consolidated Financial Statements
NOTE 11. GEOGRAPHIC AND SEGMENT INFORMATION
The Company operates in one business segment, which is to design, develop,
and market a broad range of high-performance SRAM and nonvolatile memory
integrated circuits. The following table summarizes the Company's operations in
different geographic areas:
Year Ended September 30, 1996
-----------------------------------------------------------
United States Taiwan Adjustments/
Eliminations Consolidated
-----------------------------------------------------------
(In thousands)
Sales to unaffiliated customers $ 85,676 $ 46,363 $ -- $ 132,039
Transfers between geographic areas 6,250 70,450 (76,700) --
--------- --------- ---------- ---------
Total net sales $ 91,926 $ 116,813 $ (76,700) $ 132,039
========= ========= ========== =========
Operating loss $ (3,751) $ (615) $ (317) $ (4,683)
========= ========= ========== =========
Identifiable assets $ 115,331 $ 76,976 $ (14,268) $ 178,039
========= ========= ========== =========
Cash, cash equivalents, restricted cash
and short-term investments $ 74,498 $ 6,962 $ -- $ 81,460
========= ========= ========== =========
Accounts receivable from third-party
customers $ 6,910 $ 4,406 $ -- $ 11,316
========= ========= ========== =========
Year Ended September 30, 1995
-----------------------------------------------------------
United States Taiwan Adjustments/
Eliminations Consolidated
-----------------------------------------------------------
(In thousands)
Sales to unaffiliated customers $ 59,677 $ 63,524 $ -- $ 123,201
Transfers between geographic areas 1,648 35,487 (37,135) --
--------- --------- ---------- ---------
Total net sales $ 61,325 $ 99,011 $ (37,135) $ 123,201
========= ========= ========== =========
Operating income (loss) $ 10,462 $ 24,470 $ (456) $ 34,476
========= ========= ========== =========
Identifiable assets $ 116,604 $ 98,286 $ (10,449) $ 204,441
========= ========= ========== =========
Cash, cash equivalents, restricted cash
and short-term investments $ 93,083 $ 17,655 $ -- $ 110,738
========= ========= ========== =========
Accounts receivable from third-party
customers $ 11,220 $ 7,526 $ -- $ 18,746
========= ========= ========== =========
35
38
Notes to Consolidated Financial Statements
Year Ended September 30, 1994
---------------------------------------------------------
United States Taiwan Adjustments/
Eliminations Consolidated
---------------------------------------------------------
(In thousands)
Sales to unaffiliated customers $ 25,168 $35,668 $ -- $60,836
Transfers between geographic areas 946 17,571 (18,517) --
-------- ------- -------- -------
Total net sales $ 26,114 $53,239 $(18,517) $60,836
======== ======= ======== =======
Operating income (loss) $ (864) $ 5,967 $ (109) $ 4,994
======== ======= ======== =======
Identifiable assets $ 12,125 $32,661 $(11,543) $33,243
======== ======= ======== =======
Cash, cash equivalents and restricted cash $ 2,415 $ 8,342 $ -- $10,757
======== ======= ======== =======
Accounts receivable from third-party
customers $ 3,214 $ 5,195 $ -- $ 8,409
======== ======= ======== =======
Transfers between geographic areas are accounted for at amounts which are
generally above cost and consistent with rules and regulations of governing tax
authorities. Such transfers are eliminated in the consolidated financial
statements.
Identifiable assets by geographic area are those assets used in the
Company's operations in each area.
Total assets, liabilities, and net income for ISSI-Taiwan amounted to
approximately $81,521,0000, $31,580,000 and $3,521,000, respectively, at
September 30, 1996. Included in the assets and liabilities of ISSI-Taiwan were
intercompany receivables amounting to approximately $5,678,000 at September 30,
1996.
Export sales by the U.S. operating company were approximately $15,741,000,
$17,854,000, and $5,761,000 for the years ended September 30, 1996, 1995, and
1994, respectively.
Net foreign currency transaction gains (losses) of approximately $311,000,
$(225,000) and $(50,000) for the years ended September 30, 1996, 1995 and 1994,
respectively, were primarily the result of the settlement of intercompany
transactions and are included in the determination of net income.
NOTE 12. COMMITMENTS AND CONTINGENCIES
PATENTS AND LICENSES
In the semiconductor industry it is typical for companies to receive
notices from time to time alleging infringement of patents or other intellectual
property rights of others. The Company has been and may from time to time
continue to be notified of claims that it may be infringing patents, maskwork
rights or copyrights owned by third parties. In this regard, the Company has
been notified by several companies that it may be infringing certain patents
with respect to its products and underlying process technology.
36
39
Notes to Consolidated Financial Statements
Although none of these companies have pursued a claim against the Company, there
is no assurance that these or other companies will not in the future pursue
claims against the Company with respect to the alleged infringement of patents,
maskwork rights, copyrights or other intellectual property owned by third
parties. If it appears necessary or desirable, the Company may seek licenses
under patents that it is alleged to be infringing. Although patent holders
commonly offer such licenses, there is no assurance that any licenses will be
offered or that the terms of any offered licenses will be acceptable to the
Company. The failure to obtain a license under a key patent or intellectual
property right from a third party for technology used by the Company could cause
the Company to incur substantial liabilities and to suspend the manufacture of
the products utilizing the invention or to attempt to develop non-infringing
products, any of which could materially and adversely affect the Company's
business and operating results. Furthermore, there can be no assurance that the
Company will not become involved in protracted litigation regarding the alleged
infringement by the Company of third party intellectual property rights or which
may be necessary to protect patents or other intellectual property rights of the
Company. While the Company cannot accurately predict the eventual outcome of
these or any other such infringement matters, management believes that the
likelihood of an outcome resulting in a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows is remote.
LITIGATION
On December 13, 1995, a securities class action lawsuit was filed in the
United States District Court for the Northern District of California against the
Company, certain of its officers and directors, and the co-lead underwriters for
the company's initial public offering and secondary offering, on behalf of all
persons who purchased the Company's common stock between February 3, 1995, and
December 5, 1995 (the "Lawsuit"). The Lawsuit asserts claims under Section 11 of
the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities and
Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The Lawsuit seeks
damages in an unspecified amount. The Company believes it has meritorious
defenses to the Lawsuit and intends to defend the case vigorously. The Company
believes that the ultimate resolution of this matter will not have a material
adverse effect on its financial position, results of operations or cash flow.
LEASES
The Company leases its facilities and the land upon which it is
constructing its new Taiwan facility under operating lease agreements that
expire at various dates through 2116. The Company has entered into a ten year
lease effective December 1, 1996 for its headquarters facility in Santa Clara,
California. The Company anticipates that it will sublease a portion of this
space, but as of November 1, 1996 has not yet done so. Minimum rental
commitments under these leases are as follows (in thousands):
1997 $ 1,072
1998 1,306
1999 1,269
2000 1,294
2001 1,359
Thereafter 9,118
--------
Total minimum rental commitments $ 15,418
========
Total rental expense for the years ended September 30, 1996, 1995, and
1994 was approximately $637,000, $620,000 and $391,000, respectively.
37
40
Notes to Consolidated Financial Statements
COMMITMENTS TO WAFER FABRICATION FACILITIES
In June 1996, the Company entered into a joint venture "WaferTech, LLC"
with TSMC, Altera, Analog Devices and private investors for the construction of
a wafer fabrication facility in Camas, Washington. Under the terms of the
agreement, the Company will invest $31.2 million for a 4% equity interest in the
venture and will receive access to wafers manufactured using advanced process
technology. As of September 30, 1996, $9.4 million had been paid by the Company
to WaferTech. The next payments by the Company of $9.4 million and $12.4 million
are expected to be made in December 1996 and November 1997, respectively. The
Company is accounting for this investment on the cost basis.
In 1995, the Company entered into a manufacturing agreement and joint
venture agreement with United Microelectronics Corporation ("UMC"). Under the
terms of these agreements, the Company receives a supply of wafers from UMC
beginning with the December 1995 quarter and the Company agreed to invest $30
million in cash for a 5% equity interest in a joint manufacturing venture of
which UMC retains 55% ownership. As of September 30, 1996, approximately $7.0
million has been paid to UMC for the joint venture. Based on the completion of
certain milestones, the Company is committed to future payments to UMC of
approximately an additional $23.0 million. The next payments of approximately
$15.0 million and $8.0 million are expected to be made in January 1997 and July
1997, respectively, subject to certain milestone completions. The Company is
accounting for this investment on the cost basis.
On December 31, 1995, the Company entered into a technology development
and wafer purchasing agreement with SubMicron Technology. Under the terms of the
agreement, the Company intended to assist SubMicron Technology in process
development and prepay $9 million for the purchase of wafers. The Company has
subsequently informed SubMicron Technology that the process technology proposed
by SubMicron Technology is not competitive and is therefore unacceptable. The
Company considers SubMicron Technology to be in violation of the agreement and
will, therefore, not make any prepayment nor proceed in the joint technology
development.
NOTE 13. EMPLOYEE BENEFIT PLAN
In August 1992, the Company established a defined contribution retirement
plan with 401(k) plan features. The plan covers all United States employees 18
years and older. Employees may make contributions by a percentage reduction in
their salaries, up to $9,500 for 1996. The Company elected to make no
contributions during the years ended September 30, 1996, 1995 and 1994.
Administrative expenses relating to the plan are insignificant.
NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended September 30,
1996 1995 1994
---- ---- ----
(In thousands)
Cash paid for interest $ 478 $ 214 $216
Cash paid for income taxes 8,603 7 511
Notes payable issued for other assets (31,200) 31,200 --
Tax benefit from sale of common stock 103 3,448 --
38
41
Notes to Consolidated Financial Statements
NOTE 15. RELATED PARTY TRANSACTIONS
For the years ended September 30, 1996, 1995, and 1994, the Company sold
approximately $0, $605,000, and $456,000, respectively, of SRAM products to
Wearnes Automation and Wearnes affiliates, whose vice chairman is a member of
the Company's Board of Directors. At September 30, 1996, 1995, and 1994, the
Company had a trade receivables balance from Wearnes and its affiliates of
approximately $0, $49,000, and $290,000, respectively.
For the years ended September 30, 1996, 1995, and 1994, the Company
purchased approximately $1,342,000, $2,985,000 and $2,989,000, respectively, of
services from Taicera Electronics Company, an assembly plant that is an
affiliate of the Fu Sheng Industrial Group, whose chairman is a member of the
Company's Board of Directors. At September 30, 1996, 1995, and 1994, the Company
owed Taicera Electronics Company approximately $0, $558,000 and $512,000,
respectively.
NOTE 16. SUBSEQUENT EVENT
Effective October 18, 1996, the Company's Board of Directors approved a
Nonstatutory stock option plan for employees of the Company. A total of 300,000
shares have been reserved for issuance under this plan.
NOTE 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended September 30, 1996 and 1995.
Dec. 31 Mar. 31 June 30 Sept. 30
------- ------- ------- --------
(In thousands, except per share data)
(unaudited)
1996
Net sales $45,051 $36,353 $ 27,579 $ 23,056
Gross profit (loss) 21,128 14,963 (5,756) 1,520
Operating income (loss) 12,149 5,662 (14,994) (7,500)
Net income (loss) 10,294 5,064 (10,550) (3,793)
Net income (loss) per share $ 0.56 $ 0.28 $ (0.60) $ (0.22)
1995
Net sales $19,102 $25,043 $ 35,458 $ 43,598
Gross profit 8,062 12,220 18,510 23,460
Operating income 5,088 5,807 10,665 14,424
Net income 2,557 5,394 9,242 12,460
Net income per share (1) $ 0.18 $ 0.34 $ 0.52 $ 0.67
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the basis used to calculate net income (loss) per share.
Net income for the first quarter of fiscal 1995 is presented on a pro
forma basis.
39
42
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 4, 1997, 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.
40
43
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 Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule of Integrated Silicon Solution,
Inc. is contained in Part IV, Item 14(d) of this report on Form 10-K:
Schedule II-Valuation and Qualifying Accounts
All other schedules for which provision is made in the Applicable
Accounting Regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
3. EXHIBITS
Exhibit
Number Description of Document
------ -----------------------
++3.1 Restated Certificate of Incorporation of Registrant.
+3.3 Bylaws of Registrant.
+4.2 Form of Common Stock Certificate.
+10.1 Form of Indemnification Agreement.
+10.2*** Form of 1993 Employee Stock Purchase Plan, as amended, and
form of Subscription Agreement.
+10.3*** Form of 1989 Stock Plan, as amended, and form of Stock
Option Agreements.
+10.4 Information and Registration Rights Agreement dated as of
March 17, 1993 among the Registrant and certain holders of
the Registrant's Common Stock, as amended.
+10.5* Letter Agreement dated September 14, 1994 between Taiwan
Semiconductor Manufacturing Company, Ltd. ("TSMC") and the
Registrant.
+10.6 Industrial Lease dated November 7, 1989 between Aetna Life
Insurance Company and the Registrant related to premises
at 680 Almanor Avenue, as amended by First Addendum dated
November 7, 1989 and First Amendment dated February
9,1993.
+10.7* Joint Development Contract between TSMC and the Registrant
dated February 5, 1993.
+10.8* Joint Development Contract between TSMC and the Registrant
dated October , 1992.
+10.9* Agreement for Contract Manufacturing dated July 12, 1993
between Mitsui Plastics Inc., Rohm Co., Ltd. and the
Registrant.
+10.10 Lease for ISSI-Taiwan facilities at No. 10 Prosperity
dated November 8, 1993.
+10.11 Facility Lease Agreement for second ISSI-Taiwan facility
located at No. 9 Prosperity I Road, Hsinchu, Taiwan.
+10.12 Wafer Production Agreement between TSMC and the Registrant
dated November 8, 1993.
+10.13* Joint Development Contract of 0.45u process between TSMC
and the Registrant dated November 15, 1994.
41
44
+10.14* Joint Development Contract between Chartered Semiconductor
Manufacturing Pte. Ltd. and the Registrant dated July 21,
1994.
+10.15 Office Lease for facilities located at 675 Almanor Avenue,
Sunnyvale, California.
+10.16 Subscription and Shareholders Agreement Relating to Valery
Limited dated March 30, 1994.
+10.17 Long term line of credit between Bank of Communication and
Registrant.
+10.18 Short term line of credit between International Commercial
Bank of China and Registrant.
+10.19*** 1995 Director Stock Option Plan.
++10.20* Option I Agreement between the Registrant and TSMC dated
April 21, 1995.
++10.21* Option II Agreement between the Registrant and TSMC dated
April 21, 1995.
+++10.22** UMC/ISSI-Taiwan Foundry Venture Agreement dated August 31,
1995.
+++10.23** UMC/ISSI-Taiwan Fabven Foundry Capacity Agreement dated
August 31, 1995.
++++10.24** Amended and Restated Limited Liability Company Agreement
of WaferTech, LLC, dated as of August 9, 1996.
++++10.25** Purchase Agreement by and between Taiwan Semiconductor
Manufacturing Corporation, as Seller, and Analog Devices,
Inc., Altera Corporation and Integrated Silicon Solution,
Inc., as Buyers.
10.26** Amendment to Option I and Option II Agreement between the
Company and TSMC dated September 23, 1996.
10.27 Sublease Agreement for facility located at 2231 Lawson
Lane, Santa Clara, California.
11.1 Calculation of Earnings Per Share
+21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 43).
27.1 Financial Data Schedule
- - -------------------------
* Confidential treatment granted for certain portions of this exhibit.
** Confidential treatment requested for certain portions of this exhibit. The
portions of this exhibit for which confidential treatment is being
requested have been blacked out in the copies filed with the related
report and the confidential portions so omitted have been filed separately
with the Securities and Exchange Commission.
*** Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this report on Form 10-K pursuant to form 14(c) of
this report.
+ Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (file no. 33-72960).
++ Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (file no. 33-91520).
+++ Incorporated by reference to the Company's Annual Report on Form 10-K for
the period ended September 30, 1995.
++++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1996.
(b) Reports on Form 8-K
The registrant did not file any Reports on Form 8-K during the
quarter ended September 30, 1996.
(c) Exhibits
See (a) above
(d) Financial statement schedules
See (a) above
42
45
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 Sunnyvale, State of California, on the 2nd day of December, 1996.
INTEGRATED SILICON SOLUTION, INC.
By /s/ Gary L. Fischer
-------------------------------
Gary L. Fischer
Executive Vice President,
Office of the President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Jimmy S.M. Lee and Gary L.
Fischer, and each of them acting individually, as his attorney-in-fact, each
with full power of substitution, for him 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 by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- - ----------------------------- -------------------------------------------------- ----------------
/s/ Jimmy S.M. Lee Chairman of the Board, Chief Executive Officer, December 2, 1996
- - ----------------------------- and President (Principal Executive Officer)
(Jimmy S.M. Lee)
/s/ Kong-Yeu Han Executive Vice President, Office of the President, December 2, 1996
- - ----------------------------- General Manager Taiwan and Director
(Kong-Yeu Han)
/s/ Gary L. Fischer Executive Vice President, Office of the President December 2, 1996
- - ----------------------------- and Chief Financial Officer (Principal Financial
(Gary L. Fischer) and Accounting Officer)
/s/ Diosdado P. Banatao Director December 2, 1996
- - -----------------------------
(Diosdado P. Banatao)
/s/ Hou-Teng Lee Director December 2, 1996
- - -----------------------------
(Hou-Teng Lee)
/s/ Lip-Bu Tan Director December 2, 1996
- - -----------------------------
(Lip-Bu Tan)
/s/ Chun Win Wong Director December 2, 1996
- - -----------------------------
(Chun Win Wong)
43
46
ITEM 14(d). FINANCIAL STATEMENT SCHEDULE
INTEGRATED SILICON SOLUTION, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Addition
Balance at Charged to Balance
Beginning Costs and at End
of Period Expenses Deductions of Period
---------- ---------- ------------ ---------
Year ended September 30, 1994:
Allowance for doubtful accounts................. $274 $ 1,333 $ (1,103)(1) $ 504
Sales returns reserve........................... 378 199 (32) 545
Year ended September 30, 1995:
Allowance for doubtful accounts ................ 504 1,185 (392)(1) 1,297
Sales returns reserve........................... 545 2,851 (695) 2,701
Year ended September 30, 1996:
Allowance for doubtful accounts ............... 1,297 714 (9)(1) 2,002
Sales returns reserve.......................... 2,701 665 (1,133) 2,233
(1) Uncollectible accounts written off, net of recoveries
44