Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Company Background
On January 25, 2005, we announced our intention to acquire ICSI. ICSI was a public company in Taiwan and traded on the Gre Tai
Securities Market (OTC). ICSI is a fabless semiconductor company whose principal products are DRAM and controller chips. Prior to this transaction, we owned approximately 29% of ICSI. In the nine months ended September 30, 2005, we purchased
additional shares of ICSI in the open market for approximately $52.5 million increasing our ownership percentage to approximately 83% at September 30, 2005. In fiscal 2006, we purchased additional shares of ICSI for approximately $13.9 million
increasing our ownership percentage to approximately 98% at September 30, 2006. In fiscal 2007, we purchased additional shares of ICSI for approximately $0.3 million and our ownership percentage was approximately 98% at September 30, 2007.
Our financial results for fiscal 2007, fiscal 2006 and for fiscal 2005 beginning May 1, 2005 reflect accounting for ICSI on a
consolidated basis. On May 1, 2005, we assumed effective control of ICSI and in accordance with generally accepted accounting principles we began consolidating the financial results of ICSI with our results as of such date. Our financial
results for fiscal 2005 through the period ended April 30, 2005 reflect accounting for ICSI on the equity basis and include our percentage share of the results of ICSIs operations.
In February 2006, we sold approximately 77% of our shares in Signia Technologies Inc. (Signia), a developer of wireless semiconductors, thereby reducing
our ownership percentage to approximately 16%. Effective March 1, 2006, we resumed accounting for Signia on the cost basis. During the period from December 1, 2004 through February 28, 2006, our financial results reflect accounting
for Signia on a consolidated basis. Our financial results through the period ended November 30, 2004 reflect accounting for Signia on the cost basis. At September 30, 2007, we owned approximately 6% of Signia.
In December 2006, we sold our remaining investment in Key Stream Corp. (KSC), a semiconductor company. Our financial results for fiscal 2007, until our
sale, for fiscal 2006 and for fiscal 2005 beginning May 1, 2005 reflect accounting for KSC on the equity basis.
Overview
We are a fabless semiconductor company that designs and markets high performance integrated circuits for the following key markets: (i) digital
consumer electronics, (ii) networking, (iii) mobile communications and (iv) automotive electronics. Our primary products are high speed and low power SRAM and low and medium density DRAM. We also design and market EEPROMs, SmartCards,
and selected non-memory products focused on our key markets. We were founded in October 1988 and initially focused on high performance, low cost SRAM for PC cache memory applications. In 1997, we introduced our first low and medium density DRAM
products. Prior to fiscal 2003, our SRAM product family generated a majority of our revenue. However, sales of our low and medium density DRAM products have represented a majority of our net sales in each year since fiscal 2003.
In order to limit and control our operating expenses, in recent years we reduced our headcount in the U.S. and transferred various functions to Taiwan
and China. Our acquisition of ICSI was a key part of this strategy. We believe this strategy has enabled us to limit our operating expenses while simultaneously locating these functions closer to our manufacturing partners and our customers. As a
result of these efforts, we currently have significantly more employees in Asia than we do in the U.S. We intend to continue these strategies going forward.
As a fabless semiconductor company, our business model is less capital intensive because we rely on third parties to manufacture, assemble and test our products. Because of our dependence on third-party wafer
31
foundries, our ability to increase our unit sales volumes depends on our ability to increase our wafer capacity allocation from current foundries, add
additional foundries and improve yields of good die per wafer.
The average selling prices of our SRAM and DRAM products are very sensitive
to supply and demand conditions in our target markets and have generally declined over time. We experienced declines in the average selling prices for many of our products in fiscal 2005, in fiscal 2006 and in fiscal 2007. We expect average selling
prices for our products to decline in the future, principally due to increased market competition and an increased supply of competitive products in the market. Any future decreases in our average selling prices could have an adverse impact on our
revenue growth rate, gross margins and operating margins. Our ability to maintain or increase revenues will be highly dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities
sufficient to compensate for the anticipated declines in average selling prices of existing products. Declining average selling prices will adversely affect our gross margins unless we are able to offset such declines with commensurate reductions in
per unit costs or changes in product mix in favor of higher margin products.
Revenue from product sales to our direct customers is
recognized upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance
requirements and there are no remaining significant obligations. A portion of our sales is made to distributors under agreements that provide the possibility of certain sales price rebates and limited product return privileges. Given the
uncertainties associated with credits that will be issued to these distributors, we defer recognition of such sales until our products are sold by the distributors to their end customers. Revenue from sales to distributors who do not have sales
price rebates or product return privileges is recognized at the time our products are sold by us to the distributors.
We market and sell
our products in Asia, the U.S. and Europe and other locations through our direct sales force, distributors and sales representatives. The percentage of our sales shipped outside the U.S. was approximately 82%, 83% and 85% in fiscal 2007, 2006 and
2005, respectively. We measure sales location by the shipping destination, even if the customer is headquartered in the U.S. We anticipate that sales to international customers will continue to represent a significant percentage of our net sales.
The percentages of our net sales by region are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Asia
|
|
67
|
%
|
|
73
|
%
|
|
75
|
%
|
Europe
|
|
15
|
|
|
10
|
|
|
9
|
|
U.S.
|
|
18
|
|
|
17
|
|
|
15
|
|
Other
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
Our sales are generally made by purchase orders. Because industry practice allows customers to
reschedule or cancel orders on relatively short notice, backlog is not a good indicator of our future sales. Cancellations of customer orders or changes in product specifications could result in the loss of anticipated sales without allowing us
sufficient time to reduce our inventory and operating expenses.
Since a significant portion of our revenue is from the digital consumer
electronics market, our business may be subject to seasonality, with increased revenues in the third and fourth calendar quarters of each year, when customers place orders to meet year-end holiday demand. However, broad fluctuations in our overall
business in the past several years makes it difficult for us to assess the impact of seasonal factors on our business.
We are subject to
the risks of conducting business internationally, including economic conditions in Asia, particularly Taiwan and China, changes in trade policy and regulatory requirements, duties, tariffs and other trade
32
barriers and restrictions, the burdens of complying with foreign laws and, possibly, political instability. All of our foundries and assembly and test
subcontractors are located in Asia. Although our international sales are largely denominated in U.S. dollars, we do have sales transactions in New Taiwan dollars, in Hong Kong dollars and in Chinese Renminbi. In addition, we have foreign operations
where expenses are generally denominated in the local currency. Such transactions expose us to the risk of exchange rate fluctuations. We monitor our exposure to foreign currency fluctuations, but have not adopted any hedging strategies to date.
There can be no assurance that exchange rate fluctuations will not harm our business and operating results in the future.
Fiscal Year Ended
September 30, 2007 Compared to Fiscal Year Ended September 30, 2006
Net Sales
. Net sales
consist principally of total product sales less estimated sales returns. Net sales increased by 13% to $245.4 million in fiscal 2007 from $217.5 million in fiscal 2006. The increase in net sales of $27.9 million can be attributed primarily to higher
sales of our application specific standard products (ASSP) which includes our EEPROM, Smart Card and logic products as well as our SRAM products. An increase in unit shipments of our SRAM products in fiscal 2007 compared to fiscal 2006 more than
offset a decline in average selling prices for such products resulting in an overall increase in SRAM revenue. Sales of ASSP products also increased in fiscal 2007 compared to fiscal 2006, but such products accounted for only about 13% of our total
sales in fiscal 2007. In addition, an increase in unit shipments of our DRAM products, specifically our 128 Mb and 256 Mb DRAM products, in fiscal 2007 compared to fiscal 2006 more than offset a decrease in average selling prices resulting in an
overall increase in DRAM revenue. We anticipate that the average selling prices of our existing products will generally decline over time, although the rate of decline may fluctuate for certain products. There can be no assurance that any future
price declines will be offset by higher volumes or by higher prices on newer products.
In fiscal 2007 and fiscal 2006, no single customer
accounted for over 10% of our net sales.
Gross profit
. Cost of sales includes die cost from the wafers
acquired from foundries, subcontracted package, assembly and test costs, costs associated with in-house product testing, quality assurance and import duties. Gross profit increased by $19.3 million to $48.4 million in fiscal 2007 from $29.1 million
in fiscal 2006. Our gross margin increased to 19.7% in fiscal 2007 from 13.4% in fiscal 2006. Our gross profit for fiscal 2007 included inventory write-downs of $10.3 million compared to $16.5 million of inventory write-downs in fiscal 2006. The
inventory write-downs were for excess and obsolescence issues and lower of cost or market accounting on certain of our products. Our gross profit for fiscal 2007 and fiscal 2006, benefited from the sale of $3.2 million and $3.0 million,
respectively, of previously written down products. The increase in gross profit in fiscal 2007 compared to fiscal 2006 can be attributed to increased unit shipments of our SRAM and ASSP products which more than offset declines in average selling
prices for such products. In addition, declines in the cost of our SRAM products more than offset declines in the average selling prices of our SRAM products in fiscal 2007. This contributed to an increase in our SRAM gross margin. Our DRAM gross
margin increased in fiscal 2007 compared to fiscal 2006 as a result of a shift in product mix to higher density higher margin products. We believe that the average selling prices of our products will decline over time and, unless we are able to
reduce our cost per unit to the extent necessary to offset such declines, the decline in average selling prices will result in a material decline in our gross margin. In addition, product costs could increase if our suppliers raise prices, which
could result in a material decline in our gross margin. In the past, foundries have raised wafer prices when demand for end products increases. Although we have product cost reduction programs in place that involve efforts to reduce internal costs
and supplier costs, there can be no assurance that product costs will be reduced or that such reductions will be sufficient to offset the expected declines in average selling prices. We do not believe that such cost reduction efforts are likely to
have a material adverse impact on the quality of our products or the level of service provided by us.
Research and
development
. Research and development expenses decreased by 7% to $20.2 million in fiscal 2007 from $21.6 million in fiscal 2006. As a percentage of net sales, research and development expenses decreased to 8.2% in fiscal
2007 from 9.9% in fiscal 2006. The decrease in research and development expenses
33
can be attributed to a decrease in maskwork expenses in fiscal 2007 compared to fiscal 2006 and a decrease in expenses for our Bluetooth and Flash controller
development projects which we exited in the March 2006 quarter. These factors were partially offset by an increase in development costs for new DRAM and SRAM products as well as an increase in costs of associated with the development for products
for automotive and industrial applications. Our research and development expenses could increase in absolute dollars in future periods due to increased costs associated with the development of new products.
Selling, general and administrative
. Selling, general and administrative expenses increased by 15% to $32.7 million in
fiscal 2007 from $28.3 million in fiscal 2006. As a percentage of net sales, selling, general and administrative expenses increased to 13.3% in fiscal 2006 from 13.0% in fiscal 2006. The increase in selling, general and administrative expenses was
mainly attributable to approximately $4.7 million in legal expenses and accounting fees in fiscal 2007 attributable to our stock option backdating investigation and shareholder derivative lawsuits compared to approximately $1.1 million of such
expenses in fiscal 2006. In addition, there was an increase in selling commissions associated with higher revenues in fiscal 2007 compared fiscal 2006.
Acquired in-process technology charge
. In fiscal 2006, we incurred a $0.5 million acquired in-process technology charge (IPR&D) in connection with our purchase of additional shares of
ICSI. The $0.5 million allocated to IPR&D was expensed in fiscal 2006 as it was deemed to have no future alternative use.
Interest
and other income (expense), net.
Interest and other income (expense), net was $8.2 million in fiscal 2007 compared to $4.9 million in fiscal 2006. The $8.2 million of interest and other income (expense), net in fiscal 2007
is comprised primarily of interest income of $4.5 million, a $2.3 million gain in connection with the settlement of a commercial dispute, $1.7 million in rental income from the lease of excess space in our Taiwan facility and $0.5 million expense
estimated for the settlement of derivative lawsuits. The $4.9 million of interest and other income (expense), net in fiscal 2006 is comprised primarily of interest income of $2.7 million, $0.9 million in foreign currency exchange gains, $0.9 million
in rental income from the lease of excess space in our Taiwan facility, and $0.5 million from the sale of assets from our Bluetooth business offset by an impairment charge of approximately $(0.4) million related to our investment in Signia.
Gain on sale of investments.
The gain on the sale of investments was $12.0 million in fiscal 2007 compared
to $2.5 million in fiscal 2006. In fiscal 2007, we sold shares of Ralink (a cost method equity investment) for approximately $8.9 million and recorded a pre-tax gain of approximately $7.9 million. In addition, in fiscal 2007, we sold approximately
212.8 million shares of SMIC for approximately $24.4 million which resulted in a pre-tax gain of approximately $3.8 million. We also sold our remaining shares of KSC for approximately $1.2 million which resulted in a pre-tax gain of
approximately $0.3 million. In fiscal 2006, we sold our shares in E-CMOS for approximately $1.5 million which resulted in a pre-tax gain of $0.3 million. In addition, we sold approximately 77% of our shares in Signia for approximately $4.6 million
which resulted in a pre-tax gain of $2.2 million. In addition, in September 2006, we sold a cost method equity investment for approximately $0.1 million resulting in a gain of approximately $26,000.
Provision (benefit) for income taxes.
For fiscal 2007, we recorded an income tax provision of $4,000 consisting of federal
and state minimum taxes and foreign withholding taxes net of the reversal of previously provided taxes. For fiscal 2006, we recorded an income tax benefit of $33,000 consisting of the reversal of previously provided taxes that are no longer
necessary offset by foreign withholding tax, taxes in certain foreign jurisdictions and state minimum taxes.
We have a recorded a
valuation allowance against our deferred tax assets due to our operating loss history and our expectation of future taxable income. We review the realization of these deferred tax assets on an ongoing basis. Any release of the valuation allowance
would have a favorable impact on the provision for income taxes within our statement of operations.
Minority interest in net(income)
loss of consolidated subsidiaries.
The minority interest in net (income) loss of consolidated subsidiaries was income of $0.2 million in fiscal 2007 compared to a loss of $0.7 million in
34
fiscal 2006. The minority interest in net income of consolidated subsidiaries for fiscal 2007 represents the minority shareholders proportionate share
of the net income of ICSI. The minority interest in net loss of consolidated subsidiaries for fiscal 2006 represents the minority shareholders proportionate share of the net loss of ICSI for such period and the minority shareholders
proportionate share of the net loss of Signia for the five months ended February 28, 2006. Effective March 2006, we account for Signia on the cost basis.
Equity in net loss of affiliated companies.
Equity in net loss of affiliated companies was $0.1 million in fiscal 2007 compared to $0.7 million in fiscal 2006. This related to our equity
interest in KSC which we sold in December 2006.
Fiscal Year Ended September 30, 2006 Compared to Fiscal Year Ended September 30, 2005
Net Sales
. Net sales increased by 20% to $217.5 million in fiscal 2006 from $181.4 million in fiscal 2005.
The increase in net sales of $36.1 million can principally be attributed to our acquisition of a controlling interest in and the resulting consolidation of ICSIs results of operations beginning in May 2005. An increase in unit shipments of our
SRAM products in fiscal 2006 compared to fiscal 2005 more than offset a decline in average selling prices for such products resulting in an overall increase in SRAM revenue. In addition, an increase in unit shipments of our DRAM products,
specifically our 16 Mb, 128 Mb and 256 Mb DRAM products, in fiscal 2006 compared to fiscal 2005 more than offset a decrease in average selling prices for such products resulting in an overall increase in DRAM revenue.
In fiscal 2006 and fiscal 2005, no single customer accounted for over 10% of our net sales.
Gross profit
. Gross profit increased by $13.4 million to $29.1 million in fiscal 2006 from $15.7 million in fiscal 2005.
Our gross margin increased to 13.4% in fiscal 2006 from 8.7% in fiscal 2005. Our gross profit for fiscal 2006 included inventory write-downs of $16.5 million compared to $13.9 million of inventory write-downs in fiscal 2005. The inventory
write-downs were for excess and obsolescence issues and lower of cost or market accounting on certain of our products. The increase in gross profit in fiscal 2006 can be attributed to increased unit shipments of DRAM and SRAM products due to our
acquisition of ICSI which more than offset declines in average selling prices for such products. Also, we recognized $3.0 million of gross profit on inventory sold during fiscal 2006 that had been previously written-off. The increase in the gross
margin in fiscal 2006 compared to fiscal 2005 can be primarily attributed to declines in the cost of our DRAM products which more than offset declines in the average selling prices of our DRAM products. This contributed to an increase in our DRAM
gross margin. However, declines in the average selling prices of our SRAM products more than offset declines in the cost of our SRAM products in fiscal 2006 compared to fiscal 2005 resulting in a decline in our SRAM gross margin.
Research and development
. Research and development expenses increased by 6% to $21.6 million in fiscal 2006 from $20.4
million in fiscal 2005. As a percentage of net sales, research and development expenses decreased to 9.9% in fiscal 2006 from 11.2% in fiscal 2005. Fiscal 2006 includes stock-based compensation expense under SFAS 123R of approximately $2.1 million
and fiscal 2005 includes stock-based compensation of approximately $1.0 million. Research and development expenses also increased from fiscal 2005 to fiscal 2006 due to our consolidation of ICSI but such increase was offset by a decrease in research
and development expenses in the U.S. and for Bluetooth and Flash controller development projects which we exited in the March 2006 quarter. Our research and development expenses for fiscal 2006 included $0.5 million attributable to SRAM mask works
acquired in an asset purchase from Alliance Semiconductor.
Selling, general and administrative
. Selling,
general and administrative expenses increased by 17% to $28.3 million in fiscal 2006 from $24.2 million in fiscal 2005. As a percentage of net sales, selling, general and administrative expenses decreased to 13.0% in fiscal 2006 from 13.3% in
fiscal 2005. Fiscal 2006 includes stock-based compensation expense under SFAS 123R of approximately $2.4 million and fiscal 2005 includes stock-based compensation of $0.9 million. In addition, fiscal 2006 includes approximately $1.1 million in legal
35
expenses in the September 2006 quarter attributable to our stock option backdating investigation. Fiscal 2005 includes a charge to allowance for doubtful
accounts of approximately $1.0 million, primarily for amounts due from Delphi Electronics and a $1.1 million write-off of excess facility space in our former Santa Clara headquarters. Excluding the aforementioned items, the increase in selling,
general and administrative expenses was primarily attributable to our consolidation of ICSI.
Acquired in-process technology
charge
. In fiscal 2006, we incurred a $0.5 million acquired in-process technology charge (IPR&D) in connection with our purchase of additional shares of ICSI. The $0.5 million allocated to IPR&D was expensed in
fiscal 2006 as it was deemed to have no future alternative use. In fiscal 2005, we incurred a $2.8 million IPR&D charge of which $2.5 million related to our acquisition of ICSI shares in the five months ended September 30, 2005 and $0.3
million related to our acquisition of Signia in December 2004.
Interest and other income (expense),
net.
Interest and other income (expense), net was $4.9 million in fiscal 2006 compared to $2.2 million in fiscal 2005. The $4.9 million of interest and other income (expense), net in fiscal 2006 is comprised primarily of
interest income of $2.7 million, $0.9 million in foreign currency exchange gains, $0.9 million in rental income from the lease of excess space in our Taiwan facility, and $0.5 million from the sale of assets from our Bluetooth business offset
by an impairment charge of approximately $(0.4) million related to our investment in Signia. The $2.2 million of other income in fiscal 2005 is comprised primarily of interest income of $2.6 million and the gain on the sale of assets of $0.5 million
offset by $(0.8) million in foreign currency exchange losses and $(0.3) million in impairment losses related to two of our cost method equity investments.
Gain on sale of investments.
The gain on the sale of investments was $2.5 million in fiscal 2006 compared to $5.0 million in fiscal 2005. In fiscal 2006, we sold our shares in E-CMOS for
approximately $1.5 million which resulted in a pre-tax gain of $0.3 million. In addition, we sold approximately 77% of our shares in Signia for approximately $4.6 million which resulted in a pre-tax gain of $2.2 million. As a result of the sale of
the Signia shares, we reduced our ownership percentage to approximately 16% and effective March 2006 account for Signia on the cost basis. In addition, in September 2006, we sold a cost method equity investment for approximately $0.1 million
resulting in a gain of approximately $26,000. In fiscal 2005, we sold shares of SMIC for approximately $8.7 million which resulted in a pre-tax gain of $4.4 million. In addition, we sold our investment in NexFlash (including shares held by ICSI) for
approximately $3.2 million, which resulted in a pre-tax gain of $0.6 million.
Benefit for income taxes.
For
fiscal 2006, we recorded an income tax benefit of $33,000 consisting of the reversal of previously provided taxes that are no longer necessary offset by foreign withholding tax, taxes in certain foreign jurisdictions and state minimum taxes. The
benefit for income taxes for fiscal 2005 of $268,000 consists of the reversal of previously provided taxes that are no longer necessary offset by foreign withholding tax and state minimum taxes.
Minority interest in net loss of consolidated subsidiaries.
The minority interest in net loss of consolidated subsidiaries
was $0.7 million in fiscal 2006 compared to $0.8 million in fiscal 2005. The minority interest in net loss of consolidated subsidiaries for fiscal 2006 represents the minority shareholders proportionate share of the net loss of ICSI for such
period and the minority shareholders proportionate share of the net loss of Signia for the five months ended February 28, 2006. Effective March 2006, we account for Signia on the cost basis. The minority interest in net loss of
consolidated subsidiaries for fiscal 2005 represents the minority shareholders proportionate share of the net loss of Signia for the ten months ended September 30, 2005 and the minority shareholders proportionate share of the net
loss of ICSI for the five months ended September 30, 2005.
Equity in net loss of affiliated
companies.
Equity in net loss of affiliated companies was $0.7 million in fiscal 2006 compared to $11.9 million loss in fiscal 2005. In fiscal 2006, we recorded a loss of approximately $0.7 million related to our equity
interest in KSC. In fiscal 2005, we recorded a loss of approximately
36
$11.9 million related primarily to our equity interest in ICSI prior to our consolidation of ICSIs financial results effective May 1, 2005.
Liquidity and Capital Resources
As of
September 30, 2007, our principal sources of liquidity included cash, cash equivalents and short-term investments of approximately $133.8 million. During fiscal 2007, operating activities provided cash of approximately $22.4 million compared to
$2.6 million provided in fiscal 2006. The cash provided by operations in fiscal 2007 was primarily due decreases in inventories of $21.2 million. The cash provided by operations in fiscal 2006 was primarily due to decreases in inventories of $7.1
million as a result a decrease in inventory purchases in an effort to manage inventory levels, increases in accounts payable of $4.3 million and increases in accrued expenses and other liabilities of $2.5 million. This was partially offset by
our uses of cash in fiscal 2006, including our net loss of $14.2 million adjusted for non-cash items of $6.6 million (gain on the sale of Signia shares of $(2.2) million, gain on the sale of assets of $(0.6) million, gain on the sale of
E-CMOS of $(0.3) million, stock-based compensation expense of $4.6 million, equity in net loss of affiliated companies of $0.7 million, depreciation and amortization of $3.5 million, amortization of intangibles of $1.8 million, acquired
in-process technology charge of $0.5 million and other non-cash items of $(1.4) million) and increases in accounts receivable of $3.2 million.
In fiscal 2007, we generated $0.8 million from investing activities compared to $10.2 million generated in fiscal 2006. In fiscal 2007, we generated approximately $28.2 million from the sale of shares of SMIC, resulting in a pre-tax gain of
approximately $3.8 million, generated approximately $8.9 million from the sale of shares of Ralink, resulting in a pre-tax gain of approximately $7.9 million and generated approximately $1.2 million from our sale of shares of KCS, resulting in a
pre-tax gain of approximately $0.3 million. We used $32.9 million for net purchases of available-for-sale securities and $0.3 million for the purchase of additional shares of ICSI. The cash generated from investing activities in fiscal 2006
primarily resulted from net sales of available-for-sale securities of $18.5 million. In addition, during fiscal 2006, we generated $1.5 million from the sale of our investment in E-CMOS resulting in a pre-tax gain of approximately $0.3 million, $4.6
million from the sale of Signia shares resulting in a pre-tax gain of approximately $2.2 million (which was offset by $0.1 million from the deconsolidation of Signia) and $1.3 million from the sale of Bluetooth and other assets. We used
approximately $13.9 million in fiscal 2006 for the purchase of additional shares of ICSI.
In fiscal 2007, we made capital expenditures of
approximately $4.4 million for computer software and hardware, test equipment and engineering tools compared to $1.7 million in fiscal 2006. We expect to spend approximately $1.5 million to $3.0 million to purchase capital equipment during the next
twelve months, principally for the purchase of design and engineering tools, additional test equipment, and computer software and hardware. We expect to fund our capital expenditures from our existing cash and cash equivalent balances.
We used $7.0 million for financing activities during fiscal 2007 compared to $3.0 million used in fiscal 2006. In fiscal 2007, we used $28.9 million
for the repayment of short-term borrowings and $7.4 million for the repurchase and retirement of our common stock. Our sources of financing for fiscal 2007 were borrowings of $27.2 million under ICSI lines of credit, borrowings of $0.6 million under
equipment financing loans and proceeds from the issuance of common stock of $1.5 million from stock option exercises. In fiscal 2006, we used $65.9 million for the repayment of short-term borrowings. Our sources of financing for fiscal 2006 were
borrowings of $60.9 million under ICSI lines of credit, proceeds from the issuance of common stock of $1.8 million from stock option exercises and sales under our employee stock purchase plan and a decrease in restricted cash of $0.2 million.
We have $12.9 million available through a number of short-term lines of credit with various financial institutions in Taiwan. These lines
of credit expire at various times through August 2008. As of September 30, 2007, we had outstanding borrowings of approximately $0.6 million under these short-term lines of credit. Our unused short-term lines of credit amounted to approximately
$12.3 million at September 30, 2007.
37
In November 2006, we entered into a lease for approximately 30,000 square feet of office space in San
Jose and relocated our headquarters there in February 2007. The lease on this building expires in June 2013. Outside of the U.S., we have operations in leased sites in China and Hong Kong. In addition to these sites, we lease sales offices in the
U.S., Europe and Asia. These leases expire at various dates through 2009. In Taiwan, we own and occupy the ICSI building. The land upon which the ICSI building is situated is leased under an operating lease that expires in March 2016. Our
outstanding commitments under these leases were approximately $4.3 million at September 30, 2007.
We generally warrant our products
against defects in materials and workmanship for a period of 12 months. Liability for a stated warranty period is usually limited to the replacement of defective items or return of amounts paid. Warranty expense has historically been immaterial to
our financial statements.
Our contractual cash obligations at September 30, 2007 are outlined in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
Contractual Obligations
|
|
Total
|
|
Less than
1 year
|
|
1-3
years
|
|
3-5
years
|
|
More than
5 years
|
|
|
(In thousands)
|
Operating leases
|
|
$
|
4,265
|
|
$
|
734
|
|
$
|
1,147
|
|
$
|
1,294
|
|
$
|
1,090
|
Purchase obligations with wafer foundries
|
|
|
26,677
|
|
|
26,677
|
|
|
|
|
|
|
|
|
|
Non-cancelable purchase commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
30,942
|
|
$
|
27,411
|
|
$
|
1,117
|
|
$
|
1,294
|
|
$
|
1,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 28, 2007, we announced that our board of directors had approved the repurchase of
up to $80 million of shares of our common stock. We intend to use $70 million of this amount to repurchase up to 10 million of our common stock through a self-tender offer at a price of $7.00 per share. The offer commenced on December 3,
2007 and is expected to close in early January 2008.
We believe our existing funds will satisfy our anticipated working capital and other
cash requirements through at least the next 12 months. We may from time to time take actions to further increase our cash position through equity or debt financings, sales of shares of investments, bank borrowings, or the disposition of certain
assets. From time to time, we may also commit to acquisitions or equity investments, including strategic investments in wafer fabrication foundries or assembly and test subcontractors. To the extent we enter into such transactions, any such
transaction could require us to seek additional equity or debt financing to fund such activities. There can be no assurance that any such additional financing could be obtained on terms acceptable to us, if at all.
Off-Balance Sheet Arrangements
As of
September 30, 2007, we did not have any off-balance sheet arrangements, as defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally
accepted in the U.S. requires management to make difficult and subjective estimates, judgments and assumptions. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The estimates and judgments that we use in applying our accounting policies have a significant impact on the
results we report in our financial statements. We base our estimates and judgments on our historical experience combined with knowledge of current conditions and our beliefs of what could occur in the future, considering the information available at
the time. Actual results could differ from those
38
estimates and such differences may be material to our financial statements. We reevaluate our estimates and judgments on an ongoing basis.
Our critical accounting policies which are impacted by our estimates are: (i) the valuation of our inventory, which impacts cost of goods sold and
gross profit; (ii) the valuation of our allowance for sales returns and allowances, which impacts net sales; (iii) the valuation of our allowance for doubtful accounts, which impacts general and administrative expense; (iv) accounting
for acquisitions and goodwill, which impacts other expense when we record impairments; (v) the valuation of our non-marketable equity securities, which impacts other expense when we record impairments and (vi) accounting for stock-based
compensation which impacts costs of goods sold, research and development expense and selling, general and administrative expense. Each of these policies is described in more detail below. We also have other key accounting policies that may not
require us to make estimates and judgments that are as subjective or difficult. For instance, our policies with regard to revenue recognition, including the deferral of revenues on sales to distributors with sales price rebates and product return
privileges. These policies are described in the notes to our financial statements contained elsewhere in this Report on Form 10-K.
Valuation of inventory
. Our inventories are stated at the lower of cost or market value. Determining market value requires us to project unit prices and volumes for future periods in which we expect to sell
inventory on hand as of the balance sheet date. As a result of these estimates, we may record a charge to cost of goods sold, which decreases our gross profit, in advance of when the inventory is actually sold to reflect market values, net of sales
commission costs, that are below our manufacturing costs. Conversely, if we sell inventory that has previously been written down to the lower of cost or market at more favorable prices than we had forecasted at the time of the write-down, our gross
profit may be higher. In addition to lower of cost or market write-downs, we also analyze inventory to determine whether any of it is excess, obsolete or defective. We write down to zero dollars (which is a charge to cost of goods sold) the carrying
value of inventory on hand that has aged over one year to cover estimated excess and obsolete exposures, unless adjustments are made based on our judgments for newer products, end of life products, planned inventory increases or strategic customer
supply. In making such judgments to write down inventory, we take into account the product life cycles which can range from six to 30 months, the stage in the life cycle of the product, and the impact of competitors announcements and product
introductions on our products. Once established, these adjustments are considered permanent.
Valuation of allowance for sales returns
and allowances
. Net sales consist principally of total product sales less estimated sales returns. To estimate sales returns and allowances, we analyze potential customer specific product application issues, potential
quality and reliability issues and historical returns. We evaluate quarterly the adequacy of the allowance for sales returns and allowances. This allowance is reflected as a reduction to accounts receivable in our consolidated balance sheets.
Increases to the allowance are recorded as a reduction to net sales. Because the allowance for sales returns and allowances is based on our judgments and estimates, particularly as to product application, quality and reliability issues, our
allowances may not be adequate to cover actual sales returns and other allowances. If our allowances are not adequate, our net sales could be adversely affected.
Valuation of allowance for doubtful accounts
. We maintain an allowance for doubtful accounts for losses that we estimate will arise from our customers inability to make required
payments for goods and services purchased from us. We make our estimates of the uncollectibility of our accounts receivable by analyzing historical bad debts, specific customer creditworthiness and current economic trends. Once an account is deemed
unlikely to be fully collected, we write down the carrying value of the receivable to the estimated recoverable value, which results in a charge to general and administrative expense, which decreases our profitability.
Accounting for acquisitions and goodwill.
We account for acquisitions using the purchase accounting method in accordance
with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. Under this method, the total consideration paid, excluding, if any, the contingent consideration that has not been earned, is allocated over the
fair value of the net assets acquired, including in-process research
39
and development, with any excess allocated to goodwill. Goodwill is defined as the excess of the purchase price over the fair value allocated to the net
assets. Our judgments as to fair value of the assets will, therefore, affect the amount of goodwill that we record. Management is responsible for the valuation of tangible and intangible assets. For tangible assets acquired in any acquisition, such
as plant and equipment, the useful lives are estimated by considering comparable lives of similar assets, past history, the intended use of the assets and their condition. In estimating the useful life of the acquired intangible assets with definite
lives, we consider the industry environment and unique factors relating to each product relative to our business strategy and the likelihood of technological obsolescence. Acquired intangible assets primarily include core and current technology,
customer relationships and customer contracts. We are currently amortizing our acquired intangible assets with definite lives over periods generally ranging from six months to six years.
We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances where indicators of impairment may exist. For
instance, in response to changes in industry and market conditions, we could be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of
tangible and intangible assets, including goodwill. In fiscal 2005, we recorded charges for impairment of goodwill in the amount of $4.4 million.
Valuation of non-marketable securities
. Our ability to recover our strategic investments in equity securities that are non-marketable and to earn a return on these investments is largely
dependent on financial market conditions and the occurrence of liquidity events, such as initial public offerings, mergers or acquisitions, and private equity transactions. The timing of when any of these events may occur is uncertain and very
difficult to predict. In addition, under our accounting policy, we are required to periodically review all of our investments for impairment. In the case of non-marketable equity securities, this requires significant judgment on our part, including
an assessment of the investees financial condition, the existence of subsequent rounds of financing and the impact of any relevant equity preferences, as well as the investees historical results of operations and projected results and
cash flows. If the actual outcomes for the investees are significantly different from their forecasts, the carrying value of our non-marketable equity securities may be above fair value, and we may incur additional charges in future periods,
which will decrease our profitability. In fiscal 2006, we recorded an impairment loss of approximately $0.4 million related to one of our non-marketable equity securities. In fiscal 2005, we recorded approximately $0.3 million impairment losses
related to two of our non-marketable equity securities. At September 30, 2007, our strategic investments in non-marketable securities totaled $0.6 million.
Accounting for stock-based compensation.
Effective October 1, 2005, we adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R), using the modified prospective transition method and therefore have not restated results for prior periods. Under SFAS 123R, stock option costs is calculated on the date of grant using the Black-Scholes valuation
model. The compensation cost is then recognized on a straight-line basis over the requisite service period of the option, which is generally the option vesting term of four years. We use the Black-Scholes valuation model to determine the fair value
of our stock options at the date of grant. The Black-Scholes valuation model requires us to estimate key assumptions such as expected term, volatility, dividend yield and risk free interest rates that determine the stock option fair value. In
addition, SFAS 123R requires forfeitures to be estimated at the time of grant. In subsequent periods, if actual forfeitures differ from the estimate, the forfeiture rate may be revised. We estimate our expected forfeitures rate based on our
historical activity and judgment regarding trends. Based upon the Securities and Exchange Commission (SEC) issuance of Staff Accounting Bulletin No. 107 (SAB 107) regarding the SECs interpretation of SFAS 123R, we use the
simplified calculation of expected life. If we determined that another method used to estimate expected life was more reasonable than our current method, or if another method for calculating these inputs assumptions was prescribed by authoritative
guidance, the fair value calculated could change materially.
40
Impact of Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109. The interpretation contains a two step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate
the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The
second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The provisions are effective us beginning in the first quarter of fiscal 2008. We are currently evaluating the
impact this statement will have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS No. 157) which establishes a framework for measuring fair value and enhance disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007.
The measurement and disclosure requirements are effective for us beginning in the first quarter of fiscal 2009. We are currently evaluating whether SFAS No. 157 will result in a change to our fair value measurements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159)
which permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in
earnings. SFAS 159 is effective for us beginning in the first quarter of fiscal 2009, although earlier adoption is permitted. We are currently evaluating the impact SFAS No. 159 will have on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This Statement replaces SFAS No. 141,
Business
Combinations
. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the
purchase method
) be used for all business combinations and for an acquirer to be
identified for each business combination. This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS No. 141(R) will apply prospectively to business combinations for which the acquisition date is on or after Companys fiscal year beginning October 1, 2009.
While we have not yet evaluated this statement for the impact, if any, that SFAS No. 141(R) will have on its consolidated financial statements, we will be required to expense costs related to any acquisitions after September 30, 2009.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. This
Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. We have not yet determined the impact, if any, that SFAS No. 160 will have on its consolidated financial statements. SFAS
No. 160 is effective for the Companys fiscal year beginning October 1, 2009
41
Item 8. Financial Statements and Supplementary Data
INTEGRATED SILICON SOLUTION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Reports of Independent Registered Public Accounting Firm
|
|
44
|
|
|
Financial Statements:
|
|
|
|
|
Consolidated Statements of Operations
For Fiscal Years Ended September 30, 2007, September 30,
2006, and September 30, 2005
|
|
47
|
|
|
Consolidated Balance Sheets
As of September 30, 2007 and September 30, 2006
|
|
48
|
|
|
Consolidated Statements of Stockholders Equity
For Fiscal Years Ended September 30,
2007, September 30, 2006, and September 30, 2005
|
|
49
|
|
|
Consolidated Statements of Cash Flows
For Fiscal Years Ended September 30, 2007, September 30,
2006, and September 30, 2005
|
|
50
|
|
|
Notes to Consolidated Financial Statements
|
|
51
|
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Integrated Silicon Solution, Inc.
We have audited the
accompanying consolidated balance sheet of Integrated Silicon Solution, Inc. (the Company), a Delaware Corporation, as of September 30, 2007, and the related consolidated statements of operations, stockholders equity, and cash
flows for the year ended September 30, 2007. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Integrated Silicon Solution, Inc. as of September 30, 2007, and the consolidated results of its operations and its cash flows for the year ended September 30, 2007 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 13 to the consolidated financial statements, effective October 1, 2006, the
Company adopted the provisions of Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Integrated
Silicon Solution, Inc.s internal control over financial reporting as of September 30, 2007, based on criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated December 14, 2007, expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
/s/ GRANT THORNTON LLP
San Jose, California
December 14, 2007
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders,
Integrated Silicon Solution, Inc.
We have audited Integrated Silicon Solution, Inc.s (a Delaware Corporation), internal control over financial reporting as of
September 30, 2007, based on criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Integrated Silicon Solution, Inc.s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Controls over
Financial Reporting. Our responsibility is to express an opinion on Integrated Silicon Solution, Inc.s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Integrated Silicon Solution, Inc. maintained, in all material respects, effective internal control over
financial reporting as of September 30, 2007, based on criteria established in
Internal ControlIntegrated Framework
issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheet of Integrated Silicon Solution Inc. as of
September 30, 2007, and the related consolidated statements of operations, stockholders equity, and cash flows for the year ended September 30, 2007, and our report dated December 14, 2007, expressed an unqualified opinion on
those consolidated financial statements.
/s/ GRANT THORNTON LLP
San Jose, California
December 14, 2007
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Integrated Silicon Solution, Inc.
We have audited the accompanying consolidated balance sheet of Integrated Silicon Solution, Inc. as of September 30, 2006, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the
two years in the period ended September 30, 2006. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Integrated Silicon Solution, Inc. at September 30, 2006, and the consolidated results of its operations and its cash flows for each of the two years in the period ended September 30, 2006, in
conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in the
year ended September 30, 2006, the Company changed its method of accounting for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123R, Share-Based Payment.
/s/ ERNST & YOUNG LLP
San Jose, California
May 24, 2007
46
INTEGRATED SILICON SOLUTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands, except per share data)
|
|
Net sales (See Note 19)
|
|
$
|
245,395
|
|
|
$
|
217,492
|
|
|
$
|
181,438
|
|
Cost of sales (See Note 19)
|
|
|
196,959
|
|
|
|
188,386
|
|
|
|
165,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
48,436
|
|
|
|
29,106
|
|
|
|
15,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
20,174
|
|
|
|
21,617
|
|
|
|
20,365
|
|
Selling, general and administrative
|
|
|
32,660
|
|
|
|
28,328
|
|
|
|
24,171
|
|
Acquired in-process technology charge
|
|
|
|
|
|
|
499
|
|
|
|
2,764
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
4,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
52,834
|
|
|
|
50,444
|
|
|
|
51,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(4,398
|
)
|
|
|
(21,338
|
)
|
|
|
(35,980
|
)
|
Interest and other income (expense), net
|
|
|
8,188
|
|
|
|
4,855
|
|
|
|
2,229
|
|
Interest expense
|
|
|
(195
|
)
|
|
|
(278
|
)
|
|
|
(177
|
)
|
Gain on sales of investments, net
|
|
|
12,032
|
|
|
|
2,480
|
|
|
|
5,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes, minority interest and equity in net loss of affiliated companies
|
|
|
15,627
|
|
|
|
(14,281
|
)
|
|
|
(28,926
|
)
|
Provision (benefit) for income taxes
|
|
|
4
|
|
|
|
(33
|
)
|
|
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest and equity in net loss of affiliated companies
|
|
|
15,623
|
|
|
|
(14,248
|
)
|
|
|
(28,658
|
)
|
Minority interest in net (income) loss of consolidated subsidiaries
|
|
|
(170
|
)
|
|
|
693
|
|
|
|
767
|
|
Equity in net loss of affiliated companies
|
|
|
(92
|
)
|
|
|
(687
|
)
|
|
|
(11,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,361
|
|
|
$
|
(14,242
|
)
|
|
$
|
(39,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.41
|
|
|
$
|
(0.38
|
)
|
|
$
|
(1.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in basic per share calculation
|
|
|
37,631
|
|
|
|
37,419
|
|
|
|
36,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.40
|
|
|
$
|
(0.38
|
)
|
|
$
|
(1.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in diluted per share calculation
|
|
|
37,975
|
|
|
|
37,419
|
|
|
|
36,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying
notes to consolidated financial statements
47
INTEGRATED SILICON SOLUTION, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands, except
par value)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
53,722
|
|
|
$
|
37,318
|
|
Short-term investments
|
|
|
80,093
|
|
|
|
76,015
|
|
Accounts receivable, net of allowance for doubtful accounts of $1,465 in 2007 and $1,913 in 2006
|
|
|
37,030
|
|
|
|
31,500
|
|
Accounts receivable from related parties (See Note 19)
|
|
|
|
|
|
|
406
|
|
Inventories
|
|
|
32,056
|
|
|
|
52,417
|
|
Other current assets
|
|
|
6,134
|
|
|
|
4,799
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
209,035
|
|
|
|
202,455
|
|
Property, equipment and leasehold improvements, net
|
|
|
23,284
|
|
|
|
21,984
|
|
Goodwill
|
|
|
25,338
|
|
|
|
25,338
|
|
Purchased intangible assets, net
|
|
|
3,538
|
|
|
|
5,391
|
|
Other assets
|
|
|
1,520
|
|
|
|
5,110
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
262,715
|
|
|
$
|
260,278
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term debt and notes
|
|
$
|
614
|
|
|
$
|
1,632
|
|
Accounts payable
|
|
|
36,509
|
|
|
|
35,683
|
|
Accounts payable to related parties (See Note 19)
|
|
|
|
|
|
|
4,440
|
|
Accrued compensation and benefits
|
|
|
3,588
|
|
|
|
2,928
|
|
Accrued expenses
|
|
|
6,734
|
|
|
|
9,665
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
47,445
|
|
|
|
54,348
|
|
Other long-term liabilities
|
|
|
793
|
|
|
|
2,048
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
48,238
|
|
|
|
56,396
|
|
Commitments and contingencies (See Note 16)
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
726
|
|
|
|
690
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value: Authorized shares5,000 in 2007 and 2006. No shares outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value: Authorized shares70,000 in 2007 and 2006. Issued and outstanding shares36,655 in 2007 and 37,612
in 2006
|
|
|
4
|
|
|
|
4
|
|
Additional paid-in capital
|
|
|
376,998
|
|
|
|
379,038
|
|
Accumulated deficit
|
|
|
(162,668
|
)
|
|
|
(178,029
|
)
|
Accumulated comprehensive income (loss)
|
|
|
(583
|
)
|
|
|
2,179
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
213,751
|
|
|
|
203,192
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
262,715
|
|
|
$
|
260,278
|
|
|
|
|
|
|
|
|
|
|
See the accompanying
notes to consolidated financial statements
48
INTEGRATED SILICON SOLUTION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Comprehensive
Income
(Loss)
|
|
|
Deferred
Stock-Based
Compensation
|
|
|
Total
Stockholders
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
(in thousands)
|
|
Balance at September 30, 2004
|
|
36,178
|
|
|
$
|
4
|
|
$
|
371,893
|
|
|
$
|
(123,982
|
)
|
|
$
|
20,570
|
|
|
$
|
(5,536
|
)
|
|
$
|
262,949
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,805
|
)
|
|
|
|
|
|
|
|
|
|
|
(39,805
|
)
|
Change in cumulative translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,746
|
|
|
|
|
|
|
|
2,746
|
|
Change in unrealized gain on investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,207
|
)
|
|
|
|
|
|
|
(9,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to stockholders equity due to disproportional acquisition of investee companies new shares
|
|
|
|
|
|
|
|
|
486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
486
|
|
Stock options exercised
|
|
738
|
|
|
|
|
|
|
2,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,797
|
|
Shares issued under stock purchase plan
|
|
284
|
|
|
|
|
|
|
999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
999
|
|
Unearned compensation associated with stock options granted at less than fair market value
|
|
|
|
|
|
|
|
|
2,904
|
|
|
|
|
|
|
|
|
|
|
|
(2,904
|
)
|
|
|
|
|
Cancellation of stock options
|
|
|
|
|
|
|
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102
|
)
|
Reversal of unearned compensation on options associated with employee terminations
|
|
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
|
|
|
|
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,023
|
|
|
|
2,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005
|
|
37,200
|
|
|
|
4
|
|
|
376,477
|
|
|
|
(163,787
|
)
|
|
|
14,109
|
|
|
|
(3,917
|
)
|
|
|
222,886
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,242
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,242
|
)
|
Change in cumulative translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(528
|
)
|
|
|
|
|
|
|
(528
|
)
|
Change in unrealized gain on investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,402
|
)
|
|
|
|
|
|
|
(11,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to stockholders equity due to disproportional acquisition of investee companies new shares
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Stock options exercised
|
|
198
|
|
|
|
|
|
|
769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
769
|
|
Shares issued under stock purchase plan
|
|
214
|
|
|
|
|
|
|
1,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,067
|
|
Reversal of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
(3,917
|
)
|
|
|
|
|
|
|
|
|
|
|
3,917
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
4,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
37,612
|
|
|
|
4
|
|
|
379,038
|
|
|
|
(178,029
|
)
|
|
|
2,179
|
|
|
|
|
|
|
|
203,192
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
15,361
|
|
|
|
|
|
|
|
|
|
|
|
15,361
|
|
Change in cumulative translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
742
|
|
|
|
|
|
|
|
742
|
|
Change in unrealized gain on investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,461
|
)
|
|
|
|
|
|
|
(4,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for initially applying SFAS No. 158, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
957
|
|
|
|
|
|
|
|
957
|
|
Stock options exercised
|
|
224
|
|
|
|
|
|
|
1,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,461
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
3,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,940
|
|
Shares repurchased under tender offer
|
|
(1,181
|
)
|
|
|
|
|
|
(7,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
36,655
|
|
|
$
|
4
|
|
$
|
376,998
|
|
|
$
|
(162,668
|
)
|
|
$
|
(583
|
)
|
|
$
|
|
|
|
$
|
213,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements
49
INTEGRATED SILICON SOLUTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,361
|
|
|
$
|
(14,242
|
)
|
|
$
|
(39,805
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
3,940
|
|
|
|
4,639
|
|
|
|
1,921
|
|
Depreciation and amortization
|
|
|
3,042
|
|
|
|
3,523
|
|
|
|
3,565
|
|
Amortization of intangibles
|
|
|
2,027
|
|
|
|
1,755
|
|
|
|
540
|
|
Acquired in-process technology charge
|
|
|
|
|
|
|
499
|
|
|
|
2,764
|
|
Net gain on sale of investments
|
|
|
(12,032
|
)
|
|
|
(2,480
|
)
|
|
|
(5,002
|
)
|
Loss on embedded derivative
|
|
|
|
|
|
|
|
|
|
|
21
|
|
Impairment of investments
|
|
|
|
|
|
|
426
|
|
|
|
304
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
4,400
|
|
Loss (gain) on sale of property, equipment and leasehold improvements
|
|
|
18
|
|
|
|
(575
|
)
|
|
|
(321
|
)
|
Provision for bad debts
|
|
|
(184
|
)
|
|
|
(338
|
)
|
|
|
1,039
|
|
Net foreign currency transaction (gains) losses
|
|
|
(53
|
)
|
|
|
(881
|
)
|
|
|
757
|
|
Equity in net loss of affiliated companies
|
|
|
92
|
|
|
|
687
|
|
|
|
11,914
|
|
Minority interest in net income (loss) of consolidated subsidiaries
|
|
|
170
|
|
|
|
(693
|
)
|
|
|
(767
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and accounts receivable from related parties (See Note 19)
|
|
|
(4,762
|
)
|
|
|
(3,246
|
)
|
|
|
12,194
|
|
Inventories
|
|
|
21,181
|
|
|
|
7,118
|
|
|
|
19,362
|
|
Other assets
|
|
|
284
|
|
|
|
(351
|
)
|
|
|
3,418
|
|
Accounts payable and accounts payable to related parties (See Note 19)
|
|
|
(3,989
|
)
|
|
|
4,272
|
|
|
|
(8,353
|
)
|
Accrued expenses and other liabilities
|
|
|
(2,655
|
)
|
|
|
2,458
|
|
|
|
(3,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
22,440
|
|
|
|
2,571
|
|
|
|
4,527
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property, equipment and leasehold improvements
|
|
|
(4,402
|
)
|
|
|
(1,702
|
)
|
|
|
(1,048
|
)
|
Proceeds from sale of assets
|
|
|
|
|
|
|
1,288
|
|
|
|
549
|
|
Purchases of available-for-sale securities
|
|
|
(102,900
|
)
|
|
|
(58,900
|
)
|
|
|
(105,776
|
)
|
Sales of available-for-sale securities
|
|
|
69,971
|
|
|
|
77,363
|
|
|
|
168,848
|
|
Investment in Signia Technologies, Inc. (Signia), net of cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
(7,173
|
)
|
Cash impact of deconsolidation of Signia
|
|
|
|
|
|
|
(149
|
)
|
|
|
|
|
Investment in Integrated Circuit Solution, Inc. (ICSI), net of cash and cash equivalents
|
|
|
(307
|
)
|
|
|
(13,860
|
)
|
|
|
(44,122
|
)
|
Investment in NexFlash
|
|
|
|
|
|
|
|
|
|
|
(452
|
)
|
Proceeds from sale of Ralink equity securities
|
|
|
8,938
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of Keystream Corporation (KSC) equity securities
|
|
|
1,237
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of NexFlash equity securities
|
|
|
|
|
|
|
|
|
|
|
3,169
|
|
Proceeds from sale of Signia equity securities
|
|
|
|
|
|
|
4,620
|
|
|
|
|
|
Proceeds from sale of Semiconductor Manufacturing International Corp. (SMIC) equity securities
|
|
|
28,234
|
|
|
|
|
|
|
|
8,692
|
|
Proceeds from sale of E-CMOS equity securities
|
|
|
|
|
|
|
1,454
|
|
|
|
|
|
Proceeds from the sale of other equity securities
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
771
|
|
|
|
10,240
|
|
|
|
22,687
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases and retirements of common stock
|
|
|
(7,441
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of stock through compensation plans
|
|
|
1,461
|
|
|
|
1,836
|
|
|
|
3,796
|
|
Proceeds from borrowings under equipment financing loans
|
|
|
606
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings under short-term lines of credit
|
|
|
27,259
|
|
|
|
60,866
|
|
|
|
17,852
|
|
Principal payments of notes payable, equipment financing and long-term obligations
|
|
|
(28,893
|
)
|
|
|
(65,866
|
)
|
|
|
(22,989
|
)
|
Payment of convertible debentures
|
|
|
|
|
|
|
|
|
|
|
(16,352
|
)
|
Decrease in restricted cash
|
|
|
|
|
|
|
150
|
|
|
|
1,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(7,008
|
)
|
|
|
(3,014
|
)
|
|
|
(16,503
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
201
|
|
|
|
37
|
|
|
|
(242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
16,404
|
|
|
|
9,834
|
|
|
|
10,469
|
|
Cash and cash equivalents at beginning of year
|
|
|
37,318
|
|
|
|
27,484
|
|
|
|
17,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
53,722
|
|
|
$
|
37,318
|
|
|
$
|
27,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements
50
INTEGRATED SILICON SOLUTION, INC.
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. The Company is a fabless semiconductor company that designs and markets high performance integrated circuits for the following key markets: (i) digital
consumer electronics, (ii) networking, (iii) mobile communications and (iv) automotive electronics. The Companys primary products are high speed and low power SRAM and low and medium density DRAM. The Company also designs and
markets EEPROMs, SmartCards, and selected non-memory products focused on its key markets.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Integrated Silicon Solution, Inc. and its wholly and majority owned
subsidiaries, after elimination of all significant intercompany accounts and transactions.
The Companys financial results for fiscal
2007, fiscal 2006 and fiscal 2005 effective May 1, 2005 reflect accounting for Integrated Circuit Solution, Inc. (ICSI) on a consolidated basis. The Companys financial results for fiscal 2005 through the period ended April 30, 2005
reflect accounting for its investment in ICSI using the equity method and include its percentage share of the results of ICSIs operations during those periods. On May 1, 2005, the Company assumed effective control of ICSI and in
accordance with generally accepted accounting principles the Company began consolidating the financial results of ICSI with its results. At September 30, 2007, the Company owned approximately 98% of ICSI.
In February 2006, the Company sold approximately 77% of its shares in Signia Technologies Inc. (Signia), a developer of wireless semiconductors, thereby
reducing its ownership percentage to approximately 16%. Effective March 1, 2006, the Company resumed accounting for Signia on the cost basis. During the period from December 1, 2004 through February 28, 2006, the Companys
financial results reflect accounting for Signia on a consolidated basis. The Companys financial results through the period ended November 30, 2004 reflect accounting for Signia on the cost basis. At September 30, 2007, the Company
owned approximately 6% of Signia.
In December 2006, the Company sold its remaining investment in Key Stream Corp. (KSC), a semiconductor
company. KSC was an equity investment of ICSI. The Companys financial results for fiscal 2007, until its sale, for fiscal 2006 and for fiscal 2005 beginning May 1, 2005 reflect accounting for KSC using the equity method.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained at various financial institutions.
Investments
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.
51
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
At September 30, 2007 and 2006, all marketable debt and equity securities, other than long-term
investments, were designated as available-for-sale. Available-for-sale securities are reported at fair value, with unrealized gains or 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 interest and other income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in loss on investments. The cost of fixed income securities sold is based on the specific identification method and the weighted-average method is used to determine the cost basis of
publicly traded equity securities disposed of. Interest and dividends on securities classified as available-for-sale are included in interest and other income.
The Company also has investments that are accounted for under the cost method of accounting. These investments are generally in privately held companies and are included in other assets in the Consolidated Balance
Sheets. Except for the gains recognized on the sales of equity securities of KSC, Ralink, SMIC, E-CMOS, Signia and NexFlash (see Note 2 and Note 4), there were no gains or losses on the sale of securities for the fiscal years ended
September 30, 2007, 2006 and 2005.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market. The Companys inventory valuation process is done on a part-by-part basis. Lower of cost or market adjustments, specifically identified
on a part-by-part basis, reduce the carrying value of the related inventory and takes into consideration reductions in sales prices. The Company regularly monitors inventory quantities on hand and records a write-down for excess and obsolete
inventories based primarily on the Companys estimated forecast of product demand and production requirements. Once established, these adjustments are considered permanent.
Property, Equipment and Leasehold Improvements
Property, equipment, and leasehold improvements are stated at cost. Depreciation and amortization are computed using the straight-line method, based upon the shorter of the estimated useful lives ranging from two to
ten years for property and equipment and fifty years for buildings or the lease term for leasehold improvements to leased properties.
Goodwill and Purchased Intangible Assets
Goodwill is tested for impairment on an annual basis and between annual tests in
certain circumstances, and is written down when impaired in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. For goodwill, the Company performs a two-step impairment test. In the first step, the Company compares
the fair value of the reporting unit to the carrying value, including goodwill. The Company determines the fair value of the reporting units based on a weighting of income and market approaches. If the fair value of the reporting unit exceeds the
carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the
Company performs the second step of the impairment test in order to determine the implied fair value of the reporting units goodwill. If the carrying value of a reporting units goodwill exceeds its implied fair value, the Company records
an impairment loss equal to the difference.
Based on the impairment tests performed, the Company recorded impairment charges for goodwill
of $4.4 million in fiscal 2005. Purchased intangible assets other than goodwill are amortized over their useful lives
52
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
unless these lives are determined to be indefinite. Purchased intangible assets with definite lives are carried at cost less accumulated amortization.
Amortization is computed over the estimated useful lives of the respective assets, generally six months to six years. Purchased in-process research and development without alternative future use is expensed when acquired.
Valuation of Long-Lived Assets and Certain Identifiable Intangibles
The Company evaluates the recoverability of property, plant and equipment and identifiable intangible assets in accordance with Statement of Financial Accounting Standards No. 144 (SFAS 144), Accounting for
the Impairment or Disposal of Long-Lived Assets. The Company performs periodic reviews to determine whether facts and circumstances exist that would indicate that the carrying amounts of property, plant and equipment and identifiable
intangible assets exceed their fair values. If facts and circumstances indicate that the carrying amount of property, plant and equipment might not be fully recoverable, projected undiscounted net cash flows associated with the related asset or
group of assets over their estimated remaining useful life is compared against their respective carrying amounts. In the event that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are
written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) as well as other comprehensive income
(loss). The Companys other comprehensive income (loss) consists of changes in cumulative translation adjustment and unrealized gains and losses on investments.
Comprehensive income (loss), net of taxes (which were immaterial for all periods presented), was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Net income (loss)
|
|
$
|
15,361
|
|
|
$
|
(14,242
|
)
|
|
$
|
(39,805
|
)
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes arising during current period
|
|
|
742
|
|
|
|
(528
|
)
|
|
|
2,746
|
|
Change in unrealized gain (loss) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes arising during current period
|
|
|
(729
|
)
|
|
|
(11,402
|
)
|
|
|
(6,101
|
)
|
Reclassification for gain included in net income
|
|
|
(3,732
|
)
|
|
|
|
|
|
|
(3,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
11,642
|
|
|
$
|
(26,172
|
)
|
|
$
|
(46,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income (loss), net of tax, were as follows at
September 30:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
Accumulated foreign currency translation adjustments
|
|
$
|
(1,732
|
)
|
|
$
|
(2,474
|
)
|
Accumulated net unrealized gain on SMIC
|
|
|
197
|
|
|
|
4,643
|
|
Accumulated net unrealized gain (loss) on other available-for-sale investments
|
|
|
(5
|
)
|
|
|
10
|
|
Accumulated net transition obligation
|
|
|
1,026
|
|
|
|
|
|
Accumulated net actuarial losses
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss)
|
|
$
|
(583
|
)
|
|
$
|
2,179
|
|
|
|
|
|
|
|
|
|
|
53
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The adjustment for initially applying SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158), net of tax, was recorded to accumulated other comprehensive income (loss) for $957,000 as of
September 30, 2007. See Note 13: Retirement Plan.
The estimated net prior service cost, actuarial loss, and transition
obligation for the defined benefit plan that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost during fiscal year 2008 is zero, zero, and $79,000, respectively.
Revenue Recognition and Accounts Receivable Allowances
Revenue from product sales to the Companys direct customers is recognized upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has
transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements and there are no remaining significant obligations. The Company must make estimates of potential future product returns and sales
allowances related to current period product revenue. Management analyzes historical returns, changes in customer demand, and acceptance of products when evaluating the adequacy of sales returns and allowances. Estimates made by the Company may
differ from actual product returns and sales allowances. These differences may materially impact reported revenue and amounts ultimately collected on accounts receivable.
A portion of the Companys sales is made to distributors under agreements that provide the possibility of certain sales price rebates and limited product return privileges. Given the uncertainties associated with
the levels of returns and other credits that will be issued to these distributors, the Company defers recognition of such sales until the products are sold by the distributors to their end customers. Revenue from sales to distributors who do not
have sales price rebates or product return privileges is recognized at the time the products are sold by the Company to the distributors. Accounts receivable from such distributors are recognized and inventory is relieved upon shipment, as title to
inventories generally transfers upon shipment, at which point the Company has a legally enforceable right to collection under normal terms.
In addition, the Company monitors collectibility of accounts receivable primarily through review of the accounts receivable aging. When facts and circumstances indicate the collection of specific amounts or from specific customers is at
risk, the Company assesses the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made.
The following describes activity in the accounts receivable allowance for doubtful accounts for the years ended September 30, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at
Beginning
of Period
|
|
Adjustments to
Costs and
Expenses
(1)
|
|
|
Deductions
|
|
|
Balance
at End
of Period
|
|
|
(in thousands)
|
Accounts receivableAllowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
984
|
|
$
|
1,039
|
|
|
$
|
228
|
(2)(3)
|
|
$
|
2,251
|
2006
|
|
|
2,251
|
|
|
(338
|
)
|
|
|
|
|
|
|
1,913
|
2007
|
|
|
1,913
|
|
|
(184
|
)
|
|
|
(264
|
)
|
|
|
1,465
|
(1)
|
Includes increases/(decreases) charged or credited to costs and expenses.
|
(2)
|
Uncollectible accounts written off, net of recoveries
|
(3)
|
Includes approximately $539,000 related to the acquisition of ICSI
|
54
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Research and Development
Research and development expenditures are charged to operations as incurred.
Foreign Currency Translation
The
Company uses the local currency as its functional currency for all foreign subsidiaries. Translation adjustments, which result from the process of translating foreign currency financial statements into U.S. dollars, are included in the accumulated
comprehensive income component of stockholders equity.
Advertising Costs
The Company expenses advertising costs as incurred and includes these costs in selling, general and administrative expenses in the Consolidated Statement
of Operations. Advertising costs totaled $108,000, $148,000 and $127,000 for the fiscal years ended September 30, 2007, 2006 and 2005, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. Under SFAS 109, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance against deferred tax assets when it is more likely than not that such assets will not be
realized.
Stock-Based Compensation
Effective October 1, 2005, the Company accounts for stock-based compensation arrangements in accordance with the provisions of SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R). Prior
to the adoption of SFAS 123R, the Company recognized stock-based compensation expense in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Under APB 25,
when the exercise price of the Companys employee stock options was equal to the market price of the underlying stock on the date of the grant, no compensation expense was recognized. Under SFAS 123R, compensation is measured at the grant date,
based on the fair value of the award. The Company amortizes the compensation costs on a straight-line basis over the requisite service period of the option, which is generally the option vesting term of four years. The Company estimates the fair
value of stock options using the Black-Scholes valuation model. The Black-Scholes valuation model requires the Company to estimate key assumptions such as expected term, volatility and forfeiture rates to determine the fair value of a stock option.
The estimate of these key assumptions is based on historical information and judgment regarding market factors and trends.
Use of
Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during
the reporting period. Such estimates relate to the useful lives and fair value of fixed assets, the fair value of investments, allowances for doubtful accounts and customer returns, inventory write-downs, potential reserves relating to litigation
matters, accrued liabilities, and other reserves. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions and its
55
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
beliefs of what could occur in the future, given available information. Actual results may differ from those estimates, and such difference, may be material
to the financial statements.
Fair Value of Financial Instruments
The fair value of certain of the Companys financial instruments, including cash and cash equivalents, accrued compensation and benefits, and other
accrued liabilities approximate carrying value because of their short maturities. The fair value of investments is determined using quoted market prices for those securities or similar financial instruments.
Concentration of Credit Risk
The
Company operates in one business segment, which is to design, develop, and market high performance SRAM, DRAM, and other memory and non-memory products. The Company markets and distributes its products on a worldwide basis, primarily to original
equipment manufacturers, contract manufacturers, and distributors. The Company performs ongoing credit evaluations of its customers financial condition and generally requires no collateral. In fiscal 2007, fiscal 2006 and fiscal 2005, no
single customer accounted for over 10% of net sales.
The Company maintains cash, cash equivalents, and short-term investments with various
high credit quality financial institutions. The Companys investment policy is designed to limit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are
considered in its investment strategy. The Company is exposed to credit risk in the event of default by the financial institutions or issuers of investments to the extent of the amount recorded on the balance sheet. To date, the Company has not
incurred losses related to these investments.
Product Warranty and Indemnifications
The Company generally warrants its products against defects in materials and workmanship for a period of 12 months. Liability for a stated warranty period
is usually limited to replacement of defective items or return of amounts paid. If there is a material increase in the rate of customer claims or the Companys estimates of probable losses relating to specifically identified warranty exposures
are inaccurate, the Company may record a charge against future cost of sales. Warranty expense has historically been immaterial to the Companys financial statements.
The Company indemnifies certain customers, distributors, suppliers, and subcontractors for attorney fees and damages and costs awarded against these
parties in certain circumstances in which its products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. The terms of the Companys indemnification obligations are
generally perpetual from the effective date of the agreement. In certain cases, there are limits on and exceptions to the Companys potential liability for indemnification relating to intellectual property infringement claims. In addition, the
Company has entered into indemnification agreements with its officers and directors, and the Companys bylaws provide that indemnification may be provided to the Companys agents. As described in Note 16, several lawsuits have been
filed against certain of the Companys current directors and officers and certain former directors and officers relating to the Companys historical stock option practices and related accounting; the Company is named as nominal defendant
in such matters. Under the Companys indemnification agreements with its present and former directors and officers, the Company has been indemnifying each director or officer against expenses, including attorneys fees, paid by such
individual in connection with the pending litigation, subject to applicable Delaware law. The Company has directors and officers insurance pursuant to which the Company may be reimbursed for certain of these
56
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
indemnity expenses, subject to the insurers reservation of rights. The Company cannot estimate the amount of potential future indemnity expenses
that it may be required to make. The amount of available directors and officers insurance may not be sufficient to cover the Companys indemnity obligations, which may have a material adverse effect on the Companys
results of operations in future periods.
Net Income (Loss) Per Share
Basic and diluted net loss per share and basic net income per share is computed using the weighted number of common shares outstanding during the period.
Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding, if applicable, during the period. Common equivalent shares consist of the shares issuable upon the assumed
exercise of stock options under the treasury stock method.
Impact of Recently Issued Accounting Standards
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB
Statement No. 109. The interpretation contains a two step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit
as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The provisions are effective for the Company beginning in the first quarter of fiscal 2008. The Company is currently evaluating the impact this statement
will have on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS No. 157) which establishes a framework for measuring fair value and enhance disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The measurement
and disclosure requirements are effective for the Company beginning in the first quarter of fiscal 2009. The Company is currently evaluating whether SFAS No. 157 will result in a change to its fair value measurements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159)
which permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in
earnings. SFAS 159 is effective for the Company beginning in the first quarter of fiscal 2009, although earlier adoption is permitted. The Company is currently evaluating the impact SFAS No. 159 will have on its consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This Statement replaces SFAS
No. 141,
Business Combinations
. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the
purchase method
) be used for all business combinations
and for an acquirer to be identified for each business combination. This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) will apply prospectively to business combinations for which the acquisition date is on or after Companys fiscal year
beginning October 1, 2009. While the Company has not yet evaluated this statement for the impact, if any, that SFAS No. 141(R) will
57
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
have on its consolidated financial statements, the Company will be required to expense costs related to any acquisitions after September 30, 2009.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. This
Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The Company has not yet determined the impact, if any, that SFAS No. 160 will have on its consolidated financial
statements. SFAS No. 160 is effective for the Companys fiscal year beginning October 1, 2009
Note 2. Cash,
Cash Equivalents and Investments
Cash, cash equivalents and investments consisted of the following at September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
(in thousands)
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
17,343
|
|
$
|
|
|
$
|
|
|
|
$
|
17,343
|
Money market instruments
|
|
|
21,740
|
|
|
|
|
|
|
|
|
|
21,740
|
Commercial paper
|
|
|
10,644
|
|
|
|
|
|
(5
|
)
|
|
|
10,639
|
Certificates of deposit
|
|
|
5,995
|
|
|
|
|
|
|
|
|
|
5,995
|
Municipal notes and bonds
|
|
|
71,950
|
|
|
|
|
|
|
|
|
|
71,950
|
SMIC common stocksaleable within 12 months
|
|
|
5,951
|
|
|
197
|
|
|
|
|
|
|
6,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
133,623
|
|
$
|
197
|
|
$
|
(5
|
)
|
|
$
|
133,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,722
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
80,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$
|
133,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Fair Value
|
|
|
(in thousands)
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
19,576
|
|
$
|
|
|
$
|
19,576
|
Money market instruments
|
|
|
7,601
|
|
|
|
|
|
7,601
|
Commercial paper
|
|
|
10,131
|
|
|
10
|
|
|
10,141
|
Certificates of deposit
|
|
|
2,326
|
|
|
|
|
|
2,326
|
Municipal notes and bonds
|
|
|
38,700
|
|
|
|
|
|
38,700
|
SMIC common stocksaleable within 12 months
|
|
|
30,346
|
|
|
4,643
|
|
|
34,989
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
108,680
|
|
$
|
4,653
|
|
$
|
113,333
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
$
|
37,318
|
Short-term investments
|
|
|
|
|
|
|
|
|
76,015
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
113,333
|
|
|
|
|
|
|
|
|
|
|
58
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
All debt securities held at September 30, 2007 and September 30, 2006 are due in less than
one year. As of September 30, 2007 and 2006, the Company had cash, cash equivalents and short-term investments of $13.0 million and $11.0 million, respectively, in foreign institutions.
In fiscal 2007, the Company sold approximately 212.8 million shares of Semiconductor Manufacturing International Corp. (SMIC), a related party
through July 2007, and recorded gross proceeds of approximately $28.2 million and a pre-tax gain of approximately $3.8 million. In fiscal 2005, the Company sold shares of SMIC and recorded gross proceeds of approximately $8.7 million and a pre-tax
gain of approximately $4.4 million. The Company uses the weighted-average cost method to determine the cost basis of shares of SMIC. The market value of SMIC shares is subject to fluctuations and the Companys carrying value will be subject to
adjustments to reflect the current market value. The Companys shares in SMIC were subject to certain lockup restrictions which lapsed in February 2007. Therefore all of the Companys shares in SMIC are freely tradable.
Note 3. Inventories
Inventories consisted of the following at September 30:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Purchased components
|
|
$
|
4,583
|
|
$
|
10,744
|
Work-in-process
|
|
|
9,673
|
|
|
21,467
|
Finished goods
|
|
|
17,800
|
|
|
20,206
|
|
|
|
|
|
|
|
|
|
$
|
32,056
|
|
$
|
52,417
|
|
|
|
|
|
|
|
In fiscal 2007, 2006 and 2005, the Company recorded inventory write-downs of $10.3 million, $16.5
million and $13.9 million, respectively. The inventory write-downs were predominately for lower of cost or market and excess and obsolescence issues on certain of its products.
Note 4. Other Assets
Other assets consisted of the following at
September 30:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Equity method investments
|
|
$
|
|
|
$
|
1,062
|
Cost method equity investments
|
|
|
624
|
|
|
1,904
|
Restricted assets
|
|
|
316
|
|
|
916
|
Other
|
|
|
580
|
|
|
1,228
|
|
|
|
|
|
|
|
|
|
$
|
1,520
|
|
$
|
5,110
|
|
|
|
|
|
|
|
The Company accounts for investments in 50% or less owned companies over which it has the ability
to exercise significant influence using the equity method of accounting. The Company accounts for investments in less than 20% owned companies at cost. The Company periodically reviews these investments for other-than-temporary declines in market
value and writes down these investments to their fair value when an other-than-temporary decline has occurred.
In December 2006, the
Company sold its remaining shares of Key Stream Corp. (KSC) for approximately $1.2 million and recorded a pre-tax gain of approximately $0.3 million. KSC was a related party through December 2006.
59
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In fiscal 2007, the Company sold approximately 61% of its shares of Ralink (a cost method investment)
for approximately $8.9 million and recorded a pre-tax gain of approximately $7.9 million. The market value of Ralink was approximately $7.0 million at September 30, 2007.
The Company sold its investment in E-CMOS in April 2006 for approximately $1.5 million which resulted in a pre-tax gain of $0.3 million. In addition, in
September 2006 the Company sold a cost method equity investment for approximately $0.1 million resulting in a gain of approximately $26,000.
The Company sold approximately 77% of its investment in Signia in February 2006 for approximately $4.6 million which resulted in a pre-tax gain of $2.2 million. As a result of the sale of the Signia shares, the Company reduced its
ownership percentage to approximately 16%, or approximately $0.7 million, and effective March 2006 accounts for its investment in Signia on the cost basis. In prior periods, Signias financial position and results of operation were consolidated
with the Companys financial statements. The deconsolidation of Signia did not have a material impact on the Companys balance sheet and will not have a material effect on the Companys revenues or results of operations. In the
September 2006 quarter, the Company recorded an impairment charge of approximately $0.4 million related to its investment in Signia.
KSC
issued new shares of capital stock in December 2005 and July 2005. The Company did not purchase any additional shares and its ownership percentage decreased by approximately 2%. The decrease in the investment ownership percentage and therefore the
increase in equity in net assets for the KSC investment amounted to approximately $0 and $0.5 million in December 2005 and July 2005, respectively. The changes were recorded to increase the carrying value of the investment and additional paid-in
capital.
In fiscal 2005, the Company sold its investment in NexFlash (including shares held by ICSI) for approximately $3.2 million, which
resulted in a pre-tax gain of $0.6 million.
In fiscal 2005, the Company recorded approximately $0.3 million impairment losses related to
two of its cost method equity investments.
The Company has various deposits including deposits with suppliers for purchase guarantees and
for customs clearance. These deposits are included in restricted assets.
Note 5. Property, Equipment, and Leasehold
Improvements, net
Property, equipment, and leasehold improvements, net consisted of the following at September 30:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
Machinery and equipment
|
|
$
|
31,169
|
|
|
$
|
27,870
|
|
Furniture and fixtures
|
|
|
2,380
|
|
|
|
2,899
|
|
Land, buildings and improvements
|
|
|
25,092
|
|
|
|
25,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,641
|
|
|
|
56,386
|
|
Less accumulated depreciation and amortization
|
|
|
(35,357
|
)
|
|
|
(34,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,284
|
|
|
$
|
21,984
|
|
|
|
|
|
|
|
|
|
|
60
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Note 6. Lease Payment Receivable
ICSI entered into a machinery lease contract on March 6, 2003 for a term of 5 years commencing from April 1, 2003. The lessee will obtain the
title of the property upon the termination of this agreement. Lease payment receivable consisted of the following at September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
Current
|
|
|
Non-current
|
|
Current
|
|
|
Non-current
|
|
|
(in thousands)
|
Lease payment receivable
|
|
$
|
586
|
|
|
$
|
|
|
$
|
1,153
|
|
|
$
|
576
|
Less: Unearned interest revenue
|
|
|
(1
|
)
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
585
|
|
|
$
|
|
|
$
|
1,148
|
|
|
$
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected future receipts of long-term lease payment receivable are as follows (in thousands):
|
|
|
|
Fiscal year ending:
|
|
|
2008
|
|
$
|
585
|
Thereafter
|
|
|
|
|
|
|
|
Total
|
|
$
|
585
|
|
|
|
|
The current portion of lease payment receivable is included in other current assets and the
non-current portion of the lease payment receivable is included in other assets.
The Company rents out certain floors in its office
building in HsinChu, Taiwan. These leases are cancelable with either three months or six months notice. The value of the assets leased to others is included in fixed assets in the Companys balance sheet. Rental income and the depreciation of
the assets are included in other income (expense), net and amounted to approximately $1.7 million and $0.3 million, $0.9 million and $0.1 million, and $0.2 million and $0.1 million, in fiscal 2007 fiscal 2006 and fiscal 2005, respectively.
The assets leased consisted of the following at September 30:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
Buildings and improvements
|
|
$
|
6,974
|
|
|
$
|
6,865
|
|
Less accumulated depreciation
|
|
|
(2,862
|
)
|
|
|
(2,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,112
|
|
|
$
|
4,317
|
|
|
|
|
|
|
|
|
|
|
Note 7. Purchased Intangible Assets
The following table presents details of the purchased intangible assets acquired during fiscal 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
Customer Relationships
|
|
Other
|
|
|
|
Estimated
Useful Life
(in Years)
|
|
Amount
|
|
(in thousands, except years)
|
|
Estimated
Useful Life
(in Years)
|
|
Amount
|
|
Total
|
|
|
|
Estimated
Useful Life
(in Years)
|
|
Amount
|
|
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ICSI
|
|
4.0
|
|
$
|
174
|
|
|
|
$
|
|
|
|
|
$
|
|
|
$
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
$
|
|
|
|
|
$
|
|
|
1.5
|
|
$
|
390
|
|
$
|
390
|
ICSI
|
|
5.3
|
|
|
821
|
|
2.9
|
|
|
617
|
|
|
|
|
|
|
|
1,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
821
|
|
|
|
$
|
617
|
|
|
|
$
|
390
|
|
$
|
1,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following tables present details of the Companys total purchased intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
|
(in thousands)
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
Technology
|
|
$
|
3,933
|
|
$
|
1,442
|
|
$
|
2,491
|
Customer relationships
|
|
|
2,995
|
|
|
2,013
|
|
|
982
|
Other
|
|
|
390
|
|
|
325
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,318
|
|
$
|
3,780
|
|
$
|
3,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
Technology
|
|
$
|
3,972
|
|
$
|
882
|
|
$
|
3,090
|
Customer relationships
|
|
|
2,995
|
|
|
1,019
|
|
|
1,976
|
Other
|
|
|
390
|
|
|
65
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,357
|
|
$
|
1,966
|
|
$
|
5,391
|
|
|
|
|
|
|
|
|
|
|
The following table presents details of the amortization expense of purchased intangible assets as
reported in the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
September 30,
2007
|
|
September 30,
2006
|
|
September 30,
2005
|
|
|
(in thousands)
|
Reported as:
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
1,898
|
|
$
|
1,619
|
|
$
|
469
|
Operating expenses
|
|
|
129
|
|
|
136
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,027
|
|
$
|
1,755
|
|
$
|
540
|
|
|
|
|
|
|
|
|
|
|
The estimated future amortization expense of purchased intangible assets as of September 30,
2007 is as follows (in thousands):
|
|
|
|
Fiscal year
|
|
|
2008
|
|
$
|
1,538
|
2009
|
|
|
824
|
2010
|
|
|
770
|
2011
|
|
|
406
|
Thereafter
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,538
|
|
|
|
|
62
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Goodwill
There were no changes in goodwill during fiscal 2007.
The following table presents the changes in goodwill during fiscal 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
September 30,
2005
|
|
Acquired
|
|
Other
|
|
|
Balance at
September 30,
2006
|
|
|
(in thousands)
|
Signia
|
|
$
|
1,120
|
|
$
|
|
|
$
|
(1,120
|
)
|
|
$
|
|
ICSI
|
|
|
19,112
|
|
|
6,226
|
|
|
|
|
|
|
25,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,232
|
|
$
|
6,226
|
|
$
|
(1,120
|
)
|
|
$
|
25,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2006, the Company sold approximately 77% of its investment in Signia in February
2006 and as a result of the sale of the Signia shares, the Company reduced its ownership percentage to approximately 16% and effective March 2006 accounts for its investment in Signia on the cost basis. As a result of the deconsolidation of Signia,
the Company reduced the recorded amount of its goodwill by approximately $1.1 million.
In September 2005, the Company recorded an
impairment charge of approximately $4.4 million related to the goodwill from its acquisition of Signia. The write-off was required as it became evident, based on anticipated cash flows, that the product line had not and would be unable to
generate future cash flows to support the goodwill amount.
Note 8. Borrowings
Short term debt at September 30, 2007 was comprised of a working capital loan with an interest rate of 2.69%. Short term debt and notes at
September 30, 2006 were comprised of working capital loans with a weighted average interest rate of 2.47%.
At September 30,
2007, ICSI had short-term lines of credit with various financial institutions whereby it could borrow in aggregate up to approximately $12.9 million denominated in a combination of U.S. and New Taiwan dollars. As of September 30, 2007, the
Company had borrowings of approximately $0.6 million outstanding under these lines of credit. These lines of credit expire at various times through August 2008. There were no assets pledged as collateral for short-term debt or notes. Commitment fees
relating to these lines are not material. The Companys unused short-term lines of credit amounted to approximately $12.3 million at September 30, 2007.
Note 9. Accrued Expenses
Accrued expenses consisted of the following at September 30:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Deferred distributor margin
|
|
$
|
1,811
|
|
$
|
1,836
|
Other
|
|
|
4,923
|
|
|
7,829
|
|
|
|
|
|
|
|
|
|
$
|
6,734
|
|
$
|
9,665
|
|
|
|
|
|
|
|
63
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Note 10. Capital Stock
The Companys Restated Certificate of Incorporation provides for 70,000,000 authorized shares of Common Stock and 5,000,000 authorized shares of
preferred stock. The terms of the preferred stock may be fixed by the board of directors, who have the right to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future.
As of September 30, 2007, shares of common stock were reserved for future issuance as follows:
|
|
|
Common shares reserved under Employee Stock Purchase Plan
|
|
1,072,000
|
Common shares reserved under stock option plans
|
|
8,226,000
|
On August 15, 2007, the Company commenced an offer to purchase for cash up to $30 million in
shares of its common stock at a price not greater than $6.30 nor less than $5.70 per share (the Offer). Following the expiration of the Offer on September 15, 2007, the Company accepted for payment 1,181,148 shares of its common
stock at a purchase price of $6.30 per share pursuant to the terms of the Offer, resulting in aggregate payments of approximately $7,441,000.
Note
11. Stock-Based Compensation
Stock-Based Benefit Plans
The Company has stock option plans under which options to purchase shares of the Companys common stock may be granted to employees and directors. At
September 30, 2007, the total number of shares subject to options outstanding under all plans was 5,153,000. At September 30, 2007, 3,073,000 shares were available for grant under all plans. Options generally vest ratably over a four-year
period with a 6-month or 1-year cliff vest and then vesting ratably over the remaining period. Options granted prior to October 1, 2005 expire ten years after the date of grant; options granted after October 1, 2005 expire seven years
after the date of the grant.
2007 Incentive Compensation Plan
At the 2007 annual meeting of stockholders held on July 30, 2007, the Companys stockholders approved, upon recommendation of the Companys
board of directors, the adoption of the Integrated Silicon Solution, Inc. 2007 Incentive Compensation Plan (the 2007 Plan). The 2007 Plan is the successor to each of our 1998 Stock Plan, 1996 Nonstatutory Stock Plan and 1995 Director
Stock Option Plan (the Predecessor Plans), and no further grants shall be made under the Predecessor Plans.
The 2007 Plan
permits the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares and performance units. The Compensation Committee of the Companys board of directors has the authority to
determine the type of incentive award, as well as the terms and conditions of the award, under the 2007 Plan. As of September 30, 2007, only stock options had been granted under the 2007 Plan.
3,000,000 shares of the Companys common stock were initially reserved for issuance under the 2007 Plan. To the extent any options outstanding under
the Predecessor Plans on the date of the Annual Meeting subsequently terminate unexercised or any unvested shares outstanding under the Predecessor Plans at such time are subsequently forfeited or repurchased by ISSI, the number of shares of common
stock subject to those
64
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
terminated options, together with the forfeited shares, will be added to the share reserve available for issuance under the 2007 Plan, up to an additional
4,000,000 shares.
Other Stock Plans
The Company has outstanding grants under its 1989 Stock Plan, 1998 Stock Plan, 1996 Nonstatutory Stock Plan and 1995 Director Stock Option Plan. Options generally vest ratably over a four-year period with a 6-month or
1-year cliff vest and then vesting ratably over the remaining period, except for options granted under the 1995 Director Stock Option Plan, which generally vest over 12 months. Options granted prior to October 1, 2005 expire ten years
after the date of grant; options granted after October 1, 2005 expire seven years after the date of the grant.
The Company has shares
of common stock reserved for future issuance under our 1995 Employee Stock Purchase Plan. Offering periods under the 1995 Employee Stock Purchase Plan have a duration of six months and the purchase price is equal to 85% of the fair value of our
common stock on the purchase date. The offering periods under the 1995 Employee Stock Purchase Plan commence on approximately February 1 and August 1 of each year. During fiscal 2007, 2006 and 2005, 0, 214,000, and 284,000 shares were
issued under the plan, respectively. As of September 30, 2007, 1,072,000 shares were available under the plan for future issuance.
Non-Plan Option Agreements
On February 21, 2006, the Company entered into a Stand-Alone Stock Option Agreement
(the Option) with Scott Howarth, the Companys President and Chief Financial Officer. The Option is a non-qualified stock option to purchase 100,000 shares of the Companys common stock and has the
following terms: (i) an exercise price equal to $6.33 per share which was the fair market value of the Companys common stock on the grant date of February 21, 2006, (ii) a term of 7 years from the date of
grant, and (iii) vesting as to 12.5% of the shares on the six (6) month anniversary of his employment start date, and as to 1/48th of the total shares each month thereafter until the option is fully
vested.
Amendment to Stock Options
On July 19, 2007, the Company accepted for amendment certain options to purchase an aggregate of approximately 486,000 shares of its common stock as contemplated by the Companys offer to amend certain
outstanding options and, if applicable, receive a cash payment as set forth under the Offer to Amend Certain Options dated June 14, 2007 (the Offer to Amend). The Company issued amended options to purchase up to an aggregate of
approximately 436,000 shares of its common stock and promised to make aggregate cash payments in the amount of $192,000 in exchange for the options surrendered for amendment in accordance with the terms of the Offer to Amend.
Accounting for Stock-Based Compensation
Beginning in fiscal 2006, the Company accounts for stock-based compensation arrangements in accordance with the provisions of SFAS No. 123(R) Share-Based Payment (SFAS 123R) as discussed in
Note 1
Significant Accounting Policies.
Under SFAS 123R, compensation cost is calculated by the Company on the date of grant using the fair value of the option as determined using the Black-Scholes option pricing model. The compensation cost
is then amortized ratably over the vesting period of the individual option grants. The Black-Scholes valuation calculation requires the Company to estimate key assumptions such as expected term, volatility and interest rates to determine the fair
value of the stock options. The estimate of these key assumptions is based on the Companys historical stock price volatility, employees historical exercise patterns and judgment
65
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
regarding market factors and trends. SFAS 123R also requires that forfeitures be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on its historical forfeiture rates as it believes these rates to be the most indicative of the Companys expected forfeiture rate.
As of September 30, 2007, there was approximately $7.5 million of total unrecognized stock-based compensation expense under the Companys stock
option plans that will be recognized over a weighted-average period of approximately 2.29 years. Future stock option grants will add to this total whereas quarterly amortization and the vesting of the existing stock option grants will reduce this
total. The Company will also record compensation expense for its ESPP for the difference between the purchase price and the fair market value on the day of purchase.
Prior to the adoption of SFAS 123R, the Company presented all tax benefits resulting from the exercise of stock options as operating cash flows in its Statement of Cash Flows. SFAS 123R requires that these cash flows
be classified as financing cash flows. As the Company has a valuation allowance for all of its deferred tax assets, a tax benefit associated with stock option exercises has not been recognized.
The Company issues new shares of common stock upon exercise of stock options. During fiscal year 2007, options to purchase 224,000 shares were exercised
at an aggregate intrinsic value of $598,000, determined as of the date of option exercise. During fiscal year 2006, options to purchase 198,000 shares were exercised at an aggregate intrinsic value of $564,000, determined as of the date of option
exercise.
The table below outlines the effects of total stock-based compensation for fiscal years 2007, 2006, and 2005. For fiscal year
2005, the Company accounted for stock-based compensation expense under the recognition and measurement provisions of APB No. 25 under which the Company did not have to recognize stock-based compensation expense on employee stock option grants
that were made at fair market value on the date of grant, or on shares issued under the ESPP.
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in thousands, except per
share amounts)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
104
|
|
$
|
126
|
|
$
|
25
|
Research and development
|
|
|
1,828
|
|
|
2,080
|
|
|
986
|
Selling, general and administrative
|
|
|
2,008
|
|
|
2,433
|
|
|
910
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
3,940
|
|
$
|
4,639
|
|
$
|
1,921
|
Tax effect on stock-based compensation
|
|
|
|
|
|
|
|
|
|
Net effect on net income
|
|
$
|
3,940
|
|
$
|
4,639
|
|
$
|
1,921
|
|
|
|
|
|
|
|
|
|
|
Effect on earnings per share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
$
|
0.12
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.10
|
|
$
|
0.12
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Prior to Adoption of SFAS 123R
Prior to October 1, 2005, the Company accounted for stock options under the recognition and measurement provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related Interpretations, as permitted by SFAS Statement No. 123, Accounting for Stock-Based Compensation
66
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(SFAS 123). The Company provided the disclosures required under SFAS 123 as amended by SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosures. The Company generally did not recognize stock-based compensation expense in its statement of operations for periods prior to the adoption of SFAS 123R except when options were granted at an
exercise price lower than the market value of the underlying common stock on the date of grant.
The following table illustrates the effect
on net loss and net loss per share as if the Company had applied the fair value recognition provisions of SFAS 123R to options granted under the Companys stock-based compensation plans prior to its adoption of SFAS 123R. For purposes of this
pro forma disclosure, the value of the options was estimated using a Black-Scholes option pricing formula and amortized on a straight-line basis over the respective vesting periods.
|
|
|
|
|
|
|
2005
|
|
|
|
(in thousands,
except
per share data)
|
|
Net lossas reported
|
|
$
|
(39,805
|
)
|
Intrinsic value method expense included in reported net loss, net of tax
|
|
|
1,921
|
|
Fair value method expense, net of tax
|
|
|
(6,197
|
)
|
|
|
|
|
|
Net losspro forma
|
|
$
|
(44,081
|
)
|
|
|
|
|
|
Basic and diluted net loss per shareas reported
|
|
$
|
(1.09
|
)
|
|
|
|
|
|
Basic and diluted net loss per sharepro forma
|
|
$
|
(1.20
|
)
|
|
|
|
|
|
Valuation Assumptions
The Company uses the Black-Scholes option pricing model to estimate the fair value of the options granted. The Company utilizes the simplified calculation of expected life under the provisions of the SECs Staff
Accounting Bulletin 107, as the Company shortened the contractual life of employee stock options from ten years to seven years. Estimated volatilities are based on historical stock price volatilities of the period immediately preceding the option
grant that is equal in length to the options expected term. The Company believes that historical volatility is the best estimate of future volatility. The Company bases the risk-free interest rate on the implied yield currently available on
U.S. Treasury zero-coupon issues with an equivalent remaining term. The Company has never paid dividends and does not anticipate doing so over the expected life of the options and therefore used 0% for dividend yield.
The estimated values of stock option grants, as well as the weighted average assumptions used in calculating these values during the fiscal years ended
September 30, 2007, 2006 and 2005, were based on estimates at the date of grant as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
ESPP
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
2006
|
|
2005
|
|
Expected term in years
|
|
|
4.52
|
|
|
|
4.52
|
|
|
|
2.75
|
|
|
|
|
|
|
|
1.25
|
|
Expected volatility
|
|
|
0.61
|
|
|
|
0.69
|
|
|
|
0.66
|
|
|
|
|
|
|
|
0.53
|
|
Risk-free interest rate
|
|
|
4.65
|
%
|
|
|
4.54
|
%
|
|
|
3.77
|
%
|
|
|
|
|
|
|
3.30
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Weighted-average fair value of grants
|
|
$
|
3.06
|
|
|
$
|
3.59
|
|
|
$
|
3.78
|
|
|
|
|
|
|
$
|
2.29
|
|
67
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
A summary of the Companys stock option activity and related information for the last three
fiscal years under the 1989, 1996 Nonstatutory, 1998, 1995 Director Stock Option Plans and the 2007 Incentive Compensation Plan follows (stock option amounts and aggregate intrinsic value are presented in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (in
years)
|
|
Aggregate
Intrinsic Value
|
Balance at September 30, 2004
|
|
5,001
|
|
|
$
|
7.86
|
|
|
|
|
|
Options Granted
|
|
3,037
|
|
|
$
|
6.95
|
|
|
|
|
|
Options Exercised
|
|
(738
|
)
|
|
$
|
3.79
|
|
|
|
|
|
Options Cancelled
|
|
(1,124
|
)
|
|
$
|
8.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005
|
|
6,176
|
|
|
$
|
7.82
|
|
|
|
|
|
Options Granted
|
|
1,388
|
|
|
$
|
6.24
|
|
|
|
|
|
Options Exercised
|
|
(198
|
)
|
|
$
|
3.88
|
|
|
|
|
|
Options Cancelled
|
|
(1,368
|
)
|
|
$
|
8.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
5,998
|
|
|
$
|
7.35
|
|
|
|
|
|
Options Granted
|
|
1,076
|
|
|
$
|
5.91
|
|
|
|
|
|
Options Exercised
|
|
(224
|
)
|
|
$
|
3.79
|
|
|
|
|
|
Options Cancelled
|
|
(1,697
|
)
|
|
$
|
8.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
5,153
|
|
|
$
|
7.22
|
|
5.52
|
|
$
|
2,596
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2007
|
|
3,412
|
|
|
$
|
7.68
|
|
5.13
|
|
$
|
2,123
|
Vested and expected to vest after September 30, 2007
|
|
4,891
|
|
|
$
|
7.28
|
|
5.48
|
|
$
|
2,511
|
Options exercisable at:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005
|
|
3,017
|
|
|
$
|
8.75
|
|
4.06
|
|
|
|
September 30, 2006
|
|
3,515
|
|
|
$
|
7.74
|
|
4.92
|
|
|
|
September 30, 2007
|
|
3,412
|
|
|
$
|
7.68
|
|
5.13
|
|
|
|
The following table summarizes information about options outstanding and exercisable at
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of
Exercise Prices
|
|
Number of
Options
Outstanding
(in thousands)
|
|
Wtd. Average
Remaining
Contractual Life
(in years)
|
|
Wtd. Average
Exercise Price
|
|
Number of
Options
Exercisable
(in thousands)
|
|
Wtd. Average
Exercise Price
|
$ 2.35-$ 5.54
|
|
1,126
|
|
4.75
|
|
$
|
4.19
|
|
793
|
|
$
|
3.71
|
5.55- 6.43
|
|
1,353
|
|
5.46
|
|
|
6.19
|
|
667
|
|
|
6.26
|
6.48- 7.00
|
|
1,431
|
|
6.77
|
|
|
6.86
|
|
851
|
|
|
6.88
|
7.09- 15.45
|
|
1,033
|
|
5.25
|
|
|
9.50
|
|
891
|
|
|
9.83
|
16.08- 35.38
|
|
210
|
|
2.73
|
|
|
21.39
|
|
210
|
|
|
21.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 2.35-$ 35.38
|
|
5,153
|
|
5.52
|
|
$
|
7.22
|
|
3,412
|
|
$
|
7.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Note 12. Income Taxes
The provision (benefit) for income taxes consisted of the following for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(15
|
)
|
|
$
|
(236
|
)
|
|
$
|
(369
|
)
|
State
|
|
|
9
|
|
|
|
2
|
|
|
|
2
|
|
Foreign
|
|
|
10
|
|
|
|
201
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
$
|
4
|
|
|
$
|
(33
|
)
|
|
$
|
(268
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit)
|
|
$
|
4
|
|
|
$
|
(33
|
)
|
|
$
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss) from foreign operations was approximately $6.1 million, $(13.0) million, and
$(13.3) million for 2007, 2006, and 2005, respectively.
The Companys provision (benefit) for income taxes differs from the
amount computed by applying the U.S. federal statutory rate (35%) to income before taxes and minority interest as follows for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Income taxes computed at the U.S. federal statutory rate
|
|
$
|
5,469
|
|
|
$
|
(4,998
|
)
|
|
$
|
(10,125
|
)
|
Unbenefited foreign (income) losses
|
|
|
(2,137
|
)
|
|
|
4,578
|
|
|
|
4,731
|
|
Non-deductible stock compensation
|
|
|
612
|
|
|
|
774
|
|
|
|
271
|
|
Nontaxable gain on foreign investment
|
|
|
|
|
|
|
(868
|
)
|
|
|
|
|
Non-deductible impairment charge
|
|
|
|
|
|
|
|
|
|
|
1,540
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
399
|
|
U.S. operating loss not benefited (benefited)
|
|
|
(3,961
|
)
|
|
|
509
|
|
|
|
3,258
|
|
Reversal of previously provided taxes
|
|
|
(25
|
)
|
|
|
(236
|
)
|
|
|
(369
|
)
|
Other individually immaterial items
|
|
|
46
|
|
|
|
208
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit)
|
|
$
|
4
|
|
|
$
|
(33
|
)
|
|
$
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007, the Company had net operating loss carryforwards for federal and
state income tax purposes of approximately $123.2 million and $81.6 million, respectively. The federal and state net operating loss will expire at various dates beginning in 2014, if not utilized. The Company has federal research and development tax
credit and foreign tax credit carryforwards of approximately $1.4 million and $0.9 million, respectively. The Company also has state research and development tax credit carryforwards of approximately $3.0 million. The federal tax credits will expire
at various dates beginning in 2008 through 2025, if not utilized. The California state research and development tax credit can be carried forward indefinitely.
Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended,
69
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
and similar state provisions. The annual limitation, should it become effective, may result in the expiration of net operating losses and credits before
utilization.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes consisted of the following at September 30:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
850
|
|
|
$
|
490
|
|
Inventory and other valuation reserves
|
|
|
1,480
|
|
|
|
6,690
|
|
Accrued expenses
|
|
|
3,260
|
|
|
|
3,320
|
|
Federal and state credit carryforwards
|
|
|
4,780
|
|
|
|
5,450
|
|
Federal and state net operating loss carryforwards
|
|
|
47,060
|
|
|
|
47,680
|
|
Non-deductible stock options
|
|
|
7,410
|
|
|
|
7,300
|
|
Other, net
|
|
|
2,080
|
|
|
|
2,830
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
66,920
|
|
|
|
73,760
|
|
Valuation allowance
|
|
|
(65,220
|
)
|
|
|
(70,260
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
1,700
|
|
|
$
|
3,500
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Unrealized gain on investment
|
|
|
(70
|
)
|
|
|
(1,840
|
)
|
Equity investment basis difference
|
|
|
(1,630
|
)
|
|
|
(1,660
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(1,700
|
)
|
|
|
(3,500
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Management has established a valuation allowance for a portion of the gross deferred tax assets
based on managements expectations of future taxable income and the actual taxable income during the three years ended September 30, 2007. The valuation allowance for deferred tax assets decreased by $5.0 million in fiscal 2007 and
increased by $6.7 million in fiscal 2006. Approximately $13.7 million of the valuation allowance is attributable to tax benefits of stock option deductions which will be credited to paid-in capital when recognized.
Note 13. Retirement Plan
In
connection with the acquisition of ICSI during 2005, the Company assumed pension plans covering substantially all of ICSIs Taiwan based employees. The pension plans are based on the Labor Standards Law, a defined benefit plan (Benefit Plan)
and the Labor Pension Act, a defined contribution plan (Contribution Plan).
Under the Labor Standards Law, the Benefit Plan provides for a
lump sum payment upon retirement based on years of service and the employees compensation during the last six months of employment. In accordance with the Labor Standards Law of the R.O.C., the Company makes monthly contributions equal to 2%
of its wages and salaries. The fund is administered by the Employees Retirement Fund Committee and is registered in this committees name. Accordingly, the pension fund is not included in the financial statements of the Company.
Under the Labor Pension Act effective July 1, 2005, employees may choose the requirements under the Labor Standards Law or the new
statute. For employees subject to the new statute, the Company shall contribute no less than 6% of the employees wages and salaries to the Contribution Plan.
70
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Effective for fiscal year 2007, the Company adopted the provisions of SFAS No. 158. SFAS
No. 158 requires that the funded status of defined-benefit postretirement plans be recognized on the companys consolidated balance sheet, and changes in the funded status be reflected in comprehensive income. SFAS No. 158 also
requires the measurement date of the plans funded status to be the same as the companys fiscal year-end. Since the Company uses its fiscal year end as the measurement date for its Benefit Plan, there is no impact on the projected benefit
obligation and accumulated other comprehensive income (loss) due to measurement date provision of SFAS No. 158. The incremental effect of applying SFAS No. 158 on individual line items on the consolidated balance sheet as of
September 30, 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
Application of
SFAS No. 158
|
|
|
Adjustments
|
|
|
After
Application of
SFAS No. 158
|
|
|
|
(In thousands)
|
|
Other long-term liabilities
|
|
$
|
1,750
|
|
|
$
|
(957
|
)
|
|
$
|
793
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
(1,540
|
)
|
|
$
|
957
|
|
|
$
|
(583
|
)
|
As of September 30, 3007 and 2006, the Companys Benefit Plan had projected benefit
obligations in excess of plan assets. The changes in the benefit obligations and plan assets for the Benefit Plan described above were as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
Beginning benefit obligation
|
|
$
|
1,815
|
|
|
$
|
1,998
|
|
Service cost
|
|
|
16
|
|
|
|
15
|
|
Interest cost
|
|
|
65
|
|
|
|
59
|
|
Actuarial gain
|
|
|
(11
|
)
|
|
|
(262
|
)
|
Currency exchange rate changes
|
|
|
29
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Ending projected benefit obligation
|
|
$
|
1,914
|
|
|
$
|
1,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Change in fair value plan assets:
|
|
|
|
|
|
|
Beginning fair value of plan assets
|
|
$
|
1,520
|
|
$
|
1,356
|
Actual return on plan assets
|
|
|
39
|
|
|
29
|
Employer contributions
|
|
|
101
|
|
|
131
|
Currency exchange rate changes
|
|
|
24
|
|
|
4
|
|
|
|
|
|
|
|
Ending fair value of plan assets
|
|
$
|
1,684
|
|
$
|
1,520
|
|
|
|
|
|
|
|
The following table summarizes the amounts recognized on the consolidated balance sheet as of
September 30:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Other long-term liabilities
|
|
$
|
231
|
|
$
|
1,361
|
Accumulated other comprehensive income
|
|
$
|
957
|
|
|
|
|
|
|
|
|
|
|
Amount recognized
|
|
$
|
1,188
|
|
$
|
1,361
|
|
|
|
|
|
|
|
71
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table summarizes the amounts recorded to accumulated other comprehensive income (loss)
before taxes, as of September 30:
|
|
|
|
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Reclassification adjustment of transition obligation
|
|
$
|
1,026
|
|
Net actuarial gain
|
|
|
(69
|
)
|
Net prior service cost
|
|
|
|
|
|
|
|
|
|
Defined benefit plan, net
|
|
$
|
957
|
|
|
|
|
|
|
The following table summarizes the funding status as of September 30:
|
|
|
|
|
|
|
2006
|
|
|
|
(in thousands)
|
|
Ending funded status
|
|
$
|
296
|
|
Unrecognized transition obligation (asset)
|
|
|
1,088
|
|
Unrecognized net actuarial (gain) loss
|
|
|
(64
|
)
|
Other
|
|
|
41
|
|
|
|
|
|
|
Net amount recognized/accrued benefit liability
|
|
$
|
1,361
|
|
|
|
|
|
|
The following table summarizes the accumulated benefit obligation as of September 30:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Accumulated benefit obligation
|
|
$
|
1,228
|
|
$
|
1,134
|
Weighted-average actuarial assumptions used to determine benefit obligations and plan assets for
the Benefit Plan at September 30 were as follows:
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Discount rate
|
|
3.00
|
%
|
|
3.50
|
%
|
Expected return on plan assets
|
|
3.00
|
%
|
|
3.50
|
%
|
Rate of compensation increase
|
|
3.00
|
%
|
|
3.00
|
%
|
The assumptions used in the expected long-term rate of return on plan assets are determined by the
Bureau of Labor Insurance in Taiwan.
The net periodic benefit cost for the Benefit Plan included the following components at
September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Service cost
|
|
$
|
16
|
|
|
$
|
15
|
|
|
$
|
90
|
|
Interest cost
|
|
|
65
|
|
|
|
59
|
|
|
|
24
|
|
Expected return on plan assets
|
|
|
(54
|
)
|
|
|
(48
|
)
|
|
|
(18
|
)
|
Amortization and deferred amount
|
|
|
(79
|
)
|
|
|
(78
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
(52
|
)
|
|
$
|
(52
|
)
|
|
$
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balance of vested benefit amounted to approximately $110,000 and $105,000 as of
September 30, 2007 and 2006, respectively.
72
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Non-U.S. Plan Assets
For the Benefit Plan, the Company deposits funds into government-managed accounts, and/or accrues for the unfunded portion of the obligation.
Estimated Future Benefit Payments
The following table reflects the benefit payments, which include the amount that will be funded from retiree contributions, that the Company expects to pay in the periods noted (in thousands):
|
|
|
|
Fiscal year ending:
|
|
|
|
2008
|
|
$
|
110
|
2009
|
|
|
|
2010
|
|
|
259
|
2011
|
|
|
7
|
2012
|
|
|
83
|
2013-2017
|
|
|
868
|
Estimated Future Contributions
The Companys expected contributions to be paid to the Benefit Plan during fiscal 2008 is $100,000.
Note 14. Per Share Data
The
calculations of basic and diluted net income (loss) per share for each of the three years ended September 30, 2007, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands, except per share data)
|
|
Numerator for basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,361
|
|
$
|
(14,242
|
)
|
|
$
|
(39,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
37,631
|
|
|
37,419
|
|
|
|
36,663
|
|
Dilutive effect of stock options
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share
|
|
|
37,975
|
|
|
37,419
|
|
|
|
36,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.41
|
|
$
|
(0.38
|
)
|
|
$
|
(1.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.40
|
|
$
|
(0.38
|
)
|
|
$
|
(1.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
The diluted earnings per share calculations for the years ended September 30, 2006 and 2005
do not include approximately 395,000 and 794,000 potential common shares from outstanding stock options because their inclusion would be anti-dilutive. For the years ended September 30, 2007, 2006 and 2005, an additional 4,975,000, 5,069,000
and 3,109,000 stock options were excluded from diluted earnings per share by the application of the treasury stock method.
73
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Note 15. Geographic and Segment Information
The Company has one operating segment, which is to design, develop, and market high-performance SRAM, DRAM, and other memory and non-memory semiconductor
products. The following table summarizes the Companys operations in different geographic areas:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in thousands)
|
Net Sales
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
45,040
|
|
$
|
36,751
|
|
$
|
26,965
|
China
|
|
|
9,564
|
|
|
13,785
|
|
|
26,024
|
Hong Kong
|
|
|
68,200
|
|
|
43,313
|
|
|
34,400
|
Taiwan
|
|
|
44,164
|
|
|
54,596
|
|
|
49,433
|
Japan
|
|
|
15,482
|
|
|
21,344
|
|
|
|
Other Asia Pacific countries
|
|
|
25,762
|
|
|
24,245
|
|
|
27,152
|
Europe
|
|
|
36,047
|
|
|
22,463
|
|
|
15,615
|
Other
|
|
|
1,136
|
|
|
995
|
|
|
1,849
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
245,395
|
|
$
|
217,492
|
|
$
|
181,438
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
3,247
|
|
$
|
1,269
|
|
$
|
2,057
|
Hong Kong
|
|
|
72
|
|
|
80
|
|
|
34
|
China
|
|
|
921
|
|
|
1,055
|
|
|
1,360
|
Taiwan
|
|
|
19,044
|
|
|
19,580
|
|
|
20,185
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
23,284
|
|
$
|
21,984
|
|
$
|
23,636
|
|
|
|
|
|
|
|
|
|
|
Revenues are attributed to countries based on the shipping location of customers.
Long-lived assets by geographic area are those assets used in the Companys operations in each area.
Net foreign currency transaction gains (losses) of approximately $53,000, $881,000, and ($757,000) for the years ended September 30, 2007, 2006, and
2005, respectively, were primarily the result of the settlement of intercompany transactions and are included in the determination of net income (loss).
Note 16. Commitments and Contingencies
Patents and Licenses
In the semiconductor industry, it is not unusual for companies to receive notices alleging infringement of patents or other intellectual property rights
of others. The Company has been, and from time-to-time expects to be, notified of claims that it may be infringing patents, maskwork rights or copyrights owned by third parties. If it appears necessary or desirable, the Company may seek licenses
under patents that it is alleged to be infringing. Although patent holders commonly offer such licenses, licenses may not be offered and the terms of any offered licenses may not be acceptable to the Company. The failure to obtain a license under a
key patent or intellectual property right from a third party for technology used by the Company could cause it to incur substantial liabilities 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 Companys business and operating results. Furthermore, there can be no assurance that the Company will not become involved in protracted litigation regarding its
alleged infringement of third party intellectual property rights or litigation to assert and protect its
74
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
patents or other intellectual property rights. Any litigation relating to patent infringement or other intellectual property matters could result in
substantial cost and diversion of the Companys resources that could materially and adversely affect the Companys business and operating results.
Litigation
Shareholder Derivative Actions
On July 18, 2006 and July 26, 2006, two purported shareholder derivative actions were filed against certain current and former directors and
officers of ISSI in the United States District Court for the Northern District of California, entitled (1)
Rick Tope v. Jimmy S.M. Lee, et al.
, Case No. C06-04387, and (2)
Murray Donnelly v. Jimmy S.M. Lee, et al.
, Case No.
C06-04545. The complaints purport to assert claims against the individual defendants on behalf of ISSI for breach of fiduciary duty, violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5
promulgated thereunder, unjust enrichment, and restitution based upon our alleged stock option grant practices from 1995 through 2002. The Company is named solely as a nominal defendant. The complaints seek damages in an unspecified amount against
the individual defendants, disgorgement of stock options or proceeds, equitable relief, attorneys fees, and other unspecified relief. Pursuant to the parties stipulation, the Court consolidated the two derivative actions on
August 22, 2006, under the caption
In re Integrated Silicon Solution, Inc. Shareholder Derivative Litigation
, Master File No. C-06-04387 RMW. Plaintiffs filed a consolidated complaint on November 27, 2006, based upon the same
underlying facts and circumstances alleged in the prior complaints. In addition to the claims asserted and the relief sought in the original complaints, the consolidated complaint purports to assert claims against the individual defendants for
aiding and abetting and violating Sections 14(a) and 20(a) of the Exchange Act and seeks an accounting. The Company is again named solely as a nominal defendant.
On October 31, 2006, another purported shareholder derivative action was filed against certain current and former directors and officers of ISSI in the Superior Court of California for the County of Santa Clara,
entitled
Alex Chuzhoy v. Jimmy S.M. Lee, et al.
, Case No. 1:06-CV-074031. The complaint purports to assert claims against the individual defendants on behalf of ISSI for insider trading in violation of California Corporations Code
Sections 25402 / 25502.5, breach of fiduciary duty including in connection with the alleged insider selling and misappropriation, abuse of control, gross mismanagement, constructive fraud, corporate waste, unjust enrichment, and rescission, based
upon the Companys alleged stock option grant practices from 1995 through 2002. The Company is named solely as a nominal defendant. The complaint seeks damages in an unspecified amount against the individual defendants, an accounting, certain
corporate governance changes, a constructive trust over the defendants stock options or proceeds, punitive damages, attorneys fees, and other unspecified relief.
The parties in both the state and federal shareholder derivative litigation have agreed to enter into settlement discussions, and both Courts have issued
orders staying the litigation until such time as the discussions result in a settlement which would then be presented to each Court for approval, or until such negotiations are unsuccessful, at which time litigation would resume. If the settlement
negotiations are unsuccessful, plaintiffs in the state and federal derivative complaints are expected to amend their complaints. Defendants will move to dismiss both the state and federal complaints.
75
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
SRAM Antitrust Litigation
Thirty-two purported class action lawsuits were filed by U.S. Direct-Purchaser and U.S. Indirect-Purchaser Plaintiffs against the Company and other SRAM suppliers in various U.S. federal courts alleging violations of
the Sherman Act, violations of state unfair competition laws, and unjust enrichment relating to the sale and pricing of SRAM products. The U.S. lawsuits have been consolidated in a single federal court for coordinated pre-trail proceedings. The U.S.
lawsuits seek treble damages for the alleged damages sustained by purported class members, in addition to restitution, costs and attorneys fees, as well as an injunction against the allegedly unlawful conduct. As of August 30, 2007, the
Company was voluntarily dismissed from twenty-eight of the thirty-two pending lawsuits pursuant to a Tolling Agreement between the Company and the U.S. Indirect-Purchaser Plaintiffs. The U.S. Indirect-Purchaser Plaintiffs agreed not to name the
Company as a defendant unless the Tolling Agreement is terminated according to terms specified in that agreement. The Company remains a defendant in the four lawsuits brought by the U.S. Direct-Purchaser Plaintiffs.
Three purported class action lawsuits were filed against the Company and other SRAM suppliers in three Canadian courts alleging violation of the Canadian
Competition Act and other unlawful conduct. The Canadian complaints seek compensatory and punitive damages, in addition to declaratory relief, restitution, and costs.
The Company is committed to defending itself against these claims and has instructed its counsel to contest these actions vigorously. Given the
preliminary stage of these proceedings and the inherent uncertainty in litigation, the Company is unable to predict the outcome of these suits. The final resolution of these alleged violations of federal or state antitrust laws could have a material
adverse effect on the Companys business, results of operations, or financial condition.
SRAM Antitrust Civil Investigative Demand
In May 2007, the Company received a civil investigative demand (CID) from the Attorney General of the State of Florida. The CID
is issued pursuant to the Florida Antitrust Act in the course of an official investigation to determine whether there is, has been, or may be a violation of state or federal antitrust laws. Although not alleging any wrongdoing, the CID seeks
documents and data relating to the Companys business. The Company intends to cooperate fully with the Attorney General of Florida in this investigation. Because the investigation is at an early stage, the Company cannot predict the outcome of
the investigation and its effect, if any, on its business.
Other Legal Proceedings
In the ordinary course of its business, as is common in the semiconductor industry, the Company has been involved in a limited number of legal
actions, both as plaintiff and defendant, and could incur uninsured liability in any one or more of them. Although the outcome of these actions is not presently determinable, the Company believes that the ultimate resolution of these matters
will not have a material adverse effect on our financial position, cash flows or results of operations. However, no assurances can be given with respect to the extent or outcome of any such litigation in the future.
76
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Operating Leases
The Company leases its facilities and the land upon which the ICSI building is situated under operating lease agreements that expire at various dates through 2016. The Company entered into a six year lease effective
February 2007 for its headquarters facility in San Jose, California. Minimum rental commitments under these leases are as follows (in thousands):
|
|
|
|
Fiscal year ending:
|
|
|
2008
|
|
$
|
734
|
2009
|
|
|
631
|
2010
|
|
|
516
|
2011
|
|
|
638
|
2012
|
|
|
656
|
Thereafter
|
|
|
1,090
|
|
|
|
|
Total minimum rental commitments
|
|
$
|
4,265
|
|
|
|
|
Total rental expense, recorded on a straight-line basis, for the years ended September 30,
2007, 2006 and 2005 was approximately $1.1 million (net of sublease income of $42,000), $1.1 million (net of sublease income of $173,000) and $2.6 million (net of sublease income of $165,000), respectively.
Write-off of Excess Facility Space
In fiscal 2005, the Company recorded a $1.1 million write-off of excess facility space in its Santa Clara headquarters. The write-off is included in selling, general and administrative expenses in the Companys Statement of Operations.
Commitments to Wafer Fabrication Facilities
The Company issues purchase orders for wafers to various wafer foundries. These purchase orders are generally considered to be cancelable. However, to the degree that the wafers have entered into work-in-process, as a
matter of practice it becomes increasingly difficult to cancel the purchase order. As of September 30, 2007, the Company had approximately $26.7 million of purchase orders for which the related wafers had been entered into wafer work-in-process
(manufacturing had begun).
Note 17. Employee 401(k) Plan
In August 1992, the Company established a defined contribution retirement plan with 401(k) plan features to provide retirement benefits to its eligible
United States employees. Employees may make contributions through payroll withholdings of up to the lesser of $15,500 ($20,500 for participants older than 50) or 60% of their annual compensation for 2007. The Company elected to make no matching
contributions during the years ended September 30, 2007, 2006 and 2005. Administrative expenses relating to the plan are insignificant.
77
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Note 18. Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in thousands)
|
|
Cash paid for interest
|
|
$
|
157
|
|
$
|
195
|
|
$
|
1,912
|
|
Cash paid (refunded) for income taxes
|
|
|
13
|
|
|
187
|
|
|
(259
|
)
|
Assets acquired from ICSI
|
|
|
|
|
|
|
|
|
93,832
|
|
Liabilities assumed from ICSI
|
|
|
|
|
|
|
|
|
53,708
|
|
Assets acquired from Signia
|
|
|
|
|
|
|
|
|
4,497
|
|
Liabilities assumed from Signia
|
|
|
|
|
|
|
|
|
1,143
|
|
Note 19. Related Party Transactions
Prior to May 2005, when the Company gained control and began consolidating the results of ICSI, ICSI was a related party. For the seven months ended
April 30, 2005, purchases of goods and services by the Company from ICSI were approximately $1,056,000. The Company also paid ICSI for certain product development costs, license fees and royalties. For the seven months ended April 30,
2005, these charges totaled approximately $169,000.
The Company purchases goods from SMIC in which the Company has less than a 1%
ownership interest. Lip-Bu Tan, a director of the Company through July 30, 2007, has been a director of SMIC since January 2002. For the ten months ended July 31, 2007 and the fiscal years ended September 30, 2006 and 2005, purchases
of goods from SMIC were approximately $17,520,000, $21,352,000, and $52,471,000, respectively. Accounts payable to SMIC was approximately $4,440,000 at September 30, 2006.
The Company sells semiconductor products to Key Stream Corp. (KSC) in which the Company had an approximate 22% equity interest until it sold its
investment in December 2006. Kong-Yeu Han, a director of the Company, was a director of KSC until December 2006.
The Company sells memory
products to Flextronics. Lip-Bu Tan, a director of the Company through July 30, 2007, has been a director of Flextronics since April 2003. The Company had been doing business with Flextronics prior to Mr. Tan joining the board of directors
of Flextronics.
The Company provided manufacturing support services to Signia. In February 2006, the Company sold approximately 77% of its
shares in Signia, thereby reducing its ownership percentage to approximately 16%. Effective March 1, 2006, the Company resumed accounting for Signia on the cost basis. During the period from December 1, 2004 through February 28, 2006,
the Companys financial results reflect accounting for Signia on a consolidated basis. The Companys financial results through the period ended November 30, 2004 reflect the accounting for Signia on the cost basis. At
September 30, 2007, the Company had approximately a 6% ownership interest in Signia. The Companys Chairman and CEO, Jimmy S.M. Lee, was a director of Signia until September 2006. For the two months ended November 30, 2004, the
Company provided services of approximately $382,000, to Signia.
78
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Accounts receivable from related parties consisted of the following at September 30:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Flextronics
|
|
$
|
|
|
$
|
251
|
KSC
|
|
|
|
|
|
155
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
406
|
|
|
|
|
|
|
|
The following table shows sales to related parties for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in thousands)
|
Sales to related parties
|
|
|
|
|
|
|
|
|
|
Flextronics
|
|
$
|
1,751
|
|
$
|
830
|
|
$
|
3,215
|
ICSI (1)
|
|
|
|
|
|
|
|
|
3,185
|
KSC
|
|
|
13
|
|
|
140
|
|
|
|
Others
|
|
|
|
|
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,764
|
|
$
|
970
|
|
$
|
6,515
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Sales to ICSI after May 1, 2005 are eliminated in consolidation.
|
Note 20. Acquisition of Signia Technologies Inc.
In December 2004, the Company acquired a majority
ownership interest in Signia. Signia is a privately held wireless chipset company based in Taipei, Taiwan.
In fiscal 2005, the Company
increased its ownership to approximately 68% by buying common shares from other shareholders. The cost of this additional investment was approximately $8.1 million in cash which includes $0.4 million in estimated transaction costs. Prior to this
increase, the Company owned approximately 15% of the outstanding equity of Signia and accounted for its investment on the cost basis. Since the Company increased its ownership to 68%, beginning December 1, 2004 the Company consolidated
Signias financial statements with its own. The total purchase price, including the previous investment of $1.1 million, was $9.2 million.
In the December 2004 quarter, the Company consolidated Signia based on preliminary valuation data. During the March 2005 and the September 2005 quarters, the valuation data was refined and the Companys final purchase price allocation
was presented as of September 30, 2005. The allocation of the purchase price of Signia included both tangible assets and acquired intangible assets including both developed technology as well as in-process research and development (IPR&D).
The excess of the purchase price over the fair value allocated to the net assets is goodwill. The amounts allocated to IPR&D were expensed as it was deemed to have no future alternative value.
79
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The purchase price allocation is as follows (in thousands):
|
|
|
|
|
Net tangible assets
|
|
$
|
3,354
|
|
Intangible assets:
|
|
|
|
|
IPR&D
|
|
|
294
|
|
Purchased intangible assets
|
|
|
1,099
|
|
Goodwill
|
|
|
5,520
|
|
Minority interest
|
|
|
(1,088
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
9,179
|
|
|
|
|
|
|
The developed technology was being amortized over five years.
In September 2005, the Company recorded an impairment charge for the goodwill acquired of approximately $4.4 million. The write-off was required as
it became evident, based on anticipated cash flows, that the product line had not generated and would be unable to generate future cash flows to support the goodwill amount.
The Company sold approximately 77% of its investment in Signia in February 2006 for approximately $4.6 million which resulted in a pre-tax gain of $2.2
million. As a result of the sale of the Signia shares, the Company reduced its ownership percentage to approximately 16%, or approximately $0.7 million, and effective March 2006 accounts for its investment in Signia on the cost basis. In prior
periods, Signias financial position and results of operation were consolidated with the Companys financial statements. The deconsolidation of Signia did not have a material impact on the Companys balance sheet and is not expected
to have a material effect on the Companys sales or results of operations. In the September 2006 quarter, the Company recorded an impairment charge of approximately $0.4 million related to its investment in Signia.
Note 21. Acquisition of ICSI
On January 25, 2005, the Company announced its intent to acquire the remaining 71% of ICSI that the Company did not then own. On May 1, 2005, ISSI assumed control of ICSI and began consolidating the financial results of ICSI with
its own results. In the nine months ended September 30, 2005, the Company purchased additional shares of ICSI for approximately $52.5 million, increasing its ownership percentage to approximately 83%. The total purchase price allocation in
fiscal 2005 of $61.0 million included our previous investment of $8.5 million. In fiscal 2006, the Company purchased additional shares of ICSI for approximately $13.9 million, increasing its percentage ownership to approximately 98%. In fiscal 2007,
the Company purchased additional shares of ICSI for approximately $0.3 million. The Company owned approximately 98% of ICSI at September 30, 2007.
The Companys decision to acquire ICSI was driven by several considerations including the opportunity to enhance sales, the ability to reduce the combined companys operating expenses, create stronger
purchasing power, expand sales channels, and enhance opportunities to develop non-memory product lines.
The Company is accounting for the
acquisition of ICSI as a step acquisition. The allocation of the purchase price of ICSI includes both tangible assets and acquired intangible assets including both developed technology and in-process research and development (IPR&D). The excess
of the purchase price over the fair value allocated to the net assets is goodwill. The Company currently does not expect to receive a tax benefit for goodwill. The amounts allocated to IPR&D have been expensed as it was deemed to have no future
alternative value.
80
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The purchase price allocation as of September 30 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
September 30,
2006
|
|
September 30,
2005
|
|
|
|
(in thousands)
|
|
Net tangible assets
|
|
$
|
|
|
$
|
1,097
|
|
$
|
40,124
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
|
|
|
|
|
499
|
|
|
2,470
|
|
Purchased intangible assets
|
|
|
174
|
|
|
1,438
|
|
|
5,583
|
|
Goodwill
|
|
|
|
|
|
6,226
|
|
|
19,112
|
|
Minority interest
|
|
|
133
|
|
|
4,600
|
|
|
(6,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price allocation
|
|
$
|
307
|
|
$
|
13,860
|
|
$
|
61,044
|
|
|
|
|
|
|
|
|
|
|
|
|
The developed technology is being amortized over lives ranging from four to six years and the
other amortizable intangible assets are being amortized over lives ranging from six months to five years.
Note 22. Quarterly
Financial Information (unaudited)
The following tables show the quarterly results of operations for each of the years ended
September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
Fourth
Quarter
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
Net sales
|
|
$
|
63,329
|
|
$
|
59,927
|
|
|
$
|
59,995
|
|
|
$
|
62,144
|
|
Gross profit
|
|
$
|
12,762
|
|
$
|
11,735
|
|
|
$
|
11,394
|
|
|
$
|
12,545
|
|
Operating income (loss)
|
|
$
|
1,052
|
|
$
|
(1,119
|
)
|
|
$
|
(2,421
|
)
|
|
$
|
(1,910
|
)
|
Net income
|
|
$
|
3,252
|
|
$
|
4,918
|
|
|
$
|
7,061
|
|
|
$
|
130
|
|
Basic and diluted net income per share
|
|
$
|
0.09
|
|
$
|
0.13
|
|
|
$
|
0.19
|
|
|
$
|
0.00
|
|
Market price range common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
6.95
|
|
$
|
6.49
|
|
|
$
|
6.37
|
|
|
$
|
6.37
|
|
Low
|
|
$
|
5.24
|
|
$
|
5.38
|
|
|
$
|
5.43
|
|
|
$
|
5.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
Net sales
|
|
$
|
59,905
|
|
|
$
|
53,249
|
|
|
$
|
53,245
|
|
|
$
|
51,093
|
|
Gross profit
|
|
$
|
11,738
|
|
|
$
|
4,338
|
|
|
$
|
5,644
|
|
|
$
|
7,386
|
|
Operating loss
|
|
$
|
(1,273
|
)
|
|
$
|
(7,630
|
)
|
|
$
|
(7,359
|
)
|
|
$
|
(5,076
|
)
|
Net income (loss)
|
|
$
|
112
|
|
|
$
|
(6,912
|
)
|
|
$
|
(3,554
|
)
|
|
$
|
(3,888
|
)
|
Basic and diluted net income (loss) per share
|
|
$
|
0.00
|
|
|
$
|
(0.18
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.10
|
)
|
Market price range common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
5.79
|
|
|
$
|
6.84
|
|
|
$
|
6.98
|
|
|
$
|
8.59
|
|
Low
|
|
$
|
4.23
|
|
|
$
|
4.97
|
|
|
$
|
5.97
|
|
|
$
|
6.41
|
|
Note 23. Subsequent Event (unaudited)
On November 28, 2007, the Company announced that its board of directors had approved the repurchase of up to $80 million of shares for the
repurchase of its common stock. The Company intends to use $70 million of this amount to repurchase up to 10 million shares of its common stock through a self-tender offer at a price of $7.00 per share. The offer commenced on December 3,
2007 and is expected to close in early January 2008.
81