UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2009.
OR
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number 000-23084.
Integrated Silicon Solution, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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77-0199971
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1940 Zanker Road, San Jose, California
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95112
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(Address of principal executive offices)
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(Zip Code)
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(408) 969-6600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
¨
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
¨
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Accelerated filer
x
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Non-accelerated filer
¨
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Smaller reporting company
¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
¨
No
x
The number of outstanding shares of the registrant’s Common Stock as of April 30, 2009 was 25,550,406.
TABLE OF CONTENTS
References in this Quarterly Report on Form 10-Q to “we,” “us,”
“our” and “ISSI” mean Integrated Silicon Solution, Inc. and all entities controlled by Integrated Silicon Solution, Inc.
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Item 1.
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Financial Statements
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Integrated Silicon Solution, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share
data)
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Three Months Ended
March 31,
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Six Months Ended
March 31,
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2009
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2008
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2009
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2008
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Net sales
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$
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31,253
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$
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58,046
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$
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68,918
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$
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121,394
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Cost of sales
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24,786
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44,750
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54,718
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94,897
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Gross profit
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6,467
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13,296
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14,200
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26,497
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Operating expenses:
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Research and development
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4,186
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4,935
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9,394
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9,709
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Selling, general and administrative
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6,408
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7,463
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13,709
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15,125
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Total operating expenses
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10,594
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12,398
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23,103
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24,834
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Operating income (loss)
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(4,127
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)
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898
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(8,903
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)
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1,663
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Interest and other income, net
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282
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1,105
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864
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3,179
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Gain on sale of investments
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—
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—
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—
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189
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Income (loss) before income taxes and minority interest
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(3,845
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)
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2,003
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(8,039
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)
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5,031
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Provision (benefit) for income taxes
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(42
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)
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40
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(102
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)
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100
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Income (loss) before minority interest
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(3,803
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)
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1,963
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(7,937
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)
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4,931
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Minority interest in net (income) loss of consolidated subsidiaries
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(23
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)
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20
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41
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19
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Net income (loss)
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$
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(3,826
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)
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$
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1,983
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$
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(7,896
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)
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$
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4,950
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Basic net income (loss) per share
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$
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(0.15
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)
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$
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0.07
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$
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(0.31
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)
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$
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0.15
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Shares used in basic per share calculation
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25,508
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28,160
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25,556
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32,374
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Diluted net income (loss) per share
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$
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(0.15
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)
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$
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0.07
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$
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(0.31
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)
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$
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0.15
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Shares used in diluted per share calculation
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25,508
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28,436
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25,556
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32,668
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See accompanying notes to condensed consolidated financial statements.
1
Integrated Silicon Solution, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
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March 31,
2009
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September 30,
2008
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(unaudited)
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(1)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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38,233
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$
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42,175
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Short-term investments
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5,804
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7,840
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Accounts receivable, net
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19,055
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34,741
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Inventories
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27,662
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39,222
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Other current assets
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2,754
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4,717
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Total current assets
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93,508
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128,695
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Property, equipment and leasehold improvements, net
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23,811
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24,555
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Long-term investments
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21,088
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19,304
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Purchased intangible assets, net
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2,371
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2,000
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Other assets
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1,349
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1,397
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Total assets
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$
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142,127
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$
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175,951
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$
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13,183
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$
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35,171
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Accrued compensation and benefits
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3,118
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3,729
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Accrued expenses
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5,805
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8,157
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Total current liabilities
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22,106
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47,057
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Other long-term liabilities
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667
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715
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Total liabilities
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22,773
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47,772
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Commitments and contingencies (See Note 12)
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Minority interest
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2,396
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789
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Stockholders’ equity:
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Common stock
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3
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3
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Additional paid-in capital
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309,771
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310,712
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Accumulated deficit
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(188,327
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)
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(180,431
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)
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Accumulated other comprehensive loss
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(4,489
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)
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(2,894
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)
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Total stockholders’ equity
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116,958
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127,390
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Total liabilities and stockholders’ equity
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$
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142,127
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$
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175,951
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(1)
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Derived from audited financial statements.
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See
accompanying notes to condensed consolidated financial statements.
2
Integrated Silicon Solution, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
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Six Months Ended
March 31,
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2009
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2008
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Cash flows from operating activities
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Net income (loss)
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$
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(7,896
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)
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$
|
4,950
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Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
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Depreciation and amortization
|
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1,992
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1,678
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Stock-based compensation
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1,842
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1,607
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Amortization of intangibles
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425
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|
910
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Gain on sale of investments
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|
—
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|
|
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(189
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)
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Net foreign currency transaction (gains) losses
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|
(17
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)
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43
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Other non-cash items
|
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(38
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)
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|
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(17
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)
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Minority interest in net income (loss) of consolidated subsidiary
|
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(41
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)
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(19
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)
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Net effect of changes in current and other assets and current liabilities
|
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2,864
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(7,908
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)
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|
|
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|
|
|
|
|
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Net cash provided by (used in) operating activities
|
|
|
(869
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)
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1,055
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Cash flows from investing activities
|
|
|
|
|
|
|
|
|
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Acquisition of property, equipment and leasehold improvements
|
|
|
(2,334
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)
|
|
|
(1,880
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)
|
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Proceeds from sale of assets
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|
3
|
|
|
|
—
|
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Proceeds from sale of investments
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|
—
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|
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2,713
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Proceeds from minority shareholders of Wintram Inc. (Wintram)
|
|
|
831
|
|
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|
—
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Purchases of available-for-sale securities
|
|
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(7,324
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)
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(54,630
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)
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Proceeds from sales of available-for-sale securities
|
|
|
9,002
|
|
|
|
106,630
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|
|
|
|
|
|
|
|
|
|
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Cash provided by investing activities
|
|
|
178
|
|
|
|
52,833
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Cash flows from financing activities
|
|
|
|
|
|
|
|
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Repurchases and retirement of common stock
|
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|
(3,173
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)
|
|
|
(70,858
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)
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Proceeds from issuance of common stock
|
|
|
390
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|
|
|
598
|
|
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Proceeds from borrowings under short-term lines of credit
|
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|
11,915
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|
|
|
7,697
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Principal payments of short-term lines of credit
|
|
|
(11,915
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)
|
|
|
(8,311
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)
|
|
|
|
|
|
|
|
|
|
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Cash used in financing activities
|
|
|
(2,783
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)
|
|
|
(70,874
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)
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(468
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)
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
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Net decrease in cash and cash equivalents
|
|
|
(3,942
|
)
|
|
|
(16,697
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)
|
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Cash and cash equivalents at beginning of period
|
|
|
42,175
|
|
|
|
53,722
|
|
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents at end of period
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|
$
|
38,233
|
|
|
$
|
37,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Intangibles received from minority shareholder
|
|
$
|
818
|
|
|
$
|
—
|
|
See accompanying notes to condensed consolidated financial statements.
3
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited
condensed consolidated financial statements include the accounts of Integrated Silicon Solution, Inc. (the “Company”) and its consolidated majority owned subsidiaries, after elimination of all significant intercompany accounts and
transactions. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (which are of a normal, recurring nature) considered
necessary for fair presentation have been included.
The Company’s operating results for the three and six months ended March 31,
2009 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2009 or for any other period. The financial statements included herein should be read in conjunction with the Company’s Annual
Report on Form 10-K for the fiscal year ended September 30, 2008.
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 expectations 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.
|
3.
|
Impact of Recently Issued Accounting Standards
|
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 our fiscal year beginning October 1, 2009. The impact of the adoption of SFAS No. 141(R) will depend on the nature and extent of our business
combinations occurring on or after the beginning of fiscal 2010.
In April 2009, the FASB issued Staff Position (“FSP”)
No. 141R-1, “Accounting for Assets and Liabilities Assumed in a Business Combination That Arise From Contingencies”. This Statement amends and clarifies SFAS 141R to address application issues regarding initial recognition and
measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. This Statement is effective for assets or liabilities arising from contingencies in business
combinations for which the acquisition date is on or after the Company’s fiscal year beginning October 1, 2009. The impact of the adoption of this Statement will depend on the nature and extent of our business combinations occurring on or
after the beginning of fiscal 2010.
4
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
In April 2009, the FASB issued three FSPs that are intended to provide additional application
guidance and enhance disclosures about fair value measurements and impairments of securities. FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly”, clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments”, establishes a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other
comprehensive income. FSP 107-1 and Accounting Principles Board (“APB”) 28-1, “Interim Disclosures About Fair Value of Financial Instruments, amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments”, to
require disclosures about the fair value of financial instruments in interim financial statements as well as in annual financial statements and also amends APB Opinion No. 28, “Interim Financial Reporting”, to require those
disclosures in all interim financial statements. The three FSPs are effective for periods ending after June 15, 2009. Early adoption is permitted for periods ending after March 15, 2009. The Company will adopt the FSPs during the third
quarter of its fiscal year 2009. The Company is still evaluating the impact, if any, the FSPs will have on its consolidated results of operations or financial condition.
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 our consolidated financial statements. SFAS No. 160 is effective for our fiscal year beginning October 1, 2009.
|
4.
|
Fair Value Measurements
|
Effective October 1,
2008, the Company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (SFAS No. 159). The standard permits companies to choose
to measure certain financial assets and liabilities at fair value (the “fair value option”). If the fair value option is elected, any upfront costs and fees related to the items must be recognized in earnings and cannot be deferred. The
fair value election is irrevocable and may generally be made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to fair value. At the adoption date, unrealized gains and losses on existing items for
which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. The Company chose not to elect the fair value option for its financial assets and liabilities existing on October 1, 2008, and did not
elect the fair value option for any financial assets and liabilities transacted during the three months or six months ended March 31, 2009, except for a put option related to the Company’s auction rate securities that was recorded in
conjunction with a settlement agreement with an investment firm.
Effective October 1, 2008, the Company also adopted SFAS
No. 157, “Fair Value Measurements” (SFAS No. 157) which establishes a framework for measuring fair value and enhances disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position
(“FSP”) No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13,” which amends SFAS No. 157 to exclude accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS No. 13. In February 2008, the FASB issued FSP
No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which delays the effective date of SFAS No. 157 until the beginning of fiscal 2010 for all non-financial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). In October 2008, the FASB also issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset when the Market for That
Asset Is Not Active,” which clarifies the application of SFAS No. 157 for financial assets in a market that is not active. The adoption of SFAS No. 157 and FSP No. FAS 157-3 for the Company’s financial assets and liabilities did
not have a material impact on its consolidated financial statements. The Company does not expect the adoptions of SFAS No. 157, as it pertains to non-financial assets and non-financial liabilities, to have a material impact on its consolidated
financial statements.
5
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Under SFAS No. 157, fair value is defined as the price one would receive from the sale of an
asset or paid to transfer a liability in a transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. SFAS
No. 157 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are inputs that the market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a company’s judgment concerning
the assumptions that market participants would use in pricing the asset or liability developed based on the best information available at that time. The fair value hierarchy is broken down into the following three levels based on the reliability of
inputs:
|
|
•
|
|
Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on
quoted prices which are readily and regularly available in an active market, valuation of these products can be done without a significant degree of judgment.
|
|
|
•
|
|
Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical
or similar instruments and model-derived valuations in which all significant inputs and significant value drives are observable in active markets.
|
|
|
•
|
|
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. These values are generally determined using
pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
|
As of
March 31, 2009, the Company’s financial assets utilizing Level 1 inputs included short-term and long-term investment securities traded on active securities exchanges. The Company did not have any financial assets utilizing Level 2 inputs.
Financial assets utilizing Level 3 inputs included long-term investments in auction rate securities consisting of securities collateralized by student loans, and a related put option.
At March 31, 2009, the Company’s investment portfolio included $20.0 million par value ($18.1 million fair value) of AAA rated investments in
auction rate securities, for which all of the underlying assets are student loans backed by the federal government under the Federal Family Education Loan Program. The Company continues to earn interest on all of its auction rate securities as of
March 31, 2009. Due to adverse events in the credit markets, the auction rate securities held by the Company have experienced failed auctions since February 2008. As such, quoted prices in active markets are not readily available at this time.
In November 2008, the Company entered into an agreement (the “Agreement”) with UBS AG (UBS), the investment firm that sold the Company auction rate securities. The Agreement covers all of the Company’s auction rate securities as of
March 31, 2009. By entering into the Agreement, the Company (1) received the right (“Put Option”) to sell these auction rate securities back to UBS at par, at its sole discretion, anytime during the period from June 30, 2010
through July 2, 2012, and (2) gave UBS the right to purchase these auction rate securities or sell them on the Company’s behalf at par anytime after the execution of the Agreement through July 2, 2012
.
The Company elected
to measure the Put Option under the fair value option of SFAS No. 159, and recorded pre-tax income of approximately $3.1 million, and recorded a corresponding long-term investment in the December 2008 quarter. At the same time, the Company
transferred these auction rate securities from available-for-sale to trading investment securities. As a result of this transfer, the Company recognized a pre-tax other-than-temporary impairment loss of approximately $3.1 million, reflecting a
reversal of the related temporary valuation allowance that was previously recorded in accumulated other comprehensive loss. During the three months ended March 31, 2009, the Company recognized realized gains on its trading securities of $1.3
million offset by the fair value loss adjustment to the Put Option of $1.3 million. The recording of the Put Option and the recognition of the other-than-temporary impairment loss resulted in no significant net impact to the Company’s
Consolidated Statement of Operations. The Put Option will continue to be measured at fair value utilizing Level 3 inputs until the earlier of its maturity or exercise date.
6
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table represents the Company’s fair value hierarchy for financial assets measured
at fair value on a recurring basis as of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
|
|
(in thousands)
|
|
Money market instruments (1)
|
|
$
|
15,916
|
|
$
|
—
|
|
$
|
15,916
|
|
Auction rate securities (3)
|
|
|
—
|
|
|
18,138
|
|
|
18,138
|
|
Auction rate securities Put Option (3)
|
|
|
—
|
|
|
1,812
|
|
|
1,812
|
|
Certificates of deposit (1)(2)
|
|
|
3,924
|
|
|
—
|
|
|
3,924
|
|
Mutual funds (2)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ralink common stock (2)
|
|
|
1,880
|
|
|
—
|
|
|
1,880
|
|
Semiconductor Manufacturing International Corp
|
|
|
|
|
|
|
|
|
|
|
(SMIC) common stock (3)
|
|
|
1,138
|
|
|
—
|
|
|
1,138
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,858
|
|
$
|
19,950
|
|
$
|
42,808
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in cash and cash equivalents
|
|
(2)
|
Included in short-term investments
|
|
(3)
|
Included in long-term investments
|
The following table
presents the valuation of the Company’s financial assets that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in SFAS No. 157 for the three and six months ended March 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
|
|
Three Months Ended
March 31, 2009
|
|
Six Months Ended
March 31, 2009
|
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
19,950
|
|
$
|
—
|
|
|
Transfers into Level 3
|
|
|
—
|
|
|
18,403
|
|
|
Reversal of unrealized loss associated with transfer of securities to trading
|
|
|
—
|
|
|
1,547
|
|
|
Unrealized gain (loss) included in net loss
|
|
|
—
|
|
|
(3,093
|
)
|
|
Acquisition of purchased Put Option
|
|
|
—
|
|
|
3,093
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
19,950
|
|
$
|
19,950
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Stock-based Compensation
|
Stock-Based Benefit Plans
The Company grants stock-based compensation awards under its 2007 Incentive Compensation Plan (the “2007 Plan”), which permits
the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares and performance units. The Company has outstanding grants under prior plans, though no further grants can be made under these
prior plans. At March 31, 2009, 1,488,000 shares were available for future grant under the 2007 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.
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. Restricted stock units (RSUs) generally vest annually over a
three-year period based upon continued employment with the Company.
7
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
In addition, the Company has an Employee Stock Purchase Plan (ESPP) that is available to employees.
The ESPP permits eligible employees to purchase the Company’s common stock through payroll deductions at 85% of the fair market value of the common stock at the end of each six-month offering period. The offering periods under the ESPP commence
on approximately February 1 and August 1 of each year. At March 31, 2009, 1,381,000 shares were available for future issuance under the ESPP.
Stock Option Exchange Program
The Company’s stockholders approved a stock option exchange program at its annual
meeting held on February 6, 2009. On March 2, 2009, the Company commenced the stock option exchange program whereby eligible employees (which excludes executive officers and directors) were given the opportunity to exchange some or all of
their outstanding options with exercise prices of $6.00 per share or higher for a lesser number of new options with an exercise price per share equal to the fair market value on the exchange date. Pursuant to the stock option exchange program, which
expired on April 1, 2009, a total of 208 eligible employees elected to exchange some or all of their eligible options. The Company accepted for cancellation eligible options to purchase 2,138,314 shares of the Company’s common stock, which
were cancelled as of April 2, 2009. The Company issued new options to purchase up to 355,822 shares of the Company’s common stock under the Company’s 2007 Plan in exchange for the options surrendered. The new options have an exercise
price of $1.65 per share, the closing price of the Company’s common stock on April 2, 2009.
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in accordance with the provisions of Statement of Financial Accounting Standard
No. 123(R), “Share-Based Payment” (SFAS 123R).
The following table outlines the effects of total stock-based compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
56
|
|
$
|
48
|
|
$
|
112
|
|
$
|
96
|
|
Research and development
|
|
|
397
|
|
|
341
|
|
|
782
|
|
|
634
|
|
Selling, general and administrative
|
|
|
473
|
|
|
454
|
|
|
948
|
|
|
877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
926
|
|
$
|
843
|
|
$
|
1,842
|
|
$
|
1,607
|
|
Tax effect on stock-based compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect on net income (loss)
|
|
$
|
926
|
|
$
|
843
|
|
$
|
1,842
|
|
$
|
1,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009, there was approximately $4.4 million of total unrecognized stock-based
compensation expense under the Company’s stock option plans that will be recognized over a weighted-average period of approximately 2.73 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 also records compensation expense for its ESPP for the difference between the purchase price and the fair market value on the date of purchase.
8
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The Company uses the Black-Scholes option pricing model to estimate the fair value of the options
granted. The weighted average estimated fair values of stock option grants, as well as the weighted average assumptions used in calculating these values during the three and six months ended March 31, 2009 and 2008, were based on estimates at
the date of grant as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Six Months Ended
March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Weighted-average fair value of grants
|
|
$
|
0.65
|
|
|
$
|
2.36
|
|
|
$
|
0.73
|
|
|
$
|
2.59
|
|
|
Expected term in years
|
|
|
4.54
|
|
|
|
4.54
|
|
|
|
4.54
|
|
|
|
4.54
|
|
|
Estimated volatility
|
|
|
43
|
%
|
|
|
47
|
%
|
|
|
41
|
%
|
|
|
47
|
%
|
|
Risk-free interest rate
|
|
|
1.87
|
%
|
|
|
2.76
|
%
|
|
|
2.29
|
%
|
|
|
3.18
|
%
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Estimated volatility was 43% in the three months ended March 31, 2009 and ranged from 45% to
47% in the three months ended March 31, 2008. Estimated volatility ranged from 40% to 43% and from 45% to 49% in the six months ended March 31, 2009 and March 31, 2008, respectively.
A summary of the Company’s stock option activity and related information for the six months ended March 31, 2009 follows (stock option amounts
and aggregate intrinsic value are presented in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at September 30, 2008
|
|
5,755
|
|
|
$
|
7.07
|
|
|
|
|
|
|
Granted
|
|
1,057
|
|
|
$
|
1.96
|
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
Cancelled/forfeited
|
|
(382
|
)
|
|
$
|
4.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009
|
|
6,430
|
|
|
$
|
6.37
|
|
4.83
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest after March 31, 2009
|
|
6,219
|
|
|
$
|
6.48
|
|
4.78
|
|
$
|
—
|
|
Exercisable at September 30, 2008
|
|
4,104
|
|
|
$
|
7.49
|
|
4.59
|
|
$
|
—
|
|
Exercisable at March 31, 2009
|
|
4,299
|
|
|
$
|
7.53
|
|
4.26
|
|
$
|
—
|
A summary of the Company’s RSU activity and related information for the six months ended
March 31, 2009 under the 2007 Plan follows (RSU amounts and aggregate intrinsic value are presented in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at September 30, 2008
|
|
112
|
|
|
$
|
5.60
|
|
|
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
|
|
|
Vested
|
|
(36
|
)
|
|
$
|
—
|
|
$
|
61
|
|
Forfeited
|
|
(7
|
)
|
|
$
|
5.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009
|
|
69
|
|
|
$
|
5.60
|
|
$
|
103
|
|
|
|
|
|
|
|
|
|
|
|
9
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
During the three and six months ended March 31, 2009, employees purchased 270,000 shares for
$0.4 million under the Company’s ESPP. During the three and six months ended March 31, 2008, employees purchased 67,000 shares for $0.3 million under the Company’s ESPP.
In the three and six months ended
March 31, 2009, revenue recognized for one distributor, accounted for 13% of net sales. In the three and six months ended March 31, 2008, no single customer accounted for over 10% of net sales.
The following is a summary of
inventories by major category:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2009
|
|
September 30,
2008
|
|
|
|
(In thousands)
|
|
Purchased components
|
|
$
|
10,896
|
|
$
|
11,856
|
|
Work-in-process
|
|
|
657
|
|
|
3,894
|
|
Finished goods
|
|
|
16,109
|
|
|
23,472
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,662
|
|
$
|
39,222
|
|
|
|
|
|
|
|
|
During the three months and six months ended March 31, 2009, the Company recorded inventory
write-downs of $3.2 million and $7.4 million, respectively. During the three and six months ended March 31, 2008, the Company recorded inventory write-downs of $3.8 million and $6.3 million, respectively. The inventory write-downs were
predominately for lower of cost or market and excess and obsolescence issues on certain of the Company’s products.
|
8.
|
Comprehensive Income (Loss)
|
Comprehensive income
(loss) includes the Company’s net income (loss) as well as other comprehensive income (loss). The Company’s other comprehensive income (loss) consists of changes in cumulative translation adjustment, changes in unrealized gains and losses
on investments and changes in retirement plan transition obligations.
Comprehensive income (loss), net of taxes, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Six Months Ended
March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,826
|
)
|
|
$
|
1,983
|
|
|
$
|
(7,896
|
)
|
|
$
|
4,950
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative translation adjustment
|
|
|
(1,714
|
)
|
|
|
3,515
|
|
|
|
(2,953
|
)
|
|
|
3,666
|
|
|
Change in unrealized gains (losses) on investments
|
|
|
204
|
|
|
|
(1,930
|
)
|
|
|
1,439
|
|
|
|
(2,404
|
)
|
|
Change in retirement plan transition obligation
|
|
|
(43
|
)
|
|
|
(23
|
)
|
|
|
(81
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(5,379
|
)
|
|
$
|
3,545
|
|
|
$
|
(9,491
|
)
|
|
$
|
6,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The components of accumulated other comprehensive income (loss), net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2009
|
|
|
September 30,
2008
|
|
|
|
|
(In thousands)
|
|
|
Accumulated foreign currency translation adjustments
|
|
$
|
(4,389
|
)
|
|
$
|
(1,436
|
)
|
|
Accumulated net unrealized gain on Ralink
|
|
|
1,447
|
|
|
|
1,787
|
|
|
Accumulated net unrealized loss on SMIC
|
|
|
(2,288
|
)
|
|
|
(2,525
|
)
|
|
Accumulated net unrealized loss on other investments
|
|
|
—
|
|
|
|
(1,542
|
)
|
|
Accumulated net retirement plan transition obligation
|
|
|
880
|
|
|
|
961
|
|
|
Accumulated net retirement plan actuarial losses
|
|
|
(139
|
)
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss
|
|
$
|
(4,489
|
)
|
|
$
|
(2,894
|
)
|
|
|
|
|
|
|
|
|
|
|
The Company accounts for uncertain
tax positions under FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes–an interpretation of FASB Statement No. 109” (FIN 48). Under FIN 48, the Company must recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from
such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The total amount of unrecognized tax positions that would impact the effective rate is
approximately $140,000 at March 31, 2009. In the three months and six months ended March 31, 2009, there was no change to the amount of the unrecognized tax benefits.
The Company recorded an income tax benefit of $42,000 and $102,000 for the three months and six months ended March 31, 2009, respectively. The
income tax benefit recorded for the three and six month periods ended March 31, 2009 is primarily a result of the Housing and Economic Recovery Act of 2008 and the American Recovery and Reinvestment Act of 2009. Under these Acts,
corporations otherwise eligible to claim first year bonus depreciation for assets placed in service between April 1, 2008 and December 31, 2009 may elect to claim a refund of their previously generated tax credits in lieu of claiming the
bonus depreciation. The benefit recorded represents this refund claim partially offset by state minimum taxes. The income tax provision for the three months and six months ended March 31, 2008 consists primarily of federal and state
minimum taxes of $40,000 and $100,000, respectively.
The following table sets forth the
computation of basic and diluted net income per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
2009
|
|
|
2008
|
|
Numerator for basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,826
|
)
|
|
$
|
1,983
|
|
$
|
(7,896
|
)
|
|
$
|
4,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
25,508
|
|
|
|
28,160
|
|
|
25,556
|
|
|
|
32,374
|
|
Dilutive stock options and awards
|
|
|
—
|
|
|
|
276
|
|
|
—
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share
|
|
|
25,508
|
|
|
|
28,436
|
|
|
25,556
|
|
|
|
32,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.15
|
)
|
|
$
|
0.07
|
|
$
|
(0.31
|
)
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(0.15
|
)
|
|
$
|
0.07
|
|
$
|
(0.31
|
)
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
For the three months and six months ended March 31, 2009, 6,621,000 and 6,531,000 stock
options were excluded from diluted earnings per share by the application of the treasury stock method.
For the three months and six months ended March 31, 2008, 4,851,000 and 4,702,000 stock options were excluded from diluted earnings
per share by the application of the treasury stock method.
|
11.
|
Common Stock Repurchase Program
|
The Company paid
approximately $0.2 million and $70.0 million in connection with the repurchase of 124,946 shares and 10 million shares of its common stock during the three months ended March 31, 2009 and March 31, 2008, respectively. The Company paid
approximately $3.2 million and $70.9 million in connection with the repurchase of 1,489,482 shares and 10,129,100 shares of its common stock during the six months ended March 31, 2009 and March 31, 2008, respectively. The Company has
repurchased and retired an aggregate of 12,873,912 shares of common stock at a cost of approximately $81.7 million since September 2007. As of March 31, 2009, $6.6 million remained available under the existing share repurchase
authorization.
The Company issues RSUs as part of its equity incentive plans. For a minority of RSUs granted, the number of shares issued
on the date the RSUs vest is net of the statutory withholding requirements that the Company pays on behalf of its employees. During the six months ended March 31, 2009, the Company withheld 1,680 shares to satisfy approximately $3,000 of
employees’ tax obligations. Although the shares withheld are not issued, they are treated as common stock repurchases for accounting purposes, as they reduce the number of shares that would have been issued upon vesting.
|
12.
|
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 Company’s business and operating results. Furthermore, there can be no assurance that the Company will not become involved in protracted
litigation regarding its alleged infringement of third party intellectual property rights or litigation to assert and protect its patents or other intellectual property rights. Any litigation relating to patent infringement or other intellectual
property matters could result in substantial cost and diversion of the Company’s resources that could materially and adversely affect the Company’s business and operating results.
Legal Proceedings
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 the Company 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 the Company 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 its 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, attorney’s fees, and other unspecified relief. 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
12
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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 the Company 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 the Company for insider trading in violation of California Corporations Code Sections 25402 and 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 Company’s 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, attorney’s fees, and other unspecified relief.
On March 19, 2008, the Company and the
individual defendants agreed with the plaintiffs-shareholders to settle both the federal and state shareholder derivative actions. On March 31, 2009, the United States District Court for the Northern District of California granted preliminary
approval of the settlement, which is subject to the court’s final approval hearing scheduled for June 5, 2009. The Company and its insurers have agreed to pay up to $2.1 million to plaintiffs’ counsel for their attorneys’
fees and the reimbursement of their expenses and costs, subject to approval of the federal court.
SRAM Antitrust Litigation
Thirty-three 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-trial 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 all lawsuits brought by the U.S. Indirect-Purchaser Plaintiffs 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. On January 9, 2008, the Company was
voluntarily dismissed without prejudice from one of the lawsuits brought by the U.S. Direct-Purchaser Plaintiffs. The Company remains a defendant in three lawsuits brought by the U.S. Direct-Purchaser Plaintiffs.
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 Company’s 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
was 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 Company’s business. As of January 14, 2008 and effective as of May 7, 2007, the Company’s obligation to respond to the CID was suspended pursuant to the terms of a Tolling Agreement between the
Company and the Attorney General of Florida. On January 21, 2009, the Attorney General of Florida allowed the tolling agreement to expire and stated that it is not requesting a new tolling agreement. The Attorney General of Florida also
notified the Company that it decided to suspend enforcement of its CID to the Company. 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 the effect, if any, on its business.
13
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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 other 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 its 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.
Commitments to Wafer Fabrication Facilities and Contract Manufacturers
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 at the foundry, as a matter of practice, it becomes increasingly
difficult to cancel the purchase order. As of March 31, 2009, the Company had approximately $6.0 million of purchase orders for which the related wafers had been entered into wafer work-in-process (i.e., manufacturing had begun).
|
13.
|
Geographic and Segment Information
|
The Company has
one operating segment, which is to design, develop, and market high-performance SRAM, DRAM, and other memory and non-memory semiconductor products. The following table summarizes the Company’s operations in different geographic areas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
(In thousands)
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
4,434
|
|
$
|
9,824
|
|
$
|
12,330
|
|
$
|
18,806
|
|
China
|
|
|
1,757
|
|
|
2,839
|
|
|
3,175
|
|
|
3,883
|
|
Hong Kong
|
|
|
9,360
|
|
|
13,243
|
|
|
19,793
|
|
|
33,771
|
|
Japan
|
|
|
1,102
|
|
|
2,889
|
|
|
3,512
|
|
|
6,643
|
|
Taiwan
|
|
|
5,217
|
|
|
10,097
|
|
|
9,637
|
|
|
22,334
|
|
Other Asia Pacific countries
|
|
|
3,338
|
|
|
8,181
|
|
|
7,846
|
|
|
14,620
|
|
Europe
|
|
|
5,808
|
|
|
10,473
|
|
|
12,010
|
|
|
20,632
|
|
Other
|
|
|
237
|
|
|
500
|
|
|
615
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
31,253
|
|
$
|
58,046
|
|
$
|
68,918
|
|
$
|
121,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2009
|
|
September 30,
2008
|
|
|
|
(In thousands)
|
|
Long-lived assets
|
|
|
|
|
|
|
|
United States
|
|
$
|
3,412
|
|
$
|
3,569
|
|
Hong Kong
|
|
|
38
|
|
|
53
|
|
China
|
|
|
938
|
|
|
1,029
|
|
Taiwan
|
|
|
19,423
|
|
|
19,904
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,811
|
|
$
|
24,555
|
|
|
|
|
|
|
|
|
14
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
On April 27, 2009, the
Company announced its acquisition of Enable Semiconductor Corporation (Enable), a private Taiwan and Korea based company, formerly a subsidiary of Nanoamp Solutions, Inc. The Enable acquisition provides the Company with both ultra low power Single
Data Rate (SDR) and Double Data Rate (DDR) SDRAMs, and ultra low power Pseudo SRAMs in Known Good Die (KGD) and package format targeted at the portable consumer products market. The total purchase price was $3.5 million with the potential for
additional contingent payments based on future operating results.
15
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this report that are subject to risks and uncertainties. Forward-looking statements include information
concerning possible or assumed future results of our operations. Also, when we use words such as “believes,” “expects,” “anticipates” or similar expressions, we are making forward-looking statements. You should note
that an investment in our securities involves certain risks and uncertainties that could affect our future financial results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth in “Risk Factors” and elsewhere in this report.
We believe it is important to
communicate our expectations to our investors. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risks described in “Risk Factors” included in this report, as well
as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Risk Factors and other
cautionary statements set forth in this report. Except as required by federal securities laws, we do not undertake any obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
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 and telecommunications, (iii) mobile communications, (iv) automotive electronics and
(v) industrial applications. Our primary products are high speed and low power SRAM and low and medium density DRAM in both package and Known Good Die (KGD) form. In the six months ended March 31, 2009 and in fiscal 2008, approximately 87%
and 88%, respectively, of our revenue was derived from our SRAM and DRAM products. We also design and market application specific standard products (
ASSP
) primarily EEPROMs and SmartCards 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 control our operating expenses, in recent years we limited our headcount in the U.S. and transferred various functions to Taiwan and China. 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 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 the first six months of fiscal 2009 and in fiscal 2008. We expect average selling prices for
our products to decline in the future, principally due to weak market demand, market competition and the 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.
16
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., 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%, 85%, 84% and 82% in the first six months of fiscal 2009, the first six months of fiscal 2008, and in
fiscal 2008 and fiscal 2007, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
March 31,
|
|
|
Fiscal Years Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
Asia
|
|
64
|
%
|
|
67
|
%
|
|
66
|
%
|
|
67
|
%
|
|
Europe
|
|
17
|
|
|
17
|
|
|
17
|
|
|
15
|
|
|
U.S.
|
|
18
|
|
|
15
|
|
|
16
|
|
|
18
|
|
|
Other
|
|
1
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
100
|
%
|
|
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, due to the complex nature of the
markets we serve and the recent adverse economic conditions in the U.S. and other countries, it is 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 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.
Due to the tightening of the
credit markets starting in late 2008 and continuing concerns regarding the availability of credit, our current or potential customers have delayed or reduced purchases of our products, which is adversely affecting our revenues and harming our
business and financial results. In addition, the recent uncertainty in the financial markets has had and is expected to continue to have an adverse effect on the U.S. and world economies, which is negatively impacting the
spending patterns of businesses including our current and potential customers. There can be no assurances that the government responses to the disruptions in the financial markets will restore confidence in the U.S. and global
markets. The global industrial economy is currently in a recession. Many economists and other experts are predicting that this recession will likely continue through the remainder of 2009 and possibly longer. We are unable to predict how deep
or how long the recession will last. We expect our business to be adversely impacted by
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any significant or prolonged downturn in the U.S. or global economies. In the past, industry downturns have resulted in reduced demand and
declining average selling prices for our products which adversely affected our business. We are experiencing and expect to continue to experience these adverse business conditions. The uncertainty regarding the U.S. and global economies
has also made it more difficult for us to forecast and manage our business. Although we are continuing actions in the June quarter relating to controlling our expenses and inventory levels, there can be no assurance that these actions will
be sufficient to address the impact of any economic slowdown and allow us to meet our operating objectives.
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 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 related intangibles and goodwill, which
impacts operating expense when we record impairments and (v) 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 in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2008.
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
and allowances. 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
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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 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 the 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 this regard, in fiscal 2008, we recorded charges for impairment of goodwill in the amount of
$25.3 million.
Accounting for stock-based compensation.
We account for stock-based compensation arrangements in accordance
with the provisions of Statement of Financial Accounting Standard No. 123(R), “Share-Based Payment” (SFAS 123R). Under SFAS 123R, stock option cost 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. We utilized the simplified calculation of expected life under the provisions of the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin 107 through December 2007. For option grants
subsequent to December 2007, the expected term is based upon historical exercise data. 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.
Impact of Recently Issued Accounting Standards
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 our fiscal year beginning October 1, 2009.
The impact of the adoption of SFAS No. 141(R) will depend on the nature and extent of our business combinations occurring on or after the beginning of fiscal 2010.
In April 2009, the FASB issued Staff Position (“FSP”) No. 141R-1, “Accounting for Assets and Liabilities Assumed in a Business Combination That Arise From Contingencies”. This Statement amends
and clarifies SFAS 141R to address application issues regarding initial recognition and measurement, subsequent measurement and accounting and disclosure of
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assets and liabilities arising from contingencies in a business combination. This Statement is effective for assets or liabilities arising from contingencies
in business combinations for which the acquisition date is on or after our fiscal year beginning October 1, 2009. The impact of the adoption of this Statement will depend on the nature and extent of our business combinations occurring on or
after the beginning of fiscal 2010.
In April 2009, the FASB issued three FSPs that are intended to provide additional application guidance
and enhance disclosures about fair value measurements and impairments of securities. FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly”, clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments”, establishes a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other
comprehensive income. FSP 107-1 and Accounting Principles Board (“APB”) 28-1, “Interim Disclosures About Fair Value of Financial Instruments, amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments”, to
require disclosures about the fair value of financial instruments in interim financial statements as well as in annual financial statements and also amends APB Opinion No. 28, “Interim Financial Reporting”, to require those
disclosures in all interim financial statements. The three FSPs are effective for periods ending after June 15, 2009. Early adoption is permitted for periods ending after March 15, 2009. We will adopt the FSPs during the third quarter of
our fiscal year 2009. We are still evaluating the impact, if any, the FSPs will have on our consolidated results of operations or financial condition.
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 our consolidated financial statements. SFAS No. 160 is effective for our fiscal year beginning October 1, 2009.
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Net Sales
. Net sales consist principally of total product sales less estimated sales returns. Net sales decreased by 46% to $31.3 million in the
three months ended March 31, 2009 from $58.0 million in the three months ended March 31, 2008. The decrease in net sales of $26.7 million in the three months ended March 31, 2009 compared to the three months ended March 31, 2008
was principally due to a significant decrease in DRAM revenue which was primarily the result of a decrease in unit shipments of our DRAM products and to a lesser extent a decline in average selling prices of such products. In addition, unit
shipments of both our SRAM products and our application specific standard products (ASSP) which include our EEPROM, Smart Card and logic products decreased in the three months ended March 31, 2009 compared to the three months ended
March 31, 2008 which contributed to the decline in our sales. 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 the three months
ended March 31, 2009, revenue recognized for one distributor accounted for 13% of our net sales. In the three months ended March 31, 2008, no single customer accounted for 10% or more 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 decreased by $6.8 million to $6.5 million in the three months ended March 31, 2009 from $13.3 million in the three months ended March 31, 2008. Our
gross margin decreased to 20.7% in the three months ended March 31, 2009 from 22.9% in the three months ended March 31, 2008. Our gross profit for the three months ended March 31, 2009 included inventory write-downs of $3.2 million
compared to $3.8 million of inventory write-downs in the three months ended March 31, 2008. The inventory write-downs were for lower of cost or market accounting and excess and obsolescence issues on certain of our products. Excluding the
impact of our inventory write-downs, our gross margin increased in the three months ended March 31, 2009 compared to the three months ended March 31, 2008 primarily as a result of a shift in our product mix to higher margin SRAM products
from low margin commodity DRAM products. Our DRAM gross margin increased in the three months ended March 31, 2009 from the prior year period due to a shift in our DRAM product mix. Declines in the average selling prices of our SRAM products
outweighed declines in the cost of our SRAM products in three months ended March 31, 2009 compared to the three
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months ended March 31, 2008 which contributed to a decrease in our SRAM gross margin. The decrease in our gross profit in the three months ended
March 31, 2009 compared to March 31, 2008 was primarily a result of a decrease in unit shipments across all our products but more significantly for our DRAM products. Our gross profit for the three months ended March 31, 2009 and
March 31, 2008 benefited from the sale of $0.5 million and $1.3 million, respectively, of previously written down products. Our gross profit for the three months ended March 31, 2008 benefited from approximately $0.2 million for a DRAM
development project. 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. 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 15% to $4.2 million in the three months ended
March 31, 2009 compared to $4.9 million in the three months ended March 31, 2008. As a percentage of net sales, research and development expenses increased to 13.4% in the three months ended March 31, 2009 from 8.5% in the three
months ended March 31, 2008. The decrease in research and development expenses of $0.7 million can be attributed to a decrease in expenditures for masks and other product development costs in the three months ended March 31, 2009 compared
to the three months ended March 31, 2008. We expect the dollar amount of our research and development expenses to increase in the June 2009 quarter due to costs associated with the development of new products and expect such expenses to
fluctuate as a percentage of net sales depending on our overall level of sales
.
Selling, General and Administrative
.
Selling, general and administrative expenses decreased by 14% to $6.4 million in the three months ended March 31, 2009 from $7.5 million in the three months ended March 31, 2008. As a percentage of net sales, selling, general and
administrative expenses increased to 20.5% in the three months ended March 31, 2009 from 12.9% in the three months ended March 31, 2008. The decrease in selling, general and administrative expenses of $1.1 million can be attributed to a
reduction in sales commissions in the March 2009 quarter as a result of our lower revenue and decreases in other expenses as a result of our cost reduction measures. As a result of our cost reduction measures, we expect the dollar amount of our
selling, general and administrative expenses to decline in the June 2009 quarter and expect such expenses to fluctuate as a percentage of net sales depending on our overall level of sales.
Interest and other income, net.
Interest and other income, net was $0.3 million in the three months ended March 31, 2009 compared to $1.1
million in the three months ended March 31, 2008. The $0.3 million of interest and other income in the three months ended March 31, 2009 is comprised of net interest income of $0.1 million and $0.3 million in rental income from the lease
of excess space in our Taiwan facility offset in part by other items. The $1.1 million of interest and other income in the three months ended March 31, 2008 was comprised of interest income of $0.7 million and $0.4 million in rental income from
the lease of excess space in our Taiwan facility offset in part by other items. The decrease in interest income is primarily attributable to lower cash balances and a decrease in the interest rates in the three months ended March 31, 2009
compared to the three months ended March 31, 2008.
Provision (benefit) for income taxes.
We recorded an income tax benefit of
$42,000 for the three months ended March 31, 2009 which is primarily a result of the American Recovery and Reinvestment Act of 2009. Under this Act, corporations otherwise eligible to claim first year bonus depreciation for assets placed
in service during 2009 may elect to claim a refund of their previously generated tax credits in lieu of claiming the bonus depreciation. The benefit recorded for the period represents this refund claim offset by state minimum taxes. The income
tax provision for the three months ended March 31, 2008 consists primarily of federal and state minimum taxes of $40,000.
Minority interest in net (income) loss of consolidated subsidiaries.
The minority interest in net (income) loss of consolidated subsidiaries was income of $23,000 in the three months ended March 31,
2009 compared to a loss of $20,000 in the three months ended March 31, 2008.
Six Months Ended March 31, 2009 Compared to
Six Months Ended March 31, 2008
Net Sales
. Net sales decreased by 43% to $68.9 million in the six months ended
March 31, 2009 from $121.4 million in the six months ended March 31, 2008. The decrease in net sales of $52.5 million in the six months ended March 31, 2009 compared to the six months ended March 31, 2008 was principally due to a
significant decrease in DRAM revenue which was
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primarily the result of a decrease in unit shipments of our DRAM products and to a lesser extent a decline in average selling prices of such products. In
addition, unit shipments of both our SRAM products and our ASSP products decreased in the six months ended March 31, 2009 compared to the six months ended March 31, 2008 which contributed to the decline in our sales.
In the six months ended March 31, 2009, revenue recognized for one distributor accounted for 13% of our net sales. In the six months ended
March 31, 2008, no single customer accounted for 10% or more of our net sales.
Gross profit
. Gross profit decreased by $12.3
million to $14.2 million in the six months ended March 31, 2009 from $26.5 million in the six months ended March 31, 2008. Our gross margin decreased to 20.6% in the six months ended March 31, 2009 from 21.8% in the six months ended
March 31, 2008. Our gross profit for the six months ended March 31, 2009 included inventory write-downs of $7.4 million while our gross margin for the six months ended March 31, 2008 included inventory write-downs of $6.3 million. The
inventory write-downs were for excess and obsolescence issues and lower of cost or market accounting on certain of our products. Excluding the impact of our inventory write-downs, our gross margin increased in the six months ended March 31,
2009 compared to the six months ended March 31, 2008 primarily as a result of a shift in our product mix to higher margin SRAM products from low margin commodity DRAM products. The decrease in our gross profit in the six months ended
March 31, 2009 compared to March 31, 2008 was primarily a result of a decrease in unit shipments across all our products but more significantly for our DRAM products. Our gross profit for the six months ended March 31, 2009 and
March 31, 2008 benefited from the sale of $0.8 million and $1.9 million, respectively, of previously written down products. In addition, our gross profit for the six months ended March 31, 2008 benefited from approximately $0.6 million of
revenue for a DRAM development project.
Research and development
. Research and development expenses decreased by 3% to $9.4 million
in the six months ended March 31, 2009 from $9.7 million in the six months ended March 31, 2008. As a percentage of net sales, research and development expenses increased to 13.6% in the six months ended March 31, 2009 from 8.0% in
the six months ended March 31, 2008. The decrease in research and development expenses of $0.3 million can be attributed to a decrease in expenditures for masks and other product development costs in the six months ended March 31, 2009
compared to the six months ended March 31, 2008.
Selling, general and administrative
. Selling, general and administrative
expenses decreased by 9% to $13.7 million in the six months ended March 31, 2009 from $15.1 million in the six months ended March 31, 2008. As a percentage of net sales, selling, general and administrative expenses increased to 19.9% in
the six months ended March 31, 2009 from 12.5% in the six months ended March 31, 2008. The decrease in selling, general and administrative expenses of $1.4 million was attributable to $0.5 million of expenses incurred in the six months
ended March 31, 2008 related to our $70 million stock repurchase, a reduction in sales commission in the six months ended March 31, 2009 as a result of our lower revenue and decreases in other expenses as a result of our cost reduction
measures.
Interest and other income, net.
Interest and other income, net was $0.9 million in the six months ended March 31,
2009 compared to $3.2 million in the six months ended March 31, 2008. The $0.9 million of interest and other income in the six months ended March 31, 2009 was comprised of net interest income of $0.4 million and $0.7 million in rental
income from the lease of excess space in our Taiwan facility offset in part by other items. The $3.2 million of interest and other income in the six months ended March 31, 2008 was comprised of interest income of $2.4 million and $0.9 million
in rental income from the lease of excess space in our Taiwan facility offset in part by other items.
Gain on sale of investments.
In the six months ended March 31, 2009, there were no sales of investments. In the six months ended March 31, 2008, we sold 22.0 million shares of Semiconductor Manufacturing International Corp. (SMIC) for approximately $2.7
million which resulted in a pre-tax gain of approximately $0.2 million.
Provision (benefit) for income taxes.
We recorded an income
tax benefit of $0.1 million for the six months ended March 31, 2009 which is primarily a result of the Housing and Economic Recovery Act of 2008 and the American Recovery and Reinvestment Act of 2009. Under these Acts, corporations
otherwise eligible to claim first year bonus depreciation for assets placed in service between April 1, 2008 and December 31, 2009 may elect to claim a refund of their previously generated tax credits in lieu of claiming the bonus
depreciation. The benefit recorded for the period represents this refund claim partially offset by state minimum taxes. The income tax provision for the six months ended March 31, 2008 consists primarily of federal and state minimum taxes
of $0.1 million.
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Minority interest in net income (loss) of consolidated subsidiaries.
The minority interest in net
income (loss) of consolidated subsidiaries was a loss of $41,000 in the six months ended March 31, 2009 compared to a loss of $19,000 in the six months ended March 31, 2008.
Liquidity and Capital Resources
As of March 31,
2009, our principal sources of liquidity included cash, cash equivalents and short-term investments of approximately $44.0 million. During the six months ended March 31, 2009, operating activities used cash of approximately $0.9 million
compared to $1.1 million of cash provided in the six months ended March 31, 2008. The cash used by operations in the six months ended March 31, 2009 was primarily due to decreases in accounts payable of $21.6 million, decreases in accrued
liabilities of $2.9 million and our net loss of $7.9 million adjusted for non-cash items of $4.2 million. This was offset by decreases in accounts receivable of $15.4 million, decreases in inventories of $10.1 million and decreases in other assets
of $1.8 million. The cash provided by operations in the six months ended March 31, 2008 was primarily due to our net income of $5.0 million adjusted for non-cash items of $4.0 million, increases in accounts payable of $3.6 million, and
decreases in other assets of $2.2 million. This was partially offset by increases in inventories of $11.7 million and increases in accounts receivable of $1.4 million.
In the six months ended March 31, 2009, we generated $0.2 million from investing activities compared to $52.8 million generated in the six months ended March 31, 2008. In the six months ended March 31,
2009, we generated $1.7 million from the net sales of available-for-sale securities. We also received proceeds of approximately $0.8 million from the minority investee in our consolidated subsidiary Wintram Inc. In the six months ended
March 31, 2008, we generated $52.0 million from the net sales of available-for-sale securities. We also generated approximately $2.7 million from the sale of shares of SMIC, resulting in a pre-tax gain of approximately $0.2 million.
In the six months ended March 31, 2009, we made capital expenditures of approximately $2.3 million compared to $1.9 million in the six months
ended March 31, 2008. The expenditures in the six months ended March 31, 2009 were primarily for engineering tools and computer software. 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 additional test equipment, design and engineering tools, and computer software and hardware. We expect to fund our capital expenditures from our existing cash and cash equivalent balances.
We used $2.8 million for financing activities during the six months ended March 31, 2009 compared to $70.9 million used during the
six months ended March 31, 2008. In the six months ended March 31, 2009, we used $3.2 million for the repurchase and retirement of our common stock and $11.9 million for the repayment of short-term borrowings. Our sources of financing for
the six months ended March 31, 2009 were borrowings of $11.9 million under lines of credit in Taiwan and proceeds from the issuance of common stock of $0.4 million from sales under our employee stock purchase plan. In the six months ended
March 31, 2008, we used $70.9 million for the repurchase and retirement of our common stock and $8.3 million for the repayment of short-term borrowings. Our sources of financing for the six months ended March 31, 2008 were borrowings of
$7.7 million under lines of credit in Taiwan and proceeds from the issuance of common stock of $0.6 million from stock option exercises and sales under our employee stock purchase plan.
At March 31, 2009, our investment portfolio included $20.0 million par value ($18.1 million fair value) of AAA rated investments in auction rate
securities (ARS), for which all of the underlying assets are student loans, which are backed by the federal government under the Federal Family Education Loan Program. Liquidity for these securities is typically provided by an auction process that
resets the applicable interest rate at pre-determined intervals, usually every 7 to 35 days. Continued liquidity issues in the global credit markets has caused auctions for all of our auction rate securities to fail because the amount of securities
offered for sale exceeded the amount of bids. As a result, the liquidity of our auction rate securities has greatly diminished. We expect this decreased liquidity will continue for as long as the present depressed global credit market environment
persists, or until issuers refinance and replace these securities with other instruments. Despite the current auction market, we believe the credit quality of our auction rate securities remains high due to the creditworthiness of the issuers. We
continue to collect interest when due and at this time we expect to continue to do so going forward.
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In November 2008, we entered into an agreement (the “Agreement”) with UBS AG (UBS) the
investment firm that sold us our auction rate securities. The Agreement covers all of our auction rate securities as of March 31, 2009. By entering into the Agreement, we (1) received the right to sell these auction rate securities back to
UBS at par, at our sole discretion, anytime during the period from June 30, 2010 through July 2, 2012, and (2) gave UBS the right to purchase these auction rate securities or sell them on our behalf at par anytime after the execution
of the Agreement through July 2, 2012
.
However, if the rights are not exercised before July 2, 2012 they will expire and UBS will have no further rights or obligation to buy our auction rate securities. So long as we hold our
auction rate securities, they will continue to accrue interest as determined by the auction process or the term of the auction rate securities if the auction process fails. In addition, UBS Bank USA has established a no net cost credit line for us
in an amount up to $13.4 million collateralized by our auction rate securities. As of March 31, 2009, we had no borrowings under this line of credit.
We have $6.8 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 January 2010. As of March 31,
2009, we had no outstanding borrowings under these short-term lines of credit.
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 2011. 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 $3.9 million at March 31, 2009.
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.
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, we may
need 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 March 31,
2009, we did not have any off-balance sheet arrangements as defined in Item 303 (a)(4)(ii) of SEC
Regulation S-K.
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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Our financial market risk includes foreign currency transactions, exposure to changes in interest rates on our investments and our investments in marketable equity securities.
We anticipate that international sales will continue to account for a significant portion of our consolidated revenue. Our international sales are
largely denominated in U.S. dollars and therefore are not subject to material foreign currency exchange risk. However, we have operations in China, Europe, Taiwan, Hong Kong, India, Japan, Korea and Singapore where our expenses are denominated in
each country’s local currency and are subject to foreign currency exchange risk. In the three and six months ended March 31, 2009, we recorded exchange losses of approximately $0.1 million and exchange gains of approximately $17,000,
respectively. We could be negatively impacted by exchange rate fluctuations in the future. We do not currently engage in any hedging activities.
We had cash, cash equivalents and short-term investments of $42.1 million at March 31, 2009 excluding $1.9 million of Ralink stock included in short-term investments. The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without incurring significant risk. We invest primarily in high-quality, short-term debt instruments and instruments issued by high quality financial institutions and companies, including money
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instruments. A hypothetical one percentage point decrease in interest rates would result in approximately a $0.4 million decrease in our interest income.
Included within our investment portfolio classified as long-term investments are $20.0 million par value ($18.1 million fair value) of AAA rated investments in auction rate securities. The underlying assets of these auction rate securities are
student loans which are backed by the federal government under the Federal Family Education Loan Program. We have experienced some market risk and liquidity issues related to auction rate securities. See the “Liquidity and Capital
Resources” section in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more detail on these investments.
We own ordinary shares in SMIC which has been a publicly traded company since March 2004. SMIC’s ordinary shares are traded on the Hong Kong Stock
Exchange and SMIC American Depository Receipts (“ADR”) are traded on the New York Stock Exchange. Each SMIC ADR represents fifty (50) ordinary shares. We use the weighted-average cost method to determine our cost basis of shares of
SMIC. We account for our shares in SMIC under the provisions of FASB 115 and mark the shares to the market value with the offset recorded in accumulated other comprehensive income. The cost basis of our shares in SMIC is approximately $3.4 million
and the market value at March 31, 2009 was approximately $1.1 million. The market value of SMIC shares is subject to fluctuations and our carrying value will be subject to adjustments to reflect changes in SMIC’s market value in future
periods. In the event the decline in the market value of our SMIC shares below our cost basis is determined to be other-than-temporary, we may be required to recognize a loss on our investment through operating results.
We own shares in Ralink Technology, Co. (Ralink). On April 8, 2008, Ralink completed an initial public offering (IPO) and its common shares are
traded on the Taiwan Stock Exchange. Since Ralink’s IPO, we account for our shares in Ralink under the provisions of FASB 115 and have marked our investment to the market value as of March 31, 2009 with the offset recorded in accumulated
other comprehensive income. The cost basis of our shares in Ralink is approximately $0.4 million and the market value at March 31, 2009 was approximately $1.9 million. The market value of Ralink shares is subject to fluctuations and our
carrying value will be subject to adjustments to reflect the current market value.
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Item 4.
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Controls and Procedures
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Our Chief Executive
Officer and our Chief Financial Officer, based on the evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule
13a-15 or Rule 15d-15, have concluded that, as of March 31, 2009, our disclosure controls and procedures were effective to ensure that the information we are required to disclose in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. During the three months ended March 31, 2009, there was no change in our internal control over
financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
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Item 1.
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Legal Proceedings
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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. We are 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, attorney’s fees, and other unspecified relief. 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
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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. We are 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 and 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 our alleged stock option grant practices from 1995 through 2002. We are 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, attorney’s fees, and
other unspecified relief.
On March 19, 2008, we and the individual defendants agreed with the plaintiffs-shareholders to settle both
the federal and state shareholder derivative actions. On March 31, 2009, the United States District Court for the Northern District of California granted preliminary approval of the settlement, which is subject to the court’s final
approval hearing scheduled for June 5, 2009. We and our insurers have agreed to pay up to $2.1 million to plaintiffs’ counsel for their attorneys’ fees and the reimbursement of their expenses and costs, subject to approval of the
federal court.
SRAM Antitrust Litigation
Thirty-three purported class action lawsuits were filed by U.S. Direct-Purchaser and U.S. Indirect-Purchaser Plaintiffs against us 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-trial 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, we were voluntarily dismissed from
all lawsuits brought by the U.S. Indirect-Purchaser Plaintiffs pursuant to a Tolling Agreement between us and the U.S. Indirect-Purchaser Plaintiffs. The U.S. Indirect-Purchaser Plaintiffs agreed not to name us as a defendant unless the Tolling
Agreement is terminated according to terms specified in that agreement. On January 9, 2008, we were voluntarily dismissed without prejudice from one of the lawsuits brought by the U.S. Direct-Purchaser Plaintiffs. We remain a defendant in three
lawsuits brought by the U.S. Direct-Purchaser Plaintiffs.
We are committed to defending ourselves against these claims and have instructed
our counsel to contest these actions vigorously. Given the preliminary stage of these proceedings and the inherent uncertainty in litigation, we are 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 our business, results of operations, or financial condition.
SRAM Antitrust
Civil Investigative Demand
In May 2007, we received a civil investigative demand (“CID”) from the Attorney General of the
State of Florida. The CID was 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 our business. As of January 14, 2008 and effective as of May 7, 2007, our obligation to respond to the CID was suspended pursuant to the terms of a Tolling Agreement between us and
the Attorney General of Florida. On January 21, 2009, the Attorney General of Florida allowed the tolling agreement to expire and stated that it is not requesting a new tolling agreement. The Attorney General of Florida also notified us that it
decided to suspend enforcement of its CID to us. We intend to cooperate fully with the Attorney General of Florida in this investigation. Because the investigation is at an early stage, we cannot predict the outcome of the investigation and the
effect, if any, on our business.
Other Legal Proceedings
In the ordinary course of our business, as is common in the semiconductor industry, we have been involved in a limited number of other 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, we believe 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.
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Depressed general economic conditions and
any continued downturn in the markets we serve have and are expected to continue to adversely affect our business and financial results.
Substantially all of our products are incorporated into products for the digital consumer electronics, networking, mobile communications, automotive electronics and industrial markets. Historically, these markets have experienced cyclical
depressed business conditions, often in connection with, or in anticipation of, a decline in general economic conditions, or due to adverse supply and demand conditions in such markets. Industry downturns have resulted in reduced demand and
declining average selling prices for our products which adversely affected our business. Due to the recent tightening of the credit markets and concerns regarding the availability of credit, our current or potential customers have delayed or reduced
purchases of our products which is adversely affecting our revenues and harming our business and financial results. In addition, the recent uncertainty in the financial markets and the recession in the U.S. and world economies, are negatively
impacting the spending patterns of businesses including our current and potential customers. There can be no assurance that the government responses to the disruptions in the financial markets will restore confidence in the U.S. and global
markets. The global industrial economy is currently in a recession. Many economists and other experts are predicting that this recession will likely continue through the remainder of 2009 and possibly longer. We are unable to predict how
deep or how long the recession will last. We expect our business to be adversely impacted by any significant or prolonged downturn in the U.S. or global economies. In particular, while we currently expect our revenue for the quarter ending
June 30, 2009 to increase from our revenue in the quarter ended March 31, 2009, our expected revenue in the June 2009 quarter will still be significantly below that of the corresponding period of fiscal 2008. The uncertainty
regarding the U.S. and global economies has also made it more difficult for us to forecast and manage our business. Although we are continuing actions in the June quarter relating to controlling our expenses and inventory levels, there can be
no assurance that these actions will be sufficient to address the impact of any economic slowdown and allow us to meet our operating objectives.
Our
sales depend on DRAM and SRAM products and reduced demand for these products or a decline in average selling prices could harm our business.
In the six months ended March 31, 2009 and in fiscal 2008, approximately 87% and 88%, respectively, of our net sales were derived from the sale of DRAM and SRAM products, which are subject to unit volume fluctuations and declines in
average selling prices that could harm our business. We experienced a sequential decline in revenue from $37.7 million in our December 2008 quarter to $31.3 million in our March 2009 quarter. This decline in revenue was primarily the result of a
significant decrease in unit shipments of our SRAM products and a decline in the average selling prices for our DRAM products. We experienced a sequential decline in revenue from $55.3 million in our September 2008 quarter to $37.7 million in our
December 2008 quarter. This decline in revenue was primarily the result of a significant decrease in unit shipments of both our DRAM and SRAM products. We experienced a sequential decline in revenue from $58.5 million in our June 2008 quarter to
$55.3 million in our September 2008 quarter. This decline in revenue was primarily the result of our strategic decision to reduce our sales of low margin commodity DRAM products. We may not be able to offset any future price declines for our
products by higher volumes or by higher prices on newer products. Historically, average selling prices for semiconductor memory products have declined, and we expect that average selling prices for our products will decline in the future. Our
ability to maintain or increase revenues will depend upon our ability to increase unit sales volume of existing products and introduce and sell new products that compensate for the anticipated declines in the average selling prices of our existing
products.
Our operating results are expected to continue to fluctuate and may not meet our financial guidance or published analyst forecasts. This may
cause the price of our common stock to decline significantly.
Our future quarterly and annual operating results are subject to
fluctuations due to a wide variety of factors, including:
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economic slowness and low end-user demand;
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the cyclicality of the semiconductor industry;
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declines in average selling prices of our products;
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oversupply of memory products in the market;
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inventory write-downs for lower of cost or market or excess and obsolete;
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excess inventory levels at our customers;
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decreases in the demand for our products;
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our ability to control or reduce our operating expenses;
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the ability of customers to make payments to us;
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disruption in the supply of wafers, assembly or test services;
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changes in our product mix which could reduce our gross margins;
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cancellation of existing orders or the failure to secure new orders;
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a failure to introduce new products and to implement technologies on a timely basis;
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market acceptance of ours and our customers’ products;
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a failure to anticipate changing customer product requirements;
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fluctuations in manufacturing yields at our suppliers;
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fluctuations in product quality resulting in rework, replacement, or loss due to damages;
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a failure to deliver products to customers on a timely basis;
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the timing of significant orders;
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increased expenses associated with new product introductions, masks or process changes;
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shortages in foundry, assembly or test capacity;
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the outcome of any pending or future litigation; and
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the commencement of any future litigation or antidumping proceedings.
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We have incurred significant losses in certain recent periods, and there can be no assurance that we will be able to achieve or sustain profitability in the future.
We incurred a loss of $7.9 million in the six months ended March 31, 2009 and expect to incur a loss in the June 2009 quarter. Though we were
profitable in each of the first three quarters of fiscal 2008, we incurred a loss of $17.8 million in fiscal 2008, which included charges for the impairment of goodwill of $25.3 million. Though we were profitable in fiscal 2007, we would not have
been profitable in that year except that we achieved significant income from non-operating activities such as gains on the sale of investments and interest income. There is no assurance that we will achieve or maintain profitability in future
periods. Our ability to achieve profitability on a quarterly or fiscal year basis in the future will depend on a variety of factors, including the need for future inventory write-downs, our ability to increase net sales, maintain or expand gross
margins, introduce new products on a timely basis, secure sufficient wafer fabrication capacity and control operating expenses, including stock-based compensation as required by SFAS 123R. Adverse developments with respect to these or other factors
could result in quarterly or annual operating losses in the future.
We have used and plan to use a significant amount of our cash resources to
repurchase shares of our common stock and such repurchases present potential risks and disadvantages to us and our continuing stockholders.
From September 2007 through March 2009, we repurchased shares of our common stock in the open market under Rule 10b-18 and pursuant to our tender offers. In particular, in the six months ended March 31,
2009, we repurchased 1,489,482 shares of our common stock in the open market at an aggregate price of approximately $3.2 million. In addition, in fiscal 2008, we repurchased 10,203,282 shares for an aggregate price of $71.1 million which includes
10,000,000 shares we repurchased in January 2008 for an aggregate price of $70 million pursuant to a tender offer. At March 31, 2009, we had outstanding authorization from our Board to purchase up to an additional $6.6 million of our common
stock from time to time. Although our Board of Directors has determined that these repurchase programs are in the best interests of our stockholders, these repurchases expose us to a number of risks including:
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the use of a substantial portion of our existing cash reserves, which may reduce our ability to engage in significant cash acquisitions or to pursue other business
opportunities that could create significant value to our stockholders;
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the risk that we would not be able to replenish our cash reserves by raising debt or equity financing in the future on terms acceptable to us, or at all;
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the risk that these repurchases have reduced our “public float,” which is the number of our shares owned by non-affiliate stockholders and
available for trading in the securities markets, and likely reduced the number of our stockholders, which may reduce the volume of trading in our shares and may result in lower stock prices and reduced liquidity in the trading of
our shares; and
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the risk that our stock price could decline and that we would be able to repurchase shares of our common stock at a lower price per share than the prices
we pay in our repurchase programs.
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Our long-term investments are in auction rate securities and if auctions continue to fail for
amounts we have invested, our investment will not be liquid. If the issuer is unable to successfully close future auctions and their credit rating deteriorates, we may be required to further adjust the carrying value of our investment through
an impairment charge to earnings.
In February 2008, all the auctions of our auction-rate securities failed as a result of negative
conditions in the global credit markets. Each of these securities had been subject to auction processes for which there had been insufficient bidders on the scheduled rollover dates. The failure resulted in the interest rates on these investments
resetting at the maximum rate allowed per security. Until the auctions are successful, a buyer is found outside of the auction process or the notes are redeemed, the investments are not liquid. In the event we need to access these funds, we will not
be able to do so without a loss of principal, unless a future auction on these investments is successful. We currently believe these securities are not significantly impaired, primarily due to the government backing of the underlying securities.
However, if the issuers are unable to successfully close future auctions and their credit ratings deteriorate, we may be required to further adjust the carrying value of these investments and record an impairment charge to earnings for an other than
temporary decline in the fair values. In November 2008, we elected to participate in the Auction Rate Securities Rights offering by the broker through which we purchased our $20.0 million in auction rate securities. These rights will entitle us to
sell our auction rate securities to the broker for a price equal to par value plus accrued but unpaid dividends beginning in June 2010.
Shifts in
industry-wide capacity may cause our results to fluctuate. These shifts may occur quickly with little or no advance notice. Such shifts have historically resulted in significant inventory write-downs.
The semiconductor industry is highly cyclical and is subject to significant downturns resulting from excess capacity, overproduction, reduced demand or
technological obsolescence. Shifts in industry-wide capacity from shortages to oversupply or from oversupply to shortages may result in significant fluctuations in our quarterly or annual operating results. These shifts in industry conditions can
occur quickly with little or no advance notice to us. We are currently in an industry downturn and there is excess capacity in the marketplace. Adverse changes in industry conditions are likely to result in a further decline in average selling
prices and the stated value of our inventory. In the first six months of fiscal 2009, in fiscal 2008 and in fiscal 2007, we recorded inventory write-downs of $7.4 million, $11.3 million, and $10.3 million, respectively. The inventory
write-downs related to valuing our inventory at the lower-of-cost-or-market, and adjusting our inventory valuation for certain excess and obsolete products.
We write down to zero dollars 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 management’s judgments for
newer products, end of life products, planned inventory increases or strategic customer supply. In making such judgments to write down inventory, management takes into account the product life cycles which can range from six to 30 months, the stage
in the life cycle of the product, the impact of competitors’ announcements and product introductions on our products. Future additional inventory write-downs may occur due to lower of cost or market accounting, excess inventory or inventory
obsolescence.
We rely on third-party contractors to fabricate, assemble and test our products. Our business is highly dependent on the continued
operations of such contractors and our failure to successfully manage our relationships with these contractors could damage our relationships with our customers, decrease our sales and limit our growth.
We rely on third-party contractors located in Asia to fabricate, assemble and test our products. Current and continued adverse economic conditions and
the continued uncertainty in the U.S. and global credit markets could materially impact the financial condition or operations of our third-party contractors such as our wafer foundries, test contractors and assembly contractors. Our
business is highly dependent on the continued operations of such contractors. Any deterioration in the financial condition of our contractors or any disruption in the operations of our contactors could adversely impact the flow of our
products to our end customers and materially adversely impact our business and results of operation. There are significant risks associated with our reliance on these third-party contractors, including:
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financial viability of our contractors;
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reduced control over product quality;
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potential price increases;
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reduced control over delivery schedules;
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possible capacity shortages;
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their inability to increase production and achieve acceptable yields on a timely basis;
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absence of long-term agreements;
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limited warranties on products supplied to us; and
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general risks related to conducting business internationally.
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If any of these risks are realized, our business and results of operations could be adversely affected until our subcontractor is able to remedy the problem or until we are able to secure an alternative subcontractor.
Our transition to lead-free parts may result in excess inventory of products packaged using traditional methods.
Customers are requiring that we offer our products in lead-free packages. Governmental regulations in certain countries and customers’ intention to
produce products that are less harmful to the environment has resulted in a requirement from many of our customers to purchase integrated circuits that do not contain lead. We have responded by offering our products in lead-free versions. While the
lead-free versions of our products are expected to be more friendly to the environment, the ultimate impact is uncertain. The transition to lead-free products may produce changes in demand depending on the packaging method used, which may result in
excess inventory of products packaged using traditional methods. This may have an adverse effect on our results of operations.
If we are unable to
obtain an adequate supply of wafers, our business will be harmed.
If we are unable to obtain an adequate supply of wafers from our
current suppliers or any alternative sources in a timely manner, our business will be harmed. Our principal manufacturing relationships are with Nanya, Powerchip Semiconductor, SMIC, TSMC, and Chartered Semiconductor Manufacturing. Each of our wafer
foundries also supplies wafers to other semiconductor companies, including certain of our competitors or for their own account. Although we are allocated specific wafer capacity from our suppliers, we may not be able to obtain such capacity in
periods of tight supply. If any of our suppliers experience manufacturing failures or yield shortfalls, severe financial or operational difficulties, choose to prioritize capacity for other uses, or reduce or eliminate deliveries to us for any other
reason, we may not be able to obtain enough wafers to meet the market demand for our products which would adversely affect our revenues. Once a product is in production at a particular foundry, it is time consuming and costly to have such product
manufactured at a different foundry. In addition, we may not be able to qualify additional manufacturing sources for existing or new products in a timely manner and we cannot be certain that other manufacturing sources would be able to deliver an
adequate supply of wafers to us or at the same cost.
We may encounter difficulties in effectively integrating newly acquired businesses.
From time to time, we may acquire other companies or assets that we believe to be complementary to our business. In this regard, in
April 2009, we announced the acquisition of Enable Semiconductor Corporation a private Taiwan and Korea based company. Acquisitions may result in use of our cash resources, potentially dilutive issuances of equity securities, incurrence of debt and
contingent liabilities, amortization expenses related to intangible assets, and the possible impairment of goodwill, which could harm our profitability. In addition, acquisitions involve numerous risks, including:
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higher than estimated acquisition expenses;
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difficulties in successfully assimilating the operations, technologies and personnel of the acquired company;
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difficulties in continuing to develop new technologies and deliver products to market on time;
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diversion of management’s attention from other business concerns;
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risks of entering markets in which we have no, or limited, direct prior experience;
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the risk that the markets for acquired products do not develop as expected; and
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the potential loss of key employees and customers as a result of the acquisition.
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There is no assurance that any future acquisitions will contribute positively to our business or operating results.
The loss of a significant customer or a reduction in orders from one or more large customers could adversely affect our operating results.
As sales to our customers are executed pursuant to purchase orders and no purchasing contracts typically exist, our customers can cease doing business
with us at any time. We may not be able to retain our key customers, such customers may cancel or reschedule orders, and in the event of canceled orders, such orders may not be replaced by other sales. In addition, sales to any particular customer
may fluctuate significantly from quarter to quarter, and such fluctuating sales could harm our business and financial results.
We have significant
international sales and operations and risks related to our international activities could harm our operating results.
In the six
months ended March 31, 2009, approximately 18% of our net sales was attributable to customers located in the U.S., 17% was attributable to customers located in Europe and 64% was attributable to customers located in Asia. In fiscal 2008,
approximately 16% of our net sales was attributable to customers located in the U.S., 17% was attributable to customers located in Europe and 66% was attributable to customers located in Asia. In fiscal 2007, approximately 18% of our net sales was
attributable to customers located in the U.S., 15% was attributable to customers located in Europe and 67% was attributable to customers located in Asia. We anticipate that sales to international sites will continue to represent a significant
percentage of our net sales. 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, our wafer foundries and assembly
and test subcontractors are primarily located in Taiwan and China. A substantial majority of our employees are located outside of the U.S and the expenses for our foreign operations are generally denominated in local currency. As a result, a
devaluation of the New Taiwan dollar or Chinese renminbi could substantially increase the cost of our operations in Taiwan or China.
We
are subject to the risks of conducting business internationally, including:
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global economic conditions, particularly in Taiwan and China;
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duties, tariffs and other trade barriers and restrictions;
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foreign currency fluctuations;
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changes in trade policy and regulatory requirements;
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the burdens of complying with foreign laws;
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imposition of foreign currency controls;
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difficulties in hiring and retaining experienced engineers in countries such as China and Taiwan;
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difficulties in collecting foreign accounts receivable;
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|
|
political instability, including any changes in relations between China and Taiwan;
|
|
|
•
|
|
public health outbreaks such as SARS or avian flu; and
|
|
|
•
|
|
earthquakes and other natural disasters.
|
Strong
competition in the semiconductor memory market may harm our business.
The semiconductor memory market is intensely competitive and has
been characterized by an oversupply of product, price erosion, rapid technological change, short product life cycles, cyclical market patterns, and heightened foreign and domestic competition. Many of our competitors offer broader product lines and
have greater financial, technical, marketing, distribution and other resources than us. We may not be able to compete successfully against any of these competitors. Our ability to compete successfully in the memory market depends on factors both
within and outside of our control, including:
|
|
•
|
|
the pricing of our products;
|
31
|
|
•
|
|
the supply and cost of wafers;
|
|
|
•
|
|
product design, functionality, performance and reliability;
|
|
|
•
|
|
successful and timely product development;
|
|
|
•
|
|
the performance of our competitors and their pricing policies;
|
|
|
•
|
|
wafer manufacturing over or under capacity;
|
|
|
•
|
|
real or perceived imbalances in supply and demand for our products;
|
|
|
•
|
|
the rate at which OEM customers incorporate our products into their systems;
|
|
|
•
|
|
the success of our customers’ products and end-user demand;
|
|
|
•
|
|
access to advanced process technologies at competitive prices;
|
|
|
•
|
|
achievement of acceptable yields of functional die;
|
|
|
•
|
|
the capacity of our third-party contractors to assemble and test our products;
|
|
|
•
|
|
the gain or loss of significant customers;
|
|
|
•
|
|
the nature of our competitors;
|
|
|
•
|
|
our financial strength and the financial strength of our competitors; and
|
|
|
•
|
|
general economic conditions.
|
In
addition, we are vulnerable to technology advances utilized by competitors to manufacture higher performance or lower cost products. We may not be able to compete successfully in the future as to any of these factors. Our failure to compete
successfully in these or other areas could harm our business and financial results.
Our revenues and business would be harmed if we are not able to
successfully develop, introduce and sell new products and develop and implement new manufacturing technologies in a timely manner. Our research and development expenses could increase and our business could be harmed if the implementation of these
new manufacturing technologies is unsuccessful.
We operate in highly competitive, quickly changing markets which are characterized by
rapid obsolescence of existing products. As a result, our future success depends on our ability to develop and introduce new products that our customers choose to buy in significant quantities. If we fail to introduce new products in a timely manner
or if our customers’ products do not achieve commercial success, our business and results of operations could be seriously harmed. The design and introduction of new products is challenging as such products typically incorporate more functions
and operate at faster speeds than prior products. Increasing complexity generally requires smaller features on a chip. This makes developing new generations of products substantially more difficult than prior generations. The cost to develop
products utilizing these new technologies is expensive and requires significant research and development spending and, as a result, our research and development expenses could increase in the future. Further, new products may not work properly in
our customers’ applications. If we are unable to design, introduce, market and sell new products successfully, our business and financial results would be seriously harmed.
Our products are complex and could contain defects, which could reduce sales of those products or result in claims against us.
We develop complex and evolving products. Despite testing by us and our customers, errors may be found in existing or new products. This could result in a delay in recognition or loss of revenues, loss of market share
or failure to achieve market acceptance. The occurrence of defects could also cause us to incur significant warranty, support and repair costs, could divert the attention of our engineering personnel from our product development efforts, and could
harm our relationships with our customers. The occurrence of these problems could result in the delay or loss of market acceptance of our products and would likely harm our business. Defects, integration issues or other performance problems in our
products could result in financial or other damages to our customers. Our customers could also seek and obtain damages from us for their losses. From time to time, we have been involved in disputes regarding product warranty issues. Although we seek
to limit our liability, a product liability claim brought against us, even if unsuccessful, would likely be time consuming and could be costly to defend.
32
Potential intellectual property claims and litigation could subject us to significant liability for damages and could
invalidate our proprietary rights.
In the semiconductor industry, it is not unusual for companies to receive notices alleging
infringement of patents or other intellectual property rights. We have been, and from time-to-time expect to be, notified of claims that we may be infringing patents, maskwork rights or copyrights owned by third-parties. If it appears necessary or
desirable, we may seek licenses under patents that we are alleged to be infringing. However, licenses may not be offered and the terms of any offered licenses may not be acceptable to us.
The failure to obtain a license under a key patent or intellectual property right from a third party for technology used by us could cause us to incur
substantial liabilities and to suspend the manufacture of the products utilizing the invention or to attempt to develop non-infringing products, any of which could harm our business. Furthermore, we may become involved in protracted litigation
regarding the alleged infringement by us of third-party intellectual property rights or litigation to assert and protect our patents or other intellectual property rights. Any litigation relating to patent infringement or other intellectual property
matters could result in substantial cost and diversion of our resources, which could harm our business.
We may be unable to effectively protect our
intellectual property, which would negatively impact our ability to compete.
We believe that the protection of our intellectual
proprietary rights will continue to be important to the success of our business. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter
into confidentiality or license agreements with our employees, consultants and business partners, and control access to and distribution of our documentation and other proprietary information. Despite these efforts, unauthorized parties may attempt
to copy or otherwise obtain and use our proprietary technology. Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in
foreign countries where the laws may not protect our proprietary rights as fully as do the laws of the U.S. Many U.S. companies have encountered substantial infringement problems in foreign countries, including countries in which we design and sell
our products. We cannot be certain that patents will be issued as a result of our pending applications nor can we be certain that any issued patents would protect or benefit us or give us adequate protection from competing products. For example,
issued patents may be circumvented or challenged and declared invalid or unenforceable. We also cannot be certain that others will not develop our unpatented proprietary technology or effective competing technologies on their own.
We are subject to pending legal proceedings related to SRAM products.
We have been named as a defendant in a number of civil antirust complaints filed against semiconductor companies on behalf of purchasers of SRAM products throughout the United States. The complaints allege that the
defendants conspired to raise the price of SRAM products in violation of Section 1 of the Sherman Act, the California Cartwright Act, and several other State antitrust, unfair competition and consumer protection statutes. We believe that we
have meritorious defenses to the allegations in the complaints, and we intend to defend these lawsuits vigorously. However, the litigation is in the preliminary stage and we cannot predict its outcome. Multidistrict antitrust litigation is
particularly complex and can extend for a protracted time, which can substantially increase the cost of such litigation. The defense of these lawsuits is also expected to divert the efforts and attention of some of our key management and
technical personnel. As a result, our defense of this litigation, regardless of its eventual outcome, will likely be costly and time consuming. Should the outcome of the litigation be adverse to us, we could be required to pay significant monetary
damages, which could adversely affect our business, financial condition, operating results and cash flows.
We have been named as a party to several
lawsuits related to our historical stock option practices and related accounting which could result in an unfavorable outcome and have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading
price for our securities.
Several shareholder derivative lawsuits have been filed against certain of our current directors and officers
and certain former directors and officers relating to our historical stock option practices and related accounting. We are named as nominal
33
defendant in such matters. See “Item 1—Legal Proceedings” for a more detailed description of these proceedings. We may become the subject of
additional private or government actions in the future. Litigation may be time-consuming, expensive and disruptive to our normal business operations, and the outcome of litigation is difficult to predict. The defense of these derivative lawsuits has
resulted in significant legal and accounting expenditures and the diversion of our management’s time and attention from the operation of our business. All or a portion of any amount we may be required to pay in settlement of these actions or to
satisfy a judgment or settlement in any future actions may not be covered by insurance.
We have entered into indemnification agreements
with each of our present and former directors and officers. Under those agreements, we are required to indemnify each such director or officer against expenses, including attorneys’ fees, judgments, fines and settlements, paid by such
individual in connection with the pending litigation subject to applicable Delaware law.
We have acquired equity positions for strategic reasons in
other companies which may significantly decrease in value.
Over the last several years, we have acquired equity positions for strategic
reasons in other technology companies and we may make similar equity purchases in the future. In this regard, we own shares in SMIC with a cost basis of approximately $3.4 million and a market value at March 31, 2009 of approximately $1.1
million. The market value of SMIC shares is subject to fluctuation and our carrying value will be subject to adjustments to reflect the current market value. In the event the decline in the market value of our SMIC shares below our cost basis is
determined to be other-than-temporary, we may be required to recognize a loss on our investment through operating results. In addition, we own shares in Ralink with a cost basis of approximately $0.4 million and a market value at March 31, 2009
of approximately $1.9 million. The market value of Ralink shares is subject to fluctuation and our carrying value will be subject to adjustments to reflect the current market value.
We may experience difficulties in complying with Sarbanes-Oxley Section 404 in future periods.
We concluded that our internal control over financial reporting was effective at September 30, 2008. A key element of Section 404 compliance involves an analysis of management information systems (MIS). We completed the
implementation of a new worldwide MIS system in the December 2008 quarter. If in the future we are unable to assert that our internal control over financial reporting is effective (or if our auditors are unable to express an opinion on the
effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would likely have an adverse effect on our stock price.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
We prepare our financial statements in conformity with accounting principles generally accepted in the U.S. These accounting principles are subject to
interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting policies. A change in
these policies or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. For example, beginning in the first quarter of fiscal
2006, with the adoption of SFAS 123R, we now record a charge to earnings for employee stock option grants for all stock options unvested at and granted after October 1, 2005. This accounting pronouncement is expected to continue to negatively
impact our financial results. Technology companies generally, and our company specifically, rely on stock options as a major component of our employee compensation packages. Because we are required to expense options, we may be less likely to
sustain profitability and we have decreased the use of option grants. Decreasing or eliminating option grants may negatively impact our ability to attract and retain qualified employees.
Our results of operations could vary as a result of the methods, estimates, and judgments we use in applying our accounting policies.
The methods, estimates, and judgments we use in applying our accounting policies have a significant impact on our results of operations (see
“Critical Accounting Policies” in Part I, Item 2 of this Form 10-Q). Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead
us to change our methods, estimates, and judgments. Changes in those methods, estimates, and judgments could significantly affect our results of operations. In particular, the calculation of share-based compensation expense under SFAS 123R, requires
us to use valuation methodologies (which were not developed for use in valuing employee stock options) and a number of assumptions, estimates, and conclusions regarding matters such as expected forfeitures, expected volatility of our
34
share price, the expected dividend rate with respect to our common stock, and the option exercise behavior of our employees. Furthermore, there are no means,
under applicable accounting principles, to compare and adjust our expense if and when we learn about additional information that may affect the estimates that we previously made, with the exception of changes in expected forfeitures of share-based
awards. In the future, factors may arise that lead us to change our estimates and assumptions with respect to future share-based compensation arrangements, resulting in variability in our share-based compensation expense over time. Changes in
forecasted share-based compensation expense could impact our gross margin percentage; research and development expenses; and selling, general and administrative expenses.
We depend on our ability to attract and retain our key technical and management personnel.
Our
success depends upon the continued service of our key technical and management personnel. Several of our important manufacturing and other subcontractor relationships are based on personal relationships between our senior executive officers and such
parties. In particular, our Executive Chairman has long-term relationships with our key foundries. If we were to lose the services of any key executives, it may negatively impact the related business relationships since we have no long-term
contractual agreements with such parties. Our success also depends on our ability to continue to attract, retain and motivate qualified technical personnel, particularly experienced circuit designers and process engineers. The competition for such
employees depends on general economic and industry conditions but such competition has been intense in prior periods of industry growth. We have no employment contracts or key person life insurance policies with or for any of our employees. The loss
of the service of one or more of our key personnel could harm our business.
Our stock price is expected to continue to be volatile.
The trading price of our common stock has been and is expected to be subject to wide fluctuations in response to:
|
|
•
|
|
quarter-to-quarter variations in our operating results;
|
|
|
•
|
|
general conditions or cyclicality in the semiconductor industry or the end markets that we serve;
|
|
|
•
|
|
new or revised earnings estimates or guidance by us or industry analysts;
|
|
|
•
|
|
comments or recommendations issued by analysts who follow us, our competitors or the semiconductor industry;
|
|
|
•
|
|
aggregate valuations and movement of stocks in the broader semiconductor industry;
|
|
|
•
|
|
announcements regarding our share repurchase program and the timing and amount of shares we purchase under such program;
|
|
|
•
|
|
announcements of new products, strategic relationships or acquisitions by us or our competitors;
|
|
|
•
|
|
increases or decreases in available wafer capacity;
|
|
|
•
|
|
governmental regulations, trade laws and import duties;
|
|
|
•
|
|
announcements related to future or existing litigation involving us or any of our competitors;
|
|
|
•
|
|
announcements of technological innovations by us or our competitors;
|
|
|
•
|
|
additions or departures of senior management; and
|
|
|
•
|
|
other events or factors, many of which are beyond our control.
|
In addition, stock markets have recently experienced extreme price and trading volume volatility. This volatility has had a substantial effect on the market prices of securities of many companies for reasons
frequently unrelated to the operating performance of the specific companies. These broad market fluctuations have adversely affected the market price of our common stock and may continue to do so in the future.
Foundry capacity can be limited, and we may be required to enter into costly arrangements to secure foundry capacity.
If we are not able to obtain additional foundry capacity as required, our relationships with our customers would be harmed and our future sales would be
adversely impacted. In order to secure foundry capacity, we have entered into in the past, and may enter into in the future, various arrangements with suppliers, which could include:
|
|
•
|
|
purchases of equity or debt securities in foundries;
|
35
|
|
•
|
|
process development relationships with foundries;
|
|
|
•
|
|
contracts that commit us to purchase specified quantities of wafers over extended periods;
|
|
|
•
|
|
increased prices for wafers;
|
|
|
•
|
|
option payments or other prepayments to foundries; and
|
|
|
•
|
|
nonrefundable deposits with, or loans to, foundries in exchange for capacity commitments.
|
We may not be able to make any such arrangements in a timely fashion or at all, and such arrangements, if any, may not be on terms favorable to us. Once
we make commitments to secure foundry capacity, we may incur significant financial penalties if we subsequently determine that we are not able to utilize all of that capacity. Such penalties may be substantial and could harm our financial results.
Our foundries may experience lower than expected yields which could adversely affect our business.
The manufacture of integrated circuits is a highly complex and technically demanding process. Production yields and device reliability can be affected by
a large number of factors. As is typical in the semiconductor industry, our outside foundries have from time to time experienced lower than anticipated manufacturing yields and device reliability problems, particularly in connection with the
introduction of new products and changes in such foundry’s processing steps. There can be no assurance that our foundries will not experience lower than expected manufacturing yields or device reliability problems in the future, which could
materially and adversely affect our business and operating results.
Business disruptions could seriously harm our future revenue and financial
condition and increase our costs and expenses.
Our worldwide operations, including the operations of our foundries and other suppliers,
could be subject to natural disasters and other business disruptions, which could seriously harm our revenue and financial condition and increase our costs and expenses. Our corporate headquarters, and a portion of our research and development
activities, are located in San Jose, California, and our other critical business operations and many of our suppliers are located in Asia, near major earthquake faults. The ultimate impact on us, our significant suppliers and our general
infrastructure of being located near major earthquake faults is unknown, but our revenue, profitability and financial condition could suffer in the event of a major earthquake or other natural disaster. Losses and interruptions could also be caused
by earthquakes, power shortages, telecommunications failures, water shortages, tsunamis, floods, typhoons, fires, extreme weather conditions, medical epidemics such as the recent swine flu outbreak and other natural or manmade disasters.
Terrorist attacks, threats of further attacks, acts of war and threats of war may negatively impact all aspects of our operations, revenues, costs and stock price.
Terrorist acts, conflicts or wars, as well as future events occurring in response or connection to them, including future terrorist
attacks against U.S. targets, rumors or threats of war, actual conflicts involving the U.S. or its allies (such as the war in Iraq), conflict between China and Taiwan, or trade disruptions impacting our domestic or foreign suppliers or our
customers, may impact our operations and may, among other things, cause delays or losses in the delivery of wafers or other products to us and decreased sales of our products. More generally, these events have affected, and are expected to continue
to affect, the general economy and customer demand for products sold by our customers. Any of these occurrences could have a significant impact on our operating results, revenues and costs, which in turn may result in increased volatility in our
common stock price and a decline in the price of our common stock.
36
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total
Number
of Shares
Purchased
|
|
Average
Price
Paid
Per
Share
|
|
Total
Number of
Shares
Purchased
As Part of
Publicly
Announced
Plans
|
|
Dollar Value
of Shares
That May
Yet Be
Purchased
Under the
Plans
|
|
|
January 1, 2009–January 31, 2009
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
6,810,882
|
(1)
|
|
February 1, 2009–February 28, 2009
|
|
124,946
|
|
$
|
1.65
|
|
124,946
|
|
$
|
6,604,992
|
(1)
|
|
March 1, 2009–March 31, 2009
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
6,604,992
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
124,946
|
|
$
|
1.65
|
|
124,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
On November 28, 2007, we announced that our board of directors had approved the repurchase of up to $80 million of our shares of common stock. We used $70 million of this
approved amount to repurchase 10 million shares of our common stock through a self-tender offer which expired on January 3, 2008. The additional $10 million will be used for the repurchase of additional shares, from time to time, through
open-market transactions under Rule 10b-18.
|
|
Item 4.
|
Submission of Matters to a Vote of Security Holders
|
Our Annual Meeting of Stockholders was held on Friday, February 6, 2009 at 3:30 p.m., local time, in San Jose, California.
(a) The following nominees for Directors were elected. Each person elected as a Director will serve until the next annual meeting of stockholders or until such person’s successor is elected and qualified:
|
|
|
|
|
|
|
Name of Nominee
|
|
Votes in
Favor
|
|
Votes
Withheld
|
|
Jimmy S.M. Lee
|
|
22,055,153
|
|
878,145
|
|
Scott Howarth
|
|
22,053,258
|
|
880,040
|
|
Kong-Yeu Han
|
|
22,095,429
|
|
837,869
|
|
Paul Chien
|
|
22,069,939
|
|
863,359
|
|
Jonathan Khazam
|
|
22,098,701
|
|
834,597
|
|
Keith McDonald
|
|
21,289,349
|
|
1,643,949
|
|
Stephen Pletcher
|
|
22,017,907
|
|
915,391
|
|
Bruce A. Wooley
|
|
20,570,487
|
|
2,362,811
|
|
John Zimmerman
|
|
22,068,435
|
|
864,863
|
(b) Our stockholders approved a stock option exchange program for employees (excluding executive
officers and directors) pursuant to which eligible employees were offered the opportunity to exchange their eligible options for a smaller number of new options at a lower exercise price with 10,096,124 votes in favor, 7,428,615 votes against, and
552,518 votes abstaining.
(c) Our stockholders approved an amendment to our 1993 Employee Stock Purchase Plan to increase by 750,000
shares to an aggregate of 4,400,000 shares the number of shares reserved for grant thereunder with 16,703,697 votes in favor, 723,408 votes against, and 650,152 votes abstaining.
(d) Our stockholders ratified the appointment of Grant Thornton LLP as our independent registered public accountants for the fiscal year ending
September 30, 2009, with 22,581,112 votes in favor, 305,910 votes against and 46,276 votes abstaining.
37
(a) The following exhibits are
filed as a part of this report.
|
|
|
|
|
Exhibit 10.1
|
|
1993 Employee Stock Purchase Plan, as amended.
|
|
|
|
|
Exhibit 10.2
|
|
Form of Change of Control Document.
|
|
|
|
|
Exhibit 31.1
|
|
Certification Pursuant to SEC Release No. 33-8238, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
Exhibit 31.2
|
|
Certification Pursuant to SEC Release No. 33-8238, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
Exhibit 32
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Silicon Solution, Inc.
|
|
|
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
Dated:
|
|
May 8, 2009
|
|
|
|
/s/ John M. Cobb
|
|
|
|
|
|
|
|
John M. Cobb
|
|
|
|
|
|
|
|
Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
(Principal Financial and Accounting Officer)
|
39
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