10-K 1 issi-2013q410k.htm 10-K ISSI - 2013 Q4 10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________________
FORM 10-K
(Mark One)
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 0-23084
 _____________________________________________________
INTEGRATED SILICON SOLUTION, INC.
(Exact name of Registrant as specified in its charter)
  _____________________________________________________
Delaware
 
77-0199971
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1623 Buckeye Drive, Milpitas, California
 
95035
(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number, including area code (408) 969-6600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
 
Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
 _____________________________________________________ 
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨    No  ý
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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  ý No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
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):
Large accelerated filer  ¨        Accelerated filer  ý        Non-accelerated filer  ¨        Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý
The aggregate market value of the common stock held by non-affiliates of the registrant, based upon the price at which the registrant’s Common Stock was last sold as of March 31, 2013 (the last business day of the registrant’s second quarter of fiscal 2013), was approximately $159.4 million. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant’s Common Stock on December 6, 2013 was 29,466,567.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant’s 2014 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
 
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
 
 
 
 
 
Item 15.
 
 
 

 _____________________________________________________

References in this Annual Report on Form 10-K to “we,” “us,” “our” and “ISSI” mean Integrated Silicon Solution, Inc. and all entities owned or controlled by Integrated Silicon Solution, Inc. 
 _____________________________________________________
All brand names, trademarks and trade names referred to in this report are the property of their respective holders.




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 results. Our actual results could differ materially from those anticipated in our forward-looking statements as a result of certain factors, including those set forth in “Risk Factors” beginning on page 10 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. Before you invest in our common stock, you should be aware that the occurrence of the events described in “Risk Factors” and elsewhere in this report could harm our business and adversely affect our results.
All forward-looking statements made by us 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 undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.


1


PART I

Item 1. Business
Overview
We are a fabless semiconductor company that designs and markets high performance integrated circuits for the following key markets: (i) automotive, (ii) communications, (iii) industrial, medical and military (IMM), and (iv) digital consumer. Our primary products are low and medium density DRAM in both package and Known Good Die (KGD) form, high speed and low power SRAM, serial and parallel NOR flash products and a variety of mixed signal and analog products including high brightness LED (HBLED) drivers and audio amplifiers. In fiscal 2013, approximately 88% of our revenue was derived from our DRAM and SRAM products. We target large markets with our cost-effective, high quality semiconductor products and seek to build long-term relationships with our customers. A key part of our strategy is to offer a long-term commitment supplying many of the legacy DRAM and SRAM memories that are of less interest to many of our competitors. Our customers frequently cite our commitment to long-term supply of these memories as one reason they buy products from ISSI.
Our outsourced manufacturing model is based upon relationships with key foundries such as GlobalFoundries Inc., Hynix, Nanya Technology Corporation (Nanya), Powerchip, Semiconductor Manufacturing International Corporation (SMIC), Taiwan Semiconductor Manufacturing Corporation (TSMC), and United Microelectronics Corporation (UMC). We have an established presence in the important Asian market that includes our design groups in Shanghai, China, Xiamen, China, Hsinchu, Taiwan and Songham, Korea. These locations also have product engineering, sales and marketing, quality assurance, production control, and other operating functions. Our worldwide headquarters are in Milpitas, California.
Our customers include leaders in each of our four target markets, including Continental, Delphi, Panasonic and Sirius XM in automotive electronics; Cisco, Ericsson and Huawei Technologies in communications; Honeywell, Schneider and Siemens in IMM applications; and Samsung, Sharp and Toshiba in digital consumer. Due to their significant size and market influence, we believe these types of customers generally drive memory volumes in their market segments and help define the direction of future memory needs.
On September 14, 2012, we acquired Chingis Technology Corporation (Chingis), a public company in Taiwan, which provides a variety of NOR flash memory technologies used in standalone and embedded applications. Chingis targets the personal computer peripheral markets including the hard disk drive market. Chingis's current products include low density serial flash products.
On January 31, 2011, we acquired Si En Integration Holdings Limited (Si En), a privately held fabless provider of high performance analog and mixed signal integrated circuits headquartered in Xiamen, China. Si En targets the communications, digital consumer and automotive markets.
Company Background
We were incorporated in California in October 1988 and changed our state of incorporation to Delaware in August 1993. We have one operating segment which is to design, develop and market high performance DRAM and SRAM and other memory and non-memory semiconductor products. Our principal executive offices are located at 1623 Buckeye Drive, Milpitas, California 95035, and our telephone number is (408) 969-6600. On our Investor Relations web site, located at www.issi.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such documents on our Investor Relations web site are available free of charge.
Market Background
In recent years, the need for sophisticated semiconductor memory architecture has expanded beyond the PC market and into electronic systems in a wide variety of markets, including automotive electronics, communications, IMM applications and digital consumer. Advances in technology have allowed for increasingly complex digital consumer products such as set-top boxes, digital cameras and HDTVs. Significant memory content is often required in these products to manage large amounts of data that create images and sounds in a digital format. As a result, virtually all electronic systems incorporate semiconductor memory devices to enable and enhance system performance.
The complexity of automobile electronics is also increasing rapidly. The significant increase in automotive electronic applications has resulted in an increase in microcontrollers and memory responsible for delivering control and command functionality. Automobile designers are increasing semiconductor content in automobiles to allow for improved telematics, digital audio and video entertainment systems, advanced safety features such as backup cameras and lane departure warning systems and

2


powertrain functions such as engine control and fuel efficiency management systems. These systems require memory devices that meet the automotive industry’s high quality and reliability standards.
Mobile communication products have gained broad acceptance among consumers. Applications for cellular communications, wireless local area networks (WLAN) and global positioning systems (GPS) are increasingly able to access a wide range of data services, from internet connectivity to location detection, and are delivering information to consumers through sophisticated mobile products. Mobile products connect without wires to a base station that receives and sends data or voice to the mobile device. As more data and user content is accessed and stored on the mobile devices, advanced memory is required to store and access this information. As 3G and 4G mobile broadband services proliferate, the volume of data is expected to increase significantly, and memory is expected to play a crucial role in ensuring quality of service in the mobile infrastructure market.
The needs of the industrial memory market match our strategy of providing long-term customer support. Memory products are used in various industrial applications such as power management, imaging, point of sale terminals, bar code scanners, smart meters, instrumentation and data acquisition systems. We have a wide range of DRAM, SRAM, flash and analog products that meet the needs of the industrial market segment.
As more consumers and businesses utilize the internet and broadband communications networks, the demand for networking products has accelerated. Consumers and businesses require high speed access to internet content and other services to transmit and receive large amounts of data, such as highly graphical web sites, MP3 audio files, HD video and streaming multimedia applications. The numerous and complex applications that facilitate connections within networking and broadband products, such as cable and DSL modems, switches and routers, require optimized high speed memory architectures to maximize bus bandwidth and reduce latency.
Integrated circuits that address the semiconductor memory market can be segmented into volatile memory, such as DRAM and SRAM, and non-volatile memory, such as Flash and EEPROM. Volatile memory loses its data if the power is turned off, while non-volatile memory retains its data when the power is turned off. SRAM is used for applications that require very high speed access to stored data and it typically requires four to six transistors to store each bit of data. DRAM uses only a single transistor to store each bit of data. As a result, the storage capacity of DRAM tends to be much greater than that of SRAM. SRAM is faster than DRAM, but more expensive on a cost per bit basis. The same equipment manufacturers that use high performance SRAM may also use low and medium density DRAM and such products can be sold through the same channels.
System designers use SRAM in the most performance sensitive portions of their memory architecture. High performance SRAM operates at either very high speed or very low power or both. High speed SRAM is used in applications such as base stations, aggregators, routers, switches, modems and peripherals. Low power SRAM is used in applications such as industrial applications, wireless handheld devices and mobile phones.
The DRAM market can be segmented into high density devices (currently 4 Gb and above) and low and medium density devices (currently 2 Gb and below). High density DRAM is used in applications that require high capacity storage, such as PCs, servers and other high-end computing devices. Currently, DRAM in PCs is migrating from 4 Gb to 8 Gb and above. Low and medium density DRAM is used in applications such as digital consumer electronics, networking, mobile communications, and automotive electronics, which require less memory capacity than PCs and high end computing applications. Large captive memory manufacturers tend to focus production on higher density DRAM devices, where the volumes are greater and manufacturing economies of scale can be optimized. As a result, to the extent the large, captive memory manufacturers limit or cease production of low and medium density DRAM, customers will seek long-term, steady supply of these products. We do not participate in the PC and high end computing applications market, rather we focus on providing long-term support for low and medium density DRAM products.
The flash market can be segmented into serial NOR, parallel NOR and NAND flash products. We are currently focusing on serial NOR and parallel NOR products for personnel computer peripherals, communications, automotive and industrial applications.
Memory suppliers compete on the basis of speed, power consumption, density, reliability, and cost, all of which are a function of process technology and design expertise. Success in the memory market is determined not only by the quality of the device design, but also by the process through which the device is fabricated. Process technology improvements allow design line widths to be reduced, which in turn allow the integrated circuit design to operate at faster speeds and increased memory density. To meet the demands for high performance memories, a memory supplier must also have a wafer fabrication strategy allowing it to migrate to the newest generations of process technology on a timely basis. Process technology shifts occur frequently and are developed in high end wafer fabrication facilities that typically cost over $1.0 billion. Although most of the large multinational memory companies fabricate their own semiconductor wafers, fabless suppliers rely on third-party wafer foundries. The fabless model is much less capital intensive, but requires strong relationships with foundries to secure wafer supply and access to advanced process technology.

3


We believe the demand for high performance memory products across a variety of end markets provides a substantial opportunity for a focused supplier of high performance memory integrated circuits to penetrate these markets and support customers’ long-term needs.
Strategy
Since our inception in 1988, we have developed a broad range of SRAM products that enable designers to meet the demanding density, speed, cost, reliability and power consumption requirements of semiconductors used in high technology products. In the late 1990’s, we began to establish ourselves as a supplier of low and medium density DRAM products. For both product lines, we emphasize our commitment to be a long-term provider of legacy, small to medium density memories that are of less interest to some of our larger competitors. Flash, our newest addition to our memory portfolio is complementary to our SRAM and DRAM products. Our customers are among the largest manufacturers in the automotive electronic, communications, IMM and digital consumer markets. Unlike many other fabless semiconductor companies, we employ our own process development team to work collaboratively with our key foundry suppliers, which are primarily located in Asia. Our management has extensive experience working with Asian foundries. We believe these factors allow us to build strong relationships with our foundry suppliers and facilitate access to leading edge process technology and wafer capacity. The key elements of our strategy are:
Target Specific Memory Market Segments. The memory markets are large and diverse, but also prone to the economics of demand and supply imbalances which can cause fluctuations in product prices. We work to market and sell our DRAM and SRAM products into certain specific markets that provide sufficient volume for sales, but which also may provide better stability in prices over time. Examples of the market segments that we target are automotive, communications, industrial applications, medical equipment, die sales and specialty consumer.
Commit to Being a Long-Term Supplier of our Products. We are a long-term supplier of products to many of our customers. Our fabless model provides us the flexibility to accommodate small volume production runs for products such as low and medium density memories. In contrast, many large captive suppliers may reduce or cease production of lower density products in periods of tight capacity, as manufacturing such products is less attractive to them than making higher density memories, which typically have higher volumes and greater economies of scale. As an example, we still supply low density 4 Mb EDO 3.3 volt DRAM and 64K SRAM, while most large captive memory companies ceased production of such devices many years ago.
Continue to Develop and Offer High Performance Products. We provide cost effective, high performance products, including a complete family of SRAM products and a broad range of low and medium density DRAM products. We work with our customers to identify the memory requirements of their next generation products and then focus our development efforts on achieving high performance standards through advanced process technology, circuit density, high speed, reliability and optimized power consumption. Examples of our high performance product offerings include a 72 Mb synchronous high speed SRAM product and RLDRAM® 2 and RLDRAM®3 products targeting high-end networking applications and a 2 Gb DDR2 DRAM and various densities of DDR3 DRAM products targeting the automotive and communication markets.
Expand our Cost Effective Asian-Based Development Teams. We intend to continue to capitalize on our extensive experience in Asia. We have established cost effective engineering development teams close to our customers through our subsidiaries in Taiwan, China and Korea and have a full complement of research and development and sales and marketing capability in these Asian locations.
Further Penetrate Industry Leading Customers. We leverage our expertise in producing high quality memory products to penetrate our target markets through industry leading accounts, such as Continental, Delphi and Panasonic in automotive electronics; Cisco, Ericsson and Huawei Technologies in communications; Honeywell, Schneider, and Siemens in IMM applications; and Samsung, Sharp, and Toshiba in digital consumer. We target these customers because we believe they drive high volumes in their markets, have long life cycle products and define the direction of future memory requirements. We believe our success with these market leaders enables us to attract other customers and broaden our customer base.
NOR Flash Product Line Addition. With our acquisition of Chingis, we offer a NOR flash product line which we believe is synergistic with our SRAM and DRAM customer base. Our goal is to expand our presence with our current customers and to promote our flash portfolio with our customer base specifically focused on the automotive and industrial markets.
Analog Market Expansion. We develop analog products for use in our key markets. Our goal is to expand our key customer relationships by developing additional analog products in core end markets, increasing our market share in China, and expanding into high volume emerging markets. Currently, our analog products include audio amplifiers, LED drivers, power management and temperature sensors.

4


Customers and Marketing
Over the years, we have established a strong customer base, including industry leading accounts. Our key customers in each of our target markets are presented in the following table:

Automotive
  Electronics  
 
Communications
 
Industrial/Military/Medical
 
Digital Consumer
Bosch
 
Alcatel-Lucent
 
General Electric
 
Garmin
Continental
 
Cisco
 
Honeywell
 
Inventec
Delphi
 
Ericsson
 
Hypercom
 
Lenovo
Harman Becker
 
Huawei Technologies
 
Philips
 
LG Electronics
Hyundai Mobis
 
Motorola Solutions
 
Raytheon
 
Motorola
Johnson Controls
 
Nokia Siemens Networks
 
Schneider Electric
 
NEC
Panasonic
 
Tellabs
 
Siemens
 
Oppo
Philips
 
ZTE
 
Tyco
 
Panasonic
SiriusXM
 
 
 
 
 
Samsung
TRW
 
 
 
 
 
Sharp
Valeo
 
 
 
 
 
Sony
 
 
 
 
 
 
TCL
 
 
 
 
 
 
Toshiba
 
 
 
 
 
 
Western Digital

We have sales and marketing teams in the U.S. and Asia and a sales team in Europe. We market and sell our products in Asia, the U.S. and Europe through our direct sales force, independent sales representatives and distributors. We have distributors in North America and in many countries in Europe, including a Pan-European distributor. In Asia, we sell primarily through distributors who work closely with our Asian resident direct sales force. We have sales offices in the U.S., U.K., Germany, Taiwan, China, Hong Kong, Japan, India, Korea, and Singapore. Our marketing group focuses on product strategy, product development road maps, new product introduction, demand assessment and competitive analysis. The group also helps ensure that product launches, channel marketing programs, and ongoing demand and supply planning occur on a well-managed, timely basis.
In fiscal 2013, revenue from our largest and second largest distributor accounted for approximately 17% and 11%, respectively, of our total net sales. In fiscal 2012, revenue from our largest and second largest distributor accounted for approximately 14% and 13%, respectively, of our total net sales. In fiscal 2011, revenue from our largest and second largest distributor accounted for approximately 15% and 12%, respectively, of our total net sales. The percentage of our sales from customers located outside the U.S. was approximately 88%, 84%, and 85% in fiscal 2013, 2012 and 2011, 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 sales by region are set forth in the following table:

 
Fiscal Year Ended
 
September 30,
 
2013
 
2012
 
2011
Asia
67
%
 
62
%
 
64
%
Europe
20

 
21

 
20

U.S.
12

 
16

 
15

Other
1

 
1

 
1

Total
100
%
 
100
%
 
100
%

Information regarding our long-lived assets is contained in Note 15 to our Consolidated Financial Statements.
Our sales are generally made pursuant to standard purchase orders, which can be revised by our customers to reflect changes in the customer’s requirements. Generally, our purchase orders and OEM agreements allow customers to reschedule delivery dates and cancel purchase orders without significant penalties. For these reasons, we believe that our backlog, while useful for

5


scheduling production, is not necessarily a reliable indicator of future revenues. To meet customer requirements, we often must deliver products on relatively short notice. Accordingly, we must maintain a significant inventory of certain items to be able to meet these requirements.
See page 24 of this Report on Form 10-K for a discussion of the impact of seasonality on our business. See “Risk Factors” for information regarding risks related to our international operations.
Markets and Products
Our memory products are used in a variety of specific applications within the automotive, communications, IMM, and digital consumer markets. Many of the same customers that purchase our SRAM products also purchase our DRAM products.
DRAM.    Our DRAM strategy is to be a long-term supplier of low and medium density DRAM products. Our DRAM products are not targeted at the largest DRAM markets requiring the highest density DRAM products used in PCs and workstations. Instead, we provide 4, 16, 64, 128, 256 and 512 Mb and 1 Gb, 2 Gb and 4 Gb DRAM products, including a 1.8 volt low power version of our 16, 64, 128, 256 and 512 Mb synchronous DRAM (SDRAM) products. We also provide EDO, SDRAM, DDR DDR2 and DDR3 memory solutions in both x 32 and x 16 configurations to meet our customers’ memory requirements. We provide 288 Mb and 576 Mb densities of the RLDRAM® family. RLDRAM® memory is a reduced latency DRAM product targeting high speed communication applications. We are now ramping production of various densities of DDR3 DRAM products. We also offer both high performance and lower memory solutions. Applications for our low and medium density DRAM products include products such as WLANs, base stations, networking switches and routers, fiber to the home (FTTH), DSL and cable modems, set top boxes, digital cameras, MP3, flat panel TVs, LCD TVs, HDTVs, video phones, voice over internet protocol (VOIP), printers, disk drives, tape drives, audio/video equipment, instrumentation, GPS, telematics, infotainment, backup cameras, lane departure warning systems and other applications. Most of these applications do not require high density products, and our customers’ memory component strategy typically follows one or more generations behind the high density DRAM market. Additional DRAM products are under development. For most SDRAM products, we offer both packaged and known good die (KGD) only solutions. We also offer FBGA packages, which are very small and thin, for all of our synchronous and low power DRAM products.
SRAM.    Our SRAM strategy is to offer a broad range of devices and to be a complete supplier of our customers’ SRAM requirements. We offer advanced, leading-edge products, such as our 72 Mb synchronous SRAM, and we also make long-term supply commitments on established SRAM products, such as a 32K x 8, 5 volt asynchronous SRAM. Our high performance SRAM products generally focus on either high speed or low power applications.
We offer both asynchronous and synchronous high speed SRAM products. Our high speed asynchronous SRAM products are used in applications such as LANs, telecommunication equipment such as base stations, routers, modems, automotive electronics, multimedia products, peripherals, and industrial instrumentation. We have also developed a low power family of SRAM products for wireless applications. Our high speed synchronous SRAM products are used in a variety of networking and telecommunications applications, such as high performance switches and routers, as well as in automotive applications. Additional SRAM products under development are expected to include performance-leading features in speed, configuration, power levels, density and packaging. We are also developing certain Psuedo SRAM products as a cost effective replacement for ultra low power SRAMs.
NOR Flash.    Through our acquisition of Chingis in September 2012, we are now offering serial NOR flash products targeting the personal computer peripheral, automotive, IMM and communication markets. Current products in production include 256Kb, 512Kb, 1Mb, 2Mb, 4Mb and 32Mb devices. We have a number of products that are in the engineering validation stage including 16Mb and 8Mb devices. Our goal is to provide a complete portfolio of serial NOR flash products ranging from 256Kb to 256Mb. We are also ramping production of 32Mb and 64Mb parallel NOR flash products.
Analog and Other Products.    Through our acquisition of Si En in January 2011, we added high performance analog and mixed signal integrated circuits and are targeting the communications, digital consumer, industrial and automotive markets. Our primary products are audio amplifiers, LED drivers, power management and sensors. Applications for our audio power amplifiers include smart phones, GPS devices, MP3 players and set top boxes. Applications for our LED drivers for backlighting and panel display include smart phones, digital cameras, notebook computers and other computing and consumer devices as well as voltage converters used in industrial applications. In addition, we continue to expand our product offerings in HBLED drivers for general lighting and automotive applications.
Product Warranty.    Consistent with semiconductor memory industry practice, we generally provide a limited warranty that our semiconductor memory devices are in compliance with specifications existing at the time of delivery. Liability for a stated warranty period is usually limited to replacement of defective items or return of amounts paid.

6


Manufacturing
We outsource our manufacturing operations, including wafer fabrication, assembly and testing. Since memory products are particularly well suited for the development of advanced process technology, we seek to participate in developing and refining the process technology used to manufacture many of our products. We believe that this strategy enables us to achieve earlier introduction of smaller geometries for our memory products, which results in increased performance and lower manufacturing costs, as well as facilitates access to needed capacity. Our principal manufacturing relationships are with GlobalFoundries, Hynix, Nanya, Powerchip, SMIC, TSMC and UMC.
The manufacturing of our products begins at independent wafer foundries. Once the foundry has completed wafer processing, the wafers are shipped to subcontractors for wafer testing. They are then cut into individual memory chips, assembled into final packages and tested at our third-party subcontractors in Taiwan and China. Our operations groups in the U.S., China and Taiwan perform subcontractor management. We are certified to ISO 9001/2000 standards and ISO 14001, the environmental standard, and our quality system is periodically reviewed and approved by both ISO registrars and our customers. We are compliant to ISO/TS 16949:2002, the automotive standard.
Each of our wafer suppliers also fabricates for other integrated circuit companies, including certain of our competitors. In addition, some of our wafer suppliers manufacture memories 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. There can be no assurance that the foundries we use will not encounter construction or production difficulties or that they will allocate sufficient wafer capacity to satisfy our wafer requirements, especially in times of wafer capacity shortages. Moreover, there can be no assurance that we would be able to qualify additional manufacturing sources for existing or new products in a timely manner or that such additional manufacturing sources would be able to produce an adequate supply of wafers. If we were unable to obtain an adequate supply of wafers from our current or any alternative sources in a timely manner, our business and operating results would be harmed.
Our suppliers for wafer testing, assembly, and final test also provide services to other companies. There can be no assurance that these suppliers will not encounter production difficulties or that they will allocate sufficient capacity to satisfy our requirements. If we were unable to obtain an adequate supply of wafer testing, assembly, or final test services, our business and operating results would be harmed.
Competition
The semiconductor market is intensely competitive and has been characterized by cyclical market conditions, an oversupply of product, price erosion, rapid technological change and short product life cycles. Key factors impacting our competitive capabilities include:
the pricing of our products;
the supply and cost of wafers;
product design, functionality, performance and reliability;
successful and timely product development;
wafer manufacturing over or under capacity;
access to advanced process technologies at competitive prices;
access to assembly and test capacity; and
time to market.
Adverse developments with respect to any of these factors could impact our ability to compete successfully in the future and our failure to do so could harm our business. We currently believe that we compete favorably with respect to each of the foregoing factors.
In the low to medium density DRAM area, we generally compete with Hynix, Micron, Nanya, Oki, Samsung and Winbond. In addition, there are several fabless Taiwanese companies that are competitors, including ESMT and Etron. Other large DRAM manufacturers could address the low and medium density DRAM market in the future.
In the market for SRAM products we compete with several domestic and international semiconductor companies including Cypress, Etron, GSI Technology (GSI), Integrated Device Technology, Renesas Electronics and Samsung. We also may face significant competition from other domestic and foreign integrated circuit manufacturers which have advanced technological capabilities but are not currently participating in the SRAM market sector.
In the NOR Flash area, our main competitors are Macronix, Micron, Spansion and Winbond.

7


In the analog market, our primary competitors are AMS, Dialog, Linear Technology, Maxim Integrated Products, NXP Semiconductors, On Semi, Richtek and Texas Instruments. We also compete with many small to medium-sized companies in one or more segments of the market.
Certain of our competitors offer broader product lines and have greater financial, technical, marketing, distribution and other resources than us. In industry down cycles, they may be willing to sell below fully absorbed costs at prices we cannot match. We may not be able to compete successfully against any of these competitors.
The process technology used by our manufacturing sources, including process technology that we have developed jointly with our foundries, can be used by such foundries to produce products for other companies, including our competitors. Although we believe that our participation in the development of the processes provides us the advantage of early access to such processes, the knowledge of the wafer manufacturer may be used to benefit our competitors.
Research and Development
Rapid technological change and continuing price competition require research and development efforts on both new products and advanced processes employing smaller geometries. Our research and development activities are focused primarily on the development of new memory circuit designs at very small die sizes and utilization of advanced process technologies. We currently have design teams in California, Taiwan, China and Korea. Our research and development expenditures in fiscal 2013, 2012, and 2011 were $40.8 million, $30.9 million, and $27.6 million, respectively.
New SRAM products in development include a 9Mb Synchronous SRAM, a 16Mb ultra low power Asynchronous SRAM, a 36Mb Synchronous SRAM, and a 72Mb Synchronous SRAM. New DRAM products in development include 1.8 volt, low power 256Mb, 512Mb and 1Gb SDRAMs and various densities of DDR/DDR2/DDR3 DRAMs. We are also enhancing our portfolio of RLDRAM®2 and RLDRAM®3 products . We are developing new products on advanced 38, 45, 63 and 65 nanometer process technology as well as 72nm and 0.13 micron process technology. We are planning to introduce a number of flash products to expand our portfolio including high density serial NOR and parallel NOR flash products. We are also planning to introduce low density single level cell based NAND flash products. In the analog area, we are developing various audio amplifiers and HBLED drivers.
Patents and Intellectual Property
As of September 30, 2013, we held 121 U.S. patents which expire between 2013 and 2030 and have ten U.S. patent applications pending. We do not believe that the expiration of any particular patent in the short-term will have a material impact on our business. We expect to continue to file patent applications where appropriate to protect our proprietary technologies. In addition, we hold 55 patents in foreign jurisdictions which expire between 2015 and 2033 and have 24 patent applications in foreign jurisdictions which are pending. Although patents are an important element of our intellectual property, we believe that our continued success depends primarily on factors such as the technological skills and innovation of our personnel rather than on our patents. The process of seeking patent protection can be expensive and time consuming. There can be no assurance that patents will be issued from pending or future applications or that, if patents are issued, they will not be challenged, invalidated or circumvented, or that any rights granted thereunder will provide meaningful protection or other commercial advantage to us. Moreover, there can be no assurance that any patent rights will be upheld in the future or that we will be able to preserve any of our other intellectual property rights.
In the semiconductor industry, it is not unusual for companies to receive notices alleging infringement of patents or other intellectual property rights of others. We have been, and from time-to-time expect to be, notified of claims that we may be infringing patents, maskwork rights or copyrights owned by third parties. If it appears necessary or desirable, we may seek licenses under patents that we are alleged to be infringing. Although patent holders commonly offer such licenses, licenses may not be offered and the terms of any offered licenses may not be acceptable to us. The failure to obtain a license under a key patent or intellectual property right from a third party for technology used by us could harm our business.
Part of our outsourcing strategy includes licensing product designs. To help control our research and development expenses, we license some of our DRAM and SRAM designs from other companies or our foundries. We also license our own designs to other companies.

8


Employees
As of September 30, 2013, we had 590 employees worldwide, including 81 employees in the U.S., 158 in China, 306 in Taiwan, 8 in Hong Kong, 3 in Europe, 4 in India, 9 in Japan, 19 in Korea, and 2 in Singapore. Our future success will be dependent on our ability to attract, retain and motivate highly qualified technical and management personnel. The employment market for such personnel can be very competitive and there can be no assurance that we will successfully staff all necessary positions. Our employees are not represented by any collective bargaining agreements, we have never experienced a work stoppage and we believe our employee relations are good.
Executive Officers of the Registrant
Our executive officers and their ages as of December 1, 2013 are as follows:
Name
 
Age
 
Position
Jimmy S.M. Lee
 
58
 
Executive Chairman of the Board of Directors
Scott D. Howarth
 
53
 
President and Chief Executive Officer
John M. Cobb
 
57
 
Vice President and Chief Financial Officer
Kong Yeu Han
 
58
 
Vice Chairman
Chang-Chaio (James) Han
 
59
 
Executive Vice President, GM ISSI-Taiwan and SRAM/DRAM Business Division
Set forth below is certain information relating to our executive officers.
Jimmy S.M. Lee has served as our Executive Chairman since April 2008 and as Chairman, Chief Executive Officer and a director from October 1988, when he co-founded ISSI, until March 2008. He also served as President from November 2005 until December 2007. From 1985 to 1988, Mr. Lee was engineering manager at International CMOS Technology, a semiconductor company, and from 1983 to 1985, he was a design manager at Signetics Corporation, a semiconductor company. He has served as a director of Chrontel, a video optics company, since July 1995 and as a director of Alpha & Omega Semiconductor, Inc., a developer of advanced power semiconductor solutions, from March 2006 through January 2010. Mr. Lee holds an M.S. degree in electrical engineering from Texas Tech University and a B.S. degree in electrical engineering from National Taiwan University.
Scott D. Howarth has served as our Chief Executive Officer since April 2008, as a director since October 2008 and as our President since December 2007. He also served as our Chief Financial Officer from February 2006 until May 2008. From September 2001 to February 2006, Mr. Howarth was the Vice President of Finance and Administration and Chief Financial Officer of Chrontel, Inc., a fabless video optics company. Prior to joining Chrontel, Mr. Howarth was acting Chief Financial Officer at Securecom Networks, a start-up that was acquired. From 1984 to 2000, he was employed with Intel Corporation in both finance and operation positions, and held several group controller positions in the company. Mr. Howarth holds an MBA degree in finance and a B.S. degree in mining engineering from the University of Idaho.
John M. Cobb has served as our Vice President of Finance and Administration and Chief Financial Officer since May 2008. He served as Vice President Finance and Administration and Chief Financial Officer of Power Integrations, Inc., a power conversion semiconductor company, from 2001 through 2006. From 1990 to 2000, Mr. Cobb held various senior level financial positions at Quantum Corporation, a computer storage company, most recently as Vice President Finance and Chief Financial Officer of the company’s hard disk drive group. Mr. Cobb holds a B.S. degree in accounting from Villanova University.
Kong Yeu Han has served as our Vice Chairman since May 2005 and as a director since August 2005. He served as Chief Executive Officer of Integrated Circuit Solution, Inc. (ICSI) from January 1999 to May 2005. Mr. Han was a co-founder of ISSI and served as the Company’s Executive Vice President from April 1995 to December 1998, as Vice President from December 1988 to March 1995, and as General Manager, ISSI-Taiwan from September 1990 to December 1998. Mr. Han holds an M.S. degree in electrical engineering from the University of California, Santa Barbara and a B.S. degree in electrical engineering from National Taiwan University.
Chang-Chaio (James) Han has served as the Company’s Executive Vice President and as General Manager, ISSI-Taiwan and SRAM/DRAM Business Division since May 2005. He served as President of ICSI from October 2003 to April 2005, and as Vice President of Design of ICSI from July 1998 to October 2003. He has served as a director of Win Win Precision Technology Co., a solar energy and semiconductor equipment company, since August 2010. Mr. Han holds a PhD degree in electrical engineering from Case Western Reserve University and M.S. and B.S. degrees in electrical engineering from National Taiwan University.

9


Officers serve at the discretion of the Board and are appointed annually. There are no family relationships among the directors or officers of ISSI.


Item 1A. Risk Factors
Uncertain economic conditions and any future downturn in the automotive market or other markets we serve are expected to adversely affect our business and financial results.
Substantially all of our products are incorporated into products for the automotive, communications, IMM, and digital consumer markets. In particular, in fiscal 2013 and fiscal 2012, approximately 46% and 41%, respectively, of our sales were to the automotive market and any future downturn in this market would have a material adverse effect on our revenue and profitability. Historically, the automotive, communications, IMM, and digital consumer 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. During uncertain economic conditions, our current or potential customers may delay or reduce purchases of our products which would adversely affect our revenues and harm our business and financial results. In addition, any uncertainty in the economy may negatively impact the spending patterns of businesses including our current and potential customers. We expect our business to be adversely impacted by any further downturn in the U.S. or global economies.
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 fiscal 2013, fiscal 2012 and fiscal 2011, approximately 88%, 96% and 92%, 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. While our total revenue increased in the December 2012 quarter, our DRAM and SRAM revenue declined 4.9% in the December 2012 quarter from the September 2012 quarter due to weakness in the communications market. We also experienced a sequential decline in revenue from $66.2 million in the December 2011 quarter to $62.5 million in the March 2012 quarter primarily as a result of a decrease in unit shipments of our DRAM products. We experienced a sequential decline in revenue from $71.3 million in our September 2011 quarter to $66.2 million in our December 2011 quarter partially as a result of a decrease in unit shipments of our SRAM 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. While we experienced increases in the average selling prices for certain of our products in fiscal 2011, fiscal 2012, and fiscal 2013, 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. Although we entered the NOR Flash market with our acquisition of Chingis in September 2012, our NOR Flash business is generally subject to the same types of unit volume fluctuations and declines in average selling prices as our DRAM and SRAM businesses. 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.
If we are unable to obtain an adequate supply of wafers due to industry consolidation involving foundries, financial difficulties at foundries or other reasons, our business will be harmed unless we are able to secure alternative capacity in a timely manner and on reasonable terms.
If we are unable to obtain an adequate supply of wafers from our current suppliers or any alternative sources in a timely manner and on reasonable terms, our business will be severely harmed. For example, our revenue in the March 2013 quarter was adversely affected as we were unable to secure an adequate supply of NOR flash wafers. Our principal manufacturing relationships are with GlobalFoundries, Hynix, Nanya, Powerchip, SMIC, TSMC and UMC. 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 wafer capacity from our key 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. In recent years, it has been more difficult for us to secure long-term foundry capacity (particularly for our DRAM products) due to industry consolidation affecting foundries and adverse financial conditions at foundries. From time to time, certain of our wafer foundries have announced that they will no longer produce a specific type of wafer we may need (especially certain types of DRAM wafers). In such event, we have had to and expect in the future to have to place large last time buy orders which expose us to the risk of inventory obsolescence. In this regard, in the September 2012 quarter, we took delivery of a large quantity of DRAM wafers as the result of a last time buy with one of our foundries. 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

10


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.
Foundry capacity can be limited, resulting in higher wafer prices, and we have had to enter into special arrangements to secure foundry capacity.
If we are not able to obtain sufficient 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 will likely enter into in the future, various arrangements with suppliers, which could include:
option payments or other prepayments to foundries;
increased prices for wafers;
purchases of equity or debt securities in foundries;
nonrefundable deposits with, or loans to, foundries in exchange for capacity commitments;
joint ventures;
process development relationships with foundries; and
contracts that commit us to purchase specified quantities of wafers over extended periods.
In this regard, in September 2012, we invested approximately $27.1 million in Nanya and entered into an agreement with Nanya to provide us with access to leading edge process technologies and certain wafer volume guarantees.
In the future, we may not be able to make arrangements for needed foundry capacity 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. In addition, we must be able to secure sufficient assembly and test capacity from third-party contractors. In order to secure such capacity, we are exposed to many of the same risks we face when securing foundry capacity. In the past, we have purchased testing equipment for use by our contractors to satisfy a portion of our capacity needs. If we are not able to secure required assembly and test capacity, our business and customer relationships would be harmed.
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. Any uncertain economic conditions or 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 contractors could adversely impact the flow of our products to our end customers and materially adversely impact our business and results of operation. In recent years, several foundries (including foundries that we relied on for wafers)experienced financial difficulties and filed for bankruptcy protection, substantially reduced their operations or were acquired by competing companies. There are significant risks associated with our reliance on these third-party contractors, including:
potential price increases;
possible capacity shortages;
foundries ceasing production of wafer types that we need;
financial viability of our foundries or other contractors;
reduced control over product quality;
reduced control over delivery schedules;
their inability to increase production and achieve acceptable yields on a timely basis;
absence of long-term agreements;
limited warranties on products supplied to us;
impact of foreign exchange rates on our product costs; and
general risks related to conducting business internationally.
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.

11


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 costs and diversion of our resources, which could harm our business. In this regard, please refer to "Item 3. Legal Proceedings" for discussion of our pending litigation with GSI.
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 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.
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:
changes in the global economy;
changes in business conditions in our key markets especially the automotive market;
shortages in foundry, assembly or test capacity;
the cyclicality of the semiconductor industry;
declines in average selling prices of our products;
changes in our product mix which could reduce our gross margins;
a failure to introduce new products and to implement technologies on a timely basis;
disruption in the supply of wafers, assembly or test services;
changes in the pricing for wafers or assembly or test services;
oversupply of memory or analog products in the market;
inventory write-downs for lower of cost or market or excess and obsolete;
cancellation of existing orders or the failure to secure new orders;
excess inventory levels at our customers;
decreases in the demand for our memory or analog products;
our ability to control or reduce our operating expenses;
the costs and outcome of any pending or future litigation including our litigation with GSI;
fluctuations in foreign currencies relative to the U.S. dollar
increased expenses associated with new product introductions, masks or process changes;
the ability of customers to make payments to us;
market acceptance of ours and our customers’ products;
a failure to anticipate changing customer product requirements;
fluctuations in manufacturing yields at our suppliers;
fluctuations in product quality resulting in rework, replacement, or loss due to damages;
a failure to deliver products to customers on a timely basis;

12


the timing of significant orders; and
the commencement of any future litigation or antidumping proceedings.
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. Adverse changes in industry conditions are likely to result in a decline in average selling prices and the stated value of our inventory. In fiscal 2013, fiscal 2012, and fiscal 2011, we recorded inventory write-downs of $4.6 million, $5.7 million, and $3.5 million, respectively. These inventory write-downs related to adjusting our inventory valuation for certain excess and obsolete products, and valuing our inventory at the lower-of-cost-or-market.
Differences in forecasted average selling prices used in calculating lower of cost or market adjustments can result in significant changes in the estimated net realizable value of inventory and accordingly the amount of write-down recorded. If the estimated market value of products in inventory at quarter-end is below the manufacturing cost of these products, we will recognize charges to write down the carrying value of our inventories to market value. In addition, we write down to zero dollars the carrying value of inventory on hand that has aged over one year (two years for wafer and die bank) 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.
Strong competition in the semiconductor market may harm our business.
The semiconductor 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 our markets depends on factors both within and outside of our control, including:
the pricing of our products;
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 gain or loss of significant customers;
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 nature and success 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.

13


We may encounter difficulties in effectively integrating newly acquired businesses.
From time to time, we have acquired and expect in the future to acquire other companies or assets that we believe to be complementary to our business. In this regard, in September 2012, we acquired Chingis, a provider of NOR flash memory technologies used in standalone and embedded applications headquartered in Taiwan. In addition, in January 2011, we acquired Si En, a privately held fabless provider of high performance analog and mixed signal integrated circuits headquartered in Xiamen, China. Acquisitions may result in the 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:
lower than expected sales of any acquired products;
the risk that the markets for acquired products do not develop as expected;
difficulties in continuing to develop new technologies and deliver products to market on time;
the potential loss of key employees and customers as a result of the acquisition;
difficulties in successfully assimilating the operations, technologies and personnel of the acquired company;
diversion of management’s attention from other business concerns;
risks of entering markets in which we have no, or limited, direct prior experience; and
higher than estimated acquisition expenses.
There is no assurance that any of our recent or 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 2013, approximately 12% of our net sales was attributable to customers located in the U.S., 20% was attributable to customers located in Europe and 67% was attributable to customers located in Asia. In fiscal 2012, approximately 16% of our net sales was attributable to customers located in the U.S., 21% was attributable to customers located in Europe and 62% was attributable to customers located in Asia. In fiscal 2011, approximately 15% of our net sales was attributable to customers located in the U.S., 20% was attributable to customers located in Europe and 64% 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 and, while our wafer purchases are denominated in U.S. dollars, most of our assembly and test costs are denominated in New Taiwan dollars. 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 U.S. dollar compared to the New Taiwan dollar or Chinese renminbi could substantially increase the cost of our products and our operations in Taiwan or China.
We are subject to the risks of conducting business internationally, including:
global economic conditions, particularly in Taiwan and China;
difficulties in hiring and retaining experienced engineers in countries such as China and Taiwan;
foreign currency fluctuations;
duties, tariffs and other trade barriers and restrictions;
changes in trade policy and regulatory requirements;
transportation delays;
the burdens of complying with foreign laws;
imposition of foreign currency controls;

14


language barriers;
difficulties in collecting foreign accounts receivable;
difficulties in protecting our intellectual property rights;
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.
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 typically 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 recent periods. 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 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, manufacture, 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 also 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.
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 take actions to 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

15


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 develop competing technologies on their own.
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 II, Item 7 of this Form 10-K). 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 and such changes could significantly affect our results of operations. In particular, the calculation of share-based compensation expense 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 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.
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 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;
announcements regarding our share repurchase program and the timing and amount of shares we purchase under such program;
additions or departures of senior management; and
other events or factors, many of which are beyond our control.
In addition, stock markets have from time to time 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 in the past and are likely to continue to do so in the future.
We have incurred significant losses in certain recent periods, and there can be no assurance that we will be able to sustain profitability in the future.
Though we had been profitable for twelve consecutive quarters beginning with the September 2009 quarter through the June 2012 quarter, we incurred a loss of $13.2 million in the September 2012 quarter and a loss of $2.7 million for fiscal 2012, which included a $14.3 million write-down for certain tangible and intangible net assets related to our acquisition of Si En and a charge of $2.3 million to write-down our investment in SMIC due to the decline in fair market value of such shares being considered other than temporary. There can be no assurance that we will maintain profitability in future periods. Our ability to maintain 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

16


basis, secure sufficient wafer fabrication and assembly and test capacity and control operating expenses, including stock-based compensation. Adverse developments with respect to these or other factors could result in quarterly or annual operating losses in the future.
Adverse changes in our effective tax rate will harm our results of operations.
A number of factors may increase our future effective tax rates, including:
changes in the valuation of our deferred tax assets and liabilities, and changes in deferred tax valuation allowances;
exhaustion of our existing federal and foreign net operating loss carryforwards and credits;
our decision to repatriate non-U.S. earnings for which we have not previously provided for U.S. taxes;
increases in expenses not deductible for tax purposes, including impairments of goodwill in connection with acquisitions;
the jurisdictions in which our profits are determined to be earned and taxed;
limitations on the utilization of federal net operating loss carryforwards and credits;
the resolution of issues arising from tax audits with various tax authorities;
adjustments to income taxes upon finalization of various tax returns;
changes in available tax credits;
changes in tax laws or the interpretation of such tax laws; and
changes in U.S. generally accepted accounting principles.
Any significant increase in our future effective tax rates will reduce our net income for future periods.
We have used and may in the future 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.
While we have not repurchased any shares since fiscal 2011, from September 2007 through September 2011, we repurchased and retired an aggregate of 14,179,711 shares of our common stock in the open market under Rule 10b-18 and pursuant to our tender offers at a cost of approximately $88.5 million. At September 30, 2013, we had outstanding authorization from our Board to purchase up to an additional $19.8 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:
the use of a substantial portion of our 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;
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;
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
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.
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 Milpitas, 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, volcanic eruptions, fires, extreme weather conditions, medical epidemics such as a flu outbreak and other natural or manmade disasters.

17


Our operations involve the use of hazardous and toxic materials, and we must comply with environmental laws and regulations, which can be expensive, and may adversely affect our business and operating results.
We are subject to federal, state and local regulations relating to the use, handling, storage, disposal and human exposure to hazardous and toxic materials. If we were to violate or become liable under environmental laws in the future as a result of our inability to obtain permits, human error, accident, equipment failure or other causes, we could be subject to fines, costs, or civil or criminal sanctions, face property damage or personal injury claims or be required to incur substantial investigation or remediation costs or experience disruptions in our operations, any of which could have a material adverse effect on our business. In addition, environmental laws could become more stringent over time, imposing greater compliance costs and increasing the risks and penalties associated with violations, which could harm our business.
We also face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and other hazardous substances applicable to specified electronic products placed on the market in the European Union (Restriction on the Use of Hazardous Substances Directive 2002/95/EC, also known as the RoHS Directive). We expect that our operations will be affected by other new environmental laws and regulations on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws and regulations, they will likely result in additional costs, and could require that we change the design or manufacturing of our products, any of which could have a material adverse effect on our business.
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, 2013. If, in the future, we are unable to conclude that our internal control over financial reporting is effective or we are unable to conclude that our disclosure controls and procedures are effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

Item 1B. Unresolved Staff Comments
None.

Item 2. Properties
In December 2012, we purchased a building in Milpitas, California consisting of 55,612 square feet on approximately 2.85 acres for $6.5 million. We relocated our headquarters to this location in June 2013. In Taiwan, we own and occupy our building and the land upon which our building is situated is leased under an operating lease that expires in March 2016. In China, we own and occupy an office. 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 2016. We believe our existing facilities are adequate to meet our current needs and that we can renew our existing leases or obtain alternative space on terms that would not have a material adverse impact on our financial results.

Item 3. Legal Proceedings
GSI Technology Inc. v. Integrated Silicon Solution, Inc., et al.
On October 2, 2013, GSI Technology Inc. (GSI) filed a Second Amended Complaint in a lawsuit filed earlier in 2013 solely against defendant United Memories, Inc. in the United States District Court for the Northern District of California. GSI named us as a new, second defendant in the Second Amended Complaint, and alleges claims against us for violation of the Sherman Act, violation of the Racketeering Influenced and Corrupt Organizations Act, Unfair Competition under California Business & Professions Code 17200, misappropriation of trade secrets, intentional interference with contract, and intentional interference with prospective economic advantage. GSI alleges that we conspired with United Memories, Inc. to harm GSI in connection with a bid from Cisco Systems, Inc., to misappropriate alleged GSI trade secrets, and to interfere with a contract between United Memories, Inc. and GSI. GSI seeks damages and injunctive relief. Before we were named as a defendant, the Court denied motions by GSI for temporary and preliminary injunctive relief. On December 6, 2013, we filed a motion to dismiss each of the causes of action alleged against us by GSI. The motion is currently pending. We believe we have meritorious defenses to the claims alleged by GSI and intend to defend this suit vigorously.
VAREP GmBH v. Integrated Silicon Solution, Inc.
On August 21, 2012, a lawsuit was filed against us in the Superior Court of California, County of Santa Clara by a former independent sales representative based in Germany named Varep GmbH (Varep), for the alleged underpayment of commissions(Case No. 112CV230846).  The original complaint alleged 11 causes of action, including, among others, breach of contract, Labor Code violations, and violations of the Independent Wholesale Sales Representatives Contractual Relations Act.  A demurrer by us challenging the legal sufficiency of the Complaint was sustained with leave to amend and a motion to strike portions of the

18


initial complaint by us was granted in part and denied in part.  On December 28, 2012, Varep filed a First Amended Complaint (FAC) asserting seven causes of action, including, among others, breach of contract and Labor Code violations.  On January 7, 2013, we filed a demurrer challenging the legal sufficiency of the FAC and a motion to strike portions of the FAC.  On February 19, 2013, the demurrer was sustained without leave to amend as to the causes of action for breach of the implied covenant of good faith and fair dealing and Labor Code violations and overruled with respect to other causes of action, and the motion to strike was granted in part to strike a claim for punitive damages on the cause of action for negligent misrepresentation and denied in other part.  On March 4, 2013, we filed an answer to the remaining allegations of the FAC.  We and the plaintiff entered into a settlement and mutual general release agreement and on August 22, 2013 the case was dismissed with prejudice.
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.
 
Item 4. Mine Safety Disclosures
None.


19


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Common Stock
Our common stock has been quoted on the Nasdaq Global Market under the symbol ISSI since our initial public offering in February 1995. Prior to such date, there was no public market for our common stock. The following table sets forth, for the fiscal quarters indicated, the high and low sale prices per share for our common stock as reported on the Nasdaq Global Market. These prices are over-the-counter market quotations which reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 
High
 
Low
Fiscal Year 2012
 
 
 
First Quarter
$
9.79

 
$
6.81

Second Quarter
$
11.40

 
$
9.03

Third Quarter
$
11.50

 
$
8.83

Fourth Quarter
$
10.49

 
$
8.75

Fiscal Year 2013
 
 
 
First Quarter
$
9.73

 
$
8.18

Second Quarter
$
9.92

 
$
8.33

Third Quarter
$
11.31

 
$
8.31

Fourth Quarter
$
11.99

 
$
9.99


Holders of Record
As of December 6, 2013, there were approximately 102 stockholders of record of our common stock.
Dividends
We have never declared or paid cash dividends. We currently intend to retain any earnings for use in our business and do not anticipate paying any cash dividends on our capital stock in the foreseeable future.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.


20


Stock Performance Graph
The following graph sets forth our total cumulative stockholder return compared to the Standard & Poor’s 500 Index and the Philadelphia Semiconductor Index (“SOX”), for the period September 30, 2008 through September 30, 2013. Total stockholder return assumes $100 invested at the beginning of the period in our common stock, the stocks represented in the Standard & Poor’s 500 Index and the stocks represented in the Philadelphia Semiconductor Index, respectively. Total return also assumes reinvestment of dividends; we have paid no dividends on our common stock.
Comparison of Five-Year Cumulative Return
September 30, 2008 to September 30, 2013

21




Item 6. Selected Financial Data
The selected consolidated financial data set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements and the Notes thereto included elsewhere in this report. The consolidated statement of operations data set forth below for the three year period ended September 30, 2013 and the consolidated balance sheet data set forth below at September 30, 2013 and 2012 have been derived from our audited financial statements included elsewhere in this report. The consolidated statement of operations data set forth below for the fiscal years ended September 30, 2010 and September 30, 2009 and the consolidated balance sheet data set forth below at September 30, 2011, September 30, 2010 and September 30, 2009 have been derived from our audited financial statements not included in this report. Our historical results are not necessarily indicative of the results to be expected for any future period.
 
 
Fiscal Years Ended September 30,
 
2013
 
2012
 
2011
 
2010
 
2009
 
(In thousands, except per share data)
Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
307,570

 
$
265,950

 
$
270,508

 
$
252,458

 
$
154,251

Cost of sales
206,109

 
182,966

 
180,100

 
155,927

 
113,373

Gross profit
101,461

 
82,984

 
90,408

 
96,531

 
40,878

Operating expenses
 
 
 
 
 
 
 
 
 
Research and development
40,839

 
30,918

 
27,622

 
24,066

 
20,020

Selling, general and administrative
43,964

 
42,174

 
36,617

 
32,509

 
26,221

Acquired in-process technology

 

 

 

 
710

Impairment of goodwill

 
4,261

 

 

 

Total operating expenses
84,803

 
77,353

 
64,239

 
56,575

 
46,951

Operating income (loss)
16,658

 
5,631

 
26,169

 
39,956

 
(6,073
)
Other income (expense), net
13,363

 
(1,724
)
 
2,616

 
3,953

 
961

Income (loss) before income taxes
30,021

 
3,907

 
28,785

 
43,909

 
(5,112
)
Provision (benefit) for income taxes
12,277

 
6,512

 
(27,338
)
 
1,154

 
(18
)
Consolidated net income (loss)
17,744

 
(2,605
)
 
56,123

 
42,755

 
(5,094
)
Less net (income) loss attributable to noncontrolling interest
(196
)
 
(113
)
 
(166
)
 
(559
)
 
44

Net income (loss)
$
17,548

 
$
(2,718
)
 
$
55,957

 
$
42,196

 
$
(5,050
)
Basic net income (loss) per share (1)
$
0.62

 
$
(0.10
)
 
$
2.11

 
$
1.65

 
$
(0.20
)
Diluted net income (loss) per share (1)
$
0.59

 
$
(0.10
)
 
$
1.98

 
$
1.56

 
$
(0.20
)
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, restricted cash and short-term investments
$
141,555

 
$
82,038

 
$
95,410

 
$
91,609

 
$
83,486

Total assets
361,869

 
317,071

 
291,987

 
234,031

 
161,930

Long-term obligations
13,246

 
5,478

 
9,272

 
2,288

 
797

Total ISSI stockholders’ equity
280,573

 
242,829

 
232,554

 
172,205

 
122,826

Noncontrolling interests in subsidiaries
2,197

 
3,506

 
2,692

 
5,616

 
1,750

Total stockholders’ equity
282,770

 
246,335

 
235,246

 
177,821

 
124,576

________________________
(1)
See Note 1 of Notes to Consolidated Financial Statements for an explanation of the basis used to calculate net income (loss) per share.



22


Item 7. 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) automotive, (ii) communications, (iii) industrial, medical and military, and (iv) digital consumer. Our primary products are low and medium density DRAM in both package and Known Good Die (KGD) form and high speed and low power SRAM, serial and parallel NOR flash products and a variety of mixed signal and analog products. In fiscal 2013, approximately 88% of our revenue was derived from our DRAM and SRAM products. Sales of our DRAM products have represented a majority of our revenue in each year since fiscal 2003.
On September 14, 2012, we acquired approximately 94.1% of Chingis Technology Corporation (Chingis) for approximately $32 million, or $13 million net of the approximately $19 million in cash and cash equivalents on Chingis' balance sheet at closing. In May 2013, we acquired an additional 4.8% of Chingis for approximately $1.6 million. At September 30, 2013, we owned approximately 98.9% of Chingis. Founded in 1995, Chingis provides a variety of NOR flash memory technologies used in standalone and embedded applications. Chingis is headquartered in HsinChu, Taiwan and has offices in Taiwan, Korea, China and the U.S. Our financial results reflect accounting for Chingis on a consolidated basis beginning September 14, 2012.
On January 31, 2011, we acquired Si En Integration Holdings Limited (Si En), a privately held fabless provider of high performance analog and mixed signal integrated circuits headquartered in Xiamen, China. Si En targets the mobile communications, digital consumer, networking, and automotive markets. Si En’s current products include audio power amplifiers, LED drivers, power management and temperature sensors.
In January 2010, we formed a separate business unit, Giantec Semiconductor, Inc. (Giantec) which designs and markets application specific standard products (ASSP) primarily EEPROMs and SmartCards. As part of this formation, Giantec raised approximately $3.8 million from an outside investor. On December 30, 2010, Giantec received an additional investment of $4.0 million from outside investors, and as a result our ownership interest was reduced to approximately 44% and we were required to deconsolidate Giantec. In August 2011, we sold approximately 37% of our shares in Giantec and on August 31, 2011, Giantec merged with Maxllent Corp. thereby reducing our ownership interest in Giantec to approximately 19.85%. In fiscal 2013, we sold our remaining investment in Giantec for $4.3 million which resulted in a pre-tax gain of approximately $0.2 million. Our consolidated financial statements reflect accounting for Giantec on a consolidated basis from January 1, 2010 through December 30, 2010. For the period from December 31, 2010 through August 31, 2011, we accounted for Giantec on the equity method and our results included our percentage share of Giantec’s results of operations. From September 1, 2011 until the sale of our investment in June 2013, we accounted for Giantec on the cost basis.
In order to control our operating expenses, for the past several years we have limited our headcount in the U.S. and maintained much of our operations in Taiwan and China. We believe this strategy has enabled us to limit our operating expenses while simultaneously locating these operations 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. In recent years, it has become more difficult for us to secure long-term foundry capacity (particularly for our DRAM products) due to industry consolidation affecting foundries and adverse financial conditions at foundries.  In this regard, in September 2012, we invested approximately $27.1 million in Nanya and entered into an agreement with Nanya to provide us with access to leading edge process technologies and certain wafer volume guarantees. In addition, certain of our foundries have decided from time to time not to produce the type of wafers that we need (especially certain types of DRAM wafers) so we have been forced to rely on alternative sources of supply and to place large last time buy orders which expose us to the risk of inventory obsolescence. 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.  Although such matters have not had a material adverse impact on our business or financial results in recent periods, there can be no assurance as to the future impact that such matters will have on our business, customer relationships or results of operations.
The average selling prices of our DRAM and SRAM products are 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 certain of our products in fiscal 2013 and in fiscal 2012. We expect average selling prices for our products to decline in the future, principally due to 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, 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

23


products. Declining average selling prices will adversely affect our gross margins unless we are able to offset such declines with commensurate reductions in per unit costs or changes in product mix in favor of higher margin products.
 Revenue from product sales to our direct customers is recognized upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed or 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 for 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 88%, 84% and 85% in fiscal 2013, 2012 and 2011, respectively. We measure sales location by the shipping destination. We anticipate that sales to international customers will continue to represent a significant percentage of our net sales. The percentages of our net sales by region are set forth in the following table:
 
Fiscal Years Ended
September 30,
 
2013
 
2012
 
2011
Asia
67
%
 
62
%
 
64
%
Europe
20

 
21

 
20

U.S.
12

 
16

 
15

Other
1

 
1

 
1

Total
100
%
 
100
%
 
100
%
Our sales are generally made by purchase orders. Because industry practice allows customers to reschedule or cancel orders on relatively short notice, backlog may not be 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.
Due to the complex nature of the markets we serve and the broad fluctuations in 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. Most of our foundries and all of our assembly and test subcontractors are located in Asia. Although our international sales are largely denominated in U.S. dollars, we do have sales transactions in New Taiwan dollars, in Hong Kong dollars and in Chinese renminbi. In addition, we have foreign operations where expenses are generally denominated in the local currency. Such transactions expose us to the risk of exchange rate fluctuations. We monitor our exposure to foreign currency fluctuations, but have not adopted any hedging strategies to date. There can be no assurance that exchange rate fluctuations will not harm our business and operating results in the future.

Fiscal Year Ended September 30, 2013 Compared to Fiscal Year Ended September 30, 2012
Net Sales. Net sales consist principally of total product sales less estimated sales returns. Net sales increased to $307.6 million in fiscal 2013 from $266.0 million in fiscal 2012. The increase in net sales of $41.6 million was primarily the result of $29.8 million of NOR Flash revenue from our acquisition of Chingis which closed on September 14, 2012. Our DRAM and SRAM revenue increased by $13.5 million in fiscal 2013 compared to fiscal 2012. Our DRAM revenue increased by 8% in fiscal 2013 compared to fiscal 2012 principally as a result of a favorable shift in product mix to higher density products. Our SRAM revenue remained relatively flat in fiscal 2013 compared to fiscal 2012 as the impact of an increase in average selling prices from a shift in product mix was offset by the impact of a decrease in unit shipments. Our analog revenue decreased by $1.7 million in fiscal 2013 compared to fiscal 2012. We anticipate that the average selling prices of our existing products will generally decline over time, although the rate of decline may fluctuate for certain products. There can be no assurance that any future price declines will be offset by higher volumes or by higher prices on newer products.

In fiscal 2013, revenue from our largest distributor accounted for 17% of net sales and revenue from our second largest distributor accounted for 11% of our net sales. In fiscal 2012, revenue from our largest distributor accounted for 14% of net sales and revenue from our second largest distributor accounted for 13% of our net sales.

24


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, amortization of intangibles and import duties. Gross profit increased by $18.5 million to $101.5 million in fiscal 2013 from $83.0 million in fiscal 2012. Our gross margin was 33.0% in fiscal 2013 compared to 31.2% in fiscal 2012. Fiscal 2013 included a $4.6 million charge for inventory write-downs which unfavorably impacted our gross margin by 1.5% compared to a $5.7 million charge for inventory write-downs which unfavorably impacted our gross margin by 2.2% in fiscal 2012. In addition, our gross profit for fiscal 2012 included $5.4 million for the write-off of certain intangible assets acquired with our acquisition of Si En which unfavorably impacted our gross margin by 2.0%. Excluding the impact of the inventory write-downs and impairment charge, our gross margin decreased in fiscal 2013 compared to fiscal 2012 which can be attributed to the unfavorable impact in the current period of sales of lower margin NOR flash products. We believe that the average selling prices of our products will decline over time and, unless we are able to reduce our cost per unit or improve our product mix to higher gross margin products to the extent necessary to offset such declines, the decline in average selling prices will result in a material decline in our gross margin. In addition, our product costs could increase if our suppliers raise prices, which could result in a material decline in our gross margin. When demand for end products has increased, foundries have tended to raise wafer prices. 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 increased by 32% to $40.8 million in fiscal 2013 from $30.9 million in fiscal 2012. As a percentage of net sales, research and development expenses increased to 13.3% in fiscal 2013 from 11.6% in fiscal 2012. The increase in research and development expenses of $9.9 million was primarily the result of a $7.7 million increase in research and development expenses for our NOR flash products as a result of our acquisition of Chingis. In addition, our research and development expenses in fiscal 2013 increased by $4.0 million primarily related to headcount and other product development expenses compared to fiscal 2012. Fiscal 2012 included a $1.8 million impairment charge for certain intangible and tangible assets acquired with our acquisition of Si En. We expect the dollar amount of our research and development expenses to increase in fiscal 2014 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 increased by 4% to $44.0 million in fiscal 2013 from $42.2 million in fiscal 2012. As a percentage of net sales, selling, general and administrative expenses decreased to 14.3% in fiscal 2013 from 15.9% in fiscal 2012. The increase in selling, general and administrative expenses can be attributed to a $2.8 million increase in expenses as a result of our acquisition of Chingis. In addition, our selling, general and administrative expenses in fiscal 2013 increased by $2.7 million primarily related to headcount related expenses, professional service fees and sales commissions compared to fiscal 2012. Fiscal 2012 included a $2.9 million impairment charge and $0.8 million in amortization of certain intangible assets from our acquisition of Si En which were written-off in the September 2012 quarter. We expect the dollar amount of our selling, general and administrative expenses to remain relatively flat in fiscal 2014 and expect such expenses to fluctuate as a percentage of net sales depending on our overall level of sales.
Impairment of goodwill. There was no impairment of goodwill in fiscal 2013. During the fourth quarter of fiscal 2012, we completed the first step of our annual goodwill impairment test, which included examining the impact of current general economic conditions on our future prospects and the current level of our market capitalization. Based on this analysis, we concluded that goodwill related to our analog reporting unit was impaired. Our analog reporting unit's goodwill was originally recorded in connection with our acquisition of Si En. Therefore, we performed the second step of the impairment test to determine the implied fair value of goodwill. Specifically, we hypothetically allocated the estimated fair value of our equity as determined in the first step to recognized and unrecognized net assets, including allocations to intangible assets. The analysis indicated that there would be approximately $3.9 million remaining implied value attributable to goodwill and accordingly, we wrote off $4.3 million of our goodwill.
Interest and other income (expense), net. Interest and other income (expense), net was income of $1.2 million in fiscal 2013 compared to expense of $1.7 million in fiscal 2012. The $1.2 million of interest and other income in fiscal 2013 was comprised of $1.2 million in rental income from the lease of excess space in our Taiwan facility, interest income of $0.3 million and foreign exchange gains of approximately $0.2 million offset in part by $0.5 million of other items. The $1.7 million of interest of other income (expense) in fiscal 2012 was comprised of a $2.3 million charge to write-down our investment in Semiconductor Manufacturing International Corporation (SMIC) due to the decline in fair market value being considered other than temporary, foreign exchange losses of approximately $0.6 million, other expenses of approximately $0.3 million offset in part by $1.3 million in rental income from the lease of excess space in our Taiwan facility and $0.2 million of interest income.
Gain on the sale of investments. In fiscal 2013, we sold approximately 143.5 million shares of Nanya common stock for approximately $21.2 million which resulted in a pre-tax gain of approximately $12.0 million. In addition, we sold our investment in Giantec for approximately $4.3 million which resulted in a pre-tax gain of approximately $0.2 million.

25


Provision for income taxes. We recorded income tax expense of $12.3 million in fiscal 2013 that represents an effective tax rate of approximately 41%. In fiscal 2013, we recorded an increase in the valuation allowance of approximately $0.7 million for California net operating loss carryforwards and a decrease in the valuation allowance of approximately $1.3 million for foreign tax credit carryforwards based on our estimated ability to use these carryforwards in the future as a result of a change in our legal structure. The difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the impact of such items, the differential in foreign tax rates, significant foreign inclusions and non-deductible stock-based compensation expense. We recorded income tax expense of $6.5 million for fiscal 2012 that is principally comprised of U.S. federal, state and foreign income taxes. The difference between the $6.5 million tax expense and the tax on income based on the federal statutory rate of 35% is principally due to the impact of non-deductible foreign impairment charges, foreign losses for which no tax benefit has been recorded, non-deductible stock based compensation charges and other valuation allowance adjustments. For fiscal 2012, we continued to record a valuation allowance on certain U.S. and foreign deferred tax assets where the estimated realization is not certain.
Net income attributable to noncontrolling interests. The net income attributable to noncontrolling interests was $0.2 million in fiscal 2013 compared to $0.1 million in fiscal 2012.

Fiscal Year Ended September 30, 2012 Compared to Fiscal Year Ended September 30, 2011
Net Sales. Net sales decreased by 2% to $266.0 million in fiscal 2012 from $270.5 million in fiscal 2011. The decrease in net sales of $4.5 million was principally due to a decrease in ASSP, analog and SRAM revenue partially offset by an increase in DRAM revenue in fiscal 2012 compared to fiscal 2011. Our DRAM revenue increased by 8% in fiscal 2012 compared to fiscal 2011 principally as a result of a favorable shift in product mix whereas our SRAM revenue decreased by 8% in fiscal 2012 compared to fiscal 2011 as a result of a decrease in unit shipments and average selling prices. Fiscal 2012 included $8.9 million of analog revenue compared to $13.6 million in fiscal 2011. The decrease in analog revenue was the result of a decrease in unit shipments as the China feature phone market weakened due to the shift toward smart phones. As a result of our deconsolidation of Giantec, our ASSP revenue decreased $7.0 million in fiscal 2012 compared to fiscal 2011. Fiscal 2012 includes $1.2 million of flash revenue from our acquisition of Chingis which closed on September 14, 2012.
In fiscal 2012, revenue from our largest distributor accounted for 14% of net sales and revenue from our second largest distributor accounted for 13% of our net sales. In fiscal 2011, revenue from our largest distributor accounted for 15% of net sales and revenue from our second largest distributor accounted for 12% of our net sales.
Gross profit. Gross profit decreased by $7.4 million to $83.0 million in fiscal 2012 from $90.4 million in fiscal 2011. Our gross margin was 31.2% in fiscal 2012 compared to 33.4% in fiscal 2011. Our gross profit for fiscal 2012 included $5.4 million for the write-off of certain intangible assets acquired with our acquisition of Si En which unfavorably impacted our gross margin by 2.0%. Fiscal 2012 included a $5.7 million charge for inventory write-downs which unfavorably impacted our gross margin by 2.2% compared to a $3.5 million charge for inventory write-downs which unfavorably impacted our gross margin by 1.3% in fiscal 2011. Excluding the impact of the impairment charge and inventory write-downs, our gross margin increased in fiscal 2012 compared to fiscal 2011 due to the favorable impact in the current period of a change in product mix as well as a decrease in product costs for certain products.
Research and development. Research and development expenses increased by 12% to $30.9 million in fiscal 2012 from $27.6 million in fiscal 2011. As a percentage of net sales, research and development expenses increased to 11.6% in fiscal 2012 from 10.2% in fiscal 2011. The increase in research and development expenses of $3.3 million can be partially attributed to a $1.8 million impairment charge in fiscal 2012 for certain intangible and tangible assets acquired with our acquisition of Si En. In addition, $1.1 million of the increase in our research and development expenses is the result of consolidating Si En for all of fiscal 2012 and additional analog product development expenses. Our acquisition of Chingis in September 2012 resulted in an increase of $0.5 million in research and development expenses. Also, headcount related expenses increased in fiscal 2012 compared to fiscal 2011. The foregoing increases were partially offset by a $0.9 million decrease in research and development expenses as a result of our deconsolidation of Giantec.
Selling, general and administrative. Selling, general and administrative expenses increased by 15% to $42.2 million in fiscal 2012 from $36.6 million in fiscal 2011. As a percentage of net sales, selling, general and administrative expenses increased to 15.9% in fiscal 2012 from 13.5% in fiscal 2011. The increase in selling, general and administrative expenses of $5.6 million can be partially attributed to a $2.9 million impairment charge in fiscal 2012 for certain intangible assets acquired with our acquisition of Si En. In addition, $0.9 million of the increase in our selling, general and administrative expenses is the result of consolidating Si En for all of fiscal 2012. Our acquisition of Chingis in September 2012 resulted in an increase of $1.0 million in selling, general and administrative expenses. Also, headcount related expenses and accounting and legal fees increased in fiscal 2012 compared to fiscal 2011. The foregoing increases were partially offset by a $0.7 million decrease in selling, general and administrative expenses as a result of our deconsolidation of Giantec.

26


Impairment of goodwill. During the fourth quarter of fiscal 2012, we completed the first step of our annual goodwill impairment test, which included examining the impact of current general economic conditions on our future prospects and the current level of our market capitalization. Based on this analysis, we concluded that goodwill related to our analog reporting unit was impaired. Our analog reporting unit's goodwill was originally recorded in connection with our acquisition of Si En. Therefore, we performed the second step of the impairment test to determine the implied fair value of goodwill. Specifically, we hypothetically allocated the estimated fair value of our equity as determined in the first step to recognized and unrecognized net assets, including allocations to intangible assets. The analysis indicated that there would be approximately $3.9 million remaining implied value attributable to goodwill and accordingly, we wrote off $4.3 million of our goodwill. In fiscal 2011, there was no impairment of goodwill.
Interest and other income (expense), net. Interest and other income (expense), net was expense of $1.7 million in fiscal 2012 compared to income of $2.1 million in fiscal 2011. The $1.7 million of interest of other income (expense) in fiscal 2012 was comprised of a $2.3 million charge to write-down our investment in SMIC due to the decline in fair market value being considered other than temporary, foreign exchange losses of approximately $0.6 million, other expenses of approximately $0.3 million offset in part by $1.3 million in rental income from the lease of excess space in our Taiwan facility and $0.2 million of interest income. The $2.1 million of interest and other income in fiscal 2011 was comprised of $1.4 million in rental income from the lease of excess space in our Taiwan facility, foreign exchange gains of approximately $0.4 million, $0.2 million from our equity interest in Giantec and interest income of $0.2 million offset in part by other items.
Gain on sale of investments. The gain on the sale of investments was $0.6 million in fiscal 2011 as we sold an investment and recorded a corresponding pre-tax gain.
Provision (benefit) for income taxes. We recorded income tax expense of $6.5 million for fiscal 2012 that is principally comprised of U.S. federal, state and foreign income taxes. The difference between the $6.5 million tax expense and the tax on income based on the federal statutory rate of 35% is principally due to the impact of non-deductible foreign impairment charges, foreign losses for which no tax benefit has been recorded, non-deductible stock based compensation charges and other valuation allowance adjustments. For fiscal 2012, we continued to record a valuation allowance on certain U.S. and foreign deferred tax assets where the estimated realization is not certain.
We recorded an income tax benefit of $27.3 million for fiscal 2011. The income tax benefit was due to the release of valuation allowances for federal, state and foreign deferred tax assets of approximately $28.3 million offset by the income tax provision of $1.0 million of foreign taxes on certain income earned by our foreign entities and some miscellaneous state income taxes. The release of the valuation allowance in fiscal 2011 was based on our evaluation of historical evidence, trends in profitability and expectations of future taxable income. As such, we determined that a valuation allowance was no longer necessary for the majority of our U.S. and for certain foreign deferred tax assets because, based on the available evidence, realization of these net deferred tax assets was more likely than not. A valuation allowance remained on certain U.S and foreign deferred tax assets to reduce our deferred tax assets to an amount that is more likely than not to be realized.
Net income attributable to noncontrolling interests. The net income attributable to noncontrolling interests was $0.1 million in fiscal 2012 compared to $0.2 million in fiscal 2011.

Liquidity and Capital Resources
As of September 30, 2013, our principal sources of liquidity included cash, cash equivalents and short-term investments of approximately $141.6 million. During fiscal 2013, we generated cash of approximately $33.6 million compared to $32.3 million of cash provided in fiscal 2012. The cash generated by operations in fiscal 2013 was primarily due to our net income of $17.7 million adjusted for non-cash items of $10.5 million and decreases in accounts receivable of $1.5 million, increases in accounts payable of $5.5 million and decreases in other assets of $0.7 million. This was partially offset by increases in inventory of $1.5 million and decreases in accrued liabilities of $0.8 million. The cash provided by operations in fiscal 2012 was primarily due to our net loss of $2.6 million adjusted for non-cash items of $34.9 million and increases in accounts payable of $2.4 million and increases in accrued and other liabilities of $2.0 million. This was partially offset by increases in inventories of $2.7 million, increases in accounts receivable of $1.3 million and increases in other assets of $0.3 million.
In fiscal 2013, we used $1.2 million for investing activities compared to $46.0 million used in fiscal 2012. The cash used in fiscal 2013 included $23.2 million for the acquisition of property and equipment including $8.7 million for our new corporate headquarters in Milpitas, California and $2.4 million for an office space in Suzhou, China, $4.2 million for the payment of a holdback related to our acquisition of Si En and $1.6 million to acquire an additional 4.8% of the noncontrolling interest in our Chingis subsidiary. In fiscal 2013, we generated $21.2 million from the sale of approximately143.5 million shares of Nanya common stock, $4.3 million from the sale of our investment in Giantec and $2.3 million from net sales of available-for-sale securities. The cash used in fiscal 2012 included $27.1 million for our investment in shares of Nanya, $13.2 million net of the cash acquired for our acquisition of Chingis, $6.0 million for the acquisition of property, equipment and leasehold improvements,

27


$2.4 million for our acquisition of the noncontrolling interest in our Wintram subsidiary, $2.0 million for a minority investment in a joint venture and $2.1 million for net purchases of available-for-sale securities. In fiscal 2012, we generated $6.8 million from a decrease in restricted cash.
In fiscal 2013, we made capital expenditures of approximately $23.2 million which includes $8.7 million for our new corporate headquarters, $2.4 million for office space in Suzhou and the remaining balance for test equipment, engineering tools, and computer hardware and software compared to $6.0 million in fiscal 2012. We expect to spend approximately $12.0 million to $17.0 million to purchase capital equipment during the next twelve months, principally for the purchase of additional test equipment, design and engineering tools, and computer hardware and software. We expect to fund our capital expenditures from our existing cash and cash equivalent balances.
We generated $12.4 million from financing activities in fiscal 2013 compared to $5.3 million generated from financing activities in fiscal 2012. Our sources of financing for fiscal 2013 were borrowings of $4.9 million to purchase our new corporate headquarters, borrowing $4.1 million under short-term lines of credit and proceeds from the issuance of common stock of $8.2 million from stock option exercises and sales under our employee stock purchase plan. In fiscal 2013, we used $4.2 million for the repayment of short-term and long-term borrowings and $0.6 million to settle shares withheld for statutory withholding requirements upon the vesting of RSUs. Our sources of financing for fiscal 2012 were proceeds from the issuance of common stock of $5.8 million from stock option exercises and sales under our employee stock purchase plan and borrowings of $20.8 million under short-term lines of credit. In fiscal 2012, we used $20.8 million for the repayment of short-term borrowings and $0.5 million to settle shares withheld for statutory requirements upon the vesting of RSUs.
We have $22.5 million in borrowings available through a number of short-term lines of credit with various financial institutions in Taiwan. These lines of credit expire at various times through August 2014. As of September 30, 2013, we had no outstanding borrowings under these short-term lines of credit.
On December 4, 2012, we purchased a building in Milpitas, California consisting of 55,612 square feet on approximately 2.85 acres for $6.5 million. We relocated our headquarters to this location in June 2013. We financed a portion of the purchase price for our new headquarters with a loan for approximately $4.9 million. In Taiwan, we own and occupy our building and the land upon which our building is situated is leased under an operating lease that expires in March 2016. 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 2016. Our outstanding commitments under these leases were approximately $1.8 million at September 30, 2013.
We generally warrant our products against defects in materials and workmanship for a period of 12 months. Liability for a stated warranty period is usually limited to the replacement of defective items or return of amounts paid. Warranty expense has historically been immaterial to our financial statements.
Our contractual cash obligations at September 30, 2013 are outlined in the table below:
 
Payments Due by Period
Contractual Obligations
Total
 
Less than
1 year
 
1-3
years
 
3-5
years
 
More than
5 years
 
(In thousands)
Operating leases
$
1,760

 
$
802

 
$
958

 
$

 
$

Purchase obligations with wafer foundries
31,629

 
31,629

 

 

 

Total contractual cash obligations
$
33,389

 
$
32,431

 
$
958

 
$

 
$


At September 30, 2013, we had outstanding authorization from our Board to purchase up to $19.8 million of our common stock from time to time.
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, additional 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 or prepayments to wafer fabrication foundries or assembly and test subcontractors. To the extent we enter into such transactions, any such transaction could require us to seek additional equity or debt financing to fund such activities. There can be no assurance that any such additional financing could be obtained on terms acceptable to us, if at all.

28


Off-Balance Sheet Arrangements
We may be obligated to indemnify certain customers, distributors, suppliers, and subcontractors for attorney fees and damages and costs awarded against these parties in certain circumstances in which our products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. In certain cases, there are limits on and exceptions to our potential liability for indemnification relating to intellectual property infringement claims. In addition, we have entered into indemnification agreements with our officers and directors, and the Company’s bylaws provide that indemnification may be provided to our agents. We have directors’ and officers’ insurance pursuant to which we may be reimbursed for certain indemnity expenses, subject to the terms of the insurance policy. We cannot estimate the amount of potential future indemnity expenses that we may be required to make. The amount of available directors’ and officers’ insurance may not be sufficient to cover our indemnity obligations, which may have a material adverse effect on our results of operations in future periods.
Other than as set forth above, we are not currently party to any off-balance sheet arrangements as defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make difficult and subjective estimates, judgments and assumptions. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The estimates and judgments that we use in applying our accounting policies have a significant impact on the results we report in our financial statements. We base our estimates and judgments on our historical experience combined with knowledge of current conditions and our beliefs of what could occur in the future, considering the information available at the time. Actual results could differ from those estimates and such differences may be material to our financial statements. We reevaluate our estimates and judgments on an ongoing basis.
Our critical accounting policies which are impacted by our estimates are: (i) the valuation of our inventory, which impacts cost of goods sold and gross profit; (ii) the valuation of our allowance for sales returns and allowances, which impacts net sales; (iii) the valuation of our allowance for doubtful accounts, which impacts general and administrative expense; (iv) accounting for acquisitions and goodwill, which impacts cost of goods sold and operating expense when we record impairments; (v) accounting for stock-based compensation which impacts costs of goods sold, research and development expense and selling, general and administrative expense and (vi) accounting for income taxes. Each of these policies is described in more detail below. We also have other key accounting policies that may not require us to make estimates and judgments that are as subjective or difficult. For instance, our policies with regard to revenue recognition, including the deferral of revenues on sales to distributors with sales price rebates and product return privileges. These policies are described in the notes to our financial statements contained elsewhere in this Report on Form 10-K.
Valuation of inventory.    Our inventories are stated at the lower of cost or market value. Determining the market value of inventories on hand and at distributors as of the balance sheet date involves numerous judgments, including projecting average selling prices and sales volumes for future periods and costs to complete products in work in process inventories. When market values are below our costs, we record a charge to cost of goods sold to write down our inventories to their estimated market value in advance of when the inventories are actually sold. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that may adversely affect our operating results. If actual market conditions are more favorable, we may have higher gross margins when the written down products are sold. 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 (two years for wafer and die bank) 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, 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 write-downs 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.

29


Valuation of allowance for doubtful accounts.    We maintain an allowance for doubtful accounts for losses that we estimate will arise from our customers’ inability to make required payments for goods and services purchased from us. We make our estimates of the uncollectibility of our accounts receivable by analyzing historical bad debts, specific customer creditworthiness and current economic trends. Once an account is deemed unlikely to be fully collected, we write down the carrying value of the receivable to the estimated recoverable value, which results in a charge to general and administrative expense, which decreases our profitability.
Accounting for acquisitions and goodwill.    We account for acquisitions using the purchase accounting method. Under this method, the total consideration paid 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 developed and in-process technology (IPR&D), customer relationships, trade names and non-compete agreements. The amounts allocated to IPR&D projects are not expensed until technological feasibility is reached for each project. Upon completion of development for each project, the acquired IPR&D will be amortized over its useful life. We are currently amortizing our acquired intangible assets with definite lives over periods generally ranging from three 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 2012, we recorded impairment charges of $13.1 million for intangible assets and goodwill from our acquisition of Si En and $1.2 million for the impairment of certain tangible assets.
Accounting for stock-based compensation.    Stock option fair value 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. 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, we estimate forfeitures 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 estimate the expected term for option grants 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 input assumptions was prescribed by authoritative guidance, the fair value calculated could change materially.
Accounting for income taxes.    We account for income taxes under the asset and liability approach. We record a valuation allowance to reduce our net deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider historical levels of income, projections of future income, expectations and risks associated with estimates of future taxable income, and ongoing prudent and practical tax planning strategies. To the extent we believe it is more likely than not that some portion of our deferred tax assets will not be realized, we would increase the valuation allowance against the deferred tax assets. Realization of our deferred tax assets is dependent primarily upon future U.S. and foreign taxable income. Our judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require possible material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made.
We are subject to income taxes in the U.S. and foreign countries, and we are subject to routine corporate income tax audits in certain of these jurisdictions. We believe that our tax return positions are fully supported, but tax authorities may challenge certain positions, which may not be fully sustained. Our income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges. Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgment and estimates. We evaluate our uncertain tax positions and believe that our provision for uncertain tax positions, including related interest and penalties, is adequate based on information currently available to us. However, the amount ultimately paid upon resolution of audits could be materially different from the amounts previously included in income tax expense and therefore could have a material impact on our tax provision, net income and cash flows. Our overall tax provision requirement could change due to the issuance of new regulations or new case law, management's judgments on undistributed foreign earnings including judgments about and intentions concerning our future operations, negotiations with tax authorities, resolution with respect to individual audit issues, or the entire audit, or the expiration of statutes of limitations.

30


Accounting Changes and Recent Accounting Pronouncements
For a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated condensed financial statements, see “Note 1: Organization and Significant Accounting Policies" in the Notes to Consolidated Financial Statements of this Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk.    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 fiscal 2013, we recorded exchange gains of approximately $0.2 million, whereas in fiscal 2012, we recorded exchange losses of approximately $0.6 million. We do not currently engage in any hedging activities. In the future, if we feel our foreign currency exposure has significantly increased, we may consider entering into hedging transactions to help mitigate that risk.
Interest Rate Risk.    We had cash, cash equivalents and short-term investments of $141.6 million at September 30, 2013. These funds were primarily invested in money market funds and certificates of deposit. Due to the relatively short-term nature of our investment portfolio, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. We believe a hypothetical 100 basis point increase in interest rates would not materially affect the fair value of our interest-sensitive financial instruments. Since we believe we have the ability to liquidate this portfolio, we do not expect our operating results or cash flows to be materially affected to any significant degree by a sudden change in market interest rates on our investment portfolio.
Investments in Publicly Traded Companies.    We own ordinary shares in SMIC which is classified as an available-for-sale investment and is recorded at fair value with the unrealized gain or loss reported as a component in “Accumulated other comprehensive loss” in our Consolidated Balance Sheets. The original cost basis of our shares in SMIC was approximately $3.4 million and the market value at September 30, 2013 was approximately $1.8 million and is included in short-term investments. 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. The fair value of our SMIC stock would be approximately $2.0 million or $1.6 million, respectively, based on a hypothetical 10 percent increase or 10 percent decrease in SMIC’s stock price. 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 would be required to recognize a loss on our investment through our operating results. In this regard, in September 2012, we recorded a $2.3 million charge in our statement of operations as we determined that the decline in the value of our shares in SMIC was other-than temporary.
In September 2012, we invested approximately $27.1 million in Nayna which was comprised of private placement shares which are accounted for on the cost basis and common shares which are classified as an available-for-sale investment and are recorded at fair value with the unrealized gain or loss reported as a component in “Accumulated other comprehensive income” in our Consolidated Balance Sheets. In fiscal 2013, we sold shares with a cost basis of approximately $9.2 million and recognized a gain of $12.0 million. The total cost basis of our common shares in Nanya is approximately $7.1 million and the market value at September 30, 2013 was approximately $16.6 million and is included in short-term investments. The market value of Nanya shares is subject to fluctuations and our carrying value will be subject to adjustments to reflect changes in Nanya’s market value in future periods. The fair value of our Nanya stock would be approximately $18.3 million or $15.0 million, respectively, based on a hypothetical 10 percent increase or 10 percent decrease in Nanya's stock price. In the event the decline in the market value of our Nanya shares below our cost basis is determined to be other-than-temporary, we would be required to recognize a loss on our investment through our operating results.




31


Item 8. Financial Statements and Supplementary Data
INTEGRATED SILICON SOLUTION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 


32


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Integrated Silicon Solution, Inc.
We have audited the accompanying consolidated balance sheets of Integrated Silicon Solution, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of September 30, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Integrated Silicon Solution, Inc. and subsidiaries as of September 30, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2013, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of September 30, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992 and our report dated December 13, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.




/s/ GRANT THORNTON LLP
San Francisco, California
December 13, 2013

33



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Integrated Silicon Solution, Inc.
We have audited the internal control over financial reporting of Integrated Silicon Solution, Inc. (a Delaware Corporation) and subsidiaries (the "Company") as of September 30, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2013, based on criteria established in Internal Control-Integrated Framework issued by COSO in 1992.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended September 30, 2013 and our report dated December 13, 2013 expressed an unqualified opinion on those financial statements.



/s/ GRANT THORNTON LLP
San Francisco, California
December 13, 2013


34


INTEGRATED SILICON SOLUTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Years Ended September 30,
 
2013
 
2012
 
2011
 
(in thousands, except per share data)
Net sales
$
307,570

 
$
265,950

 
$
270,508

Cost of sales
206,109

 
182,966

 
180,100

Gross profit
101,461

 
82,984

 
90,408

Operating expenses
 
 
 
 
 
Research and development
40,839

 
30,918

 
27,622

Selling, general and administrative
43,964

 
42,174

 
36,617

Impairment of goodwill

 
4,261

 

Total operating expenses
84,803

 
77,353

 
64,239

Operating income
16,658

 
5,631

 
26,169

Interest and other income (expense), net
1,247

 
(1,656
)
 
2,144

Interest expense
(101
)
 
(68
)
 
(88
)
Gain on sales of investments, net
12,217

 

 
560

Income before income taxes
30,021

 
3,907

 
28,785

Provision (benefit) for income taxes
12,277

 
6,512

 
(27,338
)
Consolidated net income (loss)
17,744

 
(2,605
)
 
56,123

Less net income attributable to noncontrolling interests
(196
)
 
(113
)
 
(166
)
Net income (loss) attributable to ISSI
$
17,548

 
$
(2,718
)
 
$
55,957

Basic net income (loss) per share
$
0.62

 
$
(0.10
)
 
$
2.11

Shares used in basic per share calculation
28,223

 
27,120

 
26,568

Diluted net income (loss) per share
$
0.59

 
$
(0.10
)
 
$
1.98

Shares used in diluted per share calculation
29,694

 
27,120

 
28,308

 
See the accompanying notes to consolidated financial statements


35


INTEGRATED SILICON SOLUTION, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Years Ended September 30,
 
2013
 
2012
 
2011
 
(in thousands)
Consolidated net income (loss)
$
17,744

 
$
(2,605
)
 
$
56,123

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Change in unrealized gain (loss) on investments:
 
 
 
 
 
Changes arising during current year, net of tax benefit (expense) of $(7,975), $312 and $716 for fiscal 2013, 2012 and 2011, respectively
13,755

 
(1,523
)
 
57

Reclassification for (gain) loss included in net income (loss), net of tax expense (benefit) of $3,823, $(716) and $0 for fiscal 2013, 2012 and 2011, respectively
(5,854
)
 
1,213

 

 
7,901

 
(310
)
 
57

Change in cumulative translation adjustment:
 
 
 
 
 
Changes arising during current year
(1,261
)
 
3,932

 
1,850

Reclassification for gain included in net income (loss)

 

 

 
(1,261
)
 
3,932

 
1,850

Change in retirement plan transition obligation:
 
 
 
 
 
Changes arising during current year, net of tax benefit (expense) of $(44), $(119) and $0 for fiscal 2013, 2012 and 2011, respectively
(23
)
 
(134
)
 
10

Reclassification for gain included in net income (loss), net of tax expense (benefit) of $15 for fiscal 2013 and $0 for both fiscal 2012 and 2011
(45
)
 
(62
)
 
(60
)
 
(68
)
 
(196
)
 
(50
)
Change in retirement plan actuarial losses:
 
 
 
 
 
Changes arising during current year, net of tax benefit (expense) of $160, $323 and $0 for fiscal 2013, 2012 and 2011, respectively
63

 
127

 
(885
)
Reclassification for gain included in net income (loss), net of tax expense (benefit) of $(13) for fiscal 2013 and $0 for both fiscal 2012 and 2011
87

 
98

 
62

 
150

 
225

 
(823
)
Other comprehensive income
6,722

 
3,651

 
1,034

Comprehensive income
24,466

 
1,046

 
57,157

Comprehensive income attributable to noncontrolling interests
(196
)
 
(113
)
 
(166
)
Comprehensive income attributable to ISSI
$
24,270

 
$
933

 
$
56,991


See the accompanying notes to consolidated financial statements


36


INTEGRATED SILICON SOLUTION, INC.
CONSOLIDATED BALANCE SHEETS
 
 
As of September 30,
 
2013
 
2012
 
(in thousands, except
Par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
119,997

 
$
75,497

Short-term investments
21,558

 
6,541

Accounts receivable, net of allowance for doubtful accounts of $372 in 2013 and $508 in 2012
46,088

 
47,710

Inventories
68,469

 
66,964

Deferred tax assets
2,326

 
8,940

Other current assets
14,602

 
12,264

Total current assets
273,040

 
217,916

Property and equipment, net
46,504

 
29,286

Goodwill
9,178

 
9,178

Purchased intangible assets, net
6,626

 
8,226

Deferred tax assets
9,942

 
13,588

Other assets
16,579

 
38,877

Total assets
$
361,869

 
$
317,071

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
50,229

 
$
44,705

Accrued compensation and benefits
8,072

 
9,420

Accrued expenses
7,357

 
11,133

Current portion of long-term debt
195

 

Total current liabilities
65,853

 
65,258

Long-term debt
4,534

 

Other long-term liabilities
8,712

 
5,478

Total liabilities
79,099

 
70,736

Commitments and contingencies (See Note 16)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.0001 par value: Authorized shares—5,000 in 2013 and 2012. No shares outstanding

 

Common stock, $0.0001 par value: Authorized shares—70,000 in 2013 and 2012. Issued and outstanding shares—29,060 in 2013 and 27,594 in 2012
3

 
3

Additional paid-in capital
343,947

 
330,473

Accumulated deficit
(72,498
)
 
(90,046
)
Accumulated other comprehensive income
9,121

 
2,399

Total ISSI stockholders’ equity
280,573

 
242,829

Noncontrolling interest
2,197

 
3,506

Total stockholders’ equity
282,770

 
246,335

Total liabilities and stockholders’ equity
$
361,869

 
$
317,071


See the accompanying notes to consolidated financial statements

37


INTEGRATED SILICON SOLUTION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive Income (Loss)
 
Total ISSI
Stockholders’
Equity
 
Non-controlling
Interest
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
(in thousands)
 
 
 
 
Balance at September 30, 2010
26,217

 
$
3

 
$
317,773

 
$
(143,285
)
 
$
(2,286
)
 
$
172,205

 
$
5,616

 
$
177,821

Net income

 

 

 
55,957

 

 
55,957

 
166

 
56,123

Other comprehensive income

 

 

 

 
1,034

 
1,034

 

 
1,034

Stock options exercised and shares issued upon vesting of restricted stock units (RSUs)
573

 

 
2,146

 

 

 
2,146

 

 
2,146

Shares issued under stock purchase plan
167

 

 
1,239

 

 

 
1,239

 

 
1,239

Stock-based compensation

 

 
4,042

 

 

 
4,042

 

 
4,042

Shares repurchased and retired
(509
)
 

 
(4,097
)
 

 

 
(4,097
)
 

 
(4,097
)
Noncontrolling interest in Giantec

 

 

 

 

 

 
(3,364
)
 
(3,364
)
Change in noncontrolling interest in Wintram

 

 
28

 

 

 
28

 
274

 
302

Balance at September 30, 2011
26,448

 
3

 
321,131

 
(87,328
)
 
(1,252
)
 
232,554

 
2,692

 
235,246

Net loss

 

 

 
(2,718
)
 

 
(2,718
)
 
113

 
(2,605
)
Other comprehensive income

 

 

 

 
3,651

 
3,651

 

 
3,651

Stock options exercised and shares issued upon vesting of restricted stock units (RSUs)
1,022

 

 
4,439

 

 

 
4,439

 

 
4,439

Shares issued under stock purchase plan
181

 

 
1,413

 

 

 
1,413

 

 
1,413

Stock-based compensation

 

 
5,031

 

 

 
5,031

 

 
5,031

Shares repurchased and retired
(57
)
 

 
(537
)
 

 

 
(537
)
 

 
(537
)
Change in noncontrolling interest in Wintram

 

 
8

 

 

 
8

 
63

 
71

Acquisition of noncontrolling interest in Wintram

 

 
(1,012
)
 

 

 
(1,012
)
 
(1,358
)
 
(2,370
)
Noncontrolling interest in Chingis

 

 

 

 

 

 
1,996

 
1,996

Balance at September 30, 2012
27,594

 
3

 
330,473

 
(90,046
)
 
2,399

 
242,829

 
3,506

 
246,335

Net income

 

 

 
17,548

 

 
17,548

 
196

 
17,744

Other comprehensive income

 

 

 

 
6,722

 
6,722

 

 
6,722

Stock options exercised and shares issued upon vesting of restricted stock units (RSUs)
1,288

 

 
6,264

 

 

 
6,264

 

 
6,264

Shares issued under stock purchase plan
237

 

 
1,915

 

 

 
1,915

 

 
1,915

Stock-based compensation

 

 
5,941

 

 

 
5,941

 

 
5,941

Tax effects from employee stock incentive plans

 

 
18

 

 

 
18

 

 
18

Shares repurchased and retired
(59
)
 

 
(555
)
 

 

 
(555
)
 

 
(555
)
Noncontrolling interest in Chingis

 

 
(109
)
 

 

 
(109
)
 
(1,505
)
 
(1,614
)
Balance at September 30, 2013
29,060

 
$
3

 
$
343,947

 
$
(72,498
)
 
$
9,121

 
$
280,573

 
$
2,197

 
$
282,770

See the accompanying notes to consolidated financial statements

38


INTEGRATED SILICON SOLUTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Years Ended September 30,
 
2013
 
2012
 
2011
 
(in thousands)
Cash flows from operating activities:
 
 
 
 
 
Consolidated net income (loss)
$
17,744

 
$
(2,605
)
 
$
56,123

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
Stock-based compensation
5,941

 
5,031

 
4,042

Depreciation and amortization
5,726

 
5,569

 
4,831

Excess tax benefits from share-based compensation
(18
)
 

 

Amortization of intangibles
1,600

 
1,848

 
1,698

Impairment of and write-off of intangibles

 
8,887

 
145

Impairment of goodwill

 
4,261

 

Impairment of assets

 
1,182

 

Impairment of investment

 
2,327

 

Gain on sale of investments
(12,217
)
 

 
(560
)
Equity in net loss (income) of affiliate
316

 

 
(233
)
Net foreign currency transaction (gains) losses
(214
)
 
640

 
(436
)
Deferred tax assets
9,287

 
5,016

 
(28,362
)
Other non-cash items
69

 
108

 
677

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
1,478

 
(1,290
)
 
721

Inventories
(1,454
)
 
(2,735
)
 
(2,026
)
Other assets
698

 
(256
)
 
(1,100
)
Accounts payable
5,443

 
2,444

 
(2,899
)
Accrued expenses and other liabilities
(771
)
 
1,928

 
(2,057
)
Net cash provided by operating activities
33,628

 
32,355

 
30,564

Cash flows from investing activities:
 
 
 
 
 
Acquisition of property and equipment
(23,191
)
 
(6,036
)
 
(6,329
)
Acquisition of noncontrolling interest in consolidated subsidiary
(1,614
)
 
(2,370
)
 

Payment of holdback related to Si En acquisition
(4,200
)
 

 

Investment in Nanya Technology Corporation (Nanya)

 
(27,109
)
 

Investment in joint venture

 
(2,000
)
 

Purchases of available-for-sale securities
(5,473
)
 
(4,800
)
 
(3,944
)
Sales of available-for-sale securities
28,969

 
2,697

 
3,305

Investment in consolidated subsidiaries, net of cash and cash equivalents acquired

 
(13,210
)
 
(15,960
)
Reduction in cash balances upon deconsolidation of Giantec

 

 
(6,455
)
Proceeds from sale of investments
4,256

 

 
2,768

Decrease (increase) in restricted cash

 
6,786

 
(1,679
)
Net cash used in investing activities
(1,253
)
 
(46,042
)
 
(28,294
)

39


 
Years Ended September 30,
 
2013
 
2012
 
2011
 
(in thousands)
Cash flows from financing activities:
 
 
 
 
 
Repurchases and retirements of common stock
(555
)
 
(537
)
 
(4,097
)
Proceeds from issuance of stock through compensation plans
8,179

 
5,852

 
3,385

Excess tax benefit from share-based compensation
18

 

 

Proceeds from borrowings
4,875

 

 

Principal payments of long-term obligations
(146
)
 

 

Proceeds from borrowings under short-term lines of credit
4,069

 
20,809

 
11,750

Principal payments of short-term lines of credit
(4,069
)
 
(20,809
)
 
(11,750
)
Net cash provided by (used in) financing activities
12,371

 
5,315

 
(712
)
Effect of exchange rate changes on cash and cash equivalents
(246
)
 
6

 
640

Net increase (decrease) in cash and cash equivalents
44,500

 
(8,366
)
 
2,198

Cash and cash equivalents at beginning of year
75,497

 
83,863

 
81,665

Cash and cash equivalents at end of year
$
119,997

 
$
75,497

 
$
83,863

Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid (refunded) for income taxes
$
1,826

 
$
875

 
$
1,601

Cash paid for interest expense
$
48

 
$
25

 
$
23

 
See the accompanying notes to consolidated financial statements

40


INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Organization and Significant Accounting Policies
Organization
Integrated Silicon Solution, Inc. (the “Company”) was incorporated in California on October 27, 1988 and reincorporated in Delaware on August 9, 1993. The Company is a fabless semiconductor company that designs and markets high performance integrated circuits for the following key markets: (i) automotive, (ii) communications, (iii) industrial, medical and military, and (iv) digital consumer. The Company’s primary products are low and medium density DRAM and high speed and low power SRAM.
In January 2010, the Company formed a separate business unit, Giantec Semiconductor, Inc. (Giantec), which designs and markets application specific standard products (ASSP) primarily EEPROMs and SmartCards. As part of this formation, a third party invested approximately $3.8 million in Giantec. On December 30, 2010, Giantec received an additional direct investment of $4.0 million from outside investors, and as a result the Company’s ownership interest was reduced to approximately 44% and the Company was required to deconsolidate Giantec. In August 2011, the Company sold approximately 37% of its shares in Giantec and, on August 31, 2011, Giantec merged with Maxllent Corp. thereby reducing the Company's ownership interest in Giantec to approximately 19.85%. In fiscal 2013, the Company sold its remaining investment in Giantec for approximately $4.3 million which resulted in a pre-tax gain of approximately $0.2 million. The Company's consolidated financial statements reflect accounting for Giantec on a consolidated basis from January 1, 2010 through December 30, 2010. For the period from December 31, 2010 through August 31, 2011, the Company accounted for Giantec on the equity method and the Company's results included its percentage share of Giantec’s results of operations in interest and other income, net. From September 1, 2011 until the sale of its investment in June 2013, the Company accounted for Giantec on the cost basis and its investment in Giantec was included in other assets on the Company's balance sheets.
On January 31, 2011, the Company acquired Si En Integration Holdings Limited (Si En) and the Company’s financial results reflect accounting for Si En on a consolidated basis from the date of acquisition (See Note 18).
On September 14, 2012, the Company acquired Chingis Technology Corporation (Chingis) and the Company’s financial results reflect accounting for Chingis on a consolidated basis from the date of acquisition (See Note 19).
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Integrated Silicon Solution, Inc. and its wholly and majority owned subsidiaries, after elimination of all significant intercompany accounts and transactions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained at various financial institutions.
Investments
Debt securities and marketable equity securities are classified as “available-for-sale”. Available-for-sale securities are recorded at fair value with unrealized gains and losses included in accumulated other comprehensive income (loss). Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest and other income, net. The cost of fixed income securities sold is based on the specific identification method and the weighted-average method is used to determine the cost basis of publicly traded equity securities disposed of. Interest and dividends on securities classified as available-for-sale are included in interest and other income, net.
The Company accounts for non-marketable equity and other equity investments for which it does not have control over the investee as equity method investments when the Company has the ability to exercise significant influence, but not control, over the investee. The Company accounts for non-marketable equity and and other equity investments as non-marketable cost method investments when the equity method does not apply. The Company's non-marketable equity and other equity investments are included in other assets in its consolidated balance sheet.
The Company regularly reviews its investments to determine whether a decline in fair value below the cost basis is other than temporary. If the decline in fair value is determined to be other than temporary, the cost basis of the investment is written down to fair value, and the amount of the write-down is included in the consolidated statements of operations.

41

INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market. The Company’s inventory valuation process is done on a part-by-part basis. Lower of cost or market adjustments, specifically identified on a part-by-part basis, reduce the carrying value of the related inventory and take into consideration reductions in sales prices. Determining the market value of inventories on hand and at distributors as of the balance sheet date involves numerous judgments, including projecting average selling prices and sales volumes for future periods and costs to complete products in work in process inventories. When market values are below the Company’s costs, the Company records a charge to cost of goods sold to write down inventories to estimated market value in advance of when the inventories are actually sold. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that may adversely affect the Company’s operating results. If actual market conditions are more favorable, the Company may have higher gross margins when such products are sold. The Company writes down to zero dollars the carrying value of inventory on hand that has aged over one year (two years for wafer and die bank) 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. Once established, these write-downs are considered permanent.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method, based upon the shorter of the estimated useful lives ranging from two to ten years for property and equipment and from 25 to 50 years for buildings or the lease term for improvements to leased properties.
Goodwill and Purchased Intangible Assets
The Company tests goodwill and other indefinite-lived intangible assets for impairment on an annual basis and between annual tests if events or circumstances require an interim impairment assessment. For goodwill, the Company either makes a qualitative assessment prior to proceeding to step 1 of the annual goodwill impairment test or performs a two-step impairment test. If the Company makes a qualitative assessment and it determines that the fair value of the reporting unit is less than its carrying amount, the Company would perform step 1 of the annual goodwill impairment test and, if necessary, proceed to step 2. Otherwise, no further evaluation is necessary. For the two-step impairment test, in the first step, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. The Company determines the fair value of the reporting unit based on a weighting of income and market approaches. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company performs the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference.
Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets with definite lives are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally six months to eight years.
The Company has acquired in-process research and development (IPR&D) projects as the result of its business combinations (see Note 6). The fair values of the acquired IPR&D projects were determined through estimates and valuation techniques based on the terms and details of the related acquisitions. Upon completion of development for each project, the acquired IPR&D will be amortized over its useful life. The Company assesses the status of each IPR&D project quarterly to evaluate whether the carrying value has been impaired.
Valuation of Long-Lived Assets and Certain Identifiable Intangibles
The Company evaluates the recoverability of property, plant and equipment and identifiable intangible assets through the performance of periodic reviews to determine whether facts and circumstances exist that would indicate that the carrying amounts of property, plant and equipment and identifiable intangible assets exceed their fair values. If facts and circumstances indicate that the carrying amount of property, plant and equipment and identifiable intangible assets might not be fully recoverable, projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful life is compared to their respective carrying amounts. In the event that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets.


42

INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



Revenue Recognition and Accounts Receivable Allowances
Revenue from product sales (net of any applicable value added tax) to the Company’s direct customers is recognized upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed or determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements and there are no remaining significant obligations. The Company makes estimates of potential future product returns and sales allowances related to current period product revenue. Management analyzes historical returns, changes in customer demand, and acceptance of products when evaluating the adequacy of sales returns and allowances. Estimates made by the Company may differ from actual product returns and sales allowances. These differences may materially impact reported revenue and amounts ultimately collected on accounts receivable.
A portion of the Company’s sales is made to distributors under agreements that provide the possibility of certain price adjustment credits, as discussed below, and to return qualifying products for credit, as determined by the Company, in order to reduce the amounts of slow-moving, discontinued or obsolete product from their inventory. These agreements limit such returns to a certain percentage of the value of the Company's shipments to that distributor during the prior quarter. In addition, distributors are allowed to return unsold products if the Company terminates the relationship with the distributor.
Certain distributors are granted price adjustment credits related to many of their sales to their customers. Price adjustment credits are granted when a distributor’s standard cost (i.e., the Company’s sales price to the distributor) does not provide the distributor with an appropriate margin on its sales to its customers. As a result, the distributor may request and receive a price adjustment credit from the Company to allow the distributor to earn an appropriate margin on the transaction. Certain distributors are also granted price adjustment credits in the event of a price decrease subsequent to the date the product was shipped and billed to the distributor. Generally, the Company will provide a credit equal to the difference between the price paid by the distributor (less any prior credits on such products) and the new price for the product multiplied by the quantity of such product in the distributor’s inventory at the time of the price decrease. Certain of the Company’s distributor arrangements may allow or require the granting of price concessions below the Company’s cost for a product.
Given the uncertainties associated with the levels of returns and other price adjustment credits that will be issued to these distributors, the sales price to distributors is not fixed or determinable until the distributors resell the products to their customers. Therefore, the Company defers revenue recognition from sales to these distributors until the distributors have sold the products to their end customers.
Title to the inventory transfers to a distributor at the time of shipment or delivery to the distributor, and payment from the distributor is due in accordance with the Company's standard payment terms. These payment terms are not contingent upon the distributors’ sale of the products to their customers. Upon title transfer to distributors, inventory is reduced for the cost of goods shipped, the deferred distributor margin (sales less cost of sales) is recorded as a liability and an account receivable is recorded.
The deferred costs of sales to distributors may be subject to impairment. The Company monitors the level and nature of product returns from distributors as well as the levels of inventory held at distributors. On a quarterly basis, the Company reviews the inventory held at distributors in terms of the Company’s inventory valuation policy and records a charge to cost of goods sold for all known lower of cost or market and excess and obsolescence issues.
In addition, the Company monitors collectibility of accounts receivable primarily through review of its accounts receivable aging. When facts and circumstances indicate the collection of specific amounts or from specific customers is at risk, the Company assesses the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made.

43

INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



The following describes activity in the accounts receivable allowance for doubtful accounts for the years ended September 30, 2013, 2012 and 2011.

Description
Balance at
Beginning
of Year
 
Adjustments to
Costs and
Expenses(1)
 
Deductions(2)
 
Balance
at End
of Year
 
(in thousands)
Accounts receivable—Allowance for doubtful accounts:
 
 
 
 
 
 
 
2011
$
154

 
$
362

 
$
(20
)
 
$
496

2012
$
496

 
$
(2
)
 
$
14

 
$
508

2013
$
508

 
$
19

 
$
(155
)
 
$
372

________________________
(1)
Includes increases/(decreases) charged or credited to costs and expenses.
(2)
Uncollectible accounts written off, net of recoveries.
Research and Development
Research and development expenditures are charged to operations as incurred.
Foreign Currency Translation
The Company uses the local currency as its functional currency for all foreign subsidiaries. Translation adjustments, which result from the process of translating foreign currency financial statements into U.S. dollars, are included in the accumulated other comprehensive income component of stockholders’ equity.
Advertising Costs

The Company expenses advertising costs as incurred and includes these costs in selling, general and administrative expenses in the consolidated statement of operations. Advertising costs totaled $79,000, $59,000 and $57,000 for the fiscal years ended September 30, 2013, 2012 and 2011, respectively.
Income Taxes
The Company accounts for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax reporting purposes. Valuation allowances are provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized. Uncertain tax positions are recognized or derecognized based on the threshold and measurement of a tax position taken or expected to be taken in a tax return. U.S. income tax has not been provided on earnings of foreign subsidiaries to the extent that such earnings are considered to be indefinitely reinvested.
Stock-Based Compensation
Stock-based compensation is measured at the grant date, based on the estimated fair value of the award. The Company amortizes the compensation costs on a straight-line basis over the requisite service period of the option, which is generally the option vesting term of four years. The Company estimates the fair value of stock options using the Black-Scholes valuation model. The Black-Scholes valuation model requires the Company to estimate key assumptions such as expected term, volatility and risk free interest rates to determine the fair value of a stock option. The estimates of these key assumptions are based on historical information and judgment regarding market factors and trends.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Such estimates relate to the useful lives and residual value of fixed assets, the fair value of investments, allowances for doubtful accounts and customer returns, valuation allowances for deferred tax assets, inventory write-downs, potential reserves relating to litigation matters, accrued liabilities, and other reserves. The Company bases its estimates and judgments on its historical

44

INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



experience, knowledge of current conditions and its beliefs of what could occur in the future, given available information. Actual results may differ from those estimates, and such difference, may be material to the financial statements.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts receivable and accounts payable. The Company believes that the carrying amounts of the financial instruments approximate their respective fair values. When there is no readily available market data, the Company may make fair value estimates, which may not necessarily represent the amounts that will be realized in a current or future sale of these assets.
Concentration of Credit Risk
The Company operates in one business segment, which is to design, develop, and market high performance SRAM, DRAM, and other semiconductor products. The Company markets and distributes its products on a worldwide basis, primarily to original equipment manufacturers, contract manufacturers, and distributors. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral. In fiscal 2013, revenue from the Company’s largest and second largest distributor accounted for approximately 17% and 11%, respectively, of the Company's total net sales. In fiscal 2012, revenue from the Company’s largest and second largest distributor accounted for approximately 14% and 13%, respectively, of the Company's total net sales. In fiscal 2011, revenue from the Company’s largest and second largest distributor, accounted for approximately 15% and 12% of the Company's total net sales.
The Company maintains cash, cash equivalents, and short-term investments with various high credit quality financial institutions. The Company’s investment policy is designed to limit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in its investment strategy. The Company is exposed to credit risk in the event of default by the financial institutions or issuers of investments to the extent of the amount recorded on the balance sheet. To date, the Company has not incurred losses related to these investments.
Product Warranty and Indemnifications
The Company generally warrants its products against defects in materials and workmanship for a period of 12 months. Liability for a stated warranty period is usually limited to replacement of defective items or return of amounts paid. If there is a material increase in the rate of customer claims or the Company’s estimates of probable losses relating to specifically identified warranty exposures are inaccurate, the Company may record a charge against future cost of sales. Warranty expense has historically been immaterial to the Company’s financial statements.
The Company may be obligated to indemnify certain customers, distributors, suppliers, and subcontractors for attorney fees and damages and costs awarded against these parties in certain circumstances in which its products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. The terms of the Company’s indemnification obligations are generally perpetual from the effective date of the agreement. In certain cases, there are limits on and exceptions to the Company’s potential liability for indemnification relating to intellectual property infringement claims. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company’s bylaws provide that indemnification may be provided to the Company’s agents. The Company has directors’ and officers’ insurance pursuant to which the Company may be reimbursed for certain indemnity expenses, subject to the insurers’ reservation of rights. The Company cannot estimate the amount of potential future indemnity expenses that it may be required to make. The amount of available directors’ and officers’ insurance may not be sufficient to cover the Company’s indemnity obligations, which may have a material adverse effect on the Company’s results of operations in future periods.
Net Income (Loss) Per Share
Basic and diluted net loss per share and basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding, if applicable, during the period. Common equivalent shares consist of the shares issuable upon the assumed exercise of stock options and awards under the treasury stock method.

45

INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



Accounting Pronouncements
The following issued accounting pronouncements are not yet effective for the Company as of September 30, 2013.
Liabilities
In February 2013, the Financial Accounting Standards Board (FASB) issued guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date. Examples of obligations include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The guidance requires an entity to measure such obligations as the sum of the amount that the reporting entity agreed to pay on the basis of its arrangement among its co-obligors in addition to amounts the reporting entity expects to pay on behalf of its co-obligors. The guidance becomes effective for the Company beginning in the first quarter of fiscal 2015 and is not expected to have a material impact on the Company's consolidated financial statements.
Foreign Currency Matters
In March 2013, FASB issued guidance on when foreign currency translation adjustments should be released to net income. When a parent entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, the parent is required to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance becomes effective for the Company beginning in the first quarter of fiscal 2015 and is not expected to have a material impact on the Company's consolidated financial statements.
Accounting Standards
On October 1, 2012, the Company adopted the following accounting standard, which did not have a material effect on its consolidated results of operations during such period or financial condition at the end of such period:
Comprehensive Income
In June 2011, FASB amended its guidance on the presentation of comprehensive income. This amendment eliminates the currently available option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. Under this amendment, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company elected to present the items of net income and other comprehensive income in two separate, but consecutive statements. Effective January 1, 2013, the Company adopted the FASB's standard regarding the reporting of reclassifications out of accumulated other comprehensive income. The new standard requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts.
Reclassifications
Certain reclassifications have been made to prior year balances in order to conform to the current year’s presentation.


46

INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



Note 2.    Fair Value Measurements
Under FASB guidance, fair value is defined as the price expected to be received 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. The FASB guidance 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 September 30, 2013, the Company’s financial assets utilizing Level 1 inputs include short-term investment securities traded on an active securities exchange. The Company did not have any financial assets utilizing Level 2 or Level 3 inputs at September 30, 2013 and September 30, 2012.
The following tables represent the Company’s fair value hierarchy for financial assets measured at fair value on a recurring basis:
 
 
September 30,
2013
 
September 30,
2012
 
 
(Level 1)
 
(Level 1)
 
 
(In thousands)
Money market instruments (1)
 
$
19,318

 
$
34,317

Semiconductor Manufacturing International Corp.
 
 
 
 
(SMIC) common stock (2)
 
1,793

 
1,099

Nanya Technology Corporation (Nanya) common stock (3)