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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997.
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 0-26944
SILICON STORAGE TECHNOLOGY, INC.
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(Exact name of Company as specified in its charter)
CALIFORNIA 77-0225590
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1171 Sonora Court, Sunnyvale, CA 94086
(Address of principal executive offices) (Zip code)
Company's telephone number, including area code: (408) 735-9110
__________
Indicate by check mark whether the Company (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 Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /.
Number of shares outstanding of the Company's Common Stock, no par value, as
of the latest practicable date, April 30,1997: 23,196,709. Total number of
pages in document: 13. Index to Exhibits is on page 11.
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1
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SILICON STORAGE TECHNOLOGY, INC.
FORM 10-Q: QUARTER ENDED MARCH 31, 1997
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations.............................. 3
Condensed Consolidated Balance Sheets........................................ 4
Condensed Consolidated Statements of Cash Flows.............................. 5
Notes to Condensed Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 8
Part II--OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 11
Item 6. Exhibits and Reports on Form 8-K............................................. 11
</TABLE>
2
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PART I
Item 1. Condensed Consolidated Financial Statements
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1996 1997
--------- ---------
(unaudited)
<S> <C> <C>
Revenues:
Product................................................................................. $ 21,499 $ 16,854
License................................................................................. 1,524 238
--------- ---------
Net revenues.......................................................................... 23,023 17,092
--------- ---------
Costs and expenses:
Cost of revenues........................................................................ 13,152 16,533
Research and development................................................................ 1,651 1,978
Sales and marketing..................................................................... 1,186 1,265
General and administrative.............................................................. 759 1,244
--------- ---------
16,748 21,020
--------- ---------
Income (loss) from operations......................................................... 6,275 (3,928)
Interest and other income (expense), net.................................................... 498 365
--------- ---------
Income (loss) before provision for (benefit from) income taxes........................ 6,773 (3,563)
Provision for (benefit from) income taxes................................................... 2,574 (1,044)
--------- ---------
Net income (loss)..................................................................... $ 4,199 ($ 2,519)
--------- ---------
--------- ---------
Net income (loss) per share................................................................. $ 0.17 ($ 0.11)
--------- ---------
--------- ---------
Shares used in per share calculation........................................................ 25,180 23,269
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
------------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 24,755 $ 28,941
Short-term investments........................................... 11,485 12,064
Accounts receivable, net......................................... 9,802 11,242
Accounts receivable from related parties......................... 3,124 1,613
Inventories...................................................... 14,495 12,682
Current deferred tax asset....................................... 3,589 3,589
Other current assets............................................. 1,394 993
------------- -----------
Total current assets......................................... 68,644 71,124
Furniture, fixtures, and equipment, net.............................. 11,274 9,053
Other assets......................................................... 996 1,001
------------- -----------
Total assets................................................. $ 80,914 $ 81,178
------------- -----------
------------- -----------
LIABILITIES
Current liabilities:
Trade accounts payable........................................... 4,075 15,814
Account payable to related party................................. 6,412 0
Accrued expenses and other liabilities........................... 4,235 2,205
Deferred revenue................................................. 1,404 1,169
------------- -----------
Total current liabilities.................................... 16,126 19,188
------------- -----------
SHAREHOLDERS' EQUITY
Common stock and deferred stock compensation......................... 54,212 54,116
Retained earnings.................................................... 10,576 7,874
------------- -----------
Total shareholders' equity..................................... 64,788 61,990
------------- -----------
Total liabilities and shareholders' equity................... $ 80,914 $ 81,178
------------- -----------
------------- -----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
1996 1997
---------- ---------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................................................... $ 4,199 ($ 2,519)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization.......................................................... 638 1,132
Provision for doubtful accounts receivable............................................. 142 200
Provision for excess and obsolete inventories.......................................... -- 2,063
Changes in operating assets and liabilities:
Accounts receivable.................................................................. (5,311) (1,640)
Accounts receivable from related parties............................................. -- 1,511
Inventories.......................................................................... (1,157) (250)
Other current and noncurrent assets.................................................. 189 401
Trade accounts payable and account payable to related party.......................... 4,225 5,327
Accrued expenses and other liabilities............................................... 2,348 (2,030)
Deferred revenue..................................................................... (432) (235)
---------- ---------
Net cash provided by (used in) operating activities................................ 4,841 3,960
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of furniture, fixtures and equipment....................................... (1,236) (441)
Proceeds from sale of equipment........................................................ -- 1,537
Purchases of short-term investments.................................................... (9,658) (5,426)
Sales and maturities of short-term investments......................................... -- 4,847
Other.................................................................................. (943) (5)
---------- ---------
Net cash provided by (used in) investing activities................................ (11,837) 512
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares of common stock..................................................... 4 221
Repurchase of shares of common stock................................................... -- (507)
---------- ---------
Net cash provided by (used in) financing activities................................ 4 (286)
---------- ---------
Net increase (decrease) in cash and cash equivalents............................. (6,992) 4,186
Cash and cash equivalents at beginning of period........................................... 48,405 24,755
---------- ---------
Cash and cash equivalents at end of period................................................. $ 41,413 $ 28,941
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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SILICON STORAGE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed interim consolidated financial
statements include all adjustments, consisting only of normal recurring
adjustments and accruals, that in the opinion of the management of Silicon
Storage Technology, Inc. (the "Company" or "SST") are necessary for a fair
presentation of the Company's financial position as of March 31, 1997 and the
results of operations and cash flows for the three months ended March 31,
1996 and 1997. The unaudited interim consolidated financial statements should
be read in conjunction with the audited consolidated financial statements of
the Company and the notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, filed with the Securities and
Exchange Commission.
The year-end balance sheet at December 31, 1996 was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.
2. COMPUTATION OF NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares are excluded from the computation when their effect is
antidilutive.
3. INVENTORIES (IN THOUSANDS):
December 31, March 31,
1996 1997
------------ -----------
Raw materials.................................. $ 3 $ 3
Work in process................................ 9,555 7,121
Finished goods................................. 4,937 5,558
------------ -----------
$ 14,495 $ 12,682
------------ -----------
------------ -----------
Inventories are stated at the lower of cost or market value. During the
quarter ended March 31, 1997, the Company recorded a charge of approximately
$3.2 million to reduce the carrying value of inventories to replacement cost.
6
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4. CONTINGENCIES
On January 3, 1996, Atmel Corporation ("Atmel") sued the Company in the U.S.
District Court for the Northern District of California. Atmel's complaint
alleges that the Company, by making, using and selling devices, is willfully
infringing five U.S. patents owned by, or exclusively licensed to, Atmel.
Regarding each of these five patents, Atmel seeks a judgment that the Company
has infringed the patent, an injunction prohibiting further infringement,
treble the amount of damages caused by the alleged infringement and
attorney's fees, costs and expenses. On February 13, 1996 the Company filed
an answer denying Atmel's allegations and asserting affirmative defenses and
counterclaims. On February 17, 1997, Atmel filed an action with the
International Trade Commission against two suppliers of the Company's parts.
The Company believes this action involves certain of the patents that Atmel
has alleged the Company infringes. Pursuant to indemnification agreements
with these suppliers, the Company has agreed to indemnify both to the extent
that it is required to do so under the agreements. Two other corporations
have sent letters charging certain of their patents as being infringed by the
Company's products. No provision for any liability that may result upon the
resolution of these matters has been made in the accompanying financial
statements nor is the amount or range of possible loss, if any, reasonably
estimable. While the Company has accrued certain amounts for the estimated
costs associated with defending these matters, there can be no assurance that
the Atmel complaint will be resolved without costly litigation or in a manner
that is not adverse to the Company's financial position or results of
operations, or without requiring royalty payments in the future which may
adversely impact gross margins.
5. STOCK REPURCHASE PROGRAM
In February, 1997 the Board of Directors approved a stock purchase program
whereby up to an aggregate of 1,000,000 shares of the Company's common stock
may be repurchased on the open market at prevailing market prices. The
repurchase program is expected to continue until June, 1997, unless extended
or shortened by the Board of Directors. Approximately 141,000 shares were
repurchased under this authorization during March 1997 for an aggregate
purchase price of $507,000. Purchase prices ranged from $3.24 to $3.875 per
share.
6. SUBSEQUENT EVENT
On April 23, 1997 the Board of Directors approved an offer to employees of
the Company to reprice outstanding options granted between August 1, 1996 and
March 3, 1997 (the "Repricing Program"). Under the Repricing Program, as of
April 28, 1997, 844,750 option grants were amended into repriced option
grants with an exercise price of $3.125 (based on the closing price as
reported on the Nasdaq National Market on such date). As consideration for
the amended grants, optionees are prohibited from exercising the repriced
options for a period of three months after the initial vest date of such
repriced options.The Repricing Program terminated on April 28, 1997.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion may be understood more fully by reference to the
condensed consolidated financial statements, notes to the condensed consolidated
financial statements, and management's discussion and analysis contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, as
filed with the Securities and Exchange Commission.
Except for the historical information contained herein, the following
discussion may contain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to the Company's actual
results to differ materially from expected results include: the availability,
deliverability and cost of raw materials, such as wafers or die, from the
Company's suppliers, competitive pricing pressures, fluctuations in
manufacturing yields, new product announcements and introductions by the Company
or its competitors, changes in demand for, or in the mix of, the Company's
products, changes in average selling prices, the gain or loss of significant
customers, market acceptance of products utilizing the Company's SuperFlash
technology, changes in the channels through which the Company's products are
distributed, foreign currency fluctuations, unanticipated research and
development expenses associated with new product introductions and the timing of
significant orders. Operating results could also be adversely affected by
general economic conditions and a downturn in the market for consumer products
which incorporate the Company's products, such as personal computers and
cellular telephones. All of these factors, and other factors, are difficult to
forecast and can materially affect the Company's quarterly or annual operating
results. Fluctuations in revenues and operating results may cause volatility in
the Company's stock price. Please also refer to the Company's Form 10-K for the
year ended December 31, 1996 in the Risk Factors section for a discussion of
such risk factors.
GENERAL
Silicon Storage Technology, Inc. ("SST" or the "Company") is a supplier of
flash memory devices, addressing the requirements of high volume applications.
Currently, the Company offers medium density flash memory devices ranging from
512Kbit to 4Mbit that target a broad range of existing and emerging applications
in the personal computer ("PC"), PC peripheral, communications, multimedia, and
video game markets. Consumer products currently sold with the Company's products
include, but are not necessarily limited to, personal computers, CD-ROMs and
hard disk drives, electronic organizers/personal digital assistants, analog
cellular telephones, modems, set-top boxes and pagers. During the first quarter
of fiscal year 1997, 48% and 32% of the Company's product revenues have been
derived from the sale of 1Mbit and 512Kbit, respectively, flash memory devices,
while the balance of the Company's product revenues have been derived from the
sales of 2Mbit and 4Mbit flash memory devices. The Company is developing higher
density flash memory products to address emerging markets such as digital
cameras, voice recorders, video telephones, memory cards, network adaptor cards,
digital cellular phones and printer font storage.
During the first quarter of 1997, the Company derived approximately 38% and
19% of its product revenues from sales to Taiwan and Japan, respectively. The
Company intends to diversify its customer base by increasing sales in other
geographic areas and to continue targeting additional high volume applications
such as the cellular telephone, CD-ROM drive, hard disk drive, video game,
electronic organizer and set-top box markets. International product revenues
accounted for 80% of total product revenues during the first quarter of 1997.
The Company expects that international sales will continue to account for a
significant portion of its product revenues although the percentage may
fluctuate from period to period. Although the Company's international sales are
primarily denominated in U.S. dollars, these sales are subject to a number of
risks associated generally with international sales, including the effect of
geo-political uncertainties, currency fluctuations, state-imposed restrictions
on the repatriation of funds, import and export duties and restrictions.
RESULTS OF OPERATIONS: QUARTER ENDED MARCH 31, 1997
The following discussion relates to the financial statements of the Company
for the three months ended March 31, 1997 (current quarter) of the fiscal year
ending December 31, 1997, in comparison to the three months ended March 31, 1996
(comparable quarter of the prior year).
8
<PAGE>
NET REVENUES. Net revenues decreased to $17.1 million in the current
quarter from $23.0 million for the comparable quarter of the prior year due to
declining average selling prices and lower license fee income received.
Product revenues decreased to $16.9 million in the current quarter from
$21.5 million for the comparable quarter of the prior year due to declining
average selling prices. Although units shipped increased by approximately one
million units between these two periods, average selling prices declined
approximately 40% across 512 Kbit and 1 Mbit product lines and 44% on the 4 Mbit
product line. License, royalty and development revenues were $0.2 million for
the current quarter as compared to $1.5 million in the comparable quarter for
the prior year. No license revenues were received during the quarter ended March
31, 1997 as compared to $1.5 million in license revenues received during the
quarter ended March 31, 1996. Current quarter nonproduct revenues consist
primarily of one royalty payment. Such royalty payments may or may not recur in
future quarters.
During the first quarter of 1997, the Company derived approximately 38% of
product revenues from sales to Taiwan as compared to 49% for the comparable
quarter of the prior year. While the Company intends to diversify both the
market application of its products and its customer base, there can be no
assurance that such diversification will occur. International sales accounted
for approximately 80% of product revenues during the current quarter, as
compared to 92% for the comparable quarter of the prior year. International
sales are anticipated to account for a substantial majority of all product
revenues for the foreseeable future.
COST OF REVENUES. Gross margin was $0.6 million or 3% of net revenues in
the first quarter of 1997 as compared to $9.9 million or 43% of net revenues for
the comparable quarter in 1996. The decrease in gross margin is due to a
combination of declining average selling prices and a charge of approximately
$3.2 million, before the effect of netting with other inventory-related
adjustments, to reduce the carrying value of inventory to its approximate
replacement cost. Future fluctuations in gross margins may occur as a result of
declining average selling prices which could lead to additional charges to cost
of revenues to reduce inventories to replacement costs; cost reduction efforts
that do not reduce costs faster than average selling price declines; price
changes in the costs of raw materials; changes in the mix between license
revenues and product revenues or the impact of changes in the product mix.
The Company's agreement with Sanyo Electric Co. Ltd. ("Sanyo") provides for
wafer price adjustments based on dollar/yen exchange rate fluctuations. As a
result, a strengthening yen could result in higher cost of revenues. Gross
margins may also be affected by cost reductions, yield fluctuations, wafer
costs, changes in the mix of sales through distribution channels and
competitive pricing pressures.
Average selling prices of Flash memory product are subject to significant
fluctuation due to periodic changes in supply and demand. Declining average
selling prices will adversely affect gross margins unless the Company is able to
offset such declines with reductions in per unit costs or changes in product
mix.
RESEARCH AND DEVELOPMENT. Research and development expenses were $2.0 million
or 12% of net revenues during the first quarter of 1997 as compared to $1.7
million or 7% of net revenues during the comparable quarter of 1996. The
increase in research and development expenses since last year is primarily a
result of hiring additional personnel, depreciation related to purchases of
additional engineering test equipment, and increased prototyping and product
qualification costs associated with the Company's process and development
efforts.
SALES AND MARKETING. Sales and marketing expenses were $1.3 million or 7% of
net revenues during the first quarter of 1997, as compared to $1.2 million or 5%
of net revenues for the comparable quarter in 1996. Sales and marketing expenses
consist primarily of sales commissions to manufacturer's representatives,
salaries of the Company's sales and marketing personnel and product literature
expenses. The increase in expense from the first quarter of 1996 as compared to
the first quarter of 1997 corresponds primarily to increased personnel costs.
The increase due to higher personnel costs was somewhat offset by lower
commissions expense related to lower product revenues for the first quarter of
1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1.2
million or 7% of net revenues during the first quarter of 1997, as compared to
$0.8 million or 3% of net revenues during the comparable quarter ended March 31,
1996. The increase is primarily due to the higher headcount, higher
facilities-related expenses and accruals for certain legal expenses and doubtful
accounts receivable costs.
9
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INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income was $0.4
million or 2% of net revenues during the first quarter of 1997 compared to $0.5
million or 2% of net revenues during the comparable quarter of 1996. Interest
income decreased from the comparable quarter of the prior year due to lower cash
balances during the 1997 quarter as compared to the 1996 quarter.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The benefit from income taxes was
$1.0 million during the first quarter of 1997 as compared to a provision for
income taxes of $2.6 million for the comparable quarter of 1996. The benefit in
the current quarter relates to the Company's loss position in the current
quarter. The Company's effective income tax rate was 38% for the comparable
quarter in the prior year.
NET INCOME (LOSS) PER SHARE. The Company's net income (loss) per share for
the current quarter was $(0.11), compared to a net income per share of $0.17 in
the comparable quarter of the prior year. The net loss per share is a result of
lower net revenues and higher costs and operating expenses than experienced in
the comparable quarter of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Principal sources of liquidity at March 31, 1997 consisted of $41.0 million
of cash, cash equivalents, and short-term investments. As of March 31, 1997, the
Company had no open lines of credit or non-trade debt. However, the Company may
endeavor to open a line of credit in the future to secure additional working
capital to finance operational growth. The Company believes that the cash
balances, together with funds expected to be generated from operations will be
sufficient to meet its projected working capital and other cash requirements
through at least the next twelve months. However, there can be no assurance that
events in the future will not require the Company to seek additional capital
sooner or, if so required, that it will be available on terms acceptable to the
Company.
Year-to-date, the Company's operating activities provided cash of $4.0
million, which consisted primarily of increases to accounts payable of $5.3
million and decreases to inventories of $0.3 million (exclusive of the
writedown of $3.2 million) offset by a net loss of $2.5 million. Increases in
accounts payable relate primarily to a major supplier, and the Company
anticipates that during the second quarter of 1997, accounts payable will
decrease as a result of anticipated payments which could exceed $10.0 million
to the supplier, and would significantly impact the Company's cash balances.
Increases in inventory in general and, more specifically, work in process,
were primarily the result of responding to shorter customer order cycles.
The Company made capital expenditures of approximately $0.4 million during
the current quarter as compared to $1.2 million during the comparable quarter of
the prior year. These expenditures were primarily for the purchase of
manufacturing test equipment, design and engineering tools, and computer
equipment. Similar levels of capital spending are expected to continue, and may
even increase, during the rest of 1997. In addition, the Company may use its
working capital to secure additional foundry capacity. These expenditures may be
in the form of deposits, equipment purchases, loans or equity investments or
joint ventures in or with wafer fabrication or other companies. The purchases
and subsequent resales of equipment to one of the Company's subcontracted
facilities resulted in cash inflows and outflows of $1.5 million. The Company
incurred no gain or loss on these transactions.
The Company's financing activities used cash of approximately $0.3 million
during the quarter, primarily for the repurchase of stock on the open market. In
comparison, financing activities during the same period of the prior year
provided $4 thousand and consisted primarily of proceeds from stock option
exercises during the quarter.
10
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PART II
ITEM 1. LEGAL PROCEEDINGS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section.
On January 3, 1996, Atmel sued the Company in the U.S. District Court for
the Northern District of California. Atmel's complaint alleges that the Company,
by making, using and selling devices, is willfully infringing five U.S. patents
owned by or exclusively licensed to Atmel. Regarding each of these five patents,
Atmel seeks a judgment that the Company has infringed the patent, an injunction
prohibiting further infringement, treble the amount of damages caused by the
alleged infringement and attorney's fees, costs and expenses. On February 13,
1996 the Company filed an answer denying Atmel's allegations and asserting
affirmative defenses and counterclaims. On February 17, 1997, Atmel filed an
action with the International Trade Commission against two suppliers of the
Company's parts. The Company believes this action involves certain of the
patents that Atmel has alleged the Company infringes. Pursuant to
indemnification agreements with these suppliers, the Company has agreed to
indemnify both to the extent that it is required to do so under the agreements.
There can be no assurance that the Atmel complaint or other third party
assertions will be resolved without costly litigation.
At the present time, there is no other pending litigation or proceeding
involving a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The Company hereby incorporates by reference all exhibits
filed in connection with Form 10-K for the year ended December 31, 1996.
EXHIBIT
NUMBER DESCRIPTION
10.16 License Agreement between Taiwan Semiconductor Manufacturing Co., Ltd.
("TSMC") and the Company
11.1 Statement Regarding Computation of Net Income (Loss) Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended March 31, 1997: None.
11
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Company has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Sunnyvale, County of Santa Clara, State of
California, on the 13th day of May, 1997.
SILICON STORAGE TECHNOLOGY, INC.
By:
/S/ BING YEH
-----------------------------------------
Bing Yeh
President, Chief Executive Officer
and Director (Principal Executive Officer)
/S/ MICHAEL J. PRAISNER
-----------------------------------------
Michael J. Praisner
Vice President Finance & Administration,
Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
12
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LICENSE AGREEMENT
THIS AGREEMENT is entered into and effective as of February 26, 1997
("Effective Date"), by and between Taiwan Semiconductor Manufacturing Co.,
Ltd. ("TSMC"), a company duly incorporated under the laws of the Republic of
China, having its principal place of business at No. 121, Park Avenue 3,
Science Based Industrial Park, Hsinchu, Taiwan, ROC, and Silicon Storage
Technology, Inc. ("SST"), a company duly incorporated under the laws of
California, having its principal place of business at 1171 Sonora Court,
Sunnyvale, California 94086.
WHEREAS, SST has designed and developed SST Technology (as defined
hereinafter),
WHEREAS, SST is the owner of SST Intellectual Property Rights (as defined
hereinafter),
WHEREAS, TSMC desires to obtain from SST a non-exclusive, personal,
non-transferable, world-wide license to use, make, have made, sell, and
distribute the products containing SST Technology and to sublicense TSMC's
customers for the right to design such products; SST agrees to grant to TSMC
such non-exclusive, world-wide license to TSMC in accordance with the terms
and conditions set forth in this Agreement,
WHEREAS, SST's grant of right to TSMC to sublicense to TSMC's customers shall
be limited to offering of the Embedded Flash (as defined hereinafter)
manufactured by and for TSMC, and such right prohibit transfer of technology,
or any part of SST Intellectual Property Rights to any third party.
NOW THEREFORE, the parties hereto agree as follows:
I. DEFINITIONS
1.1 "SST Intellectual Property Rights" shall mean all patents, mask work
rights, copyright and trade secrets subsisting in or covering the SST
Technology for single bit per cell flash memory, which are owned by SST or
to which SST has the right to license as granted herein, now or hereafter
during the term of this Agreement. SST Intellectual Property Rights
include, but not limited to, patents covering flash cell and memory
circuits and memory array architecture, process, design rule and physical
layout therefore, masks work right in the layout of the flash cells and
memory circuits, copyright in the netlist, and confidential information in
cell design layout, design rule and process flow, and cell and memory array
architecture.
1
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1.2 "Embedded Flash" shall mean a product, other than a standalone
memory device, having a single bit per cell flash memory, manufactured
by or have-made for TSMC, in which portion of SST Intellectual Property
Right is used.
1.3 "Wafer Price" shall mean the price of the wafer charged by TSMC,
net of insurance fees, duties and taxes, masks charges, transportation
and handling charges. This price shall include back-lapping.
1.4 "SST Technology" shall mean [ * ]
II. SCOPE OF LICENSE
2.1 SST hereby grants to TSMC a world-wide, non-exclusive, personal
non-transferable license for the right to sublicense others to use the
SST Intellectual Property Rights to design Embedded Flash, and for TSMC
to make and have made such designed Embedded Flash, and to sell or
distribute such made Embedded Flash to TSMC customers
2.2 TSMC agrees to enter into a non-disclosure agreement with each
sublicensee, to maintain in confidence the SST Intellectual Property
Rights. The right to enforce the non-disclosure agreement is assigned to
SST.
2.3 SST shall deliver the material set for in Exhibit A to TSMC. SST
shall render assistance and training necessary for TSMC in
implementation and use of the material as set forth in Exhibit A and
shall provide relevant services and documents. Any customization,
modifications, availability schedule and other factors which have not
been jointly defined and specified in Exhibit A, shall be discussed in
good faith and planned with mutual agreement.
2.4 The "have-made" right granted herein shall be limited to wafer
manufacturing at TSMC affiliates of which TSMC owns or control at least
25% of interests. In the event the "have made" right is to be used, TSMC
shall inform SST of such intention in advance.
III. CONSIDERATION AND MUTUAL SUPPORT
3.1 In consideration of the License granted herein, TSMC shall pay to
SST:
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the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE>
Royalties: [ * ]
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omitted portions.
<PAGE>
[ * ]
3.2 In consideration of the license granted in Section II, subject to the
royalties payments of Sub-Section 3.1, the relationship established with
TSMC in accordance with the spirit of this Agreement, although unique at
present, is viewed as most favorable. SST agrees to assure and uphold
TSMC as the most favorable licensee in respect of SST's grant of a
license having the same total consideration. SST shall keep TSMC
informed of any license or agreement which grants more favorable
condition than that of the license and adjust status of TSMC in
compliance of this Section. TSMC has the right to appoint an
internationally renown accounting firm to audit the license and license
agreements SST grants to third parties no more than once a year. Such
accounting firm can only report to TSMC if SST has treated TSMC as the
most favorable licensee.
3.3 In consideration of the license granted herein, TSMC shall provide SST's
forecast wafer requirement as agreed to by the parties, in the annual
plan. [ * ]
3.4 The wafer price used for calculation of the Royalties shall be [ * ]
3.5 Royalties payment shall be made quarterly within thirty (30) days at net
thirty (30) days term after the close of every calendar quarter. The
calculation of the Royalties payment shall be based on the actual
payment received by TSMC, payment by SST on products containing the
Embedded Flash excluded, during the particular calendar quarter. SST has
the right to appoint an internationally renown accounting firm to audit
the sales record of TSMC and the "have made" facilities of TSMC
generated from manufacturing of the Embedded Flash no more than once a
year. Such accounting firm can only report to SST if TSMC or its "have
4
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the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE>
made" licenses has made sufficient Royalties payment. The Royalties
payment shall be subject to withholding tax and custom duty, and TSMC has
the right to withhold taxes as required by the laws of Republic of China.
In the event refund of the withholding tax can be claimed, TSMC will
conduct application for refund with the assistance of SST. [ * ] In the
event a TSMC customer is an existing licensee of SST, TSMC agrees to
[ * ], in addition to the Royalties payment and report.
3.6 SST shall provide support and consultation, including support in
developing test method and tools needed for use by TSMC, and technical
support in implementation thereof. SST shall provide TSMC with
consultation support in the back end production of Embedded Flash,
including but not limited to, characterization, yield/performance
improvement, production, testing and application. Technical assistance
provided by SST shall be reasonably sufficient to demonstrate and
explain practical use and operation of the License granted herewith, and
to reasonably permit TSMC to make full use thereof. Such assistance
shall be performed by qualified SST technical staff, knowledgeable in
SST Technology. TSMC's use of consultation support, training and other
technical assistance shall be reasonable. TSMC may generate material and
discussion for internal training to carry the know-how in relation to
the License forward, such material shall be subject to proprietary
treatment of Article (V).
IV. MODIFICATION AND IMPROVEMENT
4.1 Title to all intellectual property rights relating to invention(s)
or improvement(s) to SST Technology arising from the joint efforts of
TSMC or TSMC customers or TSMC "have made" affiliates and SST under this
Agreement shall be jointly owned by TSMC and SST, and all expenses
incurred in obtaining and maintaining such rights shall be equally
shared by both parties hereto. Subject to the limitation on TSMC's
sublicense under the Agreement, either party has the right to license
such joint work to third parties. In case either party elects not to
seek or maintain legal protection for any such invention or improvement
in any particular country or territory, the other party shall have the
right to seek protection at its sole expenses and for its sole benefit
and shall have full control over the prosecution and maintenance
thereof, provided that such other party shall grant to the other party a
royalty free license to use such invention(s) or improvement(s). Any
modification and improvement to the joint work as set forth herein made
by sole efforts of a party after the termination or expiration of this
Agreement shall be solely owned by such party.
4.2 TSMC and TSMC's customers shall have the right to modify or improve
the License. Title to any intellectual property right relating to such
modifications or
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<PAGE>
improvements made by sole efforts of TSMC or TSMC customers shall be
solely owned by TSMC. TSMC will notify SST of any modifications and
improvements promptly upon use thereof and SST shall have the right to
royalty free, personal, unrestricted use of such intellectual property
right, improvements and modifications without the right to transfer to
third parties the modification or improvement owned by TSMC.
V. PROPRIETARY INFORMATION
5.1 The term "Proprietary Information" shall mean any information controlled
by a party hereto identified as proprietary and/or confidential and
disclosed to the other party according to this Agreement. Written
Proprietary Information shall be clearly marked "CONFIDENTIAL" or
"PROPRIETARY". All oral disclosures of Proprietary Information shall be
identified as such prior to disclosure and confirmed in writing, or
email, by the disclosing party within thirty (30) days of the oral
disclosure. In case of disagreement, the receiving party must make a
written objection thereto within thirty (30) days after receipt of the
information. The Proprietary Information shall not include information
that: (1) is now or subsequently in the public domain or otherwise
becomes available to the public other than by breach of this Agreement
by the receiving party; (2) has been rightfully in the receiving party's
possession prior to receipt from the disclosing party; (3) is rightfully
received by the receiving party from a third party; and (4) is
independently developed by the receiving party without use of any
proprietary information or trade secrets of disclosure, and is authorized
by the disclosing party to be disclosed or released.
5.2 Except that TSMC exercises its license and rights hereunder, both
parties agree to maintain Proprietary Information in confidence, not to
make use thereof other than for the performance of this Agreement, to
release it only to employees or TSMC customers who have a reasonable
need to know the same, and not to release or disclose it to any third
party, without the prior written consent of the disclosing party.
5.3 All Proprietary Information and any copies thereof shall remain the
property of the disclosing party. Upon expiration or termination of this
Agreement, the receiving party shall return the original and all copies
of tangible Proprietary Information at the request of the disclosing
party.
5.4 This Section shall survive the termination or expiration of this
Agreement for a period of five (5) years.
5.5 The terms and conditions of the Non-disclosure Agreement dated February
1, 1996 between the parties shall remain effective. In the event the
terms and conditions conflicts with this Agreement, this Agreement shall
prevail.
6
<PAGE>
VI. WARRANTY
6.1 SST warrants and represents that the it has the right and authority
to convey and grant the License as set forth herein.
6.2 SST agrees to indemnify, hold harmless and defend TSMC from and
against any and all equitable actions, damages, costs and expenses
incurred by TSMC in connection with a claim which, if true, would
constitute a breach of SST's warranty set forth under Sub-Section 6.1
hereof, provided SST has been given prompt notification and reasonable
assistance from TSMC, and SST has sole control over legal action.
6.3 Neither party shall be liable to the other for any incidental,
indirect or consequential damages arising out of or in connection with
this Agreement. In no event shall either party be liable to the other
for damages, in the aggregate, greater than [ * ]. Furthermore,
TSMC agrees to hold SST harmless from any cause of action arising
out of, as a result of, or in connection with, any dispute between
TSMC and its customers, except to the extent such dispute arises
from a breach by SST of its contractual obligation to TSMC under this
Agreement, including a breach by SST of its warranty under Sub-Section
6.1, and provided that SST fulfills its obligation under Sub-Section 6.2.
6.4 TSMC shall have the sole liability and responsibility for the
exploitation of the modifications and improvements it or its customer
made pursuant to Sub-Section 4.2. TSMC shall defend SST, and indemnify
it and hold it harmless from any breach of this obligation.
VII. TERM AND TERMINATION
7.1 This Agreement shall remain in full force and effect for five (5)
years. Thereafter, so long as neither party is in breach of this
Agreement, this Agreement will continue year to year unless either party
notifies the other, in writing, of a request for non-renewal at least
one year prior to the expiration of the original or renewed term of the
Agreement. Upon termination, all tangible Proprietary Information shall
be returned or destroyed according to the instruction of the disclosing
party.
7.2 This Agreement may be terminated by either party if the other party
(1) breaches any material provision of this Agreement and does not cure
or remedy such breach within thirty (30) days after receipt of the
notice of breach from the other party; (2) becomes the subject of a
voluntary or involuntary petition in bankruptcy or any proceeding
relating to insolvency, receivership, liquidation, or composition
7
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the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE>
for the benefit of creditors if such petition or proceeding is not
dismissed with prejudice within sixty (60) days after filing.
Termination of this Agreement shall be effective 30 days after issuance
of a written notice of termination to the other party by the
non-defaulting party. In the event SST becomes bankrupt, or a trustee
is otherwise appointed for SST, TSMC shall have the right to maintain
the rights and licenses provided for in this Agreement, provided it
continues to make the royalty payments provided for herein.
7.3 After effective termination of this Agreement by either party in
accordance with Section VII hereof, TSMC shall cease and desist all use
of the License except for the performance of its obligations to
customers which are incurred before termination of this Agreement. The
obligation and duties of both parties under this Agreement for
existing products at the time of termination shall survive the
termination of this Agreement.
7.4 The termination of the license granted under this Agreement, by
expiration or otherwise, shall not release TSMC from any of its
obligations or liabilities therefore incurred, or rescind or give any
rights to rescind, anything done or any payment made or other
consideration given therefore to SST under this Agreement, provided
that TSMC will have such rights, under such license, after any such
termination or expiration, as are necessary for TSMC to (a) supply
replacement products for any defective Embedded Flash units sold by
TSMC on or prior to the date of such termination or expiration, and (b)
supply Embedded Flash products under, and pursuant to the terms of,
commitments of TSMC to third parties, for a period of one year
thereafter, and (c) to dispose of inventory of Embedded Flash products
under TSMC's control as of the date of such supply Embedded Flash
products to new product design. TSMC will provide SST a statement of
inventory at this point in time, as well as an estimate of time
required to dispose of said inventory. TSMC shall cause to be issued an
irrevocable letter of credit issued by a commercial bank equal to the
amount of royalty based upon the inventory. TSMC will fulfill all
royalty obligations for material described in (a), (b) and (c). No
failure or delay on the part of SST in exercising its right to
terminate for any one or more default shall be construed to prejudice
its rights of termination for such or for any other or subsequent
default.
VIII. MISCELLANEOUS
8.1 Neither party shall be responsible for any failure to perform under
this Agreement if such failure is caused by unforseen circumstances or
due to causes beyond its control, including but not limited to acts of
God, riot, labor stoppages, acts of civil and military authorities,
fire, floods or accidents.
8
<PAGE>
8.2 This Agreement shall be governed by and construed in accordance with the
laws of the state of California. In the event of any dispute arising out
of or in connection with this Agreement which cannot be amicably settled
by the parties hereto, the parties agree to submit any such dispute to
binding arbitration to be conducted in San Francisco, California in
accordance with the then prevailing rules for the commercial arbitration
of American Arbitration Association and the decision of the arbitration
panel shall be final and binding and may be entered as a judgment by a
court of competent jurisdiction. All information relating to or
disclosed by any party in connection with the arbitration shall be
treated by the parties and the arbitration panel as confidential
information and no disclosure of such information shall be made by
either party or the arbitration panel without the prior written consent
of the disclosing party.
8.3 No modification, alteration or amendment of this Agreement shall be
effective unless in writing and duly signed by both parties. The terms
and conditions of this Agreement constitutes the entire agreement and
understanding of the parties with respect to the subject matter hereof,
and supersede all previous communication, agreement, understanding,
whether oral or written, between the parties regarding the same.
8.4 No waiver of any breach or failure by either party to enforce any
provision of this Agreement shall be deemed a waiver of any other or
subsequent breach or a waiver of future enforcement of that or any other
provision.
8.5 TSMC and SST shall schedule management review meetings a minimum of twice
a year to access the progress of the relationship, deal with any
unresolved problems, and develop strategic plans for continued joint
effort. Specific areas of discussion are to include:
1) [ * ] 2) process changes and improvements; 3) flash and embedded
flash technology roadmap planning; 4) other topics as required and
proposed by either party toward the continued achievement of the
business objectives represented by this Agreement.
8.6 Neither party can assign this Agreement without the prior written
consent of the other party.
8.7 Any notice between the parties shall be made, by fax or mail, to the
correspondent as follows:
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<PAGE>
To TSMC:
Mr. Sam Chu
121 Park Ave. III
Science-Based Industrial Park Tel: 886/3-578-0221 x.2456
Hsinchu, Taiwan, ROC Fax: 886/3-578-4450
To SST:
Mr. Sohrab Kianian/Mr. Yaw-Wen Hu
1171 Sonora Court
Sunnyvale, CA 94086 Tel: 408/735-9110
USA Fax: 408/735-9136
8.8 In the event TSMC finds a design provided by third parties for production
by TSMC which contains SST Technology without a license from SST nor
TSMC, TSMC shall promptly notify SST.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed in duplicate on their behalf by their duly authorized officers
and representatives on the date given above.
Taiwan Semiconductor Silicon Storage Technology, Inc.
Manufacturing Co., Ltd
/s/ Don Brooks /s/ Bing Yeh
- ---------------------------------- ----------------------------------
Signature Signature
Mr. Don Brooks, President Mr. Bing Yeh, President
- ---------------------------------- ----------------------------------
Name & Title Name & Title
2/26/97 2/26/97
- ---------------------------------- ----------------------------------
Date Date
11
<PAGE>
Exhibit A
1) The engineering deliverables from SST to TSMC
- -------------------------------------------------
1.1) The macrocell block according to the configuration defined in
paragraph (2)
1.2) Documentation and training material as outlined in paragraph (3)
2) Macrocell blocks
- --------------------
[ * ]
3) Documentation and material for training
- -------------------------------------------
Following documentation shall be compiled during the training period relevant
to the macrocell block defined in Paragraph (2), and they shall be delivered
at conclusion of the training period.
[ * ]
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the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE>
[ * ]
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the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE>
EXHIBIT 11.1
SILICON STORAGE TECHNOLOGY, INC.
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRIMARY BASIS:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Weighted average shares of common stock................................... 22,800 23,269
Weighted average shares of common stock obtainable on exercise of
options and warrants and upon conversion of convertible
preferred stock......................................................... 2,380 --
--------- ---------
Shares used in per share calculation...................................... 25,180 23,269
--------- ---------
Net income (loss)......................................................... $ 4,199 ($ 2,519)
--------- ---------
Net income (loss) per share............................................... $ 0.17 ($ 0.11)
--------- ---------
--------- ---------
</TABLE>
FULLY DILUTED BASIS:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Weighted average shares of common stock................................... 22,800 23,269
Weighted average shares of common stock obtainable on exercise of
options and warrants and upon conversion of convertible
preferred stock......................................................... 2,382 --
--------- ---------
Shares used in per share calculation...................................... 25,182 23,269
--------- ---------
Net income (loss)......................................................... $ 4,199 ($ 2,519)
--------- ---------
Net income (loss) per share............................................... $ 0.17 ($ 0.11)
--------- ---------
--------- ---------
</TABLE>
Net income (loss) per share is presented in the Company's financial
statements under the primary basis as the effect of dilution under the
fully diluted basis is not material.
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS FOUND IN THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 28,941
<SECURITIES> 12,064
<RECEIVABLES> 14,414
<ALLOWANCES> 1,559
<INVENTORY> 12,682
<CURRENT-ASSETS> 71,124
<PP&E> 16,603
<DEPRECIATION> 7,550
<TOTAL-ASSETS> 81,178
<CURRENT-LIABILITIES> 19,188
<BONDS> 0
0
0
<COMMON> 54,116
<OTHER-SE> 7,874
<TOTAL-LIABILITY-AND-EQUITY> 81,178
<SALES> 16,854
<TOTAL-REVENUES> 17,092
<CGS> 16,533
<TOTAL-COSTS> 21,020
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,563)
<INCOME-TAX> (1,044)
<INCOME-CONTINUING> (2,519)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,519)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
