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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT
OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ________ TO ________.
COMMISSION FILE NUMBER 0-26944
SILICON STORAGE TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 77-0225590
(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
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Securities registered pursuant to Section 12(b) of the Act:
Title of class. Name of each exchange on which registered.
--------------- ------------------------------------------
None. None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value.
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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 .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No .
--- ---
Aggregate market value of the voting stock held by non-affiliates of the Company
as of February 28, 1997: $76,551,593. based on the closing price of the
Company's Common Stock as reported on NASDAQ. Number of shares outstanding of
the Company's Common Stock, no par value, as of February 28, 1997: 23,319,516
Documents incorporated by reference: Exhibits previously filed as noted on
page 25. Index to Exhibits is on page 25. Total number of pages in this
Form 10-K is 48.
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SILICON STORAGE TECHNOLOGY, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . .11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . .11
Item 4. Submission of Matters to a Vote of Security Holders . . . . . .11
PART II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters . . . . . . . . . . . . . . . . . . . . . .12
Item 6. Selected Consolidated Financial Data. . . . . . . . . . . . . .13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . .13
Item 8. Consolidated Financial Statements and Supplementary Data. . . .17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . .18
PART III
Item 10. Directors and Executive Officers of the Company . . . . . . . .19
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . .21
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . . . . .23
Item 13. Certain Relationships and Related Transactions. . . . . . . . .24
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on
Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Index to Consolidated Financial Statements . . . . . . . . . . . . . . . . . .32
2
<PAGE>
PART I
ITEM 1. BUSINESS
Silicon Storage Technology, Inc. ("SST" or the "Company") was incorporated
in California in 1989. The Company is a supplier of flash memory devices,
addressing the requirements of high volume applications. Currently, the Company
offers medium density devices ranging from 512Kbit to 4Mbit that target a broad
range of existing and emerging applications in the personal computer,
communications, multimedia, and video game markets. The Company's product
revenues to date have substantially been derived from the sale of 1Mbit and
512Kbit memory devices used in personal computers and personal computer
peripheral devices. The Company is developing higher density 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. The Company's executive offices are located at 1171 Sonora
Court, Sunnyvale, California, 94086, and its telephone number is (408) 735-9110.
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 here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this section, as well as in the sections entitled
Risk Factors, Legal Proceedings, and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
BACKGROUND
The Company operates in one industry segment: flash memory. All of the
Company's memory products are nonvolatile memory devices. Nonvolatile memory
represents a major class of the semiconductor memory market. The nonvolatile
memory market is experiencing significant growth and facing new performance,
reliability and cost requirements. Nonvolatile memory devices are distinguished
from volatile memory devices, such as static random access memories ("SRAMs")
and dynamic random access memories ("DRAMs"), by their ability to retain data
without the continuous supply of power. Virtually all microprocessor and
microcontroller based electronic systems require nonvolatile memory to store
"program code" consisting of a basic instruction set critical to the operation
of the system and information regarding the system configuration.
Read-only memory ("ROM") devices, which are permanently encoded when they
are produced, were the earliest and most basic type of nonvolatile memory.
However, when program code had to be modified or changed, manufacturers needed
to order new ROM devices. Erasable Programmable ROMs ("EPROMs") were developed
in the early 1970s to enable system manufacturers to install or update program
code immediately prior to system assembly. Furthermore, EPROMs can be
reprogrammed by removing the device from the system, erasing the data through
exposure to ultraviolet light for approximately 30 minutes, reprogramming and
reinstalling the device in the system. Despite this rather costly and
time-consuming erasure procedure, EPROMs have achieved market acceptance in a
wide variety of applications.
Nevertheless, system manufacturers generally prefer nonvolatile memory
devices that can be reprogrammed efficiently in the system in order to achieve
several important advantages. With in-system reprogrammable devices,
manufacturers can more cost effectively change program codes in response to
faster product cycles and changing market specifications thereby simplifying
their inventory management and manufacturing process. With these devices,
systems can be easily customized for the end user's specific system
configuration, or remotely programmed and updated using a modem. In addition,
in-system reprogrammable devices can be used for data storage functions, such as
storage of phone numbers for speed dialing in a cellular phone. These market
opportunities were initially addressed by the advent of Electrically Erasable
PROMs ("EEPROMs") which could be electrically altered while remaining in the
system. However, EEPROMs have remained considerably more expensive than EPROMs
for a given amount of storage capacity ("density"). Flash memory was first
introduced in the late 1980s as an alternative solution to EPROMs and EEPROMs.
Flash memory devices are significantly less expensive than EEPROMs and can
electrically erase select blocks of data on the chip "in a flash." The flash
memory market has grown quickly as customers substitute flash memory for EPROMs
and the more expensive EEPROMs.
3
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PRODUCTS AND APPLICATIONS
The Company currently designs and markets flash memory devices, all of
which incorporate and are manufactured using the Company's proprietary
SuperFlash technology. SuperFlash is a registered trademark of SST. The
Company's products are differentiated based upon certain attributes, such as
density, voltage, access speed, packaging and predicted endurance. The following
table sets forth current products and sample applications.
<TABLE>
<CAPTION>
INITIAL
ACCESS SHIPMENT
DENSITY PRODUCT DESCRIPTION SPEED (NS) APPLICATION DATE
- ------- ------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
512Kbit 29EE512 Page Mode, 5.0V 70, 90, 120 CD-ROM Drive, Analog Cellular Phone, Network Card 4/95
29LE512 Page Mode, 3.0V 150, 200 Analog Cellular Phone 3/96
29VE512 Page Mode, 2.7V 200, 250 Electronic Organizer/Data Bank 2/96
1Mbit 29EE010 Page Mode, 5.0V 90, 120, 150 PC-BIOS, Hard Disk Drive, CD-ROM Drive, 6/93
Analog Cellular Phone, Modem, Set-top Box
Point of Sale Terminal
29LE010 Page Mode, 3.0V 150, 200 Wireless Modem, Analog Cellular Phone 6/95
29VE010 Page Mode, 2.7V 200, 250 Electronic Organizer/Data Bank 9/95
2Mbit 29EE020 Page Mode, 5.0V 120, 150 PC-BIOS 10/96
4Mbit 28SF040 Byte-Write, 5.0V 150, 200 Point of Sale Terminal, Video Game, Industrial Control 11/94
Digital Cellular Phone
28LF040 Byte-Write, 3.0V 200, 250 Digital Cellular Phone 10/95
28VF040 Byte-Write, 2.7V 200, 250 Data Bank, Organizer 10/96
28PC040 PCMCIA, 5.0V 250 PCMCIA Memory Card 7/94
</TABLE>
During 1996, a majority of the Company's product revenues were derived from
sales of the Company's 1Mbit Page Mode Flash (5.0V), and a majority of such
sales were made to personal computer ("PC") manufacturers for use in storing
PC-BIOS. This product also addresses applications for hard disk drives, CD-ROM
drives, analog cellular phones, modems and set-top boxes. The Company believes
that PC manufacturers may, over time, start to replace 1Mbit Flash products with
2Mbit Flash memory products. Total product revenues to date have substantially
been derived from the sale of 1Mbit and 512Kbit memory devices used in PC and PC
peripheral devices such as CD-ROM drives. While the Company has introduced
2Mbit and 4Mbit devices, there can be no assurance that these sales will grow
above their current low levels. The Company is in the process of developing new
products with increased densities of 16Mbit and 32Mbit and maintaining the
voltage requirement of either 5.0V-only, 3.0V-only or 2.7V-only. However, there
can be no assurance that the Company can anticipate future market demands or
that the products it develops will meet future market needs. A decline in market
demand for the Company's 512Kbit or 1Mbit SuperFlash products may adversely
affect the Company's operating results. The Company's present revenue reliance
on the 512Kbit and 1Mbit products is made more risky by the fact that the 1Mbit
product sales are concentrated in the PC industry and 512Kbit product sales are
concentrated in the CD-ROM and hard disk industry. A decline in demand in the PC
or PC peripheral industries could have a material adverse effect on the
Company's operating results and financial condition.
SALES AND DISTRIBUTION
The Company's products are commodity products, and sales are highly
dependent on the overall strength and sales of the PC and PC peripheral product
industries. A reduction in activity one of these industries could have an
adverse impact on the Company's product revenues and overall earnings. In
addition, the semiconductor memory industry has recently experienced significant
declines in average selling prices for all memory products, including flash
memory. Such significant price declines have impacted gross margin in 1996 and,
should they continue, may impact gross margin in 1997 and beyond.
4
<PAGE>
Most of the Company's sales are made to customers in Asia for use in PCs
and PC peripherals. The Company sells to these customers through manufacturers'
representatives, and in Japan through distributors. The Company sells and
distributes its products in North America and Europe through a sales
organization supported primarily by manufacturers' representatives and
distributors. These manufacturers' representatives and distributors can
discontinue selling the Company's products at any time. Two of the
manufacturers' representatives, both located in Taiwan, accounted for 40% of the
Company's product revenues during 1996. Because the Company has no direct sales
force, the loss of either of these manufacturers' representatives or any other
significant manufacturers' representative or distributor could have an adverse
effect on the Company's operating results.
During 1996, one customer, in which the Company holds a 14% equity
investment, accounted for 12.7% of the Company's net revenues. International
product and license revenues represented approximately 45% or $1.8 million, and
85% or $33.8 million, and 86% or $80.3 million of the Company's net revenues
during fiscal 1994, 1995 and 1996, respectively. Most of the Company's
international revenues during 1994 through 1996 have been earned on revenues to
Asian manufacturers of personal computers. These customers include Acer, Elite
Computer Systems, First International Computer, Giga-Byte Technology
Corporation, Asustek Computer Corporation, Mitac International, and Quantum
Designs. The Company's products are also being used in CD-ROM drives, DVD
players, hard disk drives, video games, and portable electronic devices
manufactured by Sony, Hitachi, Matsushita, Toshiba, TEAC, NEC, Seagate, InterAct
and SEGA.
Due to its level of international sales, the Company is subject to the
risks of conducting business internationally. These risks include unexpected
changes in regulatory requirements, delays resulting from difficulty in
obtaining export licenses of certain technology, tariffs and other barriers and
restrictions, and the burdens of complying with a variety of foreign laws. The
Company is also subject to general geopolitical risks in connection with its
international operations, such as political and economic instability and changes
in diplomatic and trade relationships. In addition, because the Company's
international sales are denominated in U.S. dollars, fluctuations in the
U.S. dollar could increase the price in local currencies of the Company's
products in foreign markets and make the Company's products relatively more
expensive than competitors' products that are denominated in local currencies.
Although the Company to date has not experienced any material adverse effect on
its operations as a result of such regulatory, geopolitical and other factors,
there can be no assurance that such factors will not adversely impact the
Company's operations in the future or require the Company to modify its current
business practices.
MANUFACTURING
The Company subcontracts to semiconductor manufacturing foundries. As of
December 31, 1996, the Company's major wafer fabrication foundries are three
separate Sanyo Electric Co. Ltd. ("Sanyo") facilities and one Winbond
Corporation ("Winbond") facility. In the past, the Company was not always able
to procure from its current wafer fabrication foundries sufficient wafers to
meet all of the demand and experienced difficulties in meeting scheduled
shipments to its customers. There can be no assurance that such a situation,
which resulted in allocating available products among its customers, may not
recur again in the future.
In order to obtain, on an ongoing basis, an adequate supply of wafers,
especially for future products fabricated using more advanced process
technologies, the Company has considered and will continue to consider various
possible options, including equity investments in foundries in exchange for
guaranteed production volumes and the formation of joint ventures to own and
operate foundries. There can be no assurance that the Company's current
foundries, together with any additional foundries whose capacities might be
obtained, would be willing or able to satisfy all of the Company's requirements
on a timely basis at competitive prices. In February, 1997, the Company entered
into an agreement with the Taiwan Semiconductor Manufacturing Co. Ltd. ("TSMC").
Under the agreement, TSMC will license the Company's technology to manufacture
wafers, pay a royalty on wafers manufactured using the Company's technology, and
grant the Company favorable considerations for wafer pricing and allocation. The
Company will also provide TSMC with the information necessary to establish the
Company's technology in TSMC's foundry. Product pre-production is scheduled for
the first quarter of 1997 with full production scheduled to begin in the third
quarter of 1997. However, there can be no assurance that TSMC will be able to
achieve volume production in a timely fashion or that TSMC will allocate
sufficient production capacity to the Company to satisfy the Company's
customers.
5
<PAGE>
In 1996, the Company entered into an agreement with Seiko Epson Corporation
("Seiko Epson") whereby Seiko Epson paid the Company an upfront license fee,
agreed to pay the Company a royalty on wafers manufactured using the Company's
technology other than wafers for sale to the Company and provide the Company
with a monthly minimum quantity of wafers which increases over time. The Company
granted Seiko Epson a license to use certain of the Company's technology to
manufacture wafers and to provide Seiko Epson with the information necessary to
establish the Company's technology in Seiko Epson's foundry. At the present
time, no volume production is anticipated as a result of this agreement.
The Company purchases wafers from Sanyo under a manufacturing agreement
that expires in the year 2009. The Company has encountered delays in the
qualification process and production ramp-up in the past, and there can be no
assurance that the Company will not experience future delays in the
qualification or production ramp-up of this facility. The Company purchases
wafers from Winbond under a licensing agreement that expires in the year 2008.
During 1995, the wafer allocation capacity from Winbond was limited, and the
Company received an increase in such capacity during 1996. Currently, volume
production from Winbond is not anticipated during 1997.
Wafer sort is performed at Sanyo and at the Company. The Company may add
wafer sort capacity at its Sunnyvale, California facility; however, there can be
no assurance that the Company will not experience delays in the qualification or
production ramp-up of such facilities. The Company uses various offshore
foundries for assembly. In the assembly process, the silicon wafers are
separated into individual die that are then assembled into packages. The Company
packages die into PDIP, PLCC and TSOP packages at various facilities in various
countries. In the event of a rapid growth in demand for the Company's products,
the Company may not be able to procure from its package assembly foundries a
sufficient supply of packages to satisfy its customers.
Following assembly, the packaged devices require screening, testing, and
finishing to segregate good from nonconforming devices and to identify devices
by performance levels. Currently, all devices are screened, tested, and
inspected pursuant to the Company's quality assurance program at either the
Company's test facilities in Sunnyvale, California or at subcontracted
facilities in Lingsen, Taiwan. Finishing operations are performed at either
domestic subcontractors, the Company's facility in Sunnyvale, California or
subcontracted facilities in Lingsen, as applicable, before shipment to
customers. The Company currently performs all test program development,
electrical final test, and inspection at either facility in Sunnyvale,
California or at subcontracted facilities in Lingsen, Taiwan. In 1996, the
Company expanded capacity at its Sunnyvale facility. There can be no assurance
that the Company will not experience delays in the production ramp-up of future
facilities.
While the timeliness, yield, quality and reliability of wafers and packaged
devices delivered from the Company's foundries have been acceptable to date,
there can be no assurance that problems will not occur in the future. Any
significant disruption in adequate supplies from foundries, subcontractors, or
the Company's own test facilities could delay shipment and result in loss of
customers, limitations, or reductions in the Company's revenues, and other
adverse effects on the Company's operating results. To date the Company has not
found it necessary to seek ISO-9000 certification. If in the future the
Company's customers were to require such certification, the Company would be
required to spend significant time and resources implementing the systems and
controls necessary to obtain certification. There can be no assurance that the
Company would be able to achieve such certification.
The Company maintains an information system for monitoring work-in-process
inventory and various quality parameters. The information system maintains both
forward and backward traceability for each wafer lot through test, finish, and
inspection. Records are maintained in order to maximize yields, evaluate foundry
performance, diagnose potential problems, and monitor and improve product and
process quality. As the Company expands its products and markets, there is no
assurance that the Company's information system will be adequate for its future
needs.
RESEARCH AND DEVELOPMENT
During 1994, 1995 and 1996, the Company spent $2.7 million, $4.1 million,
and $6.9 million, respectively, on research and development. The Company is
developing 16Mbit and 32Mbit products with applications for network adapter
cards, cellular telephones, printer font storage, digital cameras, voice
recorders, video telephones and memory cards. The Company also is developing a
new 0.35 micron process for these high density products. The markets for the
Company's products are characterized by rapidly changing technology, product
obsolescence, and the frequent introduction of new products. There can be no
assurance that the Company can anticipate future market demands or that the
products it develops will meet future market needs.
6
<PAGE>
The Company's ability to succeed depends upon its ability to develop
products with which the Company has limited or no experience. There can be no
assurance that the Company will be able to identify new product opportunities,
much less that the Company will be able to develop and market new products
successfully. Delays in developing new products or achieving volume production
of new products could have a material adverse effect on the Company's
operations. In addition, there can be no assurance that such products, even if
introduced, will gain market acceptance or that the Company will be able to
respond effectively to new technological changes or new product announcements by
others.
COMPETITION
The semiconductor industry is intensely competitive and has been
characterized by price erosion, rapid technological change and product
obsolescence. The Company competes with major domestic and international
semiconductor companies, many of whom have substantially greater financial,
technical, marketing, distribution, and other resources than the Company. The
Company's medium density products, sales of which presently account for
substantially all of the Company's revenues, compete principally against
products offered by Intel Corporation, Advanced Micro Devices, Inc., Atmel
Corporation, SGS-Thomson Microelectronics, Inc. and Macronix, Inc. If the
Company is successful in developing its high density products, it expects that
these products will compete principally with products offered by Intel
Corporation, Advanced Micro Devices, Inc., Fujitsu, Samsung Semiconductor, Inc.,
SanDisk Corporation and Toshiba Corporation, as well as any new entrants to the
market. In addition, the Company believes that a primary source of competition
comes from alternative technologies. In particular, competition may come from
companies that offer ferroelectric random access memory devices ("FRAMs") if
such technology is commercialized for higher density applications. The Company
may also in the future experience direct competition from its foundry partners:
Sanyo, Winbond, Seiko, and TSMC. The Company has licensed to each foundry the
right to fabricate product based on the Company's technology and circuit design,
and to sell such products worldwide, subject to royalty payments to the Company.
There can be no assurances that the Company will be able to compete successfully
in the future.
The Company believes that the principal factors upon which its products
must compete are price, reliability, functionality and ability to offer timely
delivery to customers. While the Company believes that its medium density
products currently compete favorably on the basis of price, reliability and
functionality, the Company's principal competitors have a significant advantage
over the Company in terms of financial, technical and marketing resources. The
long-term ability of the Company to compete successfully in the evolving flash
memory market will depend on factors both within and beyond its control,
including access to advanced process technologies at competitive prices,
successful and timely product development, wafer supply, product pricing,
actions of its competitors and general economic conditions. The failure of the
Company to compete successfully in these or other areas could materially and
adversely affect the Company's business and operating results.
PATENTS AND LICENSES
The Company's products are designed around patented memory cell technology
and are fabricated using patented process technology. The Company owns 19 U.S.
patents concerning certain aspects of its products and processes, although not
all of these patents are in the field of memory cell or process technology.
Foreign patent applications have been filed in Europe, Japan and Canada. There
can be no assurance that pending patent applications will be granted. The
Company's products are also protected by copyrights and mask work production
rights. There can be no assurance, however, that the Company's patents,
copyrights or mask work production rights will provide it meaningful protection
from competition, especially abroad. The Company's operating results could be
materially adversely affected by piracy of the Company's intellectual property.
The Company has from time to time received, and may in the future receive,
communications from third parties asserting patent rights embracing the
Company's products. In particular, 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.
7
<PAGE>
The Atmel complaint stated that the Company's use of its SuperFlash
technology infringes the patents of those third parties. Two other
corporations have sent letters suggesting that certain of their patents may
be infringed by the Company's products. Since the design of all the Company's
products, including the 1Mbit product, are based on the Company's SuperFlash
technology, any finding that the Company's use of its SuperFlash technology
infringes a third party patent could have a material adverse effect on the
Company's entire product line. Similarly, any finding that the Company's
products infringe a third party patent could have a material adverse effect
on the Company's product line and operating results. There can be no
assurance that other third parties will not bring suit against the Company
claiming an infringement of intellectual property. The Company cannot predict
the effects of any such litigation. If any of the Company's products were
found to infringe on the protected technology of a third party, there can be
no assurance that the Company could license such technology on commercially
reasonable terms or that the Company could successfully operate without such
technology. 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 or other third party assertions will be resolved without
costly litigation, 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. Moreover, the Company,
if found to infringe, could be required to pay damages to the owner of the
protected technology and could be prohibited from making, using, selling, or
importing into the U.S. any products that infringe the protected technology.
In addition, the management attention consumed by and legal costs associated
with any such litigation could have a material adverse effect on the
Company's operating results.
The Company has licensed to its current foundries the right to fabricate
products based on the Company's technology and to sell such products worldwide,
subject to royalty payments to the Company. In addition to these licenses, the
Company has licensed to Rockwell International Corporation the right to use the
Company's technology to produce and market 0.8 micron embedded modem
applications. The Company has also licensed similar technology to Information
Storage Device and Analog Devices. The Company intends to license its technology
to other third parties in the future which may also compete against the Company.
BACKLOG
Sales are made primarily using short-term cancelable purchase orders. The
quantities actually purchased by the customer, as well as shipment schedules,
are frequently revised to reflect changes in the customer's needs. Accordingly,
the Company believes that its open purchase orders at any given time are not a
meaningful indicator of future sales and that changes in the amount of its open
purchase orders do not necessarily reflect a corresponding change in the level
of actual sales.
EMPLOYEES
As of December 31, 1996, the Company employed 143 individuals on a
full-time basis, all but one of whom reside in the U.S. One employee resides in
Japan. Of these 143 employees, 17 were employed in manufacturing engineering,
50 in manufacturing and support, 39 in research and development, 13 in sales and
marketing and 24 in administration and finance. None of the Company's employees
are represented by a collective bargaining agreement, nor has the Company ever
experienced any work stoppage. Management believes that the Company's
relationship with its employees is good.
RISK FACTORS
The following factors should be considered carefully in addition to other
information contained in this report:
FLUCTUATIONS IN OPERATING RESULTS; SHORT HISTORY OF PROFITABILITY. The
Company has a limited operating history and its operating results are subject
to quarterly and annual fluctuations due to a variety of factors including
the availability, deliverability and cost of wafers from the Company's
suppliers, competitive pricing pressures and related changes in average
selling prices, 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, 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. Specifically, industry overcapacity
during 1996 has resulted in higher than normal price declines in the markets
to which the Company sells. This significant price erosion has unfavorably
impacted the Company's revenues, gross margins and profitability during
recent quarters.
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.
8
<PAGE>
The Company typically receives and fulfills a majority of its orders within
the quarter, with a substantial portion occurring in the third month of the
fiscal quarter. As a result, the Company may not learn of revenue shortfalls
until late in a fiscal quarter. Additionally, the Company's operating expenses
are based in part on its expectations for future revenues and are relatively
fixed in the short term. Any revenue shortfall below expectations could have an
immediate and significant adverse effect on results of operations.
POSSIBLE VOLATILITY OF STOCK PRICE. In recent years, the stock market in
general, and the price of stock of technology companies in particular, have
experienced extreme price fluctuations, sometimes without regard to operating
performance of particular companies. Factors such as quarterly variations in
actual or anticipated operating results, changes in earnings estimates by
analysts, market conditions in the industry, announcements by competitors,
regulatory actions and general economic conditions or broad market trends
unrelated to performance may have a significant effect on the market price of
the Company's Common Stock.
RELIANCE ON SINGLE PRODUCT. A majority of the Company's product revenues were
derived from sales of the Company's 1Mbit SuperFlash product. The majority of
these 1Mbit SuperFlash products were sold for use in PCs and PC peripherals. A
decline in market demand for the Company's 1Mbit SuperFlash product may
adversely affect the Company's operating results. A decline in demand in the
personal computer industry could have a material adverse effect on the Company's
operating results and financial condition.
LIMITS OF PATENT PROTECTION; CLAIMS OF OTHERS. The Company owns 19 U.S. patents
concerning certain aspects of its products and processes. Foreign patent
applications have been filed in Europe, Japan, and Canada. There can be no
assurance that pending patent applications will be granted. The Company's
products are also protected by copyrights and mask work production rights. There
can be no assurance, however, that the Company's patents, copyrights or mask
work production rights will provide it meaningful protection from competition,
especially abroad. The Company's operating results could be materially adversely
affected by piracy of the Company's intellectual property.
The Company is the defendant in a patent infringement lawsuit filed by
Atmel in the U.S. Federal District Court for the Northern District of
California on January 3, 1996. 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. In addition to the Atmel lawsuit, the Company has from time to
time received and may in the future receive, communications from third
parties asserting patent rights embracing the Company's products.
Specifically, two other corporations have sent letters suggesting that
certain of their patents may be infringed by the Company's products. The
Atmel complaint states that the Company use of its SuperFlash technology
infringes the patents of those third parties. Since the design of all the
Company's products, including the 1Mbit product are based on the Company's
SuperFlash technology, any finding that the Company's use of its SuperFlash
technology infringes a third party patent could have a material adverse
effect on the Company's entire product line and operating results. The
Company has responded to each of these claims of infringement asserting
defenses that it believes are meritorious. The Company has also indicated an
interest in licensing from Atmel one patent related to the JEDEC standard for
manufacturer identification. There can be no assurance that Atmel will
license this patent on commercially reasonable terms, nor can there be any
assurance that other third parties will not bring suit against the Company
claiming an infringement of intellectual property. The Company cannot predict
the effects of any such litigation. If any of the Company's products were
found to infringe the protected technology of a third party, there can be no
assurance that the Company could license such technology on commercially
reasonable terms or that the Company could successfully operate without such
technology. Moreover, the Company, if found to infringe, could be required to
pay damages to the owner of the protected technology and could be prohibited
from making, using, selling, or importing into the U.S. any products that
infringe the protected technology. In addition, the management attention
consumed by and legal cost associated with any litigation could have a
material adverse effect on the Company's operating results.
DEPENDENCE ON FOREIGN FOUNDRIES. The Company does not have the capability to
manufacture its product. The Company currently buys all of its wafers, an
integral component of its products, from a limited number of suppliers. Failure
by these suppliers to satisfy the Company's requirements on a timely basis at
competitive prices could cause a delay in manufacturing and a possible loss of
revenues or higher than anticipated cost of revenues, which would affect
operating results adversely. During 1996, substantially all of the raw material
was supplied by Sanyo and Winbond. During 1996, the Company entered into an
agreement with Seiko Epson but no production wafers are deliverable or have been
delivered by Seiko Epson to date.
9
<PAGE>
In February, 1997, the Company entered an agreement with TSMC for the
production of its 2Mbit product in 1997. However, there can be no assurance that
TSMC will be able to achieve volume production in a timely fashion or that TSMC
will allocate sufficient production capacity to the Company to satisfy the
Company's customers. At times, the Company has been unable to meet all of the
demand for its products, and, at times, has failed to meet scheduled shipment
dates, due to the Company's inability to obtain a sufficient supply from its
foundries. There can be no assurance that the Company's current contract
foundries, together with any additional foundry at which capacity might be
obtained, would be willing or able to satisfy all of the Company's requirements
on a timely basis at favorable prices. In addition, the Company has encountered
delays in the qualification process and production ramp-up in the past, and
qualification and production ramp-up times at any additional foundry, assuming
an additional foundry could be found at all, could take longer than anticipated.
The Company is also subject to the risks of service disruptions, raw material
shortages and price increases by the foundries. Such disruptions, shortages and
price increases could have a material adverse effect on the Company's operating
results.
DEPENDENCE ON MANUFACTURERS' REPRESENTATIVE AND DISTRIBUTORS. Most of the
Company's sales are made through manufacturers' representatives and
distributors. These manufacturers' representatives and distributors can
discontinue selling the Company's products at any time. Two of the
manufacturers' representatives accounted for 40% of the Company's product
revenues during 1996. The loss of either of these manufacturers' representatives
or any other significant manufacturer's representative or distributor could have
an adverse effect on the Company's operating results.
FLASH MEMORY MARKET. All of the Company's products, as well as all new products
currently under design, are flash memory devices. A technology other than
SuperFlash may be adopted as the industry standard. The Company's competitors
are generally in a better financial and marketing position than the Company from
which to influence industry acceptance of a particular flash technology. To the
extent those competitors are able to promote a technology other than SuperFlash
as an industry standard, the Company operating results and financial condition
may be adversely affected.
PRICE VOLATILITY; RECENT MARKET CONDITIONS; COMPETITION. The semiconductor
memory industry is intensely competitive and has been characterized by price
erosion, rapid technological change and product obsolescence. Historically, the
selling prices for semiconductor memory products fluctuate significantly with
changes in the supply and demand for these products. Recently, industry
overcapacity during 1996 has resulted in higher than normal price declines in
the Company's markets, which has unfavorably impacted the Company's revenues,
gross margins, and profitability. The Company expects this price erosion may
continue for some time, as market conditions indicate that growth in worldwide
supply outpaced growth in demand during 1996 and such market conditions may
continue into 1997 and beyond. The Company is attempting to accelerate its cost
reduction efforts and to develop new products to expand and diversify the
Company's application and geographic base. However, there can be no assurance
that these activities will be implemented in a timely manner to offset
anticipated future declines in average selling prices.
The Company competes with major domestic and international semiconductor
companies, many of whom have substantially greater financial, technical,
marketing, distribution, and other resources than the Company. Many of the
Company's competitors have recently added significant capacity for the
production of semiconductor memory components. The Company's medium density
products, sales of which presently account for substantially all of the
Company's revenues, compete principally against products offered by Intel
Corporation, Advanced Micro Devices, Inc., Atmel Corporation, SGS-Thomson
Microelectronics, Inc. and Macronix, Inc. If the Company is successful in
developing its high density products, it expects that these products will
compete principally with products offered by Intel Corporation, Advanced Micro
Devices, Fujitsu, Samsung Semiconductor, Inc., SanDisk Corporation and Toshiba
Corporation, as well as any new entrants to the market.
In addition, the Company believes that a primary source of competition may
come from alternative technologies. In particular, competition may come from
companies that offer FRAMs if such technology is commercialized for higher
density applications.
10
<PAGE>
The Company may also in the future experience direct competition from
its foundry partners: Sanyo, Winbond, Seiko Epson and TSMC. The Company has
licensed to each foundry the right to fabricate product based on the
Company's technology and circuit design, and to sell such products worldwide,
subject to royalty payments to the Company. There can be no assurances that
the Company will be able to compete successfully in the future.
INTERNATIONAL OPERATIONS. During 1994, 1995, and 1996, export product and
licensing account for approximately 45%, 85%, and 86% of the Company's net
revenues, respectively. Due to its international sales and manufacturing, the
Company is exposed to risks associated with tariffs, non-tariff trade barriers,
taxes, import license requirements, exchange rate fluctuations, foreign
government regulations, and geopolitical risks such as political and economic
instability including changes in diplomatic and trade relations.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT. The markets for the
Company's product are characterized by rapidly changing technology, product
obsolescence, and the frequent introduction of new products. The Company's
ability to succeed depends on its ability to develop products with which the
Company has limited or no experience. There can be no assurance that the Company
will be able to identify new product opportunities, much less that the Company
will be able to both develop and market new products successfully or in a timely
fashion.
PURCHASE OF MANUFACTURING CAPACITY; FUTURE CAPITAL NEEDS. In order to obtain
additional manufacturing capacity, the Company has considered expenditures in
the form of deposits, equipment purchases, loan, joint ventures or equity
investments in or with wafer fabrication companies. Any such transaction could
involve a Company commitment of substantial capital and technology licenses in
return for production capacity. The need to commit substantial capital may
require the Company to seek additional equity or debt financing. There can be
no assurance that such additional financing, if required, will be available when
needed on terms acceptable to the Company. The Company's inability to secure
such financing, if needed, could have a material adverse impact on the Company's
operating results.
ITEM 2. PROPERTIES
The Company occupies three leased facilities totaling approximately 53,000
square feet in Sunnyvale, California in which its executive offices,
manufacturing engineering, research and development and testing facilities are
located. The lease on the first of these facilities that the Company occupies,
accounting for approximately 20,000 square feet, expires in May 1998 and is
renewable at the Company's option for an additional five years. The lease on the
second facility expires in June 1998. The lease on the third facility of 20,000
square feet expires in April, 2000 and is renewable with one two-year option to
extend the lease. The Company believes these facilities are adequate to meet its
needs for at least the next 12 months.
ITEM 3. LEGAL PROCEEDINGS
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, in 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter to a vote of security
holders.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Price Range of Common Stock
The principal U.S. market for the Company's Common Stock is The Nasdaq
Stock Market. The only class of the Company's common equity that is traded is
the Company's Common Stock. The Company's Common Stock has traded on The Nasdaq
Stock Market since November 21, 1995, under the symbol SSTI. The following table
sets forth the quarterly high and low closing sales prices of the Common Stock
for the period indicated as reported by The Nasdaq Stock Market. These prices
do not include retail mark-ups, mark-downs, or commissions. The closing sales
price of the Company's Common Stock on December 31, 1996 (the last trading day
in 1996) was $4.875.
High close Low close
1995: ---------- ---------
Period from November 21, 1995 to December 29, 1995 $18 1/4 $11 11/16
1996:
First Quarter: January 1 - March 31, 1996 13 1/4 9 7/8
Second Quarter: April 1 - June 30, 1996 20 1/8 11 1/4
Third Quarter: July 1 - September 30, 1996 13 3/4 6 5/8
Fourth Quarter: October 1 - December 31, 1996 9 5/8 4 3/8
Approximate Number of Equity Securityholders
As of February 28, 1997, there were approximately 3,651 record holders of
the Company's Common Stock.
Dividends
The Company has never paid a cash dividend on its Common Stock and intends
to continue to retain earnings, if any, to finance future growth. Accordingly,
the Company does not anticipate the payment of cash dividends to holders of
Common Stock in the foreseeable future.
12
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the notes thereto
included elsewhere in this Report. The statements of operations data for the
years ended December 31, 1994, 1995 and 1996 and the balance sheet data at
December 31, 1995 and 1996 are derived from, and should be read in conjunction
with, the audited consolidated financial statements and notes thereto included
elsewhere in this Report. The statements of operations data for the years ended
December 31, 1992 and 1993 and the balance sheet data at December 31, 1992, 1993
and 1994 are derived from audited financial statements not included in this
Report. The results of operations are not necessarily indicative of the results
to be expected for future periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Product revenues $ - $ 112 $ 3,355 $38,283 $90,638
License revenues 700 4,079 730 1,245 2,652
------- ------- ------- ------- -------
Net revenues 700 4,191 4,085 39,528 93,290
------- ------- ------- ------- -------
Costs and expenses:
Cost of revenues - 391 4,080 26,360 59,494
Research and development 1,264 2,393 2,722 4,058 6,948
Sales and marketing 92 217 599 2,455 5,292
General and administrative 407 751 910 1,464 3,370
------- ------- ------- ------- -------
1,763 3,752 8,311 34,337 75,104
------- ------- ------- ------- -------
Income (loss) from operations (1,063) 439 (4,226) 5,191 18,186
Interest and other income, net 12 61 77 517 1,763
Interest expense (21) (32) (309) (273) -
------- ------- ------- ------- -------
Income (loss) before provision for (benefit from) income taxes (1,072) 468 (4,458) 5,435 19,949
Provision for (benefit from) income taxes - 307 51 (594) 7,598
------- ------- ------- ------- -------
Net income (loss) ($1,072) $ 161 ($4,509) $ 6,029 $12,351
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net income (loss) per share (1) ($ 0.09) $ 0.01 ($ 0.40) $ 0.30 $ 0.49
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Shares used in per share computation (1) 11,579 18,522 11,255 19,786 25,114
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total assets $ 626 $ 7,952 $ 7,749 $66,403 $80,914
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Long-term obligations $ - $ 3,532 $ 3,571 $ - $ -
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements describing the
shares used in computing net income (loss) per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the sections entitled Business, Risk Factors, and Legal Proceedings. All of the
Company's products are currently manufactured through collaborative
manufacturing relationships with two semiconductor manufacturers: Sanyo and
Winbond. To date, the Company has obtained the majority of its wafers from
Sanyo. The Company's orders from these manufacturers are based upon existing and
forecasted customer demand. As demand for the Company's products has increased,
the Company has been unable to obtain its desired allotment of wafers. The
Company is in the process of transitioning production of its primary SuperFlash
products to smaller geometries, thereby increasing the number of usable die per
wafer that the Company receives from its manufacturers.
13
<PAGE>
The Company has entered into agreements with Seiko Epson and TSMC to obtain
additional wafer manufacturing capacity. Bringing a new manufacturer up to full
volume production is a complex procedure and there can be no assurance that
either Seiko Epson or TSMC will be able to achieve volume production in a timely
fashion or that either Seiko Epson or TSMC will allocate sufficient production
capacity to the Company.
Average selling prices have declined significantly over the past year and
average selling prices of semiconductor products have generally declined over
time and are expected to decline in the future, principally due to increased
market competition. Specifically, industry overcapacity during 1996 has resulted
in higher than normal price declines in the Company's markets, which has
unfavorably impacted the Company's revenues, gross margins, and profitability.
The Company expects this price erosion may continue for some time. The Company
is attempting to accelerate its cost reduction efforts and to develop new
products to expand and diversify the Company's application and geographic base.
If such activities can not be implemented in a timely manner to offset
anticipated declines in average selling prices, losses may result and liquidity
may be impacted.
During 1996, the Company derived approximately 40% of its product revenues
from sales to Taiwan-based PC manufacturers. The Company intends to diversify
its customer base by increasing sales in other geographic areas and 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. The Company anticipates that as sales in Japan, the United States and
Europe increase, overall days sales outstanding will increase. During 1994, 1995
and 1996 respectively, international sales accounted for approximately 45% or
$1.8 million, 85% or $33.8 million, and 86% or $80.3 million of the Company's
net revenues, respectively. The Company is in the process of increasing the
scope of its international operations and 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 currency fluctuations, state-imposed restrictions on the
repatriation of funds, import and export duties and restrictions.
RESULTS OF OPERATIONS: YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
NET REVENUES. Net revenues increased from $4.1 million in 1994 to $39.5 million
in 1995 to $93.3 million in 1996, due to increased units shipped of the
Company's products.
The Company began recognizing product revenue in June 1993. Product
revenues were $3.4 million in 1994, increasing to $38.3 million in 1995 and
$90.6 million in 1996. These increases were primarily the result of increased
market acceptance of the Company's 1Mbit SuperFlash memory products, and to a
lesser extent the introduction of the Company's new 4Mbit product in 1994 and
first 512Kbit product in 1995 and 2Mbit product in 1996. Product revenue is
typically recognized upon shipment to manufacturing customers. Sales to
distributors are made primarily under arrangements allowing price protection and
the right of stock rotation on merchandise unsold by the distributors. Because
of the uncertainty associated with pricing concessions and future returns, the
Company defers recognition of such revenues, related cost of revenues and
related gross margin until the merchandise is sold by the distributors to the
end user.
The Company's ability to maintain or increase revenues will be highly
dependent upon its ability to increase unit sales volumes and decrease
manufacturing costs of existing products and to introduce and sell new products
in quantities sufficient to compensate for the anticipated declines in average
selling prices. The Company's ability to increase its unit sales volumes depends
on the capacity of its manufacturers' representatives and distributors to
generate orders, increasing its wafer capacity allocation from current
foundries, improving the yield of die per wafer from its foundries through
reductions in the die size of the Company's products, adding additional
foundries and implementing advanced process technologies. Industry overcapacity
during 1996 has resulted in higher than normal price declines in the Company's
markets, which has unfavorably impacted the Company's revenues, gross margins,
and profitability. The Company expects that this price erosion may continue for
some time.
14
<PAGE>
License revenues increased from $730,000 in 1994 to $1.2 million in 1995
and $2.7 million in 1996. License revenues in 1995 included a one time payment
of $1.0 million from Rockwell International Corporation and license revenues in
1996 included a one-time payment of $1.0 million from Seiko Epson. Most of the
Company's technology licenses provide for the payment of upfront license fees
and continuing royalties based on product sales. Revenue from license or other
technology arrangements is recognized upon the shipment of the product or
documentation if the remaining obligations are insignificant and collection of
the resulting accounts receivable is probable. The Company anticipates that
license revenues will fluctuate significantly in the future. Revenue from best
efforts joint development contracts is recognized under the percentage of
completion method. See Note 1 of Notes to Consolidated Financial Statements.
COST OF REVENUES. Gross margin was $5,000 in 1994, $13.2 million or 33% of net
revenues in 1995, and $33.8 million or 36% of net revenues in 1996. The
fluctuations in gross margins between 1994 through 1996 were primarily a
function of changes in the mix between license revenues and product revenues. In
1994, gross margin was further impacted by higher manufacturing costs associated
with the Company's 4Mbit product and ramp-up costs for its 1Mbit product
absorbed by a relatively small number of 1Mbit unit sales. Future fluctuations
in gross margins may occur as a result of changes in the mix between license
revenues and product revenues or the impact of changes in product mix. Year-to-
year fluctuations in gross margin during 1994 through 1996 were not necessarily
reflective of quarterly results during this period. Refer to Item 8: Selected
Consolidated Quarterly Data for a discussion of quarterly results.
The Company's agreement with 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 product mix, the
mix of sales through distribution channels and competitive pricing pressures.
GROSS MARGIN. Average selling prices of Flash memory products are subject to
significant fluctuations 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. Specifically, industry overcapacity during 1996 has resulted in
higher than normal price declines in the markets to which the Company sell. This
significant price erosion has unfavorably impacted the Company's revenues, gross
margins and profitability during recent quarters.
OPERATING EXPENSES. Operating expenses (research and development, sales and
marketing, and general and administrative expenses) as a percentage of product
revenues declined from 21% of product revenues ($8.0 million) in 1995 to 17% of
product revenues ($15.6 million) in 1996 due to increasing sales volumes. This
decrease of operating expenses as a percentage of product revenues from year to
year is not necessarily indicative of future behavior of operating expenses as a
percentage of product revenues; operating expenses may increase as a percentage
of product revenues in the future. Operating expenses are expected to increase
in absolute dollar amount over time, primarily due to the hiring of additional
personnel and development of the Company's infrastructure.
RESEARCH AND DEVELOPMENT. Research and development expenses were $2.7 million
or 67% of net revenues in 1994, $4.1 million or 10% or net revenues in 1995, and
$6.9 million or 7% of net revenues in 1996. These year over year increases in
the level of research and development expense were primarily due to the hiring
of additional personnel, depreciation related to purchases of additional test
equipment, and increased prototyping and product qualification costs associated
with the Company's product and process development efforts.
SALES AND MARKETING. Sales and marketing expenses were $0.6 million or 15% of
net revenues in 1994, $2.5 million or 6% of net revenues in 1995, and $5.3
million or 6% of net revenues in 1996. Sales and marketing expense consists
primarily of sales commissions to manufacturers' representatives, salaries of
the Company's sales and marketing personnel and product literature. The
significant increase in sales and marketing expenses during 1995 and 1996 was
primarily due to increases in sales commissions to manufacturers'
representatives and costs associated with the Company's product data books.
Historically, a majority of the Company's product revenues have been
generated through manufacturers' representatives. Manufacturers' representatives
are expected to continue to be responsible for a majority of the Company's
product revenues for the foreseeable future, but the Company anticipates an
increase in the volume of distributor sales. The Company's sales commission
structure for its manufacturers' representatives decreases as manufacturers'
representatives achieve higher levels of sales activities within a given year.
Accordingly, the Company expects that sales commissions to manufacturers'
representatives will decrease as a percentage of product revenues as cumulative
yearly product revenues increase.
15
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $910,000
or 22% of net revenues in 1994, $1.5 million or 4% of net revenues in 1995, and
$3.4 million or 4% of net revenues in 1996. These increases in the level of
general and administrative expenses were primarily to support the higher level
of operations. The Company anticipates that general and administrative expenses
will continue to increase in absolute dollar amount. Additionally, it is
reasonably possible that the Company may incur additional expenses in connection
with the Atmel litigation.
INTEREST AND OTHER INCOME. Interest and other income was $77,000 or 2% of net
revenues in 1994, $517,000 or 1% of net revenues in 1995, and $1.8 million or 2%
of net revenues in 1996. Interest income increased during 1994 through 1996 as
working capital increased, particularly as a result of the investment of
proceeds from the Company's initial public offering in late 1995.
INTEREST EXPENSE. Interest expense was $309,000 or 8% of net revenues in 1994
and $273,000 or 1% of net revenues in 1995. There was no interest expense in
1996. The interest expense in 1994 and 1995 was primarily due to borrowings
against the Company's line of credit facility in order to finance equipment
purchases. The decrease in interest expense in 1995 and 1996 was primarily due
to payments made which decreased corporate debt during 1995. All such long-term
debt was repaid as of December 31, 1995.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The Company's provision for (benefit
from) income taxes was $51,000 in 1994, $(594,000) in 1995, and $7.6 million in
1996. The provision for income taxes in 1994 was primarily the result of
Japanese taxes withheld on license revenues. At December 31, 1994, the Company
had federal and state net operating losses relating to prior years of
approximately $5.3 million and $2.1 million, respectively, which were utilized
against taxable income during 1995. The benefit in 1995 relates to the recording
of a deferred tax asset by the Company during the fourth quarter which
previously had been fully reserved by a valuation allowance. During 1996, the
Company was fully subject to federal and state income taxes. See Note 6 of Notes
to Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS. In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128), which specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS 128
supersedes Accounting Principles Board Opinion No. 15 and is effective for
financial statements issued for periods ending after December 15, 1997. SFAS
128 requires restatement of all prior-period earnings per share data
presented after the effective date. SFAS 128 will not have a material impact
on the Company's financial position, results of operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
From inception to November 1995, the Company used proceeds from the
private sale of equity securities, funds generated from corporate borrowing and
convertible debentures and internal cash flow to support its operations, acquire
capital equipment and finance inventory and accounts receivable. In November
1995, the Company completed its initial public offering. Cash from the offering
and the subsequent exercise of an over-allotment option by the underwriters
resulted in net proceeds of $40.9 million to the Company.
Cash used in operating activities was $2.7 million during 1994 and
primarily resulted from net loss of $4.5 million offset by increases to accounts
payable, accrued expenses and deferred revenue of $1.3 million. Cash provided by
operating activities was $8.2 million during 1995 and primarily resulted from
net income of $6.0 million and increases in accounts payable and accrued
expenses $10.8 million offset by cash used for increases to accounts receivable
of $6.9 million and increases to inventories of $2.7 million. Cash used in
operating activities was $1.4 million during 1996 and primarily resulted from
net income of $12.4 million and increases in accounts payable of $2.3 million
being offset by inventory increases of $13.6 million and increases to accounts
receivable and accounts receivable from related parties of $5.5 million.
During fiscal 1994 and 1995, the Company had a line of credit of $4 million
with Quantum Corporation. Total borrowings under this line of credit were
$3.3 million at the end of the third quarter 1995. This loan was repaid in full
in October 1995 and the facility was canceled. The Company issued Quantum
Corporation a $1 million convertible debenture in December 1993 and another
$1 million convertible debenture in January 1994. The principal and accrued
interest on the debentures were converted into approximately 740,000 shares of
the Company's common stock immediately prior to the completion of the offering
and were sold as a part of the offering. The Company had no long-term debt
outstanding as of December 31, 1995 or 1996.
16
<PAGE>
The Company made capital expenditures of approximately $1.4 million,
$4.3 million, and $10.7 million in 1994, 1995, and 1996, respectively. These
expenditures were primarily for the purchase of test equipment, design and
engineering tools, and computer equipment. During 1996, the Company resold
certain equipment to its subcontractor in Lingsen, Taiwan, for proceeds of $1.3
million. Management estimates that gross expenditures for capital equipment
will be approximately $4.0 million in 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.
In July, 1996 the Board of Directors authorized the purchase of up to
500,000 shares of the Company's Common Stock in the open market. Approximately
100,000 shares were repurchased under this authorization during August and
September 1996 for an aggregate purchase price of approximately $723,000. In
February, 1997, the Board of Directors approved a second 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.
As of December 31, 1996, the Company's principal sources of liquidity
included cash, cash equivalents, and short-term investments of approximately
$36.2 million. The Company had no open lines of credit at December 31, 1996.
However, the Company may elect to open a line to credit in the future to secure
sufficient working capital to finance growth in operations. The Company believes
that the cash balances, together with funds expected to be generated from
operations may 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.
Specifically, industry overcapacity during 1996 has resulted in higher than
normal price declines in the Company's markets, which has unfavorably impacted
the Company's revenues, gross margins, and profitability. The Company expects
this price erosion may continue for some time. The Company is attempting to
accelerate its cost reduction efforts and to develop new products to expand and
diversify the Company's application and geographic base. If such activities can
not be implemented in a timely manner to offset anticipated declines in average
selling prices, losses may result and liquidity may be impacted.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the report thereon of
Coopers & Lybrand L.L.P., independent accountants, dated January 15, 1997, are
included in a separate section of this Report. See Index to Consolidated
Financial Statements on Page 32.
SUPPLEMENTARY DATA: SELECTED CONSOLIDATED QUARTERLY DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1996
---------------------------- ----------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $2,046 $7,924 $12,908 $16,650 $23,023 $23,371 $23,405 $23,491
Gross margin 130 2,351 4,455 6,232 9,871 9,330 9,066 5,529
Income (loss) from operations (1,110) 749 2,290 3,262 6,275 5,564 5,502 845
Net income (loss) (1,166) 733 2,309 4,153 4,199 3,722 3,693 737
Net income (loss) per share ($0.12) $0.04 $0.12 $0.19 $0.17 $0.15 $0.15 $0.03
</TABLE>
NET REVENUES. Net revenues increased from quarter to quarter during 1995
primarily due to increased product shipment volumes. The percentage increase in
net revenues from quarter to quarter was virtually flat during 1996 as increased
product shipment volumes were offset by declining average selling prices for the
Company's products.
17
<PAGE>
GROSS MARGIN. Gross margin increased as a percentage of net revenues and in
absolute dollars from quarter to quarter during 1995 and through the first
quarter of 1996 primarily due to increased product shipment volumes. During this
period, gross margin increased from quarter to quarter due to economies of scale
achieved from higher production volumes. Gross margin decreased as a percentage
of sales and decreased in absolute dollar amount from the second quarter of 1996
through the end of the 1996 due to average selling prices declining faster than
per unit manufacturing cost reductions being implemented by the Company.
INCOME (LOSS) FROM OPERATIONS. Income (loss) from operations increased from
quarter to quarter during 1995 and through the first quarter of 1996 primarily
due to increased product shipment volumes from quarter to quarter. Income from
operations decreased from quarter to quarter during the last three quarters of
1996 because declining average selling prices outpaced manufacturing cost
reductions. In addition, operating expenses as a percentage of revenue generally
increased quarter to quarter, largely driven by increased personnel costs.
NET INCOME (LOSS). Net income (loss) per share increased from quarter to quarter
during 1995 primarily due to increased product shipment volumes from quarter to
quarter and the utilization of prior year net operating losses which resulted in
an income tax benefit during 1995. Net income per share generally decreased from
quarter to quarter during 1996 due to declining gross margins and declining
income from operations over this period as well as the impact of providing for
income taxes.
NET INCOME (LOSS) PER SHARE. Net income (loss) per share increased from
quarter to quarter during 1995 primarily due to increased product shipment
volumes from quarter to quarter and the utilization of prior year net
operating losses which resulted in an income tax benefit during 1995. Net
income per share generally decreased from quarter to quarter during 1996 due
to declining gross margins and declining income from operations over this
period as well as the impact of providing for income taxes.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table lists the names, ages and positions held with the Company of
all executive officers and Directors of the Company. There are no family
relationships between any director or executive officer of the Company.
Executive officers serve at the discretion of the Board of Directors.
PRINCIPAL OCCUPATION/
---------------------
NAME AGE POSITION HELD WITH THE COMPANY
---- --- ------------------------------
Bing Yeh (1)(4) 46 President, Chief Executive Officer and
Director
Thomas A. Freeze 50 Chief Operating Officer and Executive Vice
President
Michael J. Praisner 50 Vice President, Finance & Administration,
Chief Financial Officer and Secretary
Isao Nojima 53 Vice President, Memory Design and Product
Engineering
Yaw-Wen Hu 46 Vice President, Technology Development and
Wafer Manufacturing and Director
David Sweetman 49 Vice President, Quality and Customer Support
Amy Yuen 45 Vice President, Operations
Tsuyoshi Taira (1)(2)(3) 58 Director
Yasushi Chikagami (1)(2)(3) 58 Director
_________________________
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Stock Option Committee
(4) Sole Member of Non-Officers Stock Option Committee
Bing Yeh, co-founder of the Company, has served as President, Chief
Executive Officer and a director of the Company since its inception in 1989.
Prior to founding the Company, Mr. Yeh served as a senior Research and
Development manager of Xicor, Inc., a nonvolatile memory semiconductor company.
From 1981 to 1984, Mr. Yeh held program manager and other positions at Honeywell
Inc. From 1979 to 1981, Mr. Yeh was a senior development engineer of EEPROM
technology of Intel Corporation. He was Ph.D. candidate in Applied Physics at
Stanford University and earned an Engineer degree in electrical engineering.
Mr. Yeh holds an M.S. and a B.S. in physics from National Taiwan University.
Thomas A. Freeze, joined the Company as Chief Operating Officer and
Executive Vice President in December 1996. Prior to joining the company, Mr.
Freeze served as President of Exel Microelectronics from 1994 to 1996. From 1988
to 1994, he served as a Vice President of Cypress Semiconductor where he managed
several operations including Technology Development, EPROMs, and Programmable
Logic Products. Mr. Freeze holds a B.S.E.E. from Texas A & M University.
Michael J. Praisner joined the Company as Vice President, Finance and
Administration, Chief Financial Officer, and Secretary in September 1995. From
1994 to 1995, he served as Vice President, Finance and Chief Financial Officer
of MicroModule Systems, Inc., a manufacturer of multichip modules for computer
and telecommunications applications. From 1992 to 1993, he served as Vice
President, Finance and Chief Financial Officer of Electronics for Imaging, Inc.,
a manufacturer of color desktop publishing computer systems. During part of 1991
he served as Vice President, Finance and Chief Financial Officer of Digital Link
Corp., a computer communications equipment company. From 1989 to 1991, he served
as Corporate Controller of Applied Materials Inc., a manufacturer of
semiconductor wafer fabrication equipment. Mr. Praisner holds a B.A. in liberal
arts and an M.B.A. from Southern Methodist University and is a Certified Public
Accountant.
19
<PAGE>
Isao Nojima has served the Company as Vice President, Memory Design and
Product Engineering since March 1993. From 1990 to 1993, he served as Director
of Design Engineering of Pioneer Semiconductor Corporation, a manufacturer of
semiconductors. From 1980 to 1990, he served as Design Manager of Xicor Inc., a
nonvolatile semiconductor company. From 1977 to 1980, he served as a Senior
Design Engineer for Intel Corporation. From 1969 to 1976, he was a Senior
Researcher at Toshiba's R&D Center in Japan. Mr. Nojima holds a B.S. and an
M.S. in electrical engineering from Osaka University in Japan.
Yaw Wen Hu has served the Company as Vice President, Technology Development
and Wafer Manufacturing since July 1993 and became a director of the Company in
September 1995. From 1990 to 1993, he served as Deputy General Manager of
Technology Development of Vitelic Taiwan Corporation. From 1988 to 1990, he
served as FAB Engineering Manager of Integrated Device Technology, Inc. From
1985 to 1988 he was the Director of Technology Development at Vitelic
Corporation. From 1978 to 1985 he worked as a senior development engineer in
Intel Corporation's Technology Development group. Mr. Hu holds a B.S. in
physics from National Taiwan University and an M.S. in computer engineering and
a Ph.D. in applied physics from Stanford University.
David Sweetman has served the Company as Vice President, Quality and
Customer Support since February 1994. Prior to joining the Company, he served
from 1991 to 1993 as Vice President of Quality and Reliability of Catalyst
Semiconductor Inc. From 1986 to 1991, he served as Director of Military Programs
of Seeq Technology Inc. He has published numerous papers on the quality,
reliability and performance of reprogrammable nonvolatile memories, SPC and PPM.
Mr. Sweetman holds a B.S. in physics from San Diego State University and an
M.B.A. from the University of Santa Clara.
Amy Yuen has served the Company as Vice President, Operations since
April 1995. She joined the Company in 1991 as Director of Finance and
Administration. From 1987 to 1991, she served as Director of Operations Planning
of WYSE Technology, a personal computer company. From 1985 to 1987 she served as
Controller and Personnel Manager for TCL Incorporated. From 1982 to 1985 she
served as Cost Accounting Manager for Hewlett Packard. Ms. Yuen holds a B.S. in
accounting from San Jose State University.
Tsuyoshi Taira has been a director of the Company since July 1993. Mr.
Taira served as a member of the board of directors of Atmel Corporation from
1987 to 1992. Mr. Taira served as president of Sanyo Semiconductor Corporation
from 1986 to 1993. Mr. Taira was Chairman of the Sanyo Semiconductor Corporation
from 1993 to 1996. Mr. Taira left the Sanyo Semiconductor Corporation in August,
1996. Mr. Taira currently owns and runs a marketing and management consulting
company, Tazan International, Inc. Mr. Taira holds a B.S. from Tokyo
Metropolitan University.
Yasushi Chikagami became a director of the Company in September 1995.
Mr. Chikagami has been Chairman of Keian Corporation, a personal computer and PC
peripheral distributor, since 1993. Mr. Chikagami has also served as director of
GVC Corporation and Trident Microsystems, Inc. since 1993. Mr. Chikagami holds a
B.S. in agricultural engineering from Taiwan University and a M.S. in
engineering from University of Tokyo.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Securities
Exchange Act") requires Company's directors and executive officers, and persons
who own more than ten percent of a registered class of the Company's equity
securities, to file with the Securities & Exchange Commission initial reports of
ownership and reports of changes in ownership of the Common Stock and other
equity securities of the Company. Officers, directors, and greater than ten
percent shareholders are required by the Securities & Exchange Commission
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge all Section 16(a) filing requirements applicable
to its officers, directors and greater than ten percent beneficial owners were
complied with in accordance with the Act.
20
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors do not currently receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for certain travel-related expenses in connection with attendance at
Board and Committee meetings.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain compensation awarded or paid by the
Company during the fiscal year ended December 31, 1996 to its President and
Chief Executive Officer and the Company's other executive officers:
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------
SECURITIES UNDERLYING OTHER
NAME AND PRINCIPAL POSITION (1) YEAR SALARY ($) BONUS ($) (2) STOCK OPTIONS (#) (3) COMPENSATION ($) (4)
------------------------------- ---- ---------- ------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C>
Bing Yeh
President and 1996 $195,000 $78,682 ----- $1,980
Chief Executive Officer 1995 128,690 40,824 ----- -----
Michael J. Praisner 1996 132,000 38,324 ----- 100
Vice President, Finance 1995 37,919 ----- 200,000 -----
and Administration,
Chief Financial Officer
and Secretary
Yaw-Wen Hu 1996 132,000 40,814 ----- 1,180
Vice President, Technology 1995 115,121 18,281 2,800 -----
Development and
Wafer Manufacturing
Isao Nojima 1996 135,000 41,851 ----- 460
Vice President, Memory 1995 115,500 18,492 3,000 -----
Design and Product
Engineering
David Sweetman 1996 130,000 39,325 ----- 1,200
Vice President, Quality 1995 110,256 17,226 ----- -----
and Customer Support
Amy Yuen 1996 138,000 45,163 ----- 3,420
Vice President, Operations 1995 114,736 23,164 104,000 -----
</TABLE>
(1) The information provided herein is based upon the Company's fiscal year
ended December 31, 1996. Thomas A. Freeze, the Chief Operating Officer and
Executive Vice President of the Company, joined the Company during December,
1996, and his total compensation did not exceed $100,000 during 1996. However,
the Company anticipates that Mr. Freeze's annualized base compensation will
exceed $100,000 in fiscal year 1997.
(2) Bonus received pursuant to the Company's Profit Sharing Plan, which was
paid out on January 24, 1997.
21
<PAGE>
(3) The Company has not granted any long-term compensation, restricted stock
awards, stock appreciation rights or other such long-term incentive plans,
awards or payouts.
(4) Other compensation for travel time, new hire referrals, special bonuses,
etc.
STOCK OPTION GRANTS DURING 1996
No Named Executive Officer was granted stock options during fiscal year 1996.
AGGREGATED OPTION EXERCISES DURING 1996
<TABLE>
<CAPTION>
NUMBER (#) OF SECURITIES $ VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED $ VALUE OPTIONS AT DECEMBER 31, 1996 DECEMBER 31, 1996
NAME ON EXERCISE (#) REALIZED (1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (2)
- --------- --------------- ------------ ---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Bing Yeh - - - -
Michael J. Praisner - - 53,334/146,666 $204,003/$560,997
Isao Nojima - - 245,000/90,000 $1,145,225/$420,750
Yaw Wen Hu 2,000 $24,200 195,466/85,334 $913,664/$398,936
Amy Yuen 38,000 $366,650 17,834/64,166 $82,107/$294,143
David Sweetman 50,000 $369,375 46,000/104,000 $212,750/$481,000
</TABLE>
(1) Based on the fair market value of the Company's Common Stock on the dates
of exercise minus the exercise price.
(2) Based on the closing price of the Company's Common Stock on December 31,
1996 ($4.825), the last trading day of the fiscal year, minus the exercise
price of the option, multiplied by the number of shares underlying the option.
As of February 28, 1997, options to purchase a total of 600,800 shares were
outstanding and exercisable under the Equity Incentive Plan for purchase by
beneficial owners and options to purchase a total of 14,000 shares were
outstanding and exercisable under the Directors' Option Plan for purchase by
beneficial owners. Options to purchase approximately 1,197,000 and 102,000
shares remained authorized and available for grant as of that date for the
Equity Incentive Plan and the Directors' Option Plan, respectively.
COMPENSATION PLANS
On October 3, 1995 the Company adopted its Equity Incentive Plan, Employee
Stock Purchase Plan and 1995 Non-Employee Directors' Stock Option Plan. No
amendments to these plans were made in 1996 or are proposed for the Annual
Meeting to be held July 23, 1997.
22
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of
the Company's Common Stock as of February 28, 1997 by: (i) each director and
each nominee for director; (ii) each of the executive officers named in the
Summary Compensation Table employed by the Company in that capacity on February
28, 1997; (iii) all executive officers and directors of the Company as a group;
and (iv) all those known by the Company to be beneficial owners of more than
five percent of its Common Stock.
BENEFICIAL OWNERSHIP (1)
----------------------------------
5% SHAREHOLDERS, DIRECTORS, AND OFFICERS NUMBER OF SHARES PERCENT OF TOTAL
- ---------------------------------------- ---------------- ----------------
Bing Yeh (2) 3,640,000 15.6%
c/o Silicon Storage Technology, Inc.
1171 Sonora Court
Sunnyvale, CA 94086
Ching S. Jenq 1,980,000 8.5
13030 Cumbra Vista Court
Los Altos Hills, CA 94022
Su Hwa Tseng (3) 1,410,000 6.0
22, R&D Road 2
Hsin-Chu Science Park
Taiwan, R.O.C. 30077
Thomas A. Freeze -- --
Michael J. Praisner (4) 65,064 *
Isao Nojima (5) 298,464 1.3
Yaw Wen Hu (6) 260,531 1.1
David Sweetman (7) 102,000 *
Amy Yuen (8) 93,988 *
Tsuyoshi Taira (9) 8,000 *
Yasushi Chikagami (9) 8,000 *
All directors and executive officers
as a group (nine persons) (10) 4,476,047 19.2%
* Represents beneficial ownership of less than 1%.
(1) This table is based upon information supplied by officers, directors and
principal shareholders and schedules 13D and 13G filed with the Securities &
Exchange Commission. Unless otherwise indicated in the footnotes to this table,
and subject to community property laws where applicable, each of the
shareholders named in this table above has sole voting and investment power with
respect to the shares of Common Stock shown as beneficially owned. Percentage of
beneficial ownership is based on 23,319,516 shares of the Company's Common Stock
outstanding as of February 28, 1997 adjusted as required by rules promulgated by
the Securities & Exchange Commission.
(2) Includes (i) 1,160,000 shares held by the Yeh Family Trust U/D/T dated
August 14, 1995, of which Mr. Yeh and his wife are trustees and (ii) 2,480,000
shares held by the Yeh 1995 Children's Trust U/T/A dated July 31, 1995 (the
"Children's Trust") of which Su-Wen Y. Liu and Yeon-Hong Chan are trustees.
Mr. Yeh disclaims beneficial ownership of the shares held by the Children's
Trust.
(3) Does not include 160,000 shares of Common Stock owned by Ms. Tseng's
spouse, as to which shares she disclaims beneficial ownership.
(4) Includes 63,333 shares issuable subject to options exercisable on or before
April 29, 1997.
(5) Includes 269,000 shares issuable subject to options exercisable on or
before April 29, 1997.
(6) Includes (i) 5,000 shares held by each of Mr. Hu's two minor children and
(ii) 216,800 shares issuable subject to options exercisable on or before
April 29, 1997.
23
<PAGE>
(7) Includes 62,000 shares issuable subject to options exercisable on or before
April 29, 1997.
(8) Includes 29,500 shares issuable subject to options exercisable on or before
April 29, 1997.
(9) Includes 8,000 shares issuable subject to options exercisable on or before
April 29, 1997.
(10) Includes 656,633 shares subject to stock options held by directors and
officers exercisable within 60 days of February 28, 1997. See footnotes (4),
(5), (6), (7), (8) and (9).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company does not manufacture its own wafers, but contracts with
independent foundries that fabricate wafers to the Company's specifications. As
of December 31, 1996, the Company depended primarily on two foundries, Sanyo and
Winbond, to supply all of its wafer requirements. The Company places orders for
wafers from Sanyo through its subsidiary Sanyo Semiconductor Corporation. See
Mr. Taira's biography describing his relationship to Sanyo Semiconductor
Corporation, a major supplier to the Company, during part of 1996. Sanyo
Semiconductor Corporation supplied the Company approximately $40 million worth
of raw materials during 1996.
On January 31, 1996, the Company acquired a 14% interest in a Japanese
company for approximately $939,000 paid in cash. The president of the Japanese
company is a shareholder of the Company. In 1996 this customer accounted for
12.7% or approximately $11.5 million of net revenues of the Company. This was
the only customer that accounted for more than 10% of the Company's net revenues
in 1996.
The Compensation Committee of the Board of Directors is composed of the
following persons: Mr. Bing Yeh, Mr. Tsuyoshi Taira, and Mr. Yasushi Chikagami.
Of these Directors, Mr. Yeh is also an officer of the Company.
As a matter of policy, all future transactions between the Company or any
of its officers, directors, or principal shareholders will be approved by a
majority of the independent and disinterested members of the Board of Directors,
and will be on terms no less favorable to the Company than could be obtained
from unaffiliated third parties and will be in connection with bona fide
business purposes of the Company.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS. The index to the consolidated
financial statements is found on page 32 of this Report.
(a) 2. FINANCIAL STATEMENT SCHEDULE. Financial statement schedule Number II
is included on page 30 of this Report.
(a) 3. EXHIBITS. See Exhibit Index in part (c), below.
(b) Reports on Form 8-K filed in the last quarter of the period and subsequent:
None.
(c) INDEX TO EXHIBITS.
EXHIBIT
-------
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
3.2+ Bylaws of the Company.
3.4+ Form of Restated Articles of Incorporation of the Company to be
effective upon the closing of the offering, dated November 3, 1995.
4.1+ Reference is made to Exhibits 3.2.
10.1+ Equity Incentive Plan and related agreements.
10.2+ 1990 Stock Option Plan and related agreements.
10.3+ Employee Stock Purchase Plan.
10.4+ 1995 Non-Employee Directors' Stock Option Plan.
10.5+ Profit Sharing Plan.
10.6+ Lease Agreement between the Company and Sonora Court Properties, dated
March 15, 1993, as amended.
10.7+ Lease Agreement between the Company and Coast Properties, dated May 4,
1995, as amended.
10.8+ License Agreement between the Company and Winbond Electronics
Corporation, dated July 30, 1990, as amended on September 14, 1990,
August 27, 1992, December 15, 1992 and December 1, 1993.
10.9+ License Agreement between the Company and Sanyo Electric Co., Ltd.,
dated April 7, 1993, as clarified by two letters each dated April 8,
1993.
10.10+ Manufacturing Agreement between the Company and Sanyo Electric Co.,
Ltd., dated December 10, 1994.
10.11+ License and Technical Assistance Agreement between the Company and
Rockwell International Corporation, Digital Communications Division,
dated September 1993, as amended on March 29, 1995.
10.13++ Documents relating to investment in Japanese company.
10.14++ Lease Agreement between the Company and Aetna Life Insurance Company,
dated March 5, 1996.
10.15++ License Agreement between the Company and Seiko Epson Corporation
dated March 31, 1996.
11.1 Statement regarding computation of net income (loss) per share. See
page 27.
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants. See
page 31.
27.1 Financial Data Schedule
+ Previously filed as an Exhibit to the Registration Statement filed on Form
S-1 and incorporated by reference herein.
++ Previously filed as an Exhibit to Form 10-K or Form 10-Q and incorporated
by reference herein.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly 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 27th day of March, 1997.
SILICON STORAGE TECHNOLOGY, INC.
By: /s/ BING YEH
----------------------------------------
Bing Yeh
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ BING YEH President, Chief Executive March 27, 1996
------------ Officer and Director (Principal
Bing Yeh Executive Officer)
/s/ MICHAEL J. PRAISNER Vice President Finance & March 27, 1996
- ----------------------- Administration, Chief Financial
Michael J. Praisner Officer and Secretary (Principal
Financial and Accounting Officer)
/s/ YAW WEN HU Vice President, Technology March 27, 1996
-------------- Development and Wafer
Yaw Wen Hu Manufacturing and Director
/s/ TSUYOSHI TAIRA Director March 27, 1996
------------------
Tsuyoshi Taira
-----------------
Yasushi Chikagami Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY COMPANIES WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to security holders as of the
date of the filing of this report. Such report and proxy material is to be
furnished to security holders subsequent to the filing of the annual report of
this Form, and the Company shall furnish copies of such material to the
Commission when it is sent to security holders.
26
<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:
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
Weighted average shares of common stock 7,697 8,603 22,972
Weighted average shares of common stock obtainable
on exercise of options and warrants and upon
conversion of convertible preferred stock - 8,514 2,142
SAB 83 3,558 2,669 -
-------- -------- --------
Shares used in per share calculation 11,255 19,786 25,114
-------- -------- --------
Net income (loss) ($4,509) $6,029 $12,351
-------- -------- --------
Net income (loss) per share ($0.40) $0.30 $0.49
--------- -------- --------
--------- -------- --------
FULLY DILUTED BASIS:
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
Weighted average shares of common stock 7,697 8,603 22,972
Weighted average shares of common stock obtainable
on exercise of options and warrants and upon
conversion of convertible preferred stock - 8,791 2,151
SAB 83 3,558 2,669 -
-------- -------- --------
Shares used in per share calculation 11,255 20,063 25,123
-------- -------- --------
Net income (loss) ($4,509) $6,029 $12,351
-------- -------- --------
Net income (loss) per share ($0.40) $0.30 $0.49
-------- -------- --------
-------- -------- --------
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.
27
<PAGE>
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services L.L.C.
50 California Street, 10th Floor
San Francisco, CA 94111
EFFECTIVE APRIL 7, 1997, THE COMPANY'S TRANSFER AGENT AND REGISTRAR WILL BE:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
LEGAL COUNSEL
Cooley Godward LLP
5 Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Ten Almaden Blvd., Suite 1600
San Jose, CA 95113
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
Our report on the consolidated financial statements of Silicon Storage
Technology, Inc. and subsidiary is included on page 33 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in Item 14(a) of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 15, 1997
except for Notes 4 and 9 as to which
the date is February 17, 1997
29
<PAGE>
SCHEDULE II
SILICON STORAGE TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DESCRIPTION BALANCE AT CHARGED TO WRITE-OFF BALANCE AT
- ----------- ---------- ---------- --------- ----------
BEGINNING OF COSTS AND OF ACCOUNTS END OF PERIOD
------------ --------- ----------- -------------
PERIOD EXPENSES /OTHER
------ -------- ------
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts.............. $ _ $ 72 _ $ 72
Allowance for excess and obsolete inventories $ _ $ 264 _ $ 264
Year ended December 31, 1995
Allowance for doubtful accounts.............. $ 72 $ 261 _ $ 333
Allowance for excess and obsolete inventories $ 264 $ 832 _ $1,096
Year ended December 31, 1996
Allowance for doubtful accounts.............. $ 333 $ 17 _ $ 350
Allowance for excess and obsolete inventories $1,096 $1,622 _ $2,718
</TABLE>
30
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Silicon Storage Technology, Inc. on Form S-8 (File No. 0-26944) of our
reports dated January 15, 1997, except for Notes 4 and 9 as to which the date
is February 17, 1997, on our audits of the consolidated financial statements
and financial statement schedule of Silicon Storage Technology, Inc. as of
December 31, 1995 and 1996, and for the years ended December 31, 1994, 1995
and 1996, which reports are included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Jose, California
March 27, 1997
31
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . . 35
Consolidated Statements of Shareholders' Equity (Deficit). . . . . . . . . . 36
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . 37
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 38
32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Silicon Storage Technology, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Silicon
Storage Technology, Inc. and Subsidiary as of December 31, 1995 and 1996, and
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Silicon Storage
Technology, Inc. and Subsidiary as of December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 15, 1997,
except for Notes 4 and 9 as to which
the date is February 17, 1997
33
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
------------------
1995 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $48,405 $24,755
Short-term investments - 11,485
Accounts receivable, net of allowance for
doubtful accounts of $333 in 1995 and
$350 in 1996 7,480 9,802
Accounts receivable from related parties - 3,124
Inventories, net 2,483 14,495
Current deferred tax asset 1,930 3,589
Other current assets 605 1,394
------- -------
Total current assets 60,903 68,644
Furniture, fixtures, and equipment, net 5,178 11,274
Other assets 322 996
------- -------
Total assets $66,403 $80,914
------- -------
------- -------
LIABILITIES
Current liabilities:
Trade accounts payable $ 3,559 $ 4,075
Account payable to related party 4,581 6,412
Accrued expenses 4,678 4,164
Deferred revenue 1,337 1,404
------- -------
Total current liabilities 14,155 16,055
Other liabilities 76 71
------- -------
Total liabilities 14,231 16,126
------- -------
Commitments and contingencies (Note 4).
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized: 45,000 shares
Issued and outstanding: 22,791 shares
(1995) and 23,225 shares (1996) 53,590 54,312
Deferred stock compensation (133) (100)
Retained earnings (accumulated deficit) (1,285) 10,576
------- -------
Total shareholders' equity 52,172 64,788
------- -------
Total liabilities and shareholders' equity $66,403 $80,914
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
34
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended December 31,
----------------------------
1994 1995 1996
------ ------ ------
Revenues:
Product revenues $3,355 $38,283 $90,638
License revenues 730 1,245 2,652
------- ------- -------
Net revenues 4,085 39,528 93,290
------- ------- -------
Costs and expenses:
Cost of revenues 4,080 26,360 59,494
Research and development 2,722 4,058 6,948
Sales and marketing 599 2,455 5,292
General and administrative 910 1,464 3,370
------- ------- -------
8,311 34,337 75,104
------- ------- -------
Income (loss) from operations (4,226) 5,191 18,186
Interest income 77 517 1,648
Interest expense (309) (273) -
Other income, net - - 115
------- ------- -------
Income (loss) before provision
for (benefit from) income taxes (4,458) 5,435 19,949
Provision for (benefit from) income taxes 51 (594) 7,598
------- ------- -------
Net income (loss) ($4,509) $6,029 $12,351
------- ------- -------
------- ------- -------
Net income (loss) share ($0.40) $0.30 $0.49
------- ------- -------
------- ------- -------
Shares used in per share calculation 11,255 19,786 25,114
------- ------- -------
------- ------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED EARNINGS/
------------------
CONVERTIBLE PREFERRED STOCK COMMON STOCK DEFERRED STOCK (ACCUMULATED
--------------------------- ------------ -------------- ------------
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT) TOTAL
------ ------ ------ ------ ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, Janaury 1, 1994 3,488 $5,259 8,445 $233 $ - ($2,580) $2,912
Issuance of shares of common stock - - 20 4 - - 4
Repurchase of shares of common stock - - (2,000) (75) - (225) (300)
Net loss - - - - - (4,509) (4,509)
------- ------- ------- ------- ------- ------- -------
Balances, December 31, 1994 3,488 5,259 6,465 162 - (7,314) (1,893)
Issuance of shares of common stock
upon initial public offering, net of
offering costs of $1,062 - - 5,010 40,871 - - 40,871
Issuance of shares of common stock
upon stock option and warrant exercise - - 1,101 151 - - 151
Issuance of shares of preferred stock 1,250 4,776 - - - - 4,776
Conversion of preferred stock in
initial public offering (4,738) (10,035) 9,475 10,035 - - -
Conversion of debt and accrued
interest to common stock - - 740 2,220 - - 2,220
Deferred stock compensation - - - 151 (151) - -
Amortization of deferred stock
compensation - - - - 18 - 18
Net income - - - - - 6,029 6,029
------- ------- ------- ------- ------- ------- -------
Balances, December 31, 1995 - - 22,791 53,590 (133) (1,285) 52,172
Repurchase of shares of common stock - - (100) (233) - (490) (723)
Issuance of shares of common stock under
employees' stock purchase and option
plans - - 534 263 - - 263
Tax benefit from exercise of stock options - - - 692 - - 692
Amortization of deferred stock
compensation - - - - 33 - 33
Net income - - - - - 12,351 12,351
------- ------- ------- ------- ------- ------- -------
Balances, December 31, 1996 - $ - 23,225 $54,312 ($100) $10,576 $64,788
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($4,509) $6,029 $12,351
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 988 1,837 3,431
Provision for doubtful accounts receivable 72 261 17
Provision for excess and obsolete inventories 264 832 1,622
Amortization of deferred stock compensation - 18 33
Gain on sale of equipment - - (179)
Deferred income taxes - (2,163) (1,390)
Changes in operating assets and liabilities:
Accounts receivable (633) (6,937) (2,339)
Accounts receivable from related parties - - (3,124)
Inventories (251) (2,678) (13,634)
Other current assets 65 (657) (789)
Trade accounts payable and accounts payable to related party 457 6,585 2,347
Accrued expenses and other liabilities 339 4,263 173
Deferred revenue 500 837 67
------- ------- -------
Net cash provided by (used in) operating activities (2,708) 8,227 (1,414)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of furniture, fixtures and equipment (1,363) (4,290) (10,659)
Proceeds from sale of equipment - - 1,311
Purchases of short-term investments - - (25,900)
Sales and maturities of short-term investments - - 14,415
Other - (6) (943)
------- ------- -------
Net cash provided by (used in) investing activities (1,363) (4,296) (21,776)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares of preferred stock - 3,776 -
Borrowings (payments) under corporate line of credit 1,500 (2,924) -
Issuance of convertible notes payable 1,000 - -
Issuance of convertible debentures 1,000 - -
Issuance of shares of common stock 4 40,871 263
Change in restricted cash balance 194 800 -
Repayment of notes payable to bank (194) (800) -
Repurchase of common stock (300) - (723)
------- ------- -------
Net cash provided by (used in) financing activities 3,204 41,723 (460)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (867) 45,654 (23,650)
Cash and cash equivalents at beginning of period 3,618 2,751 48,405
------- ------- -------
Cash and cash equivalents at end of period $2,751 $48,405 $24,755
------- ------- -------
------- ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $200 $176 $ -
Cash paid during the period for income taxes 51 51 9,392
Notes payable converted into shares of Series C preferred stock - 1,000 -
Deferred stock compensation - 151 -
Conversion of convertible debentures and accrued interest to common stock - 2,220 -
Conversion of preferred to common stock - 10,035 -
Exercise of warrant - 44 -
Tax benefit from exercise of stock options - - 692
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS:
Silicon Storage Technology, Inc. ("SST" or "the Company") is a supplier of
Flash memory devices, addressing the requirements of high volume customers and
applications. The Company's product revenues to date have substantially been
derived from the sale of 1Mbit and 512Kbit memory devices used in personal
computers and personal computer peripheral devices manufactured primarily by
companies located in Asia.
USE OF ESTIMATES IN PREPARATION OF THE FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES:
The Company's sales are concentrated in the nonvolatile memory class of the
semiconductor memory industry, which is highly competitive and rapidly changing.
Significant technological changes in the industry, changes in customer
requirements, changes in product costs and selling prices, or the emergence of
competitor products with new capabilities or technologies could affect the
Company's operating results adversely. The Company currently buys all of its
wafers, an integral component of its products, from a limited number of
suppliers. Failure by these suppliers to satisfy the Company's requirements on
a timely basis at competitive prices could cause a delay in manufacturing and a
possible loss of revenues, which would affect operating results adversely.
Most of the Company's sales are made through manufacturers' representatives
and distributors. These manufacturers' representatives and distributors can
discontinue selling the Company's products at any time. Two of the
manufacturers' representatives accounted for 46%, 61% and 40% of the Company's
product revenues during 1994, 1995, and 1996, respectively. The loss of either
of the manufacturers' representatives or any other significant manufacturers'
representatives or distributor could have a material adverse effect on the
Company's operating results.
BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary after elimination of intercompany balances and
transactions.
FINANCIAL INSTRUMENTS:
Cash equivalents are highly liquid investments with original or remaining
maturities of three months or less as of the date of purchase. Cash equivalents
present insignificant risk of changes in value because of interest rate changes.
The Company maintains substantially all of its cash balances with several major
financial and/or brokerage institutions domiciled in the United States and has
not experienced any material losses relating to these investment instruments.
Short-term investments, which comprise state and municipal securities, are
classified as available-for-sale and carried at fair value, based on quoted
market prices, with the unrealized gains or losses, net of tax, reported in
shareholders' equity. Unrealized gains and losses have not been material. The
amortized cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity, both of which are included in interest
income. Realized gains and losses are recorded on the specific identification
method. As of December 31, 1996, the fair value of the short-term investments
approximated cost, and all such investments are scheduled to mature within one
year.
38
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
FINANCIAL INSTRUMENTS, CONTINUED:
The carrying amounts reported for cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses are considered to
approximate fair values based upon the short maturities of those financial
instruments. Financial instruments that potentially subject the Company to
concentrations of credit risks comprise, principally, cash, investments and
trade accounts receivable. The Company invests its excess cash in accordance
with its investment policy which is approved by the Board of Directors and
reviewed periodically. The Company performs credit evaluations of new
customers and requires those without positive, established histories to pay
in advance, upon delivery or through letters of credit. Otherwise, the
Company does not require collateral of its customers, and maintains
allowances for potential credit losses which have historically not been
material.
The Company acquired a 14% interest in a privately held Japanese company in
January, 1996 (see Note 7). It was not practicable to estimate the fair value
of the investment in the issued common stock of this untraded company. The
investment is carried at its original cost of $939,000 in the accompanying
balance sheet.
INVENTORIES:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value. The Company's inventories include high
technology parts and components that are specialized in nature or subject to
rapid technological obsolescence. While the Company has programs to minimize
the required inventories on hand and considers technological obsolescence when
estimating allowances for potentially excess and obsolete inventories and those
required to reduce recorded amounts to market values, it is reasonably possible
that such estimates could change in the near term.
FURNITURE, FIXTURES AND EQUIPMENT:
Furniture, fixtures and equipment are stated at cost and depreciated using
the straight-line method over estimated useful lives of three to seven years.
LONG-LIVED ASSETS:
Effective January 1, 1996, the Company adopted Financial Accounting
Standards Board Statement No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires
the Company to review for impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset might not
be recoverable. In certain situations, an impairment loss would be recognized.
The adoption of SFAS 121 did not impact the Company's financial condition or
results of operations.
WARRANTIES:
The Company's products are generally subject to warranty and the Company
provides for the estimated future costs of repair, replacement or customer
accommodation in the accompanying statements of operations.
REVENUE RECOGNITION:
Direct sales to customers are recognized upon shipment of product net of an
allowance for estimated returns. Sales to distributors are made primarily under
arrangements allowing price protection and the right of stock rotation on
merchandise unsold by the distributors. Because of the uncertainty associated
with pricing concessions and future returns, the Company defers recognition of
such revenues, related cost of revenues and related gross margin until the
merchandise is sold by the distributors to the end user.
39
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
REVENUE RECOGNITION, CONTINUED:
Revenue from license or other technology arrangements is recognized upon
the completion and shipment of the product and/or documentation if the remaining
obligations are insignificant and collection of the resulting account receivable
is probable. Advance payments for product licenses with significant vendor
obligations are included in deferred revenue until the product and/or
documentation has been shipped and the remaining obligations become
insignificant. Revenue from best efforts joint development contracts is
generally recognized under the percentage of completion method.
RESEARCH AND DEVELOPMENT:
Research and development expenses are charged to operations as incurred.
INCOME TAXES:
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. The impact of adoption of SFAS 109 was not material.
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 if their effect is
antidilutive, except that pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, all common and common equivalent shares issued
during the twelve months preceding the filing date of the Company's initial
public offering have been included in the calculation of the number of shares
used to determine earnings or loss per share as if the shares had been
outstanding for all periods presented using the treasury stock method.
STOCK COMPENSATION:
Effective January 1, 1996, the Company adopted Financial Accounting
Standards Board Statement No. 123 (SFAS 123), "Accounting for Stock-based
Compensation," which requires the Company to value stock-based compensation and
to either record the value in the financial statements or to disclose the impact
of the value and its impact on net income and earnings per share in the
footnotes to the financial statements. The Company elected the disclosure
alternative and continues to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees". Accordingly, the adoption of SFAS
123 did not impact the Company's financial condition or results of operations.
RECLASSIFICATIONS:
Certain amounts in the prior years' financial statements have been
reclassified to conform to the 1996 presentation. These reclassifications did
not change previously reported total assets, liabilities, shareholders' equity
(deficit), or net income (loss).
40
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
INITIAL PUBLIC OFFERING:
On November 20, 1995, the Company completed an initial public offering of
5,000,000 shares of common stock at a price of $9.00 per share. Of these
shares, 4,260,000 were sold by the Company and 740,000 were sold by existing
shareholders. On November 22, 1995 the Company's underwriters exercised an
option to purchase an additional 750,000 shares to cover over-allotments. The
net proceeds realized by the Company from this offering were approximately $40.9
million after deducting underwriting discounts and commissions and expenses
payable by the Company related to the offering.
RECENT ACCOUNTING PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share",
which specifies the computation, presentation and disclosure requirements for
earnings per share. SFAS 128 supersedes Accounting Principles Board Opinion No.
15 and is effective for financial statements issued for periods ending after
December 15, 1997. SFAS 128 requires restatement of all prior-period earnings
per share data presented after the effective date. SFAS 128 will not have a
material impact on the Company's financial position, results of operations or
cash flows.
2. INVENTORIES (IN THOUSANDS):
DECEMBER 31,
----------------------
1995 1996
------- -------
Raw Materials $ 133 $ 3
Work in process 1,831 9,555
Finished goods 519 4,937
------- -------
$ 2,483 $14,495
------- -------
------- -------
3. FURNITURE, FIXTURES AND EQUIPMENT, NET (IN THOUSANDS):
DECEMBER 31,
----------------------
1995 1996
------- -------
Equipment $ 7,224 $12,549
Design hardware 459 3,450
Software 584 1,095
Furniture and fixtures 473 605
------- -------
8,740 17,699
Less accumulated depreciation 3,562 6,425
------- -------
$ 5,178 $11,274
------- -------
------- -------
Depreciation expense was $905,000, $1,834,000, and $3,431,000 for 1994,
1995 and 1996 respectively.
4. COMMITMENTS AND CONTINGENCIES:
The Company leases its corporate facilities under noncancelable operating
leases that expire in 1998 and 2000. The leases require escalating monthly
payments over their terms and, therefore, periodic rent expense is being
recognized on a straight-line basis. Under the terms of the leases, the Company
is responsible for maintenance costs, including real property taxes, utilities
and other costs. Certain of these leases contain renewal options. Rent expense
was $130,000, $212,000, and $449,000 for 1994, 1995, and 1996 respectively.
41
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. COMMITMENTS AND CONTINGENCIES, CONTINUED:
Future minimum rental payments at December 31, 1996 are as follows (IN
THOUSANDS):
1997 $ 503
1998 361
1999 249
2000 63
-------
$ 1,176
-------
-------
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 future
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 informational letters suggesting that certain of their
patents may overlap the patents for 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 or other third
party assertions will be resolved without costly litigation, 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. SHAREHOLDERS' EQUITY:
AUTHORIZED CAPITAL SHARES:
In connection with the closing of the offering described in Note 1, all of
the Company's convertible preferred stock outstanding converted into an
aggregate of 9,475,000 common shares. In November 1995, the Company's
shareholders amended and restated the Articles of Incorporation. The Company's
authorized capital shares consist of 45,000,000 shares of common stock and
7,000,000 shares of preferred stock. None of the preferred stock has been
designated or is outstanding. All of the Company's capital shares are no par
value.
REPURCHASE OF COMMON STOCK:
In July, 1996 the Board of Directors authorized the purchase of up to
500,000 shares of the Company's stock in the open market. Approximately 100,000
shares were repurchased under this authorization during August and September
1996 for an aggregate purchase price of approximately $723,000.
EQUITY INCENTIVE PLAN
In 1990, Company adopted a combined incentive and supplemental stock option
plan (the Option Plan) under which the Board of Directors could issue options to
purchase up to 4,000,000 shares of common stock to employees and directors of
and consultants to the Company and its affiliates. In November 1995, the
Company amended the Option Plan, restated it as the Equity Incentive Plan and
reserved an additional 2,000,000 shares of common stock for issuance under the
plan.
42
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SHAREHOLDERS' EQUITY, CONTINUED:
Under the Equity Incentive Plan, the Board of Directors has the authority
to determine to whom options will be granted, the number of shares under option,
the option term and the exercise price. The options generally are exercisable
beginning one year from date of grant and generally vest over periods ranging
from four to five years from the date of grant. The term of any options issued
under either plan may not exceed ten years from the date of grant. At December
31, 1994, options to purchase approximately 1,106,000 shares of common stock
were exercisable at a weighted average exercise price of $0.13. At December 31,
1995 options to purchase approximately 636,000 shares of common stock were
exercisable at a weighted average exercise price of $0.17. At December 31, 1996,
options to purchase approximately 967,000 shares of common stock were
exercisable at a weighted average exercise price of $0.34.
Activity under the plans is as follows (IN THOUSANDS, EXCEPT PER SHARE DATA):
<TABLE>
<CAPTION>
AVAILABLE OPTIONS OUTSTANDING WEIGHTED
FOR --------------------------------- AVERAGE
GRANT SHARES PRICE PER SHARE AMOUNT EXERCISE
PRICE
--------- ------ --------------- ------ --------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1994 1,042 2,513 $0.075-$0.175 $ 368 $0.15
Granted (441) 441 $0.20 88 $0.20
Exercised - (20) $0.175-$0.20 (4) $0.20
Terminated 379 (379) $0.15-$0.20 (61) $0.16
------ ------ ------
Balances, December 31, 1994 980 2,555 $0.075-$0.20 391 $0.15
Granted (1,241) 1,241 $0.20-$16.50 2,005 $1.62
Exercised - (1,057) $0.075-$0.20 (151) $0.14
Terminated 132 (132) $0.15-$0.20 (24) $0.18
Authorized 2,000 - - - -
------ ------ ------
Balances, December 31, 1995 1,871 2,607 $0.075-$16.50 2,221 $0.85
Granted (541) 541 $6.875-$15.25 4,987 $9.22
Exercised - (509) $0.075-$2.50 (106) $0.21
Terminated 366 (366) $0.15-$16.50 (3,695) $10.10
------ ------ ------
Balances, December 31, 1996 1,696 2,273 $0.15-$9.50 $3,407 $1.50
------ ------ ------ -------
------ ------ ------ -------
</TABLE>
The Company has recorded for financial statement purposes a deferred charge
of $151,000, representing the difference between the exercise price and the
deemed fair value of the Company's common stock for 1,093,000 shares subject to
common stock options granted prior to September 30, 1995. The deemed fair value
for 566,400 and 252,000 shares of the Company's common stock granted on April 6,
1995 and August 31, 1995 at an exercise price of $0.25 and $1.00 was determined
to be $0.30 and $1.10, respectively. For grants on other dates, during 1995, the
Company determined the deemed fair value based upon the Company's operating
results and certain key events compared to the deemed fair value as determined
on April 6 and August 31, 1995. The deferred stock compensation is being
amortized to expense over the period during which the options become
exercisable, generally four to five years.
On September 11, 1996 the Board of Directors authorized employees the
right to convert certain outstanding stock options into option grants with an
exercise price of $7.125 per share (the fair market value as of the date of
the Board's authorization). The converted option grants vest on a date that
is six months after the date such installment would have vested had the
option not been amended by the employee exercising this conversion right.
Approximately 276,500 stock options were terminated at exercise prices
ranging from $9.00 to $16.50, and new options were issued pursuant to this
program. For SFAS 123 disclosure purposes, a revaluation credit of
approximately $907,000 is included in the pro forma disclosures below.
43
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SHAREHOLDERS' EQUITY, CONTINUED:
DIRECTORS' OPTION PLAN
In October 1995, the Company adopted the Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") which became effective upon the effective
date of the Company's initial public offering. The Directors' Plan provided for
the automatic grant of options to purchase 24,000 shares of the Company's common
stock to non-employee directors of the Company upon the initial public offering.
It also provides for automatic grants upon new non-employee directors being
elected to the Board of Directors. The Directors' Plan also provides for the
grant of options to purchase up to an additional 6,000 shares annually
thereafter. Options under the Directors' Plan vest over 48 months and the
exercise price of options granted must equal or exceed the fair market value of
the Company's common stock on the date of grant. The options expire ten years
after the date of grant. The Company has reserved 150,000 shares of its common
stock for issuance under the Directors' Plan. During 1995, 72,000 such options
were granted to outside directors at an exercise price of $9.00 per share and
were outstanding at December 31, 1995. As of December 31, 1995, none of these
options were exercisable. During 1996, no options were granted and 24,000
options were terminated. At December 31, 1996, 48,000 options remained
outstanding, of which 12,000 were exercisable for a weighted-average exercise
price of $9.00 per share.
STOCK COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the Equity Incentive
Plan, the Directors' Option Plan or the Stock Purchase Plan. Had compensation
cost for these plans been determined based on the fair value at the grant date
for the awards consistent with the provisions of SFAS 123, the Company's net
income and net income per share for the years ended December 31, 1995 and 1996
would have been reduced to the pro forma amounts indicated below (IN THOUSANDS):
1995 1996
---- ----
Net income As reported $6,029 $12,351
Pro forma $5,956 $11,440
Earnings per share
As reported $0.30 $0.49
Pro forma $0.30 $0.46
The weighted average fair value of options granted during 1996 was $4.01
per share. The weighted average fair value of all options granted in 1995 was
$0.56 per share. For options granted during 1995, the weighted average
exercise price and weighted average fair value for options granted when the
fair market value exceeded the grant price were $0.46 and $0.09,
respectively, and the weighted average exercise price and weighted average
fair value for options granted when the fair market value equaled the grant
price were $5.42 and $2.17, respectively.
The pro forma amounts include expense for option grants under the
Directors' Plan of approximately $17,000 in 1995 and $118,000 in 1996.
The Company made option grants prior to 1995, the effective disclosure date
of SFAS 123. Therefore the pro forma disclosures may not be representative of
the effects on reported net income or earnings-per-share for future years.
44
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SHAREHOLDERS' EQUITY, CONTINUED:
The fair value of each option grant for both the Directors' Plan and the
Equity Incentive Plan is estimated on the date of grant using the Black-Scholes
multiple options pricing model with the following weighted average assumptions
by year:
1995 1996
---- ----
Risk-free interest rate 5.8 - 6.9% 5.2 - 6.0%
Expected term of option 2 years 2 years
Expected volatility 0% 92%
Expected dividend yield $ - $ -
Option grants are priced during the quarter of the date of grant. The
risk-free interest rate range represents the low and high end of the range
used at different points during the year. In 1995 the Company was privately
held, and therefore, under the provisions of SFAS 123, expected volatility
was 0%.
The options outstanding and currently exercisable by exercise price
under the Equity Incentive Plan and the Directors' Option Plan at December
31, 1996 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$0.15 - $0.15 818,000 8.19 $0.15 554,000 $0.15
$0.175 - $0.25 646,000 9.40 $0.22 307,000 $0.22
$0.275 - $2.50 433,000 8.61 $0.73 106,000 $0.73
$6.875 - $9.50 424,000 10.38 $7.68 12,000 $9.00
--------- --------
2,321,000 9.00 $1.65 979,000 $0.34
--------- --------
--------- --------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In October 1995, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") which became effective upon the effective date of the Company's
initial public offering. A total of 850,000 shares of common stock have been
reserved for issuance under the Purchase Plan. The Purchase Plan provides for
eligible employees to purchase shares of common stock at a price equal to 85% of
the fair market value of the Company's common stock on the date of the option
grant by withholding of up to 10 percent of their annual base earnings. In
August, 1996 the Company sold approximately 25,000 shares to employees for net
proceeds of approximately $157,000. Compensation cost which would be recognized
under SFAS 123 for the fair value of the employees' purchase rights was
estimated using the Black-Scholes model with the following assumptions for 1996:
dividend yield of 0 percent; expected life of 1/2 year; expected volatility of
92%; and risk-free interest rate of 5.7%. The valuation per share of rights to
purchase stock under the Purchase Plan for this period was $5.47 per share for a
total valuation of approximately $86,000. The expense, which is included in pro
forma net income above for 1995 and for 1996, is approximately $14,000 and
$72,000, respectively.
For the following Purchase Plan period, from August, 1996 through January,
1997, the same model and assumptions were used. Estimated contributions during
this period were $200,000. The valuation per share of rights to purchase stock
under the Purchase Plan for this period was estimated at $2.93 per share for a
total valuation of approximately $97,000. The expense, which is included in pro
forma net income above for 1996, is approximately $80,000.
45
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES:
The components of the provision for (benefit from) income taxes reflected
in the statements of operations are as follows (IN THOUSANDS):
DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
Current:
Federal $ - $ 1,136 $ 7,464
State 1 500 1,349
Foreign 50 - 175
-------- -------- --------
51 1,636 8,988
-------- -------- --------
Deferred:
Federal - (1,904) (1,258)
State - (326) (132)
-------- -------- --------
- (2,230) (1,390)
-------- -------- --------
$ 51 $ (594) $ 7,598
-------- -------- --------
-------- -------- --------
Substantially all of the Company's revenue is taxable in the United States.
The principal items accounting for the difference between income taxes computed
at the U.S. statutory rate and the provision for income taxes reflected in the
statements of operations are as follows:
DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
United States statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit 6.1 6.1 6.1
Foreign taxes, net 1.1 - -
Utilization of operating loss carryforwards - (30.9) -
Utilization of tax credit carryforwards - (8.0) -
Change in valuation allowance - (16.2) -
Benefit of operating loss carryforwards
not utilized (40.1) - -
Other - 4.1 (2.0)
-------- -------- --------
1.1% (10.9)% 38.1%
-------- -------- --------
-------- -------- --------
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset are as follows (IN THOUSANDS):
DECEMBER 31,
---------------------
1995 1996
-------- --------
Capitalization of research and development
and purchased software costs $ 438 $ 258
State taxes 197 273
Accrued expenses and allowances 1,287 3,149
Depreciation (111) (227)
Other 419 167
-------- --------
Net deferred tax asset $ 2,230 $ 3,620
-------- --------
-------- --------
Management has determined that no valuation allowance is required
because, although realization is not assured, the Company has sufficient
taxable income in carryback years to absorb items deductible in the future
for federal tax purposes and anticipates that its estimated future taxable
income will allow the deferred tax asset for state tax purposes to be fully
realized in future years. The amount of the deferred tax asset that is
realizable could be reduced in the near term if actual results differ
significantly from estimates of future taxable income.
46
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION:
The Company currently operates in one industry segment, the nonvolatile
memory class of the semiconductor memory market, for financial reporting
purposes. The Company's export product and license revenues are all denominated
in U.S. dollars and are summarized as follows (IN THOUSANDS):
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
-------- -------- --------
Taiwan $1549 $24,289 $36,597
Japan 6 3,303 18,438
Other 263 6,173 25,243
-------- -------- --------
$1,818 $33,765 $80,278
-------- -------- --------
-------- -------- --------
Revenues from individual customers in excess of 10% of net revenues were as
follows (IN THOUSANDS, EXCEPT PERCENT DATA):
1994
CUSTOMER PERCENT AMOUNT
- -------- ------- ------
A 16.7% $681
B 14.5% $591
C 12.7% $517
D 11.6% $472
No customer accounted for more than 10% of net revenues in 1995.
On January 31, 1996, the Company acquired a 14% interest in a Japanese
company for approximately $939,000 paid in cash, which interest is carried at
cost in the other noncurrent assets category in the accompanying balance sheet.
The president of the Japanese company is a shareholder of the Company. In 1996
this customer accounted for 12.7% or approximately $11,823,000 of net revenues.
This customer was the only customer that accounted for more than 10% of net
revenues in 1996.
Until September, 1996, one member of the Board of Directors was the
Chairman of a subsidiary of Sanyo Electric Company, Ltd. ("Sanyo"). The Company
purchased $545,000, $15,533,000 and $40,013,000 of raw materials from Sanyo in
1994, 1995 and 1996, respectively.
8. EMPLOYEE BENEFIT PLANS:
PROFIT SHARING PLAN
In April 1995, the Board adopted the Profit Sharing Plan under which
employees may collectively earn up to 10% of the Company's operating profit,
provided that both net earnings before interest income (expense), net and
provision for (benefit from) income taxes and operating profit are greater than
10% of sales. For purposes of the Profit Sharing Plan, "operating profit" is
product revenues less cost of revenues and less operating expenses. The sum paid
to any particular employee as profit sharing is a function of the employee's
length of service, performance and salary. The Company plans to pay profit
sharing sums, when available, to employees twice a year. For the years ended
December 31, 1995 and 1996, the Company expensed approximately $560,000 and
$1,785,000, respectively, under this plan.
47
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE BENEFIT PLANS, CONTINUED:
401(k) PLAN:
In 1995, the Company adopted the SST 401(k) Tax Sheltered Savings Plan and
Trust (the Plan), as amended, which is intended to qualify under Section 401 of
the Internal Revenue Code of 1986. The Plan covers essentially all employees.
Each eligible employee may elect to contribute to the Plan, through payroll
deductions, up to 15% of their compensation, subject to certain limitations. The
Company, at its discretion, may make additional contributions on behalf of
employees. All employee contributions are 100% vested. No employer contributions
were made in 1994, 1995, or 1996.
9. SUBSEQUENT EVENT:
In February, 1997, the Company's Board of Directors authorized the
repurchase of up to one million shares of the Company's common stock from the
open market using the Company's available cash balances.
48
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEETS AND THE CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS FOUND IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 24,755
<SECURITIES> 11,485
<RECEIVABLES> 12,926
<ALLOWANCES> 350
<INVENTORY> 14,495
<CURRENT-ASSETS> 68,644
<PP&E> 17,699
<DEPRECIATION> 6,425
<TOTAL-ASSETS> 80,914
<CURRENT-LIABILITIES> 16,055
<BONDS> 0
0
0
<COMMON> 53,212
<OTHER-SE> 10,576
<TOTAL-LIABILITY-AND-EQUITY> 80,914
<SALES> 90,638
<TOTAL-REVENUES> 93,290
<CGS> 59,494
<TOTAL-COSTS> 75,104
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 19,949
<INCOME-TAX> 7,598
<INCOME-CONTINUING> 12,351
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,351
<EPS-PRIMARY> $0.49
<EPS-DILUTED> $0.49
</TABLE>
