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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ________ TO _________.
COMMISSION FILE NUMBER 0-26944
SILICON STORAGE TECHNOLOGY, INC.
(Exact name of Company 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
__________
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _.
Number of shares outstanding of the Company's Common Stock, no par value, as of
the latest practicable date, September 30, 1997: 23,176,013. Total number of
pages in document: 14. Index to Exhibits is on page 12.
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1
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SILICON STORAGE TECHNOLOGY, INC.
FORM 10-Q: QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations................ 3
Condensed Consolidated Balance Sheets.......................... 4
Condensed Consolidated Statements of Cash Flows................ 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................. 11
Item 6. Exhibits and Reports on Form 8-K.............................. 12
2
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PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1997 1996 1997
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Product $23,046 $19,669 $67,566 $54,250
License 359 346 2,233 913
------- ------- ------- -------
Net revenues 23,405 20,015 69,799 55,163
------- ------- ------- -------
Costs and expenses:
Cost of revenues 14,339 15,430 41,532 46,837
Research and development 1,713 2,029 4,986 6,235
Sales and marketing 1,129 1,865 3,584 4,719
General and administrative 722 856 2,356 3,299
------- ------- ------- -------
17,903 20,180 52,458 61,090
------- ------- ------- -------
Income (loss) from
operations 5,502 (165) 17,341 (5,927)
Interest and other income,
net 306 595 1,407 1,436
------- ------- ------- -------
Income (loss) before
provision for (benefit
from) income taxes 5,808 430 18,748 (4,491)
Provision for (benefit from)
income taxes 2,115 35 7,134 (1,348)
------- ------- ------- -------
Net income (loss) $ 3,693 $ 395 $11,614 $(3,143)
------- ------- ------- -------
------- ------- ------- -------
Net income (loss) per share $ 0.15 $ 0.02 $ 0.46 $ (0.14)
------- ------- ------- -------
------- ------- ------- -------
Shares used in per share
calculation 24,999 25,308 25,158 23,231
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
December 31, September 30,
1996 1997
----------- -------------
(unaudited)
Current assets:
Cash and cash equivalents $24,755 $50,520
Short-term investments 11,485 3,855
Accounts receivable, net 9,802 8,697
Accounts receivable from related parties 3,124 1,632
Inventories 14,495 3,818
Current deferred tax asset 3,589 3,589
Other current assets 1,394 836
------- -------
Total current assets 68,644 72,947
Furniture, fixtures, and equipment, net 11,274 6,464
Other assets 996 1,018
------- -------
Total assets $80,914 $80,429
------- -------
------- -------
LIABILITIES
Current liabilities:
Trade accounts payable 4,075 14,230
Account payable to related party 6,412 0
Accrued expenses and other liabilities 4,235 4,638
Deferred revenue 1,404 1,290
------- -------
Total current liabilities 16,126 20,158
------- -------
SHAREHOLDERS' EQUITY
Common stock and deferred stock compensation 54,212 53,584
Retained earnings 10,576 6,687
------- -------
Total shareholders' equity 64,788 60,271
------- -------
Total liabilities and shareholders' equity $80,914 $80,429
------- -------
------- -------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1997
-------- --------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 11,614 $ (3,143)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,859 3,314
Provision for doubtful accounts receivable (19) 170
Provision for excess and obsolete inventories 2,211 3,511
Deferred income taxes (1,943) --
Loss on disposal of fixed assets -- 7
Changes in operating assets and liabilities:
Accounts receivable (8,489) 2,427
Inventories (18,359) 7,166
Other current and noncurrent assets 312 536
Accounts payable 6,713 3,743
Accrued expenses and other liabilities (438) 403
Deferred revenue 324 (114)
-------- --------
Net cash provided by (used in) operating
activities (6,215) 18,020
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of furniture, fixtures and equipment (7,001) (1,022)
Proceeds from sale of equipment -- 2,538
Purchases of short-term investments (71,261) (25,701)
Sales and maturities of short-term investments 56,146 33,331
Other (939) --
-------- --------
Net cash provided by (used in) investing
activities (23,055) 9,146
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares of common stock 96 529
Repurchase of shares of common stock (723) (1,930)
-------- --------
Net cash provided by (used in) financing
activities (627) (1,401)
-------- --------
Net increase (decrease) in cash and cash
equivalents (29,897) 25,765
Cash and cash equivalents at beginning of period 48,405 24,755
-------- --------
Cash and cash equivalents at end of period $ 18,508 $ 50,520
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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SILICON STORAGE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed interim consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments and
accruals, that in the opinion of the management of Silicon Storage Technology,
Inc. (the "Company" or "SST") are necessary for a fair presentation of the
Company's financial position, and results of operations and cash flows. The
unaudited condensed interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
and the notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, filed with the Securities and Exchange
Commission.
The year-end balance sheet at December 31, 1996 was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.
2. COMPUTATION OF NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares are excluded from the computation when their effect is
antidilutive.
3. INVENTORIES, NET (IN THOUSANDS):
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1996 1997
------------ -------------
Raw materials $ 3 $ 11
Work in process 9,555 3,147
Finished goods 4,937 660
------- ------
$14,495 $3,818
------- ------
------- ------
Inventories are stated at the lower of cost or market value. During the quarter
ended March 31, 1997, the Company recorded a charge of approximately $3.2
million to reduce the carrying value of inventories to replacement cost.
6
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4. CONTINGENCIES
On January 3, 1996, Atmel Corporation ("Atmel") sued the Company in the U.S.
District Court for the Northern District of California. Atmel's complaint
alleges that the Company, by making, using and selling devices, is willfully
infringing five U.S. patents owned by, or exclusively licensed to, Atmel.
Regarding each of these five patents, Atmel seeks a judgment that the Company
has infringed the patent, an injunction prohibiting further infringement,
treble the amount of damages caused by the alleged infringement and
attorney's fees, costs and expenses. On February 13, 1996, the Company filed
an answer denying Atmel's allegations and asserting affirmative defenses and
counterclaims. On March 18, 1997, the International Trade Commission
instituted an investigation against two suppliers of the Company's parts
based upon a complaint filed by Atmel. This action involves certain of the
patents that Atmel has alleged the Company infringes. The Company has
intervened as a party to that investigation. 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. A hearing on
this matter is scheduled for December 8, 1997. On June 25, 1997, a U.S.
District Court Judge denied Atmel's motion for summary judgment for certain
patents mentioned in the above lawsuit. The basis for the denial was that
not all elements of the claims of the patents were infringed as required for
a favorable ruling for Atmel. On September 23, 1997, a U.S. District Court
Judge granted the Company's motion for summary judgment of noninfringement of
one its patents mentioned in the lawsuit. There is no trial date pending in
the District Court for this action at this time.
Two other corporations have sent informational letters asserting certain of
their patents are infringed by the Company's products. No provision for any
liability that may result upon the resolution of these matters has been made in
the accompanying financial statements nor is the amount or range of possible
loss, if any, reasonably estimable. While the Company has accrued certain
amounts for the estimated costs associated with defending these matters, there
can be no assurance that the Atmel complaint or other third party assertions
will be resolved without costly litigation or in a manner that is not adverse to
the Company's financial position or results of operations, or without requiring
royalty payments in the future which may adversely impact gross margins.
5. STOCK REPURCHASE PROGRAM
In February, 1997, the Board of Directors approved a stock repurchase 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 ended June 1997. Approximately 493,000 shares were repurchased under
this authorization during for the six months ended June 30, 1997 for an
aggregate purchase price of $1.9 million. Purchase prices ranged from $3.24 to
$3.875 per share.
In July, 1997, the Board of Directors authorized a stock repurchase program
whereby 1,000,000 shares of the Company's common stock may be repurchased on the
open market at prevailing market prices. The repurchase plan is expected to
continue until December 15, 1997, unless extended or shortened by the Board of
Directors. During the quarter ended September 30, 1997, 16,500 shares were
repurchased under this authorization for a purchase price of $3.875 per share
for an aggregate purchase price of $64 thousand.
6. REVALUATION OF STOCK OPTIONS
On April 23, 1997, the Board of Directors approved an offer to employees of the
Company to reprice outstanding options granted between August 1, 1996 and March
3, 1997 (the "Repricing Program"). Under the Repricing Program, as of April 28,
1997, 844,750 option grants with exercise prices ranging from $4.00 to $9.50
were amended into repriced option grants with an exercise price of $3.125 (based
on the closing price as reported on the Nasdaq National Market on such date).
As consideration for the amended grants, optionees are prohibited from
exercising the repriced options for a period of three months after the initial
vest date of such repriced options. The Repricing Program terminated on April
28, 1997.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion may be understood more fully by reference to the
condensed consolidated financial statements, notes to the condensed consolidated
financial statements, and management's discussion and analysis contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, as
filed with the Securities and Exchange Commission.
Except for the historical information contained herein, the following discussion
may contain forward-looking statements that involve risks and uncertainties.
The Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to the Company's actual results to differ
materially from expected results include: the availability, deliverability and
cost of raw materials, such as wafers or die, from the Company's suppliers,
competitive pricing pressures, fluctuations in manufacturing yields, new product
announcements and introductions by the Company or its competitors, changes in
demand for, or in the mix of, the Company's products, changes in average selling
prices, the gain or loss of significant customers, market acceptance of products
utilizing the Company's SuperFlash technology, changes in the channels through
which the Company's products are distributed, foreign currency fluctuations,
unanticipated research and development expenses associated with new product
introductions and the timing of significant orders. Operating results could
also be adversely affected by general economic conditions and a downturn in the
market for consumer products which incorporate the Company's products, such as
personal computers and cellular telephones. All of these factors, and other
factors, are difficult to forecast and can materially affect the Company's
quarterly or annual operating results. Fluctuations in revenues and operating
results may cause volatility in the Company's stock price. Please also refer to
the Company's Form 10-K for the year ended December 31, 1996 in the Risk Factors
section for a discussion of such risk factors.
GENERAL
The Company is a supplier of flash memory devices, addressing the requirements
of high volume applications. Currently, the Company offers medium density flash
memory devices ranging from 512Kbit to 4Mbit that target a broad range of
existing and emerging applications in the personal computer ("PC"), PC
peripheral, communications, consumer and industrial markets. The end-user
products currently sold with the Company's flash memory devices include, but are
not necessarily limited to, desk-top computers, notebook computers, CD-ROM
drives, CD-players, DVD players, hard disk drives, electronic
organizers/personal digital assistants, portable telephones, modems, pagers,
network adapter cards, set-top boxes, bar-code scanners and video games. During
the nine month period ended September 30, 1997, 43% and 31% of the Company's
product revenues have been derived from the sale of 1Mbit and 512Kbit flash
memory devices, respectively, while the balance of the Company's product
revenues have been derived from the sales of 2Mbit and 4Mbit flash memory
devices. The Company is developing higher density flash memory products to
address emerging markets such as digital cameras, voice recorders, video
telephones, memory cards, network adapter cards, digital cellular phones and
printer font storage.
During the third quarter of 1997, the Company derived approximately 29% and 21%
of its product revenues from sales to Taiwan and Japan, respectively. The
Company intends to diversify its customer base by increasing sales in other
geographic areas and to continue targeting additional high volume applications
such as the cellular telephone, CD-ROM drive, hard disk drive, pager, video
game, electronic organizer and set-top box markets. International product
revenues accounted for 86% of total product revenues during the nine month
period ended September 30, 1997. The Company expects that international sales
will continue to account for a significant portion of its product revenues
although the percentage may fluctuate from period to period. Although the
Company's international sales are primarily denominated in U.S. dollars, these
sales are subject to a number of risks associated generally with international
sales, including the effect of geo-political uncertainties, currency
fluctuations, state-imposed restrictions on the repatriation of funds, import
and export duties and restrictions.
RESULTS OF OPERATIONS: QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997
The following discussion relates to the financial statements of the Company for
the three months ended September 30, 1997 (current quarter) of the fiscal year
ending December 31, 1997, in comparison to the three months ended September 30,
1996 (comparable quarter of the prior year). In addition, certain comparisons
with the three months ended June 30, 1997 (previous quarter) are provided where
management believes it is useful to the understanding of continuing trends.
Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be achieved for the full fiscal year
ending December 31, 1997.
8
<PAGE>
NET REVENUES. Net revenues were $55.2 million for the nine months ended
September 30, 1997 as compared to $69.8 million for the nine months ended
September 30, 1996. The decrease in net revenues was primarily due to lower
average selling prices on units sold and lower license fee income received. Net
revenues were $20.0 million in the current quarter as compared to $23.4 million
for the comparable quarter of the prior year, also due to lower average selling
prices.
Product revenues were $19.7 million in the current quarter versus $23.0
million for the comparable quarter of the prior year. Although units shipped
increased by 38% between these two periods, average selling prices declined
approximately 37% on a weighted average basis across all product lines.
License, royalty and development revenues were $0.3 million for the current
quarter as compared to $0.4 million in the comparable quarter of the prior
year. Current quarter non-product revenues consisted primarily of royalty
payments from licensees of the Company's technology.
During the third quarter of 1997, the Company derived approximately 29% of
product revenues from sales to Taiwan as compared to 35% for the comparable
quarter of the prior year. While the Company intends to diversify both the
market application of its products and its customer base, there can be no
assurance that such diversification will occur. International sales accounted
for approximately 86% of product revenues during the current quarter, as
compared to 85% for the comparable quarter of the prior year. For the nine
months ended September 30, 1997, 31% of product revenues were from Taiwan
and, over the same period, 79% of product revenues were from international
sales. International sales are anticipated to account for a substantial
majority of all product revenues for the foreseeable future.
COST OF REVENUES. Gross margin was $8.3 million for the nine months ended
September 30, 1997 as compared to $28.3 million for the nine months ended
September 30, 1996. The decrease in gross margin for the first nine months of
1997 was due to a combination of declining average selling prices and a
charge to reduce the carrying value of inventory to its approximate
replacement cost. Gross margin was $4.6 million or 23% of net revenues in the
current quarter as compared to $9.1 million or 39% of net revenues for the
comparable quarter of the prior year. Future fluctuations in gross margins
may occur as a result of declining average selling prices which could lead to
additional charges to cost of revenues to reduce inventories to net
realizable value; cost reduction efforts that do not reduce costs faster than
average selling price declines; price changes in the costs of raw materials;
changes in the mix between license revenues and product revenues or the
impact of changes in the product mix.
The Company's agreement with Sanyo Electric Co. Ltd. ("Sanyo") provides for
wafer price adjustments based on dollar/yen exchange rate fluctuations. As a
result, a strengthening yen could result in higher cost of revenues. Gross
margins may also be affected by cost reductions, yield fluctuations, wafer
costs, changes in the mix of sales through distribution channels and
competitive pricing pressures.
Average selling prices of flash memory products are subject to significant
fluctuation due to periodic changes in supply and demand. Declining average
selling prices will adversely affect gross margins unless the Company is able
to offset such declines with reductions in per unit costs or changes in
product mix.
The Company does not have the capability to manufacture its products and is
dependent on foreign foundries, packaging and assembly contractors, and test
facilities to manufacture its products. The Company has had to allocate
products among customers at times because the Company was unable to meet all
of the demand for its products due to the Company's inability to secure
sufficient test capacity. This situation may or may not recur in the future.
RESEARCH AND DEVELOPMENT. Research and development expenses were $6.2 million
for the nine months ended September 30, 1997 as compared to $5.0 million for
the nine months ended September 30, 1996. Research and development expenses
were $2.0 million or 10% of net revenues during the current quarter as
compared to $1.7 million or 7% of net revenues during the comparable quarter
of the prior year. The increase in research and development expenses from
last year was primarily the result of hiring additional engineering
personnel, depreciation related to purchases of additional engineering test
equipment, and increased prototyping and product qualification costs
associated with the Company's process and product development efforts.
9
<PAGE>
SALES AND MARKETING. Sales and marketing expenses were $4.7 million for the
nine months ended September 30, 1997 as compared to $3.6 million for the nine
months ended September 30, 1996. Sales and marketing expenses were $1.9
million or 9% of net revenues during the current quarter, as compared to $1.1
million or 5% of net revenues for the comparable quarter of the prior year.
Sales and marketing expenses consist primarily of sales commissions to
manufacturer's representatives, salaries of the Company's sales and marketing
personnel and product literature expenses. The increase in expense from the
prior year corresponds primarily to the hiring of additional sales and
marketing personnel, increased advertising and promotional costs, and related
collateral materials.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $3.3
million for the nine months ended September 30, 1997 as compared to $2.4
million for the nine months ended September 30, 1996. General and
administrative expenses were $0.9 million or 4% of net revenues during the
current quarter, as compared to $0.7 million or 3% of net revenues during the
comparable quarter of the prior year. The increase was primarily due to an
increase in personnel in this area.
INTEREST AND OTHER INCOME, NET. Interest income and other income was $1.4
million for the nine months ended September 30, 1997 as compared to $1.4
million for the nine months ended September 30, 1996. Interest income was
$0.6 million or 3% of net revenues during the current quarter compared to
$0.3 million during the comparable quarter of the prior year. Interest income
increased from the comparable quarter of the prior year due to the increase
in cash and short term investments from $32.1 million to $54.4 million for
the current quarter.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The benefit from income taxes was
$1.3 million for the nine months ended September 30, 1997 as compared to a
provision of $7.1 million for the nine months ended September 30, 1996. The
provision for income taxes was $35 thousand during the current quarter as
compared to $2.1 million for the comparable quarter of the prior year. The
benefit in the current year relates to the Company's loss position for the
nine month period. The Company's effective income tax rate was 38% for the
prior year. The effective tax rate decreased from 36% for the comparable
quarter of the prior year to 8% for the current quarter due to the impact of
the reinstatement of the Research and Experimentation tax credit as of July
1, 1997 on the Company's overall tax provision.
NET INCOME (LOSS) PER SHARE. The Company's net income per share for the
current quarter was $0.02, compared to $0.15 in the comparable quarter of the
prior year. The decrease in net income per share was the result of lower net
revenues due to lower average selling prices, lower gross margins due to
average selling price declines and higher operating expenses than experienced
in the prior year. The Company's net loss per share for the nine months ended
September 30, 1997 was $0.14 as compared to net income per share of $0.46 for
the nine months ended September 30, 1996. The Company's change from a net
income position in the prior year to a net loss position in the current year
was due primarily to declining average selling prices despite an increase in
shipment volume.
LIQUIDITY AND CAPITAL RESOURCES
Principal sources of liquidity at September 30, 1997 consisted of $54.4
million of cash, cash equivalents, and short-term investments. As of
September 30, 1997, the Company had no open lines of credit or non-trade
debt. However, the Company may endeavor to open a line of credit in the
future to secure additional working capital to finance operational growth.
The Company believes that the cash balances, together with funds expected to
be generated from operations will be sufficient to meet its projected working
capital and other cash requirements through at least the next twelve months.
However, there can be no assurance that events in the future will not require
the Company to seek additional capital sooner or, if so required, that it
will be available on terms acceptable to the Company.
Year-to-date, the Company's operating activities provided cash of $18.0 million,
which consisted primarily of decreases in inventories of $7.2 million, a
decrease in accounts receivable of $2.4 million and an increase in accounts
payable of $3.7 million, offset by a net loss of $3.1 million. The decrease in
inventory was due to the increase in number of units shipped during the nine
month period ending September 30, 1997 and a writedown of $3.2 million in the
first quarter of 1997 for declining die prices. The decrease in accounts
receivable was due to heavy collection efforts during September, 1997 which
resulted in reduced days sales outstanding. The increase in accounts payable
was due to materials and other inventory related purchases during September,
1997.
10
<PAGE>
The Company made capital expenditures of approximately $1.0 million during
the current nine month period as compared to $7.0 million during the
comparable nine month period of the prior year. These expenditures were
primarily for the purchase of manufacturing test equipment, design and
engineering tools, and computer equipment. Similar levels of capital
spending are expected to continue, and may even increase, during the rest of
1997. In addition, the Company may use its working capital to secure
additional foundry capacity and to acquire new technologies. These
expenditures may be in the form of deposits, equipment purchases, loans or
equity investments or joint ventures in or with wafer fabrication or other
companies. The purchases and subsequent resale of equipment to one of the
Company's subcontracted facilities resulted in cash inflows and outflows of
$2.5 million for the nine months ended September 30, 1997. The Company
incurred no gain or loss on these transactions.
The Company's financing activities used cash of approximately $1.9 million
during the nine months ended September 30, 1997, primarily for the repurchase
of stock on the open market. In comparison, during the same period of the
prior year, financing activities used $0.6 million primarily for the
repurchase of stock on the open market.
In July, 1997, the Board of Directors authorized a stock repurchase program
whereby 1,000,000 shares of the Company's common stock may be repurchased on
the open market at prevailing market prices. The repurchase plan is expected
to continue until December 15, 1997, unless extended or shortened by the
Board of Directors. During the quarter ended September 30, 1997, 16,500
shares were repurchased under this authorization with a purchase price of
$3.875 per share for an aggregate purchase price of $64 thousand.
PART II
ITEM 1. LEGAL PROCEEDINGS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this section.
On January 3, 1996, Atmel sued the Company in the U.S. District Court for the
Northern District of California. Atmel's complaint alleges that the Company, by
making, using and selling devices, is willfully infringing five U.S. patents
owned by or exclusively licensed to Atmel. Regarding each of these five
patents, Atmel seeks a judgment that the Company has infringed the patent, an
injunction prohibiting further infringement, treble the amount of damages caused
by the alleged infringement and attorney's fees, costs and expenses. On
February 13, 1996, the Company filed an answer denying Atmel's allegations and
asserting affirmative defenses and counterclaims. On March 18, 1997, the
International Trade Commission instituted an investigation against two
suppliers of the Company's parts based upon a complaint filed by Atmel. This
action involves certain of the patents that Atmel has alleged the Company
infringes. The Company has intervened as a party to that investigation.
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. A hearing is scheduled on this matter for December 8, 1997. There
can be no assurance that the Atmel complaint or other third party assertions
will be resolved without costly litigation.
On June 25, 1997, a U.S. District Court Judge denied Atmel's motions for summary
judgment for certain patents mentioned in the above lawsuit. The basis for the
denial was that not all elements of the claims of the patents were infringed as
required for a favorable ruling for Atmel. On September 23, 1997, a U.S.
District Court Judge granted the Company's motion for summary judgment of
noninfringement of one its patents mentioned in the above lawsuit. There is no
trial date pending in the District Court action at this time.
At the present time, there is no other material 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.
11
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The Company hereby incorporates by reference all exhibits filed
in connection with Form 10-K for the year ended December 31, 1996.
EXHIBIT
NUMBER DESCRIPTION
11.1 Statement Regarding Computation of Net Income (Loss) Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended September 30, 1997:
None.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Company
has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Sunnyvale, County of Santa Clara,
State of California, on the 7th day of November, 1997.
SILICON STORAGE TECHNOLOGY, INC.
By:
/s/ BING YEH
-----------------------------------
Bing Yeh
President, Chief Executive Officer
and Director (Principal Executive
Officer)
/s/ MICHAEL J. PRAISNER
-----------------------------------
Michael J. Praisner
Vice President Finance & Administration,
Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
13
<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:
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1997
------- -------
Weighted average shares of common stock 23,098 23,112
Weighted average shares of common stock
obtainable on exercise of options 1,901 2,196
------- -------
Shares used in per share calculations 24,999 25,308
------- -------
Net income $ 3,693 $ 395
------- -------
Net income per share $ 0.15 $ 0.02
------- -------
------- -------
PRIMARY BASIS:
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1997
------- -------
Weighted average shares of common stock 22,934 23,231
Weighted average shares of common stock
obtainable on exercise of options 2,224
------- -------
Shares used in per share calculations 25,158 23,231
------- -------
Net income (loss) $11,614 $(3,143)
------- -------
Net income (loss) per share $ 0.46 $ (0.14)
------- -------
------- -------
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.
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF
OPERATIONS FOUND IN THE COMPANY'S FORM 10Q FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 50,520
<SECURITIES> 3,855
<RECEIVABLES> 10,849
<ALLOWANCES> (520)
<INVENTORY> 3,818
<CURRENT-ASSETS> 72,947
<PP&E> 14,623
<DEPRECIATION> (8,159)
<TOTAL-ASSETS> 80,429
<CURRENT-LIABILITIES> 20,158
<BONDS> 0
0
0
<COMMON> 53,584
<OTHER-SE> 6,687
<TOTAL-LIABILITY-AND-EQUITY> 80,429
<SALES> 54,250
<TOTAL-REVENUES> 55,163
<CGS> 46,837
<TOTAL-COSTS> 61,090
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,491)
<INCOME-TAX> (1,348)
<INCOME-CONTINUING> (3,143)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,143)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
