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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998.
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
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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 ___.
Number of shares outstanding of the Company's Common Stock, no par value, as
of the latest practicable date, March 31,1998: 22,831,462. Total number of
pages in document: 15. Index to Exhibits is on page 14.
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SILICON STORAGE TECHNOLOGY, INC.
FORM 10-Q: QUARTER ENDED MARCH 31, 1998
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........................ 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 13
Item 6. Exhibits and Reports on Form 8-K........................... 14
2
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PART I
------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1998
--------- ---------
(unaudited)
<S> <C> <C>
Revenues:
Product $16,854 $15,754
License 238 611
--------- ---------
Net revenues 17,092 16,365
--------- ---------
Costs and expenses:
Cost of revenues 16,533 14,390
Research and development 1,978 3,055
Sales and marketing 1,265 1,619
General and administrative 1,244 1,167
--------- ---------
21,020 20,231
--------- ---------
Income (loss) from operations (3,928) (3,866)
Interest and other income (expense), net 365 541
--------- ---------
Income (loss) before provision
for (benefit from) income taxes (3,563) (3,325)
Provision for (benefit from) income taxes (1,044) (1,000)
--------- ---------
Net income (loss) ($2,519) ($2,325)
--------- ---------
--------- ---------
Net income (loss) per share - basic and diluted ($0.11) ($0.10)
--------- ---------
--------- ---------
Shares used in per share calculations 23,269 22,960
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
December 31, March 31,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $26,743 $3,163
Short-term investments 20,476 24,570
Accounts receivable, net 8,318 8,270
Accounts receivable from related parties 2,124 3,032
Inventories 11,909 19,410
Current deferred tax asset 3,716 4,279
Other current assets 1,011 645
------------ -----------
Total current assets 74,297 63,369
Furniture, fixtures, and equipment, net 7,224 7,117
Other assets 1,018 1,487
------------ -----------
Total assets $82,539 $71,973
------------ -----------
------------ -----------
LIABILITIES
Trade accounts payable 18,957 12,661
Accrued expenses and other liabilities 6,393 5,026
Deferred revenue 1,300 1,706
------------ -----------
Total liabilities 26,650 19,393
------------ -----------
SHAREHOLDERS' EQUITY
Common stock and deferred stock compensation 53,290 52,856
Retained earnings 2,599 (276)
------------ -----------
Total shareholders' equity 55,889 52,580
------------ -----------
Total liabilities and shareholders' equity $82,539 $71,973
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1998
--------- ---------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($2,519) ($2,325)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation 1,132 1,000
Provision for doubtful accounts receivable 200 250
Provision for excess and obsolete inventories 2,063 2,521
Deferred income taxes 0 (563)
Changes in operating assets and liabilities:
Accounts receivable (1,640) (202)
Accounts receivable from related parties 1,511 (908)
Inventories (250) (10,022)
Other current and noncurrent assets 401 397
Trade accounts payable 5,327 (6,296)
Accrued expenses and other liabilities (2,030) (1,017)
Deferred revenue (235) 406
--------- ---------
Net cash provided by (used in) operating
activities 3,960 (16,759)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of furniture, fixtures and equipment (441) (893)
Proceeds from sale of equipment 1,537 0
Purchases of available-for-sale investments (5,426) (23,328)
Sales and maturities of available-for-sale
investments 4,847 19,234
Other (5) (500)
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Net cash provided by (used in)
investing activities 512 (5,487)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares of common stock 221 250
Repurchase of common stock (507) (1,584)
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Net cash provided by (used in)
financing activities (286) (1,334)
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Net increase (decrease) in cash and
cash equivalents 4,186 (23,580)
Cash and cash equivalents at beginning of period 24,755 26,743
--------- ---------
Cash and cash equivalents at end of period $28,941 $3,163
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
SILICON STORAGE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited condensed interim consolidated financial
statements include all adjustments, consisting only of normal recurring
adjustments and accruals, that in the opinion of the management of Silicon
Storage Technology, Inc. (the "Company" or "SST") are necessary for a fair
presentation of the Company's financial position as of March 31, 1998 and the
results of operations and cash flows for the three months ended March 31,
1997 and 1998. The unaudited interim consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements of the Company and the notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, filed with
the Securities and Exchange Commission.
The year-end balance sheet at December 31, 1997 was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, (SFAS 130), "Reporting Comprehensive
Income", which specifies the computation, presentation and disclosure
requirements for comprehensive income. The Company implemented SFAS 130
during the first quarter of 1998. There was no impact on the Company's
financial position, results of operations or cash flows as comprehensive
income and net income are the same.
2. COMPUTATION OF NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing income (loss)
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted net income (loss) per share is
computed by dividing income (loss) available to common shareholders, adjusted
for convertible preferred dividends and after-tax interest expense on
convertible debt, if any, by the sum of the weighted average number of common
shares outstanding and potential common shares (when dilutive).
A reconciliation of the numerator and the denominator of basic and diluted
income (loss) per share is as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1997 1998
---------- ---------
<S> <C> <C>
Numerator - Basic and Diluted:
Net income (loss) ($2,519) ($2,325)
------- -------
------- -------
Denominator - Basic and Diluted:
Weighted average common stock outstanding 23,269 22,960
------- -------
------- -------
Net income (loss) per share - Basic and Diluted ($0.11) ($0.10)
------- -------
------- -------
</TABLE>
Stock options to purchase 1,720,000 and 1,132,000 shares of common stock were
outstanding as of March 31, 1997 and March 31, 1998, respectively, but were
not included in the computation of diluted loss per share because the Company
had net losses for the three months ended March 31, 1997 and March 31, 1998.
6
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3. INVENTORIES (IN THOUSANDS):
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ---------
<S> <C> <C>
Raw materials $ 118 $ 0
Work in process 9,249 13,353
Finished goods 2,542 6,057
------------ ---------
$11,909 $19,410
------------ ---------
------------ ---------
</TABLE>
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.
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.
Atmel later amended its complaint to allege infringement of a sixth patent.
Regarding each of these six 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 ("ITC") against two suppliers of the Company's
parts. On March 18, 1997, the ITC 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 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 was held on December 8, 1997 regarding this matter.
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. On September 22, 1997 the
District Court granted the Company's motion for summary judgment and found
that one of the patents is not infringed. The Court later denied Atmel's
motion for reconsideration of the ruling. That patent was also subsequently
dismissed from the ITC action. On November 24, 1997 and January 20, 1998 the
District Court denied the Company's motions for summary judgement of
invalidity for two of the patents. On January 6, 1998 the District Court
denied the Company's motion for summary judgment that it does not infringe
two other patents and also denied Atmel's cross motion that the Company
infringed. On March 19, 1998, the ITC issued its initial determination,
finding that the Company's products do not infringe the three patents
remaining in that investigation and that Atmel has no legal right to enforce
one of those patents. The ITC has 45 days to order a review of all or part
of that determination. Atmel has requested such a review, and the Company
has opposed such a review. Trial in the District Court action is currently
scheduled for November 16, 1998.
On November 14, 1997, Intel Corporation ("Intel") sued the Company in the
U.S. District Court for the District of Delaware. Intel's complaint alleges
that the Company, by making, using and selling devices, is willfully
infringing four U.S. patents owned by Intel. Regarding each of these four
patents, Intel seeks a judgment that the Company has infringed on the patent,
an injunction prohibiting further infringement, an accounting of all damages
caused by the alleged infringement, treble the amount of damages caused by
the alleged infringement and attorney's fees, costs and expenses. The
Company has moved that the Delaware action be dismissed for lack of
jurisdiction or in the alternative be transferred to California. The
District Court has yet to rule on this motion. The Company believes that the
allegations in the Intel complaint are without merit and intends to
vigorously defend itself against such action. The Federal Trade Commission
has initiated contact with the Company to gather information about the case.
7
<PAGE>
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, the Intel 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, results of operations, or cash flows, or
without requiring royalty payments in the future which may adversely impact
gross margins. No estimate can be made of the possible loss or possible
range of loss associated with the resolution of these contingencies.
5. STOCK REPURCHASE PROGRAM
In January 1998, 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 is expected to continue until June 1998, unless extended
or shortened by the Board of Directors. Approximately 449,000 shares were
repurchased under this program during the three months ended March 31, 1998
for an aggregate purchase price of $1.6 million. Purchase prices ranged from
$3.19 to $3.78 per share.
6. READINESS FOR YEAR 2000
Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. They could fail or create
erroneous results unless corrected so that they can process data related to
the year 2000. The Company relies on its systems (such as general ledger,
accounts payable and payroll modules), customer services, infrastructure,
embedded computer chips, networks and telecommunications equipment and end
products. The Company also relies on external systems of business enterprises
such as customers, suppliers, creditors, financial organizations, and of
governments, both domestically and globally, directly for accurate exchange
of data and indirectly. The Company's current estimate is that the costs
associated with the Year 2000 issue, and the consequences of incomplete or
untimely resolution of the Year 2000 issue, will not have a material adverse
affect on the results of operations or financial position of the Company in
any given year. However, despite the Company's efforts to address the Year
2000 impact on its internal systems, the Company is not sure that it has
fully identified such impact and that it can resolve it without disruption of
its business and without incurring significant expense. In addition, even if
the internal systems of the Company are not materially affected by the
Year 2000 issue, the Company could be affected through disruption in the
operation of the enterprises with which the Company interacts.
8
<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
of financial condition and results of operations contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, 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 the Company's actual results
to differ materially from expected results include: changes in average
selling prices, competitive pricing pressures, competitive terms extended to
customers, economic changes in the Far East, the availability, deliverability
and cost of raw materials, such as wafers or die, from the Company's
suppliers, 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-Registered Trademark- 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,
1997 in the Risk Factors section for a discussion of such risk factors.
GENERAL
Silicon Storage Technology, Inc. ("SST" or the "Company") is a supplier of
flash memory devices, addressing the requirements of high volume
applications. Currently, the Company offers medium density flash memory
devices ranging from 512Kbit to 4Mbit that target a broad range of existing
and emerging applications in the personal computer ("PC"), PC peripheral,
communications, consumer and industrial markets. Consumer products currently
sold with the Company's products include, but are not necessarily limited to,
personal computers, CD-ROM, DVD and hard disk drives, video games, modems,
and set-top boxes. The Company's product revenues have been derived from
four product families: the 512Kbit, 1Mbit, 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, memory
cards, networking systems, digital cellular phones, telecommunications and
printer font storage. The Company is also developing flash embedded
controller products to address the emerging application of in-system
programmable (ISP) embedded controllers and has continued the expansion of
the Company's technology licensing strategy with respect to the Company's
technology for embedded applications.
During the first quarter of 1998, the Company derived approximately 27%, 25%
and 20% of its product revenues from sales to Taiwan, Japan, and China
respectively. The Company intends to diversify its customer base by seeking
to increase sales in other geographic areas and to continue targeting
additional high volume applications such as the cellular telephone, cordless
telephone, DVD drive, video game, electronic organizer, and set-top box
markets. International product revenues accounted for 91% of total product
revenues during the first quarter of 1998. 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.
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.
9
<PAGE>
In particular, during the second half of 1997 and the first quarter of 1998,
currency depreciation and economic deflation was experienced in several Asian
economies in which the Company does business, such as Japan, Korea, and
Taiwan. Economic problems in this region can have an adverse impact on the
Company's total revenues and may negatively impact the Company's ability to
collect payments from these customers. Furthermore, the lack of capital in
the finance sector of these countries may impact the customers' ability to
open letters of credit or other financial instruments which are guaranteed by
foreign banks. Additionally, the Company's major wafer suppliers and assembly
and packaging subcontractors are located in the Far East. Major disruptions
in their businesses due to these economic problems can have an adverse impact
on their business which, in turn, may negatively impact their ability to
adequately supply the Company. Finally, the current economic situation in
the Far East has impaired the Company's ability to compete on the basis of
price. This situation has exacerbated the current decline in the average
selling prices for the Company's products far more than originally
anticipated as the Company's competitors reduce product prices to generate
needed cash. Also, to maintain market share at the present time in this
region may require the Company to extend credit terms which will negatively
impact days sales outstanding in the future. Continued economic and/or
political instability of any kind in this region will continue to have a
material adverse effect on the Company's operating results due to the large
concentration of the Company's activities in this region in the foreseeable
future. 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. The Company has
experienced, and may continue to experience, material adverse effects on its
operations as a result of such regulatory, geopolitical and other factors.
These events may adversely impact the Company's operations or may require the
Company to modify its current business practices.
RESULTS OF OPERATIONS: QUARTER ENDED MARCH 31, 1998
The following discussion relates to the financial statements of the Company
for the three months ended March 31, 1998 (current quarter) of the fiscal
year ending December 31, 1998, in comparison to the three months ended March
31, 1997 (comparable quarter of the prior year).
NET REVENUES. Net revenues decreased to $16.4 million in the current quarter
from $17.1 million for the comparable quarter of the prior year due to a 32%
decline in average selling prices weighted across all product lines.
Product revenues decreased to $15.8 million in the current quarter from $16.9
million for the comparable quarter of the prior year due to declining average
selling prices. Although units shipped increased by approximately 2.7
million units between these two periods, average selling prices declined by
approximately 30% on the 512Kbit product line, 42% on the 1Mbit product line,
44% on the 2Mbit product line, and 42% on the 4Mbit product line.
License, royalty and development revenues were $0.6 million for the current
quarter as compared to $0.2 million in the comparable quarter for the prior
year, a 157% increase. License revenues increased due to royalties received
from an increased number of licensees and due to license fees paid by two new
licensees. Such royalty payments may or may not recur in future quarters.
During the first quarter of 1998, the Company derived approximately 27% of
product revenues from sales to Taiwan as compared to 38% 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 91% of product revenues during the current
quarter, as compared to 80% for the comparable quarter of the prior year.
International sales are anticipated to account for a substantial majority of
all product revenues for the foreseeable future.
COST OF REVENUES. Gross margin was $2.0 million or 12% of net revenues in the
first quarter of 1998 as compared to $0.6 million or 3% of net revenues for
the comparable quarter in 1997. The increase in gross margin is due to a
charge of approximately $3.2 million taken in the first quarter of 1997, to
reduce the carrying value of inventory to its approximate replacement cost.
10
<PAGE>
Future fluctuations in gross margins may occur as a result of declining
average selling prices which could lead to additional charges to cost of
revenues to reduce inventories to replacement costs; cost reduction efforts
that do not reduce costs faster than average selling price declines; price
changes in the costs of raw materials; changes in the mix between license
revenues and product revenues or the impact of changes in the product mix.
The Company's agreement with Sanyo Electric Co. Ltd. ("Sanyo") provides for
wafer price adjustments based on dollar/yen exchange rate fluctuations. As a
result, a strengthening yen could result in higher cost of revenues. Gross
margins may also be affected by cost reductions, yield fluctuations, wafer
costs, changes in the mix of sales through distribution channels and
competitive pricing pressures.
Average selling prices of Flash memory 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, changes in product
mix or new product introductions.
RESEARCH AND DEVELOPMENT. Research and development expenses were $3.1 million
or 19% of net revenues during the first quarter of 1998 as compared to $2.0
million or 12% of net revenues during the first quarter of 1997. The increase
in research and development expenses since last year is primarily a result of
hiring additional personnel, depreciation related to purchases of additional
engineering test equipment, and increased prototyping, new product
development and product qualification costs associated with the Company's
product, process and development efforts related to future product
introductions.
SALES AND MARKETING. Sales and marketing expenses were $1.6 million or 10% of
net revenues during the first quarter of 1998 and compared to $1.3 million or
7% of net revenues during the first quarter of 1997. Sales and marketing
expenses consist primarily of sales commissions to manufacturer's
representatives, salaries of the Company's sales and marketing personnel and
product literature expenses. The increase in expense from the first quarter
of 1997 to the first quarter of 1998 corresponds primarily to increased
personnel costs and advertising/collateral related spending. The increase
due to higher personnel costs was somewhat offset by lower commissions
expense related to lower product revenues for the first quarter of 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1.2
million or 7% of net revenues during the first quarter of 1998 as compared to
$1.2 million or 7% of net revenues during the first quarter of 1997.
Decreased costs in the first quarter of 1998 due to lower headcount in these
departments were offset by accruals for certain legal expenses which resulted
in approximately no change in overall expenses from the first quarter in 1997
to the first quarter in 1998.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income was $0.5
million or 3% of net revenues during the first quarter of 1998 as compared to
$0.4 million or 2% of net revenues during the first quarter of 1997. Interest
income increased from the comparable quarter of the prior year due to higher
returns from investments in taxable funds during the first quarter of 1998 as
compared to the same quarter in 1997.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The benefit from income taxes was
$1.0 million during the first quarters of both 1998 and 1997. The benefit in
both quarters relates to the Company's loss position in the quarters. The
Company's effective income tax rate was approximately 30% for both quarters.
NET INCOME (LOSS) PER SHARE. The Company's net income (loss) per share for
the current quarter was $(0.10), compared to a net loss per share of $(0.11)
in the comparable quarter of the prior year. The lower net loss per share
for the first quarter of 1998 as compared to the first quarter of 1997 is a
result of lower cost of revenues than experienced in the comparable quarter
of the prior year.
11
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LIQUIDITY AND CAPITAL RESOURCES
Principal sources of liquidity at March 31, 1998 consisted of $27.7 million
of cash, cash equivalents, and short-term investments. As of March 31, 1998,
the Company had no open lines of credit or non-trade debt. However, the
Company may endeavor to open lines of credit in the future to secure
additional working capital and to finance operational growth. Such lines of
credit may be secured by the assets of the Company. The Company believes
that the cash and short-term investment 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 used cash of $16.8 million,
which consisted primarily of increases in inventory of $10.0 million,
decreases of accounts payable and accrued expenses of $7.3 million, increases
of accounts receivable and accounts receivable from related parties of $1.1
million and net loss of $2.3 million offset by changes in provision in
reserves and depreciation. In comparison, the Company's operating activities
for the same period in the prior year provided cash of $4.0 million,
primarily related to increases in accounts payable of $5.3 million offset by
the loss for that quarter.
Cash flows used in investing activities totaled $5.5 million year-to-date and
related primarily to the net purchase of short-term investments for cash
management purposes. In addition, the Company acquired capital assets of
approximately $0.9 million during the current quarter as compared to $0.4
million during the comparable quarter of the prior year. These expenditures
were primarily for the purchase of design and engineering tools and computer
equipment. Similar levels of capital spending are expected to continue, and
may increase, during the rest of 1998. In addition, the Company may use
its working capital to secure additional foundry capacity. These expenditures
may be in the form of deposits, equipment purchases, loans or equity
investments or joint ventures in or with wafer fabrication or other
companies.
The Company's financing activities used cash of approximately $1.3 million
during the current quarter, primarily for the repurchase of stock on the open
market. During the quarter, the Company used funds of $1.6 million to
purchase 449,000 shares of its common stock. Funds used were offset by
proceeds from the issuance of common shares under the Company's stock option
and employee stock purchase plans of $0.3 million during the quarter. In
comparison, financing activities during the same period of the prior year
used $0.3 million and consisted of proceeds from stock option exercises of
$0.2 million offset by stock repurchases of $0.5 million.
In January 1998, the Company entered into an agreement to purchase a 14 acre
plot of land located in San Jose, California for $9.2 million including
closing costs. The Company plans to build its corporate headquarters on this
site, schedule for completion in 1999. In connection with the purchase of
the land, the construction of the building or other activities of the
Company, the Company may open lines of credit or seek loans to finance either
or both the land purchase and/or the scheduled construction.
12
<PAGE>
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. Atmel later amended its
complaint to allege infringement of a sixth patent. Regarding each of these
six 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 ("ITC") against two suppliers of the Company's parts. On March
18, 1997, the ITC 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 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 was held on December 8, 1997 regarding this matter.
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. On September 22, 1997 the
District Court granted the Company's motion for summary judgment and found
that one of the patents is not infringed. The Court later denied Atmel's
motion for reconsideration of the ruling. That patent was also subsequently
dismissed from the ITC action. On November 24, 1997 and January 20, 1998 the
District Court denied the Company's motions for summary judgement of
invalidity for two of the patents. On January 6, 1998 the District Court
denied the Company's motion for summary judgment that it does not infringe
two other patents and also denied Atmel's cross motion that the Company
infringed. On March 19, 1998, the ITC issued its initial determination,
finding that the Company's products do not infringe the three patents
remaining in that investigation and that Atmel has no legal right to enforce
one of those patents. The ITC has 45 days to order a review of all or part
of that determination. Atmel has requested such a review, and the Company
has opposed such a review. Trial in the District Court action is currently
scheduled for November 16, 1998.
On November 14, 1997, Intel Corporation ("Intel") sued the Company in the
U.S. District Court for the District of Delaware. Intel's complaint alleges
that the Company, by making, using and selling devices, is willfully
infringing four U.S. patents owned by Intel. Regarding each of these four
patents, Intel seeks a judgment that the Company has infringed on the patent,
an injunction prohibiting further infringement, an accounting of all damages
caused by the alleged infringement, treble the amount of damages caused by
the alleged infringement and attorney's fees, costs and expenses. The
Company has moved that the Delaware action be dismissed for lack of
jurisdiction or in the alternative be transferred to California. The
District Court has yet to rule on this motion. The Company believes that the
allegations in the Intel complaint are without merit and intends to
vigorously defend itself against such action. The Federal Trade Commission
has initiated contact with the Company to gather information about the case.
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, the Intel 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, results of operations, or cash flows, or
without requiring royalty payments in the future which may adversely impact
gross margins. No estimate can be made of the possible loss or possible
range of loss associated with the resolution of these contingencies.
13
<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, 1997.
EXHIBIT
NUMBER DESCRIPTION
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended March 31, 1998: None.
14
<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 28th day of April, 1998.
SILICON STORAGE TECHNOLOGY, INC.
By:
/s/ BING YEH
--------------------
Bing Yeh
President, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ JEFFREY L. GARON
--------------------
Jeffrey L. Garon
Vice President Finance & Administration,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS FOUND IN THE COMPANY'S FORM 10-Q FOR THE THREE MONTHS ENDED MARCH
31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,163
<SECURITIES> 24,570
<RECEIVABLES> 12,940
<ALLOWANCES> 1,638
<INVENTORY> 19,410
<CURRENT-ASSETS> 63,369
<PP&E> 17,242
<DEPRECIATION> 10,125
<TOTAL-ASSETS> 71,973
<CURRENT-LIABILITIES> 19,393
<BONDS> 0
0
0
<COMMON> 52,856
<OTHER-SE> (276)
<TOTAL-LIABILITY-AND-EQUITY> 71,973
<SALES> 15,754
<TOTAL-REVENUES> 16,365
<CGS> 14,390
<TOTAL-COSTS> 14,390
<OTHER-EXPENSES> 5,841
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,325)
<INCOME-TAX> (1,000)
<INCOME-CONTINUING> (2,325)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,325)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
