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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 JUNE 30, 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, June 30,1998: 22,880,294. Total number of
pages in document: 17. Index to Exhibits is on page 16.
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SILICON STORAGE TECHNOLOGY, INC.
FORM 10-Q: QUARTER ENDED JUNE 30, 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 . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . . 15
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 16
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 June 30, Six months ended June 30,
--------------------------- --------------------------
1997 1998 1997 1998
---------- ------- ------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product $17,727 $16,422 $34,581 $32,176
License 329 402 567 1,013
------- ------- ------- -------
Net revenues 18,056 16,824 35,148 33,189
------- ------- ------- -------
Costs and expenses:
Cost of revenues 14,874 13,406 31,407 27,796
Research and development 2,228 3,447 4,206 6,502
Sales and marketing 1,589 1,716 2,854 3,335
General and administrative 1,199 1,768 2,443 2,935
------- ------- ------- -------
19,890 20,337 40,910 40,568
------- ------- ------- -------
Income (loss) from operations (1,834) (3,513) (5,762) (7,379)
Interest and other income (expense), net 476 468 841 1,009
------- ------- ------- -------
Income (loss) before provision for
(benefit from) income taxes (1,358) (3,045) (4,921) (6,370)
Provision for (benefit from) income taxes (339) (1,803) (1,383) (2,803)
------- ------- ------- -------
Net income (loss) ($1,019) ($1,242) ($3,538) ($3,567)
------- ------- ------- -------
------- ------- ------- -------
Net income (loss) per share - basic and diluted ($0.04) ($0.05) ($0.15) ($0.16)
------- ------- ------- -------
------- ------- ------- -------
Shares used in per share calculations 23,112 22,863 23,191 22,912
------- ------- ------- -------
------- ------- ------- -------
</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, June 30,
1997 1998
------------ --------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $26,743 $16,344
Short-term investments 20,476 7,629
Accounts receivable, net 8,318 11,994
Accounts receivable from related parties 2,124 4,137
Inventories 11,909 20,356
Current deferred tax asset 3,716 4,437
Other current assets 1,011 1,061
------- -------
Total current assets 74,297 65,958
Furniture, fixtures, and equipment, net 7,224 7,377
Other assets 1,018 1,302
------- -------
Total assets $82,539 $74,637
------- -------
------- -------
LIABILITIES
Trade accounts payable 18,957 14,098
Accrued expenses and other liabilities 6,393 6,736
Deferred revenue 1,300 2,026
------- -------
Total liabilities 26,650 22,860
------- -------
SHAREHOLDERS' EQUITY
Common stock and deferred stock compensation 53,290 53,295
Retained earnings (accumulated deficit) 2,599 (1,518)
------- -------
Total shareholders' equity 55,889 51,777
------- -------
Total liabilities and shareholders' equity $82,539 $74,637
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1997 1998
------- --------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($3,538) ($3,567)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,267 2,193
Provision for doubtful accounts receivable (704) (475)
Provision for excess and obsolete inventories (334) (807)
Deferred income taxes - 6
Loss on disposal of fixed assets 7 -
Changes in operating assets and liabilities:
Accounts receivable (1,598) (3,201)
Accounts receivable from related parties 3,124 (2,013)
Inventories 11,332 (7,640)
Other current and noncurrent assets 675 (6)
Trade accounts payable (5,902) (4,859)
Accrued expenses and other liabilities (1,465) 343
Deferred revenue (284) 726
------- --------
Net cash provided by (used in) operating activities 3,580 (19,300)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of furniture, fixtures and equipment (659) (2,174)
Proceeds from sale of equipment 1,600 -
Purchases of available-for-sale investments 21,176 (24,313)
Sales and maturities of available-for-sale investments (15,381) 37,160
Other - (500)
------- --------
Net cash provided by (used in) investing activities 6,736 10,173
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares of common stock 235 312
Repurchase of common stock (1,866) (1,584)
------- --------
Net cash provided by (used in) financing activities (1,631) (1,272)
------- --------
Net increase (decrease) in cash and cash equivalents 8,685 (10,399)
Cash and cash equivalents at beginning of period 24,755 26,743
------- --------
Cash and cash equivalents at end of period $33,440 $16,344
------- --------
------- --------
</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 June 30, 1998 and the
results of operations and cash flows for the six months ended June 30, 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>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1997 1998 1997 1998
--------- ------- ------- -----------
<S> <C> <C> <C> <C>
Numerator - Basic and Diluted:
Net income (loss) ($1,019) ($1,242) ($3,538) ($3,567)
--------- ------- ------- -----------
--------- ------- ------- -----------
Denominator - Basic and Diluted:
Weighted average common stock outstanding 23,112 22,863 23,191 22,912
--------- ------- ------- -----------
--------- ------- ------- -----------
</TABLE>
Stock options to purchase 2,154,000 and 1,292,000 shares of common stock were
outstanding as of June 30, 1997 and June 30, 1998, respectively, but were not
included in the computation of diluted loss per share because the Company had
net losses for the six months ended June 30, 1997 and June 30, 1998.
6
<PAGE>
3. INVENTORIES (IN THOUSANDS):
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.
<TABLE>
<CAPTION>
December 31, December 30,
1997 1998
------------ ------------
<S> <C> <C>
Raw materials $ 118 $ -
Work in process 9,249 14,000
Finished goods 2,542 6,356
------------ ------------
$ 11,909 $ 20,356
------------ ------------
------------ ------------
</TABLE>
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 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 judgment
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 July 7, 1998, the District Court granted Atmel a motion for
summary judgment that SST could not pursue its unfair competition claims
against Atmel. On August 5, 1998, the court granted a summary judgment in
SST's favor invalidating the '811 patent' and the '829 patent'. The
remaining issues are scheduled to be tried on November 16, 1998.
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 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. On July 9, 1998, the commission entered its opinion of finding no
violation by SST. Atmel has publicly stated its intention to appeal the
decision.
On November 14, 1997, Intel Corporation ("Intel") sued the Company in the
U.S. District Court for the District of Delaware. Intel's complaint alleged
that the Company, by making, using and selling devices, was willfully
infringing four U.S. patents owned by Intel. Regarding each of these four
patents, Intel sought a judgment that the Company had 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 moved that the Delaware action be dismissed for lack of
jurisdiction or in the alternative be transferred to California. On August
5, 1998, the District Court granted the Company's motion and dismissed the
complaint on the grounds that the court could not exercise personal
jurisdiction over the company. It is not known whether Intel will pursue its
claims in another jurisdiction. The Company believes that the substantive
allegations in the dismissed Intel complaint are without merit and intends to
vigorously defend itself against any future 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, any future action by Intel relating to the dismissed
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 expired on June 16, 1998. Approximately 449,000 shares
were repurchased under this program during the three month period ended March
31, 1998 for an aggregate purchase price of $1.6 million. Purchase prices
ranged from $3.19 to $3.78 per share. No shares were repurchased during the
three month period ended June 30, 1998.
6. OTHER EVENTS
As noted in Form 8-K, filed by the Company on May 1, 1998, the Company
elected to withdraw from an agreement to purchase a 14 acre parcel of
property. The costs associated with the termination of the agreement were
approximately $500,000 and are included in general and administrative
expenses.
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 system-on-a-chip applications and
has continued the expansion of the Company's technology licensing strategy
with respect to the Company's technology for embedded applications.
During the second quarter of 1998, the Company derived approximately 25%, 19%
and 16% of its product revenues from sales to China/Hong Kong, Taiwan, and
Japan respectively. The Company intends to continue 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 90% of
total product revenues during the second 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 half 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 financial performance, and may negatively impact
the Company's ability to collect payments from its 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 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 which
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 economic, 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 AND SIX MONTHS ENDED JUNE 30, 1998
The following discussion relates to the financial statements of the Company
for the three months ended June 30, 1998 (current quarter) of the fiscal year
ending December 31, 1998, in comparison to the three months ended June 30,
1997 (comparable quarter of the prior year). In addition, certain
comparisons with the three months ended March 31, 1998 (previous quarter) are
provided where management believes it is useful to the understanding of
continuing trends. Operating results for the six months ended June 30, 1998
are not necessarily indicative of the results to be achieved for the full
fiscal year ending December 31, 1998.
NET REVENUES. Net revenues were $33.2 million for the six months ended June
30,1998 as compared to $35.1 million for the six months ended June 30, 1997.
The decrease in net revenues is primarily due to declining average selling
prices. Net revenues decreased to $16.8 million in the current quarter from
$18.1 million for the comparable quarter of the prior year.
Product revenues decreased to $16.4 million in the current quarter from $17.7
million for the comparable quarter of the prior year due primarily to
declining average selling prices. Net units shipped increased by more than
1.8 million units from the comparable quarter of the prior year to 10.8
million units shipped, the largest number of units shipped by the Company in
a single quarter. Although units shipped increased by approximately 21%
between these two periods, average selling prices declined by approximately
23% on a weighted average basis.
License, royalty and development revenues were $0.4 million for the current
quarter as compared to $0.3 million in the comparable quarter for the prior
year. Current quarter license revenues consisted primarily of royalty
payments for the use of the Company's technology. Such royalty payments may
or may not recur in future quarters.
During the second quarter of 1998, business in Taiwan and Japan decreased to
approximately 19% and 16% of world-wide product revenues, respectively, from
28% and 25% for the comparable quarter of the prior year. Business in China
increased to 25% during the second quarter of 1998 from 15% for the
comparable quarter of the prior year. International sales accounted for
approximately 90% of world-wide product revenues during the current quarter,
compared to 84% for the comparable quarter of the prior year. For the six
months ended June 30, 1998, 23% of shipment dollars were from Taiwan, 23%
from China and 20% from Japan. International sales comprised approximately
92% of shipment dollars for the six months ended June 30, 1998.
International sales are anticipated to account for a substantial majority of
all product revenues for the foreseeable future, although percentages may
vary.
10
<PAGE>
For the current quarter, product shipments for PC peripheral applications
decreased to approximately 29% of total product revenues from 42% for the
comparable quarter of the prior year, and product shipments for consumer
products increased to 32% of total product revenues from 16% for the
comparable quarter of the prior year. While the Company intends to continue
to diversify both the product applications and customer base, there can be no
assurance that such diversification will be successful.
GROSS MARGIN. Gross margin was $5.4 million or 16% of net revenues for
the six months ended June 30, 1998 as compared to $3.7 million or 11% of net
revenues for the comparable six month period of the prior year. The increase
in gross margin is primarily due to reductions in die prices, favorable
spending variances, and favorable yen share adjustments.
Future fluctuations in gross margins may occur as a result of, among other
factors, 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 $6.5 million
for the six months ended June 30, 1998 as compared to $4.2 million for the
six months ended June 30, 1997. Research and development expenses were $3.4
million or 20% of net revenues during the second quarter of 1998 as compared
to $2.2 million or 12% of net revenues during the comparable 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. Such increases may continue in both
absolute dollars and as a percentage of revenue for the foreseeable future.
SALES AND MARKETING. Sales and marketing expenses were $3.3 million for the
six months ended June 30, 1998 as compared to $2.9 million for the six months
ended June 30, 1997. Sales and marketing expenses were $1.7 million or 10%
of net revenues during the second quarter of 1998 and compared to $1.6
million or 9% of net revenues during the comparable 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 advertising and product literature expenses. The increase in
expense from the prior year 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 second quarter of 1998. Sales and
marketing expense may fluctuate over time primarily as a function of product
revenue.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.9
million for the six months ended June 30, 1998 as compared to $2.4 million
for the six months ended June 30, 1997. General and administrative expenses
were $1.8 million or 11% of net revenues during the second quarter of 1998 as
compared to $1.2 million or 7% of net revenues during the comparable quarter
of 1997. The increase in general and administrative expenses related almost
entirely to a nonrecurring charge of $0.5 million taken in connection with
the termination of a land purchase agreement, as described in Form 8-K, filed
May 1, 1998.
11
<PAGE>
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income was $1.0
million for the six months ended June 30, 1998 as compared to $0.8 million
for the six months ended June 30, 1997. Interest and other income was $0.5
million or 3% of net revenues during the second quarter of 1998 as compared
to $0.5 million or 3% of net revenues during the comparable quarter of the
prior year.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The benefit from income taxes was
$2.8 million for the six months ended June 30, 1998 as compared to a benefit
of $1.4 million for the six months ended June 30, 1997. The benefit from
income taxes was $1.8 million during the second quarter as compared to a
benefit from income taxes of $0.3 million for the comparable quarter of the
prior year. The benefit in both quarters relates to the Company's loss
position in the respective quarters. The increase in benefit from income
taxes in the quarter ended June 30, 1998 is a result of a one time adjustment
in the effective tax rate from a 30% benefit to a 44% benefit and relates to
the Company's overall tax loss position anticipated for 1998. The 44%
benefit rate is expected to continue for the remainder of 1998.
NET INCOME (LOSS) PER SHARE. The Company's net loss per share for the six
months ended June 30, 1998 was $0.16 as compared to a net loss per share of
$0.15 for the six months end June 30, 1997. The Company's net loss per share
for the current quarter was $0.05 as compared to a net loss per share of
$0.04 in the comparable quarter of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Principal sources of liquidity at June 30, 1998 consisted of $24.0 million of
cash, cash equivalents, and short-term investments. As of June 30, 1998, the
Company had no open lines of credit or non-trade debt. However, on July 9,
1998, the Company signed a letter of intent for a line of credit to secure
additional working capital of up to $25 million 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, if at all.
For the six month period ended June 30, 1998, the Company's operating
activities used cash of $19.3 million, which consisted primarily of increases
in inventory of $7.6 million, decreases of accounts payable and accrued
expenses of $4.5 million, increases of accounts receivable and accounts
receivable from related parties of $5.2 million and the net loss of $3.6
million, offset by depreciation. In comparison, the Company's operating
activities for the same six month period in the prior year provided cash of
$3.6 million, primarily related to a decrease in inventory of $11.3 million
and a decrease in accounts receivable and accounts receivable from related
parties of $1.5 million, offset by a decrease in accounts payable of $5.9
million and a net loss of $3.5 million.
Cash flows provided by investing activities totaled $10.2 million for the six
month period ended June 30, 1998 and related primarily to the net sale of
short-term investments for cash management purposes. In addition, the
Company acquired capital assets of approximately $2.2 million during the
current six month period as compared to $0.7 million during the comparable
six months 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.
The Company's financing activities used cash of approximately $1.3 million
during the current six month period, primarily for the repurchase of stock on
the open market. During the current six month period, 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 program of $0.3 million during the current six months.
In comparison, financing activities during the same six month period of the
prior year used $1.6 million and consisted of stock repurchases of $1.8
million offset by proceeds from stock option exercises of $0.2 million. The
repurchase program expired on June 16, 1998.
12
<PAGE>
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 primary management information and
accounting systems (such as integrated general ledger, accounts payable,
sales order entry and purchasing modules), ancillary information systems
(such as payroll, human resource and fixed asset tracking software), customer
services infrastructure, embedded computer chips, networks and
telecommunications equipment, manufacturing test equipment, research and
development software tools and end products, electronic security systems and
other systems whose operational ability may be adversely impacted by the year
2000. 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 and indirectly, for the
accurate exchange of data.
Because the Company is relatively young and does not use many proprietary
systems, much of the cost of upgrading the Company's systems to ensure year
2000 compliance is a part of the Company's practice of routinely upgrading
information-related systems as new versions are released by vendors and is
considered to be a normal cost of doing business. In this respect, the
Company has already upgraded all of its personal computer hardware and
operating systems, its network switches, and its primary management
information and accounting systems to year 2000 complaint versions. The cost
incurred for this effort was approximately $250,000.
Currently, the Company is conducting a survey of both its internal systems
and equipment and systems supported by third party providers to assess year
2000 compliance. The survey is expected to be completed by the end of the
fourth quarter of 1998. The Company plans to hire a specialized consultant
to assist with and to review the survey. The Company's current estimate is
that the costs associated with the Year 2000 compliance, 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. Based upon the information available at this
time, the future costs related to year 2000 compliance are not expected to
exceed $500,000. The cost estimate is based on the Company's current
assessment of the projects identified and is subject to change as the
projects progress. The estimate does not include potential costs related to
any customer or other claims.
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 materially affected through disruption in the operation
of the enterprises, financial institutions, or governmental entities with
which the Company interacts.
13
<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 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 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 judgment
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 July 7, 1998, the District Court granted Atmel a motion for
summary judgment that SST could not pursue its unfair competition claims
against Atmel. On August 5, 1998, the court granted a summary judgment in
SST's favor invalidating the '811 patent' and the '829 patent'. The
remaining issues are scheduled to be tried on November 16, 1998.
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 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. On July 9, 1998, the commission entered its opinion of finding no
violation by SST. Atmel has publicly stated its intention to appeal the
decision.
On November 14, 1997, Intel Corporation ("Intel") sued the Company in the
U.S. District Court for the District of Delaware. Intel's complaint alleged
that the Company, by making, using and selling devices, was willfully
infringing four U.S. patents owned by Intel. Regarding each of these four
patents, Intel sought a judgment that the Company had 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 moved that the Delaware action be dismissed for lack of
jurisdiction or in the alternative be transferred to California. On August
5, 1998, the District Court granted the Company's motion and dismissed the
complaint on the grounds that the court could not exercise personal
jurisdiction over the company. It is not known whether Intel will pursue its
claims in another jurisdiction. The Company believes that the substantive
allegations in the dismissed Intel complaint are without merit and intends to
vigorously defend itself against any future 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, any future action by the Intel relating to the dismissed
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.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant's Annual Meeting of Shareholders (Annual Meeting) was held on
July 17, 1998. At the Annual Meeting, the shareholders of the Registrant (i)
elected each of the persons listed below to serve as a director of the
Registrant for the ensuing year and until his successor is elected; (ii)
approved the Company's 1995 Equity Incentive Plan, as amended; and (iii)
ratified the selection of Coopers & Lybrand L.L.P. as Registant's Independent
Accountants for the fiscal year ending December 31, 1998. Effective July 1,
1998, Coopers & Lybrand L.L.P. merged with Price Waterhouse LLP and
henceforth will be referred to as PricewaterhouseCoopers LLP.
The Registrant had 22,877,585 shares outstanding as of May 26, 1998, the
record date of the Annual Meeting. At the Annual Meeting, holders of
20,013,615 shares of Common Stock were present in person or represented by
proxy. The following sets forth information regarding the results of the
voting at the Annual Meeting.
PROPOSAL 1 - ELECTION OF DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR VOTES IN FAVOR VOTES AGAINST ABSTENTIONS
- -------- -------------- ------------- -----------
<S> <C> <C> <C>
Bing Yeh 19,341,765 0 671,850
Yaw Wen Hu 19,342,065 0 671,550
Tsuyoshi Taira 19,466,765 0 546,850
Yasushi Chikagami 19,466,765 0 546,850
Ronald Chwang 19,466,765 0 546,850
</TABLE>
PROPOSAL 2 - APPROVAL OF THE COMPANY'S 1995 EQUITY INCENTIVE PLAN, AS AMENDED
<TABLE>
<S> <C>
Votes in Favor 18,621,565
Votes Against 1,095,257
Abstentions 20,169
</TABLE>
PROPOSAL 3 - RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
<TABLE>
<S> <C>
Votes in Favor 19,933,342
Votes Against 53,099
Abstentions 27,174
</TABLE>
ITEM 5. OTHER INFORMATION.
Proposals of shareholders that are intended to be presented at the Company's
1999 Annual Meeting of Shareholders must be received by the Company no later
than February 12, 1999. Pursuant to the Company's bylaws, shareholders who
wish to bring matters or propose nominees for director at the Company's 1999
Annual Meeting of Shareholders must provide specified information to the
Company between February 17, 1999 and March 19, 1999.
15
<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.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C>
10.17 Lease amendment dated March 4, 1998 between Silicon Storage
Technology, Inc. and Sonora Court Properties.
10.18 Lease amendment dated March 4, 1998 between Silicon Storage
Technology, Inc. and Coast Properties.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K filed during the quarter ended June 30, 1998:
May 1, 1998
16
<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 14th day of August, 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)
17
<PAGE>
AMENDMENT TO LEASE
I. PARTIES AND DATE.
This First Amendment to Lease (this "Amendment") dated as of March 4, 1998,
is entered into by and between Sonora Court Properties ("Landlord"), and
Silicon Storage Technology ("Tenant").
II. RECITALS.
A. Landlord and Tenant entered into that certain Lease dated as of March
15, 1993 (the "Lease"), for the Premises known as 1169-1171 Sonora Court,
Sunnyvale, California. The capitalized terms used and not otherwise defined
herein shall have the same definitions as set forth in the Lease.
B. Landlord and Tenant desire to modify the Lease as set forth in this
Amendment, which modifications shall be deemed effective as of the date of
this Amendment as indicated above.
III. MODIFICATIONS.
Landlord and Tenant hereby agree to extend the Term of the Lease upon the
terms and conditions hereinafter set forth.
1. TERM. The Term of the Lease is hereby extended for a period of
sixty (60) months, commencing on June 1, 1998, and expiring on May 31,
2003 (the "Extended Term").
2. MONTHLY RENT. During the Extended Term, not withstanding any
provision of the Lease, Tenant shall pay to Landlord at such place as
Landlord may designate, without deduction, offset, prior notice or
demand, a monthly base rent of:
Months 01-12: $31,219.00
13-24: $32,467.00
25-36: $33,766.00
37-48: $35,117.00
49-60: $36,522.00
in lawful money of the United States.
3. AS-IS. Tenant hereby acknowledges that:
A. Landlord has no obligation to improve or modify Premises
pursuant to the terms of this Amendment and Landlord has fully
performed all of Landlord's obligations to improve or modify the
Premises in accordance with the terms of the Lease; and
B. Tenant shall continue in possession of the Premises "As-Is"
subject to the terms and conditions of the Lease without any
representation or warranty by Landlord, either expressed or
implied, concerning the condition, suitability or fitness for any
purpose.
4. BROKERS. Tenant warrants and represents that, except for CPS,
The Commercial Property Services Company representing Landlord and
Colliers Parrish representing Tenant, Tenant has had no dealings with
any real estate broker or agent in connection with the negotiation of
this Amendment and that it knows of no other real estate broker, agent
or other person who is or might be entitled to a commission or fee in
connection with this Amendment. Tenant shall indemnify and hold
harmless Landlord from and against any and all liabilities or expenses
arising out of claims made by any broker or individual for commissions
or fees arising out of or resulting from representation of Tenant's
interest in connection with the negotiation of this Amendment.
5. ASSIGNMENT/SUBLETTING. Tenant's request for Landlord's consent
to an assignment of the Lease or sublease of the Premises shall not be
unreasonably withheld by Landlord. (If Landlord consents to a proposed
assignment or subletting, Landlord shall be entitled to 50% of any
excess of amounts paid by the assignee or sublessee over: (i) the Base
Rental paid by Tenant, plus (ii) Tenant's direct and customary
out-of-pocket costs paid by Tenant in connection with such assignment or
<PAGE>
subletting, specifically reasonable legal fees, brokerage commissions
and tenant improvement work.) In lieu of consenting to a proposed
assignment or subletting, Landlord may elect to recapture the Premises,
or the portion of the Premises subject to the proposed subletting, and
lease such recaptured Premises directly to the proposed assignee or
sublessee or any third party.
Once in receipt of necessary documents, Landlord shall render a
decision within ten (10) working days as to whether or not to consent
to the assignment or sublease being submitted for Landlord's approval.
Landlord agrees to cap the processing fee on assignment or sublease to
$500.
6. Paragraph 52 in the Lease, OPTION TO RENEW - ARBITRATED RENT, is hereby
deleted in its entirety.
IV. GENERAL
A. EFFECT OF AMENDMENT; RATIFICATION: Except to the extent the Lease is
modified by this Amendment, the terms and provisions of the Lease shall
remain unmodified and in full force and effect. In the event of conflict
between the terms of the Lease and terms of this Amendment, the terms of this
Amendment shall prevail.
B. ATTORNEY'S FEES. The provisions of the Lease respecting payment of
attorney's fees shall also apply to this Amendment.
C. COUNTERPARTS. If this Amendment is executed in counterparts, each
counterpart shall be deemed an original.
D. AUTHORITY TO EXECUTE AMENDMENT. Each individual executing this Amendment
on behalf of a partnership or corporation represents that he or she is duly
authorized to execute and deliver this Amendment on behalf of the partnership
and/or corporation and agrees to deliver evidence of his or her authority to
Landlord upon request by Landlord.
E. GOVERNING LAW. This Amendment and any enforcement of the agreements and
modifications set forth above shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date and year first above written.
"Landlord"
Sonora Court Properties,
a California Limited Partnership
By: /s/ Richard K. Eckstein 3/11/89
__________________________
Its: Managing Partner
__________________________
By:
__________________________
Its:
__________________________
"Tenant"
Silicon Storage Technologies, Inc.
A California corporation
By: /s/ Bing Yeh 3/10/98
__________________________
Its: President & CEO
__________________________
By:
__________________________
Its:
__________________________
<PAGE>
AMENDMENT TO LEASE
I. PARTIES AND DATE.
This First Amendment to Lease (this "Amendment") dated as of March 4,
1998, is entered into by and between Coast Properties ("Landlord"), and
Silicon Storage Technology ("Tenant").
II. RECITALS.
A. Landlord and Tenant entered into that certain Lease dated as of April
6, 1995 (the "Lease"), for the Premises known as 1156 Sonora Court,
Sunnyvale, California. The capitalized terms used and not otherwise defined
herein shall have the same definitions as set forth in the Lease.
B. Landlord and Tenant desire to modify the Lease as set forth in this
Amendment, which modifications shall be deemed effective as of the date of
this Amendment as indicated above.
III. MODIFICATIONS.
Landlord and Tenant hereby agree to extend the Term of the Lease upon the
terms and conditions hereinafter set forth.
1. TERM. The Term of the Lease is hereby extended for a period of
fifty-nine and one-half (59.5) months, commencing on June 15, 1998,
and expiring on May 31, 2003 (the "Extended Term").
2. MONTHLY RENT. During the Extended Term, not withstanding any
provision of the Lease, Tenant shall pay to Landlord at such place as
Landlord may designate, without deduction, offset, prior notice or
demand, a monthly base rent of:
Months 01-12: $21,799.00
13-24: $22,671.00
25-36: $23,578.00
37-48: $24,521.00
49-59.5: $25,502.00
in lawful money of the United States.
3. AS-IS. Tenant hereby acknowledges that:
A. Landlord has no obligation to improve or modify Premises
pursuant to the terms of this Amendment and Landlord has fully
performed all of Landlord's obligations to improve or modify the
Premises in accordance with the terms of the Lease; and
B. Tenant shall continue in possession of the Premises "As-Is"
subject to the terms and conditions of the Lease without any
representation or warranty by Landlord, either expressed or implied,
concerning the condition, suitability or fitness for any purpose.
4. BROKERS. Tenant warrants and represents that, except for CPS, The
Commercial Property Services Company representing Landlord and Colliers
Parrish representing Tenant, Tenant has had no dealings with any real
estate broker or agent in connection with the negotiation of this
Amendment and that it knows of no other real estate broker, agent or
other person who is or might be entitled to a commission or fee in
connection with this Amendment. Tenant shall indemnify and hold
harmless Landlord from and against any and all liabilities or expenses
arising out of claims made by any broker or individual for commissions
or fees arising out of or resulting from representation of Tenant's
interest in connection with the negotiation of this Amendment.
5. ASSIGNMENT/SUBLETTING. Tenant's request for Landlord's consent to
an assignment of the Lease or sublease of the Premises shall not be
unreasonably withheld by Landlord. (If Landlord consents to a proposed
assignment or subletting, Landlord shall be entitled to 50% of any
excess of amounts paid by the assignee or sublessee over: (i) the Base
Rental paid by Tenant, plus (ii) Tenant's direct and customary out-of-
pocket costs paid by Tenant in connection with such assignment or
subletting, specifically reasonable legal fees, brokerage commissions
and tenant
<PAGE>
improvement work.) In lieu of consenting to a proposed assignment or
subletting, Landlord may elect to recapture the Premises, or the
portion of the Premises subject to the proposed subletting, and lease
such recaptured Premises directly to the proposed assignee or
sublessee or any third party.
Once in receipt of necessary documents, Landlord shall render a
decision within ten (10) working days as to whether or not to consent
to the assignment or sublease being submitted for Landlord's approval.
6. Paragraph 54 of the Lease is hereby deleted in its entirety.
IV. GENERAL
A. EFFECT OF AMENDMENT; RATIFICATION: Except to the extent the Lease is
modified by this Amendment, the terms and provisions of the Lease shall
remain unmodified and in full force and effect. In the event of conflict
between the terms of the Lease and the terms of this Amendment, the terms of
this Amendment shall prevail.
B. ATTORNEY'S FEES. The provisions of the Lease respecting payment of
attorney's fees shall also apply to this Amendment.
C. COUNTERPARTS. If this Amendment is executed in counterparts, each
counterpart shall be deemed an original.
D. AUTHORITY TO EXECUTE AMENDMENT. Each individual executing this Amendment
on behalf of a partnership or corporation represents that he or she is duly
authorized to execute and deliver this Amendment on behalf of the partnership
and/or corporation and agrees to deliver evidence of his or her authority to
Landlord upon request by Landlord.
E. GOVERNING LAW. This Amendment and any enforcement of the agreements and
modifications set forth above shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date and year first above written.
"Landlord"
Coast Properties,
a ____________________________
By: /s/ Michael Smith
__________________________
Its: Managing Partner
__________________________
By:
__________________________
Its:
__________________________
"Tenant"
Silicon Storage Technologies, Inc.,
A California corporation
By: /s/ Bing Yeh 3/10/98
__________________________
Its: President & CEO
__________________________
By:
__________________________
Its:
__________________________
<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 SIX MONTHS ENDED JUNE 30,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 16,344
<SECURITIES> 7,629
<RECEIVABLES> 17,186
<ALLOWANCES> 1,055
<INVENTORY> 20,356
<CURRENT-ASSETS> 65,958
<PP&E> 18,522
<DEPRECIATION> 11,145
<TOTAL-ASSETS> 74,637
<CURRENT-LIABILITIES> 22,860
<BONDS> 0
0
0
<COMMON> 53,295
<OTHER-SE> (1,518)
<TOTAL-LIABILITY-AND-EQUITY> 74,637
<SALES> 32,176
<TOTAL-REVENUES> 33,189
<CGS> 27,796
<TOTAL-COSTS> 40,568
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,370)
<INCOME-TAX> (2,803)
<INCOME-CONTINUING> (3,567)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,567)
<EPS-PRIMARY> $(0.16)
<EPS-DILUTED> $(0.16)
</TABLE>
