<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE TRANSITION PERIOD FROM ________ TO _________.
COMMISSION FILE NUMBER 0-26944
SILICON STORAGE TECHNOLOGY, INC.
(Exact name of Company as specified in its charter)
CALIFORNIA 77-0225590
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
1171 SONORA COURT, SUNNYVALE, CA 94086
(Address of principal executive offices) (Zip code)
Company's telephone number, including area code: (408) 735-9110
----------
Indicate by check mark whether the Company (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Company was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No .
--- ---
Number of shares outstanding of our Common Stock, no par value, as of the latest
practicable date, July 28, 2000: 29,742,767.
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<PAGE>
SILICON STORAGE TECHNOLOGY, INC.
FORM 10-Q: QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations.............................................3
Condensed Consolidated Balance Sheets.......................................................4
Condensed Consolidated Statements of Cash Flows.............................................5
Notes to Condensed Consolidated Financial Statements........................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................24
Part II - OTHER INFORMATION
Item 1. Legal Proceedings ..........................................................................25
Item 4. Submission of Matters to a Vote of Security Holders.........................................26
Item 6. Exhibits and Reports on Form 8-K............................................................27
</TABLE>
2
<PAGE>
PART I
------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- ------------------------------
1999 2000 1999 2000
---------------- --------------- -------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues:
Product revenues - non-related parties $15,366 $ 92,306 $ 30,045 $147,976
Product revenues - related parties 5,067 9,770 8,181 15,913
License 2,558 1,110 3,093 1,611
---------------- --------------- -------------- ---------------
Total net revenues 22,991 103,186 41,319 165,500
Cost of revenues 18,025 57,084 35,004 93,559
---------------- --------------- -------------- ---------------
Gross profit 4,966 46,102 6,315 71,941
---------------- --------------- -------------- ---------------
Operating expenses:
Research and development 4,479 9,181 9,213 17,257
Sales and marketing 2,268 5,876 4,465 10,503
General and administrative 39 3,680 1,245 6,319
In-process research and development 2,011 - 2,011 -
---------------- --------------- -------------- ---------------
Total operating expenses 8,797 18,737 16,934 34,079
---------------- --------------- -------------- ---------------
Income (loss) from operations (3,831) 27,365 (10,619) 37,862
Interest income 235 3,020 505 3,038
Interest expense (9) (101) (36) (545)
Other income, net - 62 8 62
---------------- --------------- -------------- ---------------
Income (loss) before provision for
(benefit from) income taxes (3,605) 30,346 (10,142) 40,417
Provision for (benefit from) income taxes 25 7,810 65 8,237
---------------- --------------- -------------- ---------------
Net income (loss) ($3,630) $ 22,536 ($10,207) $ 32,180
================ =============== ============== ===============
Net income (loss) per share - basic ($0.15) $0.76 ($0.44) $ 1.17
================ =============== ============== ===============
Shares used in per share calculation 23,656 29,584 23,425 27,510
================ =============== ============== ===============
Net income (loss) per share - diluted ($0.15) $ 0.71 ($0.44) $ 1.07
================ =============== ============== ===============
Shares used in per share calculation 23,656 31,947 23,425 30,148
================ =============== ============== ===============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, JUNE 30,
1999 2000
-------------------- ------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,223 $170,632
Short-term investments - 21,175
Accounts receivable, net 33,285 75,161
Accounts receivable from related parties 5,573 9,442
Inventories, net 29,766 54,525
Other current assets 3,341 9,361
-------------------- ------------------
Total current assets 73,188 340,296
Equipment, furniture and fixtures, net 11,131 13,446
Long-term marketable securities - 24,838
Other assets 4,487 20,989
-------------------- ------------------
Total assets $88,806 $399,569
==================== ==================
LIABILITIES
Current liabilities:
Borrowings under line of credit facility $19,287 $ -
Trade accounts payable 19,207 35,804
Accrued expenses and other liabilities 4,707 15,195
Deferred revenue 4,144 10,557
-------------------- ------------------
Total current liabilities 47,345 61,556
Other liabilities 446 364
-------------------- ------------------
Total liabilities 47,791 61,920
-------------------- ------------------
SHAREHOLDERS' EQUITY
Common stock 60,570 324,968
Accumulated other comprehensive income (loss) - 56
Retained earnings (accumulated deficit) (19,555) 12,625
-------------------- ------------------
Total shareholders' equity 41,015 337,649
-------------------- ------------------
Total liabilities and shareholders' equity $88,806 $399,569
==================== ==================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------
1999 2000
------------------- ---------------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($10,207) $ 32,180
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation /amortization 2,268 2,855
Provision for doubtful accounts receivable 32 25
Provision for inventory write-downs 24 1,742
Deferred income taxes - (1,900)
Tax benefits from employee stock plans - 8,552
(Gain) loss on sale of equipment 1 (62)
Purchase of in-process research and development 2,011 -
Changes in operating assets and liabilities:
Accounts receivable (3,774) (41,901)
Accounts receivable from related parties (651) (3,869)
Inventories (4,336) (26,500)
Other current and noncurrent assets 291 (4,180)
Trade accounts payable 10,552 16,597
Accrued expenses and other current liabilities (934) 10,487
Deferred revenue 2,140 6,413
------------------- ---------------------
Net cash provided by (used in) operating activities (2,583) 439
------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available for sale investments - (45,958)
Proceeds from sales and maturities of short-term investments 851 -
Acquisition of furniture, fixtures, and equipment (4,361) (4,501)
Proceeds from sale of property and equipment - 62
Investment in equity securities 110 (17,110)
------------------- ---------------------
Net cash provided by (used in) investing activities (3,400) (67,507)
------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit facility - 39,750
Repayments under line of credit facility - (59,037)
Issuance of shares of common stock 570 255,846
Other (76) (82)
------------------- ---------------------
Net cash provided by (used in) financing activities 494 236,477
------------------- ---------------------
Net increase (decrease) in cash and cash equivalents (5,489) 169,409
Cash and cash equivalents at beginning of period 23,007 1,223
=================== =====================
Cash and cash equivalents at end of period $17,518 $170,632
=================== =====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash received during the period for interest $ 505 $ 2,225
Cash paid during the period for interest $ - $ 545
Net cash paid (received) during the period for income taxes $ - $ 3
Common stock issued on acquisition of Linvex $ 4,794 $ -
Common stock issued on conversion of Linvex liabilities $ 476 $ -
Unrealized gain (loss) on securities $ - $ 56
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2000
(UNAUDITED):
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed interim
consolidated financial statements contain all adjustments (all of which are
normal and recurring in nature) necessary to fairly present our financial
position, results of operations and cash flows. The results of operations for
the interim periods presented are not necessarily indicative of the results
that may be expected for any future interim periods or for the full fiscal
year. These interim financial statements should be read in conjunction with
the financial statements in our Annual Report on Form 10-K, as amended, for
the year ended December 31, 1999 and the Quarterly Report on Form 10-Q for
the three months ended March 31, 2000.
The year-end balance sheet at December 31, 1999 was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 established a new
model for accounting for derivative and hedging activities. In July, 1999 the
Financial Accounting Standards Board issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133" (SFAS 137). SFAS 137 deferred the effective
date of SFAS 133 until the first fiscal year beginning after June 15, 2000.
The impact of SFAS 133 on our consolidated financial statements has not yet
been determined.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin: No. 101 "Revenue Recognition in Financial Statements"
(SAB 101). SAB 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We have until the fourth quarter of 2000 to comply with the
guidance in SAB 101. The impact of SAB 101 on our consolidated financial
statements has not yet been determined.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 (FIN 44) Accounting for Certain Transactions involving
Stock Compensation an interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion 25 for (a) the definition of employee for purposes
of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or
award, and (d) the accounting for an exchange of stock compensation awards in
a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998,
or January 12, 2000. The adoption of certain provisions prior to July 1, 2000
did not have a material effect. We do not expect the adoption of the
remaining provisions to have a material effect on our financial position or
results of operations.
6
<PAGE>
2. COMPUTATION OF NET INCOME (LOSS) PER SHARE
We have computed and presented net income (loss) per share under two
methods, basic and diluted. Basic net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted net income (loss) per share is computed
by dividing the income 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 net
income (loss) per share is as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED JUNE 30,
-------------------------------- ------------------------------
1999 2000 1999 2000
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Numerator - basic and dilutive:
Net income (loss) ($3,630) $22,536 ($10,207) $32,180
================ ============== ============== ==============
Denominator - Basic:
Weighted average common stock outstanding 23,656 29,584 23,425 27,510
================ ============== ============== ==============
Net income (loss) per share - basic ($0.15) $0.76 ($0.44) $ 1.17
================ ============== ============== ==============
Denominator - diluted:
Weighted average common and common
equivalent shares 23,656 31,947 23,425 30,148
================ ============== ============== ==============
Diluted net income (loss) per share ($0.15) $0.71 ($0.44) $ 1.07
================ ============== ============== ==============
</TABLE>
Stock options to purchase approximately 1,101,000 shares of common stock
were outstanding as of June 30, 1999. These stock options were not included
in the computation of diluted net loss per share for the three and six months
ended June 30, 1999 because we had net losses for those periods.
Anti-dilutive stock options to purchase approximately 22,000 shares of common
stock were excluded from the computation of diluted net income per share for
the six months ended June 30, 2000 because the exercise price of the options
exceeded the average fair market value of the stock for the six months ended
June 30, 2000.
3. INVESTMENTS
We consider cash and all highly liquid investments purchased with an
original or remaining maturity of less than three months at the date of
purchase to be cash equivalents. Substantially all of our cash and cash
equivalents are custodied with three major financial institutions.
Our investments comprise U.S., state, and municipal government obligations
and foreign and public corporate equity securities. Investments with
maturities of less than one year are considered short term and are carried at
fair value. Nearly all investments are held in our name. The specific
identification method is used to determine the cost of securities disposed
of, with realized gains and losses reflected in other income and expense. At
June 30, 2000, substantially all of our investments were classified as
available for sale. Unrealized gains and losses on these investments are
included as a separate component of shareholders' equity, net of any related
tax effect. We also have certain investments in non publicly traded
companies. These investments are included in "Other Assets" in the balance
sheet and are generally carried at cost. The companies invested in during the
quarter ended June 30, 2000 are subcontractors to our production process. We
monitor these investments for impairment and make appropriate reductions in
carrying values when necessary.
7
<PAGE>
As of June 20, 2000 investments classified as available-for-sale were as
follows (in thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Fair
Cost Gain (Loss) Value
---------------- -------------- --------------
<S> <C> <C> <C>
Corporate bonds & notes $ 61,840 ($10) $ 61,830
Government bonds & notes 83,822 66 $ 83,888
---------------- -------------- --------------
$145,662 $ 56 $145,718
Less amounts classified as cash equivalents (99,705) (99,705)
---------------- -------------- --------------
Total short and long-term marketable securities $ 45,957 $ 56 $ 46,013
================ ============== ==============
Contractual maturity dates for investments:
Less than 1 year $ 21,175
1 to 5 years 24,838
--------------
$ 46,013
==============
</TABLE>
4. INVENTORIES (IN THOUSANDS):
Inventories are stated at the lower of cost (first-in, first-out) or market
(estimated net realizable value) and are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---------------- --------------
<S> <C> <C>
Raw Material $ 6,855 $15,909
Work in process 19,338 29,630
Finished goods 3,573 8,986
---------------- --------------
$29,766 $54,525
================ ==============
</TABLE>
5. RECENT FINANCING
We commenced a public offering on March 21, 2000 pursuant to a
Registration Statement on Form S-3 (File No. 333-30996) declared effective on
March 21, 2000. The offering terminated following the sale of all securities
registered. The managing underwriters of the public offering were Credit
Suisse First Boston and Salomon Smith Barney Inc. In the offering, we sold an
aggregate of 4,025,000 shares of our common stock at a price per share of
$64.00. The aggregate proceeds from the offering were $257.6 million. We paid
expenses of approximately $14.7 million, of which approximately $13.5 million
represented underwriting discounts and commissions and approximately $1.2
million represented expenses related to the offering. Net proceeds from the
offering were approximately $242.9 million, of which $31.8 million was
received in April, 2000 upon the exercise of an option by the underwriters.
On March 28, 2000, we sold and issued to Acer Investment Worldwide
Incorporated 168,000 shares of our common stock, at a purchase price of
$64.00 per share, in a private placement. The aggregate offering proceeds
were approximately $10.8 million. No underwriter or placement agent was
involved in the transaction.
6. CONTINGENCIES
On January 3, 1996, Atmel Corporation sued us in the U.S. District Court
for the Northern District of California. Atmel's complaint alleged that we
willfully infringe 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 sought a judgment that we
infringe the patent, an injunction prohibiting future infringement, and
treble damages, as well as attorney's fees and expenses.
On two of the six patents, the District Court granted in our favor a
summary judgment that we did not infringe. Two of the other patents were
invalidated by another U.S. District Court in a proceeding to which we were
not a party, but this decision was reversed by the Federal Circuit. Thus,
four patents remain at issue in Atmel's District Court case against us. That
case has been stayed, and Atmel has not requested a trial date.
8
<PAGE>
On February 17, 1997, Atmel filed an action with the International Trade
Commission, or ITC, against two suppliers of our parts, involving four of the
six patents that Atmel alleged that we infringed in the District Court case
above. We intervened as a party to that investigation. Pursuant to
indemnification agreements with these suppliers, we are obligated to
indemnify both to the extent provided in those agreements.
As to one of these four patents, Atmel's claims were withdrawn because of
the summary judgment granted by the District Court, as described above. The
administrative law judge, or ALJ, who makes recommended determinations to the
ITC, ruled that we did not infringe the remaining three patents. As to one of
these patents, the ALJ ruled on May 17, 2000 that it is invalid and
unenforceable because Atmel intentionally misled the U.S. Patent Office.
These rulings are currently under review by the ITC, and are not final unless
adopted by the ITC commissioners.
Any final decisions by the ITC will not be dispositive because Atmel can
still pursue its claims in the District Court action. We intend to vigorously
defend ourselves against these actions.
On July 31, 1998, we filed suit against Winbond Electronics Corporation in
the U.S. District Court for the Northern District of California, San Jose
Division. Winbond has answered the complaint and has counter-claimed. Since
then, the parties have amended the complaint and the answer and counterclaim.
As of February 24, 2000, we have asserted eight causes of action, including
breach of contract, misappropriation of trade secrets and other contractual
and tortious claims. Our suit seeks damages and equitable remedies to prevent
Winbond from using any of our technology.
Winbond has answered and asserted counter-claims for a declaration that it
is not in material breach of the agreement, breach of the agreement, breach
of the covenant of good faith and fair dealing, interference with prospective
economic advantage, unlawful business practice in violation of state law,
common law unfair competition, a declaration that Winbond is not obligated to
pay us under the agreement and/or they own or jointly own the technology
embodied in their products, misappropriation of Winbond's trade secrets,
unfair competition in violation of the Federal Lanham Act, and common law
fraud and misrepresentation. Winbond seeks, in part, restitution of the
payments made, and other damages, and an injunction.
On April 17 and 21, 2000, respectively, the District Court granted our
motions for partial summary judgment on Winbond's restitution counterclaim
and defense of contract modification by course-of-dealing. On May 1, 2000,
Winbond announced its intention to pursue, as part of its defense, certain
allegations that we do not own the licensed technology and that we have
committed antitrust violations. We believe that the substantive allegations
in the Winbond counter-claims are without merit and we intend to vigorously
defend ourselves against the action. We intend to vigorously pursue our
complaint. The trial is set for January 9, 2001.
From time to time, we are also involved in other legal actions arising in
the ordinary course of business. While we have accrued certain amounts for
the estimated legal costs associated with defending these matters, there can
be no assurance the Atmel complaint, the Winbond complaint or other third
party assertions will be resolved without costly litigation, in a manner that
is not adverse to our 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.
7. LINE OF CREDIT
As of June 30, 2000 we had no borrowings on our line of credit, as some of
the proceeds from the public offering described in Note 5 were used to pay
off this credit facility during the quarter ended March 31, 2000. However, we
continue to have access to this facility should we need it. As of June 30,
2000 our available credit was for $25 million. This agreement expires
September 2002. Borrowing is limited to 80% of eligible world-wide accounts
receivable and is also reduced by any letters of credit issued under a $25
million sub-agreement to this line. Therefore, as of June 30, 2000 our actual
credit available under this line was $24.0 million. The line bears interest
at a rate of the bank's reference rate (9.5% at June 30, 2000) plus 0.5%. We
must pay an unused line fee on the first $5 million of the line at the annual
rate of one quarter of one percent on the unused portion. As of June 30, 2000
we were in compliance with the covenants of this agreement.
9
<PAGE>
8. SEGMENT INFORMATION
Our business has two reportable segments: Flash Products and Technology
Licensing, based on our method of internal reporting. The tables below
present information about the reportable segments (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999:
Flash Technology
Products Licensing Total
-------------- -------------- -------------
<S> <C> <C> <C>
Revenues $20,433 $2,558 $22,991
Gross profits $ 2,408 $2,558 $ 4,966
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000:
Flash Technology
Products Licensing Total
------------- ------------ -------------
<S> <C> <C> <C>
Revenues $102,076 $1,110 $103,186
Gross profits $ 44,992 $1,110 $ 46,102
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999:
Flash Technology
Products Licensing Total
-------------- -------------- -------------
<S> <C> <C> <C>
Revenues $38,226 $3,093 $41,319
Gross profits $ 3,222 $3,093 $ 6,315
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000:
Flash Technology
Products Licensing Total
------------- ------------ -------------
<S> <C> <C> <C>
Revenues $163,889 $1,611 $165,500
Gross profits $ 70,330 $1,611 $ 71,941
</TABLE>
We do not allocate operating expenses, interest income or expense, other income,
net or the provision for (benefits from) income taxes to these segments for
internal reporting purposes.
9. SHAREHOLDERS' EQUITY
In June 2000, we amended the 1990 Stock Option Plan to increase the
aggregate number of shares of Common Stock authorized for issuance under the
plan by 1,000,000 to 8,750,000 shares.
In June 2000, we increased the number of authorized shares of Common Stock
from 45,000,000 shares to 250,000,000 shares. On June 16, 2000, our Board of
Directors approved a 3-for-1 stock split, in the form of a stock dividend,
payable to shareholders of record as of July 28, 2000. We anticipate that the
dividend will be distributed on or about August 11, 2000. Below are pro forma
earnings per share on a post split basis:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- --------------------------------
1999 2000 1999 2000
------------------ -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) $(3,630) $22,536 $(10,207) $32,180
================== ============== ============== ===============
Net income (loss) per share - basic ($0.05) $ 0.25 ($0.15) $ 0.39
================== ============== ============== ===============
Shares used in per share calculation 70,968 88,753 70,275 82,530
================== ============== ============== ===============
Net income (loss) per share - diluted ($0.05) $ 0.24 ($0.15) $ 0.36
================== ============== ============== ===============
Shares used in per share calculation 70,968 95,842 70,275 90,444
================== ============== ============== ===============
</TABLE>
10. LEASE COMMITMENT
On June 26, 2000, we entered into an agreement to lease approximately of
92,000 square feet of additional space in Sunnyvale, California. The lease
period begins January 1, 2001 and ends April 5, 2010. In connection with the
signing of the agreement, the first month's rent of $175,000 was paid to the
landlord. Future minimum rental payments at June 30, 2000 are as follows (in
thousands):
<TABLE>
<S> <C>
2001 $ 2,099
2002 2,162
2003 2,227
2004 2,294
2005 and thereafter 15,285
------------
$24,067
============
</TABLE>
10
<PAGE>
11. COMPREHENSIVE INCOME
Statement of Financial Accounting Standard No. 130 (SFAS 130), "Reporting
Comprehensive Income" establishes rules for the reporting and display of
comprehensive income and its components. The following are the components of
comprehensive income (loss) (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED JUNE 30,
---------------------------- ---------------------------
1999 2000 1999 2000
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) ($3,630) $22,536 ($10,207) $32,180
Unrealized gain (loss) on marketable securities - 56 - 56
------------ ------------- ------------- -------------
Comprehensive income (loss) ($3,630) $22,592 ($10,207) $32,236
============ ============= ============= =============
</TABLE>
The components of accumulated other income, net of related tax are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
<S> <C> <C>
Unrealized gain (loss) on marketable securities $ - $56
============ ============
</TABLE>
12. INCOME TAXES
During the quarter ended June 30, 2000 we recorded a $1.9 million deferred
tax asset relating to differences between the tax basis and the financial
basis of our assets, accruals, and allowances.
11
<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 OUR ANNUAL
REPORT ON FORM 10-K, AS AMENDED, FOR THE YEAR ENDED DECEMBER 31, 1999, AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH INVOLVE
RISK AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS WHICH ARE DIFFICULT TO FORECAST AND CAN MATERIALLY AFFECT OUR
QUARTERLY OR ANNUAL OPERATING RESULTS. FLUCTUATIONS IN REVENUES AND OPERATING
RESULTS MAY CAUSE VOLATILITY IN OUR STOCK PRICE. PLEASE REFER TO THE SECTION
BELOW ENTITLED "BUSINESS RISKS".
OVERVIEW
We are a leading supplier of flash memory semiconductor devices for the
digital consumer, networking, wireless communications and Internet computing
markets.
Historically, the semiconductor industry has been cyclical, alternately
experiencing periods of over-supply and increased demand. In the first half
of 2000 we continued to experience significant demand for our products.
During 1999, the semiconductor industry transitioned from a period of
over-supply to a period of increased demand, resulting in an industry-wide
shortage of flash memory product. From late 1996 through mid-1999, selling
prices of our products declined significantly. Selling prices of
semiconductor products have generally declined over time and are expected to
continue to decline over the long term, principally due to increased
competition and technological developments. Beginning in the second half of
1999 and continuing through the first half of 2000, we were able to increase
the selling price of many of our products as the industry shifted to a period
of industry-wide shortage. This trend may not continue, and the prices of our
products will likely continue to fluctuate and may decline. In addition, the
current market environment may constrain our ability to obtain wafers to
manufacture our products, which may also impair our profitability.
We derived 74.9% of our product revenues for the six month period ended
June 30, 2000 and 80.9% of our product revenues during 1999 from product
shipments to Asia. Additionally, all of our major wafer suppliers and
packaging and testing subcontractors are located in Asia. During 1998 and
1997, several Asian countries where we do business, including Japan, Taiwan
and Korea, experienced severe currency fluctuation and economic deflation,
which negatively impacted our revenues and, therefore, our ability to collect
payments from these customers. In September 1999, Taiwan experienced a major
earthquake. The resulting disruption to the manufacturing operations in the
wafer foundries and assembly and testing subcontractors that we use in Taiwan
negatively impacted our revenues and operating results during the fourth and
third quarter of 1999.
Our product sales are made primarily using short-term cancelable purchase
orders. The quantities actually purchased by the customer, as well as
shipment schedules, are frequently revised to reflect changes in the
customer's needs and in our supply of product. Accordingly, our backlog of
open purchase orders at any given time is not a meaningful indicator of
future sales. Changes in the amount of our backlog do not necessarily reflect
a corresponding change in the level of actual or potential sales.
Direct sales to customers are recognized upon shipment, net of an
allowance for estimated returns. Sales to distributors are made primarily
under arrangements allowing price protection and the right of stock rotation
on merchandise unsold to customers. Because of the uncertainty associated
with pricing concessions and future returns, we defer recognition of such
revenues, related costs of revenues and related gross margin until we are
notified by the distributor that the merchandise is sold by the distributor.
Most of our technology licenses provide for the payment of up-front
license fees and continuing royalties based on product sales. For license and
other arrangements for technology that we are continuing to enhance and
refine and under which we are obligated to provide unspecified enhancements,
revenue is recognized over the lesser of the estimated period we have
historically enhanced and developed refinements to the technology, generally
three years, the upgrade period, or the remaining portion of the upgrade
period from the date of delivery, provided all specified technology and
documentation has been delivered, the fee is fixed and determinable and
collection of the fee is probable. From time to time, we reexamine the
estimated upgrade period relating to license technology to determine if
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a change in the estimated update period is needed. Revenues from license or
other technology arrangements where we are not continuing to enhance and
refine the technology or are not obligated to provide unspecified enhancement
is recognized upon delivery, if the fee is fixed and determinable and
collection of the fee is probable.
We recognize royalties received under these arrangements during the
upgrade period as revenue based on the ratio of the elapsed portion of the
upgrade period to the estimated upgrade period. We recognize the remaining
portion of the royalties ratably over the remaining portion of the upgrade
period. We recognize royalties received after the upgrade period has elapsed
when reported to us, which generally coincides with the receipt of payment.
RESULTS OF OPERATIONS: QUARTER ENDED JUNE 30, 2000
NET REVENUES
Net revenues were $103.2 million for the three months ended June 30, 2000
as compared to $62.3 million in the first quarter of 2000 and $23.0 million
for the three months ended June 30, 1999. The increase in the second quarter
of 2000 from both the first quarter of 2000 and the second quarter of 1999
was due to increased shipment volume of new and existing products and due to
increased average selling prices. Our quarterly results are not indicative of
annual results and we may not continue to experience recent rates of growth
in revenues and earnings. Net revenues were $165.5 million for the six months
ended June 30, 2000 as compared to $41.3 million for the comparable period in
1999. The increase from year to year was due to increased shipment volume of
new and existing products and due to increased average selling prices.
PRODUCT REVENUES. Product revenues were $102.1 million in the second
quarter of 2000 as compared to $61.8 million in the first quarter of 2000 and
$20.4 million for the second quarter of 1999. The increase in the second
quarter of 2000 from both the first quarter of 2000 and the second quarter of
1999 was due to shipments of over 50 new products that we have introduced
since the second half of 1998. Approximately 79.6% of product revenues in the
second quarter of 2000 were from shipments of new products, products
introduced since the second half of 1998, as compared to 66.8% in the first
quarter of 2000 and 27.4% for the second quarter of 1999. In addition, the
net average selling price across all products increased 23.5% since the first
quarter of 2000 and has increased 54.1% since the second quarter of 1999.
Gross unit shipments increased approximately 29.0% from the first quarter of
2000 and approximately 219.3% from the second quarter of 1999. Product
revenues increased to $163.9 million in the first half of 2000 from $38.2
million in the first half of 1999 due to increased shipment volume of new and
existing products and due to increased average selling prices from period to
period.
LICENSE REVENUES. Revenues from license fees and royalties were $1.1
million in the second quarter of 2000, as compared to $0.5 million in the
first quarter of 2000 and $2.6 million in the second quarter of 1999.
Revenues from license fees and royalties were $1.6 million for the six months
ended June 30, 2000 as compared to $3.1 million for the six months ended June
30, 1999. We anticipate that license revenues will fluctuate significantly in
the future.
GROSS PROFIT
Gross profit was $46.1 million, or 44.7% of net revenues, in the second
quarter of 2000, as compared to $25.8 million or 41.5% of net revenues for
the first quarter of 2000 and $5.0 million, or 21.6% of net revenues, in the
second quarter of 1999. Gross profit was $71.9 million for the six months
ended June 30, 2000 as compared to $6.3 million for the six months ended June
30, 1999. Gross profit increased period to period across all periods due
to increased unit shipments from existing cost-reduced products, increased
shipments of new, higher margin products, and increasing average selling
prices on both older and newer products.
OPERATING EXPENSES
Our operating expenses consist of research and development, sales and
marketing, and general and administrative expenses. Operating expenses were
$18.7 million or 18.2% of net revenues in the second quarter of 2000, $15.3
million or 24.6% of net revenues in the first quarter of 2000, and $8.8
million or 38.3% of net revenues in the second quarter of 1999. The increase
in absolute dollars from the prior quarter was due to increased profit
sharing and increased commissions. The increase from the comparable quarter
last year was due to hiring additional personnel, annual salary increases and
profit sharing, and the development of new products and infrastructure.
Operating expenses increased to $34.1 million for the six months ended
June 30, 2000 from $16.9 million for the comparable period in 1999 due to
increased profit sharing and increased commissions. We anticipate that we
will continue to devote substantial resources to research and development,
sales and marketing and to general and administrative, and that these
expenses will continue to increase in absolute dollar amounts.
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RESEARCH AND DEVELOPMENT. Research and development expenses include costs
associated with the development of new products, enhancements to existing
products and quality assurance activities. These costs consist primarily of
employee salaries, benefits and the cost of outside resources that supplement
the internal development team. Research and development expenses were $9.2
million or 8.9% of net revenues during the second quarter of 2000 as compared
to $8.1 million or 13.0% of net revenues for the first quarter of 2000 and
$4.5 million or 19.5% of net revenues during the second quarter of 1999.
Research and development expenses increased 13.7% from the first quarter of
2000 due primarily to a $1.0 million expense for profit sharing and expenses
related to increased engineering headcount. Research and development expenses
increased 105.0% from the second quarter of 1999 due to increased personnel
costs (salaries, payroll taxes, benefits, and profit sharing), increased
wafer, mask and tooling charges for new product development, and increased
occupancy costs. Research and development expenses increased to $17.3 million
for the six months ended June 30, 2000 from $9.2 million for the six months
ended June 30, 1999 due to increased personnel costs, as explained above,
increased wafer, mask and tooling charges for new product development, and
increased occupancy costs. We expect research and development expenses to
continue to increase in absolute dollars.
SALES AND MARKETING. Sales and marketing expenses consist of salaries,
commission to manufacturers representatives, travel and entertainment and
promotional expenses. Sales and marketing expenses were $5.9 million or 5.7%
of net revenues in the second quarter of 2000 as compared to $4.6 million or
7.4% of net revenues in the first quarter of 2000 and $2.3 million or 9.9% of
net revenues during the second quarter of 1999. Sales and marketing expenses
increased 27.0% from the first quarter of 2000 and also increased 159.1% as
compared to the second quarter of 1999 due to increased commissions owed on
higher product revenues, increased salaries and related expenses, increased
building occupancy costs due to the lease of additional space, and increased
freight and product sample charges. Sales and marketing expenses increased to
$10.5 million for the six months ended June 30, 2000 from $4.5 million for
the six months ended June 30, 1999 due to primarily to increased commissions
owed on higher product revenues. We expect sales and marketing expense to
increase in absolute dollars as we continue to expand our sales and marketing
efforts and as our revenues increase.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
salaries for administrative, executive and finance personnel, recruiting
costs, information systems costs, professional services and legal fees and
allowances for doubtful accounts. General and administrative expenses were
$3.7 million or 3.6% of net revenues in the second quarter of 2000 as
compared to $2.6 million or 4.2% of net revenues during the first quarter of
2000. General and administrative expenses were $39,000 or 0.2% of net
revenues during the second quarter of 1999. Expenses increased 39.4% from the
first quarter of 2000 due to increased legal and profit sharing expenses.
Expenses increased from the second quarter of 1999 due to increased legal,
salary, and recruiting expenses, and also due to the depreciation associated
with our new Oracle ERP system which we implemented in January 2000. In
addition, during the second quarter of 1999 a lawsuit with Intel was settled,
which resulted in the reversal of $1.2 million in legal accruals during that
quarter. General and administrative expenses increased to $6.3 million for
the six months ended June 30, 2000 from $1.2 million for the six months ended
June 30, 1999 due to increased legal, salary and recruiting expenses and due
to the impact of the reversal of the legal accruals for the Intel lawsuit
noted previously. We anticipate that general and administrative expenses will
continue to increase in absolute dollar amount as we scale our facilities,
infrastructure, and head count to support our overall expected growth. We
expect to incur additional expenses in connection with the Winbond litigation
and may incur additional expenses in connection with the Atmel litigation.
For further information on this litigation see "Legal Proceedings."
INTEREST INCOME. Interest income was approximately $3.0 million or 3.0% of
net revenues during the second quarter of 2000 as compared to $18,000 for the
first quarter of 2000 and $0.2 million during the second quarter of 1999.
Interest income increased to $3.0 million for the first half of 2000 from
$0.5 million in the first half of 1999. Interest income increased from both
quarters and from 1999 to 2000 due to the receipt of cash proceeds from the
secondary public offering, which was completed on March 27, 2000 and the
underwriters exercise of an option in April 2000.
INTEREST EXPENSE. Interest expense was approximately $101,000 for the
second quarter of 2000, $444,000 during the first quarter of 2000, and $0 for
the second quarter of 1999. Interest expense relates to activity under our
line of credit and our letter of credit sub-facility. Interest expense
decreased from the prior quarter as we ceased to borrow against our line of
credit. Interest expense charges will continue in order to maintain the line
of credit facility.
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PROVISION FOR (BENEFIT FROM) INCOME TAXES
Our income tax provision of $7.8 million in the second quarter of 2000
consists of a 32% tax rate on income before taxes, reduced for a $1.9 million
benefit related to the recognition of our deferred tax asset. The deferred
tax asset, relating to differences between the tax basis and the financial
basis of our assets, accruals, and allowances, was considered fully
recoverable due to our four consecutive quarters of increased profitability.
Provision for (benefit from) income taxes increased to $8.2 million for the
six months ended June 30, 2000 from $65,000 in the comparable period of 1999
due to income generated in 2000 that was not present in 1999.
SEGMENT REPORTING
Our business has two segments: flash products and technology licensing.
Flash products comprise our standard flash memory products, our
application-specific memory products, flash-embedded controllers and mass
storage products. Technology licensing comprises design service fees,
technical consultation fees, license fees and royalties earned through
technology agreements that we have with wafer foundries and manufacturers for
non-competing applications. For the three month period ended June 30, 2000,
revenues and gross profits from the flash products segment was $102.1 million
and $45.0 million, respectively, and revenues and gross profit from the
technology licensing segment was $1.1 million and $1.1 million, respectively.
For the three month period ended March 31, 2000, revenues and gross profits
from the flash products segment was $61.8 million and $25.3 million,
respectively, and revenues and gross profit from the technology licensing
segment was $0.5 million and $0.5 million, respectively. For the three month
period ended June 30, 1999, revenues and gross profits from the flash
products segment was $20.4 million and $2.4 million, respectively, and
revenues and gross profit from the technology licensing segment was $2.6
million and $2.6 million, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 established a new
model for accounting for derivative and hedging activities. In July, 1999 the
Financial Accounting Standards Board issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133" (SFAS 137). SFAS 137 deferred the effective
date of SFAS 133 until the first fiscal year beginning after June 15, 2000.
The impact of SFAS 133 on our consolidated financial statements has not yet
been determined.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin: No. 101 "Revenue Recognition in Financial Statements"
(SAB 101). SAB 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We have until the fourth quarter of 2000 to comply with the
guidance in SAB 101. The impact of SAB 101 on our consolidated financial
statements has not yet been determined.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 (FIN 44) Accounting for Certain Transactions involving
Stock Compensation an interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion 25 for (a) the definition of employee for purposes
of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or
award, and (d) the accounting for an exchange of stock compensation awards in
a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998,
or January 12, 2000. The adoption of certain provisions prior to July 1, 2000
did not have a material effect. We do not expect the adoption of the
remaining provisions to have a material effect on our financial position or
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Our operating activities provided cash of $0.4
million for the six month period ended June 30, 2000 as compared to using
cash of $2.6 million for the six month period ended June 30, 1999. The cash
provided by operating activities for the six month period ended June 30, 2000
related primarily to net income of $32.2 million and increases in trade
accounts payable by $16.6 million, tax benefits from employee stock plans of
$8.6 million and increases in accrued expenses and deferred revenue of $16.9
million. Increased accounts receivable and accounts receivable from related
parties of $45.8 million and increased inventories of $26.5 million related
to our production ramp and increased shipment volume mostly offset the net
income and increased payables. In addition, depreciation and amortization of
$2.9 million and provision for inventory write-downs of $1.7 million
represented adjustments to
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reconcile net income to cash provided by operating activities. Provision for
inventory write-downs represents mostly write-downs to market value. The cash
used in operating activities for the six month period ended June 30, 1999
consisted of a net loss of $10.2 million and increased receivables of $4.4
million and increased inventories of $4.3 million partially offset by
non-cash adjustments and increased to payables and deferred revenue of $12.7
million. The higher increase in accounts receivable is primarily a result of
a 348.8% increase in net revenues in the current quarter from the comparable
quarter of 1999. Gross inventories increased $26.5 million for the six month
period ended June 30, 2000, compared to an increase of $4.3 million for the
six month period ended June 30, 1999 as a result of our recent efforts to
build inventory of our newer products in order to meet increasing customer
demand. The increase in trade accounts payable also corresponds to our
efforts to build inventory. We anticipate that additional new product
introductions in 2000 will require additional working capital. Deferred
revenue increased $6.4 million for the six month period ended June 30, 2000,
compared to an increase of $2.1 for the six month period ended June 30, 1999,
due to increased sales to distributors in the first half of 2000.
INVESTING ACTIVITIES. Our investing activities used cash of $67.5 million
for the six month period ended June 30, 2000, as compared to using cash of
$3.4 million for the first half of 1999. Of the $67.5 million cash used,
$46.0 million was invested in short-term or long-term marketable securities.
Capital expenditures were $4.5 million for the current six month period, flat
compared to $4.4 million for the same period of 1999. However, cash was used
to purchase short and long-term marketable securities during the second
quarter of 2000. We also made strategic equity investments during the second
quarter of 2000. Capital spending for the second half of the year is
currently anticipated at approximately $3.4 million, of which less than $1.0
million relates to information technology infrastructure and supply chain
management systems.
FINANCING ACTIVITIES. Our financing activities provided cash of
approximately $236.5 million during the six month period ended June 30, 2000.
The cash provided was primarily from the issuance of common stock for $255.8
million and relates to net proceeds from a secondary public offering in which
we issued and sold 4,025,000 shares of common stock, a private placement in
which we issued and sold 168,000 shares of common stock, and $2.2 million
from common stock issued under the employee stock purchase plan and the
exercise of employee stock options, offset set by the repayment of our entire
line of credit at the end of March.
Principal sources of liquidity at June 30, 2000 consisted of $191.8
million of cash, cash equivalents, and short-term marketable securities. As
of June 30, 2000 we had no borrowings on our line of credit, as some of the
proceeds from the secondary offering described above were used to pay off
this credit facility during the first quarter of 2000. However, we continue
to have access to this facility should we need it. As of June 30, 2000 our
available credit was for $25 million. Borrowing is limited to 80% of eligible
world-wide accounts receivable and is also reduced by any letters of credit
issued under a $25 million sub-agreement to this line. Therefore, as of June
30, 2000 our actual available credit under this line was $24 million. We must
pay an unused line fee at the annual rate of one quarter of one percent on
the unused portion. As of June 30, 2000 we were in compliance with the
covenants of this agreement.
We believe that our cash balances, together with funds expected to be
generated from operations and the line of credit availability, will be
sufficient to meet our projected working capital and other cash requirements
through at least the next twelve months. However, there can be no assurance
that future events will not require us to seek additional borrowings or
capital and, if so required, that such borrowing or capital will be available
on acceptable terms.
BUSINESS RISKS
RISKS RELATED TO OUR BUSINESS
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, AND AN UNANTICIPATED DECLINE
IN REVENUES MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A
DECLINE IN OUR STOCK PRICE.
Our recent growth may not be sustainable, and you should not use our past
financial performance to predict future operating results or stock
performance. We have incurred net losses for the past three fiscal years. Our
recent quarterly and annual operating results have fluctuated, and will
continue to fluctuate, due to the following factors, all of which are
difficult to forecast and many of which are out of our control:
- the availability, timely deliverability and cost of wafers from
our suppliers;
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- the routings through which our products are manufactured, pricing
differences among suppliers for the same services, and resulting
fluctuations in the actual costs and gross margins to produce
products;
- competitive pricing pressures and related changes in average
selling prices;
- fluctuations in manufacturing yields and significant yield losses
which affect our ability to fulfill orders;
- new product announcements and introductions of competing products
by us or our competitors;
- product obsolescence;
- lower of cost or market inventory adjustments;
- unpredictability of changes in demand for, or in the mix of, our
products;
- the gain or loss of significant customers;
- market acceptance of products utilizing our
SuperFlash-Registered Trademark- technology;
- changes in the channels through which our products are
distributed and the timeliness of receipt of distributor resale
information;
- exchange rate fluctuations;
- general economic, political and environmental-related conditions,
such as natural disasters;
- difficulties in forecasting, planning and management of inventory
levels;
- unanticipated research and development expenses associated with
new product introductions; and
- the timing of significant orders and of license and royalty
revenue.
A downturn in the markets for computer, consumer and communications products
that incorporate our products can also harm our operating results.
We typically receive and fulfill a majority of our orders within the quarter,
with a substantial portion occurring during the last month of the quarter.
One reason for this is that our products are primarily sold to large
manufacturers, which typically place orders at or near the end of a quarter.
As a result, we may not learn of revenue shortfalls, until late in a quarter
and may not be able to predict future revenues with accuracy. Additionally,
our costs consist of salaries for personnel and materials that must be
ordered several months in advance. These costs are based in part on our
expectations for future revenues and are relatively fixed in the short term.
As a result, any revenue shortfall below expectations could harm our business.
WE DEPEND ON A LIMITED NUMBER OF FOREIGN FOUNDRIES TO MANUFACTURE OUR PRODUCTS,
AND THESE FOUNDRIES MAY NOT BE ABLE TO SATISFY OUR MANUFACTURING REQUIREMENTS
WHICH COULD CAUSE OUR REVENUES TO DECLINE.
We outsource all of our manufacturing with the exception of limited testing
activities. We currently buy all of our wafers, and sorted die, from a
limited number of suppliers. During all of 1999 and the first half of 2000,
substantially all of our products were manufactured by three foundries, Sanyo
Electric Co., Ltd., in Japan, Taiwan Semiconductor Manufacturing Co., Ltd.,
or TSMC, in Taiwan, and Samsung Semiconductor, in Korea. We anticipate that
these foundries will continue to manufacture the majority of our products in
2000. If these suppliers fail to satisfy our requirements on a timely basis
and at competitive prices we could suffer manufacturing delays, a possible
loss of revenues or higher than anticipated costs of revenues, any of which
could seriously harm our operating results.
Given the current constraints on worldwide semiconductor manufacturing
capacity, our revenues for the next several quarters will largely be
determined by our ability to obtain adequate wafer supplies from our
foundries. We are currently unable to meet all of the demand for our
products, and have in the past failed to meet scheduled shipment dates, due
to our inability to obtain a sufficient supply of wafers and sorted die from
our foundries. The foundries with which we currently have arrangements,
together with any additional foundry at which capacity might be obtained, may
not be willing or able to satisfy all of our manufacturing requirements on a
timely basis at favorable prices. In addition, we have encountered delays in
qualifying new products and in ramping new product production and could
experience these delays in the future. We are also subject to the risks of
service disruptions, raw material shortages and price increases by the
foundries. Such disruptions, shortages and price increases could seriously
harm our operating results.
IF WE ARE UNABLE TO INCREASE OUR MANUFACTURING CAPACITY, OUR REVENUE GROWTH
MAY BE CONSTRAINED.
In order to grow, we need to increase our present manufacturing capacity.
Events that we have not foreseen could arise which would limit our capacity.
In addition, we have not secured enough capacity to meet demand beyond this
year. If we cannot satisfactorily increase our manufacturing capacity, our
ability to satisfy our customers will be severely impaired and this may harm
our future operating results.
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OUR COST OF REVENUES MAY INCREASE IF WE ARE REQUIRED TO PURCHASE
MANUFACTURING CAPACITY IN THE FUTURE.
To obtain additional manufacturing capacity, we may be required to make
deposits, equipment purchases, loans, joint ventures, equity investments or
technology licenses in or with water fabrication companies. These
transactions could involve a commitment of substantial amounts of our capital
and technology licenses in return for production capacity. We may be required
to seek additional debt or equity financing if we need substantial capital in
order to secure this capacity and we cannot assure you that we will be able
to obtain such financing,
IF OUR FOUNDRIES FAIL TO ACHIEVE ACCEPTABLE WAFER MANUFACTURING YIELDS, WE WILL
EXPERIENCE HIGHER COSTS OF REVENUES AND REDUCED PRODUCT AVAILABILITY.
The fabrication of our products requires wafers to be produced in a highly
controlled and ultra-clean environment. Semiconductor companies that supply
our wafers sometimes have experienced problems achieving acceptable wafer
manufacturing yields. Semiconductor manufacturing yields are a function of
both our design technology and the foundry's manufacturing process
technology. Low yields may result from marginal design or manufacturing
process drift. Yield problems may not be identified until the wafers are well
into the production process, which often makes them difficult, time consuming
and costly to correct. Furthermore we rely on independent foreign foundries
for our wafers which increases the effort and time required to identify,
communicate and resolve manufacturing yield problems. If our foundries fail
to achieve acceptable manufacturing yields, we will experience higher costs
of revenues and reduced product availability, which would harm out operating
results.
IF OUR FOUNDRIES DISCONTINUE THE MANUFACTURING PROCESSES NEEDED TO MEET OUR
DEMANDS, OR FAIL TO UPGRADE THE TECHNOLOGIES NEEDED TO MANUFACTURE OUR PRODUCTS,
WE MAY FACE PRODUCTION DELAYS AND LOWER REVENUES.
Our wafer and product requirements typically represent a small portion of the
total production of the foundries that manufacture our products. As a result,
we are subject to the risk that a foundry will cease production on an older
or lower-volume manufacturing process that it uses to produce our parts.
Additionally, we cannot be certain our foundries will continue to devote
resources to advance the process technologies on which the manufacturing of
our products is based. Each of these events could increase our costs and harm
our ability to deliver our products on time.
OUR DEPENDENCE ON THIRD-PARTY SUBCONTRACTORS TO ASSEMBLE AND TEST OUR PRODUCTS
SUBJECTS US TO A NUMBER OF RISKS, INCLUDING AN INADEQUATE SUPPLY OF PRODUCTS,
HIGHER COSTS OF MATERIALS, AND SUDDEN FLUCTUATIONS IN GROSS MARGINS RESULTING
FROM CHANGES IN CAPACITY AMONG DIFFERENT SUBCONTRACTORS.
We depend on independent subcontractors to assemble and test our products.
Our reliance on these subcontractors involves the following significant risks:
- reduced control over delivery schedules and quality;
- the potential lack of adequate capacity during periods of strong
demand;
- difficulties selecting and integrating new subcontractors;
- limited warranties on products supplied to us;
- potential increases in prices due to capacity shortages and other
factors; and
- potential misappropriation of our intellectual property.
These risks may lead to increased costs, delayed product delivery or loss of
competitive advantage, which would harm our profitability and customer
relationships. In addition, different subcontractors may charge us different
prices for performing the same service or providing the same product. Our
subcontractors also experience sudden changes in their capacity for assorted
reasons. As a result, the actual costs to produce the same product may
experience significant variation depending on how the manufacturing process
is routed among subcontractors at any given point in time. This results in
significant fluctuations in gross margins from month to month and from
quarter to quarter which are not predictable and which can have a sudden and
negative effect on the financial results of operations at any point in time.
OUR GROWTH DEPENDS UPON OUR ABILITY TO COMMERCIALIZE PRODUCTS FOR COMMUNICATIONS
AND DIGITAL CONSUMER ELECTRONICS APPLICATIONS.
During all of 1999 and the first half of 2000, the majority of our revenues
came from Internet Computing and Digital Consumer applications. However,
Networking and Wireless communications applications are central to our growth
strategy. We believe that products for these applications will encounter
intense competition and be highly price
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sensitive. While we are currently developing and introducing new products for
these applications, we cannot assure you that these products will reach the
market on time, will satisfactorily address customer needs, will be sold in
high volume, or will be sold at profitable margins.
OUR OPERATING EXPENSES ARE RELATIVELY FIXED, AND WE ORDER MATERIALS IN
ADVANCE OF ANTICIPATED CUSTOMER DEMAND. THEREFORE, WE HAVE LIMITED ABILITY TO
REDUCE EXPENSES QUICKLY IN RESPONSE TO ANY REVENUE SHORTFALLS.
Our operating expenses are relatively fixed, and we therefore have limited
ability to reduce expenses quickly in response to any revenue shortfalls.
Consequently, our operating results will be harmed if our revenues do not
meet our revenue projections. We may experience revenue shortfalls for the
following reasons:
- significant pricing pressures that occur because of declines in selling
prices over the life of a product;
- sudden shortages of raw materials or fabrication, test or assembly
capacity constraints that lead our suppliers to allocate available
supplies or capacity to other customers which, in turn, harm our
ability to meet our sales obligations; and
- the reduction, rescheduling or cancellation of customer orders.
In addition, we typically plan our production and inventory levels based on
internal forecasts of customer demand, which are highly unpredictable and can
fluctuate substantially. From time to time, in response to anticipated long
lead times to obtain inventory and materials from our outside suppliers and
foundries, we may order materials in advance of anticipated customer demand.
This advance ordering may result in excess inventory levels or unanticipated
inventory write-downs if expected orders fail to materialize.
BECAUSE OUR FLASH MEMORY PRODUCTS TYPICALLY HAVE LENGTHY SALES CYCLES, WE MAY
EXPERIENCE SUBSTANTIAL DELAYS BETWEEN INCURRING EXPENSES RELATED TO RESEARCH AND
DEVELOPMENT AND THE GENERATION OF REVENUES.
Due to the flash memory product cycle we usually require more than nine
months to realize volume shipments after we first contact a customer. We
first work with customers to achieve a design win, which may take three
months or longer. Our customers then complete the design, testing and
evaluation process and begin to ramp up production, a period which typically
lasts an additional six months or longer. As a result, a significant period
of time may elapse between our research and development efforts and our
realization of revenue, if any, from volume purchasing of our products by our
customers.
WE FACE INTENSE COMPETITION FROM COMPANIES WITH SIGNIFICANTLY GREATER FINANCIAL,
TECHNICAL AND MARKETING RESOURCES THAT COULD ADVERSELY AFFECT OUR ABILITY TO
INCREASE SALES OF OUR PRODUCTS.
We compete with major domestic and international semiconductor companies,
many of which have substantially greater financial, technical, marketing,
distribution, and other resources than we do. Many of our competitors have
their own facilities for the production of semiconductor memory components
and have recently added significant capacity for such production. Our memory
products, which presently account for substantially all of our revenues,
compete principally against products offered by Intel, Advanced Micro
Devices, Atmel, STMicroelectronics, Sanyo, Winbond Electronics and Macronix.
If we are successful in developing our high density products, these products
will compete principally with products offered by Intel, Advanced Micro
Devices, Fujitsu, Hitachi, Sharp, Samsung Semiconductor, SanDisk and Toshiba,
as well as any new entrants to the market.
In addition, we may in the future experience direct competition from our
foundry partners. We have licensed to our foundry partners the right to
fabricate products based on our technology and circuit design, and to sell
such products worldwide, subject to our receipt of royalty payments.
Competition may also come from alternative technologies such as ferroelectric
random access memory, or FRAM, or other developing technologies.
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND, THEREFORE, OUR
SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS.
The markets for our products are characterized by:
- rapidly changing technologies;
19
<PAGE>
- evolving and competing industry standards;
- changing customer needs;
- frequent new product introductions and enhancements;
- increased integration with other functions; and
- rapid product obsolescence.
To develop new products for our target markets, we must develop, gain access
to and use leading technologies in a cost-effective and timely manner and
continue to expand our technical and design expertise. In addition, we must
have our products designed into our customers' future products and maintain
close working relationships with key customers in order to develop now
products that meet their changing needs.
In addition, products for communications applications are based on
continually evolving industry standards. Our ability to compete will depend
on our ability to identify and ensure compliance with these industry
standards. As a result, we could be required to invest significant time and
effort and incur significant expense to redesign our products and ensure
compliance with relevant standards.
We cannot assure you that we will be able to identify new product
opportunities successfully, develop and bring to market new products, achieve
design wins or respond effectively to new technological changes or product
announcements by our competitors. In addition, we may not be successful in
developing or using new technologies or in developing new products or product
enhancements that achieve market acceptance. Our pursuit of necessary
technological advances may require substantial time and expense. Failure in
any of these areas could harm our operating results.
OUR FUTURE SUCCESS DEPENDS IN PART ON THE CONTINUED SERVICE OF OUR KEY DESIGN
ENGINEERING, SALES, MARKETING AND EXECUTIVE PERSONNEL AND OUR ABILITY TO
IDENTIFY, RECRUIT AND RETAIN ADDITIONAL PERSONNEL.
We are highly dependent on Bing Yeh, our President and Chief Executive
Officer, as well as the other principal members of our management team and
engineering staff. There is intense competition for qualified personnel in
the semiconductor industry, in particular the highly skilled design,
applications and test engineers involved in the development of flash memory
technology. Competition is especially intense in Silicon Valley, where our
corporate headquarters is located. We may not be able to continue to attract
and retain engineers or other qualified personnel necessary for the
development of our business or to replace engineers or other qualified
personnel who may leave our employ in the future. Our anticipated growth is
expected to place increased demands on our resources and will likely require
the addition of new management and engineering personnel and the development
of additional expertise by existing management personnel. The failure to
recruit and retain key design engineers or other technical and management
personnel could ham our business.
OUR ABILITY TO COMPETE SUCCESSFULLY WILL DEPEND, IN PART, ON OUR ABILITY TO
PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH WE MAY NOT BE ABLE TO PROTECT.
We rely on a combination of patent, trade secrets, copyright and mask work
production laws and rights, nondisclosure agreements and other contractual
provisions and technical measures to protect our intellectual property
rights. Policing unauthorized use of our products, however, is difficult,
especially in foreign countries. Litigation may continue to be necessary in
the future to enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Litigation
could result in substantial costs and diversion of resources and could harm
our business, operating results and financial condition regardless of the
outcome of the litigation. For example, in 1998, we filed suit against
Winbond Electronics Corporation alleging breach of contract and breach of
covenant of good faith and fair dealing and are seeking an injunction
prohibiting Winbond from using any of our licensed technology. Winbond has
responded by denying the claims and asserting counterclaims.
We own 23 patents in the United States relating to our products and
processes, and have filed for several more. In addition, we hold two patents
in Europe, one patent in Germany and additional foreign patent applications
have been filed in Europe, Japan, Taiwan and Canada. We cannot assure you
that any pending patent application will be granted. Our operating results
could be seriously harmed by the failure to protect our intellectual property.
20
<PAGE>
IF WE ARE ACCUSED OF INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHER
PARTIES WE MAY BECOME SUBJECT TO TIME-CONSUMING AND COSTLY LITIGATION. IF WE
LOSE, WE COULD SUFFER A SIGNIFICANT IMPACT ON OUR BUSINESS AND BE FORCED TO PAY
DAMAGES.
Third parties may assert that our products infringe their proprietary rights,
or may assert claims for indemnification resulting from infringement claims
against us. Any such claims may cause us to delay or cancel shipment of our
products or pay damages which could seriously harm our business, financial
condition and results of operations. In addition, irrespective of the
validity or the successful assertion of such claims, we could incur
significant costs in defending against such claims.
Over the past three years we were sued both by Atmel Corporation and Intel
Corporation regarding patent infringement issues and by Winbond Electronics
Corporation regarding our contractual relationship with them. Significant
management time and financial resources have been devoted to defending these
lawsuits. We settled with Intel in May 1999 and the Atmel and Winbond
litigation is ongoing.
In addition to the Atmel, Intel and Winbond actions, we receive from time to
time, letters or communications from other companies stating that such
companies have patent rights which involve our products. Since the design of
all of our products is based on SuperFlash technology, any legal finding that
the use of our SuperFlash technology infringes the patent of another company
would have a significantly negative effect on our entire product line and
operating results. Furthermore, if such a finding were made, there can be no
assurance that we could license the other company's technology on
commercially reasonable terms or that we could successfully operate without
such technology. Moreover, if we are found to infringe, we could be required
to pay damages to the owner of the protected technology and could be
prohibited from making, using, selling, or importing into the United States
any products that infringe the protected technology. In addition, the
management attention consumed by and legal cost associated with any
litigation could have a negative effect on our operating results.
PUBLIC ANNOUNCEMENTS MAY HURT OUR STOCK PRICE. During the course of lawsuits
there may be public announcements of the results of hearings, motions, and
other interim proceedings or developments in the litigation. If securities
analysts or investors perceive these results to be negative, it could have a
substantial negative effect on the trading price of our stock.
OUR LITIGATION MAY BE EXPENSIVE, MAY BE PROTRACTED AND CONFIDENTIAL
INFORMATION MAY BE COMPROMISED. Whether or not we are successful in our
lawsuits with Winbond and Atmel, we expect this litigation to consume
substantial amounts of our financial and managerial resources. At any time
Winbond or Atmel may file additional claims against us, which could increase
the risk, expense and duration of the litigation. Further, because of the
substantial amount of discovery required in connection with this type of
litigation, there is a risk that some of our confidential information could
be compromised by disclosure.
OUR BUSINESS MAY SUFFER DUE TO RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS.
During 1999 and the first half of 2000, our export product and licensing
revenues accounted for approximately 89.1% and 82.4% of our net revenues,
respectively. Our international business activities are subject to a number
of risks, each of which could impose unexpected costs on us that would have
an adverse effect on our operating results. These risks include:
- difficulties in complying with regulatory requirements and standards;
- tariffs and other trade barriers;
- costs and risks of localizing products for foreign countries;
- reliance on third parties to distribute our products;
- longer accounts receivable payment cycles;
- potentially adverse tax consequences;
- limits on repatriation of earnings; and
- burdens of complying with a wide variety of foreign laws.
We derived 80.9% and 74.9% of our product revenue from Asia during 1999 and
the first half of 2000 respectively. Additionally, our major wafer suppliers
and assembly and packaging subcontractors are all located in Asia. Any kind
of economic, political or environmental instability in this region of the
world can have a severe negative impact on our operating results due to the
large concentration of our production and sales activities in this region.
For example,
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<PAGE>
during 1997 and 1998, several Asian countries where we do business, such as
Japan, Taiwan and Korea, experienced severe currency fluctuation and economic
deflation, which negatively impacted our total revenues and also negatively
impacted our ability to collect payments from these customers. During this
period, the lack of capital in the financial sectors of these countries made
it difficult for our customers to open letters of credit or other financial
instruments that are guaranteed by foreign banks. Finally, the economic
situation in this period exacerbated a decline in selling prices for our
products as our competitors reduced product prices to generate needed cash.
It should also be noted that we are greatly impacted by the political,
economic and military conditions in Taiwan. Taiwan and China are continuously
engaged in political disputes and both countries have continued to conduct
military exercises in or near the other's territorial waters and airspace
from time to time. Such disputes may continue and even escalate, resulting in
an economic embargo, a disruption in shipping or even military hostilities.
Any of these events could severely harm our business by interrupting or
delaying production or shipment of our products. Any kind of activity of this
nature or even rumors of such activity could severely negatively impact our
operations, revenues, operating results, and stock price.
BECAUSE A SMALL NUMBER OF CUSTOMERS HAVE ACCOUNTED FOR, AND ARE LIKELY TO
CONTINUE TO ACCOUNT FOR, A SUBSTANTIAL PORTION OF OUR REVENUES, OUR REVENUES
COULD DECLINE DUE TO THE LOSS OF ONE OF THESE CUSTOMERS.
More than half of our revenues come from a small number of customers. For
example, product sales to our top 10 customers accounted for approximately
57% and 45.9%, respectively, of our product revenues for 1999 and the first
half of 2000, respectively. One customer, a reseller, accounted for 12% and
10.8% of product sales in 1999 and the first half of 2000, respectively. If
we were to lose any of these customers or experience any substantial
reduction in orders from these customers, our revenues and operating results
would suffer. In addition, the composition of our major customer base changes
from year to year as the market demand for our customers' products change.
WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS AND THE LOSS OF A MAJOR
CUSTOMER COULD SERIOUSLY HARM OUR BUSINESS.
We do not typically enter into long-term contracts with our customers, and we
cannot be certain as to future order levels from our customers. When we do
enter into a long-term contract, the contract is generally terminable at the
convenience of the customer. An early termination by one of our major
customers would harm our financial results as it is unlikely that we would be
able to rapidly replace that revenue source.
OUR BACKLOG MAY NOT RESULT IN FUTURE REVENUE WHICH WOULD SERIOUSLY HARM OUR
BUSINESS.
Due to possible customer changes in delivery schedules and cancellations of
orders, our backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period. A reduction of backlog during any
particular period, or the failure of our backlog to result in future revenue,
could harm our business.
IF AN EARTHQUAKE OR OTHER NATURAL DISASTER STRIKES OUR MANUFACTURING FACILITY OR
THOSE OF OUR SUPPLIERS, WE WOULD BE UNABLE TO MANUFACTURE OUR PRODUCTS FOR A
SUBSTANTIAL AMOUNT OF TIME AND WE WOULD EXPERIENCE LOST REVENUES.
Our corporate headquarters are located in California near major earthquake
faults. In addition, some of our suppliers are located near fault lines. In
the event of a major earthquake or other natural disaster near our
headquarters, our operations could be harmed. Similarly, a major earthquake
or other natural disaster near one or more of our major suppliers, like the
one that occurred in Taiwan in September 1999, could disrupt the operations
of those suppliers, which could limit the supply of our products and harm our
business.
IF WE DID NOT ADEQUATELY PREPARE FOR THE TRANSITION TO YEAR 2000, OUR BUSINESS
COULD BE HARMED.
We have executed a plan designed to make our computer systems, applications,
computer and manufacturing equipment and facilities year 2000 compliant. To
date, none of our systems, applications, equipment or facilities have
experienced any difficulties from the transition to year 2000. However, it is
possible that significant difficulties could be discovered or could arise. We
cannot guarantee that our year 2000 readiness plan has been successfully
implemented, and actual results could still differ substantially from our
plan. In addition, we have communicated with our critical suppliers to
determine the extent to which we may be vulnerable to such parties' failure
to resolve their own year 2000 issues. Where practicable, we have attempted
to mitigate our risks with respect to the failure of these entities to be
year 2000 compliant. The effect, if any, on our results of operations from
any failure of such parties to be year
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<PAGE>
2000 compliant cannot yet be determined.
WE MAY REQUIRE ADDITIONAL CAPITAL IN ORDER TO BRING NEW PRODUCTS TO MARKET, AND
THE ISSUANCE OF NEW EQUITY SECURITIES WILL DILUTE YOUR INVESTMENT IN OUR COMMON
STOCK.
To implement our strategy of diversified product offerings, we need to bring
new products to market. Bringing new products to market and ramping up
production requires significant working capital. We have in place a credit
agreement Foothill Capital Credit Corporation to provide additional capital
to support potential on-going working capital requirements. We may continue
to borrow under this credit facility for some time. During the six months
ended June 30, 2000 we sold shares of our common stock to raise funds for
working capital and general corporate purposes. We may sell additional shares
of our stock or seek additional borrowings or outside capital infusions. We
cannot assure you that such financing options will be available on terms
acceptable to us, if at all. In addition, if we issue shares of our common
stock, our shareholders will experience dilution with respect to their
investment. On June 16, 2000 our Board of Directors authorized a 3 share for
1 share stock split which will take place during the third quarter.
WE DEPEND ON MANUFACTURERS' REPRESENTATIVES AND DISTRIBUTORS TO GENERATE A
MAJORITY OF OUR REVENUES.
We rely on manufacturers' representatives and distributors to sell our
products and these entities could discontinue selling our products at any
time. Two of our manufacturers' representatives are responsible for
substantially all of our sales in Taiwan, which accounted for 28.3% and 28.0%
of our product revenues during 1999 and the first half of 2000, respectively.
One manufacturers' representative accounted for substantially all of our
sales in China, including Hong Kong, during 1999 and the first half of 2000,
which accounted for 24.4% and 17.8% of our total product revenues during 1999
and the first half of 2000, respectively. The loss of any of these
manufacturers' representatives, or any other significant manufacturers'
representative or distributor could seriously harm our operating results by
impairing our ability to sell our products.
OUR GROWTH CONTINUES TO PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT SYSTEMS AND
RESOURCES AND IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO MARKET AND SELL
OUR PRODUCTS AND DEVELOP NEW PRODUCTS MAY HE HARMED.
Our business is experiencing rapid growth which has strained our internal
systems and will require us to continuously develop sophisticated information
management systems in order to manage the business effectively. Although we
completed the implementation of an Oracle enterprise resource planning and
management system for our operations during the first quarter of 2000, a
period of stabilization is expected. We also plan to implement a supply-chain
management system and a vendor electronic data interface system during this
year. There is no guarantee that we will be able to implement these new
systems in a timely fashion, that in themselves they will be adequate to
address our expected growth, or that we will be able to foresee in a timely
manner other infrastructure needs before they arise. Our success depends on
the ability of our executive officers to effectively manage our growth. If we
are unable to manage our growth effectively, our results of operations will
be seriously harmed. If we fail to successfully implement the Oracle
enterprise resource planning and management system, our business may suffer
severe inefficiencies that may adversely impact the results of our operations.
RISKS RELATED TO OUR INDUSTRY
OUR SUCCESS IS DEPENDENT ON THE GROWTH AND STRENGTH OF THE FLASH MEMORY
MARKET.
All of our products, as well as all new products currently under design, are
stand-alone flash memory devices or devices embedded with flash memory. A
memory technology other than SuperFlash may be adopted as an industry
standard. Our competitors are generally in a better financial and marketing
position than we are from which to influence industry acceptance of a
particular memory technology. In particular, a primary source of competition
may come from alternative technologies such as FRAM devices if such
technology is commercialized for higher density applications. To the extent
our competitors are able to promote a technology other than SuperFlash as an
industry standard, our business will be seriously harmed.
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THE SELLING PRICES FOR OUR PRODUCTS ARE EXTREMELY VOLATILE AND HAVE
HISTORICALLY DECLINED DURING PERIODS OF OVER CAPACITY OR INDUSTRY DOWNTURNS.
IN ADDITION, THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY COULD CREATE
FLUCTUATIONS IN OUR OPERATING RESULTS, AS WE EXPERIENCED IN 1997 AND 1998.
The semiconductor industry has historically been cyclical, characterized by
wide fluctuations in product supply and demand. From time to time, the
industry has also experienced significant downturns, often in connection
with, or in anticipation of, maturing product cycles and declines in general
economic conditions. Downturns of this type occurred in 1997 and 1998. These
downturns have been characterized by diminished product demand, production
over-capacity and accelerated decline of average selling prices, and in some
cases have lasted for more than a year. Our business could be harmed by
industry-wide fluctuations in the future. The flash memory products portion
of the semiconductor industry, from which we derived substantially all of our
revenues in 1998, continued to suffer from excess capacity in 1998, which
resulted in greater than normal declines in our markets, which unfavorably
impacted our revenues, gross margins and profitability. While these
conditions improved in 1999 and the first half of 2000, if they were to
resume our growth and operating results would be harmed.
THERE IS SEASONALITY IN OUR BUSINESS AND IF WE FAIL TO CONTINUE TO INTRODUCE
NEW PRODUCTS THIS SEASONALITY MAY BECOME MORE PRONOUNCED.
Sales of our products in the consumer electronics applications market are
subject to seasonality. As a result, sales of these products are impacted by
seasonal purchasing patterns with higher sales generally occurring in the
second half of each year. In 1999 and the first half of 2000, this
seasonality was partially offset by the introduction of new products as we
continued to diversify our product offerings. If we fail to continue to
introduce new products, our business may suffer and the seasonality of a
portion of our sales may become more pronounced.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risks associated with foreign exchange rate fluctuations
due to our international sales and manufacturing and sales activities. These
exposures may change over time as business practices evolve and could
negatively impact our operating results and financial condition. All of our
sales are denominated in U.S. dollars. An increase in the value of the U.S.
dollar relative to foreign currencies could make our products more expensive
and therefore reduce the demand for our products. Such a decline in the
demand could reduce revenues and/or result in operating losses. In addition,
a downturn in the Japanese economy could impair the value of our investment
in our Japanese affiliate. If we consider the value of Silicon Technology, in
which we have a 14% interest, to be impaired, we would write off, or expense
some or all of our approximately $939,000 investment. During the second
quarter of 2000 we made strategic investments totaling $17.0 million, all of
which are located in Taiwan. A downturn in the Taiwanese economy could impair
the value of some or all of these investments.
At any time, fluctuations in interest rates could affect interest earnings
on our cash and cash equivalents or increase any interest expense owed on the
line of credit facility. We believe that the effect, if any, of reasonably
possible near term changes in interest rates on our financial position,
results of operations and cash flows would not be material. Currently, we do
not hedge these interest rate exposures.
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PART II
ITEM 1. LEGAL PROCEEDINGS
On January 3, 1996, Atmel Corporation sued us in the U.S. District Court for
the Northern District of California. Atmel's complaint alleged that we
willfully infringe 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 sought a judgment that we
infringe the patent, an injunction prohibiting future infringement, and
treble damages, as well as attorney's fees and expenses.
On two of the six patents, the District Court granted in our favor a summary
judgment that we did not infringe. Two of the other patents were invalidated
by another U.S. District Court in a proceeding to which we were not a party,
but this decision was reversed by the Federal Circuit. Thus, four patents
remain at issue in Atmel's District Court case against us. That case has been
stayed, and Atmel has not requested a trial date.
On February 17, 1997, Atmel filed an action with the International Trade
Commission, or ITC, against two suppliers of our parts, involving four of the
six patents that Atmel alleged that we infringed in the District Court case
above. We intervened as a party to that investigation. Pursuant to
indemnification agreements with these suppliers, we are obligated to
indemnify both to the extent provided in those agreements.
As to one of these four patents, Atmel's claims were withdrawn because of the
summary judgment granted by the District Court, as described above. The
administrative law judge, or ALJ, who makes recommended determinations to the
ITC, ruled that we did not infringe the remaining three patents. As to one of
these patents, the ALJ ruled on May 17, 2000 that it is invalid and
unenforceable because Atmel intentionally misled the U.S. Patent Office.
These rulings are currently under review by the ITC, and are not final unless
adopted by the ITC commissioners.
Any final decisions by the ITC will not be dispositive because Atmel can
still pursue its claims in the District Court action. We intend to vigorously
defend ourselves against these actions.
On July 31, 1998, we filed suit against Winbond Electronics Corporation in
the U.S. District Court for the Northern District of California, San Jose
Division. Winbond has answered the complaint and has counter-claimed. Since
then, the parties have amended the complaint and the answer and counterclaim.
As of February 24, 2000, we have asserted eight causes of action, including
breach of contract, misappropriation of trade secrets and other contractual
and tortious claims. Our suit seeks damages and equitable remedies to prevent
Winbond from using any of our technology.
Winbond has answered and asserted counter-claims for a declaration that it is
not in material breach of the agreement, breach of the agreement, breach of
the covenant of good faith and fair dealing, interference with prospective
economic advantage, unlawful business practice in violation of state law,
common law unfair competition, a declaration that Winbond is not obligated to
pay us under the agreement and/or they own or jointly own the technology
embodied in their products, misappropriation of Winbond's trade secrets,
unfair competition in violation of the Federal Lanham Act, and common law
fraud and misrepresentation. Winbond seeks, in part, restitution of the
payments made, and other damages, and an injunction.
On April 17 and 21, 2000, respectively, the District Court granted our
motions for partial summary judgment on Winbond's restitution counterclaim
and defense of contract modification by course-of-dealing. On May 1, 2000,
Winbond announced its intention to pursue, as part of its defense, certain
allegations that we do not own the licensed technology and that we have
committed antitrust violations. We believe that the substantive allegations
in the Winbond counter-claims are without merit and we intend to vigorously
defend ourselves against the action. We intend to vigorously pursue our
complaint. The trial is set for January 9, 2001.
From time to time, we are also involved in other legal actions arising in the
ordinary course of business. While we have accrued certain amounts for the
estimated legal costs associated with defending these matters, there can be
no assurance the Atmel complaint, the Winbond complaint or other third party
assertions will be resolved without costly litigation, in a manner that is
not adverse to our 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.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Shareholders was held on June 16, 2000. At the annual
meeting, the shareholders:
<TABLE>
<S> <C>
(1) elected the persons listed below to serve as a director of the company
for the ensuing year and until his successor is elected,
(2) approved an amendment to the Articles of Incorporation to increase the
authorized share of Common Stock from 45,000,000 to 250,000,000 shares,
(3) approved the 1995 Equity Incentive Plan to increase the aggregate
number of shares of our Common Stock authorized for issuance under the
plan by 1,000,000 to 8,750,000 shares, and
(4) ratified the selection of PricewaterhouseCoopers LLP as our independent
accountants for the fiscal year ending December 31, 2000.
</TABLE>
On April 21, 2000, the record date of the Annual Meeting, we had 29,569,081
shares of Common Stock outstanding. At the Annual Meeting, holders of
27,056,848 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 25,301,099 0 1,755,749
Yaw Wen Hu 25,956,695 0 1,100,153
Tsuyoshi Taira 25,733,920 0 1,322,928
Yasushi Chikagami 24,965,465 0 2,091,393
Ronald Chwang 25,916,695 0 1,140,153
</TABLE>
PROPOSAL 2 - APPROVAL OF THE AMENDMENT TO THE ARTICLES OF INCORPORATION, AS
AMENDED
<TABLE>
<S> <C>
Votes in Favor 18,039,695
Votes Against 7,464,881
Abstentions 1,552,272
</TABLE>
PROPOSAL 3 - APPROVAL OF THE 1995 EMPLOYEE INCENTIVE PLAN, AS AMENDED
<TABLE>
<S> <C>
Votes in Favor 17,057,704
Votes Against 9,967,298
Abstentions 31,845
</TABLE>
PROPOSAL 4 - RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANT
<TABLE>
<S> <C>
Votes in Favor 27,030,848
Votes Against 19,413
Abstentions 6,587
</TABLE>
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. We incorporate by reference all exhibits filed in connection
with our annual report on Form 10-K, as amended, for the year ended
December 31, 1999.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
3.5 Certificate of Amendment of the Restated Articles of
Incorporation of Silicon Storage Technology, Inc.
10.27 Agreement with National Semiconductor Corporation dated April
11, 2000.
10.28 Sunnyvale Industrials Net Lease Agreement
10.29 Amendment Number Four to Loan and Security Agreement
10.30 Amendment Number Five to Loan and Security Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended June 30, 2000: None.
</TABLE>
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sunnyvale, County of
Santa Clara, State of California, on the 7th day of August, 2000.
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)
28
