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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended December 31, 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 Registrant as specified in its charter)
California 77-0225590
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
1171 Sonora Court, Sunnyvale, CA 94086
(Address of principal executive offices) (Zip code)
Company's telephone number, including area code: (408) 735-9110
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of class Name of each exchange on which registered
None. None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value.
--------------------------
Indicate by check mark whether SST (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 SST was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No _.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of SST's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No _.
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Aggregate market value of the voting stock held by non-affiliates of
SST as of February 28, 2001: $779,303,790 based on the closing price of SST's
Common Stock as reported on the Nasdaq National Market. Number of shares
outstanding of SST's Common Stock, no par value, as of the latest practicable
date, February 28, 2001: 90,747,876.
Documents incorporated by reference: Exhibits previously filed as noted
on page 34. Part III - A portion of the Registrant's definitive proxy statement
for the Registrant's Annual Meeting of Shareholders, which will be filed with
the Securities and Exchange Commission.
2
SILICON STORAGE TECHNOLOGY, INC.
Form 10-K
For the Year Ended December 31, 2000
TABLE OF CONTENTS
Part I Page
Item 1. Business ........................................................................ 4
Item 2. Properties ..................................................................... 13
Item 3. Legal Proceedings ............................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders ............................. 14
Part II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters ............ 15
Item 6. Selected Consolidated Financial Data ............................................ 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations .................................................................. 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...................... 31
Item 8. Consolidated Financial Statements and Supplementary Data ........................ 32
Item 9. Changes in and Disagreements with Accountants on accounting and Financial
Disclosure .................................................................. 33
Part III
Item 10. Directors and Executive Officers of the Registrant .............................. 33
Item 11. Executive Compensation .......................................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and Management .................. 33
Item 13. Certain Relationships and Related Transactions .................................. 33
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K ................. 34
Index to Exhibits ..................................................................................... 34
Signatures ............................................................................................ 36
Index to Consolidated Financial Statements ............................................................ 40
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PART I
Item 1. Business
Overview
We are a leading supplier of flash memory semiconductor devices for the
digital consumer, networking, wireless communications and Internet computing
markets.
We offer over 70 products based on our SuperFlash design and
manufacturing process technology. Our customers include: 3Com, Acer, Apple,
Asustek, Cisco, Compaq, FIC, Gigabyte, Hwawei, Hyundai, Infineon, Intel, IBM,
Inventec, Legend, LG, Lucent, Motorola, National Semiconductor, Nintendo,
Nortel, Panasonic, Quanta, Samsung, Sanyo, Siemens, Sony and VTech. We also
license our SuperFlash technology to leading semiconductor companies including
Analog Devices, ATMI, IBM, Motorola, National Semiconductor, Oki, Samsung,
Sanyo, Seiko-Epson, TSMC, and Winbond to embed in semiconductor devices that
integrate flash memory with other functions on a single chip. Our products are
manufactured at leading wafer foundries and semiconductor manufacturers
including Samsung Electronics, Sanyo, Seiko-Epson, TSMC and UMC. We also work
with IBM, Oki, National Semiconductor, Samsung Electronics, Sanyo, Seiko-Epson,
TSMC and Vanguard to develop new technology for manufacturing our products.
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 1996, 1997 and
1998. These downturns have been characterized by weakening product demand,
production over-capacity and accelerated decline of selling prices, and in some
cases have lasted for more than a year. We recently began to experience a sharp
downturn in several of our markets late in the fourth quarter of 2000, as our
customers reacted to weakening demand for their products. To date, market
conditions have not improved during early 2001 and our customers have continued
to return product, cancel backlog and/or push out shipments. Our business could
be harmed by industry-wide fluctuations in the future.
We derived 77.6% of our product revenues during 2000 and 80.8% 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 harmed our revenues and operating results
during the third and fourth quarters 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.
Sales to direct customers and foreign stocking representatives 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
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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 or determinable and collection of the fee is
probable. From time to time, we reexamine the estimated upgrade period relating
to licensed technology to determine if 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 enhancements is recognized upon delivery, if the fee is
fixed or 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.
Industry Background
Semiconductor integrated circuits are critical components used in an
increasingly wide variety of applications, such as computers and computer
systems, communications equipment, consumer products and industrial automation
and control systems. As integrated circuit performance has increased and size
and cost have decreased, the use of semiconductors in these applications has
grown significantly. According to a November 2000 Dataquest report, worldwide
semiconductor device revenue grew from $169 billion in 1999 to $232 billion in
2000 and will grow to $339 billion in 2004.
Historically, the demand for semiconductors has been driven by the
personal computer, or PC, market. The demand for PCs has grown in recent years,
in part due to increased use of PCs for Internet access. According to Dataquest,
the PC market grew from 100 million units shipped in 1998 to 118 million units
shipped in 1999 to 135 million units shipped in 2000. In recent years, growth in
demand for semiconductors relating to PCs has been outpaced by growth in demand
for semiconductors in digital electronic devices for communication and consumer
applications. Communications applications include digital subscriber line
modems, cable modems, wireless local area network devices, cellular phones and
pagers. Consumer-oriented digital electronic devices include digital cameras,
DVD players, MP3 players, personal digital assistants, set-top boxes, CD-ROM
drives and GPS navigation systems.
In order to function correctly, PCs and other digital electronic
devices require program code. The program code defines how devices function and
affects how they are configured. In PCs, this program code, or BIOS, initiates
the loading of the PC's operating system, which is then read from the disk
drive. In the case of other digital electronic devices, the program code is
stored in its entirety in nonvolatile memory, mostly in flash memory. As a
result, virtually all complex electronic systems that use a processor or
controller for computing, consumer, communications, and industrial applications
require nonvolatile memory.
System manufacturers generally prefer nonvolatile memory devices that
can be reprogrammed efficiently in the system in order to achieve several
important advantages. With reprogrammable memory, manufacturers can cost
effectively change program codes in response to faster product cycles and
changing market specifications. This in turn greatly simplifies inventory
management and manufacturing processes. Reprogrammable memory also allows the
manufacturer to reconfigure or update a system either locally or through a
network connection. In addition, in-system reprogrammable devices can be used
for data storage functions, such as storage of phone numbers for speed dialing
in a cellular phone.
Flash memory is the predominant reprogrammable nonvolatile memory
device used to store program code. Flash memory can electrically erase select
blocks of data on the chip much faster and more simply than with alternative
solutions, such as Erasable Programmable Read-Only Memory, or EPROM. Moreover,
flash memory is significantly less expensive than other reprogrammable
solutions, such as Electrically Erasable Programmable Read-Only Memory, or
EEPROMs. As a result, the demand for flash memory has grown dramatically. This
growth has been fueled by the need for code sharing and other
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storage functions in a wide array of digital devices. According to a November
2000 Semiconductor Industry Association report, worldwide flash memory revenue
was $10 billion in 2000 and will grow to $23 billion in 2003.
Our Solution
We are a leading supplier of flash memory semiconductor devices
addressing the needs of high volume electronic applications. We believe our
proprietary flash memory technology, SuperFlash, offers superior performance to
other flash memory solutions. In addition, we believe SuperFlash's benefits
include high reliability, fast write performance, ability to be scaled to a
smaller size and a low-cost manufacturing process. Many leading technology
companies use our technology in their products including 3Com, Acer, Apple,
Cisco, Compaq, Dell, FIC, Hyundai, Intel, IBM, LG, Lucent, Motorola,
Panasonic, Samsung, Sanyo, Siemens and Sony. New customers include Cisco and
Nortel.
We offer over 70 products based on our proprietary SuperFlash design
and manufacturing process technology. These products are produced to meet the
needs of a wide range of digital consumer, networking, wireless communications
and Internet computing markets. Our product offerings include standard flash
products, application specific memory products, embedded controllers and mass
storage products. Our memory devices have densities ranging from 256 Kbit to 16
Mbit and are generally used for the storage of program code. Our flash embedded
microcontrollers support concurrent flash read-while-write operations using
In-Application Programming, or IAP. Our mass storage products are used for
storing images, music and other data in devices such as digital cameras and MP3
players.
Our products are manufactured at leading wafer foundries and
semiconductor manufacturers including Samsung Electronics, Sanyo, Seiko-Epson,
TSMC and UMC. We also work with IBM, Samsung Electronics, Sanyo, Seiko-Epson and
TSMC to develop new technology for manufacturing our products. We license our
SuperFlash technology to leading semiconductor companies including Analog
Devices, ATMI, IBM, ISD, Motorola, Oki, Samsung, Sanyo, Seiko-Epson and TSMC to
embed in semiconductor devices that integrate flash memory with other functions
on a single chip.
Our Strategy
Our objective is to be the leading worldwide supplier of flash memory
devices and intellectual property for program code storage applications. In
addition, we intend to leverage our SuperFlash technology to penetrate the high
density mass storage markets. We intend to achieve our objectives by:
Maintaining a leading position in the program code storage market. We
believe that program code storage is an attractive segment of the flash memory
market for a number of reasons. While experiencing continued growth in all
densities, solutions for program code storage applications benefit from the
increasing number and variety of digital electronic applications, longer product
lives and lower density requirements relative to mass data storage applications.
We believe that our proprietary SuperFlash technology is a superior product for
program code storage applications because it offers reliability and high
performance at a low cost.
Continuing to enhance our leading flash memory technology. We believe
that our proprietary SuperFlash technology is less complicated, more reliable,
more scalable and more cost-effective than competing flash memory technologies.
Our ongoing research and development efforts are focused on enhancing our
leading flash memory technology. We are working with IBM, National
Semiconductor, Samsung, Sanyo, Seiko Epson, TSMC, and Vanguard to develop new
process technologies for SuperFlash.
Introducing new products based on SuperFlash. We intend to introduce
new and different application specific products. We are currently developing
ComboMemory, a new class of devices for wireless and portable applications that
combine volatile and nonvolatile memory on a single monolithic silicon chip or
multiple dies in a common package with optimized performance. We are also
developing a new reprogrammable microcontroller family and new mass storage
products. In addition, we plan to introduce a new family of serial flash
products, 8 Mbit firmware hubs and 8, 16, 32 and 64 Mbit concurrent
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flash. ComboMemory and concurrent flash are designed to address the memory needs
of wireless communications devices, such as cellular phones, wireless modems and
pagers.
Maintaining a leading position in licensing embedded flash technology.
We believe that SuperFlash technology is well-suited for embedded memory
applications, which integrate flash memory and other functions onto a monolithic
chip. We intend to continue to license SuperFlash technology to semiconductor
manufacturers for use in embedded flash applications and to enhance our
technology to facilitate integration at higher densities and higher levels of
complexity.
Penetrating the high density mass storage market. Many digital
electronic devices currently being introduced, such as MP3 players, digital
cameras and PDAs, require high density flash memory for storing music, pictures
and other data that require mass storage capacities. We believe that the market
for high density flash memory is attractive based on its potential growth. We
further believe that SuperFlash technology can readily scale to address this
market growth. We intend to leverage our leading technology and strong
manufacturing partnerships to introduce high density mass storage flash products
and to compete effectively in this market.
Our Flash Products
Standard Flash Memory Products. Currently, we offer low and medium
density devices that target a broad range of existing and emerging applications
in the digital consumer, networking, wireless communications and Internet
computing markets. Our products are differentiated based upon attributes such as
density, voltage, access speed, package and predicted endurance.
We have three Standard Flash Memory product families: the Small-Sector
Flash, or SSF, family, the Multi-Purpose Flash, or MPF, family, and the
Many-Time Programmable, or MTP, family. These families allow us to produce
products optimized for cost and functionality to support the broad range of
applications that use nonvolatile memory products.
Among the three product families, SSF provides the highest
functionality. MPF is a lower cost flash solution because it eliminates much of
the peripheral circuitry of SSF products while retaining many of the benefits of
the SuperFlash core--high reliability, faster write performance, geometric
scalability and a low-cost manufacturing process. Both SSF and MPF address
mainstream flash applications that require In System Programming, or ISP. MTP
devices are our lowest cost flash products. Our MTP products provide an
electrically-erasable alternative to EPROM and other low-end flash products that
do not require ISP.
Application-Specific Memory Products. Our application-specific memory
products consist of ComboMemory, FlashBank, Serial Flash and Firmware Hub, or
FWH. These products are designed to address specific applications such as
cellular phones, pagers, PDAs, set-top boxes, hard disk drives and PC BIOS
applications.
Flash Embedded Controllers. Our flash embedded controllers include the
FlashFlex51 microcontroller product family, which features products that are
both software and pin compatible with industry standard 8051 microcontroller
products. This family is designed with two banks of program memory to support
concurrent read and write operations using IAP. It also contains SoftLock
security features allowing IAP while preventing software piracy. These products
target the 8-bit microcontroller market segment with products addressing the
emerging applications for in-system reprogrammable microcontrollers.
Mass Storage Products. Our mass storage products, including the ADC,
ADM, and CompactFlash Card product families address digital cameras, digital
cellular phones, Internet appliances, PDAs, MP3 players, Set-top boxes, and
other types of mass data storage applications. Our mass storage products
leverage our patented ATA controller technology and flash memory design
expertise to offer favorable read/write data transfer rates to the flash memory,
which allows significant speed advantages for applications such as digital
cameras.
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Technology Licensing
We license our SuperFlash technology to semiconductor manufacturers for
use in embedded flash applications. We intend to increase our market share by
entering into additional license agreements for our process and SuperFlash
memory cell technology with leading wafer foundries and semiconductor
manufacturers. We expect to continue to receive licensing fees and royalties
from these agreements. We design our products using patented memory cell
technology and fabricate them using patented process technology. We own 32
patents in the United States relating to certain aspects of our products and
processes, and have filed for several more. In addition, we hold several patents
in Europe and Canada and have filed several foreign patent applications in
Europe, Japan, Korea, Taiwan and Canada.
Customers
We provide high-performance flash memory solutions to customers in four major
markets: digital consumer, networking, wireless communications and Internet
computing. Our customers benefit by obtaining products that we believe are
highly reliable, technologically advanced and that have an attractive cost
structure. As a result of these highly desirable benefits, we have developed
relationships with many of the industry's leading companies. In digital consumer
products, we provide memory components for consumer companies including Canon,
Datel, Freetron, GSL, Inventec, Nintendo, Panasonic, Sanyo, Siemens, Sony, TiVo,
Vtech and Xerox. In networking, we provide memory components for 3Com, E-tech,
Intel and Nortel. In wireless communications, we provide products for companies
including Kirks, Lucent, Maxon, Quanta, RTX, Siemens and VTech. In Internet
computing, we provide wide array of memory components for companies including
Acer, Apple, Asustek, Compaq, Dell, FIC, Gigabyte, Mitac, NEC and Quanta.
The following tables illustrate the geographic regions in which our customers or
licensees operate based on the country to which the product is shipped or
license revenue is generated.
Year ended December 31,
------------------------------------------
1998 1999 2000
----------- --------------- -------------
United States $ 5,099 $ 13,644 $ 76,898
Europe 6,929 7,347 28,376
Japan 13,739 16,396 66,635
Korea 3,756 11,750 42,986
Taiwan 19,134 33,541 133,677
China (including Hong Kong) 14,104 28,776 90,839
Other Asian countries 6,119 9,340 48,102
Rest of world 531 4,000 2,748
----------- --------------- -------------
$ 69,411 $ 124,794 $ 490,261
=========== =============== =============
Sales and Distribution
We sell a majority of our products to customers in Asia through manufacturers'
representatives. We also sell and distribute our products in North America and
Europe through manufacturers' representatives and distributors. Our manufacturer
representative and distributor relationships are generally cancelable by us or
the other parties with reasonable notice.
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Applications
As the Internet, communications and consumer electronics industries
continue to expand and diversify, new applications are likely to be developed.
We believe our products are designed to address this expanding set of
applications:
Digital Consumer Networking Wireless Communications Internet Computing
- ---------------------------------------- -------------------------- --------------------------------------------------
TV Replayer Set-top Box DSL Modem Cellular Phone Network PC
Digital TV CD-ROM Drive Cable Modem Data Pager Notebook PC
Digital Camera CD-RW Drive V.90/56K Modem Cordless Telephone Palm PC
DVD Player DVD-ROM Drive Wireless LAN Cellular Phone GPS X-PC
VCD Player DVD-RAM Drive Network Interface Card Bluetooth Applications Server
MP3 Player DCD-RW Drive Router PC Firmware Hub
Video Game Web Browser VoIP Graphics Card
PDA Hand Held GPS Printer
Electronic Book Digital Camcorder Copier/Scanner
Memory Cards Electronic Toys Bar Code Scanner
Manufacturing
We purchase wafers and sorted die from semiconductor manufacturing
foundries, have this product shipped directly to subcontractors for packaging,
testing, and finishing, and then ship the final product to our customers.
Virtually all of our subcontractors are located in Asia.
Wafer and Sorted Die. We have manufacturing arrangements with National
Semiconductor, Samsung, Sanyo, Seiko-Epson, TSMC, UMC, and Vanguard. During
2000, our major wafer fabrication foundries were TSMC, Sanyo, Samsung and
Seiko-Epson. In 2000, wafer sort, which is the process of taking silicon wafers
and separating them into individual die, was performed at Acer Testing Inc.,
KYE, Lingsen, Samsung, Sanyo, Seiko-Epson and TSMC. Although capacity is not
guaranteed, under these arrangements we generally receive preferential treatment
regarding wafer pricing and capacity. In order to obtain, on an ongoing basis,
an adequate supply of wafers, we have considered and will continue to consider
various possible options, including equity investments in foundries in exchange
for guaranteed production volumes, the formation of joint ventures to own and
operate foundries and the licensing of our proprietary technology. On March 6,
2001, we invested $50.0 million in Shanghai Grace Semiconductor Manufacturing
Corporation, or GSMC. GMSC is a foreign-funded wafer foundry project which will
be located in Shanghai, People's Republic of China.
Packaging, Testing and Finishing. In the assembly process, the
individual die are assembled into packages. Following assembly, the packaged
devices require testing and finishing to segregate conforming from nonconforming
devices and to identify devices by performance levels. Currently, all devices
are tested and inspected pursuant to our quality assurance program at our test
facilities in Sunnyvale, California or at other domestic or international
subcontracted facilities. Finishing operations are performed at our Sunnyvale
facility or at other domestic or international subcontracted facilities before
shipment to customers. Certain facilities currently perform consolidated
assembly, packaging, test and finishing operations at one location. During 2000,
most subcontracted facilities performing the substantial majority of our
operations were in Taiwan. The subcontractors with the largest amount of our
activity are KYE, Lingsen, and PTI. We hold equity investments in three
subcontractors: KYE, PTI, and Apacer. For newly released products, the initial
test and finishing activities are performed at our Sunnyvale facility.
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Research and Development
We believe that our future success will depend in part on the
development of next generation technologies with reduced feature size. During
1998, 1999 and 2000, we spent $14.5 million, $18.2 million, and $41.5 million,
respectively, on research and development. Our research efforts are focused on
process development and product development. Our research strategy is to
collaborate with our partners to advance our technologies. We work
simultaneously with several partners on the development of multiple generations
of technologies. In addition, we allocate our resources and personnel into
category-specific teams to focus on new product development. From time to time
we invest in, jointly develop with or license or acquire technology from other
companies in the course of developing products. For example, in December 2000,
we acquired Agate Semiconductor, Inc., a privately held, memory design company
located in Santa Clara, California.
Competition
The semiconductor industry is intensely competitive and has been
characterized by price erosion, rapid technological change and product
obsolescence. We compete with major domestic and international semiconductor
companies, many of whom have substantially greater financial, technical,
marketing, distribution, manufacturing and other resources than us. Our low to
medium density memory products, sales of which presently account for
substantially all of our revenues, compete against products offered by Advanced
Micro Devices, Inc., Atmel Corporation, STMicroelectronics, Inc., Winbond
Electronics Corporation, and Macronix, Inc. Our high density memory products
compete with products offered by Intel, Advanced Micro Devices, Atmel, Fujitsu
Limited, Sharp Electronics Corporation, Samsung, Mitsubishi Corporation and
Toshiba Corporation. In addition, competition may come from alternative
technologies such as ferroelectric random access memory device, or FRAM,
technology.
The competition in the existing markets for our new products such as
the FlashFlex51 microcontroller product family and the ADC, ADM, and
CompactFlash Card product families is extremely intense. We compete principally
with major companies such as Philips Electronics, Atmel, Intel, and Microchip
Technology Inc. in the microcontroller market and with SanDisk Corporation,
M-Systems and Hitachi Corporation in the memory card and memory module market.
We may, in the future, also experience direct competition from our foundry
partners. We have licensed to each foundry the right to fabricate certain
products based on our proprietary technology and circuit design, and to sell
such products worldwide, subject to royalty payments back to us.
We compete principally on price, reliability, functionality and the
ability to offer timely delivery to customers. During the extreme currency
devaluations in Asia in 1997-1998, we were severely impaired in our ability to
compete on the basis of price. While we believe that our medium density products
currently compete favorably on the basis of reliability and functionality, it is
important to note that our principal competitors have a significant advantage
over us in terms of greater financial, technical and marketing resources. Our
long-term ability to compete successfully in the evolving flash memory market
will depend on factors both within and beyond our control, including access to
advanced process technologies at competitive prices, successful and timely
product development, wafer supply, product pricing, actions of our competitors
and general economic conditions.
Employees
As of December 31, 2000, we employed 455 individuals on a full-time
basis, all but twenty-six of whom reside in the United States. Fourteen
employees reside in Taiwan, four employees reside in Japan, three employees
reside in the United Kingdom, two employees reside in China, and one employee
resides in each of Sweden, Hong Kong, and Korea. Of these 455 employees, 94 were
employed in manufacturing support, 221 in engineering, 88 in sales and marketing
and 52 in administration and finance. No employees are represented by a
collective bargaining agreement, nor have we ever experienced any work stoppage
related to strike activity. We believe that our relationship with our employees
is good.
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Executive Officers and Directors
The following table lists the names, ages and positions of our executive
officers and directors as of December 31, 2000. There are no family
relationships between any director or executive officer of SST. Executive
officers serve at the discretion of the board of directors.
Name Age Position
- ---- --- --------
Bing Yeh (1)(4) 50 President and Chief Executive Officer and Director
Yaw Wen Hu 51 Senior Vice President, Operations and Process
Development and Director
Derek Best 50 Senior Vice President, Sales and Marketing
Michael Briner 53 Senior Vice President, Application Specific Product Group
Isao Nojima 56 Vice President, Standard Memory Product Group
Paul Lui 50 Vice President, Special Product Group
Jeffrey L. Garon 40 Vice President, Finance and Administration and
Chief Financial Officer and Secretary
Tsuyoshi Taira (1)(2)(3) 62 Director
Yasushi Chikagami (1)(2)(3) 62 Director
Ronald Chwang (1)(2)(3) 52 Director
- ---------------------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Stock Option Committee
(4) Sole Member of Non-Officer Stock Option Committee
Bing Yeh, one of our co-founders, has served as our President and Chief
Executive Officer and has been a member of our board of directors since our
inception in 1989. Prior to that, Mr. Yeh served as a senior research and
development manager of Xicor, Inc., a nonvolatile memory semiconductor company.
From 1981 to 1984, Mr. Yeh held program manager and other positions at Honeywell
Inc. From 1979 to 1981, Mr. Yeh was a senior development engineer of EEPROM
technology of Intel Corporation. He was a Ph.D. candidate in Applied Physics and
earned an Engineer degree at Stanford University. Mr. Yeh holds an M.S. and a
B.S. in Physics from National Taiwan University. Mr. Yeh is also the Chairman of
the Monte Jade Science & Technology Association for 2001.
Yaw Wen Hu, Ph.D., joined us in 1993 as Vice President, Technology
Development. In 1997, he was given the additional responsibility of wafer
manufacturing and, in August 1999, he became Vice President, Operations and
Process Development. In January 2000, he was promoted to Senior Vice President,
Operations and Process Development. Dr. Hu has been a member of our board of
directors since September 1995. From 1990 to 1993, Dr. Hu served as deputy
general manager of technology development of Vitelic Taiwan Corporation. From
1988 to 1990, he served as FAB engineering manager of Integrated Device
Technology, Inc. From 1985 to 1988, he was the director of technology
development at Vitelec Corporation. From 1978 to 1985, he worked as a senior
development engineer in Intel Corporation's Technology Development Group. Dr. Hu
holds a B.S. in Physics from National Taiwan University and an M.S. in Computer
Engineering and a Ph.D. in Applied Physics from Stanford University.
Derek Best joined us in June 1997 as Vice President of Sales and
Marketing. In 2000 he was promoted to Senior Vice President, Sales & Marketing.
Prior to joining SST he worked for Micromodule Systems, a manufacturer of high
density interconnect technology, as Vice President Marketing and Sales World
Wide from 1992 to 1996. From 1987 to 1992 he owned his own company, Mosaic
Semiconductor, a semiconductor company. Mr. Best holds an Electrical Engineering
degree from Portsmouth University in England.
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Michael Briner joined us as Vice President, Design Engineering in
November 1997,and become Vice President, Products during 1999. In February 2001,
he was promoted to Senior Vice President, Application Specific Product Group.
From 1993 to 1997, he served as Vice President of Design Engineering for Micron
Quantum Devices, Inc., a subsidiary of Micron Technology, Inc., chartered to
develop and manufacture flash memory products. From 1986 through 1992, he served
as Director of Design Engineering for the Nonvolatile Division of Advanced Micro
Devices, Inc. In this position, he was instrumental in helping AMD become a
major nonvolatile memory manufacturer. Mr. Briner holds a B.S. in Electrical
Engineering from the University of Cincinnati.
Isao Nojima served as our Vice President, Advanced Development since
July 1997 until he was named Vice President, Standard Memory Product Group in
2000. From March 1993 to June 1997 he served as Vice President, Memory Design
and Product Engineering. From 1990 to 1993, Mr. Nojima served as Director of
Design Engineering of Pioneer Semiconductor Corporation, now called Pericom, a
manufacturer of semiconductors. From 1980 to 1990, he served as design manager
of Xicor Inc., a nonvolatile semiconductor company. From 1977 to 1980, he served
as a senior design engineer for Intel Corporation. From 1969 to 1976, he was a
senior researcher at Toshiba's R&D Center in Japan. Mr. Nojima holds a B.S. and
an M.S. in Electrical Engineering from Osaka University in Japan.
Paul Lui joined us as Vice President and General Manager of the Linvex
Product Line in June 1999 until he was named Vice President, Special Product
Group. From 1994 to 1999, he was the president and founder of Linvex Technology
Corporation. From 1987 to 1994, he was the president and chief executive officer
of Macronix, Inc.. From 1981 to 1985, he served as group general manager at VLSI
Technology, Inc. where he was responsible for transferring that company's
technology to Korea. In addition, Mr. Lui has held senior engineering positions
at the Synertek Division of Honeywell and McDonnell Douglas. Mr. Lui holds an
M.S.E.E. degree from University of California, Berkeley and a B.S. degree in
Electrical Engineering and Mathematics from California Polytechnic State
University, San Luis Obispo.
Jeffrey L. Garon joined us as Chief Financial Officer and Vice
President, Finance and Administration and Corporate Secretary in March 1998.
Prior to that, Mr. Garon served as president and senior operating officer of The
Garon Financial Group, Inc., a venture capital and venture consulting firm
specializing in start-ups, turnarounds and restarts, from 1994 to 1998. From
1993 to 1994, he served as a vice president and chief financial officer of
Monster Cable Products, Inc., a leading provider of audio cables and supplies to
consumers and the consumer electronic retail channel. Prior to this, Mr. Garon
held senior financial positions with Visual Edge Technology, Inc., a provider of
large format digital imaging systems, Oracle Corporation, Ashton-Tate
Corporation and Teledyne Microelectronics. Mr. Garon holds a B.S. in Business
Administration Finance from California State University, Northridge and a M.B.A.
from Loyola Marymount University.
Tsuyoshi Taira has been a member of our board of directors since July
1993. Mr. Taira served as a member of the board of directors of Atmel
Corporation from 1987 to 1992. Mr. Taira served as president of Sanyo
Semiconductor Corporation from 1986 to 1993. Mr. Taira was chairman of the Sanyo
Semiconductor Corporation from 1993 to 1996. Mr. Taira left the Sanyo
Semiconductor Corporation in August, 1996. Mr. Taira currently owns and runs a
marketing and management consulting company, Tazan International, Inc. Mr. Taira
holds a B.S. from Tokyo Metropolitan University.
Yasushi Chikagami has been a member of our board of directors since
September 1995. Mr. Chikagami has been chairman of Arise, Inc since 2000. Mr.
Chikagami has also served as director of GVC Corporation and Trident
Microsystems, Inc. since 1993. Mr. Chikagami holds a B.S. in Agricultural
Engineering from Taiwan University and a M.S. in engineering from University of
Tokyo.
Ronald Chwang, Ph.D., is the Chairman and President of Acer Technology
Ventures, America. Dr. Chwang currently serves actively on the board of a number
of ATV's portfolio companies such as Reflectivity, Symmetry Communications
Systems, iRobot, OctaSoft, etc. He also serves on the board of Acer Laboratories
Inc. and Ambit Microsystems Corp. in Taiwan. From 1992 to 1997, Dr. Chwang was
president and chief executive officer of Acer America Corporation. Dr. Chwang
has been with Acer since 1986, serving in various executive positions leading
business units engaged in ASIC products, computer
12
peripherals, and Acer-Altos server system. Before joining Acer, Dr. Chwang
worked for several years in development and management positions at Intel in
Oregon and Bell Northern Research in Ottawa, Canada. Dr. Chwang holds a B.S. in
Electrical Engineering from McGill University and a Ph.D. in Electrical
Engineering from the University of Southern California.
Item 2. Properties
As of January 31, 2001, we occupy eight leased facilities totaling
approximately 188,000 square feet in Sunnyvale, California in which our
executive offices, manufacturing engineering, research and development and
testing facilities are located. Two leases were obtained upon the acquisition of
Linvex and Agate. Those leases expire in February 2001 and March 2002 and are
each less than 2,000 square feet. The leases on five other facilities expire in
2005 and the lease on the last facility expires in 2010. We believe these
facilities are adequate to meet our needs for at least the next 12 months.
Item 3. Legal Proceedings
Atmel Corporation
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 ruled by 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 later reversed by the Federal Circuit Court of Appeals. Thus, four patents
remain at issue in Atmel's District Court case against us.
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 were obligated to indemnify
both to the extent provided in those agreements. As more fully described below,
the settlement with Winbond terminated our indemnity obligations to that
company.
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, U.S. Patent No. 4,451,903 ("the `903 patent," also known as
"Silicon Signature"), the ALJ ruled on May 17, 2000 that it is invalid and
unenforceable because the patent did not name the proper inventors and because
Atmel intentionally misled the U.S. Patent Office. On October 16, 2000, the ITC
overturned the ALJ's recommendation on the `903 patent and ruled that we could
not import into the United States certain products that use this circuit. We
appealed the ITC ruling and in January 2001 the Federal Circuit Court issued an
order upholding the ITC's decision, but has not yet issued a written opinion
setting forth the basis of that order. The ITC also ruled that we do not
infringe the two other patents at issue ("the `811 and `829" patents). Atmel has
appealed that determination. Atmel's appeal brief is due on March 30, 2001, and
our brief is due on or before May 9, 2001. There is currently no schedule for
oral argument or the final determination of this appeal.
Any final decisions in the ITC action will not be dispositive in the pending
lawsuit because Atmel and SST can still pursue their claims in the District
Court action. The District Court has scheduled a hearing for December 15, 2001,
to set a trial date. We intend to vigorously defend ourselves against these
actions.
13
Winbond Electronics
On October 1, 2000, we announced a settlement in our lawsuit with Winbond
Electronics of Taiwan. We filed a lawsuit against Winbond in July 1998 in the
U.S. District Court in San Jose, California pursuant to the termination of our
SuperFlash technology licensing agreement with Winbond. As part of the
settlement, Winbond agreed to a consent judgment and will not contest the
validity and appropriateness of our termination of the licensing agreement in
June 1998. This settlement concludes all litigation between us and Winbond.
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 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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter to a vote of
security holders.
14
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
Price Range of Common Stock
The principal U.S. market for our Common Stock is The Nasdaq Stock
Market's National Market. The only class of our securities that is traded is our
Common Stock. Our Common Stock has traded on The Nasdaq Stock Market's National
Market since November 21, 1995, under the symbol SSTI. The following table sets
forth the quarterly high and low closing sales prices of the Common Stock for
the period indicated as reported by The Nasdaq Stock Market. These prices do not
include retail mark-ups, mark-downs, or commissions. The closing sales price of
SST's Common Stock on December 29, 2000, the last trading day in 2000, was
$11.8125.
1999: High Close Low Close
- ----- ---------- ---------
First Quarter: January 1 - March 31, 1999 $ 1.354 $ 0.802
Second Quarter: April 1 - June 30, 1999 2.500 1.208
Third Quarter: July 1 - September 30, 1999 5.958 2.365
Fourth Quarter: October 1 - December 31, 1999 15.375 4.708
2000: High Close Low Close
- ----- ---------- ---------
First Quarter: January 1 - March 31, 2000 $ 27.458 $ 9.854
Second Quarter: April 1 - June 30, 2000 36.083 20.330
Third Quarter: July 1 - September 30, 2000 34.063 18.604
Fourth Quarter: October 1 - December 31, 2000 27.375 10.125
2001: High Close Low Close
- ----- ---------- ---------
First Quarter: January 1 - March 12, 2001 $ 19.000 $ 9.313
Approximate Number of Equity Security Holders
As of December 31, 2000, there were approximately 79,000 record holders
of our Common Stock.
Dividends
We have never paid a cash dividend on our Common Stock and we intend to
continue to retain earnings, if any, to finance future growth. Accordingly, we
do not anticipate the payment of cash dividends to holders of Common Stock in
the foreseeable future. In addition, our line of credit does not permit the
payment of dividends.
15
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the notes thereto
included elsewhere in this report. The statements of operations data for the
years ended December 31, 1998, 1999 and 2000 and the balance sheet data at
December 31, 1999 and 2000 are derived from, and should be read in conjunction
with, the audited consolidated financial statements and notes thereto included
elsewhere in this report. The statements of operations data for the year ended
December 31, 1996 and 1997 and the balance sheet data at December 31, 1996, 1997
and 1998 are derived from audited financial statements not included in this
report. The results of operations are not necessarily indicative of the results
to be expected for future periods.
Year Ended December 31
--------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- ------------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Net revenues:
Product revenues $90,638 $73,796 $66,875 $118,242 $475,316
License revenues 2,652 1,526 2,536 6,552 14,945
----------- ----------- ----------- ----------- ------------
Total net revenues 93,290 75,322 69,411 124,794 490,261
Cost of revenues 59,494 62,747 62,703 94,652 264,139
----------- ----------- ----------- ----------- ------------
Gross profit 33,796 12,575 6,708 30,142 226,122
----------- ----------- ----------- ----------- ------------
Operating expenses:
Research and development 6,948 8,744 14,527 18,199 41,535
Sales and marketing 5,292 6,587 7,290 10,576 27,968
General and administrative 3,370 9,479 4,592 3,800 14,966
In-process research and development - - - 2,011 3,911
----------- ----------- ----------- ----------- ------------
Total operating expenses 15,610 24,810 26,409 34,586 88,380
----------- ----------- ----------- ----------- ------------
Income (loss) from operations 18,186 (12,235) (19,701) (4,444) 137,742
Interest and other income, net 1,763 2,146 1,573 730 10,510
Interest expense - - (31) (214) (691)
----------- ----------- ----------- ----------- ------------
Income (loss) before provision for (benefit from)
income taxes 19,949 (10,089) (18,159) (3,928) 147,561
Provision for (benefit from) income taxes 7,598 (3,165) (571) 88 41,813
----------- ----------- ----------- ----------- ------------
Net income (loss) $12,351 ($6,924) ($17,588) ($4,016) $105,748
=========== =========== =========== =========== ============
Net income (loss) per share - basic $0.18 ($0.10) ($0.26) ($0.06) $1.23
=========== =========== =========== =========== ============
Net income (loss) per share - diluted $0.16 ($0.10) ($0.26) ($0.06) $1.13
=========== =========== =========== =========== ============
Consolidated Balance Sheet Data:
Total assets $ 80,914 $ 82,539 $ 56,138 $88,806 $ 512,590
=========== =========== =========== =========== ============
Long-term obligations $ 71 $ 66 $ 663 $ 446 $ 279
=========== =========== =========== =========== ============
Shareholders' equity $ 64,788 $ 55,889 $ 38,030 $41,015 $ 416,635
=========== =========== =========== =========== ============
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. Our actual results could differ materially from
those discussed. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below under the heading
"Business Risks", as well as those discussed elsewhere in this report.
Overview
We are a leading supplier of flash memory semiconductor devices for the
digital consumer, networking, wireless communication and Internet computing
markets.
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 1996, 1997 and 1998. These
downturns have been characterized by weakening product demand, production
over-capacity and accelerated decline of selling prices, and in some cases have
lasted for more than a year. We recently began to experience a sharp downturn in
several of our markets late in the fourth quarter of 2000, as our customers
reacted to weakening demand for their products. To date, market conditions have
not improved during early 2001 and our customers have continued to return
product, cancel backlog and/or push out shipments. Our business could be harmed
by industry-wide fluctuations in the future.
We derived 77.6% of our product revenues for 2000 and 80.8% 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 harmed our revenues and operating results during the third and
fourth quarters 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.
Sales to customers and foreign stocking representatives 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 or determinable and collection of the fee is
probable. From time to time, we reexamine the estimated upgrade period relating
to licensed technology to determine if 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 enhancements is recognized upon delivery, if the fee is
fixed or determinable and collection of the fee is probable.
17
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: Years Ended December 31, 2000, 1999, and 1998
Net Revenues
Net revenues were $490.3 million in 2000 compared to $124.8 million in 1999
and $69.4 million in 1998. The increase from both 1999 to 2000 and from 1998 to
1999 was due to increased shipment volume of new and existing products and due
to our ability to raise prices slightly in the second half of 1999 and 2000.
Average selling prices fluctuate due to a number of factors including the
overall supply and demand for our products in the marketplace, maturing product
cycles and declines in general economic conditions. We experienced a sharp
downturn in several of our markets late in the fourth quarter of 2000, as our
customers reacted to weakening demand for their products. To date, market
conditions have not improved during early 2001 and customers have continued to
return product, cancel backlog, and/or push out shipments.
Product Revenues. Product revenues were $475.3 million in 2000, $118.2
million in 1999 and $66.9 million in 1998. The increase from both 1999 to 2000
and from 1998 to 1999 was primarily due to shipments of new products introduced
in the second half of 1998 and during 1999 and 2000. Shipping volumes fluctuate
due to overall industry supply and demand. Product revenues decreased slightly
on a quarterly basis during the fourth quarter of 2000 due to lower shipping
levels and increases in sales return reserves during the fourth quarter. Our
allowance for sales returns increased $8.2 million due primarily to anticipated
product returns related to changing market conditions at the end of 2000.
License Revenues. Revenues from license fees and royalties were $14.9 million
in 2000, $6.6 million in 1999 and $2.5 million in 1998. The increase from 1999
to 2000 was primarily due to $10.4 million in license fee received as part of a
legal settlement. We anticipated another $5.0 million to be paid under this
legal settlement in each quarter of 2001. The increase from 1998 to 1999 was
primarily due to recognition of up-front fees paid by licensees and an increase
in the number of licensees from 1998. We anticipate that license revenues will
fluctuate significantly in the future.
Gross Profit
Gross profit was $226.1 million, or 46.1% of net revenues, in 2000, $30.1
million, or 24.2% of net revenues, in 1999, and $6.7 million, or 9.7% of net
revenues, in 1998. Gross profit increased across all periods due to increased
shipments of existing cost-reduced products, increased shipments of new, higher
margin products, and increased average selling prices on both older and newer
products. We also wrote down $4.3 million of inventory related to products that
we determined to be excess or obsolete during 2000.
Operating Expenses
Our operating expenses consist of research and development, sales and
marketing, and general and administrative expenses. Operating expenses were
$88.4 million, or 18.0% of net revenues, in 2000, as compared to $34.6 million
or 27.7% of net revenues, in 1999, and $26.4 million, or 38.0% of net revenues,
in 1998. The increase in absolute dollars from 1999 to 2000 was primarily due to
increased profit sharing with employees, increased commissions, and increased
salaries and benefits due to hiring additional personnel. The increase in
absolute dollars from 1998 to 1999 was primarily due to increased commissions
and increased salaries and benefits due to hiring additional personnel. 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.
18
Research and development. Research and development expenses include costs
associated with the development of new products, enhancements to existing
products, quality assurance activities and occupancy costs. These costs consist
primarily of employee salaries, benefits and the cost of materials such as
wafers and masks. Research and development expenses were $41.5 million, or 8.5%
of net revenues, during 2000, as compared to $18.2 million, or 14.6% of net
revenues, during 1999 and $14.5 million, or 20.9% of net revenues during 1998.
Research and development expenses increased 128.2% from 1999 primarily due to an
$8.5 million expense for profit sharing and expenses related to increased
engineering headcount, materials costs and occupancy costs. Research and
development expenses increased 25.3% from 1998 due to increased personnel costs,
consisting of salaries, payroll taxes, and benefits, 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 primarily of
commissions to stocking representatives, personnel costs, and occupancy costs,
as well as travel and entertainment and promotional expenses. Sales and
marketing expenses were $28.0 million, or 5.7% of net revenues, in 2000 as
compared to $10.6 million, or 8.5% of net revenues, in 1999 and $7.3 million, or
10.5% of net revenues, during 1998. Sales and marketing expenses in 2000
increased 164.4% from 1999 and increased 45.1% in 1999 from 1998 due to
increased commissions owed on higher product revenues, increased personnel
costs, and increased building occupancy costs due to the lease of additional
space. We expect sales and marketing expense to increase in absolute dollars as
we continue to expand our sales and marketing efforts. In addition, fluctuations
in revenues will cause fluctuations in sales and marketing expense as it impacts
our commissions expense.
General and administrative. General and administrative expenses consist of
salaries for administrative, executive and finance personnel, recruiting costs,
professional services and legal fees and allowances for doubtful accounts.
General and administrative expenses were $15.0 million, or 3.1% of net revenues,
in 2000 as compared to $3.8 million, or 3.0% of net revenues, in 1999 and $4.6
million, or 6.6% of net revenues, during 1998. Expenses increased 293.8% from
1999 to 2000 due to increased legal, personnel, occupancy expenses and
depreciation expense associated with our new Oracle ERP system, which we
implemented in January 2000. General and administrative expenses decreased from
$4.6 million to $3.8 million from 1998 to 1999 due to the reversal of certain
legal accruals associated with the settlement of our lawsuit with Intel in 1999.
Our allowance for bad debt increased $477,000 due to the increase of our
accounts receivable from 1999 to 2000. 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 may also incur additional expenses in connection with the
Atmel litigation. For further information on this litigation see "Legal
Proceedings."
In-process Research and Development Charge. A charge of $3.9 million, or 0.8%
of net revenues, in 2000, relates to the expense for in-process research and
development incurred during the acquisition of Agate Semiconductor Inc. Refer
also to Note 7 of the Notes to the Consolidated Financial Statements. The fair
value of Agate's patents, workforce, and the technology currently under
development was determined by an independent appraiser using the income approach
for the patents and technology and the cost approach for the workforce. The
income approach discounts expected future cash flows to present value. The
discount rates used in the present value calculations were derived from a
weighted average cost of capital analysis, adjusted upward by a premium of 20%
to reflect additional risks inherent in the development life cycle. We believe
that the pricing model related to this acquisition is consistent within the
high-technology industry. We do not expect to achieve a material amount of the
expense reductions or synergies as a result of integrating the acquired
in-process technology. Therefore the valuation assumptions do not include
anticipated cost savings. In-process research and development valued at $3.9
million consisted of a single project to develop a high-density
multiple-bit-per-cell flash memory chip targeted for high-capacity, low cost
applications such as digital cameras, MP3 players, cellular telephones and
pagers. At the time of the acquisition the estimated cost to complete the
project was $2 to $3 million and the chip was approximately 50% complete. The
risk adjusted discount rate relating to in-process technology determined by the
independent appraiser to be 40.5%.
19
We expect that the multiple-bit-per-cell chip will be completed and begin to
generate cash flows within 12 to 18 months from the date of the acquisition.
However, development of the multiple-bit-per-cell remains a significant risk due
to the remaining effort to achieve technical viability, rapidly changing
customer markets, uncertain standards for new products and significant
competitive threats from numerous companies. The nature of the efforts to
develop the multiple-bit-per-cell chip into a commercially viable product
consists principally of planning, designing and testing activities necessary to
determine that the multiple-bit-per-cell chip can meet market expectations,
including functionality and technical requirements. Failure to bring the
multiple-bit-per-cell chip to market in a timely manner could result in a lost
opportunity to capitalize on emerging markets. Failure to achieve the expected
levels of revenues and net income from the multiple-bit-per-cell chip will
negatively impact the return on the investment expected at the time of the
acquisition and potentially result in impairment of other assets related to the
development activities.
A charge of $2.0 million, or 2% of net revenues, in 1999, relates to the
expense for in-process research and development incurred during the acquisition
of Linvex Technology Corporation. Refer also to the Notes to the Consolidated
Financial Statements. The fair value of Linvex' core technology, existing
products, as well as the technology currently under development was determined
by an independent appraiser using the income approach, which discounts expected
future cash flows to present value. The discount rates used in the present value
calculations were derived from a weighted average cost of capital analysis,
adjusted upward by a premium of 5% to reflect additional risks inherent in the
development life cycle. We expect that the pricing model related to this
acquisition will be considered standard within the high-technology industry. We
do not expect to achieve a material amount of expense reductions or synergies as
a result of integrating the acquired in-process technology. Therefore the
valuation assumptions do not include anticipated cost savings. In process
research and development valued at $2.0 million consisted of a single project to
combine flash and SRAM memory on a single chip (the ComboMemory chip). At the
time of the acquisition the estimated cost to complete the ComboMemory chip was
$1.1 million and the chip was approximately 42% complete. The risk adjusted
discount rate relating to in-process technology was 40%. During late 2000 and
early 2001, the ComboMemory chip was completed and began to generate cash
flows. However, if we fail to achieve the expected levels of revenues and net
income from the ComboMemory chip, this could negatively impact the return on
investment expected at the time of the acquisition and potentially result in
impairment of other assets related to the development activities.
Actions and comments regarding other companies from the Securities and
Exchange Commission have indicated that they are reviewing the current valuation
methodology of purchased in-process research and development relating to
acquisitions. The Commission is concerned that some companies are writing off
more of the value of an acquisition than is appropriate. We believe that we are
in compliance with all of the rules and related guidance as they currently
exist. However, the Commission may seek to reduce the amount of purchased
in-process research and development we have previously expensed. This would
result in the restatement of our previously filed financial statement and could
have a material negative impact on the financial results for the period
subsequent to the acquisition.
Interest Income. Interest income was approximately $9.9 million, or 2.0% of
net revenues, during 2000, as compared to $714,000, or 0.6% of net revenues,
during 1999, and $1.5 million, or 2.2% of net revenues, during 1998. Interest
income increased from 1999 to 2000 due to the receipt of cash proceeds from a
follow-on public offering and private placement, which closed on March 27, 2000,
and the underwriters exercise of an over-allotment option which closed April 13,
2000. Interest income decreased from 1998 to 1999 due to a decrease in cash
during that period.
Interest Expense. Interest expense was approximately $691,000 during 2000
as compared to $214,000 during 1999 and $31,000 during 1998. Interest expense
relates to borrowing prior to the completion of a follow-on public offering and
to fee activity under our line of credit. Interest expense increased each year
due to increased borrowing under our line of credit. Interest expense charges
will continue in order to maintain the line of credit facility.
20
Other income, net. Other income of $630,000 in 2000 consists primarily of the
receipt of a dividend of approximately $569,000 from an investee company during
the fourth quarter of 2000.
Provision for (Benefit from) Income Taxes
The provision for (benefit from) income taxes was approximately $41.8 million
in 2000, approximately $88,000 in 1999 and ($571,000) in 1998. During 1998, we
created a valuation allowance because the cumulative net operating losses
incurred exceeded the amount of tax carry back available. During 2000 we
reversed the entire allowance. This reversal was due to our increased earnings
and was based on management's assessment that it is more likely than not that
all the net deferred tax assets will be realized through future taxable
earnings. See Note 8 of the Notes to the Consolidated Financial Statements of
this Annual Report on Form 10-K.
Segment Reporting
Our business has two reportable segments: flash products and technology
licensing. Flash products comprise our standard memory products, our application
specific memory products, flash-embedded controllers, mass storage products and
special 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.
The table below presents information about reported segments for the three years
ended December 31:
2000 (in thousands):
-----------------------------------------
Flash Technology
Products Licensing Total
---------- ---------- ----------
Revenues $ 475,316 $ 14,945 $ 490,261
Gross profits $ 211,177 $ 14,945 $ 226,122
1999 (in thousands):
------------------------------------------
Flash Technology
Products Licensing Total
---------- ---------- ----------
Revenues $ 118,242 $ 6,552 $ 124,794
Gross profits $ 23,590 $ 6,552 $ 30,142
1998 (in thousands):
---------------------------------------------
Flash Technology
Products Licensing Total
---------- ---------- ----------
Revenues $ 66,875 $ 2,536 $ 69,411
Gross profits $ 4,172 $ 2,536 $ 6,708
21
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133," which deferred the effective date until the first
fiscal year beginning after June 15, 2000. In June 2000, the FASB issued SFAS
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities-an Amendment of SFAS 133." SFAS No. 138 amends certain terms
and conditions of SFAS 133. SFAS 133 requires that all derivative instruments be
recognized at fair value as either assets or liabilities in the statement of
financial position. The accounting for changes in the fair value (i.e., gains or
losses) of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of hedging
relationship. We will adopt SFAS No. 133, as amended, in our quarter ending
March 31, 2001. The adoption of SFAS No. 133 will not have a material impact on
our financial statements.
Liquidity and Capital Resources
Operating activities. Cash provided by operations was $43.5 million in 2000
and relates primarily to net income of $105.7 million offset by accounts
receivable increase of $81.6 million and an increase in accounts receivable from
related parties of $14.4 million, all due to increased sales in 2000. Increases
in trade accounts payable of $20.0 million, trade payables to related parties of
$7.3 million, and accrued expenses of $28.5 million and deferred revenue of
$11.1 million were offset by increases in inventory of $47.8 million and
increases in other current and noncurrent assets of $11.6 million. Cash used in
operations was $35.8 million in 1999 and relates primarily to the increase in
accounts receivable and accounts receivable from related parties of $26.4
million and the increase in inventories of $24.7 million due to the
production ramp, offset in part by an $8.4 million increase in trade accounts
payable.
Investing activities. Cash used in investing activities of $173.1 million
during 2000 consisted primarily of investments of cash in available-for-sale
marketable securities. We also made strategic equity investments in privately
held companies which are either subcontractors to our production process or
customers; we also acquired equipment, invested in enterprise resource planning
software, and made leasehold improvements. Cash used in investing activities
during 1999 consisted primarily of $7.9 million to acquire test equipment,
furniture and fixtures. Planned capital spending for 2001 is currently
approximately $27.0 million to be used primarily for test equipment and design
engineering tools for research and development, information systems
infrastructure, and leasehold improvements.
On March 6, 2001, we invested $50.0 million in Shanghai Grace Semiconductor
Manufacturing Corporation (GSMC). GMSC is a foreign-funded wafer foundry project
and will be located in Shanghai, P.R.C.
Financing activities. Our financing activities provided cash of approximately
$237.5 million during 2000. The cash provided was primarily from the issuance of
common stock for $257.5 million and primarily relates to net proceeds from a
follow-on public offering in which we issued and sold 12,075,000 shares of
common stock, a private placement in which we issued and sold 504,000 shares of
common stock, and $3.8 million from common stock issued under the employee stock
purchase plan and the exercise of employee stock options, offset by the
repayment of our entire line of credit at the end of March, 2000. Cash provided
by financing activities during 1999 consisted primarily of borrowings under the
line of credit of $42.2 million offset by payments of $22.9 million under that
same line.
22
Principal sources of liquidity at December 31, 2000 consisted of $249.0
million of cash, cash equivalents, and short-term marketable securities and the
line of credit. As of December 31, 2000 we had no borrowing on our line of
credit as this credit facility was paid off during March, 2000. However we
continue to have access to this facility should we need it. As of December 31,
2000, our line of credit was for $25 million. This agreement expires in
September 2002. Borrowing is limited to 80.0% of eligible world-wide accounts
receivable and is also reduced by any letters of credit issued under a $25
million subagreement to this line. Therefore, as of December 31, 2000, our
actual credit available under this line was approximately $4.0 million. The line
bears interest at a rate of the bank's reference rate (9.5% at December 31,
2000) plus 0.5%. There is a minimum interest rate of 6.0%. We are required to
maintain specified levels of tangible net worth. Under the agreement we are not
permitted to pay a dividend. We must pay an unused line fee at the annual rate
of one quarter of one percent on the unused portion. As of December 31, 2000, we
were in compliance with the covenants of this agreement. Subsequent to December
31, 2000 the line of credit was increased to $35 million.
Purchase Commitments. We have committed to pay $50.0 million in 2001, subject
to certain business conditions, to secure increased wafer capacity in 2001 and
2002.
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.
23
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. Although we were
profitable in 2000, we incurred net losses in fiscal 1997, 1998 and 1999. 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:
o the availability, timely delivery and cost of wafers from our suppliers;
o competitive pricing pressures and related changes in selling prices;
o fluctuations in manufacturing yields and significant yield losses;
o new product announcements and introductions of competing products by us
or our competitors;
o product obsolescence;
o lower of cost or market inventory adjustments;
o changes in demand for, or in the mix of, our products;
o the gain or loss of significant customers;
o market acceptance of products utilizing our SuperFlash(R) technology;
o changes in the channels through which our products are distributed and
the timeliness of receipt of distributor resale information;
o exchange rate fluctuations;
o general economic, political and environmental-related conditions, such
as natural disasters;
o difficulties in forecasting, planning and management of inventory
levels;
o unanticipated research and development expenses associated with new
product introductions; and
o the timing of significant orders and of license and royalty revenue.
A downturn in the market for products such as personal computers and cellular
telephones that incorporate our products can also harm our operating results.
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:
o sudden drops in consumer demand which causes customers to cancel
backlog, push out shipment schedules, or reduce new orders, possibly
due to a slowing economy or inventory corrections among our customers;
o significant declines in selling prices that occur because of
competitive price pressure during an over-supply market environment;
o 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
o 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.
24
Cancellations or rescheduling of backlog may result in lower future revenue and
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. We experienced a sharp downturn in several of our
markets late in the fourth quarter of 2000, as our customers reacted to
weakening demand for their products. To date, market conditions have not
improved during early 2001 and our customers have continued to return product,
cancel backlog and/or push out shipments. Our business could be harmed by
industry-wide fluctuations in the future.
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. Substantially all of our products are manufactured by four
foundries, Taiwan Semiconductor Manufacturing Co., Ltd., in Taiwan, Sanyo
Electric Co., Ltd., in Japan, Seiko-Epson Corp. in Japan, and Samsung
Electronics Ltd. in Korea. We anticipate that these foundries, together with
National Semiconductor Corporation in the United States and Vanguard
International Semiconductor Corporation in Taiwan, will manufacture the majority
of our products in 2001. On March 6, 2001, we invested $50.0 million in Shanghai
Grace Semiconductor Manufacturing Corporation (GSMC). GMSC is a foreign-funded
wafer foundry project which will be located in Shanghai, P.R.C. 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 harm our operating
results.
Our revenues may be impacted by our ability to obtain adequate wafer supplies
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 harm our
operating results.
If we are unable to increase our manufacturing capacity, our revenues may
decline.
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. We are
continually engaged in attempting to secure additional manufacturing capacity to
support our long-term growth. In the longer term we may determine that it is
necessary to invest substantial capital in order to secure appropriate
production capacity commitments. If we cannot secure additional manufacturing
capacity on acceptable terms, our ability to grow will be impaired and our
operating results will be harmed.
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 wafer 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.
25
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 our 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 and
higher costs of materials.
We depend on independent subcontractors to assemble and test our products. Our
reliance on these subcontractors involves the following significant risks:
o reduced control over delivery schedules and quality;
o the potential lack of adequate capacity during periods of strong demand;
o difficulties selecting and integrating new subcontractors;
o limited warranties on products supplied to us;
o potential increases in prices due to capacity shortages and other factors;
and
o 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.
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 harm 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
26
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:
o rapidly changing technologies;
o evolving and competing industry standards;
o changing customer needs;
o frequent new product introductions and enhancements;
o increased integration with other functions; and
o 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 new 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 believe that products for these applications will encounter intense
competition and be highly price 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.
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
27
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 harm our business.
Our ability to compete successfully will depend, in part, on our ability to
protect our intellectual property rights.
We rely on a combination of patent, trade secrets, copyrights, mask work 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. We own 32 patents in the United
States relating to our products and processes, and have filed for several more.
In addition, we hold several patents in Europe and Canada, and have filed
several foreign patent applications in Europe, Japan, Korea, Taiwan and Canada.
We cannot assure you that any pending patent application will be granted. Our
operating results could be harmed by the failure to protect our intellectual
property.
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 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, with Winbond in October 2000, and
the Atmel 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 harm 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 harm the market 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 lawsuit with Atmel,
we expect this litigation to consume substantial amounts of our financial and
managerial resources. At any time Atmel may file additional claims against us,
28
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 1998, 1999 and 2000, our export product and licensing revenues accounted
for approximately 92.7%, 89.1% and 84.3% 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 harm our operating results.
These risks include:
o difficulties in complying with regulatory requirements and standards;
o tariffs and other trade barriers;
o costs and risks of localizing products for foreign countries;
o reliance on third parties to distribute our products;
o longer accounts receivable payment cycles;
o potentially adverse tax consequences;
o limits on repatriation of earnings; and
o burdens of complying with a wide variety of foreign laws.
We derived 80.8% and 77.6% of our product revenue from Asia during 1999 and
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, 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. 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 delay
production or shipment of our products. Any kind of activity of this nature or
even rumors of such activity could harm our operations, revenues, operating
results, and stock price.
Because a small number of customer accounts are responsible for a substantial
portion of our revenues, our revenues could decline due to the loss of one of
these customer accounts.
In the past, more than half of our revenues have come from a small number of
customer accounts. For example, product sales to our top 10 customer accounts
represented approximately 62.8%, 53.6% and 43.0% of our product revenues for
1998, 1999 and 2000, respectively. During 2000, 7 of our top 10 accounts were
stocking representatives, two were domestic distributors and one was an OEM. In
1998, one customer account represented 15.2% of product sales. Another customer
account represented 10.7% and 12.4% of product sales in 1998 and 1999,
respectively. No single customer account represented 10.0% or more of product
revenues during 2000. If we were to lose any of these customer accounts or
experience any substantial reduction in orders from these customer accounts, our
revenues and operating results would suffer. In addition, the composition of our
major customer account base changes from year to year as the market demand for
our end customers' products change.
29
We do not typically enter into long-term contracts with our customers, and the
loss of a major customer could 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.
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.
Prolonged electrical power outages or shortages, or increased costs of energy
could harm our business.
Our design and process research and development facilities and our corporate
offices are located in California, which is currently susceptible to power
outages and shortages as well as increased eneregy costs. To limit this
exposure, we are in the process of securing back-up generators and power
supplies to our main California facilities. While the majority of our production
facilities are not located in California, more extensive power shortages in the
state could delay our design and process research and development as well as
increase our operating costs.
We depend on stocking representatives and distributors to generate a majority of
our revenues.
We rely on stocking representatives and distributors to establish and maintain
customer relationships and, at times, to sell our products and these accounts
could discontinue their relationship with us or discontinue selling our products
at any time. Two of our stocking representatives are responsible for
relationships with customers which account for substantially all of our product
sales in Taiwan, which were 28.3% and 25.5% of our net product revenues during
1999 and 2000. One stocking representative was responsible for relationships
with customers which accounted for substantially all of our sales in China,
including Hong Kong, during 1999 and 2000, which accounted for 24.3% and 19.1%
of our total product revenues during 1999 and 2000, respectively. The loss of
any of these stocking representatives, or any other significant stocking
representative or distributor could harm our operating results by impairing our
ability to sell our products to these customers.
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. We are currently
implementing a supply-chain management system and a vendor electronic data
interface system. 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
harmed. If we fail to successfully implement new management information systems,
our business may suffer severe inefficiencies that may harm the results of our
operations.
30
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.
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 derive substantially all of our revenues, continued to suffer from
excess capacity in 1996, 1997 and 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 2000,
deteriorating market conditions at the end of 2000 and early 2001 could result
in the eventual decline of our selling prices and, if such declines 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 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to risks associated with foreign exchange rate
fluctuations due to our international manufacturing and sales activities. These
exposures may change over time as business practices evolve 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, Silicon Technology, Co., Ltd.. If we consider the value of this
affiliate in which we have a 11% interest, to be impaired, we would write off,
or expense, some or all of our approximately $939,000 investment. Similarly, a
downturn in the economy of Taiwan could impair the value of equity investments
made there, which totaled $18.4 million at December 31, 2000.
At any time, fluctuations in interest rates could effect interest
earnings on our cash, cash equivalents and short-term investments, any interest
expense owed on the line of credit facility, or the fair value of our investment
portfolio. 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
31
not hedge these interest rate exposures.
Item 8. Consolidated Financial Statements and Supplementary Data
The consolidated financial statements, together with the report thereon
of PricewaterhouseCoopers LLP, independent accountants, dated January 31, 2001,
except for Note 12, which is as of March 6, 2001, are included in a separate
section of this Report.
Supplementary Data: Selected Consolidated Quarterly Data
The following table presents our unaudited consolidated statements of
operations data for each of the eight quarters in the period ended December 31,
2000. In our opinion, this information has been presented on the same basis as
the audited consolidated financial statements included in a separate section of
this report, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts below to present fairly the
unaudited quarterly results when read in conjunction with the audited
consolidated financial statements and related notes. The operating results for
any quarter should not be relied upon as necessarily indicative of results for
any future period. We expect our quarterly operating results to fluctuate in
future period due to a variety of reasons, including those discussed in
"Business Risks".
Quarter Ended
---------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999 2000 2000 2000 2000
---- ---- ---- ---- ---- ---- ---- ----
Net revenues: (in thousands, except per share data)
Product revenues $17,793 $20,433 $32,508 $47,508 $61,813 $102,076 $162,365 $149,062
License revenues 535 2,558 2,639 820 501 1,110 1,356 11,978
--------- ---------- --------- ---------- ---------- ---------------------- -----------
Total net revenues 18,328 22,991 35,147 48,328 62,314 103,186 163,721 161,040
Gross profit 1,349 4,966 9,206 14,621 25,839 46,102 73,635 80,546
Income (loss) from operations (6,788) (3,831) 773 5,402 10,497 27,365 49,222 50,658
Net income (loss) (6,577) (3,630) 448 5,743 9,644 22,536 36,266 37,302
Net income (loss) per share-basic ($0.09) ($0.05) $0.01 $0.08 $0.13 $0.25 $0.41 $0.41
Net income (loss) per share-diluted ($0.09) ($0.05) $0.01 $0.07 $0.11 $0.24 $0.37 $0.39
Quarterly Discussion
Net revenues. During 1999 and 2000, units shipped continued to increase and new
products began to ship at high volume levels throughout each quarter of 1999 and
2000, except from the third to the fourth quarter of 2000. The decrease during
that period was due to lower shipping levels and increases in the allowance for
sales returns during the fourth quarter. These adverse market conditions may
continue well into 2001. License revenues as a portion of net revenues
fluctuated from quarter to quarter and will continue to fluctuate in the future.
During the fourth quarter of 2000 $10.4 million of the $12.0 million of license
revenue recognized was earned as a result of a legal settlement.
Gross profit. Gross margin increased in 1999 and 2000 from quarter to quarter
due to the recovery of margin on our existing products in the first half of 1999
and the volume shipment of new products with improved gross margin in the second
half of 1999 and during 2000.
Income (loss) from operations. Income from operations increased during each
quarter of 2000 due to increasing shipment volumes of new products with higher
margins. Loss from operations decreased in the first half of 1999 and income
from operations increased in the second half of 1999 as we returned to
profitability in the third quarter of 1999. This has been due to the overall
increases in units shipped for both new and existing products and due to selling
price increases on our existing products in the second half of 1999.
Net income (loss) and net income (loss) per share. Net income increased
during each quarter of 2000 due to increasing shipment volumes of new products
with higher margins. Net loss decreased in the first half of 1999 and net income
increased in the second half of 1999 as we returned to profitability in the
third quarter of
32
1999. This has been due to the overall increases in units shipped for both new
and existing products and due to selling price increases on our existing
products in the second half of 1999.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item will be contained in our
definitive Proxy Statement with respect to our Annual Meeting of Stockholders
under the captions "Election of Directors - Nominees," and "Security Ownership
of Certain Beneficial Owners and Management - Compliance with the Reporting
Requirement of Section 16(a)," and is incorporated by reference into this
report. The information relating to our executive officers and directors is
contained in Part I, Item 1 of this report.
Item 11. Executive Compensation
The information required by this item will be contained in our
definitive Proxy Statement with respect to our Annual Meeting of Stockholders
under the caption "Executive Compensation," and is incorporated by reference
into this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be contained in our
definitive Proxy Statement with respect to our Annual Meeting of Stockholders
under the caption "Security Ownership of Certain Beneficial Owners and
Management," and is incorporated by reference into this report.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be contained in our
definitive Proxy Statement with respect to our Annual Meeting of Stockholders
under the caption "Certain Transactions," and is incorporated by reference into
this report.
33
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.
(a) (1) Consolidated Financial Statements. The index to the consolidated
financial statements is found on page 40 of this Report.
(2) Financial Statement Schedule. Financial statement schedule Number
II is included.
(3) Exhibits. See Exhibit Index in part (c), below.
(b) Reports on Form 8-K. A report on Form 8-K was filed on October 3,
2000.
(c) Index to Exhibits.
Exhibit
Number Description of Document
- ------- --------------------------------------------------------------------
3.2 ++ Bylaws of SST.
3.4 + Form of Restated Articles of Incorporation of SST to be effective
upon the closing of the offering, dated November 3, 1995.
3.5 ++ Certificate of Amendment of the Restated Articles of Incorporation
of Silicon Storage Technology, Inc.
3.6 Amendment No. 1 to Rights Agreement
4.1 + Reference is made to Exhibits 3.2.
10.1 + Equity Incentive Plan and related agreements.
10.2 + 1990 Stock Option Plan and related agreements.
10.3 + Employee Stock Purchase Plan.
10.4 + 1995 Non-Employee Director's Stock Option Plan.
10.5 + Profit Sharing Plan.
10.6 + Lease Agreement between SST and Sonora Court Properties, dated May
4, 1993, as amended.
10.7 + Lease Agreement between SST and Coast Properties, dated May 4, 1995,
as amended.
10.13++ Documents relating to investment in Japanese company.
10.15++ License Agreement between SST and Seiko Epson Corporation dated
March 31, 1996.
10.16++ License Agreement between SST and Taiwan Semiconductor Manufacturing
Co., Ltd. dated February 26, 1997.
10.17++ Lease amendment, dated March 4, 1998, between SST and Sonora Court
Properties.
10.18++ Lease Amendment, dated March 4, 1998, between SST and Coast
Properties.
- --------------
+ Previously filed as an Exhibit to the Registration Statement filed on
Form S-1 (33-97802) and incorporated by reference herein.
++ Previously filed as an Exhibit to Form 10-K or Form 10-Q and incorporated by
reference herein.
* Confidential treatment has been requested for portions of this exhibit.
34
Exhibit
Number Description of Document
- ------- --------------------------------------------------------------------
10.20++ Loan and Security Agreement amendment between SST and Foothill
Capital Corporation dated December 8, 1998.
10.21++ 0.25 Micron Agreement between SST and Motorola, Inc., dated May 5,
1999.
10.22++ Loan and Security Agreement amendment between SST and Foothill
Capital Corporation, dated September 30, 1999.
10.23++ Second Amendment to Lease, dated September 13, 1999, between SST and
Coast Properties.
10.24++ Lease Agreement between SST and Bhupinder S. Lehga and Rupinder K.
Lehga, dated November 15, 1999.
10.25++ Lease Agreement between SST and The Irvine Company, dated November
22, 1999.
10.26*++ Agreement between SST and Samsung Electronic Co Ltd., dated March
19, 1998.
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.
10.31 Amendment Number Six to Loan and Security Agreement.
- --------------
+ Previously filed as an Exhibit to the Registration Statement filed on
Form S-1 (33-97802) and incorporated by reference herein.
++ Previously filed as an Exhibit to Form 10-K or Form 10-Q and incorporated by
reference herein.
* Confidential treatment has been requested for portions of this exhibit.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Sunnyvale, County of Santa Clara, State of California, on the 29th day of March,
2001.
SILICON STORAGE TECHNOLOGY, INC.
By: /s/ BING YEH
-------------
Bing Yeh
President and Chief Executive Officer
(Principle Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of SST and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
President, Chief Executive March 29, 2001
/S/ BING YEH Officer and Director (Principal
- ---------------------- Executive Officer)
Bing Yeh
Vice President Finance & Administration, March 29, 2001
/S/ JEFFREY L. GARON Chief Financial Officer and Secretary
- ---------------------- (Principal Financial and Accounting Officer)
Jeffrey L. Garon
March 29, 2001
Senior Vice President, Operations and Process
/S/ YAW WEN HU Development and Director
- ----------------------
Yaw Wen Hu
March 29, 2001
/s/ TSUYOSHI TAIRA
- ----------------------
Tsuyoshi Taira Director
March 29, 2001
/s/ RONALD CHWANG
- ----------------------
Ronald Chwang Director
March 29, 2001
/s/ YASUSHI CHIKAGAMI
- ----------------------
Yasushi Chikagami Director
36
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Silicon Storage Technology, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated January 31, 2001, except for Note 12, which is as of March 6, 2001,
appearing on page 41 of this Annual Report on Form 10-K of Silicon Storage
Technology, Inc. also included an audit of the financial statement schedule
listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
January 31, 2001
37
SCHEDULE II
SILICON STORAGE TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Description Balance at Charged to Write-off Balance at
- ----------- Beginning of Costs and of Accounts End of
Period Expenses /Other Period
------------ ---------- ----------- ----------
Year ended December 31, 1998
Allowance for doubtful accounts $ 720 $ 13 $ 170 $ 563
Allowance for sales returns $ 669 $ (609) $ - $ 60
Allowance for excess and obsolete inventories $ 3,733 $ 2,740 $ 5,051 $ 1,422
Valuation allowance on deferred tax $ - $ 9,607 $ - $ 9,607
Year ended December 31, 1999
Allowance for doubtful accounts $ 563 $ 32 $ 60 $ 535
Allowance for sales returns $ 60 $ 144 $ 163 $ 41
Allowance for excess and obsolete inventories $ 1,422 $ 3,293 $ 4,565 $ 150
Valuation allowance on deferred tax $ 9,607 $ 3,092 $ - $12,699
Year ended December 31, 2000
Allowance for doubtful accounts $ 535 $ 477 $ 229 $ 783
Allowance for sales returns $ 41 $ 8,166 $ - $ 8,207
Allowance for excess and obsolete inventories $ 150 $ 4,261 $ 1,895 $ 2,516
Valuation allowance on deferred tax $ 12,699 $(12,699) $ - $ -
38
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-83981) and Form S-8 (No. 333-47388, 333-33130
and 0-26944) of Silicon Storage Technology, Inc. of our report dated January 31,
2001, except for Note 12, which is as of March 6, 2001, relating to the
financial statements, which appears in this Form 10-K. We also consent to the
incorporation by reference of our report dated January 31, 2001 relating to the
financial statement schedule, which appears in this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
March 29, 2001
39
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants......................................... 41
Consolidated Balance Sheets............................................... 42
Consolidated Statements of Operations..................................... 43
Consolidated Statements of Shareholders' Equity
and Comprehensive Income (Loss)........................................ 44
Consolidated Statements of Cash Flows..................................... 45
Notes to Consolidated Financial Statements................................ 46
40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Silicon Storage Technology, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and comprehensive
income (loss) and of cash flows present fairly, in all material respects, the
financial position of Silicon Storage Technology, Inc. and its Subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
January 31, 2001, except for Note 12,
which is as of March 6, 2001.
41
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
December 31,
------------------------
1999 2000
----------- -----------
Current assets:
Cash and cash equivalents $ 1,223 $ 109,086
Short-term investments - 139,963
Trade accounts receivable-unrelated parties, net 33,285 106,258
Trade accounts receivable-related parties 5,573 20,000
Inventories 29,766 73,290
Deferred tax asset - 9,491
Other current assets 3,341 14,835
---------- ----------
Total current assets 73,188 472,923
Equipment, furniture and fixtures, net 11,131 16,874
Other assets 4,487 22,793
---------- ----------
Total assets $ 88,806 $ 512,590
========== ==========
LIABILITIES
Current liabilities:
Borrowings under line of credit facility $ 19,287 $ -
Trade accounts payable-unrelated parties 19,207 39,184
Trade accounts payable-related parties - 7,339
Accrued expenses and other liabilities 4,707 33,879
Deferred revenue 4,144 15,274
---------- ----------
Total current liabilities 47,345 95,676
Other liabilities 446 279
---------- ----------
Total liabilities 47,791 95,955
---------- ----------
Commitments (Note 4) and Contingencies (Note 5).
SHAREHOLDERS' EQUITY
Preferred Stock, no par value
Authorized: 7,000 shares
Series A Junior Participating Preferred Stock, no par value
Designated: 450 shares
Issued and outstanding: none - -
Common stock, no par value:
Authorized: 250,000 shares
Issued and outstanding: 74,838 shares (1999)
and 90,118 shares (2000) 60,570 330,310
Accumulated other comprehensive income - 132
Retained earnings (accumulated deficit) (19,555) 86,193
---------- ----------
Total shareholders' equity 41,015 416,635
---------- ----------
Total liabilities and shareholders' equity $ 88,806 $ 512,590
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
42
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year ended December 31,
-------------------------------------
1998 1999 2000
----------- ----------- -----------
Net revenues:
Product revenues - non-related parties $ 51,611 $ 99,769 $ 408,708
Product revenues - related parties 15,264 18,473 66,608
License revenues 2,536 6,552 14,945
----------- ----------- -----------
Total net revenues 69,411 124,794 490,261
Cost of revenues 62,703 94,652 264,139
----------- ----------- -----------
Gross profit 6,708 30,142 226,122
----------- ----------- -----------
Operating expenses:
Research and development 14,527 18,199 41,535
Sales and marketing 7,290 10,576 27,968
General and administrative 4,592 3,800 14,966
In-process research and development - 2,011 3,911
----------- ----------- -----------
Total operating expenses 26,409 34,586 88,380
----------- ----------- -----------
Income (loss) from operations (19,701) (4,444) 137,742
Interest income 1,542 714 9,880
Interest expense (31) (214) (691)
Other income, net 31 16 630
----------- ----------- -----------
Income (loss) before provision for (benefit from) income taxes (18,159) (3,928) 147,561
Provision for (benefit from) income taxes (571) 88 41,813
----------- ----------- -----------
Net income (loss) $ (17,588) $ (4,016) $ 105,748
=========== =========== ===========
Net income (loss) per share - basic ($0.26) ($0.06) $1.23
=========== =========== ===========
Net income (loss) per share - diluted ($0.26) ($0.06) $1.13
=========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
43
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Accumulated
Common Stock Deferred Retained Earnings Other
----------------------- Stock (Accumulated Comprehensive
Shares Amount Compensation Deficit) Income (Loss) Total
-------- ------------ ------------ ----------------- ------------- -----------
Balances, December 31, 1997 69,321 $ 53,356 $ (66) $ 2,599 $ - $ 55,889
Repurchase of shares
of common stock (1,347) (1,034) - (550) - (1,584)
Issuance of shares of
common stock under
employees' stock
purchase and
option plans 1,284 572 - - - 572
Tax benefit from exercise
of stock options - 707 - - - 707
Amortization of deferred
stock compensation - - 34 - - 34
Net loss - - - (17,588) - (17,588)
------- ---------- ----------- ------------- -------- ---------
Balances, December 31, 1998 69,258 53,601 (32) (15,539) - 38,030
Issuance of shares for
acquisition of Linvex
Technology Corporation 2,685 5,146 - - - 5,146
Issuance of shares of
common stock under
employees' stock
purchase and
option plans 2,895 1,823 - - - 1,823
Tax benefit from exercise
of stock options - - - - - -
Amortization of deferred
stock ompensation - - 32 - - 32
Net loss - - - (4,016) - (4,016)
-------- ----------- ------------ ----------------- ------------- -----------
Balances, December 31, 1999 74,838 60,570 - (19,555) - 41,015
Issuance of shares of common
stock upon secondary
offering and private
placement, net of offering
costs of $1,099 12,579 253,729 - - - 253,729
Issuance of shares of
common stock under
employees' stock
purchase and
option plans 2,701 3,782 - - - 3,782
Tax benefit from exercise
of stock options - 12,229 - - - 12,229
Net income - - - 105,748 -
Unrealized gain on
available for sale - - - - 132 -
securities
Comprehensive income - - - - - 105,880
-------- ----------- ------------ ----------------- ------------- -----------
Balances, December 31, 2000 90,118 $ 330,310 $ - $ 86,193 $ 132 $416,635
======== =========== ============ ================= ============= ===========
The accompanying notes are an integral part of these consolidated
financial statements.
44
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
------------------------------------
1998 1999 2000
----------- ---------- ------------
Cash flows from operating activities:
Net income (loss) ($17,588) ($4,016) $105,748
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,235 4,613 6,218
Provision for doubtful accounts receivable 13 32 477
Provision for sales return - - 8,166
Provision for excess and obsolete inventories
and write down of inventory to market 2,740 3,293 4,261
Amortization of deferred stock compensation 34 32 -
(Gain) loss on sale of equipment 1 3 (62)
Deferred income taxes 3,747 - (8,994)
Purchased in-process research and development - 2,011 3,911
Tax benefit from employee stock plans 707 - 12,229
Changes in operating assets and liabilities:
(in 1999 and 2000, net of effects of acquisition)
Accounts receivable (944) (23,745) (81,616)
Accounts receivable from related parties (714) (2,735) (14,427)
Inventories 872 (24,662) (47,785)
Other current and noncurrent assets (1,219) (321) (11,646)
Trade accounts payable (8,648) 8,385 19,977
Trade accounts payable to related parties - - 7,339
Accrued expenses and other liabilities (1,287) (881) 28,538
Deferred revenue 527 2,205 11,130
----------- ---------- ------------
Net cash provided by (used in) operating activities (17,524) (35,786) 43,464
----------- ---------- ------------
Cash flows from investing activities:
Acquisition of equipment, furniture and fixtures (3,758) (7,928) (10,745)
Proceeds from sale of equipment - - 62
Purchases of available-for-sale investments (25,167) - (147,550)
Sales and maturities of available-for-sale investments 44,792 851 7,719
Investment in equity securities - - (18,429)
Cash acquired (used in) in acquisition - 110 (4,154)
Other (1,000) - -
----------- ---------- ------------
Net cash provided by (used in) investing activities 14,867 (6,967) (173,097)
----------- ---------- ------------
Cash flows from financing activities:
Borrowings under line of credit facility - 42,150 39,750
Repayments under line of credit facility - (22,863) (59,037)
Repayments of loans - - (637)
Issuance of shares of common stock 572 1,823 257,511
Repurchase of common stock (1,584) - -
Other (67) (141) (91)
----------- ---------- ------------
Net cash provided by (used in) financing activities (1,079) 20,969 237,496
----------- ---------- ------------
Net increase (decrease) in cash and cash equivalents (3,736) (21,784) 107,863
Cash and cash equivalents at beginning of year 26,743 23,007 1,223
----------- ---------- ------------
Cash and cash equivalents at end of year $23,007 $ 1,223 $109,086
=========== ========== ============
Supplemental disclosure of cash flow information:
Cash received for interest $ - $ - $ 3,844
Cash paid for interest $ 31 $ 213 $ 691
Net cash paid (received) for income taxes $ 95 $(1,652) $ 24,513
Common stock issued in relation to the acquisition of Linvex $ - $ 5,146 $ -
Write-off of fully depreciated equipment, furniture and fixtures $ - $11,847 $ -
The accompanying notes are an integral part of these
consolidated financial statements.
45
Notes to the Consolidated Financial Statements:
1. Nature of Operations and Summary of Significant Accounting Policies:
Nature of Operations:
Silicon Storage Technology, Inc. ("SST" or "us" or "we") supplies flash
memory semiconductor devices for digital consumer, networking, wireless
communications and Internet computing markets. Flash memory is nonvolatile
memory that does not lose data when the power source is removed and is capable
of electronically erasing selected blocks of data. We license our SuperFlash
technology to other companies for non-competing applications. Our products are
used in personal computers, personal computer peripheral devices, consumer
electronics and communications devices. The products are sold to manufacturers
located primarily in Asia.
Use of Estimates in Preparation of the Financial Statements:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Risks and Uncertainties:
Our sales are concentrated in the nonvolatile memory class of the
semiconductor memory industry, which is highly competitive and rapidly changing.
Significant technological changes in the industry, changes in customer
requirements, changes in product costs and selling prices, or the emergence of
competitor products with new capabilities or technologies could affect our
operating results adversely. We currently buy all wafers and die, an integral
component of our products, from outside suppliers and we are dependent on third
party subcontractors to assemble and test our products. Failure by these
suppliers to satisfy our requirements on a timely basis at competitive prices
could cause us to suffer manufacturing delays, a possible loss of revenues, or
higher than anticipated cost of revenues any of which could severely adversely
affect operating results.
Most of our sales are made through manufacturers' stocking
representatives and distributors. These manufacturers' stocking representatives
and distributors can discontinue selling our products at any time. Two of the
manufacturers' stocking representatives are responsible for substantially all
sales into Taiwan, which accounted for 28.1%, 28.3% and 25.5% of our net product
revenues during 1998, 1999 and 2000 respectively. One manufacturers' stocking
representative accounted for substantially all sales in China, including Hong
Kong, during 2000, which accounted for 21.1%, 24.3% and 19.1% of our net product
revenues during 1998, 1999 and 2000 respectively. The loss of any of these
manufacturers' stocking representatives or any other significant manufacturers'
stocking representatives or distributors could have a material adverse effect on
our operating results. A majority of our product revenue came from sales to
customers in the personal computer and computer peripherals industries. A
decline in demand in these industries could have a material adverse affect on
our operating results and financial condition.
We derived 82.3%, 80.8% and 77.6% of our product revenue from Asia
during 1998, 1999 and 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, 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 exacerbated a decline in average selling prices for our products as
our competitors reduced product prices to generate needed cash.
46
Notes to the Consolidated Financial Statements, continued:
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
It should be noted that we may be greatly impacted by the political,
economic and military conditions in Taiwan. Taiwan and China are continuously
engaged in political disputes and both countries continue to conduct military
exercises in or near the other's territorial waters and airspace. Such disputes
may continue and even escalate, resulting in an economic embargo, a disruption
in shipping or even military hostilities. This could severely harm our business
by interrupting or delaying production or shipment of our product. Any kind of
activity of this nature or even rumors of such activity could severely and
negatively impact our operations, revenues, operating results, and stock price.
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.
Basis of Consolidation:
The consolidated financial statements include the accounts of SST and
our wholly-owned subsidiaries after elimination of intercompany balances and
transactions.
Financial Instruments:
Cash equivalents are highly liquid investments with original or
remaining maturities of three months or less as of the dates of purchase. Highly
liquid investments included in cash equivalents are classified as available for
sale and are carried at cost which approximates fair value. Cash equivalents
present insignificant risk of changes in value because of interest rate changes.
We maintain substantially all of our cash balances with three major financial
and/or brokerage institutions domiciled in the United States and we have not
experienced any material losses relating to these investment instruments.
Short-term investments, which are comprised of federal, state and
municipal government obligations and foreign and public corporate debt
securities, are classified as available-for-sale and carried at fair value,
based on quoted market prices, with the unrealized gains or losses, net of tax,
reported in shareholders' equity as other comprehensive income. The cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity, both of which are included in interest income. Realized gains and
losses are recorded on the specific identification method. Realized gains and
losses were not material in 1998, 1999, and 2000.
The carrying amounts reported for cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses are considered to approximate
fair values based upon the short maturities of those financial instruments. The
carrying amount of borrowing under the line of credit is also considered to
approximate fair value as the interest rate on the borrowing adjusts to the
bank's reference rate. The fair value of marketable securities is in Note 2 of
these Notes to the Consolidated Financial Statements.
Financial instruments that potentially subject us to concentrations of
credit risks comprise, principally, cash, cash equivalents, investments and
trade accounts receivable. We invest our excess cash in accordance with our
investment policy which is approved by the Board of Directors and reviewed
periodically. We perform credit evaluations of new customers and require those
without positive, established histories to pay in advance, upon delivery or
through letters of credit. Otherwise, we do not require collateral of our
customers, and maintain allowances for potential credit losses which have
historically not been material. As of December 31, 1999, one customer
represented 11% of our accounts receivable. As of December 31, 2000, no customer
exceeded 10% of our accounts receivable.
In 1998, 1999 and 2000, sales to our top ten customers accounted for
approximately 62.8%, 53.6% and 43.0% of net product revenues.
47
Notes to the Consolidated Financial Statements (continued)
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
We have acquired interests in privately held Japanese and Taiwanese
companies (see Note 10). It was not practicable to estimate the fair value of
the investments in the issued untraded common stock of these companies. The
investments are included in "Other Assets" in the balance sheet and are carried
at their original cost and when a decline in value is other than temporary the
securities are reduced to their estimated fair value. Dividends and other
distributions of earnings from the investees, if any, are included in other
income when declared.
Inventories:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value. Our inventories include high technology parts
and components that are specialized in nature or subject to rapid technological
obsolescence. While we have programs to minimize the required inventories on
hand and we consider technological obsolescence when estimating allowances for
potentially excess and obsolete inventories and those required to reduce
recorded amounts to market values, it is reasonably possible that such estimates
could change in the near term.
Equipment, Furniture and Fixtures:
Equipment, furniture and fixtures are stated at cost and depreciated
using the straight-line method over estimated useful lives of three to seven
years (see Note 3).
Intangible Assets:
Intangible assets include technology acquired in acquisitions and
technology acquired under licensing arrangements. These amounts are included in
other assets and amortized over estimated lives of three years to five years.
Long-Lived Assets:
Long-lived assets include equipment, furniture and fixtures and
intangible assets. Whenever events or changes in circumstances indicate that the
carrying amounts of long-lived assets may not be recoverable, we estimate the
future cash flows, undiscounted and without interest charges, expected to result
from the use of those assets and their eventual cash position. If the sum of the
expected future cash flows is less then the carrying amount of those assets, we
recognize an impairment loss based on the excess of the carrying amount over the
fair value of the assets.
Warranties:
Our products are generally subject to warranty and we provide for the
estimated future costs of repair, replacement or customer accommodation upon
shipment of the product in the accompanying statements of operations.
Revenue Recognition:
Sales to direct customers and foreign stocking representatives are
recognized upon shipment of product net of an allowance for estimated returns.
Sales to distributors are made primarily under arrangements allowing price
protection and the right of stock rotation on merchandise unsold to
distributors. Because of the uncertainty associated with pricing concessions and
future returns, we defer recognition of such revenues, related costs of revenues
and related gross profit until the merchandise is sold by the distributor to the
end user.
48
Notes to the Consolidated Financial Statements (continued)
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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 that 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 or
determinable and collection of the fee is probable. From time to time, we
reexamine the estimated upgrade period relating to licensed technology to
determine if a change in the estimated upgrade period is needed. Revenue from
license or other technology arrangements where we are not continuing to enhance
and refine technology or are not obligated to provide unspecified enhancements
is recognized upon delivery, if the fee is fixed or determinable and collection
of the fee is probable.
Royalties received under these arrangements during the upgrade period
are recognized as revenue based on the ratio of the elapsed portion of the
upgrade period to the estimated upgrade period. The remaining portions of the
royalties are recognized ratably over the remaining portion of the upgrade
period. Royalties received after the upgrade period has elapsed are recognized
when reported to us, which generally coincides with the receipt of payment.
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.
Our accounting policies are consistent with the requirements of SAB 101, and the
implementation of SAB 101 has had no material impact on our financial position
or results of operations.
Research and Development:
Research and development expenses are charged to operations as
incurred.
Income Taxes:
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
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 income (loss) by the sum of the weighted average number of common
shares outstanding and potential common shares (when dilutive).
Stock Compensation:
We account for stock-based compensation using the intrinsic value
method. We calculate the fair value of stock-based compensation and disclose the
pro forma impact of the value on net income (loss) and net income (loss) per
share in the footnotes to the financial statements.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation," an interpretation of APB Opinion No. 25. Most provisions of
FIN 44 were effective for transactions occurring after July 1, 2000. The
application of FIN 44 did not have a material impact on our financial position
or results of operations.
49
Notes to the Consolidated Financial Statements (continued)
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Comprehensive Income:
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources, including unrealized gains and losses on marketable
securities. Other comprehensive gain (loss) is presented in the statement of
shareholders' equity and comprehensive income (loss).
Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133," which deferred the effective date until the first
fiscal year beginning after June 15, 2000. In June 2000, the FASB issued SFAS
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities-an Amendment of SFAS 133." SFAS No. 138 amends certain terms
and conditions of SFAS 133. SFAS 133 requires that all derivative instruments be
recognized at fair value as either assets or liabilities in the statement of
financial position. The accounting for changes in the fair value (i.e., gains or
losses) of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of hedging
relationship. SST will adopt SFAS No. 133, as amended, in its quarter ending
March 31, 2001. The adoption of SFAS No. 133 will not have a material impact on
its financial statements.
2. Marketable Securities
All marketable securities are classified as available-for-sale and are
summarized as follows (in thousands):
Amortized Unrealized Fair
Cost Gain (Loss) Value
---------- ----------- --------
Corporate bonds and notes $ 69,155 ($20) $69,135
Government bonds and notes
141,523 152 141,675
---------- ----------- --------
Total bonds and notes $210,678 $132 210,810
========== ===========
Less amounts classified as cash equivalents (70,847)
---------
Total short-term marketable securities $139,963
=========
At December 31, 2000 the contractual maturity for all investments is less than
one year. Available-for-sale securities are carried at fair value. Gross
unrealized gains of approximately $152,000 are netted against gross unrealized
losses of approximately $20,000.
50
Notes to the Consolidated Financial Statements (continued)
3. Balance Sheet Detail (in thousands):
Trade accounts receivable comprise:
December 31,
------------------------
1999 2000
----------- -----------
Trade accounts receivable-unrelated parties $33,820 $107,041
Trade accounts receivable-related parties 5,573 20,000
Less allowance for doubtful accounts (535) (783)
----------- -----------
$38,858 $126,258
=========== ===========
Inventories comprise:
December 31,
------------------------
1999 2000
----------- -----------
Raw materials $ 6,855 $ 29,025
Work in process 19,338 17,631
Finished goods 3,573 26,634
----------- -----------
$29,766 $ 73,290
=========== ===========
Equipment, furniture and fixtures comprise:
December 31,
------------------------ Estimated
1999 2000 Useful Lives
----------- ----------- ------------
Equipment $7,932 $13,389 Four years
Design hardware 2,540 4,234 Three years
Software 2,478 5,781 Three years
Furniture and fixtures 1,109 2,269 Seven years
----------- -----------
14,059 25,673
Less accumulated depreciation 4,859 9,906
----------- -----------
9,200 15,767
Construction in progress 1,931 1,107
----------- -----------
$11,131 $ 16,874
=========== ===========
Depreciation expense was $4,314,000, $3,676,000, and $5,016,000 for 1998, 1999,
and 2000 respectively. Construction in progress relates to software and
consulting costs incurred to implement our enterprise resource planning system,
datawarehouse and our supply chain management system. These costs will be
depreciated over three years beginning during the month that each system is
fully functional. The enterprise resource planning system was fully functional
during the first half of 2000 and it is anticipated that the datawarehouse and
supply chain management system will be fully functional by the end of 2001. The
estimated useful life of software purchased after December 31, 1999 is three
years (as compared to the four year life previously used) to more accurately
reflect our actual replacement rate of software.
Accrued liabilities comprise:
December 31,
-------------------------
1999 2000
----------- ------------
Accrued compensation and related $ 1,442 $ 14,509
Accrued income tax payable 2 11,292
Accrued liabilities-related parties - 356
Other accrued liabilities 3,263 7,722
----------- ------------
$ 4,707 $ 33,879
=========== ============
51
Notes to the Consolidated Financial Statements (continued)
4. Commitments:
We lease our corporate facilities under noncancelable operating leases
that expire in 2001, 2002, 2005 and 2010. The leases require escalating monthly
payments over their terms and, therefore, periodic rent expense is being
recognized on a straight-line basis. Under the terms of the leases, we are
responsible for maintenance costs, including real property taxes, utilities and
other costs. Rent expense was $749,000, $1,107,000, and $2,060,000 in 1998,
1999, and 2000 respectively.
Future minimum rental payments at December 31, 2000 are as follows (in
thousands):
2001 $ 4,675
2002 4,803
2003 4,960
2004 5,131
2005 3,563
Thereafter 10,905
-----------
$ 34,037
===========
Line of Credit:
As of December 31, 2000 we had no borrowing on our line of credit as
this credit facility was paid off during the quarter ended March 31, 2000.
However we continue to have access to this facility should we need it. As of
December 31, 2000, our line of credit was for $25 million. This agreement
expires in September 2002. Borrowing is limited to 80.0% of eligible world-wide
accounts receivable and is also reduced by any letters of credit issued under a
$25 million subagreement to this line. Therefore, as of December 31, 2000, our
actual credit available under this line was approximately $4.0 million. The line
bears interest at a rate of the bank's reference rate (9.5% at December 31,
2000) plus 0.5%. There is a minimum interest rate of 6.0%. We are required to
maintain specified levels of tangible net worth. Under the agreement we are not
permitted to pay a dividend. We must pay an unused line fee at the annual rate
of one quarter of one percent on the unused portion. As of December 31, 2000, we
were in compliance with the covenants of this agreement.
Purchase Commitments:
We have committed to pay $50.0 million in 2001, subject to certain
business conditions, to secure increased wafer capacity in 2001 and 2002.
52
Notes to the Consolidated Financial Statements (continued)
5. 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 ruled by 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 later reversed by the Federal Circuit Court of Appeals. Thus, four patents
remain at issue in Atmel's District Court case against us.
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 were obligated to indemnify
both to the extent provided in those agreements. As more fully described below,
the settlement with Winbond terminated our indemnity obligations to that
company.
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, U.S. Patent No. 4,451,903 ("the `903 patent," also known as
"Silicon Signature"), the ALJ ruled on May 17, 2000 that it is invalid and
unenforceable because the patent did not name the proper inventors and because
Atmel intentionally misled the U.S. Patent Office. On October 16, 2000, the ITC
overturned the ALJ's recommendation on the `903 patent and ruled that we could
not import into the United States certain products that use this circuit. We
appealed the ITC ruling and in January 2001 the Federal Circuit Court issued an
order upholding the ITC's decision, but has not yet issued a written opinion
setting forth the basis of that order. The ITC also ruled that we do not
infringe the two other patents at issue ("the `811 and `829" patents). Atmel has
appealed that determination. Atmel's appeal brief is due on March 30, 2001, and
SST's brief is due on or before May 9, 2001. There is currently no schedule for
oral argument or the final determination of this appeal.
Any final decisions in the ITC action will not be dispositive in the pending
lawsuit because Atmel and SST can still pursue their claims in the District
Court action. The District Court has scheduled a hearing for December 15, 2001,
to set a trial date. We intend to vigorously defend ourselves against these
actions.
On October 1, 2000, we announced a settlement in our lawsuit with Winbond
Electronics of Taiwan. We filed a lawsuit against Winbond in July 1998 in the
U.S. District Court in San Jose, California pursuant to the termination of our
SuperFlash technology licensing agreement with Winbond. As part of the
settlement, Winbond agreed to a consent judgment and will not contest the
validity and appropriateness of SST's termination of the licensing agreement in
June 1998. This settlement concludes all litigation between us and Winbond.
We received $10.4 million in license fees during 2000 as part of this
settlement.
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 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.
53
Notes to the Consolidated Financial Statements (continued)
6. Shareholders' Equity:
Stock Dividend:
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. The stock dividend was distributed on August 14, 2000. All share
and per share amounts in these Consolidated Financial Statements and related
Notes to the Consolidated Financial Statements have been adjusted to reflect the
stock split.
Authorized Capital Shares:
Our authorized capital shares consist of 250,000,000 shares of common
stock and 7,000,000 shares of preferred stock. Of the preferred stock, 450,000
shares has been designated as series A junior participating preferred stock. All
of SST's capital shares have no par value.
Share Purchase Rights Plan:
We have a Share Purchase Rights Plan, adopted in May 1999 and
subsequently amended, in which preferred stock rights were distributed as a
rights dividend at a rate of one right for each share of common stock held as of
the close of business on May 27, 1999. Preferred stock rights will also be
issued with any new issuance of common shares. Each Right entitles the
registered holder under certain circumstances to purchase from SST one
three-hundredth (one-third of one one-hundredth) of a share of series A junior
participating preferred stock. Until the occurrence of certain events the
preferred stock rights will be transferable with and only with the Common
Shares. The effect will be to discourage acquisitions of more than 15 percent of
SST's common stock without negotiations with the Board of Directors. The rights
expire May 3, 2009.
Net Income (Loss) Per Share:
A reconciliation of the numerator and the denominator of basic and
diluted net income (loss) per share is as follows:
1998 1999 2000
---- ---- ----
Numerator - Basic
Net income (loss) ($17,588) ($4,016) $105,748
========== ========= ==========
Denominator - Basic
Weighted average common stock outstanding 68,874 72,177 86,123
========== ========= ==========
Basic net income (loss) per share ($0.26) ($0.06) $1.23
========== ========= ==========
Numerator - Diluted:
Net income (loss) ($17,588) ($4,016) $105,748
========== ========= ==========
Denominator - Diluted:
Weighted average common stock outstanding 68,874 72,177 86,123
Dilutive potential of common stock equivalents:
Options - - 7,701
---------- --------- ----------
68,874 72,177 93,824
========== ========= ==========
Diluted net income (loss) per share ($0.26) ($0.06) $1.13
========== ========= ==========
Stock options to purchase 9,285,000 and 9,618,000 shares of common
stock were outstanding at December 31, 1998 and 1999 but were not included in
the computation of diluted loss per share because we had a net loss in 1998 and
1999. Anti-dilutive stock options to purchase approximately 358,000 shares of
common stock were excluded from the computation of diluted net income per share
for the twelve months ended December 31, 2000 because the exercise price of the
options exceeded the average fair market value of the stock for the twelve
months ended December 31, 2000.
54
Notes to the Consolidated Financial Statements (continued)
6. Shareholders' Equity, continued:
Repurchase of Common Stock:
In January 1998, the Board of Directors approved a stock repurchase
program whereby up to an aggregate of 3,000,000 shares of SST's common stock may
be repurchased on the open market at prevailing market prices. Approximately
1,347,000 shares were repurchased under this authorization for an aggregate
purchase price of $1,584,000 at prices ranging from $1.06 to $1.26 per share.
The program terminated in June 1998.
Equity Incentive Plan:
In 1990, SST adopted a combined incentive and supplemental stock option
plan, or the Option Plan, under which the Board of Directors could issue options
to purchase up to 12,000,000 shares of common stock to employees and directors
of and consultants to SST and our affiliates. In November 1995, SST amended the
Option Plan, restated it as the Equity Incentive Plan and reserved an additional
6,000,000 shares of common stock for issuance under the plan. In July 1998, 1999
and June 2000, SST amended the Equity Incentive Plan and reserved an additional
2,250,000, 3,000,000, and 3,000,000 shares, respectively, of common stock for
issuance under the plan.
Under the Equity Incentive Plan, the Board of Directors has the
authority to determine to whom options will be granted, the number of shares
under option, the option term and the exercise price. The options generally are
exercisable beginning one year from date of grant and generally vest over
periods ranging from four to five years from the date of grant. The term of any
options issued under either plan may not exceed ten years from the date of
grant.
Directors' Option Plan:
In October 1995, SST adopted the Non-Employee Directors' Stock Option
Plan, or the Directors' Plan, which became effective upon the effective date of
SST's initial public offering. The Directors' Plan provided for the automatic
grant of options to purchase 72,000 shares of SST's common stock to non-employee
directors of SST upon the initial public offering. It also provides for
automatic grants upon new non-employee directors being elected to the Board of
Directors. The Directors' Plan also provides for the grant of options to
purchase up to an additional 18,000 shares annually thereafter. Options under
the Directors' Plan vest over 48 months and the exercise price of options
granted must equal or exceed the fair market value of SST's common stock on the
date of grant. The options expire ten years after the date of grant. In July
1999, SST amended the Directors' Plan to change the vesting terms from ratably
over four years to upon date of grant, decreased the initial grant amount of
options from 72,000 to 45,000 shares, and increased the aggregate number of
share authorized by 150,000 shares to 600,000 shares.
55
Notes to the Consolidated Financial Statements (continued)
6. Shareholders' Equity, continued:
Activity under the Equity Incentive Plan and Directors Plan follows (in
thousands, except per share data):
Available Options Outstanding Weighted
for ---------------------------------------- Average
Grant Shares Price per Share Amount Exercise Price
----------- --------- ----------------- --------- --------------
Balances, December 31, 1997 1,788 9,315 $0.05-$5.50 $7,933 $0.85
Granted (2,664) 2,664 0.44-1.00 2,335 0.88
Exercised - (804) 0.05-1.04 (155) 0.19
Terminated 1,821 (1,821) 0.08-2.00 (2,797) 1.06
Authorized 2,250 - - - -
---------- -------- ------------- -------- -----
Balances, December 31, 1998 3,195 9,354 0.05-5.50 7,316 0.78
Granted (3,057) 3,057 0.80-8.29 7,990 2.61
Exercised - (2,136) 0.05-2.00 (1,117) 0.52
Terminated 657 (657) 0.11-4.42 (643) 0.79
Authorized 3,150 - - - -
---------- -------- ------------- -------- -----
Balances, December 31, 1999 3,945 9,618 0.05-8.29 13,546 1.41
Granted (3,921) 3,921 9.85-29.44 62,559 15.95
Exercised - (2,449) 0.05-5.56 (2,410) 0.98
Terminated 487 (487) 0.68-29.44 (2,267) 4.66
Authorized 3,000 - - - -
---------- -------- ------------- -------- -----
Balances, December 31, 2000 3,511 10,603 $0.05-$29.44 $71,428 $6.74
========== ======== ========
At December 31, 1998, 4,131,000 options were exercisable at a weighted-average
exercise price of $0.49 per share. At December 31, 1999, 3,922,000 options were
exercisable at a weighted-average exercise price of $0.79 per share. At December
31, 2000, 3,643,000 options were exercisable at a weighted-average exercise
price of $1.63 per share.
Employee Stock Purchase Plan:
In October 1995, SST adopted the Employee Stock Purchase Plan, or the
Purchase Plan, which became effective upon the effective date of SST's initial
public offering. A total of 2,550,000 shares of common stock have been reserved
for issuance under the Purchase Plan. The Purchase Plan provides for eligible
employees to purchase shares of common stock at a price equal to 85% of the fair
market value of SST's common stock on the date of the option grant by
withholding up to 10 percent of their annual base earnings. In July 1999, the
Purchase Plan was amended to increase the aggregate number of shares of common
stock authorized for issuance by 1,050,000 shares to 3,600,000 shares. At
December 31, 2000, shares available for purchase under this plan were
approximately 1,696,000. Shares issued under the Purchase Plan in 1998, 1999,
and 2000 were 480,000, 759,000, and 252,000, respectively.
56
Notes to the Consolidated Financial Statements (continued)
6. Shareholders' Equity, continued:
Stock Compensation:
No compensation cost has been recognized for the Equity Incentive Plan,
the Directors' Option Plan or the Stock Purchase Plan. Had compensation cost for
these plans been determined based on the fair value at the grant date for the
awards, our net income (loss) and net income (loss) per share for 1998, 1999,
and 2000 would have been decreased (increased) to the pro forma amounts
indicated below (in thousands):
1998 1999 2000
---- ---- ----
Pro forma net income (loss) $ (19,316) $ (6,479) $ 89,700
Pro forma net income (loss) per share - basic $ (0.29) $ (0.09) $ 1.01
Pro forma net income (loss) per share - diluted $ (0.29) $ (0.09) $ 0.93
The fair value of each option grant for both the Directors' Plan and
the Equity Incentive Plan is estimated on the date of grant using the
Black-Scholes multiple options pricing model with the following weighted average
assumptions by year:
1998 1999 2000
----- ----- ----
Risk-free interest rate 4.1-5.8% 4.6-5.9% 5.9-6.4%
Expected term of option 2 years 2 years 2 years
Expected volatility 92% 92% 100%
Expected dividend yield 0% 0% 0%
The weighted average fair value of options granted under the Equity Incentive
Plan and the Directors' Option Plan during 1998, 1999 and 2000 was $0.88, $2.60,
and $12.70, respectively, per share.
The fair value of each stock purchase right is estimated using the
Black-Scholes model with the following weighted average assumptions by year:
1998 1999 2000
----- ----- ----
Risk-free interest rate 5.3-5.5% 4.6-5.3% 6.0-6.1%
Expected term of option 1/2 year 1/2 year 1/2 year
Expected volatility 92% 92% 100%
Expected dividend yield 0% 0% 0%
Option grants and purchase plan rights are priced at the date of grant.
The risk-free interest rate range represents the low and high end of the range
used at different points during the year.
The weighted average valuation of right grants under the Purchase Plan during
1998, 1999 and 2000 was $0.44, $0.45, and $2.77, respectively, per share.
57
Notes to the Consolidated Financial Statements (continued)
6. Shareholders' Equity, continued:
Stock Compensation, continued:
The options outstanding and currently exercisable by exercise price
under the Equity Incentive Plan and the Directors' Option Plan at December 31,
2000 are as follows:
Options Outstanding Options Exercisable
------------------------------------------------------------ -------------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Outstanding Exercise Price
- ---------------------- ------------- ---------------- ---------------- ------------ -----------------
$0.050 - $0.680 1,339,000 4.30 $0.24 1,051,000 $0.14
$0.800 - $0.990 1,121,000 7.48 0.95 341,000 0.95
$1.000 - $1.020 241,000 7.98 1.01 155,000 1.01
$1.040 - $1.040 1,605,000 6.66 1.04 1,261,000 1.04
$1.080 - $2.360 1,818,000 8.09 1.93 455,000 1.58
$2.540 - $9.850 1,278,000 8.72 6.53 286,000 4.73
$10.290 - $11.813 1,098,000 9.47 11.14 39,000 10.29
$11.850 - $18.600 1,084,000 9.48 17.91 1,000 18.60
$19.960 - $28.350 988,000 9.45 24.01 54,000 28.35
$29.440 - $29.440 31,000 9.50 29.44 - 0.00
---------- ---------
$0.050 - $29.440 10,603,000 7.82 $6.74 3,643,000 $1.63
========== =========
7. Acquisitions
Agate Semiconductor, Inc. On December 1, 2000, we increased our ownership of
Agate Semiconductor, Inc., or Agate, a privately held, memory design company
located in Santa Clara, California, from 39.45% to 100% in a series of related
transactions, effectively purchasing all of the remaining assets and stock of
that company. The purchase price of $4.7 million, which was paid in cash and
includes acquisition costs of $40,000, was accounted for using the purchase
method of accounting, which means that the purchase price was allocated to the
assets acquired and liabilities assumed based on the estimated fair values at
the date of the acquisition. The purchase price comprises cash paid of $4.2
million and $498,000 payable in June 2001. The results of operations of Agate
have been included with our results of operations since December 1, 2000, the
date that the acquisition was consummated.
The fair value of the assets of Agate, which was determined through established
valuation techniques used by an independent appraiser, and a summary of the
consideration exchanged for these assets is as follows (in thousands):
Total purchase price................................................... $4,657
======
Assets acquired:
Tangible assets, primarily cash, deposits, and equipment............ $ 33
Deferred tax asset.................................................. 863
Patents............................................................. 762
Workforce ......................................................... 152
Purchased in-process research and development....................... 3,911
Deferred tax liability ................................................ (366)
Other liabilities assumed.............................................. (698)
------
$4,657
======
58
Notes to the Consolidated Financial Statements (continued)
7. Acquisitions (continued)
The amount allocated to the patents and the workforce is amortized on a straight
line basis over five and three years, respectively. At December 31, 2000,
accumulated amortization related to these items was $25,000. The amount of the
purchase price allocated to purchased in-process research and development, which
had no alternative future use and relates to a product for which technological
feasibility had not been established, was expensed at the acquisition date.
As part of the acquisition, we have agreed to pay $659,000 to certain Agate
employees if they remain in our employ until December 1, 2001. In addition,
after the purchase, loans assumed totaling $637,000 were repaid in cash.
Summarized below are the unaudited pro forma results of SST as though Agate had
been acquired at the beginning of each of the periods presented. Adjustments
have been made for the estimated increases in amortization related to the
purchased of patents, workforce, and other appropriate pro forma adjustments.
December 31,
----------------------------
1999 2000
-------------- ------------
Revenue $ 124,794 $490,261
Net income (loss) (5,009) 108,313
Net income (loss) per share - basic (0.07) 1.26
Net income (loss) per share - diluted $ (0.07) $ 1.15
The above amounts are based upon certain assumptions and estimates which we
believe are reasonable and do not reflect any benefit from economies which might
be achieved from combined operations. The pro forma financial information
presented above is not necessarily indicative of either the results of
operations that would have occurred had the acquisition taken place at the
beginning of each of the periods presented or of future results of operations of
the combined companies. The charge for purchased in process research and
development has not been included in the pro forma results above because it is
nonrecurring and directly related to the acquisition.
Linvex Technology, Corp. On June 4, 1999, we purchased all of the outstanding
capital stock of Linvex Technology, Corp., or Linvex, a privately held, memory
design company located in Sunnyvale, California, in exchange for 789,000 shares
of SST common stock with a fair market value of $4.7 million. The purchase price
of $4.8 million, which includes acquisition costs of $0.1 million, was accounted
for using the purchase method of accounting, which means that the purchase price
was allocated to the assets acquired and liabilities assumed based on the
estimated fair values at the date of the acquisition. The results of operations
of Linvex have been included with those of SST since June 4, 1999, the date that
the acquisition was consummated.
The fair value of the assets of Linvex, which was determined through established
valuation techniques used by an independent appraiser, and a summary of the
consideration exchanged for these assets is as follows (in thousands):
Total purchase price................................................. $4,794
======
Assets acquired:
Tangible assets, primarily cash, accounts receivable,
and computer software.......................................... $ 701
Core technology ................................................. 2,827
Completed products ............................................... 163
Workforce ....................................................... 272
Purchased in-process research and development..................... 2,011
Liabilities assumed ................................................. (1,180)
------
$4,794
======
The amount allocated to the core technology, the completed products, for which
technological feasibility had been established at the acquisition date, and the
workforce is amortized on a straight line basis over three years. At December
31, 1999 accumulated amortization related to these items was $634,000. The
amount of the purchase price allocated to purchased in-process research and
development, which had no alternative future use and relates to a product for
which technological feasibility had not been established, was expensed at the
acquisition date.
In addition, after the purchase, notes payable and deferred salary payable to
shareholders and employees of $476,000 were converted into an additional 106,000
shares of SST's common stock.
59
Notes to the Consolidated Financial Statements (continued)
7. Acquisitions (continued)
Summarized below are the unaudited pro forma results of SST as though Linvex had
been acquired at the beginning of January 1, 1998. Adjustments have been made
for the estimated increases in amortization related to the purchased of core
technology, completed products and workforce, and other appropriate pro forma
adjustments.
December 31,
---------------------------------
1998 1999
----------------- ---------------
Revenue $ 70,515 $ 125,311
Net income (loss) (19,495) (3,146)
Net income (loss) per share $ (0.82) $ (0.13)
The above amounts are based upon certain assumptions and estimates which we
believe are reasonable and do not reflect any benefit from economies which might
be achieved from combined operations. The pro forma financial information
presented above is not necessarily indicative of either the results of
operations that would have occurred had the acquisition taken place at the
beginning of fiscal 1998 or of future results of operations of the combined
companies. The charge for purchased in process research and development has not
been included in the pro forma results above because it is nonrecurring and
directly related to the acquisition.
The accumulated amortization of intangible assets at December 31, 1999 and 2000
was $874,000 and $2,147,000, respectively.
8. Income Taxes:
The provision for income taxes reflected in the statements for the
years ended December 31, 1998, 1999 and 2000 were as follows (in thousands):
December 31,
--------------------------------------------
1998 1999 2000
--------------- -------------- -------------
Current:
Federal $ (4,445) $ (489) $ 47,187
State 1 248 3,606
Foreign 126 329 14
--------------- -------------- -------------
(4,318) 88 50,807
--------------- -------------- -------------
Deferred:
Federal 3,131 - (8,273)
State 343 - (721)
--------------- -------------- -------------
3,747 - (8,994)
--------------- -------------- -------------
$ (571) $ 88 $ 41,813
=============== ============== =============
Substantially all of our revenue is taxable in the United States of America. Our
effective tax rate (benefit)/provision differs from the statutory federal
income tax rate as shown in the following schedule:
December 31,
------------------------------------
1998 1999 2000
----------- ------------- ---------
United States statutory rate (35.0)% (35.0)% 35.0%
State taxes, net of federal benefit 4.3 6.3 3.9
Foreign taxes, net - 8.4 -
Research and development credit - - (2.9)
Net operating losses not utilized 9.3 21.5 -
Change in valuation allowance 20.6 - (8.6)
Other (2.3) 1.1 0.9
----------- ------------- ---------
(3.1)% 2.3% 28.3%
=========== ============= =========
60
Notes to the Consolidated Financial Statements (continued)
8. Income Taxes (continued)
In the year ended December 31, 1999, we placed a valuation allowance
against the deferred tax assets due to uncertainty surrounding the realization
of such assets. In the year ended December 31, 2000, we determined that it is
more likely than not that the deferred tax assets were realizable based on our
operating results in 2000 and projected future earnings.
At December 31, 2000, we had available approximately $2,100,000 in federal
and state net operating losses related to the acquisition of Agate. These net
operating losses, if not utilized, expire between 2004 and 2020. Under the Tax
Reform Act of 1986, the annual utilization of these losses is limited because a
change in stock ownership had occurred. Utilization of these losses is limited
to approximately $600,000 annually against future taxable income. As of December
31, 1999 and 2000 our deferred tax assets and liabilities consisted of (in
thousands):
December 31,
----------------------------
1999 2000
------------- -------------
Allowance for excess and obsolete inventory $ 611 $ 814
Allowance for sales returns 17 3,155
Allowance for doubtful accounts 791 1,185
Deferred revenue 980 2,816
Other 200 565
Net operating loss carry-forwards 4,992 863
Depreciation - 93
Tax credits 5,431 -
------------- -------------
Total 13,022 9,491
Depreciation (323) -
Valuation Allowance (12,699) -
------------- -------------
Net deferred tax asset $ - $ 9,491
============= =============
9. Segment Reporting:
Our business has two reportable segments: Flash Products and Technology
Licensing based on our method of internal reporting. The table below presents
information about reported segments:
2000 (in thousands):
---------------------------------------------
Technology
Flash Products Licensing Total
-------------- ----------- -----------
Revenues $ 475,316 $ 14,945 $ 490,261
Gross profits $ 211,177 $ 14,945 $ 226,122
1999 (in thousands):
---------------------------------------------
Technology
Flash Products Licensing Total
-------------- ----------- -----------
Revenues $ 118,242 $ 6,552 $ 124,794
Gross profits $ 23,590 $ 6,552 $ 30,142
1998 (in thousands):
---------------------------------------------
Technology
Flash Products Licensing Total
-------------- ----------- -----------
Revenues $ 66,875 $ 2,536 $ 69,411
Gross profits $ 4,172 $ 2,536 $ 6,708
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.
61
Notes to the Consolidated Financial Statements (continued)
9. Segment Reporting (continued)
The Technology Licensing segment comprises license fees and royalties earned
through technology agreements that we have with wafer foundries and
manufacturers for non-competing applications.
SST's net revenues are all denominated in U.S. dollars and are summarized as
follows: (in thousands):
Year ended December 31,
------------------------------------------
1998 1999 2000
----------- --------------- -------------
United States $ 5,099 $ 13,644 $ 76,898
Europe 6,929 7,347 28,376
Japan 13,739 16,396 66,635
Korea 3,756 11,750 42,986
Taiwan 19,134 33,541 133,677
China (including Hong Kong) 14,104 28,776 90,839
Other Asian countries 6,119 9,340 48,102
Rest of world 531 4,000 2,748
----------- --------------- -------------
$ 69,411 $ 124,794 $ 490,261
=========== =============== =============
Foreign revenue is based on the country to which the product is shipped.
The locations and net book value of long lived assets follows:
Year ended December 31,
-------------------------------------------------
1998 1999 2000
--------------- ----------------- ---------------
United States $ 7,312 $ 12,982 $ 18,551
Taiwan 924 1,655 20,157
Japan 939 939 953
Malaysia - 42 -
Korea - - 4
United Kingdom - - 2
Philippines 106 - -
--------------- ----------------- ---------------
$ 9,281 $ 15,618 $ 39,667
=============== ================= ===============
62
Notes to the Consolidated Financial Statements (continued)
10. Related Party Reporting:
On January 31, 1996, we acquired a 14% interest in a Japanese company
for approximately $939,000 paid in cash, which interest is carried at cost in
the other noncurrent assets category in the balance sheet. At December 31, 2000,
the investment was 11% of the outstanding equity in the company. The president
of the Japanese company is a shareholder of SST. In 1998, 1999 and 2000 this
customer accounted for 15%, 8% and 3% respectively or approximately $10,180,000,
and $10,032,000 and $12,232,000, respectively, of net revenues.
In June 1997, Dr. Ronald Chwang became a member of the Board of
Directors. Dr. Chwang is the Chairman and President of Acer Technology Ventures,
America. Related Acer entities, Acer Corporation, Acer Peripherals and Acer
Technologies are customers of SST. In 1998, 1999 and 2000 the combined Acer
entities accounted for 7%, 6% and 5%, respectively, or $5,084,000, $7,900,000
and $22,543,000 of net revenues.
In 1999, Ocean Automation Ltd. and related entities became a customer.
Mr. Yasushi Chikagami, a member of the SST Board of Directors, is also a member
of the Board of Directors of Ocean. During 1999 and 2000 Ocean accounted for
0.4% and 0.3% or $541,000 and $1,441,000 of net revenues, respectively.
In 2000, we acquired a 15% interest in a Taiwanese company for
approximately $1,455,000 paid in cash and which is carried at cost in the other
noncurrent assets category on the balance sheet. This company is also one of our
manufacturers' representatives. In 2000, this company accounted for 5% or
$24,444,000 of net revenues. During 2000 we paid sales commissions of $1,970,000
to this company.
In 2000, no customer accounted for more than 10% of net revenues for
SST. In both 1999 and 1998, only one other customer accounted for more than 10%
of net revenues for SST. This customer accounted for 11.8% and 10.8%, or
approximately $14,700,000 and $7,187,000 of net revenues in 1999 and 1998,
respectively.
In 2000, we acquired a 10%, 1%, and 3% interest in three different
production subcontractors for $9,868,000, $4,574,000, and $2,553,000, which at
December 31, 2000 represented 9%, 1%, and 3% of the outstanding equity of these
companies, respectively. All of the subcontractors are privately held companies
in Taiwan. These investments are carried at cost in the other noncurrent assets
category on the balance sheet. During 2000 we made purchases of $7,500,
$16,721,000 and $9,478,000, respectively, from these subcontractors. The third
subcontractor described is also our customer and this customer accounted for
$9,044,000, or 2%, of net product revenues during 2000.
11. Employee Benefit Plans:
Profit Sharing Plan:
In April 1995, the Board adopted the Profit Sharing Plan under which
employees may collectively earn up to 10% of SST's operating profit, provided
that both net earnings before interest income (expense), net and provision for
(benefit from) income taxes and operating profit are greater than 10% of sales.
For purposes of the Profit Sharing Plan, "operating profit" is net revenues less
cost of revenues and less operating expenses. The sum paid to any particular
employee as profit sharing is a function of the employee's length of service,
performance and salary. We plan to pay profit sharing sums, when available, to
employees twice a year. No profit sharing was paid in 1998 or 1999. During 2000
profit sharing expenses of $14,876,000 were recorded.
401(k) Plan:
In 1995, SST adopted the SST 401(k) Tax Sheltered Savings Plan and
Trust (the Plan), as amended, which is intended to qualify under Section 401 of
the Internal Revenue Code of 1986. The Plan covers essentially all employees.
Each eligible employee may elect to contribute to the Plan, through payroll
deductions, up to 15% of their compensation, subject to certain limitations. At
our discretion, we may make additional contributions on behalf of employees. All
employee contributions are 100% vested. No employer contributions were made in
1998 or 1999. During 2000, we matched the first $1,000 of each employees'
contribution, for a total of $326,000.
63
Notes to the Consolidated Financial Statements (continued)
12. Subsequent Events:
On February 8, 2001 our limit on our line of credit was increased to
$35.0 million.
On March 6, 2001 we invested $50.0 million in Shanghai Grace
Semiconductor Manufacturing Corporation (GSMC). GMSC is a foreign-funded wafer
foundry project and will be located in Shanghai, P.R.C. The project is expected
to be completed in late 2002.
64