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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: APRIL 30, 1996
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: 0-26942
SMART MODULAR TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
CALIFORNIA 77-0200166
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
4305 CUSHING PARKWAY
FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 623-1231
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO __
AT JUNE 10, 1996, THERE WERE 18,032,454 SHARES OF THE REGISTRANT'S COMMON
STOCK, NO PAR VALUE, OUTSTANDING.
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SMART MODULAR TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets --
As of April 30, 1996 and October 31, 1995.................................... 3
Consolidated Condensed Statements of Income --
For the Three and Six Months Ended April 30, 1996 and 1995................... 4
Consolidated Condensed Statements of Cash Flows --
For the Six Months Ended April 30, 1996 and 1995............................. 5
Notes to Consolidated Condensed Financial Statements........................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 19
Item 2. Changes in Securities.......................................................... 19
Item 3. Defaults upon Senior Securities................................................ 19
Item 4. Submission of Matters to a Vote of Security Holders............................ 19
Item 5. Other Information.............................................................. 19
Item 6. Exhibits and Reports on Form 8-K............................................... 19
Signatures.............................................................................. 20
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 31,
1995
APRIL 30, -----------
1996
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................... $ 53,427 $13,059
Accounts receivable, net of allowance for doubtful accounts of $550
and $443, respectively.......................................... 29,651 27,355
Notes receivable from related parties.............................. 72 153
Inventories........................................................ 48,743 40,882
Deferred income taxes.............................................. 2,627 2,627
Prepaid expenses and other......................................... 1,850 1,141
-------- -------
Total current assets....................................... 136,370 85,217
Property and Equipment, net.......................................... 8,378 6,582
Other................................................................ 1,705 177
-------- -------
Total assets............................................... $ 146,453 $91,976
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................... $ 63,940 $50,628
Lines of credit.................................................... -- 3,598
Current portion of capital lease obligations....................... 1,271 1,130
Accrued compensation and commissions............................... 3,025 1,961
Accrued bonuses.................................................... 2,487 3,645
Other accrued expenses............................................. 1,360 1,013
Income taxes payable............................................... 2,007 1,778
-------- -------
Total current liabilities.................................. 74,090 63,753
Long-term Liabilities:
Capital lease obligations, net of current portion.................. 1,454 1,599
Deferred income taxes.............................................. 390 390
-------- -------
Total liabilities.......................................... 75,934 65,742
-------- -------
Shareholders' Equity:
Common stock, no par value --
Authorized -- 100,000,000 shares
Outstanding -- 17,836,457, and 14,653,005 shares,
respectively.................................................... 35,037 2,222
Shareholder notes receivable related to common stock issuances..... (501) (501)
Retained earnings.................................................. 35,983 24,513
-------- -------
Total shareholders' equity................................. 70,519 26,234
-------- -------
Total liabilities and shareholders' equity................. $ 146,453 $91,976
======== =======
</TABLE>
See the accompanying notes to these consolidated condensed financial statements
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SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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<CAPTION>
3 MONTHS ENDED 6 MONTHS ENDED
APRIL 30, APRIL 30,
-------------------- ---------------------
1996 1995 1996 1995
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales........................................ $103,760 $62,980 $193,851 $123,488
Cost of sales.................................... 86,165 52,672 159,852 102,972
-------- ------- -------- --------
Gross profit..................................... 17,595 10,308 33,999 20,516
-------- ------- -------- --------
Operating expenses:
Research and development....................... 1,350 1,194 2,598 2,437
Sales and marketing............................ 3,750 2,502 7,037 4,774
General and administrative..................... 3,525 3,550 7,003 6,184
-------- ------- -------- --------
Total operating expenses.................. 8,625 7,246 16,638 13,395
-------- ------- -------- --------
Income from operations........................... 8,970 3,062 17,361 7,121
Other income (expense), net...................... 424 (82) 845 (124)
-------- ------- -------- --------
Income before provision for income taxes......... 9,394 2,980 18,206 6,997
Provision for income taxes....................... 3,476 1,554 6,736 3,284
-------- ------- -------- --------
Net income....................................... $ 5,918 $ 1,426 $ 11,470 $ 3,713
======== ======= ======== ========
Net income per share............................. $ 0.29 $ 0.08 $ 0.57 $ 0.21
======== ======= ======== ========
Weighted average common and common equivalent
shares outstanding............................. 20,611 17,569 20,284 17,578
======== ======= ======== ========
</TABLE>
See the accompanying notes to these consolidated condensed financial statements
4
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SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30,
(IN THOUSANDS)
(UNAUDITED)
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1996 1995
-------- --------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ 11,470 $ 3,713
Adjustments to reconcile net income to net cash provided by (used in)
operating activities --
Depreciation and amortization..................................... 990 331
Provision for doubtful accounts................................... 108 --
Loss on sale of equipment......................................... 24 --
Change in assets and liabilities
Increase in accounts and notes receivable....................... (2,323) (7,601)
Increase in inventories......................................... (7,861) (5,534)
Increase in deferred income taxes, net.......................... -- (755)
(Increase) decrease in prepaid expenses and other............... (709) 318
(Increase) decrease in other assets............................. (1,528) 680
Increase in accounts payable.................................... 13,312 2,830
Increase in income taxes payable................................ 229 1,196
Increase in accrued liabilities................................. 253 9
-------- --------
Net cash provided by (used in) operating activities.......... 13,965 (4,813)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................................. (2,177) (670)
-------- --------
Net cash used in investing activities............................. (2,177) (670)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit........................................ 16,069 17,763
Payments on lines of credit.......................................... (19,667) (17,176)
Payments of capital lease obligations................................ (637) (170)
Proceeds from sale of common stock................................... 32,815 111
-------- --------
Net cash provided by financing activities......................... 28,580 528
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... 40,368 (4,955)
CASH AND CASH EQUIVALENTS, beginning of period......................... 13,059 5,065
-------- --------
CASH AND CASH EQUIVALENTS, end of period............................... $ 53,427 $ 110
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes........................................... $ 6,507 $ 2,088
======== ========
Cash paid for interest............................................... $ 170 $ 179
======== ========
NON CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under capital leases.............. $ 633 $ 685
======== ========
</TABLE>
See the accompanying notes to these consolidated condensed financial statements
5
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SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The Interim Consolidated Condensed Financial Statements of SMART Modular
Technologies, Inc., a California corporation, and subsidiaries (the "Company")
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. These Interim Consolidated Condensed
Financial Statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's fiscal 1995 Form 10-K as
filed with the Securities and Exchange Commission on January 26, 1996.
The Interim Consolidated Condensed Financial Statements for the second
quarter of fiscal 1996 reflect, in the opinion of management, all adjustments
(which include only the normal recurring adjustments) necessary for a fair
presentation of financial position, results of operations and cash flows for
such periods. The Interim Consolidated Condensed Financial Statements for fiscal
1995 are provided for information purposes only. The results of operations for
the three and six month periods ended April 30, 1996 are not necessarily
indicative of the results that may be expected for the entire fiscal year ending
October 31, 1996, or any other future periods.
BUSINESS COMBINATION
On July 28, 1995, a wholly-owned subsidiary of the Company merged with Apex
Data, Inc., a Delaware corporation ("Apex"), which resulted in Apex becoming a
wholly-owned subsidiary of the Company. Apex shareholders received one share of
the Company's common stock for ten shares of Apex's common stock. This resulted
in the issuance of approximately 1,283,000 shares of the Company's common stock.
Additionally, outstanding options to acquire Apex common stock were exchanged
for options to acquire approximately 80,000 shares of the Company's common
stock. The merger was accounted for as a pooling of interests. Accordingly, the
Company's consolidated condensed financial statements for all periods presented
have been restated to include the financial statements of Apex.
REVENUE RECOGNITION
Revenue is recognized upon shipment to the customer. The Company provides
for estimated future returns for inventory rebalancing, stock rotation, and
established price protection arrangements.
NET INCOME PER SHARE
Net income per share has been computed using the weighted average number of
shares of common stock, common equivalent shares from convertible preferred
stock (when dilutive using the if converted method at date of issuance) and
common equivalent shares from stock options outstanding (when dilutive using the
treasury stock method). Pursuant to certain Securities and Exchange Commission
Staff Accounting Bulletins, common and common equivalent shares issued during
the twelve-month period prior to the Company's initial public offering have been
included in the calculation as if they were outstanding for all periods
presented (even if antidilutive using the treasury stock method and assuming an
initial public offering price of $15.00 per share).
PREFERRED STOCK CONVERSION
Upon the consummation of the Company's initial public offering of common
stock (November 17, 1995), all of the preferred stock outstanding as of that
date was converted into an aggregate of 3,200,000
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shares of common stock and the Company's authorized preferred stock was reduced
from 40,000,000 shares to 15,000,000 shares. Accordingly, all share and per
share amounts presented in the accompanying consolidated condensed financial
statements have been restated to reflect this conversion and the change in
authorized preferred stock.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and include material, labor and manufacturing costs. Inventories consist of the
following (in thousands):
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<CAPTION>
OCTOBER 31,
1995
APRIL 30, -----------
1996
-----------
(UNAUDITED)
<S> <C> <C>
Raw materials........................................ $30,233 $22,000
Work-in-process...................................... 6,106 7,792
Finished goods....................................... 12,404 11,090
------- -------
Total...................................... $48,743 $40,882
======= =======
</TABLE>
INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Company adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" which
addresses the accounting and reporting of investments in equity securities that
have readily determinable fair values and for investments in debt securities.
The provisions of this statement are not expected to have a material effect on
the Company's consolidated condensed financial statements.
2. LINES OF CREDIT:
During fiscal 1996, the Company entered into a revolving bank line of
credit agreement which expires in February 1997. Borrowings under this agreement
bear interest at the prime rate and are limited to $7,500,000. There were no
borrowings outstanding under this agreement as of April 30, 1996 or October 31,
1995.
The Company has an additional revolving line of credit agreement with
another bank. The agreement expires in February 1997. Borrowings under this
agreement bear interest at 2.6% above the rate for 30-day commercial paper
(8.21% at October 31, 1995) and are limited to $12,500,000. As of October 31,
1995, the outstanding balance was approximately $3,600,000. No borrowings were
outstanding under this agreement as of April 30, 1996.
Both agreements require that the Company maintain specified levels of
tangible net worth and comply with certain other covenants. Both line of credit
agreements are secured by substantially all of the Company's assets. The banks
have an intercreditor agreement whereby they agree to allocate the collateral
pro-rata among the two parties based upon the outstanding amounts.
4. RELATED PARTY TRANSACTIONS:
RESEARCH AND DEVELOPMENT FUNDING
In July 1994, the Company paid $30,000 for a warrant to purchase two
million shares of Series A preferred stock of a company in which certain
shareholders of the Company and members of its Board of Directors had purchased
a combined 42.8% interest. The Company has the right to exercise the warrant up
to 48 months after the date of issuance at $0.05 per warrant share. The Company
also entered into a license and supply agreement with the affiliate, whereby the
affiliate agreed to supply the Company with 100% of the Company's requirements
for certain of the affiliate's product, and the Company agreed to purchase 100%
of such requirements from the affiliate. In addition, the affiliate granted to
the Company certain license and trademark rights, with respect to the use and
modification of the affiliate's product. In exchange, the Company agreed to
provide research and development funding to the affiliate in an aggregate amount
of $750,000. As of April 30, 1996, such payments have been fully paid. The
license portion of the agreement has no expiration date. All other provisions of
the agreement shall continue in effect for a period of 15 years.
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In January 1996, the Company and the affiliate entered into an agreement
whereby the Company paid an additional $80,000 for a warrant to purchase two
million shares of Series B preferred stock of the affiliate. The Company has the
right to exercise the warrant for a period of up to 48 months after the date of
issuance at $0.15 per warrant share. The Company and the affiliate also entered
into a license and supply agreement similar to that described above. The funding
requirement for this new agreement totals $500,000 with $100,000 due at
inception, and an additional $100,000 due every six weeks, provided certain
milestones are met, until paid in full. The license portion of the agreement has
no expiration date. All other provisions of the agreement will continue in
effect for a period of 15 years. Concurrently, with the Company's purchase of
the warrant, certain shareholders of the Company and members of its Board of
Directors purchased additional common stock of the affiliate, which increased
their interest to 50.0% of the affiliate.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW:
SMART Modular Technologies, Inc., a California corporation (the "Company"),
commenced operations in 1989 and initially focused on the design and manufacture
of standard memory modules for original equipment manufacturers ("OEMs") and
semiconductor manufacturers. Standard memory modules implement industry standard
specifications, primarily utilize Dynamic Random Access Memory ("DRAM") and are
designed to be incorporated into a wide variety of electronic equipment. In
1991, the Company expanded its design, manufacturing and marketing efforts to
offer specialty memory modules and PC card memory products. Specialty memory
products include both custom and application specific products based on DRAM,
Static Random Access Memory ("SRAM") or Flash technologies. The Company expanded
its product lines in 1993 by offering a suite of PC card communication products.
In July 1995, the Company further expanded its PC card communication
products business with the acquisition of Apex Data, Inc., a Delaware
corporation ("Apex"). The Company acquired Apex in a stock for stock
acquisition. The acquisition of Apex has been accounted for as a pooling of
interests; accordingly, the Company's historical results of operations include
Apex's historical results of operations. Apex designs and markets wireless and
wireline PC card data/fax modem and connectivity products into both the computer
reseller and OEM channels.
Over the last eight quarters, the Company's gross margin has ranged from
16.4% to 19.6%. One of the primary factors affecting gross margin has been the
proportion of the Company's standard memory products manufactured on either a
turnkey or consignment basis. Products manufactured on a turnkey basis are
designed and manufactured by the Company with purchased memory devices. Products
manufactured on a consignment basis are generally designed and manufactured by
the Company with memory devices which are owned and supplied by the customer.
While products manufactured on a turnkey basis typically have a lower gross
margin than products manufactured on a consignment basis, products manufactured
on a turnkey basis generally contribute greater net sales and higher gross
profit per unit than products manufactured on a consignment basis.
The other primary factor affecting the Company's gross margin has been the
mix between sales of specialty memory, standard memory and PC card communication
products. A majority of the Company's net sales are currently derived from the
sales of its specialty memory products, which typically have higher gross margin
than the Company's standard memory products. The Company's PC card communication
products generally have the Company's highest gross margin, while currently
representing the smallest portion of its net sales.
The Company expects that its gross margin will continue to vary based on
these and other factors, including changes in the selling prices for its
products, pricing by competitors and suppliers, the level of manufacturing
efficiencies achieved and the mix of sales between the OEM and computer reseller
channels. The selling prices of the Company's products have declined in the past
and the Company expects that prices will continue to decline in the future. In
particular, the selling prices of the Company's existing products have declined
due to recent significant declines in SRAM and DRAM semiconductor prices and
declines in Flash semiconductor prices. Accordingly, the Company's ability to
maintain or increase gross profit and gross
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margin will be highly dependent upon its ability to increase unit sales volumes
of existing products and to introduce and sell new products in quantities and
with gross margins sufficient to compensate for the anticipated declines in
selling prices.
The fifth paragraph of this Overview section contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those projected in the
forward-looking statements as a result of certain factors including without
limitation those set forth in "Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FACTORS THAT MAY AFFECT FUTURE
RESULTS." In particular, note the factors entitled "Significant Customer
Concentration," "Intense Competition," "Fluctuations in Operating Results,"
"Dependence on Sole or Limited Sources of Supply" and "Requirement for Response
to Rapid Technological Change." The discussion of those factors is incorporated
herein by this reference as if said discussion was fully set forth at this
point.
The Company earned net income of $5.9 million on net sales of $103.8
million for the second quarter of fiscal 1996 ended April 30, 1996, compared
with net income of $1.4 million on net sales of $63.0 million for the same
period of fiscal 1995. Net income for the first six months of fiscal 1996 was
$11.5 million on net sales of $193.9 million compared to net income of $3.7
million on net sales of $123.5 million for the same period of fiscal 1995.
RESULTS OF OPERATIONS:
The following table sets forth certain consolidated condensed statements of
income data of the Company expressed as a percentage of net sales (unaudited):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
----------------- -----------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales............................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales........................................... 83.0 83.6 82.5 83.4
----- ----- ----- -----
Gross profit............................................ 17.0 16.4 17.5 16.6
Operating expenses:
Research and development.............................. 1.3 1.9 1.3 2.0
Sales and marketing................................... 3.6 4.0 3.6 3.9
General and administrative............................ 3.4 5.6 3.6 5.0
----- ----- ----- -----
Total operating expenses...................... 8.3 11.5 8.6 10.8
----- ----- ----- -----
Income from operations.................................. 8.6 4.9 9.0 5.8
Other income (expense), net............................. 0.4 (0.1) 0.4 (0.1)
----- ----- ----- -----
Income before provision for income taxes................ 9.1 4.7 9.4 5.7
Provision for income taxes.............................. 3.4 2.5 3.5 2.7
----- ----- ----- -----
Net income.................................... 5.7% 2.3% 5.9% 3.0%
===== ===== ===== =====
</TABLE>
NET SALES
Net sales consist of sales of specialty memory modules and PC cards,
standard memory modules and PC card communication products, less returns and
discounts. Net sales for the second quarter of fiscal 1996 increased 64.8% to
$103.8 million from $63.0 million for the same period of fiscal 1995. Net sales
for the first six months of fiscal 1996 increased 57.0% to $193.9 million from
$123.5 million for the comparable period of fiscal 1995. The increase for both
the three and the six months ended April 30, 1996 was primarily due to an
increase in sales of specialty memory products, such as L2 cache memory modules,
to both existing and new customers. The Company's sales of PC card communication
products to both new and existing customers also
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increased significantly during the three and six months ended April 30, 1996 as
compared to the same periods of fiscal 1995.
GROSS PROFIT
Cost of sales includes the costs of semiconductor devices and other
components and materials purchased by the Company for its products, as well as
the direct labor and overhead costs associated with manufacturing. Gross profit
increased 70.7% to $17.6 million for the second quarter of fiscal 1996 from
$10.3 million for the same period of fiscal 1995. Gross margin increased to
17.0% for the second quarter of fiscal 1996 from 16.4% for the comparable period
of fiscal 1995. Gross profit for the first six months of fiscal 1996 increased
65.7% to $34.0 million from $20.5 million for the comparable period of fiscal
1995. Gross margin increased to 17.5% for the first six months of fiscal 1996
from 16.6% for the comparable period of fiscal 1995. The increase in gross
margin was principally due to an increase in the percentage of net sales derived
from higher margin specialty memory products as compared to sales of lower
margin standard memory products during the three and six months ended April 30,
1996 as compared to the same periods of fiscal 1995. In addition, an increase in
the proportion of standard memory products manufactured on a consignment basis
as compared to a turnkey basis further contributed to the increase in gross
margin for the three and six months ended April 30, 1996 as compared to the same
periods of fiscal 1995.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of the costs associated
with the design and testing of new products. These costs relate primarily to
costs of personnel, management and employee bonuses associated with development
efforts, materials, development of tooling and outside design and testing
services. Research and development expenses incurred during the second quarter
of fiscal 1996 were $1.4 million, representing an increase of 13.1% from $1.2
million for the comparable period of fiscal 1995 and comprising 1.3% and 1.9% of
net sales, respectively. For the first six months of fiscal 1996, research and
development expenses totaled $2.6 million, up 6.6% from $2.4 million for the
corresponding six month period of fiscal 1995 and comprising 1.3% and 2.0% of
net sales, respectively. The decrease in research and development expenses as a
percentage of net sales for the three and six months ended April 30, 1996 as
compared to the same periods of fiscal 1995 was due to a change in the Company's
bonus structure which rewards the development efforts of certain key management
employees and was partially offset by an overall increase in non-compensation
based research and development expenses.
SALES AND MARKETING
Sales and marketing expenses include salaries and commissions of employees
and independent sales personnel, as well as the costs of advertising, promotions
and trade shows. Sales and marketing expenses incurred during the second quarter
of fiscal 1996 totaled $3.8 million, representing an increase of 49.9% from $2.5
million for the comparable quarter of fiscal 1995 and comprising 3.6% and 4.0%
of net sales, respectively. For the first six months of fiscal 1996, sales and
marketing expenses totaled $7.0 million, representing an increase of 47.4% from
$4.8 million for the same periods of fiscal 1995 and comprising 3.6% and 3.9% of
net sales, respectively. The increase in absolute dollars of sales and marketing
expenses for the three and six months ended April 30, 1996 as compared to the
same periods of fiscal 1995 was primarily due to increased commissions
associated with higher sales volumes, an increase in the number of sales and
marketing personnel and the increase of advertising activities designed to
further promote sales of the Company's products. The Company expects sales and
marketing expenses to increase in absolute dollars in future periods.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of personnel costs,
including performance-based bonuses and employee benefits, rental costs and
other support costs including utilities, insurance and professional fees.
General and administrative expenses incurred during the second quarter of both
fiscal 1996 and 1995 were $3.5 million and comprised 3.4% and 5.6% of net sales,
respectively. For the first six months of fiscal 1996, general and
administrative expenses totaled $7.0 million, up 13.2% from $6.2 million and
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comprising 3.6% and 5.0% of net sales, respectively. For the three and six
months ended April 30, 1996 as compared to the same periods of fiscal 1995, the
decrease in general and administrative expenses as a percentage of net sales was
due in part to the elimination of significant operational costs related to
Apex's operations, which were integrated into the Company's operations. In
addition, a change in the Company's bonus structure for certain key employees
contributed to the percentage decrease. The Company expects general and
administrative expenses to increase in absolute dollars in future periods.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income, less
interest expense. Interest expense is attributable to the Company's utilization
of its lines of credit. Subsequent to the fiscal 1995 year end, the Company
repaid the outstanding balances on its lines of credit. Interest income from the
proceeds of the Company's initial public offering of its common stock has
resulted in a significant increase in other income.
PROVISION FOR INCOME TAXES
Provisions for income taxes were $3.5 million and $1.6 million for the
second quarter of fiscal 1996 and fiscal 1995, respectively, resulting in
effective tax rates of 37.0% and 52.2%, respectively. For the first six months
of fiscal 1996 and fiscal 1995, provisions for income taxes totaled $6.7 million
and $3.3 million, respectively, resulting in respective tax rates of 37.0% and
46.9%. The Company does not expect its effective tax rate to vary significantly
from its rate for the second quarter of fiscal 1996. At April 30, 1996, the
Company had net operating loss carryforwards resulting from the merger with Apex
totaling approximately $1.9 million for federal income tax purposes and $1.2
million for state income tax purposes. In accordance with certain provisions of
the Internal Revenue Code, a change in ownership of greater than 50% within a
three year period results in an annual limitation of the Company's ability to
utilize its net operating loss carryforwards from tax periods prior to the
ownership change. Accordingly, utilization of the Company's net operating losses
are subject to this annual limitation.
LIQUIDITY AND CAPITAL RESOURCES:
Since its inception, the Company has used funds generated primarily from
operations, certain borrowings and capital leases to support its operations,
acquire capital equipment and finance inventory and accounts receivable. For the
six months ended April 30, 1996, the Company provided $14.0 million in net cash
from operating activities versus a deficit in operating activities of $4.8
million for the same period of fiscal 1995. At April 30, 1996, the Company had
$53.4 million in cash and cash equivalents, and $62.3 million in working
capital. At October 31, 1995, the Company had $13.1 million in cash and cash
equivalents, and $21.5 million in working capital. The increase in working
capital is primarily attributable to $32.9 million in net cash proceeds
generated from the Company's initial public offering of its common stock. These
proceeds were used to fund deficits in operating and investing activities
generated during the first quarter of fiscal 1996. In fiscal 1995, the Company
primarily funded its financing and investing deficits from amounts borrowed
under the existing lines of credit and utilization of existing cash balances.
The Company expects to fund any future deficits in operating, investing and
financing activities from a combination of available cash reserves and certain
short term borrowings.
At April 30, 1996, the Company has two revolving lines of credit in an
aggregate amount of $20.0 million, each of which are secured by substantially
all of the Company's assets with terms expiring in February 1997. Amounts
available for borrowing under the Company's existing lines of credit are limited
to the lower of the commitment amount or a borrowing base amount calculated
based on certain levels of inventory and accounts receivable. There were no
borrowings under these lines of credit as of April 30, 1996. The Company repaid
the outstanding balances on its lines of credit with a portion of the proceeds
from the Company's initial public offering of its common stock. The lines of
credit have restrictions on the payment of dividends and require the Company to
maintain certain minimum financial covenants including the maintenance of
minimum tangible net worth and minimum annual cash flow.
11
<PAGE> 12
Capital expenditures totaled approximately $2.8 million and $1.4 million
for the six month periods ended April 30, 1996 and 1995, respectively. These
expenditures were primarily for manufacturing equipment, test equipment and the
expansion of the Company's manufacturing facilities. The Company expects to fund
capital expenditures in fiscal 1996 through working capital and/or capital
leases.
The Company has entered into certain capital lease arrangements. The
outstanding principal balance on these obligations was $2.7 million at April 30,
1996 and October 31, 1995.
The Company believes that the net proceeds from its initial public offering
of its common stock, anticipated cash flows from operations and amounts
available under its existing lines of credit will be sufficient to meet its
working capital and capital expenditure requirements for the next 12 months.
The first, third and fifth paragraphs of this Liquidity and Capital
Resources section contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in the forward-looking statements as a result of
certain factors including without limitation those set forth in "Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- FACTORS THAT MAY AFFECT FUTURE RESULTS." In particular, note the
factors entitled "Significant Customer Concentration," "Intense Competition,"
"Fluctuations in Operating Results," "Dependence on Sole or Limited Sources of
Supply" and "Requirement for Response to Rapid Technological Change." The
discussion of those factors is incorporated herein by this reference as if said
discussion was fully set forth at this point.
FACTORS THAT MAY AFFECT FUTURE RESULTS:
The Company's business, financial condition and results of operations can
be impacted by a number of factors including without limitation the following
factors.
SIGNIFICANT CUSTOMER CONCENTRATION
A relatively small number of customers have accounted for a significant
percentage of the Company's net sales. In each of fiscal 1995 and fiscal 1994,
the Company's ten largest customers accounted for 68% of net sales. In fiscal
1995, Cisco Systems, Inc. ("Cisco Systems") accounted for 18% of net sales, IBM
Corporation ("IBM") accounted for 15% of net sales and Hewlett-Packard Company
("Hewlett-Packard") accounted for 10% of net sales. In fiscal 1994,
Hewlett-Packard accounted for 21% of net sales, IBM accounted for 20% of net
sales and Intel Corporation ("Intel") accounted for 10% of net sales. The
Company expects to continue to be dependent upon these customers for a
significant percentage of its net sales. However, there can be no assurance that
IBM, Cisco Systems, Hewlett-Packard and Intel will continue to utilize the
Company's products at current levels, if at all. The Company expects that sales
to relatively few customers will continue to account for a significant
percentage of its net sales in the foreseeable future and believes that its
financial results will depend in significant part upon the success of its
customers' products. The loss of a major customer or any reduction in orders by
any such customer would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company generally has no firm long-term volume commitments from its
customers and generally enters into individual purchase orders with its
customers. The Company has experienced cancellations of orders and fluctuations
in order levels from period to period and expects it will continue to experience
such cancellations and fluctuations in the future. In addition, customer
purchase orders may be canceled and order volume levels can be changed, canceled
or delayed with limited or no penalties. The replacement of canceled, delayed or
reduced purchase orders with new business cannot be assured. Moreover, the
Company's business, financial condition and results of operations will depend in
significant part upon its ability to obtain orders from new customers, as well
as the financial condition and success of its customers, its customers' products
and the general economy. The factors affecting any of the Company's major
customers or their customers could have a material adverse effect on the
Company's business, financial condition and results of operations.
12
<PAGE> 13
INTENSE COMPETITION
The memory module and PC card industries are intensely competitive. The
memory module manufacturing and PC card markets are each comprised of a large
number of competitive companies, several of which have achieved a substantial
share of their respective markets. Certain of the Company's competitors in each
of these markets have substantially greater financial, marketing, technical,
distribution and other resources, greater name recognition, lower cost
structures and larger customer bases than the Company. In the OEM memory module
market, the Company competes against semiconductor manufacturers that maintain
captive memory module production capabilities, including Celestica (a division
of IBM), Integrated Device Technology, Inc., Micron Electronics, Inc. (a
subsidiary of Micron Technology Inc.) and Multichip Technology, Inc. (a division
of Cypress Semiconductor Corporation). The Company also competes with
independent memory module manufacturers, including PNY Electronics, Inc. In the
computer systems reseller market for memory modules, the Company primarily
competes with Kingston Technology, Inc., Viking Technology, Inc. and Vision Tek,
Inc. In the PC card market, the Company competes with AT&T/Paradyne Corp., Hayes
Microcomputer Products, Inc., U.S. Robotics, Inc. and Centennial Technologies,
Inc. The Company faces competition from current and prospective customers that
evaluate the Company's capabilities against the merits of manufacturing products
internally. In addition, the Company competes and expects to continue to compete
with certain of its suppliers. These suppliers may have the ability to
manufacture competitive products at lower costs than the Company as a result of
their higher levels of integration. The Company also faces and may face
competition from new and emerging companies that have recently entered or may in
the future enter the markets in which the Company serves.
The Company expects its competitors to continue to improve the performance
of their current products, to reduce their current product sales prices and to
introduce new products that may offer greater performance and improved pricing,
any of which could cause a decline in sales or loss of market acceptance of the
Company's products and thereby have a material adverse effect on the Company's
business, financial condition and results of operations.
There can be no assurance that enhancements to or future generations of
competitive products will not be developed that offer superior prices and
technical performance features than the Company's products. To be competitive,
the Company must continue to provide technologically advanced products and
manufacturing services, maintain quality levels, offer flexible delivery
schedules, deliver finished products on a reliable basis and compete favorably
on the basis of price. In addition, increased competitive pressure has led in
the past and may continue to lead to intensified price competition, resulting in
lower prices and gross margin, which could materially adversely affect the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will be able to compete successfully in the
future.
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations and gross margin have in the past
fluctuated significantly and may in the future continue to fluctuate
significantly from period to period. The primary factors that have affected and
may in the future affect the Company's results of operations include the loss of
a principal customer or the short term loss of a customer due to product
inventory accumulation by the customer, the inability to procure required
components and adverse changes in the mix of products sold by the Company. Other
factors that may affect the Company's results of operations in the future
include fluctuating market demand for, and declines in the selling prices of,
the Company's products, market acceptance of new products and enhanced versions
of the Company's products, delays in the introduction of new products and
enhancements to existing products, manufacturing inefficiencies associated with
the start up of new product introductions, the timing of new product
announcements and releases by the Company or its competitors, the timing of
significant orders, the ability to volume produce products and meet customer
requirements, patterns of spending by customers, delays, cancellations or
reschedulings of orders due to customer financial difficulties or other events,
inventory obsolescence, including the reduction in value of the Company's
inventories due to unexpected price declines, unexpected product returns, the
timing of expenditures in anticipation of increased sales, cyclicality in the
Company's targeted markets, regulatory changes and expenses associated with
acquisitions. In particular,
13
<PAGE> 14
recently there have been significant declines in SRAM and DRAM semiconductor
prices and declines in Flash semiconductor prices that could affect the
valuation of the Company's inventory.
In addition, operating results in future periods may be impacted by general
economic conditions and various competitive factors, including price-based
competition and competition from other parties employing competing technologies.
The Company's operating results could also be affected in any given period by
business interruptions or costs associated with an earthquake, hurricanes, fire,
theft or other similar events outside the control of the Company, which events
may not be fully covered, or covered at all, by applicable insurance coverages.
The concentration of the Company's assets in its Fremont, California facility
could make the Company's exposure to such events greater than if the Company's
assets were more geographically dispersed.
The Company's gross margin has varied and will continue to vary
significantly based on a variety of factors, including the mix of products sold
and the manufacturing services provided, the channels through which the
Company's products are sold, declines in selling prices, the level of
manufacturing efficiencies achieved and pricing by competitors or suppliers. The
selling prices of the Company's existing products have declined in the past and
the Company expects that prices will continue to decline in the future. In
particular, the selling prices of the Company's existing products have declined
due to recent significant declines in SRAM and DRAM semiconductor prices and
declines in Flash semiconductor prices. Accordingly, the Company's ability to
maintain or increase net sales will be highly dependent upon its ability to
increase unit sales volumes of existing products and to introduce and sell new
products in quantities sufficient to compensate for the anticipated declines in
selling prices. Declining selling prices may also materially adversely affect
the Company's gross margin unless the Company is able to reduce its cost per
unit to offset declines in selling prices. There can be no assurance that the
Company will be able to increase unit sales volumes, introduce and sell new
products or reduce its cost per unit. In addition, the Company's business has in
the past been subject to seasonality, although the Company believes such
seasonality has been masked by its recent growth.
Sales of the Company's individual products and product lines toward the end
of a product's life cycle are typically characterized by steep declines in
sales, pricing and gross margin, the precise timing of which may be difficult to
predict. The Company could experience unexpected reductions in sales of products
as customers anticipate new product purchases. These factors could give rise to
charges for obsolete or excess inventory, returns of products by distributors,
or substantial price protection charges or discounts. In the past, the Company
has had to write-down and write-off obsolete or excess inventory. To the extent
that the Company is unsuccessful in managing product transitions, its business,
financial condition and results of operations could be materially adversely
affected. The Company's results of operations are also affected by the value of
the United States dollar due to the fact that the Company purchases components
from foreign suppliers and that the Company sells its products outside of the
United States. Fluctuations in the value of the United States dollar in relation
to foreign currencies could increase the cost of certain components for the
Company's products and could make the price of the Company's products in foreign
countries more expensive compared to the price of other companies' products
denominated in other currencies.
The need for continued significant expenditures for capital equipment
purchases, research and development and ongoing customer service and support,
among other factors, will make it difficult for the Company to reduce its
operating expenses in any particular period if the Company's net sales for that
period are not met. The Company has significantly increased its expense levels
to support its recent growth, and there can be no assurance that the Company
will maintain its current level of net sales or rate of growth for any period in
the future. Accordingly, there can be no assurance that the Company will be able
to be profitable or that it will not sustain losses in future periods. The
Company believes that period-to-period comparisons of the Company's financial
results are not necessarily meaningful and should not be relied upon as
indications of future performance. Due to the foregoing factors, it is likely
that in some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's common stock may be materially adversely affected.
14
<PAGE> 15
DEPENDENCE ON SOLE OR LIMITED SOURCES OF SUPPLY
The Company is dependent on certain suppliers, including limited and sole
source suppliers, to provide key components used in the Company's products. In
particular, the Company is dependent in significant part upon certain limited or
sole source suppliers for critical components in the Company's memory module and
PC card products. The Company also depends on sole source third party
manufacturers to produce certain of the Company's PC card products. The
electronics industry has experienced in the past and may experience in the
future shortages in semiconductor memory devices, including DRAM, SRAM and Flash
memory. The Company has experienced and may continue to experience delays in
component deliveries and quality problems with respect to certain component
deliveries which have caused and could in the future cause delays in product
shipments and have required and could in the future require the redesign of
certain products. The Company generally has no written agreements with its
suppliers. The inability to continue to obtain sufficient supplies of components
as required, or to develop alternative sources if required, could cause delays,
disruptions or reductions in product shipments or require product redesigns
which could damage relationships with current or prospective customers, could
increase prices and could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will receive adequate component supplies on a timely
basis in the future.
MANAGEMENT OF GROWTH; EXPANSION OF OPERATIONS
The Company has significantly expanded its operations over the last several
years. This growth has resulted in a significant increase in responsibility for
existing management which has placed, and may continue to place, a significant
strain on the Company's limited personnel and management, manufacturing and
other resources. The Company's ability to manage the recent and any possible
future growth will depend upon a significant expansion of its manufacturing,
accounting and other internal management systems and the implementation of a
variety of procedures and controls. There can be no assurance that significant
problems in these areas will not occur. Any failure to expand these systems and
implement such procedures and controls in an efficient manner and at a pace
consistent with the Company's business could have a material adverse effect on
the Company's business, financial condition and results of operations.
In connection with the Company's recent growth, the Company's operating
expenses have increased significantly and the Company anticipates that operating
expenses will continue to increase significantly in the future. In particular,
in order to continue to provide customer service and quality products and to
meet any anticipated demand of its customers, the Company will be required to
continue to increase staffing and other expenses, including expenditures on
capital equipment, sales and marketing. Should the Company increase its
expenditures in anticipation of a future level of sales that does not
materialize, the Company's business, financial condition and results of
operations would be materially adversely affected. Certain customers have
required and may continue to require rapid increases in production and
accelerated delivery schedules which have placed and may continue to place an
excessive burden on the Company's resources. In order to achieve anticipated
sales levels and profitability, the Company will continue to be required to
manage its assets and operations efficiently. In addition, should the Company
continue to expand geographically, it may experience certain inefficiencies from
the management of geographically dispersed facilities.
DEPENDENCE ON SEMICONDUCTOR, COMPUTER, TELECOMMUNICATIONS AND NETWORKING
INDUSTRIES
The semiconductor industry has been characterized by cyclical market
conditions. This industry has experienced significant economic downturns at
various times, characterized by diminished product demand, accelerated erosion
of average selling prices and production overcapacity. The Company's rate of
growth has been positively impacted by recent trends in the semiconductor
industry in general and the memory market in particular. There can be no
assurance as to how long these favorable trends will continue. Recently there
have been significant declines in SRAM and DRAM semiconductor prices and
declines in Flash semiconductor prices. These price declines as well as any
future price declines could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, the
Company may experience substantial period-to-period fluctuations in future
operating results due to general industry conditions or events occurring in the
general economy. From time to time, the computer, telecommunications and
networking
15
<PAGE> 16
industries, like the semiconductor industry, have experienced significant
downturns, often in connection with, or in anticipation of, declines in general
economic conditions. Accordingly, any factor adversely affecting the
semiconductor, computer, telecommunications or networking industries or
particular segments within the semiconductor, computer, telecommunications or
networking industries, such as the market for memory products, could materially
adversely affect the Company's business, financial condition and results of
operations. There can be no assurance that the Company's net sales and results
of operations will not be materially adversely affected in the future if
downturns or slowdowns occur in the semiconductor, computer, telecommunications,
networking or other industries utilizing the Company's products.
REQUIREMENT FOR RESPONSE TO RAPID TECHNOLOGICAL CHANGE
The semiconductor, computer, telecommunications and networking industries
are subject to rapid technological change, short product life cycles, frequent
new product introductions and enhancements, changes in end-user requirements and
evolving industry standards. The Company's ability to be competitive in these
markets will depend in significant part upon its ability to invest significant
amounts for research and development efforts and to successfully develop,
introduce and sell new products and enhancements on a timely and cost-effective
basis that respond to changing customer requirements and that meet evolving
industry standards. The Company is currently focusing its research and
development resources on the development of Flash and SRAM products, multichip
module manufacturing techniques and the development of a PC card universal
modem. Any success of the Company in developing new and enhanced products will
depend upon a variety of factors, including integration of the various elements
of its complex technology, timely and efficient completion of product design,
timely and efficient implementation of manufacturing and assembly processes,
availability of production capacity, achievement of acceptable manufacturing
yields and product performance, quality and reliability. The Company has
experienced and may in the future experience delays from time to time in
development and introduction of new products. Moreover, there can be no
assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new products or enhancements. There can be no
assurance that defects or errors will not be found in the Company's products
after commencement of commercial shipments, which could result in the loss of or
delay in market acceptance. The inability of the Company to introduce in a
timely manner new products or enhancements that contribute to sales could have a
material adverse effect on the Company's business, financial condition and
results of operations.
ACQUISITIONS
In July 1995, the Company acquired Apex, a designer, developer and marketer
of wireline, wireless and LAN PC card data communication products for the mobile
computing market. Apex incurred a net loss during its fiscal year ended March
31, 1994 and its accountants qualified their audit report dated July 12, 1994
with a going concern qualification. There can be no assurance that Apex's or the
Company's operations will be profitable after the acquisition. The acquisition
of Apex or other companies has involved or may involve numerous risks, including
difficulties in the assimilation of the operations, technologies and products of
the acquired company, unexpected liabilities, unforeseen operating difficulties,
the diversion of management's attention from other business concerns, risks of
entering markets in which the Company has no or limited direct prior experience,
dilutive issuances of equity securities, the potential loss of key employees and
the use of cash and other resources that would otherwise be available for the
ongoing development of the Company's business. There can be no assurance that
the Company will be able to efficiently integrate Apex's operations into the
Company's overall operations or that the anticipated benefits of the Apex
acquisition will be realized.
DEPENDENCE ON KEY PERSONNEL
The Company's future operating results depend in significant part upon the
continued contributions of its key technical and senior management personnel,
many of whom would be difficult to replace. None of such persons, including the
executive officers, has an employment or non-competition agreement with the
Company. The Company's future operating results also depend in significant part
upon its ability to attract and retain qualified management, manufacturing and
quality assurance, engineering, marketing, sales and support
16
<PAGE> 17
personnel. The Company is actively recruiting such personnel. However,
competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting or retaining such personnel now or
in the future. There may be only a limited number of persons with the requisite
skills to serve in these positions and it may be increasingly difficult for the
Company to hire such persons over time. The loss of any key employee, the
failure of any key employee to perform in his or her current position, the
Company's inability to attract and retain skilled employees as needed or the
inability of the officers and key employees of the Company to expand, train and
manage the Company's employee base could materially adversely affect the
Company's business, financial condition and results of operations.
INTERNATIONAL SALES
International sales accounted for 14% of net sales in both fiscal 1995 and
fiscal 1994. The Company anticipates that international sales will continue to
account for a substantial portion of net sales. As a result, a significant
portion of the Company's sales will be subject to certain risks, including
changes in regulatory requirements, tariffs and other barriers, timing and
availability of export licenses, political and economic instability,
difficulties in accounts receivable collections, natural disasters, difficulties
in staffing and managing foreign subsidiary and branch operations, difficulties
in managing distributors, difficulties in obtaining governmental approvals for
telecommunications and other products, foreign currency exchange fluctuations,
the burden of complying with a wide variety of complex foreign laws and treaties
and potentially adverse tax consequences. The Company is also subject to the
risks associated with the imposition of legislation and regulations relating to
the import or export of high technology products. The Company cannot predict
whether quotas, duties, taxes or other charges or restrictions upon the
importation or exportation of the Company's products will be implemented by the
United States. Fluctuations in currency exchange rates could cause the Company's
products to become relatively more expensive to customers in a particular
country, leading to a reduction in sales or profitability in that country.
Although the Company's sales are currently denominated primarily in United
States dollars, future international activity may result in foreign currency
denominated sales. Gains and losses on the conversion to United States dollars
of accounts receivable and accounts payable arising from international
operations may contribute to fluctuations in the Company's results of
operations. Some of the Company's customer purchase orders and agreements are
governed by foreign laws, which may differ significantly from United States
laws. Therefore, the Company may be limited in its ability to enforce its rights
under such agreements and to collect damages, if awarded. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company's business, financial condition and results of operations.
NO ASSURANCE OF PRODUCT QUALITY, PERFORMANCE AND RELIABILITY
The Company expects that its customers will continue to establish demanding
specifications for quality, performance, reliability and delivery. In the past,
the Company has experienced quality problems resulting in product returns and
cancellations. To date, the Company's quality problems have not had a
significant effect on the Company's results of operations and the known quality
problems have been or are in the process of being remedied. There can be no
assurance that problems will not occur in the future with respect to the
quality, performance, reliability and delivery of the Company's products. If
such problems occur, the Company could experience increased costs, delays in or
cancellations or reschedulings of orders or shipments, delays in collecting
accounts receivable and increases in product returns and discounts, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTY REGARDING PROTECTION OF PROPRIETARY RIGHTS
The Company attempts to protect its intellectual property rights through
patents, trademarks, trade secrets and a variety of other measures including
non-disclosure agreements. There can be no assurance, however, that such
measures will provide adequate protection for the Company's trade secrets or
other proprietary information, that disputes with respect to the ownership of
its intellectual property rights will not arise, that the Company's trade
secrets or proprietary technology will not otherwise become known or be
independently developed by competitors or that the Company can otherwise
meaningfully protect its
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<PAGE> 18
intellectual property rights. There can be no assurance that patents will issue
from pending or future applications or that, if patents are issued, they will
not be challenged, invalidated or circumvented, or that rights granted
thereunder will provide meaningful protection or other commercial advantage to
the Company. Furthermore, there can be no assurance that third parties will not
develop similar products, duplicate the Company's products or design around the
patents owned by the Company or that third parties will not assert intellectual
property infringement claims against the Company. In addition, there can be no
assurance that foreign intellectual property laws will adequately protect the
Company's intellectual property rights abroad. The failure of the Company to
protect its proprietary rights could have a material adverse effect on its
business, financial condition and results of operations.
In the semiconductor, computer, telecommunications and networking
industries, it is typical for companies to receive notices from time to time
alleging infringement of patents or other intellectual property rights of
others. While there is currently no material pending intellectual property
litigation involving the Company, the Company has been and may from time to time
continue to be notified of claims that it may be infringing patents, copyrights
or other intellectual property rights owned by third parties. There can be no
assurance that these or other companies will not in the future pursue claims
against the Company with respect to the alleged infringement of patents,
copyrights or other intellectual property rights owned by third parties. In
addition, litigation may be necessary to protect the Company's intellectual
property rights and trade secrets, to determine the validity of and scope of the
proprietary rights of others or to defend against third party claims of
invalidity. Any litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations.
There can be no assurance that infringement, invalidity, right to use or
ownership claims by third parties or claims for indemnification resulting from
infringement claims will not be asserted in the future. The Company has also
entered into license agreements in the past regarding certain alleged
infringement claims asserted by third parties. If any other claims or actions
are asserted against the Company, the Company may again seek to obtain a license
under a third party's intellectual property rights. There can be no assurance,
however, that a license will be available under reasonable terms or at all. The
failure to obtain a license under a patent or intellectual property right from a
third party for technology used by the Company could cause the Company to incur
substantial liabilities and to suspend the manufacture of the products utilizing
the invention. In addition, should the Company decide to litigate such claims,
such litigation could be extremely expensive and time consuming and could
materially adversely affect the Company's business, financial condition and
results of operations, regardless of the outcome of the litigation.
18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: For a list of exhibits to this Form 10-Q see the exhibit
index located on pages 21-22.
(b) Reports on Form 8-K: There were no reports on Form 8-K filed during the
three months ended April 30, 1996.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements 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.
SMART MODULAR TECHNOLOGIES, INC.
By: /s/ LATA KRISHNAN
------------------------------------
Lata Krishnan
Vice President, Finance and
Administration,
Chief Financial Officer and
Secretary
(Duly Authorized Officer, Principal
and
Financial Accounting Officer)
Date: June 14, 1996
20
<PAGE> 21
SMART MODULAR TECHNOLOGIES, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- - ----------- ---------------------------------------------------------------------- ------------
<C> <S> <C>
3.1(1) Registrant's Amended and Restated Articles of Incorporation
3.2(1) Registrant's Amended Bylaws.
4.1(1) Registration Rights Agreement dated July 26, 1995.
4.2(1) Registrant's specimen stock certificate.
4.3 Termination to the Registration Rights Agreement dated July 26, 1995.
10.1(1) 1989 Incentive Stock Plan, as amended, and forms of agreements
attached thereto.
10.2(1) 1995 Employee Stock Purchase Plan, and forms of agreements attached
thereto.
10.3(1) 1995 Director Option Plan, and forms of agreements attached thereto.
10.4(1) 1995 Stock Plan, and forms of agreements attached thereto.
10.5(1) Form of Indemnification Agreement between the Registrant and its
officers, directors and certain significant employees.
10.6(1) Standard Triple Net Industrial Lease between the Registrant and Pactel
Properties dated November 18, 1991.
10.7(1) First Amendment to Lease between the Registrant and Pactel Properties
dated July 19, 1993.
10.8(1) Second Amendment to Lease between the Registrant and Riggs National
Bank of Washington, D.C. as Trustee of the Multi-Employer Property
Trust Northport Business Park, a National Banking Association dated
May 31, 1994.
10.9(1) Third Amendment to Lease between the Registrant and Riggs National
Bank of Washington, D.C. as Trustee of the Multi-Employer Property
Trust Northport Business Park, a National Banking Association dated
November 1994.
10.10(1) Standard Triple Net Industrial Lease between the Registrant and Riggs
National Bank of Washington, D.C., as Trustee of the Multi-Employer
Property Trust, dated June 18, 1995.
10.11(1) Lease Contract between the Registrant and The Puerto Rico Industrial
Development Company dated April 24, 1995.
10.12(1) Note, Loan and Security Agreement between the Registrant and Merrill
Lynch Business Financial Services Inc. dated May 19, 1993.
10.13(1) Letter Agreement between the Registrant and Merrill Lynch Business
Financial Services Inc. dated December 28, 1994.
10.14(1) Letter Agreement between the Registrant and Merrill Lynch Business
Financial Services Inc. dated June 27, 1995.
10.15(1) Intercreditor Agreement among the Registrant, Merrill Lynch Business
Financial Services Inc. and Imperial Bank dated June 27, 1995.
10.16(1) Security and Loan Agreement between the Registrant and Imperial Bank
dated July 19, 1995.
*10.17(1) License and Supply Agreement between the Registrant and Krypton
Isolation, Inc. dated July 22, 1994.
10.18(1) Warrant Purchase Agreement between the Registrant and Krypton
Isolation, Inc. dated July 27, 1994.
10.19(1) Holders' Agreement dated July 27, 1994 by and among Krypton Isolation,
Inc. and certain individuals and entities identified on Exhibit A
attached thereto.
10.20(1) Common Stock Purchase Agreement dated July 27, 1994 by and among
Krypton Isolation, Inc. and the individuals identified on Exhibit A
attached thereto.
10.21(1) First Amendment to the Krypton Isolation, Inc. Warrant to Purchase
2,000,000 Shares of Series A Preferred Stock between the Registrant
and Krypton Isolation, Inc. dated October 24, 1995.
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- - ----------- -------- ------------
<S> <C> <C>
10.22(1) Letter of Intent dated as of October 24, 1995 by and among Krypton
Isolation, Inc., the Registrant and certain individuals identified on
the signature pages thereto.
**10.23(2) License and Supply Agreement between the Registrant and Krypton
Isolation, Inc. dated January 29, 1996.
10.24(2) Warrant Purchase Agreement between the Registrant and Krypton
Isolation, Inc. dated January 29, 1996.
10.25(2) First Amended and Restated Holders' Agreement dated January 29, 1996
by and among Krypton Isolation, Inc. and certain individuals and
entities identified on Exhibit A attached thereto.
10.26(2) Common Stock Purchase Agreement dated January 29, 1996 by and among
Krypton Isolation, Inc. and the entities identified on Exhibit A
attached thereto.
10.27(2) First Amendment to the License and Supply Agreement between the
Registrant and Krypton Isolation, Inc. dated January 29, 1996.
10.28 1989 Incentive Stock Plan, as amended, dated March 25, 1996.
27.1 Financial Data Schedule
</TABLE>
- - ---------------
(1) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 33-97748) filed October 4, 1995,
Amendment No. 1 thereto filed October 24, 1995, Amendment No. 2 thereto
filed November 6, 1995, Amendment No. 3 thereto filed November 14, 1995 and
Amendment No. 4 thereto filed November 16, 1995, which Registration
Statement became effective November 16, 1995.
(2) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-Q filed March 16, 1996.
* Pursuant to Rule 406(b) under the Securities Act of 1933, confidential
treatment has been granted to certain portions of this exhibit, which
portions have been deleted and filed separately with the Securities and
Exchange Commission.
** Pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
confidential treatment has been granted to certain portions of this exhibit,
which portions have been deleted and filed separately with the Securities
and Exchange Commission.
22
<PAGE> 1
TERMINATION TO THE
SMART MODULAR TECHNOLOGIES, INC.
REGISTRATION RIGHTS AGREEMENT
This TERMINATION TO THE SMART MODULAR TECHNOLOGIES, INC. REGISTRATION
RIGHTS AGREEMENT (this "TERMINATION AGREEMENT") is made as of May 20, 1996, by
and among SMART MODULAR TECHNOLOGIES, INC., a California corporation (the
"COMPANY"), and the parties listed on Exhibit 1 attached hereto (the "RIGHT
HOLDERS").
RECITALS
WHEREAS, the Right Holders possess registration rights granted under the
Smart Modular Technologies, Inc. Registration Rights Agreement dated as of July
26, 1995 by and between the Company and the Right Holders (the "REGISTRATION
AGREEMENT");
WHEREAS, the Company registered its Common Stock on a Registration
Statement on Form S-1 pursuant to the Securities Act of 1933, as amended;
WHEREAS, the Company and the Right Holders desire to enter into this
Termination Agreement for the purpose of waiving permanently any registration or
other rights that the Right Holders have pursuant to the Registration Agreement;
WHEREAS, pursuant to Section 16 of the Registration Agreement, any term of
the Registration Agreement may be waived with the written consent of the Company
and the holders of a majority of the Registrable Securities (as defined in the
Registration Agreement) with registration rights pursuant to the Registration
Agreement; and
WHEREAS, the signatories to this Termination Agreement constitute the
holders of a majority of the Registrable Securities with registration rights
pursuant to the Registration Agreement;
NOW, THEREFORE, INTENDING TO BE LEGALLY BOUND, and in consideration of the
promises and mutual covenants and agreements contained herein, the Company and
the Right Holders hereby agree as follows:
1. Termination. Pursuant to Section 16 of the Registration Agreement, the
signatories to this Termination Agreement, constituting the holders of a
majority of the Registrable Securities with registration rights pursuant to the
Registration Agreement, hereby waive permanently any registration or other
rights that the Right Holders have pursuant to the Registration Agreement.
2. Governing Law. This Termination Agreement shall be governed in all
respects by the laws of the State of California as such laws are applied to the
agreements between California residents entered into and performed entirely
within California.
3. Counterparts. This Termination Agreement may be executed in any number
of counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
<PAGE> 2
IN WITNESS WHEREOF, the parties have duly executed this Termination
Agreement as of the date first written above.
SMART MODULAR TECHNOLOGIES, INC.
By:
Ajay Shah, President
C.J. OVERSEAS, LTD
By:
Title:
Shares: In its capacity as the beneficial owner of shares of
Common Stock of SMART Modular Technologies, Inc.
JOHN J. CHESS AND MARIE CHESS
By:
John J. Chess
By:
Marie Chess
Shares: In their capacity as the beneficial owners of shares of
Common Stock of SMART Modular Technologies, Inc.
<PAGE> 1
SMART MODULAR TECHNOLOGIES, INC.
1989 INCENTIVE STOCK PLAN
AS AMENDED MARCH 25, 1996
1. Purposes of the Plan. The purposes of this Incentive Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and Consultants
of the Company and to promote the success of the Company's business.
Options granted hereunder may be either "incentive stock options", as
defined in Section 422A of the Internal Revenue Code of 1986, as amended, or
"nonstatutory stock options," at the discretion of the Board and as reflected in
the terms of the written option agreement. The Board also has the discretion to
grant Stock Purchase Rights hereunder.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Committee, if one has been appointed, or the
Board of Directors of the Company, if no Committee is appointed.
(b) "Common Stock" shall mean the Common Stock of the Company.
(c) "Company" shall mean Smart Modular Technologies, Inc., California
corporation.
(d) "Committee" shall mean the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan, if one is
appointed.
(e) "Consultant" shall mean any person who is engaged by the Company or any
Parent or Subsidiary to render consulting services and is compensated for such
consulting services, and any director of the Company whether compensated for
such services or not; provided that if and in the event the Company registers
any class of any equity security pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the term Consultant shall
thereafter not include directors who are not compensated for their services or
are paid only a director's fee by the Company.
(f) "Continuous Status as an Employee or Consultant" shall, for the
purposes of this Plan and the Options granted and shares issued hereunder only,
mean the absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, including leave on account of
disability or military leave, provided that such sick leave or military leave is
for a period of not more than 90 days, except as may otherwise be approved by
the Board and specified in writing by the Company, or any other leave of absence
approved by the Board and specified in writing by the Company, subject to any
conditions of such approval. In the event that at the end of such leave the
Employee or Consultant does not resume his service to the Company, his
employment or relationship with the Company (and his Continuous Status as an
Employee or Consultant) shall be deemed to have terminated as of the end of the
leave period.
(g) "Employee" shall mean any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(h) "Incentive Stock Option" shall mean an Option intended to qualify as an
incentive stock option within the meaning of Section 422A of the Internal
Revenue Code of 1986, as amended.
(i) "Option" shall mean a stock option granted pursuant to the Plan.
(j) "Optioned Stock" shall mean the Common Stock subject to an Option.
(k) "Optionee" shall mean an Employee who receives an Option.
(l) "Parent" shall mean a "parent corporation", whether now or hereafter
existing, as defined in Section 425(e) of the Internal Revenue Code of 1986, as
amended.
(m) "Plan" shall mean this 1989 Incentive Stock Plan.
<PAGE> 2
(n) "Purchaser" shall mean an Employee or Consultant who exercises a Stock
Purchase Right.
(o) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(p) "Stock Purchase Right" shall mean a right, other than an Option, to
purchase Common Stock pursuant to the Plan.
(q) "Subsidiary" shall mean a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 425(f) of the Internal Revenue Code of
1986, as amended.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of shares which may be optioned and/or
sold under the Plan is 3,996,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan. However, any shares sold under the Plan and subsequently
repurchased by the Company shall not be available for new issuance pursuant to
the Plan.
4. Administration of the Plan.
(a) Procedure. The Plan shall be administered by the Board of Directors of
the Company.
(i) Subject to subparagraph (ii), the Board of Directors may appoint a
Committee consisting of not less than two members of the Board of Directors
or one or more officers of the Company to administer the Plan on behalf of
the Board of Directors, subject to such terms and conditions as the Board
of Directors may prescribe. Once appointed, the Committee shall continue to
serve until otherwise directed by the Board of Directors. From time to time
the Board of Directors may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies however
caused, or remove all members of the Committee and thereafter directly
administer the Plan.
Members of the Board who either are eligible for Options or Stock
Purchase Rights or have been granted Options or Stock Purchase Rights may
vote on any matters affecting the administration of the Plan or the grant
of any Options or Stock Purchase Rights pursuant to the Plan, except that
no such member shall act upon the granting of an Option or Stock Purchase
Right to himself, but any such member may be counted in determining the
existence of a quorum at any meeting of the Board during which action is
taken with respect to the granting of Options or Stock Purchase Rights to
him.
(ii) Notwithstanding the foregoing subparagraph (i), if and in the
event the Company registers any class of any equity security pursuant to
Section 12 of the Exchange Act, from the effective date of such
registration until six months after the termination of such registration,
any grants of Options or Stock Purchase Rights to directors shall only be
made by the Board of Directors; provided, however, that if a majority of
the Board of Directors is eligible to participate in this Plan or any other
stock option or other stock plan of the Company or any of its affiliates,
or has been eligible at any time within the preceding year, any grants of
Options or Stock Purchase Rights to directors must be made by, or only in
accordance with the recommendation of, a Committee consisting of three or
more persons, who may but need not be directors or employees of the
Company, appointed by the Board of Directors and having full authority to
act in the matter, none of whom is eligible to participate in this Plan or
any other stock option or other stock plan of the Company or any of its
affiliates, or has been eligible at any time within the preceding year. Any
Committee administering the Plan with respect to grants to officers who are
not also directors shall conform to the requirements of the preceding
sentence. Once appointed, the Committee shall continue to serve until
otherwise directed by the Board of Directors. Subject to the foregoing,
from time to time the Board of Directors may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill
vacancies however caused, or remove all members of the Committee and
thereafter directly administer the Plan.
<PAGE> 3
(b) Powers of the Board. Subject to the provisions of the Plan, the Board
shall have the authority, in its discretion: (i) to grant Incentive Stock
Options, in accordance with Section 422A of the Internal Revenue Code of 1986,
as amended, or "non-statutory stock options," or Stock Purchase Rights; (ii) to
determine, upon review of relevant information and in accordance with Section
8(b) of the Plan, the fair market value of the Common Stock; (iii) to determine
the exercise price per share of Options or Stock Purchase Rights to be granted,
which exercise price shall be determined in accordance with Section 8(a) of the
Plan; (iv) to determine the Employees or Consultants to whom, and the time or
times at which, Options or Stock Purchase Rights shall be granted and the number
of shares to be represented by each Option or Stock Purchase Right; (v) to
interpret the Plan; (vi) to prescribe, amend and rescind rules and regulations
relating to the Plan; (vii) to determine the terms and provisions of each Option
or Stock Purchase Right granted (which need not be identical) and, with the
consent of the holder thereof, modify or amend each Option or Stock Purchase
Right; (viii) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option or Stock Purchase Right
previously granted by the Board; and (ix) to make all other determinations
deemed necessary or advisable for the administration of the Plan.
(c) Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees,
Purchasers and any other holders of any Options or Stock Purchase Rights granted
under the Plan.
5. Eligibility.
(a) Options and Stock Purchase Rights may be granted only to Employees or
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option or Stock Purchase Right
may, if he is otherwise eligible, be granted additional Option(s) or Stock
Purchase Right(s).
(b) No Incentive Stock Option may be granted to an Employee which, when
aggregated with all other incentive stock options granted to such Employee by
the Company or any Parent or Subsidiary, would result in Shares having an
aggregate fair market value (determined for each Share as of the date of grant
of the Option covering such Share) in excess of $100,000 becoming first
available for purchase upon exercise of one or more incentive stock options
during any calendar year.
(c) Section 5(b) of the Plan shall apply only to an Incentive Stock Option
evidenced by an "Incentive Stock Option Agreement" which sets forth the
intention of the Company and the Optionee that such Option shall qualify as an
incentive stock option. Section 5(b) of the Plan shall not apply to any Option
evidenced by a "Nonstatutory Stock Option Agreement" which sets forth the
intention of the Company and the Optionee that such Option shall be a
nonstatutory stock option.
(d) The Plan shall not confer upon any Optionee, Purchaser or holder of a
Stock Purchase Right, any right with respect to continuation of employment or
consulting relationship with the Company, nor shall it interfere in any way with
his right or the Company's right to terminate his employment or consulting
relationship at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to occur
of its adoption by the Board of Directors or its approval by the shareholders of
the Company as described in Section 17 of the Plan. It shall continue in effect
for a term of ten (10) years unless sooner terminated under Section 13 of the
Plan.
7. Exercise Price and Consideration.
(a) The per Share exercise price for the Shares to be issued pursuant to
exercise of an Option or Stock Purchase Right shall be such price as is
determined by the Board, but shall be subject to the following:
(i) In the case of any Incentive Stock Option, the per Share exercise
price shall be no less than 100% of the fair market value per Share on the
date of grant.
(ii) In the case of any Nonstatutory Stock Option or Stock Purchase
Right, the per Share exercise price shall be no less than 85% of the fair
market value per Share on the date of grant.
<PAGE> 4
(iii) In the case of any Option granted to any person who, at the time
of the grant of such Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than
110% of the fair market value per Share on the date of grant.
(iv) In the case of any Option or Stock Purchase Right granted on or
after the effective date of registration of any class of equity security of
the Company pursuant to Section 12 of the Exchange Act and prior to six
months after the termination of such registration, the per Share exercise
price shall be no less than 100% of the fair market value per Share on the
date of grant.
(b) The fair market value shall be determined by the Board in its
discretion; provided, however, that where there is a public market for the
Common Stock, the fair market value per Share shall be the mean of the last
reported bid and asked prices of the Common Stock on the last trading day
immediately preceding the date of grant (or, if not so reported, as otherwise
reported by the National Association of Securities Dealers Automated Quotation
(NASDAQ) System), or, in the event the Common Stock is listed on a stock
exchange or quoted on the NASDAQ National Market System, the fair market value
per Share shall be the reported closing price on such exchange or in the NASDAQ
National Market on the last trading day immediately prior to the date of grant.
(c) The consideration to be paid for the Shares to be issued upon exercise
of an Option or Stock Purchase Right, including the method of payment, shall be
determined by the Board and may consist entirely of cash, check, promissory
note, other shares of Common Stock having a fair market value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option or Stock Purchase Right shall be exercised, or any combination of such
methods of payment, or such other consideration and method of payment for the
issuance of Shares to the extent permitted under the California Corporations
Code and permitted by the permit issued by the California Commissioner of
Corporations with respect to shares issuable under the Plan. In making its
determination as to the type of consideration to accept, the Board shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company, in accordance with the Delaware Corporation Law.
8. Options.
(a) Term of Option.
The term of each Stock Option shall be ten (10) years from the date of
grant thereof or such shorter term as may be provided in the Stock Option
Agreement. However, in the case of an Option granted to an Optionee who, at the
time the Option is granted, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the term of the Option shall be five (5) years from the date of
grant thereof or such shorter time as may be provided in the Stock Option
Agreement.
(b) Exercise of Option.
(i) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable and shall vest at such times and
under such conditions as determined by the Board, including performance
criteria with respect to the Company and/or the Optionee, and as shall be
permissible under the terms of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received
by the Company. Full payment may, as authorized by the Board, consist of
any consideration and method of payment allowable under Section 7(c) of the
Plan. Until the issuance (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company)
of the stock certificate evidencing such Shares, no right to vote or
receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option.
<PAGE> 5
No adjustment will be made for a dividend or other right for which the
record date is prior to the date the stock certificate is issued, except as
provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares that thereafter shall be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which
the Option is exercised. Any Shares issued and sold pursuant to the Plan
and repurchased by the Company shall not be available for reissuance under
the Plan.
(ii) Termination of Status as an Employee or Consultant. If an
Optionee's Continuous Status as an Employee or Consultant terminates, the
Optionee may, but only within one (1) month (or such other period of time
not exceeding three (3) months as is determined by the Board and is
specified in writing by the Company) after the date he ceases to be an
Employee or Consultant (as the case may be) of the Company (but in no event
later than ten years from the date of grant of the Option), exercise his
Option to the extent that (A) the Option was vested and (B) he was entitled
to exercise it, at the date of such termination. To the extent that the
Option was not vested or he was not entitled to exercise the Option, at the
date of such termination, or if he does not exercise such Option within the
time specified herein, the Option shall terminate.
(iii) Disability. Notwithstanding the provisions of Section 8(b)(ii)
above, in the event of termination of Continuous Status as an Employee or
Consultant as a result of an Optionee's disability, the Optionee may, but
only within six (6) months (or such other period of time not less than six
(6) months nor more than twelve (12) months, as determined by the Board and
specified in writing by the Company) from the date of termination (but in
no event later than ten years from the date of the grant of the Option),
exercise the Option to the extent otherwise entitled to exercise it at the
date of such termination. If such disability is not a "disability" as such
term is defined in Section 22(e)(3) of the Code, in the case of an
Incentive Stock Option such Incentive Stock Option shall automatically
cease to be treated as an Incentive Stock Option and shall be treated for
tax purposes as a Nonstatutory Stock Option on the day three months and one
day following such termination. To the extent that the Optionee was not
entitled to exercise the Option at the date of termination, or if the
Optionee does not exercise the Option to the extent so entitled within the
time specified herein, the Option shall terminate, and the Shares covered
by such Option shall revert to the Plan.
(iv) Death of Optionee. Notwithstanding the provisions of Section
8(b)(ii) above, in the event of (A) the death of an Optionee during the
term of his Option, where such Optionee is at the time of his death an
Employee or Consultant of the Company and such Optionee shall at the date
of death have been in Continuous Status as an Employee or Consultant since
the date of grant of the Option, or (B) the death of an Optionee within
thirty (30) days after the termination of such Optionee's Continuous Status
as an Employee or Consultant, then the Option may be exercised at any time
within six (6) months (or such other period of time not less than six (6)
months nor more than twelve (12) months as determined by the Board and
specified in writing by the Company) following the date of death (but in no
event later than ten years from the date of grant of the Option), by the
Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent that (A) the
Option was vested as of the date of termination, and (B) the Optionee was
entitled to exercise it at the date of termination.
9. Stock Purchase Rights.
(a) Rights to Purchase. After the Board of Directors determines that it
will offer an Employee or Consultant the right to purchase Shares under the
Plan, it shall advise the offeree in writing of the terms, conditions and
restrictions relating to the offer, including the number of Shares that such
person shall be entitled to purchase, and the time within which such person must
accept such offer, which shall in no event exceed ninety (90) days from the date
upon which the Board of Directors or its Committee made the determination to
grant the Stock Purchase Right. The offer shall be accepted by execution of a
Restricted Stock Purchase Agreement in the form determined by the Board of
Directors.
<PAGE> 6
(b) Issuance of Shares. Forthwith after payment therefor, the Shares
purchased shall be duly issued; provided, however, that the Board may require
that the Purchaser make adequate provision for any Federal and State withholding
obligations of the Company as a condition to the Purchaser purchasing such
Shares.
(c) Repurchase Option. Unless the Board of Directors or its Committee
determines otherwise, the Restricted Stock Purchase Agreement shall grant the
Company a repurchase option exercisable upon the voluntary or involuntary
termination of the Purchaser's employment with the Company for any reason
(including death or disability). If the Board or its Committee so determines,
the Restricted Stock Purchase Agreement may provide that the purchase price for
shares repurchased shall be the original price paid by the Purchaser and may be
paid by cancellation of any indebtedness of the Purchaser to the Company. The
repurchase option shall lapse at such a rate as the Board of Directors may
determine.
(d) Other Provisions. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Board of Directors.
(e) Rights as a Shareholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing the shares as to which
a Stock Purchase Right has been exercised, no right to vote or to receive
dividends or any other rights as a shareholder shall exist with respect to
shares of Common Stock subject to a Stock Purchase Right, notwithstanding the
exercise of a Stock Purchase Right. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock certificate
is issued, except as provided in Section 11 of the Plan.
(f) Shares Available Under the Plan. Exercise of a Stock Purchase Right in
any manner shall result in a decrease in the number of Shares that thereafter
shall be available, both for purposes of the Plan and for sale under the Stock
Purchase Right, by the number of Shares as to which the Stock Purchase Right is
exercised. Shares repurchased by the Company pursuant to Section 9(c) hereof
shall not be available for reissuance under the Plan.
10. Non-Transferability of Options and Stock Purchase Rights. Options and
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee or holder of a Stock Purchase Right, only by such Optionee or holder of
a Stock Purchase Right.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option and Stock Purchase Right, and
the number of shares of Common Stock which have been authorized for issuance
under the Plan but as to which no Options or Stock Purchase Rights have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Option or Stock Purchase Right, as well as the price per share of Common
Stock covered by each such outstanding Option or Stock Purchase Right, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
Option or Stock Purchase Right.
In the event of the proposed dissolution or liquidation of the Company, any
outstanding Options or Stock Purchase Rights shall terminate immediately prior
to the consummation of such proposed action. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify the
Optionee at lease fifteen (15) days prior to such proposed action. To the extent
it has not been previously exercised, the Option or Stock Purchase Right shall
terminate immediately prior to the consummation of such proposed action.
<PAGE> 7
In the event of a merger of the Company with or into another corporation,
or the sale of substantially all of the assets of the Company, each outstanding
Option and Stock Purchase Right shall be assumed or an equivalent option or
right substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In the event that the successor corporation refuses to
assume or substitute for the Option or stock purchase right, the Optionee shall
have the right to exercise the Option or Stock Purchase Right as to all of the
Optioned Stock, including Shares as to which it would not otherwise be
exercisable. If an Option or Stock Purchase Right is exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee that the Option or Stock Purchase Right
shall be fully exercisable for a period of fifteen (15) days from the date of
such notice, and the Option or Stock Purchase Right shall terminate upon the
expiration of such period. For the purposes of this paragraph, the Option or
Stock Purchase Right shall be considered assumed if, following the merger or
sale of assets, the option or right confers the right to purchase or receive,
for each Share of Optioned Stock subject to the Option or Stock Purchase Right
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
assets was not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
12. Time of Granting Options or Stock Purchase Rights. The date of grant
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Board makes the determination granting such Option or Stock Purchase
Right. Notice of the determination shall be given to each Employee or Consultant
to whom an Option or Stock Purchase Right is so granted within a reasonable time
after the date of such grant.
13. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may amend or terminate the Plan
from time to time in such respects as the Board may deem advisable; provided
that, the following revisions or amendments shall require approval of the
holders of a majority of the outstanding shares of the Company entitled to vote:
(i) any increase in the number of Shares subject to the Plan, other
than in connection with an adjustment under Section 11 of the Plan;
(ii) any material change in the designation of the class of employees
or consultants eligible to be granted Options or Stock Purchase Rights; or
(iii) if the Company has a class of equity security registered under
Section 12 of the Exchange Act at the time of such revision or amendment,
any material increase in the benefits accruing to participants under the
Plan.
(b) Shareholder Approval. If any amendment requiring shareholder approval
under Section 13(a) of the Plan is made subsequent to the first registration of
any class of equity security by the Company under Section 12 of the Exchange
Act, such shareholder approval shall be solicited as described in Section 17(a)
of the Plan.
(c) Effect of Amendment or Termination. Any such amendment or termination
of the Plan shall not affect Options or Stock Purchase Rights already granted
and such Options and Stock Purchase Rights shall remain in full force and effect
as if this Plan had not been amended or terminated, unless mutually agreed
otherwise between the Board and the Optionee, Purchaser or holder of a Stock
Purchase Right, which agreement must be in writing and signed by the Company and
the Optionee, Purchaser or holder of the Stock Purchase Right.
<PAGE> 8
14. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance.
As a condition to the exercise of an Option or Stock Purchase Right, the
Company may require the person exercising such Option or Stock Purchase Right to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned relevant provisions of
law.
15. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
16. Option and Stock Purchase Agreements. Options shall be evidenced by
written option agreements in such form as the Board shall approve. Upon the
exercise of Stock Purchase Rights, a Purchaser shall execute a Restricted Stock
Purchase Agreement in such form as the Board of Directors shall approve.
17. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve months before or after
the date the Plan is adopted. If such shareholder approval is obtained at a duly
held Shareholders' meeting, it may be obtained by the affirmative vote of the
holders of a majority of the outstanding shares of the Company present or
represented and entitled to vote thereon. If and in the event that the Company
registers any class of any equity security pursuant to Section 12 of the
Exchange Act, the approval of such shareholders of the Company shall be:
(a) (1) solicited substantially in accordance with Section 14(a) of the
Exchange Act and the rules and regulations promulgated thereunder, or (2)
solicited after the Company has furnished in writing to the holders entitled to
vote substantially the same information concerning the Plan as that which would
be required by the rules and regulations in effect under Section 14(a) of the
Exchange Act at the time such information is furnished; and
(b) obtained at or prior to the first annual meeting of shareholders held
subsequent to the first registration of any class of equity securities of the
Company under Section 12 of the Exchange Act.
If such shareholder approval is obtained by written consent, it must be
obtained by the unanimous written consent of all shareholders of the Company.
18. Information to Optionees and Holders of Stock Purchase Rights. The
Company shall provide to each Optionee and each Holder of a Stock Purchase
Right, during the period for which such person has one or more Options or Stock
Purchase Rights outstanding, copies of annual financial statements of the
Company. The Company shall not be required to provide such information if the
issuance of Options and grant of Stock Purchase Rights under the Plan is limited
to key employees whose duties to the Company assure their access to equivalent
information.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED CONDENSED BALANCE SHEETS AND CONSOLIDATED CONDENSED
INCOME STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED
APRIL 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS YEAR
<FISCAL-YEAR-END> OCT-31-1996 OCT-31-1996 OCT-31-1996
<PERIOD-START> FEB-01-1996 NOV-01-1995 NOV-01-1994
<PERIOD-END> APR-30-1996 APR-30-1996 OCT-31-1995
<EXCHANGE-RATE> 1 1 1
<CASH> 0 53427 13059
<SECURITIES> 0 0 0
<RECEIVABLES> 0 29723 27508
<ALLOWANCES> 0 550 443
<INVENTORY> 0 48743 40882
<CURRENT-ASSETS> 0 136370 85217
<PP&E> 0 11305 8534
<DEPRECIATION> 0 2927 1952
<TOTAL-ASSETS> 0 146453 91976
<CURRENT-LIABILITIES> 0 74090 63753
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 35037 2222
<OTHER-SE> 0 35482 24012
<TOTAL-LIABILITY-AND-EQUITY> 0 146453 91976
<SALES> 103760 193851 0
<TOTAL-REVENUES> 103760 193851 0
<CGS> 86165 159852 0
<TOTAL-COSTS> 86165 159852 0
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 156 156 0
<INTEREST-EXPENSE> 77 170 0
<INCOME-PRETAX> 9394 18206 0
<INCOME-TAX> 3476 6736 0
<INCOME-CONTINUING> 5918 11470 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 5,918 11470 0
<EPS-PRIMARY> .29 .57 0
<EPS-DILUTED> 0 0 0
</TABLE>
