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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 July 31, 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)
CALIFORNIA 77-0200166
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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 September 9, 1996, there were 18,779,546 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
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets ---
As of July 31, 1996 and October 31, 1995 3
Consolidated Condensed Statements of Income ---
For the Three and Nine Months Ended July 31, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flows ---
For the Nine Months Ended July 31, 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 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</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>
JULY 31, OCTOBER 31,
1996 1995
-------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $45,247 $13,059
Investments 9,581 --
Accounts receivable, net of allowance for doubtful accounts of
$650 and $443, respectively 39,182 27,355
Notes receivable from related parties 44 153
Inventories 31,956 40,882
Deferred income taxes 2,627 2,627
Prepaid expenses and other 905 1,141
-------- -------
Total current assets 129,542 85,217
Property and Equipment, net 8,987 6,582
Other 1,531 177
-------- -------
Total assets $140,060 $91,976
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $46,445 $50,628
Current maturities of long-term debt 33 --
Lines of credit 187 3,598
Current portion of capital lease obligations 1,466 1,130
Accrued compensation and commissions 3,371 1,961
Accrued bonuses 3,292 3,645
Other accrued expenses 1,825 1,013
Income taxes payable 3,495 1,778
-------- -------
Total current liabilities 60,114 63,753
Long-term Liabilities:
Long-term debt 63 --
Capital lease obligations, net of current portion 1,570 1,599
Deferred income taxes 390 390
-------- -------
Total liabilities 62,137 65,742
-------- -------
Shareholders' Equity:
Common stock, no par value --
Authorized -- 100,000,000 shares
Outstanding -- 18,541,684, and 14,653,005 shares, respectively 35,792 2,222
Shareholder notes receivable related to common stock issuances (512) (501)
Retained earnings 42,643 24,513
-------- -------
Total shareholders' equity 77,923 26,234
-------- -------
Total liabilities and shareholders' equity $140,060 $91,976
======== =======
</TABLE>
See the accompanying notes to these consolidated condensed financial statements
3
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SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
3 MONTHS ENDED 9 MONTHS ENDED
JULY 31, JULY 31,
-------------------------------------------------------
1996 1995 1996 1995
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales $101,048 $70,570 $295,481 $194,058
Cost of sales 82,728 57,216 242,734 160,189
-------- ------- -------- --------
Gross profit 18,320 13,354 52,747 33,869
-------- ------- -------- --------
Operating expenses:
Research and development 1,405 1,287 4,327 3,724
Sales and marketing 3,444 2,946 10,489 7,719
General and administrative 3,587 3,473 10,749 9,657
-------- ------- -------- --------
Total operating expenses 8,436 7,706 25,565 21,100
-------- ------- -------- --------
Income from operations 9,884 5,648 27,182 12,769
Other income (expense), net 568 (333) 1,428 (457)
-------- ------- -------- --------
Income before provision for income taxes 10,452 5,315 28,610 12,312
Provision for income taxes 3,831 1,363 10,586 4,647
-------- ------- -------- --------
Net income $ 6,621 $ 3,952 $ 18,024 $ 7,665
======== ======= ======== ========
Net income per share $ 0.31 $ 0.22 $ 0.87 $ 0.44
======== ======= ======== ========
Weighted average common and common
equivalent shares outstanding 21,061 17,638 20,784 17,584
======== ======= ======== ========
</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 NINE MONTHS ENDED JULY 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,024 $ 7,665
Adjustments to reconcile net income to net cash provided
by (used in) operating activities--
Depreciation and amortization 1,558 461
Provision for doubtful accounts 207 225
Loss on sale of equipment 31 --
Change in assets and liabilities--
Increase in investments (9,581) --
Increase in accounts and notes receivable (11,710) (10,988)
Decrease (increase) in inventories 9,043 (19,430)
Increase in deferred income taxes, net -- (1,531)
Decrease in prepaid expenses and other 237 127
Increase in other assets (1,341) (30)
(Decrease) increase in accounts payable (4,243) 12,797
Increase in income taxes payable 1,719 1,320
Increase in accrued liabilities 1,860 871
---------- ----------
Net cash provided by (used in) operating activities 5,804 (8,513)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,581) (1,579)
---------- ----------
Net cash used in investing activities (2,581) (1,579)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit 16,521 42,761
Payments on lines of credit (19,900) (35,406)
Proceeds from long-term debt 18 --
Payments on long-term debt (24) --
Proceeds from notes payable -- 495
Payments of capital lease obligations (1,015) (422)
Proceeds from sale of common stock 33,365 2
---------- ----------
Net cash provided by financing activities 28,965 7,430
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32,188 (2,662)
CASH AND CASH EQUIVALENTS, beginning of period 13,059 5,065
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 45,247 $ 2,403
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ 8,869 $ 5,105
========== ==========
Cash paid for interest $ 249 $ 324
========== ==========
NON CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under capital leases $ 1,322 $ 1,339
========== ==========
Issuance of common stock pursuant to acquisition of pooled company $ 306 $ --
========== ==========
Issuance of common stock pursuant to notes receivable $ -- $ 200
========== ==========
</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
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 third
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 nine month periods ended July 31, 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 COMBINATIONS
On July 31, 1996, a wholly-owned subsidiary of the Company merged with
RISQ Modular Systems, Inc., a California corporation ("RISQ"), which resulted
in RISQ becoming a wholly-owned subsidiary of the Company. The Company
acquired RISQ by issuing 368,000 shares of SMART common stock in exchange for
100% of the outstanding securities of RISQ as of October 31, 1995. The merger
was accounted for as a pooling of interests. However, given the immateriality
of this acquisition to the Company's consolidated condensed financial
statements taken as a whole, RISQ has been included in the Company's
consolidated condensed results of operations as of the beginning of fiscal 1996
(November 1, 1995) and amounts presented for periods prior to fiscal 1996 have
not been restated to include RISQ's historical results of operations. RISQ's
net sales totaled $414,747 and $996,260 for the three and nine month periods
ended July 31, 1996, respectively. RISQ generated net losses of $53,866 and
$121,305 for the three and nine month periods ended July 31, 1996,
respectively. RISQ designs and manufactures embedded processor modules and
products in both standard and custom form factors for OEMs in the
telecommunications, networking, industrial control and image processing
markets.
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.
6
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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 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):
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1996 1995
-------- -----------
<S> <C> <C>
Raw materials $19,667 $22,000
Work-in-process 6,387 7,792
Finished goods 5,902 11,090
------- -------
Total $31,956 $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.
7
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2. LINES OF CREDIT:
During fiscal 1996, the Company extended 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 July 31, 1996 or
October 31, 1995.
The Company has a second 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 July 31, 1996.
The Company acquired an additional revolving line of credit pursuant
to the acquisition of RISQ. The agreement expires in September 1996.
Borrowings under this line of credit bear interest at 12.75% per annum and are
limited to $200,000. Borrowings under this agreement totaled approximately
$187,000 as of July 31, 1996. In August 1996, the Company repaid the
outstanding balance and terminated the agreement.
All agreements require that the Company maintain specified levels of
tangible net worth and comply with certain other covenants. All 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.
3. 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 July 31, 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.
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.
8
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In April 1996, certain shareholders of the Company and members of its
Board of Directors purchased additional common stock of the affiliate from
other shareholders of the affiliate. Currently, certain shareholders of the
Company and members of its Board of Directors have a 50.6% interest in the
affiliate.
9
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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.
In July 1996, the Company expanded its specialized technical
capabilities with the acquisition of RISQ Modular Systems, Inc., a California
corporation ("RISQ"). The Company acquired RISQ in a stock for stock
acquisition. The acquisition of RISQ has been accounted for as a pooling of
interests. Given the immateriality of this acquisition to the Company's
financial statements taken as a whole, RISQ has been included in the Company's
consolidated condensed results of operations as of the beginning of fiscal 1996
(November 1, 1995) and amounts presented for periods prior to fiscal 1996 have
not been restated to include RISQ's historical results of operations. RISQ
designs and manufactures embedded processor modules and products in both
standard and custom form factors for OEM's in the telecommunications,
networking, industrial control and image processing markets.
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, embedded processor
module 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 embedded processor module products generate the
Company's highest gross margin, followed by the Company's PC card
communication products. Both product lines currently contribute the smallest
portion of the Company's consolidated 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
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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 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 sixth 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 $6.6 million on net sales of $101.0
million for the third quarter of fiscal 1996 ended July 31, 1996, compared with
net income of $4.0 million on net sales of $70.6 million for the same period of
fiscal 1995. Net income for the first nine months of fiscal 1996 was $18.0
million on net sales of $295.5 million compared to net income of $7.7 million
on net sales of $194.1 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
-------------------- ------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . . . . . . . 81.9 81.1 82.1 82.5
------ ------ ------ ------
Gross profit . . . . . . . . . . . . . . . . . . . 18.1 18.9 17.9 17.5
Operating expenses:
Research and development . . . . . . . . . . . . 1.4 1.8 1.5 1.9
Sales and marketing . . . . . . . . . . . . . . . 3.4 4.2 3.6 4.0
General and administrative . . . . . . . . . . . 3.5 4.9 3.6 5.0
------- ------ ------- -------
Total operating expenses . . . . . . . . 8.3 10.9 8.7 10.9
------- ----- ------- ------
Income from operations . . . . . . . . . . . . . . 9.8 8.0 9.2 6.6
Other income (expense), net . . . . . . . . . . . . 0.6 (0.5) 0.5 (0.2)
------- -------- ------- --------
Income before provision for income taxes . . . . . 10.4 7.5 9.7 6.4
Provision for income taxes . . . . . . . . . . . . 3.8 1.9 3.6 2.4
------- ------- ------- --------
Net income . . . . . . . . . . . . . . . . . . . . 6.6% 5.6% 6.1% 4.0%
======= ======= ======= ========
</TABLE>
NET SALES
Net sales consist of sales of specialty memory modules and PC cards,
standard memory modules, embedded processor modules and PC card communication
products, less returns and discounts. Net sales for the third quarter of
fiscal 1996 increased 43.2% to $101.0 million from $70.6 million for the same
period of fiscal 1995. Net sales for the first nine months of fiscal 1996
increased 52.3% to $295.5 million from $194.1 million for the comparable period
of fiscal 1995. The increase for both the three and the nine months ended July
31, 1996 was primarily due to an increase in sales of specialty memory products
to both existing and new customers.
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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 37.2% to $18.3 million for the third quarter of fiscal 1996
from $13.4 million for the same period of fiscal 1995. Gross margin decreased
to 18.1% for the third quarter of fiscal 1996 from 18.9% for the comparable
period of fiscal 1995. Gross profit for the first nine months of fiscal 1996
increased 55.7% to $52.7 million from $33.9 million for the comparable period
of fiscal 1995. Gross margin increased to 17.9% for the first nine months of
fiscal 1996 from 17.5% for the comparable period of fiscal 1995.
The decrease in gross margin for the third quarter of fiscal 1996 as
compared to the same period of fiscal 1995 was primarily due to a decrease in
the proportion of standard memory products manufactured on a consignment basis
as compared to a turnkey basis. In addition, the percentage of net sales
derived from higher margin PC card communication products was lower in the
third quarter of fiscal 1996 as compared to the same period of fiscal 1995,
further contributing to the decrease in gross margin for the three month period
ended July 31, 1996 as compared to the same period of fiscal 1995. The
decrease in gross margin was partially offset by an increase in the percentage
of net sales derived from higher margin specialty memory products as compared
to net sales of lower margin standard memory products during the third quarter
of fiscal 1996 as compared to the same period of fiscal 1995.
The increase in gross margin for the first nine months of fiscal 1996
as compared to the same period of fiscal 1995 was primarily 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. 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 nine month period ended July 31, 1996 as
compared to the same period 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
third quarter of fiscal 1996 were $1.4 million, representing an increase of
9.2% from $1.3 million for the comparable period of fiscal 1995 and comprising
1.4% and 1.8% of net sales, respectively. For the first nine months of fiscal
1996, research and development expenses totaled $4.3 million, up 16.2% from
$3.7 million for the corresponding nine month period of fiscal 1995 and
comprising 1.5% and 1.9% of net sales, respectively. The decrease in research
and development expenses as a percentage of net sales for the three and nine
months ended July 31, 1996 as compared to the same periods of fiscal 1995 was
primarily 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 for the third quarter
of fiscal 1996 totaled $3.4 million, representing an increase of 16.9% from
$2.9 million for the comparable quarter of fiscal 1995 and comprising 3.4% and
4.2% of net sales, respectively. For the first nine months of fiscal 1996,
sales and marketing expenses totaled $10.5 million, representing an increase of
35.9% from $7.7 million for the same period of fiscal 1995 and comprising 3.6%
and 4.0% of net sales, respectively. The increase in absolute dollars of sales
and marketing expenses for the three and nine months ended July 31, 1996 as
compared to the same periods of fiscal 1995 was primarily due to
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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 third quarter of fiscal
1996 totaled $3.6 million, representing an increase of 3.3% from $3.5 million
for the comparable quarter of fiscal 1995 and comprising 3.5% and 4.9% of net
sales, respectively. For the first nine months of fiscal 1996, general and
administrative expenses totaled $10.7 million, up 11.3% from $9.7 million for
the same period of fiscal 1995 and comprising 3.6% and 5.0% of net sales,
respectively. For the three and nine months ended July 31, 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 nearly all 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 $3.8 million and $1.4 million for the
third quarter of fiscal 1996 and fiscal 1995, respectively, resulting in
effective tax rates of 36.7% and 25.6%, respectively. For the first nine
months of fiscal 1996 and fiscal 1995, provisions for income taxes totaled
$10.6 million and $4.6 million, respectively, resulting in respective tax rates
of 37.0% and 37.7%. The Company does not expect its effective tax rate to
vary significantly from its rate for the nine months ended July 31, 1996. At
July 31, 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 nine months ended July 31, 1996, the Company provided
$5.8 million in net cash from operating activities versus a deficit in
operating activities of $8.5 million for the same period of fiscal 1995. At
July 31, 1996, the Company had $45.2 million in cash and cash equivalents, and
$69.4 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. Prior to fiscal 1996, the Company primarily funded its financing
and investing deficits
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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 July 31, 1996, the Company has three revolving lines of credit in
an aggregate amount of $20.2 million, which are secured by substantially all
of the Company's assets with terms expiring in February 1997 and September
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.
Borrowings under these lines of credit as of July 31, 1996 totaled $0.2 million
and represent the obligation acquired pursuant to the acquisition of RISQ.
The Company repaid all balances on its lines of credit outstanding as of fiscal
year ended October 31, 1995 with a portion of the proceeds received from the
Company's initial public offering of its common stock. In August 1996, the
Company repaid all borrowings under the RISQ line of credit and terminated the
agreement. All 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.
Capital expenditures totaled approximately $3.9 million and $2.9
million for the nine month periods ended July 31, 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 $3.0 million and $2.7
million at July 31, 1996 and October 31, 1995, respectively.
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
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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.
INTENSE COMPETITION
The memory module, PC card and embedded processor module industries
are intensely competitive. The memory module manufacturing, PC card and
embedded processor module 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. In the embedded processor module market, the Company
competes with Force Computers Inc., Motorola, Inc. and Radisys Corporation.
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.
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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, 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
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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.
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, embedded processor module and PC card products. The
Company also depends on sole source third party manufacturers to produce
certain of the Company's embedded processor module 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.
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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 in absolute dollars 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. 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
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
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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 DSP-based modem products. 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. In July 1996, the Company acquired RISQ, a designer, developer
and marketer of embedded processor module products for the telecom, networking,
industrial control and image processing markets. RISQ incurred a net loss
during the nine month period ended July 31, 1996. There can be no assurance
that RISQ's or the Company's operations will be profitable after the
acquisition. The acquisitions of Apex, RISQ or other companies have 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 or RISQ's operations into the Company's overall
operations or that the anticipated benefits of the Apex and RISQ acquisitions
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 agreement with the Company.
With the exception of certain employees associated with RISQ's operations, none
of such persons, including the executive officers, has a 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 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.
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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 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
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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.
21
<PAGE> 22
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 24-25.
(b) Reports on Form 8-K: There were no reports on Form 8-K filed
during the three months ended July 31, 1996.
22
<PAGE> 23
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: September 9, 1996
23
<PAGE> 24
SMART MODULAR TECHNOLOGIES, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBITS
------- --------
2.1(1) Agreement and Plan of Reorganization among the Registrant, Apex
Data, Inc. and SMART Acquisition, Inc. dated April 24, 1995
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(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.
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(3) 1989 Incentive Stock Plan, as amended, dated March 25, 1996.
27.1(3) Financial Data Schedule for the Quarter Ended April 30, 1996.
27.2 Financial Data Schedule for the Quarter Ended July 31, 1996.
__________
(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.
24
<PAGE> 25
(3) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-Q filed June 14, 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.
25
<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 THIRD QUARTER
ENDED JULY 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-Q.
</LEGEND>
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<FISCAL-YEAR-END> OCT-31-1996 OCT-31-1996 OCT-31-1996
<PERIOD-START> MAY-01-1996 NOV-01-1995 NOV-01-1994
<PERIOD-END> JUL-31-1996 JUL-31-1996 OCT-31-1995
<CASH> 0 45,247 13,059
<SECURITIES> 0 9,581 0
<RECEIVABLES> 0 39,226 27,508
<ALLOWANCES> 0 650 443
<INVENTORY> 0 31,956 40,882
<CURRENT-ASSETS> 0 129,542 85,217
<PP&E> 0 12,549 8,534
<DEPRECIATION> 0 3,562 1,952
<TOTAL-ASSETS> 0 140,060 91,976
<CURRENT-LIABILITIES> 0 60,114 63,753
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 35,792 2,222
<OTHER-SE> 0 42,131 24,012
<TOTAL-LIABILITY-AND-EQUITY> 0 140,060 91,976
<SALES> 101,048 295,481 0
<TOTAL-REVENUES> 101,048 295,481 0
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<TOTAL-COSTS> 82,728 242,734 0
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<LOSS-PROVISION> 185 341 0
<INTEREST-EXPENSE> 69 249 0
<INCOME-PRETAX> 10,452 28,618 0
<INCOME-TAX> 3,831 10,586 0
<INCOME-CONTINUING> 6,621 18,024 0
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