<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended April 30, 1997, 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 June 9, 1997, there were 19,337,856 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>
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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, 1997 and October 31, 1996 3
Consolidated Condensed Statements of Income ---
For the Three and Six Months Ended April 30, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows ---
For the Six Months Ended April 30, 1997 and 1996 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>
APRIL 30, OCTOBER 31,
1997 1996
--------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 40,210 $ 52,568
Short term investments 11,311 8,494
Accounts receivable, net 70,576 52,806
Inventories 52,195 39,001
Prepaid expenses and other 4,892 4,949
-------- --------
Total current assets 179,184 157,818
Property and Equipment, net 20,005 13,434
Other 299 933
-------- --------
Total assets $199,488 $172,185
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 72,943 $ 66,206
Accrued compensation and commissions 5,758 3,441
Accrued bonuses 3,787 4,212
Other accrued expenses 3,566 3,445
Income taxes payable 5,739 6,190
-------- --------
Total current liabilities 91,793 83,494
Long-term Liabilities:
Capital lease obligations, net of current portion 636 1,241
Deferred income taxes and other 883 831
-------- --------
Total liabilities 93,312 85,566
-------- --------
Shareholders' Equity:
Common stock, no par value --
Authorized -- 100,000,000 shares
Outstanding -- 19,238,392 and 18,855,163 shares, 38,248 36,869
respectively
Retained earnings 67,928 49,750
-------- --------
Total shareholders' equity 106,176 86,619
-------- --------
Total liabilities and shareholders' equity $199,488 $172,185
======== ========
</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)
<TABLE>
<CAPTION>
3 MONTHS ENDED 6 MONTHS ENDED
APRIL 30, APRIL 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $143,652 $104,116 $275,264 $194,433
Cost of sales 119,511 86,227 228,492 160,006
-------- -------- -------- --------
Gross profit 24,141 17,889 46,772 34,427
-------- -------- -------- --------
Operating expenses:
Research and development 2,066 1,508 3,895 2,922
Selling, general and administrative 8,209 7,378 16,335 14,207
-------- -------- -------- --------
Total operating expenses 10,275 8,886 20,230 17,129
-------- -------- -------- --------
Income from operations 13,866 9,003 26,542 17,298
Other income, net 480 431 1,009 860
-------- -------- -------- --------
Income before provision for income taxes 14,346 9,434 27,551 18,158
Provision for income taxes 4,878 3,476 9,373 6,755
-------- -------- -------- --------
Net income $ 9,468 $ 5,958 $ 18,178 $ 11,403
======== ======== ======== ========
Net income per share $ 0.44 $ 0.28 $ 0.84 $ 0.55
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding 21,640 20,979 21,551 20,646
======== ======== ======== ========
</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 CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
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NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES: $ (1,302) $ 13,965
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments available-for-sale (5,088) --
Maturities of investments available-for-sale 2,271 --
Purchases of property and equipment (8,720) (2,177)
Proceeds from sale of property and equipment 71 --
-------- --------
Net cash used in investing activities (11,466) (2,177)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit -- 16,069
Payments on lines of credit -- (19,667)
Payments of capital lease obligations (875) (637)
Proceeds from sale of common stock 1,285 32,815
-------- --------
Net cash provided by financing activities 410 28,580
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (12,358) 40,368
CASH AND CASH EQUIVALENTS, beginning of period 52,568 13,059
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 40,210 $ 53,427
======== ========
</TABLE>
See the accompanying notes to these consolidated condensed financial statements
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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 1996 Report on
Form 10-K as filed with the Securities and Exchange Commission on January 28,
1997.
The Interim Consolidated Condensed Financial Statements for the second
quarter of fiscal 1997 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 period. The Interim Consolidated Condensed Financial Statements for fiscal
1996 are provided for information purposes only. The results of operations for
the three and six month periods ended April 30, 1997 are not necessarily
indicative of the results that may be expected for the entire fiscal year ending
October 31, 1997, or any other future periods.
REVENUE RECOGNITION
Revenue is recognized upon shipment to the customer. The Company provides for
estimated future returns for inventory rebalancing, stock rotation, established
price protection arrangements and the estimated costs of warranty at the time of
sale.
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 using the if converted method at date of issuance and common equivalent
shares from stock options outstanding 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 through the quarter in which the
Company's initial public offering was completed.
In March 1997, the Financial Accounting Standards Board issued Statement No. 128
(SFAS No. 128), "Earnings Per Share," which the Company will be required to
adopt on a retroactive basis in the first quarter of fiscal 1998. The pro forma
effect of SFAS No. 128 for the second quarter is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Reported earnings per share $ 0.44 $ 0.28 $ 0.84 $ 0.55
Basic earnings per share (pro forma) $ 0.49 $ 0.33 $ 0.95 $ 0.64
Diluted earnings per share (pro forma) $ 0.44 $ 0.28 $ 0.84 $ 0.55
</TABLE>
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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>
APRIL 30, OCTOBER 31,
1997 1996
--------- -----------
<S> <C> <C>
Raw materials $28,407 $21,553
Work-in-process 8,243 9,267
Finished goods 15,545 8,181
------- -------
Total $52,195 $39,001
======= =======
</TABLE>
2. LINES OF CREDIT:
In June 1997, the Company entered into a $20 million unsecured revolving bank
line of credit agreement which expires in May 1998. Borrowings under this
agreement bear interest at either the bank's prime rate or a spread over LIBOR,
at the Company's option. The Company is required to maintain specified levels of
tangible net worth and comply with certain other covenants.
At April 30, 1997 and October 31, 1996, the Company had two revolving line
of credit agreements with terms expiring in May 1997. Borrowings under these
agreements were limited to $7.5 million and $12.5 million, respectively, and had
respective interest rates at prime and at 2.6% above the rate for 30-day
commercial paper. Both agreements were secured by substantially all of the
Company's assets and required that the Company maintain specified levels of
tangible net worth and comply with certain other covenants. No borrowings were
outstanding under these agreements as of April 30, 1997 or October 31, 1996.
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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" or
"SMART"), 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. Apex designs and markets wireless and wireline PC card data/fax
modem, I/O 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 consolidated financial
position and results of operations, RISQ has been included in the Company's
consolidated results of operations as of the beginning of fiscal 1996 (November
1, 1995). RISQ designs and manufactures embedded computer modules and products
in both standard and custom form factors for OEMs in the telecommunications,
networking, industrial control and image processing markets.
In September 1996, the Company expanded its manufacturing capacity by
opening a 25,000 square foot manufacturing facility in East Kilbride, Scotland.
This is the Company's first manufacturing facility outside of the United States
and Puerto Rico.
Over the last eight quarters, the Company's gross margin has ranged from
16.8% to 19.6%. One of the primary factors affecting gross margin has been the
proportion of the Company's 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 lower gross margins 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 computer
modules and communication card products. Historically, the majority of the
Company's net sales have been derived from sales of its specialty memory
products, which typically have higher gross margin than the Company's standard
memory products. During fiscal 1997, sales of the Company's standard memory
products have increased as a percentage of net sales. The Company's embedded
computer modules typically generate the Company's highest gross margin, followed
by the Company's communication card products. However, both product lines
currently contribute the smallest portion of the Company's net sales.
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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. Selling prices of certain of SMART's products have declined in the
past and SMART expects that some prices will continue to decline in the future.
Accordingly, SMART'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 $9.5 million on revenues of $143.7 million
for the second quarter of fiscal 1997 compared with net income of $6.0 million
on revenues of $104.1 million for the same period in fiscal 1996. Net income for
the six months ended April 30, 1997 was $18.2 million on revenues of $275.3
million compared to net income of $11.4 million on revenues of $194.4 million
for the same period of fiscal 1996.
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 SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------ -----------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales .............................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .......................... 83.2 82.8 83.0 82.3
----- ----- ----- -----
Gross profit ........................... 16.8 17.2 17.0 17.7
Operating expenses:
Research and development ............. 1.4 1.5 1.4 1.5
Selling, general and administrative .. 5.7 7.1 6.0 7.3
----- ----- ----- -----
Total operating expenses ..... 7.1 8.6 7.4 8.8
----- ----- ----- -----
Income from operations ................. 9.7 8.6 9.6 8.9
Other income, net ...................... 0.3 0.4 0.4 0.4
----- ----- ----- -----
Income before provision for income taxes 10.0 9.0 10.0 9.3
Provision for income taxes ............. 3.4 3.3 3.4 3.5
----- ----- ----- -----
Net income ............................. 6.6% 5.7% 6.6% 5.8%
===== ===== ===== =====
</TABLE>
NET SALES
Net sales consist of sales of specialty memory, standard memory, embedded
computer modules and communication card products, less returns and discounts.
Net sales for the second quarter of fiscal 1997 increased 38.0% to $143.7
million from $104.1 million for the same period of fiscal 1996. Net sales for
the six months ended April 30, 1997 increased 41.6% to $275.3 million from
$194.4 million for the comparable period of fiscal 1996. The increase in net
sales for both the three and six month periods ended April 30, 1997 reflects an
overall increase in demand for the Company's products from both new customers
and particularly one existing customer as compared to the same periods of fiscal
1996.
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In addition, increases in sales of products manufactured on a turnkey basis
versus on a consignment basis further contributed to the increase in net sales
as compared to the same periods of fiscal 1996. These increases were partially
offset by declines in sales of the Company's communication card products during
the three and six month periods ended April 30, 1997 as compared to the same
periods of fiscal 1996.
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 34.9% to $24.1 million for the second quarter of fiscal 1997 from
$17.9 million for the same period of fiscal 1996. Gross margin decreased to
16.8% for the second quarter of fiscal 1997 from 17.2% for the comparable period
of fiscal 1996. Gross profit for the first six months of fiscal 1997 increased
35.9% to $46.8 million from $34.4 million for the same period of fiscal 1996.
Gross margin decreased to 17.0% for the first six months of fiscal 1997 from
17.7% for the comparable period of fiscal 1996. The decrease in gross margin for
the three and six month periods ended April 30, 1997 was due in part to an
increase in the proportion of products manufactured on a turnkey basis versus
products manufactured on a consignment basis as compared to the same periods of
fiscal 1996. Further contributing to the decline in gross margin was an increase
in the proportion of the Company's net sales derived from its lower margin
standard memory products as compared to the same periods of fiscal 1996.
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
compensation of personnel involved with development efforts, materials and
outside design and testing services. Research and development expenses increased
37.0% to $2.1 million for the second quarter of fiscal 1997 from $1.5 million
during the same period of fiscal 1996 and totaled 1.4% and 1.5% of net sales for
the second quarter of fiscal 1997 and fiscal 1996, respectively. For the first
six months of fiscal 1997, research and development expenses increased 33.3% to
$3.9 million from $2.9 million for the same period of fiscal 1996. Research and
development expenses totaled 1.4% and 1.5% of net sales for the first six months
of fiscal 1997 and fiscal 1996, respectively. The Company expects that its
research and development expenses will increase in absolute dollars in future
periods as the Company expands its research and development efforts.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses consist primarily of personnel
costs, including salaries, performance-based bonuses, commissions and employee
benefits, facilities and equipment costs, costs related to advertising and
marketing and other support costs including utilities, insurance and
professional fees. Selling, general and administrative expenses incurred during
the second quarter of fiscal 1997 totaled $8.2 million, representing an increase
of 11.3% from $7.4 million for the same period of fiscal 1996. Selling, general
and administrative expenses comprised 5.7% and 7.1% of net sales for the second
quarter of fiscal 1997 and fiscal 1996, respectively. For the first six months
of fiscal 1997, selling, general and administrative expenses totaled $16.3
million, representing a 15.0% increase from $14.2 million for the comparable
period of fiscal 1996. Selling, general and administrative expenses comprised
6.0% and 7.3% of net sales for the first six months of fiscal 1997 and fiscal
1996, respectively. The decrease in selling, general and administrative expenses
as a percentage of net sales was principally due to the growth in net sales
including an increase in net sales generated by certain OEM customers requiring
lower levels of selling and marketing expenses. The Company expects that its
selling, general and administrative expenses will increase in absolute dollars
in future periods as the Company expands its staffing, information systems and
other items related to infrastructure.
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OTHER INCOME, NET
Other income, net consists primarily of interest income, less interest
expense. Interest expense is attributable to interest paid for certain lease
obligations. Interest income results from investment of cash balances. The
increase in other income over the prior year quarter reflects higher average
invested cash balances.
PROVISION FOR INCOME TAXES
Provisions for income taxes were $4.9 million and $3.5 million for the
second quarter of fiscal 1997 and fiscal 1996, respectively, resulting in
effective tax rates of 34.0% and 36.8%, respectively. For the first six months
of fiscal 1997 and fiscal 1996, the Company provided $9.4 million and $6.8
million for income taxes, respectively, resulting in effective tax rates of
34.0% and 37.2 %, respectively. The decrease in the Company's consolidated
effective tax rate for the three and six month periods ended April 30, 1997 is
principally due to an increase in the amount of income contributed to the
Company from its Puerto Rican and international operations as compared to the
same periods of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES:
The Company used cash from operating activities totaling $1.3 million for
the six months ended April 30, 1997 versus cash totaling $14.0 million provided
by operations for the same period of fiscal 1996. Cash used during the first six
months of fiscal 1997 resulted from increases in inventories and accounts
receivable. At April 30, 1997, the Company had $51.5 million of cash, cash
equivalents and short term investments, and $87.4 million of working capital. At
October 31, 1996, the Company had $61.1 million of cash, cash equivalents and
short term investments, and $74.3 million of working capital. The Company
primarily funds its financing and investing deficits from amounts borrowed under
its 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, 1997, the Company had two revolving line of credit agreements
with terms expiring in May 1997. Borrowings under these agreements were limited
to $7.5 million and $12.5 million, respectively, and had respective interest
rates at prime and at 2.6% above the rate for 30-day commercial paper. Both
agreements were secured by substantially all of the Company's assets and
required that the Company maintain specified levels of tangible net worth and
comply with certain other covenants. No borrowings were outstanding under these
agreements as of April 30, 1997 or October 31, 1996.
Subsequent to April 30, 1997, the Company entered into a $20 million
unsecured revolving bank line of credit agreement which expires in May 1998.
Borrowings under this agreement bear interest at either the bank's prime rate or
a spread over LIBOR, at the Company's option. The Company is required to
maintain specified levels of tangible net worth and comply with certain other
covenants.
SMART has entered into certain capital lease arrangements. The outstanding
principal on these obligations was $1.8 million and $2.7 million at April 30,
1997 and October 31, 1996, respectively.
The first paragraph of this Liquidity and Capital Resources 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."
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<PAGE> 12
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 could 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 fiscal 1996 and fiscal 1995, the
Company's ten largest customers accounted for 71% and 68% of net sales,
respectively. In fiscal 1996, the Company's top three customers as a percentage
of net sales accounted for 19%, 15% and 12% of net sales, respectively. During
fiscal 1996, no other customers accounted for more than 10% of net sales. In
fiscal 1995, the Company's top three customers as a percentage of net sales
accounted for 18%, 15% and 10% of net sales, respectively. During fiscal 1995,
no other customers accounted for more than 10% of net sales. For the first six
months of fiscal 1997, the Company's aggregate net sales to its top three
customers increased as a percentage of total net sales as compared to the same
period of fiscal 1996. 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 any of these customers and/or any of the Company's
other significant customers 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 computer module industries are
intensely competitive. The memory module, PC card and embedded computer 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 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 Celestica Inc., PNY
Electronics, Inc. and Simple Technology Incorporated. 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 Centennial Technologies, Inc., Hayes
Microcomputer Products, Inc. and U.S.
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<PAGE> 13
Robotics, Inc. In the embedded computer module market, the Company competes with
Force Computers Inc. (a subsidiary of Solectron Corporation), 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.
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 compared to 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, adverse changes in the mix of products
sold by the Company and the inability to procure required components. 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, declines in DRAM, Flash and SRAM semiconductor
prices 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.
-13-
<PAGE> 14
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 product selling prices and component
costs, 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, during fiscal 1996, the selling prices of
the Company's existing products declined due to significant declines in SRAM and
DRAM semiconductor prices and declines in Flash semiconductor prices. Moreover,
since the fiscal 1996 year end, declines in the selling prices of certain of the
Company's existing products have continued due to further declines in certain
DRAM and 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 product 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 product 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 securities 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 computer module and PC card products. The Company also depends on sole
source third party manufacturers to produce certain of the Company's embedded
computer module products. The electronics industry has experienced in the past
and may experience in the future shortages in semiconductor devices, including
DRAM, SRAM and Flash memory. The Company has experienced
-14-
<PAGE> 15
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 costs and/or
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 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. During fiscal 1996, there
were significant declines in DRAM and SRAM semiconductor prices and declines in
Flash semiconductor prices. Since the fiscal 1996 year end, there have been
continued declines in certain DRAM and 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
-15-
<PAGE> 16
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. For example, the semiconductor memory market is currently
transitioning from FPM and EDO to SDRAM and the industry standard modem is
currently changing from a 33,600 bits per second ("bps") synchronous modem to a
56,000 bps asynchronous modem. The Company is currently focusing its research
and development resources on the development of DRAM, particularly SDRAM, Flash
and SRAM products, 56,000 bps asynchronous modem products and various embedded
computer modules. 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.
NEW FACILITIES
In September 1996, the Company opened a new manufacturing facility in East
Kilbride, Scotland. The Company has never operated a manufacturing facility
outside of the United States and Puerto Rico. The Company is currently operating
four production lines at this facility and plans to add additional production
lines in the future. There can be no assurance that the Company will be able to
successfully add the additional production lines, that the Company can operate
the new facility on a cost effective basis or that the Company can integrate the
new operations with its operations in Fremont, California and Arecibo, Puerto
Rico. Any inability to begin additional production at this new facility as
scheduled or to manage the operations at this facility efficiently could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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
-16-
<PAGE> 17
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 8% of net sales in fiscal 1996 and 14% of
net sales in each of fiscal 1995 and 1994. In September 1996, the Company opened
a new manufacturing facility in East Kilbride, Scotland. The Company anticipates
that international sales will continue to account for a portion of net sales. As
a result, a 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 or other countries. 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 increased
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 a
variety of measures including non-disclosure agreements, trademarks, trade
secrets and to a lesser extent patents. 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
-17-
<PAGE> 18
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 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, copyrights 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
(a) The Company held an annual meeting of shareholders (the "Annual
Meeting") on April 4, 1997.
(b) The following individuals were nominated and elected to the Board of
Directors to serve for the ensuing year and until their successors are
duly elected and qualified or until their earlier death, resignation
or removal. Each individual so nominated also served as a Director on
the Company's Board of Director during the preceding year.
<TABLE>
<CAPTION>
Number of Votes
-------------------------------------------------------------
Broker
Nominee For Against Withheld Non-Votes
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ajay Shah 17,448,025 0 60,410 0
Mukesh Patel 17,448,125 0 60,310 0
Erik Anderson 17,447,895 0 60,540 0
Tor R. Braham 17,448,195 0 60,240 0
</TABLE>
(c) The following matter was voted upon at the Annual Meeting and the
results of voting were as follows:
(1) The shareholders voted 17,486,119 shares in the affirmative,
4,400 shares in the negative and 17,916 shares withheld to
ratify the appointment of Arthur Andersen LLP as independent
auditors of the Company for the fiscal year ending October 31,
1997.
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, 1997.
-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 hereunto duly authorized.
SMART MODULAR TECHNOLOGIES, INC.
By: /s/ DAVID MULLIN
-------------------------------------
David Mullin
Vice President, Finance and
Chief Financial Officer
(Principal Financial and)
Accounting Officer)
Date: June 13, 1997
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<PAGE> 21
SMART MODULAR TECHNOLOGIES, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
<S> <C>
2.1(1) Agreements 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 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.
10.29 Fourth Amendment to Lease between the Registrant and Riggs Bank
N.A. dated September 27, 1996.
27.1 Financial Data Schedule for the Quarter Ended April 30, 1997.
</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.
(3) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-Q filed June 14, 1996.
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<PAGE> 22
* 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
FOURTH AMENDEMNT TO LEASE
THIS FOURTH AMENDMENT TO LEASE is made and entered into September 27, 1996 by
and between RIGGs BANK N.A. ("Landlord"), and SMART MODULAR TECHNOLOGIES, INC.,
A CALIFORNIA CORPORATION ("Tenant").
RECITALS:
A. Landlord's predecessor-in-interest, Pactel Properties, a California
Corporation, and Tenant entered into that certain Standard Triple Net Industrial
Lease, dated November 18, 1991 covering certain premises consisting of
approximately 15,865 rentable square feet (the "Premises") and amended by that
First Amendment To Lease, dated July 19, 1993 covering certain Additional Space
("Additional Space") of approximately 2,206 rentable square feet and amended by
that Second Amendment to Lease, dated May 31, 1994, and that Third Amendment to
Lease, dated November 1, 1994, covering certain Expansion Space ("Expansion
Space") of approximately 6,959 rentable square feet, hereinafter together
referred to as the Lease (the "Lease"), located in the building at 45521
Northport Loop West, Fremont, California (the "Building").
B. Landlord and Tenant desire to further amend the Lease so as to extend the
term, amend the Base Rent, provide a Cancellation Option and make certain other
changes, all as described below.
NOW, THEREFORE, the parties agree as follows:
1. DEFINED TERMS. All capitalized terms used in this Amendment
shall have the meanings given in the Lease, unless otherwise expressly defined
herein.
2. EFFECTIVE DATE. Each provision of this Fourth Amendment to
Lease which deletes, replaces, amends or revises any portion of the Lease, shall
not delete, replace amend or revise the Lease until the Effective Date of this
Fourth Amendment to Lease. The "Effective Date" is defined as January 20, 1997.
Notwithstanding the foregoing, this Fourth Amendment to Lease shall be in full
force and effect and binding upon the parties immediately upon execution.
3. PARAGRAPH 3. TERM. Notwithstanding anything to the contrary in
the Lease, the Term of the Lease shall be extended for seventy-two (72) months
and eleven (11) days from the Effective Date and, therefore, will expire
January 31, 2003, unless otherwise terminated or extended pursuant to the terms
of the Lease.
4. PARAGRAPH 4. RENT. The Base Monthly Rent for the Premises
shall be modified as follows:
<TABLE>
<CAPTION>
Base
Months Monthly Rent
- - ------ ------------
<S> <C>
1 - 24 $17,521
25 - 48 $18,021
49 - January 31, 2003 $19,023
</TABLE>
5. Paragraph 46. Extension Option. Pursuant to Paragraph 46 of
the Lease, Landlord hereby grants to Tenant the option to extend the term of
this Lease (the "Option") for one additional five-year period. Tenant shall
exercise such Option by giving written notice of exercise to Landlord no less
than four (4) months, nor more than nine (9) months prior to the Expiration
Date; provided, however, that such Option shall not be exercisable if Tenant is
then in default hereunder or if the other conditions set forth in the Lease have
not been met. All of the terms and conditions of this Lease shall govern such
extended term insofar as applicable, and all references in this Lease to the
term hereof shall be deemed to include such extended term unless the context
clearly indicates to the contrary.
<PAGE> 2
6. Cancellation Option. Provided Tenant is not in default of the Lease at (i)
the Notice Date, or (ii) the Cancellation Date, Tenant shall have the option to
cancel the Lease at any time after the forty-eighth (48th) month of the Lease
("Cancellation Date") by providing Landlord not less than six (6) months prior
written notice ("Notice Date"). Prior to the Cancellation Date, Tenant shall
provide Landlord a Penalty in the amount of $15,000 ("Penalty"). Should Tenant
not provide Landlord the Penalty prior to the Cancellation Date, Tenant's
Cancellation Option shall become null and void and the lease shall continue in
full force and effect pursuant to the Lease.
7. Lease Ratification. Except as amended hereby, all terms and conditions of the
Lease are ratified and confirmed, and the Lease shall continue in full force and
effect in accordance with its terms.
LANDLORD:
RIGGS BANK as Trustee for the
Multi-Employer Property Trust
By: /s/ Maria E. Fleming
Maria E. Fleming
Senior Trust Officer
TENANT:
SMART MODULAR TECHNOLOGIES, INC.,
A CALIFORNIA CORPORATION
By: /s/ Mukesh Patel
Mukesh Patel
Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S
FORM 10-Q FOR THE SECOND QUARTER ENDED APRIL 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS YEAR
<FISCAL-YEAR-END> OCT-31-1997 OCT-31-1997 OCT-31-1997
<PERIOD-START> FEB-01-1997 NOV-01-1996 NOV-01-1995
<PERIOD-END> APR-30-1997 APR-30-1997 OCT-31-1996
<CASH> 0 40,210 52,562
<SECURITIES> 0 11,311 8,494
<RECEIVABLES> 0 70,576 52,806
<ALLOWANCES> 0 0 0
<INVENTORY> 0 52,195 39,001
<CURRENT-ASSETS> 0 179,184 157,818
<PP&E> 0 20,005 13,434
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 0 199,488 172,185
<CURRENT-LIABILITIES> 0 91,793 83,494
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 38,248 36,869
<OTHER-SE> 0 67,928 49,750
<TOTAL-LIABILITY-AND-EQUITY> 0 106,176 86,619
<SALES> 143,652 275,264 0
<TOTAL-REVENUES> 143,652 275,264 0
<CGS> 119,511 228,492 0
<TOTAL-COSTS> 119,511 228,492 0
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 34 86 0
<INCOME-PRETAX> 14,346 27,551 0
<INCOME-TAX> 4,878 9,373 0
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 9,468 18,178 0
<EPS-PRIMARY> 0.44 0.84 0
<EPS-DILUTED> 0 0 0
</TABLE>
