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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 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)
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CALIFORNIA 77-0200166
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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4305 CUSHING PARKWAY
FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA (510) 623-1231
CODE:
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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 MARCH 10, 1997, THERE WERE 19,146,852 SHARES OF THE REGISTRANT'S COMMON
STOCK, NO PAR VALUE, OUTSTANDING.
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SMART MODULAR TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Consolidated Condensed Balance Sheets -- As of
January 31, 1997 and October 31, 1996................................... 3
Consolidated Condensed Statements of Income -- For the Three Months Ended
January 31, 1997 and 1996............................................... 4
Consolidated Condensed Statements of Cash Flows -- For the Three Months
Ended January 31, 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......................................................... 18
Item 2. Changes in Securities..................................................... 18
Item 3. Defaults upon Senior Securities........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders....................... 18
Item 5. Other Information......................................................... 18
Item 6. Exhibits and Reports on Form 8-K.......................................... 18
Signatures........................................................................... 19
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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)
ASSETS
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<CAPTION>
JANUARY 31, OCTOBER 31,
1997 1996
----------- -----------
(UNAUDITED)
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Current Assets:
Cash and cash equivalents........................................... $ 54,366 $ 52,568
Short term investments.............................................. 9,353 8,494
Accounts receivable, net............................................ 56,604 52,806
Inventories......................................................... 36,678 39,001
Prepaid expenses and other.......................................... 5,696 4,949
-------- --------
Total current assets........................................ 162,697 157,818
Property and Equipment, net........................................... 17,169 13,434
Other................................................................. 734 933
-------- --------
Total assets................................................ $ 180,600 $ 172,185
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................... $ 62,307 $ 66,206
Accrued compensation and commissions................................ 4,634 3,441
Accrued bonuses..................................................... 2,509 4,212
Other accrued expenses.............................................. 4,515 3,445
Income taxes payable................................................ 8,528 6,190
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Total current liabilities................................... 82,493 83,494
Long-term Liabilities:
Capital lease obligations, net of current portion................... 919 1,241
Deferred income taxes and other..................................... 865 831
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Total liabilities........................................... 84,277 85,566
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Shareholders' Equity:
Common stock, no par value --
Authorized -- 100,000,000 shares
Outstanding -- 19,046,600 and 18,855,163 shares, respectively....... 37,863 36,869
Retained earnings................................................... 58,460 49,750
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Total shareholders' equity.................................. 96,323 86,619
-------- --------
Total liabilities and shareholders' equity.................. $ 180,600 $ 172,185
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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
FOR THE THREE MONTHS ENDED JANUARY 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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1997 1996
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Net sales............................................................... $131,612 $90,317
Cost of sales........................................................... 108,981 73,779
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Gross profit............................................................ 22,631 16,538
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Operating expenses:
Research and development.............................................. 1,829 1,414
Sales and marketing................................................... 3,192 3,311
General and administrative............................................ 4,934 3,518
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Total operating expenses...................................... 9,955 8,243
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Income from operations.................................................. 12,676 8,295
Other income, net....................................................... 529 429
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Income before provision for income taxes................................ 13,205 8,724
Provision for income taxes.............................................. 4,495 3,279
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Net income.............................................................. $ 8,710 $ 5,445
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Net income per share.................................................... $ 0.41 $ 0.27
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Weighted average common and common equivalent shares outstanding........ 21,462 20,313
======== =======
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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 THREE MONTHS ENDED JANUARY 31,
(IN THOUSANDS)
(UNAUDITED)
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1997 1996
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:..................... $ 6,841 $(4,716)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments available-for-sale............................ (859) --
Purchases of property and equipment.................................... (4,689) (419)
Proceeds from sale of property and equipment........................... 22 --
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Net cash used in investing activities.......................... (5,526) (419)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit.......................................... -- 16,069
Payments on lines of credit............................................ -- (19,667)
Payments of capital lease obligations.................................. (417) (300)
Proceeds from sale of common stock..................................... 900 32,930
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Net cash provided by financing activities...................... 483 29,032
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NET INCREASE IN CASH AND CASH EQUIVALENTS................................ 1,798 23,897
CASH AND CASH EQUIVALENTS, beginning of period........................... 52,568 13,059
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CASH AND CASH EQUIVALENTS, end of period................................. $54,366 $36,956
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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
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The Interim Consolidated Condensed Financial Statements of SMART Modular
Technologies, Inc., a California corporation, and Subsidiaries (the "Company")
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. These Interim Consolidated Condensed
Financial Statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's fiscal 1996 Form 10-K as
filed with the Securities and Exchange Commission on January 28, 1997.
The Interim Consolidated Condensed Financial Statements for the first
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 month period ended January 31, 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.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and include material, labor and manufacturing costs. Inventories consist of the
following (in thousands):
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JANUARY 31, OCTOBER 31,
1997 1996
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(UNAUDITED)
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Raw materials......................................... $19,287 $21,553
Work-in-process....................................... 5,089 9,267
Finished goods........................................ 12,302 8,181
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Total....................................... $36,678 $39,001
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SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. LINES OF CREDIT:
In March 1997, the Company signed a letter of intent to enter into a $20
million unsecured revolving bank line of credit agreement which expires in March
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 January 31, 1997 and October 31, 1996 , the Company had two revolving
line of credit agreements with terms expiring in February 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 January 31, 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. 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, 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 processor 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
16.4% 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 processor
modules 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 currently generate
the Company's highest gross margin, followed by the Company's PC card
communication products. However, both product lines currently contribute the
smallest portion of the Company's 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. 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
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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 seventh 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 $8.7 million on revenues of $131.6 million
for the first quarter of fiscal 1997, compared with net income of $5.4 million
on revenues of $90.3 million for the same period in 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 (unaudited):
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THREE MONTHS
ENDED
JANUARY 31,
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1997 1996
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Net sales.................................................... 100.0% 100.0%
Cost of sales................................................ 82.8 81.7
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Gross profit................................................. 17.2 18.3
Operating expenses:
Research and development................................... 1.4 1.6
Sales and marketing........................................ 2.4 3.7
General and administrative................................. 3.8 3.9
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Total operating expenses........................... 7.6 9.2
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Income from operations....................................... 9.6 9.1
Other income, net............................................ 0.4 0.5
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Income before provision for income taxes..................... 10.0 9.6
Provision for income taxes................................... 3.4 3.6
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Net income................................................... 6.6% 6.0%
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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 first quarter of fiscal
1997 increased 45.7% to $131.6 million from $90.3 million for the same period of
fiscal 1996. The increase was primarily due to an increase in sales of standard
memory products to both new and existing customers. The Company's sales of
specialty memory products to new and existing customers also increased during
the first quarter of fiscal 1997 over the comparable period of fiscal 1996.
These increases were partially offset by a reduction in sales of the Company's
PC card communication products as compared to the first quarter of fiscal 1996.
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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 36.8% to $22.6 million for the first quarter of fiscal 1997 from $16.5
million for the same period of fiscal 1996. Gross margin decreased to 17.2% for
the first quarter of fiscal 1997 from 18.3% for the comparable period of fiscal
1996. The decrease in gross margin had two principle causes. First, the mix
between products manufactured on a turnkey versus on a consignment basis was
more heavily weighted toward turnkey than in the first quarter of fiscal 1996.
Secondly, standard memory products made up a greater portion of the Company's
net sales than in the same quarter last year.
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
29.3% to $1.8 million for the first quarter of fiscal 1997 from $1.4 million
during the comparable period of fiscal 1996. As a percentage of net sales,
research and development expenses decreased to 1.4% for the first quarter of
fiscal 1997 from 1.6% for the same period of fiscal 1996. The decrease in
research and development expenses as a percentage of net sales in the first
quarter of fiscal 1997 as compared to the first quarter of fiscal 1996 was
principally due to the growth in net sales and efforts to control both
compensation based and non-compensation based costs related to research and
development efforts.
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 decreased 3.6% to $3.2 million for
the first quarter of fiscal 1997 from $3.3 million for the comparable period of
fiscal 1996. As a percentage of net sales, sales and marketing expenses
decreased to 2.4% for the first quarter of fiscal 1997 from 3.7% for the same
period of fiscal 1996. The decrease in sales and marketing expenses in absolute
dollars was principally due to an increase in net sales generated from certain
OEM customers which require a lower level of sales and marketing expenses. 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, facilities and
equipment costs and other support costs including utilities, insurance and
professional fees. General and administrative expenses increased 40.3% to $4.9
million for the first quarter of fiscal 1997 from $3.5 million for the same
period of fiscal 1996. As a percentage of net sales, general and administrative
expenses decreased to 3.8% for the first quarter of fiscal 1997 compared to 3.9%
for the first quarter of fiscal 1996. The decrease in general and administrative
expenses as a percentage of net sales was principally due to the growth in net
sales and efforts to control costs. The Company expects that its 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.
Other Income, Net
Other income, net consists primarily of interest income, less interest
expense. Interest expense is attributable to the Company's utilization of its
lines of credit as well as 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.
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Provision for Income Taxes
Provisions for income taxes were $4.5 million and $3.3 million for the
first quarter of fiscal 1997 and fiscal 1996, respectively. The Company's
effective tax rate for these periods was 34.0% and 37.6 %, respectively. The
decrease in the Company's consolidated effective tax rate 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 first quarter of fiscal
1996.
LIQUIDITY AND CAPITAL RESOURCES:
Since its inception, SMART has used funds generated primarily from
operations, certain borrowings, capital leases and its initial public offering
to support its operations, acquire capital equipment and finance inventory and
accounts receivable. The Company generated cash from operations totaling $6.8
million for the first quarter of fiscal 1997 versus a deficit in operating
activities of $4.7 million for the same period of fiscal 1996. At January 31,
1997, the Company had $63.7 million of cash, cash equivalents and short term
investments, and $80.2 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. Prior to fiscal 1997, the Company
primarily funded 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 January 31, 1997, the Company had two revolving line of credit
agreements with terms expiring in February 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 January 31, 1997 or October 31, 1996.
Subsequent to January 31, 1997, the Company signed a letter of intent to
enter into a $20 million unsecured revolving bank line of credit agreement which
expires in March 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 $2.3 million and $2.7 million at January 31,
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." 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
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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. 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 processor module industries are
intensely competitive. The memory module, 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 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. Robotics, Inc. In the embedded processor
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.
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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 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.
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 the Company's
existing products have continued due to further declines in DRAM, SRAM 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
13
<PAGE> 14
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 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 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 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
14
<PAGE> 15
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 DRAM, Flash and SRAM 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 enhancements on a timely and cost-effective
basis that respond to changing customer requirements and that meet evolving
industry standards. For example, 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
processor 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
15
<PAGE> 16
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 telecommunications, 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 anticipated benefits of the Apex and RISQ acquisitions will be realized.
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
three 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 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
16
<PAGE> 17
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 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
17
<PAGE> 18
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.
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 20-21.
(b) Reports on Form 8-K: There were no reports on Form 8-K filed during the
three months ended January 31, 1997.
18
<PAGE> 19
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: March 14, 1997
19
<PAGE> 20
SMART MODULAR TECHNOLOGIES, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------- -----------------------------------------------------------------------------
<C> <S>
2.1 (1) Agreements and Plan of Reorganization among the Registrant, Apex ata, Inc.
and SMART Acquisition Inc. dated April 24, 1995.
3.2 (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
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.
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------- -----------------------------------------------------------------------------
<C> <S>
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.
27.1 Financial Data Schedule for the Quarter Ended January 31, 1997.
</TABLE>
- - ---------------
* 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
(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.
21
<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
10-Q FOR THE FIRST QUARTER ENDED JANUARY 31, 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 YEAR 3-MOS
<FISCAL-YEAR-END> OCT-31-1997 OCT-31-1997 OCT-31-1997
<PERIOD-START> NOV-01-1996 NOV-01-1995 NOV-01-1995
<PERIOD-END> JAN-31-1997 OCT-31-1996 JAN-31-1996
<CASH> 54,366 52,568 0
<SECURITIES> 9,353 8,494 0
<RECEIVABLES> 56,604 52,806 0
<ALLOWANCES> 0 0 0
<INVENTORY> 36,678 39,001 0
<CURRENT-ASSETS> 162,697 157,818 0
<PP&E> 17,169 13,434 0
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 180,600 172,185 0
<CURRENT-LIABILITIES> 82,493 83,494 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 37,863 36,869 0
<OTHER-SE> 58,460 49,750 0
<TOTAL-LIABILITY-AND-EQUITY> 96,323 86,619 0
<SALES> 131,612 0 90,317
<TOTAL-REVENUES> 131,612 0 90,317
<CGS> 108,981 0 73,779
<TOTAL-COSTS> 108,981 0 73,779
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 52 0 93
<INCOME-PRETAX> 13,205 0 8,724
<INCOME-TAX> 4,495 0 3,279
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 8,710 0 5,445
<EPS-PRIMARY> 0.41 0 0.27
<EPS-DILUTED> 0 0 0
</TABLE>
