<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 11, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SMART MODULAR TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 3674 77-0200166
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
4305 CUSHING PARKWAY
FREMONT, CALIFORNIA 94538
(510) 623-1231
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
AJAY SHAH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SMART MODULAR TECHNOLOGIES, INC.
4305 CUSHING PARKWAY
FREMONT, CALIFORNIA 94538
(510) 623-1231
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
COPIES TO:
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TOR R. BRAHAM, ESQ. JOSHUA L. GREEN, ESQ.
WILSON SONSINI GOODRICH & ROSATI VENTURE LAW GROUP
PROFESSIONAL CORPORATION A PROFESSIONAL CORPORATION
650 PAGE MILL ROAD 2800 SAND HILL ROAD
PALO ALTO, CALIFORNIA 94304-1050 MENLO PARK, CALIFORNIA 94025
(415) 493-9300 (415) 854-4488
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement is declared effective.
If the only securities being registered on this form are being offered
pursuant to dividend or reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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======================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- ------------------------------------------------------------------------------------------------------
Common Stock.................. 2,380,500 shares $45.00 $107,122,500 $32,462
======================================================================================================
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(1) Includes shares which the Underwriters have the option to purchase solely to
cover over-allotments, if any.
(2) The proposed maximum offering price per share and the registration fee were
calculated in accordance with Rule 457(c) based on the average of the high
and low prices for the Company's Common Stock on August 5, 1997, as quoted
on the Nasdaq National Market.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Issued August 11, 1997
2,070,000 Shares
LOGO
COMMON STOCK
------------------------
OF THE 2,070,000 SHARES OF COMMON STOCK OFFERED HEREBY, 1,100,000 SHARES ARE
BEING SOLD BY THE COMPANY AND 970,000 SHARES ARE BEING SOLD BY THE SELLING
SHAREHOLDERS. SEE "PRINCIPAL AND SELLING SHAREHOLDERS." THE COMPANY WILL NOT
RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES BY THE SELLING SHAREHOLDERS.
THE COMPANY'S COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "SMOD." ON AUGUST 8, 1997, THE LAST SALE PRICE FOR THE COMMON STOCK AS
REPORTED ON THE NASDAQ NATIONAL MARKET WAS $46 PER SHARE. SEE "PRICE RANGE OF
COMMON STOCK."
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
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UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Per Share............................. $ $ $ $
Total(3).............................. $ $ $ $
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(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $340,000.
(3) The Company has granted the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an aggregate of 310,500
additional Shares at the price to public less underwriting discounts
and commissions for the purpose of covering over-allotments, if any. If
the Underwriters exercise such option in full, the total price to
public, underwriting discounts and commissions, and proceeds to Company
will be $ , $ , and $ , respectively. See
"Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Venture Law Group, A Professional Corporation, counsel for the Underwriters.
It is expected that delivery of the
Shares will be made on or about , 1997, at the office of Morgan
Stanley & Co. Incorporated, New York, N.Y., against payment therefor in
immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER
DONALDSON, LUFKIN & JENRETTE
Securities Corporation
COWEN & COMPANY
MONTGOMERY SECURITIES
, 1997
<PAGE> 3
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY THE SELLING SHAREHOLDERS OR BY
ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY
SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
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PAGE
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Incorporation of Certain Documents by
Reference..................................... 2
Prospectus Summary.............................. 3
The Company..................................... 4
Risk Factors.................................... 5
Use of Proceeds................................. 12
Dividend Policy................................. 12
Price Range of Common Stock..................... 12
Capitalization.................................. 13
Selected Consolidated Financial Data............ 14
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PAGE
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Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 15
Business........................................ 23
Management...................................... 35
Principal and Selling Shareholders.............. 38
Underwriters.................................... 40
Legal Matters................................... 41
Experts......................................... 41
Available Information........................... 42
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
0-26942) pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), are incorporated in this Prospectus by reference: (i) the
Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996;
(ii) the Company's Quarterly Report on Form 10-Q for the quarter ended January
31, 1997; (iii) the Company's Quarterly Report on Form 10-Q for the quarter
ended April 30, 1997; and (iv) the description of the Company's Common Stock
contained in the Company's Registration Statement on Form 8-A filed under
Section 12 of the Exchange Act, including any amendment or report updating such
description.
Each document filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering made hereby shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
of such document (all such documents, and the documents enumerated above, being
hereinafter referred to as "Incorporated Documents").
Any statement contained in an Incorporated Document shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed Incorporated
Document modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, including any beneficial owner, upon the written
or oral request of such person, a copy of any or all of the Incorporated
Documents, other than exhibits to such documents unless such exhibits are
specifically incorporated by reference therein. Requests for such copies should
be directed to SMART Modular Technologies, Inc., 4305 Cushing Parkway, Fremont,
California 94538, Attention: Charles W. Welch, General Counsel (telephone: (510)
623-1231). The information relating to the Company contained in this Prospectus
does not purport to be comprehensive and should be read together with the
information contained in the Incorporated Documents.
------------------------
Apex, Apex Data, SMART and Design and SMART Modular Technologies are
registered trademarks of the Company. This Prospectus also refers to trademarks
held by other corporations.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
------------------------
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITERS."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the detailed information and the financial statements
appearing elsewhere in this Prospectus or incorporated herein by reference.
Unless otherwise indicated, the information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. Prospective investors
should consider carefully the factors described under "Risk Factors."
THE COMPANY
SMART Modular Technologies, Inc. is a leading independent manufacturer of
specialty and standard memory modules and Flash memory cards and also
manufactures high performance embedded computer modules, as well as
communication card solutions in PC card and other form factors. SMART offers
more than 500 products to leading OEMs in the computer, networking and
telecommunications industries. The Company's principal customers include Cisco,
Compaq, Data General, Fujitsu Microelectronics, Gateway, Hewlett-Packard, IBM,
Motorola, NCR and Solectron.
THE OFFERING
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Common Stock offered.............................. 2,070,000 shares, including
1,100,000 shares by the Company and
970,000 shares by the Selling Shareholders
Common Stock to be outstanding after the 20,338,392 shares(1)
offering........................................
Use of proceeds................................... For capital expenditures, facilities expansion,
working capital and other general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol..................... SMOD
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SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
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<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, APRIL 30,
---------------------------------- ---------------------
1994 1995 1996 1996 1997
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CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales.......................................... $163,849 $274,592 $401,774 $194,433 $275,264
Income from operations............................. 9,940 20,426 37,653 17,298 26,542
Net income......................................... 6,159 12,567 25,131 11,403 18,178
Net income per share(2)............................ $ .37 $ .72 $ 1.20 $ .55 $ .84
Weighted average common and common equivalent
shares outstanding(2)............................ 16,537 17,565 20,874 20,646 21,551
</TABLE>
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<CAPTION>
APRIL 30, 1997
---------------------------
ACTUAL AS ADJUSTED(3)
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CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments............................... $ 51,521 $ 99,125
Working capital................................................................. 87,391 134,995
Total assets.................................................................... 199,488 247,092
Capital lease obligations, net of current portion............................... 636 636
Total shareholders' equity...................................................... 106,176 153,780
</TABLE>
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(1) Based on the number of shares of Common Stock outstanding as of April 30,
1997. Excludes, as of April 30, 1997, (i) 3,797,837 shares of Common Stock
available for issuance pursuant to the Company's 1989 Incentive Stock Plan,
of which options to purchase 2,408,417 shares were outstanding; (ii)
2,977,309 shares of Common Stock available for issuance pursuant to the
Company's 1995 Stock Plan, of which options to purchase 796,979 shares were
outstanding; (iii) 100,000 shares of Common Stock available for issuance
pursuant to the Company's 1995 Director Option Plan, of which options to
purchase 7,200 shares were outstanding; and (iv) 456,784 shares of Common
Stock available for issuance pursuant to the Company's Employee Stock
Purchase Plan.
(2) See Note 2 of Notes to Consolidated Financial Statements incorporated herein
by reference for an explanation of the determination of the number of shares
used in computing net income per share. In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS 128") which requires
disclosure of basic earnings per share and diluted earnings per share and is
effective for periods ending subsequent to December 15, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Accounting Pronouncement."
(3) Adjusted to reflect the sale of 1,100,000 shares of Common Stock offered by
the Company hereby at an assumed public offering price of $46 per share and
after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company.
3
<PAGE> 5
THE COMPANY
SMART Modular Technologies, Inc. ("SMART" the "Company") is a leading
independent manufacturer of specialty and standard memory modules and Flash
memory cards and also manufactures high performance embedded computer modules,
as well as communication card solutions in PC card and other form factors. SMART
offers more than 500 products to leading OEMs in the computer, networking, and
telecommunications industries.
In July 1995, the Company increased its focus on the PC card business and
its presence in the computer reseller channel through its acquisition of Apex
Data, Inc. ("Apex"), which designs and markets wireless and wireline
communication card products. The Company further extended its product line to
include embedded computers through the acquisition of RISQ Modular Systems, Inc.
("RISQ") in July 1996. SMART has developed extensive design and manufacturing
expertise which the Company believes enables it to respond to its customers'
rapidly changing product and service requirements; provide its customers with
timely access to new higher speed or higher performance modules or subsystems;
reduce its customer's time-to-market and capital requirements; and decrease its
customers' production and inventory costs.
The demand for semiconductor memory devices and other subsystems in digital
electronic systems has grown dramatically over the last several years as a
result of the increasing importance of both of these components in determining
system performance. The demand for greater overall system performance, as well
as the increasing number and variety of electronic devices, has required that
electronics manufacturers increase the number and functionality of memory
devices and the performance of other subsystems.
The factors contributing to the increasing demand for memory devices and
communications and embedded computer subsystems include the expanding unit sales
of PCs in the business and consumer market segments; the increasing use of PCs
to perform memory-intensive graphics and multimedia functions; the volume of
memory required to support faster microprocessors; the proliferation of
increasingly complex operating system and applications software; the increased
use of local area network and wide area network routing and switching equipment,
which incorporate complex memory and embedded computer subsystems; the growth in
on-line communications, such as e-mail and the Internet; and, in general, the
increasing performance requirements of workstations, servers and networking and
telecommunications equipment.
As the variety of memory devices and subsystems available to address
specific applications has expanded, the design and manufacture of memory
modules, PC cards and embedded computer subsystems have increasingly become
areas in which electronics OEMs employ outsourcing strategies. OEM outsourcing
practices for memory products range from contract manufacturing, in which the
OEM may turn to an outside supplier to procure third-party components and for
the design, manufacture and distribution a specific product for the OEM on a
turnkey basis, to consignment, in which the OEM employs the outside supplier to
design and manufacture a product using memory or other components supplied by
the OEM. OEMs may also purchase memory modules or subsystems which have been
designed by a supplier for a specific application. The Company's memory module
products can be manufactured on a turnkey basis or on a consignment basis,
depending on the needs of the OEM.
The Company's principal customers include Cisco Systems, Inc. ("Cisco"),
Compaq Computer Corporation ("Compaq"), Data General Corporation ("Data
General"), Fujitsu Microelectronics ("Fujitsu"), Gateway 2000 ("Gateway"),
Hewlett-Packard Company ("Hewlett-Packard"), IBM Corporation ("IBM"), Motorola,
Inc. ("Motorola"), NCR Corp. ("NCR") and Solectron Corp. ("Solectron").
The Company was originally incorporated as Precision SMT Incorporated under
the laws of the State of California in August 1988 and changed its name to SMART
Modular Technologies, Inc. in March 1989. SMART's executive offices are located
at 4305 Cushing Parkway, Fremont, California 94538 and its telephone number is
(510) 623-1231. As used herein, "SMART" and the "Company" mean SMART Modular
Technologies, Inc. and its subsidiaries, unless the context otherwise requires.
4
<PAGE> 6
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus. Prospective investors in the Common Stock offered hereby should
carefully consider the following risk factors in addition to the other
information contained in this Prospectus.
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 three
largest customers were Cisco, Hewlett-Packard and IBM, which accounted for 19%,
15% and 12% of net sales, respectively. In fiscal 1995, the Company's three
largest customers were Cisco, IBM and Hewlett-Packard, which accounted for 18%,
15% and 10% of net sales, respectively. During these periods, no other customers
accounted for more than 10% of net sales. 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. However, there can be no assurance
that any of these customers or any of the Company's other customers will
continue to utilize the Company's products at current levels, if at all. The
Company has experienced significant changes in the composition of its major
customer base and expects that this variability will continue in the future. For
example, sales to Compaq, which represented under 10% of net sales in fiscal
1996 and fiscal 1995, represented a substantial portion of the Company's net
sales in the first half of fiscal 1997. The loss of any 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 has no firm long-term volume commitments from any of its major
customers and generally enters into individual purchase orders with its
customers, in certain cases under master agreements governing the terms and
conditions of the relationship. 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 on its ability to obtain
orders from new customers, as well as on the financial condition and success of
its customers. Therefore, any adverse 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. See
"Business -- Customers, Sales and Marketing."
Product Concentration; Dependence on Memory Market. A substantial majority
of the Company's revenues is derived from memory products. The market for memory
products is characterized by frequent transitions in which products rapidly
incorporate new features and performance standards. A failure to develop
products with required feature sets or performance standards or a delay as short
as a few months in bringing a new product to market could significantly reduce
the Company's revenues for a substantial period, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The market for semiconductor memory devices has been cyclical. The 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. Because a substantial portion of the
Company's net sales are attributable to the resale of semiconductor memory
devices, future price declines could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Fluctuations in Operating Results."
Dependence on Semiconductor, Computer, Telecommunications and Networking
Industries. The Company may experience substantial period-to-period fluctuations
in future operating results due to factors affecting the, semiconductor,
computer, telecommunications and networking industries. From time to time,
5
<PAGE> 7
each of these industries has experienced downturns, often in connection with, or
in anticipation of, declines in general economic conditions. A decline or
significant shortfall in growth in any one of these industries could have a
material adverse impact on the demand for the Company's products and therefore a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, changes in end user demand for the products
sold by any individual OEM customer can have a rapid and exaggerated effect on
demand for the Company's products from that customer in any given period,
particularly in the event that the OEM customer has accumulated excess
inventories of products purchased from the Company. There can be no assurance
that the Company's net sales and results of operations will not be materially
and adversely affected in the future due to changes in demand from individual
customers or cyclical changes in the semiconductor, computer,
telecommunications, networking or other industries utilizing the Company's
products.
Intense Competition. The memory module, PC card and embedded computer
industries are intensely competitive. Each of these markets includes a large
number of competitive companies, several of which have achieved a substantial
market share. 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 memory module market, the Company competes
against semiconductor manufacturers that maintain captive memory module
production capabilities, including Micron Electronics, Inc. (a subsidiary of
Micron Technology Inc.) and Samsung Electronics Company Ltd. ("Samsung"). 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 companies such as Kingston Technology, Inc., Viking Technology,
Inc. and Vision Tek, Inc. In the PC card market, the Company competes with Hayes
Communications, Inc. and U.S. Robotics, Inc. (a subsidiary of 3Com Corporation),
among others. In the embedded computer market, the Company competes with Force
Computers Inc. (a subsidiary of Solectron), Motorola and Radisys Corporation,
among others. The Company faces competition from current and prospective
customers that evaluate the Company's capabilities against the merits of
manufacturing products internally. In addition, certain of the Company's
competitors, such as Samsung, are significant suppliers to the Company. 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 competition from new and emerging companies that have
recently entered or may in the future enter the markets in which the Company
participates.
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. There can be no assurance that enhancements to or future
generations of competitive products will not be developed that offer better
prices or technical performance features than the Company's products. To remain
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, reduce
manufacturing and testing costs 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. See
"Business -- Competition."
Fluctuations in Operating Results. The Company's results of operations and
gross margin have fluctuated significantly from period to period in the past 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 reduction
in orders from a customer due to excess product inventory accumulation by such
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
6
<PAGE> 8
Company's products, delays in the introduction of new products and enhancements
to existing products, and manufacturing inefficiencies associated with the start
up of new product introductions. In addition, the Company's operating results
may be affected by the timing of new product announcements and releases by the
Company or its competitors, the timing of significant orders, the ability to
produce products in volume, 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,
and expenses associated with acquisitions. In particular, declines in DRAM, SRAM
and Flash semiconductor prices could affect the valuation of the Company's
inventory which could result in adverse changes in the Company's business,
financial condition and results of operations. The concentration of the
Company's assets in its Fremont, California facility could make the Company's
exposure to business disruptions greater than if the Company's assets were more
geographically dispersed.
The Company's net sales and 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, changes in product selling prices and component
costs, the level of manufacturing efficiencies achieved and pricing by
competitors. 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 DRAM and SRAM
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. Because a substantial portion of the
Company's turnkey sales are attributable to the resale of semiconductor devices,
a continued decline in the prices of these components could have a material
adverse effect on the Company's net sales. 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 and
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 growth. The Company
expects that its business will experience more significant seasonality as it
expands its sales and marketing efforts in Europe.
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. In addition, to the extent that
the Company manufactures products in anticipation of future demand that does not
materialize, or in the event a customer cancels outstanding orders during a
period of either declining product selling prices or decreasing demand, the
Company could experience an unanticipated decrease in sales of products. 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 excess or obsolete
inventory. To the extent that the Company is unsuccessful in managing product
transitions, its business, financial condition and results of operations could
be materially and adversely affected.
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 expectations for
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 continue to be profitable. 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
7
<PAGE> 9
foregoing factors, it is likely that in some future period the Company's
operating results will be below the expectations of public market analysts or
investors. In such event, the market price of the Company's securities would be
materially and adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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, PC card and embedded
computer module 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 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. There can be no assurance that the Company will
receive adequate component supplies on a timely basis in the future. 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. See
"Business -- Design, Manufacturing and Test."
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
require a significant expansion of its manufacturing capacity, 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 quality products and customer
service 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 and 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 a
significant 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.
The Company anticipates that future demand for its products will require
expansion of its current operations and the addition of new production lines in
the future. Specifically, the Company currently expects that it will relocate
its 23,000 square foot manufacturing facility in Arecibo, Puerto Rico into a new
83,000 square foot manufacturing facility in Aguada, Puerto Rico. Should the
Company's relocation to this facility be delayed or should the Company
experience any unexpected disruptions associated with this transition, the
Company's results of operations could be materially adversely affected. There
can be no assurance that any such expansion will be completed successfully.
8
<PAGE> 10
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 of resources for research and
development efforts, successfully develop, introduce and sell new products and
enhancements on a timely and cost-effective basis and to respond to changing
customer requirements that meet evolving industry standards. For example, the
semiconductor memory market is currently transitioning from fast page mode
("FPM") and EDO memory to SDRAM, and the industry standard modem is currently
changing from a 33.6 kbps synchronous modem to a 56 kbps asynchronous modem. The
Company is currently focusing its research and development resources on the
development of SDRAM, Flash and SRAM products, 56 kbps asynchronous modem
products and various embedded computer modules. The 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 the 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 delay in market acceptance of such products. The inability of the
Company to introduce 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. See "Business -- Research and Development."
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. The Company's future operating results also depend in significant
part upon its ability to attract, train 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, training 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, train 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 and
adversely affect the Company's business, financial condition and results of
operations.
International Sales. International sales accounted for 14%, 8% and 10% of
net sales in fiscal 1995, fiscal 1996 and the first half of fiscal 1997,
respectively. The Company anticipates that international sales will increase in
future periods and will account for an increasing portion of net sales. As a
result, an increasing 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. Because sales of the Company's products have
been denominated to date primarily in U.S. dollars, increases in the value of
the U.S. dollar could increase the price of the Company's products so that they
become relatively more expensive to customers in the local currency of
9
<PAGE> 11
a particular country, leading to a reduction in sales and profitability in that
country. Future international activity may result in increased foreign currency
denominated sales. Gains and losses on the conversion to U.S. dollars of
accounts receivable, accounts payable and other monetary assets and liabilities
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
U.S. 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.
Uncertainty Regarding Protection of Proprietary Rights. 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. 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 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 intellectual property. 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.
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. See
"Business -- Intellectual Property."
Risks Associated with Acquisitions. As part of its business strategy, the
Company expects to make acquisitions of, or significant investments in,
businesses that offer complementary products and technologies. Any such future
acquisitions or investments would expose the Company to the risks commonly
encountered in acquisitions of businesses. Such risks include, among others,
difficulty of assimilating the operations, information systems and personnel of
the acquired businesses, the potential disruption of the Company's ongoing
business, the inability of management to maximize the financial and strategic
position of the Company through the successful incorporation of acquired
employees and customers, the maintenance of uniform standards, controls,
procedures and policies and the impairment of relationships with employees and
customers as a result of any integration of new management personnel. There can
be no assurance that any potential acquisition will be consummated or, if
consummated, that it will not have a material adverse effect on the Company's
business, financial condition and results of operations.
10
<PAGE> 12
Volatility of Stock Prices. There has been a history of significant
volatility in the market prices of the common stock of technology companies,
including the Common Stock of the Company, and it is likely that the market
price of the Company's Common Stock will continue to be subject to significant
fluctuations. Factors such as the timing and market acceptance of new product
introductions by the Company, demand for products of the Company's customers,
the introduction of new products by the Company's competitors, variations in
quarterly operating results, changes in securities analysts' recommendations
regarding the Company's Common Stock, developments in the technology industry
and general economic conditions may have a significant impact on the market
price of the Company's Common Stock. In addition, the equity markets in recent
years have experienced significant price and volume fluctuations that have
affected the market prices of technology companies and that have often been
unrelated to the operating performance of such companies.
11
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,100,000 shares of
Common Stock offered by the Company hereby (at an assumed public offering price
of $46 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company) hereby are
estimated to be approximately $47.6 million ($61.1 million if the Underwriters'
over allotment option is exercised in full). The Company will not receive any of
the proceeds from the sale of shares by the Selling Shareholders.
The principal purpose of this offering is to obtain additional capital
which the Company expects will be used for capital expenditures and facilities
expansion. The balance of the net proceeds will be used for general corporate
purposes, including working capital requirements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." The Company may also use a portion of the proceeds for the
acquisition of complementary businesses or product lines, although no particular
acquisition is currently being negotiated or is contemplated. See "Risk
Factors -- Risks Associated with Acquisitions." Pending such uses, the Company
will invest the net proceeds in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. Certain
financial covenants set forth in the Company's bank line of credit agreement
prohibit the Company from paying dividends.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "SMOD." The following table sets forth, for the periods indicated,
the high and low closing sale prices for the Common Stock as reported by the
Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal year ended October 31, 1996
First Quarter (from November 17, 1995)................................... $12 5/8 $ 9 1/2
Second Quarter........................................................... 22 5/8 10 5/8
Third Quarter............................................................ 24 1/8 9 3/8
Fourth Quarter........................................................... 21 1/4 12 1/4
Fiscal year ending October 31, 1997
First Quarter............................................................ 31 7/16 19 3/8
Second Quarter........................................................... 34 23 1/4
Third Quarter............................................................ 47 3/8 31 7/8
Fourth Quarter (through August 8, 1997).................................. 46 3/4 45 1/4
</TABLE>
On August 8, 1997, the last reported sale price for the Common Stock on the
Nasdaq National Market was $46 per share. At January 6, 1997, the Company had
approximately 171 holders of record of the Common Stock and the approximate
number of beneficial holders of the Common Stock was 5,800.
12
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
April 30, 1997, and as adjusted to give effect to the sale of 1,100,000 shares
of Common Stock offered by the Company hereby (at an assumed public offering
price of $46 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company).
<TABLE>
<CAPTION>
APRIL 30, 1997
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Capital lease obligations, net of current portion....................... $ 636 $ 636
-------- --------
Shareholders' equity:
Preferred Stock, no par value; 15,000,000 shares authorized; no shares
issued and outstanding, actual; no shares issued and outstanding,
as adjusted........................................................ -- --
Common Stock, no par value; 100,000,000 shares authorized; 19,238,392
shares issued and outstanding, actual; 20,338,392 shares issued and
outstanding, as adjusted(1)........................................ 38,248 85,852
Retained earnings..................................................... 67,928 67,928
-------- --------
Total shareholders' equity......................................... 106,176 153,780
-------- --------
Total capitalization............................................. $106,812 $ 154,416
======== ========
</TABLE>
- ---------------
(1) Excludes, as of April 30, 1997, (i) 3,797,837 shares of Common Stock
available for issuance pursuant to the Company's 1989 Incentive Stock Plan,
of which options to purchase 2,408,417 shares were outstanding; (ii)
2,977,309 shares of Common Stock available for issuance pursuant to the
Company's 1995 Stock Plan, of which options to purchase 796,979 shares were
outstanding; (iii) 100,000 shares of Common Stock available for issuance
pursuant to the Company's 1995 Director Option Plan, of which options to
purchase 7,200 shares were outstanding; and (iv) 456,784 shares of Common
Stock available for issuance pursuant to the Company's Employee Stock
Purchase Plan.
13
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated statement of income
data and balance sheet data for the Company. The following information has been
derived from the Company's consolidated financial statements, which have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports incorporated herein by reference. The selected consolidated
statement of income data shown below for the six months ended April 30, 1996 and
April 30, 1997 and the selected consolidated balance sheet data as of April 30,
1997 have been derived from the unaudited consolidated financial statements of
the Company incorporated herein by reference which, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of such interim periods. The selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the Company incorporated herein by
reference. The results for the six months ended April 30, 1997 are not
necessarily indicative of results that may be expected for the full fiscal year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, APRIL 30,
-------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA(1):
Net sales......................................... $15,991 $80,810 $163,849 $274,592 $401,774 $194,433 $275,264
Cost of sales..................................... 10,435 63,542 132,826 224,931 329,644 160,006 228,492
------- ------- -------- -------- -------- -------- --------
Gross profit...................................... 5,556 17,268 31,023 49,661 72,130 34,427 46,772
------- ------- -------- -------- -------- -------- --------
Operating expenses:
Research and development........................ 1,199 2,224 5,891 5,283 5,933 2,922 3,895
Sales, general and administrative............... 3,935 9,629 15,192 23,952 28,544 14,207 16,335
------- ------- -------- -------- -------- -------- --------
Total operating expenses.................. 5,134 11,853 21,083 29,235 34,477 17,129 20,230
------- ------- -------- -------- -------- -------- --------
Income from operations............................ 422 5,415 9,940 20,426 37,653 17,298 26,542
Other income (expense), net....................... 73 9 (143) (515) 2,238 860 1,009
------- ------- -------- -------- -------- -------- --------
Income before provision for income taxes.......... 495 5,424 9,797 19,911 39,891 18,158 27,551
Provision for income taxes........................ 203 2,134 3,759 7,344 14,760 6,755 9,373
------- ------- -------- -------- -------- -------- --------
Income before cumulative effect of change in
accounting principle............................ 292 3,290 6,038 12,567 25,131 11,403 18,178
Cumulative effect of change in accounting
principle....................................... -- -- 121 -- -- -- --
------- ------- -------- -------- -------- -------- --------
Net income........................................ $ 292 $ 3,290 $ 6,159 $ 12,567 $ 25,131 $ 11,403 $ 18,178
======= ======= ======== ======== ======== ======== ========
Net income per share(2)(3)........................ $ .02 $ .23 $ .37 $ .72 $ 1.20 $ .55 $ .84
======= ======= ======== ======== ======== ======== ========
Weighted average common and common equivalent
shares outstanding(3)........................... 13,498 14,339 16,537 17,565 20,874 20,646 21,551
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA(1):
Cash, cash equivalents and short-term
investments..................................... $2,153 $ 8,134 $ 5,065 $13,059 $ 61,062 $ 51,521
Working capital................................... 2,136 5,719 12,185 21,464 74,324 87,391
Total assets...................................... 7,439 34,752 45,612 91,976 172,185 199,488
Capital lease obligations, net of current
portion......................................... 6 142 632 1,599 1,241 636
Total shareholders' equity........................ 2,513 6,598 13,665 26,234 86,619 106,176
</TABLE>
- ---------------
(1) On July 28, 1995, a wholly-owned subsidiary of the Company merged with Apex
which resulted in Apex becoming a wholly-owned subsidiary of the Company.
The merger was accounted for as a pooling of interests. Accordingly, the
consolidated financial statements of the Company have been restated to
include the financial statements of Apex from its inception in May 1992. On
July 31, 1996, a wholly-owned subsidiary of the Company merged with RISQ
which resulted in RISQ becoming a wholly-owned subsidiary of the Company.
The merger was 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) and amounts presented for periods prior to fiscal 1996
have not been restated to include RISQ's historical results of operations.
(2) The cumulative effect of the change in accounting principle did not
materially impact net income per share. See the Consolidated Financial
Statements incorporated herein by reference.
(3) See Note 2 of Notes to the Consolidated Financial Statements incorporated
herein by reference for an explanation of the determination of the number of
shares used in computing net income per share. In February 1997, the
Financial Accounting Standards Board issued SFAS 128 which requires
disclosure of basic earnings per share and diluted earnings per share and is
effective for periods ending subsequent to December 15, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Accounting Pronouncement."
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to other areas of this Management's Discussion and Analysis of
Financial Condition and Results of Operations, the fourth and fifth paragraphs
of the Overview Section, the first paragraph of the Gross Profit Section, the
first paragraph of the Research and Development Section, the first paragraph of
the Sales, General and Administrative Section, and the first and third
paragraphs of the Liquidity and Capital Resources Section contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth in "Risk
Factors." In particular, note the factors entitled "Significant Customer
Concentration," "Product Concentration; Dependence on Memory Market,"
"Dependence on Semiconductor, Computer, Telecommunications and Networking
Industries," "Intense Competition," "Fluctuations in Operating Results,"
"Dependence on Sole or Limited Sources of Supply" and "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.
OVERVIEW
The Company commenced operations in 1989 and initially focused on the
design and manufacture of standard memory modules for OEMs and semiconductor
manufacturers. Standard memory modules implement industry standard
specifications, primarily utilize 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. The Company expanded its PC card communication
product line through the acquisition of Apex in July 1995. The Company further
expanded its product line to include embedded computer modules through the
acquisition of RISQ in July 1996.
The Company's net sales and gross profit have increased substantially over
the last three fiscal years. Over the last six fiscal quarters, SMART's gross
margin has ranged from 16.8% to 18.3%. 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. Currently, a substantial majority of the Company's net sales
is derived from sales of products manufactured on a turnkey basis.
The other primary factor affecting the Company's gross margin has been the
mix between sales of specialty memory modules, standard memory modules, PC cards
and embedded computer modules. A majority of the Company's net sales are
currently derived from the sales of its specialty memory modules, which
typically have higher gross margins than the Company's standard memory modules.
The Company's embedded computer modules currently generate the Company's highest
gross margins, followed by the Company's PC card communication products. Both of
these product lines currently contribute a relatively small 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 and the level of manufacturing
efficiencies achieved. 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 Company primarily sells its products to OEMs and semiconductor
manufacturers in the computer, networking and telecommunications industries. In
fiscal 1996 and fiscal 1995, the Company's top ten
15
<PAGE> 17
customers accounted for 71% and 68% of the Company's net sales, respectively. In
fiscal 1996, the Company's three largest customers were Cisco, Hewlett-Packard
and IBM, which accounted for 19%, 15% and 12% of net sales, respectively. In
fiscal 1995, the Company's three largest customers were Cisco, IBM and Hewlett-
Packard, which accounted for 18%, 15% and 10% of net sales, respectively. During
these periods, no other customers accounted for more than 10% of net sales. 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.
The Company has added new OEM customers and programs in recent periods and its
strategy is to increase its sales to both existing and new OEM customers. In
addition, the Company's strategy calls for further expansion of its geographic
operations, particularly in Europe. International sales accounted for 8% and 14%
of the Company's net sales in fiscal 1996 and fiscal 1995, respectively,
although such sales remained relatively consistent in absolute dollars during
such periods.
In July 1995, the Company expanded its PC card communication products with
the acquisition of Apex. Apex designs and markets wireless and wireline
communication card products into both the computer reseller and OEM channels.
The Company acquired Apex in a stock for stock transaction that was accounted
for as a pooling-of-interests. Accordingly, the Company's historical results of
operations include Apex's historical results of operations.
In July 1996, the Company expanded its specialized technical capabilities
with the acquisition of RISQ. 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.
The Company acquired RISQ in a stock for stock transaction that was 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) and amounts presented for periods
prior to fiscal 1996 have not been restated to include RISQ's historical results
of operations.
16
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of income
data of the Company expressed as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
OCTOBER 31, APRIL 30,
----------------------------- -----------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 81.1 81.9 82.0 82.3 83.0
----- ----- ----- ----- -----
Gross profit............................... 18.9 18.1 18.0 17.7 17.0
Operating expenses:
Research and development................. 3.6 1.9 1.5 1.5 1.4
Sales, general and administrative........ 9.2 8.7 7.1 7.3 6.0
----- ----- ----- ----- -----
Total operating expenses......... 12.8 10.6 8.6 8.8 7.4
----- ----- ----- ----- -----
Income from operations..................... 6.1 7.5 9.4 8.9 9.6
Other income (expense), net................ (.1) (.2) .6 .4 .4
----- ----- ----- ----- -----
Income before provision for income taxes... 6.0 7.3 10.0 9.3 10.0
Provision for income taxes................. 2.3 2.7 3.7 3.4 3.4
----- ----- ----- ----- -----
Income before cumulative effect of change
in accounting principle.................. 3.7 4.6 6.3 5.9 6.6
Cumulative effect of change in accounting
principle................................ .1 -- -- -- --
----- ----- ----- ----- -----
Net income................................. 3.8% 4.6% 6.3% 5.9% 6.6%
===== ===== ===== ===== =====
</TABLE>
NET SALES
Six Months Ended April 30, 1997 vs. 1996. Net sales consist of sales of
specialty and standard memory products, PC cards and embedded computer modules,
less returns and discounts. 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, reflecting an overall increase in demand for the Company's
products from new customers and certain existing customers. In addition,
increases in sales of products manufactured on a turnkey basis as compared to
products manufactured on a consignment basis further contributed to the increase
in net sales as compared to the same period of fiscal 1996.
Fiscal Year 1996 vs. 1995. Net sales increased 46.3% to $401.8 million in
fiscal 1996 from $274.6 million in fiscal 1995. The increase was primarily due
to an increase in sales of specialty memory products and, to a lesser extent due
to an increase in sales of standard memory products to both existing and new
customers.
Fiscal Year 1995 vs. 1994. Net sales increased 67.6% to $274.6 million in
fiscal 1995 from $163.8 million in fiscal 1994. The increase was primarily due
to an increase in sales of specialty memory products, such as L2 cache memory
modules, to both existing and new customers. The Company's sales of PC cards to
both new and existing customers also increased significantly in fiscal 1995 over
fiscal 1994. These increases were partially offset by a reduction in sales of
standard memory products due to limitations in the availability of certain
semiconductor memory devices and the Company's strategy to focus on specialty
memory products.
GROSS PROFIT
Six Months Ended April 30, 1997 vs. 1996. 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 for the six months ended April 30,
1997 increased 35.9% to $46.8 million from $34.4 million for the comparable
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 six month period ended April 30, 1997 was due in part to
an increase in the proportion
17
<PAGE> 19
of products manufactured on a turnkey basis as compared to products manufactured
on a consignment basis as compared to the same period 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 period of fiscal 1996. The Company currently anticipates
that a substantial majority of the Company's memory products will continue to be
manufactured on a turnkey basis in the near term.
Fiscal Year 1996 vs. 1995. Gross profit increased 45.2% to $72.1 million in
fiscal 1996 from $49.7 million in fiscal 1995. Gross margin decreased to 18.0%
in fiscal 1996 from 18.1% in fiscal 1995. The decrease in gross margin was
principally due to an increase in the proportion of sales of memory products
manufactured on a turnkey basis compared to products manufactured on a
consignment basis. The decrease was partially offset by an increase in the
percentage of net sales derived from higher margin specialty memory products as
compared to standard memory products in fiscal 1996 over fiscal 1995.
Fiscal Year 1995 vs. 1994. Gross profit increased 60.1% to $49.7 million in
fiscal 1995 from $31.0 million in fiscal 1994. Gross margin decreased to 18.1%
in fiscal 1995 from 18.9% in fiscal 1994. The decrease in gross margin was
principally due to an increase in the proportion of sales of specialty memory
products manufactured on a turnkey basis compared to products manufactured on a
consignment basis. The decrease was partially offset by a significant increase
in the percentage of net sales derived from higher margin specialty memory
products as compared to standard memory products in fiscal 1995 over fiscal
1994.
RESEARCH AND DEVELOPMENT
Six Months Ended April 30, 1997 vs. 1996. 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. For
the six months ended April 30, 1997, research and development expenses increased
33.3% to $3.9 million from $2.9 million for the comparable 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 to the extent the Company expands its research and
development efforts.
Fiscal Year 1996 vs. 1995. Research and development expenses increased
12.3% to $5.9 million in fiscal 1996 from $5.3 million in fiscal 1995. As a
percentage of net sales, research and development expenses decreased to 1.5% in
fiscal 1996 from 1.9% in fiscal 1995 primarily due to a change in the Company's
bonus structure which rewards the development efforts of certain key management
employees, partially offset by an overall increase in non-compensation based
research and development expenses.
Fiscal Year 1995 vs. 1994. Research and development expenses decreased
10.3% to $5.3 million in fiscal 1995 from $5.9 million in fiscal 1994. As a
percentage of net sales, research and development expenses decreased to 1.9% in
fiscal 1995 from 3.6% in fiscal 1994 primarily due to the completion of the
Company's obligation to fund certain research and development costs of an
affiliated party.
SALES, GENERAL AND ADMINISTRATIVE
Six Months Ended April 30, 1997 vs. 1996. Sales, 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. Sales, general and
administrative expenses increased 15.0% to $16.3 million during the first six
months of fiscal 1997 from $14.2 million for the comparable period of fiscal
1996. Sales, general and administrative expenses totalled 6.0% and 7.3% of net
sales for the first six months of fiscal 1997 and fiscal 1996, respectively. The
decrease in sales, general and administrative expenses as a percentage of net
sales was principally due to the growth in net sales generated by certain OEM
customers, which sales generally require lower incremental levels of selling and
marketing expenses. The Company expects that its sales, general and
administrative expenses will increase in absolute dollars in future periods to
the extent the Company expands its staffing, information systems and other
systems and personnel in connection with the expansion of the Company's
infrastructure.
18
<PAGE> 20
Fiscal Year 1996 vs. 1995. Sales, general and administrative expenses
increased 19.2% to $28.5 million during fiscal 1996 from $24.0 million in fiscal
1995. As a percentage of net sales, sales, general and administrative expenses
decreased to 7.1% for fiscal 1996 from 8.7% in fiscal 1995, due primarily to the
elimination of significant operating costs related to Apex's operations, which
were integrated into the Company's operations during the final quarter of fiscal
1995, and to a lesser extent, a change in the Company's bonus structure for
certain key employees.
Fiscal Year 1995 vs. 1994. Sales, general and administrative expenses
increased 57.7% to $24.0 million during fiscal 1995 from $15.2 million in fiscal
1994. As a percentage of net sales, sales, general and administrative expenses
decreased to 8.7% for fiscal 1995 from 9.2% in fiscal 1994. The increase in
absolute dollars was primarily due to the costs incurred to integrate Apex's
operations into the Company's operations, and costs associated with the opening
of a new facility in Puerto Rico during fiscal 1995.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income, less
interest expense. Interest expense is attributable to the Company's utilization
of its lines of credit. Subsequent to the fiscal 1995 year end, the Company
repaid nearly all outstanding balances on its then existing lines of credit.
Interest income from the proceeds of the Company's initial public offering, as
well as cash generated from operations has resulted in a significant increase in
other income through fiscal 1996. Interest income declined for the six months
ended April 30, 1997 due to lower cash balances.
PROVISION FOR INCOME TAXES
Provisions for income taxes were $14.8 million and $7.3 million in fiscal
1996 and fiscal 1995, respectively, and $9.4 million and $6.8 million for the
first six months ended April 30, 1997 and 1996, respectively. The Company's
effective tax rates for these periods were 37.0% and 36.9%, respectively, and
34.0% and 37.2%, respectively. The decrease in the Company's consolidated
effective tax rate for the six months ended April 30, 1997 was 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 period of
fiscal 1996.
19
<PAGE> 21
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited consolidated statement of
income data in dollars and as a percentage of net sales for each of SMART's last
six fiscal quarters. This information has been derived from the Company's
unaudited consolidated financial statements incorporated herein by reference. In
management's opinion, this unaudited information has been prepared on the same
basis as the audited consolidated financial statements incorporated herein by
reference, and includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation thereof. The unaudited quarterly
information should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto incorporated by reference
herein. The growth in net sales and improvement in operating results experienced
by the Company during the Company's last six fiscal quarters are not necessarily
indicative of future results. The Company's results of operations and gross
margin have fluctuated significantly in the past and may in the future continue
to fluctuate significantly from period to period based on a number of factors.
See "Risk Factors -- Fluctuations in Operating Results."
<TABLE>
<CAPTION>
FISCAL 1997
FISCAL 1996 QUARTER ENDED QUARTER ENDED
----------------------------------------------- ---------------------
JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30,
1996 1996 1996 1996 1997 1997
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME
DATA:
Net sales........................... $ 90,317 $104,116 $101,048 $106,293 $131,612 $143,652
Cost of sales....................... 73,779 86,227 82,728 86,910 108,981 119,511
------- -------- -------- -------- -------- --------
Gross profit........................ 16,538 17,889 18,320 19,383 22,631 24,141
Operating expenses:
Research and development.......... 1,414 1,508 1,405 1,606 1,829 2,066
Sales, general and
administrative.................. 6,829 7,378 7,031 7,306 8,126 8,209
------- -------- -------- -------- -------- --------
Total operating expenses... 8,243 8,886 8,436 8,912 9,955 10,275
------- -------- -------- -------- -------- --------
Income from operations.............. 8,295 9,003 9,884 10,471 12,676 13,866
Other income (expense), net......... 429 431 568 810 529 480
------- -------- -------- -------- -------- --------
Income before provision for income
taxes............................. 8,724 9,434 10,452 11,281 13,205 14,346
Provision for income taxes.......... 3,279 3,476 3,831 4,174 4,495 4,878
------- -------- -------- -------- -------- --------
Net income.......................... $ 5,445 $ 5,958 $ 6,621 $ 7,107 $ 8,710 $ 9,468
======= ======== ======== ======== ======== ========
Net income per share................ $ .27 $ .28 $ .31 $ .34 $ .41 $ .44
======= ======== ======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding..... 20,313 20,979 21,061 21,143 21,462 21,640
AS A PERCENT OF NET SALES:
Net sales......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales..................... 81.7 82.8 81.9 81.8 82.8 83.2
----- ----- ----- ----- ----- -----
Gross profit...................... 18.3 17.2 18.1 18.2 17.2 16.8
Operating expenses:
Research and development........ 1.5 1.4 1.4 1.5 1.4 1.4
Sales, general and
administrative................ 7.6 7.1 7.0 6.9 6.2 5.7
----- ----- ----- ----- ----- -----
Total operating
expenses............... 9.1 8.5 8.4 8.4 7.6 7.1
----- ----- ----- ----- ----- -----
Income from operations............ 9.2 8.7 9.7 9.8 9.6 9.7
Other income (expense), net....... .4 .4 .6 .8 .4 .3
----- ----- ----- ----- ----- -----
Income before provision for income taxes.. 9.6 9.1 10.3 10.6 10.0 10.0
Provision for income taxes........ 3.6 3.4 3.8 3.9 3.4 3.4
----- ----- ----- ----- ----- -----
Net income........................ 6.0% 5.7% 6.5% 6.7% 6.6% 6.6%
===== ===== ===== ===== ===== =====
</TABLE>
20
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
Since inception, SMART has used funds generated primarily from operations,
certain borrowings, capital leases and equity financings to support its
operations, acquire capital equipment and finance inventory and accounts
receivable. The Company generated cash from operations totaling $27.0 million
and $11.0 million in fiscal 1996 and fiscal 1995, respectively. The Company used
cash from operating activities totaling $1.3 million for the six months ended
April 30, 1997 as a result of increases in inventories and accounts receivable,
as compared to cash provided by operations totaling $14.0 million for the
comparable period of fiscal 1996. 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. The Company primarily funds its liquidity requirements, from
amounts borrowed under its existing line of credit and utilization of existing
cash balances. The Company expects to fund any future liquidity requirements
from a combination of available cash reserves, the proceeds of this offering and
certain short-term borrowings. The Company currently anticipates that its
working capital requirements will continue to increase in future periods to the
extent that the Company's operations continue to expand.
The Company has a revolving line of credit agreement (the "Credit Line")
with a term expiring May 30, 1998. Borrowing under this agreement is limited to
$20.0 million. 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. The Credit Line is unsecured and no borrowings were
outstanding under the Credit Line as of July 31, 1997.
Capital expenditures totaled approximately $8.7 million, $9.0 million and
$5.4 million for the six months ended April 30, 1997, fiscal 1996 and fiscal
1995, respectively. These expenditures were primarily for manufacturing and test
equipment and the expansion of the Company's existing manufacturing facilities.
The Company's fiscal 1996 capital expenditure total reflects expenditures
related to the addition of a manufacturing facility in East Kilbride, Scotland.
SMART anticipates spending between $18.0 million and $20.0 million on capital
expenditures in fiscal 1997 related to the continued expansion of the Company's
manufacturing facilities and related equipment.
SMART has entered into certain capital lease arrangements. The outstanding
principal on these obligations was approximately $1.8 million and $2.7 million
at April 30, 1997 and October 31, 1996, respectively. See Note 4 of Notes to
Consolidated Financial Statements incorporated herein by reference.
From time to time, the Company evaluates acquisitions of businesses,
products or technologies that complement its business. Currently, the Company
has no present understandings, commitments or agreements with respect to any
material acquisitions of other businesses, products or technologies. Any such
transactions, if consummated, may use a portion of the Company's working capital
or require the issuance of debt or equity.
21
<PAGE> 23
RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128")
which requires disclosure of basic earnings per share and diluted earnings per
share and is effective for periods ending subsequent to December 15, 1997. The
pro forma effect of adoption of SFAS 128 is included in the table below.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
---------------------------------- ---------------------
OCT. 31, OCT. 31, OCT. 31, APR. 30, APR. 30,
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
AS REPORTED:
Net income per share........................ $.37 $.72 $1.20 $.55 $.84
Weighted average number of common and common
equivalent shares outstanding............ 16,537 17,565 20,874 20,646 21,551
PRO FORMA:
Basic net income per share.................. $.46 $.87 $1.38 $.64 $.95
Weighted average number of common shares
outstanding.............................. 13,438 14,493 18,256 17,850 19,058
Diluted net income per share................ $.37 $.72 $1.20 $.55 $.84
Weighted average number of common and common
equivalent shares outstanding............ 16,537 17,565 20,874 20,646 21,551
</TABLE>
22
<PAGE> 24
BUSINESS
SMART is a leading independent manufacturer of specialty and standard
memory modules and Flash memory cards and also manufactures high performance
embedded computer modules, as well as communication card solutions in PC card
and other form factors. SMART offers more than 500 products to leading OEMs in
the computer, networking and telecommunications industries. The Company's
principal customers include Cisco, Compaq, Data General, Fujitsu Gateway,
Hewlett-Packard, IBM, Motorola, NCR and Solectron.
SMART has developed extensive design, manufacturing, testing and logistics
expertise that the Company believes enables it to respond to its customers'
rapidly changing product and service requirements; provide its customers with
timely access to new higher speed or higher performance modules or subsystems;
reduce its customers' time-to-market and capital requirements; and decrease its
customers' production and inventory costs.
INDUSTRY BACKGROUND
The demand for semiconductor memory devices and other subsystems in digital
electronic systems has grown dramatically over the last several years as a
result of the increasing importance of both of these components in determining
system performance. The demand for greater overall system performance, as well
as the increasing number and variety of electronic devices, has required that
electronics manufacturers increase the number and functionality of memory
devices and the performance of other subsystems.
The factors contributing to the increasing demand for memory devices and
communications and embedded computer subsystems include the expanding unit sales
of PCs in the business and consumer market segments; the increasing use of PCs
to perform memory-intensive graphics and multimedia functions; the volume of
memory required to support faster microprocessors; the proliferation of
increasingly complex operating system and applications software; the increased
use of local area network and wide area network routing and switching equipment
that incorporates complex memory and embedded computer subsystems; the growth in
on-line communications, such as e-mail and the Internet; and, in general, the
increasing performance requirements of workstations, servers and networking and
telecommunications equipment.
Memory integrated circuits ("ICs") and subsystems encompass several types
of devices designed to perform specific functions within computer and other
electronic systems. The three most significant categories of memory ICs are
DRAM, SRAM and non-volatile memory, including Flash. DRAM provides large
capacity "main" memory; SRAM provides specialized high speed memory; and Flash
and other non-volatile memory provide low power memory that retains data after a
system is turned off. Within each of these broad categories of memory products,
semiconductor manufacturers are offering an increasing variety of memory devices
that are designed for different application and performance requirements. For
example, the variety of DRAM memory ICs has increased in recent years with the
introduction and adoption of architectures such as SDRAM, Rambus DRAM, SGRAM,
VRAM, FPM and EDO. This increase in the variety of memory ICs has placed greater
demands on OEMs to maintain a current knowledge base and expertise. In addition,
other specialized subsystems, such as modems, networking devices and embedded
computer solutions, enable critical data transfer and data processing functions.
MARKETS
Memory Module Market. Memory modules are compact circuit board assemblies
consisting of DRAM, SRAM, Flash or other semiconductor memory devices and
related circuitry. Electronic systems increasingly employ memory modules as
building blocks in system design as a result of the many advantages memory
modules offer OEMs and end users. The use of memory modules enables OEMs to
easily configure a system with a variety of different levels of memory, thus
increasing their flexibility to address multiple price points or applications
with a single base system design. In addition, the use of memory modules enables
OEMs to offer a relatively easy path for upgradeability of a PC or workstation,
a feature of system design that is increasingly required by end-users. To
achieve this flexibility and upgradeability, both PC and communications OEMs
frequently design their systems to use memory modules as a "daughter card,"
reducing the need to include
23
<PAGE> 25
memory devices on the motherboard. This design structure frees up space on the
motherboard and enables the OEM to use a single motherboard as a common central
element for a variety of different systems, resulting in significant cost
savings. The use of memory modules further reduces costs by reducing OEMs'
work-in-process inventories by allowing them to add expensive and increasingly
diverse memory devices to products during the final stages of the manufacturing
process.
The market for memory modules includes both standard and specialty modules.
The high volume standard memory module market includes modules that can be
sourced from many module suppliers, and are designed to be incorporated into a
wide variety of equipment. These modules employ designs meeting widely used
industry specifications and are available with a variety of options to address
the needs of multiple OEMs. Standard memory modules are typically used in
desktop PCs and printers and are sold both to OEMs and through computer
resellers directly to end users.
Specialty memory modules include both custom and application specific
modules. The varying requirements of different electronic systems and the
increased number of memory device options have resulted in a market for
specialized memory modules that are designed to enhance the performance of a
particular system or a set of applications. These modules are based on either
DRAM, SRAM or Flash technologies and may include additional control circuitry.
Specialty memory modules are typically sourced from a limited number of
suppliers. Application specific and custom memory modules are generally used in
mobile computers, workstations and telecommunications devices, such as routers
and switches, and are primarily sold to OEMs.
PC Card Market. PC cards are small form factor cards conforming to the
Personal Computer Memory Card International Association ("PCMCIA") standards and
are used as peripheral devices in products such as notebook and subnotebook
computers, personal digital assistants ("PDAs"), cellular phones, pagers and
digital cameras. The Company believes that growth in the mobile computing market
will expand the market for mobile computing peripherals, including PC cards for
memory (primarily Flash memory) and communications (wireline and wireless
data/fax modems). Increasingly important aspects of PC card modem functionality
are the abilities to be easily configurable for use internationally and to
provide high speed connections over wireline and wireless networks such as ISDN,
switched cellular, digital cellular and personal communications services.
Embedded Computer Subsystem Market. Unlike PCs or workstations that serve as
general purpose computers, embedded computer subsystems are integrated into
larger systems and perform a single function or a closely related group of
functions such as input/output ("I/O") and data processing with high degrees of
repeatability, accuracy and reliability. Embedded computer subsystems are
incorporated into an ever-increasing array of products used in a variety of
markets, including telecommunications, networking, imaging, simulation, command
and control, industrial control and desktop publishing. Examples of embedded
computer subsystem applications include Digital Satellite Systems, set-top
boxes, video games, laser printers, scanners, network routers and switches,
robots, computer guided missiles, paint mixing systems, medical imaging
analyzers, automated toll collection systems and Global Positioning System
receivers. With current market conditions requiring shorter design cycles and
the options for implementation becoming more varied and complex, OEMs are
increasingly outsourcing their requirements for embedded computer subsystems to
specialists that complement the value added by the OEM.
Opportunity for Manufacturers of Memory Modules and Subsystems. As the variety
of memory devices and subsystems available to address specific applications has
expanded, the design and manufacture of memory modules, PC cards and embedded
computer subsystems have increasingly become areas in which electronics OEMs
employ outsourcing strategies. OEM outsourcing practices for memory products
range from contract manufacturing, in which the OEM may turn to an outside
supplier to procure third-party components and design, manufacture and
distribute a specific product for the OEM on a turnkey basis, to consignment, in
which the OEM employs the outside supplier to design and manufacture a product
using memory or other components supplied by the OEM. OEMs may also purchase
memory modules or subsystems which have been designed by a supplier for a
specific application.
24
<PAGE> 26
The use of outsourcing strategies has many benefits for OEMs. By
outsourcing design, manufacturing, testing and logistics functions, OEMs are
able to focus their resources on activities and technologies in which they add
the greatest value, such as system design, sales, marketing and distribution. In
addition, OEMs can reduce their time to market by utilizing the manufacturing
and logistics expertise of specialized manufacturers. In particular, the
increasing trend under which large PC OEMs are implementing build-to-order and
direct sales distribution strategies may create opportunities for independent
suppliers of memory modules, as these strategies place increased reliance on the
manufacturing, logistics and inventory management functions of these suppliers.
Moreover, as memory modules, PC card, embedded computer subsystems and other
subsystems become more complex and differentiated, the design, manufacturing and
test processes become increasingly automated and more complex, requiring a
greater level of investment in capital equipment and skilled engineers and
specialists. Outsourcing enables OEMs to gain access to advanced manufacturing
facilities, thereby reducing the OEMs' overall capital equipment requirements.
Also, the proliferation of a wide variety of DRAM, SRAM and Flash memory devices
combined with frequent product design changes, short product life cycles and
component price fluctuations, have created increasing difficulties for OEMs in
planning, procuring and managing their inventories efficiently. By using a
manufacturing specialist's volume procurement capabilities and expertise in
inventory management, OEMs can reduce production and inventory costs.
THE SMART SOLUTION
SMART is a leading independent manufacturer of specialty and standard
memory modules and Flash memory cards and also manufactures high performance
embedded computer modules, as well as communication card solutions in PC card
and other form factors. SMART offers more than 500 products to leading OEMs in
the computer, networking and telecommunications industries. SMART has developed
extensive design, manufacturing, testing and logistics expertise that the
Company believes enables it to respond to its customers' rapidly changing
product and service requirements; provide its customers with timely access to
new higher speed or higher performance modules or subsystems; reduce its
customers' time-to-market and capital requirements; and decrease its customers'
production and inventory costs.
STRATEGY
SMART's objective is to strengthen its position as a leading supplier of
memory products and to become a leading supplier of communication card products
and embedded computer modules in high growth markets. The Company believes that
its specialization in each of these areas provides it with significant
competitive advantages. The following are key elements of the Company's
strategy:
Maintain Technological Leadership in Memory Module Design. SMART believes
it is a leader in the design of custom, application specific and standard memory
modules. Through its experience with substantially all types of memory devices
supplied by a wide range of leading semiconductor manufacturers, SMART has
developed significant expertise in memory module design and component selection.
The Company uses its extensive library of product designs and layouts of memory
modules to increase its speed and efficiency in introducing new products, which
enables it to provide its OEM customers with time to market advantages. The
Company's strategy is to apply its design expertise to continue to develop new
memory modules that address emerging opportunities utilizing DRAM, SRAM and
Flash memory technologies. SMART has also developed a substantial base of
proprietary testing routines and parameters that enable it to diagnose problems
in system design or memory components, to characterize the performance of new
products and to provide high quality products in volume.
Expand Manufacturing Capacity and Expertise. The Company intends to further
expand and automate its manufacturing capability while maintaining and improving
its responsiveness to OEMs with shorter design cycles and more rapid turnaround.
The Company believes that it benefits from certain economies of scale in
procurement and equipment utilization due to its high volume manufacturing of a
wide variety of memory module and PC card products. The Company has developed an
experienced manufacturing staff and has established automated specialized
surface mount lines that enable the Company to manufacture its products in a
cost-effective manner. An important aspect of the Company's manufacturing
strategy is to focus
25
<PAGE> 27
intensively on product quality to address the stringent requirements of leading
electronics OEMs worldwide. In addition, the Company believes that it has
established particular expertise in materials management and logistics through
efficient procurement and inventory tracking and control systems.
Broaden OEM Relationships. The Company's applications engineers regularly
work with OEMs to seek, develop and support multiple design-in opportunities
over multiple generations of products. The Company believes that large OEMs may
increasingly seek to expand outsourcing relationships beyond contract
manufacturing services alone to include additional services such as technical
development, design collaboration and logistical support. The Company is
currently developing comprehensive programs to better enable OEMs to directly
address before-sale and after-market demand for the Company's products. Without
outsourcing, OEMs face significant challenges in terms of procurement,
manufacturing, inventory and distribution. The Company believes that the number
of OEMs that can meet these demanding requirements is limited. The Company's
programs are designed to enable OEMs to better implement highly-efficient
build-to-order production processes and to lower costs.
The Company plans to continue to develop relationships with new OEM
customers, as well as expand those with existing customers, both domestically
and internationally. In support of this strategy, the Company is expanding its
sales force to address new opportunities with OEM customers worldwide. The
Company has historically opened and anticipates that it will continue to open
new manufacturing facilities in proximity to major OEMs in order to provide
greater customer service and support with services such as "just-in-time"
delivery and logistical support. Within the last few years, the Company has
opened facilities in Puerto Rico and Scotland.
Address New Opportunities in Subsystem Markets. The Company believes that
it has significant expertise in the design and manufacture of electronic
subsystems, which require a high density of components in a small form factor.
The Company intends to leverage this expertise in the emerging and high growth
segments of other subsystem markets, such as the embedded computer module
markets. The Company seeks to increase its market share in such markets by
offering customers the same breadth of services and complete solutions, from
design to manufacturing and logistical support, that it currently offers
customers in the memory module market. In the market for PC card products
incorporating memory, data communications functionality and networking
connectivity, the Company intends to continue to focus on increasing the
penetration of its PC card products at major OEMs, which it believes are looking
for solutions to reduce the number of suppliers and SKUs required to service the
needs of their end customers. In the fragmented embedded computer market, the
Company believes that its relationships, infrastructure, large scale production
capabilities and financial resources, relative to many smaller competitors,
offer a competitive advantage in securing large OEM customers.
PRODUCTS
The Company designs and markets products consisting of memory modules, PC
cards and embedded computer modules. The Company's memory modules include DRAM,
SRAM and Flash memory-based products. The Company offers custom and application
specific memory modules, as well as standard memory modules that comply with
industry standards established by the Joint Electronic Development Engineering
Council ("JEDEC"). The Company's PC cards comply with PCMCIA standards and
include memory cards, wireless and wireline data communication modem cards,
network connectivity cards and other I/O cards. The Company's embedded computer
module products include a range of standard and perfect fit embedded computers
for use in a variety of specialized computing applications.
MEMORY MODULES
DRAM Modules. The Company offers a comprehensive line of DRAM memory
modules, including a wide range of single in-line memory modules ("SIMMs"), dual
in-line memory modules ("DIMMs") and small outline dual in-line memory modules
("SO DIMMs"). The Company's DRAM modules are available in various configurations
of up to 200 pins and densities of up to 256 MBytes. Many of these products are
offered in both 5.0 volt and 3.3 volt versions, with FPM, EDO, SDRAM and SGRAM
architectures.
26
<PAGE> 28
The following table summarizes certain of the Company's DRAM module product
offerings:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
DRAM
PRODUCT FAMILIES DENSITY FEATURES SPEED (MHZ) APPLICATIONS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
72 Pin SIMMs 4-64 MBytes FPM, EDO 10-33 Desktop PCs, Printers, Embedded
Controllers, Routers, Servers
- -----------------------------------------------------------------------------------------------------
100 Pin DIMMs 4-64 MBytes FPM, EDO, 66-133 Networking, Printers
SDRAM
- -----------------------------------------------------------------------------------------------------
144 Pin SO DIMMs 4-64 MBytes FPM, EDO 10-33 Notebook PCs, Printers,
---------------------------------------------------------------
SDRAM, SGRAM 66-133 X-Window Terminals, 3D Graphics
- -----------------------------------------------------------------------------------------------------
168 Pin DIMMs 8-256 MBytes FPM, EDO 10-33 Workstations, Routers, PCs
---------------------------------------------------------------
SDRAM 66-133 Servers, Telecom Equipment, PCs
- -----------------------------------------------------------------------------------------------------
Registered 168 Pin 8-256 MBytes SDRAM 66-133 Workstations, Servers, Routers
DIMMs
- -----------------------------------------------------------------------------------------------------
200 Pin DIMMs 16-64 MBytes FPM, SDRAM 10-150 Workstations, Super Computers
- -----------------------------------------------------------------------------------------------------
VRAM Modules 2-16 MBytes RAM, High 60-200 High Performance Graphics for
Speed SRAM Workstations
- -----------------------------------------------------------------------------------------------------
VME Bus Modules 256 KBytes- FPM, Low 10-33 Industrial Control Systems
Profile
16 MBytes
- -----------------------------------------------------------------------------------------------------
Custom 1-256 MBytes Per Customer Per Customer Embedded Controllers, Telecom
Specifications Specifications Switches, Notebook PCs
- -----------------------------------------------------------------------------------------------------
</TABLE>
SRAM Modules. The Company offers a comprehensive line of SRAM memory
modules, including L2 cache modules and other high speed and low power SRAM
modules. The Company's L2 cache modules are available in speeds from 33 to 83
MHz, in asynchronous and synchronous versions, with burst, pipelined burst and
serial access operating modes and in densities from 256 KBytes to eight MBytes.
The following table summarizes certain of the Company's high speed SRAM L2
cache module product offerings:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
SRAM L2 CACHE CHIPSET
PRODUCT FAMILIES DENSITY COMPATIBILITY SPEED (MHZ) APPLICATIONS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Synchronous 64 Bit 256 KBytes-1 MByte Intel, SIS, OPTi, 66-83 Desktop PCs, Embedded
VLSI Controllers
- -------------------------------------------------------------------------------------------------------------
Synchronous 72 Bit 256 KBytes-1 MByte Intel, SIS, OPTi, 66-83 Desktop PCs, Workstations,
VLSI Servers, Routers
- -------------------------------------------------------------------------------------------------------------
Asynchronous 64 Bit 256 KBytes-1 MByte Intel, OPTi, VLSI 50-66 Desktop PCs, Embedded
Controllers
- -------------------------------------------------------------------------------------------------------------
Asynchronous 72 Bit 256 KBytes-1 MByte Intel, OPTi, VLSI 50-66 Desktop PCs, Workstations,
Servers, Routers
- -------------------------------------------------------------------------------------------------------------
Custom 256 KBytes-8 MBytes Per Customer Per Customer Desktop PCs
Specifications Specifications
- -------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 29
The following table summarizes certain of the Company's other high speed
and low power SRAM module product offerings:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
SRAM MODULE
PRODUCT
FAMILIES DENSITY SPEED (NS) APPLICATIONS
- --------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
8 Bit I/O 256 KBytes-2 MBytes 100-20 Point of Sale Terminals, Electronic
Verification Equipment, Industrial
Instrumentation
- --------------------------------------------------------------------------------------------------
16 Bit I/O 32 KBytes-1 MByte 120-15 Disk Drives, Medical Instruments
- --------------------------------------------------------------------------------------------------
18 Bit I/O 768 KBytes 25-15 Disk Drives, Medical Instruments
- --------------------------------------------------------------------------------------------------
24 Bit I/O 960 KBytes 25-15 Servers, Graphics
- --------------------------------------------------------------------------------------------------
32 Bit I/O 32 KBytes-1 MByte 100-12 Graphics, Industrial Instrumentation
- --------------------------------------------------------------------------------------------------
36 Bit I/O 32 KBytes-1 MByte 35-15 Servers, Workstations
- --------------------------------------------------------------------------------------------------
44 Bit I/O 1.4-5.5 MBytes 20-15 Minicomputers
- --------------------------------------------------------------------------------------------------
</TABLE>
Flash Modules. The Company offers a comprehensive line of Flash modules,
including 72 Pin DRAM-like SIMMs, 80 Pin synchronous SIMMs, 80 Pin asynchronous
SIMMs and 168 Pin synchronous and asynchronous DIMMs. The Company's Flash
modules are available in densities of up to 64 MBytes. The Company also offers
additional options such as an on-board active reset control, system reset
control and DC to DC power conversion which allows the use of 12.0 volt
components in a 5.0 volt system.
The following table summarizes certain of the Company's Flash module
product offerings:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
FLASH PRODUCT FAMILIES DENSITY FEATURES APPLICATIONS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
72 Pin DRAM-like SIMMs 4-8 MBytes Reads like DRAM Embedded Controllers
Plugs into DRAM Socket
- -----------------------------------------------------------------------------------------------------------
80 Pin Synchronous SIMMs 8-32 MBytes Synchronized to System Clock Embedded Controllers
- -----------------------------------------------------------------------------------------------------------
80 Pin Asynchronous 1-32 MBytes 12.0 Volt/5.0 Volt Programming Routers, Servers,
SIMMs 5.0 Volt/3.3 Volt Read Voltage Telecom Switches
5.0 Volt Only
3 Reset Options
- -----------------------------------------------------------------------------------------------------------
168 Pin Asynchronous 4-64 MBytes 5.0 Volt/3.3 Volt Read Voltage Telecom Switches, Routers
DIMMs
- -----------------------------------------------------------------------------------------------------------
Custom 1-64 MBytes Per Customer Specifications Industrial Applications
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Sales of memory modules accounted for a substantial majority of the
Company's net sales during the six months ended April 30, 1997 and during fiscal
1996 and fiscal 1995.
PC CARD PRODUCTS.
The Company sells PC card products that provide both memory, I/O and
communication functions. The Company's PC cards are marketed under the "SMART"
and "Apex Data" brand names. The Company offers a comprehensive line of memory
PC card products, including 68 Pin PC cards with densities ranging from 2 MBytes
to 32 MBytes and 68 Pin ATA Flash memory PC cards with densities ranging from 2
MBytes to 112 MBytes. These cards provide additional memory for notebook and
subnotebook computers and PDAs. The Company's memory PC cards are PCMCIA Type I
compatible.
28
<PAGE> 30
The following table summarizes certain of the Company's PC card memory
product offerings:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PC CARD MEMORY
PRODUCT FAMILIES DENSITY FEATURES APPLICATIONS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
68 Pin Linear 2-32 MBytes Plug & Play, Software Driver PDAs, Notebook PCs, Networking,
Flash Included Portable Medical Equipment
- ----------------------------------------------------------------------------------------------------------
68 Pin ATA 2-112 MBytes 5.0 Volt, 3.3 Volt PDAs, Notebook PCs, Networking
Flash ATA Compliant
- ----------------------------------------------------------------------------------------------------------
Compact Flash 2-16 MBytes 5.0 Volt, 3.3 Volt PDAs, Cellular Phones, Pagers,
ATA ATA Compliant Digital Cameras
- ----------------------------------------------------------------------------------------------------------
Miniature 2-4 MBytes 5.0 Volt, 3.3 Volt PDAs, Cellular Phones, Pagers,
16 Bit Data Interface Digital Cameras
MCIF Specification Compliant
- ----------------------------------------------------------------------------------------------------------
Custom 128 KBytes-20 MBytes Per Customer Specifications Portable Medical Equipment
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The Company also offers a comprehensive line of modem and communications
products. These products include a full line of PC card data/fax modems for
notebook and PDA devices, as well as, beginning in 1997, internal (ISA) modems
for desktop computers. The Company currently offers 56 kbps modems utilizing the
K56flex(TM) technology supported by Lucent Technologies, Inc. and Rockwell
International Corporation ("Rockwell"). To address the needs of users demanding
international mobility, the Company's world-approved modems allow users to have
one modem that can be used worldwide. In addition, the Company has added digital
GSM technology to its world-approved modems providing users with secure,
digital, wireless communications.
The following chart summarizes certain of the Company's communications
product offerings:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
COMMUNICATION PRODUCT FAMILIES FEATURES
- ---------------------------------------------------------------------------------------------
<S> <C>
MODEMS
- ---------------------------------------------------------------------------------------------
Mobile Plus V.34 PC Card (33.6) Landline and Cellular-ready
Supports over 50 different types of analog cellular
phones
- ---------------------------------------------------------------------------------------------
ClipperCom World V.34 PC Card (33.6) Internal DAA certified in over 50 countries
w/GSM Country Select GUI software
Digital GSM wireless capabilities
- ---------------------------------------------------------------------------------------------
Winperformer V.34 (33.6) PC Card HSP technology
Win95, NT
- ---------------------------------------------------------------------------------------------
Rapid Transit 56k PC Card K56flex(TM) technology
Software upgradable
- ---------------------------------------------------------------------------------------------
Rapid Transit 56k Internal (ISA) K56flex(TM) technology
Software upgradable
Full duplex speakerphone
- ---------------------------------------------------------------------------------------------
NETWORKING
- ---------------------------------------------------------------------------------------------
Ethernet Adapter 10BaseT or 10Base2
- ---------------------------------------------------------------------------------------------
VIDEO ADAPTER
- ---------------------------------------------------------------------------------------------
Media Express MPEG 1 ZV Port compatible
Full screen, full motion video
- ---------------------------------------------------------------------------------------------
</TABLE>
EMBEDDED COMPUTER MODULES
The Company's SMARTengine family of products helps accelerate time to
market, reduce system cost, lower power requirements and provide a clear upgrade
path for OEMs. The Company offers a line of standard
29
<PAGE> 31
and perfect-fit embedded computers with complete software support that offer
varying price/performance and industry standard bus interfaces. The Company's
product line is processor independent and operates in systems using 32 and 64
bit CPUs from several vendors. This compatibility enhances flexibility to match
price, performance and power requirements to the customer's application. The
Company has also used industry standard buses, including ISA, EISA, PCI and
Compact PCI, as well as custom buses, where required. All products are supported
by on-board software for development and real-time operating systems support.
The following table summarizes certain of the Company's SMARTengine
embedded computer module product offerings:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
EMBEDDED COMPUTER
MODULE FAMILIES FEATURES APPLICATIONS
- -------------------------------------------------------------------------------------------
<S> <C> <C>
SMARTengine/50PCI R5000, Compact PCI, 8-128MB DRAM, ATM Switch, Ethernet Switch
FLASH, PROM, Ethernet, SCSI, RTC,
DUART
- -------------------------------------------------------------------------------------------
SMARTengine/43PCI R4300, 8MB EDO DRAM, FLASH, PROM, RTC, Imaging, Game, Publishing
3 PCI slots
- -------------------------------------------------------------------------------------------
SMARTengine 43hPCI, R4300, 8 MB DRAM, FLASH, PROM, Networking, Printers,
RTC Datacom, Test and
Measurement
- -------------------------------------------------------------------------------------------
SMARTengine/43NET R4300, 2 Ethernets, 8MB DRAM, FLASH, Networking, Ethernet Switch
PROM, RTC, DUART
- -------------------------------------------------------------------------------------------
SMARTengine/47PCI R4700, 2 PCI buses, 8-128MB DRAM, Imaging
FLASH, PROM, RTC, DUART
- -------------------------------------------------------------------------------------------
SMARTengine/30ISA R3081, ISA bus, 8MB DRAM Simulation
- -------------------------------------------------------------------------------------------
Custom Perfect-fit embedded computer for the Various
customer's application
- -------------------------------------------------------------------------------------------
</TABLE>
CUSTOMERS, SALES AND MARKETING
The Company's principal customers include major computing, networking and
telecommunication OEMs and semiconductor manufacturers. In fiscal 1996 and in
fiscal 1995, the Company's ten largest customers accounted for approximately 71%
and 68% of net sales, respectively. In fiscal 1996, the Company's three largest
customers were Cisco, Hewlett-Packard and IBM, which accounted for 19%, 15% and
12% of net sales, respectively. In fiscal 1995, the Company's three largest
customers were Cisco, IBM, and Hewlett-Packard, which accounted for 18%, 15% and
10% of net sales, respectively. No other customers accounted for more than 10%
of net sales in these periods.
The Company primarily sells its memory and embedded computer module
products directly to major OEM customers and uses a network of independent sales
representatives located throughout North America and Europe for sales to other
OEM customers. The Company's direct sales and marketing efforts are conducted in
an integrated process involving direct salespeople, customer service
representatives and senior executives. An important aspect of the Company's
sales and marketing efforts is that the Company's experienced applications
engineers work closely with OEM customers in designing the Company's products
into the OEM's systems. The Company's sales offices are located in California,
Colorado, Texas, Massachusetts, North Carolina, England, Australia and Germany.
To address the needs of its OEM customers, the Company has developed and
maintains relationships with leading vendors of memory devices located in the
United States, Japan and South Korea. These include limited and sole source
suppliers of certain products, such as NEC Corporation, IBM, Intel, Oki
Semiconductor, Inc., Rockwell and Samsung. The Company frequently works jointly
with these vendors in bidding for customers' design-in opportunities. The
Company's OEM marketing activities include advertising in technical journals and
direct mail solicitation.
30
<PAGE> 32
The Company sells PC card products to OEMs and corporate end users, as well
as to small office/home office ("SOHO") and consumer end users. The Company's
OEM customers integrate the Company's PC cards into their end products.
Corporate end users typically buy the Company's PC card products for mobile
computing applications through computer resellers, such as distributors and
VARs. Distributors in North America include Ingram Micro Inc., Merisel Inc.,
Microage, Inc. and Tech Data Corp. The Company sells to SOHO and consumer end
users through catalog sales organizations and retailers including PC's Compleat
Corp. and Mobile Planet in North America.
Sales are generally made pursuant to standard purchase orders. The Company
includes in its backlog only those customer orders for which it has accepted
purchase orders and it expects to ship within the next 12 months. Since orders
constituting the Company's current backlog are subject to changes in delivery
schedules and are subject to cancellation with only limited or no penalties,
backlog is not necessarily an accurate indication of future net sales. There can
be no assurance that current backlog will necessarily lead to net sales in any
future period. The Company's total backlog was $69.2 million and $63.2 million
as of April 30, 1997 and 1996, respectively.
DESIGN, MANUFACTURING AND TEST
The Company has a staff of engineers for applications development,
component selection, schematic design, layout, firmware and software driver
development. The layouts for memory modules, PC cards and embedded computer
modules are specialized due to their high component and trace densities,
particularly for high speed memory modules. To further enhance its design
capability, the Company established in fiscal 1995 a design center in Bangalore,
India.
The Company believes that the efficiency of its manufacturing operations
has benefited from its extensive experience and its library of proven designs
which stress high manufacturability and quality. Through its extensive library
of memory module designs and its experience in designing and manufacturing
memory modules, the Company is able to work closely with its customers and
suppliers to design competitive solutions to system memory problems and shorten
the time it takes its customers to get their products to market.
The Company's manufacturing processes rely on a high level of automation
and involve the use of a substantial base of fine pitch surface mount equipment
which is specialized for the production of memory modules and PC cards. The
Company's surface mount manufacturing lines have been optimized to support the
placement and configuration of a high number of ICs on each board, in contrast
to surface mount equipment used in less specialized electronics manufacturing
which typically involves a fewer number of ICs and a greater number of passive
components on each printed circuit board. The Company also has developed
automated methods for PC card case assembly and test. As a result of its design
efficiencies, high level of automation and general manufacturing expertise, the
Company believes that it achieves relatively high manufacturing yields. In
addition, due to the high level of automation in the Company's manufacturing
approach, the Company maintains a relatively low percentage of direct labor
costs. The Company believes that it has achieved and maintains a rapid
manufacturing cycle and is able to offer its customers quick turnaround of both
small and large projects. The Company is frequently able to provide turnaround
on major customer orders within days or weeks.
An important aspect of the Company's manufacturing operations is its focus
on product testing. The Company tests 100% of its memory modules, PC cards and
embedded computer modules for full functionality, in contrast with many other
suppliers which the Company believes may test only at the system level. The
Company believes that it has established substantial technical expertise in the
testing of memory modules, PC cards and embedded computer. The Company further
believes that test capability will grow in importance as the speed and
complexity of memory devices and modules utilizing those devices increase. The
Company has a group of experienced test engineers that develop proprietary
testing routines and parameters which, combined with the Company's continued
investment in advanced test equipment, enable it to diagnose problems in system
design or memory components, to characterize the performance of new products and
to provide high quality products in volume.
31
<PAGE> 33
The Company currently manufactures and tests the majority of its products
in a 62,250 square foot facility in Fremont, California. In addition, the
Company utilizes a 23,000 square foot manufacturing and test facility in
Arecibo, Puerto Rico and, since its opening in September 1996, a 25,000 square
foot manufacturing and test facility in East Kilbride, Scotland. The Company
operates multiple production lines at these facilities. The Company currently
plans to add additional manufacturing and test capacity in each of its
manufacturing and test sites. The Company subcontracts a limited amount of
production requirements to third party manufacturers.
RESEARCH AND DEVELOPMENT
The Company believes that the timely development of new memory modules, PC
cards and embedded computer modules is essential to maintaining the Company's
competitive position. In the memory market, the Company's research and
development activities are focused primarily on new high speed memory modules,
the continual improvement in test routines and software and the ongoing
improvement in manufacturing processes and technologies. In particular, the
Company is focusing its research and development resources on the development of
SDRAM, Flash and SRAM products. The Company plans to continue to devote
substantial research and development efforts to the design of new memory module
products which address the requirements of OEMs and corporate end users.
In the PC card market, the Company's research and development efforts are
focused primarily on the design and introduction of new PC card products which
provide improved memory, connectivity and communications functionality. The
Company's research and development efforts in the embedded computer market are
focused on the design of standard and custom embedded computer modules based
primarily on the MIPS and PowerPC computing architectures and standard or custom
bus architectures.
The Company's research and development expenses for the six months ended
April 30, 1997, fiscal 1996 and fiscal 1995 were $3.9 million, $5.9 million and
$5.3 million, respectively.
COMPETITION
The memory module, PC card and embedded computer industries are intensely
competitive. Each of these markets comprises 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 memory module market, the Company
competes against semiconductor manufacturers that maintain captive memory module
production capabilities, including Micron Electronics, Inc. (a subsidiary of
Micron Technology Inc.) and Samsung. 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 companies such as Kingston
Technology, Inc., Viking Technology, Inc. and Vision Tek, Inc. In the PC card
market, the Company competes with Hayes Communications, Inc. and U.S. Robotics,
Inc. (a subsidiary of 3Com Corporation), among others. In the embedded computer
market, the Company competes with Force Computers, Inc. (a subsidiary of
Solectron), Motorola and Radisys Corporation, among others. The Company faces
competition from current and prospective customers that evaluate the Company's
capabilities against the merits of manufacturing products internally. In
addition, certain of the Company's competitors, such as Samsung, are significant
suppliers to the Company. 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 competition from new and emerging
companies that have recently entered or may in the future enter the markets in
which the Company participates.
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. There can be no assurance that enhancements to or future
generations of competitive
32
<PAGE> 34
products will not be developed that offer better prices or technical performance
features than the Company's products. To remain 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, reduce manufacturing and testing costs
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.
INTELLECTUAL PROPERTY
The Company has one issued patent. The Company expects to file new patent
applications where appropriate to protect its proprietary technologies; however,
the Company believes that its continued success depends primarily on factors
such as the technological skills and innovation of its personnel rather than on
patent protection. 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. 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 intellectual property. 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.
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.
EMPLOYEES
As of July 31, 1997, the Company had 625 regular, full time employees of
which 444 were in manufacturing (including test, quality assurance and materials
work), 68 were in design and product development, 60 were in marketing and sales
and 53 were in finance and administration. The Company's future results depend
in significant part upon its ability to attract, train and retain qualified
management, manufacturing and quality assurance, engineering, marketing, sales
and support personnel. The Company's employees are not represented by any
collective bargaining agreements and the Company has never experienced a work
stoppage. The Company believes that its employee relations are good.
33
<PAGE> 35
FACILITIES
The Company's corporate headquarters and a manufacturing facility are
located in a 62,250 square foot facility in Fremont, California. The lease on
this facility expires in January 2003. The Company leases an additional 25,000
square foot facility in Fremont, California. The lease on this facility expires
in January 2003. The Company also leases a 23,000 square foot manufacturing
facility in Arecibo, Puerto Rico and a 25,000 square foot manufacturing facility
in East Kilbride, Scotland. The leases on these facilities expire in May 2005
and September 2006, respectively. In addition, the Company leases various small
facilities for its sales offices. The Company currently expects that it will
relocate its facility in Arecibo, Puerto Rico into a new 83,000 square foot
manufacturing facility in Aguada, Puerto Rico.
LEGAL PROCEEDINGS
As of the date hereof, there is no material litigation pending against the
Company. From time to time, the Company may be a party to litigation and claims
incident to the ordinary course of its business. Although the results of
litigation and claims cannot be predicted with certainty, the Company believes
that the final outcome of such matters will not have a material adverse effect
on the Company's business, financial condition and results of operations.
34
<PAGE> 36
MANAGEMENT
The following table sets forth certain information concerning the executive
officers, officers and directors of the Company as of July 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- ---- -------------------------------------------------
<S> <C> <C>
Ajay Shah(1)................. 37 Chairman of the Board of Directors, President and
Chief Executive Officer
Mukesh Patel................. 39 Vice President and General Manager
Memory/Processor Product Line and Director
Lata Krishnan................ 36 Vice President, Business Development and
Administration and Secretary
David B. Mullin.............. 43 Vice President, Finance and Chief Financial
Officer
Alan Marten.................. 37 Vice President, Product Line Manager Memory
Products
Jim Northington.............. 50 Vice President, Quality Assurance and Corporate
Development
Pranatharthi Haran........... 37 Vice President, Research and Development
Dhaval J. Brahmbhatt......... 42 Vice President, Technology Development Memory
Product Line
Eric Taborek................. 40 Vice President, OEM Sales
William C. Johnson........... 65 Vice President, Marketing
Nageeen Sharma............... 37 Vice President, Product Line Manager, Embedded
Computer Products
Jeff Miller.................. 35 Vice President, Engineering
Paul Mercadante.............. 36 Vice President, Product Line Manager
Communications Division
Charles W. Welch............. 32 General Counsel
Erik Anderson(1)(2).......... 39 Director
Tor R. Braham(1)(2).......... 39 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
The directors of the Company are elected at the annual meeting of
shareholders of the Company. Each director of the Company holds office until his
successor is elected and qualified or until his earlier death, resignation or
removal. The executive officers of the Company serve at the discretion of the
Board of Directors. Ajay Shah and Lata Krishnan are married to each other. There
are no other family relationships among the directors and executive officers of
the Company. The Company has obtained and is the beneficiary of a $1.0 million
insurance policy on the life of Ajay Shah, the Company's Chairman of the Board,
President and Chief Executive Officer, and a $1.0 million insurance policy on
the life of Mukesh Patel, Vice President and General Manager Memory/Processor
Product Line and a director of the Company.
Ajay Shah co-founded the Company and has served as the Company's President
and Chief Executive Officer and as a director since its inception. In July 1995,
Mr. Shah became the Company's Chairman of the Board of Directors. Mr. Shah holds
an M.S. degree in Engineering Management from Stanford University and a B.S.
degree in Engineering with a major in Mechanical Engineering from the University
of Baroda, India. Mr. Shah also serves on the Board of Directors of Krypton
Isolation, Inc. ("Krypton"), a semiconductor company.
Mukesh Patel co-founded the Company and has served as the Company's Vice
President and General Manager Memory/Processor Product Line since August 1995
and as a director since the Company's inception. From February 1989 until July
1995, Mr. Patel served as the Company's Vice President, Engineering. Mr. Patel
holds a B.S. degree in Engineering with emphasis on digital electronics from
Bombay University, India. Mr. Patel also serves on the Board of Directors of
Krypton.
35
<PAGE> 37
Lata Krishnan co-founded the Company and has served as the Company's Vice
President, Business Development since September 1996 and Vice President
Administration and Secretary since the Company's inception. From September 1996
until July 1997, Ms. Krishnan served as the Company's Vice President, Business
Development. From the Company's inception until September 1996, Ms. Krishnan
served as the Company's Vice President, Finance and Chief Financial Officer. Ms.
Krishnan holds a B.S. degree from the London School of Economics and is a member
of the Institute of Chartered Accountants in England and Wales.
David B. Mullin has served as Vice President, Finance and Chief Financial
Officer of the Company since September 1996. From November 1995 until September
1996, Mr. Mullin served as Borland International, Inc.'s Vice President Finance
and Administration and Chief Financial Officer. From September 1990 until
November 1995, Mr. Mullin served in various capacities at Conner Peripherals,
Inc. ("Conner"), the most recent of which were Director of Corporate Financial
Planning & Analysis and Chief Financial Officer of Arcada Software, Inc., a
subsidiary of Conner. Mr. Mullin holds a B.A. degree from San Francisco State
University, and is licensed as a certified public accountant in California.
Alan Marten joined the Company in February 1990 and has served as Vice
President, Product Line Manager Memory Product Line since July 1995. From
February 1990 until January 1997, Mr. Marten served as the Company's Vice
President, Sales. Mr. Marten holds an M.B.A. degree from San Jose State
University and a B.S. degree in Economics and Computer Science from Santa Clara
University.
Jim Northington has served as Vice President, Quality Assurance and
Corporate Development of the Company since January 1997. From November 1994
until January 1997, Mr. Northington served as the Company's Vice President,
Operations. From July 1989 until October 1994, Mr. Northington was a principal
at APS Products, Inc., an electronics manufacturing consulting firm. From June
1986 until July 1989, Mr. Northington served as Western Digital Corporation's
Vice President of Manufacturing for North America and Hong Kong. Mr. Northington
holds a B.S. degree in Industrial Technology from California State University,
Long Beach.
Pranatharthi Haran has served as Vice President, Research and Development
of the Company since March 1993. From May 1986 until February 1993, Mr. Haran
was the Vice President of Engineering at Omnitel, Inc., a data communications
company. Mr. Haran holds an M.S. degree in Electrical Engineering from Kansas
State University and a B.S. degree in Electrical Engineering from the Indian
Institute of Technology in Madras, India.
Dhaval J. Brahmbhatt has served as Vice President, Technology Development
Memory Product Line of the Company since January 1996. From August 1991 to
January 1996, Mr. Brahmbhatt served as a Product Line Director at National
Semiconductor Inc., a semiconductor company. Mr. Brahmbhatt holds an M.S. degree
in Electrical Engineering from the University of Cincinnati, an M.S. degree in
Solid-State Electronics and a B.S. degree in Physics from Gujarat University in
Ahmedabad, India.
Eric Taborek has served as Vice President, OEM Sales of the Company since
February 1997. For the 14 years prior to joining SMART, Mr. Taborek served in
various product engineering and sales capacities at Advanced Micro Devices,
Inc., the most recent of which was Director of Sales, Western Area, North
America. Mr. Taborek holds a B.S. degree in Business/Computer Science from the
University of California, Berkeley and an M.B.A. degree in Finance/Operations
from the University of Michigan.
William C. Johnston has served as Vice President, Marketing of the Company
since February 1997. From March 1993 until February 1997, Mr. Johnston served as
the Company's Director, Marketing. For the nine years prior to joining SMART,
Mr. Johnston served in various marketing capacities at Samsung Semiconductor,
Inc. Mr. Johnston holds a B.S. degree and an M.S. degree in Electrical
Engineering from the University of Illinois.
Nageen Sharma has served as Vice President, Product Line Manager, Embedded
Computer Products since the Company's acquisition of RISQ in July 1996. From
March 1991 until July 1996, Mr. Sharma served as Chief Executive Officer of
RISQ, Mr. Sharma holds a B.S. degree in Electrical Engineering from the
36
<PAGE> 38
University of Delhi, India, an M.S. degree in Electrical Engineering from the
University of Maryland and an M.B.A. degree from National University.
Jeff Miller has served as Vice President, Engineering since the Company's
acquisition of RISQ in July 1996. From March 1991 until July 1996, Mr. Miller
served as President of RISQ. Mr. Miller holds a B.S. degree in Electrical
Engineering from the University of California, Santa Barbara and an M.S. degree
in Systems Management from the University of Southern California.
Paul Mercadante has served as Vice President, Product Line Manager,
Communication Division since the Company's acquisition of Apex in July 1995.
From August 1993 until July 1995, Mr. Merdacante served as Vice President,
Operations of Apex. From September 1991 until July 1993, Mr. Mercadante served
as Director of Program Management at Rose Communication, Inc. Mr. Mercadante
holds a B.A. degree in Economics from the New York State University.
Charles W. Welch has served as General Counsel of the Company since October
1995. From October 1995 until July 1997, Mr. Welch also served as the Director,
Investor Relations of the Company. From September 1994 until October 1995, Mr.
Welch practiced law with Wilson Sonsini Goodrich & Rosati, Professional
Corporation. Mr. Welch holds a J.D. degree from the University of California,
Berkeley -- Boalt Hall School of Law, a Master of Real Estate Development degree
from the University of Southern California and a B.S. degree in Civil
Engineering from Virginia Tech.
Erik Anderson has served as a director of the Company since November 1994.
Since February 1994, Mr. Anderson has served as the Co-President and a director
of Trillium Corp., a diversified investment company. From March 1992 until
January 1994, Mr. Anderson was a principal with Fraizer Management LLC, a
medical technology investment company. From October 1990 until March 1992, Mr.
Anderson served as the Vice President and Treasurer of Services Group of
America, an investment holding company, and from February 1985 until October
1990, he served as a Vice President of Goldman Sachs & Company, an investment
banking firm. Mr. Anderson holds an M.S. degree and a B.S. degree in Industrial
Engineering from Stanford University and a B.A. degree in Economics from
Claremont McKenna College. Mr. Anderson also serves as Chairman of the Board of
Directors of Gargoyles Performance Eyewear, Inc., a manufacturer of sunglasses.
Tor R. Braham has served as a director of the Company since July 1995. Mr.
Braham is a member of the law firm of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, where he has been practicing since 1984. Mr. Braham
holds a J.D. degree from New York University School of Law and a B.A. degree
from Columbia College. Mr. Braham also serves on the Board of Directors of OPTi
Inc., a semiconductor company, and 3Dlabs Inc., Ltd., a 3D graphics processor
company.
37
<PAGE> 39
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of July 31, 1997 by (i) each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each of the Company's directors, (iii) the Company's Chief
Executive Officer and each of the Named Executive Officers, and (iv) all
directors and executive officers as a group. A total of 19,378,452 shares of the
Company's Common Stock was issued and outstanding as of July 31, 1997.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) SHARES OFFERING(1)
NAME AND ADDRESS ---------------------- BEING ---------------------
OF BENEFICIAL OWNERS NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------------------------------- ---------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Ajay Shah(2)............................ 5,911,250 29.4% 580,000 5,331,280 25.2%
Lata Krishnan(3)........................ 5,911,250 29.4 580,000 5,331,280 25.2
Mukesh Patel(4)......................... 3,802,500 19.2 350,000 3,452,500 16.5
Alan Marten(5).......................... 428,000 2.2 40,000 388,000 1.9
David B. Mullin(6)...................... 21,988 * -- 21,988 *
Bayside Development Corporation(7)...... 1,790,000 9.2 -- 1,790,000 8.4
c/o International Service Co.
Apartado 7440
Panama
Attention: Dr. Sharma
Barclays Private Trust (BVI) Limited as
Trustee of the Indira Trusti.......... 1,000,000 5.2 -- 1,000,000 4.7
c/o C.J. Couzens
P.O. Box 70
Roadtown
Tortola, British Virgin Islands
Erik Anderson(8)........................ 26,000 * -- 26,000 *
Tor R. Braham(9)........................ 33,500 * -- 33,500 *
All directors and executive officers as
a group (7 persons)(10)............... 10,223,238 49.2 970,000 9,253,238 42.3
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable within sixty (60) days of July 31, 1997
are deemed outstanding. To the Company's knowledge, except as set forth in
the footnotes to this table and subject to applicable community property
laws, each party named in the table has sole voting and investment power
with respect to the shares set forth opposite such party's name. Except as
otherwise indicated, the address of each of the parties in this table is as
follows: c/o SMART Modular Technologies, Inc., 4305 Cushing Parkway,
Fremont, California 94538.
(2) Includes 2,832,591 shares held by Mr. Shah and 450,000 shares owned by Mr.
Shah in the form of immediately exercisable options, some of which, if
exercised and issued, would be subject to a repurchase right of the Company
that lapses over time. Includes 876,659 shares held by Ms. Krishnan and
250,000 shares owned by Ms. Krishnan in the form of immediately exercisable
options, some of which, if exercised and issued, would be subject to a
repurchase right of the Company that lapses over time. Also includes
1,500,000 shares which are held in Krishnan-Shah Family Partners, LP, a
California limited partnership, in which Mr. Shah and Ms. Krishnan are the
general partners. 520,000 shares of the 1,500,000 shares held by the
Krishnan Shah Family Partnership are included in the shares being offered,
as indicated. Mr. Shah and Ms. Krishnan are married to each other.
38
<PAGE> 40
(3) Includes 578,659 shares held by Ms. Krishnan and 250,000 shares owned by
Ms. Krishnan in the form of immediately exercisable options, some of which,
if exercised and issued, would be subject to a repurchase right of the
Company that lapses over time. Includes 2,832,591 shares held by Mr. Shah
and 450,000 shares owned by Mr. Shah in the form of immediately exercisable
options, some of which, if exercised and issued, would be subject to a
repurchase right of the Company that lapses over time. Also includes
1,500,000 shares which are held in Krishnan-Shah Family Partners, LP, a
California limited partnership, in which Mr. Shah and Ms. Krishnan are the
general partners. 520,000 shares of the 1,500,000 shares held by the
Krishnan Shah Family Partnership are included in the shares being offered,
as indicated. Mr. Shah and Ms. Krishnan are married to each other.
(4) Includes 450,000 shares owned by Mr. Patel in the form of immediately
exercisable options, some of which, if exercised and issued, would be
subject to a repurchase right of the Company that lapses over time. Also
includes 1,270,000 shares which are held in Patel Family Partners, LP, a
California limited partnership, in which Mr. Patel and his spouse are the
general partners.
(5) Includes 180,000 shares owned by Mr. Marten in the form of immediately
exercisable options, some of which, if exercised and issued, would be
subject to a repurchase right of the Company that lapses over time. Also
includes 3,000 shares owned by Mr. Martin in the form of options
exercisable as of July 31, 1997 or within sixty (60) days thereafter.
(6) Includes 20,000 shares owned by Mr. Mullin in the form of options
exercisable as of July 31, 1997 or within sixty (60) days thereafter.
(7) Bayside Development Corporation is beneficially owned by Tej Kaur Sharma.
(8) Includes 1,000 shares owned by Mr. Anderson in the form of options
exercisable as of July 31, 1997 or within sixty (60) days thereafter.
(9) Includes 30,000 shares owned by Mr. Braham in the form of immediately
exercisable options, some of which, if exercised and issued, would be
subject to a repurchase right of the Company that lapses over time. Also
includes 1,000 shares owned by Mr. Braham in the form of options
exercisable as of July 31, 1997 or within sixty (60) days thereafter.
(10) Includes 1,360,000 shares owned by the seven directors and executive
officers listed above in the form of immediately exercisable options, some
of which, if exercised and issued, would be subject to a repurchase right
of the Company that lapses over time. Also includes 25,000 shares owned by
certain of the directors and executive officers listed above in the form of
options exercisable as of July 31, 1997 or within sixty (60) days
thereafter.
39
<PAGE> 41
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters
named below (the "Underwriters"), for whom Morgan Stanley & Co. Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation, Cowen & Company and
Montgomery Securities are serving as Representatives (the "Representatives"),
have severally agreed to purchase, and the Company and Selling Shareholders have
agreed to sell to them, severally, the respective number of shares of Common
Stock set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
------------------------------------------------------------------------- -----------
<S> <C>
Morgan Stanley & Co. Incorporated........................................
Donaldson, Lufkin & Jenrette Securities Corporation......................
Cowen & Company..........................................................
Montgomery Securities....................................................
---------
Total.......................................................... 2,070,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the Underwriters' over-allotment option described below) if any such
shares are taken.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $ a share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 310,500
additional shares of Common Stock at the public offering price set forth on the
cover page hereof, less underwriting discounts and commissions. The Underwriters
may exercise such option solely for the purpose of covering over-allotments, if
any, made in connection with the offering of the shares of Common Stock offered
hereby. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares of
Common Stock set forth next to the names of all Underwriters in the preceding
table.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
Each of the Company and the directors, executive officers and certain other
shareholders of the Company has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the
40
<PAGE> 42
Underwriters, it will not, during the period ending 90 days after the date of
this Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer, lend or dispose of, directly
or indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. However, the
executive officers of the Company may, without such consent, sell an aggregate
of up to 50,000 shares, which shall include no more than 20,000 shares by any
such individual. Additionally, the Company may, without such consent, (i) grant
options or issue stock upon the exercise of outstanding stock options pursuant
to the Company's stock option plans and (ii) issue stock upon the exercise of
outstanding warrants.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing the
Common Stock in the offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
The Underwriters and dealers may engage in passive market marking
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Securities and Exchange Commission (the "Commission"). In
general, a passive market maker may not bid for, or purchase, the Common Stock
at a price that exceeds the highest independent bid. In addition, the net daily
purchases made by any passive market maker generally may not exceed 30% of its
average daily trading volume in the Common Stock during a specified two month
prior period, or 200,000 shares, whichever is greater. A passive market maker
must indemnify passive market making bids as such on the Nasdaq electronic
inter-dealer reporting system. Passive market making may stabilize or maintain
the market price of the Common Stock above independent market levels.
Underwriters and dealers are not required to engage in passive market making and
may end passive market making activities at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Shareholders by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Certain legal matters relating
to this offering will be passed upon for the Underwriters by Venture Law Group,
A Professional Corporation, Menlo Park, California, counsel for the
Underwriters. As of the date of this Prospectus, 33,500 shares of Common Stock
issuable upon the exercise of Stock options was beneficially owned by certain
members of Wilson Sonsini Goodrich & Rosati, Professional Corporation. Tor R.
Braham, a member of the firm of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, is one of the Company's directors.
EXPERTS
The financial statements and schedule incorporated by reference in this
Prospectus and Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as set forth in their reports. In those reports,
that firm states, with respect to certain subsidiaries, its opinion is based on
the report of other independent public accountants, namely BDO Seidman, LLP. The
financial statements and supporting schedules referred to above have been
incorporated by reference herein in reliance upon the authority of those firms
as experts in giving said reports.
41
<PAGE> 43
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements, and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy and information statements, and other information filed by the Company can
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C., as well as the regional
offices of the Commission located at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois, and Seven World Trade Center, Suite 1300, New
York, New York. Copies of such materials can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. The Company's Common Stock is listed on the Nasdaq
National Market. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements, and other information filed through
the Commission's Electronic Data Gathering, Analysis and Retrieval System. This
Web site can be accessed at http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and such Common
Stock, reference is made to the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. Copies of the Registration
Statement, including all exhibits thereto, may be inspected without charge at
the Commission's principal office in Washington, D.C., and copies of all or any
part thereof may be obtained from the Public Reference Section, Securities and
Exchange Commission, Washington, D.C. 20549, upon payment of the prescribed
fees.
42
<PAGE> 44
LOGO
<PAGE> 45
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the Registration Fee, the NASD Filing Fee and the Nasdaq Notification for
Listing Additional Shares Fee.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID BY THE
COMPANY
------------
<S> <C>
SEC Registration Fee................................................... $ 32,462
NASD Filing Fee........................................................ 11,213
Nasdaq Notification for Listing Additional Shares Fee.................. 17,500
Printing and Engraving................................................. 60,000
Legal Fees and Expenses................................................ 125,000
Accounting Fees and Expenses........................................... 40,000
Blue Sky Fees and Expenses............................................. 5,000
Transfer and Custody Agent Fees........................................ 20,000
Miscellaneous.......................................................... 28,825
--------
Total........................................................ $340,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California Corporations Code authorizes a court to
award, or a corporation's Board of Directors to grant indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act. Article IV of the Registrant's
Articles of Incorporation and Article VI of the Registrant's Bylaws provide for
indemnification of its directors, officers, employees and other agents to the
maximum extent permitted by the California Corporations Code. In addition, the
Registrant has entered into Indemnification Agreements with its officers and
directors and certain employees. Reference is also made to Section 12 of the
Underwriting Agreement contained in Exhibit 1.1 hereto, with respect to the
indemnification of officers and directors of the Registrant against certain
liabilities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C> <C>
(a) Exhibits
1.1 Form of Underwriting Agreement among the Registrant, Morgan
Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette,
Securities Corporation, Cowen & Company and Montgomery
Securities.
2.1(1) Agreement and Plan of Reorganization among the Registrant,
Apex Data, Inc. and SMART Acquisition Inc. dated April 24,
1995.
4.2(1) Registrant's specimen stock certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, counsel for the Registrant.
23.1 Consent of Independent Certified Public Accountants.
23.2 Consent of Independent Certified Public Accountants.
23.3 Consent of Counsel (included in Exhibit 5.1
24.1 Power of Attorney (included on page II-3).
</TABLE>
II-1
<PAGE> 46
- ---------------
(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 June 14, 1996.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of the Registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Exchange Act that is
incorporated by reference in this Registration Statement shall be deemed to be a
new registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-2
<PAGE> 47
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
SMART Modular Technologies, Inc., a corporation organized and existing under the
laws of the State of California, certifies that it has reasonable grounds to
believe that it meets all the requirements for filing on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fremont, State of
California, on the 11th day of August, 1997.
SMART MODULAR TECHNOLOGIES, INC.
By: /s/ AJAY SHAH
--------------------------------------
Ajay Shah
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ajay Shah and David Mullin and each of
them singly, as true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign the Registration Statement filed herewith and any
or all amendments to said Registration Statement (including post-effective
amendments and registration statements filed pursuant to Rule 462 and
otherwise), and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission granting
unto said attorneys-in-fact and agents the full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the foregoing, as full to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his substitute, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-3 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ---------------------------- ----------------
<C> <S> <C>
/s/ AJAY SHAH President, Chief Executive August 11, 1997
- ----------------------------------------------- Officer and Chairman of
Ajay Shah the Board of Directors
(Principal Executive
Officer)
/s/ MUKESH PATEL Vice President and General August 11, 1997
- ----------------------------------------------- Manager Memory Product
Mukesh Patel Line and Director
/s/ DAVID B. MULLIN Vice President, Finance and August 11, 1997
- ----------------------------------------------- Chief Financial Officer
David B. Mullin (Principal Financial and
Accounting Officer)
/s/ ERIK ANDERSON Director August 11, 1997
- -----------------------------------------------
Erik Anderson
/s/ TOR R. BRAHAM Director August 11, 1997
- -----------------------------------------------
Tor R. Braham
</TABLE>
II-3
<PAGE> 48
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
--------- --------------------------------------------------------------------
<S> <C> <C> <C>
1.1 Form of Underwriting Agreement among the Registrant, Morgan Stanley
& Co. Incorporated, Donaldson, Lufkin & Jenrette, Securities
Corporation, Cowen & Company and Montgomery Securities.
2.1(1) Agreement and Plan of Reorganization among the Registrant, Apex
Data, Inc. and SMART Acquisition Inc. dated April 24, 1995.
4.2(1) Registrant's specimen stock certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, counsel for the Registrant.
23.1 Consent of Independent Certified Public Accountants.
23.2 Consent of Independent Certified Public Accountants.
23.3 Consent of Counsel (included in Exhibit 5.1
24.1 Power of Attorney (included on page II-3).
</TABLE>
<PAGE> 1
EXHIBIT 1.1
2,070,000 Shares
SMART MODULAR TECHNOLOGIES, INC.
COMMON STOCK (NO PAR VALUE)
UNDERWRITING AGREEMENT
__________, 1997
<PAGE> 2
_____________, 1997
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Cowen & Company
Montgomery Securities
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
Smart Modular Technologies, Inc., a California corporation (the
"Company"), proposes to issue and sell to the several Underwriters named in
Schedule I hereto (the "Underwriters"), and certain principal shareholders of
the Company named on Schedule II hereto, together with each of Ajay Shah, Lata
Krishnan and Mukesh Patel (individually a "Founder" and collectively the
"Founders") (the "Principal Selling Shareholders") and certain other
Shareholders of the Company named in Schedule III hereto (the "Other Selling
Shareholders") (collectively, the Principal Selling Shareholders and the Other
Selling Shareholders are referred to herein as the "Selling Shareholders")
severally propose to sell to the several Underwriters, an aggregate of 2,070,000
shares of the Company's Common Stock (no par value) of the Company (the "Firm
Shares"), of which 1,100,000 shares are to be issued and sold by the Company and
970,000 shares are to be sold by the Selling Shareholders, each Selling
Shareholder selling the amount set forth opposite such Selling Shareholder's
name in Schedule II and Schedule III hereto.
The Company also proposes to issue and sell to the several Underwriters
not more than an additional 310,500 shares of the Company's Common Stock (the
"Additional Shares") if and to the extent that you, as Managers of the offering,
shall have determined to exercise, on behalf of the Underwriters, the right to
purchase such shares of common stock granted to the Underwriters in Section 4
hereof. The Firm Shares and the Additional Shares are hereinafter collectively
referred to as the "Shares." The shares of the Company's Common Stock to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "Common Stock." The Company and the Selling Shareholders are
hereinafter sometimes collectively referred to as the "Sellers."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if
-1-
<PAGE> 3
any) deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended
(the "Securities Act"), is hereinafter referred to as the "Registration
Statement"; the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "Prospectus." As used herein, the terms
"Registration Statement," "Prospectus" and "preliminary prospectus" shall
include in each case the documents, if any, incorporated by reference (the
"Incorporated Documents") that the Company has filed pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). If the Company has filed
an abbreviated registration statement to register additional shares of Common
Stock pursuant to Rule 462(b) under the Securities Act (the "Rule 462
Registration Statement"), then any reference herein to the term "Registration
Statement" shall also be deemed to include such Rule 462 Registration Statement.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to and agrees with each of the Underwriters that:
(a) The Company meets the requirements for using a Registration
Statement on Form S-3 and such Registration Statement has become
effective; no stop order suspending the effectiveness of the
Registration Statement is in effect, and no proceedings for such purpose
are pending before or threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and (iii)
the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph 1(b) do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of California, has the
corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be
so qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
-2-
<PAGE> 4
(d) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority
to own its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or
its ownership or leasing of property requires such qualification, except
to the extent that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole; all of the issued shares of capital
stock of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and are owned
directly by the Company, free and clear of all liens, encumbrances,
equities or claims.
(e) This Agreement has been duly authorized, executed and
delivered by the Company.
(f) The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock (including the Shares to be sold
by the Selling Shareholders) outstanding prior to the issuance of the
Shares to be sold by the Company have been duly authorized and are
validly issued, fully paid and non-assessable.
(h) The Shares to be sold by the Company have been duly
authorized and, when issued and delivered in accordance with the terms
of this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject to
any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the articles of
incorporation or bylaws of the Company or any agreement or other
instrument binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
-3-
<PAGE> 5
(k) There are no legal or governmental proceedings pending, or to
the Company's knowledge, threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company
or any of its subsidiaries is subject that are required to be described
in the Registration Statement or the Prospectus and are not so described
or any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the Prospectus
or to be filed as exhibits to the Registration Statement that are not
described or filed as required.
(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 under the Securities Act, complied when so
filed in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder. The
Incorporated Documents heretofore filed, when they were filed (or, if
any amendment with respect to any such document was filed, when such
amendment was filed), conformed in all material respects with the
requirements of the Exchange Act and the rules and regulations of the
Commission thereunder; any further Incorporated Documents so filed will,
when they are filed, conform in all material respects with the
requirements of the Exchange Act and the rules and regulations of the
Commission thereunder.
(m) The Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
(n) The Company and its subsidiaries (i) are in compliance with
any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are
in compliance with all terms and conditions of any such permit, license
or approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(o) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(p) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require the
Company to file a
-4-
<PAGE> 6
registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such
securities with the Shares registered pursuant to the Registration
Statement.
(q) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government
of Cuba or with any person or affiliate located in Cuba.
2. REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL SELLING SHAREHOLDERS.
The Principal Selling Shareholders represents and warrants to and agrees with
each of the Underwriters that to his or her knowledge: (i) the Registration
Statement, when it became effective, did not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, (ii) the Registration Statement
and the Prospectus comply and, as amended or supplemented, if applicable, will
comply in all material respects with the Securities Act and the applicable rules
and regulations of the Commission thereunder and (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph 2 do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each of
the Selling Shareholders represents and warrants to and agrees with each of the
Underwriters that:
(a) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Shareholder.
(b) The execution and delivery by such Selling Shareholder of,
and the performance by such Selling Shareholder of its obligations
under, this Agreement, the Custody Agreement signed by such Selling
Shareholder and ____________, as Custodian, relating to the deposit of
the Shares to be sold by such Selling Shareholder (the "Custody
Agreement") and the Power of Attorney appointing certain individuals as
such Selling Shareholder's attorneys-in-fact to the extent set forth
therein, relating to the transactions contemplated hereby and by the
Registration Statement (the "Power of Attorney") will not contravene any
provision of applicable law, or the certificate of incorporation or
bylaws of such Selling Shareholder (if such Selling Shareholder is a
corporation), or any agreement or other instrument binding upon such
Selling Shareholder or any judgment, order or decree of any governmental
body, agency or court having jurisdiction over such Selling Shareholder,
and no consent, approval, authorization or order of, or qualification
with, any governmental body or agency is required for the performance by
such Selling Shareholder of its obligations under this Agreement or the
Custody Agreement or Power of Attorney of such Selling Shareholder,
-5-
<PAGE> 7
except such as may be required by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the Shares.
(c) Such Selling Shareholder has, and on the Closing Date will
have, valid title to the Shares to be sold by such Selling Shareholder
and the legal right and power, and all authorization and approval
required by law, to enter into this Agreement, the Custody Agreement and
the Power of Attorney and to sell, transfer and deliver the Shares to be
sold by such Selling Shareholder.
(d) The Shares to be sold by such Selling Shareholder pursuant to
this Agreement have been duly authorized and are validly issued, fully
paid and non-assessable.
(e) The Custody Agreement and the Power of Attorney have been
duly authorized, executed and delivered by such Selling Shareholder and
are valid and binding agreements of such Selling Shareholder.
(f) Delivery of the Shares to be sold by such Selling Shareholder
pursuant to this Agreement will pass title to such Shares free and clear
of any security interests, claims, liens, equities and other
encumbrances.
(g) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and (iii)
the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph 3(g) do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
4. AGREEMENTS TO SELL AND PURCHASE. Each Seller, severally and not
jointly, hereby agrees to sell to the several Underwriters, and each
Underwriter, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees, severally
and not jointly, to purchase from such Seller at $______ a share (the "Purchase
Price") the number of Firm Shares (subject to such adjustments to eliminate
fractional shares as you may determine) that bears the same proportion to the
number of Firm Shares to be sold by such Seller as the number of Firm Shares set
forth in Schedule I hereto opposite the name of such Underwriter bears to the
total number of Firm Shares.
-6-
<PAGE> 8
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to 310,500 Additional
Shares at the Purchase Price. If you, on behalf of the Underwriters, elect to
exercise such option, you shall so notify the Company in writing not later than
30 days after the date of this Agreement, which notice shall specify the number
of Additional Shares to be purchased by the Underwriters and the date on which
such shares are to be purchased. Such date may be the same as the Closing Date
(as defined below) but not earlier than the Closing Date nor later than ten
business days after the date of such notice. Additional Shares may be purchased
as provided in Section 6 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
Each Seller hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 90 days after the date of the Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase any
option or contract to sell, grant any option, right or warrant to purchase,
loan, or otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock (whether such shares or any securities are now owned by the
Seller or are hereafter acquired) or (ii) enter into any swap or other
arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of the Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (A) the Shares to be sold hereunder or (B) the issuance by
the Company of shares to Common Stock upon the exercise of an option or warrant
or the conversion of a security outstanding on the date hereof of which the
Underwriters have been advised in writing. In addition, each Selling
Shareholder, agrees that, without the prior written consent of Morgan Stanley &
Co. Incorporated on behalf of the Underwriters, it will not, during the period
ending 90 days after the date of the Prospectus, make any demand for, or
exercise any right with respect to, the registration of any shares of Common
Stock or any security convertible into or exercisable or exchangeable for Common
Stock.
5. TERMS OF PUBLIC OFFERING. The Sellers are advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Sellers are further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "Public Offering Price") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.
-7-
<PAGE> 9
6. PAYMENT AND DELIVERY. Payment for the Firm Shares to be sold by each
Seller shall be made to such Seller in Federal or other funds immediately
available in New York City against delivery of such Firm Shares for the
respective accounts of the several Underwriters at 10:00 A.M., New York City
time, on ____________, 1997, or at such other time on the same or such other
date, not later than _________, 1997, as shall be designated in writing by you.
The time and date of such payment are hereinafter referred to as the "Closing
Date."
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 A.M., New York City time, on the date specified in the
notice described in Section 4 or at such other time on the same or on such other
date, in any event not later than _______, 1997, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to as
the "Option Closing Date."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
7. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Sellers to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 5:45 P.M. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor
shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not
indicate the direction of the possible change, in the rating
accorded any of the Company's securities by any "nationally
recognized statistical rating organization," as such term is
defined for purposes of Rule 436(g)(2) under the Securities Act;
and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole,
from that set forth in the Prospectus (exclusive of any
amendments or
-8-
<PAGE> 10
supplements thereto subsequent to the date of this Agreement) that, in
your judgment, is material and adverse and that makes it, in your
judgment, impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer
of the Company, to the effect set forth in clause (a)(i) above and to
the effect that the representations and warranties of the Company
contained in this Agreement are true and correct as of the Closing Date
and that the Company has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied
hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon
the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich & Rosati, external legal counsel for
the Company, dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
(ii) each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation,
has the corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole;
(iii) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus;
(iv) the shares of Common Stock (including the Shares to
be sold by the Selling Shareholders) outstanding prior to the
issuance of the Shares to be sold
-9-
<PAGE> 11
by the Company have been duly authorized and are validly issued,
fully paid and non-assessable;
(v) all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized
and issued, are fully paid and non-assessable and are owned
directly by the Company, free and clear of all liens,
encumbrances, equities or claims;
(vi) the Shares to be sold by the Company have been duly
authorized and, when issued and delivered in accordance with the
terms of this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be
subject to any preemptive or similar rights;
(vii) this Agreement has been duly authorized, executed
and delivered by the Company;
(viii) the execution and delivery by the Company of, and
the performance by the Company of its obligations under, this
Agreement will not contravene any provision of applicable law or
the articles of incorporation or bylaws of the Company or, to the
best of such counsel's knowledge, any agreement or other
instrument binding upon the Company or any of its subsidiaries
that is material to the Company and its subsidiaries, taken as a
whole, or, to the best of such counsel's knowledge, any judgment,
order or decree of any governmental body, agency or court having
jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by
the Company of its obligations under this Agreement, except such
as may be required by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the
Shares;
(ix) the statements (A) in the Prospectus under the
caption "Control by Officers and Directors; Possible Adverse
Impact of Issuance of Preferred Stock" (B) in the Registration
Statement in Items 14 and 15, and (C) in the Company's
Registration Statement on Form 8-A filed under the Exchange Act
concerning the description of the Company's capital stock
incorporated by reference in the Prospectus, in each case insofar
as such statements constitute summaries of the legal matters,
documents or proceedings referred to therein, fairly present the
information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters
referred to therein;
(x) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or threatened to which
the Company or any of its subsidiaries is a party or to which any
of the properties of the Company or any of its subsidiaries is
subject that are required to be described in the Registration
Statement or the Prospectus and are not so described or of any
statutes,
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<PAGE> 12
regulations, contracts or other documents that are required to
be described in the Registration Statement or the Prospectus or
to be filed as exhibits to the Registration Statement that are
not described or filed as required;
(xi) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus, will not be an
"investment company" as such term is defined in the Investment
Company Act of 1940, as amended;
(xii) such counsel (A) is of the opinion that the
Registration Statement and Prospectus (for financial statements
and schedules and other financial and statistical data included
therein as to which such counsel need not express any opinion)
comply as to form in all material respects with the Securities
Act and the applicable rules and regulations of the Commission
thereunder, (B) has no reason to believe that (except for
financial statements and schedules and other financial and
statistical data as to which such counsel need not express any
belief) the Registration Statement and the prospectus included
therein at the time the Registration Statement became effective
contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary
to make the statements therein not misleading and (C) has no
reason to believe that (except for financial statements and
schedules and other financial and statistical data as to which
such counsel need not express any belief) the Prospectus contains
any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich & Rosati, counsel for the Selling
Shareholders, dated the Closing Date, to the effect that:
(i) this Agreement has been duly authorized, executed and
delivered by or on behalf of each of the Selling Shareholders;
(ii) the execution and delivery by each Selling
Shareholder of, and the performance by such Selling Shareholder
of its obligations under, this Agreement and the Custody
Agreement and Powers of Attorney of such Selling Shareholder will
not contravene any provision of applicable law, or the
certificate of incorporation or bylaws of such Selling
Shareholder (if such Selling Shareholder is a corporation), or,
to the best of such counsel's knowledge, any agreement or other
instrument binding upon such Selling Shareholder or, to the best
of such counsel's knowledge, any judgment, order or decree of any
governmental body, agency or court having jurisdiction over such
Selling Shareholder, and no consent, approval, authorization or
order of, or qualification with, any governmental body or agency
is required for the performance by such Selling Shareholder of
its obligations under this Agreement or the Custody Agreement or
Power of Attorney
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<PAGE> 13
of such Selling Shareholder, except such as may be required by
the securities or Blue Sky laws of the various states in
connection with offer and sale of the Shares;
(iii) each of the Selling Shareholders has valid title to
the Shares to be sold by such Selling Shareholder and the legal
right and power, and all authorization and approval required by
law, to enter into this Agreement and the Custody Agreement and
Power of Attorney of such Selling Shareholder and to sell,
transfer and deliver the Shares to be sold by such Selling
Shareholder;
(iv) the Custody Agreement and the Power of Attorney of
each Selling Shareholder have been duly authorized, executed and
delivered by such Selling Shareholder and are valid and binding
agreements of such Selling Shareholder; and
(v) delivery of the Shares to be sold by each Selling
Shareholder pursuant to this Agreement will pass title to such
Shares free and clear of any security interests, claims, liens,
equities and other encumbrances.
(e) The Underwriters shall have received on the Closing Date an
opinion of Venture Law Group, A Professional Corporation ("Venture Law
Group"), counsel for the Underwriters, dated the Closing Date, covering
the matters referred to in subparagraphs (vi), (vii), (ix) (but only as
to the statements in the Prospectus under "Control by Officers and
Directors; Possible Adverse Impact of Issuance of Preferred Stock" and
"Underwriters") and (xii) of paragraph (c) above.
With respect to subparagraph (xii) of paragraph (c) above and
with respect to subparagraph (vi) of paragraph (d) above, Wilson Sonsini
Goodrich & Rosati and Venture Law Group may state that their opinion and
belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are
without independent check or verification, except as specified. With
respect to paragraph (d) above, Wilson Sonsini Goodrich & Rosati and
Venture Law Group may rely upon an opinion or opinions of counsel for
any Selling Shareholders and, with respect to factual matters and to the
extent such counsel deems appropriate, upon the representations of each
Selling Shareholder contained herein and in the Custody Agreement and
Power of Attorney of such Selling Shareholder and in other documents and
instruments; provided that (A) each such counsel for the Selling
Shareholders is satisfactory to your counsel, (B) a copy of each opinion
so relied upon is delivered to you and is in form and substance
satisfactory to your counsel, (C) copies of such Custody Agreements and
Powers of Attorney and of any such other documents and instruments shall
be delivered to you and shall be in form and substance satisfactory to
your counsel and (D) Wilson Sonsini Goodrich & Rosati and Venture Law
Group shall state in their opinion that they are justified in relying on
each such other opinion.
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<PAGE> 14
The opinions of Wilson Sonsini Goodrich & Rosati and Venture Law
Group described in paragraphs (c) and (d) above (and any opinions of
counsel for any Selling Shareholder referred to in the immediately
preceding paragraph) shall be rendered to the Underwriters at the
request of the Company or one or more of the Selling Shareholders, as
the case may be, and shall so state therein.
(f) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to
the Underwriters, from Arthur Anderson LLP, independent public
accountants, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus;
provided that the letter delivered on the Closing Date shall use a
"cut-off date" not earlier than the date hereof.
(g) The "lock-up" agreements, each substantially in the form of
Exhibit A and Exhibit B hereto, between you and certain shareholders,
officers and directors of the Company relating to sales and certain
other dispositions of shares of Common Stock or certain other
securities, delivered to you on or before the date hereof, shall be in
full force and effect on the Closing Date.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the delivery to you on the Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of the
Additional Shares and other matters related to the issuance of the Additional
Shares.
8. COVENANTS OF THE COMPANY. In further consideration of the agreements
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, five (5) signed copies of
the Registration Statement (including exhibits thereto) and for delivery
to each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City,
without charge, prior to 5:00 P.M. New York City time on the business
day next succeeding the date of this Agreement and during the period
mentioned in paragraph (c) below, as many copies of the Prospectus and
any supplements and amendments thereto or to the Registration Statement
as you may reasonably request.
(b) Before amending or supplementing the Registration Statement
or the Prospectus, to furnish to you a copy of each such proposed
amendment or supplement and not to file any such proposed amendment or
supplement to which you reasonably object, and to file with the
Commission within the applicable period specified in Rule 424(b) under
the Securities Act any prospectus required to be filed pursuant to such
Rule.
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<PAGE> 15
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with
sales by an Underwriter or dealer, any event shall occur or condition
exist as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of counsel for the Underwriters, it is
necessary to amend or supplement the Prospectus to comply with
applicable law, forthwith to prepare, file with the Commission and
furnish, at its own expense, to the Underwriters and to the dealers
(whose names and addresses you will furnish to the Company) to which
Shares may have been sold by you on behalf of the Underwriters and to
any other dealers upon request, either amendments or supplements to the
Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security holders
and to you as soon as practicable an earning statement covering the
twelve-month period ending August 31, 1998 that satisfies the provisions
of Section 11(a) of the Securities Act and the rules and regulations of
the Commission thereunder.
9. EXPENSES. Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, the Sellers agree to
pay or cause to be paid all expenses incident to the performance of their
obligations under this Agreement, including: (i) the fees, disbursements and
expenses of the Company's counsel, the Company's accountants and counsel for the
Selling Shareholders in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in connection
with the preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws as
provided in Section 8(d) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky or Legal Investment
memorandum, (iv) all filing fees and disbursements of counsel to the
Underwriters incurred in connection with the review and qualification of the
offering of the Shares by the National Association of Securities Dealers, Inc.,
(v) all costs and expenses incident to listing the Shares on the Nasdaq National
Market, (vi) the cost of printing certificates representing the Shares, (vii)
the costs and charges of any transfer agent, registrar or depositary, (viii) the
costs
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<PAGE> 16
and expenses of the Company relating to investor presentations on any "road
show" undertaken in connection with the marketing of the offering of the Shares,
including, without limitation, expenses associated with the production of road
show slides and graphics, fees and expenses of any consultants engaged in
connection with the road show presentations with the prior approval of the
Company, travel and lodging expenses of the representatives and officers of the
Company and any such consultants, and the cost of any aircraft chartered in
connection with the road show, and (ix) all other costs and expenses incident to
the performance of the obligations of the Company hereunder for which provision
is not otherwise made in this Section. It is understood, however, that except as
provided in this Section, Section 10 entitled "Indemnity and Contribution", and
the last paragraph of Section 12 below, the Underwriters will pay all of their
costs and expenses, including fees and disbursements of their counsel, stock
transfer taxes payable on resale of any of the Shares by them and any
advertising expenses connected with any offers they may make.
The provisions of this Section shall not supersede or otherwise affect
any agreement that the Sellers may otherwise have for the allocation of such
expenses among themselves.
10. INDEMNITY AND CONTRIBUTION.
(a) The Company and the Principal Selling Shareholders, jointly
and severally, agree to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of
either Section 15 of the Securities Act or Section 20 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), from and against
any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim)
caused by any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any amendment thereof,
including any Incorporated Document, any preliminary prospectus or the
Prospectus (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto), including any
Incorporated Document, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use therein.
(b) Each Other Selling Shareholder agrees, severally and not
jointly, to indemnify and hold harmless the Company, its directors, its
officers who sign the Registration Statement and each person, if any,
who controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, and each Underwriter
and each person, if any, who controls any Underwriter within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange
Act, from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending
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<PAGE> 17
or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement or any amendment or supplement thereto,
including any Incorporated Document, thereof, any preliminary prospectus
or the Prospectus, including any Incorporated Document (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, but only with reference
to information relating to such Selling Shareholder furnished in writing
by or on behalf of such Selling Shareholder expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or
any amendments or supplements thereto.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, the Selling Shareholders, the
directors of the Company, the officers of the Company who sign the
Registration Statement and each person, if any, who controls the Company
or any Selling Shareholder within the meaning of either Section 15 of
the Securities Act or Section 20 of the Exchange Act from and against
any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim)
caused by any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any amendment thereof,
or supplement thereto, including any Incorporated Document, any
preliminary prospectus or the Prospectus, including any Incorporated
Document (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, but
only with reference to information relating to such Underwriter
furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendments or supplements thereto.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to paragraph (a), (b) or (c) of
this Section 10, such person (the "indemnified party") shall promptly
notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing and the indemnifying party, upon
request of the indemnified party, shall retain counsel reasonably
satisfactory to the indemnified party to represent the indemnified party
and any others the indemnifying party may designate in such proceeding
and shall pay the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood
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<PAGE> 18
that the indemnifying party shall not, in respect of the legal expenses
of any indemnified party in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for (i) the fees and
expenses of more than one separate firm (in addition to any local
counsel) for all Underwriters and all persons, if any, who control any
Underwriter within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act, (ii) the fees and expenses of
more than one separate firm (in addition to any local counsel) for the
Company, its directors, its officers who sign the Registration Statement
and each person, if any, who controls the Company within the meaning of
either such Section and (iii) the fees and expenses of more than one
separate firm (in addition to any local counsel) for all Selling
Shareholders and all persons, if any, who control any Selling
Shareholder within the meaning of either such Section, and that all such
fees and expenses shall be reimbursed as they are incurred. In the case
of any such separate firm for the Underwriters and such control persons
of any Underwriters, such firm shall be designated in writing by Morgan
Stanley & Co. Incorporated. In the case of any such separate firm for
the Company, and such directors, officers and control persons of the
Company, such firm shall be designated in writing by the Company. In the
case of any such separate firm for the Selling Shareholders and such
control persons of any Selling Shareholders, such firm shall be
designated in writing by the persons named as attorneys-in-fact for the
Selling Shareholders under the Powers of Attorney. The indemnifying
party shall not be liable for any settlement of any proceeding effected
without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party
agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have
requested an indemnifying party to reimburse the indemnified party for
fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the indemnifying party agrees that it shall
be liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 30 days
after receipt by such indemnifying party of the aforesaid request and
(ii) such indemnifying party shall not have reimbursed the indemnified
party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending
or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder
by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on
claims that are the subject matter of such proceeding.
(e) To the extent the indemnification provided for in paragraph
(a), (b) or (c) of this Section 10 is unavailable to an indemnified
party or insufficient in respect of any losses, claims, damages or
liabilities referred to therein, then each indemnifying party under such
paragraph, in lieu of indemnifying such indemnified party thereunder,
shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (i) in such
proportion as is appropriate to reflect the relative benefits received
by the indemnifying party or parties on the one hand and the indemnified
party or parties on the other hand from the offering of the Shares or
(ii) if the
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allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative
fault of the indemnifying party or parties on the one hand and of the
indemnified party or parties on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Sellers on the one hand and the
Underwriters on the other hand in connection with the offering of the
Shares shall be deemed to be in the same respective proportions as the
net proceeds from the offering of the Shares (before deducting expenses)
received by each Seller and the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in
the table on the cover of the Prospectus, bear to the aggregate Public
Offering Price of the Shares. The relative fault of the Sellers on the
one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Sellers or
by the Underwriters and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or
omission. The Underwriters' respective obligations to contribute
pursuant to this Section 10 are several in proportion to the respective
number of Shares they have purchased hereunder, and not joint.
(f) The Sellers and the Underwriters agree that it would not be
just or equitable if contribution pursuant to this Section 10 were
determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to
in paragraph (e) of this Section 10. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be
deemed to include, subject to the limitations set forth above, any legal
or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 10, (i) no Underwriter
shall be required to contribute any amount in excess of the amount by
which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount
of any damages that such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or
alleged omission and (ii) no Selling Shareholder shall be required to
contribute amounts in excess of the net amount received by such Other
Selling Shareholder from the sale of shares pursuant to this Agreement.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.
The remedies provided for in this Section 10 are not exclusive and shall
not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(g) The aggregate liability of each Selling Shareholder under the
indemnity, contribution and reimbursement agreements contained in this
Section 10 shall be limited to an amount equal to the proceeds received
by such Selling Shareholder (net of the
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underwriting discount) from the Underwriters in the offering.
Notwithstanding the foregoing, no Selling Shareholder shall be required
to provide indemnification under this Section 10 unless the Underwriter
seeking indemnification shall have first made a written demand for
payment on the Company and the Company shall have failed to make such
demanded payment (a) within 30 days after receipt of a written demand
for fees and expenses of counsel and other litigation costs and (b)
within 90 days after receipt of a written demand for all other losses,
claims, damages or liabilities, including, without limitation, any final
settlements or judgments.
(h) The indemnity and contribution provisions contained in this
Section 10 and the representations, warranties and other statements of
the Company and the Selling Shareholders contained in this Agreement
shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on
behalf of any Underwriter or any person controlling any Underwriter, any
Selling Shareholder or any person controlling any Selling Shareholder,
or the Company, its officers or directors or any person controlling the
Company and (iii) acceptance of and payment for any of the Shares.
11. TERMINATION. This Agreement shall be subject to termination by
notice given by you to the Sellers, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses (a)(i) through (iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
12. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase Shares that
it has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedule I bears to the aggregate number of
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but
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failed or refused to purchase on such date; provided that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 12 by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail
or refuse to purchase Firm Shares and the aggregate number of Firm Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Firm Shares to be purchased, and arrangements satisfactory to you, the
Company and the Selling Shareholders for the purchase of such Firm Shares are
not made within 36 hours after such default, this Agreement shall terminate
without liability on the part of any non-defaulting Underwriter, the Company or
the Selling Shareholders. In any such case either you or the relevant Sellers
shall have the right to postpone the Closing Date, but in no event for longer
than seven days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. If, on the Option Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Additional Shares to be purchased, the
non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase Additional Shares or (ii) purchase not less
than the number of Additional Shares that such non-defaulting Underwriters would
have been obligated to purchase in the absence of such default. Any action taken
under this paragraph shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of any Seller to comply with
the terms or to fulfill any of the conditions of this Agreement, or if for any
reason any Seller shall be unable to perform its obligations under this
Agreement, the Sellers will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
13. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
14. APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
-20-
<PAGE> 22
15. HEADINGS. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
Smart Modular Technologies, Inc.
By_____________________________
Name:
Title:
The Selling Shareholders
named in Schedule I and Schedule II hereto,
acting severally
By_____________________________
Attorney-in-Fact
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Cowen & Company
Montgomery Securities
Acting severally on behalf
of themselves and the
several Underwriters named
herein.
By Morgan Stanley & Co.
Incorporated
By________________________________
Name:
Title:
-21-
<PAGE> 23
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Firm Shares
Underwriter To Be Purchased
----------- ---------------
<S> <C>
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Cowen & Company
Montgomery Securities
----------
Total ..................... 2,070,000
==========
</TABLE>
<PAGE> 24
SCHEDULE II
<TABLE>
<CAPTION>
Number of
Firm Shares
Principal Selling Shareholders To Be Sold
------------------------------ ----------
<S> <C>
[NAMES OF PRINCIPAL SELLING SHAREHOLDER(S)]
-----------
Total.......................
===========
</TABLE>
<PAGE> 25
SCHEDULE III
<TABLE>
<CAPTION>
Number of
Firm Shares
Other Selling Shareholders To Be Sold
-------------------------- ----------
<S> <C>
[NAMES OF OTHER SELLING SHAREHOLDER(S)]
-----------
Total........................
===========
</TABLE>
<PAGE> 26
EXHIBIT A
FORM OF LOCK-UP LETTER
____________, 1997
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette
Cowen & Company
Montgomery Securities
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co.
Incorporated ("Morgan Stanley") proposes to enter into an Underwriting Agreement
(the "Underwriting Agreement") with Smart Modular Technologies, Inc., a
California corporation (the "Company"), providing for the public offering (the
"Public Offering") by the several Underwriters, including Morgan Stanley (the
"Underwriters"), of 2,070,000 shares (the "Shares") of the Common Stock (no par
value) of the Company (the "Common Stock").
To induce the Underwriters that may participate in the Public
Offering to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period commencing
on the date hereof and ending 90 days after the date of the final prospectus
relating to the Public Offering (the "Prospectus"), (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock (whether such shares or any such securities are now owned by the
undersigned or hereafter acquired), or (2) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of the Common Stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to the sale of any Shares to the Underwriters pursuant to the
Underwriting Agreement. In addition, the undersigned agrees that, without the
prior written consent of Morgan Stanley on behalf of the Underwriters, it will
not, during the period commencing on the date hereof and ending 90 days after
the date of the Prospectus, make any demand for or exercise any right with
respect to, the registration of any shares of Common Stock or any security
convertible into or exercisable or exchangeable for Common Stock.
<PAGE> 27
Whether or not the Public Offering actually occurs depends on a
number of factors, including market conditions. Any Public Offering will only be
made pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Notwithstanding anything to the contrary herein, if the closing
of the Public Offering shall not have occurred prior to March 1, 1998, this
Lock-Up Agreement shall be of no further force and effect.
Very truly yours,
-------------------------
(Name)
-------------------------
(Address)
-2-
<PAGE> 28
EXHIBIT B
LOCK-UP AGREEMENT
August 7, 1997
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Montgomery Securities
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Ladies and Gentlemen:
The undersigned understands that Morgan Stanley & Co. Incorporated
("Morgan Stanley") proposes to enter into an Underwriting Agreement (the
"Underwriting Agreement") with Smart Modular Technologies, Inc., a California
corporation (the "Company"), providing for the public offering (the "Public
Offering") by the several Underwriters, including Morgan Stanley (the
"Underwriters"), of 2,070,000 shares (the "Shares") of the Common Stock, no par
value of the Company (the "Common Stock").
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, he, she or it will not, during the period
commencing on the date hereof and ending 90 days after the date of the final
prospectus (the "Prospectus") relating to the Public Offering, (1) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, loan, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (2) enter into any swap or other arrangement
that transfers, in whole or in part, any of the economic consequences of
ownership of the Common Stock, whether any such transaction described in clause
(1) or (2) above is to be settled by delivery of Common Stock or other
securities, in cash or otherwise. The foregoing sentence shall not apply to (1)
the sale of any Shares to the Underwriters pursuant to the Underwriting
Agreement, (2) transactions relating to shares of Common Stock or other
securities acquired in open market transactions after the completion of the
Public Offering, or (3) the sale of no more than 20,000 Shares by any single
person or entity (including the undersigned) listed on Exhibit A hereto;
provided, however, that such person or entity (including the undersigned) shall
only be able to sell that number of Shares, such that the sale of such Shares,
when combined with the number of Shares previously (or simultaneously) sold by
all persons and entities (including the undersigned) listed on Exhibit A, shall
not exceed 50,000 Shares in the aggregate. In addition, the undersigned agrees
that, without the prior written consent of Morgan Stanley, on behalf of
<PAGE> 29
the Underwriters, he, she or it will not, during the period commencing on the
date hereof and ending 90 days after the date of the Prospectus, make any demand
for or exercise any right with respect to, the registration of any shares of
Common Stock or any security convertible into or exercisable or exchangeable for
Common Stock.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to the Underwriting Agreement, the terms of which are subject to
agreement between the Company and the Underwriters.
Notwithstanding anything to the contrary herein, if the closing of the
Public Offering shall not have occurred prior to March 1, 1998, this Lock-Up
Agreement shall be of no further force and effect.
Very truly yours,
-------------------------
(Name)
-------------------------
(Address)
-2-
<PAGE> 30
Exhibit A
Ajay Shah
Lata Krishnan
Krishnan-Shah Family Partners, L.P.
Mukesh Patel
Patel Family Partners, L.P.
Alan Marten
Erik Anderson
Tor Braham
David Mullin
<PAGE> 1
EXHIBIT 5.1
Smart Modular Technologies, Inc.
4305 Cushing Parkway
Fremont, CA 94538
RE: REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3 filed by you with
the Securities and Exchange Commission on August , 1997 (Registration No.
333- ) (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of up to 2,070,000
shares of your Common Stock, no par value per share (the "Shares"). The Shares
include an over-allotment option granted to the underwriters of the offering to
purchase 310,500 shares. We understand that the Shares are to be sold to the
underwriters of the offering for resale to the public as described in the
Registration Statement. As your legal counsel, we have examined the proceedings
taken, and are familiar with the proceedings proposed to be taken, by you in
connection with the sale and issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares, when issued and sold in the manner described in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of the Company, will be legally and validly issued, fully
paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH &
ROSATI
--------------------------------------
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated November 27, 1996
included in SMART Modular Technologies, Inc.'s Form 10-K for the year ended
October 31, 1996 and to all references to our Firm included in this
registration statement.
ARTHUR ANDERSEN LLP
San Jose, California
August 7, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Smart Modular Technologies, Inc.
Fremont, California
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement of our report, dated
September 8, 1995, relating to the consolidated financial statements of Apex
Data, Inc. and Subsidiary for the year ended December 31, 1994, appearing in the
Annual Report of Smart Modular Technologies, Inc. on Form 10-K for the year
ended October 31, 1996.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
San Francisco, California
August 7, 1997
