<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended October 31, 1996, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
__________.
Commission file number: 0-26942
SMART MODULAR TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 77-0200166
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4305 CUSHING PARKWAY
FREMONT, CALIFORNIA 94538
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 623-1231
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of the
Registrant was approximately $345,778,306 as of January 6, 1997 based upon the
closing price on the Nasdaq National Market System reported for such date.
Shares of common stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding common stock have been excluded in
that such persons may under certain circumstances be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
Number of Shares of common stock outstanding as of January 6, 1997: 18,991,443
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference to Part III of
this Form 10-K : Proxy Statement for Registrant's Annual Meeting of Shareholders
to be held April 4, 1997.
<PAGE> 2
SMART MODULAR TECHNOLOGIES, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I
<S> <C> <C>
ITEM 1. Business 3
ITEM 2. Properties 15
ITEM 3. Legal Proceedings 15
ITEM 4. Submission of Matters to Vote of Security Holders 15
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters 16
ITEM 6. Selected Consolidated Financial Data 16
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 17
ITEM 8. Financial Statements and Supplementary Data 30
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 30
PART III
ITEM 10. Directors and Executive Officers of the Registrant 30
ITEM 11. Executive Compensation 30
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 30
ITEM 13. Certain Relationships and Related Transactions 30
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 31
Signatures 34
</TABLE>
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PART I
ITEM 1. BUSINESS
SMART Modular Technologies, Inc., a California corporation ("SMART" or the
"Company"), designs, manufactures and markets memory modules, personal computer
("PC") card products and embedded processor modules primarily to leading
original equipment manufacturers ("OEMs") in the computer, networking and
telecommunications industries. Founded in 1988, the Company has grown rapidly to
become a leading independent manufacturer of specialty memory modules and PC
cards, standard memory modules, communications PC cards and embedded processor
modules offering products for a wide variety of electronic system applications.
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 PC card data/fax
modem and connectivity products. The Company further extended its product line
to include embedded computers through the acquisition of RISQ Modular Systems,
Inc. in July 1996. SMART has developed extensive design and manufacturing
expertise which the Company believes provides it with competitive advantage,
including the ability to respond to its customers' rapidly changing
requirements. To this end, the Company maintains two design centers, one in
Bangalore, India, the other in Fremont, California, and manufacturers its
products in Fremont, California, Arecibo, Puerto Rico and East Kilbride,
Scotland. The Company's principal customers include major electronic OEMs,
semiconductor manufacturers, computer distributors, corporate end users,
government agencies, catalog retailers, value-added resellers ("VARs") and
system integrators. The Company's OEM customers include, Cisco Systems, Inc.,
Compaq Computer Corporation, Gateway 2000, Hewlett-Packard Company, IBM
Corporation ("IBM"), NCR Corp., Solectron Corp. and Toshiba America Information
Systems Corp.
INDUSTRY BACKGROUND
The demand for semiconductor memory devices in digital electronic systems
has grown dramatically over the last several years as a result of the increasing
importance of memory in determining system performance. The demand for greater
system performance has required that electronics manufacturers increase the
number and functionality of memory devices incorporated into a system.
The factors which have contributed to the increasing demand for memory
devices include the expanding unit sales of personal computers in the business
and consumer market segments; the increasing use of personal computers to
perform memory-intensive graphics and multimedia functions; the volume of memory
required to support faster microprocessors; the proliferation of increasingly
complex personal computer software; and the increasing performance requirements
of workstations, servers and networking and telecommunications equipment.
Memory integrated circuits encompass several types of devices designed to
perform specific functions within computer and other electronic systems. The
three most significant categories of semiconductor memory are Dynamic Random
Access Memory ("DRAM"), Static Random Access Memory ("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 which retains data after a system is turned off. In
addition, within each of these broad categories of memory products,
semiconductor manufacturers are offering an increasing variety of memory devices
which are designed for application specific uses.
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MARKETS
THE DRAM MARKET
DRAMs are the most commonly used memory devices for storage and retrieval
of data during a system's operation. The development of more powerful personal
computers and workstations and the increasing emphasis on high-throughput
networking and telecommunications products have resulted in the need for higher
volumes and greater varieties of DRAM memory in electronic systems. For example,
PCs currently based on 486, Pentium and PowerPC microprocessors frequently
employ eight to 32 megabytes ("MBytes") of DRAM, which is significantly more
memory than that employed by older generation PCs. The adoption of Windows 95
and Windows NT is further increasing the need for DRAM, as 16 MBytes of DRAM
memory or more are required for higher performance to support these operating
systems.
The Company believes the overall DRAM market is becoming more diversified
as a variety of architectures, features, organizations, densities and operating
voltages have been introduced to address different applications and performance
requirements. Examples of such architectures and features include Synchronous
DRAM ("SDRAM"), Synchronous Graphics RAM ("SGRAM"), RAMBUS, Video RAM ("VRAM"),
Fast Page Mode ("FPM"), Extended Data Out ("EDO") and Burst EDO. DRAM devices
are available in organizations ranging from one bit to 32 bits wide, densities
of up to 64 megabits ("Mbits") and in operating voltages of 5.0 volts and 3.3
volts.
THE SRAM MARKET
The market for SRAM includes the high speed SRAM segment and the low power
SRAM segment. The market for high speed SRAM devices has grown rapidly over the
last few years driven primarily by the inability of slower DRAM devices to
support the increasing speed requirements of PC and data communications systems.
Due to existing architectural limitations, DRAM speeds have not increased
commensurately with improvements in microprocessor speeds. DRAMs typically
operate at 10 to 20 megahertz ("MHz") (100 to 50 nanoseconds ("ns")), while
microprocessor memory bus speeds for most 486 and all Pentium-class PCs
currently sold are 66 MHz (15 ns) or higher. Operating at 66 MHz or faster, high
performance SRAM devices can be used as "cache" memory, which increases a
system's performance. For example, in a PC or workstation, secondary ("L2")
cache memory can increase system performance by acting as an intermediary
between fast microprocessors and slower DRAM main memory. In disk drives, SRAM
cache memories can be used as a high speed buffer to accelerate data throughput
from the drive to the system bus.
High speed SRAMs are experiencing rapid advancements in speed,
architecture, organization, density and operating voltages. These advancements
are primarily necessitated by the increasing speed and functionality of
microprocessors such as the Pentium, the PowerPC, the Alpha and the SPARC. High
speed SRAMs are reaching access times below 3 ns. High speed SRAM architecture
has evolved from asynchronous random access to synchronous pipelined burst mode
corresponding with the Pentium architecture, and synchronous serial access
corresponding with RISC architectures. SRAM devices are available in
organizations ranging from one bit to 36 bits wide and densities of up to 4
Mbits. In addition, industry trends toward lower voltage microprocessors such as
the Intel P54C (3.3 volt Pentium) have created a need for new, low voltage SRAM
cache memories.
Low power SRAM devices are used primarily in computing or industrial
applications in which efficient power management is of greatest importance.
Primary applications for low power SRAM devices include mobile computing and
other environments in which electronic systems rely on battery power or require
low power dissipation.
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THE FLASH MEMORY MARKET
Flash memory is an application of non-volatile memory used to retain stored
data after a system's power has been turned off. The ability of Flash devices to
be electronically rewritten to update parameters or system software provides
greater flexibility and ease of use than other non-volatile memory devices, such
as older erasable programmable read only memory ("EPROM") devices. Flash memory
is a fast growing segment of the memory market, as a growing range of
applications utilize Flash memory in the computer, telecommunications,
networking, consumer electronics, automotive, industrial control and
instrumentation industries. For example, Flash memory can be used in
communication devices such as routers, in which Flash memory provides storage of
control programs and system-critical data. Another common application for Flash
memory is in PC cards, which are small form factor devices that are inserted
into notebook, subnotebook computers or personal digital assistants ("PDAs"),
and digital cameras to provide added storage.
Due to the increasing number of Flash suppliers, a variety of Flash
architectures such as NOR, DINOR, NAND and AND have become available. These
devices are offered in an increasing number of operating modes, such as random
access, serial access, synchronous and DRAM-like, and in a range of operating
voltages from 3.3 volts to 12.0 volts.
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 offer a relatively easy
path for upgradeability of a personal computer or workstation, a feature of
system design which is increasingly required by end users. The use of memory
modules allows OEMs to increase flexibility by enabling them to easily configure
a system with a variety of different levels of memory, thus enabling OEMs to
address multiple price points or applications with a single base system design.
To achieve this upgradeability and flexibility, both PC and communications OEMs
frequently design their systems to use memory modules as a "daughter card,"
reducing the need to include 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 of 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 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 primarily utilizing DRAM memory and are available with a
variety of options to address the needs of multiple OEMs. Standard memory
modules are typically used in desktop personal computers 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 usually 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 or custom memory modules are generally used
in mobile computers, workstations and telecommunications devices, such as
routers and switches, and are primarily sold to OEMs.
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INDEPENDENT MANUFACTURERS OF MEMORY MODULES
As the variety of memory devices available to address specific applications
has expanded, the design and manufacture of memory modules has increasingly
become an area in which electronics OEMs employ outsourcing strategies. By
outsourcing design and manufacturing functions, OEMs are able to focus their
resources on their own areas of core competence and competitive advantage, such
as unique technology, system design and marketing capabilities. OEM outsourcing
practices range from contract manufacturing, in which the OEM may turn to an
outside supplier to procure components and design and manufacture 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 components
supplied by the OEM. OEMs may also purchase memory modules which have been
designed by a supplier for a specific application.
The suppliers of memory modules include semiconductor manufacturers which
maintain captive memory module production capabilities and independent memory
module manufacturers which source memory devices from a wide variety of
suppliers. Although some semiconductor manufacturers have the ability to
manufacture significant volumes of standard memory modules, generally these
companies are focused on adding value through their silicon expertise, rather
than through their memory module manufacturing capabilities. The Company
believes that the business models of most semiconductor manufacturers may not
adequately address OEMs' changing requirements for a broad range of custom and
application specific products.
Independent manufacturers of memory modules have experience with a broad
range of memory devices and offer substantial expertise in component selection
and module product development. Due to the fact that independent manufacturers
do not produce their own semiconductor devices, they have the ability to mix and
match devices from a variety of semiconductor suppliers in a single memory
module. Independent manufacturers of memory modules currently address two
primary market segments: the OEM channel and the reseller channel. Suppliers to
the OEM channel typically offer custom and application specific modules to the
workstation and telecommunications industries, as well as standard memory
modules for use by computer and peripherals OEMs. Suppliers to the reseller
channel typically offer standard DRAM memory modules as an upgrade product sold
through computer distributors and retail channels.
PC CARD MARKET
PC cards are small form factor products conforming to the Personal Computer
Memory Card International Association ("PCMCIA") standards which are used as
peripheral devices in notebook and subnotebook computers and PDAs. Dataquest
Incorporated forecasts that unit sales of mobile computer systems in the United
States will increase in the range of 20% annually, reaching annual shipments of
29 million units by the end of 2000. This growth is expected to expand the
market for mobile computing peripherals, including PC cards for memory
(primarily Flash memory), communications (data/fax modems, wireless, cellular
and pager) and networking (Ethernet and Token Ring). An increasingly important
aspect of PC card modem functionality is the ability to provide high speed data
transmission over wireless networks such as switched cellular, digital cellular
and personal communications services. A number of companies have announced that
they will introduce modems in 1997 that perform at 56,000 bits per second
("bps") in certain environments. This speed of transmission rate has yet to be
ratified as a standard by the ITU and there are still a number of issues
surrounding the new technological advancement. However, the technology promises
an improvement over current V.34, 33,600 bps modems.
EMBEDDED COMPUTER MARKET
In 1996, the Company entered the embedded computer market through its
acquisition of RISQ Modular Systems, Inc. ("RISQ"), a designer and manufacturer
of standard and perfect-fit (custom) embedded processor modules for OEMs.
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Embedded computers 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. Unlike PCs or workstations which serve as general purpose computers,
embedded computers perform a single or limited number of dedicated tasks.
Examples of embedded computer applications include Digital Satellite Systems,
set-top boxes, video games, laser printers, scanners, routers, network switches,
robots, computer guided missiles, paint mixing systems, medical imaging
analyzers, automated toll collection systems and Global Positioning System
receivers.
These products are characterized by unique requirements such as compute
performance, real-time operating system software, power consumption, weight,
form-factor, upgradability, life cycles and cost. OEMs in the 1970s and 1980s
that needed embedded computers had to either design their own systems based on
available technology or buy a limited choice of standard boards and then modify
them for their proprietary requirements. With market conditions requiring
shorter design cycles and the choices for implementation becoming more complex,
OEMs are increasingly outsourcing their requirements for embedded computers to
specialists that complement the value-added by the OEM (typically the
application software and the market channels). The Company believes it plays an
important role in shrinking time to market for OEMs trying to introduce their
embedded systems in networking, telecommunications, imaging, network security
and industrial control.
PRODUCTS
The Company designs and markets products consisting of memory modules,
embedded processor modules and PC cards. The Company's memory modules include
DRAM, SRAM and Flash memory. 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. Embedded processor 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.
The following chart 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
- - -----------------------------------------------------------------------------------------------------------
144 Pin SO DIMMs 4-64 MBytes FPM, EDO 10-33 Notebook PCs, Printers,
-------------------------------------------------------------------
SDRAM, SGRAM 60-133 X-Window Terminals, 3D
Graphics
- - -----------------------------------------------------------------------------------------------------------
168 Pin DIMMs 8-256 MBytes FPM, EDO 10-33 Workstations, Routers,
-------------------------------------------------------------------
SDRAM 66-133 Servers, Telecom Equipment
- - -----------------------------------------------------------------------------------------------------------
200 Pin DIMMs 16-64 MBytes FPM, SDRAM 10-150 Workstations, Super
Computers
- - -----------------------------------------------------------------------------------------------------------
VRAM Modules 2-16 MBytes RAM, High Speed 60-200 High Performance
SRAM Graphics for Workstations
- - -----------------------------------------------------------------------------------------------------------
VME Bus Modules 256 KBytes- FPM, Low Profile 10-33 Industrial Control Systems
16 MBytes
- - -----------------------------------------------------------------------------------------------------------
Custom 1-256 MBytes Per Customer Per Customer Embedded Controllers,
Specifications Specifications Telecom Switches, Notebook PCs
- - -----------------------------------------------------------------------------------------------------------
</TABLE>
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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 chart 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- Intel, SIS, OPTi, 66-83 Desktop PCs, Embedded
1 MByte VLSI Controllers
- - -------------------------------------------------------------------------------------------------------
Synchronous 72 Bit 256 KBytes- Intel, SIS, OPTi, 66-83 Desktop PCs, Workstations,
1 MByte VLSI Servers, Routers
- - -------------------------------------------------------------------------------------------------------
Asynchronous 64 Bit 256 KBytes- Intel, OPTi, VLSI 50-66 Desktop PCs, Embedded
1 MByte Controllers
- - -------------------------------------------------------------------------------------------------------
Asynchronous 72 Bit 256 KBytes- Intel, OPTi, VLSI 50-66 Desktop PCs, Workstations,
1 MByte Servers, Routers
- - -------------------------------------------------------------------------------------------------------
Custom 256 KBytes- Per Customer Per Customer Desktop PCs
8 MBytes Specifications Specifications
- - -------------------------------------------------------------------------------------------------------
</TABLE>
The following chart 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
- - ------------------------------------------------------------------------------------------------
<S> <C> <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 chart 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 SIMMs 1-32 MBytes 12 Volt/5 Volt Programming Routers, Servers,
5 Volt/3.3 Volt Read Voltage Telecom Switches
5 Volt Only
3 Reset Options
- - --------------------------------------------------------------------------------------------------------
168 Pin Asynchronous DIMMs 4-64 MBytes 5 Volt/3.3 Volt Read Voltage Telecom Switches, Routers
- - --------------------------------------------------------------------------------------------------------
Custom 1-64MBytes Per Customer Specifications Industrial Applications
- - --------------------------------------------------------------------------------------------------------
</TABLE>
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 memory PC cards with densities ranging
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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.
The following chart 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 Flash 2-32 MBytes Plug & Play, Software PDAs, Notebook PCs, Networking, Portable
Driver Included Medical Equipment
- - -----------------------------------------------------------------------------------------------------------------
68 Pin ATA 2-112 MBytes 5 Volt, 3.3 Volt PDAs, Notebook PCs, Networking
ATA Compliant
- - -----------------------------------------------------------------------------------------------------------------
Compact Flash ATA 2-16 MBytes 5 Volt, 3.3 Volt PDAs, Celluar Phones, Pagers, Digital
ATA Compliant Cameras
- - -----------------------------------------------------------------------------------------------------------------
Miniature 2-4 MBytes 5 Volt 3.3 Volt PDAs, Celluar Phones, Pagers, Digital
16 Bit Data Interface Cameras
MCIF Specification
Compliant
- - -----------------------------------------------------------------------------------------------------------------
Custom 128 KBytes- Per Customer Portable Medical Equipment
20 MBytes Specifications
- - -----------------------------------------------------------------------------------------------------------------
</TABLE>
The Company also offers a comprehensive line of wireless and wireline PC
card data/fax modems which are compatible with most notebook and subnotebook
computers and PDAs that utilize at least one PCMCIA slot. In fiscal 1995, the
Company enhanced its PC card communication product offerings by acquiring Apex,
which offers a line of wireless and wireline modem products. The Company's
modems are available in speeds of up to 33,600 bps and are compatible with
Windows, OS/2 and DOS environments. The Company's Apex brand modems are one of
only two brands recognized as "ThinkPad Proven" by IBM in North America and
Europe. The Company's wireless modems support connections with the majority of
cellular phones currently on the market, including those manufactured by
Motorola, Inc., Ericsson, Nokia, OKI and NEC Corporation. Certain of the
Company's modems also contain Flash memory for use in PDA devices such as
Hewlett-Packard's HP 100LX and HP 200LX. All of the Company's data/fax modem
cards meet PCMCIA Type II specifications.
In June of 1996, the Company introduced its ClipperCom World Data/Fax
Modem. This product has been certified in over 30 countries and allows the user
to have one modem that can be used virtually anywhere in the world. Included
with this product is the Company's GUI (graphical user interface) Country Select
software which allows the modem to be configured by the user to any of the
certified country's specific requirements. This modem won Byte Magazine's "Best
of PC Expo" award at this years PC Expo show.
In 1996, the Company also introduced Media Express, its MPEG 1 Playback PC
card for Notebook computers that have incorporated Zoomed Video ("ZV") port
technology. This Type II PC card product delivers full motion, full screen video
playback when used with any software incorporating MPEG technology that is OM-1
compatable.
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The following chart summarizes certain of the Company's PC card
communication product offerings:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------
PC CARD COMMUNICATION PRODUCT FAMILIES FEATURES
- - ------------------------------------------------------------------------------------------------
<S> <C>
MODEMS
- - ---------------------------------------------------
Mobile Plus V.34 (33.6 kbps) Landline and Cellular-ready
TX-CEL licensed protocol
MNP-10EC protocol
Supports over 50 different types of cellular
phones
Low power consumption
- - ------------------------------------------------------------------------------------------------
ClipperCom World V.34 (33.6 kbps) Internal DAA certified in over 30 countries
Full cellular phone support
Country Select GUI software
Digital line protection
- - ------------------------------------------------------------------------------------------------
Fax/Modem and Memory For Hewlett-Packard PDA
6 meg of Flash memory
- - ------------------------------------------------------------------------------------------------
NETWORKING
- - ---------------------------------------------------
Ethernet Adapter Direct Connect cable
Supports 10BT and 10B2
- - ------------------------------------------------------------------------------------------------
Token Ring Adapter IBM compatable
Supports shielded and unshielded twisted pair
- - ------------------------------------------------------------------------------------------------
Serial Card Adapter Easy-install software, Plug & Play capability
- - ------------------------------------------------------------------------------------------------
VIDEO ADAPTERS
- - ---------------------------------------------------
Media Express MPEG 1 Compatable with leading ZV Port notebooks
Delivers full screen, full motion video
OM-1 compatable
- - ------------------------------------------------------------------------------------------------
</TABLE>
EMBEDDED COMPUTER PRODUCTS
The Company's SMARTengine family of hardware and software products help
accelerate time to market, reduce system cost, lower power requirements and
provide a clear upgrade path for OEMs' requirements. The Company provides a mix
of standard and perfect-fit embedded computers with complete software support
that offer varying price/performance and industry standard bus interfaces. The
Company is processor independent which allows the existing product line to be
powered by 32 and 64 bit CPUs from several vendors. This enhances flexibility to
match price, performance and power requirements to the customer's application.
The Company has also used industry standard ISA bus, EISA bus, PCI bus, Compact
PCI bus or a custom bus where appropriate as being part of the solution for
customers with unique requirements. All products are supported by on-board
software for development and real-time operating systems support.
The following chart summarizes certain of the Company's SMARTengine
embedded computer product offerings:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
EBEDDED PROCESSOR
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, Imaging, Game, Publishing
PROM, RTC, 3 PCI slots
- - -------------------------------------------------------------------------------------------------
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 Various
the customer's application
- - -------------------------------------------------------------------------------------------------
</TABLE>
-10-
<PAGE> 11
CUSTOMERS, SALES AND MARKETING
The Company's principal customers include major electronics OEMs,
semiconductor manufacturers, computer distributors, corporate end users,
government agencies, catalog retailers, VARs and systems integrators. 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 top three customers as a percentage of net sales accounted for 19%,
15% and 12% of net sales, respectively. During fiscal 1996, no other customers
accounted for more than 10% of net sales. In fiscal 1995, the Company's top
three customers as a percentage of net sales accounted for 18%, 15% and 10% of
net sales, respectively. During fiscal 1995, no other customers accounted for
more than 10% of net sales.
The Company primarily sells its memory module and processor 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 also derives a small portion of its sales in North
America and Europe through industrial distributors such as Milgray, Jaco and
MEMEC Components. In the Far East, the Company utilizes stocking representative
relationships with companies such as Kanematsu Semiconductor Corporation in
Japan. 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 its use of an experienced group of applications
engineers who work closely with OEM customers in designing the Company's
products into the OEM's systems. The Company's sales offices are located in
Fremont, California, Dallas, Texas, Marlboro, Mass., Charlotte, North Carolina,
Milton Keynes, England, Basingstoke, England and Perth, Australia.
To address the needs of its memory module and PC card 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
("NEC")., IBM, Intel, Oki Semiconductor, Inc. ("Oki Semiconductor"), Rockwell
International Corp. ("Rockwell") and Samsung Electronics Company Ltd.
("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.
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. The Company's 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, ADO/T-Zone in Japan and
Misco and Dixon's Stores Group Ltd. in the United Kingdom.
Sales are generally made pursuant to standard purchase orders. The Company
includes in its backlog only those customer orders for which it accepted
purchase orders and assigned shipment dates within the next 12 months. Since
orders constituting the Company's current backlog are subject to change in
delivery schedules and are subject to cancellation with only limited or no
penalties, backlog is not necessarily an 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 $57.1 million and $88.2
million as of fiscal 1996 and fiscal 1995, 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 and PC cards are specialized due to
their high component and trace densities, particularly for high speed memory
-11-
<PAGE> 12
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. As a result of its design
efficiencies, the Company believes that it achieves relatively high
manufacturing yields. In addition, 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 currently manufactures a majority of its products in a 62,250
square foot facility in Fremont, California. In addition, the Company employs a
23,000 square foot manufacturing facility in Arecibo, Puerto Rico and, since its
opening in September 1996, a 25,000 square foot manufacturing facility in East
Kilbride, Scotland. The Company operates multiple production lines at these
facilities. The Company currently plans to add additional manufacturing capacity
in each of its manufacturing sites. The Company also subcontracts a limited
amount of production requirements to third party manufacturers.
The Company's manufacturing process relies on a high level of automation
and involves the use of a substantial base of fine pitch surface mount equipment
which is specialized for the production of memory modules and PC card products.
The Company also has developed automated methods for PC card case assembly. The
Company's surface mount manufacturing lines have been optimized to support the
placement and configuration of a high number of integrated circuits on each
board, in contrast to surface mount equipment used in less specialized
electronics manufacturing which typically involves a fewer number of integrated
circuits and a greater number of passive components on each printed circuit
board. 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 turn around of both
small and large projects. The Company is frequently able to provide turn around
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 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. The Company
has a group of experienced test engineers that develop proprietary testing
routines and parameters which 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.
RESEARCH AND DEVELOPMENT
The Company believes that the timely development of new memory modules,
embedded processor modules and PC card products is essential to maintain 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
DRAM, particularly 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 OEM, corporate and
retail customers.
-12-
<PAGE> 13
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. In
particular, the Company is devoting resources to the development of 56,000 bps
asynchronous modem products.
The Company's research and development efforts in the embedded computing
market are focused on the design of standard and custom embedded processor
modules based primarily on the MIPS and PowerPC computing architectures and
standard or custom bus architectures.
The Company's research and development expenses in fiscal 1996, fiscal 1995
and fiscal 1994 were $5.9 million, $5.3 million and $5.9 million, respectively.
COMPETITION
The memory module, PC card and embedded processor module industries are
intensely competitive. The memory module, PC card and embedded processor module
markets are each comprised of a large number of competitive companies, several
of which have achieved a substantial share of their respective markets. Certain
of the Company's competitors in each of these markets have substantially greater
financial, marketing, technical, distribution and other resources, greater name
recognition, lower cost structures and larger customer bases than the Company.
In the OEM memory module market, the Company competes against semiconductor
manufacturers that maintain captive memory module production capabilities,
including Integrated Device Technology, Inc., Micron Electronics, Inc. (a
subsidiary of Micron Technology Inc.) and Multichip Technology, Inc. (a division
of Cypress Semiconductor Corporation). The Company also competes with
independent memory module manufacturers, including Celestica Inc., PNY
Electronics, Inc. and Simple Technology Incorporated. In the computer systems
reseller market for memory modules, the Company primarily competes with Kingston
Technology, Inc., Viking Technology, Inc. and Vision Tek, Inc. In the PC card
market, the Company competes with Centennial Technologies, Inc., Hayes
Microcomputer Products, Inc. and U.S. Robotics, Inc. In the embedded processor
module market, the Company competes with Force Computers Inc.(a subsidiary of
Solectron Corporation), Motorola, Inc. and Radisys Corporation. The Company
faces competition from current and prospective customers that evaluate the
Company's capabilities against the merits of manufacturing products internally.
In addition, the Company competes and expects to continue to compete with
certain of its suppliers. These suppliers may have the ability to manufacture
competitive products at lower costs than the Company as a result of their higher
levels of integration. The Company also faces and may face competition from new
and emerging companies that have recently entered or may in the future enter the
markets in which the Company serves.
The Company expects its competitors to continue to improve the performance
of their current products, to reduce their current product sales prices and to
introduce new products that may offer greater performance and improved pricing,
any of which could cause a decline in sales or loss of market acceptance of the
Company's products and thereby have a material adverse effect on the Company's
business, financial condition and results of operations.
There can be no assurance that enhancements to or future generations of
competitive products will not be developed that offer superior prices and
technical performance features compared to the Company's products. To be
competitive, the Company must continue to provide technologically advanced
products and manufacturing services, maintain quality levels, offer flexible
delivery schedules, deliver finished products on a reliable basis and compete
favorably on the basis of price. In addition, increased competitive pressure has
led in the past and may continue to lead to intensified price competition,
resulting in lower prices and gross margin, which could materially adversely
affect the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to compete successfully
in the future.
-13-
<PAGE> 14
INTELLECTUAL PROPERTY
As of October 31, 1996, the Company had one pending patent application
while no patents have been granted to date. There can be no assurance this
pending patent will be issued. The Company expects to continue to file 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 addition, the Company attempts to protect its intellectual
property rights through a variety of other measures including non-disclosure
agreements, trademarks and trade secrets. There can be no assurance, however,
that such measures will provide adequate protection for the Company's trade
secrets or other proprietary information, that disputes with respect to the
ownership of its intellectual property rights will not arise, that the Company's
trade secrets or proprietary technology will not otherwise become known or be
independently developed by competitors or that the Company can otherwise
meaningfully protect its intellectual property rights. There can be no assurance
that patents will issue from future applications or that, if patents are issued,
they will not be challenged, invalidated or circumvented, or that rights granted
thereunder will provide meaningful protection or other commercial advantage to
the Company. Furthermore, there can be no assurance that third parties will not
develop similar products, duplicate the Company's products or design around the
patents owned by the Company or that third parties will not assert intellectual
property infringement claims against the Company. In addition, there can be no
assurance that foreign intellectual property laws will adequately protect the
Company's intellectual property rights abroad. The failure of the Company to
protect its proprietary rights could have a material adverse effect on its
business, financial condition and results of operations.
In the semiconductor, computer, telecommunications and networking
industries, it is typical for companies to receive notices from time to time
alleging infringement of patents, copyrights or other intellectual property
rights of others. While there is currently no material pending intellectual
property litigation involving the Company, the Company has been and may from
time to time continue to be notified of claims that it may be infringing
patents, copyrights or other intellectual property rights owned by third
parties. There can be no assurance that these or other companies will not in the
future pursue claims against the Company with respect to the alleged
infringement of patents, copyrights or other intellectual property rights owned
by third parties. In addition, litigation may be necessary to protect the
Company's intellectual property rights and trade secrets, to determine the
validity of and scope of the proprietary rights of others or to defend against
third party claims of invalidity. Any litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, financial condition and results of operations.
There can be no assurance that infringement, invalidity, right to use or
ownership claims by third parties or claims for indemnification resulting from
infringement claims will not be asserted in the future. The Company has also
entered into license agreements in the past regarding certain alleged
infringement claims asserted by third parties. If any other claims or actions
are asserted against the Company, the Company may again seek to obtain a license
under a third party's intellectual property rights. There can be no assurance,
however, that a license will be available under reasonable terms or at all. The
failure to obtain a license under a patent or intellectual property right from a
third party for technology used by the Company could cause the Company to incur
substantial liabilities and to suspend the manufacture of the products utilizing
the invention. In addition, should the Company decide to litigate such claims,
such litigation could be extremely expensive and time consuming and could
materially adversely affect the Company's business, financial condition and
results of operations, regardless of the outcome of the litigation.
EMPLOYEES
As of October 31, 1996, the Company had 474 regular, full time employees of
which 353 were in manufacturing (including testing, quality assurance and
materials work), 31 were in design and product development, 63 were in marketing
and sales and 27 were in finance and administration. The Company's future
results depend in significant part upon its ability to attract and retain
qualified management,
-14-
<PAGE> 15
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.
ENVIRONMENTAL REGULATION
The Company's operations and manufacturing processes are subject to certain
federal, state, local and foreign environmental protection laws and regulations.
Public attention has increasingly been focused on the environmental impact of
manufacturing operations which use hazardous materials or generate hazardous
wastes, and environmental laws and regulations may become more stringent over
time. There can be no assurance that the Company's failure to comply with either
present or future regulations, or to obtain all necessary permits required under
such regulations, would not subject the Company to significant compliance
expenses, production suspensions or delay, restrictions on expansion at its
present or future locations, the acquisition of costly equipment or other
liabilities.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business, financial condition and results of operations can
be impacted by a number of factors. See "Item 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FACTORS THAT MAY
AFFECT FUTURE RESULTS."
ITEM 2. PROPERTIES
In January 1996, the Company moved its operations from its Fremont and
Pleasanton, California facilities into a 62,250 square foot facility in Fremont,
California, which is being used for manufacturing and as the Company's corporate
headquarters. The lease on the 62,250 square foot 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 believes that it has adequate facilities to accommodate its needs for at
least the next 12 months.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not Applicable.
-15-
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock has been traded in the over-the-counter market
since the Company's initial public offering on November 17, 1995 and is quoted
on The Nasdaq National Market under the symbol SMOD. No public trading market in
the Company's common stock existed prior to the Company's initial public
offering.
The following table sets forth for the periods indicated the high and low
closing prices for the Company's common stock as reported by The Nasdaq National
Market.
<TABLE>
<CAPTION>
FISCAL YEAR 1996 HIGH LOW
<S> <C> <C>
Fourth quarter ended October 31, 1996 21 1/4 12 1/4
Third quarter ended July 31, 1996 24 1/8 9 3/8
Second quarter ended April 30, 1996 22 5/8 10 5/8
First quarter ended January 31, 1996 12 5/8 9 1/2
</TABLE>
As of January 6, 1997, the approximate number of record holders was 171 and
the approximate number of beneficial holders was 5800. The Company has never
paid cash dividends on its common stock. The Company presently intends to retain
any earnings for use in its business 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 agreements prohibit the Company from paying
dividends.
On July 31, 1996, pursuant to an Agreement and Plan of Reorganization and
an Agreement and Plan of Merger, SMT Acquisition Corp., a California corporation
and wholly-owned subsidiary of SMART, merged (the "RISQ Merger") with and into
RISQ Modular Systems, Inc., a California corporation ("RISQ"). In the RISQ
Merger, all of the shares of the capital stock of RISQ issued and outstanding
prior to the RISQ Merger were exchanged for shares of SMART common stock and
RISQ became a wholly-owned subsidiary of SMART. Pursuant to the RISQ Merger,
SMART issued 368,000 shares of common stock (the "Shares"). On July 25, 1996
after a fairness hearing and pursuant to Section 3(a)(10) of the Securities Act
of 1933, as amended, SMART obtained a permit from the California Department of
Corporations to authorize the issuance of the Shares.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below under the captions
"Consolidated Statement of Income Data" and "Consolidated Balance Sheet Data"
are derived from the consolidated financial statements of the Company and
subsidiaries, which financial statements have been audited by Arthur Andersen
LLP, independent public accountants, to the extent indicated in their reports
included elsewhere herein. 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 have been restated
to include the financial statements of Apex from its inception in May 1992. See
Note 2 to the Consolidated Financial Statements. 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. See Note 2 to the Consolidated Financial Statements.
-16-
<PAGE> 17
The selected consolidated financial data set forth below is qualified in
its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
INCOME DATA:
Net sales ....................... $ 401,774 $ 274,592 $ 163,849 $ 80,810 $ 15,991
Cost of sales ................... 329,644 224,931 132,826 63,542 10,435
--------- --------- --------- --------- ---------
Gross profit .................... 72,130 49,661 31,023 17,268 5,556
Operating expenses:
Research and development ...... 5,933 5,283 5,891 2,224 1,199
Sales and marketing ........... 14,011 11,012 7,562 4,948 875
General and administrative .... 14,533 12,940 7,630 4,681 3,060
--------- --------- --------- --------- ---------
Total operating expenses ... 34,477 29,235 21,083 11,853 5,134
--------- --------- --------- --------- ---------
Income from operations .......... 37,653 20,426 9,940 5,415 422
Other income (expense), net ..... 2,238 (515) (143) 9 73
--------- --------- --------- --------- ---------
Income before provision for
income taxes ................. 39,891 19,911 9,797 5,424 495
Provision for income taxes ...... 14,760 7,344 3,759 2,134 203
--------- --------- --------- --------- ---------
Income before cumulative
effect of change in
accounting principle ......... 25,131 12,567 6,038 3,290 292
Cumulative effect of change
in accounting principle ...... -- -- 121 -- --
--------- --------- --------- --------- ---------
Net income ...................... $ 25,131 $ 12,567 $ 6,159 $ 3,290 $ 292
========= ========= ========= ========= =========
Net income per share(1) ......... $ 1.20 $ 0.72 $ 0.37 $ 0.23 $ 0.02
========= ========= ========= ========= =========
Weighted average common and
common equivalent shares
outstanding(2) ............... 20,874 17,565 16,537 14,339 13,498
========= ========= ========= ========= =========
<CAPTION>
AS OF OCTOBER 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA (In thousands):
Working capital ............... $ 73,301 $ 21,464 $ 12,185 $ 5,719 $ 2,136
Total assets .................. 172,185 91,976 45,612 34,752 7,439
Capital lease obligations,
net of current portion ..... 1,241 1,599 632 142 6
Shareholders' equity .......... 86,619 26,234 13,665 5,598 2,513
</TABLE>
- - ---------------
(1) The cumulative effect of the change in accounting principle did not
materially impact net income per share. See the Consolidated Financial
Statements.
(2) See Note 2 to the Consolidated Financial Statements for an explanation of
the method used to determine the number of shares used in computing net
income per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
SMART Modular Technologies, Inc., a California corporation (the "Company"
or "SMART"), commenced operations in 1989 and initially focused on the design
and manufacture of standard memory modules for original equipment manufacturers
("OEMs") and semiconductor manufacturers. Standard memory modules implement
industry standard specifications, primarily utilize Dynamic Random Access Memory
("DRAM") and are designed to be incorporated into a wide variety of electronic
equipment. In 1991, the Company expanded its design, manufacturing and marketing
efforts to offer specialty memory modules and PC card memory products. Specialty
memory products include both custom and application
-17-
<PAGE> 18
specific products based on DRAM, Static Random Access Memory ("SRAM") or Flash
technologies. The Company expanded its product lines in 1993 by offering a suite
of PC card communication products.
In July 1995, the Company further expanded its PC card communication
products business with the acquisition of Apex Data, Inc., a Delaware
corporation ("Apex"). The Company acquired Apex in a stock for stock
acquisition. The acquisition of Apex has been accounted for as a pooling of
interests; accordingly, the Company's historical results of operations include
Apex's historical results of operations. Apex designs and markets wireless and
wireline PC card data/fax modem, I/O and connectivity products into both the
computer reseller and OEM channels.
In July 1996, the Company expanded its specialized technical capabilities
with the acquisition of RISQ Modular Systems, Inc., a California corporation
("RISQ"). The Company acquired RISQ in a stock for stock acquisition. The
acquisition of RISQ has been accounted for as a pooling of interests. Given the
immateriality of this acquisition to the Company's consolidated financial
position and results of operations, RISQ has been included in the Company's
consolidated results of operations as of the beginning of fiscal 1996 (November
1, 1995) and amounts presented for periods prior to fiscal 1996 have not been
restated to include RISQ's historical results of operations. RISQ designs and
manufactures embedded processor modules and products in both standard and custom
form factors for OEMs in the telecommunications, networking, industrial control
and image processing markets.
In September 1996, the Company expanded its manufacturing capacity by
opening a 25,000 square foot manufacturing facility in East Kilbride, Scotland.
This is the Company's first manufacturing facility outside of the United States
and Puerto Rico.
The Company's net sales and gross profit have increased substantially over
the last three fiscal years. Over the last three fiscal years, SMART's gross
margin has ranged from 18.0% to 18.9%. One of the primary factors affecting
gross margin has been the proportion of the Company's memory products
manufactured on either a turnkey or consignment basis. Products manufactured on
a turnkey basis are designed and manufactured by the Company with purchased
memory devices. Products manufactured on a consignment basis are generally
designed and manufactured by the Company with memory devices which are owned and
supplied by the customer. While products manufactured on a turnkey basis
typically have lower gross margins than products manufactured on a consignment
basis, products manufactured on a turnkey basis generally contribute greater net
sales and higher gross profit per unit than products manufactured on a
consignment basis.
The other primary factor affecting the Company's gross margin has been the
mix between sales of specialty memory, standard memory, embedded processor
module and PC card communication products. A majority of the Company's net sales
are currently derived from the sales of its specialty memory products, which
typically have higher gross margin than the Company's standard memory products.
The Company's embedded processor module products currently generate the
Company's highest gross margin, followed by the Company's PC card communication
products. Both product lines currently contribute the smallest portion of the
Company's net sales.
The Company expects that its gross margin will continue to vary based on
these and other factors, including changes in the selling prices for its
products, pricing by competitors and suppliers, the level of manufacturing
efficiencies achieved and the mix of sales between the OEM and computer reseller
channels. Selling prices of certain of SMART's products have declined in the
past and SMART expects that some prices will continue to decline in the future.
Accordingly, SMART's ability to maintain or increase gross profit 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 in the computer,
networking and telecommunications industries, and, to a lesser extent, to the
computer reseller channel. In fiscal 1996, the Company's top ten customers
accounted for 71% of the Company's net sales. In each of fiscal 1995
-18-
<PAGE> 19
and fiscal 1994, SMART's top ten customers accounted for 68% of the Company's
net sales. While the Company expects to be dependent upon these customers for a
significant percentage of its net sales, the composition of SMART's top ten
customers has changed in recent periods and the Company expects that the
composition of its top ten customers may change in the 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, as well as through
the computer reseller channel. In addition, the Company's strategy calls for
further expansion of its geographic operations, particularly in Europe. The
acquisition of Apex has increased the Company's sales of its PC card products,
and has also contributed to the Company's sales through the computer reseller
channel. International sales accounted for 8% of the Company's net sales in
fiscal 1996 and 14% of the Company's net sales in both fiscal 1995 and fiscal
1994.
The seventh and eighth paragraphs of this Overview 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 "Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--FACTORS THAT MAY AFFECT FUTURE RESULTS." In particular, note the
factors entitled "Significant Customer Concentration," "Intense Competition,"
"Fluctuations in Operating Results," "Dependence on Sole or Limited Sources of
Supply" and "Requirement for Response to Rapid Technological Change." The
discussion of those factors is incorporated herein by this reference as if said
discussion was fully set forth at this point.
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 YEARS ENDED
OCTOBER 31,
-----------------------------------
1996 1995 1994
<S> <C> <C> <C>
Net sales .................................. 100.0% 100.0% 100.0%
Cost of sales .............................. 82.0 81.9 81.1
------ ------ ------
Gross profit ............................... 18.0 18.1 18.9
Operating expenses:
Research and development ................. 1.5 1.9 3.6
Sales and marketing ...................... 3.5 4.0 4.6
General and administrative ............... 3.6 4.7 4.7
------ ------ ------
Total operating expenses ......... 8.6 10.6 12.9
------ ------ ------
Income from operations ..................... 9.4 7.5 6.0
Other income (expense), net ................ 0.6 (0.2) (0.1)
------ ------ ------
Income before provision for income taxes ... 10.0 7.3 5.9
Provision for income taxes ................. 3.7 2.7 2.3
------ ------ ------
Income before cumulative effect of change in
accounting principle ..................... 6.3 4.6 3.6
Cumulative effect of change in accounting
principle ................................ -- -- 0.1
------ ------ ------
Net income ................................. 6.3% 4.6% 3.7%
====== ====== ======
</TABLE>
NET SALES
Fiscal Year Ended 1996 vs 1995. Net sales consist of sales of specialty
memory modules and PC cards, standard memory modules, embedded processor modules
and PC card communication products, less returns and discounts. Net sales
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 secondarily due to an increase in sales of standard memory products
to both existing and new customers.
Fiscal Year Ended 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
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<PAGE> 20
products, such as L2 cache memory modules, to both existing and new customers.
The Company's sales of PC card communication products to both new and existing
customers also 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 on the availability of certain semiconductor memory
devices and the Company's strategy to focus on specialty memory products.
GROSS PROFIT
Fiscal Year Ended 1996 vs 1995. Cost of sales includes the costs of
semiconductor devices and other components and materials purchased by the
company for its products, as well as the direct labor and overhead costs
associated with manufacturing. Gross profit increased 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 memory products manufactured
on a turnkey basis compared to 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 Ended 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 specialty memory
products manufactured on a turnkey basis compared to 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
Fiscal Year Ended 1996 vs 1995. Research and development expenses consist
primarily of the costs associated with the design and testing of new products.
These costs relate primarily to costs of personnel including management and
employee bonuses associated with development efforts, materials and outside
design and testing services. 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. The decrease in research and development expenses as a
percentage of net sales was primarily due to a change in the Company's bonus
structure which rewards the development efforts of certain key management
employees and was partially offset by an overall increase in non-compensation
based research and development expenses.
Fiscal Year Ended 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. The decrease in research and development
expenses was primarily due to the completion of the Company's obligation to fund
certain research and development costs of an affiliated party.
SALES AND MARKETING
Fiscal Year Ended 1996 vs 1995. Sales and marketing expenses include
salaries and commissions of employees and independent sales personnel, as well
as the costs of advertising, promotions and trade shows. Sales and marketing
expenses increased 27.2% to $14.0 million in fiscal 1996 from $11.0 million in
fiscal 1995. The increase in absolute dollars was primarily due to increased
commissions associated with higher sales volumes, an increase in the number of
sales and marketing personnel and the increase of advertising activities
designed to further promote sales of the Company's products. As a percentage of
net sales, sales and marketing expenses decreased to 3.5% in fiscal 1996 from
4.0% in fiscal 1995. The Company expects that sales and marketing expenses will
increase in absolute dollars in future periods, although they may flucuate as a
percentage of net sales.
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<PAGE> 21
Fiscal Year Ended 1995 vs 1994. Sales and marketing expenses increased
45.6% to $11.0 million in fiscal 1995 from $7.6 million in fiscal 1994. The
increase was primarily due to increased commissions associated with higher sales
volumes, an increase in the number of sales and marketing personnel and the
increase of advertising activities designed to further promote sales of the
Company's products. The Company opened one new sales office in fiscal 1995. As a
percentage of net sales, sales and marketing decreased to 4.0% in fiscal 1995
from 4.6% in fiscal 1994.
GENERAL AND ADMINISTRATIVE
Fiscal Year Ended 1996 vs 1995. General and administrative expenses consist
primarily of personnel costs, including performance-based bonuses and employee
benefits, facilities and equipment costs and other support costs including
utilities, insurance and professional fees. General and administrative expenses
increased 12.3% to $14.5 million in fiscal 1996 from $12.9 million in fiscal
1995. As a percentage of net sales, general and administrative expenses
decreased to 3.6% in fiscal 1996 from 4.7% in fiscal 1995. The decrease in
general and administrative expenses as a percentage of net sales was due in part
to the elimination of significant operational costs related to Apex's
operations, which were integrated into the Company's operations during the final
quarter of fiscal 1995. In addition, a change in the Company's bonus structure
for certain key employees contributed to the percentage decrease. The Company
expects that general and administrative expenses will increase in absolute
dollars in future periods, although they may flucuate as a percentage of net
sales.
Fiscal Year Ended 1995 vs 1994. General and administrative expenses
increased 69.6% to $12.9 million in fiscal 1995 from $7.6 million in fiscal
1994. As a percentage of net sales, general and administrative expenses were
4.7% for both fiscal 1995 and fiscal 1994. The increased expenses were primarily
due to costs associated with integrating Apex's operations into SMART's
operations, higher performance-based bonuses, the costs associated with the
opening of a new facility in Puerto Rico and increases in reserves for accounts
receivable.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income, less
interest expense. Interest expense is attributable to the Company's utilization
of its lines of credit. Subsequent to the fiscal 1995 year end, the Company
repaid nearly all outstanding balances on its lines of credit. Interest income
from the proceeds of the Company's initial public offering of its common stock
as well as cash generated from operations has resulted in a significant increase
in other income.
PROVISION FOR INCOME TAXES
Provisions for income taxes were $14.8 million, $7.3 million and $3.8
million in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. The Company's
effective tax rate for these periods was 37.0%, 36.9% and 38.4%, respectively.
The Company expects its consolidated effective tax rate to decrease in future
periods as its Puerto Rican and international operations begin contributing a
larger percentage of the Company's before tax income. At October 31, 1996, the
Company had net operating loss carry-forwards of approximately $1.8 million for
federal income tax purposes and approximately $1.0 million for state income tax
purposes arising from the acquisition of Apex.
SMART adopted Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes" effective November 1, 1993. The cumulative effect
in fiscal 1994 of adopting SFAS No. 109 was to increase net income in fiscal
1994 by $121,000, or $0.01 per share. For a description of the components of the
deferred tax asset recorded by SMART, see Note 8 to the Consolidated Financial
Statements.
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<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, SMART has used funds generated primarily from
operations, certain borrowings and capital leases to support its operations,
acquire capital equipment and finance inventory and accounts receivable. The
Company generated cash from operations totaling $27.0 million and $11.0 million
in fiscal 1996 and fiscal 1995, respectively. In fiscal 1994, the Company's
operations used $4.5 million. At October 31, 1996, SMART had $52.6 million of
cash and cash equivalents, and $73.3 million of working capital. At October 31,
1995, the Company had $13.1 million of cash and cash equivalents, and $21.5
million of working capital. The $32.6 million proceeds generated from the
Company's initial public offering of its common stock during fiscal 1996
contributed to the increase in cash and cash equivalents and working capital.
Prior to fiscal 1996, the Company primarily funded its financing and investing
deficits from amounts borrowed under the existing lines of credit and
utilization of existing cash balances. The Company expects to fund any future
deficits in operating, investing and financing activities from a combination of
available cash reserves and certain short term borrowings.
SMART has two revolving lines of credit aggregating $20.0 million which are
secured by substantially all of SMART's assets with terms expiring in February
1997. The Company expects to renew these line of credit agreements upon
expiration. Amounts available for borrowing under the Company's existing lines
of credit are limited to the lower of the commitment amount or a borrowing base
amount calculated based on certain levels of inventory and accounts receivable.
At October 31, 1996, no borrowings were outstanding under the lines of credit
and $20.0 million was available for borrowing. At October 31, 1995, $3.6 million
was outstanding and $16.4 million was available for borrowing under the lines of
credit. Subsequent to fiscal 1995 year end, the Company repaid the outstanding
balances on its lines of credit with a portion of the proceeds from the
Company's initial public offering of its common stock. The lines of credit have
restrictions on the payment of dividends and require SMART to maintain certain
minimum financial covenants including the maintenance of minimum tangible net
worth and minimum annual cash flow.
Capital expenditures totaled approximately $9.0 million, $5.4 million and
$1.5 million in fiscal 1996, fiscal 1995 and fiscal 1994, 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 plans on
spending between $8.0 million and $12.0 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 at October 31, 1996 was approximately $2.7
million. See Note 4 to the Consolidated Financial Statements.
From time to time, SMART evaluates acquisitions of businesses, products or
technologies that complement the business of SMART. SMART 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 SMART's working capital or
require the issuance of debt or equity.
SMART believes that the net proceeds from its initial public offering of
its common stock (effective November 17, 1995), together with existing funds,
anticipated cash flow from operations and amounts available under its existing
lines of credit, will be sufficient to meet its working capital and capital
expenditure requirements for the next 12 months.
The first, third and sixth paragraphs of this Liquidity and Capital
Resources section contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the factors set forth in "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
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<PAGE> 23
OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE RESULTS." In particular, note the
factors entitled "Significant Customer Concentration," "Intense Competition,"
"Fluctuations in Operating Results," "Dependence on Sole or Limited Sources of
Supply" and "Requirement for Response to Rapid Technological Change." The
discussion of those factors is incorporated herein by this reference as if said
discussion was fully set forth at this point.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business, financial condition and results of operations can be
impacted by a number of factors including without limitation the following
factors.
SIGNIFICANT CUSTOMER CONCENTRATION
A relatively small number of customers have accounted for a significant
percentage of the Company's net sales. In fiscal 1996 and fiscal 1995, the
Company's ten largest customers accounted for 71% and 68% of net sales,
respectively. In fiscal 1996, the Company's top three customers as a percentage
of net sales accounted for 19%, 15% and 12% of net sales, respectively. During
fiscal 1996, no other customers accounted for more than 10% of net sales. In
fiscal 1995, the Company's top three customers as a percentage of net sales
accounted for 18%, 15% and 10% of net sales, respectively. During fiscal 1995,
no other customers accounted for more than 10% of net sales. The Company expects
to continue to be dependent upon these customers for a significant percentage of
its net sales. However, there can be no assurance that any of these customers
and/or any of the Company's other significant customers will continue to utilize
the Company's products at current levels, if at all. The Company expects that
sales to relatively few customers will continue to account for a significant
percentage of its net sales in the foreseeable future and believes that its
financial results will depend in significant part upon the success of its
customers' products. The loss of a major customer or any reduction in orders by
any such customer would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company generally has no firm long-term volume commitments from its
customers and generally enters into individual purchase orders with its
customers. The Company has experienced cancellations of orders and fluctuations
in order levels from period to period and expects it will continue to experience
such cancellations and fluctuations in the future. In addition, customer
purchase orders may be canceled and order volume levels can be changed, canceled
or delayed with limited or no penalties. The replacement of canceled, delayed or
reduced purchase orders with new business cannot be assured. Moreover, the
Company's business, financial condition and results of operations will depend in
significant part upon its ability to obtain orders from new customers, as well
as the financial condition and success of its customers, its customers' products
and the general economy. The factors affecting any of the Company's major
customers or their customers could have a material adverse effect on the
Company's business, financial condition and results of operations.
INTENSE COMPETITION
The memory module, PC card and embedded processor module industries are
intensely competitive. The memory module, PC card and embedded processor module
markets are each comprised of a large number of competitive companies, several
of which have achieved a substantial share of their respective markets. Certain
of the Company's competitors in each of these markets have substantially greater
financial, marketing, technical, distribution and other resources, greater name
recognition, lower cost structures and larger customer bases than the Company.
In the OEM memory module market, the Company competes against semiconductor
manufacturers that maintain captive memory module production capabilities,
including Integrated Device Technology, Inc., Micron Electronics, Inc. (a
subsidiary of Micron Technology Inc.) and Multichip Technology, Inc. (a division
of Cypress Semiconductor Corporation). The Company also competes with
independent memory module manufacturers, including Celestica Inc., PNY
Electronics, Inc. and Simple Technology Incorporated. In
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<PAGE> 24
the computer systems reseller market for memory modules, the Company primarily
competes with Kingston Technology, Inc., Viking Technology, Inc. and Vision Tek,
Inc. In the PC card market, the Company competes with Centennial Technologies,
Inc., Hayes Microcomputer Products, Inc. and U.S. Robotics, Inc. In the
embedded processor module market, the Company competes with Force Computers
Inc.(a subsidiary of Solectron Corporation), Motorola, Inc. and Radisys
Corporation. The Company faces competition from current and prospective
customers that evaluate the Company's capabilities against the merits of
manufacturing products internally. In addition, the Company competes and expects
to continue to compete with certain of its suppliers. These suppliers may have
the ability to manufacture competitive products at lower costs than the Company
as a result of their higher levels of integration. The Company also faces and
may face competition from new and emerging companies that have recently entered
or may in the future enter the markets in which the Company serves.
The Company expects its competitors to continue to improve the performance
of their current products, to reduce their current product sales prices and to
introduce new products that may offer greater performance and improved pricing,
any of which could cause a decline in sales or loss of market acceptance of the
Company's products and thereby have a material adverse effect on the Company's
business, financial condition and results of operations.
There can be no assurance that enhancements to or future generations of
competitive products will not be developed that offer superior prices and
technical performance features compared to the Company's products. To be
competitive, the Company must continue to provide technologically advanced
products and manufacturing services, maintain quality levels, offer flexible
delivery schedules, deliver finished products on a reliable basis and compete
favorably on the basis of price. In addition, increased competitive pressure has
led in the past and may continue to lead to intensified price competition,
resulting in lower prices and gross margin, which could materially adversely
affect the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to compete successfully
in the future.
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations and gross margin have in the past
fluctuated significantly and may in the future continue to fluctuate
significantly from period to period. The primary factors that have affected and
may in the future affect the Company's results of operations include the loss of
a principal customer or the short term loss of a customer due to product
inventory accumulation by the customer, adverse changes in the mix of products
sold by the Company and the inability to procure required components. Other
factors that may affect the Company's results of operations in the future
include fluctuating market demand for, and declines in the selling prices of
the Company's products, market acceptance of new products and enhanced versions
of the Company's products, delays in the introduction of new products and
enhancements to existing products, manufacturing inefficiencies associated with
the start up of new product introductions, the timing of new product
announcements and releases by the Company or its competitors, the timing of
significant orders, the ability to volume produce products and meet customer
requirements, patterns of spending by customers, delays, cancellations or
reschedulings of orders due to customer financial difficulties or other events,
inventory obsolescence, including the reduction in value of the Company's
inventories due to unexpected price declines, unexpected product returns, the
timing of expenditures in anticipation of increased sales, cyclicality in the
Company's targeted markets, regulatory changes and expenses associated with
acquisitions. In particular, since the fiscal 1996 year end, there have been
declines in DRAM, Flash and SRAM semiconductor prices that could affect the
valuation of the Company's inventory.
In addition, operating results in future periods may be impacted by general
economic conditions and various competitive factors, including price-based
competition and competition from other parties employing competing technologies.
The Company's operating results could also be affected in any given period by
business interruptions or costs associated with an earthquake, hurricanes, fire,
theft or other similar events outside the control of the Company, which events
may not be fully covered, or covered at all, by applicable insurance coverages.
The concentration of the Company's assets in its Fremont,
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<PAGE> 25
California facility could make the Company's exposure to such events greater
than if the Company's assets were more geographically dispersed.
The Company's gross margin has varied and will continue to vary
significantly based on a variety of factors, including the mix of products sold
and the manufacturing services provided, the channels through which the
Company's products are sold, declines in product selling prices and component
costs, the level of manufacturing efficiencies achieved and pricing by
competitors or suppliers. The selling prices of the Company's existing products
have declined in the past and the Company expects that prices will continue to
decline in the future. In particular, during fiscal 1996, the selling prices of
the Company's existing products declined due to significant declines in SRAM and
DRAM semiconductor prices and declines in Flash semiconductor prices. Moreover,
since the fiscal 1996 year end, declines in the selling prices of the Company's
existing products have continued due to further declines in DRAM, SRAM and Flash
semiconductor prices. Accordingly, the Company's ability to maintain or increase
net sales will be highly dependent upon its ability to increase unit sales
volumes of existing products and to introduce and sell new products in
quantities sufficient to compensate for the anticipated declines in selling
prices. Declining product selling prices may also materially adversely affect
the Company's gross margin unless the Company is able to reduce its cost per
unit to offset declines in product selling prices. There can be no assurance
that the Company will be able to increase unit sales volumes, introduce and sell
new products or reduce its cost per unit. In addition, the Company's business
has in the past been subject to seasonality, although the Company believes such
seasonality has been masked by its recent growth.
Sales of the Company's individual products and product lines toward the end
of a product's life cycle are typically characterized by steep declines in
sales, pricing and gross margin, the precise timing of which may be difficult to
predict. The Company could experience unexpected reductions in sales of products
as customers anticipate new product purchases. These factors could give rise to
charges for obsolete or excess inventory, returns of products by distributors,
or substantial price protection charges or discounts. In the past, the Company
has had to write-down and write-off obsolete or excess inventory. To the extent
that the Company is unsuccessful in managing product transitions, its business,
financial condition and results of operations could be materially adversely
affected. The Company's results of operations are also affected by the value of
the United States dollar due to the fact that the Company purchases components
from foreign suppliers and that the Company sells its products outside of the
United States. Fluctuations in the value of the United States dollar in relation
to foreign currencies could increase the cost of certain components for the
Company's products and could make the price of the Company's products in foreign
countries more expensive compared to the price of other companies' products
denominated in other currencies.
The need for continued significant expenditures for capital equipment
purchases, research and development and ongoing customer service and support,
among other factors, will make it difficult for the Company to reduce its
operating expenses in any particular period if the Company's net sales for that
period are not met. The Company has significantly increased its expense levels
to support its recent growth, and there can be no assurance that the Company
will maintain its current level of net sales or rate of growth for any period in
the future. Accordingly, there can be no assurance that the Company will be able
to be profitable or that it will not sustain losses in future periods. The
Company believes that period-to-period comparisons of the Company's financial
results are not necessarily meaningful and should not be relied upon as
indications of future performance. Due to the foregoing factors, it is likely
that in some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's securities may be materially adversely affected.
DEPENDENCE ON SOLE OR LIMITED SOURCES OF SUPPLY
The Company is dependent on certain suppliers, including limited and sole
source suppliers, to provide key components used in the Company's products. In
particular, the Company is dependent in significant part upon certain limited or
sole source suppliers for critical components in the Company's memory module,
embedded processor module and PC card products. The Company also depends on sole
source third party manufacturers to produce certain of the Company's embedded
processor module
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<PAGE> 26
products. The electronics industry has experienced in the past and may
experience in the future shortages in semiconductor devices, including DRAM,
SRAM and Flash memory. The Company has experienced and may continue to
experience delays in component deliveries and quality problems with respect to
certain component deliveries which have caused and could in the future cause
delays in product shipments and have required and could in the future require
the redesign of certain products. The Company generally has no written
agreements with its suppliers. The inability to continue to obtain sufficient
supplies of components as required, or to develop alternative sources if
required, could cause delays, disruptions or reductions in product shipments or
require product redesigns which could damage relationships with current or
prospective customers, could increase prices and could have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will receive adequate component
supplies on a timely basis in the future.
MANAGEMENT OF GROWTH; EXPANSION OF OPERATIONS
The Company has significantly expanded its operations over the last several
years. This growth has resulted in a significant increase in responsibility for
existing management which has placed, and may continue to place, a significant
strain on the Company's limited personnel and management, manufacturing and
other resources. The Company's ability to manage the recent and any possible
future growth will depend upon a significant expansion of its manufacturing,
accounting and other internal management systems and the implementation of a
variety of procedures and controls. There can be no assurance that significant
problems in these areas will not occur. Any failure to expand these systems and
implement such procedures and controls in an efficient manner and at a pace
consistent with the Company's business could have a material adverse effect on
the Company's business, financial condition and results of operations.
In connection with the Company's recent growth, the Company's operating
expenses have increased significantly and the Company anticipates that operating
expenses will continue to increase in absolute dollars in the future. In
particular, in order to continue to provide customer service and quality
products and to meet any anticipated demand of its customers, the Company will
be required to continue to increase staffing and other expenses, including
expenditures on capital equipment, sales and marketing. Should the Company
increase its expenditures in anticipation of a future level of sales that does
not materialize, the Company's business, financial condition and results of
operations would be materially adversely affected. Certain customers have
required and may continue to require rapid increases in production and
accelerated delivery schedules which have placed and may continue to place an
excessive burden on the Company's resources. In order to achieve anticipated
sales levels and profitability, the Company will continue to be required to
manage its assets and operations efficiently. In addition, should the Company
continue to expand geographically, it may experience certain inefficiencies from
the management of geographically dispersed facilities.
DEPENDENCE ON SEMICONDUCTOR, COMPUTER, TELECOMMUNICATIONS AND NETWORKING
INDUSTRIES
The semiconductor industry has been characterized by cyclical market
conditions. This industry has experienced significant economic downturns at
various times, characterized by diminished product demand, accelerated erosion
of average selling prices and production overcapacity. During fiscal 1996, there
were significant declines in DRAM and SRAM semiconductor prices and declines in
Flash semiconductor prices. Since the fiscal 1996 year end, there have been
continued declines in DRAM, Flash and SRAM semiconductor prices. These price
declines as well as any future price declines could have a material adverse
effect on the Company's business, financial condition and results of operations.
Furthermore, the Company may experience substantial period-to-period
fluctuations in future operating results due to general industry conditions or
events occurring in the general economy. From time to time, the computer,
telecommunications and networking industries, like the semiconductor industry,
have experienced significant downturns, often in connection with, or in
anticipation of, declines in general economic conditions. Accordingly, any
factor adversely affecting the semiconductor, computer, telecommunications or
networking industries or particular segments within the semiconductor, computer,
telecommunications or networking industries, such as the market for memory
products, could materially
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<PAGE> 27
adversely affect the Company's business, financial condition and results of
operations. There can be no assurance that the Company's net sales and results
of operations will not be materially adversely affected in the future if
downturns or slowdowns occur in the semiconductor, computer, telecommunications,
networking or other industries utilizing the Company's products.
REQUIREMENT FOR RESPONSE TO RAPID TECHNOLOGICAL CHANGE
The semiconductor, computer, telecommunications and networking industries
are subject to rapid technological change, short product life cycles, frequent
new product introductions and enhancements, changes in end-user requirements and
evolving industry standards. The Company's ability to be competitive in these
markets will depend in significant part upon its ability to invest significant
amounts for research and development efforts and to successfully develop,
introduce and sell new products and enhancements on a timely and cost-effective
basis that respond to changing customer requirements and that meet evolving
industry standards. For example, the industry standard modem is currently
changing from a 33,600 bits per second ("bps") synchronous modem to a 56,000 bps
asynchronous modem. The Company is currently focusing its research and
development resources on the development of DRAM, particularly SDRAM, Flash and
SRAM products, 56,000 bps asynchronous modem products and various embedded
processor modules. Any success of the Company in developing new and enhanced
products will depend upon a variety of factors, including integration of the
various elements of its complex technology, timely and efficient completion of
product design, timely and efficient implementation of manufacturing and
assembly processes, availability of production capacity, achievement of
acceptable manufacturing yields and product performance, quality and
reliability. The Company has experienced and may in the future experience delays
from time to time in development and introduction of new products. Moreover,
there can be no assurance that the Company will be successful in selecting,
developing, manufacturing and marketing new products or enhancements. There can
be no assurance that defects or errors will not be found in the Company's
products after commencement of commercial shipments, which could result in the
loss of or delay in market acceptance. The inability of the Company to introduce
in a timely manner new products or enhancements that contribute to sales could
have a material adverse effect on the Company's business, financial condition
and results of operations.
ACQUISITIONS
In July 1995, the Company acquired Apex, a designer, developer and marketer
of wireline, wireless and LAN PC card data communication products for the mobile
computing market. Apex incurred a net loss during its fiscal year ended March
31, 1994 and its accountants qualified their audit report dated July 12, 1994
with a going concern qualification. There can be no assurance that Apex's or the
Company's operations will be profitable after the acquisition. In July 1996, the
Company acquired RISQ, a designer, developer and marketer of embedded processor
module products for the telecommunications, networking, industrial control and
image processing markets. RISQ incurred a net loss during the nine month period
ended July 31, 1996. There can be no assurance that RISQ's or the Company's
operations will be profitable after the acquisition. The acquisitions of Apex,
RISQ or other companies have involved or may involve numerous risks, including
difficulties in the assimilation of the operations, technologies and products of
the acquired company, unexpected liabilities, unforeseen operating difficulties,
the diversion of management's attention from other business concerns, risks of
entering markets in which the Company has no or limited direct prior experience,
dilutive issuances of equity securities, the potential loss of key employees and
the use of cash and other resources that would otherwise be available for the
ongoing development of the Company's business. There can be no assurance that
the anticipated benefits of the Apex and RISQ acquisitions will be realized.
NEW FACILITIES
In September 1996, the Company opened a new manufacturing facility in East
Kilbride, Scotland. The Company has never operated a manufacturing facility
outside of the United States and Puerto Rico. The Company is currently operating
two production lines at this facility and plans to add additional production
lines in the future. There can be no assurance that the Company will be able to
successfully add the
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additional production lines, that the Company can operate the new facility on a
cost effective basis or that the Company can integrate the new operations with
its operations in Fremont, California and Arecibo, Puerto Rico. Any inability to
begin additional production at this new facility as scheduled or to manage the
operations at this facility efficiently could have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future operating results depend in significant part upon the
continued contributions of its key technical and senior management personnel,
many of whom would be difficult to replace. None of such persons, including the
executive officers, has an employment agreement with the Company. With the
exception of certain employees associated with RISQ's operations, none of such
persons, including the executive officers, has a non-competition agreement with
the Company. The Company's future operating results also depend in significant
part upon its ability to attract and retain qualified management, manufacturing
and quality assurance, engineering, marketing, sales and support personnel. The
Company is actively recruiting such personnel. However, competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting or retaining such personnel now or in the future. There
may be only a limited number of persons with the requisite skills to serve in
these positions and it may be increasingly difficult for the Company to hire
such persons over time. The loss of any key employee, the failure of any key
employee to perform in his or her current position, the Company's inability to
attract and retain skilled employees as needed or the inability of the officers
and key employees of the Company to expand, train and manage the Company's
employee base could materially adversely affect the Company's business,
financial condition and results of operations.
INTERNATIONAL SALES
International sales accounted for 8% of net sales in fiscal 1996 and 14% of
net sales in each of fiscal 1995 and 1994. In September 1996, the Company opened
a new manufacturing facility in East Kilbride, Scotland. The Company anticipates
that international sales will continue to account for a portion of net sales. As
a result, a portion of the Company's sales will be subject to certain risks,
including changes in regulatory requirements, tariffs and other barriers, timing
and availability of export licenses, political and economic instability,
difficulties in accounts receivable collections, natural disasters, difficulties
in staffing and managing foreign subsidiary and branch operations, difficulties
in managing distributors, difficulties in obtaining governmental approvals for
telecommunications and other products, foreign currency exchange fluctuations,
the burden of complying with a wide variety of complex foreign laws and treaties
and potentially adverse tax consequences. The Company is also subject to the
risks associated with the imposition of legislation and regulations relating to
the import or export of high technology products. The Company cannot predict
whether quotas, duties, taxes or other charges or restrictions upon the
importation or exportation of the Company's products will be implemented by the
United States or other countries. Fluctuations in currency exchange rates could
cause the Company's products to become relatively more expensive to customers in
a particular country, leading to a reduction in sales or profitability in that
country. Although the Company's sales are currently denominated primarily in
United States dollars, future international activity may result in increased
foreign currency denominated sales. Gains and losses on the conversion to United
States dollars of accounts receivable and accounts payable arising from
international operations may contribute to fluctuations in the Company's results
of operations. Some of the Company's customer purchase orders and agreements are
governed by foreign laws, which may differ significantly from United States
laws. Therefore, the Company may be limited in its ability to enforce its rights
under such agreements and to collect damages, if awarded. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company's business, financial condition and results of operations.
NO ASSURANCE OF PRODUCT QUALITY, PERFORMANCE AND RELIABILITY
The Company expects that its customers will continue to establish demanding
specifications for quality, performance, reliability and delivery. In the past,
the Company has experienced quality problems
-28-
<PAGE> 29
resulting in product returns and cancellations. To date, the Company's quality
problems have not had a significant effect on the Company's results of
operations and the known quality problems have been or are in the process of
being remedied. There can be no assurance that problems will not occur in the
future with respect to the quality, performance, reliability and delivery of the
Company's products. If such problems occur, the Company could experience
increased costs, delays in or cancellations or reschedulings of orders or
shipments, delays in collecting accounts receivable and increases in product
returns and discounts, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
UNCERTAINTY REGARDING PROTECTION OF PROPRIETARY RIGHTS
The Company attempts to protect its intellectual property rights through a
variety of measures including non-disclosure agreements, trademarks, trade
secrets and to a lesser extent patents. There can be no assurance, however, that
such measures will provide adequate protection for the Company's trade secrets
or other proprietary information, that disputes with respect to the ownership of
its intellectual property rights will not arise, that the Company's trade
secrets or proprietary technology will not otherwise become known or be
independently developed by competitors or that the Company can otherwise
meaningfully protect its intellectual property rights. There can be no assurance
that patents will issue from future applications or that, if patents are issued,
they will not be challenged, invalidated or circumvented, or that rights granted
thereunder will provide meaningful protection or other commercial advantage to
the Company. Furthermore, there can be no assurance that third parties will not
develop similar products, duplicate the Company's products or design around the
patents owned by the Company or that third parties will not assert intellectual
property infringement claims against the Company. In addition, there can be no
assurance that foreign intellectual property laws will adequately protect the
Company's intellectual property rights abroad. The failure of the Company to
protect its proprietary rights could have a material adverse effect on its
business, financial condition and results of operations.
In the semiconductor, computer, telecommunications and networking
industries, it is typical for companies to receive notices from time to time
alleging infringement of patents, copyrights or other intellectual property
rights of others. While there is currently no material pending intellectual
property litigation involving the Company, the Company has been and may from
time to time continue to be notified of claims that it may be infringing
patents, copyrights or other intellectual property rights owned by third
parties. There can be no assurance that these or other companies will not in the
future pursue claims against the Company with respect to the alleged
infringement of patents, copyrights or other intellectual property rights owned
by third parties. In addition, litigation may be necessary to protect the
Company's intellectual property rights and trade secrets, to determine the
validity of and scope of the proprietary rights of others or to defend against
third party claims of invalidity. Any litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, financial condition and results of operations.
There can be no assurance that infringement, invalidity, right to use or
ownership claims by third parties or claims for indemnification resulting from
infringement claims will not be asserted in the future. The Company has also
entered into license agreements in the past regarding certain alleged
infringement claims asserted by third parties. If any other claims or actions
are asserted against the Company, the Company may again seek to obtain a license
under a third party's intellectual property rights. There can be no assurance,
however, that a license will be available under reasonable terms or at all. The
failure to obtain a license under a patent or intellectual property right from a
third party for technology used by the Company could cause the Company to incur
substantial liabilities and to suspend the manufacture of the products utilizing
the invention. In addition, should the Company decide to litigate such claims,
such litigation could be extremely expensive and time consuming and could
materially adversely affect the Company's business, financial condition and
results of operations, regardless of the outcome of the litigation.
-29-
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and the report of the independent
auditors appear on pages F-1 through F-23 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
Certain information required by Part III is omitted from this Annual Report
on Form 10-K because the Registrant will file a definitive proxy statement for
its Annual Meeting of Shareholders currently scheduled for April 4, 1997 (the
"Proxy Statement") with the Securities and Exchange Commission within one
hundred twenty (120) days after the end of its fiscal year pursuant to
Regulation 14A, and certain information included in the Proxy Statement is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
information in the Registrant's Proxy Statement under the headings "Election of
Directors" and "Other Information - Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information in the Registrant's Proxy Statement under the headings "Other
Information - Executive Compensation," "Other Information - Option Grants in
Last Fiscal Year," and "Other Information - Aggregate Option Exercises in Last
Fiscal Year and Fiscal Year End Option Values."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference to the
information in the Registrant's Proxy Statement under the headings "Information
Concerning Solicitation and Voting - Record Date and Shares Outstanding" and
"Other Information - Security Ownership of Certain Beneficial Owners and
Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information in the Registrant's Proxy Statement under the headings "Other
Information - Compensation Committee Interlocks and Insider Participation" and
"Other Information - Certain Transactions."
-30-
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements. The following Consolidated Financial
Statements of SMART Modular Technologies, Inc. are filed as part of this
report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORTS OF INDEPENDENT PUBLIC ACCOUNTS
Report of Arthur Andersen LLP F-2
Report of BDO Seidman LLP F-3
(Related financial statements not included herein)
Consolidated Balance Sheets as of October 31, 1996 and 1995 F-4
Consolidated Statements of Income for the Years Ended October 31,
1996, 1995 and 1994 F-5
Consolidated Statements of Shareholders' Equity for the Years Ended
October 31, 1996, 1995 and 1994 F-6
Consolidated Statements of Cash Flows for the Years Ended October 31,
1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
2. Financial Statement Schedules. The following financial statement
schedules of SMART Modular Technologies, Inc. for the years ended October
31, 1996, 1995 and 1994 are filed as part of this report and should be read
in conjunction with the Consolidated Financial Statements of SMART Modular
Technologies, Inc.:
<TABLE>
<CAPTION>
Schedule Page
-------- ----
<S> <C>
Report of Independent Public Accountants on Schedule F-21
Valuation and Qualifying Accounts F-22
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes
thereto.
-31-
<PAGE> 32
3. Exhibits. The following exhibits are filed as part of this report:
2.1(1) Agreement and Plan of Reorganization among the Registrant, Apex
Data, Inc. and SMART Acquisition, Inc. dated April 24, 1995
3.1(1) Registrant's Amended and Restated Articles of Incorporation.
3.2(1) Registrant's Amended Bylaws.
4.1(1) Registration Rights Agreement dated July 26, 1995.
4.2(1) Registrant's specimen stock certificate.
4.3(3) Termination to the Registration Rights Agreement dated July 26,
1995.
10.1(1) 1989 Incentive Stock Plan, as amended, and forms of agreements
attached thereto.
10.2(1) 1995 Employee Stock Purchase Plan, and forms of agreements attached
thereto.
10.3(1) 1995 Director Option Plan, and forms of agreements attached
thereto.
10.4(1) 1995 Stock Plan, and forms of agreements attached thereto.
10.5(1) Form of Indemnification Agreement between the Registrant and its
officers, directors and certain significant employees.
10.6(1) Standard Triple Net Industrial Lease between the Registrant and
Pactel Properties dated November 18, 1991.
10.7(1) First Amendment to Lease between the Registrant and Pactel
Properties dated July 19, 1993.
10.8(1) Second Amendment to Lease between the Registrant and Riggs National
Bank of Washington, D.C. as Trustee of the Multi-Employer Property
Trust Northport Business Park, a National Banking Association dated
May 31, 1994.
10.9(1) Third Amendment to Lease between the Registrant and Riggs National
Bank of Washington, D.C. as Trustee of the Multi-Employer Property
Trust Northport Business Park, a National Banking Association dated
November 1994.
10.10(1) Standard Triple Net Industrial Lease between the Registrant and
Riggs National Bank of Washington, D.C., as Trustee of the
Multi-Employer Property Trust, dated June 18, 1995.
10.11(1) Lease Contract between the Registrant and The Puerto Rico
Industrial Development Company dated April 24, 1995.
10.12(1) Note, Loan and Security Agreement between the Registrant and
Merrill Lynch Business Financial Services Inc. dated May 19, 1993.
10.13(1) Letter Agreement between the Registrant and Merrill Lynch Business
Financial Services Inc. dated December 28, 1994.
10.14(1) Letter Agreement between the Registrant and Merrill Lynch Business
Financial Services Inc. dated June 27, 1995.
10.15(1) Intercreditor Agreement among the Registrant, Merrill Lynch
Business Financial Services Inc. and Imperial Bank dated June 27,
1995.
10.16(1) Security and Loan Agreement between the Registrant and Imperial
Bank dated July 19, 1995.
*10.17(1) License and Supply Agreement between the Registrant and Krypton
Isolation, Inc. dated July 22, 1994.
10.18(1) Warrant Purchase Agreement between the Registrant and Krypton
Isolation, Inc. dated July 27, 1994.
10.19(1) Holders' Agreement dated July 27, 1994 by and among Krypton
Isolation, Inc. and certain individuals and entities identified on
Exhibit A attached thereto.
10.20(1) Common Stock Purchase Agreement dated July 27, 1994 by and among
Krypton Isolation, Inc. and the individuals identified on Exhibit A
attached thereto.
10.21(1) First Amendment to the Krypton Isolation, Inc. Warrant to Purchase
2,000,000 Shares of Series A Preferred Stock between the Registrant
and Krypton Isolation, Inc. dated October 24, 1995.
10.22(1) Letter of Intent dated as of October 24, 1995 by and among Krypton
Isolation, Inc., the Registrant and certain individuals identified
on the signature pages thereto.
**10.23(2) License and Supply Agreement between the Registrant and Krypton
Isolation, Inc. dated January 29, 1996.
10.24(2) Warrant Purchase Agreement between the Registrant and Krypton
Isolation, Inc. dated January 29, 1996.
10.25(2) First Amended and Restated Holders' Agreement dated January 29,
1996 by and among Krypton Isolation, Inc. and certain individuals
and entities identified on Exhibit A attached thereto.
10.26(2) Common Stock Agreement dated January 29, 1996 by and among Krypton
Isolation, Inc. and the entities identified on Exhibit A attached
thereto.
10.27(2) First Amendment to the License and Supply Agreement between the
Registrant and Krypton Isolation, Inc. dated January 29, 1996.
10.28(3) 1989 Incentive Stock Plan, as amended, dated March 25, 1996.
16.1(1) Letter Regarding Change in Certifying Accountant.
16.2(1) Letter Regarding Change in Certifying Accountant.
16.3(1) Letter Regarding Change in Certifying Accountant.
16.4(1) Letter Regarding Change in Certifying Accountant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Certified Public Accountants.
23.2 Consent of Independent Certified Public Accountants.
24.1 Power of Attorney (included on page 34).
27.1 Financial Data Schedule for the Fiscal Year Ended
October 31, 1996.
- - ---------------
(1) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 33-97748) filed October 4, 1995,
Amendment No. 1 thereto filed October 24, 1995, Amendment No. 2 thereto
filed November 6, 1995, Amendment No. 3 thereto filed November 14, 1995 and
Amendment No. 4 thereto filed November 16, 1995, which Registration
Statement became effective November 16, 1995.
(2) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-Q filed March 16, 1996.
(3) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-Q filed June 14, 1996.
-32-
<PAGE> 33
* Pursuant to Rule 406(b) under the Securities Act of 1933, confidential
treatment has been granted to certain portions of this exhibit, which
portions have been deleted and filed separately with the Securities and
Exchange Commission.
** Pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
confidential treatment has been granted to certain portions of this
exhibit, which portions have been deleted and filed separately with the
Securities and Exchange Commission.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of fiscal
1996.
(c) Exhibits.
See Item 14(a)(3) above.
(d) Financial Statement Schedules.
See Item 14(a)(2) above.
-33-
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
SMART MODULAR TECHNOLOGIES, INC.
By: /s/ AJAY SHAH
--------------------------------
Ajay Shah
President and Chief
Executive Officer
Dated: January 27, 1997
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 any or all amendments to this report on Form
10-K, 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. Witness our hands on the date set forth below.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ AJAY SHAH President, Chief January 27, 1997
- - ---------------------------- Executive Officer and
Ajay Shah Chairman of the Board
of Directors
(Principal Executive
Officer)
/s/ MUKESH PATEL Vice President and January 27, 1997
- - ---------------------------- General Manager
Mukesh Patel Memory Product Line
and Director
/s/ DAVID MULLIN Vice President, January 27, 1997
- - ---------------------------- Finance and
David Mullin Chief Financial
Officer (Principal
Financial and
Accounting Officer)
/s/ ERIK ANDERSON Director January 27, 1997
- - ----------------------------
Erik Anderson
/s/ TOR R. BRANHAM Director January 27, 1997
- - ----------------------------
Tor R. Braham
-34-
<PAGE> 35
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
Report of Arthur Andersen LLP F-2
Report of BDO Seidman LLP F-3
(Related financial statements not included herein)
CONSOLIDATED BALANCE SHEETS F-4
CONSOLIDATED STATEMENTS OF INCOME F-5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SCHEDULE F-21
SCHEDULE II - Valuation and Qualifying Accounts F-22
SUPPLEMENTARY CONSOLIDATED FINANCIAL DATA F-23
F-1
<PAGE> 36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SMART Modular Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of SMART
Modular Technologies, Inc. (a California Corporation) and subsidiaries as of
October 31, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended October 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of Apex Data, Inc. as of December 31, 1994
and for the year ended December 31, 1994. As discussed in Note 2, Apex Data,
Inc. was acquired in July 1995 in a transaction accounted for as a pooling of
interests. The financial statements of Apex Data, Inc. are included in the
consolidated financial statements of SMART Modular Technologies, Inc. and
reflect net sales of 14% of the related consolidated total for the year ended
October 31, 1994. These statements were audited by other auditors whose report
has been furnished to us and our opinion, insofar as it relates to amounts
included for Apex Data, Inc., is based solely upon the report of other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of SMART Modular Technologies, Inc.
and subsidiaries as of October 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1996 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Jose, California
November 27, 1996
F-2
<PAGE> 37
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Apex Data, Inc. and Subsidiary
Pleasanton, California
We have audited the accompanying consolidated balance sheet of Apex Data, Inc.
and Subsidiary as of December 31, 1994, and the related consolidated statement
of operations, stockholders' equity, and cash flows for the year then ended (not
presented separately herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As described in Note 12, the Company entered into an agreement to merge with
another company subsequent to December 31, 1994.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Apex Data, Inc. and
Subsidiary as of December 31, 1994, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
San Francisco, California
September 8, 1995
F-3
<PAGE> 38
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 52,568 $13,059
Short term investments 7,471 --
Accounts receivable, net of allowance for doubtful accounts of
$583 and $443, respectively 52,806 27,355
Related party notes receivable 36 153
Inventories 39,001 40,882
Deferred income taxes 3,848 2,627
Prepaid expenses and other 1,065 1,141
-------- -------
Total current assets 156,795 85,217
Property and equipment, net 13,434 6,582
Long term investments 1,023 --
Related party notes receivable, net of current portion 177 146
Other 756 31
-------- -------
Total assets $172,185 $91,976
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 66,206 $50,628
Lines of credit -- 3,598
Accrued bonuses 4,212 3,645
Other accrued expenses 6,886 4,104
Income taxes payable 6,190 1,778
-------- -------
Total current liabilities 83,494 63,753
Long-term Liabilities:
Capital lease obligations, net of current portion 1,241 1,599
Deferred income taxes 831 390
-------- -------
Total liabilities 85,566 65,742
-------- -------
Shareholders' Equity:
Common stock, no par value --
Authorized -- 100,000,000 shares
Outstanding -- 18,858,163, and 14,653,005 shares, respectively 37,321 2,222
Shareholder notes receivable related to common stock issuances (452) (501)
Retained earnings 49,750 24,513
-------- -------
Total shareholders' equity 86,619 26,234
-------- -------
Total liabilities and shareholders' equity $172,185 $91,976
======== =======
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE> 39
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED OCTOBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net sales $401,774 $274,592 $163,849
Cost of sales 329,644 224,931 132,826
-------- -------- --------
Gross profit 72,130 49,661 31,023
-------- -------- --------
Operating expenses:
Research and development 5,933 5,283 5,891
Sales and marketing 14,011 11,012 7,562
General and administrative 14,533 12,940 7,630
-------- -------- --------
Total operating expenses 34,477 29,235 21,083
-------- -------- --------
Income from operations 37,653 20,426 9,940
Other income (expense):
Interest expense (309) (704) (220)
Interest income 2,252 190 81
Other, net 295 (1) (4)
-------- -------- --------
Total other income (expense) 2,238 (515) (143)
Income before provision for income taxes 39,891 19,911 9,797
Provision for income taxes 14,760 7,344 3,759
-------- -------- --------
Income before cumulative effect of
change in accounting principle 25,131 12,567 6,038
Cumulative effect of change in
accounting principle -- -- 121
-------- -------- --------
Net income $ 25,131 $ 12,567 $ 6,159
======== ======== ========
Net income per share (cumulative
effect of change in accounting
principle did not materially impact
net income per share) $ 1.20 $ 0.72 $ 0.37
======== ======== ========
Weighted average common and common
equivalent shares outstanding 20,874 17,565 16,537
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE> 40
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK SHAREHOLDER TOTAL
----------------------- NOTES RETAINED SHAREHOLDERS'
SHARES AMOUNT RECEIVABLE EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE, October 31, 1993 12,542,855 $ 1,165 $ (146) $ 5,579 $ 6,598
Issuance of common stock 101,738 692 -- -- 692
Issuance of common stock pursuant to
exercise of stock options 1,500,000 8 -- -- 8
Issuance of common stock in exchange for
notes receivable 188,412 155 (155) -- --
Net income -- -- -- 6,159 6,159
Adjustment to conform year-end of
pooled company -- -- -- 208 208
---------- -------- -------- -------- --------
BALANCE, October 31, 1994 14,333,005 2,020 (301) 11,946 13,665
Issuance of common stock pursuant to
exercise of stock options 270,000 2 -- -- 2
Issuance of common stock pursuant to
exercise of stock purchase rights in
exchange for notes receivable 50,000 200 (200) -- --
Net income -- -- -- 12,567 12,567
---------- -------- -------- -------- --------
BALANCE, October 31, 1995 14,653,005 2,222 (501) 24,513 26,234
Issuance of common stock pursuant to
acquisition of pooled company 368,000 205 (5) 106 306
Issuance of common stock pursuant to
initial public offering 3,000,000 32,640 -- -- 32,640
Issuance of common stock pursuant to
exercise of stock options 813,638 772 -- -- 772
Issuance of common stock 23,520 240 -- -- 240
Disqualifying dispositions of stock options -- 1,242 -- -- 1,242
Repayment of shareholder note receivable -- -- 54 -- 5
Net income -- -- -- 25,131 25,131
---------- -------- -------- -------- --------
BALANCE, October 31, 1996 18,858,163 $ 37,321 $ (452) $ 49,750 $ 86,619
========== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE> 41
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,131 $ 12,567 $ 6,159
Adjustments to reconcile net income to net cash provided
by (used in) operating activities--
Adjustment to conform year-end of pooled entity -- -- 208
Depreciation and amortization 2,182 867 483
Provision for doubtful accounts 140 324 62
Reserve for obsolescence 2,135 1,359 422
Loss (gain) on disposition of equipment 31 (7) --
Change in assets and liabilities--
Increase in accounts and notes receivable (25,230) (8,912) (6,918)
Increase in inventories (137) (24,107) (5,704)
Increase in deferred income taxes, net (776) (1,729) (409)
Decrease (increase) in prepaid expenses and other 77 (522) (191)
Increase in other assets (712) (93) (83)
Increase in accounts payable 15,518 29,265 184
Increase (decrease) in income taxes payable 5,656 1,463 (743)
Increase in accrued liabilities 3,015 478 2,077
-------- -------- --------
Net cash provided by (used in) operating activities 27,030 10,953 (4,453)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments available-for-sale (8,494) -- --
Purchases of property and equipment (7,652) (2,297) (452)
Proceeds from sales of equipment -- 109 --
-------- -------- --------
Net cash used in investing activities (16,146) (2,188) (452)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long term debt (102) -- --
Proceeds from lines of credit 16,521 67,064 35,160
Payments on lines of credit (20,087) (66,327) (33,790)
Payments of capital lease obligations (1,359) (1,410) (234)
Proceeds from notes payable -- 495 --
Payments on notes payable -- (595) --
Proceeds from sale of common stock 33,912 2 700
Expenses related to issuances of common stock (260) -- --
-------- -------- --------
Net cash provided by (used in) financing activities 28,625 (771) 1,836
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 39,509 7,994 (3,069)
CASH AND CASH EQUIVALENTS, beginning of year 13,059 5,065 8,134
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 52,568 $ 13,059 $ 5,065
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ 9,895 $ 7,854 $ 5,101
======== ======== ========
Cash paid for interest $ 309 $ 453 $ 197
======== ======== ========
NON CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under capital leases $ 1,322 $ 3,099 $ 1,039
======== ======== ========
Tax benefits from employee stock transactions $ 1,242 $ -- $ --
======== ======== ========
Issuance of common stock pursuant to acquisition of pooled company $ 306 $ -- $ --
======== ======== ========
Issuance of common stock pursuant to notes receivable $ -- $ 200 $ 155
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
<PAGE> 42
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
SMART Modular Technologies, Inc. (the "Company") was incorporated in
California in August 1988. The Company designs, manufactures and markets memory
modules, embedded processor modules and PC card products primarily to the
computer, networking and telecommunications industries. In July 1995, the
Company acquired Apex Data, Inc. ("Apex") (See Note 2). Apex designs and markets
wireless and wireline PC cards, data/fax modems, I/O and networking products for
both computer reseller and OEM customers. In July 1996, the Company acquired
RISQ Modular Systems, Inc. ("RISQ") (See Note 2). RISQ designs and manufactures
embedded processor modules and products for OEMs in the telecommunications,
networking, industrial control and image processing markets.
On November 17, 1995, the Company completed an initial public offering of
3,000,000 shares of common stock at $12 per share. Total proceeds to the Company
(net of underwriting discounts and commissions) were approximately $32.6
million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of all intercompany accounts and
transactions.
BUSINESS COMBINATIONS
On July 31, 1996, a wholly-owned subsidiary of the Company merged with RISQ
Modular Systems, Inc., a California corporation ("RISQ"), which resulted in RISQ
becoming a wholly-owned subsidiary of the Company. The Company acquired RISQ by
issuing 368,000 shares of SMART common stock in exchange for 100% of the
outstanding securities of RISQ. 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. RISQ designs and manufactures embedded processor modules and
products in both standard and custom configurations for OEMs in the
telecommunications, networking, industrial control and image processing markets.
F-8
<PAGE> 43
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Apex
was founded in May 1992. Apex shareholders received one share of the Company's
common stock for ten shares of Apex's common stock. This resulted in the
issuance of 1,283,005 shares of the Company's common stock. Additionally,
outstanding options to acquire Apex common stock were exchanged for options to
acquire 80,016 shares of the Company's common stock.
The merger was accounted for as a pooling of interests. Accordingly, the
Company's consolidated financial statements for all periods presented have been
restated to include the financial statements of Apex. Apex's year end was March
31. In accordance with Securities and Exchange Commission rules and regulations,
Apex's year end of March 31, 1995 was restated to December 31, 1994 and combined
with the consolidated financial statements of the Company for the year ended
October 31, 1994.
The net sales and net loss of Apex for the quarter ended March 31, 1994 of
$6,235,000 and $55,000, respectively, and the net sales and net loss of Apex for
the two months ended December 31, 1994 of $4,452,000 and $208,000, respectively,
have been included twice as a result of the combinations referred to above.
Adjustments to account for the duplication of the net losses have been made to
retained earnings in fiscal 1994. Net sales and net income of the separate
companies for the periods preceding the acquisition were (in thousands):
SMART MODULAR
<TABLE>
<CAPTION>
TECHNOLOGIES, INC. APEX COMBINED
<S> <C> <C> <C>
Year ended October 31, 1995
Net sales $247,892 $ 26,700 $274,592
Net income (loss) 13,974 (1,407) 12,567
Year ended October 31, 1994
Net sales 140,958 22,891 163,849
Net income (loss) 7,161 (1,002) 6,159
</TABLE>
Costs associated with the merger were expensed during the year ended
October 31, 1995. The expenses associated with the merger were approximately
$180,000.
STOCK SPLIT
The Company consummated a stock split in May 1995 whereby each issued and
outstanding share of the Company's capital stock was converted into ten shares.
All share and per share amounts in the accompanying consolidated financial
statements have been retroactively adjusted to reflect the stock split.
CASH EQUIVALENTS
For purposes of the Consolidated Statements of Cash Flows, the Company
considers all highly liquid investments with an original maturity of three
months or less to be cash equivalents.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," during fiscal 1996, and the effect of its adoption on the
Company's consolidated financial statements was not significant.
F-9
<PAGE> 44
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with SFAS No. 115, debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Marketable debt securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with unrealized holding gains and
losses reported as a separate component of shareholders' equity, if significant.
As of October 31, 1996, all of the Company's investments are classified as
available-for-sale securities as summarized below (in thousands):
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE UNREALIZED UNREALIZED
COST FAIR VALUE GAINS LOSSES
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
Debt securities issued by the states of the United
States and political subdivisions of the states $4,594 $4,595 $ 3 $ (2)
Securities issued by private investment companies
and backed by debts issued by the United States
and states of U.S. government agencies 3,900 3,900 -- --
------ ------ ------ ------
$8,494 $8,495 $ 3 $ (2)
====== ====== ====== ======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful life of five years. Assets
acquired under capital leases are recorded at the present value of the related
lease obligations and depreciated on a straight-line basis over five years.
Betterments, renewals and extraordinary repairs that extend the life of the
asset are capitalized; other repairs and maintenance are expensed. The cost and
accumulated depreciation applicable to assets retired are removed from the
accounts and any resulting gain or loss on disposition is recognized in income.
Property, plant and equipment consists of the following as of October 31,
(in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Computer and office equipment $ 1,001 $ 426
Production machinery and equipment 16,583 6,853
Vehicles 36 16
Construction in progress 3 1,239
-------- --------
Total property and equipment 17,623 8,534
Less: accumulated depreciation and amortization (4,189) (1,952)
-------- --------
Property and equipment, net $ 13,434 $ 6,582
======== ========
</TABLE>
F-10
<PAGE> 45
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of approximately $5,024,000 and $4,520,000 as
of October 31, 1996 and 1995, respectively. Accumulated amortization on the
leased assets was approximately $1,651,000 and $713,000 as of October 31, 1996
and 1995, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's subsidiaries is the United States
dollar. Accordingly, all translation gains and losses resulting from
transactions denominated in currencies other than United States dollars are
included in net income. To date the resulting gains and losses have not been
material.
REVENUE RECOGNITION
Revenue is recognized upon shipment to the customer. The Company provides
for estimated future returns for inventory rebalancing, stock rotation,
established price protection arrangements and the estimated costs of warranty at
the time of sale.
NET INCOME PER SHARE
Net income per share has been computed using the weighted average number of
shares of common stock, common equivalent shares from convertible preferred
stock using the if converted method at date of issuance and common equivalent
shares from stock options outstanding using the treasury stock method. Pursuant
to certain Securities and Exchange Commission Staff Accounting Bulletins, common
and common equivalent shares issued during the twelve-month period prior to the
Company's initial public offering have been included in the calculation as if
they were outstanding for all periods presented (even if antidilutive using the
treasury stock method and assuming an initial public offering price of $15.00
per share).
PREFERRED STOCK CONVERSION
Upon the consummation of the Company's initial public offering of common
stock (November 17, 1995), all of the preferred stock outstanding as of that
date was converted into an aggregate of 3,200,000 shares of common stock and the
Company's authorized preferred stock was reduced from 40,000,000 shares to
15,000,000 shares. Accordingly, all share and per share amounts presented in the
accompanying consolidated financial statements have been retroactively restated
to reflect this conversion and the change in authorized preferred stock.
RISKS AND UNCERTAINTIES
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of accounts receivable. As of
October 31, 1996, approximately 70% of accounts receivable were concentrated
with six customers. As of October 31, 1995, approximately 50% of accounts
receivable were concentrated with five customers. The Company generally does not
require collateral on accounts receivable as the majority of the Company's
customers are large, well established companies.
The Company is dependent on certain suppliers, including limited and sole
source suppliers, to provide key components used in the Company's products.
Although there are a limited number of manufacturers of such key components,
management believes that other suppliers could provide similar components on
comparable terms. A change in suppliers, however, could cause a delay in
manufacturing and a possible loss of net sales, which would affect operating
results adversely.
F-11
<PAGE> 46
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and include material, labor and manufacturing costs. Inventories consist of the
following as of October 31, (in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Raw materials $21,553 $22,000
Work-in-process 9,267 7,792
Finished goods 8,181 11,090
------- -------
Total $39,001 $40,882
======= =======
</TABLE>
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of."
This statement requires long-lived assets to be evaluated for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The Company adopted SFAS No. 121 on November 1,
1996 and accordingly, its provisions did not have a material effect on the
Company's consolidated results of operations in the year of adoption.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." The Company adopted the
disclosure provisions of SFAS No. 123 on November 1, 1996 and accordingly, its
provisions will not have an impact on the Company's consolidated results of
operations since the intrinsic value-based method prescribed by APB Opinion No.
25, and also allowed by SFAS No. 123, will continue to be used.
3. LINES OF CREDIT:
During fiscal 1996, the Company extended a revolving bank line of credit
agreement which expires in February 1997. Borrowings under this agreement bear
interest at the prime rate and are limited to $7,500,000. There were no
borrowings outstanding under this agreement as of October 31, 1996 or 1995.
The Company has a second revolving line of credit agreement with another
bank. The agreement was extended during fiscal 1996 and expires in February
1997. Borrowings under this agreement bear interest at 2.6% above the rate for
30-day commercial paper and are limited to $12,500,000. As of October 31, 1995,
the outstanding balance was approximately $3,600,000. No borrowings were
outstanding under this agreement as of October 31, 1996.
The Company expects to renew both line of credit agreements upon expiration
(February 1997). Both agreements require that the Company maintain specified
levels of tangible net worth and comply with certain other covenants and are
secured by substantially all of the Company's assets. The banks have an
intercreditor agreement whereby they agree to allocate the collateral pro-rata
among the two banks based upon the outstanding amounts.
F-12
<PAGE> 47
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. CAPITAL LEASE OBLIGATIONS:
Minimum future lease payments under capital leases as of October 31, 1996
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING OCTOBER 31,
<S> <C>
1997 $ 1,703
1998 1,022
1999 181
-------
Total minimum lease payments 2,906
Less: Amount representing interest (8%
to 12%) (214)
-------
Present value of lease payments 2,692
Less: Current Portion (1,451)
-------
Long-term portion $ 1,241
=======
</TABLE>
5. COMMITMENTS:
The Company leases its current facilities and certain equipment under
noncancelable operating leases that expire at various dates through fiscal 2006.
Under the terms of the facilities leases, the Company is responsible for
utilities, maintenance, insurance and property taxes. As of October 31, 1996,
the future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING OCTOBER 31,
<S> <C>
1997 $ 691
1998 697
1999 863
2000 846
2001 856
Thereafter 2,007
-------
$ 4,662
=======
</TABLE>
Rental expense was approximately $1,025,000, $539,000 and $441,000 for the
years ended October 31, 1996, 1995 and 1994, respectively.
6. PROFIT SHARING AND 401(K) PLANS:
The Company has a profit sharing plan (the "Plan") which generally covers
all employees of the Company who are over 21 years of age and have worked for
the Company for at least one year. Annual contributions to the Plan are
discretionary, as determined by the Board of Directors. Contributions vest at a
rate of 20% per year beginning with an individual's third year with the Company.
There were no contributions to the Plan for the fiscal year ended October 31,
1996. Contributions to the Plan for the fiscal years ended October 31, 1995 and
1994 amounted to approximately $100,000 and $50,000, respectively.
F-13
<PAGE> 48
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective November 1, 1993, the Company established a 401(k) Plan. The
401(k) Plan covers all employees of the Company who are over 21 years of age and
have worked for the Company for at least 90 days. Annual Company contributions
are discretionary, as determined by the Board of Directors and are based on the
Company's annual performance. Contributions vest at a rate of 20% per year
beginning with an individual's second year with the Company. Employer
contributions to the 401(k) Plan for the years ended October 31, 1996, 1995 and
1994 were approximately $50,000, $25,000 and $60,000, respectively.
7. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors has the authority to issue up to 15,000,000 shares
of preferred stock in one or more series and to fix the number of shares of any
series and to determine or alter the rights, preferences, privileges,
restrictions and designation granted to or imposed upon any wholly unissued
series of preferred stock, without any further vote or action by the
shareholders.
STOCK PLANS
1989 Incentive Stock Plan
Under the Company's 1989 Incentive Stock Plan (the "1989 Stock Plan"), the
Board of Directors may grant incentive stock options to employees and
nonstatutory stock options and stock purchase rights to employees, directors and
consultants. Stock purchase rights are rights, other than stock options, to
purchase common stock pursuant to the 1989 Stock Plan. The exercise price for an
incentive stock option cannot be less than the fair market value, as determined
by the Board of Directors, on the date of grant. The exercise price per share of
nonstatutory stock options granted under the 1989 Stock Plan cannot be less than
85% of the fair market value on the date of grant. As of October 31, 1996, a
total of 6,770,000 shares of common stock have been authorized by the Company's
Board of Directors and shareholders for grant under the 1989 Stock Plan.
Under the 1989 Stock Plan, in the event of the termination of a purchaser's
continuous status as an employee or consultant, the Company has the right to
repurchase, at the original purchase price, any unvested stock granted under a
stock purchase right.
The 1989 Stock Plan grants the Board of Directors the discretion to
determine when the stock purchase rights and options granted thereunder shall
become exercisable. The majority of the options vest at the rate of 1/36th per
month. In addition, under the 1989 Stock Plan, all unvested stock options are
exercisable at any time in whole or in part provided that the optionee executes
a purchase agreement that grants the Company repurchase rights similar to those
described above. In October 1995, the Board of Directors suspended the issuance
of further grants under the 1989 Stock Plan.
F-14
<PAGE> 49
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option and purchase right activity under the 1989 Stock Plan is as
follows:
<TABLE>
<CAPTION>
STOCK OPTIONS AND PURCHASE
RIGHTS OUTSTANDING
SHARES -----------------------------
AVAILABLE NUMBER PRICE
FOR GRANT OF SHARES PER SHARE
<S> <C> <C> <C>
BALANCE, October 31, 1993 1,262,274 3,737,726 $.005-$3.75
Granted (167,290) 167,290 $.045-$3.75
Exercised / Canceled -- (1,500,000) $.005
---------- ---------- -----------
BALANCE, October 31, 1994 1,094,984 2,405,016 $.008-$3.75
Authorized 1,770,000 -- --
Granted (1,522,190) 1,522,190 $3.00-$8.00
Exercised / Canceled 4,883 (325,566) $.008-$4.00
---------- ---------- -----------
BALANCE, October 31, 1995 1,347,677 3,601,640 $.015-$8.00
Exercised / Canceled 32,647 (846,285) $.015-$7.00
---------- ---------- -----------
BALANCE, October 31, 1996 1,380,324 2,755,355 $0.02-$8.00
========== ========== ===========
</TABLE>
As of October 31, 1996, 2,045,693 of the outstanding options and purchase
rights were vested.
1995 Stock Plan
On October 3, 1995, the Company's Board of Directors adopted and its
shareholders approved the Company's 1995 Stock Plan (the "1995 Stock Plan") to
be effective as of the date of the Company's initial public offering (November
17, 1995). The 1995 Stock Plan provides for the granting to employees (including
officers and employee directors) of incentive stock options and for the granting
to employees (including officers and employee directors) and consultants of
nonstatutory stock options and stock purchase rights ("SPRs"). Unless terminated
sooner, the 1995 Stock Plan will terminate automatically in October 2005. A
total of 3,000,000 shares of common stock is reserved for issuance under the
1995 Stock Plan.
The exercise price of all nonstatutory stock options and SPRs granted under
the 1995 Stock Plan will be determined by the 1995 Stock Plan administrator.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of the Company's outstanding capital stock (a "10%
Shareholder"), the exercise price of any incentive stock option granted must
equal at least 110% of the fair market value on the date of grant. The exercise
price of incentive stock options for all other employees will be no less than
100% of the fair market value per share on the date of grant. The maximum term
of an option granted under the 1995 Stock Option Plan will not exceed ten years
from the date of grant (five years in the case of an incentive stock option
granted to a 10% Shareholder).
F-15
<PAGE> 50
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity under the 1995 Stock Plan is as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
OUTSTANDING
SHARES --------------------------------
AVAILABLE NUMBER PRICE
FOR GRANT OF SHARES PER SHARE
<S> <C> <C> <C>
BALANCE, October 31, 1995 -- -- --
Authorized 3,000,000 -- --
Granted (642,600) 642,600 $10.25-$15.375
Exercised / Canceled 26,022 (26,022) $15.25
---------- ---------- --------------
BALANCE, October 31, 1996 2,383,422 616,578 $10.25-$15.375
========== ========== ==============
</TABLE>
As of October 31, 1996, 66,306 of the outstanding options were vested.
1995 Director Option Plan
Non-employee directors are entitled to participate in the 1995 Director
Option Plan (the "Director Plan"). The Director Plan has a term of ten years,
unless terminated sooner by the Board of Directors. A total of 100,000 shares of
common stock is reserved for issuance under the Director Plan.
The Director Plan provides that each non-employee director who first
becomes a non-employee director on or after the date of the Company's initial
public offering (November 17, 1995) will be automatically granted an option to
purchase 12,000 shares of common stock (the "First Option") on the date on which
the person first becomes a non-employee director, unless immediately prior to
becoming a non-employee director, such person was a director of the Company.
Beginning November 1, 1996, each non-employee director will be automatically
granted an option to purchase 3,600 shares (a "Subsequent Option") on November 1
of each year provided they are then a non-employee director and, provided
further, that on such date he or she has served on the Board of Directors for at
least the preceding six months. Each First Option and each Subsequent Option
shall have a term of ten years and the shares subject to the option shall vest
as to 1/36th of the shares at the end of each month after the date of grant,
provided that the optionee continues to serve as a director on such dates. The
exercise prices of the First Option and each Subsequent Option shall be 100% of
the fair market value per share of the common stock on the date of grant of the
option. As of October 31, 1996, no options were outstanding under the Director
Plan.
Employee Stock Purchase Plan
On October 3, 1995, the Company's Board of Directors adopted and its
shareholders approved the Employee Stock Purchase Plan (the "Purchase Plan") to
be effective as of the date of the Company's initial public offering (November
17, 1995). A total of 500,000 shares of common stock is reserved for issuance
under the Purchase Plan. The Purchase Plan permits eligible employees of the
Company to purchase common stock through payroll deductions of up to 15% of
their compensation (excluding payments for overtime, shift premium, incentive
compensation, incentive payments, bonuses and other compensation), up to a
maximum of $21,250 for all purchase periods ending within any calendar year.
F-16
<PAGE> 51
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The price of common stock purchased under the Purchase Plan will be 85% of
the lower of the fair market value of the common stock on the first or last day
of each six month purchase period. Employees may end their participation in the
Purchase Plan at any time during an offering period, upon which time, any
payroll deductions not used to purchase Company stock will be refunded.
Participation ends automatically upon termination of employment with the
Company.
Employees are eligible to participate if they are customarily employed by
the Company or any designated subsidiary for at least 20 hours per week and for
more than five months in any calendar year. The Purchase Plan will terminate in
October 2005. For the year ended October 31, 1996, a total of 23,520 shares of
the Company's common stock was issued under the Purchase Plan at $10.20 per
share. At October 31, 1996, 476,480 shares remain available for sale under the
Purchase Plan.
8. INCOME TAXES:
Effective November 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income
Taxes." SFAS No. 109 provides for an asset and liability approach to accounting
for income taxes under which deferred income taxes are provided based upon
enacted tax laws and rates applicable to the periods in which taxes become
payable.
The cumulative effect of adopting SFAS No. 109 resulted in an increase in
net income of approximately $121,000 and has been shown separately in the
Consolidated Statement of Income for the year ended October 31, 1994. The
provision for income taxes consisted of the following components as of October
31, (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current
Federal $ 14,178 $ 7,251 $ 3,144
State 3,598 1,882 910
-------- -------- --------
Total current 17,776 9,133 4,054
-------- -------- --------
Deferred (prepaid):
Federal (2,526) (1,368) (300)
State (490) (421) 5
-------- -------- --------
Total deferred (prepaid), net (3,016) (1,789) (295)
-------- -------- --------
Total provision for income taxes $ 14,760 $ 7,344 $ 3,759
======== ======== ========
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory Federal income tax rates as follows as of October 31, (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Provision computed at Federal statutory rate $ 13,962 $ 6,971 $ 3,331
Foreign taxes, net of Federal benefit 1,596 -- --
State income taxes, net of Federal benefit 2,513 1,203 604
Tax credits (3,391) (646) (350)
Tax exempt interest income (798) -- --
FSC benefit (598) -- --
Other 1,476 (184) 174
-------- -------- --------
Total provision for income taxes $ 14,760 $ 7,344 $ 3,759
======== ======== ========
</TABLE>
F-17
<PAGE> 52
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The major components of the deferred tax asset and liability are as follows
as of October 31, (in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Inventory reserves $ 1,565 $ 404
Bad debt reserves 239 137
Accrued vacation 404 238
Warranty reserves 308 --
State taxes 653 659
Net operating loss carryforward 679 949
Research and development credit
carryforward -- 119
Other temporary differences -- 121
------- -------
Total deferred tax assets $ 3,848 $ 2,627
======= =======
Deferred tax liabilities -- depreciation ($ 831) ($ 390)
------- -------
Total deferred tax liabilities ($ 831) ($ 390)
======= =======
</TABLE>
Net operating loss and tax credit carryforwards, all of which resulted from
the merger with Apex, expire at various dates through 2010. In accordance with
certain provisions of the Internal Revenue Code, a change in ownership of
greater than 50% within a three year period results in an annual limitation of
the Company's ability to utilize its net operating loss carryforwards from tax
periods prior to the ownership change. Accordingly, utilization of net operating
loss carryforwards of approximately $1,770,000 for Federal income tax purposes
and $996,000 for state income tax purposes are subject to this annual
limitation.
Realization is dependent on generating sufficient taxable income prior to
the expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that all the deferred tax asset
will be realized. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
9. RELATED PARTY TRANSACTIONS:
RESEARCH AND DEVELOPMENT FUNDING
In July 1994, the Company paid $30,000 for a warrant to purchase 2,000,000
shares of Series A preferred stock of a company in which certain shareholders of
the Company and members of its Board of Directors had concurrently purchased a
combined 42.8% interest in the affiliate's common stock. The Company has the
right to exercise the warrant up to 48 months after the date of issuance at
$0.05 per warrant share. The Company also entered into a license and supply
agreement with the affiliate, whereby the affiliate agreed to supply the Company
with 100% of the Company's requirements for certain of the affiliate's product,
and the Company agreed to purchase 100% of such requirements from the affiliate.
In addition, the affiliate granted to the Company certain license and trademark
rights, with respect to the use and modification of the affiliate's product. In
exchange, the Company agreed to provide research and development funding to the
affiliate in an aggregate amount of $750,000. As of October 31, 1995, such
payments have been fully paid. The license portion of the agreement has no
expiration date. All other provisions of the agreement shall continue in effect
for a period of 15 years.
F-18
<PAGE> 53
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In January 1996, the Company and the affiliate entered into an agreement
whereby the Company paid an additional $80,000 for a warrant to purchase
2,000,000 shares of Series B preferred stock of the affiliate. The Company has
the right to exercise the warrant for a period of up to 48 months after the date
of issuance at $0.15 per warrant share. The Company and the affiliate also
entered into a license and supply agreement similar to that described above. The
funding requirement for this new agreement totals $500,000 with $100,000 due at
inception, and an additional $100,000 due every six weeks, provided certain
milestones are met, until paid in full. As of October 31, 1996, the Company had
paid the affiliate $380,000 in funding. The license portion of the agreement has
no expiration date. All other provisions of the agreement will continue in
effect for a period of 15 years. Concurrently, with the Company's purchase of
the warrant, certain shareholders of the Company and members of its Board of
Directors purchased additional common stock of the affiliate, which increased
their interest to 50.0% of the affiliate.
In April 1996, certain shareholders of the Company and members of its Board
of Directors purchased additional common stock of the affiliate from other
shareholders of the affiliate. Currently, certain shareholders of the Company
and members of its Board of Directors have a 50.4% interest in the affiliate.
As of October 31, 1996, the affiliate owed the Company approximately
$10,000 on a note bearing interest at 10% per annum and payable in full by July
1997 and approximately $25,000 on a second note bearing interest at 10% per
annum and payable in full by April 1998.
NOTE RECEIVABLE FROM SHAREHOLDER
On November 15, 1993, one of the Company's officers borrowed $146,250 from
the Company. The debt arose from the issuance and sale of shares of the common
stock of Apex to the officer prior to the Apex merger. The loan, which is
unsecured, bears interest at a rate of 6.5% per annum, and is payable in annual
interest-only installments through November 15, 1998, when the principal balance
is due in full. As of October 31, 1996, the officer owed the Company
approximately $177,000 under this loan.
STOCK PURCHASE RIGHT
On June 30, 1995, pursuant to a stock purchase right granted under the 1989
Stock Plan, the Company sold 50,000 shares of common stock to a director for
$200,000. In consideration, the director executed a full recourse promissory
note secured by the 50,000 shares of common stock for a like amount. The note
bears interest at 6.27% compounded semi-annually and is due in full on June 30,
1998. As of October 31, 1996, approximately $217,000 was outstanding under the
note. Portions of this stock is subject to repurchase by the Company, at the
original purchase price per share, upon the director's cessation of service
prior to vesting of such shares. The shares vest as to 1/36th of the shares at
the end of each month after the date of purchase, provided that the director
continues to serve as a director on such dates.
STOCK OPTION GRANT
On August 31, 1995, pursuant to the 1989 Stock Plan, the Company granted a
nonstatutory stock option exercisable for 30,000 shares of common stock to one
of the Company's directors. The stock option exercise price is $7.00 per share
and vests at the rate of 1/36th of the shares on the first day of each calendar
month.
F-19
<PAGE> 54
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. EXPORT SALES AND SIGNIFICANT CUSTOMERS
The Company operates in a single industry segment. The Company markets its
products in the United States (which includes Puerto Rico) and in foreign
countries through its sales personnel, independent sales representatives and
distributors. The Company's geographic sales as a percent of net sales are as
follows for the years ended October 31,:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
United States 92% 86% 86%
International 8 14 14
--- --- ---
Total 100% 100% 100%
=== === ===
</TABLE>
A relatively small number of customers have accounted for a significant
percentage of the Company's net sales. Sales to major customers as a percentage
of net sales are as follows for the years ended October 31,:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Customer A 19% 18% *
Customer B 15% 10% 21%
Customer C 12% 15% 20%
Customer D * * 10%
</TABLE>
* Less than 10%
F-20
<PAGE> 55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of SMART Modular Technologies, Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon dated
November 27, 1996. Our audit was made for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole. The schedule
listed under Item 14 is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic consolidated financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Jose, California
November 27, 1996
F-21
<PAGE> 56
SCHEDULE II
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
<S> <C> <C> <C> <C>
Year ended October 31, 1994
Allowance for doubtful accounts $ 57 $ 62 $ -- $ 119
Allowance for future returns $ 318 $ -- $(250) $ 68
Year ended October 31, 1995
Allowance for doubtful accounts $ 119 $ 343 $ (19) $ 443
Allowance for future returns $ 68 $ -- $ -- $ 68
Year ended October 31, 1996
Allowance for doubtful accounts $ 443 $ 349 $(209) $ 583
Allowance for future returns $ 68 $ 75 $ -- $ 143
</TABLE>
F-22
<PAGE> 57
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
SUPPLEMENTARY CONSOLIDATED FINANCIAL DATA
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1996
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Net Sales $90,317 $104,116 $101,048 $106,293
Gross Profit 16,538 17,889 18,320 19,383
Net Income 5,445 5,958 6,621 7,107
Net Income Per Share $ 0.27 $ 0.28 $ 0.31 $ 0.34
<CAPTION>
YEAR ENDED OCTOBER 31, 1995
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Net Sales $60,508 $62,980 $70,570 $80,534
Gross Profit 10,208 10,308 13,354 15,791
Net Income 2,287 1,426 3,952 4,902
Net Income Per Share $ 0.13 $ 0.08 $ 0.22 $ 0.28
</TABLE>
F-23
<PAGE> 58
SMART MODULAR TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBITS
2.1(1) Agreements and Plan of Reorganization among the Registrant, Apex
Data, Inc. and SMART Acquisition Inc. dated April 24, 1995
3.1(1) Registrant's Amended and Restated Articles of Incorporation
3.2(1) Registrant's Amended Bylaws.
4.1(1) Registration Rights Agreement dated July 26, 1995.
4.2(1) Registrant's specimen stock certificate.
4.3(3) Termination to the Registration Rights Agreement dated July 26,
1995.
10.1(1) 1989 Incentive Stock Plan, as amended, and forms of agreements
attached thereto.
10.2(1) 1995 Employee Stock Purchase Plan, and forms of agreements
attached thereto.
10.3(1) 1995 Director Option Plan, and forms of agreements attached
thereto.
10.4(1) 1995 Stock Plan, and forms of agreements attached thereto.
10.5(1) Form of Indemnification Agreement between the Registrant and its
officers, directors and certain significant employees.
10.6(1) Standard Triple Net Industrial Lease between the Registrant and
Pactel Properties dated November 18, 1991.
10.7(1) First Amendment to Lease between the Registrant and Pactel
Properties dated July 19, 1993.
10.8(1) Second Amendment to Lease between the Registrant and Riggs
National Bank of Washington, D.C. as Trustee of the
Multi-Employer Property Trust Northport Business Park, a
National Banking Association dated May 31, 1994.
10.9(1) Third Amendment to Lease between the Registrant and Riggs
National Bank of Washington, D.C. as Trustee of the
Multi-Employer Property Trust Northport Business Park, a
National Banking Association dated November 1994.
10.10(1) Standard Triple Net Industrial Lease between the Registrant and
Riggs National Bank of Washington, D.C., as Trustee of the
Multi-Employer Property Trust, dated June 18, 1995.
10.11(1) Lease Contract between the Registrant and The Puerto Rico
Industrial Development Company dated April 24, 1995.
10.12(1) Note, Loan and Security Agreement between the Registrant and
Merrill Lynch Business Financial Services Inc. dated May 19,
1993.
10.13(1) Letter Agreement between the Registrant and Merrill Lynch
Business Financial Services Inc. dated December 28, 1994.
10.14(1) Letter Agreement between the Registrant and Merrill Lynch
Business Financial Services Inc. dated June 27, 1995.
10.15(1) Intercreditor Agreement among the Registrant, Merrill Lynch
Business Financial Services Inc. and Imperial Bank dated June
27, 1995.
10.16(1) Security and Loan Agreement between the Registrant and Imperial
Bank dated July 19, 1995.
*10.17(1) License and Supply Agreement between the Registrant and Krypton
Isolation, Inc. dated July 22, 1994.
10.18(1) Warrant Purchase Agreement between the Registrant and Krypton
Isolation, Inc. dated July 27, 1994.
10.19(1) Holders' Agreement dated July 27, 1994 by and among Krypton
Isolation, Inc. and certain individuals and entities identified
on Exhibit A attached thereto.
10.20(1) Common Stock Purchase Agreement dated July 27, 1994 by and among
Krypton Isolation, Inc. and the individuals identified on
Exhibit A attached thereto.
10.21(1) First Amendment to the Krypton Isolation, Inc. Warrant to
Purchase 2,000,000 Shares of Series A Preferred Stock between
the Registrant and Krypton Isolation, Inc. dated October 24,
1995.
10.22(1) Letter of Intent dated as of October 24, 1995 by and among
Krypton Isolation, Inc., the Registrant and certain individuals
identified on the signature pages thereto.
**10.23(2) License and Supply Agreement between the Registrant and Krypton
Isolation, Inc. dated January 29, 1996.
10.24(2) Warrant Purchase Agreement between the Registrant and Krypton
Isolation, Inc. dated January 29, 1996.
10.25(2) First Amended and Restated Holders' Agreement dated January 29,
1996 by and among Krypton Isolation, Inc. and certain
individuals and entities identified on Exhibit A attached
thereto.
10.26(2) Common Stock Agreement dated January 29, 1996 by and among
Krypton Isolation, Inc. and the entities identified on Exhibit A
attached thereto.
10.27(2) First Amendment to the License and Supply Agreement between the
Registrant and Krypton Isolation, Inc. dated January 29, 1996.
10.28(3) 1989 Incentive Stock Plan, as amended, dated March 25, 1996.
16.1(1) Letter Regarding Change in Certifying Accountant.
16.2(1) Letter Regarding Change in Certifying Accountant.
16.3(1) Letter Regarding Change in Certifying Accountant.
16.4(1) Letter Regarding Change in Certifying Accountant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Certified Public Accountants.
23.2 Consent of Independent Certified Public Accountants.
24.1 Power of Attorney (included on page 34).
27.1 Financial Data Schedule for the Fiscal Year Ended
October 31, 1996.
- - ---------------
(1) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 33-97748) filed October 4, 1995,
Amendment No. 1 thereto filed October 24, 1995, Amendment No. 2 thereto
filed November 6, 1995, Amendment No. 3 thereto filed November 14, 1995 and
E-1
<PAGE> 59
Amendment No. 4 thereto filed November 16, 1995, which Registration
Statement became effective November 16, 1995.
(2) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-Q filed March 16, 1996.
(3) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-Q filed June 14, 1996.
* Pursuant to Rule 406(b) under the Securities Act of 1933, confidential
treatment has been granted to certain portions of this exhibit, which
portions have been deleted and filed separately with the Securities and
Exchange Commission.
** Pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
confidential treatment has been granted to certain portions of this
exhibit, which portions have been deleted and filed separately with the
Securities and Exchange Commission.
E-2
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
NAME JURISDICTION
Apex Data, Inc. Delaware
SMART Modular Technologies (Europe), Ltd. United Kingdom
SMART Modular Technologies (U.K.), Ltd. United Kingdom
SMART Modular Technologies FSC, Inc. Barbados
SMART Modular Technologies (India) Pvt. Ltd. India
SMART Modular Technologies (P.R.), Inc. California
SMART Modular Technologies (Aust) Pty. Ltd. Australia
RISQ Modular Systems, Inc. California
E-3
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K into the Company's previously filed
Registration Statement (File No. 33-99822) on Form S-8.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Jose, California
January 27, 1997
E-4
<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 previously filed
Registration Statement on Form S-8 (No. 33-99822) 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, and appearing in the
Annual Report of SMART Modular Technologies, Inc. on Form 10-K for the year
ended October 31, 1996.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
San Francisco, California
January 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME
CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
OCTOBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-K.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> OCT-31-1996 OCT-31-1995 OCT-31-1994
<PERIOD-START> NOV-01-1995 NOV-01-1994 NOV-01-1993
<PERIOD-END> OCT-31-1996 OCT-31-1995 OCT-31-1994
<EXCHANGE-RATE> 1 1 1
<CASH> 52,568 13,059 0
<SECURITIES> 7,471 0 0
<RECEIVABLES> 52,806 27,508 0
<ALLOWANCES> 583 443 0
<INVENTORY> 39,001 40,882 0
<CURRENT-ASSETS> 156,795 85,217 0
<PP&E> 17,623 8,534 0
<DEPRECIATION> 4,189 1,952 0
<TOTAL-ASSETS> 172,185 91,976 0
<CURRENT-LIABILITIES> 83,494 63,753 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 37,321 2,222 0
<OTHER-SE> 49,298 24,012 0
<TOTAL-LIABILITY-AND-EQUITY> 172,185 91,976 0
<SALES> 401,774 274,592 163,849
<TOTAL-REVENUES> 401,774 274,592 163,849
<CGS> 329,644 224,931 132,826
<TOTAL-COSTS> 329,644 224,931 132,826
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 379 375 113
<INTEREST-EXPENSE> 309 704 220
<INCOME-PRETAX> 39,891 19,911 9,797
<INCOME-TAX> 14,760 7,344 3,759
<INCOME-CONTINUING> 25,131 12,567 6,038
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 121
<NET-INCOME> 25,131 12,567 6,159
<EPS-PRIMARY> 1.20 .72 .37
<EPS-DILUTED> 0 0 0
</TABLE>
