<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1997,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM --------------- TO ---------------.
COMMISSION FILE NUMBER: 0-26942
------------------------
SMART MODULAR TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 77-0200166
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
4305 CUSHING PARKWAY
FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 623-1231
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At August 22, 1997, there were 19,385,778 shares of the Registrant's common
stock, no par value, outstanding.
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<PAGE> 2
SMART MODULAR TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets --
As of July 31, 1997 and October 31, 1996....................................... 3
Consolidated Condensed Statements of Income --
For the Three and Nine Months Ended July 31, 1997 and 1996..................... 4
Consolidated Condensed Statements of Cash Flows --
For the Nine Months Ended July 31, 1997 and 1996............................... 5
Notes to Consolidated Condensed Financial Statements........................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 19
Item 2. Changes in Securities.......................................................... 19
Item 3. Defaults upon Senior Securities................................................ 19
Item 4. Submission of Matters to a Vote of Security Holders............................ 19
Item 5. Other Information.............................................................. 19
Item 6. Exhibits and Reports on Form 8-K............................................... 19
Signatures............................................................................... 20
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1997 1996
-------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................................... $ 33,576 $ 52,568
Short term investments.............................................. 9,586 8,494
Accounts receivable, net............................................ 86,148 52,806
Inventories......................................................... 50,481 39,001
Prepaid expenses and other.......................................... 8,177 4,949
-------- --------
Total current assets........................................ 187,968 157,818
Property and equipment, net........................................... 22,862 13,434
Other................................................................. 895 933
-------- --------
Total assets................................................ $211,725 $ 172,185
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................... $ 67,934 $ 66,206
Accrued compensation and commissions................................ 5,195 3,441
Accrued bonuses..................................................... 5,412 4,212
Other accrued expenses.............................................. 4,020 3,445
Income taxes payable................................................ 5,743 6,190
-------- --------
Total current liabilities................................... 88,304 83,494
Long-term Liabilities:
Capital lease obligations, net of current portion................... 434 1,241
Deferred income taxes and other..................................... 909 831
-------- --------
Total liabilities........................................... 89,647 85,566
-------- --------
Shareholders' Equity:
Common Stock, no par value --
Authorized -- 100,000,000 shares
Outstanding -- 19,378,452 and 18,855,163 shares, respectively.... 41,698 36,869
Retained earnings................................................... 80,380 49,750
-------- --------
Total shareholders' equity.................................. 122,078 86,619
-------- --------
Total liabilities and shareholders' equity.................. $211,725 $ 172,185
======== ========
</TABLE>
See the accompanying notes to these consolidated condensed financial statements.
3
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SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales........................................... $201,923 $101,048 $477,187 $295,481
Cost of sales....................................... 171,047 82,728 399,539 242,734
-------- -------- -------- --------
Gross profit........................................ 30,876 18,320 77,648 52,747
-------- -------- -------- --------
Operating Expenses:
Research and development.......................... 2,496 1,405 6,390 4,327
Sales, general and administrative................. 9,926 7,031 26,262 21,238
-------- -------- -------- --------
Total operating expenses.................. 12,422 8,436 32,652 25,565
-------- -------- -------- --------
Income from operations.............................. 18,454 9,884 44,996 27,182
Other income, net................................... 412 568 1,421 1,428
-------- -------- -------- --------
Income before provision for income taxes............ 18,866 10,452 46,417 28,610
Provision for income taxes.......................... 6,414 3,831 15,787 10,586
-------- -------- -------- --------
Net income.......................................... $ 12,452 $ 6,621 $ 30,630 $ 18,024
======== ======== ======== ========
Net income per share................................ $ 0.57 $ 0.31 $ 1.42 $ 0.87
======== ======== ======== ========
Weighted average common and common equivalent shares
outstanding....................................... 21,810 21,061 21,637 20,784
======== ======== ======== ========
</TABLE>
See the accompanying notes to these consolidated condensed financial statements.
4
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SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES...................... $ (6,104) $ 5,804
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments available-for-sale............................ (5,810) --
Maturities of investments available-for-sale........................... 4,718 --
Purchases of property and equipment.................................... (12,915) (2,581)
Proceeds from sale of property and equipment........................... 90 --
--------- ---------
Net cash used in investing activities............................... (13,917) (2,581)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit.......................................... -- 16,521
Payments on lines of credit............................................ -- (19,900)
Proceeds from long-term debt........................................... -- 18
Payments on long-term debt............................................. -- (24)
Payments of capital lease obligations.................................. (1,202) (1,015)
Proceeds from sale of common stock..................................... 2,231 33,365
--------- ---------
Net cash provided by financing activities........................... 1,029 28,965
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS..................... (18,992) 32,188
CASH AND CASH EQUIVALENTS, beginning of period........................... 52,568 13,059
--------- ---------
CASH AND CASH EQUIVALENTS, end of period................................. $ 33,576 $ 45,247
========= =========
</TABLE>
See the accompanying notes to these consolidated condensed financial statements.
5
<PAGE> 6
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The Interim Consolidated Condensed Financial Statements of SMART Modular
Technologies, Inc., a California corporation, and subsidiaries (the "Company")
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. These Interim Consolidated Condensed
Financial Statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's fiscal 1996 Report on
Form 10-K as filed with the Securities and Exchange Commission on January 28,
1997.
The Interim Consolidated Condensed Financial Statements for the third
quarter of fiscal 1997 reflect, in the opinion of management, all adjustments
(which include only the normal recurring adjustments) necessary for a fair
presentation of financial position, results of operations and cash flows for
such period. The Interim Consolidated Condensed Financial Statements for fiscal
1996 are provided for information purposes only. The results of operations for
the three and nine month periods ended July 31, 1997 are not necessarily
indicative of the results that may be expected for the entire fiscal year ending
October 31, 1997, or any other future periods.
Revenue Recognition
Revenue is recognized upon shipment to the customer. The Company provides
for estimated future returns for inventory rebalancing, stock rotation,
established price protection arrangements and the estimated costs of warranty at
the time of sale.
Net Income Per Share
Net income per share has been computed using the weighted average number of
shares of common stock, common equivalent shares from convertible preferred
stock using the if converted method at date of issuance and common equivalent
shares from stock options outstanding using the treasury stock method. Pursuant
to certain Securities and Exchange Commission Staff Accounting Bulletins, common
and common equivalent shares issued during the twelve month period prior to the
Company's initial public offering have been included in the calculation as if
they were outstanding for all periods presented through the quarter in which the
Company's initial public offering was completed.
In March 1997, the Financial Accounting Standards Board issued Statement
No. 128 (SFAS No. 128), "Earnings Per Share," which the Company will be required
to adopt on a retroactive basis in the first quarter of fiscal 1998. The pro
forma effect of SFAS No. 128 for the third quarter is as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
JULY 31, JULY 31,
--------------- ---------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Reported earnings per share................. $ 0.57 $ 0.31 $ 1.42 $ 0.87
Basic earnings per share (pro forma)........ $ 0.64 $ 0.36 $ 1.60 $ 1.00
Diluted earnings per share (pro forma)...... $ 0.57 $ 0.31 $ 1.42 $ 0.87
</TABLE>
6
<PAGE> 7
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED 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 (in thousands):
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1997 1996
-------- -----------
<S> <C> <C>
Raw materials........................ $28,878 $21,553
Work-in-process...................... 6,428 9,267
Finished goods....................... 15,175 8,181
------- -------
Total................................ $50,481 $39,001
======= =======
</TABLE>
2. LINES OF CREDIT:
In June 1997, the Company entered into an unsecured revolving bank line of
credit agreement which expires in May 1998. Borrowings under this agreement are
limited to $20.0 million and bear interest at either the bank's prime rate or a
spread over LIBOR, at the Company's option. The Company is required to maintain
specified levels of tangible net worth and comply with certain other covenants.
As of July 31, 1997, no borrowings were outstanding under this agreement.
At October 31, 1996, the Company had two revolving line of credit
agreements which expired according to their terms in May 1997. Borrowings under
these agreements were limited to $7.5 million and $12.5 million, respectively,
and had respective interest rates at prime and at 2.6% above the rate for 30-day
commercial paper. Both agreements were secured by substantially all of the
Company's assets and required that the Company maintain specified levels of
tangible net worth and comply with certain other covenants. No borrowings were
outstanding under these agreements as of October 31, 1996.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to other areas of this Management's Discussion and Analysis of
Financial Condition and Results of Operations, the fourth and fifth paragraphs
of the Overview Section, the first paragraph of the Gross Profit Section, the
first paragraph of the Research and Development Section, the first paragraph of
the Sales, General and Administrative Section, and the first and third
paragraphs of the Liquidity and Capital Resources Section contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth in "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Future Results." In particular, note the
factors entitled "Significant Customer Concentration," "Product Concentration;
Dependence on Memory Market," "Dependence on Semiconductor, Computer,
Telecommunications and Networking Industries," "Intense Competition,"
"Fluctuations in Operating Results," "Dependence on Sole or Limited Sources of
Supply" and "Rapid Technological Change." The discussion of those factors is
incorporated herein by this reference as if said discussion was fully set forth
at this point.
OVERVIEW:
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 OEMs and semiconductor
manufacturers. Standard memory modules implement industry standard
specifications, primarily utilize DRAM and are designed to be incorporated into
a wide variety of electronic equipment. In 1991, the Company expanded its
design, manufacturing and marketing efforts to offer specialty memory modules
and PC card memory products. The Company expanded its PC card communication
product line through the acquisition of Apex Data, Inc., a Delaware corporation
("Apex"), in July 1995. The Company further expanded its product line to include
embedded computer modules through the acquisition of RISQ Modular Systems, Inc.,
a California corporation ("RISQ"), in July 1996.
The Company's net sales and gross profit have increased substantially over
the last three fiscal years. Over the last seven fiscal quarters, SMART's gross
margin has ranged from 15.3% to 18.3%. One of the primary factors affecting
gross margin has been the proportion of the Company's memory products
manufactured on either a turnkey or consignment basis. Products manufactured on
a turnkey basis are designed and manufactured by the Company with purchased
memory devices. Products manufactured on a consignment basis are generally
designed and manufactured by the Company with memory devices which are owned and
supplied by the customer. While products manufactured on a turnkey basis
typically have lower gross margin than products manufactured on a consignment
basis, products manufactured on a turnkey basis generally contribute greater net
sales and higher gross profit per unit than products manufactured on a
consignment basis. Currently, a substantial majority of the Company's net sales
is derived from sales of products manufactured on a turnkey basis.
The other primary factor affecting the Company's gross margin has been the
mix between sales of specialty memory modules, standard memory modules, PC cards
and embedded computer modules. A majority of the Company's net sales are
currently derived from the sales of its standard memory modules, which typically
have lower gross margin than the Company's specialty memory modules. The
Company's embedded computer modules currently generate the Company's highest
gross margin, followed by the Company's PC card communication products. Both of
these product lines currently contribute a relatively small portion of the
Company's net sales.
The Company expects that its gross margin will continue to vary based on
these and other factors, including changes in the selling prices for its
products, pricing by competitors and suppliers and the level of manufacturing
efficiencies achieved. Selling prices of certain of SMART's products have
declined in the past and SMART expects that some prices will continue to decline
in the future. Accordingly, SMART's ability to maintain or increase gross profit
and gross margin will be highly dependent upon its ability to increase unit
8
<PAGE> 9
sales volumes of existing products and to introduce and sell new products in
quantities and with gross margin sufficient to compensate for the anticipated
declines in selling prices.
The Company primarily sells its products to OEMs and semiconductor
manufacturers in the computer, networking and telecommunications industries. For
the nine months ended July 31, 1997, fiscal 1996 and fiscal 1995, the Company's
ten largest customers accounted for 86%, 71% and 68% of the Company's net sales,
respectively. For the nine months ended July 31, 1997, the Company's three
largest customers were Compaq Computer Corporation ("Compaq"), Cisco Systems,
Inc. ("Cisco") and Hewlett-Packard Company ("Hewlett-Packard"), which accounted
for 50%, 13% and 11% of net sales, respectively. In fiscal 1996, the Company's
three largest customers were Cisco, Hewlett-Packard and IBM Corporation ("IBM"),
which accounted for 19%, 15% and 12% of net sales, respectively. In fiscal 1995,
the Company's three largest customers were Cisco, IBM and Hewlett-Packard, which
accounted for 18%, 15% and 10% of net sales, respectively. During these periods,
no other customers accounted for more than 10% of net sales. The Company expects
that sales to relatively few customers will continue to account for a
significant percentage of its net sales in the foreseeable future. The Company
has added new OEM customers and programs in recent periods and its strategy is
to increase its sales to both existing and new OEM customers. In addition, the
Company's strategy calls for further expansion of its geographic operations,
particularly in Europe. International sales accounted for 14%, 8% and 14% of the
Company's net sales for the nine months ended July 31, 1997, fiscal 1996 and
fiscal 1995, respectively.
In July 1995, the Company expanded its PC card communication products with
the acquisition of Apex. Apex designs and markets wireless and wireline
communication card products into both the computer reseller and OEM channels.
The Company acquired Apex in a stock for stock transaction that was accounted
for as a pooling-of-interests. Accordingly, the Company's historical results of
operations include Apex's historical results of operations.
In July 1996, the Company expanded its specialized technical capabilities
with the acquisition of RISQ. RISQ designs and manufactures embedded computer
modules and products in both standard and custom form factors for OEMs in the
telecommunications, networking, industrial control and image processing markets.
The Company acquired RISQ in a stock for stock transaction that was accounted
for as a pooling-of-interests. Given the immateriality of this acquisition to
the Company's consolidated financial position and results of operations, RISQ
has been included in the Company's consolidated results of operations as of the
beginning of fiscal 1996 (November 1, 1995) and amounts presented for periods
prior to fiscal 1996 have not been restated to include RISQ's historical results
of operations.
9
<PAGE> 10
RESULTS OF OPERATIONS:
The following table sets forth certain consolidated condensed statements of
income data of the Company expressed as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
JULY 31, JULY 31,
--------------- ---------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................. 84.7 81.9 83.7 82.1
----- ----- ----- -----
Gross profit.............................................. 15.3 18.1 16.3 17.9
Operating expenses:
Research and development................................ 1.2 1.4 1.3 1.5
Sales, general and administrative....................... 4.9 7.0 5.5 7.2
----- ----- ----- -----
Total operating expenses........................ 6.2 8.3 6.8 8.7
----- ----- ----- -----
Income from operations.................................... 9.1 9.8 9.4 9.2
Other income, net......................................... 0.2 0.6 0.3 0.5
----- ----- ----- -----
Income before provision for income taxes.................. 9.3 10.3 9.7 9.7
Provision for income taxes................................ 3.2 3.8 3.3 3.6
----- ----- ----- -----
Net income................................................ 6.2% 6.6% 6.4% 6.1%
===== ===== ===== =====
</TABLE>
NET SALES
Net sales consist of sales of specialty and standard memory products, PC
cards, embedded computer modules and communication card products, less returns
and discounts. Net sales for the third quarter of fiscal 1997 increased 100.0%
to $201.9 million from $101.0 million for the same period of fiscal 1996. Net
sales for the nine months ended July 31, 1997 increased 61.5% to $477.2 million
from $295.5 million for the comparable period of fiscal 1996. The increase in
net sales for both the three and nine month periods ended July 31, 1997 reflects
an overall increase in demand for the Company's products from new customers and
certain existing customers as compared to the same periods of fiscal 1996. In
addition, increases in sales of products manufactured on a turnkey basis as
compared to products manufactured on a consignment basis further contributed to
the increase in net sales as compared to the same periods of fiscal 1996.
GROSS PROFIT
Cost of sales includes the costs of semiconductor devices and other
components and materials purchased by the Company for its products, as well as
the direct labor and overhead costs associated with manufacturing. Gross profit
increased 68.5% to $30.9 million for the third quarter of fiscal 1997 from $18.3
million for the same period of fiscal 1996. Gross margin decreased to 15.3% for
the third quarter of fiscal 1997 from 18.1% for the comparable period of fiscal
1996. Gross profit for the nine months ended July 31, 1997 increased 47.2% to
$77.6 million from $52.7 million for the comparable period of fiscal 1996. Gross
margin decreased to 16.3% for the first nine months of fiscal 1997 from 17.9%
for the comparable period of fiscal 1996. The decrease in gross margin for the
three and nine month periods ended July 31, 1997 was due in large part to an
increase in the proportion of products manufactured on a turnkey basis versus
those products manufactured on a consignment basis as compared to the same
periods of fiscal 1996. Further contributing to the decline in gross margin was
an increase in the proportion of the Company's net sales derived from its lower
margin standard memory products as compared to the same periods of fiscal 1996.
The Company currently anticipates that a substantial majority of the Company's
memory products will continue to be manufactured on a turnkey basis in the near
term.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of the costs associated
with the design and testing of new products. These costs relate primarily to
compensation of personnel involved with development efforts,
10
<PAGE> 11
materials and outside design and testing services. Research and development
expenses increased 77.7% to $2.5 million for the third quarter of fiscal 1997
from $1.4 million during the same period of fiscal 1996 and totaled 1.2% and
1.4% of net sales for the third quarter of fiscal 1997 and fiscal 1996,
respectively. For the nine months ended July 31, 1997, research and development
expenses increased 47.7% to $6.4 million from $4.3 million for the comparable
period of fiscal 1996. Research and development expenses totaled 1.3% and 1.5%
of net sales for the first nine months of fiscal 1997 and fiscal 1996,
respectively. The Company expects that its research and development expenses
will increase in absolute dollars in future periods to the extent that the
Company expands its research and development efforts.
SALES, GENERAL AND ADMINISTRATIVE
Sales, general and administrative expenses consist primarily of personnel
costs (including salaries, performance-based bonuses, commissions and employee
benefits), facilities and equipment costs, costs related to advertising and
marketing and other support costs including utilities, insurance and
professional fees. Sales, general and administrative expenses incurred during
the third quarter of fiscal 1997 totaled $9.9 million, representing an increase
of 41.2% from $7.0 million for the same period of fiscal 1996. Sales, general
and administrative expenses totaled 4.9% and 7.0% of net sales for the third
quarter of fiscal 1997 and fiscal 1996, respectively. Sales, general and
administrative expenses increased 23.7% to $26.3 million during the first nine
months of fiscal 1997 from $21.2 million for the comparable period of fiscal
1996. Sales, general and administrative expenses totaled 5.5% and 7.2% of net
sales for the first nine months of fiscal 1997 and fiscal 1996, respectively.
The decrease in sales, general and administrative expenses as a percentage of
net sales was principally due to the growth in net sales generated by certain
OEM customers, which sales generally require lower incremental levels of selling
and marketing expenses. The Company expects that its sales, general and
administrative expenses will increase in absolute dollars in future periods to
the extent that the Company expands its staffing, information systems and other
systems and personnel in connection with the expansion of the Company's
infrastructure.
OTHER INCOME, NET
Other income, net consists primarily of interest income, less interest
expense. Interest expense is attributable to the Company's utilization of its
lines of credit and interest paid on certain lease obligations. Interest income
results from investment of cash balances. As compared to the same periods of
fiscal 1996, interest income earned during the three and nine month periods
ended July 31, 1997 declined due to lower cash balances.
PROVISION FOR INCOME TAXES
Provisions for income taxes were $6.4 million and $3.8 million for the
third quarter of fiscal 1997 and fiscal 1996, respectively, resulting in
effective tax rates of 34.0% and 36.7%, respectively. For the first nine months
of fiscal 1997 and fiscal 1996, the Company provided $15.8 million and $10.6
million for income taxes, respectively, resulting in effective tax rates of
34.0% and 37.0%, respectively. The decrease in the Company's consolidated
effective tax rate for the three and nine month periods ended July 31, 1997 was
principally due to an increase in the amount of income contributed to the
Company from its Puerto Rican and international operations as compared to the
same periods of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES:
Since inception, SMART has used funds generated primarily from operations,
certain borrowings, capital leases and equity financings to support its
operations, acquire capital equipment and finance inventory and accounts
receivable. The Company used cash from operating activities totaling $6.1
million for the nine months ended July 31, 1997 as a result of increases in
inventories and accounts receivable, as compared to cash provided by operations
totaling $5.8 million for the comparable period of fiscal 1996. At July 31,
1997, the Company had $43.2 million of cash, cash equivalents and short-term
investments, and $99.7 million of working capital. At October 31, 1996, the
Company had $61.1 million of cash, cash equivalents and short-term investments
and $74.3 million of working capital. The Company primarily funds its liquidity
require-
11
<PAGE> 12
ments from amounts borrowed under its existing line of credit and utilization of
existing cash balances. The Company expects to fund any future liquidity
requirements from a combination of available cash balances, the proceeds from
its pending secondary public offering and certain short-term borrowings under
its line of credit. The Company currently anticipates that its working capital
requirements will continue to increase in future periods to the extent that the
Company's operations continue to expand.
The Company has a revolving line of credit agreement (the "Credit Line")
with a term expiring May 30, 1998. Borrowings under the Credit Line are limited
to $20.0 million. Borrowings under the Credit Line bear interest at either the
bank's prime rate or a spread over LIBOR, at the Company's option. The Company
is required to maintain specified levels of tangible net worth and comply with
certain other covenants. The Credit Line is unsecured and no borrowings were
outstanding under the Credit Line as of July 31, 1997.
Capital expenditures totaled $12.9 million for the nine months ended July
31, 1997 and $9.0 million for fiscal 1996. These expenditures were primarily for
manufacturing and test equipment and the expansion of the Company's existing
manufacturing facilities. SMART anticipates spending between $18.0 million and
$20.0 million on capital expenditures in fiscal 1997 related to the continued
expansion of the Company's manufacturing facilities and related equipment.
SMART has entered into certain capital lease arrangements. The outstanding
principal on these obligations was $1.5 million and $2.7 million at July 31,
1997 and October 31, 1996, respectively.
FACTORS THAT MAY AFFECT FUTURE RESULTS:
The Company's business, financial condition and results of operations could
be impacted by a number of factors including without limitation the following
factors.
SIGNIFICANT CUSTOMER CONCENTRATION
A relatively small number of customers have accounted for a significant
percentage of the Company's net sales. For the nine months ended July 31, 1997,
fiscal 1996 and fiscal 1995, the Company's ten largest customers accounted for
86%, 71% and 68% of net sales, respectively. For the nine months ended July 31,
1997, the Company's three largest customers were Compaq, Cisco and
Hewlett-Packard, which accounted for 50%, 13% and 11% of net sales,
respectively. In fiscal 1996, the Company's three largest customers were Cisco,
Hewlett-Packard and IBM, which accounted for 19%, 15% and 12% of net sales,
respectively. In fiscal 1995, the Company's three largest customers were Cisco,
IBM and Hewlett-Packard, which accounted for 18%, 15% and 10% of net sales,
respectively. During these periods, no other customers accounted for more than
10% of net sales. The Company expects that sales to relatively few customers
will continue to account for a significant percentage of its net sales in the
foreseeable future. However, there can be no assurance that any of these
customers or any of the Company's other customers will continue to utilize the
Company's products at current levels, if at all. The Company has experienced
significant changes in the composition of its major customer base and expects
that this variability will continue in the future. For example, sales to Compaq,
which represented under 10% of net sales in fiscal 1996 and fiscal 1995,
represented 50% of the Company's net sales in the first nine months of fiscal
1997. The loss of any major customer or any reduction in orders by any such
customer would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has no firm long-term volume commitments from any of its major
customers and generally enters into individual purchase orders with its
customers, in certain cases under master agreements governing the terms and
conditions of the relationship. The Company has experienced cancellations of
orders and fluctuations in order levels from period to period and expects it
will continue to experience such cancellations and fluctuations in the future.
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. In
addition, under the terms of the Company's master agreement with Compaq, the
Company has granted Compaq certain rights to manufacture the Company's memory
module products and a license to certain intellectual property rights of the
Company, which Compaq may exercise under certain circumstances if the Company
does not have the manufacturing
12
<PAGE> 13
capacity to satisfy Compaq's forecasted production requirements. Moreover, the
Company's business, financial condition and results of operations will depend in
significant part on its ability to obtain orders from new customers, as well as
on the financial condition and success of its customers. Therefore, any adverse
factors affecting any of the Company's major customers or their customers could
have a material adverse effect on the Company's business, financial condition
and results of operations.
PRODUCT CONCENTRATION; DEPENDENCE ON MEMORY MARKET
A substantial majority of the Company's net sales is derived from memory
products. The market for memory products is characterized by frequent
transitions in which products rapidly incorporate new features and performance
standards. A failure to develop products with required feature sets or
performance standards or a delay as short as a few months in bringing a new
product to market could significantly reduce the Company's net sales for a
substantial period, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The market for semiconductor memory devices has been cyclical. The industry
has experienced significant economic downturns at various times, characterized
by diminished product demand, accelerated erosion of average selling prices and
production overcapacity. During fiscal 1996, there were significant declines in
DRAM and SRAM semiconductor prices and declines in Flash semiconductor prices.
Since the fiscal 1996 year end, there have been continued declines in certain
DRAM and Flash semiconductor prices. Because a substantial portion of the
Company's net sales are attributable to the resale of semiconductor memory
devices, future price declines could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON SEMICONDUCTOR, COMPUTER, TELECOMMUNICATIONS AND NETWORKING
INDUSTRIES
The Company may experience substantial period-to-period fluctuations in
future operating results due to factors affecting the semiconductor, computer,
telecommunications and networking industries. From time to time, each of these
industries has experienced downturns, often in connection with, or in
anticipation of, declines in general economic conditions. A decline or
significant shortfall in growth in any one of these industries could have a
material adverse impact on the demand for the Company's products and therefore a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, changes in end user demand for the products
sold by any individual OEM customer can have a rapid and exaggerated effect on
demand for the Company's products from that customer in any given period,
particularly in the event that the OEM customer has accumulated excess
inventories of products purchased from the Company. There can be no assurance
that the Company's net sales and results of operations will not be materially
and adversely affected in the future due to changes in demand from individual
customers or cyclical changes in the semiconductor, computer,
telecommunications, networking or other industries utilizing the Company's
products.
INTENSE COMPETITION
The memory module, PC card and embedded computer subsystem industries are
intensely competitive. Each of these markets includes a large number of
competitive companies, several of which have achieved a substantial market
share. Certain of the Company's competitors in each of these markets have
substantially greater financial, marketing, technical, distribution and other
resources, greater name recognition, lower cost structures and larger customer
bases than the Company. In the memory module market, the Company competes
against semiconductor manufacturers that maintain captive memory module
production capabilities, including Micron Electronics, Inc. (a subsidiary of
Micron Technology, Inc.) and Samsung Electronics Company Ltd. ("Samsung"). The
Company also competes with independent memory module manufacturers, including
Celestica Inc., PNY Electronics, Inc. and Simple Technology Incorporated. In the
computer systems reseller market for memory modules, the Company primarily
competes with companies such as Kingston Technology, Inc., Viking Technology,
Inc. and Vision Tek, Inc. In the PC card market, the Company competes with Hayes
Communications, Inc. and U.S. Robotics, Inc. (a subsidiary of 3Com Corporation),
among others. In the embedded computer subsystem market, the Company competes
with
13
<PAGE> 14
Force Computers Inc. (a subsidiary of Solectron), Motorola, Inc. and Radisys
Corporation, among others. The Company faces competition from current and
prospective customers that evaluate the Company's capabilities against the
merits of manufacturing products internally. In addition, certain of the
Company's competitors, such as Samsung, are significant suppliers to the
Company. These suppliers may have the ability to manufacture competitive
products at lower costs than the Company as a result of their higher levels of
integration. The Company also faces competition from new and emerging companies
that have recently entered or may in the future enter the markets in which the
Company participates.
The Company expects its competitors to continue to improve the performance
of their current products, to reduce their current product sales prices and to
introduce new products that may offer greater performance and improved pricing,
any of which could cause a decline in sales or loss of market acceptance of the
Company's products. There can be no assurance that enhancements to or future
generations of competitive products will not be developed that offer better
prices or technical performance features than the Company's products. To remain
competitive, the Company must continue to provide technologically advanced
products and manufacturing services, maintain quality levels, offer flexible
delivery schedules, deliver finished products on a reliable basis, reduce
manufacturing and testing costs and compete favorably on the basis of price. In
addition, increased competitive pressure has led in the past and may continue to
lead to intensified price competition, resulting in lower prices and gross
margin, which could materially adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to compete successfully in the future.
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations and gross margin have fluctuated
significantly from period to period in the past and may in the future continue
to fluctuate significantly from period to period. The primary factors that have
affected and may in the future affect the Company's results of operations
include the loss of a principal customer or the reduction in orders from a
customer due to excess product inventory accumulation by such customer, adverse
changes in the mix of products sold by the Company and the inability to procure
required components. Other factors that may affect the Company's results of
operations in the future include fluctuating market demand for and declines in
the selling prices of the Company's products, market acceptance of new products
and enhanced versions of the Company's products, delays in the introduction of
new products and enhancements to existing products, and manufacturing
inefficiencies associated with the start up of new product introductions. In
addition, the Company's operating results may be affected by the timing of new
product announcements and releases by the Company or its competitors, the timing
of significant orders, the ability to produce products in volume, delays,
cancellations or reschedulings of orders due to customer financial difficulties
or other events, inventory obsolescence, including the reduction in value of the
Company's inventories due to unexpected price declines, unexpected product
returns, the timing of expenditures in anticipation of increased sales,
cyclicality in the Company's targeted markets, and expenses associated with
acquisitions. In particular, declines in DRAM, SRAM and Flash semiconductor
prices could affect the valuation of the Company's inventory which could result
in adverse changes in the Company's business, financial condition and results of
operations. The concentration of the Company's assets in its Fremont, California
facility could make the Company's exposure to business disruptions greater than
if the Company's assets were more geographically dispersed.
The Company's net sales and gross margin has varied and will continue to
vary significantly based on a variety of factors, including the mix of products
sold and the manufacturing services provided, the channels through which the
Company's products are sold, changes in product selling prices and component
costs, the level of manufacturing efficiencies achieved and pricing by
competitors. The selling prices of the Company's existing products have declined
in the past and the Company expects that prices will continue to decline in the
future. In particular, during fiscal 1996, the selling prices of the Company's
existing products declined due to significant declines in DRAM and SRAM
semiconductor prices and declines in Flash semiconductor prices. Moreover, since
the fiscal 1996 year end, declines in the selling prices of certain of the
Company's existing products have continued due to further declines in certain
DRAM and Flash semiconductor prices. Because a substantial portion of the
Company's turnkey sales are attributable to the resale of semiconductor devices,
a
14
<PAGE> 15
continued decline in the prices of these components could have a material
adverse effect on the Company's net sales. Accordingly, the Company's ability to
maintain or increase net sales will be highly dependent upon its ability to
increase unit sales volumes of existing products and to introduce and sell new
products in quantities sufficient to compensate for the anticipated declines in
selling prices. Declining product selling prices may also materially and
adversely affect the Company's gross margin unless the Company is able to reduce
its cost per unit to offset declines in product selling prices. There can be no
assurance that the Company will be able to increase unit sales volumes,
introduce and sell new products or reduce its cost per unit. In addition, the
Company's business has in the past been subject to seasonality, although the
Company believes such seasonality has been masked by its growth. The Company
expects that its business will experience more significant seasonality as it
expands its sales and marketing efforts in Europe.
Sales of the Company's individual products and product lines toward the end
of a product's life cycle are typically characterized by steep declines in
sales, pricing and gross margin, the precise timing of which may be difficult to
predict. The Company could experience unexpected reductions in sales of products
as customers anticipate new product purchases. In addition, to the extent that
the Company manufactures products in anticipation of future demand that does not
materialize, or in the event a customer cancels outstanding orders during a
period of either declining product selling prices or decreasing demand, the
Company could experience an unanticipated decrease in sales of products. These
factors could give rise to charges for obsolete or excess inventory, returns of
products by distributors, or substantial price protection charges or discounts.
In the past, the Company has had to write-down and write-off excess or obsolete
inventory. To the extent that the Company is unsuccessful in managing product
transitions, its business, financial condition and results of operations could
be materially and adversely affected.
The need for continued significant expenditures for capital equipment
purchases, research and development and ongoing customer service and support,
among other factors, will make it difficult for the Company to reduce its
operating expenses in any particular period if the Company's expectations for
net sales for that period are not met. The Company has significantly increased
its expense levels to support its recent growth, and there can be no assurance
that the Company will maintain its current level of net sales or rate of growth
for any period in the future. Accordingly, there can be no assurance that the
Company will be able to continue to be profitable. The Company believes that
period-to-period comparisons of the Company's financial results are not
necessarily meaningful and should not be relied upon as indications of future
performance. Due to the foregoing factors, it is likely that in some future
period the Company's operating results will be below the expectations of public
market analysts or investors. In such event, the market price of the Company's
securities would be materially and adversely affected.
DEPENDENCE ON SOLE OR LIMITED SOURCES OF SUPPLY
The Company is dependent on certain suppliers, including limited and sole
source suppliers, to provide key components used in the Company's products. In
particular, the Company is dependent in significant part upon certain limited or
sole source suppliers for critical components in the Company's memory module, PC
card and embedded computer module products. The Company also depends on sole
source third party manufacturers to produce certain of the Company's embedded
computer module products. The electronics industry has experienced in the past,
and may experience in the future, shortages in semiconductor devices, including
DRAM, SRAM and Flash memory. The Company has experienced and may continue to
experience delays in component deliveries and quality problems with respect to
certain component deliveries which have caused and could in the future cause
delays in product shipments and have required and could in the future require
the redesign of certain products. The Company generally has no written
agreements with its suppliers. There can be no assurance that the Company will
receive adequate component supplies on a timely basis in the future. The
inability to continue to obtain sufficient supplies of components as required,
or to develop alternative sources if required, could cause delays, disruptions
or reductions in product shipments or require product redesigns which could
damage relationships with current or prospective customers, could increase costs
and/or prices and could have a material adverse effect on the Company's
business, financial condition and results of operations.
15
<PAGE> 16
MANAGEMENT OF GROWTH; EXPANSION OF OPERATIONS
The Company has significantly expanded its operations over the last several
years. This growth has resulted in a significant increase in responsibility for
existing management which has placed, and may continue to place, a significant
strain on the Company's limited personnel and management, manufacturing and
other resources. The Company's ability to manage the recent and any possible
future growth will require a significant expansion of its manufacturing
capacity, accounting and other internal management systems and the
implementation of a variety of procedures and controls. There can be no
assurance that significant problems in these areas will not occur. Any failure
to expand these systems and implement such procedures and controls in an
efficient manner and at a pace consistent with the Company's business could have
a material adverse effect on the Company's business, financial condition and
results of operations.
In connection with the Company's recent growth, the Company's operating
expenses have increased significantly, and the Company anticipates that
operating expenses will continue to increase in absolute dollars in the future.
In particular, in order to continue to provide quality products and customer
service and to meet any anticipated demand of its customers, the Company will be
required to continue to increase staffing and other expenses, including
expenditures on capital equipment, sales and marketing. Should the Company
increase its expenditures in anticipation of a future level of sales that does
not materialize, the Company's business, financial condition and results of
operations would be materially and adversely affected. Certain customers have
required and may continue to require rapid increases in production and
accelerated delivery schedules which have placed and may continue to place a
significant burden on the Company's resources. In order to achieve anticipated
sales levels and profitability, the Company will continue to be required to
manage its assets and operations efficiently. In addition, should the Company
continue to expand geographically, it may experience certain inefficiencies from
the management of geographically dispersed facilities.
The Company anticipates that future demand for its products will require
expansion of its current operations and the addition of new production lines in
the future. Specifically, the Company currently expects that it will relocate
its manufacturing operations in Puerto Rico from a 23,000 square foot facility
in Arecibo, Puerto Rico into a new 83,000 square foot facility in Aguada, Puerto
Rico. Should the Company's relocation to this facility be delayed or should the
Company experience any unexpected disruptions associated with this transition,
the Company's results of operations could be materially and adversely affected.
There can be no assurance that any such expansion will be completed
successfully.
RAPID TECHNOLOGICAL CHANGE
The semiconductor, computer, telecommunications and networking industries are
subject to rapid technological change, short product life cycles, frequent new
product introductions and enhancements, changes in end-user requirements and
evolving industry standards. The Company's ability to be competitive in these
markets will depend in significant part upon its ability to invest significant
amounts of resources for research and development efforts, to successfully
develop, introduce and sell new products and enhancements on a timely and
cost-effective basis and to respond to changing customer requirements that meet
evolving industry standards. For example, the semiconductor memory market is
currently transitioning from fast page mode and EDO memory to SDRAM, and the
industry standard modem is currently changing from a 33.6 kbps synchronous modem
to a 56 kbps asynchronous modem. The Company is currently focusing its research
and development resources on the development of SDRAM, Flash and SRAM products,
56 kbps asynchronous modem products and various embedded computer modules. The
success of the Company in developing new and enhanced products will depend upon
a variety of factors, including integration of the various elements of its
complex technology, timely and efficient completion of product design, timely
and efficient implementation of manufacturing and assembly processes,
availability of production capacity, achievement of acceptable manufacturing
yields and product performance, quality and reliability. The Company has
experienced, and may in the future experience, delays from time to time in the
development and introduction of new products. Moreover, there can be no
assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new products or enhancements. There can be no
assurance that defects or errors will not be found in the Company's products
after commencement of commercial shipments, which could result in the delay in
market acceptance of such products. The inability of the Company to introduce
new
16
<PAGE> 17
products or enhancements that contribute to sales 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. The Company's
future operating results also depend in significant part upon its ability to
attract, train and retain qualified management, manufacturing and quality
assurance, engineering, marketing, sales and support personnel. The Company is
actively recruiting such personnel. However, competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting, training or retaining such personnel now or in the future. There may
be only a limited number of persons with the requisite skills to serve in these
positions and it may be increasingly difficult for the Company to hire such
persons over time. The loss of any key employee, the failure of any key employee
to perform in his or her current position, the Company's inability to attract,
train and retain skilled employees as needed or the inability of the officers
and key employees of the Company to expand, train and manage the Company's
employee base could materially and adversely affect the Company's business,
financial condition and results of operations.
INTERNATIONAL SALES
International sales accounted for 14%, 8% and 14% of net sales in fiscal
1995, fiscal 1996 and the first nine months of fiscal 1997, respectively. The
Company anticipates that international sales will increase in future periods and
will account for an increasing portion of net sales. As a result, an increasing
portion of the Company's sales will be subject to certain risks, including
changes in regulatory requirements, tariffs and other barriers, timing and
availability of export licenses, political and economic instability,
difficulties in accounts receivable collections, natural disasters, difficulties
in staffing and managing foreign subsidiary and branch operations, difficulties
in managing distributors, difficulties in obtaining governmental approvals for
telecommunications and other products, foreign currency exchange fluctuations,
the burden of complying with a wide variety of complex foreign laws and treaties
and potentially adverse tax consequences. The Company is also subject to the
risks associated with the imposition of legislation and regulations relating to
the import or export of high technology products. The Company cannot predict
whether quotas, duties, taxes or other charges or restrictions upon the
importation or exportation of the Company's products will be implemented by the
United States or other countries. Because sales of the Company's products have
been denominated to date primarily in U.S. dollars, increases in the value of
the U.S. dollar could increase the price of the Company's products so that they
become relatively more expensive to customers in the local currency of a
particular country, leading to a reduction in sales and profitability in that
country. Future international activity may result in increased foreign currency
denominated sales. Gains and losses on the conversion to U.S. dollars of
accounts receivable, accounts payable and other monetary assets and liabilities
arising from international operations may contribute to fluctuations in the
Company's results of operations. Some of the Company's customer purchase orders
and agreements are governed by foreign laws, which may differ significantly from
U.S. laws. Therefore, the Company may be limited in its ability to enforce its
rights under such agreements and to collect damages, if awarded. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company's business, financial condition and results of operations.
UNCERTAINTY REGARDING PROTECTION OF PROPRIETARY RIGHTS
In the semiconductor, computer, telecommunications and networking
industries, it is typical for companies to receive notices from time to time
alleging infringement of patents, copyrights or other intellectual property
rights of others. While there is currently no material pending intellectual
property litigation involving the Company, the Company has been and may from
time to time continue to be notified of claims that it may be infringing
patents, copyrights or other intellectual property rights owned by third
parties. There can be no assurance that these or other companies will not in the
future pursue claims against the Company with respect to the alleged
infringement of patents, copyrights or other intellectual property rights.
17
<PAGE> 18
In addition, litigation may be necessary to protect the Company's intellectual
property rights and trade secrets, to determine the validity of and scope of the
proprietary rights of others or to defend against third party claims of
invalidity. Any litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations.
There can be no assurance that infringement, invalidity, right to use or
ownership claims by third parties or claims for indemnification resulting from
infringement claims will not be asserted in the future. The Company has entered
into license agreements in the past regarding certain alleged infringement
claims asserted by third parties. If any other claims or actions are asserted
against the Company, the Company may again seek to obtain a license under a
third party's intellectual property rights. There can be no assurance, however,
that a license will be available under reasonable terms or at all. The failure
to obtain a license under a patent or intellectual property right from a third
party for technology used by the Company could cause the Company to incur
substantial liabilities and to suspend the manufacture of the products utilizing
the intellectual property. In addition, should the Company decide to litigate
such claims, such litigation could be extremely expensive and time consuming and
could materially and adversely affect the Company's business, financial
condition and results of operations, regardless of the outcome of the
litigation.
The Company attempts to protect its intellectual property rights through a
variety of measures including non-disclosure agreements, trademarks, trade
secrets and to a lesser extent, patents. There can be no assurance, however,
that such measures will provide adequate protection for the Company's trade
secrets or other proprietary information, that disputes with respect to the
ownership of its intellectual property rights will not arise, that the Company's
trade secrets or proprietary technology will not otherwise become known or be
independently developed by competitors or that the Company can otherwise
meaningfully protect its intellectual property rights.
RISKS ASSOCIATED WITH ACQUISITIONS
As part of its business strategy, the Company expects to make acquisitions
of, or significant investments in, businesses that offer complementary products
and technologies. Any such future acquisitions or investments would expose the
Company to the risks commonly encountered in acquisitions of businesses. Such
risks include, among others, difficulty of assimilating the operations,
information systems and personnel of the acquired businesses, the potential
disruption of the Company's ongoing business, the inability of management to
maximize the financial and strategic position of the Company through the
successful incorporation of acquired employees and customers, the maintenance of
uniform standards, controls, procedures and policies and the impairment of
relationships with employees and customers as a result of any integration of new
management personnel. There can be no assurance that any potential acquisition
will be consummated or, if consummated, that it will not have a material adverse
effect on the Company's business, financial condition and results of operations.
VOLATILITY OF STOCK PRICES
There has been a history of significant volatility in the market prices of
the common stock of technology companies, including the Common Stock of the
Company, and it is likely that the market price of the Company's Common Stock
will continue to be subject to significant fluctuations. Factors such as the
timing and market acceptance of new product introductions by the Company, demand
for products of the Company's customers, the introduction of new products by the
Company's competitors, variations in quarterly operating results, changes in
securities analysts' recommendations regarding the Company's Common Stock,
developments in the technology industry and general economic conditions may have
a significant impact on the market price of the Company's Common Stock. In
addition, the equity markets in recent years have experienced significant price
and volume fluctuations that have affected the market prices of technology
companies and that have often been unrelated to the operating performance of
such companies.
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<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: For a list of exhibits to this Form 10-Q see the exhibit
index located on pages 21-22.
(b) Reports on Form 8-K: There were no reports on Form 8-K filed during the
three months ended July 31, 1997.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SMART MODULAR TECHNOLOGIES, INC.
By: /s/ DAVID B. MULLIN
------------------------------------
David B. Mullin
Vice President, Finance and
Chief Financial Officer
(Principal Financial and)
Accounting Officer)
Date: August 28, 1997
20
<PAGE> 21
SMART MODULAR TECHNOLOGIES, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- - ---------- ----------------------------------------------------------------------------
<C> <S>
2.1(1) Agreements and Plan of Reorganization among the Registrant, Apex 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.
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- - ---------- ----------------------------------------------------------------------------
<C> <S>
10.21(1) First Amendment to the Krypton Isolation, Inc. Warrant to Purchase 2,000,000
Shares of Series A Preferred Stock between the Registrant and Krypton
Isolation, Inc. dated October 24, 1995.
10.22(1) Letter of Intent dated as of October 24, 1995 by and among Krypton
Isolation, Inc., the Registrant and certain individuals identified on the
signature pages thereto.
**10.23(2) License and Supply Agreement between the Registrant and Krypton Isolation,
Inc. dated January 29, 1996.
10.24(2) Warrant Purchase Agreement between the Registrant and Krypton Isolation,
Inc. dated January 29, 1996.
10.25(2) First Amended and Restated Holders' Agreement dated January 29, 1996 by and
among Krypton Isolation, Inc. and certain individuals and entities
identified on Exhibit A attached thereto.
10.26(2) Common Stock Agreement dated January 29, 1996 by and among Krypton
Isolation, Inc. and the entities identified on Exhibit A attached thereto.
10.27(2) First Amendment to the License and Supply Agreement between the Registrant
and Krypton Isolation, Inc. dated January 29, 1996.
10.28(3) 1989 Incentive Stock Plan, as amended, dated March 25, 1996.
10.29(4) Fourth Amendment to Lease between the Registrant and Riggs Bank N.A. dated
September 27, 1996.
10.30 Revolving Line of Credit Note between the Registrant and Wells Fargo Bank,
National Association dated May 29, 1997.
10.31 Credit Agreement between the Registrant and Wells Fargo Bank, National
Association dated May 29, 1997.
10.32 Subfeature Note between the Registrant and Wells Fargo Bank, National
Association dated May 29, 1997.
27.1 Financial Data Schedule for the Quarter Ended July 31, 1997.
</TABLE>
- - ---------------
(1) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 33-97748) filed October 4, 1995,
Amendment No. 1 thereto filed October 24, 1995, Amendment No. 2 thereto
filed November 6, 1995, Amendment No. 3 thereto filed November 14, 1995 and
Amendment No. 4 thereto filed November 16, 1995, which Registration
Statement became effective November 16, 1995.
(2) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-Q filed March 16, 1996.
(3) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-Q filed June 14, 1996.
(4) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-Q filed June 16, 1997.
* Pursuant to Rule 406(b) under the Securities Act of 1933, confidential
treatment has been granted to certain portions of this exhibit, which
portions have been deleted and filed separately with the Securities and
Exchange Commission.
** Pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
confidential treatment has been granted to certain portions of this exhibit,
which portions have been deleted and filed separately with the Securities
and Exchange Commission.
22
<PAGE> 1
Exhibit 10.30
REVOLVING LINE OF CREDIT NOTE
$20,000,000.00 San Jose, California
May 29, 1997
FOR VALUE RECEIVED, the undersigned SMART MODULAR TECHNOLOGIES, INC.
("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank") at its office at Santa Clara Valley RCBO, 121 Park Center
Plaza, San Jose, California, or at such other place as the holder hereof may
designate, in lawful money of the United States of America and in immediately
available funds, the principal sum of Twenty Million Dollars ($20,000,000.00),
or so much thereof as may be advanced and be outstanding, with interest thereon,
to be computed on each advance from the date of its disbursement as set forth
herein.
DEFINITIONS:
As used herein, the following terms shall have the meanings set forth
after each, and any other term defined in this Note shall have the meaning set
forth at the place defined:
(a) "Business Day" means any day except a Saturday, Sunday or any other
day on which commercial banks in California are authorized or required by law to
close.
(b) "Fixed Rate Term" means a period commencing on a Business Day and
continuing for one (1), two (2) or three (3) months, as designated by Borrower,
during which all or a portion of the outstanding principal balance of this Note
bears interest determined in relation to LIBOR; provided however, that no Fixed
Rate Term may be selected for a principal amount less than one Million Dollars
($1,000,000.00); and provided further, that no Fixed Rate Term shall extend
beyond the scheduled maturity date hereof. If any Fixed Rate Term would end on a
day which is not a Business Day, then such Fixed Rate Term shall be extended to
the next succeeding Business Day.
(c) "LIBOR" means, for each Fixed Rate Term, the rate per annum
(rounded upward, if necessary, to the nearest whole 1/16 of 1%) and determined
pursuant to the following formula:
LIBOR = Base LIBOR
---------------------------------------
100% - LIBOR Reserve Percentage
(i) "Base LIBOR" means the average of the rates per annum (rounded
upward, if necessary, to the nearest 1/16 of 1%) at which U.S. dollar deposits
are offered to Agent in the London interbank Eurocurrency market on the second
Business Day prior to the commencement of a Fixed Rate Term at or about 11:00
A.M.
<PAGE> 2
(London time), for delivery on the first day of such Fixed Rate Term, for a term
comparable to the number of days in such Fixed Rate Term and in an amount
approximately equal to the principal amount to which such Fixed Rate Term shall
apply.
(ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed
by the Board of Governors of the Federal Reserve System (or any successor) for
"Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve
Board, as amended), adjusted by Bank for expected changes in such reserve
percentage during the applicable Fixed Rate Term.
(d) "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) either
(i) at a fluctuating rate equal to the Prime Rate in effect from time to time,
or (ii) at a fixed rate per annum determined by Bank to be one and one-fourth
percent (1.25%) above LIBOR in effect on the first day of the applicable Fixed
Rate Term. When interest is determined in relation to the Prime Rate, each
change in the rate of interest hereunder shall become effective on the date each
Prime Rate change is announced within Bank. With respect to each LIBOR selection
hereunder, Bank is hereby authorized to note the date, principal amount,
interest rate and Fixed Rate Term applicable thereto and any payments made
thereon on Bank's books and records (either manually or by electronic entry)
and/or on any schedule attached to this Note, which notations shall be prima
facie evidence of the accuracy of the information noted.
(b) Selection of Interest Rate Options. At any time any portion of this
Note bears interest determined in relation to LIBOR, it may be continued by
Borrower at the end of the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate or to
LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion
of this Note bears interest determined in relation to the Prime Rate, Borrower
may convert all or a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as
Borrower requests an advance hereunder or wishes to select a
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<PAGE> 3
LIBOR option for all or a portion of the outstanding principal balance hereof,
and at the end of each Fixed Rate Term, Borrower shall give Bank notice
specifying: (i) the interest rate option selected by Borrower; (ii) the
principal amount subject thereto; and (iii) for each LIBOR selection, the length
of the applicable Fixed Rate Term. Any such notice may be given by telephone so
long as, with respect to each LIBOR selection, (A) Bank receives written
confirmation from Borrower not later than three (3) Business Days after such
telephone notice is given (provided that Bank's failure to receive such notice
shall not invalidate an advance which has been made), and (B) such notice is
given to Bank prior to 10:00 a.m., California time, on the first day of the
Fixed Rate Term. For each LIBOR option requested hereunder, Bank will quote the
applicable fixed rate to Borrower at approximately 10:00 a.m., California time,
on the first day of the Fixed Rate Term. If Borrower does not immediately accept
the rate quoted by Bank, any subsequent acceptance by Borrower shall be subject
to a redetermination by Bank of the applicable fixed rate; provided however,
that if Borrower fails to accept any such rate by 11:00 a.m., California time,
on the Business Day such quotation is given, then the quoted rate shall expire
and Bank shall have no obligation to permit a LIBOR option to be selected on
such day. If no specific designation of interest is made at the time any advance
is requested hereunder or at the end of any Fixed Rate Term, Borrower shall be
deemed to have made a Prime Rate interest selection for such advance or the
principal amount to which such Fixed Rate Term applied.
(c) Additional LIBOR Provisions.
(i) If Bank at any time shall determine that for any reason adequate
and reasonable means do not exist for ascertaining LIBOR, then Bank shall
promptly give notice thereof to Borrower. If such notice is given and until such
notice has been withdrawn by Bank, then (A) no new LIBOR option may be selected
by Borrower, and (B) any portion of the outstanding principal balance hereof
which bears interest determined in relation to LIBOR, subsequent to the end of
the Fixed Rate Term applicable thereto, shall bear interest determined in
relation to the Prime Rate.
(ii) If any change after the date hereof in law, treaty, rule,
regulation or determination of a court or governmental authority or any change
therein or in the interpretation or application thereof (each, a "Change in
Law") shall make it unlawful for Bank (A) to make LIBOR options available
hereunder, or (B) to maintain interest rates based on LIBOR, then in the former
event, any obligation of Bank to make available such unlawful LIBOR options
shall immediately be cancelled, and in the latter event, any such unlawful
LIBOR-based interest rates then outstanding shall be converted, at Bank's
option, so that
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<PAGE> 4
interest on the portion of the outstanding principal balance subject thereto is
determined in relation to the Prime Rate; provided however, that if any such
Change in Law shall permit any LIBOR-based interest rates to remain in effect
until the expiration of the Fixed Rate Term applicable thereto, then such
permitted LIBOR-based interest rates shall continue in effect until the
expiration of such Fixed Rate Term. Upon the occurrence of any of the foregoing
events, Borrower shall pay to Bank immediately upon demand such amounts as may
be necessary to compensate Bank for any fines, fees, charges, penalties or other
costs incurred or payable by Bank as a result thereof and which are attributable
to any LIBOR options made available to Borrower hereunder, and any reasonable
allocation made by Bank among its operations shall be conclusive and binding
upon Borrower.
(iii) If any Change in Law or compliance by Bank with any request or
directive (whether or not having the force of law) from any central bank or
other governmental authority shall:
(A) subject Bank to any tax, duty or other charge with respect to
any LIBOR options, or change the basis of taxation of payments
to Bank of principal, interest, fees or any other amount
payable hereunder (except for changes in the rate of tax on
the overall net income of Bank); or
(B) impose, modify or hold applicable any reserve, special
deposit, compulsory loan or similar requirement against assets
held by, deposits or other liabilities in or for the account
of, advances or loans by, or any other acquisition of funds by
any office of Bank; or
(C) impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any LIBOR options hereunder and/or to reduce any
amount receivable by Bank in connection therewith, then in any such case,
Borrower shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any additional costs incurred by Bank and/or
reductions in amounts received by Bank which are attributable to such LIBOR
options. In determining which costs incurred by Bank and/or reductions in
amounts received by Bank are attributable to any LIBOR options made available to
Borrower hereunder, any reasonable allocation made by Bank among its operations
and demonstrated to Borrower shall be conclusive and binding upon Borrower.
(d) Payment of Interest. Interest accrued on this Note shall be payable
on the first day of each month, commencing July 1, 1997.
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<PAGE> 5
(e) Default Interest. From and after the maturity date of this Note, or
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to four percent (4%) above
the rate of interest from time to time applicable to this Note.
BORROWING AND REPAYMENT:
(a) Borrowing and Repayment. Borrower may from time to time during the
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and reborrow, subject to all of the limitations, terms and conditions of this
Note and of the Credit Agreement, defined below; provided however, that the
total outstanding borrowings under this Note shall not at any time exceed the
principal amount stated above. The unpaid principal balance of this obligation
at any time shall be the total amounts advanced hereunder by the holder hereof
less the amount of principal payments made hereon by or for Borrower, which
balance may be endorsed hereon from time to time by the holder. The outstanding
principal balance of this Note shall be due and payable in full on May 1, 1998.
(b) Advances. Advances hereunder, to the total amount of the principal
sum stated above, shall be made by the holder at the oral or written request of
(i) Ajah Shah or Lata Krishnan or David Mullin or Jack Pacheco, any one acting
alone, who are authorized to request advances and direct the disposition of any
advances until written notice of the revocation of such authority is received by
the holder at the office designated above, or (ii) any person, with respect to
advances deposited to the credit of any account of any Borrower with the holder,
which advances, when so deposited, shall be conclusively presumed to have been
made to or for the benefit of each Borrower regardless of the fact that persons
other than those authorized to request advances may have authority to draw
against such account. The holder shall have no obligation to determine whether
any person requesting an advance is or has been authorized by any Borrower.
(c) Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
LIBOR, with such payments applied to the oldest Fixed Rate Term first.
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<PAGE> 6
PREPAYMENT:
(a) Prime Rate. Borrower may prepay principal on any portion of this
Note which bears interest determined in relation to the Prime Rate at any time,
in any amount and without penalty.
(b) LIBOR. Borrower may prepay principal on any portion of this Note
which bears interest determined in relation to LIBOR at any time and in the
minimum amount of Ten Thousand Dollars ($10,000.00); provided however, that if
the outstanding principal balance of such portion of this Note is less than said
amount, the minimum prepayment amount shall be the entire outstanding principal
balance thereof. In consideration of Bank providing this prepayment option to
Borrower, or if any such portion of this Note shall become due and payable at
any time prior to the last day of the Fixed Rate Term applicable thereto by
acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a
fee which is the sum of the discounted monthly differences for each month from
the month of prepayment through the month in which such Fixed Rate Term matures,
calculated as follows for each such month:
(i) Determine the amount of interest which would have accrued each
month on the amount prepaid at the interest rate applicable to
such amount had it remained outstanding until the last day of
the Fixed Rate Term applicable thereto.
(ii) Subtract from the amount determined in (i) above the amount of
interest which would have accrued for the same month on the
amount prepaid for the remaining term of such Fixed Rate Term
at LIBOR in effect on the date of prepayment for new loans
made for such term and in a principal amount equal to the
amount prepaid.
(iii) If the result obtained in (ii) for any month is greater than
zero, discount that difference by LIBOR used in (ii) above.
Each Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Each Borrower, therefore, agrees to pay the above-described
prepayment fee and agrees that said amount represents a reasonable estimate of
the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to
pay any prepayment fee when due, the amount of such prepayment fee shall
thereafter bear interest until paid at a rate per annum two percent (2.0%) above
the Prime Rate in effect from time to time (computed on the basis of a 360-day
year, actual days elapsed). Each change in the rate of interest
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<PAGE> 7
on any such past due prepayment fee shall become effective on the date each
Prime Rate change is announced within Bank.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and
conditions of that certain Credit Agreement between Borrower and Bank dated as
of May 29, 1997, as amended from time to time (the "Credit Agreement"). Any
default in the payment or performance of any obligation under this Note, or any
defined event of default under the Credit Agreement, shall constitute an "Event
of Default" under this Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default, the holder
of this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, notice of nonperformance, notice of protest, protest or
notice of dishonor, all of which are expressly waived by each Borrower, and the
obligation, if any, of the holder to extend any further credit hereunder shall
immediately cease and terminate. Borrower shall pay to the holder immediately
upon demand the full amount of all payments, advances, charges, costs and
expenses, including reasonable attorneys' fees (to include outside counsel fees
and all allocated costs of the holder's in-house counsel), expended or incurred
by the holder in connection with the enforcement of the holder's rights and/or
the collection of any amounts which become due to the holder under this Note,
and the prosecution or defense of any action in any way related to this Note,
including without limitation, any action for declaratory relief, whether
incurred at the trial or appellate level, in an arbitration proceeding or
otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.
(b) Obligations Joint and Several. Should more than one person or
entity sign this Note as a Borrower, the obligations of each such Borrower shall
be joint and several.
(c) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of California.
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<PAGE> 8
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
SMART MODULAR TECHNOLOGIES, INC.
By: /s/ LATA KRISHNAN
------------------------------------
Title: Vice President, Administration
By: /s/ DAVID B. MULLIN
------------------------------------
Title: Vice President, Finance and
Chief Financial Officer
-8-
<PAGE> 1
Exhibit 10.31
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of May 29, 1997, by and between SMART
MODULAR TECHNOLOGIES, INC., a California corporation ("Borrower"), SMART MODULAR
TECHNOLOGIES (EUROPE) LIMITED, a private limited company incorporated in
England, ("Smart(Europe)"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITAL
Borrower has requested from Bank the credit accommodation described
below, and Bank has agreed to provide said credit accommodation to Borrower on
the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Bank and Borrower hereby agree as follows:
ARTICLE I
THE CREDIT
SECTION 1.1. LINE OF CREDIT.
(a) Line of Credit. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time up
to and including May 1, 1998, not to exceed at any time the aggregate principal
amount of Twenty Million Dollars ($20,000,000.00) ("Line of Credit"), the
proceeds of which shall be used for working capital purposes. Borrower's
obligation to repay advances under the Line of Credit shall be evidenced by a
promissory note substantially in the form of Exhibit A attached hereto ("Line of
Credit Note"), all terms of which are incorporated herein by this reference.
(b) Subfeature. Subject to the terms and conditions of this Agreement,
Bank hereby agrees to make advances to Smart(Europe) from time to time up to and
including May 1, 1998, not to exceed at any time the aggregate principal amount
of Ten Million Dollars ($10,000,000.00) ("Subfeature"), the proceeds of which
shall be used for working capital purposes. Smart(Europe)'s obligation to repay
advances under the Subfeature shall be evidenced by a promissory note
substantially in the form of Exhibit B attached hereto ("Smart (Europe) Note"),
all terms of which are incorporated herein by this reference. The outstanding
principal balance of advances and the available undrawn balance of Letters of
Credit issued under the Subfeature
<PAGE> 2
shall be reserved under the Line of Credit and shall not be available for
advances or Letters of Credit thereunder.
(c) Letter of Credit Subfeature. As a subfeature under the Line of
Credit and Subfeature, Bank agrees from time to time during the term thereof to
issue sight commercial and standby letters of credit for the account of Borrower
or Smart(Europe), respectively, to finance working capital and business
requirements (each, a "Letter of Credit" and collectively, "Letters of Credit");
provided however, that the form and substance of each Letter of Credit shall be
subject to approval by Bank, in its sole discretion; and provided further, that
the aggregate undrawn amount of all outstanding Letters of Credit shall not at
any time exceed Four Million Dollars ($4,000,000.00). No Letter of Credit shall
have an expiration date subsequent to the maturity date of the Line of Credit.
The undrawn amount of all Letters of Credit for the account of Borrower shall be
reserved under the Line of Credit and the undrawn amount of all Letters of
Credit for the account of Smart(Europe) shall be reserved under the Subfeature
and shall not be available for borrowings thereunder. Each Letter of Credit
shall be subject to the additional terms and conditions of the Letter of Credit
Agreement and related documents, if any, required by Bank in connection with the
issuance thereof (each, a "Letter of Credit Agreement" and collectively, "Letter
of Credit Agreements"). Each draft paid by Bank under a Letter of Credit shall
be deemed an advance under the Line of Credit or Subfeature, as applicable, and
shall be repaid by Borrower or Smart(Europe), in accordance with the terms and
conditions of this Agreement applicable to such advances; provided however, that
if advances under the Line of Credit or Subfacility, as applicable, are not
available, for any reason, at the time any draft is paid by Bank, then Bank
shall so notify Borrower or Smart(Europe), as applicable, and Borrower or
Smart(Europe) shall immediately pay to Bank the full amount of such draft,
together with interest thereon from the date such amount is paid by Bank to the
date such amount is fully repaid by Borrower or Smart(Europe), at the rate of
interest applicable to advances under the Line of Credit. In such event Borrower
agrees that Bank, in its sole discretion, may debit any demand deposit account
maintained by Borrower with Bank for the amount of any such draft.
(d) Borrowing and Repayment. Borrower or Smart(Europe) may from time to
time during the terms of the Line of Credit and Subfeature, respectively borrow,
partially or wholly repay its outstanding borrowings, and reborrow, subject to
all of the limitations, terms and conditions contained herein or in the Line of
Credit Note and Smart(Europe) Note, respectively; provided however, that the
total outstanding borrowings under the Line of Credit an Subfeature shall not at
any time exceed the respective
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<PAGE> 3
maximum principals amount available thereunder, as set forth above.
SECTION 1.2. INTEREST/FEES.
(a) Interest. The outstanding principal balances of the Line of Credit
and Subfeature Note shall bear interest at the rates of interest set forth in
the Line of Credit Note and Subfeature Note, respectively (the "Notes").
(b) Computation and Payment. Interest shall be computed on the basis of
a 360-day year, actual days elapsed. Interest shall be payable at the times and
place set forth in the Notes.
(c) Letter of Credit Fees. Borrower shall pay to Bank fees upon the
issuance of each Letter of Credit and fees upon the payment or negotiation by
Bank of each draft under any Letter of Credit and fees upon the occurrence of
any other activity with respect to any Letter of Credit (including without
limitation, the transfer, amendment or cancellation of any Letter of Credit)
determined in accordance with Bank's standard fees and charges then in effect
for such activity.
SECTION 1.3. COLLECTION OF PAYMENTS. Borrower authorizes Bank to
collect all interest and fees due under the Line of Credit (including the
Subfeature) by charging Borrower's demand deposit account number 4430-817214
with Bank, or any other demand deposit account maintained by Borrower with Bank,
for the full amount thereof. Should there be insufficient funds in any such
demand deposit account to pay all such sums when due, the full amount of such
deficiency shall be immediately due and payable by Borrower upon notice,
provided however failure by Bank to provide such notice shall not relieve
Borrower of liability for amounts then due.
SECTION 1.4. GUARANTIES. All indebtedness of Smart(Europe) to Bank
shall be guaranteed by Borrower in the principal amount of Ten Million Dollars
($10,000,000.00), as evidenced by and subject to the terms of a guaranty in form
and substance satisfactory to Bank.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Borrower and Smart(Europe) makes the following representations and
warranties to Bank, which representations and warranties shall survive the
execution of this Agreement and shall continue in full force and effect until
the full and final payment, and satisfaction and discharge, of all obligations
of Borrower and Smart(Europe) to Bank subject to this Agreement.
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<PAGE> 4
SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized
and existing and in good standing under the laws of the state of California, and
Smart(Europe) is a corporation, duly organized and existing and in good standing
under the laws of the United Kingdom, and each is qualified or licensed to do
business (and is in good standing as a foreign corporation, if applicable) in
all jurisdictions in which such qualification or licensing is required or in
which the failure to so qualify or to be so licensed could reasonably be
expected to have a material adverse effect on Borrower and Smart(Europe), taken
as a whole.
SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Notes, and
each other document, contract and instrument required hereby or at any time
hereafter delivered to Bank in connection herewith (collectively, the "Loan
Documents") have been duly authorized, and upon their execution and delivery in
accordance with the provisions hereof will constitute legal, valid and binding
agreements and obligations of Borrower or Smart(Europe), as applicable,
enforceable in accordance with their respective terms.
SECTION 2.3. NO VIOLATION. The execution, delivery and performance by
Borrower and Smart(Europe) of the Loan Documents do not violate any provision of
any law or regulation in any material respect, or contravene any provision of
the Articles of Incorporation or By-Laws of Borrower, or the Articles of
Incorporation of Smart(Europe), or result in any breach of or default in any
material respect under any material contract, obligation, indenture or other
instrument to which Borrower or Smart(Europe) is a party or by which Borrower or
Smart(Europe) may be bound.
SECTION 2.4. LITIGATION. There are no pending, or to the best of
Borrower's or Smart(Europe)'s knowledge, threatened, actions, claims,
investigations, suits or proceedings by or before any governmental authority,
arbitrator, court or administrative agency which could reasonably be expected to
have a material adverse effect on the financial condition or operation of
Borrower and Smart(Europe), taken as a whole, other than those disclosed by
Borrower or Smart(Europe) to Bank in writing prior to the date hereof.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The consolidated
financial statement of Borrower dated October 31, 1996, a true copy of which has
been delivered by Borrower to Bank prior to the date hereof, (a) is complete and
correct and presents fairly the consolidated financial condition of Borrower as
of that date and for the period then ended, (b) discloses all liabilities of
Borrower or Smart(Europe) that are required to be reflected or reserved against
under generally accepted accounting
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<PAGE> 5
principles, whether liquidated or unliquidated, fixed or contingent, and (c) has
been prepared in accordance with generally accepted accounting principles
consistently applied. Since the date of such financial statement there has been
no material adverse change in the financial condition of Borrower and
Smart(Europe), taken as a whole, nor has Borrower or Smart(Europe) mortgaged,
pledged, granted a security interest in or otherwise encumbered any of their
assets or properties except in favor of Bank or as permitted in Section 5.6
heretofore otherwise permitted by Bank in writing.
SECTION 2.6. INCOME TAX RETURNS. Neither Borrower nor Smart(Europe) has
any knowledge of any pending assessments or adjustments of its income tax
payable with respect to any year.
SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture,
contract or instrument to which Borrower or Smart(Europe) is a party or by which
Borrower or Smart(Europe) may be bound that requires the subordination in right
of payment of any of Borrower's or Smart(Europe)'s obligations subject to this
Agreement to any other obligation of Borrower or Smart(Europe).
SECTION 2.8. PERMITS, FRANCHISES. Each of Borrower and Smart(Europe)
possesses, and will hereafter possess, all permits, consents, approvals,
franchises and licenses required and rights to all trademarks, trade names,
patents, and fictitious names, if any, necessary to enable it to conduct the
business in which it is now engaged in compliance with applicable law, except if
failure to possess the same could not be reasonably expected to have a material
adverse affect on Borrower and Smart(Europe), taken as a whole.
SECTION 2.9. ERISA. To the extent applicable, Borrower is in compliance
in all material respects with all applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended or recodified from time to
time ("ERISA"); Borrower has not violated any provision of any defined employee
pension benefit plan (as defined in ERISA) maintained or contributed to by
Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred
and is continuing with respect to any Plan initiated by Borrower; Borrower has
met its minimum funding requirements under ERISA with respect to each Plan; and
each Plan will be able to fulfill its benefit obligations as they come due in
accordance with the Plan documents and under generally accepted accounting
principles.
SECTION 2.10. OTHER OBLIGATIONS. Neither Borrower nor Smart(Europe) is
in default of any monetary or other material obligation on any obligation for
borrowed money, any purchase money obligation in a principal amount in excess of
$2,500,000.00
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<PAGE> 6
or any other material lease, commitment, contract, instrument or obligation.
SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to
Bank in writing prior to the date hereof, to the best of Borrower's knowledge,
based on reasonable due diligence, each of Borrower and Smart(Europe) is in
compliance in all material respects with all applicable federal or state
environmental, hazardous waste, health and safety statutes, and any rules or
regulations adopted pursuant thereto, which govern or affect any of their
respective operations and/or properties, including without limitation, with
respect to Borrower, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986,
the Federal Resource Conservation and Recovery Act of 1976, and the Federal
Toxic Substances Control Act, as any of the same may be amended, modified or
supplemented from time to time. To the best of Borrower's knowledge, based on
reasonable due diligence, none of the operations of Borrower or Smart(Europe) is
the subject of any federal or state investigation evaluating whether any
remedial action involving a material expenditure is needed to respond to a
release of any toxic or hazardous waste or substance into the environment.
Neither Borrower nor Smart(Europe) has any material contingent liability in
connection with any release of any toxic or hazardous waste or substance into
the environment.
ARTICLE III
CONDITIONS
SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation
of Bank to extend any credit contemplated by this Agreement is subject to the
fulfillment to Bank's satisfaction of all of the following conditions:
(a) Approval of Bank Counsel. All legal matters incidental to the
extension of credit by Bank shall be satisfactory to Bank's counsel.
(b) Documentation. Bank shall have received, in form and substance
satisfactory to Bank, each of the following, duly executed:
(i) This Agreement and the Notes.
(ii) Corporate Resolutions.
(iii) Legal opinion.
(iv) Guaranty.
(v) Such other documents as Bank may reasonably require under any
other Section of this Agreement.
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(c) Financial Condition. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower and Smart(Europe), taken as a whole.
SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of
Bank to make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:
(a) Compliance. The representations and warranties contained herein and
in each of the other Loan Documents shall be true in all material respects on
and as of the date of the signing of this Agreement and on the date of each
extension of credit by Bank pursuant hereto (except to the extent they expressly
relate to an earlier date), with the same effect as though such representations
and warranties had been made on and as of each such date, and on each such date,
no Event of Default as defined herein, and no condition, event or act which with
the giving of notice or the passage of time or both would constitute such an
Event of Default, shall have occurred and be continuing or shall exist.
(b) Documentation. Bank shall have received all additional documents
which may be reasonably required in connection with such extension of credit.
ARTICLE IV
AFFIRMATIVE COVENANTS
Borrower or Smart(Europe) covenant that so long as Bank remains
committed to extend credit to Borrower or Smart(Europe) pursuant hereto, or any
liabilities (whether direct or contingent, liquidated or unliquidated) of
Borrower or Smart(Europe) to Bank under any of the Loan Documents remain
outstanding, and until payment in full of all obligations of Borrower or
Smart(Europe) subject hereto, Borrower and Smart(Europe) shall, unless Bank
otherwise consents in writing:
SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest,
fees or other liabilities due under any of the Loan Documents at the times and
place and in the manner specified therein, and immediately upon demand by Bank,
the amount by which the outstanding principal balance of the Line of Credit at
any time exceeds any limitation on borrowings applicable thereto.
SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently applied
(subject in the case of Smart(Europe), to such accounting principles as are
necessary to
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comply with the law or accepted practice in the United Kingdom), and permit any
representative of Bank, at any reasonable time (and, if no Event of Default
exists, upon reasonable notice), to inspect, audit and examine such books and
records, to make copies of the same, and to inspect the properties of Borrower
or Smart(Europe).
SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the
following, in form and detail satisfactory to Bank:
(a) not later than 90 days after and as of the end of each fiscal year,
Borrower's 10K report filed with the Securities and Exchange Commission ("SEC");
(b) not later than 45 days after and as of the end of each fiscal
quarter, a consolidated financial statement of Borrower, prepared by Borrower,
to include balance sheet, income statement and statement of cash flows (which
may be in the form of Borrower's 10Q filed with the SEC);
(c) not later than 5 days after filing with the SEC, copies of all 8K
reports, proxy statements, registration statements and all other documents filed
with the SEC;
(d) contemporaneously with each annual and quarterly financial
statement of Borrower required hereby, a certificate of the president or chief
financial officer of Borrower that said financial statements are accurate and
that there exists no Event of Default nor any condition, act or event which with
the giving of notice or the passage of time or both would constitute an Event of
Default;
(e) from time to time such other information as Bank may reasonably
request.
SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of their businesses; and in all material respects comply with the
provisions of all documents pursuant to which Borrower and Smart(Europe) are
organized and/or which govern their continued existence and with the
requirements of all laws, rules, regulations and orders of any governmental
authority applicable to Borrower and/or their businesses, except those, which if
not complied with, could not be reasonably expected to have a material adverse
affect on Borrower and Smart (Europe) taken as a whole.
SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the
types and in amounts customarily carried in lines of business similar to that of
Borrower and Smart(Europe), including but not limited to fire, extended
coverage, public
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liability, property damage and workers' compensation, with all such insurance
carried with companies and in amounts reasonably satisfactory to Bank, and
deliver to Bank from time to time at Bank's request schedules setting forth all
insurance then in effect.
SECTION 4.6. FACILITIES. Keep all properties useful or necessary to
their businesses in good repair and condition, ordinary wear and tear excepted,
and from time to time make necessary repairs, renewals and replacements thereto
so that such properties shall be fully and efficiently preserved and maintained.
SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due
any and all indebtedness, obligations, assessments and taxes, both real or
personal, including without limitation federal and state income taxes and state
and local property taxes and assessments, except such (a) as may in good faith
be contested or as to which a bona fide dispute may arise, and (b) for which
provision has been made, in accordance with generally accepted accounting
principles, consistently applied, for eventual payment thereof in the event
Borrower or Smart(Europe) is obligated to make such payment.
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower or Smart(Europe) with a claim
in excess of $1,500,000.00.
SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's consolidated
financial condition as follows using generally accepted accounting principles
consistently applied and used consistently with prior practices (except to the
extent modified by the definitions herein):
(a) Tangible Net Worth not less than $85,000,000.00 as of October 31,
1996, plus, thereafter, on a cumulative basis, an amount equal to 80% of net
income after taxes (with no deduction for losses) and 100% of proceeds of new
equity (less reasonable and customary costs of issuance) since October 31, 1996,
determined as of each fiscal quarter end, with "Tangible Net Worth" defined as
the aggregate of total stockholders' equity plus subordinated debt less any
intangible assets.
(b) Total Liabilities divided by Tangible Net Worth not at any time
greater than 1.25 to 1.0 determined as of each fiscal quarter end, with "Total
Liabilities" defined as the aggregate of current liabilities and non-current
liabilities less subordinated debt, and with "Tangible Net Worth" as defined
above.
(c) Quick Ratio not at any time less than 1.0 to 1.0, with "Quick
Ratio" defined as the aggregate of unrestricted cash and
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cash equivalents, unrestricted marketable securities and receivables convertible
into cash divided by total current liabilities.
(d) Net income after taxes not less than $1.00 on an annual basis,
determined as of each fiscal year end, and pre-tax profit not less than $1.00 in
each fiscal quarter following any fiscal quarter in which a pre-tax loss was
incurred.
SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five
(5) days after the occurrence of each such event or matter) give written notice
to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or
any condition, event or act which with the giving of notice or the passage of
time or both would constitute an Event of Default; (b) any change in the name or
the organizational structure of Borrower or Smart(Europe); (c) the occurrence
and nature of any Reportable Event or Prohibited Transaction, each as defined in
ERISA, or any funding deficiency with respect to any Plan; or (d) any
termination or cancellation of any insurance policy which Borrower is required
to maintain, or any uninsured or partially uninsured loss through liability or
property damage, or through fire, theft or any other cause affecting Borrower's
property in excess of an aggregate of $1,500,000.00.
ARTICLE V
NEGATIVE COVENANTS
Borrower or Smart(Europe) further covenant that so long as Bank remains
committed to extend credit to Borrower or Smart(Europe) pursuant hereto, or any
liabilities (whether direct or contingent, liquidated or unliquidated) of
Borrower or Smart(Europe) to Bank under any of the Loan Documents remain
outstanding, and until payment in full of all obligations of Borrower and
Smart(Europe) subject hereto, neither Borrower nor Smart(Europe) will without
Bank's prior written consent:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any credit
extended hereunder except for the purposes stated in Article I hereof.
SECTION 5.2. OTHER INDEBTEDNESS. Create, incur, assume or permit to
exist any indebtedness or liabilities resulting from borrowings, loans or
advances, whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except (a) the liabilities of Borrower and
Smart(Europe) to Bank, and (b) any other liabilities of Borrower or
Smart(Europe) existing as of, and disclosed to Bank prior to, the date hereof,
(c) to the extent not included in clause (b), indebtedness incurred in the
ordinary course of business for the
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purpose of purchasing inventory, equipment and/or real estate not to exceed
$8,000,000.00 outstanding at any time, and (d) subordinated indebtedness
pursuant to subordination agreements in form and content acceptable to Bank; and
(e) extensions, modifications, refinancings and refundings of the foregoing, so
long as the maximum principal amount is not increased.
SECTION 5.3. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or
consolidate with any other entity unless (i) at least 90% of the consideration
paid by Borrower and/or Smart(Europe) consists of equity securities in Borrower,
subject to the terms of last sentence of this Section, (ii) Borrower or
Smart(Europe), as applicable, is the surviving entity (provided that in no event
shall Borrower be merged into or consolidated with Smart(Europe) unless Borrower
is the surviving entity), and (iii) no violation of this Agreement exists at the
time of or would exist after such merger or consolidation; make any substantial
change in the nature of Borrower's business as conducted as of the date hereof;
acquire all or substantially all of the assets of any other entity except to the
extent set forth in the last sentence of this Section; nor sell, lease, transfer
or otherwise dispose of all or a substantial or material portion of Borrower's
assets except in the ordinary course of its business. Borrower shall not pay
more than an aggregate of $5,000,000.00 per fiscal year (in addition to payment
in the form of its equity securities) for all mergers with and acquisitions of
stock and/or all or substantially all of the assets of other entities in such
fiscal year.
SECTION 5.4. GUARANTIES. Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for deposit
or collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security for,
any liabilities or obligations of any other person or entity, except any of the
foregoing in favor of Bank, guaranties by Borrower of Smart(Europe)'s trade debt
incurred in the ordinary course of business, and guaranties existing in and
disclosed in writing to Bank prior to the date hereof.
SECTION 5.5. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances
to or investments in any person or entity, except (a) any of the foregoing
existing as of, and disclosed to Bank prior to, the date hereof, (b) additional
loans or advances to Smart(Europe) in amounts not to exceed an aggregate of
$7,500,000.00 outstanding at any one time, (c) loans to employees for travel
advances, relocation loans and other loans in the ordinary course of business,
(d) investments in accordance with Borrower's investment policy, as in effect
from time to time, (e) existing investments in subsidiaries and joint ventures
which
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have been disclosed to Bank in writing prior to the date hereof, and (f) loans
to employees, officers, directors to finance or refinance the purchase of equity
securities of Borrower.
SECTION 5.6. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to
exist a security interest in, or lien upon, all or any portion of Borrower's or
Smart(Europe)'s assets now owned or hereafter acquired, except (a) purchase
money security interests in real property inventory and equipment securing
indebtedness permitted under Sections 5.2(b) and (c), (b) any of the foregoing
in favor of Bank, (c) liens for taxes, assessments or other governmental charges
which are not due and which remain payable without penalty or which are being
contested in good faith, provided that adequate reserves therefor have been
established, which reserves in accordance with generally accepted accounting
principles, consistently applied, (d) liens in connection with insurance or
compensation funds, pensions, social security obligations, bids, tender, leases,
statutory obligations, surety and appeal bonds and other liens arising in the
ordinary course of Borrower's or Smart(Europe)'s business, including mechanics
and materialman's which do not adversely affect Borrower's or Smart(Europe)'s
business operations, (e) liens reflected in Borrower's and Smart(Europe)'s
financial statements dated October 31, 1996, previously submitted to Bank, (f)
liens (otherwise permitted in this Section) on assets that existed at the time
such assets were acquired by Borrower or any of its subsidiaries, (g) liens on
deposit accounts in the nature of set off rights, banker's liens or other
customary rights, and (h) liens of the type referred to in Section 6.1(e) that
do not exceed an aggregate of $2,500,000.00.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:
(a) Borrower or Smart(Europe) shall fail to pay when due any principal,
or within 5 days after the due date, any interest, fees or other amounts payable
under any of the Loan Documents.
(b) Any financial statement or certificate furnished to Bank in
connection with, or any representation or warranty made by Borrower or any other
party under this Agreement or any other Loan Document shall prove to be
incorrect, false or misleading in any material respect when furnished or made.
(c) Any default in the performance of or compliance with any
obligation, agreement or other provision contained herein or in any other Loan
Document (other than those referred to in
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subsections (a) and (b) above), and with respect to any such default which by
its nature can be cured, such default shall continue for a period of thirty (30)
days from its occurrence.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under the terms of any contract or instrument (other
than any of the Loan Documents) pursuant to which Borrower or Smart(Europe) has
incurred any debt or other liability in the principal amount of $2,500,000.00 or
more to any person or entity, including Bank.
(e) The filing of a notice of judgment lien against Borrower or
Smart(Europe); or the recording of any abstract of judgment against Borrower or
Smart(Europe) in any county in which Borrower or Smart(Europe) has an interest
in real property; or the service of a notice of levy and/or of a writ of
attachment or execution, or other like process, against the assets of Borrower
or Smart(Europe); or the entry of a judgment against Borrower or Smart(Europe);
in each case involving $2,500,000.00 or more (and for all cases involving
$5,000,000.00 or more) and the enforcement thereof is not dismissed stayed or
bonded pending appeal within 60 days after its (their) occurrence, provided that
Bank shall not be required to make advances during such 60 day period.
(f) Borrower or Smart(Europe) shall become insolvent, or shall suffer
or consent to or apply for the appointment of a receiver, trustee, custodian or
liquidator of itself or any of its property, or shall generally fail to pay its
debts as they become due, or shall make a general assignment for the benefit of
creditors; Borrower or Smart(Europe) shall file a voluntary petition in
bankruptcy, or seeking reorganization, in order to effect a plan or other
arrangement with creditors or any other relief under the Bankruptcy Reform Act,
Title 11 of the United States Code, as amended or recodified from time to time
("Bankruptcy Code"), or under any state or federal law granting relief to
debtors, whether now or hereafter in effect; or any involuntary petition or
proceeding pursuant to the Bankruptcy Code or any other applicable state or
federal law relating to bankruptcy, reorganization or other relief for debtors
is filed or commenced against Borrower or Smart(Europe) (and such involuntary
petition or proceeding is not dismissed within 60 days after its filing provided
that Bank shall not be obligated to make advances during such 60 day period), or
Borrower or Smart(Europe) shall file an answer admitting the jurisdiction of the
court and the material allegations of any involuntary petition; or Borrower or
Smart(Europe) shall be adjudicated a bankrupt, or an order for relief shall be
entered against Borrower or Smart(Europe) by any court of competent jurisdiction
under the Bankruptcy Code or any other applicable state or federal law relating
to bankruptcy, reorganization or other
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relief for debtors.
(g) Borrower shall cease its normal operations for a period in excess 5
business days, other than by reason of weekends, customary holidays or regularly
scheduled vacation periods.
(h) The dissolution or liquidation of Borrower or Smart(Europe); or
Borrower or Smart(Europe), or any of its directors, stockholders or members,
shall take action seeking to effect the dissolution or liquidation of Borrower
or Smart(Europe).
SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a)
all indebtedness of Borrower and Smart(Europe) under each of the Loan Documents,
any term thereof to the contrary notwithstanding, shall at Bank's option and
without notice become immediately due and payable without presentment, demand,
protest or notice of dishonor, all of which are hereby expressly waived by each
Borrower; (b) the obligation, if any, of Bank to extend any further credit under
any of the Loan Documents shall immediately cease and terminate; and (c) Bank
shall have all rights, powers and remedies available under each of the Loan
Documents, or accorded by law, including without limitation the right to resort
to any or all security for any credit accommodation from Bank subject hereto and
to exercise any or all of the rights of a beneficiary or secured party pursuant
to applicable law. All rights, powers and remedies of Bank may be exercised at
any time by Bank and from time to time after the occurrence of an Event of
Default, are cumulative and not exclusive, and shall be in addition to any other
rights, powers or remedies provided by law or equity.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by Bank of any breach of or default under any of the Loan Documents must be
in writing and shall be effective only to the extent set forth in such writing.
SECTION 7.2. NOTICES. All notices, requests and demands which any party
is required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:
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BORROWER: SMART MODULAR TECHNOLOGIES, INC.
4305 Cushing Parkway
Fremont, CA 94538
Attn: David Mullin, CFO
Smart(Europe): SMART MODULAR TECHNOLOGIES (EUROPE) LIMITED
c/o SMART MODULAR TECHNOLOGIES, INC.
4305 Cushing Parkway
Fremont, CA 94538
Attn: David Mullin, CFO
BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
Santa Clara Valley Regional
Commercial Banking Office
121 Park Center Plaza
San Jose, CA 95113
Attn: Robin S. Apple, Vice President
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower and
Smart(Europe) shall pay to Bank immediately upon demand the full amount of all
payments, advances, charges, costs and expenses, including reasonable attorneys'
fees (to include outside counsel fees and all allocated costs of Bank's in-house
counsel) (collectively "Costs and Expenses"), expended or incurred by Bank in
connection with the negotiation and preparation of this Agreement and the other
Loan Documents, Bank's continued administration hereof and thereof, and the
preparation of any amendments and waivers hereto and thereto. The non-prevailing
party shall pay to the prevailing party the latter's Costs and Expenses incurred
in (a) the enforcement of rights and/or the collection of any amounts which
become due to Bank under any of the Loan Documents, and (b) the prosecution or
defense of any action in any way related to any of the Loan Documents, including
without limitation, any action for declaratory relief, whether incurred at the
trial or appellate level, in an arbitration proceeding or otherwise, and
including any of the foregoing incurred in connection with any bankruptcy
proceeding (including without limitation, any adversary proceeding, contested
matter or motion brought by Bank or any other person) relating to any Borrower,
Smart(Europe), or any other person or entity. This provision is in furtherance
of the provision regarding the same in the letter dated March 21, 1996 between
Borrower and Bank.
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SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however, that
neither Borrower nor Smart(Europe) may assign or transfer its interest hereunder
without Bank's prior written consent. Bank reserves the right, upon 90 days
notice to Borrower, to sell, assign, transfer, negotiate or grant participations
in all or any part of, or any interest in, Bank's rights and benefits under each
of the Loan Documents, provided that Borrower shall not be required to
communicate directly with any such participant. In connection therewith, Bank
may disclose all documents and information which Bank now has or may hereafter
acquire relating to any credit extended by Bank to Borrower, Smart(Europe) or
their business, subject to the terms of a Confidentiality Agreement reasonably
acceptable to all parties.
SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
Loan Documents constitute the entire agreement between Borrower, Smart(Europe)
and Bank with respect to any extension of credit by Bank subject hereto and
supersede all prior negotiations, communications, discussions and correspondence
concerning the subject matter hereof. This Agreement may be amended or modified
only in writing signed by each party hereto.
SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.
SECTION 7.7. TIME. Time is of the essence of each and every provision
of this Agreement and each other of the Loan Documents.
SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.
SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when executed and delivered shall be deemed to be
an original, and all of which when taken together shall constitute one and the
same Agreement.
SECTION 7.10. GOVERNING LAW. This Agreement shall be
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governed by and construed in accordance with the laws of the State of
California.
SECTION 7.11. ARBITRATION.
(a) Arbitration. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of the foregoing arising in
connection with the exercise of any self-help, ancillary or other remedies
pursuant to any of the Loan Documents. Any party may by summary proceedings
bring an action in court to compel arbitration of a Dispute. Any party who fails
or refuses to submit to arbitration following a lawful demand by any other party
shall bear all costs and expenses incurred by such other party in compelling
arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in California
selected by the AAA or other administrator. If there is any inconsistency
between the terms hereof and any such rules, the terms and procedures set forth
herein shall control. All statutes of limitation applicable to any Dispute shall
apply to any arbitration proceeding. All discovery activities shall be expressly
limited to matters directly relevant to the Dispute being arbitrated. Judgment
upon any award rendered in an arbitration may be entered in any court having
jurisdiction; provided however, that nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. Section 91 or any similar applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration,
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attachment, garnishment or the appointment of a receiver, from a court of
competent jurisdiction before, after or during the pendency of any arbitration
or other proceeding. The exercise of any such remedy shall not waive the right
of any party to compel arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three arbitrators must actively participate in all
hearings and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
California, and (iii) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (A) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (B) whether the
conclusions of law are erroneous under the substantive law of the state of
California. Judgment confirming an award in such a proceeding may be entered
only if a court
-18-
<PAGE> 19
determines the award is supported by substantial evidence and not based on legal
error under the substantive law of the state of California.
(f) Real Property Collateral; Judicial Reference. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration if
the Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.
(g) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.
-19-
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
WELLS FARGO BANK,
SMART MODULAR TECHNOLOGIES, INC. NATIONAL ASSOCIATION
By: /s/ DAVID B. MULLIN By: /s/ JOHN ADAMS
--------------------------------- ------------------------------
Vice President, Finance Title: Vice President
Title: and Chief Financial Officer
By: /s/ LATA KRISHNAN
---------------------------------
Title: Vice President, Administration
SMART MODULAR TECHNOLOGIES (EUROPE) LIMITED
By: /s/ DAVID B. MULLIN
---------------------------------
Vice President, Finance
Title: and Chief Financial Officer
By: /s/ LATA KRISHNAN
---------------------------------
Title: Vice President, Administration
-20-
<PAGE> 1
Exhibit 10.32
SUBFEATURE NOTE
$10,000,000.00 San Jose, California
May 29, 1997
FOR VALUE RECEIVED, the undersigned SMART MODULAR TECHNOLOGIES (EUROPE)
LIMITED ("Smart(Europe)") promises to pay to the order of WELLS FARGO BANK,
NATIONAL ASSOCIATION ("Bank") at its office at Santa Clara Valley RCBO, 121 Park
Center Drive, San Jose, California, or at such other place as the holder hereof
may designate, in lawful money of the United States of America and in
immediately available funds, the principal sum of Ten Million Dollars
($10,000,000.00), or so much thereof as may be advanced and be outstanding, with
interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.
DEFINITIONS:
As used herein, the following terms shall have the meanings set forth
after each, and any other term defined in this Note shall have the meaning set
forth at the place defined:
(a) "Business Day" means any day except a Saturday, Sunday or any other
day on which commercial banks in California are authorized or required by law to
close.
(b) "Fixed Rate Term" means a period commencing on a Business Day and
continuing for one (1), two (2) or three (3) months, as designated by
Smart(Europe), during which all or a portion of the outstanding principal
balance of this Note bears interest determined in relation to LIBOR; provided
however, that no Fixed Rate Term may be selected for a principal amount less
than One Million Dollars ($1,000,000.00); and provided further, that no Fixed
Rate Term shall extend beyond the scheduled maturity date hereof. If any Fixed
Rate Term would end on a day which is not a Business Day, then such Fixed Rate
Term shall be extended to the next succeeding Business Day.
(c) "LIBOR" means, for each Fixed Rate Term, the rate per annum
(rounded upward, if necessary, to the nearest whole 1/16 of 1%) and determined
pursuant to the following formula:
LIBOR = Base LIBOR
------------------------------------
100% - LIBOR Reserve Percentage
(i) "Base LIBOR" means the average of the rates per annum (rounded
upward, if necessary, to the nearest 1/16 of 1%) at which U.S. dollar deposits
are offered to Agent in the London interbank Eurocurrency market on the second
Business Day prior to the commencement of a Fixed Rate Term at or about 11:00
A.M. (London time), for delivery on the first day of such Fixed Rate
<PAGE> 2
Term, for a term comparable to the number of days in such Fixed Rate Term and in
an amount approximately equal to the principal amount to which such Fixed Rate
Term shall apply.
(ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed
by the Board of Governors of the Federal Reserve System (or any successor) for
"Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve
Board, as amended), adjusted by Bank for expected changes in such reserve
percentage during the applicable Fixed Rate Term.
(d) "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) either
(i) at a fluctuating rate per annum at the Prime Rate in effect from time to
time, or (ii) at a fixed rate per annum determined by Bank to be one and
one-fourth percent (1.25%) above LIBOR in effect on the first day of the
applicable Fixed Rate Term. When interest is determined in relation to the Prime
Rate, each change in the rate of interest hereunder shall become effective on
the date each Prime Rate change is announced within Bank. With respect to each
LIBOR selection hereunder, Bank is hereby authorized to note the date, principal
amount, interest rate and Fixed Rate Term applicable thereto and any payments
made thereon on Bank's books and records (either manually or by electronic
entry) and/or on any schedule attached to this Note, which notations shall be
prima facie evidence of the accuracy of the information noted.
(b) Selection of Interest Rate Options. At any time any portion of this
Note bears interest determined in relation to LIBOR, it may be continued by
Smart(Europe) at the end of the Fixed Rate Term applicable thereto so that all
or a portion thereof bears interest determined in relation to the Prime Rate or
to LIBOR for a new Fixed Rate Term designated by Smart(Europe). At any time any
portion of this Note bears interest determined in relation to the Prime Rate,
Smart(Europe) may convert all or a portion thereof so that it bears interest
determined in relation to LIBOR for a Fixed Rate Term designated by
Smart(Europe). At such time as Smart(Europe) requests an advance hereunder or
wishes to select a LIBOR option for all or a portion of the outstanding
principal balance hereof, and at the end of each Fixed Rate Term, Smart(Europe)
shall give Bank notice
-2-
<PAGE> 3
specifying: (i) the interest rate option selected by Smart(Europe); (ii) the
principal amount subject thereto; and (iii) for each LIBOR selection, the length
of the applicable Fixed Rate Term. Any such notice may be given by telephone so
long as, with respect to each LIBOR selection, (A) Bank receives written
confirmation from Smart(Europe) not later than three (3) Business Days after
such telephone notice is given, and (B) such notice is given to Bank prior to
10:00 a.m., California time, on the first day of the Fixed Rate Term. For each
LIBOR option requested hereunder, Bank will quote the applicable fixed rate to
Smart(Europe) at approximately 10:00 a.m., California time, on the first day of
the Fixed Rate Term. If Smart(Europe) does not immediately accept the rate
quoted by Bank, any subsequent acceptance by Smart(Europe) shall be subject to a
redetermination by Bank of the applicable fixed rate; provided however, that if
Smart(Europe) fails to accept any such rate by 11:00 a.m., California time, on
the Business Day such quotation is given, then the quoted rate shall expire and
Bank shall have no obligation to permit a LIBOR option to be selected on such
day. If no specific designation of interest is made at the time any advance is
requested hereunder or at the end of any Fixed Rate Term, Smart(Europe) shall be
deemed to have made a Prime Rate interest selection for such advance or the
principal amount to which such Fixed Rate Term applied.
(c) Additional LIBOR Provisions.
(i) If Bank at any time shall determine that for any reason adequate
and reasonable means do not exist for ascertaining LIBOR, then Bank shall
promptly give notice thereof to Smart(Europe). If such notice is given and until
such notice has been withdrawn by Bank, then (A) no new LIBOR option may be
selected by Smart(Europe), and (B) any portion of the outstanding principal
balance hereof which bears interest determined in relation to LIBOR, subsequent
to the end of the Fixed Rate Term applicable thereto, shall bear interest
determined in relation to the Prime Rate.
(ii) If any change after the date hereof in law, treaty, rule,
regulation or determination of a court or governmental authority or any change
therein or in the interpretation or application thereof (each, a "Change in
Law") shall make it unlawful for Bank (A) to make LIBOR options available
hereunder, or (B) to maintain interest rates based on LIBOR, then in the former
event, any obligation of Bank to make available such unlawful LIBOR options
shall immediately be cancelled, and in the latter event, any such unlawful
LIBOR-based interest rates then outstanding shall be converted, at Bank's
option, so that interest on the portion of the outstanding principal balance
subject thereto is determined in relation to the Prime Rate; provided however,
that if any such Change in Law shall permit any LIBOR-based interest rates to
remain in effect until the expiration of the Fixed Rate Term applicable thereto,
then such
-3-
<PAGE> 4
permitted LIBOR-based interest rates shall continue in effect until the
expiration of such Fixed Rate Term. Upon the occurrence of any of the foregoing
events, Smart(Europe) shall pay to Bank immediately upon demand such amounts as
may be necessary to compensate Bank for any fines, fees, charges, penalties or
other costs incurred or payable by Bank as a result thereof and which are
attributable to any LIBOR options made available to Smart(Europe) hereunder, and
any reasonable allocation made by Bank among its operations and demonstrated to
Borrower shall be conclusive and binding upon Smart(Europe).
(iii) If any Change in Law or compliance by Bank with any request or
directive (whether or not having the force of law) from any central bank or
other governmental authority shall:
(A) subject Bank to any tax, duty or other charge with respect to
any LIBOR options, or change the basis of taxation of payments
to Bank of principal, interest, fees or any other amount
payable hereunder (except for changes in the rate of tax on
the overall net income of Bank); or
(B) impose, modify or hold applicable any reserve, special
deposit, compulsory loan or similar requirement against assets
held by, deposits or other liabilities in or for the account
of, advances or loans by, or any other acquisition of funds by
any office of Bank; or
(C) impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any LIBOR options hereunder and/or to reduce any
amount receivable by Bank in connection therewith, then in any such case,
Smart(Europe) shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any additional costs incurred by Bank and/or
reductions in amounts received by Bank which are attributable to such LIBOR
options. In determining which costs incurred by Bank and/or reductions in
amounts received by Bank are attributable to any LIBOR options made available to
Smart(Europe) hereunder, any reasonable allocation made by Bank and demonstrated
to Smart(Europe) among its operations shall be conclusive and binding upon
Smart(Europe).
(d) Payment of Interest. Interest accrued on this Note shall be payable
on the first day of each month, commencing July 1, 1997.
(e) Default Interest. From and after the maturity date of this Note, or
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on
-4-
<PAGE> 5
the basis of a 360-day year, actual days elapsed) equal to four percent (4%)
above the rate of interest from time to time applicable to this Note.
(f) Payments. All payments to be made and all proceeds received by Bank
under this Note shall be in immediately available funds in United States dollars
without any setoff or counterclaim and free and clear of, and without deduction
for, any and all present and future taxes, duties, withholdings, fees, levies,
imposts or any other charges of any nature whatsoever. Without reducing any
amount which Bank is to receive under this Note, Smart(Europe), for and on
behalf of Bank, agrees to pay or cause to be paid directly to the appropriate
governmental authorities, or to reimburse Bank for the cost of, any and all
present and future taxes, withholdings, duties, fees, levies, imposts and other
charges of any nature whatsoever, including, but not limited to, United States
of America interest equalization taxes, if any, levied or imposed by any
governmental authority on or with regard to any aspect of the transaction
contemplated in or by this Note, except such taxes as may be measured by or
imposed upon Bank's net income by, or franchise taxes imposed upon Bank by, the
United States of America or the State of California. Any stamp tax required for
this transaction, whether at execution or subsequently, shall be paid by
Smart(Europe).
(g) Withholding. If Smart(Europe) is prohibited by any law of any
jurisdiction from making payments under this Note unless a tax, withholding,
duty, fee or other charge (hereinafter collectively called "Withholding Taxes")
is deducted or withheld therefrom, or from reimbursing Bank for any tax, duty,
fee, levy or impost or other charge as provided above, Smart(Europe) shall pay
to Bank or any other holder of this Note as of the date of payment of any
Withholding Taxes, such additional amounts as may be necessary in order that the
net amount received by Bank or any other holder of this Note after such
deduction or withholding shall equal the amount which would have been received
if such deduction or withholding was not required. Smart(Europe) shall confirm
that all such Withholding Taxes imposed on this transaction or on any payments
made or received by Bank under this Note shall have been paid to the appropriate
taxing authorities by delivering to Bank within thirty (30) days after payment
of any such Withholding Taxes, valid and properly completed official tax
receipts or notarized copies of such receipts together with any other evidence
requested by Bank to document such payment.
BORROWING AND REPAYMENT:
(a) Borrowing and Repayment. Smart(Europe) may from time to time during
the term of this Note borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions of this Note and of any
-5-
<PAGE> 6
document executed in connection with or governing this Note; provided however,
that the total outstanding borrowings under this Note shall not at any time
exceed the principal amount stated above. The unpaid principal balance of this
obligation at any time shall be the total amounts advanced hereunder by the
holder hereof less the amount of principal payments made hereon by or for any
Smart(Europe), which balance may be endorsed hereon from time to time by the
holder. The outstanding principal balance of this Note shall be due and payable
in full on May 1, 1998.
(b) Advances. Advances hereunder, to the total amount of the principal
sum stated above, shall be made by the holder at the oral or written request of
(i) Ajah Shah or Lata Krishnan or David Mullin or Jack Pacheco, any one acting
alone, who are authorized to request advances and direct the disposition of any
advances until written notice of the revocation of such authority is received by
the holder at the office designated above, or (ii) any person, with respect to
advances deposited to the credit of any account of any Smart(Europe) with the
holder, which advances, when so deposited, shall be conclusively presumed to
have been made to or for the benefit of each Smart(Europe) regardless of the
fact that persons other than those authorized to request advances may have
authority to draw against such account. The holder shall have no obligation to
determine whether any person requesting an advance is or has been authorized by
any Smart(Europe).
(c) Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
LIBOR, with such payments applied to the oldest Fixed Rate Term first.
PREPAYMENT:
(a) Prime Rate. Smart(Europe) may prepay principal on any portion of
this Note which bears interest determined in relation to the Prime Rate at any
time, in any amount and without penalty.
(b) LIBOR. Smart(Europe) may prepay principal on any portion of this
Note which bears interest determined in relation to LIBOR at any time and in the
minimum amount of Ten Thousand Dollars ($10,000.00); provided however, that if
the outstanding principal balance of such portion of this Note is less than said
amount, the minimum prepayment amount shall be the entire outstanding principal
balance thereof. In consideration of Bank providing this prepayment option to
Smart(Europe), or if any such portion of this Note shall become due and payable
at any time
-6-
<PAGE> 7
prior to the last day of the Fixed Rate Term applicable thereto by acceleration
or otherwise, Smart(Europe) shall pay to Bank immediately upon demand a fee
which is the sum of the discounted monthly differences for each month from the
month of prepayment through the month in which such Fixed Rate Term matures,
calculated as follows for each such month:
(i) Determine the amount of interest which would have accrued each
month on the amount prepaid at the interest rate applicable to
such amount had it remained outstanding until the last day of
the Fixed Rate Term applicable thereto.
(ii) Subtract from the amount determined in (i) above the amount of
interest which would have accrued for the same month on the
amount prepaid for the remaining term of such Fixed Rate Term
at LIBOR in effect on the date of prepayment for new loans
made for such term and in a principal amount equal to the
amount prepaid.
(iii) If the result obtained in (ii) for any month is greater than
zero, discount that difference by LIBOR used in (ii) above.
Smart(Europe) acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Each Smart(Europe), therefore, agrees to pay the above-described
prepayment fee and agrees that said amount represents a reasonable estimate of
the prepayment costs, expenses and/or liabilities of Bank. If Smart(Europe)
fails to pay any prepayment fee when due, the amount of such prepayment fee
shall thereafter bear interest until paid at a rate per annum two percent (2.0%)
above the Prime Rate in effect from time to time (computed on the basis of a
360-day year, actual days elapsed). Each change in the rate of interest on any
such past due prepayment fee shall become effective on the date each Prime Rate
change is announced within Bank.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and
conditions of that certain Credit Agreement between Smart(Europe) and Bank dated
as of May 29, 1997, as amended from time to time (the "Credit Agreement"). Any
default in the payment or performance of any obligation under this Note, or any
defined event of default under the Credit Agreement, shall constitute an "Event
of Default" under this Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default,
-7-
<PAGE> 8
the holder of this Note, at the holder's option, may declare all sums of
principal and interest outstanding hereunder to be immediately due and payable
without presentment, demand, notice of nonperformance, notice of protest,
protest or notice of dishonor, all of which are expressly waived by
Smart(Europe), and the obligation, if any, of the holder to extend any further
credit hereunder shall immediately cease and terminate. Smart(Europe) shall pay
to the holder immediately upon demand the full amount of all payments, advances,
charges, costs and expenses, including reasonable attorneys' fees (to include
outside counsel fees and all allocated costs of the holder's in-house counsel),
expended or incurred by the holder in connection with the enforcement of the
holder's rights and/or the collection of any amounts which become due to the
holder under this Note, and the prosecution or defense of any action in any way
related to this Note, including without limitation, any action for declaratory
relief, whether incurred at the trial or appellate level, in an arbitration
proceeding or otherwise, and including any of the foregoing incurred in
connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Smart(Europe) or any other person or entity.
(b) Jurisdiction and Service of Process, Venue, Immunity. Subject to
the terms of Section 7.11 of the Credit Agreement relative to arbitration, any
suit, action or proceeding against Smart(Europe) with respect to this Guaranty
may be brought in (a) the courts of the State of California, (b) the United
States District Court for the Northern District of California, or (c) the courts
of the country of Smart(Europe)'s incorporation, as Bank may elect in its sole
discretion, and the Smart(Europe) hereby submits to any such suit, action,
proceeding or judgment and waives any other preferential jurisdiction by reason
of domicile. The Smart(Europe) hereby agrees that service of all writs,
processes and summonses in any suit, action or proceeding brought in the State
of California may be made upon Smart Modular Technologies, Inc. and/or its
successors, presently located at 4305 Cushing Parkway, Fremont, California,
94538, U.S.A. (the "Process Agent"). Smart(Europe) hereby irrevocably appoints
the Process Agent its agent and true and lawful attorney-in-fact while any of
the Smart(Europe)'s obligations under this Note remain unsatisfied, in its name,
place and stead only to accept such service of any and all such writs, processes
and summonses, and agrees that the failure of the Process Agent to give any
notice of any such service of process to the Smart(Europe) shall not impair or
affect the validity of such service or of any judgment based thereon.
Smart(Europe) hereby further irrevocably consents to the service of process in
any suit, action or proceeding in the above specified courts by the mailing
thereof by Bank by registered or certified mail, postage prepaid, to
Smart(Europe) at the address specified in the Credit Agreement. Nothing herein
shall in any way be deemed to limit the ability of
-8-
<PAGE> 9
Bank to serve any writs, processes or summonses in any other manner, as may be
permitted by applicable law. Smart(Europe) irrevocably waives any objection
which it may now or hereafter have to the laying of the venue of any suit,
action or proceeding arising out of or relating to this Note brought in the
courts of the State of California or of the United States District Court for the
Northern District of California, or the courts in the country of Smart(Europe)'s
incorporation, and also irrevocably waives any claim that any such suit, action
or proceeding brought in any of those courts has been bought in an inconvenient
form.
(c) Judgment Currency. Notwithstanding any judgment rendered in a
currency other than United States Dollars, Smart(Europe) shall not be relieved
of any obligations with respect to any amount owed by it to Bank under this Note
except to the extent of the amount in United States dollars which Bank is able
to acquire with such amount of such currency on the Banking Day (a day when Bank
is open for business in San Francisco, California, U.S.A.) following receipt of
such amount by Bank. If the amount in United States dollars so acquired is less
than the amount initially due to Bank, Smart(Europe) shall indemnify Bank by
paying the difference between such amounts in United States Dollars. The payment
of any additional amount so required of Smart(Europe) under this Section shall
constitute an independent obligation of Smart(Europe), the enforcement of which
obligation may not be impeded by Smart(Europe).
(d) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
SMART MODULAR TECHNOLOGIES (EUROPE) LIMITED
By: /s/ LATA KRISHNAN
---------------------------------------
Title: Vice President, Administration
By: /s/ DAVID B. MULLIN
---------------------------------------
Title: Vice_President, Finance and
Chief Financial Officer
-9-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTAINED IN THE
COMPANY'S FORM 10-Q FOR THE THIRD QUARTER ENDED JULY 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS YEAR
<FISCAL-YEAR-END> OCT-31-1997 OCT-31-1997 OCT-31-1997
<PERIOD-START> MAY-01-1997 NOV-01-1996 NOV-01-1995
<PERIOD-END> JUL-31-1997 JUL-31-1997 OCT-31-1996
<CASH> 0 33,576 52,568
<SECURITIES> 0 9,586 8,494
<RECEIVABLES> 0 86,148 52,806
<ALLOWANCES> 0 0 0
<INVENTORY> 0 50,481 39,001
<CURRENT-ASSETS> 0 187,968 157,818
<PP&E> 0 22,862 13,434
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 0 211,725 172,185
<CURRENT-LIABILITIES> 0 88,304 83,494
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 41,698 36,869
<OTHER-SE> 0 80,380 49,750
<TOTAL-LIABILITY-AND-EQUITY> 0 211,725 172,185
<SALES> 201,923 477,187 0
<TOTAL-REVENUES> 201,923 477,187 0
<CGS> 171,047 399,539 0
<TOTAL-COSTS> 171,047 399,539 0
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 40 126 0
<INCOME-PRETAX> 18,866 46,417 0
<INCOME-TAX> 6,414 15,787 0
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 12,452 30,630 0
<EPS-PRIMARY> 0.57 1.42 0
<EPS-DILUTED> 0 0 0
</TABLE>
