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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1998,
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
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SMART MODULAR TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<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 March 9, 1998, there were 42,851,489 shares of the Registrant's common
stock, no par value, outstanding.
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SMART MODULAR TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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PAGE
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Item 1. Financial Statements
Consolidated Condensed Balance Sheet --
As of January 31, 1998 and October 31, 1997................. 3
Consolidated Condensed Statements of Income --
For the Three Months Ended January 31, 1998 and 1997........ 4
Consolidated Condensed Statements of Cash Flows --
For the Three Months Ended January 31, 1998 and 1997........ 5
Notes to Consolidated Condensed Financial Statements........ 6
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................... 8
</TABLE>
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings........................................... 20
Item 2. Changes in Securities....................................... 20
Item 3. Defaults upon Senior Securities............................. 20
Item 4. Submission of Matters to a Vote of Security Holders......... 20
Item 5. Other Information........................................... 20
Item 6. Exhibits and Reports on Form 8-K............................ 20
Signatures........................................................... 21
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 81,947 $111,331
Short term investments.................................... 79,660 38,672
Accounts receivable, net.................................. 78,766 95,366
Inventories............................................... 37,865 39,336
Prepaid expenses and other................................ 17,293 18,317
-------- --------
Total current assets.............................. 295,531 303,022
Property and equipment, net................................. 32,258 24,604
Other....................................................... 688 359
-------- --------
Total assets...................................... $328,477 $327,985
======== ========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
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Current Liabilities:
Accounts payable.......................................... $ 51,991 $ 73,833
Accrued bonuses........................................... 3,918 6,761
Other accrued expenses.................................... 8,994 9,001
Income taxes payable...................................... 14,230 7,312
-------- --------
Total current liabilities......................... 79,133 96,907
Long-term Liabilities:
Deferred income taxes and other........................... 676 758
-------- --------
Total liabilities................................. 79,809 97,665
-------- --------
Shareholders' Equity:
Common stock, no par value --
Authorized -- 100,000,000 shares
Outstanding -- 42,632,941 and 42,334,260 shares,
respectively.......................................... 137,049 135,123
Retained earnings......................................... 111,619 95,197
-------- --------
Total shareholders' equity........................ 248,668 230,320
-------- --------
Total liabilities and shareholders' equity........ $328,477 $327,985
======== ========
</TABLE>
See the accompanying notes to these consolidated condensed financial statements.
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SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JANUARY 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
-------- --------
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Net sales................................................... $202,840 $131,612
Cost of sales............................................... 167,758 108,981
-------- --------
Gross profit................................................ 35,082 22,631
======== ========
Operating expenses:
Research and development.................................. 2,146 1,829
Sales, general and administrative......................... 10,706 8,126
-------- --------
Total operating expenses.......................... 12,852 9,955
-------- --------
Income from operations...................................... 22,230 12,676
Other income, net........................................... 1,927 529
-------- --------
Income before provision for income taxes.................... 24,157 13,205
Provision for income taxes.................................. 7,735 4,495
-------- --------
Net income.................................................. $ 16,422 $ 8,710
======== ========
Diluted net income per share................................ $ 0.35 $ 0.20
======== ========
Weighted average common and common equivalent shares
outstanding............................................... 47,216 42,924
======== ========
Basic net income per share.................................. $ 0.39 $ 0.23
======== ========
Weighted average common shares outstanding.................. 42,472 37,888
======== ========
</TABLE>
See the accompanying notes to these consolidated condensed financial statements.
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SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31,
(IN THOUSANDS)
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<CAPTION>
1998 1997
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NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 20,570 $ 6,841
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments available-for-sale............... (44,888) (859)
Maturities of investments available-for-sale.............. 3,900 --
Purchases of property and equipment....................... (9,677) (4,689)
Proceeds from sale of property and equipment.............. 23 22
-------- -------
Net cash used in investing activities............. (50,642) (5,526)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations..................... (340) (417)
Proceeds from sale of common stock........................ 1,028 900
-------- -------
Net cash provided by financing activities......... 688 483
-------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (29,384) 1,798
CASH AND CASH EQUIVALENTS, beginning of period.............. 111,331 52,568
-------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 81,947 $54,366
======== =======
</TABLE>
See the accompanying notes to these consolidated condensed financial statements.
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SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The Interim Consolidated Condensed Financial Statements of SMART Modular
Technologies, Inc., a California corporation, and subsidiaries (the "Company")
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. These Interim Consolidated Condensed
Financial Statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's fiscal 1997 Report on
Form 10-K as filed with the Securities and Exchange Commission on January 29,
1998.
The Interim Consolidated Condensed Financial Statements for the first
quarter of fiscal 1998 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
1997 are provided for information purposes only. The results of operations for
the three month period ended January 31, 1998 are not necessarily indicative of
the results that may be expected for the entire fiscal year ending October 31,
1998, 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
The Company computes net income per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No.
128 requires companies to compute net income per share under two different
methods, basic and diluted, and present per share data for all periods in which
a statement of operations is presented. Basic net income per share is computed
by dividing net income by the weighted average number of shares of common stock
outstanding during the period. Diluted net income per share is computed using
the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. Common stock equivalents consist of
preferred stock (using the "if converted" method), stock options and warrants
(using the treasury stock method). Preferred stock, stock options and warrants
are excluded from the computation of diluted net income per share if their
effect is anti-dilutive.
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SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
The following table reconciles the amounts used in the computation of basic
and diluted net income per share for the three month periods ended January 31,:
<TABLE>
<CAPTION>
1998 1997
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(IN THOUSANDS, EXCEPT
PER SHARE DATA)
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NET INCOME AVAILABLE TO COMMON SHAREHOLDERS................. $16,422 $ 8,710
======= =======
DILUTED NET INCOME PER SHARE:
Weighted average common shares outstanding................ 42,472 37,888
Weighted average common stock options outstanding......... 4,744 5,036
------- -------
Total weighted average common and common
equivalents outstanding......................... 47,216 42,924
======= =======
Diluted net income per share...................... $ 0.35 $ 0.20
======= =======
BASIC NET INCOME PER SHARE:
Weighted average common shares outstanding................ 42,472 37,888
------- -------
Total weighted average common shares
outstanding..................................... 42,472 37,888
======= =======
Basic net income per share........................ $ 0.39 $ 0.23
======= =======
</TABLE>
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>
JANUARY 31, OCTOBER 31,
1998 1997
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Raw materials................................. $25,476 $22,692
Work-in-process............................... 4,160 5,266
Finished goods................................ 8,229 11,378
------- -------
Total............................... $37,865 $39,336
======= =======
</TABLE>
2. LINES OF CREDIT
In June 1997, the Company entered into an unsecured revolving bank line of
credit agreement that expires in May 1998. Borrowings under this agreement are
limited to $20.0 million and bear interest at either the bank's prime rate (8.5%
at January 31, 1998) or a spread over LIBOR (5.6% at January 31, 1998), 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 January 31,
1998 and October 31, 1997, no borrowings were outstanding under this agreement.
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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 Net Sales Section, the Gross Profit Section, the
Research and Development Section, 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,
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, in July 1996.
The Company's net sales and gross profit have increased substantially over
the last three fiscal years. Over the last eight fiscal quarters, SMART's gross
margin has ranged from 15.3% to 18.2%. 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 that 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,
communication card products and embedded computer modules. In prior fiscal
periods, a significant majority of the Company's net sales were derived from the
sales of its specialty memory modules which typically have slightly higher gross
margin than the Company's standard memory modules. Currently, a majority of the
Company's net sales are derived from the sales of its standard 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 net sales and gross margin will continue to
vary based on these and other 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 1997, the selling prices of the Company's existing
products declined due to
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significant declines in DRAM semiconductor prices and declines in SRAM and Flash
semiconductor prices. Moreover, since the fiscal 1997 year end, declines in the
selling prices of certain of the Company's existing products have continued due
to significant declines in DRAM semiconductor prices and declines in SRAM and
Flash semiconductor prices which has adversely impacted net sales. Because a
substantial portion of the Company's net sales are attributable to the resale of
semiconductor memory devices, a continued decline in the prices of these
components would have a material adverse effect on the Company's net sales and
could have a material adverse effect on the Company's business, financial
condition and results of operations. 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 and to the extent its exposure
to the PC market remains significant.
The Company primarily sells its products to OEMs and semiconductor
manufacturers in the computer, networking and telecommunications industries. A
relatively small number of customers have accounted for a significant percentage
of the Company's net sales. For fiscal 1997, fiscal 1996 and fiscal 1995, the
Company's ten largest customers accounted for 86%, 71% and 68% of net sales,
respectively. For fiscal 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 53%, 12% 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. 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 less
than 10% of net sales in fiscal 1996 and fiscal 1995, represented 53% of the
Company's net sales in 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. Recently,
certain of the Company's customers including Compaq have announced that their
sales and earnings are expected to be below expectations of public analysts. Any
adverse changes in the business of the Company's customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, one of the Company's largest customers has recently
reduced the Company's market share levels for certain of the products the
Company sells to the customer. If the Company is unable to regain the lost
market share or otherwise satisfy the customer, the Company's business,
financial condition and results of operations would be materially and adversely
affected.
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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:
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THREE MONTHS
ENDED
JANUARY 31,
--------------
1998 1997
----- -----
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Net sales............................................ 100.0% 100.0%
Cost of sales........................................ 82.7 82.8
----- -----
Gross profit......................................... 17.3 17.2
Operating expenses:
Research and development........................... 1.1 1.4
Sales, general and administrative.................. 5.3 6.2
----- -----
Total operating expenses........................ 6.3 7.6
----- -----
Income from operations............................... 11.0 9.6
Other income, net.................................... 1.0 0.4
----- -----
Income before provision for income taxes............. 11.9 10.0
Provision for income taxes........................... 3.8 3.4
----- -----
Net income........................................... 8.1% 6.6%
===== =====
</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 first quarter of fiscal 1998 increased 54.1% to
$202.8 million from $131.6 million for the same period of fiscal 1997. The
increase in net sales for the first quarter of fiscal 1998 reflects an overall
increase in demand for the Company's products from new and existing customers as
compared to the same period of fiscal 1997. This increase was partially offset
by a decrease in net sales resulting from a substantial decline in the cost of
certain memory devices used in the production of the Company's products. The
Company expects net sales to continue to be affected in future periods by
changes in the cost of memory devices used in the production of the Company's
products.
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 55.0% to $35.1 million for the first quarter of fiscal 1998 from $22.6
million for the same period of fiscal 1997. Gross margin increased to 17.3% for
the first quarter of fiscal 1998 from 17.2% for the comparable period of fiscal
1997. The increase in gross margin for the three month period ended January 31,
1998 was principally due to a decrease in the cost of certain memory chips used
in the production of the Company's products as compared to the same period of
fiscal 1997. The increase in gross margin was partially offset by an increase in
the proportion of the Company's net sales derived from its lower margin standard
memory products as compared to the same period of fiscal 1997. The Company
expects gross margin to continue to be affected in future periods by changes in
the cost of memory devices used in the production of the Company's products.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of the costs associated
with the design and testing of new products. These costs relate primarily to
compensation of personnel involved with development efforts, materials and
outside design and testing services. Research and development expenses increased
17.3% to $2.1 million for the first quarter of fiscal 1998 from $1.8 million
during the same period of fiscal 1997 and totaled 1.1% and 1.4% of net sales for
the first quarter of fiscal 1998 and fiscal 1997, respectively. The
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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 first quarter of fiscal 1998 totaled $10.7 million, representing an increase
of 31.7% from $8.1 million for the same period of fiscal 1997. Sales, general
and administrative expenses totaled 5.3% and 6.2% of net sales for the first
quarter of fiscal 1998 and fiscal 1997, 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
line of credit and interest paid on certain lease obligations. Interest income
results from investment of cash balances. As compared to the same period of
fiscal 1997, interest income earned during the first quarter of fiscal 1998
increased due to higher cash balances generated from operations and proceeds
from the Company's secondary public offering of common stock completed in
September 1997.
PROVISION FOR INCOME TAXES
Provisions for income taxes were $7.7 million and $4.5 million for the
first quarter of fiscal 1998 and fiscal 1997, respectively, resulting in
effective tax rates of 32.0% and 34.0%, respectively. The decrease in the
Company's consolidated effective tax rate for the three month period ended
January 31, 1998 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 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, SMART has used funds generated primarily from operations,
certain borrowings, capital leases and equity financings to support its
operations, acquire capital equipment and finance inventory and accounts
receivable. The Company generated cash from operating activities totaling $20.6
million for the first quarter of fiscal 1998. The increase in cash primarily
resulted from net income generated during the period, a decrease in accounts
receivable, an increase in taxes payable and was partially offset by a decrease
in accounts payable. For the first quarter of fiscal 1997, the Company generated
cash from operations totaling $6.8 million. At January 31, 1998, the Company had
$161.6 million of cash, cash equivalents and short-term investments, and $216.4
million of working capital. At October 31, 1997, the Company had $150.0 million
of cash, cash equivalents and short-term investments and $206.1 million of
working capital. The Company primarily funds its liquidity requirements from
utilization of existing cash balances and amounts borrowed under its existing
line of credit. The Company expects to fund any future liquidity requirements
from a combination of available cash balances 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
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required to maintain specified levels of tangible net worth and comply with
certain other covenants. As of January 31, 1998, the Company was in compliance
with all covenants related to the line of credit. The Credit Line is unsecured
and no borrowings were outstanding under the Credit Line as of January 31, 1998.
Capital expenditures totaled $9.7 million for the first quarter of fiscal
1998 and $17.1 million for the fiscal year ended October 31, 1997. These
expenditures were primarily for manufacturing and test equipment and the
expansion of the Company's existing manufacturing operations. SMART anticipates
spending between $30.0 million and $35.0 million on capital expenditures in
fiscal 1998 related to the continued expansion of the Company's manufacturing
operations and related equipment.
SMART has entered into certain capital lease arrangements. The outstanding
principal on these obligations was approximately $0.8 million and $1.2 million
at January 31, 1998 and October 31, 1997, 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 fiscal 1997, fiscal 1996 and fiscal
1995, the Company's ten largest customers accounted for 86%, 71% and 68% of net
sales, respectively. For fiscal 1997, the Company's three largest customers were
Compaq, Cisco and Hewlett-Packard, which accounted for 53%, 12% 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 less than 10% of net sales in fiscal 1996 and fiscal 1995,
represented 53% of the Company's net sales in 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. Recently, certain of the Company's customers including Compaq have
announced that their sales and earnings are expected to be below expectations of
public analysts. Any adverse changes in the business of the Company's customers
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, one of the Company's largest
customers has recently reduced the Company's market share levels for certain of
the products the Company sells to the customer. If the Company is unable to
regain the lost market share or otherwise satisfy the customer, the Company's
business, financial condition and results of operations would be materially and
adversely affected.
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.
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
12
<PAGE> 13
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 1997, there were significant declines in
DRAM semiconductor prices and declines in SRAM and Flash semiconductor prices.
Since the fiscal 1997 year end, there have been continued significant declines
in DRAM semiconductor prices and declines in SRAM and Flash semiconductor prices
which have adversely impacted net sales. Because a substantial portion of the
Company's net sales are attributable to the resale of semiconductor memory
devices, a continued decline in the prices of these components would have a
material adverse effect on the Company's net sales and 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, communication 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 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 communication card market,
the Company competes with GVC, TDK and U.S. Robotics, Inc. (a subsidiary of 3Com
Corporation), among others. In the embedded computer subsystem market, the
Company competes with Force Computers Inc. (a subsidiary of Solectron
Corporation), Motorola Inc. and Radisys Corporation, among others. The Company
faces competition from current and prospective customers
13
<PAGE> 14
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 have the
ability to manufacture competitive products at lower costs than the Company as a
result of their higher levels of integration and therefore have the ability to
sell competitive products at lower prices than the Company's products. 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 partial or complete 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, the
Company's competitors selling products that compete with the Company's products
at lower prices than 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. Recently, certain of
the Company's customers including Compaq have announced that their sales and
earnings are expected to be below expectations of public analysts. Any adverse
changes in the business of the Company's customers could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, one of the Company's largest customers has recently reduced the
Company's market share levels for certain of the products the Company sells to
the customer. If the Company is unable to regain the lost market share or
otherwise satisfy the customer, the Company's business, financial condition and
results of operations would be materially and adversely affected.
The Company's operating results may also 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 have 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
14
<PAGE> 15
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 1997, the selling prices of the Company's existing
products declined due to significant declines in DRAM semiconductor prices and
declines in SRAM and Flash semiconductor prices. Moreover, since the fiscal 1997
year end, declines in the selling prices of certain of the Company's existing
products have continued due to significant declines in DRAM semiconductor prices
and declines in SRAM and Flash semiconductor prices which has adversely impacted
net sales. Because a substantial portion of the Company's net sales are
attributable to the resale of semiconductor memory devices, a continued decline
in the prices of these components would have a material adverse effect on the
Company's net sales and could have a material adverse effect on the Company's
business, financial condition and results of operations. 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
and to the extent its exposure to the PC market remains significant.
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,
communication 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
15
<PAGE> 16
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.
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 an 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.
The Company intends to purchase a new management information system to
replace its existing management information system. The implementation of such a
new system will impact almost all phases of the Company's operations (e.g.,
planning, manufacturing, finance and accounting). Implementation of a new
management information system and transition from the current system to a new
system will require substantial financial resources, time and personnel. There
can be no assurance that the Company will not experience problems, delays or
unanticipated additional costs in implementing a new management information
system or in the use of its existing system that could have a material adverse
effect on the Company's business, financial condition and results of operations,
particularly in the period in which a new system is brought online.
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.
In December 1997, the Company relocated its manufacturing operations in
Puerto Rico from a 23,000 square foot facility in Arecibo, Puerto Rico into an
83,000 square foot facility in Aguada, Puerto Rico. The Company's expansion will
result in higher operating expenses. There can be no assurance that the Company
can successfully implement the transition from its old facility to the new
facility or that the new facility's production lines will be efficient or that
they will result in an increase in output. Any delay or unexpected difficulties
arising from the transition could materially and adversely affect the Company's
business, financial condition and results of operations.
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<PAGE> 17
YEAR 2000; INFORMATION TECHNOLOGY TRANSITION
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists concerning the potential effects associated with such
compliance. The Company's existing management information system is not Year
2000 compliant. The Company intends to purchase a new management information
system to replace its existing management information system. The implementation
of such a new system will impact almost all phases of the Company's operations
(e.g., planning, manufacturing, finance and accounting). Implementation of a new
management information system and transition from the current system to a new
system will require substantial financial resources, time and personnel. There
can be no assurance that such a system will be implemented by the year 2000, or
that the Company will not experience problems, delays or unanticipated
additional costs in implementing the new system or in the use of its existing
system that could have a material adverse effect on the Company's business,
financial condition and results of operations, particularly in the period in
which the new system is brought online. In addition, there can be no assurance
that the Company's customers and suppliers have, or will have management
information systems that are Year 2000 compliant. Any Year 2000 compliance
problem facing the Company, its customers or suppliers could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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 ("FPM") and EDO memory to SDRAM, and
the industry standard modem is currently changing from a 33.6 kbps synchronous
modem to a 56 kbps asynchronous modem. The Company is currently focusing its
research and development resources on the development of SDRAM, Flash and SRAM
products, 56 kbps asynchronous modem products and various embedded computer
modules. The success of the Company in developing new and enhanced products will
depend upon a variety of factors, including integration of various elements of
complex technology, timely and efficient completion of product design, timely
and efficient implementation of manufacturing and assembly processes,
availability of production capacity, achievement of acceptable manufacturing
yields and product performance, quality and reliability. The Company has
experienced, and may in the future experience, delays from time to time in the
development and introduction of new products. Moreover, there can be no
assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new products or enhancements. There can be no
assurance that defects or errors will not be found in the Company's products
after commencement of commercial shipments, which could result in the delay in
market acceptance of such products. The inability of the Company to introduce
new products or enhancements that contribute to net 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
17
<PAGE> 18
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 18%, 8% and 14% of net sales in fiscal
1997, fiscal 1996 and fiscal 1995, 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 may 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, potentially adverse
tax consequences and uncertainties relative to regional, political and economic
circumstances. In particular, recent instability in certain Asian economies and
financial markets could have an adverse effect on the Company's business,
financial condition and results of operations in future quarters. In fiscal
1997, the Company's net sales to customers in Asia accounted for less than one
percent of all net sales. In addition to exporting products to Asia, the Company
maintains strategic supply relationships with companies located in Asia.
Moreover and as a result of currency changes and other factors, certain of the
Company's competitors may have the ability to manufacture competitive products
in Asia at lower costs than the Company. There can be no assurance that current
economic instability in Asia will not have a material adverse effect on the
Company's net sales, its ability to compete or its ability to receive raw
materials for its products.
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
United States dollars, increases in the value of the United States 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 United States 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's purchase orders and agreements
are governed by foreign laws, which may differ significantly from United States
laws. Therefore, the Company may be limited in its ability to enforce its rights
under such agreements and to collect damages, if awarded. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company's business, financial condition and results of operations.
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.
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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 acquire or make
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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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 22 - 24.
(b) Reports on Form 8-K: There were no reports on Form 8-K filed during the
three months ended January 31, 1998.
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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: March 13, 1998
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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.
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------- --------
<C> <S>
10.16(1) Security and Loan Agreement between the Registrant and
Imperial Bank dated July 19, 1995.
*10.17(1) License and Supply Agreement between the Registrant and
Krypton Isolation, Inc. dated July 22, 1994.
10.18(1) Warrant Purchase Agreement between the Registrant and
Krypton Isolation, Inc. dated July 27, 1994.
10.19(1) Holders' Agreement dated July 27, 1994 by and among Krypton
Isolation, Inc. and certain individuals and entities
identified on Exhibit A attached thereto.
10.20(1) Common Stock Purchase Agreement dated July 27, 1994 by and
among Krypton Isolation, Inc. and the individuals identified
on Exhibit A attached thereto.
10.21(1) First Amendment to the Krypton Isolation, Inc. Warrant to
Purchase 2,000,000 Shares of Series A Preferred Stock
between the Registrant and Krypton Isolation, Inc. dated
October 24, 1995.
10.22(1) Letter of Intent dated as of October 24, 1995 by and among
Krypton Isolation, Inc., the Registrant and certain
individuals identified on the signature pages thereto.
**10.23(2) License and Supply Agreement between the Registrant and
Krypton Isolation, Inc. dated January 29, 1996.
10.24(2) Warrant Purchase Agreement between the Registrant and
Krypton Isolation, Inc. dated January 29, 1996.
10.25(2) First Amended and Restated Holders' Agreement dated January
29, 1996 by and among Krypton Isolation, Inc. and certain
individuals and entities identified on Exhibit A attached
thereto.
10.26(2) Common Stock Agreement dated January 29, 1996 by and among
Krypton Isolation, Inc. and the entities identified on
Exhibit A attached thereto.
10.27(2) First Amendment to the License and Supply Agreement between
the Registrant and Krypton Isolation, Inc. dated January 29,
1996.
10.28(3) 1989 Incentive Stock Plan, as amended, dated March 25, 1996.
10.29(4) Fourth Amendment to Lease between the Registrant and Riggs
Bank N.A. dated September 27, 1996.
10.30(5) Revolving Line of Credit Note between the Registrant and
Wells Fargo Bank, National Association dated May 29, 1997.
10.31(5) Credit Agreement between the Registrant and Wells Fargo
Bank, National Association dated May 29, 1997.
10.32(5) Subfeature Note between the Registrant and Wells Fargo Bank,
National Association dated May 29, 1997.
10.33(6) Lease Contract between the Registrant and The Puerto Rico
Industrial Development Company dated October 9, 1997.
10.34(6) Second 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
January 21, 1998.
27.1 Financial Data Schedule for the Quarter Ended January 31,
1998.
</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
23
<PAGE> 24
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.
(5) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-Q filed August 28, 1997.
(6) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-K filed January 29, 1998.
* 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.
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S
10-Q FOR THE FIRST FISCAL QUARTER ENDED JANUARY 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR 3-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1997 OCT-31-1997
<PERIOD-START> NOV-01-1997 NOV-01-1996 NOV-01-1996
<PERIOD-END> JAN-31-1998 OCT-31-1997 JAN-31-1997
<CASH> 81,947 111,331 0
<SECURITIES> 79,660 38,672 0
<RECEIVABLES> 78,766 95,366 0
<ALLOWANCES> 0 0 0
<INVENTORY> 37,865 39,336 0
<CURRENT-ASSETS> 295,531 303,022 0
<PP&E> 32,258 24,604 0
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 328,477 327,985 0
<CURRENT-LIABILITIES> 79,133 96,907 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 137,228 135,302 0
<OTHER-SE> 111,440 95,018 0
<TOTAL-LIABILITY-AND-EQUITY> 328,477 327,985 0
<SALES> 202,840 0 131,612
<TOTAL-REVENUES> 202,840 0 131,612
<CGS> 167,758 0 108,981
<TOTAL-COSTS> 167,758 0 108,981
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 63 0 52
<INCOME-PRETAX> 24,157 0 13,205
<INCOME-TAX> 7,735 0 4,495
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 16,422 0 8,710
<EPS-PRIMARY> 0.39<F1> 0<F1> 0.23<F1>
<EPS-DILUTED> 0.35 0 0.20
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
