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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 APRIL 30, 1999,
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)
<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 May 31, 1999, there were 45,082,915 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
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets --
As of April 30, 1999 and October 31, 1998................... 3
Consolidated Condensed Statements of Income --
For the Three and Six Months Ended April 30, 1999 and
1998........................................................ 4
Consolidated Condensed Statements of Cash Flows --
For the Six Months Ended April 30, 1999 and 1998............ 5
Notes to Consolidated Condensed Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 25
Item 2. Changes in Securities....................................... 25
Item 3. Defaults upon Senior Securities............................. 25
Item 4. Submission of Matters to a Vote of Security Holders......... 25
Item 5. Other Information........................................... 26
Item 6. Exhibits and Reports on Form 8-K............................ 26
Signatures........................................................... 27
</TABLE>
2
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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>
APRIL 30, OCTOBER 31,
1999 1998
--------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 94,413 $ 75,478
Short term investments.................................... 73,795 99,822
Accounts receivable, net.................................. 111,934 89,203
Inventories............................................... 61,092 40,138
Deferred income taxes..................................... 5,080 5,080
Prepaid expenses and other................................ 10,231 10,262
-------- --------
Total current assets.............................. 356,545 319,983
Property and equipment, net................................. 45,597 47,920
Other....................................................... 1,603 1,089
-------- --------
Total assets...................................... $403,745 $368,992
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 70,985 $ 64,335
Accrued bonuses........................................... 2,573 4,545
Other accrued expenses.................................... 8,396 8,255
Income taxes payable...................................... 16,596 11,557
-------- --------
Total current liabilities......................... 98,550 88,692
Long-term Liabilities:
Deferred income taxes and other........................... 682 679
-------- --------
Total liabilities................................. 99,232 89,371
-------- --------
Shareholders' Equity:
Common stock, no par value
Authorized -- 200,000,000 shares
Outstanding -- 44,966,076 and 44,714,589 shares,
respectively........................................... 132,903 132,941
Retained earnings......................................... 171,610 146,680
-------- --------
Total shareholders' equity........................ 304,513 279,621
-------- --------
Total liabilities and shareholders' equity........ $403,745 $368,992
======== ========
</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 SIX MONTHS ENDED
APRIL 30, APRIL 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales....................................... $257,851 $181,421 $521,939 $384,262
Cost of sales................................... 225,667 150,314 459,759 318,073
-------- -------- -------- --------
Gross profit.................................... 32,184 31,107 62,180 66,189
-------- -------- -------- --------
Operating Expenses:
Research and development...................... 2,724 2,295 5,180 4,441
Sales, general and administrative............. 12,137 9,883 23,637 20,588
-------- -------- -------- --------
Total operating expenses.............. 14,861 12,178 28,817 25,029
-------- -------- -------- --------
Income from operations.......................... 17,323 18,929 33,363 41,160
Other income, net............................... 1,536 1,588 3,282 3,515
-------- -------- -------- --------
Income before provision for income taxes........ 18,859 20,517 36,645 44,675
Provision for income taxes...................... 6,029 6,555 11,715 14,291
-------- -------- -------- --------
Net income...................................... $ 12,830 $ 13,962 $ 24,930 $ 30,384
======== ======== ======== ========
Diluted net income per share.................... $ 0.28 $ 0.30 $ 0.53 $ 0.64
======== ======== ======== ========
Weighted average common and common equivalent
shares outstanding............................ 46,378 47,202 46,774 47,209
======== ======== ======== ========
Basic net income per share...................... $ 0.28 $ 0.33 $ 0.55 $ 0.71
======== ======== ======== ========
Weighted average common shares outstanding...... 45,108 42,892 45,045 42,682
======== ======== ======== ========
</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 SIX MONTHS ENDED APRIL 30,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 23 $ 36,352
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments available-for-sale............... (111,813) (55,819)
Maturities of investments available-for-sale.............. 137,840 13,921
Purchases of property and equipment....................... (4,430) (18,667)
Proceeds from sale of property and equipment.............. 7 32
--------- --------
Net cash provided by (used in) investing
activities.......................................... 21,604 (60,533)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit.............................. 31,850 5,000
Payments on line of credit................................ (31,850) (5,000)
Payments of capital lease obligations..................... (156) (578)
Proceeds from sale of common stock........................ 4,615 2,421
Purchases of common stock................................. (7,151) --
--------- --------
Net cash (used in) provided by financing
activities.......................................... (2,692) 1,843
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 18,935 (22,338)
CASH AND CASH EQUIVALENTS, beginning of period.............. 75,478 111,331
--------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 94,413 $ 88,993
========= ========
</TABLE>
See the accompanying notes to these consolidated condensed financial statements.
5
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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 1998 Report on
Form 10-K as filed with the Securities and Exchange Commission on January 29,
1999.
The Interim Consolidated Condensed Financial Statements for the second
quarter of fiscal 1999 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
1998 are provided for information purposes only. The results of operations for
the three and six month periods ended April 30, 1999 are not necessarily
indicative of the results that may be expected for the entire fiscal year ending
October 31, 1999, 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
stock options (using the treasury stock method) and 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 (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED APRIL 30, ENDED APRIL 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income available to common shareholders......... $12,830 $13,962 $24,930 $30,384
======= ======= ======= =======
Diluted net income per share:
Weighted average common shares outstanding........ 45,108 42,892 45,045 42,682
Weighted average common stock options
outstanding.................................... 1,270 4,310 1,729 4,527
------- ------- ------- -------
Total weighted average common and common
equivalents outstanding...................... 46,378 47,202 46,774 47,209
======= ======= ======= =======
Diluted net income per share................... $ 0.28 $ 0.30 $ 0.53 $ 0.64
======= ======= ======= =======
Basic net income per share:
Weighted average common shares outstanding........ 45,108 42,892 45,045 42,682
------- ------- ------- -------
Total weighted average common shares
outstanding.................................. 45,108 42,892 45,045 42,682
======= ======= ======= =======
Basic net income per share..................... $ 0.28 $ 0.33 $ 0.55 $ 0.71
======= ======= ======= =======
</TABLE>
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its individual components. The statement
requires the disclosure of all changes in equity of an enterprise that result
from transactions and other economic events of the period other than
transactions with owners ("comprehensive income"). Effective November 1, 1998,
the Company adopted the provisions of SFAS No. 130. For the three and six months
ended April 30, 1999 and 1998, the Company had no material differences between
net income and comprehensive income. Accordingly, comprehensive income is the
same as net income for all periods presented.
Effect of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas
of operations and major customers. The Company is required to adopt the
provisions of SFAS No. 131 beginning with its annual report on Form 10-K for the
fiscal year ended October 31, 1999 and for all subsequent interim periods. The
Company does not expect the adoption of SFAS No. 131 to have a material effect
on the Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Investments and Hedging Activities." The statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The Company does not expect the adoption of SFAS
No. 133 to have a material effect on the Company's consolidated financial
statements.
7
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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>
APRIL 30, OCTOBER 31,
1999 1998
--------- -----------
<S> <C> <C>
Raw materials............................................... $39,295 $24,210
Work-in-process............................................. 8,101 7,379
Finished goods.............................................. 13,696 8,549
------- -------
Total............................................. $61,092 $40,138
======= =======
</TABLE>
2. LINE OF CREDIT:
In June 1997, the Company entered into an unsecured revolving bank line of
credit agreement that expired in May 1999. Borrowings under this agreement were
limited to $20.0 million and bore interest at either the bank's prime rate (7.8%
at April 30, 1999) or a spread over LIBOR (5.0% at April 30, 1999), at the
Company's option. The Company was required to maintain specified levels of
tangible net worth and comply with certain other covenants. As of April 30, 1999
and October 31, 1998, no borrowings were outstanding under this agreement and
the Company was in compliance with all covenants related to the line of credit.
In May 1999, the Company entered into an unsecured revolving bank line of
credit agreement that expires in May 2000. Borrowings under this agreement are
limited to $30.0 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
related to this line of credit.
3. STOCK REPURCHASE:
On May 25, 1998, the Company's Board of Directors authorized the repurchase
from time to time of up to 4,000,000 shares of the Company's Common Stock
through open market purchases. During the fiscal year ended October 31, 1998,
the Company repurchased 620,000 shares of its Common Stock in the open market at
an average purchase price of $14.80 per share and a total cost of approximately
$9.2 million. During the first six months of fiscal 1999, the Company
repurchased 445,000 shares of its Common Stock in the open market at an average
purchase price of $16.07 per share and a total cost of approximately $7.2
million.
4. LITIGATION:
The Company and certain of its officers and directors have been named as
defendants in six securities class action lawsuits filed in the United States
District Court for the Northern District of California, Boren v. SMART Modular
Technologies, Inc., et al., No. C 98 20692 JW (PVT) (filed July 1, 1998),
Woszczak v. SMART Modular Technologies, Inc., et al., No. C 98 2617 JL (filed
July 2, 1998), Bisson v. SMART Modular Technologies, Inc., et al., No. C 98
20714 JF (filed July 8, 1998), D'Amato v. SMART Modular Technologies, Inc., et
al., No. C 98 2804 PJH (filed July 16, 1998), Cha v. SMART Modular Technologies,
Inc., et al., No. C 98 2833 BZ (filed July 17, 1998) and Chang v. SMART Modular
Technologies, Inc., et al., No. C 98 3151 SI (filed August 13, 1998)
(collectively, the "Federal Actions"). The plaintiffs in the Federal Actions
allege that defendants made material misrepresentations and omissions during the
period from July 1, 1997 through May 21, 1998 in violation of Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The
Federal Actions were consolidated on October 9, 1998, and a consolidated
complaint was filed on November 30, 1998 (the "Federal Complaint").
On October 22, 1998, a putative securities class action lawsuit, captioned
Reagan v. SMART Modular Technologies, Inc., et al., Case No. H204162-5 (the
"State Complaint"), was filed against the Company and
8
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SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
certain of its officers and directors in the Superior Court of the State of
California, County of Alameda (the "Superior Court"). The State Complaint
alleges violations of Sections 25400 and 25500 of the California Corporations
Code and seeks unspecified damages on behalf of a purported class of purchasers
of SMART common stock during the period from July 1, 1997 through May 21, 1998.
The factual allegations of the State Complaint are nearly identical to the
factual allegations contained within the Federal Complaint. On February 22,
1999, the Superior Court granted the Company's motion to stay the State
Complaint pending the resolution of the Federal Complaint.
The Company believes that all claims related to the state and federal
securities actions are without merit and intends to defend itself vigorously
against these actions. Currently, the Company is unable to estimate the
financial impact of the state and federal securities actions.
9
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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 sixth paragraphs
of the Overview Section, the Gross Profit Section, the Research and Development
Section, the Sales, General and Administrative Section, the Provision for Income
Taxes 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," "Rapid Technological Change"
and "International Sales." The discussion of those factors is incorporated
herein by this reference as if said discussion was fully set forth at this
point.
OVERVIEW
The Company commenced operations in 1989 and initially focused on the
design and manufacture of standard memory modules for OEMs and semiconductor
manufacturers. Standard memory modules implement industry standard
specifications, primarily utilize DRAM and are designed to be incorporated into
a wide variety of electronic equipment. In 1991, the Company expanded its
design, manufacturing and marketing efforts to offer specialty memory modules
and PC card memory products. The Company expanded its PC card communication
product line through the acquisition of Apex Data, Inc. ("Apex") in July 1995.
The Company further expanded its product line to include embedded computer
modules through the acquisition of RISQ Modular Systems, Inc. ("RISQ") in July
1996.
Over the last eight fiscal quarters, SMART's gross margin has ranged from
11.4% to 17.3%. 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 factors affecting the Company's gross margin have been
the mix between sales of specialty memory modules, standard memory modules,
communication card products and embedded computer modules as well as changes in
average memory densities used in the Company's memory products. Currently, a
significant majority of the Company's net sales are derived from the sales of
standard memory modules which typically have lower gross margin than the
Company's specialty memory modules. The Company's embedded computer modules have
historically generated 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 significantly 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 products have declined in the
past and the Company expects that prices could continue to decline in the
future. In particular, during fiscal 1998, the selling prices of the Company's
products declined due to significant declines in DRAM semiconductor prices and
declines in SRAM and Flash semiconductor prices. Moreover, since the beginning
of calendar 1999, declines in the selling prices of certain of the Company's
10
<PAGE> 11
existing products have continued due to significant declines in DRAM
semiconductor prices. Because a substantial portion of the Company's net sales
are attributable to the resale of semiconductor memory devices, declines 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 to the
extent it continues to sell a material portion of its products in Europe and to
the extent its exposure to the personal computer 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 1998, fiscal 1997 and fiscal 1996, the
Company's ten largest customers accounted for 87%, 86% and 71% of net sales,
respectively. For fiscal 1998, the Company's largest customer was Compaq
Computer Corporation ("Compaq"), which accounted for 62% of net sales. For
fiscal 1997, the Company's three largest customers were 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. 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 is the sole source provider of certain
products to some of its customers. Recently, certain of these customers have
begun to increase the number of sources for these products. The emergence of
additional sources could cause the Company's customers to reduce orders to the
Company. 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, represented 62% and 53% of the Company's net sales in
fiscal 1998 and fiscal 1997, respectively. 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.
11
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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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------ ----------------
1999 1998 1999 1998
------ ------ ----- -----
<S> <C> <C> <C> <C>
Net sales............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales......................................... 87.5 82.9 88.1 82.8
----- ----- ----- -----
Gross profit.......................................... 12.5 17.1 11.9 17.2
Operating expenses:
Research and development............................ 1.1 1.3 1.0 1.2
Selling, general and administrative................. 4.7 5.4 4.5 5.4
----- ----- ----- -----
Total operating expenses.................... 5.8 6.7 5.5 6.5
----- ----- ----- -----
Income from operations................................ 6.7 10.4 6.4 10.7
Other income, net..................................... 0.6 0.9 0.6 0.9
----- ----- ----- -----
Income before provision for income taxes.............. 7.3 11.3 7.0 11.6
Provision for income taxes............................ 2.3 3.6 2.2 3.7
----- ----- ----- -----
Net income............................................ 5.0% 7.7% 4.8% 7.9%
===== ===== ===== =====
</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 second quarter of fiscal 1999 increased 42.1%
to $257.9 million from $181.4 million for the same period of fiscal 1998. Net
sales for the six months ended April 30, 1999 increased 35.8% to $521.9 million
from $384.3 million for the same period of fiscal 1998. The increase in net
sales for the three and six month periods ended April 30, 1999 was primarily due
to an increase in the average memory densities incorporated into the Company's
standard memory products as compared to the same periods of fiscal 1998. In
addition, an increase in net sales of communication card products further
contributed to the increase in net sales as compared to the same periods of
fiscal 1998. These increases were partially offset by a decrease in net sales of
specialty memory products as compared to the same periods of fiscal 1998.
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 3.5% to $32.2 million for the second quarter of fiscal 1999 from $31.1
million for the same period of fiscal 1998. Gross margin decreased to 12.5% for
the second quarter of fiscal 1999 from 17.1% for the comparable period of fiscal
1998. Gross profit for the first six months of fiscal 1999 decreased 6.1% to
$62.2 million from $66.2 million for the same period of fiscal 1998. Gross
margin decreased to 11.9% for the first six months of fiscal 1999 from 17.2% for
the comparable period of fiscal 1998. The decrease in gross margin for the three
and six month periods ended April 30, 1999 was principally due to an increase in
the proportion of the Company's net sales derived from its higher density
standard memory products as compared to the same periods of fiscal 1998. Gross
margin also decreased due to an increase in the proportion of the Company's
products manufactured on a turnkey basis versus those manufactured on a
consignment basis as compared to the same periods of fiscal 1998. The Company
expects gross margin to continue to be affected in future periods by, among
other things, changes in the cost of memory devices used in the production of
the Company's products, changes in the sales mix of the Company's products, the
average memory densities incorporated into the Company's memory products and
changes in the proportion of products manufactured on a turnkey basis versus
those manufactured on a consignment basis.
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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
18.7% to $2.7 million for the second quarter of fiscal 1999 from $2.3 million
during the same period of fiscal 1998 and totaled 1.1% and 1.3% of net sales for
the second quarter of fiscal 1999 and fiscal 1998, respectively. For the first
six months of fiscal 1999, research and development expenses increased 16.6% to
$5.2 million from $4.4 million during the same period of fiscal 1998 and totaled
1.0% and 1.2% of net sales for the first six months of fiscal 1999 and fiscal
1998, 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 second quarter of fiscal 1999 totaled $12.1 million, representing an
increase of 22.8% from $9.9 million for the same period of fiscal 1998. Sales,
general and administrative expenses totaled 4.7% and 5.4% of net sales for the
second quarter of fiscal 1999 and fiscal 1998, respectively. For the first six
months of fiscal 1999, sales, general and administrative expenses totaled $23.6
million, representing an increase of 14.8% from $20.6 million incurred during
the same period of fiscal 1998. Sales, general and administrative expenses
totaled 4.5% and 5.4% of net sales for the first six months of fiscal 1999 and
fiscal 1998, respectively. The increases in sales, general and administrative
expenses in absolute dollars for the three and six month periods ended April 30,
1999 were due in part to growth in the Company's staffing and infrastructure,
particularly in its international operations. 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 capital lease obligations. Interest
income results from investment of cash balances. As compared to the same periods
of fiscal 1998, interest income earned during the three and six months ended
April 30, 1999 decreased due to a reduction in cash available for investment
resulting from an increase in the proportion of the Company's working capital
being used to finance higher net sales as compared to the same period of fiscal
1998.
Provision for Income Taxes
Provisions for income taxes were $6.0 million and $6.6 million for the
second quarter of fiscal 1999 and fiscal 1998, respectively, resulting in an
effective tax rate of 32.0% in both periods. For the first six months of fiscal
1999 and fiscal 1998, the Company provided $11.7 million and $14.3 million for
income taxes, respectively, resulting in an effective tax rate of 32.0% in both
periods. The Company expects its effective tax rate in future periods to be
affected by, among other things, changes in the proportion of income contributed
to the Company by its foreign operations.
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. For the first six months of fiscal 1999, the Company generated cash
from operating activities totaling approximately $23,000. The cash provided by
operating activities during the first six months
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of fiscal 1999 primarily resulted from net income generated during the period,
increases in accounts payable and income taxes payable and depreciation on
capital equipment and was partially offset by increases in accounts receivable
and inventories. For the first six months of fiscal 1998, the Company generated
cash from operating activities totaling $36.4 million. At April 30, 1999, the
Company had $168.2 million in cash, cash equivalents and short-term investments,
and $258.0 million in working capital. At October 31, 1998, the Company had
$175.3 million in cash, cash equivalents and short-term investments and $231.3
million in 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.
On April 30, 1999, the Company had an unsecured revolving bank line of
credit agreement with a term expiring in May 1999. Borrowings under this
agreement were limited to $20.0 million and bore interest at either the bank's
prime rate or a spread over LIBOR, at the Company's option. The Company was
required to maintain specified levels of tangible net worth and comply with
certain other covenants. As of April 30, 1999 and October 31, 1998, no
borrowings were outstanding under this agreement and the Company was in
compliance with all covenants related to the line of credit.
In May 1999, the Company entered into an unsecured revolving bank line of
credit agreement that expires in May 2000. Borrowings under this agreement are
limited to $30.0 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
related to this line of credit.
Capital expenditures totaled $4.4 million for the first six months of
fiscal 1999 and $33.3 million for the fiscal year ended October 31, 1998. These
expenditures were primarily for manufacturing and test equipment and the
expansion of the Company's existing manufacturing operations. SMART anticipates
spending between $15.0 million and $20.0 million on capital expenditures during
all of fiscal 1999 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 $20,000 and $176,000 at April
30, 1999 and October 31, 1998, respectively.
On May 25, 1998, the Company's Board of Directors authorized the repurchase
from time to time of up to 4,000,000 shares of the Company's Common Stock
through open market purchases. During the fiscal year ended October 31, 1998,
the Company repurchased 620,000 shares of its Common Stock in the open market at
an average purchase price of $14.80 per share and a total cost of approximately
$9.2 million. During the first six months of fiscal 1999, the Company
repurchased 445,000 shares of its Common Stock in the open market at an average
purchase price of $16.07 per share and a total cost of approximately $7.2
million.
Year 2000 Readiness Disclosure; 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 with 21st
century dates, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, 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 has licensed a
new management information system that is Year 2000 compliant. In February 1999,
the Company replaced its existing management information system at its
headquarters in Fremont, California with the new management information system.
By mid 1999, the Company intends to replace its existing management information
systems at its other worldwide facilities with the new information system. The
implementation of the new system will impact almost all phases of the Company's
operations (e.g., planning, manufacturing, finance and accounting).
Implementation of the new system and transition from the existing system to the
new system will require substantial financial resources, time and personnel.
There can be no assurance that the new system will be completely implemented in
time to avoid any Year 2000 compliance problems, or that the Company will not
experience problems, delays or unanticipated additional costs in
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implementing the new management information system that could have a material
adverse effect on the Company's business, financial condition and results of
operations, particularly during the periods in which the new system is brought
online. The new system will be centrally operated from one location for all of
the Company's facilities worldwide. Each of the Company's facilities will
remotely access the new system via a wide area network. There can be no
assurance that the Company will not experience interruption of use of the new
system due to telecommunications problems or otherwise that could have a
material adverse effect on the Company's business, financial condition and
results of operations.
During the second quarter of fiscal 1998, the Company began a Year 2000
assessment of its management information system, other information technology
systems, non-information technology systems, products and key suppliers. Items
identified and under review include manufacturing and test equipment,
telecommunications systems and equipment and computer systems and equipment. In
addition, the Company is assessing the Year 2000 compliance of its products. The
Company intends to have its Year 2000 assessment, testing, remediation efforts
and development of necessary contingency plans complete by the year 2000, the
total cost of which has not yet been determined. To date, however, costs
incurred to address Year 2000 compliance issues have not been material. Costs
related to Year 2000 compliance issues continue to be funded through operating
cash flows. There can be no assurance that the Company will be able to complete
its Year 2000 assessment, testing, remediation efforts and development of
necessary contingency plans by the year 2000. Any failure to complete the Year
2000 assessment, testing, remediation efforts and development of necessary
contingency plans prior to the year 2000 could have a material adverse effect on
the Company's business, financial condition and results of operations.
During the third quarter of fiscal 1998, the Company initiated formal
communications with its key suppliers of raw materials and services. Although a
number of respondents indicated that their products are or will be Year 2000
compliant prior to the year 2000 and that they expect their operations and
services will continue uninterrupted, there can be no assurance that the
Company's key suppliers have, or will have information technology systems,
non-information technology systems and products that are Year 2000 compliant.
Similarly, there can be no assurance that the Company's customers have or will
have information technology systems, non-information technology systems and
products 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.
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 1998, fiscal 1997 and fiscal
1996, the Company's ten largest customers accounted for 87%, 86% and 71% of net
sales, respectively. For fiscal 1998, the Company's largest customer was Compaq,
which accounted for 62% of net sales. In 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. 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 is the sole source provider of certain products to some of its
customers. Recently, certain of these customers have begun to increase the
number of sources for these products. The emergence of additional sources could
cause the Company's customers to reduce orders to the Company. 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,
represented 62% and 53% of the Company's net sales in fiscal 1998 and fiscal
1997,
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respectively. 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.
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 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 1998, there were significant declines in
DRAM semiconductor prices and declines in SRAM and Flash semiconductor prices.
Since the beginning of calendar 1999, there have been significant declines in
DRAM semiconductor prices. Because a substantial portion of the Company's net
sales are attributable to the resale of semiconductor memory devices, declines
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
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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. The Company also competes with
independent memory module manufacturers, including Celestica Inc., MCMS, 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 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 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, among other things, 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 have affected and may in the future affect the Company's results of
operations include fluctuating market demand for and declines in the selling
prices of the Company's products, decreases or increases in the costs of the
components 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 or on better
terms than the Company's products, delays in the introduction of new products
and enhancements to existing products, manufacturing inefficiencies associated
with the start up of new product introductions, and the Company's semiconductor
customers manufacturing memory modules, internally or with other third parties,
outside of the United States due to concerns about United States antidumping
investigations and laws.
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 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,
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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, the manufacturing services provided, the average memory densities
incorporated into the Company's memory products, 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 products have declined in the
past and the Company expects that prices could continue to decline in the
future. In particular, during fiscal 1998, the selling prices of the Company's
products declined due to significant declines in DRAM semiconductor prices and
declines in SRAM and Flash semiconductor prices. Moreover, since the beginning
of calendar 1999, declines in the selling prices of certain of the Company's
existing products have continued due to significant declines in DRAM
semiconductor prices. Because a substantial portion of the Company's net sales
are attributable to the resale of semiconductor memory devices, declines 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 to the
extent it continues to sell a material portion of its products in Europe and to
the extent its exposure to the personal computer 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 has experienced and could continue to 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.
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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 products. The Company also depends on
sole source third party manufacturers to produce certain of the Company's
embedded computer 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.
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 has licensed a new management information system that is Year
2000 compliant. In February 1999, the Company replaced its existing management
information system at its headquarters in Fremont, California with the new
management information system. By mid 1999, the Company intends to replace its
existing management information systems at its other worldwide facilities with
the new information system. The implementation of the new system will impact
almost all phases of the Company's operations (e.g., planning, manufacturing,
finance and accounting). Implementation of the new system and transition from
the existing system to the new system will require substantial financial
resources, time and personnel. There can be no assurance that the new system
will be completely implemented in time to avoid any Year 2000 compliance
problems, or that the Company will not experience problems, delays or
unanticipated additional costs in implementing the new management information
system that could have a material adverse effect on the Company's business,
financial condition and results of operations, particularly during the periods
in which the new system is brought online. The new system will be centrally
operated from one location for all of the Company's facilities worldwide. Each
of the Company's facilities will remotely access the new system via a wide area
network. There can be no assurance that the Company will not experience
interruption of use of the new system due to telecommunications problems or
otherwise that could have a material adverse effect on the Company's business,
financial condition and results of operations.
In connection with the Company's growth over the last several years, 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.
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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 fiscal 1998, the Company opened a new manufacturing facility in Penang,
Malaysia, which has resulted and will continue to result in higher operating
expenses. There can be no assurance that enough future sales will exist to
support the operating expenses of the new facility or that the production lines
of the new facility will be efficient or that they will result in an increase in
output. Any delay or difficulties arising from the start-up of the new facility
could materially and adversely affect the Company's business, financial
condition and results of operations.
Year 2000 Readiness Disclosure; 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 with 21st
century dates, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, 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 has licensed a
new management information system that is Year 2000 compliant. In February 1999,
the Company replaced its existing management information system at its
headquarters in Fremont, California with the new management information system.
By mid 1999, the Company intends to replace its existing management information
systems at its other worldwide facilities with the new information system. The
implementation of the new system will impact almost all phases of the Company's
operations (e.g., planning, manufacturing, finance and accounting).
Implementation of the new system and transition from the existing system to the
new system will require substantial financial resources, time and personnel.
There can be no assurance that the new system will be completely implemented in
time to avoid any Year 2000 compliance problems, or that the Company will not
experience problems, delays or unanticipated additional costs in implementing
the new management information system that could have a material adverse effect
on the Company's business, financial condition and results of operations,
particularly during the periods in which the new system is brought online. The
new system will be centrally operated from one location for all of the Company's
facilities worldwide. Each of the Company's facilities will remotely access the
new system via a wide area network. There can be no assurance that the Company
will not experience interruption of use of the new system due to
telecommunications problems or otherwise that could have a material adverse
effect on the Company's business, financial condition and results of operations.
During the second quarter of fiscal 1998, the Company began a Year 2000
assessment of its management information system, other information technology
systems, non-information technology systems, products and key suppliers. Items
identified and under review include manufacturing and test equipment,
telecommunications systems and equipment and computer systems and equipment. In
addition, the Company is assessing the Year 2000 compliance of its products. The
Company intends to have its Year 2000 assessment, testing, remediation efforts
and development of necessary contingency plans complete by the year 2000, the
total cost of which has not yet been determined. To date, however, costs
incurred to address Year 2000 compliance issues have not been material. Costs
related to Year 2000 compliance issues continue to be funded through operating
cash flows. There can be no assurance that the Company will be able to complete
its Year 2000 assessment, testing, remediation efforts and development of
necessary contingency plans by the year 2000. Any failure to complete the Year
2000 assessment, testing, remediation efforts and development of necessary
contingency plans prior to the year 2000 could have a material adverse effect on
the Company's business, financial condition and results of operations.
During the third quarter of fiscal 1998, the Company initiated formal
communications with its key suppliers of raw materials and services. Although a
number of respondents indicated that their products are or will be Year 2000
compliant prior to the year 2000 and that they expect their operations and
services will
20
<PAGE> 21
continue uninterrupted, there can be no assurance that the Company's key
suppliers have, or will have information technology systems, non-information
technology systems and products that are Year 2000 compliant. Similarly, there
can be no assurance that the Company's customers have or will have information
technology systems, non-information technology systems and products 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
expected to transition from SDRAM to Direct RDRAM. The Company is currently
focusing its research and development resources on the development of Rambus
DRAM, DDR, SDRAM, Flash and SRAM products, 56 kbps asynchronous modem products
and various embedded computer products. 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 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 30%, 18% and 8% of net sales in fiscal
1998, fiscal 1997 and fiscal 1996, respectively. The Company anticipates that
international sales will continue to be material in future periods. As a result,
a material 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
21
<PAGE> 22
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 1998, the Company's net sales to
customers in Asia accounted for less than one percent of all net sales. In
addition to net sales to customers in 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. The Company is currently being sued by a party who alleges
that certain of the Company's communication card products have infringed and
continue to infringe upon the party's intellectual property rights. The Company
is also currently being sued by a party who alleges that the Company's
manufacturing operations and processes have infringed and continue to infringe
upon the party's intellectual property rights. Moreover, 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
other third parties. There can be no assurance that these or other companies
will not in the future pursue claims against the Company with respect to the
alleged infringement of patents, copyrights or other intellectual property
rights. In addition, litigation may be necessary to protect the Company's
intellectual property rights and trade secrets, to determine the validity of and
scope of the proprietary rights of others or to defend against third party
claims of invalidity. The current litigation or any other 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 additional 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. In response to the
current litigation or 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
22
<PAGE> 23
technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of products. In addition, should the
Company decide to litigate the current claims or such other 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relate
primarily to the Company's investment portfolio. Currently, the Company does not
use derivative financial instruments in its investment portfolio. The Company
invests in high-credit quality issuers and, by policy, limits the amount of
principal exposure to any one issuer. As stated in the Company's policy, the
Company seeks to ensure the safety and preservation of its invested principal
funds by limiting default and market risk.
The Company seeks to mitigate default risk by investing in high-credit
quality securities and by positioning its investment portfolio to respond to a
significant reduction in a credit rating of any investment issuer, guarantor or
depository. The Company seeks to mitigate market risk by limiting the principal
and investment term of funds held with any one issuer and by investing funds in
marketable securities with active secondary or resale markets.
23
<PAGE> 24
The table below presents principal amounts and related weighted average
interest rates by year of maturity for the Company's investment portfolio as of
October 31, 1998 (in thousands):
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL
-------- ------- ---- ---- ---- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS:
Fixed-rate investments............... $113,061 $20,885 $-- $-- $-- $-- $133,946
Average interest rate................ 3.93% 4.19% -- -- -- -- 3.97%
</TABLE>
As of April 30, 1999, there were no changes in the Company's investment
portfolio that would materially impact the Company's exposure to interest rate
risk.
Foreign Currency Exchange Risk
The Company transacts business in various foreign countries. The Company's
primary foreign currency cash flows are in certain European countries. As of
April 30, 1999 and October 31, 1998, the Company did not employ a foreign
currency hedge program with respect to transactions and expenditures originating
in these or any other foreign countries. The Company believes that its foreign
currency exchange risk is currently immaterial.
24
<PAGE> 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of its officers and directors have been named as
defendants in six securities class action lawsuits filed in the United States
District Court for the Northern District of California, Boren v. SMART Modular
Technologies, Inc., et al., No. C 98 20692 JW (PVT) (filed July 1, 1998),
Woszczak v. SMART Modular Technologies, Inc., et al., No. C 98 2617 JL (filed
July 2, 1998), Bisson v. SMART Modular Technologies, Inc., et al., No. C 98
20714 JF (filed July 8, 1998), D'Amato v. SMART Modular Technologies, Inc., et
al., No. C 98 2804 PJH (filed July 16, 1998), Cha v. SMART Modular Technologies,
Inc., et al., No. C 98 2833 BZ (filed July 17, 1998) and Chang v. SMART Modular
Technologies, Inc., et al., No. C 98 3151 SI (filed August 13, 1998)
(collectively, the "Federal Actions"). The plaintiffs in the Federal Actions
allege that defendants made material misrepresentations and omissions during the
period from July 1, 1997 through May 21, 1998 in violation of Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The
Federal Actions were consolidated on October 9, 1998, and a consolidated
complaint was filed on November 30, 1998 (the "Federal Complaint").
On October 22, 1998, a putative securities class action lawsuit, captioned
Reagan v. SMART Modular Technologies, Inc., et al., Case No. H204162-5 (the
"State Complaint"), was filed against the Company and certain of its officers
and directors in the Superior Court of the State of California, County of
Alameda (the "Superior Court"). The State Complaint alleges violations of
Sections 25400 and 25500 of the California Corporations Code and seeks
unspecified damages on behalf of a purported class of purchasers of SMART common
stock during the period from July 1, 1997 through May 21, 1998. The factual
allegations of the State Complaint are nearly identical to the factual
allegations contained within the Federal Complaint. On February 22, 1999, the
Superior Court granted the Company's motion to stay the State Complaint pending
the resolution of the Federal Complaint.
The Company believes that all claims related to the state and federal
securities actions are without merit and intends to defend itself vigorously
against these actions. Currently, the Company is unable to estimate the
financial impact of the state and federal securities actions.
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
(a) The Company held an annual meeting of shareholders (the "Annual
Meeting") on March 16, 1999.
(b) The following individuals were nominated and elected to the Board of
Directors to serve for the ensuing year and until their successors are
duly elected and qualified or until their earlier death, resignation or
removal. Each individual so nominated also served as a Director on the
Company's Board of Director during the preceding year.
<TABLE>
<CAPTION>
NUMBER OF VOTES
----------------------------------------------
BROKER
NOMINEE FOR AGAINST WITHHELD NON-VOTES
------- ---------- ------- -------- ---------
<S> <C> <C> <C> <C>
Ajay Shah............................... 39,749,868 133,330 0 0
Mukesh Patel............................ 39,750,848 132,350 0 0
Erik Anderson........................... 39,748,976 134,222 0 0
Tor R. Braham........................... 39,749,348 133,850 0 0
</TABLE>
25
<PAGE> 26
(c) The following matter was voted upon at the Annual Meeting and the
results of voting were as follows:
(1) The shareholders voted 39,804,908 shares in the affirmative, 30,899
shares in the negative and withheld 47,391 shares to approve the
ratification of the appointment of Arthur Andersen LLP as
independent auditors of the Company for the fiscal year ending
October 31, 1999.
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 28 - 30.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months ended April
30, 1999.
26
<PAGE> 27
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 and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: June 11, 1999
27
<PAGE> 28
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(7) 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
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------- --------
<C> <S>
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
10.35(7) Revolving Line of Credit Note between the Registrant and
Wells Fargo Bank, National Association dated May 1, 1998
10.36(7) Credit Agreement between the Registrant and Wells Fargo
Bank, National Association dated May 1, 1998
10.37(7) Subfeature Note between the Registrant and Wells Fargo Bank,
National Association dated May 1, 1998
10.38(8) Sublease Contract between the Registrant and Philips
Consumer Communications, L.P. dated June 30, 1998
10.39(9) First Amendment to the License and Supply Agreement between
the Registrant and Krypton Isolation, Inc. dated June 22,
1998
10.40(9) Second Amendment to the License and Supply Agreement between
the Registrant and Krypton Isolation, Inc. dated June 22,
1998
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------- --------
<C> <S>
10.41 First Amendment to the Credit Agreement between the
Registrant and Wells Fargo Bank, National Association dated
May 1, 1998
10.42 Second Amendment to the Credit Agreement between the
Registrant and Wells Fargo Bank, National Association dated
May 1, 1998
10.43 Revolving Line of Credit Note between the Registrant and
Wells Fargo Bank, National Association dated April 28, 1999
10.44 Subfeature Note between the Registrant and Wells Fargo Bank,
National Association dated April 28, 1999
10.45 Employment Letter between the Registrant and Keith McDonald
dated February 17, 1999
16.1(1) Letter Regarding Change in Certifying Accountant
16.2(1) Letter Regarding Change in Certifying Accountant
16.3(1) Letter Regarding Change in Certifying Accountant
16.4(1) Letter Regarding Change in Certifying Accountant
27.1 Financial Data Schedule for the Quarter Ended April 30, 1999
</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.
(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.
(7) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-Q filed June 15, 1998.
(8) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-Q filed September 11, 1998.
(9) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-K filed January 29, 1999.
* 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.
30
<PAGE> 1
EXHIBIT 10.41
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of May 14, 1998, 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").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms
and conditions of that certain Credit Agreement between Borrower and Bank dated
as of May 1, 1998, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms
and conditions set forth in the Credit Agreement and have agreed to amend the
Credit Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. Section 4.9(a) is hereby deleted in its entirety, and the
following substituted therefor:
"(a) Tangible Net Worth not less than $230,000,000.00 as of
October 31, 1997, 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, 1997, less the effect of any stock
repurchase up to $50,000,000.00, 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."
2. Except as specifically provided herein, all terms and conditions
of the Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
<PAGE> 2
3. Borrower hereby remakes all representations and warranties
contained in the Credit Agreement and reaffirms all covenants set forth therein.
Borrower further certifies that as of the date of this Amendment there exists no
Event of Default as defined in the Credit Agreement, nor any condition, act or
event which with the giving of notice or the passage of time or both would
constitute any such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK,
SMART MODULAR NATIONAL ASSOCIATION
TECHNOLOGIES, INC.
By: /s/ DAVID B. MULLIN By: /s/ KAREN BARONE
-------------------------------- -------------------------------------
Karen Barone
Title: CFO Vice President
-----------------------------
SMART MODULAR TECHNOLOGIES (EUROPE), LIMITED
By: /s/ DAVID B. MULLIN
-------------------------------
Title: CFO
-----------------------------
-2-
<PAGE> 1
EXHIBIT 10.42
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of April 28, 1999, by and among 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").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms
and conditions of that certain Credit Agreement between Borrower and Bank dated
as of May 1, 1998, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms
and conditions set forth in the Credit Agreement and have agreed to amend the
Credit Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. Section 1.1(a) is hereby amended (a) by deleting "May 1, 1999"
as the last day on which Bank will make advances under the Line of Credit, and
by substituting for said date "May 1, 2000," and (b) by deleting "Twenty Million
Dollars ($20,000,000.00)" as the maximum principal amount available under the
Line of Credit, and by substituting for said amount "Thirty Million Dollars
($30,000,000.00)," with such changes to be effective upon the execution and
delivery to Bank of a promissory note substantially in the form of Exhibit A
attached hereto (which promissory note shall replace and be deemed the Line of
Credit Note defined in and made pursuant to the Credit Agreement) and all other
contracts, instruments and documents required by Bank to evidence such change.
2. Section 1.1(b) is hereby amended by deleting "May 1, 1999" as
the last day on which Bank will make advances under the Subfeature, and by
substituting for said date "May 1, 2000", with such change to be effective upon
the execution and delivery to Bank of a promissory note substantially in the
form of Exhibit B attached hereto (which promissory note shall replace and be
deemed the Smart (Europe) Note defined in and made pursuant to the Credit
Agreement) and all other contracts, instruments and documents required by Bank
to evidence such change.
<PAGE> 2
3. Section 1.2(c) is hereby deleted in its entirety, and the
following substituted therefor:
"(c) Unused Commitment Fee. Borrower shall pay to Bank a fee
equal to fifteen hundredths percent (0.15%) per annum (computed on the
basis of a 360-day year, actual days elapsed) on the average daily
unused amount of the Line of Credit, which fee shall be calculated on a
quarterly basis by Bank and shall be due and payable by Borrower in
arrears each June 30, September 30, December 31, and March 31."
4. Section 4.3(d) is hereby deleted in its entirety, and the
following substituted therefor:
"(d) contemporaneously with each annual and quarterly financial
statement of Borrower required hereby, a compliance certificate of the
Chief Executive Officer or Chief Financial Officer or Controller 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; and"
5. Section 4.9(a) and (c) are hereby deleted in their entirety,
and the following substituted therefor:
"(a) Tangible Net Worth not less than $279,000,000.00 as of
October 31, 1998, 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, 1998, less the effect of any stock
repurchase up to $50,000,000.00, 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.
(c) Quick Ratio not at any time less than 1.25 to 1.0 determined
as of each fiscal quarter end, with "Quick Ratio" defined as the
aggregate of unrestricted cash and cash equivalents, unrestricted
marketable
-2-
<PAGE> 3
securities and receivables convertible into cash divided by total
current liabilities."
Sections 4.9(b) and (d) remain unchanged.
6. Section 5.2 is hereby deleted in its entirety, and the following
substituted therefor:
"SECTION 5.2. OTHER INDEBTEDNESS. Create, incur, assume or
permit to exist any indebtedness or liabilities resulting from
borrowings, loans, leases 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, (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 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; (e) extensions, modifications,
refinancings and refundings of the foregoing, so long as the maximum
principal amount is not increased; and (f) liabilities arising under
operating leases (inclusive of operating leases included under clause
(b) hereof) requiring payment of more than $20,000,000.00 in the
aggregate during any fiscal year."
7. Section 5.3 is hereby deleted in its entirety, and the following
substituted therefor:
"SECTION 5.3. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge
into or consolidate with, or acquire all or substantially all of the
assets of, any other entity unless (i) there occurs no material change
in the nature of Borrower's business, and (ii) no violation of this
Agreement exists at the time of or would exist after such merger,
consolidation or acquisition, and (iii) if a merger or consolidation,
Borrower or Smart(Europe), as applicable, is the surviving entity
(provided that in no
-3-
<PAGE> 4
event shall Borrower be merged into or consolidated with Smart(Europe)
unless Borrower is the surviving entity); make any material change in
the nature of Borrower's business as conducted as of the date hereof;
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."
8. Except as specifically provided herein, all terms and conditions
of the Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
9. Borrower hereby remakes all representations and warranties
contained in the Credit Agreement and reaffirms all covenants set forth therein.
Borrower further certifies that as of the date of this Amendment there exists no
Event of Default as defined in the Credit Agreement, nor any condition, act or
event which with the giving of notice or the passage of time or both would
constitute any such Event of Default.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
SMART MODULAR TECHNOLOGIES, INC. WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: /s/ DAVID B. MULLIN By: /s/ PETER HOM
---------------------------------- -------------------------------------
Title: CFO Title: Vice President
---------------------------------- -------------------------------------
By: /s/ LATA KRISHNAN
----------------------------------
Title: Vice President, Administration
----------------------------------
SMART MODULAR TECHNOLOGIES (EUROPE) LIMITED
By: /s/ DAVID B. MULLIN
----------------------------------
Title: CFO
----------------------------------
By: /s/ LATA KRISHNAN
----------------------------------
Title: Vice President, Administration
----------------------------------
-5-
<PAGE> 1
EXHIBIT 10.43
REVOLVING LINE OF CREDIT NOTE
$30,000,000.00 San Jose, California
April 28, 1999
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 Regional Commercial
Banking Office, 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 Thirty
Million Dollars ($30,000,000.00), 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. (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 one percent (1.0%) below the Prime
Rate in effect from time to time, or (ii) at a fixed rate per annum determined
by Bank to be one percent (1.0%) 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 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
-2-
<PAGE> 3
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 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, 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 June 1, 1999.
(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
-4-
<PAGE> 5
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, 2000.
(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.
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.
-5-
<PAGE> 6
(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 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 1,
1998, as amended from time to time
-6-
<PAGE> 7
(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.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
SMART MODULAR TECHNOLOGIES, INC.
By: /s/ DAVID B. MULLIN
----------------------------------
Title: CFO
-------------------------------
By: /s/ LATA KRISHNAN
----------------------------------
Title: Vice President, Administration
-------------------------------
-7-
<PAGE> 1
EXHIBIT 10.44
SUBFEATURE NOTE
$10,000,000.00 San Jose, California
April 28, 1999
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 one percent (1.0%) below Prime Rate
in effect from time to time, or (ii) at a fixed rate per annum determined by
Bank to be one percent (1.0%) 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 June 1, 1999.
(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, 2000.
(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
1, 1998, 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.
-7-
<PAGE> 8
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 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.
-8-
<PAGE> 9
Nothing herein shall in any way be deemed to limit the ability of 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/ DAVID B. MULLIN
-------------------------------------
Title: CFO
----------------------------------
By: /s/ LATA KRISHNAN
-------------------------------------
Title: Vice President, Administration
----------------------------------
-9-
<PAGE> 1
EXHIBIT 10.45
February 17, 1999
Keith McDonald
Re: Employment Contract
Dear Keith:
We take great pleasure in making you an offer to join us at SMART
Modular Technologies, Inc. as SMART's President reporting directly to Ajay Shah,
SMART's CEO.
Your offer package includes a base salary of $11,550 per pay period
($300,300 per year), paid bi-weekly together with the following benefits:
1. Annual, performance-based bonus paid quarterly contingent upon (i) your
individual performance and contribution, (ii) SMART's profitability and
(iii) you being employed at SMART at the time the bonus is paid;
provided, however, if you are employed at SMART on your first
anniversary date or if the reason you are not employed at SMART on your
first anniversary date is because SMART involuntarily terminated you
other than for cause, your aggregate bonus for your first full year of
employment will be at least 100% of your annual base salary. In case of
termination, bonuses will be paid on a prorated basis for any partial
quarterly periods.
2. Within three months of the date you join SMART, SMART shall grant to you
through the SMART 1995 Stock Plan a stock option to acquire 300,000
shares of SMART common stock. One forty-eighth (1/48th) of the shares
underlying the option shall vest on each monthly anniversary date of the
option grant date, so that the shares underlying the option shall be
fully vested and exercisable four (4) years after the option grant date.
Each share's exercise price shall be the closing price of SMART's common
stock on the option grant date. The option shall be an incentive stock
option ("ISO") to the maximum extent permitted by ISO rules. Other terms
and conditions of the option shall be as determined by SMART's Board of
Directors and the 1995 Stock Plan.
3. Participation in SMART's 401(k) plan. SMART will contribute $0.50 for
each $1.00 contributed by you, up to $1,000 per plan year. There is a
three month waiting period for eligibility into this plan and entry
dates into the plan are the following January 1, April 1, July 1 or
October 1.
<PAGE> 2
Mr. McDonald
February 17, 1999
Page 2
4. Participation in SMART's Employee Stock Purchase Plan.
5. Accrual of sick and vacation time as of your date of hire as per
standard company policies.
In addition, the following benefits will be available to you on the
first day of the month following the month in which you are hired:
1. Participation in SMART's medical/dental/vision/life and long term
disability plans.
2. Participation in Section 125 Child/Dependent Care Expenses.
If your employment with SMART, or its' successors, is involuntarily
terminated other than for cause, then SMART, or its' successors, shall continue
to pay your base salary and extend your medical/dental/vision/life and long term
disability benefits until the later of two years from your date of hire or one
year from your date of termination, provided that (i) you sign a release
agreement, satisfactory to SMART, releasing any claims you have or may have
against SMART, its officers, directors, etc., and (ii) for so long as your base
salary is continued as severance, you or a business you participate in does not
hire or solicit to hire any former or then current SMART employees.
For purposes of this letter, "cause" shall mean (i) your intentional
misconduct which is materially injurious to SMART and which you do not cure
after thirty days written notice from SMART, (ii) your conviction of a felony,
(iii) your permanent disability or death.
On beginning your employment with SMART, you will be given an Employee
Handbook which is a statement of SMART's current employment policies. It is
important that you read, understand and comply with the policies contained in
the Employee Handbook and any revisions made to it. You understand that the
Employee Handbook does not constitute an employment contract. Like all employees
at SMART, your employment will be at-will. Accordingly, either you or SMART can
terminate your employment at will, with or without cause, at any time and with
or without any advance notice.
<PAGE> 3
Mr. McDonald
February 17, 1999
Page 3
This agreement is binding on SMART, its' successors and its' assigns.
This offer will remain open until Friday, February 26, 1999. Please
accept by signing in the space provided below and return the original to me by
this date.
We look forward to working with you at SMART.
Sincerely,
SMART Modular Technologies, Inc.
/s/ Ajay Shah
- --------------------------------
Ajay Shah,
CEO
I accept the above offer and will join SMART on ____/____/______.
/s/ Keith Mcdonald 2/17/99
- ------------------------------------ ----------------------------------------
Keith Mcdonald Date
<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 SECOND FISCAL QUARTER ENDED APRIL 30, 1999 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 6-MOS YEAR
<FISCAL-YEAR-END> OCT-31-1999 OCT-31-1999 OCT-31-1999
<PERIOD-START> FEB-01-1999 NOV-01-1998 NOV-01-1997
<PERIOD-END> APR-30-1999 APR-30-1999 OCT-31-1998
<CASH> 0 94,413 75,478
<SECURITIES> 0 73,795 99,822
<RECEIVABLES> 0 111,934 89,203
<ALLOWANCES> 0 0 0
<INVENTORY> 0 61,092 40,138
<CURRENT-ASSETS> 0 356,545 319,983
<PP&E> 0 45,597 47,920
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 0 403,745 368,992
<CURRENT-LIABILITIES> 0 98,550 88,692
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 132,903 132,941
<OTHER-SE> 0 171,610 146,680
<TOTAL-LIABILITY-AND-EQUITY> 0 403,745 368,992
<SALES> 257,851 521,939 0
<TOTAL-REVENUES> 257,851 521,939 0
<CGS> 225,667 459,759 0
<TOTAL-COSTS> 225,667 459,759 0
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 18,859 36,645 0
<INCOME-TAX> 6,029 11,715 0
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 12,830 24,930 0
<EPS-BASIC> 0.28 0.55 0<F1>
<EPS-DILUTED> 0.28 0.53 0
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
