<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 15, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SIMPLE TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 3572 33-0399154
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
3001 DAIMLER STREET
SANTA ANA, CALIFORNIA 92705-5812
(949) 476-1180
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------------------
MANOUCH MOSHAYEDI
CHIEF EXECUTIVE OFFICER
SIMPLE TECHNOLOGY, INC.
3001 DAIMLER STREET
SANTA ANA, CALIFORNIA 92705-5812
(949) 476-1180
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
KENNETH R. BENDER, ESQ. BRYANT B. EDWARDS, ESQ.
ALLEN Z. SUSSMAN, ESQ. TERI L. WITTEMAN, ESQ.
PAUL S. BERNSTEIN, ESQ. ESTHER CHU, ESQ.
JOSHUA ARMSTRONG, ESQ. LATHAM & WATKINS
MICHAEL W. CHOU, ESQ. 633 WEST FIFTH STREET
BROBECK, PHLEGER & HARRISON LLP LOS ANGELES, CALIFORNIA 90071
550 SOUTH HOPE STREET (213) 485-1234
LOS ANGELES, CALIFORNIA 90071
(213) 489-4060
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $0.001 par value.......................... $57,500,000 $15,180.00
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES, IN ANY STATE WHEN THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 15, 2000
[LOGO]
SHARES
COMMON STOCK
Simple Technology, Inc. is offering shares of its common stock. This
is our initial public offering, and no public market currently exists for our
shares. We have applied for approval for quotation of our common stock on the
Nasdaq National Market under the symbol "STEC." We anticipate that the initial
public offering price will be between $ and $ per share.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ----------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Simple Technology............................... $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Simple Technology has granted the underwriters a 30-day option to purchase
up to an additional shares of common stock to cover over-allotments.
------------------------
ROBERTSON STEPHENS
BANC OF AMERICA SECURITIES LLC
NEEDHAM & COMPANY, INC.
THE DATE OF THIS PROSPECTUS IS , 2000
<PAGE>
INSIDE FRONT COVER
The Simple Technology logo is at the center of the page. Above the logo are
the words "Engineering," "Manufacturing" and "Testing," accompanied by three
pictures: (1) an engineer at a computer workstation; (2) a factory worker on the
manufacturing or testing lines; and (3) two engineers handling a memory card
while engaged in a discussion.
To the right of the logo are the words "Memory," "Flash" and "Solid State
Devices," accompanied by two pictures. The first picture depicts a circuit board
with memory modules and the second picture depicts a Simple Technology
CompactFlash-TM- card.
Below the logo is the phrase "Worldwide Support & Sales," accompanied by
three pictures and an image of the Simple Technology website. The pictures
depict: (1) the Simple Technology sales force at work; (2) a sales or service
employee on the phone with another sales or service employee in the background;
and (3) Simple Technology's headquarters.
INSIDE GATEFOLD
<TABLE>
<CAPTION>
<S> <C>
Inside Gatefold Across the top of the page is the phrase "Flash Cards."
Left Page: Under the label "Flash Cards," there are pictures of a Flash
storage card and a CompactFlash-TM- card, both branded with
the Simple Technology logo, with lines connecting them to
three digital cameras, three MP3 digital audio players and
three personal digital assistants (PDAs). The Simple
Technology logo appears in the lower right corner of the
page.
Inside Gatefold Across the top of the page is the phrase "DRAM Memory
Right Page: Modules." In the center of the page is a large picture of a
circuit board with stacked memory modules. The three
pictures around the large center picture of the circuit
board depict: (1) a close up of stacked memory modules; (2)
equipment used in manufacturing or testing of the memory
modules; and (3) an engineer examining a computer monitor
showing a schematic of a memory module. The Simple
Technology logo appears in the upper right corner of the
page.
</TABLE>
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF
THIS PROSPECTUS REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS, OR SALE
OF OUR COMMON STOCK. IN THIS PROSPECTUS, "SIMPLE TECHNOLOGY," "WE," "US" AND
"OUR" REFER TO SIMPLE TECHNOLOGY, INC., A CALIFORNIA CORPORATION, AND OUR
SUBSIDIARIES.
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Summary..................................................... 3
Risk Factors................................................ 8
Forward-Looking Statements.................................. 24
S Corporation Status and Conversion......................... 24
Use of Proceeds............................................. 27
Dividend Policy............................................. 27
Capitalization.............................................. 28
Dilution.................................................... 29
Selected Consolidated Financial Data........................ 30
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 31
Business.................................................... 42
Management.................................................. 61
Certain Transactions........................................ 75
Principal Shareholders...................................... 80
Description of Capital Stock................................ 82
Shares Eligible for Future Sale............................. 85
Underwriting................................................ 87
Legal Matters............................................... 89
Experts..................................................... 89
Where You Can Find More Information......................... 90
Index to Consolidated Financial Statements.................. F-1
</TABLE>
------------------------
We own or have rights to product names, trade names and trademarks that we
use in conjunction with the sale of our products, including
Simple-Registered Trademark-, Simple Technology-Registered Trademark-,
SiliconTech-TM-, IC Tower-TM- and CompactFlash-TM-. The CompactFlash Association
makes the CompactFlash name and logo available royalty-free to member companies.
References in this prospectus to CompactFlash are references only to our
products unless otherwise indicated. This prospectus also contains other product
names, trade names and trademarks that belong to other organizations.
2
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION WE PRESENT MORE FULLY ELSEWHERE
IN THIS PROSPECTUS. BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF
THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY BEFORE DECIDING TO INVEST IN THE SHARES OF OUR COMMON
STOCK. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF FACTORS DESCRIBED
UNDER THE HEADING "RISK FACTORS" AND IN OUR CONSOLIDATED FINANCIAL STATEMENTS
AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS.
OUR COMPANY
Simple Technology is a leading independent provider of standard and custom
memory solutions, with products based on dynamic random access memory, or DRAM,
static random access memory, or SRAM, and Flash memory technologies, such as
CompactFlash. We design, manufacture and market a comprehensive line of over
2,500 memory, storage and connectivity products used in high performance
computing, networking and communications, consumer electronics and industrial
applications. Our patented IC Tower stacking technology allows multiple standard
components to be stacked together to provide increased functionality in the same
form factor as a single component. Our CompactFlash technology provides portable
digital devices, such as digital cameras and MP3 digital audio players, with
increased storage and functionality in a smaller form factor. Our Original
Equipment Manufacturer, or OEM, Division, known as SiliconTech, primarily sells
custom memory products for new systems. Our Aftermarket Division primarily sells
standard and custom memory and storage products which are mainly used as
upgrades to existing systems.
The demand for memory products in digital electronic systems is growing
rapidly. The development of high performance PCs and servers and the evolution
of Internet infrastructure have increased the demand for greater capabilities in
the storage, manipulation, transfer and management of digital data. Digital
computing and processing have extended beyond traditional computer systems, such
as PCs and servers, to include a wide array of networking and communications,
consumer electronics and industrial applications, including routers, switches,
digital cameras, digital video recorders, MP3 digital audio players, personal
digital assistants, or PDAs, embedded controls and medical instruments. The
increased functionality and decreased size of many of these products have led to
a greater demand for higher density memory products with smaller form factors,
lower power consumption and higher speeds at lower cost. The shift to modular PC
and server designs configured with a base level of memory and sockets for
upgrade memory has led to a growing demand for aftermarket memory modules.
According to Dataquest, the worldwide market for DRAM is expected to grow at a
compound annual growth rate of 44.3% from $21.0 billion in 1999 to
$63.1 billion in 2002, the worldwide market for SRAM is expected to grow at a
compound annual growth rate of 8.5% from $4.3 billion in 1999 to $5.5 billion in
2002, and the worldwide market for Flash memory is expected to grow at a
compound annual growth rate of 19.7% from $3.9 billion in 1999 to $8.0 billion
in 2003.
As product lead times shorten and time-to-market and time-to-volume become
more critical in product adoption and success, OEMs are increasingly outsourcing
the design, development and manufacture of memory products to third party memory
providers. By outsourcing, OEMs are able to focus their resources on activities
and technologies in which they add the greatest value, such as system design,
sales, marketing and distribution. As memory products increase in complexity,
the design, manufacturing and test processes become more automated, requiring a
greater level of investment in capital equipment and skilled engineers and
specialists. In addition, the proliferation of a wide variety of memory devices,
as well as frequent product design changes, short product life cycles and
component price fluctuations, has created increased difficulties for OEMs to
plan, procure and manage their inventories efficiently. We believe our technical
capabilities and volume manufacturing strengths allow our OEM customers to
cost-effectively design and implement customized, advanced memory chip
technology in high volume product applications. In addition, we believe our
design, manufacturing,
3
<PAGE>
testing and logistics expertise, along with our proprietary technologies,
enables us to respond to our customers' rapidly changing product and service
requirements by providing our customers with timely access to higher speed and
higher density memory products, reducing our customers' time-to-market and
time-to-volume, and decreasing our customers' capital requirements and
production and inventory costs.
Our goal is to be a worldwide leader in the design, manufacture and
marketing of standard and custom memory solutions. The following are key
elements of our strategy:
- Expand and broaden our product line;
- Maintain and extend our technological and engineering leadership;
- Aggressively engage OEMs;
- Aggressively engage aftermarket customers;
- Increase manufacturing efficiencies;
- Further penetrate international markets; and
- Pursue acquisitions of complementary businesses and technologies.
In 1999, our principal direct OEM Division customers included Dell Products
L.P., Mitsubishi Electronics America, Inc., Motorola, Inc., Unisys Corporation
and Xerox Corporation. In 1999, our principal Aftermarket Division customers
included Avnet Computer, Best Buy Co., Inc., CDW Computer Centers, Inc., Costco
Wholesale Corporation, Ingram Micro Inc., Micro Warehouse, Inc. and PC
Connection, Inc.
CORPORATE INFORMATION
Simple Technology, Inc. was incorporated in California in March 1990. Our
principal executive offices are located at 3001 Daimler Street, Santa Ana,
California 92705-5812. Our telephone number is (949) 476-1180. Our website is
located at www.simpletech.com. INFORMATION CONTAINED ON OUR WEBSITE IS NOT PART
OF THIS PROSPECTUS.
------------------------
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT:
- THE INITIAL PUBLIC OFFERING PRICE WILL BE $ PER SHARE;
- EACH SHARE OF OUR COMMON STOCK HAS BEEN SPLIT ON A FOR BASIS PRIOR TO
THE COMPLETION OF THIS OFFERING;
- THE UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT OPTION TO PURCHASE
UP TO ADDITIONAL SHARES OF OUR COMMON STOCK;
- OUR S CORPORATION STATUS UNDER SUBCHAPTER S OF THE INTERNAL REVENUE CODE
HAS BEEN REINSTATED FOR THE PERIODS DURING WHICH IT WAS INADVERTENTLY
TERMINATED AND WE HAVE TERMINATED OUR REINSTATED S CORPORATION STATUS AS
OF THE DATE IMMEDIATELY PRECEDING THE COMPLETION OF THIS OFFERING;
- IMMEDIATELY PRIOR TO THE COMPLETION OF THIS OFFERING, WE HAVE ISSUED
ADDITIONAL PAID-IN CAPITAL NOTES TO OUR EXISTING SHAREHOLDERS IN THE
AGGREGATE PRINCIPAL AMOUNT OF $3.0 MILLION REPRESENTING ADDITIONAL PAID-IN
CAPITAL ORIGINALLY INVESTED BY THEM;
- IMMEDIATELY PRIOR TO THIS OFFERING, WE HAVE ISSUED UNDISTRIBUTED EARNINGS
NOTES TO OUR EXISTING SHAREHOLDERS IN AN AGGREGATE PRINCIPAL AMOUNT EQUAL
TO OUR UNDISTRIBUTED EARNINGS FROM THE DATE OF OUR FORMATION THROUGH THE
DATE IMMEDIATELY PRIOR TO THE COMPLETION OF THIS OFFERING;
- WE WILL ISSUE SHARES OF COMMON STOCK AT THE INITIAL PUBLIC OFFERING
PRICE TO OUR EXISTING SHAREHOLDERS UPON THEIR CONTRIBUTION TO US OF THE
ADDITIONAL PAID-IN CAPITAL NOTES UPON THE COMPLETION OF THIS OFFERING; AND
- WE WILL USE A PORTION OF THE NET PROCEEDS FROM THIS OFFERING TO REPAY THE
UNDISTRIBUTED EARNINGS NOTES HELD BY OUR EXISTING SHAREHOLDERS.
------------------------
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common stock offered by Simple Technology......... shares
Common stock to be outstanding after the shares
offering........................................
Use of proceeds................................... We intend to use a portion of the net proceeds
from this offering for debt repayment under our
line of credit and repayment of the
undistributed earnings notes held by our
existing shareholders. We intend to use the
balance of the net proceeds for working capital
and general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol............ STEC
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based upon shares of common stock outstanding as of February 29, 2000,
the issuance of shares of common stock at the initial public offering
price to our existing shareholders upon the their contribution to us of the
additional paid-in capital notes upon completion of this offering, and the
shares of common stock being sold by us in this offering, and excludes:
- shares of common stock issuable upon exercise of stock options
outstanding as of February 29, 2000 under our 1996 Stock Option Plan at a
weighted average exercise price of $ per share;
- shares of common stock reserved for future issuance under our 2000
Stock Incentive Plan;
- shares of common stock reserved for future issuance under our 2000
Employee Stock Purchase Plan; and
- Up to shares of common stock to be sold by us if the underwriters
exercise their over-allotment option in full, as described in
"Underwriting."
Our 1996 Stock Option Plan will be succeeded by our 2000 Stock Incentive
Plan upon the completion of this offering. You should read the discussion under
"Management--Stock Plans/ Employee Compensation Programs" for additional
information concerning our 2000 Stock Incentive Plan and our 2000 Employee Stock
Purchase Plan.
------------------------
This prospectus includes statistical data regarding our company and the
industries in which we compete. These data are based on our records taken or
derived from information published or prepared by various sources, including
Dataquest. Market data used throughout this prospectus relating to our relative
position in our industry are based upon industry sources and the good faith
estimates of our management, based upon relevant information known to them.
Although we believe those sources are reliable, the accuracy and completeness of
this information is not guaranteed and has not been independently verified.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables set forth summary consolidated financial data for
Simple Technology. The historical results presented are not necessarily
indicative of future results. The summary consolidated financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $206,756 $163,716 $159,088 $122,288 $192,593
Cost of revenues.......................... 181,595 137,442 131,094 98,168 152,973
-------- -------- -------- -------- --------
Gross profit.............................. 25,161 26,274 27,994 24,120 39,620
Total operating expenses.................. 13,811 22,897 26,877 24,880 25,713
-------- -------- -------- -------- --------
Income (loss) from operations............. 11,350 3,377 1,117 (760) 13,907
Interest and other expense, net........... 2,018 1,496 1,741 1,380 1,922
-------- -------- -------- -------- --------
Income (loss) before provision (benefit)
for income taxes........................ 9,332 1,881 (624) (2,140) 11,985
Provision (benefit) for income taxes...... 133 (201) 2 23 (518)
-------- -------- -------- -------- --------
Net income (loss)......................... $ 9,199 $ 2,082 $ (626) $ (2,163) $ 12,503
======== ======== ======== ======== ========
Net income (loss) per share(2):
Basic................................... $ $ $ $ $
Diluted................................. $ $ $ $ $
PRO FORMA DATA(1):
Income before provision for income taxes............................................. $ 11,985
Pro forma provision for income taxes................................................. 4,554
--------
Pro forma net income................................................................. $ 7,431
========
Pro forma net income per share(2)
Basic.............................................................................. $
Diluted............................................................................ $
Weighted average shares outstanding(2)
Basic...................................
Diluted.................................
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
-------- ------------ --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 3,779 $ 3,779
Working capital........................................... 22,855 11,348
Total assets.............................................. 55,131 56,631
Total shareholders' equity................................ 15,780 3,075
</TABLE>
- ------------------------
(1) Since our formation in March 1990, we have elected for federal and state
income tax purposes to be treated as an S corporation under Subchapter S of
the Internal Revenue Code of 1986 and comparable state tax laws.
Accordingly, no provision has been made for federal or certain state income
taxes. Pro forma net income has been computed as if we had been fully
subject to federal
6
<PAGE>
and state income taxes as a C corporation. Our S corporation status will
terminate on the date immediately preceding the completion of this offering,
after which time we will be required to pay federal and state
corporate-level income taxes as a C corporation. See "S Corporation Status
and Conversion," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and note 13 of the notes to our
consolidated financial statements.
(2) Reflects a for stock split of our common stock prior to the completion
of this offering and the issuance of shares of common stock at the
initial public offering price to our existing shareholders upon their
contribution to us of the additional paid-in capital notes. All share and
per share amounts have been adjusted to give retroactive effect to the stock
split and issuance of these shares of common stock for all periods
presented.
(3) Adjusted to reflect our repayment of the undistributed earnings notes held
by our existing shareholders in the aggregate principal amount equal to our
undistributed earnings from the date of our formation through December 31,
1999, estimated to be approximately $13.6 million, including an increase in
net deferred tax assets of $940,000 assuming our S corporation status has
been reinstated and subsequently terminated on December 31, 1999. See "S
Corporation Status and Conversion."
(4) As adjusted to reflect the sale of shares of common stock by us at an
assumed initial public offering price of $ per share, the mid-point of
the filing range, and the application of the estimated net proceeds from
this offering as described under "Use of Proceeds."
7
<PAGE>
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CONSIDER CAREFULLY THE RISK FACTORS DESCRIBED BELOW, AND ALL OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS BEFORE DECIDING WHETHER TO INVEST IN OUR COMMON
STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES THAT WE
FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY BELIEVE ARE IMMATERIAL ALSO MAY IMPAIR OUR BUSINESS OPERATIONS. IF ANY
OF THE FOLLOWING RISKS OR ANY ADDITIONAL RISKS ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE HARMED. THIS COULD CAUSE
THE TRADING PRICE OF OUR COMMON STOCK TO DECLINE, AND YOU MIGHT LOSE PART OR ALL
OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY HARM OUR STOCK
PRICE.
We may experience substantial period-to-period fluctuations in future
operating results due to factors affecting the semiconductor, computer, consumer
electronics, and networking and communications industries, many of which are
beyond our control. From time to time, each of these industries has experienced
downturns, often in connection with, or in anticipation of, declines in general
economic conditions and global uncertainty. A decline or significant shortfall
in growth in any one of these industries could negatively impact the demand for
our products and therefore harm our business, financial condition and results of
operations. Moreover, changes in end-user demand for the products sold by any
individual customer could have a rapid and exaggerated effect on demand for our
products from that customer in any given period, particularly in the event that
the customer has accumulated excess inventories of our products. There can be no
assurance that our business, financial condition and results of operations will
not be harmed in the future due to changes in demand from individual customers
or cyclical changes in the semiconductor, computer, consumer electronics,
networking and communications or other industries utilizing our products.
Moreover, declines in semiconductor prices could affect the valuation of our
inventory which could harm our business, financial condition and results of
operations.
Fluctuations in our operating results could cause our share price to decline
substantially. We believe that period-to-period comparisons of our operating
results may not be meaningful, and you should not rely upon them as indicators
of our future performance. Our sales in, and our operating results for, a
particular quarter can vary significantly due to a variety of factors, including
those described elsewhere in this prospectus and the following:
- Fluctuating market demand for and declines in the average sales prices of
our products;
- Overproduction by suppliers of the components used in our products;
- The loss of any significant customer;
- Our inability to procure required components or an increase in the cost of
such components;
- The effects of litigation;
- Changes in our product and sales mix as well as seasonal demand for our
products;
- Market acceptance of new and enhanced versions of our products;
- The timing of the introduction of new products or components and
enhancements to existing products or components by us or our competitors;
- Delays, cancellations or reductions of customer orders;
- Inventory obsolescence, product returns and price protection;
8
<PAGE>
- Manufacturing inefficiencies associated with the start-up of new products
and volume production;
- Expenses associated with acquisitions; and
- Manufacturing disruptions.
We base our current and future expense plans in significant part on our
expectation of our long-term future revenue growth. As a result, we expect our
expense levels to be relatively fixed in the short-run. An unanticipated decline
in revenues for a particular quarter would disproportionately affect our net
income in that quarter. As a result, our operating results would also be below
expectations and, as we have in the past, we could have losses in the short-run.
Any one of the factors listed above, or a combination thereof, could harm our
quarterly results and, consequently, could cause a decline in our share price.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SINCE WE DEPEND ON A SMALL NUMBER OF SUPPLIERS FOR IC DEVICES, A DELAY IN THE
SHIPMENT OF CRITICAL COMPONENTS OR OUR FAILURE TO MAINTAIN OUR EXISTING
RELATIONSHIPS AND DEVELOP NEW RELATIONSHIPS WITH SUPPLIERS COULD HARM OUR
BUSINESS.
Integrated circuit, or IC, devices represent approximately 95% of our
component costs. We purchase these IC devices from a small number of suppliers.
In particular, Hitachi Semiconductor (America) Inc. supplies substantially all
of the IC devices used in our Flash memory products. In addition, Fujitsu
Microelectronics, Inc., Hyundai Electronics America, Inc., NEC
Electronics, Inc., Toshiba America Electronic Components, Inc. and Vanguard
International Semiconductor Corporation supply a majority of the dynamic random
access memory, or DRAM, IC devices used in our DRAM memory products. We have no
long-term supply contracts. Our dependence on a small number of suppliers and
our lack of long-term supply contracts expose us to several risks, including the
inability to obtain an adequate supply of components, price increases, late
deliveries and poor component quality. A disruption or termination of our supply
relationship with any of our significant suppliers by natural disaster or
otherwise, or our inability to develop relationships with new suppliers, if
required, would cause delays, disruptions or reductions in product shipments or
require product redesigns which could damage relationships with current or
prospective customers, would increase costs and/or prices and would harm our
business, financial condition and results of operations. In particular, if our
supply relationship with Hitachi Semiconductor (America) Inc. is disrupted or
terminated, our Flash business would be substantially harmed. There can be no
assurance that we will be able to maintain our existing relationships or develop
new relationships with suppliers in the future. See "Business--Suppliers."
OUR INABILITY TO MAINTAIN A STEADY SUPPLY OF COMPONENTS COULD HARM OUR BUSINESS.
From time to time, industry capacity has become constrained such that some
vendors which supply components for our products have placed their customers,
ourselves included, on allocation. This means that while we may have customer
orders, we may not be able to obtain the materials that we need to fill those
orders in a timely manner, which may negatively impact our revenues, gross
margins and profitability. The electronics industry has experienced in the past,
and may experience in the future, shortages in IC devices, including DRAM,
static random access memory, or SRAM, and Flash memory. We have experienced and
may continue to experience delays in component deliveries and quality problems
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 some of our
products. There can be no assurance that we will be able to maintain a steady
supply of components in the future. See "Business--Suppliers."
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DECLINES IN OUR AVERAGE SALES PRICES MAY RESULT IN DECLINES IN OUR GROSS
MARGINS.
The market for memory products is very competitive and has in recent years
experienced severe product price erosion, rapid technological change and product
obsolescence. Historically, the sales prices of memory products have fluctuated
significantly with changes in the supply of and demand for these products.
During 1998, industry overcapacity resulted in greater than normal price
declines for our memory products, which negatively impacted our revenues, gross
margins and profitability. We expect this price erosion will continue in the
future. To respond to these pressures, we are attempting to accelerate our cost
reduction efforts and develop new products to expand and diversify our product
line. However, there can be no assurance that our efforts to reduce costs and
develop new products will offset the impact of further declines in average sales
prices on gross margins and operating results. Our ability to maintain or
increase revenues will be highly dependent upon our 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 sales
prices. Sales of our individual products and product lines toward the end of a
product's life cycle are typically characterized by rapid declines in sales
prices and gross margins, the precise timing of which may be difficult to
predict. There can be no assurance that we will be able to increase unit sales
volumes, introduce and sell new products or reduce our cost per unit. Our
business could also be harmed by decreases in sales prices because lower prices
would result in more memory being built into products by original equipment
manufacturers, or OEMs, which would favor our largest competitors and reduce the
demand for our aftermarket memory products.
BECAUSE SALES TO A SMALL NUMBER OF CUSTOMERS REPRESENT A SIGNIFICANT PORTION OF
OUR REVENUES, THE LOSS OF ANY OF THESE CUSTOMERS WOULD HARM OUR BUSINESS.
Historically, a relatively small number of customers have accounted for a
significant percentage of our revenues. In 1999, our ten largest OEM Division
customers accounted for an aggregate of 75.4% of our OEM Division revenues or
19.4% of our total revenues. Our largest OEM Division customer accounted for
24.0% of our OEM Division revenues or 6.2% of our total revenues in 1999. No OEM
Division customer accounted for more than 10.0% of our total revenues in 1999.
In 1999, our ten largest Aftermarket Division customers accounted for an
aggregate of 47.6% of our Aftermarket Division revenues or 35.3% of our total
revenues. Our largest Aftermarket Division customer, CDW Computer
Centers, Inc., accounted for 26.1% of our Aftermarket Division revenues or 19.4%
of our total revenues in 1999. No other Aftermarket Division customer accounted
for more than 10.0% of our total revenues in 1999. There can be no assurance
that these customers or any of our other customers will continue to utilize our
products at current levels, if at all. Furthermore, consolidation in the
industry may result in increased customer concentration and the potential loss
of customers as a result of acquisitions. The loss of a major customer or any
reduction in orders by a major customer would harm our business, financial
condition and results of operations. In addition, the composition of our major
customer base changes from year to year as the market demand for our customers'
products change and we expect this variability will continue in the future. We
expect that sales of our products to a small number of customers will continue
to account for a significant percentage of our revenues in the foreseeable
future and believe that our financial results will depend in significant part
upon the success of our customers' products. See "Business--Customers."
DECREASES IN DEMAND FOR CONSUMER ELECTRONICS THAT INCORPORATE FLASH MEMORY WOULD
HARM OUR FLASH BUSINESS.
The market for consumer electronics incorporating Flash memory is relatively
new and emerging. The success of our Flash memory products will depend largely
on the level of consumer interest in consumer electronics utilizing Flash
memory, such as digital cameras, MP3 digital audio players and personal digital
assistants, or PDAs, many of which have only recently been introduced to the
market. If sales of these or similar products using Flash memory do not grow,
our revenues, gross margins and
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profitability would be harmed. Because we sell our products for use in many new
applications, it is difficult to forecast demand. If we are unable to fulfill
customer demand for our products, we may lose sales to our competitors.
OUR BUSINESS WOULD BE HARMED IF THE MARKET FOR FLASH MEMORY DOES NOT DEVELOP, OR
IF A COMPETING TECHNOLOGY DISPLACES FLASH MEMORY.
There is currently an absence of a single Flash memory standard. It is
possible that Flash memory standards other than those to which our products
conform will emerge as the industry standard. If we are unable to anticipate and
adequately allocate our resources in a timely and efficient manner toward the
production and development of industry standard Flash memory products, we may
experience significant delays in releasing new and commercially viable products
and our business would be harmed. These delays would provide a competitor a
first-to-market opportunity and allow a competitor to achieve greater market
share. Some of our competitors are in a better financial and marketing position
from which to influence industry acceptance of a particular Flash memory
standard or competing technology than we are. In particular, a primary source of
competition may come from companies that offer alternative technologies such as
ferroelectric random access memory products. If a competing technology replaces
or takes significant market share from the Flash memory market, we would not be
able to sell our Flash products and our business would be harmed.
BECAUSE SUBSTANTIALLY ALL OF OUR REVENUES ARE DERIVED FROM THE SALE OF MEMORY
PRODUCTS, THE SUCCESS OF OUR BUSINESS IS DEPENDENT ON TRENDS IN THE MEMORY
PRODUCTS MARKET.
The market for memory products is characterized by ongoing advancement in
product design and performance standards. In addition, the market for memory
products has experienced significant economic downturns at various times,
characterized by diminished product demand, accelerated erosion of average sales
prices and production overcapacity. Since 1995, there have been significant
declines in DRAM, SRAM and Flash memory prices. Because a substantial portion of
our revenues are attributable to the sale of memory products, our failure to
develop products with required feature sets or performance standards or delays
as short as a few months in bringing a new product to market, as well as future
price declines, would harm our business, financial condition and results of
operations.
OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL, INCLUDING OUR EXECUTIVE OFFICERS, THE
LOSS OF ANY OF WHOM COULD HARM OUR BUSINESS.
Our success depends on the continued contributions of our senior management
and other key research and development, sales and marketing and operations
personnel, including Manouch Moshayedi, our Chief Executive Officer, Mike
Moshayedi, our President, and Mark Moshayedi, our Chief Operating Officer, Chief
Technical Officer and Secretary. We have entered into employment agreements
with, and we plan to obtain key man life insurance for, Manouch Moshayedi, Mike
Moshayedi and Mark Moshayedi. Competition for employees in our industry is
intense. We have had and may continue to have difficulty hiring the necessary
engineering, sales and marketing and management personnel to support our growth.
There can be no assurance that we will be successful in hiring or retaining such
key personnel, or that any of our key personnel will remain employed with us.
The loss of any key employee, the failure of any key employee to perform in his
or her current position, or the inability of our officers and key employees to
expand, train and manage our employee base could harm our business, financial
condition and results of operations. See "Management."
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OUR EXISTING SHAREHOLDERS WILL HAVE SUBSTANTIAL INFLUENCE OVER OUR OPERATIONS,
CAN SIGNIFICANTLY INFLUENCE MATTERS REQUIRING SHAREHOLDER APPROVAL AND MAY HAVE
INTERESTS THAT ARE DIFFERENT FROM, OR IN ADDITION TO, YOUR INTERESTS. OUR
EXISTING SHAREHOLDERS WILL ALSO RECEIVE MATERIAL BENEFITS IN CONNECTION WITH
THIS OFFERING.
Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi, each of whom is an
executive officer and director of Simple Technology, are members of the same
family and will beneficially own approximately % of our common stock
following the completion of this offering, or approximately % if the
underwriters' over-allotment option is exercised in full. As a result, our
existing shareholders, voting together, will have the ability to control all
matters requiring approval by our shareholders, including the election and
removal of directors and approval of significant corporate transactions. Our
existing shareholders may have interests that are different from, or in addition
to, your interests. In addition, Manouch Moshayedi, Mike Moshayedi and Mark
Moshayedi as beneficial shareholders, will receive material benefits in
connection with this offering, including dedication of a portion of the net
proceeds to the repayment of the undistributed earnings notes in an amount equal
to our undistributed earnings from the date of our formation through the date
immediately preceding the completion of this offering, estimated to be
$ million as of , 2000. In addition, upon completion of this offering the
Mosheyedis, as beneficial shareholders, will receive shares of common
stock at the initial public offering price upon their contribution to us of the
additional paid-in capital notes. See "S Corporation Status and Conversion" and
"Principal Shareholders."
WE HAVE A HISTORY OF LOSSES AND MAY INCUR FUTURE LOSSES.
We incurred net losses of $2.2 million in 1998 and $626,000 in 1997.
Although we earned net income on a pro forma basis of $7.4 million in 1999, we
may incur operating losses and negative cash flows in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS ASSOCIATED WITH PATENTS, PROPRIETARY RIGHTS AND RELATED LITIGATION MAY
ADVERSELY AFFECT OUR BUSINESS.
We attempt to protect our intellectual property rights through patents,
trademarks, copyrights and trade secret common and statutory laws, as well as
confidentiality procedures and employee disclosure and invention assignment
agreements. Despite our efforts to protect our intellectual property rights, we
are currently involved in and may in the future be involved in disputes
regarding our intellectual property rights. Therefore, there can be no assurance
that:
- Any of our existing patents will not be challenged, invalidated or
circumvented;
- Patents that we have obtained, or any patents that we may obtain as a
result of our pending patent applications, will provide a basis for
commercially viable products or will provide any competitive advantages
for our products;
- Our competitors will not independently develop similar products, duplicate
our products or design around the patents currently owned by us;
- We will develop additional patentable products or procedures;
- The patents of others will not have an adverse effect on our ability to do
business;
- Any claims allowed from our existing patents or pending patent
applications will have sufficient scope or strength to preclude
competition or infringement;
- Such measures will provide adequate protection for our patents,
trademarks, copyrights, trade secrets or other intellectual property
rights;
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- Our competitors, many of which have substantial resources and have made
substantial investments in competing technologies, have not already
applied for or obtained, or will not seek to apply for and obtain, patents
that will prevent, limit or interfere with our ability to make, use and
sell our products;
- Disputes with respect to the ownership of our intellectual property rights
will not arise;
- Our trade secrets and know-how may not become known to third parties,
become part of the public domain, or be independently developed by our
competitors which in either case would harm our business, financial
condition and results of operations;
- Patents will be issued for any of our pending applications;
- The laws of foreign countries will adequately protect our intellectual
property rights; and
- Our employee disclosure and invention assignment agreements will be
enforceable or that we will have an adequate remedy in the event such
agreements are breached.
We have not applied and do not expect to apply for patent protection in
foreign countries. In addition, the laws of foreign countries may not adequately
protect our intellectual property rights. Many U.S. companies have encountered
substantial infringement problems in some foreign countries. Because some of our
products are sold and some of our business is conducted overseas, we have
exposure to foreign intellectual property risks.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions. Therefore, we believe that
it may be necessary from time to time to preserve our intellectual property
rights to initiate litigation against one or more third parties to preserve our
intellectual property rights. In addition, from time to time, third parties may
bring suit against us. If litigation with regards to our intellectual property
rights and/or our products arises, we intend to vigorously enforce and defend
our rights, but there can be no assurance that these efforts will be successful.
The results of any litigation are inherently uncertain. In the event of an
adverse result in such litigation, we could be required to pay substantial
damages, cease the manufacture, use and sale of certain products, expend
significant resources to develop non-infringing technology, discontinue the use
of certain processes or obtain licenses to practice the infringing technology.
Furthermore, there can be no assurance that a license will be available under
commercially reasonable terms or at all if we are required to obtain licenses to
practice the technology. The failure to obtain a license or the failure to
obtain a license upon commercially reasonable terms could cause us to incur
substantial liabilities and may suspend the manufacturing of the products
utilizing the infringing technology. In addition, such litigation would likely
result in significant expense to us and divert the efforts of our technical and
management personnel. See "Risk Factors--If we are unsuccessful in our suit
against Dense-Pac Microsystems for patent infringement of our IC Tower stacking
patent, or if we are unsuccessful in defending against Dense-Pac's counterclaim
of patent infringement and patent invalidity, our business would be harmed" and
"--Success by Interactive Flight Technologies and Avnet in their suit against us
relating to our sale of allegedly defective products would harm our business"
and "Business--Intellectual Property Rights" and "--Legal Proceedings."
In our efforts to maintain the confidentiality and ownership of trade
secrets and other confidential information, all of our employees are required to
sign employee disclosure and invention assignment agreements. This agreement
requires our employees to disclose, document and assign their interest in all
inventions, patents and copyrights developed while employed with us. Our
employees further agree to preserve all of our confidential information
including trade secrets, customer information, know-how and other business
information. There can be no assurance that these agreements will provide
meaningful protection of our trade secrets or other confidential information in
the event of unauthorized use or disclosure of such information.
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We have received, and may receive in the future, notifications of potential
conflicts of existing patents, pending patent applications or challenges to the
validity of existing patents. In addition, we have become aware of, and may
become aware of in the future, patent applications and issued patents that
relate to our products. If third party patents or patent applications contain
claims infringed by our technology and such claims are ultimately determined to
be valid, we may not be able to obtain licenses to those patents on commercially
reasonable terms, if at all, or be able to develop alternative products. Our
inability to do either could harm our business, financial condition and results
of operations. We may have to defend ourselves in court against allegations of
infringement of third party patents and our defenses may not be successful.
On October 27, 1999 we received a letter from Micron Electronics, Inc.
requesting that we refrain from the manufacture, sale or offer to sell memory
products which infringe Micron's U.S. Patent Nos. 5,661,677 and 5,859,792. We
are presently evaluating Micron's patents and their relationship to our memory
products. If Micron concludes that our products infringe Micron's patents, we
may be sued by Micron for patent infringement. Such litigation could result in
significant expenses and diversion of management time and other resources. If
Micron's patents are found to be valid and our memory products are found to
infringe, we may lose our ability to manufacture, sell or offer to sell certain
memory products, and we may have to seek a license from Micron in order to use
its technology. Further, there can be no assurance that we would be able to
secure a license from Micron on commercially reasonable terms, if at all. For
more details concerning Micron's allegations, see "Business-Litigation-Micron
Electronics, Inc."
IF WE ARE UNSUCCESSFUL IN OUR SUIT AGAINST DENSE-PAC MICROSYSTEMS FOR PATENT
INFRINGEMENT OF OUR IC TOWER STACKING PATENT, OR IF WE ARE UNSUCCESSFUL IN
DEFENDING AGAINST DENSE-PAC'S COUNTERCLAIM OF PATENT INFRINGEMENT AND PATENT
INVALIDITY, OUR BUSINESS WOULD BE HARMED.
On September 23, 1998, we filed a lawsuit against Dense-Pac
Microsystems, Inc. in the United States District Court for the Central District
of California for infringement of our IC Tower stacking patent, U.S. Patent
No. 5,514,907. We are seeking damages and injunctive relief. On October 15,
1998, Dense-Pac filed an answer to our complaint denying our claim of
infringement, asserted a defense of patent invalidity against our IC Tower
stacking patent and asserted a counterclaim against us alleging infringement of
its stacking patent, U.S. Patent No. 4,956,694. On November 12, 1998, we filed
an answer to Dense-Pac's counterclaim denying Dense-Pac's claim of infringement
against us and asserting a defense of patent invalidity. Dense-Pac is seeking
injunctive relief and damages equal to 2% of the sales of our IC Tower stacking
products, plus interest. As of December 31, 1999, Dense-Pac sought damages,
including interest, totaling approximately $400,000. Dense-Pac has also
requested an award of attorneys' fees and treble damages and has reserved the
right to seek unspecified lost profits as a result of the alleged infringement.
Trial is set for June 2000.
The outcome of this litigation is uncertain. Patent litigation is
particularly complex and can extend for a protracted time, which can
substantially increase the cost of such litigation. In connection with the
Dense-Pac litigation, we have incurred, and expect to continue to incur,
substantial legal fees and expenses. The Dense-Pac litigation has also diverted,
and is expected to continue to divert, the efforts and attention of our key
management and technical personnel. As a result, our pursuit and defense of this
litigation, regardless of its eventual outcome, has been, and will likely
continue to be, costly and time consuming. Should the outcome of the litigation
be adverse to us, we would be required to pay significant monetary damages to
Dense-Pac and would be enjoined from selling those of our products found to
infringe Dense-Pac's patent unless and until we are able to negotiate a license
from Dense-Pac. In the event we obtain a license from Dense-Pac, we would likely
be required to make royalty payments to Dense-Pac with respect to sales of our
products covered by the license. Any such payments would increase our expenses
and reduce our gross profits. There can be no assurance that we could enter into
a license agreement with Dense-Pac on commercially reasonable terms, if at all.
If we
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are required to pay significant monetary damages, are enjoined from selling any
of our products or are required to make substantial royalty payments pursuant to
any such license agreement, our business would be harmed. In addition, if our IC
Tower stacking patent is found to be invalid, our ability to exclude competitors
from making, using or selling the same or similar products to our IC Tower
stacking products would cease and our business would be harmed. For more details
concerning this litigation, see "Business--Litigation--Dense-Pac
Microsystems, Inc."
WE HAVE INDEMNIFICATION OBLIGATIONS RELATED TO INFRINGEMENT BY OUR PRODUCTS OF
THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS WHICH COULD REQUIRE US TO PAY DAMAGES
WHICH WOULD HARM OUR BUSINESS.
We currently have in effect a number of agreements in which we have agreed
to defend, indemnify and hold harmless customers and suppliers from damages and
costs which may arise from the infringement by our products of third party
patents, trademarks or other proprietary rights. We may periodically have to
respond to claims and become engaged in litigating these types of
indemnification obligations. Any such indemnification claims could require us to
pay substantial damages, which would harm our business, financial condition and
results of operations. We do not carry infringement insurance.
SUCCESS BY INTERACTIVE FLIGHT TECHNOLOGIES AND AVNET IN THEIR SUIT AGAINST US
RELATING TO OUR SALE OF ALLEGEDLY DEFECTIVE PRODUCTS WOULD HARM OUR BUSINESS.
On June 8, 1998, Interactive Flight Technologies, Inc. filed a lawsuit
against Avnet, Inc. in the Superior Court of Maricopa County, Arizona seeking an
award for direct and consequential damages arising from a transaction in which
we supplied allegedly defective hard disk drives to Avnet for inclusion in an
in-flight entertainment system manufactured by Interactive Flight. We purchased
the hard disk drives from Integral Peripherals, Inc., the manufacturer, through
its distributor, Bell Microsystems, Inc. Integral has since declared bankruptcy
and is not a party to this litigation. On July 16, 1998, Avnet filed a third
party complaint against us for indemnification pursuant to the terms of a
distribution agreement between Avnet and us. On September 18, 1998, we filed an
answer denying the third party complaint and filed a third party complaint
against, among others, Bell Microsystems seeking indemnification and
contribution. On May 24, 1999, Interactive Flight filed a first amended
complaint to add us as an additional defendant. On June 8, 1999 Avnet filed a
cross claim against us seeking indemnification. On June 18, 1999, we answered
the first amended complaint and Avnet's cross claim. We are the beneficiary of a
potential insurance claim against the Chubb Group based on a policy of insurance
originally issued to Integral by Chubb Group and assigned to us as part of a
settlement reached in Integral's bankruptcy proceedings. Interactive Flight is
seeking out-of-pocket damages of approximately $3.0 million and consequential
damages arising from the alleged loss of contracts with several airline carriers
totaling an additional $10.0 million. Trial is set for August 2000.
This litigation is in the discovery stage, and we cannot predict its outcome
with certainty. In connection with this litigation, we have incurred, and expect
to continue to incur, substantial legal fees and expenses. This litigation has
diverted, and is expected to continue to divert, the efforts and attention of
our key management and technical personnel. As a result, our pursuit and defense
of this litigation, regardless of its eventual outcome, has been, and will
continue to be, costly and time consuming. Should the outcome of the litigation
be adverse to us, we would be required to pay significant monetary damages to
Interactive Flight and Avnet and our business would be harmed. In addition, we
can give no assurance that Chubb will honor our claim for coverage to pay for
damages arising out of this litigation. For more details concerning this
litigation, see "Business--Litigation--Interactive Flight Technologies, Inc."
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WE COULD BE HELD LIABLE FOR PRODUCT DEFECTS, WHICH COULD REQUIRE US TO PAY
SUBSTANTIAL DAMAGES AND HARM OUR BUSINESS.
Complex products such as ours may contain errors, defects and bugs. Delivery
of products with production defects or reliability, quality or compatibility
problems could hinder market acceptance of our products, which could damage our
reputation and harm our ability to attract and retain customers. Errors, defects
or bugs could also cause interruptions, delays or a cessation of sales to our
customers, and could subject us to warranty claims, causing us to expend
significant capital and resources. In addition, errors, defects or bugs may
result in additional development costs and diversion of technical and other
resources from our other development efforts.
A number of our product sales and product purchase agreements provide that
we will defend, indemnify and hold harmless our customers and suppliers from
damages and costs which may arise from product warranty claims or claims for
injury or damage resulting from defects arising out of our products. We maintain
insurance to protect against certain claims associated with the use of our
products, but there can be no assurance that our insurance coverage would
adequately cover any claim asserted against us. A successful claim brought
against us that is in excess of, or excluded from, our insurance coverage, could
substantially harm our business, financial condition and results of operations.
We are currently involved in litigation concerning our sale of allegedly
defective hard disk drives to Avnet, Inc. which, in turn, supplied them to
Interactive Flight Technologies, Inc. for inclusion in their in-flight
entertainment systems. For further details concerning this litigation, see
"--Success by Interactive Flight Technologies and Avnet in their suit against us
relating to our sale of allegedly defective products would harm our business,"
and "Business--Litigation--Interactive Flight Technologies, Inc."
WE EXPERIENCE SEASONAL FLUCTUATIONS IN OUR BUSINESS.
Sales of our products, in particular sales of our Flash memory products, are
subject to seasonality. As a result, product sales are impacted by seasonal
purchasing patterns with higher sales generally occurring in the third and
fourth quarters of each year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE OUR SHAREHOLDER VALUE AND HARM OUR OPERATING RESULTS.
While we have no current agreements or negotiations underway, we intend to
pursue selective acquisitions to complement our internal growth. We intend to
seek acquisitions which we believe will strengthen our position in our targeted
markets, enhance our technology base, increase or production capacity and expand
our geographic base. We intend to seek and acquire companies with synergistic or
complementary technologies, manufacturing capabilities and sales channels. If we
make any future acquisitions, we could issue stock that would dilute our
shareholders' percentage ownership, incur substantial debt or assume contingent
liabilities. Our experience in acquiring other businesses, product lines and
technologies is limited. Potential acquisitions also involve numerous risks,
including, among others:
- Problems assimilating the purchased operations, technologies or products;
- Costs associated with the acquisition;
- Diversion of management's attention from our core business;
- Adverse effects on existing business relationships with suppliers and
customers;
- Risks associated with entering markets in which we have no or limited
prior experience;
- Potential loss of key employees of purchased organizations; and
- Potential litigation arising from the acquired company's operations prior
to the acquisition.
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There can be no assurance that we would be successful in overcoming problems
encountered in connection with such acquisitions, and our inability to do so
could harm our business. In addition, we are unable to predict whether or when
any prospective acquisition candidate will become available or the likelihood
that any acquisition will be completed.
PRODUCT RETURNS, PRICE PROTECTIONS AND ORDER CANCELLATIONS COULD REDUCE OUR
REVENUES AND HARM OUR BUSINESS.
To the extent we manufacture products in anticipation of future demand that
does not materialize, or in the event a customer cancels outstanding orders, we
could experience an unanticipated increase in our inventory. A lack of consumer
demand for our products also may result in increased product returns. A
significant portion of our sales through aftermarket channels include limited
rights to return unsold inventory. In addition, while we may not be
contractually obligated to accept returned products, we may determine that it is
in our best interest to accept returns in order to maintain good relations with
our customers. Product returns would increase our inventory and reduce our
revenues. We have had to write-down and write-off excess inventory in the past.
In addition, we offer some of our aftermarket customers limited price protection
rights for inventories of our products held by them. If we reduce the list price
of our products, these customers receive credits from us. These events could
give rise to charges for excess inventory, returns of products by customers, or
substantial price protection charges or discounts which could harm our business,
financial condition and results of operations.
We have no long-term volume commitments from our customers. Sales of our
products are made through individual purchase orders and, in certain cases, are
made under master agreements governing the terms and conditions of the
relationships. Customer purchase orders may be canceled and order volume levels
can be changed, canceled or delayed with limited or no penalties. We have
experienced cancellations of orders and fluctuations in order levels from
period-to-period and we expect to continue to experience similar cancellations
and fluctuations in the future which could harm our business, financial
condition and results of operations.
IF WE FAIL TO COMPETE EFFECTIVELY AGAINST OTHER MANUFACTURERS OF MEMORY
PRODUCTS, WE WILL LOSE CUSTOMERS AND OUR BUSINESS WOULD BE HARMED.
We conduct business in an industry characterized by intense competition,
rapid technological change, evolving industry standards, declining average sales
prices and rapid product obsolescence. Our competitors include many large
domestic and international companies that have substantially greater financial,
technical, marketing, distribution and other resources, broader product lines,
lower cost structures, greater brand recognition and longer standing
relationships with customers and suppliers. As a result, our competitors may be
able to respond better to new or emerging technologies or standards and to
changes in customer requirements. Our competitors may also be able to devote
greater resources to the development, promotion and sale of products, and may be
able to deliver competitive products at a lower price.
We expect to face competition from existing competitors and new and emerging
companies that may enter our existing or future markets that have similar or
alternative products which may be less costly or provide additional features. In
addition, some of our significant suppliers, including Advanced Micro
Devices, Inc., Hitachi Semiconductor (America) Inc., NEC Electronics, Inc. and
Toshiba America Electronic Components, Inc., are also competitors. These
suppliers may have the ability to manufacture competitive products at lower
costs as a result of their higher levels of integration. We also face
competition from current and prospective customers that evaluate our
capabilities against the merits of manufacturing products internally.
Competition may arise due to the development of cooperative relationships among
our current and potential competitors or third parties to increase the ability
of their products to address the needs of our prospective customers. Therefore,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share.
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Our primary competitors include:
<TABLE>
<CAPTION>
COMPONENT MANUFACTURERS MODULE/PC CARD ASSEMBLERS STACKING MEMORY MANUFACTURERS
- ------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
- - Advanced Micro Devices, Inc. - Celestica Inc. - Dense-Pac Microsystems, Inc.
- - Hitachi Semiconductor - Centennial Technologies - StakTek Corporation
(America) Inc. - Kingston Technology
- - Intel Corporation Company
- - Micron Semiconductor - SanDisk Corporation
Electronics, Inc. - Silicon Storage Technology,
- - NEC Electronics, Inc. Inc.
- - Samsung Electronics Company - Solectron Corporation
Ltd. - Viking Components, Inc.
- - Toshiba America Electronic
Components, Inc.
</TABLE>
We compete in our target markets based primarily on quality and price,
design and manufacturing technology, and responsiveness to our customers' needs.
We expect our competitors will continue to improve the performance of their
current products, reduce their prices and 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 our products. There can be no assurance
that enhancements to or future generations of competitive products will not be
developed by other companies that offer better prices or technical performance
features than our products or that would render our technology or products
obsolete or uncompetitive. To remain competitive, we must, among other things,
compete favorably on the basis of price, maintain quality levels, provide
technologically advanced products, offer flexible delivery schedules, deliver
finished products on a timely basis in sufficient volume to satisfy our
customers' requirements, successfully protect our intellectual property rights,
provide efficient and high volume manufacturing and testing services, and
accurately anticipate and prepare for new technological trends and standards in
the industry. There can be no assurance that we will be able to compete
successfully in the future. See "Business--Competition."
OUR BUSINESS WOULD BE HARMED IF WE FAIL TO PROPERLY RESPOND TO RAPID CHANGES IN
TECHNOLOGY BY DEVELOPING NEW AND ENHANCED PRODUCTS AND INTRODUCING THEM IN A
TIMELY MANNER.
The high performance computing, networking and communications, consumer
electronics and industrial markets are subject to rapid technological change,
product obsolescence, frequent new product introductions and enhancements,
changes in end-user requirements and evolving industry standards. Our ability to
compete in these markets will depend in significant part upon our ability to
successfully develop, introduce and sell new and enhanced products on a timely
and cost-effective basis, and to respond to changing customer requirements.
Our success in developing new and enhanced products will depend upon a
variety of factors, including our ability to:
- Integrate various elements of our complex technology;
- Complete product design efficiently and in a timely manner;
- Anticipate or respond adequately to technological developments or customer
requirements;
- Implement manufacturing and assembly processes efficiently and in a timely
manner;
- Allocate and increase production capacity; and
- Maintain high levels of quality and reliability in our manufacturing
yields, processes and products.
We have experienced, and may in the future experience, delays in the
development and introduction of new products. Product development is inherently
risky because it is difficult to foresee developments in technology, coordinate
our technical personnel, and identify and eliminate design
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flaws. There can be no assurance that defects or errors will not be found in our
products after commencement of commercial shipments, which could result in
delays in market acceptance of these products. Delays in developing,
manufacturing or marketing new or enhanced products could harm our business,
financial condition and results of operations. In addition, there can be no
assurance that such products, even if introduced, will gain market acceptance or
that we will be able to respond effectively to new technological changes or new
product announcements by others.
Our future success also depends in part on our ability to implement new
processes and process technologies and achieve higher product densities. We
believe that our ability to transition to smaller design rules is critical to
our ability to remain competitive. To the extent we are slow in making this
transition relative to our competitors, our business, financial condition and
results of operations could be harmed. There can be no assurance that we can
make this transition quickly enough to remain competitive.
OBTAINING ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH MAY
IMPAIR THE VALUE OF YOUR INVESTMENT.
We believe that the net proceeds from this offering, together with our
existing assets, anticipated debt and expected cash flow from operations will be
sufficient to fund our operations for the next 12 months. However, if we expand
more rapidly than currently anticipated or if our working capital needs exceed
our current expectations, we may need to raise additional capital through public
or private equity offerings or debt financings. Our future capital requirements
depend on many factors that affect our research, development, and sales and
marketing activities. We do not know whether additional financing will be
available when needed, or that we will be able to obtain any available financing
on terms favorable to our shareholders or us. If we cannot raise needed funds on
acceptable terms, we may not be able to develop or enhance our products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, which could harm our business, financial condition
and results of operations. To the extent we raise additional capital by issuing
equity securities, our shareholders may experience substantial dilution and the
new equity securities may have rights, preferences or privileges senior to those
of our existing common stock.
WE FACE RISKS ASSOCIATED WITH DOING BUSINESS IN FOREIGN COUNTRIES, INCLUDING
FOREIGN CURRENCY FLUCTUATIONS AND TRADE BARRIERS, THAT COULD LEAD TO A DECREASE
IN DEMAND FOR OUR PRODUCTS OR AN INCREASE IN THE COST OF COMPONENTS USED IN OUR
PRODUCTS AND IMPAIR OUR FINANCIAL RESULTS.
The volatility of general economic conditions and fluctuations in currency
exchange rates affect the prices of our products and the prices of the
components used in our products. Substantially all of our international sales
are denominated in U.S. dollars. However, if there is a significant devaluation
of the currency in a specific country, the prices of our products will increase
relative to that country's currency and our products may be less competitive in
that country. In addition, we cannot be sure that our international customers
will continue to be willing to place orders denominated in U.S. dollars. If they
do not, our revenues and results of operations will be subject to foreign
exchange fluctuations which could harm our business. We do not hedge against
foreign currency exchange rate risks. In addition, any economic, banking or
currency difficulties experienced by countries in which we have sales may lead
to economic recession in those countries. This in turn may result in the
cancellation or delay of orders for our products from customers in those
countries, thus harming our business, financial condition and results of
operations.
In addition, we purchase substantially all of the IC devices used in our
products from local distributors of foreign suppliers. Although our purchases of
IC devices are currently denominated in U.S. dollars, devaluation of the U.S.
dollar relative to the currency of a foreign supplier would likely result in an
increase in our cost of IC devices which could harm our operating results and
gross margins.
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International sales of our products accounted for 15.0% of our revenues in
1999, 19.0% of our revenues in 1998 and 22.5% of our revenues in 1997. Our
international sales are subject to certain risks, including regulatory risks,
tariffs and other trade barriers, timing and availability of export licenses,
political and economic instability, difficulties in accounts receivable
collections, difficulties in managing distributors, lack of a local sales
presence, difficulties in obtaining governmental approvals, foreign currency
exchange fluctuations, the burden of complying with a wide variety of complex
foreign laws and treaties and potentially adverse tax consequences. We are also
subject to risks associated with legislation and regulations relating to the
import and export of high technology products. The U.S. or foreign countries may
implement quotas, duties, taxes or other charges or restrictions upon the
importation or exportation of our products, leading to a reduction in sales and
profitability in that country. These factors could harm our business, financial
condition and results of operations.
DISRUPTION OF OUR OPERATIONS IN OUR SANTA ANA, CALIFORNIA MANUFACTURING FACILITY
WOULD SUBSTANTIALLY HARM OUR BUSINESS.
All of our manufacturing operations are located in our facility in Santa
Ana, California. Due to this geographic concentration, a disruption of our
manufacturing operations, resulting from sustained process abnormalities, human
error, government intervention or natural disasters such as earthquakes, fires
or floods could cause us to cease or limit our manufacturing operations and
consequently substantially harm our business, financial condition and results of
operations. See "Business--Design, Manufacturing and Test" and "--Facilities."
OUR REPORTING AS AN S CORPORATION COULD EXPOSE US TO LIABILITY EXCEEDING
$ AND ADVERSELY AFFECT OUR PROFITABILITY.
Since our formation in March 1990, we have elected for federal and state
income tax purposes to be treated as an S corporation under Subchapter S of the
Internal Revenue Code of 1986 and comparable state tax laws. Our status as an S
corporation was inadvertently terminated as of November 11, 1996 and May 14,
1999, as a result of transfers by certain of our existing shareholders of a
portion of their shares of our common stock to trusts established for the
benefit of their children. Notwithstanding the inadvertent termination of our S
corporation status, for the period including and subsequent to November 12, 1996
we have continued to file federal and state income tax returns as if we were an
S corporation. We have filed a request for a private letter ruling with the IRS
with respect to the November 12, 1996 transfers seeking to have our S
corporation status reinstated for the period from and after November 12, 1996.
In addition, we have filed a statement with the IRS with respect to the May 14,
1999 transfer, pursuant to a published revenue procedure, to obtain automatic
relief from the failure of the trust to file a timely election to be an eligible
shareholder and the reinstatement of our S corporation status for the period
from and after May 14, 1999. Even if the IRS reinstates our S corporation
status, our S corporation status will terminate on the date immediately
preceding the date of the completion of this offering, after which time we will
be required to pay federal and state corporate-level income taxes as a
C corporation. If the IRS does not reinstate our S corporation status from and
after November 12, 1996, we would be liable to pay corporate-level taxes on our
income, including interest and possible penalties, for the period from
November 12, 1996 through the date immediately preceding the completion of this
offering. As of December 31, 1999, the amount of this tax liability, including
interest and possible penalties, would have been approximately $3.6 million.
This tax liability would be increased by the amount of our corporate tax
liability from January 1, 2000 through the date immediately preceding the
completion of this offering, estimated to be an additional $ million, for a
total potential corporate tax liability of $ million, as of , 2000.
ENVIRONMENTAL LAWS AND REGULATIONS COULD HARM OUR BUSINESS.
We are subject to a variety of environmental laws and regulations governing,
among other things, air emissions, waste water discharge, waste storage,
treatment and disposal, and remediation of releases of hazardous materials.
While we believe that we are currently in material compliance with all such
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environmental requirements, any failure to comply with present and future
requirements could harm our business, financial condition and results of
operations. Such requirements could require us to acquire costly equipment or to
incur other significant expenses to comply with environmental regulations. The
imposition of additional or more stringent environmental requirements, the
results of future testing at our facilities, or a determination that we are
potentially responsible for remediation at other sites where problems are not
presently known to us, could result in expenses in excess of amounts currently
estimated to be required for such matters.
WE MAY STILL FACE UNKNOWN YEAR 2000 ISSUES THAT COULD HARM OUR BUSINESS.
Many existing computer systems and applications may not function properly
when using dates beyond December 31, 1999. We completed a Year 2000 review of
our operations and products prior to January 1, 2000. Although we have not
experienced any significant Year 2000 problems to date, Year 2000 issues may
still arise involving our computer systems used for facilities control, machine
control, manufacturing, testing and products. In addition, the inability of our
significant suppliers or customers to efficiently and effectively remedy any
unknown Year 2000 problems in the future could harm our business, financial
condition and results of operations. Accordingly, there can be no assurance that
we will not encounter Year 2000 problems with our systems or those of our
significant suppliers and customers. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Year 2000 Compliance."
RISKS RELATED TO THIS OFFERING
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE.
Prior to this offering, there has been no public market for our common
stock. Accordingly, there can be no assurance that an active trading market will
develop or be sustained or that the market price of our common stock will not
decline. The initial public offering price for the shares will be determined by
us and representatives of the underwriters and may not be indicative of prices
that will prevail in the trading market. Investors may not be able to sell their
common stock at or above our initial public offering price. The price at which
our common stock will trade after this offering will be determined in the
marketplace and is likely to be highly volatile and may fluctuate substantially
due to factors described elsewhere in this prospectus and the following:
- Actual or anticipated fluctuations in our results of operations;
- Changes in securities analysts' expectations or our failure to meet those
expectations;
- Conditions and trends in technology industries;
- General market, economic, industry and political conditions;
- Changes in market values of comparable companies;
- Stock market price and volume fluctuations attributable to inconsistent
trading volume levels;
- Future sales of our common stock, including sales which dilute existing
investors; and
- Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have affected the market prices for the
securities of technology companies. In the past, these broad market fluctuations
have been unrelated or disproportionate to the operating performance of these
companies. Any significant fluctuations in the future might result in a material
decline in the market price of our common stock. In the past, following periods
of volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against that company.
We may become involved in this type of litigation in the future. Litigation is
often expensive and diverts management's attention and resources, which could
harm our business, financial condition and results of operations.
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MANAGEMENT WILL HAVE BROAD DISCRETION FOR THE USE OF PROCEEDS FROM THIS
OFFERING, INCLUDING THE ABILITY TO APPLY THE PROCEEDS TO USES THAT DO NOT
INCREASE OUR OPERATING RESULTS OR MARKET VALUE.
We intend to use a portion of the net proceeds of this offering for the
repayment of amounts outstanding at the completion of this offering under our
$20.0 million line of credit and the repayment of the undistributed earnings
notes held by our existing shareholders. We currently estimate that the
aggregate principal amount of the undistributed earnings notes will be
approximately $ million which represents our undistributed earnings
through the date of completion of this offering. We intend to use the balance of
the net proceeds for working capital and general corporate purposes, including
expansion of sales and marketing activities, enhancement of our technology,
possible acquisitions and possible international expansion. We have not reserved
or allocated the balance of the net proceeds for any specific transaction, and
we cannot specify with certainty how we will use the balance of the net
proceeds. Accordingly, our management will have considerable discretion in the
application of the balance of the net proceeds, and you will not have the
opportunity, as part of your investment decision, to assess whether the balance
of the net proceeds is being used appropriately. The balance of the net proceeds
may be used for corporate purposes that do not increase our operating results or
market value. Pending application of the balance of the net proceeds, they may
be placed in investments that do not produce income or that lose value. The
failure to apply these funds effectively could harm our business, financial
condition and results of operations. See "Use of Proceeds."
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND STOCK OPTION PLAN, AND THE
CONCENTRATION OF OWNERSHIP HELD BY OUR EXISTING SHAREHOLDERS, COULD PREVENT OR
DELAY A CHANGE IN CONTROL AND, AS A RESULT, NEGATIVELY IMPACT OUR SHAREHOLDERS.
We have taken a number of actions that could have the effect of discouraging
a takeover attempt. For example, provisions of our amended and restated articles
of incorporation and amended and restated bylaws could make it more difficult
for a third party to acquire us, even if doing so would be beneficial to our
shareholders. These provisions also could limit the price that certain investors
might be willing to pay in the future for shares of our common stock.
These provisions include:
- Limitations on who may call special meetings of shareholders;
- Advance notice requirements for nominations for election to the board of
directors or for proposing matters that can be acted upon by shareholders
at shareholder meetings;
- Elimination of cumulative voting in the election of directors;
- Provision for vacancies on the board of directors to be filled by a
majority of directors in office, although less than a quorum; and
- The ability of our board of directors to issue without shareholder
approval "blank check" preferred stock to increase the number of
outstanding shares and thwart a takeover attempt.
Provisions of our 2000 Stock Incentive Plan allow for the automatic vesting
of all outstanding options granted under the 2000 Stock Incentive Plan upon a
change in control under certain circumstances. Such provisions may have the
effect of discouraging a third party from acquiring us, even if doing so would
be beneficial to our shareholders. Furthermore, Manouch Moshayedi, Mike
Moshayedi, and Mark Moshayedi, each of whom is an executive officer and director
of Simple Technology, will beneficially own approximately % of our common
stock following the completion of this offering and will have the ability to
control the decision of whether a change in control will occur. See
"Management--Stock Plans/Employee Compensation Programs" and "Principal
Shareholders."
A SUBSTANTIAL AMOUNT OF OUR SHARES WILL BE ELIGIBLE FOR SALE SHORTLY AFTER THIS
OFFERING, WHICH COULD RESULT IN A DECLINE IN OUR STOCK PRICE.
If our shareholders sell substantial amounts of our common stock in the
public market following this offering, the trading price of our common stock
could fall. These sales also might make it more
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difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate. Based on shares outstanding as of
February 29, 2000 and the issuance of shares of common stock at the
initial public offering price to our existing shareholders upon their
contribution to us of the additional paid-in capital notes upon completion of
this offering, we will have shares of common stock outstanding, assuming
no exercise of outstanding options after February 29, 2000 and assuming no
exercise of the underwriters' over-allotment option. Of these shares, the
shares being sold in this offering will be freely tradeable without restriction
under the Securities Act of 1933 except for shares held by our "affiliates" as
that term is defined in Rule 144 of the Securities Act of 1933, which sales will
be subject to the volume limitations and certain other restrictions set forth in
Rule 144. As of February 29, 2000, shares of our common stock held by
existing shareholders were "restricted shares" as that term is defined in
Rule 144, and these shares will be available for sale in the public market
commencing 180 days after the date of this prospectus, or earlier if the
underwriters release their lock-up restrictions. The shares issued to our
existing shareholders upon their contribution to us of the additional paid-in
capital notes will also be "restricted shares" and will be available for sale in
the public market subject to the limitations of Rule 144 one year after the
conversion. As of February 29, 2000, there were options to purchase shares
of our common stock outstanding. Should the holders of these options exercise
their options, there will be additional shares eligible for sale 180 days after
the date of this prospectus. In connection with this offering, all of our
officers, directors and existing shareholders, and substantially all of our
option holders will be required not to sell any shares of common stock for a
period of 180 days after the date of this prospectus without the prior written
consent of FleetBoston Robertson Stephens Inc. We cannot be sure what effect, if
any, future sales of our shares or the availability of shares for future sale
will have on the market price of our common stock. The market price of our
common stock could drop due to sales of a large number of shares in the market
after this offering or the perception that sales of large numbers of shares
could occur.
In addition, shortly after the effective date of this offering, we expect to
register for sale shares of common stock reserved for issuance under our
2000 Stock Incentive Plan and shares of common stock reserved for issuance
under our 2000 Employee Stock Purchase Plan. All options were granted under our
1996 Stock Option Plan, which will be succeeded by our 2000 Stock Incentive Plan
upon the completion of this offering. Shares acquired upon exercise of these
options will be eligible for sale in the public market from time to time subject
to vesting and the 180-day lock-up restrictions that apply to the outstanding
stock. The exercise price of all of these stock options is lower than the
expected initial public offering price of our common stock. The sale of a
significant number of these shares could cause the price of our common stock to
decline. See "Shares Eligible for Future Sale" and "Management--Stock
Plans/Employee Compensation Programs."
PURCHASERS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION OF
THEIR INVESTMENT.
The initial public offering price is substantially higher than the pro forma
net book value per share of our outstanding common stock. Our existing
shareholders have paid an average of $ per share for their common stock, which
is considerably less than the amount to be paid for the common stock in this
offering. As a result, assuming an initial public offering price of $ per
share, investors purchasing common stock in this offering will incur immediate
dilution of $ in pro forma net tangible book value per share of common stock.
In addition, we have issued options to acquire common stock at prices
significantly below the initial public offering price. To the extent those
outstanding options are ultimately exercised, there will be further dilution to
investors in this offering. See "Dilution."
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties, including, without limitation, statements concerning conditions
in the memory, high performance computing, networking and communications,
consumer electronics and industrial industries and our business, financial
condition and operating results, including in particular statements relating to
our business and growth strategies, our product development efforts and our
operational and legal risks. We use words like "believe," "expect,"
"anticipate," "intend," "future," "plan" and other similar expressions to
identify forward-looking statements. Purchasers of our common stock should not
place undue reliance on these forward-looking statements, which speak only as of
the date of this prospectus. These forward-looking statements are based on our
current expectations, and are subject to a number of risks and uncertainties,
including, without limitation, those identified under "Risk Factors" and
elsewhere in this prospectus. Our actual results could differ materially from
those predicted in these forward-looking statements, and any other events
anticipated in the forward-looking statements may not actually occur. Although
we believe that the expectations reflected in these forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity,
performance or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of these statements. We are
under no duty to update any of the forward-looking statements after the date of
this prospectus to conform these statements to actual results or to reflect the
occurrence of unanticipated events, unless required by law.
S CORPORATION STATUS AND CONVERSION
Since our formation in March 1990, we have elected for federal and state
income tax purposes to be treated as an S corporation under Subchapter S of the
Internal Revenue Code of 1986 and comparable state tax laws. An S corporation
generally is not subject to corporate-level income tax. However, California
levies an S corporation tax of approximately 1.5%, which we are required to pay.
In addition to the California S corporation tax that we pay, our existing
shareholders have been taxed directly on our earnings for federal and state
income tax purposes, whether or not the earnings were distributed.
On November 12, 1996, certain of our existing shareholders transferred all
of their shares of our common stock to trusts established for the benefit of
their children and themselves. The trusts established for the benefit of their
children did not make the elections required for the trusts to be eligible
shareholders of an S corporation. As a result, our election to be treated as an
S corporation was inadvertently terminated as of November 11, 1996. In addition,
on May 14, 1999, one of our other existing shareholders transferred all of his
shares of our common stock to trusts established for the benefit of his children
and himself. Since the trust established for the benefit of his children did not
make the required election, this transfer also had the effect of inadvertently
terminating our S corporation status as of the date immediately prior to the
transfer. We have filed a request for a private letter ruling with the IRS with
respect to the November 12, 1996 transfers seeking to have our S corporation
status reinstated for the period from and after November 12, 1996. In addition,
we have filed a statement with the IRS with respect to the May 14, 1999
transfer, pursuant to a published revenue procedure, to obtain automatic relief
from the failure of the trust to file a timely election to be an eligible
shareholder and the reinstatement of our S corporation status for the period
from and after May 14, 1999.
For the period including and subsequent to November 12, 1996, we have
continued to file federal and state income tax returns as if we were an S
corporation. If the IRS does not reinstate our S corporation status from and
after November 12, 1996, we would be required to file income tax returns as a C
corporation for periods since November 12, 1996. As a result, we would be
required to record an income tax expense and liability payable in cash equal to
the amount of our C corporation tax liability, including interest and possible
penalties, for the period from November 12, 1996 through the date immediately
preceding the completion of this offering. As of December 31, 1999, the amount
of
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this tax liability, including interest and possible penalties, would have been
approximately $3.6 million. This tax liability would be increased by the amount
of our corporate tax liability from January 1, 2000 through the date immediately
preceding the completion of this offering, estimated to be an additional $
million, for a total potential corporate tax liability of $ million, as of
, 2000. Even if the IRS reinstates our S corporation status, our S
corporation status will terminate on the date immediately preceding the
completion of this offering, after which time we will be required to pay federal
and state corporate-level income taxes as a C corporation. In addition, upon the
termination of our S corporation status on the date immediately preceding the
completion of this offering, we will be required to record an increased
nonrecurring income tax benefit and a corresponding net deferred income tax
asset equal to the difference in our basis for assets and liabilities for
financial reporting and income tax purposes. As of December 31, 1999, the amount
of this increase would have been approximately $940,000. The actual amount of
the increase will be adjusted through the date immediately preceding the
completion of this offering.
We have made cash distributions of a portion of our earnings to certain of
our existing shareholders for reasons including payment of their overall
personal income tax liabilities. These shareholders have transferred amounts in
excess of their pro rata share of these distributions to our other shareholders
in order to ensure that all of our shareholders have received pro rata
distributions in accordance with rules applicable to S corporations. The
aggregate net cash distributions for overall personal income tax liabilities
were approximately $237,000 in 1999 and $380,000 in 1997. In 1998, certain of
our existing shareholders received overpayment refunds of approximately
$105,000, which they remitted to us on behalf of all of our existing
shareholders. For financial statement purposes, the distributions to our
existing shareholders were unequal due to their differing personal tax
liabilities. In 1999, net cash distributions for personal income tax liabilities
and other purposes were $556,000 to Manouch Moshayedi, $578,000 to Mike
Moshayedi and $503,000 to Mark Moshayedi. In 1997, net cash distributions for
personal income tax liabilities and other purposes were $56,000 to Manouch
Moshayedi and $369,000 to Mike Moshayedi, and overpayment refunds of $45,000
were remitted to us by Mark Moshayedi. In 1998, overpayment refunds were
remitted to us in the amount of $15,000 by Manouch Moshayedi, $38,000 by Mike
Moshayedi and $52,000 by Mark Moshayedi. For tax purposes, equal net cash
distributions for personal income tax liabilities and other purposes were made
to each of our existing shareholders of $502,000 in 1999 and $170,000 in 1997.
For tax purposes, the excess of the net cash distributions for financial
statement purposes over the net cash distributions for tax purposes is treated
as a loan receivable from the applicable shareholder to us. For tax purposes,
the overpayment refunds remitted to us by the existing shareholders in 1998
reduced this loan receivable from the applicable shareholder to us.
Prior to the completion of this offering, we will enter into a Tax
Distribution and Indemnity Agreement with our existing shareholders. Pursuant to
this agreement, on the date immediately prior to the completion of this offering
we will distribute to our existing shareholders notes in an aggregate principal
amount equal to our undistributed earnings from the date of our formation
through the date immediately preceding the completion of this offering. Upon the
completion of this offering, we will repay the principal amount of such notes
less the amount of our estimated income tax liability, including interest and
possible penalties, determined as if we were a C corporation for all periods
commencing January 1, 1996 through the date immediately preceding the completion
of this offering. As of December 31, 1999, the aggregate principal amount of
these notes would have been approximately $13.6 million, after giving effect to
the increase in net deferred income tax assets resulting from the termination of
our S corporation status on November 11, 1996, and the amount of our estimated
C corporation income tax liability would have been approximately $5.6 million.
The actual principal amount of the undistributed earnings notes will be
increased by the amount of our earnings from January 1, 2000 through the date
immediately preceding the completion of this offering, estimated to be an
additional $ million as of , 2000. The actual amount of our
potential C corporation income tax liability from January 1, 2000 through the
date immediately
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preceding the completion of this offering, estimated to be an additional $
million as of , 2000. We will repay some or all of the remaining
principal amount of these notes, depending on whether our status as an S
corporation is reinstated by the IRS and depending on our ultimate additional
tax liability as a C corporation, if any. In the event the IRS does not
reinstate our S corporation status for all periods prior to the date of the
completion of this offering, our existing shareholders will forgive that portion
of the remaining principal amount of the notes equal to such additional
corporate-level tax liability, including interest and possible penalties, and we
will repay the resulting balance due on the notes to our existing shareholders.
Our board of directors has determined that the distribution of these notes is
reasonable and appropriate in light of our existing shareholders' investment in
and ownership risks associated with us prior to the distribution of these notes.
Purchasers of common stock in this offering will not be entitled to receive any
portion of these notes or any portion of the net proceeds from this offering
used to repay these notes.
The Tax Distribution and Indemnity Agreement generally provides that certain
federal and state income taxes payable on account of our income earned during
the period prior to the date of the completion of this offering will be borne by
our existing shareholders, and that all such taxes on account of our income
earned after such period will be borne by us. More particularly, the Tax
Distribution and Indemnity Agreement provides that payments may be made to our
existing shareholders by us in the event their taxable income during years in
which we were an S corporation is increased because and to the extent that our
taxable income is correspondingly reduced with respect to any year in which we
are taxable as a C corporation.
In addition, our existing shareholders will be required to reimburse us for
income tax liabilities that we incur for periods prior to this offering,
including penalties and interest, as a result of the loss of our S corporation
status. In general, the obligation of our existing shareholders to make payments
to us will, with respect to any income tax liability resulting from a
termination of our S corporation status prior to this offering, be limited to
the lesser of the distributions made by us to our existing shareholders to pay
their respective taxes for years in which we are determined to be a C
corporation or the amount of income taxes we incur for those years. Finally, our
existing shareholders will be required to make a payment to us with respect to
periods after the date of this offering if our taxable income is increased and
there is a corresponding decrease in the taxable income of our existing
shareholders for a year in which we were an S corporation. The obligation of our
existing shareholders to make payments to us in these circumstances will be
limited to the lesser of the amount we distributed to our existing shareholders
with respect to the year in which their taxable income is decreased, or our
increased tax liability. We will be reimbursed first out of the forgiveness by
our existing shareholders of that portion of the remaining principal amount of
the undistributed earnings notes. If the remaining principal amount of the
undistributed earnings notes is insufficient to pay the income tax liability,
our existing shareholders will be required to make the payments to us in cash.
There can be no assurance that the IRS will grant us relief from the
termination of our S corporation status as described herein. Further, there can
be no assurance that, notwithstanding our obtaining the requested relief from
termination of our S corporation status, no event other than the transfers
described herein has or will have occurred that has resulted or will have
resulted in the termination of our S corporation status prior to the completion
of this offering, whether that termination is due to the occurrence of such
event, a final determination by a taxing authority or otherwise.
In addition to the distribution of our undistributed earnings, we will issue
shares of common stock at the initial public offering price to our
existing shareholders upon their contribution to us of the additional paid-in
capital notes upon the completion of this offering.
26
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the shares being offered by us
at an assumed initial public offering price of $ per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses, are estimated to be $ million, or $ million if the
underwriters' over-allotment option is exercised in full.
We intend to use a portion of the net proceeds of this offering for the
repayment of amounts outstanding at the completion of this offering under our
$20.0 million line of credit and the repayment of the undistributed earnings
notes held by our existing shareholders. We currently estimate that the
aggregate principal amount of the undistributed earnings notes will be
approximately $ million. It is not possible at this time to determine the exact
aggregate principal amount of the undistributed earnings notes.
Our line of credit bears interest at the prime lending rate plus 0.5% and
matures in August 2001. We currently estimate that there will be approximately
$ million outstanding under this line of credit on the date of the completion
of this offering. We intend to use the balance of the net proceeds for working
capital and general corporate purposes, including expansion of sales and
marketing activities, enhancement of our technology, possible acquisitions and
possible international expansion. We have not allocated any specific amount of
the balance of the net proceeds for any other purposes. The amounts and timing
of our actual expenses will depend on numerous factors, including the status of
our product development efforts, sales and marketing activities, technological
advances, the amount of cash generated or used by our operations and
competition. We may find it necessary or advisable to use portions of the
balance of the net proceeds for other purposes, and we will have broad
discretion in the application of the balance of the net proceeds. Pending these
other uses, we intend to invest the balance of the net proceeds in short-term,
interest-bearing, investment grade securities.
DIVIDEND POLICY
Since our formation in March 1990, we have elected for federal and state
income tax purposes to be treated as an S corporation under Subchapter S of the
Internal Revenue Code of 1986 and comparable state tax laws. For the period
subsequent to the inadvertent termination of our S corporation status on
November 11, 1996, we have continued to file federal and state income tax
returns as if we were an S corporation. As a result, our existing shareholders
have been taxed directly on our earnings for federal and state income tax
purposes, whether or not the earnings were distributed. We have made cash
distributions of a portion of our earnings to certain of our existing
shareholders for reasons including payment of their overall personal tax
liabilities. These shareholders have transferred amounts in excess of their pro
rata share of these distributions to our other shareholders in order to ensure
that all of our shareholders have received pro rata distributions in accordance
with rules applicable to S corporations. Except for the distribution to our
existing shareholders of the undistributed earnings notes and the additional
paid-in capital notes immediately prior to the completion of this offering, none
of which will be distributed to purchasers of common stock in this offering, we
do not anticipate paying any cash or other property dividends in the foreseeable
future and intend to retain our earnings for use in our business. Any
determination to pay dividends in the future will be at the discretion of our
board of directors and will depend principally upon our results of operations,
financial condition, capital requirements and contractual restrictions under our
credit facilities. Furthermore, in connection with our line of credit with
Comerica Bank, we have agreed not to declare or pay any cash dividends or make
any other cash distribution with respect to shares of our capital stock without
the prior written consent of Comerica Bank, except as necessary to cover tax
liability to our existing shareholders resulting from our operations. We are
also subject to various covenants under the equipment note payable agreements
with respect to our equipment leases that, among other things, limit
distributions and dividends to shareholders without the prior written consent of
the lenders.
27
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999
on:
- an actual basis;
- a pro forma basis to give effect to our distribution to our existing
shareholder of the undistributed earnings notes in an aggregate principal
amount equal to our undistributed earnings through December 31, 1999 of
approximately $ million, the accounting adjustments required in
connection with our change from an S corporation to a C corporation, and
the issuance of shares of common stock at the initial public
offering price to our existing shareholders upon their contribution to us
of the additional paid-in capital notes; and
- a pro forma as adjusted basis to reflect our proposed sale of shares
of common stock in this offering at an assumed initial public offering
price of $ per share, and our application of the estimated net
proceeds therefrom after deducting estimated underwriting discounts and
commissions and estimated offering expenses.
See "Use of Proceeds," "S Corporation Status and Conversion" and "Description of
Capital Stock."
The capitalization information set forth in the table below is qualified by
the more detailed consolidated financial statements and related notes appearing
elsewhere in this prospectus and should be read in conjunction with such
financial statements and related notes. The table does not include shares
of common stock issuable upon exercise of options outstanding as of
December 31, 1999 at a weighted average exercise price of $ per share. The
table also assumes that the underwriters do not exercise their over-allotment
option and excludes shares available for future issuance under our 2000 Stock
Incentive Plan and our 2000 Employee Stock Purchase Plan. See "Management--Stock
Plan/Employee Compensation Programs."
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Current portion of capital lease obligations.............. $ 938
Current portion of long-term debt......................... 697
Distributions payable to shareholders.....................
Distributions payable to shareholders--retained...........
------- ------ ------
Total short-term debt................................... $ 1,635
======= ====== ======
Long-term debt:
Line of credit............................................ $12,479
Long-term portion of capital lease obligations, net of
current................................................. 1,358
Long-term debt, net of current............................ 1,844
------- ------ ------
Total long-term debt.................................... 15,681
------- ------ ------
Shareholders' equity:
Common stock, no par value, 10,000,000 shares authorized,
shares issued and outstanding, actual; $0.001
par value, 100,000,000 shares authorized shares
issued and outstanding, pro forma; and shares
issued and outstanding, pro forma as adjusted........... 30
Additional paid-in capital.................................. 3,283
Unearned stock based compensation........................... (141)
Retained earnings........................................... 12,705
Accumulated other comprehensive loss........................ (97)
------- ------ ------
Total shareholders' equity.............................. 15,780
------- ------ ------
Total capitalization........................................ $31,461
======= ====== ======
</TABLE>
28
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $ million, or $ per share of common stock. Net tangible book
value per share is calculated by subtracting our total liabilities from our
total tangible assets, which equals total assets less intangible assets, and
dividing this amount by the number of shares of common stock outstanding as of
December 31, 1999. Assuming the distribution to our existing shareholders of
undistributed earnings notes in an aggregate principal amount equal to our
undistributed earnings through December 31, 1999 of approximately $ million,
and the issuance of shares of common stock at the initial public offering
price to our existing shareholders upon their contribution to us of the
additional paid-in capital notes, and the sale by us of shares of common
stock offered in this offering at an assumed initial public offering price
of per share and the application of the estimated net proceeds from this
offering, our pro forma net tangible book value as of December 31, 1999 would
have been $ million, or $ per share of common stock. See "S Corporation Status
and Conversion." Assuming completion of this offering, there will be an
immediate increase in the pro forma net tangible book value of $ per share to
our existing shareholders and an immediate dilution in the net tangible book
value of $ per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share
Pro forma net tangible book value per share as of December
31, 1999................................................ $
Increase per share attributable to new investors..........
-----
Pro forma net tangible book value after the offering........
-----
Dilution per share to new investors......................... $
=====
</TABLE>
The following table summarizes on a pro forma basis, as of December 31,
1999, the difference between our existing shareholders and new investors with
respect to the number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid. The following
table does not include shares subject to outstanding options or reserved
for issuance under our 1996 Stock Option Plan as of December 31, 1999. To the
extent that outstanding options are exercised and shares of common stock are
issued, there will be further dilution to new investors. Our 1996 Stock Option
Plan will be succeeded by our 2000 Stock Incentive Plan upon the completion of
this offering. See "Management--Stock Plans/Employee Compensation Programs."
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders....................... $30,000 $0.00
New investors...............................
---------- ----- ------- ----- -----
Total....................................... 100.0% 100.0%
========== ===== ======= ===== =====
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares of common stock held by new investors will increase to shares,
or approximately % of the total number of shares of common stock to be
outstanding immediately after this offering.
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The consolidated statement
of operations data for the years ended December 31, 1997 through 1999 and the
consolidated balance sheet data at December 31, 1998 and 1999 are derived from
our consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere
in this prospectus. The consolidated statement of operations data for the years
ended December 31, 1995 and 1996 and the consolidated balance sheet data at
December 31, 1995 through 1997 are derived from our consolidated financial
statements that have been audited and are not included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues................................................ $206,756 $163,716 $159,088 $122,288 $192,593
Cost of revenues............................................ 181,595 137,442 131,094 98,168 152,973
-------- -------- -------- -------- --------
Gross profit................................................ 25,161 26,274 27,994 24,120 39,620
Operating expenses
Research and development.................................. 1,609 1,911 2,154 2,180 1,832
Sales and marketing....................................... 7,824 12,557 15,972 13,340 14,150
General and administrative................................ 4,378 8,429 8,751 9,360 9,731
-------- -------- -------- -------- --------
Total operating expenses.................................... 13,811 22,897 26,877 24,880 25,713
-------- -------- -------- -------- --------
Income (loss) from operations............................... 11,350 3,377 1,117 (760) 13,907
Interest and other expense, net............................. 2,018 1,496 1,741 1,380 1,922
-------- -------- -------- -------- --------
Income (loss) before provision (benefit) for income taxes... 9,332 1,881 (624) (2,140) 11,985
Provision (benefit) for income taxes........................ 133 201 2 23 (518)
-------- -------- -------- -------- --------
Net income (loss)........................................... $ 9,199 $ 2,082 $ (626) $ (2,163) $ 12,503
======== ======== ======== ======== ========
Net income (loss) per share(2):
Basic..................................................... $ $ $ $ $
Diluted................................................... $ $ $ $ $
PRO FORMA DATA(1):
Income before provision for income taxes............................................................... $ 11,985
Pro forma provision for income taxes................................................................... 4,554
--------
Pro forma net income................................................................................... $ 7,431
========
Pro forma net income per share(2):
Basic................................................................................................ $
Diluted.............................................................................................. $
Weighted average shares outstanding(2)
Basic.....................................................
Diluted...................................................
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 352 $ 2,265 $ 2,572 $ 817 $ 3,779
Working capital............................................. 7,878 2,494 14,247 11,283 22,855
Total assets................................................ 59,149 45,466 41,873 40,087 55,131
Total shareholders' equity.................................. 10,941 7,886 6,862 4,760 15,780
</TABLE>
- ------------------------------
(1) Since our formation in March 1990, we have elected for federal and state
income tax purposes to be treated as an S corporation under Subchapter S of
the Internal Revenue Code of 1986 and comparable state tax laws.
Accordingly, no provision has been made for federal or certain state income
taxes. Pro forma net income has been computed as if we had been fully
subject to federal and state income taxes as a C corporation. Our S
corporation status will terminate immediately preceding the date of the
completion of this offering after which time we will be required to pay
federal and state corporate-level income taxes as a C corporation. See "S
Corporation Status and Conversion," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and note 13 of the notes to
our consolidated financial statements.
(2) Reflects a for stock split of common stock prior to the completion of
this offering and the issuance of shares of common stock at the
initial public offering price to our existing shareholders upon their
contribution to us of the additional paid-in capital notes. All share and
per share amounts have been adjusted to give retroactive effect to the stock
split and issuance of these shares of common stock for all periods
presented.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. THE RESULTS
DESCRIBED BELOW ARE NOT NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED IN
ANY FUTURE PERIOD. CERTAIN STATEMENTS IN THIS DISCUSSION AND ANALYSIS ARE
FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS.
THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR
OUR PREDICTIONS. SUCH RISKS AND UNCERTAINTIES ARE SET FORTH UNDER THE CAPTION
"RISK FACTORS."
OVERVIEW
Incorporated in 1990, Simple Technology designs, manufactures and markets a
comprehensive line of memory, storage and connectivity products used in high
performance computing, networking and communications, consumer electronics and
industrial applications. We initially focused on designing and marketing dynamic
random access memory, or DRAM, memory modules primarily used in desktop PCs. In
1994, we began to manufacture substantially all of our products internally and
began to expand our product offerings to include products used in mobile
applications such as memory cards, communications cards and hard drive upgrade
kits. In 1995, we further expanded our product line by developing a line of
Flash memory products used in networking and communications, consumer
electronics and industrial applications. In the same year, we introduced a line
of high density memory products using our three-dimensional IC Tower stacking
technology. In 1999, the percentage of our revenues derived from the sale of
Flash memory and IC Tower stacking products increased significantly as a result
of increased demand for consumer electronics and high density memory products
used in Internet infrastructure and embedded applications. We believe that Flash
memory and high density memory products will continue to represent an increasing
percentage of our product mix as demand for these applications expands. We also
expect continued growth in our non-stacking DRAM products fueled by increased
memory demand in the high performance computing market.
We sell our products through our Original Equipment Manufacturer, or OEM,
and Aftermarket Divisions. While our OEM Division focuses on a single sales
channel, OEMs, our Aftermarket Division sells our products through the following
five channels: value added reseller, or VAR, mail order, commercial and
industrial distribution, and retail. Prior to 1997, we primarily concentrated
our sales efforts in the VAR, mail order and OEM channels. In 1997 and early
1998, we reallocated resources to focus on penetrating the commercial and
industrial distribution channels. As a result of such reallocation, revenues
from VARs declined significantly in 1998, which contributed to an overall
decline in revenues in 1998. During 1999, we aggressively enhanced our presence
in the VAR channel, experienced rapid growth in sales through our mail order
channel and OEM Division, and penetrated the retail channel with customers such
as Best Buy Co., Inc. and Costco Wholesale Corporation. Combined growth in our
OEM and Aftermarket Divisions contributed to our revenue growth of 57.5% from
1998 to 1999.
Our OEM Division addresses the increasing trend of OEMs to outsource the
design, development and manufacture of memory products. Outsourcing allows
OEMs to focus their resources on activities and technologies in which they add
the greatest value, such as system design, sales, marketing and distribution.
OEM outsourcing practices are either on a turnkey basis, in which the OEM uses
an outside supplier to procure components and for the design and manufacture of
a specific product, or on a consignment basis, in which the OEM employs an
outside supplier to design and manufacture a product using memory components
supplied by the OEM. Since revenue is not recognized on the integrated circuit,
or IC, devices used in products manufactured on a consignment basis, revenues
related to sales on a consignment basis typically result in significantly lower
average sales prices than revenues related to turnkey sales. A significant
portion of our 1998 unit shipments related to products
31
<PAGE>
manufactured on a consignment basis. As a result, those sales contributed to our
operating losses in 1998. In 1999, we discontinued substantially all of our
sales of products manufactured on a consignment basis and we expect
substantially all of our future revenues will be derived from the sale of
products manufactured on a turnkey basis.
Historically, a relatively small number of customers have accounted for a
significant percentage of our revenues. Our ten largest customers accounted for
an aggregate of 44.3% of our revenues in 1999, 38.8% of our revenues in 1998 and
36.8% of our revenues in 1997. Our top ten OEM Division customers accounted for
an aggregate of 75.4% of our OEM Division revenues or 19.4% of our total
revenues in 1999. Our largest OEM Division customer accounted for 24.0% of our
OEM Division revenues or 6.2% of our total revenues in 1999. Our top ten
Aftermarket Division customers accounted for an aggregate of 47.6% of our
Aftermarket Division revenues or 35.3% of our total revenues in 1999. Our
largest Aftermarket Division customer, CDW Computer Centers, Inc., accounted for
26.1% of our Aftermarket Division revenues or 19.4% of our total revenues in
1999. No other customer accounted for more than 10.0% of our total revenues in
1999, 1998 or 1997. The composition of our major customer base changes from year
to year as the market demand for our customers' products change and we expect
this variability will continue in the future. We expect that sales of our
products to a small number of customers will continue to account for a
significant percentage of our revenues in the foreseeable future and believe
that a significant portion of our financial results will depend upon the success
of our customers' products.
International sales constituted 15.0% of our revenues in 1999, 19.0% of our
revenues in 1998 and 22.5% of our revenues in 1997. Substantially all of our
international sales are denominated in U.S. dollars. However, if the value of
the U.S. dollar increases relative to a particular foreign currency, our
products could become relatively more expensive, which could result in a
reduction of sales in a particular country. We do not hedge against foreign
currency exchange fluctuations. In addition, we purchase substantially all of
the IC devices used in our products from local distributors of Japanese, Korean
and Taiwanese suppliers. Although our purchases of IC devices are currently
denominated in U.S. dollars, devaluation of the U.S. dollar relative to the
currency of a foreign supplier would likely result in an increase in our cost of
IC devices. Our international sales also could be adversely affected by risks
including regulatory risks, tariffs and other trade barriers.
In the past we have been impacted by seasonal purchasing patterns resulting
in higher sales in the third and fourth quarters of each year. Our ability to
adjust our short-term operating expenses in response to fluctuations in revenues
is limited. As a result, if revenues are lower than expected in any given
period, our results of operations could be harmed.
Substantially all of our revenues are recognized at the time of shipment. A
significant portion of our sales through aftermarket channels include limited
rights to return unsold inventory. In addition, while we may not be
contractually obligated to accept returned products, we may determine that it is
in our best interest to accept returns in order to maintain good relations with
our customers. Product returns would increase our inventory and reduce our
revenues. We also have price protection agreements with a number of our
aftermarket customers in which we retain limited liability for price declines
related to unsold inventory. If we reduce the list price of our products, these
customers receive credits from us. These events could give rise to charges for
excess inventory, returns of products by distributors, or substantial price
protection charges or discounts.
Our expansion of manufacturing, sales and support functions to Scotland and
Canada contributed to our net operating losses in 1998 and 1997. Our
subsidiaries in Scotland and Canada incurred combined net operating losses of
approximately $2.8 million in 1998 and $1.8 million in 1997. In 1998, we
incurred $397,000 in restructuring costs to reduce our operations in Scotland to
a regional sales office. We discontinued the operations of our Canadian facility
in 1997 at a nominal cost. Currently, all of our manufacturing and support
functions are consolidated in Santa Ana, California.
32
<PAGE>
Since our formation in March 1990, we have elected for federal and state
income tax purposes to be treated as an S corporation under Subchapter S of the
Internal Revenue Code of 1986 and comparable state tax laws. On November 12,
1996, certain of our existing shareholders transferred all of their shares of
our common stock to trusts established for the benefit of their children and
themselves. The trusts established for the benefit of their children did not
make the elections required for the trusts to be eligible shareholders of an S
corporation. As a result, our election to be treated as an S corporation was
inadvertently terminated as of November 11, 1996. In addition, on May 14, 1999,
one of our other existing shareholders transferred all of his shares of common
stock to trusts established for the benefit of his children and himself. Since
the trust established for the benefit of his children did not make the required
election, this transfer also had the effect of inadvertently terminating our S
corporation status as of the date immediately prior to the transfer. We have
filed a request for a private letter ruling with the IRS with respect to the
November 12, 1996 transfers seeking to have our S corporation status reinstated
for the period from and after November 12, 1996. In addition, we have filed a
statement with the IRS with respect to the May 14, 1999 transfer, pursuant to a
published revenue procedure, to obtain automatic relief from the failure of the
trust to file a timely election to be an eligible shareholder and the
reinstatement of our S corporation status for the period from and after May 14,
1999. If the IRS does not reinstate our S corporation status, we would be
required to file income tax returns as a C corporation for periods since
November 12, 1996. As a result, we would be required to record an income tax
expense and liability payable in cash equal to the amount of our C corporation
tax liability, including interest and possible penalties, for the period from
November 12, 1996 through the date immediately preceding the completion of this
offering. As of December 31, 1999, the amount of this tax liability, including
interest and possible penalties, would have been approximately $3.6 million.
This tax liability would be increased by the amount of our corporate tax
liability from January 1, 2000 through the date immediately preceding the
completion of this offering, estimated to be an additional $ million, for a
total of $ million, as of , 2000. Even if the IRS reinstates our
S corporation status, our S corporation status will terminate on the date
immediately preceding the completion of this offering, after which time we will
be required to pay federal and state corporate-level taxes as a C corporation.
In addition, upon the termination of our S corporation status on the date
immediately preceding the completion of this offering, we will be required to
record an increased nonrecurring income tax benefit and corresponding net
deferred income tax asset equal to the difference in our basis for assets and
liabilities for financial reporting and income tax purposes. As of December 31,
1999, the amount of this increase would have been approximately $940,000. The
actual amount of the increase will be adjusted through the date immediately
preceding the completion of this offering.
33
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
consolidated statement of operations data reflected as a percentage of revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net Revenues................................................ 100.0% 100.0% 100.0%
Cost of revenues............................................ 82.4 80.3 79.4
----- ----- -----
Gross profit................................................ 17.6 19.7 20.6
Operating expenses
Research and development.................................. 1.4 1.8 1.0
Sales and marketing....................................... 10.0 10.9 7.3
General and administrative................................ 5.5 7.7 5.1
----- ----- -----
Total operating expenses................................ 16.9 20.4 13.4
----- ----- -----
Income (loss) from operations............................... 0.7 (0.7) 7.2
Interest and other expense, net............................. 1.1 1.1 1.0
----- ----- -----
Income (loss) before provision (benefit) for income taxes... (0.4) (1.8) 6.2
Provision (benefit) for income taxes........................ 0.0 0.0 (0.3)
----- ----- -----
Net income (loss)........................................... (0.4)% (1.8)% 6.5%
===== ===== =====
</TABLE>
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NET REVENUES. Our revenues were $192.6 million in 1999, $122.3 million in
1998 and $159.1 million in 1997. Sales of memory products accounted for 90.0% of
our revenues in 1999, 82.0% of our revenues in 1998 and 88.4% of our revenues in
1997. Although unit volume was relatively flat from 1998 to 1999, revenues
increased 57.5% primarily due to an increase in average sales prices resulting
from a shift in product mix toward higher density DRAM and Flash products and
products manufactured on a turnkey basis as opposed to consignment basis. The
mix of products sold varies from quarter to quarter and may vary in the future,
affecting our overall average sales prices and gross margins.
Other factors that contributed to the increase in revenues from 1998 to 1999
included the rapid growth of our Flash memory and IC Tower stacking products,
the enhancement of sales through our VAR channel, an earthquake in Taiwan in
September 1999, which caused a short-term supply shortage and substantial
temporary price increase in the cost of our DRAM raw materials, and increased
demand for DRAM memory related to Year 2000 conversions and upgrades. We
estimate that revenues increased approximately $9.0 million as a result of the
increased demand due to the Taiwan earthquake. Sales of our Flash memory
products were $13.2 million in 1998 and $24.9 million in 1999, representing an
increase of 88.6%. Sales of our IC Tower stacking products were $2.7 million in
1998 and $15.1 million in 1999, representing an increase of 459.0%. We expect
continued sales growth in our Flash and IC Tower stacking product lines due to
growth in high performance computing, networking and communications, consumer
electronics and industrial applications.
Revenues decreased 23.1% from 1997 to 1998 primarily due to a decrease in
average sales prices, which was partially offset by an increase in units sold.
The decrease in average sales prices resulted from a significant increase in the
proportion of units sold on a consignment basis and an overall decline in the
price of IC devices due to oversupply.
During late 1998, we created a separate OEM Division to enhance the
marketing of our products to OEM customers. In 1999, our OEM Division revenues
were $49.6 million and our Aftermarket
34
<PAGE>
Division revenues were $143.0 million. In 1999, we began tracking revenues and
gross margins on a divisional basis, however, we do not intend to track
operating expenses on a divisional basis. Our combined backlog was
$13.4 million as of December 31, 1999 and $2.0 million as of December 31, 1998.
Our OEM Division backlog was $12.8 million as of December 31, 1999 and
$1.5 million as of December 31, 1998, compared to our Aftermarket Division
backlog of $600,000 as of December 31, 1999 and $500,000 as of December 31,
1998. The increase in OEM Division backlog was primarily due to increasing OEM
orders and the lengthening of OEM order cycles. Aftermarket backlog is typically
nominal since substantially all aftermarket orders are filled on a same-day or
next-day basis. We include in our backlog only those customer orders for which
we have accepted purchase orders and to which we have assigned shipment dates
within the upcoming six months. Since orders constituting our backlog are
subject to change due to, among other things, customer cancellations and
reschedulings, and our ability to procure necessary components, backlog is not
necessarily an indication of future revenue.
COST OF REVENUES. Cost of revenues include component costs, personnel costs
related to manufacturing, testing, quality control and material management
employees, and depreciation costs on production, testing and quality control
equipment. These expenses were $153.0 million in 1999, $98.2 million in 1998 and
$131.1 million in 1997. Cost of revenues as a percentage of revenues were 79.4%
in 1999, 80.3% in 1998 and 82.4% in 1997. The decrease in cost of revenues as a
percentage of revenues from 1998 to 1999 and from 1997 to 1998 resulted
primarily from a shift in product mix to a greater concentration of higher
margin Flash memory and IC Tower stacking products.
GROSS PROFIT. Our gross profit was $39.6 million in 1999, $24.1 million in
1998 and $28.0 million in 1997. Gross profit as a percentage of revenues was
20.6% in 1999, 19.7% in 1998 and 17.6% in 1997. This expansion of gross profit
as a percentage of revenues from 1998 to 1999 and from 1997 to 1998 primarily
resulted from increased sales of our higher margin Flash memory and IC Tower
stacking products. In 1999, gross profit as a percentage of revenues was 29.0%
for our OEM Division and 17.7% for our Aftermarket Division. In 1999, gross
margins for our OEM Division were greater than for our Aftermarket Division
primarily due to the fact that our OEM Division sold a higher percentage of
Flash memory and IC Tower stacking products. We expect revenues from our OEM
Division will comprise an increasing percentage of our overall revenues in the
future as outsourcing trends by OEMs continues, which may lead to higher overall
gross margins.
RESEARCH AND DEVELOPMENT. Research and development expenses are primarily
comprised of personnel costs for our engineering and design staff and the cost
of prototype supplies. Our research and development expenses were $1.8 million
in 1999, $2.2 million in 1998 and $2.2 million in 1997. Research and development
expenses as a percentage of revenues were 1.0% in 1999, 1.8% in 1998 and 1.4% in
1997. In 1999, research and development expenses decreased as a result of the
internal transfer of several of our engineers to sales and marketing. Research
and development expenses were relatively flat in 1997 and 1998. In 2000, we plan
to hire additional engineers to develop new and enhanced products in an effort
to respond to changing customer requirements for higher density DRAM and Flash
memory and storage products with smaller form factors, lower power consumption
and higher speeds.
SALES AND MARKETING. Sales and marketing expenses are primarily comprised
of personnel costs and travel expenses for our domestic and international sales
and marketing employees, commissions paid to internal salespersons and
independent manufacturers' representatives, shipping costs and marketing
programs. Our sales and marketing expenses were $14.1 million in 1999,
$13.3 million in 1998 and $16.0 million in 1997. Sales and marketing expenses as
a percentage of revenues were 7.3% in 1999, 10.9% in 1998 and 10.0% in 1997.
Sales and marketing expenses increased from 1998 to 1999 primarily due to
increases in personnel costs related to the addition of internal salespersons
and increased commissions related to higher revenues. As a percentage of
revenues, sales and marketing expenses decreased as a result of modifying the
commission structure in 1998 for certain internal
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salespersons. Sales and marketing expenses decreased from 1997 to 1998 as a
result of lower commissions paid on reduced revenues. Sales and marketing
expenses as a percentage of revenues were relatively flat from 1997 to 1998. We
plan to expand our marketing programs and implement brand-name print advertising
campaigns in 2000, which is expected to increase sales and marketing expenses as
a percentage of revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses are
primarily comprised of personnel costs for our executive and administrative
employees, professional fees and facilities overhead. These expenses were
$9.7 million in 1999, $9.4 million in 1998 and $8.8 million in 1997. General and
administrative expenses as a percentage of revenues were 5.1% in 1999, 7.7% in
1998 and 5.5% in 1997. From 1998 to 1999, general and administrative expenses
increased primarily due to additional legal costs offset by reduced expenses due
to the restructuring of our subsidiary in Scotland. General and administrative
expenses were relatively flat from 1997 to 1998, with the exception of $397,000
related to costs associated with the restructuring of our subsidiary in
Scotland. However, since the majority of our general and administrative expenses
are fixed in the short-term, the downturn in revenues in 1998 caused an increase
in general and administrative expenses as a percentage of revenues. Although we
expect substantial legal expenses to continue in 2000, we expect general and
administrative expenses to increase at a slower rate than revenues in future
years.
INTEREST AND OTHER EXPENSE, NET. Interest expense is comprised of interest
related to our line of credit and equipment financing. Interest expense was
$1.6 million in 1999, $1.4 million in 1998 and $1.7 million in 1997. In
addition, in 1999 we contributed land with a cost basis of $325,000 to charity
resulting in other expense. The decline in interest expense in 1998 resulted
primarily from reduced borrowings.
PROVISION (BENEFIT) FOR INCOME TAXES. Since our formation in March 1990, we
have elected for federal and state income tax purposes to be treated as an S
corporation under Subchapter S of the Internal Revenue Code of 1986 and
comparable state tax laws. An S corporation is generally not subject to
corporate-level income tax. However, California levies an S corporation tax of
approximately 1.5%, which we are required to pay. In addition to the California
S corporation tax that we pay, our existing shareholders have been taxed
directly on our earnings for federal and state income tax purposes, whether or
not the earnings were distributed. Our S corporation status will terminate on
the date immediately preceding the completion of this offering after which time
we will be required to pay federal and state corporate-level income taxes as a
C corporation. The provision (benefit) for income taxes has been restated on a
pro forma basis for 1999 to reflect C corporation tax treatment. Our effective
tax rate is estimated at 38%, which differs from the combined federal and state
statutory rates due primarily to the utilization of Enterprise Zone tax credits.
We operate in a state designated Enterprise Zone, in which companies located in
economically depressed regions are offered hiring tax credits for eligible
employees as well as tax credits related to the purchase of qualified production
equipment.
PRO FORMA NET INCOME. On a pro forma basis, after giving effect to the
reinstatement of our S corporation status and the subsequent termination of our
S corporation status on December 31, 1999, pro forma net income would have been
$7.4 million in 1999.
QUARTERLY RESULTS
The following table sets forth our unaudited quarterly consolidated results
of operations data for each of the eight quarters ended December 31, 1999. In
the opinion of management, these data have been prepared on a basis
substantially consistent with our audited consolidated financial statements
appearing elsewhere in this prospectus, and include all adjustments, consisting
solely of normal recurring adjustments, that we believe necessary for a fair
presentation of the data. The quarterly data should be read together with our
consolidated financial statements and related notes appearing
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elsewhere in this prospectus. The operating results for any one quarter are not
necessarily indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED RESULTS OF OPERATIONS:
Net revenues.............................. $31,294 $23,402 $28,080 $39,511 $41,951 $41,327 $53,007 $56,308
Cost of revenues.......................... 23,883 18,747 22,663 32,874 34,823 33,649 39,958 44,543
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.............................. 7,411 4,655 5,417 6,637 7,128 7,678 13,049 11,765
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses
Research and development................ 555 590 517 518 536 438 373 485
Sales and marketing..................... 3,860 3,355 2,852 3,274 3,324 3,710 3,314 3,802
General and administrative.............. 2,395 2,242 2,056 2,270 2,127 2,158 2,099 3,347
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.............. 6,810 6,187 5,425 6,062 5,987 6,306 5,786 7,634
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations............. $ 601 $(1,532) $ (8) $ 575 $ 1,141 $ 1,372 $ 7,263 $ 4,131
======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF REVENUES:
Net revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................... 76.3% 80.1% 80.7% 83.2% 83.0% 81.4% 75.4% 79.1%
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.............................. 23.7% 19.9% 19.3% 16.8% 17.0% 18.6% 24.6% 20.9%
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses
Research and development................ 1.8% 2.5% 1.8% 1.3% 1.3% 1.1% 0.7% 0.9%
Sales and marketing..................... 12.3% 14.3% 10.2% 8.3% 7.9% 9.0% 6.3% 6.8%
General and administrative.............. 7.7% 9.6% 7.3% 5.7% 5.1% 5.2% 3.9% 5.9%
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.............. 21.8% 26.4% 19.3% 15.3% 14.3% 15.3% 10.9% 13.6%
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations............. 1.9% (6.5%) 0.0% 1.5% 2.7% 3.3% 13.7% 7.3%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
We experienced increased revenues from the third quarter to the fourth
quarter of 1999 as a result of increased demand in DRAM memory related to Year
2000 upgrades and conversions. In addition, an increased density 256 megabit
Flash IC device was released to us in volume in November 1999 allowing us to
ship related backlog. Availability of new technologies in our markets may lead
to fluctuations in future quarterly revenues. Revenues and gross profit as a
percentage of revenues increased significantly from the second quarter to the
third quarter of 1999 as a result of an earthquake in Taiwan in September 1999.
The earthquake resulted in a short-term supply shortage and substantial
temporary price increase in the cost of our DRAM raw materials, resulting in
higher overall average sales prices and gross margins for our DRAM memory
products. Revenues in the second quarter of 1998 declined significantly from the
first quarter due to declines in average sales prices resulting from an increase
in the proportion of products sold on a consignment basis. Gross profit as a
percentage of revenues decreased in the first two quarters of 1999 and the last
quarter of 1998 as we reduced pricing in order to further establish our presence
in the VAR channel.
FLUCTUATIONS IN QUARTERLY RESULTS
Our quarterly operating results have fluctuated in the past and we believe
they will continue to do so in the future. Our future results of operations will
depend on many factors including:
- Fluctuating market demand for and declines in the average sales prices of
our products;
- Overproduction by suppliers of the components used in our products;
- The loss of any significant customer;
- Our inability to procure required components or an increase in the cost of
such components;
- The effects of litigation;
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- Changes in our product and sales mix as well as seasonal demand for our
products;
- Market acceptance of new and enhanced versions of our products;
- The timing of the introduction of new products or components and
enhancements to existing products or components by us or our competitors;
- Delays, cancellations or reductions of customer orders;
- Inventory obsolescence, product returns and price protection;
- Manufacturing inefficiencies associated with the start-up of new products
and volume production;
- Expenses associated with acquisitions; and
- Manufacturing disruptions.
Due to the above factors, quarterly revenues and results of operations are
difficult to forecast, and we believe that period-to-period comparisons of our
operating results are neither meaningful nor predictive of future performance.
In one or more future quarters our results of operations may fall below the
expectations of securities analysts and investors. In that event, the trading
price of our common stock would likely be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations from contributions of
capital by our existing shareholders, borrowings on various lines of credit and
cash from ongoing operations. As of December 31, 1999, we had working capital of
$22.9 million and $3.8 million of cash and cash equivalents. In addition, we had
approximately $7.5 million in unused availability at December 31, 1999 under our
$20.0 million line of credit with Comerica Bank. At December 31, 1999, the
outstanding principal balance under our line of credit was $12.5 million. In
order to reduce borrowings and interest expense, we operate a control
disbursement or zero-balance checking account. Under this account, we maintain a
zero-balance and transfer funds from our line of credit to cover presented
checks. As a result, we usually maintain a negative book cash balance related to
outstanding checks.
Net cash provided by operating activities was $7.5 million in 1999,
$2.3 million in 1998 and $2.1 million in 1997. Net cash provided by operating
activities in 1999 resulted primarily from an increase in operating income,
offset partially by an increase in accounts receivable related to increased
revenues. Net cash provided by operating activities in 1998 was attributable
primarily to a decline in accounts receivable related to decreased revenues. In
1997, net cash provided by operating activities increased primarily due to a
decline in inventory related to improved inventory management procedures.
Net cash used in investing activities was $471,000 in 1999 and $2.6 million
in 1998, attributable primarily to purchases of furniture, fixtures and
equipment. Net cash provided by investing activities was $2.1 million in 1997,
resulting from the repayment of related party loans of $3.4 million offset by
purchases of furniture, fixtures and equipment. Purchases of furniture, fixtures
and equipment related primarily to production and testing equipment to increase
capacity. Although we had no material capital expense commitments as of
December 31, 1999, we expect to spend up to approximately $2.0 million during
the next 12 months, primarily for testing equipment.
Net cash used in financing activities totaled $4.1 million in 1999,
$1.4 million in 1998 and $3.9 million in 1997. In 1999, net cash used in
financing activities resulted primarily from reduced borrowings and a decrease
in capital lease and loan obligations for equipment, resulting from the
restructuring of our subsidiary in Scotland. Net cash used in financing
activities in 1998 was attributable primarily to payments on capital lease
obligations. In 1997, net cash used in financing activities resulted primarily
from reduced borrowings under our line of credit.
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In August 1999, we entered into a credit agreement with Comerica Bank. Under
this agreement, we can borrow up to $20.0 million for general working capital
purposes under a revolving line of credit. The amount available under our line
of credit is based upon the levels of eligible accounts receivable and
inventory. Borrowings under our line of credit bear interest at the prime
lending rate plus 0.5%. At December 31, 1999, the prime lending rate was 8.5%.
As a condition to our line of credit, we granted the bank a first priority
security interest in substantially all of our assets. Our line of credit matures
in August 2001 and requires us to maintain compliance with financial and
non-financial covenants such as a minimum level of tangible net worth and a
maximum debt to tangible net worth ratio. In the event we terminate the credit
facility before August 2000 or August 2001, a termination fee of $400,000 and
$200,000, respectively, will be assessed against us, unless the termination is
due to the origination of a new credit facility with the bank. The line of
credit also restricts our ability to engage in certain transactions without the
prior written consent of the bank, including but not limited to the purchase
redemption or acquisition of shares of our capital stock, the making of loans or
guarantees to any other person or entity and the acquisition or disposition of
any significant assets or entities. Also, we have agreed not to declare or pay
any cash dividends or make any other cash distribution with respect to shares of
our capital stock without the prior written consent of the bank, except as
necessary to cover tax liability to our shareholders resulting from our
operations. As of December 31, 1999, we were in compliance with all covenant
requirements under the credit agreement.
We have entered into several capital leases and loans to finance
manufacturing and testing equipment. Our obligations under capital leases were
$2.3 million on December 31, 1999, $5.1 million on December 31, 1998, and $4.3
million on December 31, 1997, with interest rates ranging from 8.1% to 9.6% per
annum. Our equipment financing loan balances were $2.4 million on December 31,
1999, $1.4 million on December 31, 1998, and $1.6 million on December 31, 1997,
with interest rates ranging from 8.4% to 9.1% per annum. The equipment note
payable agreements contain various nonfinancial covenants that, among other
things, limit distributions and dividends to shareholders without the prior
written consent of the lenders, and require the equipment to remain unencumbered
with other liens. As of December 31, 1999, we were in compliance with all
covenants under the equipment note payable agreements.
We have made cash distributions of a portion of our earnings to certain of
our existing shareholders for reasons including payment of their overall
personal income tax liabilities. These shareholders have transferred amounts in
excess of their pro rata share of these distributions to our other shareholders
in order to ensure that all of our shareholders have received pro rata
distributions in accordance with rules applicable to S corporations. The
aggregate net cash distributions for overall personal income tax liabilities
were $237,000 in 1999 and $380,000 in 1997. In 1998, certain of our existing
shareholders received overpayment refunds of approximately $105,000, which they
remitted to us on behalf of all of our existing shareholders. For financial
statement purposes, the distributions to our existing shareholders were unequal
due to their differing personal tax liabilities. In 1999, net cash distributions
for personal income tax liabilities and other purposes were $556,000 to Manouch
Moshayedi, $578,000 to Mike Moshayedi and $503,000 to Mark Moshayedi. In 1997,
net cash distributions for personal income tax liabilities and other purposes
were $56,000 to Manouch Moshayedi and $369,000 to Mike Moshayedi, and
overpayment refunds of $45,000 were remitted to us by Mark Moshayedi. In 1998,
overpayment refunds were remitted to us in the amount of $15,000 by Manouch
Moshayedi, $38,000 by Mike Moshayedi and $52,000 by Mark Moshayedi. For tax
purposes, equal net cash distributions for personal income tax liabilities and
other purposes were made to each of our existing shareholders of $502,000 in
1999 and $170,000 in 1997. For tax purposes, the excess of the net cash
distributions for financial statement purposes over the net cash distributions
for tax purposes is treated as a loan receivable from the applicable shareholder
to us. For tax purposes, the overpayment refunds remitted to us by the existing
shareholders in 1998 reduced this loan receivable from the applicable
shareholder to us.
On the date immediately prior to the completion of this offering we will
distribute to our existing shareholders notes in an aggregate principal amount
equal to our undistributed earnings from the date
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<PAGE>
of our formation through the date immediately preceding the completion of this
offering. Upon the completion of this offering, we will repay the principal
amount of such notes less the amount of our estimated income tax liability,
including interest and possible penalties, determined as if we were a
C corporation for all periods commencing January 1, 1996 through the date
immediately preceding the completion of this offering. As of December 31, 1999,
the aggregate principal amount of these notes would have been approximately
$13.6 million, after giving effect to the increase in net deferred income tax
assets resulting from the termination of our S corporation status on
November 11, 1996, and the amount of our estimated C corporation income tax
liability would have been approximately $5.6 million. The actual principal
amount of the undistributed earnings notes will be increased by the amount of
our earnings from January 1, 2000 through the date immediately preceding the
completion of this offering, estimated to be an additional $ million as of
, 2000. The actual amount of our potential C corporation income tax
liability would be increased by the amount of our income tax liability from
January 1, 2000 through the date immediately preceding the completion of this
offering, estimated to be an additional $ million as of , 2000.
We will repay some or all of the remaining principal amount of these notes,
depending on whether our status as an S corporation is reinstated by the IRS and
depending on our ultimate additional tax liability as a C corporation, if any.
In the event the IRS does not reinstate our S corporation status for all periods
prior to the date of the completion of this offering, our existing shareholders
will forgive that portion of the remaining principal amount of the notes equal
to such additional corporate-level income tax liability, including interest and
possible penalties, and we will repay the resulting balance due on the notes to
our existing shareholders. See "S Corporation Status and Conversion."
We believe that the net proceeds from this offering, together with our
existing assets, anticipated debt and expected cash flow from operations will be
sufficient to fund our operations for the next 12 months. Thereafter, we may
require additional sources of funds to continue to support our business. Such
funds, if needed, may not be available or may not be available on terms
acceptable to us.
YEAR 2000 COMPLIANCE
The Year 2000 problem is the result of many computer systems and software
programs having been designed to accept or recognize only two digits rather than
four digits to define the applicable year. Date sensitive hardware and software
may recognize a date using "00" as the year 1900 rather than the year 2000. As a
result, computer systems and software used by many organizations and
governmental agencies may need to be upgraded to comply with these Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately recognize 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally and
the compliance and remediation work accomplished leading up to 2000 was
effective to prevent any problems. Computer experts have warned that there may
still be residual consequences of the change in centuries and any such
difficulties could result in a decrease in sales of our products, an increase in
allocation of resources to address Year 2000 problems of our customers and
suppliers without additional revenue commensurate with such dedication of
resources, or an increase in litigation costs relating to losses suffered by our
customers and suppliers due to such Year 2000 problems.
STATE OF READINESS. We conducted a Year 2000 assessment to assess the
impact of the Year 2000 issue on us, and to coordinate remediation activities.
We completed the evaluation of our products for Year 2000 compliance in
June 1999. None of our product lines perform date related processing and none
contain real time clock circuitry and, therefore, are Year 2000 ready. Our
storage and connectivity products are used as components in a variety of host
systems. The firmware, operating system and application software of these host
systems are designed and manufactured by others. We make no claim with regard to
the Year 2000 readiness of host systems designed by others in which our products
are used.
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Our assessment of Year 2000 risks related to material suppliers, customers
and other third parties is complete. Inquires were made of all critical
suppliers and an assessment of their Year 2000 readiness was the basis for
strategic decisions regarding alternate material sourcing and/or increasing
inventory safety stocks. We also contacted our significant suppliers and
customers regarding their Year 2000 readiness in order to understand the
potential for any disruptions in their ordering patterns. Although based on our
inquiries we have not found any potential Year 2000 problems with our customers,
there can be no assurance that our customers will not be impacted by any unknown
Year 2000 issues. The impact of any unknown Year 2000 issues for any of our
significant customers could harm our business, financial condition and results
of operations.
COSTS TO ADDRESS OUR YEAR 2000 COMPLIANCE. Our costs for our Year 2000
assessment and remediation in 1999 was approximately $100,000. To date, we have
not incurred any material expenditure in connection with identifying,
evaluating, or remediating any Year 2000 compliance issues. However, if we
discover any Year 2000 issue, the costs of remediating the problem could be
higher than anticipated and could harm our business, financial condition and
results of operations.
RISKS. We are not currently aware of any additional significant Year 2000
compliance problems relating to our computer systems, software, or other systems
that would materially harm our business, financial condition and results of
operations. We may discover Year 2000 compliance problems in the future that may
require substantial repair or replacement of our systems which could cause our
business to suffer. The success of our Year 2000 compliance efforts depends, in
part, on the success of our significant suppliers and customers in dealing with
their Year 2000 issues. We do not have any control over the remediation efforts
of our significant suppliers and customers and cannot fully determine the extent
to which they have resolved their Year 2000 compliance issues. We currently
purchase several critical components from a small number of suppliers. While
this issue is being carefully managed, disruptions in the supply of components
from any of these suppliers due to Year 2000 issues, could cause delays in our
fulfillment of customer orders which could result in reduced or lost revenues.
Furthermore, a significant portion of our sales have historically been to a
limited number of customers. Any disruptions in the purchasing patterns of these
customers or potential customers due to Year 2000 issues could cause a decline
in our revenues. There can be no assurance that we and our significant suppliers
and customers have identified and remedied all significant Year 2000 problems.
Furthermore, there can be no assurance our insurance will cover losses from
business interruptions arising from Year 2000 problems or those of our
suppliers. If our significant suppliers and customers have Year 2000 problems,
our business could be harmed.
CONTINGENCY PLAN. Should previously undetected Year 2000 problems be found
in our systems, these systems will either be upgraded, replaced, or operated in
place with manual procedures to compensate for their deficiencies. While we
believe that these alternative plans would be adequate to meet our needs without
materially impacting our operations, there can be no assurance that these
alternatives would be successful or that our results of operations would not be
harmed by the delays and inefficiencies inherent in conducting operations in
this manner.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have market risk relating to borrowings under our line of credit because
the interest rate under the line of credit is variable. Our line of credit had a
balance of $12.5 million at December 31, 1999. Substantially all of our sales
are denominated in U.S. dollars. However, if the value of the U.S. dollar
increases relative to a particular foreign currency, our products could become
relatively more expensive. In addition, we purchase substantially all of our IC
devices from U.S. subsidiaries of Japanese, Korean and Taiwanese companies.
Fluctuations in the currencies of Japan, Korea or Taiwan could have an impact on
the costs of our raw materials. To date, we have not entered any derivative
instruments to manage risks related to interest rates or foreign currency
exchange rates.
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BUSINESS
COMPANY OVERVIEW
Simple Technology is a leading independent provider of standard and custom
memory solutions, with products based on dynamic random access memory, or DRAM,
static random access memory, or SRAM, and Flash memory technologies such as
CompactFlash. We design, manufacture and market a comprehensive line of over
2,500 memory, storage and connectivity products used in high performance
computing, networking and communications, consumer electronics and industrial
applications. Examples of these applications include desktop and notebook
computers, servers, routers, switches, digital cameras, digital video recorders,
MP3 digital audio players, personal digital assistants, or PDAs, embedded
controls and medical instruments. Our patented IC Tower stacking technology
allows multiple standard components to be stacked together to provide increased
functionality in the same form factor as a single component. This technology
allows our customers to design memory intensive systems on a more competitive
basis. Our CompactFlash technology provides portable digital devices, such as
digital cameras and MP3 digital audio players, with increased storage and
functionality in a smaller form factor.
We offer standard and custom memory solutions to original equipment
manufacturer, or OEM, and aftermarket customers, including value added
resellers, or VARs, mail order customers, commercial and industrial
distributors, and retailers. We believe our comprehensive line of products
allows our customers to efficiently manage their supply chains by consolidating
their memory, storage and connectivity product purchases. Our OEM Division,
known as SiliconTech, primarily sells custom memory products for new systems,
with most sales based on a coordinated design effort between us and our OEM
customers. We believe our design, manufacturing, testing and logistics
expertise, along with our proprietary technologies, enables us to respond to our
customers' rapidly changing product and service requirements by providing our
customers with timely access to higher speed and higher density memory products,
reducing our customers' time-to-market and time-to-volume, and decreasing our
customers' capital requirements and production and inventory costs. In 1999, our
principal direct OEM Division customers included Dell Products L.P., Mitsubishi
Electronics America, Inc., Motorola, Inc., Unisys Corporation and Xerox
Corporation. Our Aftermarket Division primarily sells standard and custom memory
and storage products which are mainly used as upgrades to existing systems. In
1999, our principal Aftermarket Division customers included Avnet Computer, Best
Buy Co., Inc., CDW Computer Centers, Inc., Costco Wholesale Corporation, Ingram
Micro Inc., Micro Warehouse, Inc. and PC Connection, Inc.
INDUSTRY BACKGROUND
The demand for memory products in digital electronic systems is growing
rapidly. The development of high performance PCs and servers and the evolution
of Internet infrastructure have increased the demand for greater capabilities in
the storage, manipulation, transfer and management of digital data. Digital
computing and processing have extended beyond traditional computer systems, such
as PCs and servers, to include a wide array of networking and communications,
consumer electronics and industrial applications, including routers, switches,
digital cameras, digital video recorders, MP3 digital audio players, PDAs,
embedded controls and medical instruments. The increased functionality and
decreased size of many of these products have led to a greater demand for higher
density memory products with smaller form factors, lower power consumption and
higher speeds at a lower cost. As a result, growth in the market for traditional
devices and expansion in the demand for new forms of memory are expected to
continue.
The memory market can be divided into several types of integrated circuit,
or IC, devices that are designed to perform specific functions within computer
and other electronic systems. Three significant types of memory IC devices are
DRAM, SRAM and Flash. DRAM and SRAM require a constant power supply to retain
data and therefore are considered volatile memory. Since Flash is able to retain
42
<PAGE>
data without a power source, it is considered non-volatile memory. Within each
of these categories, manufacturers are offering an increased variety of memory
products that are designed for different applications and performance
requirements. This increased variety has placed greater demands on manufacturers
of computer and other electronic systems to maintain a current knowledge base
and expertise.
DRAM is a high density, low cost per bit, random access memory component
which stores digital information in the form of bits and provides high speed
storage and retrieval of data. According to Dataquest, the worldwide market for
DRAM is expected to grow at a compound annual growth rate of 44.3% from
$21.0 billion in 1999 to $63.1 billion in 2002.
SRAM performs memory functions similar to DRAM, but is much faster and does
not require the memory modules to be electronically refreshed. According to
Dataquest, the worldwide market for SRAM is expected to grow at a compound
annual growth rate of 8.5% from $4.3 billion in 1999 to $5.5 billion in 2002.
Flash memory was developed as a solid-state, non-volatile memory alternative
to rotating disk drives. Flash is noiseless, considerably lighter, more rugged
and consumes substantially less power than a rotating disk drive. According to
Dataquest, the worldwide market for Flash memory is expected to grow at a
compound annual growth rate of 19.7% from $3.9 billion in 1999 to $8.0 billion
in 2003.
MARKET DRIVERS
Growth in the third party memory market is expected to continue due to the
following four primary market drivers:
INCREASE IN DEMAND FOR MEMORY IN TRADITIONAL APPLICATIONS. The demand for
memory in traditional applications is fueled by, among other things, expanding
unit sales of PCs in business and consumer markets, the increasing use of PCs to
perform memory-intensive graphics and multimedia functions, the increasing
amount of memory required to support faster microprocessors, the proliferation
of increasingly complex operating systems and application software, and the
increasing use of local area network and wide area network routing and switching
equipment that incorporates complex memory and embedded computer subsystems. For
example, the evolution of PCs running Windows 95 and Pentium processors to PCs
running Windows 98 and Pentium II processors has led to increased memory
requirements from 16 megabytes to 32 megabytes. Furthermore, increased memory
usage in servers and workstations, and networking and communications equipment
has been driven by the growth of Internet infrastructure for such applications
as e-commerce, e-mail and web hosting.
GROWTH IN NEW AND EMERGING MEMORY APPLICATIONS. The evolution of digital
technology has created a demand for memory solutions that offer smaller form
factors, reduced power requirements, higher density and reliability, and the
capability to withstand high levels of shock and vibration and extreme
temperature fluctuations. These applications include, among others:
- Networking and communications equipment, including mobile communications
systems, network servers, network attached storage, routers, switches and
wireless base stations;
- Consumer electronics, including cellular telephones, digital cameras, MP3
digital audio players, network computers, PDAs and set top boxes; and
- Industrial applications, including hand-held scanning devices and medical
monitors.
INCREASE IN OEM OUTSOURCING. As product lead times shorten and
time-to-market and time-to-volume become more critical in product adoption and
success, OEMs are increasingly outsourcing the design, development and
manufacture of memory products to third party memory providers. These OEM
outsourcing practices range from contract manufacturing, in which the OEM turns
to an outside supplier to procure components and design and manufacture a
specific product on a
43
<PAGE>
turnkey basis, to consignment, in which the OEM employs an outside supplier to
design and manufacture a product using memory components supplied by the OEM. By
outsourcing, OEMs are able to focus their resources on activities and
technologies in which they add the greatest value, such as system design, sales,
marketing and distribution. With the wide acceptance of build-to-order and
direct sales distribution strategies, OEMs are increasingly more reliant on the
manufacturing, logistics and inventory management functions of third party
vendors to reduce their time-to-market and time-to-volume. Furthermore, as
memory products increase in complexity, the design, manufacturing and test
processes become more automated, requiring a greater level of investment in
capital equipment and skilled engineers and specialists. Outsourcing allows
OEMs to gain access to advanced manufacturing facilities, thereby reducing OEMs'
overall capital equipment requirements. In addition, the proliferation of a wide
variety of memory devices, as well as frequent product design changes, short
product life cycles and component price fluctuations, has created increased
difficulties for OEMs to plan, procure and manage their inventories efficiently.
By using a third party memory provider's manufacturing, volume procurement
capabilities and inventory management expertise, OEMs can reduce their
production and inventory costs.
GROWTH IN AFTERMARKET DEMAND FOR MEMORY MODULES. The shift to modular PC
and server designs configured with a base level of memory and sockets for
upgrade memory has led to a growing demand for aftermarket memory modules. As an
alternative to purchasing more expensive OEM-provided memory, corporate PC and
server customers are relying on VARs, resellers and distributors as a source of
high volume, cost-effective memory modules. In addition, consumer PC buyers are
increasingly buying their additional memory requirements through retail
channels. The introduction of new consumer electronic applications such as
digital cameras and MP3 digital audio players has also led to a growing
aftermarket for Flash memory cards.
THE SIMPLE TECHNOLOGY SOLUTION
Simple Technology designs, manufactures and markets a comprehensive line of
memory, storage and connectivity products used in high performance computing,
networking and communications, consumer electronics and industrial applications.
We believe our comprehensive line of products allows our customers to
efficiently manage their supply chains by consolidating their memory, storage
and connectivity product purchases.
Our products are designed to offer the following features:
- HIGH DENSITY. Our patented IC Tower stacking technology allows us to
design and manufacture CompactFlash cards and DRAM memory modules in which
multiple standard components are stacked together to provide increased
functionality in the same form factor as a single component. This
technology allows our customers to design memory intensive systems on a
more competitive basis. As the component chips increase in capacity, our
ability to increase density in the same form factor also increases.
- SMALL FORM FACTOR. We are able to achieve one of the smallest form factors
in the market for high density memory modules and Flash storage products.
- HIGH PERFORMANCE AND RELIABILITY. Our memory products utilize
sophisticated error detection and correction algorithms and dynamic defect
management techniques to provide high data reliability and integrity. In
addition, our memory products are designed to withstand high levels of
shock and vibration and extreme temperature fluctuations typically
associated with mobile computing and industrial applications.
- LOW POWER CONSUMPTION. During read and write operations, our Flash storage
products use less power than most rotating disk drives. At all other times
during system operation, our Flash storage products require no power. This
low power consumption translates into longer battery life for many mobile
computing and consumer electronics devices.
44
<PAGE>
We offer our OEM customers a comprehensive memory solution from design and
prototyping, through high volume production and testing. We believe our
quick-turn design capabilities and automated manufacturing and test processes
allow our OEM customers to achieve more rapid time-to-market and time-to-volume
of their products in a cost-effective manner. Moreover, this outsourcing allows
our OEM customers to focus their resources on activities and technologies in
which they add the greatest value, such as system design, sales, marketing and
distribution. We believe our technical capabilities and volume manufacturing
strengths allow our OEM customers to cost-effectively design and implement
customized, advanced memory chip technology in high volume product applications.
Our Aftermarket Division customers include VARs, mail order customers,
commercial and industrial distributors, and retailers. We are able to strengthen
our relationships with these aftermarket customers and develop the Simple
Technology brand-name through various marketing programs, such as volume
purchase rebates, joint marketing, account manager incentives and lead
generation. Moreover, we provide ongoing customer support, including on-line
pricing and navigation tools, toll-free technical support and account manager
training programs.
We believe our design, manufacturing, testing and logistics expertise, along
with our proprietary technologies, enables us to respond to our customers'
rapidly changing product and service requirements by:
- Providing our customers with timely access to higher speed and higher
density memory products;
- Reducing our customers' time-to-market and time-to-volume; and
- Decreasing our customers' capital requirements and production and
inventory costs.
STRATEGY
Our goal is to be a worldwide leader in the design, manufacture and
marketing of standard and custom memory solutions. We intend to continue to
focus on growing markets, such as high performance computing, networking and
communications, consumer electronics and industrial applications. In addition,
we plan to expand our presence in new and emerging high growth memory markets
for applications such as digital cameras, MP3 digital audio players, PDAs and
various Internet devices. We plan to increase our market share in new and
emerging markets by leveraging our existing sales channels to serve the OEM and
aftermarket upgrade requirements for DRAM and SRAM memory modules, and Flash
cards.
The following are key elements of our strategy:
EXPAND AND BROADEN OUR PRODUCT LINE. We plan to develop additional high
density products to serve the growing memory needs of traditional applications,
such as PCs, networking equipment and embedded applications, and new and
emerging applications, such as digital cameras, MP3 digital audio players and
PDAs. We expect to leverage our design, manufacturing, testing and logistics
expertise to further expand and broaden our product line to produce higher
density memory products with smaller form factors, lower power consumption and
higher speeds.
MAINTAIN AND EXTEND OUR TECHNOLOGICAL AND ENGINEERING LEADERSHIP. We are
focused on utilizing our technological and engineering expertise to develop
proprietary technologies to efficiently produce high quality, technologically
advanced products that meet the complex and diverse needs of our customer base.
Through this expertise we have developed patented proprietary technologies such
as IC Tower stacking, as well as manufacturing and testing techniques which we
believe allow for higher production yields and lower defect rates. We intend to
continue to leverage and expand our technological and engineering expertise to
develop new proprietary technologies and further expand our product and service
offerings while improving our manufacturing and testing capabilities.
45
<PAGE>
AGGRESSIVELY ENGAGE OEMS. We intend to increase our marketing efforts
directed at OEM design and supply chain managers. We believe the combination of
our internal direct sales force and an external sales force of manufacturers'
representatives and industrial distributors allows us to more effectively market
our products to a larger number of OEM customers. We intend to expand our
internal sales force by hiring additional corporate and regional account
managers and hiring additional field application engineers to provide increased
sales support. We also intend to expand our use of manufacturers'
representatives and industrial distributors to target international customers.
In addition, we plan to continue to implement Web-based interactive forums on
key technology and product trends directed at existing and potential OEM
customers.
AGGRESSIVELY ENGAGE AFTERMARKET CUSTOMERS. We intend to increase our
marketing efforts directed at aftermarket customers. We plan to make a
significant investment in advertising and marketing programs that we believe
will enhance our relationships with these customers and further develop Simple
Technology brand-name recognition. In addition, we believe that many of the
custom products developed for our OEM customers will eventually reach the high
volume aftermarket channel as advanced memory technologies become widely
accepted. We believe that we are well positioned to capitalize on these product
life cycle synergies between our OEM and Aftermarket Divisions.
INCREASE MANUFACTURING EFFICIENCIES. We intend to further improve our
manufacturing efficiencies while maintaining our focus on quality and
responsiveness to customers through our quick-turn design and manufacturing
services. We believe we benefit from certain economies of scale in procurement
and equipment utilization due to our volume manufacturing of a wide variety of
products. In addition, we believe our experienced manufacturing staff and
automated surface mount equipment improve the efficiency of our manufacturing
process. We plan to continue our focus on improving this efficiency through
enhanced procurement, inventory tracking and control, and management information
systems.
FURTHER PENETRATE INTERNATIONAL MARKETS. We intend to expand our existing
relationships and establish new relationships with international customers
through increased sales and marketing activities, including local advertising
campaigns and joint marketing programs. In addition, we plan to increase our
local sales presence through additional sales offices and field application
engineers, as well as expand our relationships with manufacturers'
representatives and industrial distributors overseas.
PURSUE ACQUISITIONS OF COMPLEMENTARY BUSINESSES AND TECHNOLOGIES. We intend
to pursue selective acquisitions to complement our internal growth. We intend to
seek acquisitions which we believe will strengthen our position in our targeted
markets, enhance our technology base, increase our production capacity and
expand our geographic presence. We intend to seek and acquire companies with
synergistic or complementary technologies, manufacturing capabilities and sales
channels. We currently have no commitments or agreements and are not involved in
any negotiations with respect to any such transactions.
DESIGN, MANUFACTURING AND TEST
DESIGN AND PRODUCTION. The typical production cycle consists of a design
stage followed by a prototype stage and ends with full production of the final
product. The length of the design stage has been reduced in recent years due to
rapid improvements in technology and the increased demand for greater
functionality and smaller form factors. In response, we have developed
quick-turn design and manufacturing services. By working with our OEM customers
early in the design and prototype stages, we are able to resolve critical design
considerations effectively and efficiently, thus shortening the time from
prototype design to volume manufacturing. Moreover, working closely with our OEM
customers throughout the design and production stages allows us to gain
important insights into their future product requirements. In addition, we
believe our quick-turn design and manufacturing services allow us to introduce
upgrade products to the aftermarket on a timely basis to coincide with new
product releases.
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<PAGE>
MANUFACTURING. Our manufacturing processes rely on a high level of
automation and involve the use of fine pitch surface mount equipment which has
been specialized for the production of memory products. Our surface mount
manufacturing lines have been optimized to support the placement and
configuration of a high number of IC devices on each board. We believe we are
able to achieve a high manufacturing yield and minimize direct labor costs as a
result of our design efficiencies, high level of automation and general
manufacturing expertise. Due to our flexible manufacturing setup, we have the
ability to offer our customers rapid manufacturing and test cycles on small and
large projects. We also have developed an automated method of manufacturing our
IC Tower stacking products which we believe results in further manufacturing
efficiencies. Our OEM Division manufacturing is ISO 9001 certified.
TEST. An important aspect of our manufacturing operations is our focus on
product testing. We test 100% of our memory products upon completion of
manufacturing, which results in lower returns due to product defects. We believe
that our test expertise will continue to grow in importance as the speed and
complexity of memory products increase. Our test engineering group develops
proprietary testing routines and parameters which, together with our continued
investment in advanced testing equipment, enables us to diagnose problems in
system design and memory components.
TECHNOLOGY
Our research and development efforts are focused on developing reliable,
high performance and cost-effective memory products to address the needs of
traditional and emerging memory applications. We believe that the timely
development of new products is essential to maintaining our competitive
position. Our engineering staff works closely with our OEM customers and
provides services throughout the production cycle, including component
selection, schematic design, layout, manufacturing and test development. We
design our products to be compatible with existing industry standards and, where
appropriate, develop and promote new standards. An important aspect of our
engineering operations is to understand the challenges being offered by our OEM
customers' custom design requirements and satisfy them by utilizing our
proprietary technologies and our technical expertise. In the course of meeting
our customers' challenges, we are often required to develop new technologies and
processes which are later added to our design library for use by our other
customers. Our design library consists of over 1,000 designs that are available
for all standard and custom configurations. We focus primarily on new high speed
memory modules, improvements in test routines and related software, and
improvements in manufacturing processes and technologies. We plan to continue to
direct our research and development efforts toward the design of new memory
products which address the requirements of our OEM and aftermarket customers.
In the Flash market, our research and development is directed toward the
design and introduction of new Flash products that provide improved storage
capacities, higher speed read and write capabilities, smaller form factors, and
new form factors and interfaces. These products are intended for networking and
communications, consumer electronics and industrial applications.
Our IC Tower stacking technology enables us to produce high density DRAM and
Flash products by manufacturing products in a three-dimensional form. These
products are smaller in form factor and have higher speed capabilities than the
traditional two-dimensional designs. We stack DRAM modules and Flash cards using
standard components without any modification to the underlying components. This
capability enables us to shorten our customers' design cycles for high density
modules to standard lead times normally associated with non-stacked modules.
PRODUCTS
We design, manufacture and market a comprehensive line of over 2,500 memory,
storage and connectivity products using our proprietary design and manufacturing
technologies. Substantially all of our DRAM and Flash memory products comply
with industry standards and are based on a variety of
47
<PAGE>
industry architectures. We offer DRAM, Flash, stacking, SRAM and other products,
which include hard drive upgrade kits and connectivity products. Sales of memory
products accounted for substantially all of our revenues in 1999.
DRAM PRODUCTS
We offer DRAM products including a wide range of single in-line memory
modules, or SIMMs, dual in-line memory modules, or DIMMs, and small outline dual
in-line memory modules, or SO DIMMs. Our standard DRAM products are available in
various configurations of up to 184-pins and densities of up to 512 megabytes.
Many of these products are also offered in 3.3 volt or 5.0 volt configurations
utilizing different DRAM architectures such as DDR, EDO, FPM, RDRAM and SDRAM.
The following table describes certain of our non-stacking DRAM products as
of March 10, 2000:
<TABLE>
DRAM SPEED
PRODUCT FAMILY DENSITY ARCHITECTURE (MHZ) APPLICATIONS
<S> <C> <C> <C> <C>
184-pin DIMM 64-512MB DDR 200-266 Servers and workstations
Rambus DIMM 32-256MB RDRAM 600-800 Desktop PCs, embedded controls and
workstations
168-pin Registered DIMM 64-512MB SDRAM 66-133 Desktop PCs, embedded controls,
networking and communications
equipment, printers, routers, servers
and workstations
168-pin DIMM 16-512MB EDO, FPM, 10-133 Desktop PCs, embedded controls,
SDRAM networking and communications
equipment, printers, routers, servers
and workstations
144-pin SO DIMM 16-256MB EDO, FPM, 10-133 Embedded controls, networking and
SDRAM communications equipment, notebook PCs,
printers and routers
100-pin DIMM 16-64MB EDO, FPM, 33-133 Networking and communications
SDRAM equipment, printers and Windows
terminals
72-pin SO DIMM 16-64MB EDO, FPM 10-33 Networking and communications
equipment, and notebook PCs
72-pin SIMM 16-128MB EDO, FPM 10-33 Desktop PCs, embedded controls,
networking and communications
equipment, printers, routers and
servers
</TABLE>
FLASH PRODUCTS
We manufacture three types of Flash products: Flash modules, Linear Flash PC
Cards and data storage Flash products. Flash modules and Linear Flash PC Cards
are commonly used in execute-in-place and code storage applications such as
networking and communications and embedded applications. Data storage Flash
products are commonly used where execute-in-place is not required
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<PAGE>
and data storage is the primary function such as in digital cameras, MP3 digital
audio players, certain networking and communications and embedded applications,
and ruggedized computers.
FLASH MODULES. We offer standard, custom and application-specific Flash
modules, including 168-pin Asynchronous DIMMs, 80-pin Asynchronous SIMMs and
72-pin DRAM/Flash combination SIMMs. Our Flash modules are available in
densities of up to 64 megabytes. We also offer additional options such as on
board active reset control and system reset. Many of these products are also
available in 3.3 volt or 5.0 volt configurations.
The following table describes certain of our Flash modules as of March 10,
2000:
<TABLE>
FLASH MODULE
PRODUCT FAMILY DENSITY ARCHITECTURE APPLICATIONS
<S> <C> <C> <C>
168-pin DIMM 4-16MB 3.3 volt or 5.0 volt Networking and communications
equipment, printers and switches
80-pin SIMM 2-64MB 12.0 volt/5.0 volt programming, Networking and communications
5.0 volt only, 3.3 volt only, equipment, printers and switches
reset options
72-pin DRAM/Flash 8MB Flash Plugs into the DRAM socket; Networking and communications
SIMM 56MB DRAM reads and writes like DRAM equipment
</TABLE>
LINEAR FLASH PC CARDS. We offer standard, custom and application-specific
Linear Flash PC Cards, with densities ranging from 512 kilobytes to 64
megabytes.
The following table describes certain of our Linear Flash PC Cards as of
March 10, 2000:
<TABLE>
LINEAR FLASH PC CARD
PRODUCT FAMILY DENSITY FEATURES APPLICATIONS
<S> <C> <C> <C>
68-pin PC Card 512KB-64MB Plug and play, compatible to Medical equipment, networking and
Intel based series 1, 2, 2+ and communications equipment, notebook
Value Series 100 and 200 PC PCs, PDAs and test equipment
Cards
68-pin PC Card 1MB-64MB Plug and play, compatible to Medical equipment, networking and
series C and D AMD cards communications equipment, PDAs and
test equipment
</TABLE>
DATA STORAGE FLASH PRODUCTS. We offer a broad line of data storage Flash
products in various capacities, form factors, operational voltages and
temperature ranges. Our current product families include CompactFlash, ATA Flash
PC Cards and solid-state Flash storage. Our data storage Flash products are
compatible with a majority of today's industry-standard computing and
communications systems.
COMPACTFLASH. Our CompactFlash products provide full PC Card ATA
functionality but are only one-fourth the size of a standard PC Card.
CompactFlash's small size, durability, low power consumption and ability to
operate at either 3.3 volts or 5.0 volts make it well-suited for a range of
current and next-generation, small form factor consumer applications such as
audio recorders, digital cameras, MP3 digital audio players and PDAs.
CompactFlash products provide interoperability with systems based on the PC
Card ATA standard by using a low cost passive adapter.
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<PAGE>
ATA FLASH PC CARDS. Our ATA Flash PC Cards are used in storage, data
backup and data logging applications. Our products are available in PC Card
Type I, II and III form factors.
SOLID-STATE FLASH STORAGE. Our solid-state Flash storage products are
available in 2.5 inch and 3.5 inch hard disk form factors and are targeted
at applications that require embedded data storage devices. Our solid-state
Flash storage products offer rugged, portable, low power data storage and
are plug and play replacements for rotating IDE drives, making them ideal
for notebook computers, communication devices, and networking and
communications applications requiring embedded storage.
The following table describes certain of our data storage Flash products as
of March 10, 2000:
<TABLE>
DATA STORAGE FLASH
PRODUCT FAMILY DENSITY FORM FACTOR
<S> <C> <C>
CompactFlash 8-128MB Type I (36.4mm X 42.8mm X 3.3mm)
ATA Flash PC Card 8MB-1GB Type I (54.0mm X 85.6mm X 3.3mm)
Type II (54.0mm X 85.6mm X 5.0mm)
Type III (54.0mm X 85.6mm X 10.0mm)
Solid-state Flash storage 8MB-1GB Type III (54.0mm X 85.6mm X 10.0mm)
</TABLE>
STACKING DRAM AND FLASH CARD PRODUCTS
DRAM MODULES AND FLASH CARD PRODUCTS. We offer custom and
application-specific stacking DRAM modules including a wide range of DIMMs and
SO DIMMs. Our stacking DRAM modules are available in various configurations of
up to 200-pins and densities of up to 1 gigabyte. Many of these modules are also
offered in both 3.3 volt and 5.0 volt configurations utilizing different DRAM
architectures such as EDO, FPM and SDRAM. Furthermore, our IC Tower stacking
technology has enabled us to offer a 320 megabyte Type II CompactFlash card,
which is one of the highest capacity CompactFlash cards currently available.
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<PAGE>
The following tables describe certain of our stacking DRAM and Flash card
products as of March 10, 2000:
<TABLE>
STACKING DRAM SPEED
PRODUCT FAMILY DENSITY ARCHITECTURE (MHZ) APPLICATIONS
<S> <C> <C> <C> <C>
200-pin Registered DIMM 256-512MB SDRAM 66-133 Servers
168-pin Registered DIMM 256MB-1GB SDRAM 66-133 Desktop PCs,
embedded controls,
networking and
communications
equipment, printers,
routers, servers and
workstations
168-pin DIMM 256MB-1GB EDO, FPM, SDRAM 10-133 Desktop PCs,
embedded controls,
networking and
communications
equipment, printers,
routers, servers and
workstations
144-pin SO DIMM 128MB SDRAM 66-133 Embedded controls,
networking and
communications
equipment, notebook
PCs and routers
</TABLE>
<TABLE>
STACKING FLASH CARD
PRODUCT FAMILY DENSITY FORM FACTOR
<S> <C> <C>
CompactFlash 320MB Type II (36.4mm X 42.8mm X 5.0mm)
</TABLE>
IC TOWER STACKING COMPONENTS. Our patented IC Tower stacking technology is
a high density memory design architecture that uses standard DRAM IC devices to
create high capacity components. We offer a wide selection of stacked components
to be used on memory modules and on our customers' specific applications. This
technology is used in complex, high capacity module designs and systems and
offers chip density that is less expensive that non-stacked components on a per
megabyte basis.
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<PAGE>
The following table describes certain of our IC Tower stacking components as
of March 10, 2000:
<TABLE>
IC TOWER STACKING PRODUCT SPEED
FAMILY DENSITY ARCHITECTURE (MHZ) APPLICATIONS
<S> <C> <C> <C> <C>
DDR 128-512MB 2 High 200-266 Standard and application-
(64-256MB) specific memory modules and
systems
SDRAM 128-512MB 2 High 66-133 Standard and application-
(64-256MB) specific memory modules and
systems
EDO/FPM 128MB 2 High 10-33 Standard and application-
(64MB) specific memory modules and
systems
</TABLE>
SRAM PRODUCTS
We offer a comprehensive line of standard, custom and application-specific
SRAM modules and PC Cards, including synchronous, asynchronous and battery
backup low power SRAMs. Our SRAM products are available in densities of up to 8
megabytes. Many of these products are also available in 3.3 volt or 5.0 volt
configurations.
The following table describes certain of our SRAM products as of March 10,
2000:
<TABLE>
SPEED
SRAM PRODUCT FAMILY DENSITY (MHZ) APPLICATIONS
<S> <C> <C> <C>
Custom ZBT 4-8MB 133-200 Networking and communications
equipment
PC Card 512KB-6MB 6.6-10 Embedded systems, industrial
control test equipment and
networking and communications
equipment
72-pin SIMM 2-8MB 66-100 Networking and communications
equipment
64-pin SIMM 1MB 66-83 Networking and communications
equipment
</TABLE>
OTHER PRODUCTS
HARD DRIVE UPGRADE KITS. We offer hard drive upgrade kits for many of the
major brands of notebook PCs. Our products range from 4 to 18 gigabytes. The
primary use of these products is to enhance the storage capacity of notebook
PCs.
CONNECTIVITY PRODUCTS. We offer connectivity products that connect PC
Cards, CompactFlash cards and hard drive upgrade kits to a PC's parallel port or
USB port. These products allow the user to move information from their PC Card,
CompactFlash card or hard drive to their desktop or notebook PC.
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<PAGE>
CUSTOMERS
OEM DIVISION
In 1999 our OEM Division sold to over 200 direct customers and industrial
distributors, none of which accounted for more than 10.0% of our total revenues
in 1999. Our largest OEM customer accounted for 24.0% of our OEM Division
revenues or 6.2% of our total revenues in 1999. No OEM Division customer
accounted for more than 10.0% of our total revenues in 1999. The following table
lists our top ten OEM Division customers in 1999 comprising an aggregate of
75.4% of our OEM Division revenues or 19.4% of our total revenues.
<TABLE>
<CAPTION>
CUSTOMER MARKET SEGMENT/DISTRIBUTION CHANNEL
-------- ------------------------------------------------
<S> <C>
Alcatel Internetworking, Inc. Networking equipment
Bell Microproducts, Inc. Industrial distribution
Dell Products L.P. Desktop PCs, enterprise servers and notebook PCs
EMC Corporation Network attached storage
Fujitsu Microelectronics, Inc./ Desktop PCs, enterprise servers, notebook PCs
Fujitsu Personal Systems, Inc. and workstations
Mitsubishi Electronics America, Inc. Desktop PCs, enterprise servers and notebook PCs
Motorola, Inc. Single board computers
Pioneer-Standard Electronics, Inc. Industrial distribution
Unisys Corporation Mainframes and servers
Xerox Corporation Office equipment
</TABLE>
AFTERMARKET DIVISION
In 1999 our Aftermarket Division sold to over 1,500 customers through a
variety of distribution channels including VAR, mail order, commercial and
industrial distribution and retail. Our largest Aftermarket Division customer,
CDW Computer Centers, Inc., accounted for 26.1% of our Aftermarket Division
revenues or 19.4% of our total revenues in 1999. No other Aftermarket Division
customer accounted for more than 10.0% of our total revenues in 1999. The
following table lists our top ten Aftermarket Division customers in 1999
comprising an aggregate of 47.6% of our Aftermarket Division revenues or 35.3%
of our total revenues.
<TABLE>
<CAPTION>
CUSTOMER DISTRIBUTION CHANNEL
-------- -----------------------
<S> <C>
Avnet Computer Industrial distribution
Best Buy Co., Inc. Retail
CDW Computer Centers, Inc. Mail order
Costco Wholesale Corporation Retail
Ingram Micro Inc. Commercial distribution
Micro Warehouse, Inc. Mail order
PC Connection, Inc. Mail order
PC Service Source VAR
WestGroup International Pty Ltd. VAR
Wyle Electronics Industrial distribution
</TABLE>
In addition, through our commercial distribution arrangements, we supply
certain of our products to e-commerce companies, including Buy.com, Beyond.com
and Egghead.com, for their sale of these products on the Internet.
We expect that sales of our products to a small number of customers will
continue to account for a significant portion of our revenues for the
foreseeable future and believe that our financial results will depend in
significant part upon the success of our customers' products. We have also
experienced
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<PAGE>
changes in the composition of our major customer base from year to year as the
market demand for our customers' products change and we expect this variability
will continue in the future.
SALES AND MARKETING
OEM DIVISION
Our OEM Division uses an internal direct sales force complemented by an
external sales force of manufacturers' representatives and industrial
distributors for sales to OEM customers in the U.S. and internationally. We
believe these combined sales forces have the local presence, market knowledge
and strategic insight to allow us to more effectively market our products to a
larger number of OEM customers. In addition, as part of our sales and marketing
efforts, our experienced applications engineers work closely with our OEM
customers in designing our products into OEMs' systems.
AFTERMARKET DIVISION
We ship Simple Technology brand-name products directly to VARs, mail order
customers, commercial and industrial distributors and retailers. Our products
are available in more than 800 stores. In addition to in-house sales
representatives, our sales efforts in the aftermarket channel are supported by
manufacturers' representatives. For the mail order and retail channels, we
implement direct advertising in magazines and newspapers as a way of bringing
end-users to our customers' locations. Some of our aftermarket customers also
feature our products in their advertisements in exchange for a fee. We offer
certain VARs volume rebates and work with their customers to qualify our
products for their information system departments. For commercial distributors,
we purchase corporate image advertising, offer volume rebate and joint marketing
programs and generate leads at electronics trade shows and refer those potential
customers to our distributors. In addition, we have developed direct advertising
programs with certain of our commercial distributors' e-commerce customers in
which we market our products on their web-sites.
CUSTOMER SERVICE AND SUPPORT
We provide our customers with comprehensive product service and support. We
work closely with our OEM customers to monitor the performance of their product
designs and to provide application design and support and assistance to provide
us with insights into defining their subsequent generations of products. Our
standard OEM support package is generally offered with all product sales and
includes full technical documentation and application design assistance. During
our OEM customers' production phase, we also provide failure analysis and
replacement of defective components. In some cases, we also offer more extensive
support which includes training, system-level design, implementation and
integration support. We believe that tailoring our technical support to our OEM
customers' needs is essential for the success of our product introductions and
to achieve a high level of satisfaction among our customers. Our aftermarket
customers receive technical support on an unlimited, toll-free basis and are
assigned a dedicated technician familiar with their account. We train the
account managers of certain aftermarket customers to keep them informed about
our product line. In addition, we offer aftermarket customers on-line pricing
and navigation tools, and a personalized Web page available through our extranet
which features personalized information such as promotions, new products and
contact information.
COMPETITION
We conduct business in an industry characterized by intense competition,
rapid technological change, evolving industry standards, declining average sales
prices and rapid product obsolescence. Our competitors include many large
domestic and international companies that have substantially greater
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financial, technical, marketing, distribution and other resources, broader
product lines, lower cost structures, greater brand recognition and longer
standing relationships with customers and suppliers.
Our primary competitors include:
<TABLE>
<CAPTION>
COMPONENT MANUFACTURERS MODULE/PC CARD ASSEMBLERS STACKING MEMORY MANUFACTURERS
- ------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
- - Advanced Micro Devices, Inc. - Celestica Inc. - Dense-Pac Microsystems, Inc.
- - Hitachi Semiconductor - Centennial Technologies - StakTek Corporation
(America) Inc. - Kingston Technology
- - Intel Corporation Company
- - Micron Semiconductor - SanDisk Corporation
Electronics, Inc. - Silicon Storage Technology, Inc.
- - NEC Electronics, Inc. - Solectron Corporation
- - Samsung Electronics - Viking Components, Inc.
Company Ltd.
- - Toshiba America Electronic
Components, Inc.
</TABLE>
We expect to face competition from existing competitors and new and emerging
companies that may enter our existing or future markets that have similar or
alternative products which may be less costly or provide additional features. In
addition, some of our significant suppliers are also our competitors, many of
whom have the ability to manufacture competitive products at lower costs as a
result of their higher levels of integration. We also face competition from
current and prospective customers that evaluate our capabilities against the
merits of manufacturing products internally. Competition also may arise due to
the development of cooperative relationships among our current and potential
competitors or third parties to increase the ability of their products to
address the needs of our prospective customers. Therefore, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
We compete in our target markets based primarily on quality and price,
design and manufacturing technology, and responsiveness to our customers' needs.
We expect our competitors will continue to improve the performance of their
current products, reduce their current product sales prices and 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 our products.
To remain competitive, we must, among other things:
- Compete favorably on the basis of price;
- Maintain quality levels;
- Provide technologically advanced products;
- Offer flexible delivery schedules;
- Deliver finished products on a timely basis in sufficient volume to
satisfy our customers' requirements;
- Successfully protect our intellectual property rights;
- Provide efficient and high volume manufacturing and testing services; and
- Accurately anticipate and prepare for new technological trends and
standards in the industry.
The Flash memory market is in the early stage of development. There is
currently an absence of a single Flash memory standard. It is possible that
Flash memory standards other than those to which our products conform will
emerge as the industry standard. If we are unable to anticipate and adequately
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allocate our resources in a timely and efficient manner toward the production
and development of industry standard Flash memory products, we may experience
significant delays in releasing new and commercially viable products. In
addition, if a competing technology replaces or takes significant market share
from the Flash memory market, we would not be able to sell our Flash products.
SUPPLIERS
IC devices represent approximately 95% of our component costs. We purchase
these IC devices from a small number of suppliers. In 1999 our significant
suppliers of IC devices included:
<TABLE>
<CAPTION>
DRAM IC DEVICE SUPPLIERS FLASH IC DEVICE SUPPLIERS
- ----------------------------------------------------- -----------------------------------------------------
<S> <C>
- - Fujitsu Microelectronics, Inc. - Advanced Micro Devices, Inc.
- - Hyundai Electronics America, Inc. - Hitachi Semiconductor (America) Inc.
- - NEC Electronics, Inc. - Sharp Microelectronics of the Americas
- - Toshiba America Electronic Components, Inc. - Toshiba America Electronic Components, Inc.
- - Vanguard International Semiconductor Corporation
</TABLE>
Hitachi Semiconductor (America) Inc. supplies substantially all of the IC
devices used in our Flash memory products. In addition, Fujitsu
Microelectronics, Inc., Hyundai Electronics America, Inc., NEC
Electronics, Inc., Toshiba America Electronic Components, Inc. and Vanguard
International Semiconductor Corporation supply a majority of the DRAM IC devices
used in our DRAM memory products. We have no long-term supply contracts. A
disruption or termination of our supply relationship with any of our significant
suppliers would, among other things, cause delays, disruptions or reductions in
product shipments or increase costs and/or prices and would harm our business.
In particular, if our supply relationship with Hitachi Semiconductor
(America) Inc. is disrupted or terminated, our Flash business would be
substantially harmed.
We are continuing to identify and establish additional sources of supply
where we have supplier concentrations, although there can be no assurance that
these efforts will be successful. In the future, if the demand for our products
exceeds our suppliers' ability to deliver needed components or subassemblies, we
may be placed on supplier allocation and we may be unable to meet customer
demand.
BACKLOG
Sales of our memory products are made pursuant to short-term cancelable
purchase orders. We include in our backlog only those customer orders for which
we have accepted purchase orders and to which we have assigned shipment dates
within the upcoming six months. Since orders constituting our backlog are
subject to change due to, among other things, customer cancellations and
reschedulings, and our ability to procure necessary components, backlog is not
necessarily an indication of future revenues. In addition, there can be no
assurance that current backlog will necessarily lead to revenues in any future
period. Our combined backlog was $13.4 million as of December 31, 1999 and
$2.0 million as of December 31, 1998. Our OEM Division backlog was
$12.8 million as of December 31, 1999 and $1.5 million as of December 31, 1998,
compared to our Aftermarket Division backlog of $600,000 as of December 31, 1999
and $500,000 as of December 31, 1998. This increase in OEM Division backlog was
primarily due to increasing OEM orders and the lengthening of OEM order cycles.
Aftermarket backlog is typically nominal since substantially all aftermarket
orders are filled on a same-day or next-day basis. Booking visibility continues
to be limited with a substantial majority of our quarterly product revenues
coming from orders that are received and fulfilled in the same quarter.
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INTELLECTUAL PROPERTY RIGHTS
We regard our patents, trademarks, trade secrets and other intellectual
property as critical to our success. We rely on a combination of patents,
trademarks, copyrights and trade secret common and statutory laws,
confidentiality procedures, and employee disclosure and invention assignment
agreements to protect our intellectual property rights.
As of December 31, 1999, we owned eight U.S. patents, including a patent
related to our IC Tower stacking products, and two additional patent
applications were pending. Although we consider the patents currently held by us
to be critical to our success, there can be no assurance that any patents
currently held by us or any patents which may be granted to us in the future
will not be challenged, invalidated or circumvented or that rights granted
thereunder will provide meaningful protection or other commercial advantage to
us. Furthermore, there can be no assurance that third parties will not develop
similar products, duplicate our products or design around the patents currently
owned by us or which may be granted to us in the future. Because we view
intellectual property rights as critical to our success, we intend to pursue
future patents and other intellectual property rights in the U.S. There can be
no assurance that we will be successful in our endeavors to pursue future
patents and intellectual property rights. Furthermore, there can be no assurance
that our trade secrets and know-how may not become known to third parties, or
become part of the public domain, which in either case would harm our financial
performance and business operations.
We have not applied and do not expect to apply for patent protection in
foreign countries. In addition, the laws of foreign countries may not adequately
protect our intellectual property rights. Many U.S. companies have encountered
substantial infringement problems in some foreign countries. Because some of our
products are sold and some of our business is conducted overseas, we have
exposure to foreign intellectual property risks.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions. Therefore, we believe that
it may be necessary, from time to time, to initiate litigation against one or
more third parties to preserve our intellectual property rights. In addition,
from time to time, third parties may bring suit against us. On September 23,
1998, we filed a lawsuit against Dense-Pac Microsystems, Inc. because we believe
that Dense-Pac's stacking products infringe our IC Tower stacking patent.
Dense-Pac denied our claim and asserted a counterclaim against us alleging
infringement of its stacking patent. We denied Dense-Pac's claim of infringement
and trial is set for June 2000. We intend to vigorously enforce and defend our
patent rights, but there can be no assurance that these efforts will be
successful. For further discussion concerning this litigation, see "--Legal
Proceedings--Dense-Pac Microsystems, Inc.," and "Risk Factors--If we are
unsuccessful in our suit against Dense-Pac Microsystems for patent infringement
of our IC Tower stacking patent, or if we are unsuccessful in defending against
Dense-Pac's counterclaim of patent infringement and patent invalidity, our
business would be harmed."
In the event of an adverse result in any such litigation, we could be
required to pay substantial damages, cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses to
practice the infringed technology. Any litigation, whether as plaintiff or as a
defendant, would likely result in significant expense to us and divert the
efforts of our technical and management personnel, whether or not such
litigation is ultimately determined in our favor. In addition, the results of
any litigation are inherently uncertain.
In the event we desire to incorporate third party technology into our
products or our products are found to infringe on others' patents or
intellectual property rights, we may be required to license such patents or
intellectual property rights. If we obtain licenses from third parties, we may
be required to pay license fees or make royalty payments, which could reduce our
gross margins. If we are unable to obtain a license from a third party for
technology, we could incur substantial liabilities or be required
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to expend substantial resourses redesigning our products to eliminate the
infringement. There can be no assurance that we would be successful in
redesigning our products or that we could obtain licenses under commercially
reasonable terms. Furthermore, any development or license negotiations could
require substantial expenditures of time and other resources by us.
As is common in the industry, we currently have in effect a number of
agreements to indemnify certain of our suppliers and customers for alleged
patent infringement. The scope of such indemnity varies, but may, in some
instances, include indemnification for damages and expenses, including
attorneys' fees. We may from time to time be engaged in litigation as a result
of such indemnification obligations. Furthermore, our insurance does not provide
protection in such circumstances.
In our efforts to maintain the confidentiality and ownership of trade
secrets and other confidential information, all of our employees are required to
sign employee disclosure and invention assignment agreements. This agreement
requires our employees to disclose, document, and assign their interest in all
inventions, patents and copyrights developed while employed with us. Our
employees further agree to preserve all of our confidential information
including trade secrets, customer information, know-how and other business
information. There can be no assurance that these agreements will provide
meaningful protection of our trade secrets or other confidential information in
the event of unauthorized use or disclosure of such information. See "Risk
Factors--Risks associated with patents, proprietary rights and related
litigation may harm our business."
LEGAL PROCEEDINGS
DENSE-PAC MICROSYSTEMS, INC.
On September 23, 1998, we filed a lawsuit against Dense-Pac
Microsystems, Inc. in the United States District Court for the Central District
of California for infringement of our IC Tower stacking patent, U.S. Patent
No. 5,514,907. We are seeking damages and injunctive relief. On October 15,
1998, Dense-Pac filed an answer to our complaint denying our claim of
infringement, asserted a defense of patent invalidity against our IC Tower
stacking patent and asserted a counterclaim against us alleging infringement of
its stacking patent, U.S. Patent No. 4,956,694. On November 12, 1998, we filed
an answer to Dense-Pac's counterclaim denying Dense-Pac's claim of infringement
against us and asserting a defense of patent invalidity. Dense-Pac is seeking
injunctive relief and damages equal to 2% of the sales of our IC Tower stacking
products plus interest. As of December 31, 1999, Dense-Pac sought damages,
including interest, totaling approximately $400,000. Dense-Pac has also
requested an award of attorneys' fees and treble damages and has reserved the
right to seek unspecified lost profits as a result of the alleged infringement.
We intend to pursue and defend our position vigorously. Trial is set for
June 2000.
The outcome of this litigation is uncertain. Patent litigation is
particularly complex and can extend for a protracted time, which can
substantially increase the cost of such litigation. In connection with the
Dense-Pac litigation, we have incurred, and expect to continue to incur,
substantial legal fees and expenses. The Dense-Pac litigation has also diverted,
and is expected to continue to divert, the efforts and attention of our key
management and technical personnel. As a result, our pursuit and defense of this
litigation, regardless of its eventual outcome, has been, and will likely
continue to be, costly and time consuming. Should the outcome of the litigation
be adverse to us, we would be required to pay significant monetary damages to
Dense-Pac and would be enjoined from selling those of our products found to
infringe Dense-Pac's patent unless and until we are able to negotiate a license
from Dense-Pac. In the event we obtain a license from Dense-Pac, we would likely
be required to make royalty payments to Dense-Pac with respect to sales of our
products covered by the license. Any such payments would increase our cost of
revenues and reduce our gross profits. There can be no assurance that we could
enter into a licensing arrangement with Dense-Pac on commercially reasonable
terms, if at all. If we are required to pay significant monetary damages, are
enjoined from selling any of our
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products or are required to make substantial royalty payments pursuant to any
such license agreement, our business would be harmed. In addition, if our IC
Tower stacking patent is found to be invalid, our ability to exclude competitors
from making, using or selling the same or similar products to our IC Tower
stacking products would cease and our business would be harmed. See "Risk
Factors--If we are unsuccessful in our suit against Dense-Pac Microsystems for
patent infringement of our IC Tower stacking patent, or if we are unsuccessful
in defending against Dense-Pac's counterclaim of patent infringement and patent
invalidity, our business would be harmed."
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
On June 8, 1998, Interactive Flight Technologies, Inc. filed a lawsuit
against Avnet, Inc. in the Superior Court of Maricopa County, Arizona seeking an
award for direct and consequential damages arising from a transaction in which
we supplied allegedly defective hard disk drives to Avnet for inclusion in an
in-flight entertainment system manufactured by Interactive Flight. We purchased
the hard disk drives from Integral Peripherals, Inc., the manufacturer, through
its distributor, Bell Microsystems, Inc. Integral has since declared bankruptcy
and is not a party to this litigation. On July 16, 1998, Avnet filed a third
party complaint against us for indemnification pursuant to the terms of a
distribution agreement between Avnet and us. On September 18, 1998, we filed an
answer denying the third party complaint and filed a third party complaint
against, among others, Bell Microsystems seeking indemnification and
contribution. On May 24, 1999, Interactive Flight filed a first amended
complaint to add us as an additional defendant. On June 8, 1999, Avnet filed a
cross claim against us seeking indemnification. On June 18, 1999, we answered
the first amended complaint and Avnet's cross claim. We are the beneficiary of a
potential insurance claim against the Chubb Group based on a policy of insurance
originally issued to Integral by Chubb Group and assigned to us as part of a
settlement reached in Integral's bankruptcy proceeding. Interactive Flight is
seeking out-of-pocket damages of approximately $3.0 million and consequential
damages arising from the alleged loss of contracts with several airline carriers
totaling an additional $10.0 million. Trial is set for August 2000.
We intend to pursue and defend our position vigorously. However, this
litigation is in the discovery stage, and we cannot predict its outcome with
certainty. The litigation process is inherently uncertain. We have incurred, and
expect to continue to incur, substantial legal fees and expenses. This
litigation has diverted, and is expected to continue to divert, the efforts and
attention of our key management and technical personnel. As a result, our
pursuit and defense of this litigation, regardless of its eventual outcome, has
been, and will likely continue to be, costly and time consuming. Should the
outcome of this litigation be adverse to us, we would be required to pay
significant monetary damages to Interactive Flight and Avnet and our business
could be harmed. In addition, we can give no assurance that Chubb will honor our
claim for coverage to pay for damages arising out of this litigation. See "Risk
Factors--Success by Interactive Flight Technologies and Avnet in their suit
against us relating to our sale of allegedly defective products would harm our
business."
MICRON ELECTRONICS, INC.
On October 27, 1999 we received a letter from Micron Electronics, Inc.
requesting that we refrain from the manufacture, sale or offer to sell memory
products which infringe Micron's U.S. Patent Nos. 5,661,677 and 5,859,792. We
are presently evaluating Micron's patents and their relationship to our memory
products. If Micron concludes that our products infringe Micron's patents, we
may be sued by Micron for patent infringement. Such litigation could result in
significant expenses and diversion of management time and other resources. If
Micron's patents are found to be valid and our memory products are found to
infringe, we may lose our ability to manufacture, sell or offer to sell certain
memory products, and we may have to seek a license from Micron going forward in
order to use its technology. Further, there can be no assurance that we would be
able to secure a license from Micron
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on commercially reasonable terms, if at all. See "Risks Factors--Risks
associated with patents, proprietary rights and related litigation may adversely
affect our business."
We are currently not a party to any other material legal proceedings.
However, we are involved in several other suits and claims in the ordinary
course of business, and we may from time to time become a party to other legal
proceedings arising in the ordinary course of business.
EMPLOYEES
As of December 31, 1999, we had 323 full-time employees, including 168 in
manufacturing (including test, quality assurance and material management), 91 in
sales and marketing, 42 in finance and administration and 22 in design and
product development. Our employees are not represented by any collective
bargaining agreements and we have never experienced a work stoppage. Management
believes that relations with our employees are good.
FACILITIES
We occupy two leased facilities of approximately 24,500 and 48,600 square
feet in Santa Ana, California, in which our executive offices, manufacturing,
engineering, research and development and testing operations are located. We
lease the 24,500 square foot facility from MDC Land LLC, a limited liability
company owned by Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi, each of
whom is an executive officer and director of Simple Technology. This lease
expires in February 2020 and our current monthly rent due under this lease is
$19,000. We lease the 48,600 square foot facility from a third party and this
lease expires in April 2001. The monthly rent due under this lease is
approximately $32,000. In addition, we lease various small facilities for our
sales offices. We believe that our existing leased space is adequate for our
current operations and that suitable replacement and additional spaces will be
available in the future on commercially reasonable terms. See "Certain
Transactions."
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
Set forth below is certain information concerning our executive officers,
directors and other key employees as of March 1, 2000. Following the completion
of this offering, our board of directors intends to select at least three people
who are not our employees and are otherwise independent to serve as directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Manouch Moshayedi.................. 41 Chief Executive Officer and Chairman of the Board
of Directors
Mike Moshayedi..................... 45 President and Director
Mark Moshayedi..................... 38 Chief Operating Officer, Chief Technical Officer,
Secretary and Director
Dan Moses.......................... 32 Chief Financial Officer and Director
Michael Hajeck..................... 39 Vice President of OEM Division
Carl Swartz........................ 59 Vice President of Strategic Planning and General
Counsel
Shane Mortazavi.................... 47 Vice President of Operations
</TABLE>
MANOUCH MOSHAYEDI, a co-founder of Simple Technology, has served as our
President or Chief Executive Officer and Chairman of the Board of Directors
since our inception in March 1990. From our inception in March 1990 to September
1994, Mr. Moshayedi also served as our Chief Financial Officer. Mr. Moshayedi
graduated with a B.S. in engineering from California State University, Fullerton
and an M.B.A. from Long Island University in New York. Mr. Moshayedi is the
brother of Mike Moshayedi and Mark Moshayedi, both of whom are our executive
officers and directors.
MIKE MOSHAYEDI, a co-founder of Simple Technology, has served as our
director since our inception in March 1990 and our President since January 1995.
From our inception in March 1990 to December 1994, Mr. Moshayedi served as our
Senior Vice President or President of Sales and Marketing and Secretary.
Mr. Moshayedi graduated with a B.S. in engineering from California State
University, Long Beach. Mr. Moshayedi is the brother of Manouch Moshayedi and
Mark Moshayedi, both of whom are our executive officers and directors.
MARK MOSHAYEDI has served as our director since April 1992 and our Chief
Operating Officer, Chief Technical Officer and Secretary since January 1995.
From June 1994 to December 1994, Mr. Moshayedi served as our President of
Research and Development. From our inception in March 1990 to June 1994,
Mr. Moshayedi served as our Senior Vice President. Mr. Moshayedi graduated with
a B.S. in engineering from the University of California, Irvine and an M.B.A.
from Pepperdine University. Mr. Moshayedi is the brother of Manouch Moshayedi
and Mike Moshayedi, both of whom are our executive officers and directors.
DAN MOSES has served as our Chief Financial Officer since September 1994 and
our director since March 2000. From October 1992 to August 1994, Mr. Moses
served as our Controller. Prior to joining Simple Technology, Mr. Moses was a
Senior Auditor with PricewaterhouseCoopers LLP from May 1990 to October 1992.
Mr. Moses graduated with a B.S. in business administration from the University
of California, Riverside and a Master's of Accounting from the University of
Southern California. Mr. Moses is a Certified Public Accountant.
MICHAEL HAJECK joined Simple Technology as our Vice President of OEM
Division in January 1998. From October 1997 to January 1998, Mr. Hajeck was an
independent consultant. From October 1996 to October 1997, Mr. Hajeck was Vice
President of Sales, Americas at SanDisk Corporation, a manufacturer of Flash
memory storage products. From January 1993 to October 1996, Mr. Hajeck was
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Director of Sales at SanDisk Corporation. Mr. Hajeck graduated with a B.S. and
Master's in Engineering from Rensselaer Polytechnic Institute.
CARL SWARTZ joined Simple Technology as our Vice President of Strategic
Planning and General Counsel in January 2000. From October 1999 to
January 2000, Mr. Swartz was Chief Operating Officer with American
BioScience, Inc., a biotechnology research and technology company. From
January 1995 to October 1999, Mr. Swartz was our Vice President of Strategic
Planning and General Counsel. Mr. Swartz graduated with a B.S. in engineering
from the United States Naval Academy, a M.S. in engineering from the University
of California, Los Angeles and a J.D. from Georgetown University.
SHANE MORTAZAVI joined Simple Technology as our Vice President of Operations
in March 2000. From June 1992 to February 2000, Mr. Mortazavi was Manufacturing
Operations Manager at General Monitors, Inc., a manufacturer of combustible and
toxic gas monitoring and flame detection products. Mr. Mortazavi graduated with
a B.S. in industrial engineering and an M.S. in operations research from the
University of California, Berkeley.
BOARD OF DIRECTORS
Following the completion of this offering, our board of directors will have
seven members, including three directors who are not employees and who are
otherwise independent. Each director currently serves until the next annual
meeting of shareholders or until his or her successor is duly elected and
qualified. At each annual meeting of shareholders, the successors to directors
whose term will then expire will be elected to serve until the next annual
meeting of shareholders. In addition, our amended and restated bylaws provide
that the authorized number of directors will be between four and seven, with the
exact number to be determined by a majority of our board of directors or
shareholders.
COMMITTEES OF THE BOARD OF DIRECTORS
Following the completion of this offering, our board of directors intends to
establish an audit committee to be composed of three independent directors. The
audit committee will generally meet with and consider suggestions from members
of management and our internal accounting personnel, as well as our independent
accountants, concerning our financial operations.
The audit committee also has the responsibility to:
- Review the audit committee charter at least annually and recommend any
changes to our board of directors;
- Review our annual financial statements and any other relevant reports or
other financial information;
- Review the regular internal financial reports prepared by management and
any internal auditing department;
- Recommend to the board of directors the selection of the independent
accountants and approve the fees and other compensation to be paid to the
independent accountants;
- Review and discuss with the accountants all significant relationships the
accountants have with us to determine the accountants' independence;
- Review the performance of the independent accountants and approve any
proposed discharge of the independent accountants when circumstances
warrant; and
- Following completion of the annual audit, review separately with the
independent accountants, the internal auditing department, if any, and
management any significant difficulties encountered during the course of
the audit.
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Following the completion of this offering, our board of directors intends to
establish a compensation committee to be composed of three independent
directors. The compensation committee will be responsible for the design,
review, recommendation and approval of compensation arrangements for our
directors, executive officers and key employees, and for the administration of
our 2000 Stock Incentive Plan, including the approval of grants under such plan
to our employees, consultants and directors, and our 2000 Employee Stock Plan.
Our board of directors may establish, from time to time, other committees to
facilitate the management of our business.
BOARD COMPENSATION
We do not provide cash compensation to employee directors for serving on our
board of directors or for attendance of meetings of committees of the board of
directors. Each non-employee member of our board of directors receives $3,000
for attendance at each meeting of the board of directors, however, they do not
receive compensation for attendance at meetings of committees of the board of
directors. In addition, non-employee directors are reimbursed for reasonable
travel and other out-of-pocket expenses incurred in connection with attendance
at meetings of the board of directors and committees of the board of directors.
Employee directors are eligible to receive options and be issued shares of
common stock directly under our 2000 Stock Incentive Plan. Non-employee
directors will, upon their initial election or appointment to the board, receive
an automatic option grant to purchase shares of common stock that will
vest in equal annual installments over the five-year period from the grant date.
See "--Stock Plans/Employee Compensation Programs."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a compensation committee or other board committee performing
equivalent functions in 1999. Manouch Moshayedi, Mike Moshayedi and Mark
Moshayedi participated in deliberations of our board of directors concerning
executive officer compensation. MDC Land Corporation, MDC Land LLC, XYZ, Inc.
and Qualcenter, Inc. are companies wholly-owned by Manouch Moshayedi, Mike
Moshayedi and Mark Moshayedi. In addition to being the only owners of these
companies, Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi are also either
a director and/or executive officer of each of these companies. Following the
completion of this offering, our board of directors will establish a
compensation committee composed of three independent directors that will result
in none of our executive officers being a member of our compensation committee.
EMPLOYMENT AGREEMENTS
We renewed our employment agreement with Manouch Moshayedi, our Chief
Executive Officer and Chairman of the Board of Directors, in March 2000. Under
this agreement, Mr. Moshayedi is entitled to an annual base salary of $440,000
and is required to devote all of his working time and attention to our business.
In addition, this agreement also contains non-competition restrictions and
covenants, including provisions prohibiting Mr. Moshayedi from competing with us
during his employment with us and for a one-year period after his employment
with us. Mr. Moshayedi's employment with us is at-will and may be terminated by
either party at any time, with or without notice, and with or without cause. In
addition, Mr. Moshayedi has entered into a non-disclosure agreement relating to
our intellectual property and proprietary information under which he has agreed
to assign all intellectual property rights developed during the course of his
employment to us.
We renewed our employment agreement with Mike Moshayedi, our President, in
March 2000. Under this agreement, Mr. Moshayedi is entitled to an annual base
salary of $440,000 and is required to devote all of his working time and
attention to our business. In addition, this agreement also contains
non-competition restrictions and covenants, including provisions prohibiting
Mr. Moshayedi
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from competing with us during his employment with us and for a one-year period
after his employment with us. Mr. Moshayedi's employment with us is at-will and
may be terminated by either party at any time, with or without notice, and with
or without cause. In addition, Mr. Moshayedi has entered into a non-disclosure
agreement relating to our intellectual property and proprietary information
under which he has agreed to assign all intellectual property rights developed
during the course of his employment to us.
We also renewed our employment agreement with Mark Moshayedi, our Chief
Operating Officer, Chief Technical Officer and Secretary, in March 2000. Under
this agreement, Mr. Moshayedi is entitled to an annual base salary of $440,000
and is required to devote all of his working time and attention to our business.
In addition, this agreement also contains non-competition restrictions and
covenants, including provisions prohibiting Mr. Moshayedi from competing with us
during his employment with us and for a one-year period after his employment
with us. Mr. Moshayedi's employment with us is at-will and may be terminated by
either party at any time, with or without notice, and with or without cause. In
addition, Mr. Moshayedi has entered into a non-disclosure agreement relating to
our intellectual property and proprietary information under which he has agreed
to assign all intellectual property rights developed during the course of his
employment to us.
We renewed our employment agreement with Dan Moses, our Chief Financial
Officer, in March 2000. Under this agreement, Mr. Moses is entitled to an annual
base salary of $150,000 and is required to devote all of his working time and
attention to our business. In addition, this agreement also contains
non-competition restrictions and covenants, including provisions prohibiting
Mr. Moses from competing with us during his employment with us and for a
one-year period after his employment with us. Mr. Moses's employment with us is
at-will and may be terminated by either party at any time, with or without
notice, and with or without cause. In addition, Mr. Moses has entered into a
non-disclosure agreement relating to our intellectual property and proprietary
information under which he has agreed to assign all intellectual property rights
developed during the course of his employment to us.
We renewed our employment agreement with Michael Hajeck, our Vice President
of OEM Division, in March 2000. Under this agreement and his employment offer
letter, Mr. Hajeck is entitled to an annual base salary of $250,000 and a
monthly commission based on the dollar value of net sales of products sold by
the OEM Division for that particular month. Under his employment agreement,
Mr. Hajeck is required to devote all of his working time and attention to our
business. In addition, his employment agreement also contains non-competition
restrictions and covenants, including provisions prohibiting Mr. Hajeck from
competing with us during his employment with us and for a one-year period after
his employment with us. Mr. Hajeck's employment with us is at-will and may be
terminated by either party at any time, with or without notice, and with or
without cause. In addition, Mr. Hajeck has entered into a non-disclosure
agreement relating to our intellectual property and proprietary information
under which he has agreed to assign all intellectual property rights developed
during the course of his employment to us.
We also renewed our employment agreement with Carl Swartz, our Vice
President of Strategic Planning and General Counsel, in March 2000. Under this
agreement, Mr. Swartz is entitled to an annual base salary of $200,000 and is
required to devote all of his working time and attention to our business. In
addition, this agreement also contains non-competition restrictions and
covenants, including provisions prohibiting Mr. Swartz from competing with us
during his employment with us and for a one-year period after his employment
with us. Mr. Swartz's employment with us is at-will and may be terminated by
either party at any time, with or without notice, and with or without cause. In
addition, Mr. Swartz has entered into a non-disclosure agreement relating to our
intellectual property and proprietary information under which he has agreed to
assign all intellectual property rights developed during the course of his
employment to us.
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We entered into an employment agreement with Shane Mortazavi, our Vice
President of Operations, in March 2000. Under this agreement, Mr. Mortazavi is
entitled to an annual base salary of $160,000 and is required to devote all of
his working time and attention to our business. In addition, this agreement also
contains non-competition restrictions and covenants, including provisions
prohibiting Mr. Mortazavi from competing with us during his employment with us
and for a one-year period after his employment with us. Mr. Mortazavi's
employment with us is at-will and may be terminated by either party at any time,
with or without notice, and with or without cause. In addition, Mr. Mortazavi
has entered into a non-disclosure agreement relating to our intellectual
property and proprietary information under which he has agreed to assign all
intellectual property rights developed during the course of his employment to
us.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth all compensation awarded
to, earned by or paid to our Chief Executive Officer and each of our other five
highest paid executive officers whose annual salary and bonus exceeded $100,000
during 1999 for services rendered in all capacities to us during the year ended
December 31, 1999. These officers are referred to in this prospectus as the
"Named Executive Officers." All option grants were made under our 1996 Stock
Option Plan, which will be succeeded by our 2000 Stock Incentive Plan upon the
completion of this offering. See "--Stock Plans/Employee Compensation Programs."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
----------------------------- OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
- --------------------------- ------------- ------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Manouch Moshayedi(1)............ 440,000 -- 103,700(4) -- 18,600(5)
Chief Executive Officer and
Chairman of the Board of
Directors
Mike Moshayedi(2)............... 440,000 -- 79,500(6) -- 18,600(7)
President and Director
Mark Moshayedi(3)............... 428,000 -- 66,400(8) -- 18,600(9)
Chief Operating Officer, Chief
Technical Officer, Secretary
and Director
Dan Moses....................... 138,200(10) -- -- -- 5,000(11)
Chief Financial Officer and
Director
Michael Hajeck.................. 236,500 150,100 -- 5,000(12)
Vice President of OEM Division
Carl Swartz..................... 192,300(13) -- -- -- 5,000(14)
Vice President of Strategic
Planning and General Counsel
</TABLE>
- ------------------------------
(1) In 1999, as our beneficial shareholder, Manouch Moshayedi received S
corporation distributions for personal income taxes and other purposes of
approximately $556,200.
(2) In 1999, as our beneficial shareholder, Mike Moshayedi received S
corporation distributions for personal income taxes and other purposes of
approximately $577,900.
(3) In 1999, as our beneficial shareholder, Mark Moshayedi received S
corporation distributions for personal income taxes and other purposes of
approximately $502,500.
(4) Includes (a) $55,700 for personal travel and entertainment expenses,
(b) $11,700 for personal use of our company automobiles, (c) $1,700 for
personal use of company services and equipment, (d) $7,600 for personal
accounting services paid
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<PAGE>
by us, (e) $500 for auto insurance premiums paid on Manouch Moshayedi's
behalf and (f) interest income of $26,500 in connection with below-market
interest rate loans by us to affiliates owned by Manouch Moshayedi.
(5) Includes (a) $13,600 for life insurance premiums paid on Manouch
Moshayedi's behalf and (b) $5,000 in 401(k) matching contributions paid by
us.
(6) Includes (a) $28,500 for personal travel and entertainment expenses,
(b) $13,600 for personal use of our company automobiles, (c) $1,700 for
personal use of company services and equipment, (d) $7,600 for personal
accounting services paid by us, (e) $1,600 for auto insurance premiums paid
on Mike Moshayedi's behalf and (f) interest income of $26,500 in connection
with below-market interest rate loans by us to affiliates owned by Mike
Moshayedi.
(7) Includes (a) $13,600 for life insurance premiums paid on Mike Moshayedi's
behalf and (b) $5,000 in 401(k) matching contributions paid by us.
(8) Includes (a) $16,700 for personal travel and entertainment expenses,
(b) $12,700 for personal use of our company automobiles, (c) $1,700 for
personal use of company services and equipment, (d) $7,600 for personal
accounting services paid by us, (e) $1,200 for auto insurance premiums on
Mark Moshayedi's behalf and (f) interest income of $26,500 in connection
with below-market interest rate loans by us to affiliates owned by Mark
Moshayedi.
(9) Includes (a) $13,600 for life insurance premiums paid on Mark Moshayedi's
behalf and (b) $5,000 in 401(k) matching contributions paid by us.
(10) Includes $6,300 for an automobile allowance.
(11) Represents 401(k) matching contributions paid by us.
(12) Represents 401(k) matching contributions paid by us.
(13) Represents salary earned for the period from January 1, 1999 through
October 5, 1999.
(14) Represents 401(k) matching contributions paid by us.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding options granted to our
Named Executive Officers during the year ended December 31, 1999. We did not
grant any stock appreciation rights during the year ended December 31, 1999. In
determining the fair market value of the common stock, the board of directors
considered various factors, including our financial condition and business
prospects, operating results, the absence of a market for the common stock and
risks normally associated with investments in companies engaged in similar
businesses.
During the year ended December 31, 1999, we granted options to purchase
shares of common stock. All options were granted under our 1996 Stock
Option Plan, which will be succeeded by our 2000 Stock Incentive Plan upon the
completion of this offering. The exercise price may be paid in cash, check,
promissory note, shares of our common stock valued at fair market value on the
exercise date or a cashless exercise procedure involving a same-day sale of the
purchased shares.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT
-------------------------------------------------- ASSUMED
NUMBER OF ANNUAL RATES OF
SHARES OF STOCK PRICE
COMMON % OF TOTAL APPRECIATION
STOCK OPTIONS EXERCISE FOR OPTION
UNDERLYING GRANTED TO PRICE PER TERM
OPTIONS EMPLOYEES IN SHARE EXPIRATION -------------------
NAME GRANTED(#) 1999 ($/SHARE) DATE 5%($) 10%($)
- ---- ---------- ------------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Manouch Moshayedi....................... -- -- -- -- -- --
Mike Moshayedi.......................... -- -- -- -- -- --
Mark Moshayedi.......................... -- -- -- -- -- --
Dan Moses............................... -- -- -- -- -- --
Michael Hajeck.......................... (1) 8.8 01/25/09
(2) 66.2 01/25/09
Carl Swartz............................. -- -- -- -- -- --
</TABLE>
- ------------------------------
(1) Non-statutory stock options
(2) Incentive stock options
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<PAGE>
The term of each option granted is generally ten years from the date of the
grant. Options may terminate before their expiration dates, if the optionee's
status as an employee is terminated or upon the optionee's death or disability.
Each option listed in the table was granted under our 1996 Stock Option Plan,
which will be succeeded by our 2000 Stock Incentive Plan upon the completion of
this offering. Mr. Hajeck's non-statutory stock option for shares is
subject to the following vesting schedule:
- shares shall vest upon the completion of one year of employment
measured from the vesting commencement date;
- shares shall vest in equal monthly installments over the 11 month
period following the one year anniversary of employment;
- shares shall vest upon completion of employment through
December 16, 2000; and
- shares shall vest upon completion of employment through
December 16, 2001;
Mr. Hajeck's incentive stock option for shares is subject to the
following vesting schedule:
- shares shall vest upon the completion of one year of employment
measured from the vesting commencement date; and
- shares shall vest in equal monthly installments over the 25 month
period following the one year anniversary of employment, except that on
December 16, 2000 and 2001, shares shall vest. See "--Stock
Plans/Employee Compensation Programs."
Potential realizable values are net of exercise price, but before the
payment of taxes associated with exercise. Amounts represent hypothetical gains
that could be achieved for the respective options if exercised at the end of the
option term. The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange Commission and
do not represent our estimate or projection of our future common stock prices.
These amounts represent assumed rates of appreciation in the value of the common
stock from the fair market value on the date of grant. Actual gains, if any, on
stock option exercises are dependent on the future performance of the common
stock and overall stock market conditions. The amounts reflected in the table
may not necessarily be achieved.
AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth the number and value of unexercised options
held by our Named Executive Officers at December 31, 1999. There was no public
trading market for the common stock as of December 31, 1999. Accordingly, the
value of unexercised options has been calculated by subtracting the exercise
price from the fair market value of $ per share of common stock on
December 31, 1999,
67
<PAGE>
as determined by the board of directors, multiplied by the number of shares
underlying the option. None of our Named Executive Officers exercised options in
1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
--------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Manouch Moshayedi.............................. -- -- -- --
Mike Moshayedi................................. -- -- -- --
Mark Moshayedi................................. -- -- -- --
Dan Moses......................................
Michael Hajeck.................................
Carl Swartz....................................
</TABLE>
STOCK PLANS/EMPLOYEE COMPENSATION PROGRAMS
2000 STOCK INCENTIVE PLAN
INTRODUCTION. Our 2000 Stock Incentive Plan is intended to serve as the
successor equity incentive program to our 1996 Stock Option Plan. Our 2000 Stock
Incentive Plan was adopted by our board of directors in March 2000 and approved
by our shareholders in March 2000. Our 2000 Stock Incentive Plan will become
effective on the date the underwriting agreement for this offering is signed. At
that time, all outstanding options under the 1996 Stock Option Plan will be
transferred to our 2000 Stock Incentive Plan, and no further option grants will
be made under that predecessor plan. The transferred options will continue to be
governed by their existing terms, unless our compensation committee elects to
extend one or more features of our 2000 Stock Incentive Plan to those options.
Except as otherwise noted below, the transferred options have substantially the
same terms as will be in effect for grants made under the discretionary option
grant program of our 2000 Stock Incentive Plan.
SHARE RESERVE. shares of common stock have been reserved for
issuance under our 2000 Stock Incentive Plan. Such share reserve consists of the
number of shares we estimate will be carried over from our 1996 plan, including
the shares subject to outstanding options thereunder, plus an additional
increase of approximately shares. The initial reserve cannot exceed
shares. The number of shares of common stock reserved for issuance under
our 2000 Stock Incentive Plan will automatically increase on the first trading
day in January of each calendar year, beginning in calendar year 2001, by an
amount equal to 4% of the total number of shares of common stock outstanding on
the last trading day in December of the preceding calendar year, but in no event
will any such annual increase exceed shares. In addition, no
participant in our 2000 Stock Incentive Plan may be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than shares of common stock per calendar year.
EQUITY INCENTIVE PROGRAMS. Our 2000 Stock Incentive Plan is divided into
five separate components:
- The discretionary option grant program, under which eligible individuals
in our employ or service may be granted options to purchase shares of
common stock at an exercise price not less than 100% of the fair market
value of those shares on the grant date.
- The stock issuance program, under which eligible individuals may be issued
shares of common stock directly, through the purchase of such shares at a
price not less than 100% of their fair market value at the time of
issuance or as a bonus tied to the attainment of performance milestones or
the completion of a specified period of service.
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<PAGE>
- The salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary to the acquisition of
special below-market stock option grants.
- The automatic option grant program, under which option grants will
automatically be made to new non-employee board members to purchase shares
of common stock at an exercise price equal to 100% of the fair market
value of those shares on the date those individuals are first elected or
appointed to the board.
- The director fee option grant program, under which our non-employee board
members may be given the opportunity to apply a portion of the annual
retainer fee, if any, otherwise payable to them in cash each year to the
acquisition of special below-market option grants.
ELIGIBILITY. The individuals eligible to participate in our 2000 Stock
Incentive Plan include our officers and other employees, our non-employee board
members and any consultants we hire.
ADMINISTRATION. The discretionary option grant program and the stock
issuance program will be administered by the compensation committee. This
committee will determine which eligible individuals are to receive option grants
or stock issuances under those programs, the time or times when such option
grants or stock issuances are to be made, the number of shares subject to each
such grant or issuance, the status of any granted option as either an incentive
stock option or a non-statutory stock option under the federal tax laws, the
vesting schedule to be in effect for the option grant or stock issuance and the
maximum term for which any granted option is to remain outstanding. The
compensation committee will also have the exclusive authority to select the
executive officers and other highly compensated employees who may participate in
the salary investment option grant program in the event that program is
activated for one or more calendar years.
PLAN FEATURES. Our 2000 Stock Incentive Plan will include the following
features:
- The exercise price for the shares of common stock subject to option grants
made under our 2000 Stock Incentive Plan may be paid in cash or in shares
of common stock valued at fair market value on the exercise date. The
option may also be exercised through a same-day sale program without any
cash outlay by the optionee. In addition, the plan administrator may
provide financial assistance to one or more optionees in the exercise of
their outstanding options or the purchase of their unvested shares by
allowing such individuals to deliver a full-recourse, interest-bearing
promissory note in payment of the exercise price and any associated
withholding taxes incurred in connection with such exercise or purchase.
- The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including options
transferred from the 1996 plan, in return for the grant of new options for
the same or a different number of option shares with an exercise price per
share based upon the fair market value of our common stock on the new
grant date.
- Stock appreciation rights may be issued under the discretionary option
grant program. Such rights will provide the holders with the election to
surrender their outstanding options for an appreciation distribution from
us equal to the fair market value of the vested shares of common stock
subject to the surrendered option, less the aggregate exercise price
payable for those shares. Such appreciation distribution may be made in
cash or in shares of common stock. None of the outstanding options under
our 1996 plan contain any stock appreciation rights.
CHANGE IN CONTROL. The 2000 Stock Incentive Plan will include the following
change in control provisions which may result in the accelerated vesting of
outstanding option grants and stock issuances:
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<PAGE>
- In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which is
not assumed by the successor corporation will automatically accelerate in
full, and all unvested shares under the discretionary option grant and
stock issuance programs will immediately vest, except to the extent our
repurchase rights with respect to those shares are to be assigned to the
successor corporation.
- The compensation committee will have complete discretion to structure one
or more options under the discretionary option grant program so those
options will vest as to all the option shares in the event those options
are assumed in the acquisition but the optionee's service with us or the
acquiring entity is subsequently terminated. The vesting of outstanding
shares under the stock issuance program may be accelerated upon similar
terms and conditions.
- The compensation committee will also have the authority to grant options
which will immediately vest in the event we are acquired, whether or not
those options are assumed by the successor corporation.
- The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than 50% of our outstanding voting stock or a change in the majority
of our board through one or more contested elections for board membership.
Such accelerated vesting may occur either at the time of such transaction
or upon the subsequent termination of the individual's service.
- The options currently outstanding under our 1996 Stock Option Plan will
immediately vest in the event we are acquired by merger or sale of
substantially all of our assets, unless those options are assumed by the
acquiring entity or our repurchase rights with respect to any unvested
shares subject to those options are assigned to such entity.
SALARY INVESTMENT OPTION GRANT PROGRAM. In the event the compensation
committee elects to activate the salary investment option grant program for one
or more calendar years, each of our executive officers and other highly
compensated employees selected for participation may elect, prior to the start
of the calendar year, to reduce his or her base salary for that calendar year by
a specified dollar amount not less than $10,000 nor more than $50,000. Each
selected individual who files such a timely election will automatically be
granted, on the first trading day in January of the calendar year for which his
or her salary reduction is to be in effect, an option to purchase that number of
shares of common stock determined by dividing the salary reduction amount by
two-thirds of the fair market value per share of our common stock on the grant
date. The option will be exercisable at a price per share equal to one-third of
the fair market value of the option shares on the grant date. As a result, the
option will be structured so that the fair market value of the option shares on
the grant date less the exercise price payable for those shares will be equal to
the amount by which the optionee's salary is reduced under the program. The
option will become exercisable in a series of 12 equal monthly installments over
the calendar year for which the salary reduction is to be in effect.
AUTOMATIC OPTION GRANT PROGRAM. Under the automatic option grant program,
each individual who first becomes a non-employee board member at any time after
the completion of this offering will automatically receive an option grant for
shares on the date such individual joins the board, provided such
individual has not been in our prior employ.
Each automatic grant will have an exercise price per share equal to the fair
market value per share of our common stock on the grant date and will have a
term of ten years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid per
share, any shares purchased under the option which are not vested at the time of
the optionee's cessation of board service. The shares subject to each automatic
option grant will vest in a series of five successive annual
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<PAGE>
installments upon the optionee's completion of each year of board service over
the five-year period measured from the grant date. However, the shares will
immediately vest in full upon certain changes in control or ownership of Simple
Technology or upon the optionee's death or disability while a board member.
DIRECTOR FEE OPTION GRANT PROGRAM. Should the director fee option grant
program be activated in the future, each non-employee board member will have the
opportunity to apply all or a portion of any cash retainer fee for the year to
the acquisition of a below-market option grant. The option grant will
automatically be made on the first trading day in January in the year for which
the retainer fee would otherwise be payable in cash. The option will have an
exercise price per share equal to one-third of the fair market value of the
option shares on the grant date, and the number of shares subject to the option
will be determined by dividing the amount of the retainer fee applied to the
program by two-thirds of the fair market value per share of our common stock on
the grant date. As a result, the option will be structured so that the fair
market value of the option shares on the grant date less the exercise price
payable for those shares will be equal to the portion of the retainer fee
applied to that option. The option will become exercisable in a series of 12
equal monthly installments over the calendar year for which the election is to
be in effect. However, the option will become immediately exercisable for all
the option shares upon the optionee's death or disability while serving as a
board member.
Our 2000 Stock Incentive Plan will also have the following features:
- Outstanding options under the salary investment and director fee option
grant programs will immediately vest if we are acquired by a merger or
asset sale or if there is a successful tender offer for more than 50% of
our outstanding voting stock or a change in the majority of our board
through one or more contested elections.
- Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights may
also be granted to one or more officers as part of their option grants
under the discretionary option grant program. Options with this feature
may be surrendered to us upon the successful completion of a hostile
tender offer for more than 50% of our outstanding voting stock. In return
for the surrendered option, the optionee will be entitled to a cash
distribution from us in an amount per surrendered option share based upon
the highest price per share of our common stock paid in that tender offer.
- The board will be able to amend or modify the 2000 Stock Incentive Plan at
any time, subject to any required shareholder approval. The 2000 Stock
Incentive Plan will terminate no later than 2010.
2000 EMPLOYEE STOCK PURCHASE PLAN
INTRODUCTION. Our 2000 Employee Stock Purchase Plan was adopted by the
board of directors and approved by our shareholders in March 2000. The plan will
become effective immediately upon the signing of the underwriting agreement for
this offering. The plan is designed to allow our eligible employees and the
eligible employees of our participating subsidiaries to purchase shares of our
common stock, at semi-annual intervals, with their accumulated payroll
deductions.
SHARE RESERVE. shares of our common stock will initially be
reserved for issuance. The reserve will automatically increase on the first
trading day in January each calendar year, beginning in calendar year 2001, by
an amount equal to 1% of the total number of outstanding shares of our common
stock on the last trading day in December in the prior calendar year. In no
event will any such annual increase exceed shares.
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<PAGE>
OFFERING PERIODS. The plan will have a series of successive overlapping
offering periods, with a new offering period beginning on the first business day
of February and August each year. Each offering period will have a duration of
24 months, unless otherwise determined by the compensation committee. However,
the initial offering period may have a duration in excess of 24 months and will
start on the date the underwriting agreement for this offering is signed and
will end on the last business day in . The next offering period will
start on the first business day in .
ELIGIBLE EMPLOYEES. Individuals scheduled to work more than 20 hours per
week for more than five calendar months per year may join an offering period on
the start date of that period. However, employees may participate in only one
offering period at a time.
PAYROLL DEDUCTIONS. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated payroll deductions
will be applied to the purchase of shares on the participant's behalf on each
semi-annual purchase date. The purchase price per share will be equal to 85% of
the fair market value per share on the start date of the offering period in
which the participant is enrolled or, if lower, 85% of the fair market value per
share on the semi-annual purchase date. Semi-annual purchase dates will occur on
the last business day of January and July each year. However, a participant may
not purchase more than shares on any purchase date, and not more than
shares may be purchased in total by all participants on any purchase date.
Our compensation committee will have the authority to change these limitations
for any subsequent offering period.
RESET FEATURE. If the fair market value per share of our common stock on
any purchase date within a two year offering period is less than the fair market
value per share on the start date of that offering period, then the offering
period will automatically terminate, and a new two-year offering period will
begin on the next business day. All participants in the terminated offering will
be transferred to the new offering period.
CHANGE IN CONTROL. Should we be acquired by merger or sale of substantially
all of our assets or more than fifty percent of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately prior to
the effective date of the acquisition. The purchase price will be equal to 85%
of the market value per share on the start date of the offering period in which
the participant is enrolled at the time of the acquisition, or, if lower, 85% of
the fair market value per share immediately prior to the acquisition.
PLAN PROVISIONS. The following provisions will also be in effect under the
plan:
- The plan will terminate no later than the last business day of
.
- The board may at any time amend, suspend or discontinue the plan. However,
certain amendments may require shareholder approval.
401(K) PROFIT SHARING PLAN
We adopted a 401(k) profit sharing plan on January 1, 1991. The plan covers
all full-time employees on our U.S. payroll who are at least 21 years of age.
Employees become eligible to participate in the plan after they have worked at
least six months, commencing on the date of hire. The plan provides for
voluntary employee contributions up to 20% of their annual pre-tax compensation,
subject to the maximum limit allowed by the Internal Revenue Service guidelines,
which is currently $10,500 annually. We make matching contributions to each
participating employee based on his or her voluntary contributions to the plan.
We currently match one-half of an employee's matchable contributions to the plan
which cannot exceed 10% of their salary. Our matching contributions to the plan
are subject to vesting at the rate of 20% per year beginning after the
employee's second year of employment with us. The plan is intended to qualify
under Section 401 of the Internal Revenue Code
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so that contributions by employees or by us to the plan, and income earned on
the plan contributions, are not taxable to employees until withdrawn from the
plan, and so that contributions by us, if any, will be deductible by us when
made. The trustee under the plan, at the discretion of each participant, invests
the employee contributions to the plan in selected investment options. For the
year ended December 31, 1999, we have made matching contributions of
approximately $339,000 to the plan.
We may also make, in our discretion, annual profit sharing contributions on
behalf of eligible employees. Each employee who is a plan participant on the
last day of the plan year and has completed at least 1,000 hours of service
during the year is entitled to a share of any profit sharing contribution we
make for the plan year. Our profit sharing contributions are subject to vesting
at the rate of 20% per year beginning after the employee's second year of
employment with us. We did not make any profit sharing contributions to the plan
for the year ended December 31, 1999.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our amended and restated articles of incorporation limit the personal
liability of our directors for monetary damages to the fullest extent permitted
by the California General Corporation Law. Under California law, a director's
liability to a company or its shareholders may not be limited:
- For acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law;
- For acts or omissions that a director believes to be contrary to the best
interests of the company or its shareholders or that involve the absence
of good faith on the part of the director;
- For any transaction from which a director derived an improper personal
benefit;
- For acts or omissions that show a reckless disregard for the director's
duty to the company or its shareholders in circumstances in which the
director was aware, or should have been aware, in the ordinary course of
performing the director's duties, of a risk of serious injury to the
company or its shareholders;
- For acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abdication of the director's duty to the company or its
shareholders;
- Under Section 310 of the California General Corporation Law concerning
contracts or transactions between the company and a director; or
- Under Section 316 of the California General Corporation Law concerning
directors' liability for improper dividends, loans and guarantees.
The limitation of liability does not affect the availability of injunctions
and other equitable remedies available to our shareholders for any violation by
a director of the director's fiduciary duty to us or our shareholders.
Our amended and restated articles of incorporation also include an
authorization for us to indemnify our "agents," as defined in Section 317 of the
California General Corporation Law, through bylaw provisions, by agreement with
the agents, vote of our shareholders or disinterested directors, or otherwise,
to the fullest extent permitted by law. Pursuant to this provision, our amended
and restated bylaws provide for indemnification of our directors, officers and
employees. In addition, we may, at our discretion, provide indemnification to
persons whom we are not obligated to indemnify. The amended and restated bylaws
also allow us to enter into indemnity agreements with individual directors,
officers, employees and other agents.
We intend to enter into indemnification agreements with our officers and
directors prior to the completion of this offering. These agreements contain
provisions that may require us, among other things, to indemnify these officers
and directors against liabilities that may arise because of their status
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or service as officers or directors, except for liabilities arising from willful
misconduct of a culpable nature, advance their expenses incurred as a result of
any proceeding against them as to which they could be indemnified, and obtain
officers' and directors' liability insurance if it is maintained for other
officers and directors. These agreements do not require us to indemnify our
directors and officers in situations where:
- The remuneration rendered against our officer and director is determined
by final judgment or other final adjudication that such remuneration was
in violation of law;
- A judgment is rendered against the director or officer for an accounting
of profits made from the purchase or sale of our securities pursuant to
the provisions of Section 16(b) of the Securities Exchange Act of 1934, as
amended or similar provisions of any federal, state or local statutory
laws;
- The officer's or director's conduct is adjudged to have been knowingly
fraudulent or deliberately dishonest, or constitutes willful misconduct;
or
- A court determines that indemnification under the circumstances is not
lawful.
Prior to the completion of this offering, we intend to obtain directors' and
officers' liability insurance. At present, we are not aware of any pending or
threatened litigation or proceeding involving a director, officer, employee or
agent in which indemnification would be required or permitted. We believe that
our charter provisions and indemnification agreements are necessary to attract
and retain qualified persons as directors and officers.
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CERTAIN TRANSACTIONS
THE TRANSACTIONS SET FORTH BELOW WERE MADE WHILE WE WERE A PRIVATELY HELD
CORPORATION AND CERTAIN OF THE TRANSACTIONS MAY BE ON TERMS MORE FAVORABLE TO
OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS AND THEIR AFFILIATES THAN THEY
COULD OBTAIN IN A TRANSACTION WITH AN UNAFFILIATED PARTY. ALL FUTURE
TRANSACTIONS, INCLUDING LOANS, IF ANY, BETWEEN US AND OUR OFFICERS, DIRECTORS
AND PRINCIPAL SHAREHOLDERS AND THEIR AFFILIATES AND ANY TRANSACTIONS BETWEEN US
AND ANY ENTITY WITH WHICH OUR OFFICERS, DIRECTORS OR PRINCIPAL SHAREHOLDERS ARE
AFFILIATED WILL BE APPROVED BY A MAJORITY OF THE BOARD OF DIRECTORS, INCLUDING A
MAJORITY OF THE INDEPENDENT AND DISINTERESTED OUTSIDE DIRECTORS OF THE BOARD OF
DIRECTORS AND WILL BE ON TERMS NO LESS FAVORABLE TO US THAN COULD BE OBTAINED
FROM UNAFFILIATED THIRD PARTIES.
S CORPORATION DISTRIBUTIONS TO SHAREHOLDERS FOR TAXES
Since our formation in March 1990, we have elected for federal and state
income tax purposes to be treated as an S corporation under Subchapter S of the
Internal Revenue Code of 1986 and comparable state tax laws. An S corporation
generally is not subject to corporate-level income tax. However, California
levies an S corporation tax of approximately 1.5%, which we are required to pay.
In addition to the California S corporation tax that we pay, our existing
shareholders have been taxed directly on our earnings for federal and state
income tax purposes whether or not the earnings were distributed.
We have made cash distributions of a portion of our earnings to certain of
our existing shareholders for reasons including payment of their overall
personal income tax liabilities. These shareholders have transferred amounts in
excess of their pro rata share of these distributions to our other shareholders
in order to ensure that all of our shareholders have received pro rata
distributions in accordance with rules applicable to S corporations. The
aggregate net cash distributions for overall personal income tax liabilities
were approximately $237,000 in 1999 and $380,000 in 1997. In 1998, certain of
our existing shareholders received overpayment refunds of approximately
$105,000, which they remitted to us on behalf of all our existing shareholders.
For financial statement purposes, the distributions to our existing shareholders
were unequal due to their differing personal tax liabilities. In 1999, net cash
distributions for personal income tax liabilities and other purposes were
$556,000 to Manouch Moshayedi, $578,000 to Mike Moshayedi and $503,000 to Mark
Moshayedi. In 1997, net cash distributions for personal income tax liabilities
and other purposes were $56,000 to Manouch Moshayedi and $369,000 to Mike
Moshayedi, and overpayment refunds of $45,000 were remitted to us by Mark
Moshayedi. In 1998, overpayment refunds were remitted to us in the amount of
$15,000 by Manouch Moshayedi, $38,000 by Mike Moshayedi and $52,000 by Mark
Moshayedi. For tax purposes, equal net cash distributions for personal income
tax liabilities and other purposes were made to each of our existing
shareholders of $502,000 in 1999 and $170,000 in 1997. For tax purposes, the
excess of the net cash distributions for financial statement purposes over the
net cash distributions for tax purposes is treated as a loan receivable from the
applicable shareholder to us. For tax purposes, the overpayment refunds remitted
to us by the existing shareholders in 1998 reduced this loan receivable from the
applicable shareholder to us.
Our status as an S corporation was inadvertently terminated as of
November 11, 1996 and May 14, 1999, as a result of transfers by certain of our
existing shareholders of all of their common stock to trusts established for the
benefit of their children and themselves. We have filed a request for a private
letter ruling with the IRS with respect to the November 12, 1996 transfers,
seeking to have our S corporation status reinstated for the period from and
after November 12, 1996. In addition, we have filed a statement with the IRS
with respect to the May 14, 1999 transfers, pursuant to a published revenue
procedure, to obtain automatic reinstatement of our S corporation status for the
period from and after May 14, 1999. If the IRS does not reinstate our S
corporation status from and after November 12, 1996, we would be required to
record an income tax expense and liability payable in cash
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equal to the amount of our C corporation tax liability, including interest and
possible penalties, for the period from November 12, 1996 through the date
immediately preceding the completion of this offering. As of December 31, 1999,
the amount of this tax liability, including interest and possible penalties,
would have been approximately $3.6 million. This tax liability would be
increased by the amount of our corporate tax liability from January 1, 2000
through the date immediately preceding the completion of this offering,
estimated to be an additional $ million, for a total potential corporate
tax liability of $ million, as of , 2000. Even if the IRS reinstates
our S corporation status, our S corporation status will terminate on the date
immediately preceding the completion of this offering, after which time we will
be required to pay federal and state corporate-level income taxes as a
C corporation.
On the date immediately prior to the completion of this offering we will
distribute to our existing shareholders notes in an aggregate principal amount
equal to our undistributed earnings from the date of our formation through the
date immediately preceding the completion of this offering. Upon the completion
of this offering, we will repay the principal amount of such notes less the
amount of our estimated income tax liability, including interest and possible
penalties, determined as if we were a C corporation for all periods commencing
January 1, 1996 through the date immediately preceding the completion of this
offering. As of December 31, 1999, the aggregate principal amount of these notes
would have been approximately $13.6 million, after giving effect to the increase
in net deferred income tax assets resulting from the termination of our S
corporation status on November 11, 1996, and the amount of our estimated
C corporation income tax liability would have been approximately $5.6 million.
The actual principal amount of the undistributed earnings notes will be
increased by the amount of our earnings from January 1, 2000 through the date
immediately preceding the completion of this offering, estimated to be an
additional $ million as of , 2000. The actual amount of our
potential C Corporation income tax liability would be increased by the amount of
our income tax liability from January 1, 2000 through the date immediately
preceding the completion of this offering estimated to be an additional
$ million as of , 2000. We will repay some or all of the
remaining principal amount of these notes depending on whether our status as an
S corporation is reinstated by the IRS and depending on our ultimate additional
tax liability as a C corporation, if any. In the event the IRS does not
reinstate our S corporation status for all periods prior to the date of the
completion of this offering, our existing shareholders will forgive that portion
of the remaining principal amount of the notes equal to our corporate-level tax
liability, including interest and possible penalties, and we will repay the
resulting balance due on these notes to our existing shareholders. The total
amount of the estimated distribution is reflected in the pro forma financial
data contained in this prospectus. See "S Corporation Status and Conversion."
MDC LAND CORPORATION AND MDC LAND LLC
We occupy two leased facilities of approximately 24,500 and 48,600 square
feet in Santa Ana, California, in which our executive offices, manufacturing,
engineering, research and development, and testing operations are located. At
various times, we have leased these facilities from MDC Land Corporation, MDC
Land LLC and a third party. We also lease some of the equipment used in our
manufacturing and testing operations from MDC Land Corporation. Our
relationships with MDC Land Corporation and MDC Land LLC involve various
obligations that have been offset and are reflected in the financial statements
as described below.
24,500 SQUARE FOOT FACILITY. The 24,500 square foot facility was originally
owned by MDC Land Corporation, a company wholly-owned by Manouch Moshayedi, Mike
Moshayedi and Mark Moshayedi, each of whom is an executive officer and director
of Simple Technology. MDC Land Corporation purchased this building in February
1994 financed with a $1,053,000 mortgage loan from First Security Bank. The loan
was guaranteed by us, Manouch Moshayedi, Mike Moshayedi, Mark Moshayedi and the
U.S. Small Business Administration. In February 1994, we made a non-interest
bearing advance of
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approximately $500,000 to MDC Land Corporation to enable it to make certain
leasehold improvements related to our use of the facility.
MDC Land Corporation sold the facility in February 1999 and transferred the
mortgage note in April 1999 to MDC Land LLC, a limited liability company
wholly-owned by Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi. However,
MDC Land Corporation remained obligated on the leasehold improvement advance.
Our lease for this facility expires in February 2020 and our current monthly
rent due under this lease is $19,000.
Historically, we have made the mortgage, property tax and other
miscellaneous payments on behalf of MDC Land Corporation and MDC Land LLC
related to the mortgage loan during their respective periods as lessors. These
payments totaled approximately $270,000 in 1999, $132,000 in 1998 and $165,000
in 1997. The outstanding balance on the mortgage loan was approximately $995,000
on December 31, 1999, $1,010,000 on December 31, 1998 and $1,023,000 on
December 31, 1997. MDC Land LLC is currently in escrow to refinance the mortgage
loan.
48,600 SQUARE FOOT FACILITY. We lease the 48,600 square foot facility from a
third party to which we pay monthly rent of approximately $32,000. Under the
terms of this lease, the third party lessor granted us an option to purchase
this facility for approximately $2.7 million, as adjusted by the increase in the
cost of living index between April 1997 and the date the option is exercised. In
November 1998, we transferred this option to MDC Land LLC at its nominal
historic value, since we are under common ownership with MDC Land LLC. At the
time of the transfer the fair market value of the facility may have exceeded the
option exercise price. The option expires in November 2000. MDC Land LLC has
exercised its option to purchase the 48,600 square foot facility from the third
party owner and is currently in escrow to purchase this facility. Upon the close
of escrow, we anticipate entering into a new lease with MDC Land LLC on terms no
less favorable to us than could be obtained from unaffiliated third parties.
LEASE OF EQUIPMENT. We lease some of the equipment used in our manufacturing
and testing operations from MDC Land Corporation. We have entered into six
equipment leases, each for a period of 60 months, at interest rates ranging from
8.4% to 9.6%. The expiration dates of the leases range from May 2001 to March
2002. Our aggregate annual lease payments to MDC Land Corporation were
approximately $574,000 in each of 1999 and 1998, and $568,000 in 1997. In order
to secure financing for the equipment, MDC Land Corporation entered into a loan
and security agreement with United Capital, formerly known as Lyon Credit
Corporation, in March 1996. We guaranteed MDC Land Corporation's obligations and
indebtedness under this agreement.
Historically, we have made the down payments, loan payments and sales tax
payments on behalf of MDC Land Corporation related to the equipment we have
leased from MDC Land Corporation. These payments totaled $460,000 in 1999,
$460,000 in 1998 and $418,000 in 1997. The outstanding balance on the equipment
loan from United Capital to MDC Land Corporation was approximately $775,000 on
December 31, 1999, $1.1 million on December 31, 1998 and $1.5 million on
December 31, 1997. Our remaining capital lease obligation due to MDC Land
Corporation was approximately $900,000 on December 31, 1999, $1.4 million on
December 31, 1998 and $1.8 million on December 31, 1997.
MDC LAND CORPORATION RECEIVABLE ACCOUNT AND MDC LAND LLC PAYABLE
ACCOUNT. We have created a receivable account, with rights of offset, to
reflect the payments by Simple Technology on behalf of MDC Land Corporation.
This account includes leasehold improvement, mortgage, property tax and other
miscellaneous payments related to the 24,500 square foot facility, and the down
payments, loan payments and sales tax payments related to the equipment we have
leased from MDC Land Corporation. Rather than making lease payments to MDC Land
Corporation, we reduced the receivable account by the amount of the rental
payments equal to approximately $605,000 in 1999, $802,000 in 1998 and $778,000
in 1997. As a result, the outstanding balance on the receivable account was
approximately $73,000 on December 31, 1999, $112,000 on December 31, 1998 and
$339,000 on
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December 31, 1997. In March 2000, MDC Land Corporation paid the entire
receivable balance to us. We will remit all future equipment rental payments
directly to MDC Land Corporation, and MDC Land Corporation will remit all future
loan payments directly to United Capital under the equipment loan agreement.
We have created a payable account, with rights of offset, to reflect the
rental payments owed by Simple Technology to MDC Land LLC related to the 24,500
square foot facility. Rather than making these payments, equal to approximately
$197,000 in 1999, we reduced the payable account by the mortgage, property tax
and other miscellaneous payments we made on behalf of MDC Land LLC of $164,000
in 1999. As a result, the outstanding balance on the payable account was
approximately $33,000 on December 31, 1999. In March 2000, we paid the entire
payable balance to MDC Land LLC. We will remit all future rental payments
directly to MDC Land LLC, and MDC Land LLC will remit all future loan, mortgage,
property tax and other miscellaneous payments.
Our consolidated financial statements, as of December 31, 1999, reflect a
related party receivable balance of $40,000, which is the net of the $73,000
receivable balance with MDC Land Corporation and the $33,000 payable balance
with MDC Land LLC.
LOANS TO LEXAR MEDIA, INC.
In September 1996, we made a $3.0 million non-interest bearing loan to
Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi, each of whom is an
executive officer and director of Simple Technology. The purpose of this loan
was to facilitate the purchase by the Moshayedi brothers of a business unit of
Cirrus Logic, Inc., now named Lexar Media, Inc. In addition, from November 1996
through May 1997, we made related non-interest bearing advances to the
Moshayedis totaling $2.3 million as operating capital for Lexar. In May 1997,
the Moshayedis repaid $2.3 million of non-interest bearing advances. In
addition, in August 1997, the Moshayedis repaid the remaining $3.0 million loan
to us in full. Currently, neither we nor the Moshayedis have any type of
relationship, either business, financial or otherwise, with Lexar.
SIMPLE TECHNOLOGY SUBSIDIARY OWNERSHIP
In February 1995, we formed Simple Technology Canada Ltd., a Canadian
corporation with headquarters in Mississauga, Canada, with Manouch Moshayedi,
Mike Moshayedi and Mark Moshayedi, each of whom is an executive officer and
director of Simple Technology. We own 79% of the membership interests in Simple
Technology Canada and the Moshayedis own the remaining 21%. Simple Technology
Canada was formed for the purpose of manufacturing, selling and marketing our
products in Canada. Under U.S. law at the time of formation of Simple Technology
Canada, we could not wholly own a subsidiary since we are an S corporation.
Accordingly, we formed Simple Technology Canada with the Moshayedi brothers to
meet this ownership requirement. Simple Technology Canada became inactive in
April 1998 when we discontinued our Canadian operations, and we are presently in
the process of dissolving the company. To date, there has been no withdrawal
from, or distribution of any kind by, Simple Technology Canada in favor of any
owner. Upon dissolution, approximately $95,000 will be distributed to the
Moshayedis and us in proportion to our respective ownership interests.
In May 1996 we formed S.T.I., LLC, a California limited liability company,
with Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi, each of whom is an
executive officer and director of Simple Technology. We own 97% of the
membership interests in S.T.I. and the Moshayedis own the remaining 3%. S.T.I.
was formed for the purpose of limiting our potential liability from our
international manufacturing, sales and marketing operations in Europe. Under
California law at the time of formation of S.T.I., limited liability companies
were required to have more than one member. Accordingly, we formed S.T.I. with
the Moshayedis to meet this ownership requirement. To date, there has been no
withdrawal from, or distribution of any kind by, S.T.I. in favor of any owner.
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In June 1996, S.T.I. and MDC Land Corporation formed Simple Technology
Europe, a privately held unlimited company registered in Scotland. Simple
Technology Europe was set up as the sales and marketing entity for our
international operations in Europe and currently employs our sales and marketing
team located in Scotland and England. S.T.I. owns 99% and MDC Land Corporation
owns 1% of the outstanding shares of capital stock of Simple Technology Europe.
Other than the 1% ownership interest in Simple Technology Europe held by MDC
Land Corporation, MDC Land Corporation does not have any other relationship,
either business, financial or otherwise, with Simple Technology Europe. To date,
there has been no withdrawal from, or distribution of any kind by, Simple
Technology Europe in favor of any owner.
Simple Technology Limited, a privately held limited company formed in
Scotland in January 1996, is a wholly-owned subsidiary of Simple Technology
Europe. Simple Technology Limited was set up as the manufacturing entity for our
European headquarters in order to take advantage of local U.K. tax laws. Simple
Technology Limited concluded its manufacturing operations in April 1999 and is
currently inactive. To date, there has been no withdrawal from, or distribution
of any kind by, Simple Technology Limited in favor of any owner.
LOAN TO QUALCENTER, INC.
During 1998, we made a series of non-interest bearing loans to
QualCenter, Inc., a company wholly-owned by Manouch Moshayedi, Mike Moshayedi
and Mark Moshayedi, each of whom is an executive officer and director of Simple
Technology. QualCenter is located in Houston, Texas and tests memory modules on
an exclusive basis for Compaq Corporation under an arrangement whereby Compaq
defines and specifies all test and evaluation procedures and methodologies. The
loans were used for start-up costs and working capital requirements. The largest
aggregate amount of indebtedness outstanding under these loans was approximately
$499,000. QualCenter repaid approximately $311,000 through December 27, 1999.
The remaining loan balance of approximately $188,000 was repaid on December 29,
1999 in conjunction with a shareholder distribution of $188,000.
LOAN TO XYZ, INC.
During 1999, we made a series of non-interest bearing loans to XYZ, Inc., a
company wholly-owned by Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi,
each of whom is an executive officer and director of Simple Technology. XYZ
sells DVD movies over the Internet and is located in Irvine, California. The
loans were used for start-up costs and working capital requirements. The largest
aggregate amount of indebtedness outstanding under these loans was approximately
$918,000 and the entire outstanding loan balance was repaid in December 1999 in
conjunction with a shareholder distribution of $918,000.
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PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of the shares of our common stock as of February 29, 2000, and as
adjusted to reflect the sale of the shares of common stock in this
offering assuming (a) shares of common stock outstanding as of
February 29, 2000 and shares outstanding immediately following the
completion of this offering, (b) the issuance of shares of common stock at
the initial public offering price to our existing shareholders upon their
contribution to us of the additional paid-in capital notes upon the completion
of this offering and (c) no exercise of the underwriters' over-allotment option,
by:
- Each person who we know to be the beneficial owner of 5% or more of our
outstanding common stock;
- Each Named Executive Officer;
- Each of our directors; and
- All of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that person,
shares of common stock subject to options held by that person that are currently
exercisable or become exercisable within 60 days of February 29, 2000, are
deemed outstanding even if they have not actually been exercised. Those shares,
however, are not deemed outstanding for the purpose of computing the percentage
ownership of any other person. Unless otherwise indicated in the table, the
persons and entities named in the table have sole voting and sole investment
power with respect to the shares set forth opposite the shareholder's name,
subject to community property laws where applicable. The address of each
individual listed below is c/o 3001 Daimler Street, Santa Ana, California
92705-5812.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY OWNED
-------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Named executive officers and directors:
Manouch Moshayedi(1)....................................... % %
Mike Moshayedi(2)..........................................
Mark Moshayedi(3)..........................................
Dan Moses(4)............................................... *
Michael Hajeck(5).......................................... * *
Carl Swartz(6)............................................. *
Shane Mortazavi............................................ -- -- --
All directors and executive officers as a group (7
persons)(7).............................................. 100.0% %
</TABLE>
- ------------------------
*Less than one percent
(1) Consists of shares of common stock to be issued to trusts controlled
by Manouch Moshayedi upon the trusts' contribution to us of an additional
paid-in capital note in the principal amount of $1.0 million, shares
held by Mark Moshayedi, as Trustee for the M. and S. Moshayedi Investment
Trust, dated 11/16/95 for the benefit of Manouch Moshayedi's children and
shares held by Manouch Moshayedi, as Trustee of the M. and S.
Moshayedi Revocable Trust, dated 11/16/95 for the benefit of Manouch
Moshayedi's family. Mark Moshayedi disclaims beneficial ownership of the
shares held in the M. and S. Moshayedi Investment Trust, dated 11/16/95.
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(2) Consists of shares of common stock to be issued to trusts controlled
by Mike Moshayedi upon the trusts' contribution to us of an additional
paid-in capital note in the principal amount of $1.0 million, shares
held by Mark Moshayedi & Kamran Ghadimi, as Trustees for the M. and P.
Moshayedi Investment Trust, dated 12/30/96 for the benefit of Mike
Moshayedi's children and shares held by Mike & Parto Moshayedi, as
Trustees for the M. and P. Moshayedi Revocable Trust, dated 12/30/96 for the
benefit of Mike Moshayedi's family. Mark Moshayedi & Kamran Ghadimi disclaim
beneficial ownership of the shares held in the M. and P. Moshayedi
Investment Trust, dated 12/30/96.
(3) Consists of shares of common stock to be issued to Mark Moshayedi upon
the trusts' contribution of an additional paid-in capital note in the
principal amount of $1.0 million, shares held by Manouch Moshayedi &
Ali Dariushnia, as Trustees for the D. and N. Moshayedi Investment Trust,
dated 9/25/98 for the benefit of Mark Moshayedi's children and shares
held by Mark & Semira Moshayedi, as Trustees for the M. and S. Moshayedi
Revocable Trust, dated 9/25/98 for the benefit of Mark Moshayedi's family.
Manouch Moshayedi & Ali Dariushnia disclaim beneficial ownership of the
shares held in the D. and N. Moshayedi Investment Trust, dated 9/25/98.
(4) Consists of shares subject to options, all of which are presently
exercisable or will become exercisable within 60 days from February 29,
2000.
(5) Consists of shares subject to options, all of which are presently
exercisable or will become exercisable within 60 days from February 29,
2000.
(6) Consists of shares subject to options, all of which are presently
exercisable or will become exercisable within 60 days from February 29,
2000.
(7) Consists of shares subject to options, all of which are presently
exercisable or will become exercisable within 60 days from February 29,
2000.
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DESCRIPTION OF CAPITAL STOCK
The following summary of our capital stock and certain provisions of our
amended and restated articles of incorporation and amended and restated bylaws
does not purport to be complete. It is qualified in its entirety by the
provisions of the amended and restated articles of incorporation and amended and
restated bylaws which have been filed as exhibits to the registration statement
of which this prospectus is a part. Our amended and restated articles of
incorporation authorize us to issue 100,000,000 shares of common stock, $0.001
par value, and 20,000,000 shares of preferred stock, $0.001 par value. As of
February 29, 2000, there were shares of common stock outstanding held by
six shareholders of record and no shares of preferred stock outstanding. Options
to purchase an aggregate of shares of common stock were also outstanding
at a weighted average exercise price of $ per share. There will be
shares of common stock outstanding (assuming no exercise of the
underwriters' over-allotment option or exercise of outstanding options as of
February 29, 2000) after giving effect to the sale of the shares offered in this
offering and the issuance of shares of common stock to our existing
shareholders upon their contribution of the additional paid-in capital notes
upon completion of this offering.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the board of directors out of funds legally available for that
purpose. In the event of liquidation, dissolution or winding up of Simple
Technology, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to the prior distribution
rights of any outstanding preferred stock. The common stock has no preemptive or
conversion rights or other subscription rights. The outstanding shares of common
stock are, and the shares of common stock to be issued upon completion of this
offering will be, fully paid and non-assessable.
PREFERRED STOCK
The board of directors will have the authority, without further action by
the shareholders, to issue up to 20,000,000 shares of preferred stock in one or
more series. The board of directors will also have the authority to designate
the price, rights, preferences, privileges and restrictions of each such series,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series, any or all of which may be greater than the
rights of the common stock.
The issuance of preferred stock might have the effect of delaying, deferring
or preventing a change in control of Simple Technology without further action by
the shareholders. The issuance of preferred stock with voting and conversion
rights might also adversely affect the voting power of the holders of common
stock. In some circumstances, an issuance of preferred stock could have the
effect of decreasing the market price of the common stock. There are no shares
of preferred stock currently outstanding and as of the completion of this
offering, no shares of preferred stock will be outstanding. We currently have no
plans to issue any shares of preferred stock.
AUTHORIZED BUT UNISSUED CAPITAL STOCK
We estimate that following the completion of this offering we will have
approximately shares of authorized but unissued common stock, including an
aggregate of shares reserved for issuance upon the exercise of
options under our 2000 Stock Incentive Plan, and 20,000,000 shares of authorized
preferred stock, none of which will be issued and outstanding. If the
underwriters' over-allotment option is exercised in full, we will have
approximately shares of authorized but
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<PAGE>
unissued common stock. However, the listing requirements of The Nasdaq Stock
Market, Inc., which apply so long as the common stock remains included in that
inter-dealer quotation system, require prior shareholder approval of specified
issuances, including issuances of shares bearing voting power equal to or
exceeding 20% of the pre-issuance outstanding voting power or pre-issuance
outstanding number of shares of common stock. These additional shares could be
used for a variety of corporate purposes, including future public offerings to
raise additional capital or to facilitate corporate acquisitions. We currently
do not have any plans to issue additional shares of common stock or preferred
stock, other than in connection with employee compensation plans. See
"Management--Stock Plans/Employee Compensation Programs." One of the effects of
the existence of unissued and unreserved common stock and preferred stock may be
to enable the board of directors to issue shares to persons who may agree or be
inclined to vote in concert with current management on issues put to
consideration of shareholders, which issuance could render more difficult or
discourage an attempt to obtain control of us by means of a merger, tender
offer, proxy contest or otherwise, and protect the continuity of our management
and possibly deprive the shareholders of the opportunity to sell their shares of
common stock at prices higher than prevailing market prices.
ANTI-TAKEOVER PROVISIONS
Our amended and restated articles of incorporation and amended and restated
bylaws contain provisions that could have the effect of discouraging potential
acquisition proposals or making a tender offer or delaying or preventing a
change in control of Simple Technology, including changes a shareholder might
consider favorable. In particular, our amended and restated articles of
incorporation and amended and restated bylaws, as applicable, among other
things, will:
- Provide that special meetings of shareholders can be called by the
chairman of the board of directors, the president, the board of directors
or by a majority of the shareholders. Moreover, the business permitted to
be conducted at any special meeting of shareholders is limited to the
business brought before the meeting by the board of directors, the
chairman of the board of directors, the president or any such shareholder;
- Provide for an advance notice procedure with regard to the nomination,
other than by or at the direction of the board of directors, of candidates
for election as directors and with regard to business to be brought before
a meeting of shareholders;
- Eliminate cumulative voting in the election of directors. Under cumulative
voting, a minority of shareholders holding a sufficient number of shares
may be able to ensure the election of one or more directors. The absence
of cumulative voting may have the effect of limiting the ability of
minority shareholders to effect changes in the board of directors and, as
a result, may have the effect of deterring a hostile takeover or delaying
or preventing changes in control or management of Simple Technology;
- Provide that vacancies on our board of directors may be filled by a
majority of directors in office, although less than a quorum; and
- Allow us to issue up to 20,000,000 shares of preferred stock with rights
senior to those of the common stock and that otherwise could adversely
affect the rights and powers, including voting rights, of the holders of
common stock. In certain circumstances, this issuance could have the
effect of decreasing the market price of the common stock, as well as
having the anti-takeover effect discussed above.
In addition, provisions of our 2000 Stock Incentive Plan allow for the
automatic vesting of all outstanding options granted under the plan upon a
change in control under certain circumstances. Such provisions may have the
effect of discouraging a third party from acquiring us, even if doing so would
be beneficial to our shareholders.
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<PAGE>
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of our board of directors and in the policies
formulated by them, and to discourage certain types of transactions that may
involve an actual or threatened change of control of Simple Technology. These
provisions are designed to reduce our vulnerability to an unsolicited
acquisition proposal and to discourage certain tactics that may be used in proxy
fights. We believe that the benefits of increased protection of our potential
ability to negotiate with the proponent of an unfriendly or unsolicited proposal
to acquire or restructure Simple Technology outweigh the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms. However, these
provisions could have the effect of discouraging others from making tender
offers for our shares that could result from actual or rumored takeover
attempts. These provisions also may have the effect of preventing changes in our
management.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is .
LISTING
We have applied for approval for quotation of our common stock on the Nasdaq
National Market under the symbol "STEC."
84
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock, including shares
issued upon exercise of outstanding options, in the public market could
adversely affect prevailing market prices from time to time. Furthermore, since
only a limited number of shares will be available for sale shortly after this
offering because of certain contractual and legal restrictions on resale, as
described below, sales of substantial amount of common stock in the public
market after the restrictions lapse could adversely affect the prevailing market
price and our ability to raise equity capital in the future.
Upon completion of this offering, we will have shares of common stock
outstanding assuming the issuance of shares of common stock in this
offering and the issuance of shares of common stock to our existing
shareholders upon their contribution to us of the additional paid-in capital
notes, assuming no exercise of the underwriters' over-allotment option and no
exercise of outstanding stock options after , 2000. Of the total
outstanding shares of common stock, the shares sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act of 1933, except that any shares purchased by our "affiliates," as
that term is defined in Rule 144 under the Securities Act of 1933, may generally
only be sold pursuant to an effective registration statement under the
Securities Act of 1933 or in compliance with the limitations of Rule 144 as
described below.
All of the remaining shares of common stock are "restricted securities" as
that term is defined in Rule 144. of these restricted securities will be
available for sale in the public market under Rule 144 following the expiration
of the 180 day lock-up agreement further described below. If the underwriter
elects to waive the lock-up period for any reason, these shares will be
available for sale under Rule 144 prior to that time. The shares issued to
our existing shareholders upon their contribution of the additional paid-in
capital notes are also restricted securities and will be available for sale in
the public market subject to the limitations of Rule 144 one year after the
conversion.
Simple Technology, our officers, directors, existing shareholders and
existing optionholders have entered into contractual "lock-up" agreements
generally providing that, subject to certain limited exceptions, they will not
offer, pledge, sell, offer to sell, contract to sell, sell any option or
contract to purchase, purchase any option to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any of the shares of common stock or any securities convertible
into, or exercisable or exchangeable for, common stock owned by them, or enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the common stock, for a
period of 180 days after the date of this prospectus, without the prior written
consent of FleetBoston Robertson Stephens Inc., except that we may, without such
consent, grant options and sell shares pursuant to our stock plans. FleetBoston
Robertson Stephens Inc. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. FleetBoston Robertson Stephens Inc. currently has no plans to
release any portion of the securities subject to lock-up agreements. When
determining whether or not to release shares from the lock-up agreements,
FleetBoston Robertson Stephens Inc. will consider, among other factors, the
shareholder's reasons for requesting the release, the number of shares for which
the release is being requested and market conditions at the time. Following the
expiration of the 180-day lock-up period, the restricted securities will be
available for sale in the public market subject to compliance with Rule 144 or
Rule 701.
In general, under Rule 144 as currently in effect, any affiliate of ours or
a person, or persons whose shares are aggregated, who has beneficially owned
restricted shares for at least one year, including the holding period of any
prior owner other than a person who may be deemed an affiliate of
85
<PAGE>
ours, is entitled to sell within any three-month period a number of shares of
common stock that does not exceed the greater of:
- One percent of the then-outstanding shares of common stock (approximately
shares after giving effect to this offering); and
- The average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
Form 144 notice with respect to this sale.
Sales under Rule 144 of the Securities Act of 1933 are subject to certain
restrictions relating to manner of sale, notice and the availability of current
public information about us. Under Rule 144(k), a person who is not an affiliate
of ours at any time during the 90 days preceding a sale, and who has
beneficially owned shares for at least two years, including the holding period
of any prior owner other than a person who may be deemed an affiliate of ours,
would be entitled to sell these shares immediately following this offering
without regard to the volume limitations, manner of sale provisions or notice or
other requirements of Rule 144 of the Securities Act of 1933. However, the
transfer agent may require an opinion of counsel that a proposed sale of shares
comes within the terms of Rule 144 of the Securities Act of 1933 prior to
effecting a transfer of these shares.
We are unable to estimate the number of shares that will be sold under
Rule 144, as this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Prior to this offering,
there has been no public market for our common stock, and there can be no
assurance that a significant public market for our common stock will develop or
be sustained after this offering. Any future sale of substantial amounts of
common stock in the open market may adversely affect the market price of the
common stock offered hereby.
We will file, on or after the date of this prospectus, a Form S-8
registration statement under the Securities Act of 1933 to register all shares
of common stock issuable under the 2000 Stock Incentive Plan, and shares of
common stock issuable under the 2000 Employee Stock Purchase Plan. Such
registration statements will become effective immediately upon filing, and
shares covered by those registration statements will thereupon be eligible for
sale in the public markets, subject to any lock-up agreements applicable thereto
and Rule 144 limitations applicable to affiliates. See "Risk Factors--A
substantial amount of our shares will be eligible for sale shortly after this
offering, which could result in a decline in our stock price" and
"Management--Stock Plans/Employee Compensation Programs."
86
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Banc of America Securities LLC and
Needham & Company, Inc., have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock set forth below opposite their respective names. The
underwriters are committed to purchase and pay for all shares if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
FleetBoston Robertson Stephens Inc..........................
Banc of America Securities LLC..............................
Needham & Company, Inc......................................
-------
Total.....................................................
=======
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to certain dealers at that price less a
concession of not in excess of $ per share, of which $ may be reallowed to
other dealers. After this offering, the public offering price, concession and
reallowance to dealers may be reduced by the representatives. No such reduction
shall change the amount of proceeds to be received by us as set forth on the
cover page of this prospectus. The common stock is offered by the underwriters
as stated herein, subject to receipt and acceptance by them and subject to their
right to reject any offer in whole or in part.
Prior to this offering, there has been no public market for the common
stock. Consequently, the public offering price for the common stock offered by
this prospectus has been determined through negotiations among the
representatives and us. Among the factors considered in such negotiations were
prevailing market conditions, certain of our financial information, market
valuations of other companies that we and the representatives believe to be
comparable to us, estimates of our business potential, the present state of our
development and other factors deemed relevant.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to additional
shares of common stock to cover over-allotments, if any, at the public offering
price less the underwriting discount set forth on the cover page of this
prospectus. If the underwriters exercise their over-allotment option to purchase
any of the additional shares of common stock, the underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof as the number of shares to be purchased by each of them
bears to the total number of shares of common stock offered in this offering. If
purchased, these additional shares will be sold by the underwriters on the same
terms as those on which the shares offered hereby are being sold. We will be
obligated, pursuant to the over-allotment option, to sell shares to the
underwriters to the extent the over-allotment option is exercised. The
underwriters may exercise the over-allotment option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered in this offering.
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<PAGE>
The following table summarizes the compensation to be paid to the
underwriters by us:
<TABLE>
<CAPTION>
TOTAL
---------------------------
PER WITHOUT OVER- WITH OVER-
SHARE ALLOTMENT ALLOTMENT
-------- ------------- -----------
<S> <C> <C> <C>
Underwriting Discounts and Commissions
payable by us.......................... $ $ $
</TABLE>
We estimate expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $ .
INDEMNITY
The underwriting agreement contains covenants of indemnity among the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act of 1933, and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
LOCK-UP AGREEMENTS
Each of our executive officers, directors, existing shareholders and
substantially all of our option holders have agreed with the representatives and
us, for a period of 180 days after the effective date of this prospectus,
subject to specified exceptions, not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to any
shares of common stock, any options or warrants to purchase any shares of common
stock, or any securities convertible into or exchangeable for shares of common
stock owned as of the date of this prospectus or thereafter acquired directly by
those holders or with respect to which they have the power of disposition,
without the prior written consent of FleetBoston Robertson Stephens Inc.
However, FleetBoston Robertson Stephens Inc. may, in its sole discretion and at
any time or from time to time, without notice, release all or any portion of the
securities subject to lock-up agreements. There are no existing agreements
between the representatives and any of our existing shareholders and option
holders who have executed a lock-up agreement providing consent to the sale of
shares prior to the expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of FleetBoston Robertson Stephens Inc.,
subject to certain exceptions, consent to the disposition of any shares held by
shareholders subject to lock-up agreements prior to the expiration of the
lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any
shares of common stock, any options or warrants to purchase any shares of common
stock or any securities convertible into, exercisable for or exchangeable for
shares of common stock other than our sale of shares in this offering, the
issuance of our common stock upon the exercise of outstanding options or
warrants, and the issuance of options under existing stock option and incentive
plans provided that those options do not vest prior to the expiration of the
lock-up period. See "Shares Eligible for Future Sale."
LISTING
We have applied to list our common stock on the Nasdaq National Market under
the symbol "STEC."
STABILIZATION
The representatives have advised us that, pursuant to Regulation M under the
Securities Act of 1933, some persons participating in the offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the shares of common stock at a level above that
which might otherwise prevail in the open market. A "stabilizing bid" is a bid
for or the purchase of shares of
88
<PAGE>
common stock on behalf of the underwriters for the purpose of fixing or
maintaining the price of the common stock. A "syndicate covering transaction" is
the bid for or purchase of common stock on behalf of the underwriters to reduce
a short position incurred by the underwriters in connection with the offering. A
"penalty bid" is an arrangement permitting the representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member
purchased by the representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
The representatives have advised us that such transactions may be effected on
the Nasdaq National Market or otherwise, and if commenced, may be discontinued
at any time.
DIRECTED SHARE PROGRAM
The underwriters have reserved up to five percent (5%) of the common stock
to be issued by us and offered for sale in this offering, at the initial public
offering price, to directors, officers, employees, business associates and
persons otherwise connected to Simple Technology, Inc. The number of shares of
common stock available for sale to the general public will be reduced to the
extent these individuals purchase reserved shares. Any reserved shares which are
not purchased will be offered by the underwriters to the general public on the
same basis as the other shares offered in this offering.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Brobeck, Phleger & Harrison LLP, Los Angeles, California. Latham & Watkins,
Los Angeles, California, is acting as counsel for the underwriters in connection
with selected legal matters relating to the shares of common stock offered by
this prospectus.
EXPERTS
Our consolidated financial statements as of December 31, 1998 and 1999 and
for each of the three years in the period ended December 31, 1999 included in
this offering have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in auditing and accounting.
89
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Simple Technology has filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act of 1933 with respect
to the common stock offered hereby. This prospectus, which is part of the
registration statement, does not contain all of the information set forth in the
registration statement and the exhibits thereto which has been omitted in
accordance with the rules and regulations of the SEC. For further information
with respect to Simple Technology and the common stock offered hereby, reference
is made to the registration statement and to the exhibits thereto. Statements
made in this prospectus concerning the contents of any document referred to
herein are not necessarily complete, and in each instance, we refer you to the
copy of the contract or other document filed as an exhibit to the registration
statement. Each statement about those contracts is qualified in its entirety by
that reference. You should be aware that when we discuss these contracts or
documents in this prospectus we are assuming that you will read the exhibits to
the registration statement for a more complete understanding of the contract or
document.
Following the offering we will become subject to the reporting requirements
of the Securities Exchange Act of 1934. In accordance with that law, we will be
required to file reports and other information with the SEC. The registration
statement and exhibits, as well as those reports and other information when so
filed, may be inspected without charge at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the SEC located at Seven World Trade Center, 13th Floor,
New York, New York 10048, the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and 5670 Wilshire Boulevard, 11th
Floor, Los Angeles, California 90036. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of the public reference facilities. Copies
of all or any part of the registration statement may be obtained from the SEC's
offices upon payment of fees prescribed by the SEC. The SEC maintains a World
Wide Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the site is http://www.sec.gov.
We will furnish our shareholders annual reports and unaudited quarterly
reports for the first three quarters of each fiscal year. Annual reports will
include audited consolidated financial statements prepared in accordance with
generally accepted accounting principles. The consolidated financial statements
included in the annual reports will be examined and reported upon, with an
opinion expressed, by our independent auditors.
90
<PAGE>
SIMPLE TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1998 and 1999.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders and Board of Directors
Simple Technology, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Simple
Technology, Inc. and its subsidiaries (the "Company") at December 31, 1998 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Costa Mesa, California
February 25, 2000
F-2
<PAGE>
SIMPLE TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
PRO FORMA
1999
1998 1999 (NOTE 13)
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents............................. $ 816,525 $ 3,778,612 $ 3,778,612
Accounts receivable, net of allowances of $725,803 in
1998 and $771,806 in 1999........................... 12,421,309 23,704,448 23,704,448
Related party receivable.............................. 594,434 40,396 40,396
Inventory, net........................................ 13,877,625 18,276,441 18,276,441
Deferred income taxes................................. 307,617 180,552 2,318,000
Other current assets.................................. 452,314 544,608 544,608
----------- ----------- -----------
Total current assets.............................. 28,469,824 46,525,057 48,662,505
Furniture, fixtures and equipment, net................ 11,092,013 7,968,259 7,968,259
Deferred income taxes................................. - 637,417 -
Other noncurrent assets............................... 525,000 - -
----------- ----------- -----------
Total assets...................................... $40,086,837 $55,130,733 $56,630,764
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable...................................... $13,077,805 $20,033,184 $20,033,184
Distribution payable to shareholders.................. - - 13,644,603
Current maturities of long-term debt.................. 351,581 697,079 697,079
Current maturities of capital lease obligations....... 1,263,079 938,278 938,278
Accrued and other liabilities......................... 2,493,975 2,001,799 2,001,799
----------- ----------- -----------
Total current liabilities......................... 17,186,440 23,670,340 37,314,943
Line of credit........................................ 13,176,095 12,478,675 12,478,675
Long-term debt........................................ 1,094,133 1,844,033 1,844,033
Capital lease obligations............................. 3,861,464 1,357,878 1,357,878
Deferred income taxes................................. 8,399 - 560,000
----------- ----------- -----------
Total liabilities................................. 35,326,531 39,350,926 53,555,529
----------- ----------- -----------
Commitments and contingencies (Note 9)
SHAREHOLDERS' EQUITY:
Common stock, no par value, 10,000,000 shares
authorized,
6,035,706 shares issued and outstanding............. 30,000 30,000 30,000
Additional paid-in capital............................ 3,033,663 3,283,262 3,283,262
Unearned stock based compensation..................... (25,247) (141,475) (141,475)
Retained earnings..................................... 1,838,327 12,704,572 -
Accumulated other comprehensive loss.................. (116,437) (96,552) (96,552)
----------- ----------- -----------
Total shareholders' equity........................ 4,760,306 15,779,807 3,075,235
----------- ----------- -----------
Total liabilities and shareholders' equity........ $40,086,837 $55,130,733 $56,630,764
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SIMPLE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues....................................... $159,087,716 $122,287,737 $192,593,273
Cost of revenues................................... 131,093,468 98,168,102 152,972,826
------------ ------------ ------------
Gross profit................................... 27,994,248 24,119,635 39,620,447
------------ ------------ ------------
Sales and marketing................................ 15,972,337 13,340,207 14,149,974
General and administrative (Note 11)............... 8,751,451 9,359,774 9,731,572
Research and development........................... 2,153,619 2,180,440 1,831,539
------------ ------------ ------------
Total operating expenses....................... 26,877,407 24,880,421 25,713,085
------------ ------------ ------------
Income (loss) from operations.................. 1,116,841 (760,786) 13,907,362
Interest income.................................... (28,084) (20,939) (23,904)
Interest expense................................... 1,769,151 1,400,566 1,621,430
Other expense...................................... -- -- 325,000
------------ ------------ ------------
Income (loss) before provision (benefit) for
income taxes................................. (624,226) (2,140,413) 11,984,836
Provision (benefit) for income taxes............... 1,672 22,482 (517,968)
------------ ------------ ------------
Net income (loss).............................. $ (625,898) $ (2,162,895) $ 12,502,804
============ ============ ============
Net income (loss) per share:
Basic............................................ $ (.10) $ (.36) $ 2.07
============ ============ ============
Diluted.......................................... $ (.10) $ (.36) $ 1.94
============ ============ ============
Unaudited pro forma data (Notes 2 and 13):
Income before provision for income taxes...................................... $ 11,984,836
Provision for income taxes.................................................... 4,554,238
------------
Pro forma net income.......................................................... $ 7,430,598
============
Pro forma net income per share:
Basic....................................................................... $ 1.23
============
Diluted..................................................................... $ 1.15
============
Weighted average shares outstanding:
Basic.......................................... 6,035,706 6,035,706 6,035,706
============ ============ ============
Diluted........................................ 6,035,706 6,035,706 6,441,573
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SIMPLE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL UNEARNED OTHER TOTAL
-------------------- PAID-IN STOCK BASED RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS LOSS EQUITY
--------- -------- ---------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996.... 6,035,706 $30,000 $3,000,000 $ -- $ 4,902,659 $ (46,708) $ 7,885,951
Comprehensive loss:
Net loss..................... (625,898) (625,898)
Foreign currency translation
adjustment................. (18,055) (18,055)
-----------
Total comprehensive loss... (643,953)
Distributions to shareholders,
net.......................... (380,374) (380,374)
--------- ------- ---------- --------- ----------- --------- -----------
Balances, December 31, 1997.... 6,035,706 30,000 3,000,000 -- 3,896,387 (64,763) 6,861,624
Comprehensive loss:
Net loss..................... (2,162,895) (2,162,895)
Foreign currency translation
adjustment................. (51,674) (51,674)
-----------
Total comprehensive loss... (2,214,569)
Unearned compensation related
to stock options granted for
services to be rendered...... 33,663 (33,663) --
Compensation related to stock
options vesting.............. 8,416 8,416
Contributions from
shareholders................. 104,835 104,835
--------- ------- ---------- --------- ----------- --------- -----------
Balances, December 31, 1998.... 6,035,706 30,000 3,033,663 (25,247) 1,838,327 (116,437) 4,760,306
Comprehensive income:
Net income................... 12,502,804 12,502,804
Foreign currency translation
adjustment................. 19,885 19,885
-----------
Total comprehensive
income................. 12,522,689
Reduction in unearned
compensation due to
termination of services...... (12,319) 12,319 --
Unearned compensation related
to stock options granted to
employees.................... 261,918 (261,918) --
Compensation related to stock
options vesting.............. 133,371 133,371
Distributions to
shareholders................. (1,636,559) (1,636,559)
--------- ------- ---------- --------- ----------- --------- -----------
Balances, December 31, 1999.... 6,035,706 $30,000 $3,283,262 $(141,475) $12,704,572 $ (96,552) $15,779,807
========= ======= ========== ========= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SIMPLE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ (625,898) $(2,162,895) $ 12,502,804
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization..................... 1,913,000 3,418,578 3,580,963
Loss (gain) on sale of furniture, fixtures and
equipment....................................... (4,202) 17,844 6,511
Charitable contribution of land held for
investment...................................... -- -- 325,000
Bad debt expense.................................. 482,205 67,404 115,624
Inventory excess and obsolescence expense......... 1,252,557 592,513 698,023
Deferred income taxes............................. (124,849) -- (518,751)
Compensation related to stock options vesting..... -- 8,416 133,371
Foreign currency translation adjustment........... (18,055) (51,674) 19,885
Change in operating assets and liabilities:
Accounts receivable............................. 335,323 2,679,311 (11,398,763)
Inventory....................................... 1,479,024 (3,191,723) (5,096,839)
Other assets.................................... (11,928) 755,335 107,706
Accounts payable................................ (1,879,542) (190,524) 6,955,379
Accrued and other liabilities................... (706,755) 360,267 110,824
----------- ----------- ------------
Net cash provided by operating activities..... 2,090,880 2,302,852 7,541,737
----------- ----------- ------------
Cash flows from investing activities:
Advances to shareholders............................ (1,864,698) (482,152) (918,075)
Repayment of advances to shareholders............... 5,280,086 -- 1,400,227
Purchase of furniture, fixtures and equipment....... (1,592,407) (2,160,392) (1,240,663)
Proceeds from sale of furniture, fixtures and
equipment......................................... 299,640 31,659 287,758
----------- ----------- ------------
Net cash provided by (used in) investing
activities.................................. 2,122,621 (2,610,885) (470,753)
----------- ----------- ------------
Cash flows from financing activities:
Repayment of borrowings under line of credit, net... (2,757,969) (337,925) (697,420)
Repayment of long-term debt......................... (215,572) (330,019) (467,263)
Payment on capital lease obligations................ (757,603) (1,110,804) (1,379,541)
Repayment of loans to related parties, net.......... 204,531 226,598 71,886
Distributions to shareholders....................... (510,644) -- (1,636,559)
Contributions from shareholders..................... 130,270 104,835 --
----------- ----------- ------------
Net cash used in financing activities......... (3,906,987) (1,447,315) (4,108,897)
----------- ----------- ------------
Net increase (decrease) in cash............... 306,514 (1,755,348) 2,962,087
Cash and cash equivalents at beginning of year........ 2,265,359 2,571,873 816,525
----------- ----------- ------------
Cash and cash equivalents at end of year.............. $ 2,571,873 $ 816,525 $ 3,778,612
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SIMPLE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year:
Income taxes $ 6,100 $ 6,862 $ 5,196
Interest $1,668,526 $1,650,593 $1,605,487
Noncash activities:
Purchase of furniture, fixtures, and equipment with:
Long-term debt $1,734,933 $ -- $ 113,815
Capital lease obligations $2,074,947 $1,923,723 $ --
Refinance of furniture, fixtures and equipment under
capital lease obligations with long-term debt $ -- $ -- $1,448,846
Advances to shareholders offset against
accrued liabilities $ 57,247 $ -- $ --
</TABLE>
Refer to Note 3 for noncash activities with related parties.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY ORGANIZATION:
Simple Technology, Inc. was incorporated in the state of California on
March 13, 1990 to design, manufacture and market a comprehensive line of memory,
storage and connectivity products used in high performance computing, networking
and communications, consumer electronics and industrial applications throughout
the United States and internationally. During 1995 and 1996, Simple
Technology, Inc. formed subsidiaries in Canada and Scotland, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
Simple Technology, Inc. and its subsidiaries in Canada and Scotland
(collectively, the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist primarily of cash in banks and money
market funds. All highly liquid investments with a maturity date of three months
or less when acquired are considered to be cash equivalents. Cash and cash
equivalents are carried at cost, which approximates market.
INVENTORY:
Inventory is stated at the lower of cost or market, with cost being
determined on the first-in, first-out ("FIFO") method of accounting.
FURNITURE, FIXTURES AND EQUIPMENT:
Furniture, fixtures and equipment are stated at cost and depreciated using
the straight-line method. The Company's estimated useful lives of the assets,
other than leasehold improvements, range from four to five years for equipment
to seven years for furniture and fixtures. Leasehold improvements and assets
under capital leases are amortized using the straight-line method over the
shorter of the lease term or the estimated useful life of the assets.
Expenditures for major renewals and betterments are capitalized, while minor
replacements, maintenance and repairs, which do not extend the asset lives, are
charged to operations as incurred. Upon sale or disposition, the cost and
related accumulated depreciation are removed from the accounts and any gain or
loss is included in operations.
The Company continually monitors events and changes in circumstances that
could indicate that the carrying balances of its furniture, fixtures and
equipment may not be recoverable in accordance with the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
When such events or changes in circumstances are present, the Company assesses
the recoverability of long-lived assets by determining whether the carrying
value of such assets will be recovered through undiscounted expected future cash
flows. If the total of the future cash flows is less than the carrying amount of
those assets, the Company recognizes an impairment loss based on the excess of
the carrying amount over the fair value of the assets.
LAND HELD FOR INVESTMENT:
Land held for investment, included in other noncurrent assets at December
31, 1998, is recorded at the shareholders' contributed historical cost, which is
less than or approximates fair market value. Such land, with a cost of $325,000,
was contributed to charity in 1999 and is reflected in other expense.
F-8
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
LONG-TERM DEBT:
The fair values of the Company's long-term debt have been estimated based on
current rates offered to the Company for debt of the same remaining maturities.
The carrying amounts of the Company's loans approximate their fair values.
REVENUE RECOGNITION:
Revenue is generally recognized upon shipment of products to the customer if
collectibility is probable. A substantial portion of the Company's sales through
aftermarket channels includes limited rights to return unsold inventory and some
customers have limited price protection rights. The Company provides for
estimated future returns of inventory, limited price protection arrangements and
the estimated costs of warranty at the time of sale based on historical
experience. Actual results have been within management's expectations.
ADVERTISING COSTS:
Advertising costs, which relate primarily to various print media
expenditures, are expensed as incurred. For the years ended December 31, 1997,
1998 and 1999, advertising costs were approximately $2,650,000, $2,412,000 and
$2,858,000, respectively.
FOREIGN CURRENCY TRANSLATION:
The financial statements of subsidiaries outside the United States are
generally measured using the local currency as the functional currency. Assets
and liabilities of these subsidiaries are translated at the rates of exchange at
the balance sheet date. The resultant translation adjustments are recorded as a
separate component of shareholders' equity. Income and expense items are
translated at average monthly rates of exchange. Gains and losses from foreign
currency transactions are included in operations and were less than $100,000 for
each year presented.
INCOME TAXES:
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred income tax assets to the amount expected to be realized. The
provision for income taxes represents the tax payable for the year and the
change during the year in deferred income tax assets and liabilities.
STOCK-BASED COMPENSATION:
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has elected to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the estimated market price
of the Company's underlying stock at the date of grant over the exercise price
of the option, amortized over the vesting period. The Company has adopted the
disclosure-only provisions of SFAS No. 123.
F-9
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PER SHARE INFORMATION:
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, "Earnings Per Share," which established standards for the computation,
presentation and disclosure requirements for basic and diluted earnings per
share for entities with publicly held common shares and potential common shares.
Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding. In computing diluted earnings per share,
the weighted average number of shares outstanding is adjusted to additionally
reflect the effect of potentially dilutive securities.
No potential common shares were included in the diluted per share amounts
for the years ended December 31, 1997 and 1998 as the effect would have been
anti-dilutive. For the year ended December 31, 1999, potentially dilutive
securities consisted solely of options and resulted in potential common shares
of 405,867.
PRO FORMA NET INCOME:
Pro forma net income is computed using an effective tax rate of 38% to
reflect the estimated income tax expense of the Company as if it had been
subject to C corporation federal and state income taxes for the year, instead of
S Corporation income taxes.
COMPREHENSIVE INCOME:
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which established standards for the reporting and display of comprehensive
income. The Company adopted SFAS No. 130 effective January 1, 1998.
Comprehensive income includes such items as foreign currency translation
adjustments. These amounts are presented as a component of shareholders' equity,
consistent with the Company's previous practice. SFAS No. 130 does not affect
current principles of measurement of revenues and expenses and, accordingly, the
adoption of SFAS No. 130 had no effect on the Company's results of operations or
financial position.
The balance of accumulated other comprehensive loss at December 31, 1998 and
1999 consists of accumulated foreign currency translation adjustments. None of
the components of accumulated other comprehensive loss have been recorded net of
any tax benefit as the Company does not expect to realize any significant tax
benefit from these items.
SEGMENT REPORTING
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which supercedes substantially all the
reporting requirements previously required under SFAS No. 14, "Financial
Reporting for Business Segments of an Enterprise," and establishes standards for
the way the Company reports information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under SFAS No. 131, the determination of
segments to be reported in the financial statements is to be consistent with the
manner in which management organizes and evaluates the internal organization to
make operating decisions and assess performance. The adoption of this statement
did not have an impact upon the Company's operating results or financial
position as this statement's provisions affect only the disclosure of certain
segment information in the notes to the consolidated financial statements.
F-10
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RISKS AND UNCERTAINTIES:
Financial instruments, which potentially subject the Company to a
concentration of credit risk, principally consist of cash and cash equivalents
and accounts receivable. As of December 31, 1998 and 1999, approximately 28% and
35%, respectively, of accounts receivable were concentrated with three
customers. With respect to one of these customers, the Company recorded sales
totaling 16% and 19% of the Company's revenues for the years ended December 31,
1998 and 1999, respectively. No other single customer accounted for more than
10% of accounts receivable or revenues at December 31, 1999 or for each of the
three years in the period ended December 31, 1999. The Company generally does
not require collateral on accounts receivable as the majority of the Company's
customers are large, well-established companies. Historically, bad debt
allowances have been consistent with management's expectations.
At December 31, 1998 and 1999, the Company had amounts on deposit with
financial institutions that were in excess of the federally insured limit of
$100,000.
The manufacturing operations of the Company are concentrated in a facility
located in Santa Ana, California. As a result of this geographic concentration,
a disruption in the manufacturing process resulting from a natural disaster or
other unforeseen event could have a material adverse effect on the Company's
financial position and results of operations.
Certain of the Company's products utilize components that are purchased from
a small number of sources with whom the Company has no long-term contracts. An
inability to obtain such components in the amounts needed on a timely basis or
at commercially reasonable prices could result in delays in product
introductions or interruption in product shipments or increases in product
costs, which could have a material adverse effect on the Company's financial
position and results of operations.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS:
Certain amounts in the prior year consolidated financial statements have
been reclassified to conform to the current year presentation.
3. RELATED PARTY TRANSACTIONS:
During 1994, the Company commenced leasing a building from MDC Land
Corporation, which is beneficially owned by the shareholders of the Company.
During 1999, this building and the underlying mortgage note was transferred from
MDC Land Corporation to MDC Land LLC (collectively known as "MDC"), which is
also beneficially owned by the shareholders of the Company. The term of the
lease is 26 years, through 2020, with scheduled rental payments of $19,000 per
month. Building rent expense for the years ended December 31, 1997, 1998 and
1999 amounted to $205,500, $228,000 and $228,000, respectively. The Company pays
for leasehold improvement costs, in addition to the monthly
F-11
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS: (CONTINUED)
mortgage on the building, on behalf of MDC. During 1996, the Company began
leasing equipment from MDC. Each lease has a term of five years and is accounted
for as a capital lease. Equipment rental payments for the years ended
December 31, 1997, 1998 and 1999 amounted to $568,000, $574,000 and $574,000,
respectively. The Company pays the monthly financing payments for this equipment
on behalf of MDC. Additionally, the Company paid the sales tax and down payments
related to this equipment on behalf of MDC. These payments on behalf of MDC, net
of the monthly rental payments due MDC, resulted in a net related party
receivable due to the Company.
In connection with the purchase of the building by MDC, the Company
guaranteed a mortgage note payable by MDC ($1,010,047 and $995,301 at
December 31, 1998 and 1999, respectively). The note is also 71% guaranteed by
the U.S. Small Business Administration and 100% guaranteed by the beneficial
shareholders. In connection with the financing of the equipment by MDC, the
Company guaranteed notes payable by MDC of $1,127,179 and $751,838 at
December 31, 1998 and 1999, respectively.
In 1995, the Company entered into a separate 5 year lease agreement with a
third party to lease a second building located adjacent to the building leased
from MDC. One of the provisions of this agreement was an option to buy this
building for an initial purchase price of $2,723,560, thereafter increased by a
cost of living index. In November 1998, the Company transferred this option to
MDC at its nominal historical value, since both entities are under common
ownership.
During 1997, the Company made noninterest-bearing advances to beneficial
shareholders of the Company totaling $1,864,698 to fund working capital needs in
a development stage company in Fremont, California, in which the beneficial
shareholders of the Company then owned a controlling interest. In 1997, the
beneficial shareholders later sold such interest and repaid the amounts due to
the Company.
During 1998, the Company made non-interest bearing advances to beneficial
shareholders of the Company to finance the development of a new company in
Houston, Texas. At December 31, 1998, this receivable balance amounted to
$482,152, which was included in the related party receivable. During 1999, the
Company made additional non-interest bearing advances of $918,075 to the
beneficial shareholders of the Company to finance the development of a new
company in Irvine, California. At December 31, 1999 all of the above mentioned
advances had been repaid in full in conjunction with shareholder distributions.
4. INVENTORY:
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Raw materials...................................... $ 7,579,228 $11,283,408
Work-in-progress................................... 622,438 1,261,703
Finished goods..................................... 7,165,916 7,811,551
----------- -----------
15,367,582 20,356,662
Valuation allowance................................ (1,489,957) (2,080,221)
----------- -----------
$13,877,625 $18,276,441
=========== ===========
</TABLE>
F-12
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FURNITURE, FIXTURES AND EQUIPMENT:
Furniture, fixtures and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Furniture and fixtures............................. $ 558,095 $ 92,866
Equipment.......................................... 17,155,390 14,748,300
----------- -----------
17,713,485 14,841,166
Accumulated depreciation and amortization.......... (6,621,472) (6,872,907)
----------- -----------
$11,092,013 $ 7,968,259
=========== ===========
</TABLE>
For the years ended December 31, 1997, 1998 and 1999, the Company recorded
depreciation and amortization expense of approximately $1,883,000, $3,389,000
and $3,581,000, respectively.
At December 31, 1998 and 1999, furniture, fixtures and equipment included
approximately $10,114,000 and $7,499,000, respectively, of assets under capital
leases with associated accumulated amortization of approximately $3,819,000 and
$5,318,000, respectively. As discussed in Note 3, such 1998 and 1999 amounts
include approximately $2,304,000 of assets under capital lease with a related
party with associated accumulated amortization of approximately $1,060,000 and
$1,520,000 at December 31, 1998 and 1999, respectively.
6. LINE OF CREDIT:
Effective August 3, 1999, the Company entered into a new line of credit
agreement. Amounts borrowed thereunder are collateralized by substantially all
of the Company's assets. Terms of the new agreement include a maximum borrowing
amount of $20,000,000, subject to eligible accounts receivable and inventory
balances, bearing interest at the prime rate plus 0.5% and expiring in
August 2001, unless renewed. There was $13,176,095 and $12,478,675 outstanding
on this line of credit and the previously existing line of credit, bearing
interest at prime (7.75%) and prime plus 0.5% (9.0%) at December 31, 1998 and
1999, respectively.
The provisions of the line of credit agreement contain various nonfinancial
and financial covenants that, among other things, require the Company to
maintain a minimum tangible net worth amount and a maximum debt to tangible net
worth ratio. The covenants also limit capital expenditures, distributions and
dividends that can be made by the Company.
F-13
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Equipment notes payable, principal and interest
payable in monthly installments of $70,671,
maturing at various dates through December 2004,
collateralized by equipment, interest ranging
between 8.4% and 9.1%.............................. $1,368,628 $2,403,812
Automobile notes payable to bank, principal and
interest payable in monthly installments totalling
$3,418, maturing at various dates through
May 2004, collateralized by automobiles, interest
ranging between 7.5% and 8.2%...................... 77,086 137,300
---------- ----------
1,445,714 2,541,112
Less current portion................................. (351,581) (697,079)
---------- ----------
$1,094,133 $1,844,033
========== ==========
</TABLE>
The equipment notes payable agreements contain various nonfinancial
covenants that, among other things, limit distributions and dividends to
shareholders and require the equipment to remain unencumbered with other liens.
Scheduled principal payments, including the line of credit, during each of
the years ending December 31 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000........................................... $ 697,079
2001........................................... 13,239,681
2002........................................... 775,403
2003........................................... 154,773
2004........................................... 152,851
-----------
$15,019,787
===========
</TABLE>
8. INCOME TAXES:
The Company has elected to be treated as an S Corporation for U.S. federal
income tax purposes. Under this election, the Company's shareholders, rather
than the Company, are subject to federal income taxes on their respective share
of the Company's taxable income. The Company has elected similar treatment for
California franchise tax purposes which, in addition, requires a state income
tax at the corporate level of 1.5%.
F-14
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES: (CONTINUED)
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
--------- -------- ---------
<S> <C> <C> <C>
Current...................................... $ 126,522 $22,482 $ 783
Deferred..................................... (124,850) -- (518,751)
--------- ------- ---------
$ 1,672 $22,482 $(517,968)
========= ======= =========
</TABLE>
For 1997 and 1998, the difference between the effective tax rate and the
expected California tax rate is due primarily to state tax credits, offset by
increases in the valuation allowance and losses without benefit. For 1999, the
difference between the effective tax rate and the expected California tax rate
is due primarily to state tax credits and decreases in the valuation allowance.
The components of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Current deferred tax assets (liabilities):
Financial statement reserves.......................... $ 33,407 $ 36,485
Accrued expenses...................................... 2,485 12,237
Credit carryforwards.................................. 258,906 134,000
Other................................................. 12,819 (2,170)
-------- --------
Total current....................................... 307,617 180,552
-------- --------
Non current deferred tax assets (liabilities):
Depreciation and amortization......................... (112,661) (20,823)
Operating loss carryforwards.......................... 307,675 102,674
Credit carryfowards................................... 364,816 651,446
Other................................................. (7,942) 6,794
-------- --------
551,888 740,091
Valuation allowance................................... (560,287) (102,674)
-------- --------
Total noncurrent.................................... (8,399) 637,417
-------- --------
$299,218 $817,969
======== ========
</TABLE>
The components of tax credit assets relate primarily to California tax
credit carryforwards for manufacturers' investment credits at December 31, 1998
and 1999, respectively, of $123,000 and $32,000, which begin to expire in the
year 2004, and enterprise zone credits of $501,000 and $753,000, which have an
unlimited carryover. Investment tax credits may be utilized prior to enterprise
zone credits.
F-15
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES: (CONTINUED)
For income tax purposes, the Company's foreign subsidiaries, Simple
Technology Canada Limited and Simple Technology Limited, are treated as separate
entities and, therefore, are not subject to U.S. taxation. These subsidiaries
had net foreign deferred tax assets of approximately $193,000 and $103,000,
which are primarily attributable to combined net operating loss carryforwards of
approximately $464,000 and $428,000, as of December 31, 1998 and 1999,
respectively. These losses begin to expire in 2002. Due to the subsidiaries' tax
status, these losses may not be used to offset U.S. income. The Company has
established a valuation allowance against these deferred tax assets since it is
not more likely than not that the foreign subsidiaries' net operating loss
carryforwards will be utilized.
The Company's foreign subsidiary, Simple Technology Europe, is treated as a
branch partnership for income tax purposes and, therefore, is subject to U.S.
taxation.
Since the Company's formation in March 1990, the Company has elected for
federal and state income tax purposes to be treated as an S corporation of the
Internal Revenue Code of 1986, as amended, and comparable state tax laws. On
November 12, 1996, certain of the Company's existing shareholders transferred
all of their shares of common stock to trusts established for the benefit of
their children and themselves. The trusts established for the benefit of their
children did not make the elections required for the trusts to be eligible
shareholders of an S corporation. As a result, the Company's election to be
treated as an S corporation was inadvertently terminated as of November 11,
1996. In addition, on May 14, 1999, one of the Company's other existing
shareholders transferred all of his shares of the Company's common stock to
trusts established for the benefit of his children and himself. Since the trust
established for the benefit of his children did not make the required election,
this transfer also had the effect of inadvertently terminating the Company's
S corporation status as of the date immediately prior to the transfer. The
Company has filed a request for a private letter ruling with the Internal
Revenue Service ("IRS") with respect to the November 12, 1996 transfers seeking
to have the Company's S corporation status reinstated for the period from and
after November 12, 1996. In addition, the Company has filed a statement with the
IRS with respect to the May 14, 1999 transfer, pursuant to a published revenue
procedure, to obtain automatic relief from the failure of the trust to file a
timely election to be an eligible shareholder, and the restatement of the
Company's S corporation status for the period from and after May 14, 1999.
For the period including and subsequent to November 12, 1996, the Company
has continued to file federal and state income tax returns as if it were an S
corporation. If the IRS does not reinstate the Company's S corporation status
from and after November 12, 1996, the Company will be required to file income
tax returns as a C corporation for periods since November 12, 1996. As a result,
the Company would be required to record an income tax liability payable in cash
in the amount of approximately $3,600,000, including interest and possible
penalties at December 31, 1999. In addition, the Company would be required to
record a non-recurring income tax benefit and a corresponding net deferred
income tax asset, which would have been approximately $940,000 (unaudited) as of
December 31, 1999. The actual amount would be adjusted based on the tax effect
of the difference in the basis for assets and liabilities for financial
reporting and income tax purposes as of the date immediately preceding the
completion of an initial public offering. Refer to Note 13 of the consolidated
financial statements. Even if the IRS reinstates the Company's S corporation
status, the S corporation status will terminate on the date immediately
preceding the completion of an initial public offering, after which time the
Company will be required to pay federal and state corporate-level income taxes
on its taxable income as a C corporation.
F-16
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES:
DENSE-PAC MICROSYSTEMS, INC.
On September 23, 1998, the Company filed a lawsuit against Dense-Pac
Microsystems, Inc. in a United States District Court for infringement of the
Company's IC Tower stacking patent. The Company is seeking damages and
injunctive relief. On October 15, 1998, Dense-Pac filed an answer to the
Company's complaint denying the claim of infringement, asserted a defense of
patent invalidity against the IC Tower stacking patent and asserted a
counterclaim against the Company for alleged infringement of its stacking
patent. On November 12, 1998, the Company filed an answer to Dense-Pac's
counterclaim denying Dense-Pac's claim of infringement against the Company and
asserting a defense of patent invalidity. Dense-Pac is seeking injunctive relief
and damages equal to 2% of the Company's sales of the IC Tower stacking
products, plus interest. As of December 31, 1999, Dense-Pac sought damages,
including interest, totaling approximately $400,000. Dense-Pac has also
requested an award of attorneys' fees and treble damages and has reserved the
right to seek unspecified lost profits as a result of the alleged infringement.
The Company intends to pursue and defend its position vigorously. Trial is set
for June 2000.
The outcome of this litigation is uncertain. Patent litigation is
particularly complex and can extend for a protracted time, which can
substantially increase the cost of such litigation. In connection with the
Dense-Pac litigation, the Company has incurred, and expects to continue to
incur, substantial legal fees and expenses. The Dense-Pac litigation has also
diverted, and is expected to continue to divert, the efforts and attention of
key management and technical personnel. As a result, the Company's pursuit and
defense of this litigation, regardless of its eventual outcome, has been, and
will likely continue to be, costly and time consuming. Should the outcome of the
litigation be adverse, the Company would be required to pay significant monetary
damages to Dense-Pac and would be enjoined from selling those products found to
infringe Dense-Pac's patent unless and until the Company is able to negotiate a
license from Dense-Pac. In the event the Company were to obtain a license from
Dense-Pac, the Company would likely be required to make royalty payments to
Dense-Pac with respect to sales of the products covered by the license. Any such
payments would increase cost of revenues and reduce gross profits. There can be
no assurances that the Company could enter into a license agreement with
Dense-Pac on commercially reasonable terms, if at all. If the Company is
required to pay significant monetary damages, is enjoined from selling any of
the products or is required to make substantial royalty payments pursuant to any
such license agreement, the Company's business would be significantly harmed. In
addition, if the IC Tower stacking patent is found to be invalid, the Company's
ability to exclude competitors from making, using or selling the same or similar
products to the IC Tower stacking products would cease and the Company's
business would be harmed. An adverse outcome could be material to the Company's
financial position or results of operations.
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
On June 8, 1998, Interactive Flight Technologies, Inc. ("Interactive
Flight") filed a lawsuit against Avnet, Inc. in a Superior Court of Arizona
seeking an award for direct and consequential damages arising from a transaction
in which the Company supplied allegedly defective hard disk drives to Avnet for
inclusion in an in-flight entertainment system manufactured by Interactive
Flight. The Company purchased the hard disk drives from Integral
Peripherals, Inc. ("Integral"), the manufacturer, through its distributor, Bell
Microsystems, Inc. ("Bell"). Integral has since declared bankruptcy and is not
party to this litigation. On July 16, 1998, Avnet filed a third party complaint
against the Company for indemnification pursuant to the terms of a distribution
agreement between Avnet and the Company. On September 18, 1998, the Company
filed an answer denying the third party complaint and filed a
F-17
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
third party complaint against, among others, Bell seeking indemnification and
contribution. On May 24, 1999, Interactive Flight filed a first amended
complaint to add the Company as an additional defendant. On June 8, 1999, Avnet
filed a cross claim against the Company seeking indemnification and
contribution. On June 18, 1999, the Company answered the first amended complaint
and Avnet's cross claim. The Company is the beneficiary of a potential insurance
claim against the Chubb Group based on a policy of insurance originally issued
to Integral by Chubb Group and assigned to the Company as part of a settlement
reached in Integral's bankruptcy proceeding. Interactive Flight is seeking
out-of-pocket damages of approximately $3,000,000 and consequential damages
arising from alleged loss of contracts with several airline carriers totaling an
additional $10,000,000. Trial is set for August 2000.
The Company intends to pursue and defend its position vigorously. However,
this litigation is in the discovery stage and the Company cannot predict its
outcome with certainty. The litigation process is inherently uncertain. The
Company has incurred, and expects to continue to incur, substantial legal fees
and expenses. This litigation has diverted and is expected to continue to divert
the efforts and attention of key management and technical personnel. As a
result, the Company's pursuit and defense of this litigation, regardless of its
eventual outcome, has been, and will likely continue to be, costly and time
consuming. Should the outcome of this litigation be adverse, the Company would
be required to pay significant monetary damages to Interactive Flight and Avnet
and the Company's business would be harmed. In addition, the Company can give no
assurance that Chubb will honor the claim for coverage to pay for damages
arising out of this litigation. An adverse outcome could be material to the
Company's financial position or results of operations.
MICRON ELECTRONICS, INC.
On October 27, 1999, the Company received a letter from Micron Electronics,
Inc. ("Micron"), requesting that the Company refrain from the manufacture, sale
or offer to sell memory products which infringe on two of Micron's U.S. patents.
The Company is presently evaluating Micron's patents and their relationship to
the Company's memory products.
If Micron concludes the Company's products infringe Micron's patents, the
Company may be sued by Micron for patent infringement. Such litigation could
result in significant expenses and diversion of management time and other
resources. If Micron's patents are found to be valid and the memory products are
found to infringe, the Company may lose the ability to manufacture, sell or
offer to sell certain memory products, and the Company may have to seek a
license from Micron in order to use its technology. Further, there can be no
assurance that the Company would be able to secure a license from Micron on
commercially reasonable terms, if at all.
OTHER LEGAL PROCEEDINGS
The Company is currently not a party to any other material legal
proceedings. However, the Company is involved in other suits and claims in the
ordinary course of business, and the Company may from time to time become a
party to other legal proceedings arising in the ordinary course of business.
As is common in the industry, the Company currently has in effect a number
of agreements to indemnify certain of its suppliers and customers for alleged
patent infringement. The scope of such indemnity varies, but may, in some
instances, include indemnification for damages and expenses, including
attorneys' fees. The Company's insurance does not provide protection in such
circumstances.
F-18
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
LEASE COMMITMENTS
As discussed in Note 3, the Company leases its corporate office facilities
and some manufacturing equipment from its shareholders and guarantees the
related notes payable. In addition, the Company leases, under operating leases
and capital leases, an office building and manufacturing equipment with initial
noncancellable lease terms ranging from 4 to 6 years. Future scheduled minimum
annual lease payments for the years ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES OTHER LEASE OTHER
(RELATED CAPITAL (RELATED OPERATING
PARTY) LEASES PARTY) LEASES
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
2000............................................ $ 573,600 $ 516,539 $ 228,000 $421,631
2001............................................ 394,949 478,739 228,000 126,452
2002............................................ 5,600 466,139 228,000 --
2003............................................ -- 114,530 228,000 --
2004............................................ -- -- 228,000 --
Thereafter...................................... -- -- 3,439,000 --
--------- ---------- ---------- --------
Net minimum lease payments...................... 974,149 1,575,947 $4,579,000 $548,083
========== ========
Less, amounts representing interest........... (74,616) (179,324)
--------- ----------
Present value of future minimum capital lease
obligations................................... 899,533 1,396,623
Less, current portion......................... (514,105) (424,173)
--------- ----------
Capital lease obligations, less current
portion....................................... $ 385,428 $ 972,450
========= ==========
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $1,092,000, $953,000 and $802,000, respectively. Refer to Note 3
for related party amounts.
REPURCHASE AGREEMENTS
The Company is contingently liable at December 31, 1999 to various financial
institutions on repurchase agreements in connection with wholesale inventory
financing. In general, inventory would be repurchased by the Company upon
customer default with a financing institution and then resold through normal
distribution channels. The amount of potential product returns is estimated and
provided for in the period of the sale for financial reporting purposes. As of
December 31, 1999, the Company has never been required to repurchase inventory
in connection with the customer default agreements noted above. However, there
is no assurance that the Company will not be required to repurchase inventory,
upon customer default, in the future. Sales under such agreements were
approximately $3,600,000, $1,700,000 and $2,000,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
401(k) PLAN
The Company has a 401(k) plan for employees with at least six months of
service. The Company matches 50% of eligible employee contributions, limited to
10% of employee salaries. Participants in the Plan are 20% vested in the
Company's contributions after two years of service and vest an additional 20%
each year thereafter unless the Plan is terminated, whereby participants will
become fully vested in the contributions made to date. For the years ended
December 31, 1997, 1998 and 1999, the Company contributed approximately
$254,000, $250,000 and $339,000, respectively.
F-19
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLAN:
The 1996 Incentive Stock Option Purchase Plan (the "Plan") provides for the
direct sale of shares and the grant of options to purchase shares of the
Company's common stock to employees, officers, consultants and directors. The
Plan includes nonqualified stock options ("NSOs") and incentive stock options
("ISOs"). The option price for the ISOs and NSOs shall not be less than the fair
market value of the shares of the Company's stock on the date of the grant. For
ISOs, the exercise price per share may not be less than 110% of the fair market
value of a share of common stock on the grant date for any individual possessing
more than 10% of the total outstanding stock of the Company. The Board of
Directors has the authority to determine the time or times at which options
become exercisable. Options expire within a period of not more than ten years
from the date of grant.
The Plan provides for the issuance of up to 891,734 shares of common stock.
A summary of the option activity under the Stock Option Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
INCENTIVE NONQUALIFIED TOTAL SHARE
--------- ------------ -------- ---------
<S> <C> <C> <C> <C>
Balances at December 31, 1996........ 563,188 88,494 651,682 $5.37
Granted.............................. 20,000 -- 20,000 $6.00
Exercised............................ -- -- -- --
Forfeited and/or expired............. (83,562) -- (83,562) $5.37
------- ------- -------
Balances at December 31, 1997........ 499,626 88,494 588,120 $5.39
Granted.............................. 11,000 10,000 21,000 $6.00
Exercised............................ -- -- -- --
Forfeited and/or expired............. (12,105) -- (12,105) $5.71
------- ------- -------
Balances at December 31, 1998........ 498,521 98,494 597,015 $5.40
Granted.............................. 86,695 15,664 102,359 $6.00
Exercised............................ -- -- -- --
Forfeited and/or expired............. (24,834) (6,875) (31,709) $5.62
------- ------- -------
Balances at December 31, 1999........ 560,382 107,283 667,665 $5.48
======= ======= =======
Exercisable at December 31, 1997..... 296,873 57,152 354,025 $5.37
======= ======= =======
Exercisable at December 31, 1998..... 416,831 79,276 496,107 $5.38
======= ======= =======
Exercisable at December 31, 1999..... 514,893 99,125 614,018 $5.44
======= ======= =======
</TABLE>
As of December 31, 1999, options outstanding have a range of per share
exercise prices between $5.37 and $6.00 and a weighted average remaining
contractual life of 6.9 years.
No compensation expense was recorded as a result of stock options granted to
employees through December 31, 1998 as the fair value approximated the per share
exercise price of the respective options granted. With respect to options
granted to employees in 1999, there were 88,059 shares under options granted in
January 1999 with an estimated fair market value of $8.00 per share, 13,000
granted in April 1999 and 1,300 granted in May 1999 with an estimated fair
market value of $12.00 per share, all of which were granted at an exercise price
of $6.00 per share. The difference between the exercise price and the fair
market value at the date of grant of $262,000 is accounted for as unearned
F-20
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLAN: (CONTINUED)
compensation and will be amortized to expense over the related service period.
The Company recorded a total of approximately $120,000 as compensation expense
for the year ended December 31, 1999 related to options granted to employees in
1999.
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to continue the intrinsic value method of accounting for
stock options granted to employees and directors in accordance with APB Opinion
No. 25 and related interpretations in accounting for stock option plans.
Accordingly, no compensation cost has been recognized for its Plan other than
that described above. Had compensation cost been determined based on the fair
value at the grant dates for stock options under the Plan consistent with the
method promulgated by SFAS No. 123, the Company's net income (loss) for the
years ended December 31, 1997, 1998 and 1999 would have resulted in the pro
forma amounts below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Income (loss) before income taxes, as
reported.............................. $(624,226) $(2,140,413) $11,984,836
Additional compensation expense per SFAS
No. 123 (315,429) (117,290) (107,040)
--------- ----------- -----------
Pro forma income (loss) before provision
(benefit) for income taxes............ (939,655) (2,257,703) 11,877,796
Pro forma provision (benefit) for income
taxes................................. 2,517 23,714 (513,342)
--------- ----------- -----------
Pro forma net income (loss)............. $(942,172) $(2,281,417) $12,391,138
========= =========== ===========
Net income (loss) as reported........... $(625,898) $(2,162,895) $12,502,804
========= =========== ===========
Basic net income (loss) per share:
Pro forma............................. $ (0.16) $ (0.38) $ 2.05
========= =========== ===========
As reported........................... $ (0.10) $ (0.36) $ 2.07
========= =========== ===========
Diluted net income (loss) per share:
Pro forma............................. $ (0.16) $ (0.38) $ 1.92
========= =========== ===========
As reported........................... $ (0.10) $ (0.36) $ 1.94
========= =========== ===========
Weighted average shares outstanding:
Basic................................. 6,035,706 6,035,706 6,035,706
========= =========== ===========
Diluted............................... 6,035,706 6,035,706 6,441,573
========= =========== ===========
</TABLE>
The fair value of each option grant under the Plan was estimated on the date
of the grant using the minimum value method as the Company is a nonpublic
entity. This value is the current stock price less the present value of the
exercise price for a stock that does not pay dividends. The assumptions used for
the minimum value computation for the years ended December 31, 1997, 1998 and
1999 are as follows: the risk-free interest rate ranges from 4.39% to 6.41%; the
exercise price is equal to the fair market value of the underlying common stock
at the grant date, except in 1999 when the estimated fair
F-21
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLAN: (CONTINUED)
market value per share under options granted is higher; the expected life of the
option is the term to expiration, generally 5 years; the forfeiture rate is
8.0%; and the common stock will pay no dividends.
11. RESTRUCTURING OF OPERATIONS:
In December 1998, the Company adopted a plan to restructure its operations
in Scotland in response to the increasingly competitive market conditions. The
restructuring consisted of a series of planned actions, including the
consolidation of the office and warehouse facility, the sale of machinery and
equipment and a reduction in the number of employees. The restructuring charge
recorded in 1998, included in general and administrative expenses, was $397,000
and related to estimated losses associated with the disposal of machinery and
equipment ($234,000) and the consolidation of the office and warehouse facility
($163,000). The estimated severance costs associated with the reduction of 32
employees of approximately $157,000 were recognized in 1999 because the
employees affected by the plan were not notified by the Company until early
1999.
At December 31, 1998, the total restructuring charge of $397,000 is
reflected on the Company's consolidated balance sheet in accrued and other
liabilities. Also included in accrued and other liabilities at December 31, 1998
is $1,007,000 of unutilized deferred incentive grants originally awarded to the
Company by governmental agencies of Scotland in 1996. Certain of these grants
included reduced rental costs and the remaining grants were contingent on the
Company maintaining certain levels of manufacturing activity and employee
headcounts over a predetermined period of time. As a result of the restructuring
decision at December 31, 1998, it was uncertain whether these grants would be
partially forgiven or if the Company would be required to repay all such amounts
and benefits previously received.
In 1999, the Company ultimately incurred approximately $638,000 of charges
associated with the disposal of machinery and equipment and the consolidation of
the office and warehouse facility in Scotland, of which $397,000 was applied to
the original restructuring liability with the remainder of $241,000 recognized
in 1999 as a component of general and administrative expenses. In addition, the
government of Scotland notified the Company in October 1999 that it would
forgive approximately $603,000 of incentive grants, which was then recorded as a
reduction to general and administrative expenses. Contingent on the Company
maintaining certain minimum headcount levels through 2001, the government of
Scotland further committed to forgive another $303,000 of incentive grants,
which will remain as a component of accrued and other liabilities until such
time as the amount is forgiven. The remaining $101,000 of deferred incentive
grants was required to be repaid in two payments of approximately $51,500, both
of which were paid in 1999.
12. SEGMENT INFORMATION:
The Company designs, manufactures and markets a comprehensive line of
memory, storage and connectivity products used in high performance computing,
networking and communications, consumer electronics and industrial applications.
The Company provides both standard and specialty memory solutions for two
reportable operating segments, Original Equipment Manufacturer and Aftermarket,
based on dynamic random access memory, static random access memory and Flash
memory technologies. The accounting policies for each of the reportable
operating segments are the same as those described in Note 2.
F-22
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT INFORMATION: (CONTINUED)
Beginning in 1999, after completion of management information system
enhancements, the Company used net sales and gross profit as the basis for
evaluating the performance of its operating segments. The Company performed no
such analysis in 1998 and 1997, since no such information was then available.
The Company does not allocate operating expenses, interest or income taxes to
operating segments. Due to the similarity of products manufactured for customers
within each operating segment, the Company does not maintain separate records to
identify assets by operating segment.
Summarized financial information regarding the Company's reportable segments
for the year ended December 31, 1999 is shown in the following table:
<TABLE>
<CAPTION>
ORIGINAL
EQUIPMENT
MANUFACTURER AFTERMARKET CONSOLIDATED
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues........................ $49,601,356 $142,991,917 $192,593,273
Cost of revenues.................... 35,247,639 117,725,187 152,972,826
----------- ------------ ------------
Gross profit...................... $14,353,717 $ 25,266,730 $ 39,620,447
=========== ============ ============
</TABLE>
International sales comprised 22.5%, 19.0% and 15.0% of the Company's
revenues for the years ended December 31, 1997, 1998 and 1999, respectively.
Foreign sales are shipped directly from the Company's foreign subsidiaries,
while export sales are shipped domestically to the Company's foreign customers.
During early 1999, the Company restructured its operation in Scotland to a sales
office, resulting in a substantial shift of foreign sales to export sales.
Financial information regarding the Company's international revenues is shown in
the following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Export................................ $12,685,942 $16,779,344 $28,852,113
Foreign............................... 23,044,685 6,425,700 121,069
----------- ----------- -----------
$35,730,627 $23,205,044 $28,973,182
=========== =========== ===========
</TABLE>
F-23
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. UNAUDITED PRO FORMA INFORMATION:
In connection with the completion of the initial public offering of the
Company's common stock, the Company will terminate its S corporation status for
tax purposes, assuming reinstatement of the S corporation status as discussed in
Note 8. In addition, the Company will be required to record a nonrecurring
income tax benefit and a corresponding net deferred income tax asset equal to
the difference in the Company's basis for assets and liabilities for financial
reporting and income tax purposes. Accordingly, the Company's unaudited pro
forma consolidated balance sheet at December 31, 1999 includes net adjustments
of approximately $940,000, which increase deferred tax assets in the aggregate
by approximately $1,475,000 and deferred tax liabilities by approximately
$535,000 assuming the Company ceased to be treated as an S corporation on
December 31, 1999. The actual net increase in a nonrecurring income tax benefit
and a corresponding increase in a net deferred income tax asset will be adjusted
through the date immediately preceding the completion of this offering. The
Company has calculated the pro forma deferred tax assets and liabilities and
benefit for income taxes using the asset and liability approach in accordance
with SFAS No. 109.
The following presents the unaudited pro forma deferred tax assets and
liabilities assuming the Company ceased to be treated as an S corporation on
December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Financial statement reserves................................ $1,145,000
Accrued expenses............................................ 305,000
Stock options............................................... 48,000
Net operating loss carryforwards............................ 103,000
Investment tax credits...................................... 785,000
Other....................................................... 35,000
----------
Gross deferred tax asset.................................. 2,421,000
Less, Valuation allowance................................. (103,000)
----------
2,318,000
----------
Accumulated depreciation.................................... (555,000)
Other....................................................... (5,000)
----------
Gross deferred tax liability.............................. (560,000)
----------
Net deferred tax asset...................................... $1,758,000
==========
</TABLE>
Additionally, the unaudited pro forma balance sheet includes an adjustment
to reflect a distribution to existing shareholders of an amount equal to the
undistributed earnings from the date of the Company's formation through
December 31, 1999, estimated to be approximately $13,645,000, including an
amount to be retained by the Company equal to the estimated income tax
liability, including interest and possible penalties, determined as if the
Company were a C corporation for all periods commencing January 1, 1996 through
December 31, 1999, estimated to be approximately $5,645,000, and an increase in
net deferred tax assets of $940,000 assuming the Company's S corporation status
had been reinstated and subsequently terminated on December 31, 1999. The
unaudited pro forma balance sheet does not give effect to distributions, either
to be paid or retained by the Company, to the existing shareholders concurrently
with the completion of the offering related to the Company's earnings from
January 1, 2000 to the date immediately preceding the completion of the
offering.
F-24
<PAGE>
SIMPLE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. UNAUDITED PRO FORMA INFORMATION: (CONTINUED)
The following provides a summary reconciliation of the effects of the
unaudited pro forma adjustments to the Company's retained earnings:
<TABLE>
<CAPTION>
<S> <C>
Retained earnings as of December 31, 1999................... $ 12,704,572
Distributions to existing shareholders, including amounts
retained by the Company................................... (13,644,603)
Pro forma income tax benefit, net........................... 940,031
------------
Pro forma retained earnings as of December 31, 1999....... $ --
============
</TABLE>
14. SUBSEQUENT EVENTS (UNAUDITED):
STOCK SPLITS:
On , 2000, the Board of Directors authorized a for stock split of
all outstanding common stock and common stock options. All share and per share
amounts have been adjusted to give retroactive effect to the stock split for all
periods presented.
On , 2000, the existing shareholders contractually committed to
convert an aggregate of $3.0 million of additional paid-in capital originally
invested by them into shares of common stock at the initial public
offering price upon completion of the offering. All share and per share amounts
have been adjusted to give retroactive effect to this transaction for all
periods presented, based on an estimated conversion price at the mid-range of
the per share offering price of common stock in the prospectus.
F-25
<PAGE>
INSIDE BACK COVER
The Simple Technology logo is at the center of the page divided into four
equal pictures. The top left picture depicts memory modules on two memory
boards. The top right picture depicts two engineers testing and installing
memory boards. The bottom left picture depicts an engineer examining a computer
display showing a schematic of a memory module's placement on a circuit board.
The bottom right picture depicts a Simple Technology CompactFlash-TM- card.
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
DESCRIPTION
- -----------
<S> <C>
SEC registration fee........................................ $15,180.00
NASD filing fee............................................. 6,250.00
Printing and engraving expenses............................. *
Blue Sky fees and expenses.................................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Nasdaq National Market listing fee.......................... *
Transfer agent and registrar fees and expenses.............. *
Miscellaneous............................................... *
----------
Total................................................. $ *
==========
</TABLE>
- ------------------------
* To be added by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Amended and Restated Articles of Incorporation limit the personal
liability of our directors for monetary damages to the fullest extent permitted
by the California General Corporation Law (the "California Law"). Under the
California Law, a director's liability to a company or its shareholders may not
be limited (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law, (ii) for acts or omissions that a
director believes to be contrary to the best interests of the Company or its
shareholders or that involve the absence of good faith on the part of the
director, (iii) for any transaction from which a director derived an improper
personal benefit, (iv) for acts or omissions that show a reckless disregard for
the director's duty to the Company or its shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of a serious injury to the Company or
its shareholders, (v) for acts or omissions that constitute an unexcused pattern
of inattention that amounts to an abdication of the director's duty to the
Company or its shareholders, (vi) under Section 310 of the California Law
concerning contracts or transactions between the Company and a director, or
(vii) under Section 316 of the California Law concerning directors' liability
for improper dividends, loans and guarantees. The limitation of liability does
not affect the availability of injunctions and other equitable remedies
available to the Company's shareholders for any violation by a director of the
director's fiduciary duty to the Company or its shareholders. The Company's
Amended and Restated Articles of Incorporation also include an authorization for
the Company to indemnify its "agents" (as defined in Section 317 of the
California Law) through bylaw provisions, by agreement with the agents, vote of
our shareholders or disinterested directors, or otherwise, to the fullest extent
permitted by law. Pursuant to this provision, the Company's Amended and Restated
Bylaws provide for indemnification of the Company's directors, officers and
employees. In addition, the Company may, at its discretion, provide
indemnification to persons whom the Company is not obligated to indemnify. The
Amended and Restated Bylaws also allow the Company to enter into indemnity
agreements with individual directors, officers, employees and other agents.
These indemnity agreements have been entered into
II-1
<PAGE>
with all directors and executive officers and provide the maximum
indemnification permitted by law. These agreements, together with the Company's
Amended and Restated Articles of Incorporation and Amended and Restated Bylaws,
may require the Company, among other things, to indemnify these directors or
executive officers (other than for liability resulting from willful misconduct
of a culpable nature), to advance expenses to them as they are incurred,
provided that they undertake to repay the amount advanced if it is ultimately
determined by a court that they are not entitled to indemnification, and to
obtain directors' and officers' insurance if available on reasonable terms.
Section 317 of the California Law and the Company's Amended and Restated Bylaws
make provision for the indemnification of officers, directors and other agents
in terms sufficiently broad to indemnify such persons, under certain
circumstances, for liabilities (including reimbursement of expense incurred)
arising under the Securities Act of 1933. The Company is not aware of any
pending litigation or proceeding involving any director, officer, employee or
agent of the Company in which indemnification will be required or permitted. See
"Business--Legal Proceedings." Moreover, the Company is not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification. The Company believes that the foregoing indemnification
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers. The Company currently maintains directors'
and officers' liability insurance.
The Underwriting Agreement provides for indemnification by the underwriters
of Simple Technology and its officers and directors, and by Simple Technology of
the underwriters, for certain liabilities arising under the Securities Act of
1933, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by Simple Technology during the
past three years involving sales of our securities that were not registered
under the Securities Act of 1933:
Since January 1, 1997, we have granted options to purchase an aggregate of
shares of common stock to our directors, executive officers, employees and
consultants at exercise prices of $ to per share. No options have
been exercised.
Upon the completion of this offering, we will issue shares of common
stock at the initial public offering price to our existing shareholders upon
their contribution to us of the additional paid-in capital notes.
The sale and issuance of securities in the above transactions were deemed to
be exempt from registration under the Securities Act of 1933 by virtue of
Section 4(2) or Rule 701 thereof, as transactions by an issuer not involving a
public offering under the Securities Act of 1933. Appropriate legends have been
or will be affixed to the stock certificates issued in such transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
See Exhibit Index at page II-7.
(b) Financial Statement Schedules
See page II-4.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in
denominations as required by the underwriters and registered in such names as
required by the underwriters to permit prompt delivery to each purchaser.
II-2
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, may be permitted to directors, officers or controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
indemnification is against public policy as expressed in the Securities Act of
1933, and is, therefore, unenforceable. In the event that a claim for
indemnification against liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person of the Registrant in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and this offering of these securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
The Shareholders and Board of Directors
Simple Technology, Inc.
Our audits of the consolidated financial statements of Simple Technology, Inc.
referred to in our report dated February 25, 2000 appearing in this registration
statement on Form S-1 also included an audit of the financial statement schedule
listed in Item (16)(b) of this Form S-1. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
Costa Mesa, California
February 25, 2000
II-4
<PAGE>
SIMPLE TECHNOLOGY, INC.
SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, 1999
<TABLE>
<CAPTION>
ACCOUNTS INVENTORY
RECEIVABLE ALLOWANCES VALUATION ALLOWANCE
--------------------- -------------------
<S> <C> <C>
Balance, December 31, 1996............................... $ 805,079 $ 2,095,932
Charged to operations.................................... 482,205 1,252,557
Write-offs............................................... (101,445) (1,399,730)
---------- ------------
Balance, December 31, 1997............................... 1,185,839 1,948,759
Charged to operations.................................... 67,404 592,513
Write-offs............................................... (527,440) (1,051,315)
---------- ------------
Balance, December 31, 1998............................... 725,803 1,489,957
Charged to operations.................................... 115,624 698,023
Write-offs............................................... (69,621) (107,759)
---------- ------------
Balance, December 31, 1999............................... $ 771,806 $ 2,080,221
========== ============
</TABLE>
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Santa Ana,
State of California on March 13, 2000.
<TABLE>
<S> <C> <C>
SIMPLE TECHNOLOGY, INC.
By: /s/ MANOUCH MOSHAYEDI
-----------------------------------------
Manouch Moshayedi
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF
THE BOARD OF DIRECTORS
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Manouch Moshayedi and Dan Moses, and each of
them, as his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including pre-effective
and post-effective amendments) to this Registration Statement, or any related
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission and any other
regulatory authority, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or either
of them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MANOUCH MOSHAYEDI Chief Executive Officer and and Chairman March 13, 2000
- ---------------------------- of the Board of Directors
Manouch Moshayedi
/s/ MIKE MOSHAYEDI President and Director March 13, 2000
- ----------------------------
Mike Moshayedi
/s/ MARK MOSHAYEDI Chief Operating Officer, Chief Technical March 13, 2000
- ---------------------------- Officer, Secretary and Director
Mark Moshayedi
/s/ DAN MOSES Chief Financial Officer (Principal March 13, 2000
- ---------------------------- Financial and Accounting Officer) and
Dan Moses Director
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
1.1 *Form of Underwriting Agreement
3.1 *Amended and Restated Articles of Incorporation of the
Registrant, as currently in effect
3.2 Amended and Restated Bylaws of the Registrant, as currently
in effect
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws for the Registrant defining the rights of holders of
Common Stock of the Registrant
4.2 *Specimen Stock Certificate
5.1 *Opinion of Brobeck, Phleger & Harrison LLP
10.1 *Lease, dated February 2, 1994, by and between MDC Land
Corporation and the Registrant, as currently in effect
10.2 *Industrial Real Estate Lease, dated December 20, 1995, by
and between David Pick, Trustee of the David Pick and
Beatrice A. Pick Trust Dated March 10, 1994 and the
Registrant, as currently in effect
10.3 Credit Agreement, dated August 3, 1999, between the
Registrant and Comerica Bank
10.4 *Security Agreement, dated August 3, 1999, by the Registrant
and Comerica Bank
10.5 *2000 Stock Incentive Plan
10.6 *2000 Employee Stock Purchase Plan
10.7 *Form of Indemnification Agreement between the Registrant
and each of its directors and officers
10.8 Form of Employment Agreement for Executive Officers of the
Registrant (including a schedule of substantially identical
agreements)
10.9 *Tax Distribution and Indemnity Agreement, dated ,
2000, by and between the Registrant and each of the
Registrant's shareholders
10.10+ *Sales Agreement, dated April 30, 1998, by and between
Hitachi Semiconductor (America) Inc. and the Registrant
10.11 Equipment Lease, dated June 1, 1996, by and between MDC Land
Corporation and the Registrant, as currently in effect
10.12 Equipment Lease, dated September 1, 1996, by and between MDC
Land Corporation and the Registrant, as currently in effect
10.13 Equipment Lease, dated October 1, 1996, by and between MDC
Land Corporation and the Registrant, as currently in effect
10.14 Equipment Lease, dated January 1, 1997, by and between MDC
Land Corporation and the Registrant, as currently in effect
10.15 Equipment Lease, dated February 1, 1997, by and between MDC
Land Corporation and the Registrant, as currently in effect
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
10.16 Equipment Lease, dated April 1, 1997, by and between MDC
Land Corporation and the Registrant, as currently in effect
10.17 *Small Business Administration Guaranty, dated February 2,
1994
10.18 *Guaranty, dated March 5, 1996, by the Registrant in favor
of Lyon Credit Corporation
21.1 *List of subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 *Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-6)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
+ Confidential treatment will be requested for certain confidential portions
of this exhibit pursuant to Rule 406 under the Securities Act. In accordance
with Rule 406, these confidential portions will be omitted from this exhibit
and will be filed separately with the Commission.
II-8
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED BYLAWS OF
SIMPLE TECHNOLOGY, INC.
ARTICLE I
CORPORATE OFFICES
1.1 PRINCIPAL OFFICE. The Board of Directors shall fix the location of the
principal executive office of the corporation at any place within or outside the
State of California. If the principal executive office is located outside
California and the corporation has one or more business offices in California,
then the Board of Directors shall fix and designate a principal business office
in California.
1.2 OTHER OFFICES. The Board of Directors may at any time establish branch
or subordinate offices at any place or places.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 PLACE OF MEETINGS. Meetings of shareholders shall be held at any place
within or outside the State of California designated by the Board of Directors.
In the absence of any such designation, shareholders' meetings shall be held at
the principal executive office of the corporation or any place consented to in
writing by all persons entitled to vote at such meeting, given before or after
the meeting and filed with the Secretary of the corporation.
2.2 ANNUAL MEETING. An annual meeting of shareholders shall be held each
year on a date and at a time designated by the Board of Directors. At that
meeting, directors shall be elected. Any other proper business may be transacted
at the annual meeting of shareholders.
2.3 SPECIAL MEETINGS. Special meetings of the shareholders may be called
at any time, subject to the provisions of Sections 2.4 and 2.5 of these
Bylaws, by the Board of Directors, the Chairman of the Board, the President
or the holders of shares entitled to cast not less than fifty percent (50%)
of the votes at that meeting.
If a special meeting is called by anyone other than the Board of Directors
or the President or the Chairman of the Board, then the request shall be in
writing, specifying the time of such meeting and the general nature of the
business proposed to be transacted, and shall be delivered personally or sent by
registered mail or by other written communication to the Chairman of the Board,
the President, any Vice President or the Secretary of the corporation. The
officer receiving the request shall cause notice to be given to the shareholders
entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of
these Bylaws, that a meeting will be held at the time requested by the person or
persons calling the meeting, so long as that time is not less than thirty-five
(35) nor more than sixty (60) days after the receipt of the request. If the
notice is not given within twenty (20) days after receipt of the request, then
the person or persons requesting the meeting may give the notice. Nothing
contained in this paragraph of this Section 2.3 shall be construed as limiting,
fixing or affecting the time when a meeting of shareholders called by action of
the Board of Directors may be held.
<PAGE>
2.4 NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 2.5 of
these Bylaws not less than ten (10) (or, if sent by third-class mail pursuant to
Section 2.5 of these Bylaws, not less than thirty (30)) nor more than sixty (60)
days before the date of the meeting to each shareholder entitled to vote
thereat. Such notice shall state the place, date, and hour of the meeting and
(i) in the case of a special meeting, the general nature of the business to be
transacted, and no business other than that specified in the notice may be
transacted, or (ii) in the case of the annual meeting, those matters which the
Board of Directors, at the time of the mailing of the notice, intends to present
for action by the shareholders, but, subject to the provisions of the next
paragraph of this Section 2.4, any proper matter may be presented at the meeting
for such action. The notice of any meeting at which directors are to be elected
shall include the names of nominees intended at the time of the notice to be
presented by the Board for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the California Corporations Code (the
"Code"), (ii) an amendment of the Articles of Incorporation, pursuant to Section
902 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (v) a distribution in dissolution other than in
accordance with the rights of any outstanding preferred shares, pursuant to
Section 2007 of the Code, then the notice shall also state the general nature of
that proposal.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of a shareholders'
meeting shall be given either personally or by first-class mail, or, if the
corporation has outstanding shares held of record by five hundred (500) or more
persons (determined as provided in Section 605 of the Code) on the record date
for the shareholders' meeting, notice may be sent by third-class mail, or other
means of written communication, addressed to the shareholder at the address of
the shareholder appearing on the books of the corporation or given by the
shareholder to the corporation for the purpose of notice; or if no such address
appears or is given, at the place where the principal executive office of the
corporation is located or by publication at least once in a newspaper of general
circulation in the county in which the principal executive office is located.
The notice shall be deemed to have been given at the time when delivered
personally or deposited in the mail or sent by other means of written
communication.
If any notice (or any report referenced in Article VII of these Bylaws)
addressed to a shareholder at the address of such shareholder appearing on the
books of the corporation is returned to the corporation by the United States
Postal Service marked to indicate that the United States Postal Service is
unable to deliver the notice to the shareholder at that address, all future
notices or reports shall be deemed to have been duly given without further
mailing if the same shall be available to the shareholder upon written demand of
the shareholder at the principal executive office of the corporation for a
period of one (1) year from the date of the giving of the notice.
An affidavit of mailing of any notice or report in accordance with the
provisions of this Section 2.5, executed by the Secretary, Assistant Secretary
or any transfer agent, shall be prima facie evidence of the giving of the notice
or report.
2
<PAGE>
2.6 QUORUM. Unless otherwise provided in the Articles of Incorporation of
the corporation, shares entitled to vote and holding a majority of the voting
power, represented in person or by proxy, shall constitute a quorum at a meeting
of shareholders. The shareholders present at a duly called or held meeting at
which a quorum is present may continue to transact business until adjournment
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum, if any action taken (other than adjournment) is approved by shares
holding at least a majority of the voting power required to constitute a quorum.
In the absence of a quorum, any meeting of shareholders may be adjourned
from time to time by the vote of a majority of the shares represented either in
person or by proxy, but no other business may be transacted, except as provided
in the last sentence of the preceding paragraph.
2.7 ADJOURNED MEETING NOTICE. Any shareholders' meeting, annual or special,
whether or not a quorum is present, may be adjourned from time to time by the
shares entitled to vote and holding a majority of the voting power, represented
in person or by proxy, at that meeting.
When any meeting of shareholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if its
time and place are announced at the meeting at which the adjournment is taken.
However, if the adjournment is for more than forty-five (45) days from the date
set for the original meeting or if a new record date for the adjourned meeting
is fixed, a notice of the adjourned meeting shall be given to each shareholder
of record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 2.4 and 2.5 of these Bylaws. At any adjourned meeting the
corporation may transact any business which might have been transacted at the
original meeting.
2.8 VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section
2.11 of these Bylaws, subject to the provisions of Sections 702 through 704 of
the Code (relating to voting shares held by a fiduciary, in the name of a
corporation, or in joint ownership).
Elections for directors and voting on any other matter at a shareholders'
meeting need not be by ballot unless a shareholder demands election by ballot at
the meeting and before the voting begins.
Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the Articles of Incorporation, each outstanding share,
regardless of class, shall be entitled to one (1) vote on each matter submitted
to a vote of the shareholders. Any holder of shares entitled to vote on any
matter may vote part of the shares in favor of the proposal and refrain from
voting the remaining shares or may vote them against the proposal other than
elections to office, but, if the shareholder fails to specify the number of
shares such shareholder is voting affirmatively, it will be conclusively
presumed that the shareholder's approving vote is with respect to all shares
which the shareholder is entitled to vote.
The affirmative vote of shares holding a majority of the voting power,
represented and voting at a duly held meeting at which a quorum is present
(which shares voting
3
<PAGE>
affirmatively also constitute at least a majority of the voting power required
to constitute a quorum), shall be the act of the shareholders, unless the vote
of a greater number voting by classes is required by the Code or by the Articles
of Incorporation.
At a shareholders' meeting at which directors are to be elected, a
shareholder shall be entitled to cumulate votes either (i) by giving one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which that shareholder's shares are
normally entitled or (ii) by distributing the shareholder's votes on the same
principle among as many candidates as the shareholder thinks fit, if the
candidate or candidates' names have been placed in nomination prior to the
voting and the shareholder has given notice prior to the voting of the
shareholder's intention to cumulate the shareholder's votes. If any one
shareholder has given such a notice, then every shareholder entitled to vote may
cumulate votes for candidates in nomination. The candidates receiving the
highest number of affirmative votes, up to the number of directors to be
elected, shall be elected; votes against any candidate and votes withheld shall
have no legal effect. Notwithstanding the foregoing, at such time as the
corporation becomes a listed corporation (as such term is defined in Section
301.5 of the California Corporations Code), shareholders shall no longer be
entitled to cumulate their votes for candidates in an election of directors.
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT. The transactions of
any meeting of shareholders, either annual or special, however called and
noticed, and wherever held, are as valid as though they had been taken at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each of the
persons entitled to vote, not present in person or by proxy, signs a written
waiver of notice or a consent to the holding of the meeting or an approval of
the minutes thereof. Neither the business to be transacted at nor the purpose of
any annual or special meeting of shareholders need be specified in any written
waiver of notice or consent to the holding of the meeting or approval of the
minutes thereof, except that if action is taken or proposed to be taken for
approval of any of those matters specified in the second paragraph of Section
2.4 of these Bylaws, the waiver of notice or consent or approval shall state the
general nature of the proposal. All such waivers, consents, and approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting.
Attendance of a person at a meeting shall constitute a waiver of notice of
and presence at that meeting, except when the person objects, at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened and except that attendance at a meeting is not a
waiver of any right to object to the consideration of matters required by the
Code to be included in the notice of such meeting but not so included, if such
objection is expressly made at the meeting.
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action
which may be taken at any annual or special meeting of shareholders may be taken
without a meeting and without prior notice, if a consent in writing, setting
forth the action so taken, shall be signed by the holders of outstanding shares
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted.
4
<PAGE>
Directors may not be elected by written consent except by unanimous written
consent of all shares entitled to vote for the election of directors.
However, a director may be elected at any time to fill any vacancy on the
Board of Directors (so long as such vacancy has not been filled by the
directors) by the written consent of shares holding a majority of the voting
power that are entitled to vote for the election of directors.
All such consents shall be maintained in the corporate records. Any
shareholder giving a written consent, or the shareholder's proxy holders, or a
transferee of the shares, or a personal representative of the shareholder, or
their respective proxy holders, may revoke the consent by a writing received by
the Secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, the Secretary shall give prompt notice of any corporate
action approved by the shareholders without a meeting by less than unanimous
written consent to those shareholders entitled to vote who have not consented in
writing. Such notice shall be given in the manner specified in Section 2.5 of
these Bylaws. In the case of approval of (i) a contract or transaction in which
a director has a direct or indirect financial interest, pursuant to Section 310
of the Code, (ii) indemnification of a corporate "agent," pursuant to Section
317 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, and (iv) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section
2007 of the Code, the notice shall be given at least ten (10) days before the
consummation of any action authorized by that approval, unless the consents of
all shareholders entitled to vote have been solicited in writing.
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVEN CONSENTS. In order
that the corporation may determine the shareholders entitled to notice of any
meeting or to vote, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days prior
to the date of such meeting nor more than sixty (60) days before any other
action. Shareholders at the close of business on the record date are entitled to
notice and to vote, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date, except as
otherwise provided in the Articles of Incorporation or the Code.
A determination of shareholders of record entitled to notice of or to vote
at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
but the Board of Directors shall fix a new record date if the meeting is
adjourned for more than forty-five (45) days from the date set for the original
meeting.
If the Board of Directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of or
to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the
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day on which notice is given or, if notice is waived, at the close of business
on the business day next preceding the day on which the meeting is held.
(b) The record date for determining shareholders entitled to give consent
to corporate action in writing without a meeting, (i) when no prior action by
the Board of Directors has been taken, shall be the day on which the first
written consent is given, or (ii) when prior action by the Board of Directors
has been taken, shall be at the close of business on the day on which the Board
of Directors adopts the resolution relating thereto, or the sixtieth (60th) day
prior to the date of such other action, whichever is later.
The record date for any other purpose shall be as provided in Section 8.1
of these Bylaws.
2.12 PROXIES. Every person entitled to vote for directors, or on any other
matter, shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the Secretary
of the corporation. A proxy shall be deemed signed if the shareholder's name or
other authorization is placed on the proxy (whether by manual signature,
typewriting, telegraphic or electronic transmission or otherwise) by the
shareholder or the shareholder's attorney-in-fact. A validly executed proxy
which does not state that it is irrevocable shall continue in full force and
effect unless (i) the person who executed the proxy revokes it prior to the time
of voting by delivering a writing to the corporation stating that the proxy is
revoked or by executing a subsequent proxy and presenting it to the meeting or
by attendance at such meeting and voting in person, or (ii) written notice of
the death or incapacity of the maker of that proxy is received by the
corporation before the vote pursuant to that proxy is counted; provided,
however, that no proxy shall be valid after the expiration of eleven (11) months
from the date thereof, unless otherwise provided in the proxy. The dates
contained on the forms of proxy presumptively determine the order of execution,
regardless of the postmark dates on the envelopes in which they are mailed. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Sections 705(e) and 705(f) of the Code.
2.13 INSPECTORS OF ELECTION. In advance of any meeting of shareholders, the
Board of Directors may appoint inspectors of election to act at the meeting and
any adjournment thereof. If inspectors of election are not so appointed or
designed or if any persons so appointed fail to appear or refuse to act, then
the Chairman of the meeting may, and on the request of any shareholder or a
shareholder's proxy shall, appoint inspectors of election (or persons to replace
those who so fail to appear) at the meeting. The number of inspectors shall be
either one (1) or three (3). If appointed at a meeting on the request of one (1)
or more shareholders or proxies, shares holding a majority of the voting power,
represented in person or by proxy, shall determine whether one (1) or three (3)
inspectors are to be appointed.
The inspectors of election shall (a) determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, and the authenticity, validity, and effect of
proxies, (b) receive totes, ballots or consents, (c) bear and determine all
challenges and questions in any way arising in connection with the right to
vote, (d) count and tabulate all votes or consents, (e) determine when the polls
shall close, (f)
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determine the result and (g) do any other acts that may be proper to conduct the
election or vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
3.1 POWERS. Subject to the provisions of the Code, any limitations in the
Articles of Incorporation, and these Bylaws, relating to action required to be
approved by the shareholders or by the outstanding shares, the business and
affairs of the corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the Board of Directors. The Board of
Directors may delegate the management of the day-to-day operation of the
business of the corporation to a management company or other person provided
that the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised under the ultimate direction of the Board of
Directors.
3.2 NUMBER OF DIRECTORS. The authorized number of directors of the
corporation shall be not less than four (4) nor more than seven (7) and the
exact number of directors shall be set by a resolution duly adopted by the Board
of Directors or by the shareholders. The minimum and maximum number of directors
may be changed, or a definite number may be fixed without provision for an
indefinite number, by a duly adopted amendment to the Articles of Incorporation
or by an amendment to this Bylaw duly adopted by vote or written consent of
holders of a majority of the outstanding shares entitled to vote; provided,
however, that an amendment reducing the fixed number or minimum number of
directors to a number less than four (4) cannot be adopted if the votes cast
against its adoption at a meeting, or the shares not consenting in the case of
an action by written consent, are equal to more than sixteen and two-thirds
percent (16-2/3%) of the outstanding shares entitled to vote thereon.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS. At each annual meeting of
shareholders, directors shall be elected to hold office until the next annual
meeting. Each director, including a director elected to fill a vacancy, shall
hold office until the expiration of the term for which elected and until a
successor has been elected and qualified, except in the case of the death,
resignation, or removal of such a director.
3.4 RESIGNATION, REMOVAL AND VACANCIES. Any director may resign effective
upon giving oral or written notice to the Chairman of the Board, the President,
the Secretary, or the Board of Directors, unless the notice specifies a later
time for the effectiveness of such resignation. If the resignation of a director
is effective at a future time, the Board of Directors may elect a successor to
take office when the resignation becomes effective.
The Board of Directors may declare vacant the office of a director who has
been declared of unsound mind by an order of court or who has been convicted of
a felony. The entire Board of Directors or any individual director may be
removed from office without cause by a vote of shareholders holding at least 66
2/3% of the outstanding shares entitled to vote at an election of directors;
provided, however, that unless the entire Board is removed, no individual
director may
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be removed when the votes cast against removal, or not consenting in writing to
such removal, would be sufficient to elect such director if voted cumulatively
at an election at which the same total number of votes cast were cast (or, if
such action is taken by written consent, all shares entitled to vote were voted)
and the entire number of directors authorized at the time of the director's most
recent election were then being elected. In the event an office of a director is
so declared vacant or in case the Board or any one or more directors be so
removed, new directors may be elected at the same meeting.
All vacancies on the Board of Directors, whether caused by removal,
resignation, death or otherwise, may be filled by a majority of the remaining
directors or, if the number of directors then in office is less than a quorum,
by (a) the unanimous written consent of the directors then in office, (b) the
affirmative vote of a majority of the directors then in office at a meeting held
pursuant to notice or waivers of notice complying with California Corporations
Code Section 307, or (c) a sole remaining director. Each director so elected
shall hold office until his successor is elected at an annual, regular or
special meeting of the shareholders. The shareholders may elect a director at
any time to fill any vacancy not filled by the directors. Any such election by
written consent requires the consent of a majority of the outstanding shares
entitled to vote.
A vacancy or vacancies in the Board of Directors shall be deemed to exist
(i) in the event of the death, resignation or removal of any director, (ii) if
the Board of Directors resolution declares vacant the office of a director who
has been declared of unsound mind by an order of court or who has been convicted
of a felony, (iii) if the authorized number of directors is increased, or (iv)
if the shareholders fail, at any meeting of shareholders at which any director
or directors are elected, to elect the full number of directors to be elected at
that meeting.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election by
written consent shall require the consent of shares holding a majority of the
voting power that are entitled to vote thereon.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. Regular meetings of the Board
of Directors may be held at any place within or outside the State of California
that has been designated from time to time by resolution of the Board of
Directors. In the absence of such a designation, regular meetings shall be held
at the principal executive office of the corporation. Special meetings of the
Board of Directors may be held at any place within or outside the State of
California that has been designated in the notice of the meeting or, if not
stated in the notice or if there is no notice, at the principal executive office
of the corporation.
Members of the Board of Directors may participate in a meeting through use
of conference telephone, electronic video screen communication, or other
communications equipment. Participation in a meeting through use of conference
telephone constitutes presence in person at the meeting as long as all members
participating in such meeting can hear one another. Participation in a meeting
through the use of electronic video screen communication or other communications
equipment (other than conference telephone) constitutes presence in person at
that meeting if all of the following apply: (a) each member participating in the
meeting can communicate with all of the other members concurrently, (b) each
member is provided the means of participating in all matters before the Board of
Directors, including, without limitation,
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the capacity to propose, or to interpose an objection to, a specific action to
be taken by the corporation, and (c) the corporation adopts and implements some
means of verifying that (i) a person participating in the meeting is a director
or other person entitled to participate in the Board of Directors' meeting, and
(ii) all actions of, or votes by, the Board of Directors are taken or cast only
by the directors and not by persons who are not directors.
3.6 REGULAR MEETINGS. Regular meetings of the Board of Directors may be
held without notice if the time and place of such meetings are fixed by the
Board of Directors.
3.7 SPECIAL MEETINGS; NOTICE. Subject to the provisions of the following
paragraph, special meetings of the Board of Directors for any purpose or
purposes may be called at any time by the Chairman of the Board, the President,
any Vice President, the Secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone (including a voice messaging system or other system
or technology designed to record and communicate messages, telegraph, facsimile,
electronic mail or other electronic means) to each director or sent by first
class mail, addressed to each director at the director's address as it is shown
on the records of the corporation. If the notice is mailed, it shall be
deposited in the United States mail at least four (4) days before the time of
the holding of the meeting. If the notice is delivered personally or by
telephone, telecopier, telegram or any electronic means, it shall be delivered
at least forty-eight (48) hours before the time of the holding of the meeting.
An oral notice given personally or by telephone may be communicated either to
the director or to the person at the office of the director who the person
giving the notice has reason to believe will promptly communicate it to the
director. The notice need not specify the purpose of the meeting.
3.8 QUORUM. A majority of the authorized number of directors shall
constitute a quorum of the Board of Directors for the transaction of business,
except to adjourn as provided in Section 3.10 of these Bylaws. Every act or
decision done or made by a majority of the directors present at a meeting duly
held at which a quorum is present is the act of the Board of Directors, subject
to the provisions of Section 310 of the Code (as to the approval of contracts or
transactions in which a director has a direct or indirect material financial
interest), Section 311 of the Code (as to the appointment of committees),
Section 317(e) of the Code (as to the indemnification of directors), the
Articles of Incorporation, and other applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for such meeting.
3.9 WAIVER OF NOTICE. Notice of a meeting need not be given to any director
who signs a waiver of notice or a consent to holding the meeting or an approval
of the minutes thereof, whether before or after the meeting, or who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such director. All such waivers, consents, and approvals shall be
filed with the corporate records or be made a part of the minutes of the
meeting. A waiver of notice need not specify the purpose of any regular or
special meeting of the Board of Directors.
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3.10 ADJOURNMENT. A majority of the directors present, whether or not a
quorum is present, may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT. If the meeting is adjourned for more than
twenty-four (24) hours, notice of any adjournment to another time and place
shall be given prior to the time of the adjourned meeting to the directors who
were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action required
or permitted to be taken by the Board of Directors may be taken without a
meeting, if all members of the Board of Directors individually or collectively
consent in writing to such action. Such written consent or consents shall be
filed with the minutes of the proceedings of the Board of Directors. Such action
by written consent shall have the same force and effect as a unanimous vote of
the Board of Directors.
3.13 FEES AND COMPENSATION OF DIRECTORS. Directors and members of
committees may receive such compensation, if any, for their services and such
reimbursement of expenses as may be fixed or determined by resolution of the
Board of Directors. This Section 3.13 shall not be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation for those services.
3.14 APPROVAL OF LOANS TO OFFICERS. If these Bylaws have been approved by
the corporation's shareholders in accordance with the Code, the corporation may,
upon the approval of the Board of Directors alone, make loans of money or
property to, or guarantee the obligations of, any officer of the corporation or
of its parent, if any, whether or not a director, or adopt an employee benefit
plan or plans authorizing such loans or guaranties provided that (i) the Board
of Directors determines that such a loan or guaranty or plan may reasonably be
expected to benefit the corporation, (ii) the corporation has outstanding shares
held of record by 100 or more persons (determined as provided in Section 605 of
the Code) on the date of approval by the Board of Directors, and (iii) the
approval of the Board of Directors is by a vote sufficient without counting the
vote of any interested director or directors. Notwithstanding the foregoing, the
corporation shall have the power to make loans permitted by the Code.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution
adopted by a majority of the authorized number of directors, designate one or
more committees, each consisting of two (2) or more directors, to serve at the
pleasure of the Board of Directors. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of a committee requires the vote of a majority of the authorized number
of the directors. Any such committee shall have authority to act in the manner
and to the extent provided in the resolution of the Board of Directors and may
have all the authority of the Board of Directors, except with respect to:
(a) The approval of any action which, under the Code, also requires
shareholders' approval or approval of the outstanding shares.
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(b) The filling of vacancies on the Board of Directors or on any committee.
(c) The fixing of compensation of the directors for serving on the Board of
Directors or on any committee.
(d) The amendment or repeal of these Bylaws or the adoption of new Bylaws.
(e) The amendment or repeal of any resolution of the Board of Directors
which by its express terms is not so amendable or repealable.
(f) A distribution to the shareholders of the corporation, except at a
rate, in a periodic amount or within a price range set forth in the Articles of
Incorporation or determined by the Board of Directors.
(g) The appointment of any other committee of the Board of Directors or the
members thereof.
4.2 MEETINGS AND ACTIONS OF COMMITTEES. Meetings and actions of committee
shall be governed by, and held and taken in accordance with, the provisions of
Article III of these Bylaws, Section 3.5 (place of meetings), Section 3.6
(regular meetings), Section 3.7 (special meetings and notice), Section 3.8
(quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment), Section
3.11 (notice of adjournment), and Section 3.12 (action without meeting), with
such changes in the context of those Bylaws as are necessary to substitute the
committee and its members for the Board of Directors and its members; provided,
however, that the time of regular meetings of committees may be determined
either by resolution of the Board of Directors or by resolution of the
committee, that special meetings of the Committees may also be called by
resolution of the Board of Directors, and that notice of special meetings of
committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The Board of Directors may adopt
rules for the government of any committee not inconsistent with the provisions
of these Bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS. The officers of the corporation shall be a President, a
Secretary, and a Chief Financial Officer. The corporation may also have, at the
discretion of the Board of Directors, a Chairman of the Board, one or more Vice
Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers,
and such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these Bylaws. Any number of offices may be held by the same
person.
5.2 APPOINTMENT OF OFFICERS. The officers of the corporation, except such
officers as may be appointed in accordance with the provisions of Section 5.3 of
these Bylaws, shall be chosen by the Board of Directors and serve at the
pleasure of the Board of Directors, subject to the rights, if any, of an officer
under any contract of employment.
5.3 SUBORDINATE OFFICERS. The Board of Directors may appoint, or may
empower the Chairman of the Board or the President to appoint, such other
officers as the business of the
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corporation may require, each of whom shall hold office for such period, have
such authority, and perform such duties as are provided in these Bylaws or as
the Board of Directors may from time to time determine.
5.4 REMOVAL OR RESIGNATION OF OFFICERS. Subject to the rights, if any, of
an officer under any contract of employment, all officers serve at the pleasure
of the Board of Directors and any officer may be removed, either with or without
cause, by the Board of Directors at any regular or special meeting of the Board
of Directors or, except in case of an officer chosen by the Board of Directors,
by any officer upon whom such power of removal may be conferred by the Board of
Directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCY IN OFFICES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed by these Bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an officer be
elected, shall, if present, preside at meetings of the Board of Directors and
exercise and perform such other powers and duties as may from time to time be
assigned by the Board of Directors or as may be prescribed by these Bylaws. If
there is no President, then the Chairman of the Board shall also be the chief
executive officer of the corporation and shall have the powers and duties
prescribed in Section 5.7 of these Bylaws.
5.7 PRESIDENT. The President shall be the general manager and chief
executive officer of the corporation unless such title is assigned to another
officer of the corporation; in the absence of a Chairman and Vice Chairman of
the Board, the President shall preside as the chairman of meetings of the
shareholders and the Board of Directors; and the President shall have general
and active management of the business of the corporation and shall see that all
orders and resolutions of the Board of Directors are carried into effect. The
President or any Vice President shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the corporation (if the
corporation has adopted a seal), except where required or permitted by law to be
otherwise signed and executed and except where the signing and execution thereof
shall be expressly delegated by the Board of Directors to some other officer or
agent of the corporation. The President shall perform all such other duties as
are incident to such office or are properly required by the Board of Directors.
5.8 VICE PRESIDENTS. In the absence or disability of the President, the
Vice Presidents, if any, in order of their rank as fixed by the Board of
Directors or, if not ranked, a Vice President designated by the Board of
Directors, shall perform all the duties of the President and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time
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may be prescribed for them respectively by the Board of Directors, these Bylaws,
the President or the Chairman of the Board.
5.9 SECRETARY. The Secretary shall keep or cause to be kept, at the
principal executive office of the corporation or other such place as the Board
of Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors and shareholders. The minutes shall show the
time and place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
shareholders' meetings, and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the Board of Directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and dates of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings of
shareholders and of the Board of Directors required to be given by law or by
these Bylaws. The Secretary shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform other such
duties as may be prescribed by the Board of Directors or by these Bylaws.
5.10 CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and
maintain, or cause to be kept and maintained, adequate and correct books and
records of accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings, and shares. The books
of account shall at all reasonable times be open to inspection by any director.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS. The corporation shall, to the maximum
extent and in the manner permitted by the Code, indemnify each of its directors
against expenses (as defined in Section 317(a) of the Code), judgment, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding (as defined in Section 317(a) of the Code), arising by
reason of the fact that such person is or was a director of the corporation. For
purposes of this Article VI, a "director" of the corporation includes any person
(i) who is or was a director of the corporation, (ii) who is or was serving at
the request of the corporation as a director of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise, or (iii) who
was a director of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 INDEMNIFICATION OF OTHERS. The corporation shall have the power, to the
extent and in the manner permitted by the Code, to indemnify each of its
employees, officers, and
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agents (other than directors) against expenses (as defined in Section 317(a) of
the Code), judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding (as defined in Section
317(a) of the Code), arising by reason of the fact that such person is or was an
employee, officer, or agent of the corporation. For purposes of this Article VI,
an "employee" or "officer" or "agent" of the corporation (other than a director)
includes any person (i) who is or was an employee, officer, or agent of the
corporation, (ii) who is or was serving at the request of the corporation as an
employee, officer, or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee, officer, or agent of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE. Expenses and attorneys' fees incurred
in defending any civil or criminal action or other proceeding for which
indemnification is required pursuant to Section 6.1, or if otherwise authorized
by the Board of Directors, shall be paid by the corporation in advance of the
final disposition of such action or proceeding upon receipt of an undertaking by
or on behalf of the indemnified party to repay such an amount if it shall
ultimately be determined that the indemnified party is not entitled to be
indemnified as authorized in this Article VI.
6.4 INDEMNITY NOT EXCLUSIVE. The indemnification provided by this Article
VI shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any Bylaw, agreement, vote of shareholders
or directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office. The rights to indemnity
hereunder shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors, and administrators of the person.
6.5 INSURANCE INDEMNIFICATION. The corporation shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation against any liability
asserted against or incurred by such person in such capacity or arising out of
that person's status as such, whether or not the corporation would have the
power to indemnify that person against such liability under the provisions of
this Article VI.
6.6 CONFLICTS. No indemnification or advance shall be made under this
Article VI, except where such indemnification or advance is mandated by law or
the order, judgment or decree of any court of competent jurisdiction, in any
circumstance where it appears:
(1) that it would be inconsistent with the provisions of the Articles of
Incorporation, these Bylaws, a resolution of the shareholders or an agreement in
effect at the time of the accrual of the alleged cause of the action asserted in
the proceeding in which the expenses were incurred or other amounts were paid,
which prohibits or otherwise limits indemnification; or
(2) that it would be inconsistent with any condition expressly imposed by a
court in approving a settlement.
6.7 RIGHT TO BRING SUIT. If a claim under this Article VI is not paid in
full by the corporation within ninety (90) days after a written claim has been
received by the corporation
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(either because the claim is denied or because no determination is made), the
claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall also be entitled to be paid the expenses of prosecuting such
claim. The corporation shall be entitled to raise as a defense to any such
action that the claimant has not met the standards of conduct that make it
permissible under the Code for the corporation to indemnify the claimant for the
claim. Neither the failure of the corporation (including its Board of Directors,
independent legal counsel, or its shareholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
permissible in the circumstances because he or she has met the applicable
standard of conduct, if any, nor an actual determination by the corporation
(including the Board of Directors, independent legal counsel, or its
shareholders) that the claimant has not met the applicable standard of conduct,
shall be a defense to such action or create a presumption for the purposes of
such action that the claimant has not met the applicable standard of conduct.
6.8 INDEMNITY AGREEMENTS. The Board of Directors is authorized to enter
into a contract with any director, officer, employee or agent of the
corporation, or any person who is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans, or any person who was a director, officer, employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation, providing for
indemnification rights equivalent to or, if the Board of Directors so determines
and to the extent permitted by applicable law, greater than, those provided for
in this Article VI.
6.9 AMENDMENT, REPEAL OR MODIFICATION. Any amendment, repeal or
modification of any provision of this Article VI shall not adversely affect any
right or protection of a director, employee, officer or agent of the corporation
existing at the time of such amendment, repeal or modification.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation shall
keep either at its principal executive office or at the office of its transfer
agent or registrar (if either be appointed), as determined by resolution of the
Board of Directors, a record of its shareholders listing the names and addresses
of all shareholders and the number and class of shares held by each shareholder.
A shareholder or shareholders of the corporation holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation who held at least one percent (1%) of such voting shares and have
filed a Schedule 14B with the United States Securities and Exchange Commission
relating to the election of directors, shall have an absolute right to do either
or both of the following (i) inspect and copy the record of shareholders' names,
addresses, and shareholdings during usual business hours upon five (5) days'
prior written demand upon the corporation, or (ii) obtain from the transfer
agent of the corporation, upon written demand and upon the tender of such
transfer agent's usual charges for such list (the amount of which charges shall
be stated to the shareholder by the transfer agent upon request), a
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<PAGE>
list of the shareholders' names and addresses who are entitled to vote for the
election of the directors, and their shareholdings, as of the most recent record
date for which it has been compiled or as of the date specified by the
shareholder subsequent to the date of demand. The list shall be made available
on or before the later of five (5) business days after the demand is received or
the date specified therein as the date as of which the list is to be compiled.
The record of shareholders shall also be open to inspection or copying by
any shareholder or holder of a voting trust certificate at any time during usual
business hours upon written demand on the corporation, for a purpose reasonably
related to the holder's interests as a shareholder or holder of a voting trust
certificate.
Any inspection and copying under this Section 7.1 may be made in person or
by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall keep at its
principal executive office or, if its principal executive office is not in the
State of California, at its principal business office in California, the
original or a copy of these Bylaws as amended to date, which shall be open to
inspection by the shareholders at all reasonable times during business hours. If
the principal executive office is outside the State of California and the
corporation has no principal business office in such state, then it shall, upon
the written request of any shareholder, furnish to such shareholder a copy of
these Bylaws as amended to date.
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The accounting
books and records and the minutes of proceedings of the shareholders and the
Board of Directors, and committees of the Board of Directors shall be kept at
such place or places as are designated by the Board of Directors or, in absence
of such designation, at the principal executive office of the corporation. The
minutes shall be kept in written form or in any other form capable of being
converted into written form.
The minutes and accounting books and records shall be open to inspection
upon the written demand on the corporation of any shareholder or holder of a
voting trust certificate at any reasonable time during usual business hours, for
a purpose reasonably related to such holder's interests as a shareholder or as a
holder of a voting trust certificate. Such inspection by a shareholder or a
holder of a voting trust certificate may be made in person or by an agent or
attorney and the right of inspection includes the right to copy and make
extracts. Such rights of inspections shall extend to the records of each
subsidiary corporation of the corporation.
7.4 INSPECTION BY DIRECTORS. Every director shall have the absolute right
at any reasonable time to inspect and copy all books, records, and documents of
every kind and to inspect the physical properties of the corporation and each of
its subsidiary corporations, domestic or foreign. Such inspection by a director
may be made in person or by an agent or attorney and the right of inspection
includes the right to copy and make extracts.
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER. The Board of Directors shall
cause an annual report to be sent to the shareholders not later than one hundred
twenty (120) days after the close of the fiscal year adopted by the corporation.
Such report shall be sent to the shareholders at least fifteen (15) (or, if sent
by third class mail, thirty-five (35)) days prior to the annual
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<PAGE>
meeting of shareholders to be held in the next fiscal year and in the manner
specified in Section 2.5 of these Bylaws for giving notice to shareholders of
the corporation.
The annual report shall contain a balance sheet as of the end of the fiscal
year and an income statement and statement of changes in financial position for
the fiscal year, accompanied by any report thereon of independent accountants
or, if there is no such report, the certificate of an authorized officer of the
corporation that the statements were prepared without audit from the books and
records of the corporation.
The foregoing requirement of an annual report shall be waived so long as
the shares of the corporation are held by fewer than one hundred (100) holders
of record.
7.6 FINANCIAL STATEMENTS. If no annual report for the fiscal year has been
sent to shareholders, then the corporation shall, upon the written request of
any shareholder made more than one hundred twenty (120) days after the close of
such fiscal year, deliver or mail to the person making the request, within
thirty (30) days thereafter, a copy of a balance sheet as of the end of such
fiscal year and an income statement and statement of changes in financial
position for such fiscal year.
A shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of the corporation may make a written request to
the corporation for an income statement of the corporation for the three-month,
six-month or nine-month period of the current fiscal year ended more than thirty
(30) days prior to the date of the request and a balance sheet of the
corporation as of the end of that period. The statements shall be delivered or
mailed to the person making the request within thirty (30) days thereafter. A
copy of the statements shall be kept on file in the principal office of the
corporation for twelve (12) months and it shall be exhibited at all reasonable
times to any shareholder demanding an examination of the statements or a copy
shall be mailed to the shareholder. If the corporation has not sent to the
shareholders its annual report for the last fiscal year, the statements referred
to in the first paragraph of this Section 7.6 shall likewise be delivered or
mailed to the shareholder or shareholders within thirty (30) days after the
request.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report thereon, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chairman of the
Board, the President, any Vice President, the Chief Financial Officer, the
Secretary or Assistant Secretary of this corporation, or any other person
authorized by the Board of Directors or the President or a Vice President, is
authorized to vote, represent, and exercise on behalf of this corporation all
rights incident to any and all shares of any other corporation or corporations
standing in the name of this corporation. The authority herein granted may be
exercised either by such person directly or by any other person authorized to do
so by proxy or by power of attorney duly executed by such person having the
authority.
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ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSE OTHER THAN NOTICE AND VOTING. For purposes of
determining the shareholders entitled to receive payment of any dividend or
other distribution or allotment of any rights or entitled to exercise any rights
in respect of any other lawful action (other than with respect to notice or
voting at a shareholders' meeting or action by shareholders by written consent
without a meeting), the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) days prior to any such action. Only
shareholders of record at the close of business on the record date are entitled
to receive the dividend, distribution or allotment of rights, or to exercise the
rights, as the case may be, notwithstanding any transfer of any shares on the
books of the corporation after the record date, except as otherwise provided for
in the Articles of Incorporation or the Code.
If the Board of Directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto or
the sixtieth (60th) day prior to the date of that action, whichever is later.
8.2 CHECKS; DRAFTS; EVIDENCE OF INDEBTEDNESS. From time to time, the Board
of Directors shall determine by resolution which person or persons may sign or
endorse all checks, drafts, other orders for payment of money, notes or other
evidences of indebtedness that are issued in the name of or payable to the
corporation, and only the persons so authorized shall sign or endorse those
instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board of
Directors, except as otherwise provided in these Bylaws, may authorize any
officer or officers, or agent or agents, to enter into any contract or execute
any instrument in the name of or on behalf of the corporation; such authority
may be general or confined to specific instances. Unless so authorized or
ratified by the Board of Directors or within the agency power of an officer, no
officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
8.4 CERTIFICATE FOR SHARES. A certificate or certificates for shares of the
corporation shall be issued to each shareholder when any such shares are fully
paid. The Board of Directors may authorize the issuance of certificates for
shares partly paid provided that these certificates shall state the total amount
of the consideration to be paid for them and the amount actually paid. All
certificates shall be signed in the name of the corporation by the Chairman of
the Board or the Vice Chairman of the Board or the President or a Vice President
and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or
an Assistant Secretary, certifying the number of shares and the class and series
of shares owned by the shareholder. Any or all of the signatures on the
certificates may be by facsimile.
In case any officer, transfer agent or registrar has signed or whose
facsimile signature has been placed on a certificate has ceased to be such
officer, transfer agent or registrar
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before such certificate is issued, it may be issued by the corporation with the
same effect as if that person were an officer, transfer agent or registrar at
the date of issue.
8.5 LOST CERTIFICATES. Except as provided in this Section 8.5, no new
certificate for shares shall be issued to replace a previously issued
certificate unless the later is surrendered to the corporation or its transfer
agent or registrar and cancelled at the same time. The Board of Directors may,
in case any share certificate or certificate for any other security is lost,
stolen or destroyed (as evidenced by a written affidavit or affirmation of such
fact), authorize the issuance of replacement certificates on such terms and
conditions as the Board of Directors may require; the Board of Directors may
require indemnification of the corporation secured by a bond or other adequate
security sufficient to protect the corporation against any claim that may be
made against it, including any expense or liability, on account of the alleged
loss, theft or destruction of the certificate or the issuance of the replacement
certificate.
8.6 CONSTRUCTION; DEFINITIONS. Unless the context requires otherwise, the
general provisions, rules of construction, and definitions in the Code shall
govern the construction of these Bylaws. Without limiting generality of the
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
ARTICLE IX
AMENDMENTS
9.1 AMENDMENT BY SHAREHOLDERS. New Bylaws may be adopted or these Bylaws
may be amended or repealed by the vote or written consent of holders of a
majority of outstanding shares entitled to vote; provided, however, that if the
Articles of Incorporation of the corporation set forth the number of authorized
directors of the corporation, then the authorized number of directors may be
changed only by an amendment of the Articles of Incorporation.
9.2 AMENDMENT BY DIRECTORS. Subject to the rights of the shareholders as
provided by Section 9.1 of these Bylaws, Bylaws, other than a Bylaw or an
amendment of a Bylaw changing the authorized number of directors (except to fix
the authorized number of directors pursuant to a Bylaw providing for a variable
number of directors), may be adopted, amended or repealed by the Board of
Directors.
9.3 RECORD OF AMENDMENTS. Whenever an amendment or new Bylaw is adopted,
it shall be copied in the book of minutes with the original Bylaws. If any
Bylaw is repealed, the face of repeal, with the date of the meeting at which
the repeal was enacted or written consent was filed, shall be stated in said
book of minutes.
ARTICLE X
INTERPRETATION
Reference in the Bylaws to any provision of the California Corporations
Code shall be deemed to include all amendments thereof.
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CERTIFICATE OF CHIEF EXECUTIVE OFFICER OF
SIMPLE TECHNOLOGY, INC.
The undersigned, Manouch Moshayedi, Chief Executive Officer of Simple
Technology, Inc. (the "Corporation"), a California corporation, hereby certifies
that the attached document is a true and complete copy of the Amended and
Restated Bylaws of the Corporation as in effect on the date hereof.
IN WITNESS WHEREOF, the undersigned has executed this certificate as of
this ____ day of March 2000.
------------------------------------
Manouch Moshayedi,
Chief Executive Officer
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EXHIBIT 10.3
CREDIT AGREEMENT
BETWEEN
SIMPLE TECHNOLOGY, INC.
AND
COMERICA BANK
AUGUST 3, 1999
<PAGE>
CREDIT AGREEMENT
THIS AGREEMENT, made as of the 3rd day of August 1999, by and between
SIMPLE TECHNOLOGY, INC, a California corporation ("Borrower") and COMERICA BANK,
a Michigan banking corporation ("Bank").
1. DEFINITIONS
For purposes of this Agreement the following terms will have the
following meanings:
1.1 "ACCOUNTS," "CHATTEL PAPER," "DOCUMENTS," "EQUIPMENT," "FIXTURES,"
"GENERAL INTANGIBLES," "GOODS," "INSTRUMENTS" AND "INVENTORY" shall have the
meanings assigned to them in the Uniform Commercial Code as in effect in
Michigan on the date of this Agreement.
1.2 "ACCOUNT DEBTOR" shall mean the party who is obligated on or under
any Account Receivable.
1.3 "ACCOUNTS RECEIVABLE" shall mean and include Accounts, Chattel
Paper and General Intangibles (including, but not limited to tax refunds, trade
names, trade styles and goodwill, trade marks, copyrights and patents, and
applications therefor, trade and proprietary secrets, formulae, designs,
blueprints and plans, customer lists, literary rights, licenses and permits,
receivables, insurance proceeds, beneficial interests in trusts and minute books
and other books and records) to the extent they evidence, consist of, or relate
to rights of payment or related rights now owned or hereafter acquired by a
Borrower.
1.4 "ADVANCE" shall mean a borrowing requested by Borrower and made by
Bank under this Agreement.
1.5 "AFFILIATE" shall mean, when used with respect to any person, any
other person which, directly or indirectly, controls or is controlled by or is
under common control with such person. For purposes of this definition,
"control" (including the correlative meanings of the terms "controlled by" and
"under common control with"), with respect to any person, shall mean possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such person, whether through the ownership of voting
securities or by contract or otherwise.
1.6 "APPLICABLE INTEREST RATE" shall mean with respect to any Advance,
the Prime-based Rate or the Eurocurrency-based Rate, subject to the terms and
conditions of this Agreement.
1.7 "BORROWING BASE REPORT" shall mean a report in form and content
satisfactory to Bank setting forth the Formula Amount applicable to a Facility.
1.8 "BUSINESS DAY" shall mean any day, other than a Saturday, Sunday or
holiday, on which Bank is open for all or substantially all of its business in
Detroit, Michigan.
<PAGE>
1.9 "CANADIAN NOTE" shall mean a Note issued by Borrower under this
Agreement as evidence of Advances under the Canadian Subfacility.
1.10 "CANADIAN PRIME RATE" shall mean the per annum interest rate
established by Comerica Bank-Canada as its prime rate for its borrowers as such
rate may vary from time to time, which rate is not necessarily the lowest rate
on loans made by Comerica Bank-Canada at any such time.
1.11 "CANADIAN SUBFACILITY" shall mean a subfacility for advances under
the Facility provided for in Article 2 of this Agreement up to the Canadian Sub
facility Maximum.
1.12 "CANADIAN SUBFACILITY MAXIMUM" shall mean as of any date, the
lesser of (a) the Formula Amount with respect to the Canadian Subfacility; or
(b) CAN $1,000,000.
1.13 "CASH COLLATERAL" shall mean good funds on deposit with Bank in
the name of Borrower and pledged to Bank as security for indebtedness of
Borrower to Bank.
1.14 "COLLATERAL" shall mean all property of the Borrower now or
hereafter in the possession of the Bank or any Affiliate of the Bank (or as to
which the Bank or any Affiliate of the Bank now or hereafter controls possession
by documents or otherwise), all amounts in all deposit or other accounts
(including without limit an account evidenced by a certificate of deposit) of
the Borrower now or hereafter with the Bank or any Affiliate of the Bank and all
of Borrower's Accounts, Chattel Paper, Documents, Equipment, Fixtures, General
Intangibles, Goods, Instruments and Inventory, wherever located and whether now
owned or hereafter acquired, together with all replacements of any of the
foregoing, substitutions therefor, accessions thereto, and all proceeds and
products of all the foregoing, and all additional property (real or personal) of
the Borrower which is now or hereafter subject to a security interest, mortgage,
lien, claim or other encumbrance granted by the Borrower to, or in favor of, the
Bank.
1.15 "DEBT" shall mean, as of any applicable date of determination, all
items of indebtedness, obligation or liability of a person, whether matured or
unmatured, liquidated or unliquidated, direct or indirect, absolute or
contingent, joint or several, that should be classified as liabilities in
accordance with GAAP.
1.16 "DEFAULT" shall mean, an event or occurrence which, with the
giving of notice and/or the passage of time, would constitute an Event of
Default hereunder.
1.17 "EFFECTIVE TANGIBLE NET WORTH" shall mean Total Assets plus
Subordinated Debt less Total Liabilities and Soft Assets.
1.18 "EFFECTIVE TANGIBLE NET WORTH RATIO" shall mean a ratio, the
numerator of which is the Total Liabilities less Subordinated Debt and the
denominator of which is Effective Tangible Net Worth.
1.19 "ELIGIBLE ACCOUNTS RECEIVABLE" shall mean Accounts Receivable
which meet the following requirements:
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<PAGE>
(a) it is not owing more than ninety (90) days from the invoice
date on the invoice evidencing such Account;
(b) it arises from the sale or lease of goods and such goods
have been shipped or delivered to the Account Debtor under such Account; or
it arises from services rendered and such services have been performed,
excluding however, Accounts representing customer deposits due but not yet
paid;
(c) it is evidenced by an invoice, dated not later than the
date of shipment or performance, rendered to such Account Debtor or some
other evidence of billing reasonably acceptable to Bank;
(d) it is not evidenced by any note, trade acceptance, draft or
other negotiable instrument or by any chattel paper;
(e) it is a valid, legally enforceable obligation of the
Account Debtor thereunder, and is not subject to any defense on the part of
such Account Debtor and, if subject to any claim on the part of such Account
Debtor denying liability thereunder in whole or in part only the undisputed
portion shall only be thereof included as an Eligible Account receivable;
(f) it is not subject to any sale of accounts, any rights of
offset (except as set forth in Section 1.19(o) below), assignment, lien or
security interest whatsoever;
(g) it is not owing by an Account Debtor which is a Foreign
Person;
(h) it is not a Government Account, except to the extent that
(i) not more the Two Hundred Fifty Thousand Dollars ($250,000) is includable
in the calculation of the Formula Amount with respect to Government Accounts,
or (ii) the Federal Assignment of Claims Act of 1940 applies thereto, and all
necessary steps are taken to comply with the Federal Assignment of Claims Act
of 1940, as amended, and with any comparable state law, if applicable, and
all other necessary steps are taken to perfect Bank's security interest in
such account;
(i) it is not owing by an Account Debtor for which a
Borrower has received any notice of (i) the death of the Account Debtor, (ii)
the dissolution, liquidation, termination of existence, insolvency or
business failure of the Account Debtor, (iii) the appointment of a receiver
for any part of the property of the Account Debtor, or (iv) an assignment for
the benefit of creditors, the filing of a petition in bankruptcy, or the
commencement of any proceeding under any bankruptcy or insolvency laws by or
against the Account Debtor (which notice, in the case of a notice of an event
described in clauses (ii) through (iv), has not been revoked or annulled);
(j) it is not an Account payable at a future date in accordance
with its terms (other than an Account payable within sixty (60) days of the
invoice date), billed in advance, payable on delivery, for goods which are
placed on consignment, guaranteed sale or other terms by reason of which the
payment by the Account Debtor may be conditional, for guaranteed sales, for
unbilled sales, for progress billings, subject to a retainage or holdback by
the Account Debtor or insured by a surety company, wherein the primary
recourse is to such surety company rather than the Account Debtor;
-3-
<PAGE>
(k) it is not owing by any Account Debtor whose obligations
Bank, acting in its reasonable business discretion, shall have notified
Borrower are not deemed to constitute Eligible Accounts;
(l) it is not an Eligible Foreign Account Receivable;
(m) it is not an Account with respect to which the Account
Debtor is an officer, employee, partner, joint venturer or agent of Borrower;
(n) it is not an Account with respect to which the Account
Debtor is a subsidiary of, related to, affiliated or has common shareholders,
officers or directors with Borrower;
(o) if it is an Account with respect to which Borrower is
liable to the Account Debtor for goods sold or services rendered by the
Account Debtor to Borrower only the portion thereof exceeding Borrower's
obligation to such Account Debtor shall be included as an Eligible Account;
and
(p) it is not an Account due from a particular Account Debtor
as to which over twenty-five percent (25%) of the aggregate amount owing from
such Account Debtor is greater than ninety (90) days from the date of
invoice, other than Accounts which are supported by a commercial letter of
credit or credit insurance satisfactory to Bank or Accounts with an Account
Debtor satisfactory to Bank.
An Account Receivable which is at any time an Eligible Account Receivable,
but which subsequently fails to meet any of the foregoing requirements, shall
forthwith cease to be an Eligible Account Receivable unless and until it
meets all of the foregoing requirements again.
1.20 "ELIGIBLE FOREIGN ACCOUNT RECEIVABLE" shall mean an Account
Receivable which meets each of the following requirements:
(a) it arises from an Account Receivable where the Account
Debtor is a Foreign Person;
(b) the payment of such Account Receivable is (i) insured by an
export credit insurance policy satisfactory to Bank or (ii) one hundred
percent (100%) supported by a commercial letter of credit, unless as to both
subsections (b)(i) and (ii) if the Foreign Person is Canadian or the Account
Receivable is specifically approved by Bank; and
(c) it meets requirements (a) through (f), (i) through (k), and
(m) through (o) of Eligible Account Receivable; provided, however, that with
respect hereto, Section 1.19(j) shall be subject to Section 1.20(b)(i).
An Account Receivable which is at any time an Eligible Foreign Account
Receivable, but which subsequently fails to meet any of the foregoing
requirements, shall forthwith cease to be an Eligible Foreign Account Receivable
unless and until it meets all of the foregoing requirements again.
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<PAGE>
1.21 "ELIGIBLE INVENTORY" shall mean all Inventory which is in good and
merchantable condition, is not obsolete or discontinued, and which would
properly be classified as "work-in-process", "raw materials", or as "finished
goods inventory" under generally accepted accounting principles, consistently
applied, excluding (a) consigned goods and inventory located outside the United
States of America, (b) inventory covered by or subject to a seller's right to
repurchase, or any consensual or nonconsensual lien or security interest
(including without limitation purchase money security interests) other than in
favor of Bank, whether senior or junior to Bank's security interest, (c)
inventory that Bank, acting in its reasonable discretion, after having notified
Borrower, excludes. Inventory which is at any time Eligible Inventory, but which
subsequently fails to meet any of the foregoing requirements, shall forthwith
cease to be Eligible Domestic Inventory unless and until it meets all of the
foregoing requirements again.
1.22 "ENVIRONMENTAL LAWS" shall mean all federal, state and local laws
including statutes, regulations, ordinances, codes, rules, and other
governmental restrictions and requirements, relating to environmental pollution,
contamination or other impairment of any nature, any hazardous or other toxic
substances of any nature, whether liquid, solid and/or gaseous, including smoke,
vapor, fumes, soot, acids, alkalis, chemicals, wastes, by-products, and recycled
materials.
1.23 "EQUIVALENT AMOUNT" shall mean (i) with respect to each advance
made or carried (or to be carried) in Dollars under the principal amount thereof
and (ii) with respect to each Advance made or carried (or to be carried) in
Canadian Dollars, the amount of United States Dollars which is equivalent to
such amount at the spot exchange determined by Bank making or carrying such
Advance to be available at approximately 11:00 a.m. (Bank time) two (2) Business
Days before such Advance is made.
1.24 "EVENT OF DEFAULT" shall mean the occurrence of any of the events
described in Section 8 hereof.
1.25 "EUROCURRENCY-BASED LOAN" shall mean a Loan at any time during
which such Loan bears interest at a Eurocurrency-based Rate.
1.26 "EUROCURRENCY-BASED RATE" shall mean a per annum interest rate
equal to the Eurocurrency Rate, plus 3.25% per annum.
1.27 "EUROCURRENCY RATE" shall mean, for any Eurocurrency-based Loan:
(a) (i) in the case of Eurocurrency-based Loans denominated in
Canadian Dollars under the Canadian Subfacility, the per annum interest rate at
which the Bank's eurocurrency lending office offers deposits in the Canadian
Dollars to prime banks in the eurocurrency market in an amount comparable to the
relevant Eurocurrency-based Loan and for a period equal to the relevant Interest
Period at approximately 11:00 a.m. Detroit time two (2) Business Days prior to
the first day of such Interest Period; and
(ii) in the case of Eurocurrency-based Loans denominated in
United States Dollars, under the Facility the per annum interest rate at which
the Bank's eurocurrency lending office offers deposits in applicable
Eurocurrency to prime banks in the Eurocurrency market in an amount comparable
to the relevant Eurocurrency-based Loan and for a period equal
-5-
<PAGE>
to the Interest Period therefore at approximately 11:00 a.m. Detroit time two
(2) Business Days prior to the first day of such Interest Period; divided by,
(b) a percentage (expressed as a decimal) equal to one hundred
percent (100%) minus that percentage which is in effect on the date for an
Advance of a Eurocurrency-based Loan, as prescribed by the Board of Governors
of the Federal Reserve System (or any successor) for determining the maximum
reserve requirements for a member bank of the Federal Reserve System with
deposits exceeding five billion dollars in respect of "Euro-currency
Liabilities" (or in respect of any other category of liabilities which
includes deposits by reference to which the interest rate on
Eurocurrency-based Loans is determined or any category of extensions of
credit or other assets which includes loans by a non-United States
Eurocurrency Lending Office of such a bank to United States residents).
1.28 "FACILITY" shall mean the facility for Advances to Borrower
provided for in Section 2 of this Agreement.
1.29 "FACILITY MAXIMUM" shall mean as of any date, the lesser of (a)
the Formula Amount; or (b) $20,000,000 (inclusive of amounts advanced under the
Canadian Subfacility).
1.30 "FOREIGN PERSON" shall mean any person, entity, firm or
corporation (i) whose principal office is located outside of the United States,
(ii) is not incorporated or organized under the laws of the United States of
America or any state thereof, or (iii) is the government of any foreign country
or sovereign state, or of any state, province, municipality or other political
subdivision thereof or any department or agency thereof.
1.31 "FORMULA AMOUNT" shall mean, as of the date of any determination
thereof, the sum of:
(a) in the case of the Canadian Subfacility eighty percent
(80%) of Borrower's Canadian Dollar denominated Eligible Accounts Receivable
(exclusive of any Government Accounts);
(b) in the case of the Facility the sum (without
duplication) of (1) eighty percent (80%) of its Eligible Accounts Receivable,
plus (2) eighty percent (80%) of its Eligible Foreign Accounts Receivable up
to $3,000,000, plus (3) the lesser of eighty percent (80%) of the Orderly
Liquidation Value of its Eligible Inventory or $10,000,000.
1.32 "GAAP" shall mean generally accepted accounting principles in the
United States of America, applied consistently.
1.33 "GOVERNMENT ACCOUNT" shall mean an Account owing by the United
States of America or any state or political subdivision thereof, or by any
department, agency, public body corporate or other instrumentality of any of the
foregoing.
1.34 "INDEBTEDNESS" " shall mean all loans, advances, indebtedness,
obligations and liabilities of the Borrower to the Bank under the Note(s), this
Agreement and the Loan Documents, together with all other indebtedness,
obligations and liabilities whatsoever of the Borrower to the Bank, whether
matured or unmatured, liquidated or unliquidated, direct or
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indirect, absolute or contingent, joint or several, due or to become due, now
existing or hereafter arising.
1.35 "INTEREST PERIOD" shall mean an interest period for a
Eurocurrency-based Loan of one (1), three (3), or six (6) months, provided
however, that:
(a) any Interest Period which would otherwise end on a day
which is not a Business Day shall be extended to the next succeeding Business
Day unless the next succeeding Business Day falls in another calendar month,
in which case, such Interest Period shall end on the immediately preceding
Business Day; and
(b) no Interest Period may end after the Maturity Date.
1.36 "LOAN DOCUMENTS" shall mean this Agreement, the Notes, the
Security Agreements, and all other documents, instruments or agreements executed
and/or delivered to Bank pursuant hereto or pursuant to any of the foregoing.
1.37 "MATERIAL ADVERSE EFFECT" shall mean any material adverse effect,
or the occurrence of any event or the existence of any condition that has or
could reasonably be expected to have a material adverse effect, on (a) the
business or financial condition or performance of Borrower and its subsidiaries
taken as a whole, (b) the ability of Borrower to pay the Debt when due, (c) the
validity or enforceability of any of the Loan Documents, and lien created or
purported to be created by any of the Loan Documents or the required priority of
any such lien, or (d) any material right or remedy of Bank under any of the Loan
Documents.
1.38 "MATURITY DATE" shall mean: August 3, 2001.
1.39 "NET WORTH" shall mean the net worth of Borrower, determined in
accordance with GAAP.
1.40 "NOTE" shall mean a Note issued by Borrower in the form attached
as Exhibit "A" hereto as evidence of Advances under the Facility.
1.41 "NOTE(S)" shall mean the Note and any other promissory note
heretofore or hereafter made by Borrower to Bank as evidence of indebtedness, or
any one or more of the foregoing, including, but not limited to any note
executed by Borrower to evidence an Advance under the Canadian Subfacility.
1.42 "ORDERLY LIQUIDATION VALUE" shall mean the estimated probable
price which could typically be realized at a properly advertised and conducted
public auction sale, held under orderly sale conditions and under present day
economic trends determined by Bank on the basis of appraisals thereof delivered
to Bank in form, content and cost satisfactory to Bank and otherwise subject to
the following schedule:
(a) delivery of desk top appraisals on DRAM and memory
modules on the first business day of each consecutive calendar month;
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(b) delivery of desk top appraisals for all Inventory on a
semi-annual basis; and
(c) delivery of complete on-site/physical appraisal for all
Inventory annually.
1.43 "PERMITTED LIENS" shall mean:
(a) liens and encumbrances in favor of Bank;
(b) liens for taxes, assessments or other governmental
charges incurred in the ordinary course of business and not yet past due or
being contested in good faith by appropriate proceedings and with proper
reserves therefor maintained in accordance with GAAP;
(c) liens not delinquent created by statute in connection
with worker's compensation, unemployment insurance, social security and
similar statutory obligations;
(d) liens of mechanics, materialmen, carriers, warehousemen
or other like statutory or common law liens securing obligations incurred in
good faith in the ordinary course of business that are not yet due and
payable or that are being contested in good faith by appropriate proceedings
and with proper reserves therefor maintained in accordance with GAAP;
(e) encumbrances consisting of easements, rights of way,
zoning restrictions or other similar restrictions on the use of real
property, none of which materially impairs the use of such property by
Borrower in the operation of the business for which it is used and none of
which is violated in any material respect by any existing or proposed
structure or land use;
(f) liens on real estate, furniture, fixtures and equipment
for purchase money financing (including loans and leases) hereafter existing
used for capital expenditures permitted under Section 7.10 hereof;
(g) liens arising by operation of law in connection with
judgments being appealed;
(h) liens on property acquired by a Borrower or any
subsidiary to the extent such Liens are in existence when such property or
subsidiary was acquired and were not made in anticipation of such
acquisition; and
(i) liens described on Schedule 1.43(i) hereof.
1.44 "PRIME RATE" shall mean the per annum interest rate established by
Bank as its prime rate for its borrowers as such rate may vary from time to
time, which rate is not necessarily the lowest rate on loans made by Bank at any
such time.
1.45 "PRIME-BASED ADVANCE" shall mean an Advance which bears interest
at the Prime-based Rate or the Canadian Prime Rate, with respect to the Canadian
Subfacility, as the case may be.
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1.46 "PRIME-BASED RATE" shall mean a per annum interest rate which is
equal to the Prime Rate or the Canadian Prime Rate, with respect to the Canadian
Subfacility, plus .5%.
1.47 "SECURITY AGREEMENTS" shall mean security agreements in form and
content satisfactory to Bank pursuant to which Borrower grants to Bank a
security interest in all of its tangible and intangible personal property,
whether now owned or hereafter existing or arising.
1.48 "SOFT ASSETS" shall mean patents, patent rights, trademarks, trade
names, copyrights, franchises, licenses, goodwill and other intangible assets
(other than Accounts Receivable) of Borrower.
1.49 "SUBORDINATED DEBT" shall mean the indebtedness of Borrower, the
repayment of which has been subordinated to the prior payment and performance of
all of Borrower's indebtedness and obligations to Bank, pursuant to a written
subordination agreement in form and content satisfactory to Bank.
1.50 "TOTAL ASSETS" shall mean the assets of Borrower, determined in
accordance with GAAP.
1.51 "TOTAL LIABILITIES" shall mean shall mean the liabilities of
Borrower, determined in accordance with GAAP.
1.52 "WIP" shall mean shall mean the work in process of Borrower,
determined in accordance with GAAP.
1.53 "YEAR 2000 ISSUE" shall mean the risk of computer hardware,
software or equipment containing imbedded micro chips which perform functions
relevant to the business or operation of a Borrower which will not, in the
case of dates occurring after December 31, 1999, function as effectively and
reliably as in the case of dates occurring prior to such date.
2. INDEBTEDNESS: FACILITY
2.1 Bank agrees to make Advances under the Note(s) from time to time
from the effective date hereof until the Maturity Date, in aggregate
principle amount at any time outstanding not to exceed the Facility Maximum.
All of the Advances hereunder shall be evidenced by the Note(s) under which
advances, repayments and re-advances may be made, subject to the terms and
conditions of this Agreement.
2.2 Borrower may request an Advance by delivery to Bank of a Request
for Loan executed by an authorized officer of Borrower (which delivery may be
made by facsimile with original following within a week by courier or mail)
and subject to the following:
(a) each such Request for Loan shall set forth the
information required on the Request for Loan form and shall set forth whether
the request is for an Advance under the Canadian Subfacility;
(b) each such Request for Loan shall be delivered to Bank
by 3:00 p.m. three (3) Business Days prior to the proposed date of Advance,
except if the Applicable Interest Rate
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for such Advance is to be the Prime-based Rate, such Request for Loan must be
delivered by 3:00 p.m. (Detroit time) on such proposed date;
(c) if the Request for Loan is a request for a
Eurocurrency-based Loan, the principal amount of the Advance requested shall
be at least Five Hundred Thousand Dollars ($500,000) or an integral multiple
thereof; and
(d) each Request for Loan shall constitute a certification
by the Borrower as of the date thereof that all of the conditions set forth
in Section 4 hereof are satisfied as of the date of such request and shall be
satisfied as of the date such Advance is requested.
2.3 The Note(s) shall mature on the Maturity Date when all outstanding
principal and interest shall be due, and each Advance from time to time
outstanding thereunder shall bear interest at the Applicable Interest Rate. The
amount and date of each Advance, and the amount and date of any repayment shall
be noted on Bank's records, which records will be conclusive evidence thereof
absent manifest error.
2.4 Interest shall be payable on all Prime-based Advances, monthly, on
the first Business Day of each month. Interest shall be payable on each
Eurocurrency-based Advance on the last day of its Interest Period and, if such
Interest Period has a duration of longer than three (3) months, also at each
three month interval from the first day of such interest period.
2.5 Borrower shall pay to Bank:
(a) concurrently with the execution of this Agreement, the
amount of the expenses (including without limit reasonable attorneys' fees,
whether of inside or outside counsel, and disbursements) incurred by the Bank in
connection with the preparation and closing of this Agreement and related
instruments and/or making of advances hereunder, including but not limited to
costs to conduct audits, monitoring and appraisals;
(b) concurrently with the execution of this Agreement, a
non-refundable closing fee in the amount of Seventy Five Thousand Dollars
($75,000);
(c) on an ongoing basis, (i) all audit costs, limited to
four (4) audits per annum, in the amount of $750 per day per auditor and (ii)
collateral monitoring costs of Bank in the amount of $500 per month, with
such audit and monitoring costs subject to periodic increases by Bank as are
usual and customary in connection with the Bank's cost of doing business.
Borrower shall pay all inventory appraisal fees directly to
such appraiser(s).
2.6 The amount of all interest and fees hereunder shall be computed for
the actual number of days elapsed on the basis of a year consisting of three
hundred sixty (360) days.
2.7 Any payment of the Indebtedness made by mail will be deemed
tendered and received only upon actual receipt by the Bank at the address
designated for such payment, whether or not the Bank has authorized payment by
mail or any other manner, and shall not be deemed to have been made in a timely
manner unless received on the date due for such payment, time being of the
essence. The Borrower expressly assumes all risks of loss or liability resulting
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from non-delivery or delay of delivery of any item of payment transmitted by
mail or in any other manner. Acceptance by the Bank of any payment in an amount
less than the amount then due shall be deemed an acceptance on account only.
2.8 Notwithstanding anything herein to the contrary, in the event and
so long as an Event of Default shall exist, all principal outstanding under the
Note shall bear interest, payable on demand, from the date of such Event of
Default at a rate per annum equal to:
(a) in the case of a Prime-based Loan, two and one half
percent (2.5%) above the Prime-base Rate; and
(b) in the case of a Eurocurrency-based Loan, two and one
half percent (2.5%) above the Eurocurrency-based Rate until the end of the
then current Interest Period, at which time such Eurocurrency-based Loans
shall be automatically converted into Prime-based Loans and bear interest at
the rate provided for in clause (a) above.
2.9 Providing that no Event of Default shall have occurred and be
continuing, the Borrower may elect to renew or convert Applicable Interest Rates
applicable to Advances from the Prime-based Rate to the Eurocurrency-based Rate
or from the Eurocurrency-based Rate to the Prime-based Rate, provided that any
conversion of a Eurocurrency-based Loan shall be made only on the last Business
Day of the Interest Period applicable to such Eurocurrency-based Loan. If the
Borrower desires such a renewal or conversion, it shall give Bank not less than
three (3) Business Days' prior notice in the manner provided in Section 2.2
hereof, specifying the date of such renewal or conversion, the Advances to be
converted and the type of Advances elected. If with respect to any
Eurocurrency-based Loan outstanding at any time the Bank does not receive notice
of the election from a Borrower not less than three (3) Business Days prior to
the last day of the Interest Period therefor, the Borrower shall be deemed to
have elected to convert such Eurocurrency-based Loan to a Prime-based Loan at
the end of the then current Interest Period unless such Eurocurrency-based Loan
is repaid upon the last day of such Interest Period.
2.10 In the event that Borrower shall terminate this Agreement on or
before the Maturity Date, Borrower shall be obligated to pay to Bank, as a
condition to such termination and prior to the release of Bank's liens and
encumbrances, the amount of: (a) Four Hundred Thousand Dollars ($400,000) if
such termination occurs before the first anniversary hereof; or (b) Two Hundred
Thousand Dollars ($200,000) if such termination occurs on or after the first
anniversary hereof but before the second anniversary of this Agreement. This
Early Termination Compensation shall be waived if the Loan is replaced by
another credit facility with Bank.
2.11 If the Equivalent Amount of Advances outstanding under the Loan
exceeds the Facility Maximum, then Borrower shall immediately repay Advances by
the amount necessary so that, after payment, the Equivalent Amount of Advances
shall not be greater than the Facility Maximum.
3. SPECIAL PROVISIONS FOR EUROCURRENCY-BASED LOANS
3.1 As to any Advances, if any prepayment thereof shall occur on any
day other than the last day of an Interest Period (in the case of a
Eurocurrency-based Loan) or the first day of an Interest Period (with regard to
a Prime-Based Loan) (whether pursuant to this Article, or by
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acceleration, or otherwise), or if an Applicable Interest Rate shall be changed
during any Interest Period pursuant to this Article, the Borrower agrees to
reimburse Bank any costs incurred by Bank as a result of the timing thereof
including but not limited to any net costs incurred in liquidating or employing
deposits from third parties, upon Bank's delivery to Borrower of a certificate
setting forth in reasonable detail the basis for determining such costs, which
certificate shall be conclusively presumed correct save for manifest error.
3.2 For any Advance for which the Applicable Interest Rate is the
Eurocurrency-based Rate, if Bank shall designate a Eurocurrency lending office
which maintains books separate from those of the rest of Bank, Bank shall have
the option of maintaining and carrying the relevant advance on the books of such
office.
3.3 If Bank determines that, by reason of circumstances affecting the
foreign exchange and interbank markets generally, deposits in Eurocurrencys in
the applicable amounts are not being offered to Bank for an Interest Period,
then Bank shall forthwith give notice thereof to the Borrower. Thereafter, the
obligation of Bank to make Eurocurrency-based Loans, and the right of Borrower
to convert an Advance to or refund an Advance as a Eurocurrency-based Loan shall
be suspended and all subsequent Loans, and renewals and conversions of then
outstanding Loans shall be Prime-based Loans bearing interest at the Prime-based
Rate until the Bank notifies Borrower that such circumstance no longer exists.
3.4 If, after the date hereof, the introduction of, or any change in,
any applicable law, rule or regulation or in the interpretation or
administration thereof by any governmental authority charged with the
interpretation or administration thereof, or compliance by Bank (or its
Eurocurrency lending offices) with any request or directive (whether or not
having the force of law) of any such authority, shall make it unlawful or
impossible for Bank to honor its obligations hereunder to make or maintain any
Advance with interest at the Eurocurrency-based Rate, Bank shall forthwith give
notice thereof to Borrower. Thereafter: (a) the obligations to make
Eurocurrency-based Loans and the right of Borrower to convert an Advance or
refund an Advance as a Eurocurrency-based Loan shall be suspended; and (b) if
Bank may not lawfully continue to maintain a Eurocurrency-based Loan to the end
of the then current Interest Period, the Prime-based Rate shall be the
Applicable Interest Rate for such Eurocurrency-based Loan for the remainder of
such Interest Period.
3.5 In the event that any change after the date hereof in applicable
law, treaty or governmental regulation, or in the interpretation or application
thereof, or compliance by Bank with any request or directive (whether or not
having the force of law) from any central bank or other financial, monetary or
other authority:
(a) shall subject Bank (or its Eurocurrency lending office)
to any tax, duty or other charge with respect to any Advance or shall change
the basis of taxation of payments to Bank (or its Eurocurrency lending
office) of the principal of or interest on any Advance or any other amounts
due under this Agreement (except for changes in the rate of tax on the
overall net income or gross receipts of Bank or its Eurocurrency lending
office imposed by the jurisdiction in which Bank's principal executive office
or Eurocurrency lending office is located); or
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(b) shall impose, modify or deem applicable any reserve
(including, without limitation, any imposed by the Board of Governors of the
Federal Reserve System but excluding with respect to any Eurocurrency-based
Loan any such requirement included in an applicable Eurocurrency Reserve
Requirement), special deposit, or similar requirement against assets of,
deposits with or for the account of, or credit extended by Bank (or its
Eurocurrency lending offices) or shall impose on Bank (or its Eurocurrency
lending offices) or the foreign exchange and interbank markets or other
condition affecting any Advance or any commitment of Bank under this
Agreement; and the result of any of the foregoing is to increase the cost to
Bank of making, renewing or maintaining any Advance or its commitments
hereunder or to reduce the amount or rate of return on any sum received or
receivable by Bank under this Agreement, or under any Note, then Bank may
promptly notify Borrower of such fact and demand compensation therefor and
Borrower agrees to pay to Bank (so long as such event or circumstance
continues to exist) such additional amount or amounts as will compensate Bank
for such increased costs or reduced return within thirty (30) days of such
notice; provided, however that, to the extent doing so would eliminate or
decrease Borrower's liability for increased costs hereunder, and to the
extent that doing so would not otherwise be disadvantageous to Bank, Bank
will attempt to designate a Eurocurrency lending office for which the tax,
duty, reserve, deposit requirement, or other circumstance giving rise to
Bank's demand for increased compensation, is not applicable. A certificate of
the Bank demanding such compensation setting forth in reasonable detail the
basis for determining such additional amount or amounts necessary to
compensate shall be conclusively presumed to be correct save for manifest
error.
3.6 At no time shall there be greater than three (3) outstanding
Advances on a Eurocurrency-based Loan.
4. CONDITIONS AND SECURITY
4.1 Borrower shall have executed and delivered to Bank, or caused to
have been executed and delivered to the Bank, this Agreement, the Note(s) and
all other applicable Loan Documents (including all schedules, exhibits,
certificates, opinions, financial statements and other documents to be delivered
pursuant hereto), and the Note(s) and other applicable Loan Documents (when
executed and delivered to Bank) shall be in full force and effect and binding
and enforceable obligations of Borrower and any other persons who may be parties
thereto, except to the extent limited by applicable bankruptcy, insolvency or
other insolvency laws.
4.2 Bank shall have received: (a) certified copies of resolutions of
the Board of Directors of Borrower evidencing approval of the borrowings
hereunder and the transactions contemplated hereby, (b) certified copies of
Borrower's Articles of Incorporation and Bylaws; and (c) a certificate of good
standing from the state or other jurisdiction of Borrower's incorporation, and
from each state or other jurisdiction in which Borrower is required, under
applicable law, to be qualified to do business.
4.3 Bank shall have received copies of each authorization, license,
permit, consent, order or approval of, or registration, declaration or filing
with, any governmental authority or any securities exchange or other person
obtained or made by Borrower in connection with the transactions contemplated by
this Agreement or the Loan Documents.
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4.4 Bank shall have received evidence of satisfaction of the Federal
Assignment of Claims Act required for any Government Account included in the
Formula Amounts set forth therein, if applicable.
4.5 The representations and warranties made by Borrower under this
Agreement or any of the Loan Documents, and the representations and warranties
of any of the foregoing made to Bank which are contained in any certificate,
document or financial or other statement furnished at any time hereunder or
thereunder or in connection herewith or therewith, shall have been true and
correct in all material respects when made.
4.6 Bank shall have received duly executed Loan Documents and Borrower
shall have performed and complied in all material respects with all agreements
and conditions contained in the Loan Documents applicable to it which are then
in effect.
4.7 No Default or Event of Default shall have occurred and be
continuing and there shall have been no material adverse change in the condition
(financial or otherwise), properties, business, results or operations of
Borrowers since the date of the financial statements mentioned in Section 4.9
hereof.
4.8 Bank shall have received such other instruments and documents (not
inconsistent with the terms hereof) as Bank may request in connection with the
making of the Advances hereunder, and all such instruments and documents shall
be reasonably satisfactory in form and substance to the Bank.
4.9 Bank shall have received and be satisfied with Borrower's final
draft of the financial statement for the fiscal year ending 1998 unqualified
audited by an independent certified public accountants of recognized standing.
Notwithstanding the foregoing, within five (5) business days of the effective
date of this Agreement, Bank shall have received and be satisfied with
Borrower's financial statement for the fiscal year ending 1998 audited, without
qualifications, by an independent certified public accountants of recognized
standing, together with delivery to Bank of a typical "management letter"
within 10 business days with respect to the Borrower.
4.10 Bank shall have received and be satisfied with a completed updated
appraisal of the Orderly Liquidation Value of the Inventory prepared by
independent licensed appraisers satisfactory to Bank.
4.11 The obligations of Bank to make Advances under this Agreement
shall be subject to the continuing condition that all documents, instruments and
agreements executed or submitted pursuant hereto shall be reasonably
satisfactory in form and substance to Bank; Bank shall have received all
information, and such counterpart originals or such certified or other copies of
such materials, as Bank and its counsel may reasonably request; and all other
legal matters relating to the transactions contemplated by this Agreement
(including, without limitation, matters arising from time to time as a result of
changes occurring with respect to any statutory, regulatory or decisional law
applicable hereto) shall be reasonably satisfactory to Bank.
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5. REPRESENTATIONS AND WARRANTIES OF BORROWER
Borrower represents and warrants and such representations and
warranties shall be deemed to be continuing representations and warranties
during the entire life of this Agreement:
5.1 Borrower is a corporation duly organized and existing in good
standing under the laws of the State of California; is duly qualified and
authorized to do business in each jurisdiction where the character of its assets
or the nature of its activities makes such qualification necessary; execution,
delivery and performance of this Agreement, and any other documents and
instruments required under this Agreement, and the issuance of the Note(s) are
within its corporate powers, have been duly authorized, are not in contravention
of law or the terms of the Articles of Incorporation or Bylaws of Borrower and
do not require the consent or approval of any governmental body, agency or
authority that has not been obtained; and this Agreement, and any other
documents and instruments required under this Agreement, when issued and
delivered under this Agreement, will be valid and binding upon Borrower in
accordance with their terms subject only to applicable bankruptcy, insolvency
laws and equitable principles.
5.2 The execution, delivery and performance of this Agreement, and any
other documents and instruments required under this Agreement, and the issuance
of the Note(s), are not in contravention of the unwaived terms of any indenture,
agreement or undertaking to which Borrower is a party or by which it is bound
the breach of which could have a material adverse effect on the properties,
business or prospects of Borrower.
5.3 No litigation or other proceeding before any court or
administrative agency is pending, or to the knowledge of the officers of
Borrower is threatened against Borrower other than as set forth on Schedule 5.3
the outcome of which could have a material adverse effect on the properties,
business or prospects of Borrower. Borrower shall notify Bank of all litigation
commenced or threatened after the date of this Agreement that would have a
material adverse effect on the properties, business or prospects of Borrower.
5.4 There are no security interests in, liens, mortgages, or other
encumbrances on any of Borrower's assets, except to Bank or except for Permitted
Liens.
5.5 There are no subsidiaries of Borrower except for those in
attached Schedule 5.5.
5.6 There exists no default under the provisions of any instrument
evidencing any debt of Borrower or of any agreement relating thereto (other than
to Bank), that would have a Material Adverse Effect.
5.7 Borrower is not a party to any litigation or administrative
proceeding, nor so far as is known by Borrower is any litigation or
administrative proceeding threatened against Borrower, in either case, the
outcome of which if determined adversely would materially impair the financial
condition of Borrower or its ability to carry on its business, which in either
case (A) asserts or alleges that Borrower violated Environmental Laws, (B)
asserts or alleges that Borrower is required to clean up, remove, or take
remedial or other response action due to the disposal, depositing, discharge,
leaking or other release of any hazardous substances of materials,
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(C) asserts or alleges that Borrower is required to pay all or a portion of the
cost of any past, present, or future cleanup, removal or remedial or other
response action which arises out of or is related to the disposal, depositing,
discharge, making or other release of any hazardous substances or materials by
Borrower.
5.8 There are no conditions existing currently or likely to exist
during the term of this Agreement which would subject Borrower to material
damages, penalties, injunctive relief or cleanup costs under any applicable
Environmental Laws or which require or are likely to require material cleanup,
removal, remedial action or other response pursuant to applicable Environmental
Laws by Borrower.
5.9 Borrower is not subject to any judgment, decree, order or citation
related to or arising out of applicable Environmental Laws and to the best
knowledge of Borrower after due inquiry, Borrower has not been named or listed
as a potentially responsible party by any governmental body or agency in a
matter arising under any applicable Environmental Laws.
5.10 Borrower has all permits, licenses and approvals required under
applicable Environmental Laws.
5.11 Borrower has reviewed its operations and is in the process of
reviewing its major commercial counterparts with a view to assessing whether it
will, in the receipt, transmission, processing, manipulation, storage,
retrieval, retransmission or other utilization of data, be vulnerable to a Year
2000 Issue. Based on such review, Borrower has no reason to believe that any
Material Adverse Effect will occur with respect to its businesses or operations
resulting from a Year 2000 Issue.
6. AFFIRMATIVE COVENANTS OF BORROWER
On a continuing basis from the date of this Agreement until the
Indebtedness is paid in full and the Borrower has performed all of its other
obligations hereunder, the Borrower covenants and agrees that it will:
6.1 Financial and Other Information.
(a) Furnish to the Bank, in form and reporting basis satisfactory to
the Bank, not later than ninety (90) days after the close of each fiscal year of
the Borrower, financial statements of the Borrower containing the balance sheet
of the Borrower of the close of each such fiscal year, statements of income and
retained earnings and a statement of cash flows for each such fiscal year, and
such other comments and financial details as are usually included in similar
reports. Such reports shall be prepared in accordance with GAAP by independent
certified public accountants of recognized standing selected by the Borrower and
acceptable to the Bank and shall contain (i) unqualified opinions as to the
fairness of the statements therein contained and (ii) a typical "management
letter" with respect to Borrower. These statements shall be prepared on an
audited basis.
(b) Furnish to the Bank not later than thirty (30) days after the close
of each month of each fiscal year of the Borrower, unaudited financial
statements on a consolidated basis containing the balance sheet of the Borrower
as of the end of each such period, statements of
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income and retained earnings of the Borrower and a statement of cash flows of
the Borrower for the portion of the fiscal year up to the end of such period,
and such other comments and financial details as are usually included in similar
reports. The statements shall be in such detail as the Bank may reasonably
require, and the accuracy of the statements shall be certified by the chief
executive or financial officer of the Borrower.
(c) Furnish to the Bank on a quarterly basis, a certificate of its
chief executive or financial officer certifying compliance with the financial
covenants set forth in Section 6.8.
(d) Together with each delivery of the financial statements required by
Sections 6.1(a) and 6.1(b) of this Agreement, furnish to the Bank a certificate
of its chief executive or financial officer stating that no Event of Default or
Default has occurred, or if any such Event of Default or Default exists, stating
the nature thereof, the period of existence thereof and what action the Borrower
proposes to take with respect thereto.
(e) Furnish to Bank not later than ten (10) days after and as of the
end of each month, Inventory reports, agings of the Accounts and any accounts
payable of Borrower, and a schedule identifying each Eligible Account and
identifying for each Eligible Account, the portions thereof which constitute
Eligible Foreign Accounts. Any such schedule, certificate or report shall be
executed by a duly authorized officer of Borrower and shall be in such form and
detail as Bank may specify.
(f) Furnish to the Bank upon presentment of each Request for Loan but
in any event no later than five (5) days after and as of the end of each week,
in form, content, and reporting basis satisfactory to the Bank, a Borrowing Base
report.
(g) Furnish to the Bank, in form and reporting basis satisfactory to
the Bank, prior to the commencement of each fiscal year of the Borrower,
projected financial statements of the Borrower containing the balance sheet of
the Borrower of the beginning of each such fiscal year, statements of income and
retained earnings and a statement of cash flows for each such fiscal year, and
such other comments and financial details as are usually included in similar
reports prepared by management of Borrower utilizing their then current
knowledge and reasonable expectations with respect to the periods covered
thereby.
(h) Promptly inform the Bank of the occurrence of any Event of Default
or Default, or of any other occurrence which has or could reasonably be expected
to have a materially adverse effect upon the Borrower's business, properties, or
financial condition or upon the Borrower's ability to comply with its
obligations under the Documents.
(i) Promptly furnish to the Bank such other information regarding the
operations, business affairs and financial condition of the Borrower and its
subsidiaries as the Bank may reasonably request from time to time, including,
but not limited to monthly DRAM desktop inventory appraisal updates, semi-annual
desk top Inventory appraisals (as provided in Section 1.42 above) and weekly
Inventory reporting and permit the Bank, its employees, attorneys and agents,
upon 72 hours prior notice (except in case of emergency or during the existence
of an Event of Default) to inspect all of the books, records and properties of
the Borrower and its subsidiaries during normal business hours.
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<PAGE>
6.2 In the event that at any time, the aggregate principal amount of
Advances exceeds the Facility Maximum, immediately pay to Bank for application
against such Advances, an amount sufficient to eliminate such excess.
6.3 Keep its insurable properties (including but not limited to the
Collateral) adequately insured and maintain (a) insurance against fire and other
risks customarily insured against under an "all-risk" policy and such additional
risks customarily insured against by companies engaged in the same or a similar
business to that of the Borrower, (b) necessary worker's compensation insurance,
(c) public liability and product liability insurance, and (d) such other
insurance as may be required by law or as may be reasonably required in writing
by the Bank, all of which Insurance shall be in such amounts, containing such
terms, in such form, for such purposes, prepaid for such time period, and
written by such companies as shall be satisfactory to the Bank. All such
policies shall contain a provision whereby they may not be canceled or amended
except upon thirty (30) days' prior written notice to the Bank. The Borrower
will promptly deliver to the Bank, at the Bank's request, evidence satisfactory
to the Bank that such insurance has been so procured and, with respect to
casualty insurance, made payable to the Bank. If the Borrower fails to maintain
satisfactory insurance as herein provided, the Bank shall have the option to do
so, and the Borrower agrees to repay the Bank upon demand, with interest at the
Prime-based Rate then in effect for the Revolving, all amounts so expended by
the Bank. The Borrower hereby appoints the Bank or any employee or agent of the
Bank as the Borrower's attorney-in-fact, which appointment is coupled with an
interest and irrevocable, and authorizes the Bank or any employee or agent of
the Bank, on behalf of the Borrower, to adjust and compromise any loss under
said insurance and to endorse any check or draft payable to the Borrower in
connection with returned or unearned premiums on said insurance or the proceeds
of said insurance, and any amount so collected shall be applied toward repair
and/or replacement of the Collateral to which such casualty occurred or
satisfaction of the Indebtedness in accordance in accordance with the provisions
governing such application in the Documents pursuant to which Bank's Liens on
such Collateral were granted.
6.4 Pay in accordance with commercially reasonable practices and within
the time that they can be paid without late charge, penalty or interest all
taxes, assessments and similar imposts and charges of every kind and nature
lawfully levied, assessed or imposed upon the Borrower, and its property, except
to the extent being contested in good faith and, if requested by the Bank,
bonded in an amount and manner satisfactory to the Bank. If the Borrower shall
fail to pay such taxes and assessments within the time they can be paid without
penalty, late charge or interest the Bank shall have the option to do so, and
the Borrower agrees to repay the Bank upon demand, with interest at the
Prime-based Rate from time to time in effect under the Note, all amounts so
expended by the Bank.
6.5 Do or cause to be done all things necessary to preserve and keep in
full force and effect the Borrower's corporate existence, and material rights
and franchises and comply with all material respects with applicable laws,
continue to conduct and operate its business substantially as conducted and
operated during the present and preceding calendar year, at all times maintain,
preserve and protect all material franchises and trade names and property and
keep the same in good repair, working order and condition, and from time to time
make, or cause to be made, all needed and proper repairs, renewals,
replacements, betterments and improvements thereto so that
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<PAGE>
the business carried on in connection therewith may be properly and
advantageously conducted at all times.
6.6 (a) At all times meet the minimum funding requirements of ERISA
with respect to the Borrower's employee benefit plans subject to ERISA, (b)
promptly after the Borrower knows or has reason to know (i) of the occurrence of
any event, which would constitute a reportable event or prohibited transaction
under ERISA, or (ii) that the PBGC or the Borrower has instituted or will
institute proceedings to terminate an employee pension plan, deliver to the Bank
a certificate of the chief financial officer of the Borrower setting forth
details as to such event or proceedings and the action which the Borrower
proposes to take with respect thereto, together with a copy of any notice of
such event which may be required to be filed with the PBGC, and (c) furnish to
the Bank (or cause the plan administrator to furnish the Bank) a copy of the
annual return (including all schedules and attachments) for each plan covered by
ERISA, and filed with the Internal Revenue Service by the Borrower not later
than ten (10) days after such report has been so filed.
6.7 Cause credit extended by Borrower to QualCenter and XYZ, Inc. to be
reduced to $300,000 by December 31, 1999.
6.8 Financial Covenants:
(a) Maintain an Effective Tangible Net Worth of not less than
$5,000,000;
(b) Maintain an Effective Tangible Net Worth Ratio of not more than 7
to 1.
6.9 In the event that, at any time, Borrower has or acquires any
Subsidiary which has assets or revenues equal to or greater than 3% of the
consolidated assets or revenues, respectively, of Borrower, Borrower shall cause
such Subsidiary to, immediately upon Bank's request execute and deliver to Bank
such guaranties, security agreements, pledges, mortgages and financial
statements as Bank shall require for the purpose of having such Subsidiary
guaranty the payment of the Indebtedness and having the obligation of such
Subsidiary under such guaranty secured by first priority perfected liens on
substantially all assets of such Subsidiary, in favor of Bank; provided, that,
in the case only of Simple Technology Europe, such documents shall only be
required to be delivered if (a) there occurs any Event of Default, or (b) such
entity has in excess of 3% of the consolidated assets or revenues of Borrower as
of June 30, 2000.
7. NEGATIVE COVENANTS OF BORROWER
On a continuing basis from the date of this Agreement until the
Indebtedness is paid in full and the Borrower has performed all of its other
obligations hereunder, the Borrower covenants and agrees that it will not,
without the Bank's prior written consent:
7.1 Declare or pay any cash dividends on, or make any other cash
distribution (whether by reduction of capital or otherwise) with respect to any
shares of its capital stock except dividends or distributions necessary to cover
tax liability to shareholders of Borrower resulting from Borrower.
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<PAGE>
7.2 Purchase, redeem, retire or otherwise acquire any of the shares of
its capital stock, or make any commitment to do so.
(a) Create, incur, assume or suffer to exist any mortgage,
pledge, encumbrance, security interest, lien or charge of any kind upon any
of its property or assets (including without limit any charge upon property
purchased or acquired under a conditional sales or other title retaining
agreement or lease required to be capitalized under GAAP) whether now owned
or hereafter acquired, other than to Bank or except for the Permitted Liens.
(b) Incur, create, assume or permit to exist any indebtedness
or liability on account of deposits or advances or any indebtedness or
liability for borrowed money, or any other indebtedness or liability
evidenced by notes, bonds, debentures or similar obligations, or any other
indebtedness whatsoever, except for the Debt on the obligations from time to
time secured by the Permitted Liens.
7.3 Make loans, advances or extensions of credit to any Person, except
(a) loans to officers to cover tax liabilities; and (b) other loans and advances
to officers, employees and sales representatives in aggregate amount at any time
outstanding not to exceed Fifty Thousand Dollars ($50,000).
7.4 Guarantee or otherwise, directly or indirectly, in any way be or
become responsible for obligations of any other Person, whether by agreement to
purchase the indebtedness of any other Person, agreement for the furnishing of
funds to any other Person through the furnishing of goods, supplies or services,
by way of stock purchase, capital contribution, advance or loan, for the purpose
of paying or discharging (or causing the payment or discharge of) the
indebtedness of any other Person, or otherwise, except for the endorsement of
negotiable instruments by the Borrower in the ordinary course of business for
deposit for collection.
7.5 (a) Sell, lease, transfer or otherwise dispose of properties and
asset, having an aggregate book value of more than Two Hundred Thousand Dollars
($200,000) (whether in one transaction or in a series of transactions) except
(i) as to the sale of inventory in the ordinary course of business and (ii)
sales, subleases and transfers of the assets of Simple Technology Europe; (b)
change its name, consolidate with or merge into any other corporation, permit
another corporation to merge into it, acquire all or substantially all the
properties or assets of any other Person, enter into any reorganization or
recapitalization or reclassify its capital stock or (c) enter into any
sale-leaseback transaction.
7.6 Purchase or hold beneficially any stock or other securities of, or
make any investment or acquire any interest whatsoever in, any other Person,
except for: (a) certificates of deposit with maturities of one year or less of
United States commercial banks with capital, surplus and undivided profits in
excess of $100,000,000 and direct obligations of the United States Government
maturing within one year from the date of acquisition thereof; and (b)
investments in majority-owned subsidiaries.
7.7 (a) Allow any fact, condition or event to occur or exist with
respect to any employee pension or profit sharing plans established or
maintained by it which might constitute
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<PAGE>
grounds for termination of any such plan or for the court appointment of a
trustee to administer any such plan, or (b) permit any such plan to be the
subject of termination proceedings (whether voluntary or involuntary) from which
termination proceedings there may result a liability of the Borrower to the PBGC
which, in the opinion of the Bank, will have a materially adverse effect upon
the operations, business, property, assets, financial condition or credit of the
Borrower.
7.8 Increase salaries and/or compensation to officers of Borrower in
excess of 5% per annum.
7.9 Allow the credit referenced in Section 6.7 to be greater than
$300,000 after December 31, 1999.
7.10 Make or incur, or become obligated to make or incur, expenditures
for the purchase or lease of fixed assets in amount which, in aggregate, would
exceed the amount of Two Million Five Hundred Thousand Dollars ($2,500,000)
during any fiscal year.
8. DEFAULTS
8.1 The occurrence of any of the following events shall constitute an
Event of Default hereunder:
(a) If the Borrower shall fail to pay, when due, any principal
or interest under any Note or other Indebtedness when due or shall default in
an obligation described in Section 6.1 or 6.2 hereof and such failure or
default shall continue for a period in excess of three (3) Business Days
after notice by Bank to Borrower thereof.
(b) If any warranty or representation in connection with or
contained in this Agreement or any Loan Document, or if any Financial
Statements now or hereafter furnished to the Bank by or on behalf of the
Borrower, shall prove to be false or misleading in any material respect as of
the date made or deemed made hereunder.
(c) If the Borrower shall fail to perform in the time and
manner required any of its obligations or covenants under, or shall fail to
comply with any of the provisions of, this Agreement or any other Loan
Document and, in the case of a failure to perform obligations other than
those described in Section 6.3 or Sections 7.1 through 7.9 above, such
failure shall continue for a period in excess of thirty (30) days after the
earlier of Bank's notice to Borrower thereof or the date Borrower actually
becomes aware thereof.
(d) If the Borrower shall default in the payment when due of
any of its borrowed money indebtedness (other than to the Bank) in amounts in
excess of Two Hundred Fifty Thousand Dollars ($250,000) or in the observance
or performance of any term, covenant or condition in any agreement or
instrument evidencing, securing or relating to such indebtedness, and such
default be continued for a period sufficient to permit acceleration of the
indebtedness, irrespective of whether any such default shall be forgiven or
waived or there has been acceleration by the holder thereof.
(e) If there shall be rendered against the Borrower one or more
judgments or decrees involving an aggregate liability of Two Hundred Fifty
Thousand Dollars ($250,000) or
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<PAGE>
more, which has or have become non-appealable and shall remain undischarged,
unsatisfied by insurance and unstayed for more than thirty (30) days, whether or
not consecutive, or if a writ of attachment or garnishment against the property
of the Borrower shall be issued and levied in an action claiming Two Hundred
Fifty Thousand Dollars ($250,000) or more and not released or appealed and
bonded in an amount and manner satisfactory to the Bank within thirty (30) days
after such issuance and levy.
(f) If the Borrower shall voluntarily suspend transaction of
its business, or if the Borrower shall not pay its debts as they mature or
shall make a general assignment for the benefit of creditors, or proceedings
in bankruptcy, or for reorganization or liquidation of the Borrower under the
Bankruptcy Code or under any other, state federal or other applicable law for
the relief of debtors shall be commenced by Borrower, or shall be commenced
against the Borrower and shall not be discharged within sixty (60) days of
commencement, or a receiver, trustee or custodian shall be appointed for the
Borrower or for any substantial portion of their respective properties or
assets.
(g) If a majority of the persons serving on the board of
directors of Borrower as of the date of this Agreement shall cease to serve
on such board of directors and Bank considers (in its reasonable discretion)
such change to affect materially and adversely the prospects of Borrower.
(h) If the Borrower shall fail to meet its minimum funding
requirements under ERISA with respect to any employee benefit plan
established or maintained by it, or if any such plan shall be subject of
termination proceedings (whether voluntary or involuntary) and there shall
result from such termination proceedings a liability of Borrower to the PBGC
which in the opinion of the Bank will have a materially adverse effect upon
the operations, business, property, assets, financial condition or credit of
the Borrower.
(i) If there shall occur, with respect to any pension plan
maintained by the Borrower any reportable event (within the meaning of
Section 4043(b) of ERISA) which the Bank shall determine constitutes a ground
for the termination of any such plan, and if such event continues for thirty
(30) days after the Bank gives written notice to the Borrower, provided that
termination of such plan or appointment of such trustee would, in the opinion
of the Bank, have a materially adverse effect upon the operations, business,
property, assets, financial condition or credit of the Borrower, as the case
may be.
(j) If Borrower repudiates, contests, revokes or purports to
revoke any of its obligations to Bank, or any rights or remedies of Bank,
under Loan Documents to which they are party.
8.2 Upon the occurrence of an Event of Default, all Indebtedness shall
be due and payable in full immediately (without notice or demand in the case of
an Event of Default of the type described in Section 8.1.(f) above, and upon
written notice from Bank in the case of any other Event of Default) without
presentation, demand, protest, notice of dishonor or other further notice of any
kind, all of which are hereby expressly waived, and Bank shall have no further
commitment to make Advances. Unless all of the Indebtedness is then immediately
fully paid, the Bank shall have and may exercise any one or more of the rights
and remedies for which
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<PAGE>
provision is made for a secured party under the UCC, under the or for which
provision is provided by law or in equity, including, without limitation, the
right to take possession and sell, lease or otherwise dispose of any or all of
the Collateral and to set off against the Indebtedness any amount owing by the
Bank to the Borrower and/or any property of the Borrower in possession of the
Bank. The Borrower agrees, upon request of the Bank, to assemble the Collateral
and make it available to the Bank at any place designated by the Bank.
8.3 All of the Indebtedness shall constitute one loan secured by the
Bank's security interest in the Collateral and by all other security interests,
mortgages, liens, claims, and encumbrances now and from time to time hereafter
granted from the Borrower to the Bank. Upon the occurrence of an Event of
Default which is not cured within the cure period, if any, provided under
Section 8.1, the Bank may in its sole discretion apply the Collateral to any
portion of the Indebtedness. The proceeds of any sale or other disposition of
the Collateral authorized by this Agreement shall be applied by the Bank, first
upon all expenses authorized by the UCC or otherwise in connection with the sale
and all reasonable attorneys' fees and legal expenses incurred by the Bank, the
balance of the proceeds of such sale or other disposition shall be applied in
the payment of the Indebtedness, first to interest, then to principal, then to
other Indebtedness and the surplus, if any, shall be paid over to the Borrower
or to such other Person or Persons as may be entitled thereto under applicable
law. The Borrower shall remain liable for any deficiency, which the Borrower
shall pay to the Bank immediately upon demand.
8.4 The remedies provided for herein are cumulative to the remedies for
collection of the Indebtedness as provided by law, in equity or by any Loan
Document. Nothing herein contained is intended, nor shall it be construed, to
preclude the Bank from pursuing any other remedy for the recovery of any other
sum to which the Bank may be or become entitled for the breach of this Agreement
by the Borrower.
9. MISCELLANEOUS
9.1 This Agreement shall be binding upon and shall inure to the benefit
of Borrowers and Bank and their respective successors and assigns, except that
the credit provided for under this Agreement and no part thereof and no
obligation of Bank hereunder shall be assignable or otherwise transferable by
Borrowers.
9.2 Where the character or amount of any asset or liability or item of
income or expense is required to be determined or any other accounting
computation is required to be made for the purposes of this Agreement, unless
the calculation of such item, amount or computation is specifically defined to
the contrary herein, it shall be done in accordance with GAAP.
9.3 No delay or failure of Bank in exercising any right, power or
privilege hereunder shall affect such right, power or privilege, nor shall any
single or partial exercise thereof preclude any further exercise thereof, or the
exercise of any other power, right or privilege. The rights of Bank under this
Agreement are cumulative and not exclusive of any right or remedies which Bank
would otherwise have.
9.4 Until Borrowers or Bank, as the case may be, shall notify one
another in writing that notices shall be sent to some other address, in which
case subsequent notice shall be given,
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<PAGE>
all notices with respect to this Agreement shall be deemed to be completed two
Business Days after mailing, or upon delivery by overnight courier, or
confirmation of facsimile transmission to the following:
TO BORROWERS:
Simple Technology, Inc.
Attn: Dan Moses
3001 Daimler Street
Santa Ana, CA 92705
Telephone: 949-260-8284
Facsimile: 949-851-2757
TO BANK:
Comerica Business Credit
Attn: Mark Smith
611 Anton Blvd., 2nd Floor
Costa Mesa, CA 92626
Telephone: (714) 424-3835
Facsimile: (714) 424-3854
All agreements between the Borrowers and the Bank pertaining to the
indebtedness described herein are expressly limited so that in no event
whatsoever shall the amount of interest paid or agreed to be paid to the Bank
exceed the highest rate of interest permissible under applicable law. If, from
any circumstances whatsoever, fulfillment of any provision of this Agreement,
the Loan Documents, the Note(s) or any other instrument securing the Note(s) or
all or any part of the indebtedness secured thereby, at the time performance of
such provision shall be due, shall involve exceeding the interest limitation
validly prescribed by law which a court of competent jurisdiction may deem
applicable thereto, then, the obligation to be fulfilled shall be reduced to an
amount computed at the highest rate of interest permissible under such
applicable law, and if, for any reason whatsoever, the Bank shall ever receive
as interest an amount which would be deemed unlawful under such applicable law,
such interest shall be automatically applied to the payment of the principal
amount described herein or otherwise owed by the relevant Borrowers to Bank
(whether or not then due and payable) and not to payment of interest.
9.5 This Agreement, the Loan Documents and the Notes shall be governed
by, and construed and enforced in accordance with, Michigan law.
9.6 Borrowers hereby indemnify, save and hold Bank and any of its past,
present and future officers, directors, shareholders, employees, representatives
and consultants harmless from any and all loss, damages, suits, penalties,
costs, liabilities and expenses (including but not limited to reasonable
investigation, environmental audit(s), and legal expenses) arising out of any
claim, loss or damage of any property, injuries to or death of persons,
contamination of or adverse affects on the environment, or any violation of any
applicable Environmental Laws, caused by or in any way related to the real
property owned by Borrowers, or due to any acts of Borrowers, its officers,
directors, shareholders, employees, consultants and/or representatives. In no
event shall the Borrowers be liable hereunder for any loss, damages, suits,
penalties, costs,
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<PAGE>
liabilities or expenses arising from any act of gross negligence or willful
misconduct of Bank, or its agents or employees.
9.7 It is expressly understood and agreed that the indemnifications
granted herein are intended to protect Bank, its past, present and future
officers, directors, shareholders, employees, consultants and representatives
from any claims that may arise by reason of the security interest, liens and/or
mortgages granted to Bank, or under any other document or agreement given to
secure repayment of any indebtedness from Borrowers, whether or not such claims
arise before or after Bank has foreclosed upon and/or otherwise become the owner
of any such property. All obligations of indemnity as provided hereunder shall
be secured by the Loan Documents.
9.8 It is expressly agreed and understood that the provisions hereof
shall and are intended to be continuing and shall survive the repayment of any
indebtedness from Borrowers to the Bank.
9.9 Borrowers and the Bank acknowledge that the right to trial by jury
is a constitutional one, but that it may be waived, and, after consulting with
counsel of their choice, knowingly and voluntarily, and for their mutual
benefit, waive any right to trial by jury in the event of litigation regarding
the performance or enforcement of, or in any way related hereto.
[signature page follows]
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<PAGE>
WITNESS the due execution hereof as of the day and year first above
written.
COMERICA BANK SIMPLE TECHNOLOGY, INC.
By: [ILLEGIBLE] By: [ILLEGIBLE]
Its: [ILLEGIBLE] Its: CEO
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<PAGE>
EXHIBIT "A"
REVOLVING NOTE
$20,000,000 Detroit, Michigan
August 3, 1999
FOR VALUE RECEIVED, on or before the Maturity Date, SIMPLE TECHNOLOGY,
INC., a California corporation promises to pay to the order of COMERICA BANK, a
Michigan banking corporation ("Bank") at its main office at One Detroit Center,
Detroit, Michigan, in lawful money of the United States of America so much of
the principal sum of _______________ ($____________) as shall have been advanced
and then be outstanding hereunder and all the accrued and unpaid interest
thereon.
Capitalized terms used herein and not defined to the contrary have the
meanings given them in the Credit Agreement of even date herewith between the
undersigned and Bank ("Agreement") to which reference is hereby made.
Interest on the Advances from time to time outstanding shall bear
interest at their Applicable Interest Rates; provided, however, that in the
event and so long as there shall exist an Event of Default, the principal
balance from time to time outstanding shall bear interest at the rates provided
in Section 2.8 of the Agreement. Interest shall be computed on the basis of a
360 day year and assessed for the actual number of days elapsed.
This Note is a note under which advances, repayments and readvances may
be made subject to the terms and conditions of the Agreement. This Note
evidences borrowing under, is subject to, is secured in accordance with, and may
be matured under, the terms of the Agreement, to which reference is hereby made.
As additional security for this Note, Company grants Bank a lien on all property
and assets including deposits and other credits of the Company, at any time in
possession or control of or owing by Bank for any purpose.
Company hereby waives presentment for payment, demand, protest and
notice of dishonor and nonpayment of this Note and agrees that no obligation
hereunder shall be discharged by reason of any extension, indulgence, release,
or forbearance granted by any holder of this Note to any party now or hereafter
liable hereon or any present or subsequent owner of any property, real or
personal, which is now or hereafter security for this Note. Any transferees of,
or endorser, guarantor or surety paying this Note in full may succeed to all
rights of Bank, and Bank shall be under no further responsibility for the
exercise thereof or the loan evidenced hereby. Nothing herein shall limit any
right granted Bank by other instrument or by law.
<PAGE>
This Note shall be governed by and construed in accordance with the
laws of the State of Michigan.
SIMPLE TECHNOLOGY, INC.
By: [ILLEGIBLE]
Its: CEO
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<PAGE>
FIRST AMENDMENT TO
CREDIT AGREEMENT
This Amendment is entered into as of this 29th day of December, 1999,
by and between COMERICA BANK, a Michigan banking corporation ("Bank"), with
offices at One Detroit Center, 500 Woodward Avenue, Detroit, Michigan 48226 and
SIMPLE TECHNOLOGY, INC., a California corporation ("Company"), whose principal
office is located at 3001 Daimler Street, Santa Ana, CA 92705.
RECITALS:
A. On August 3, 1999, the parties entered into a certain Credit
Agreement (the "Agreement") and in connection therewith, Company executed and
delivered to Bank a certain Revolving Note in the principal amount of
$20,000,000 and Canadian Subfacility Note in the principal amount of CAD
$1,000,000 both of even date therewith (collectively, the "Note").
B. The parties desire to amend the Agreement, upon the following terms
and conditions.
NOW THEREFORE, for good and valuable consideration, the parties agree
as follows:
1. Section 6.7 of the Agreement is amended and restated in its entirety
as follows:
"6.7 Cause advance(s) by Borrower to its shareholders not to exceed in
the aggregate $1,400,000 (the "Distribution"); provided, however, that a portion
of the Distribution shall be applied by the shareholders first to outstanding
debts due and owing from XYZ, Inc. and QualCenter to Borrower and any remaining
amount of the Distribution will be earmarked for the benefit of XYZ, Inc. by the
shareholders , and it is agreed that no further advances shall be distributed by
Borrower or its shareholders to XYZ, Inc. and QualCenter ".
2. Section 7.9 of the Agreement is deleted in its entirety.
3. Company hereby ratifies and reaffirms the representations,
warranties and covenants set forth in the Agreement.
4. Company certifies that no Event of Default or default (as defined in
the Agreement) has occurred and is continuing.
5. Company represents and warrants that its Articles of Incorporation
and Bylaws delivered to Bank as of August 3, 1999 in connection with the
Agreement, are in
<PAGE>
full force and effect and have not been modified, repealed or amended since the
date thereof.
6. If any provision of this Amendment shall be held invalid or
unenforceable, such invalidity or unenforceability shall affect only such
provision and shall not in any manner affect or render invalid or unenforceable
any other provision of this Amendment, and this Amendment shall be enforced as
if any such invalid or unenforceable provision were not contained herein.
7. Except as specifically amended hereby, the Agreement shall remain
unchanged and shall be in full force and effect, enforceable in accordance with
its terms.
IN WITNESS WHEREOF, this Amendment has been executed as of the day
first stated above.
SIMPLE TECHNOLOGY, INC.
By: _________________________
Its:_________________________
COMERICA BANK
By: _________________________
Mark C. Smith
Its: Vice President
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<PAGE>
EXHIBIT 10.8
[FORM OF EMPLOYMENT AGREEMENT]
SIMPLE TECHNOLOGY, INC.
EMPLOYMENT AGREEMENT
THIS AGREEMENT is dated March 10, 2000, between Simple Technology, Inc.
("Employer"), a California Corporation, and _______________________("Employee").
In consideration of the mutual promises and covenants contained in this
Agreement, the parties agree as follows:
1. EMPLOYMENT DUTIES. Employer agrees to employ Employee in the
position of __________________________________, beginning on March 10, 2000, and
Employee agrees to serve in that position or in such other positions (including
positions with a wholly-owned subsidiary or partnership controlled by Employer)
as Employee may be assigned from time to time by Employer. Employee shall report
to the Employer's Board of Directors or, to such other person as management
designates. Employee shall have such duties as are assigned from time to time by
Employer and as are consistent with such position. In connection with Employee's
employment by Employer, Employee shall be based at Employer's place of business
at 3001 and 3009 Daimler Street, Santa Ana, CA 92705.
2. TIME AND EFFORT, EXCLUSIVITY OF EMPLOYMENT. Employee shall faithfully,
honestly and diligently serve Employer, devote all of Employee's working time,
attention, knowledge and skill to Employee's employment hereunder and use
Employee's best efforts to promote the business and interests of Employer and to
perform the duties and responsibilities that are assigned to Employee. Employer
shall be entitled to all of the benefits arising from or incident to the duties
of Employee pursuant to this Agreement.
3. COMPENSATION. As compensation for the services to be rendered by
Employee, Employer shall pay Employee in equal semi-monthly installments of
$___________________ (less normal withholding for state and federal income
taxes and employee portions of FICA, SDI, and any other required or
Employee-authorized deductions), together with such additional terms of
compensation, if any, as set forth in this Agreement, Employee's employment
offer letter and/or as determined by Employer from time to time. Employee
shall also be entitled to participate in such employee benefit programs as
may be offered by Employer, subject to the terms and eligibility requirements
established by Employer for such programs. The parties contemplate that
compensation adjustments may be made from time to time at the discretion of
Employer. Such adjustments shall be incorporated into and form a part of this
Agreement.
<PAGE>
4. TERM AND TERMINATION. Employee's employment with Employer is "at will,"
meaning that either Employee or Employer may terminate the employment
relationship at any time on notice to the other, with or without cause, for any
reason or no reason, and with no liability of Employer to Employee other than
for wages accrued to the date of termination. Employer may also discipline,
demote or alter the terms of employment of Employee at any time, with or without
cause or advance notice.
5. NON-COMPETITION.
(a) For the duration of Employee's employment with Employer and for a
period of one (1) year after the date of termination of Employee's employment
with Employer, whether terminated by Employee or Employer, Employee will not, as
an employee, agent, consultant, advisor, independent contractor, general
partner, officer, director, stockholder, investor, lender or guarantor of any
corporation, partnership or other entity, or in any other capacity, directly or
indirectly:
(i) Engage in any employment, business or activity that
competes or may compete with Employer's business or reasonably anticipated
business or permit Employee's name to be used in connection with, or assist, any
person or organization in competing with or preparing to compete with Employer;
or
(ii) Solicit, divert, or take away or assist any competitor or
potential competitor of Employer in soliciting, diverting or taking away any
person, firm, corporation or other entity from Employer who is or was a past or
present customer or supplier of Employer;
(iii) Induce or attempt to induce any person, who at the time
of such inducement is an employee of Employer, to perform work or services for
any other person or entity other than Employer; or
(iv) Permit other employees of Employer to be used in connection
with a business which is competitive or substantially similar to the business of
Employer.
(b) Notwithstanding the foregoing, Employee may own, directly or
indirectly, solely as an investment, up to one percent (1%) of any class of
"publicly traded securities" of any person or entity which owns a business that
is competitive or substantially similar to the Employer's business. The term
"publicly traded securities" shall mean securities that are traded on a national
securities exchange or listed on the National Association of Securities Dealers
Automated Quotation System.
(c) If any restriction set forth in this non-competition section is
found by a court to be unreasonable, then Employee agrees and hereby submits, to
the reduction and limitation of such prohibition to such area or period as shall
be deemed reasonable. Employee acknowledges that the services that Employee will
provide to Employer under this agreement are unique and that irreparable harm
will be suffered by Employer in the event of the breach by Employee of any of
its obligations under this agreement, and that Employer may be entitled, in
addition to its other rights, to enforce obligations set forth in this agreement
by an injunction or decree of specific
2
<PAGE>
performance. Any claims asserted by Employee against Employer shall not
constitute a defense in any injunction action brought by Employer to obtain
specific enforcement of said obligations.
6. OBSERVANCE OF RULES AND REGULATIONS. Employee agrees to abide by all
Employer's policies, rules and regulations as adopted or amended from time to
time by Employer in its discretion.
7. EMPLOYEE NONDISCLOSURE AND INVENTION ASSIGNMENT AGREEMENT. Employee's
employment is subject to the requirement that Employee sign, observe, and agree
to be bound, both during and after Employee's employment, by the provisions of
the Employer's Employee Nondisclosure and Invention Assignment Agreement, a copy
of which is being furnished to Employee at the same time as this Agreement.
Employee's execution of the Employee Nondisclosure and Invention Assignment
Agreement is an express condition precedent to Employee's commencement and
continuation of employment with Employer.
8. REMEDIES. Employee acknowledges that a breach or threatened breach by
Employee of the provisions of Sections 5 and 7 of this Agreement or Sections 2
or 4 of the Employee Nondisclosure and Invention Assignment Agreement will
result in Employer and its affiliates suffering irreparable harm which cannot be
calculated or fully or adequately compensated by recovery of damages alone.
Accordingly, Employee agrees that Employer shall be entitled to temporary and
permanent injunctive relief, specific performance and other equitable remedies,
in addition to any other relief to which Employer may become entitled.
9. NOTICES. Any notice or other communication required or permitted to be
given under the Agreement shall be in writing and shall be given by prepaid
first class mail or by hand-delivery. Any such notice or other communication, if
mailed by prepaid first class mail shall be deemed to have been received on the
fourth business day after the postmarked date, or if delivered by hand, shall be
deemed to have been received by Employer at the time it is delivered to the
applicable address noted below or by Employee at the time it is received by
Employee or at the time it is delivered to the applicable address noted below.
Notices and other communications shall be addressed as follows:
(a) If to Employer:
Simple Technology, Inc.
3001 Daimler St.
Santa Ana, CA 92705
Attn: Human Resources Dept.
(b) If to Employee:
c/o Simple Technology, Inc.
3001 Daimler St.
Santa Ana, CA 92705
3
<PAGE>
Either party may change its address for the purposes of this Agreement by giving
written notice of such change to the other party.
10. INVALIDITY OF PROVISIONS. If any provision of this Agreement should be
declared to be void or unenforceable by a court of competent jurisdiction from
which no further appeal lies or is taken, that provision shall be deemed to be
severed from this Agreement and the remaining provisions shall not be affected
and shall remain valid and enforceable.
11. ENTIRE AGREEMENT, AMENDMENT, WAIVER. This Agreement, together with the
Employer's Employee Nondisclosure and Invention Assignment Agreement and the
Employer's employment offer letter, if any, to Employee (each of which is
incorporated herein), constitute the entire agreement between the parties with
respect to the subject matter contained in such documents, and supersede all
prior agreements relating to the same subject matter. There are no other
representations, warranties, conditions, agreements or acknowledgments, which
form a part of or affect this Agreement. Except as provided in this Agreement,
no waiver or termination shall be binding unless accepted in writing by both
parties. No waiver of any provision of this Agreement shall constitute a waiver
of any other provision and no waiver of any provision of this Agreement shall
constitute a continuing waiver unless otherwise expressly provided.
12. GOVERNING LAW AND FORUM SELECTION. This Agreement shall be governed by, and
interpreted and enforced in accordance with, the laws of the State of California
(excluding any conflict of law rule or principle, which might refer such
construction to the laws of another jurisdiction). Employer and Employee
irrevocably submit to jurisdiction of the courts of Orange County, California,
for the purpose of obtaining an order to compel submission to binding
arbitration pursuant to Section 13 below.
13. BINDING ARBITRATION. Employer and Employee agree to submit to final and
binding arbitration before J-A-M-S/ENDISPUTE in Orange County, California, all
past, present, and future claims or disputes in any way arising out of or
relating to Employee's employment with Employer, including, without limitation
(except as expressly excluded below in this Section), any claims or disputes
concerning the separation of that employment; any other adverse personnel action
by Employer; any claims by Employee against Employer, or by Employer against
Employee, arising out of or related to any federal, state or local law, statute
or regulation prohibiting employment discrimination or harassment; any public
policy, and any other claim for personal, emotional, physical or economic injury
(individually or collectively, "Covered Claims"). The only claims or disputes
excluded from binding arbitration under this Agreement are the following: any
claim by Employee for workers' compensation benefits or for benefits under an
Employer plan that provides its own arbitration procedure; and any claim by
Employer for equitable relief, including but not limited to, a temporary
restraining order, preliminary injunction or permanent injunction against
Employee.
(a) The party asserting a Covered Claim must give written notice to the
other party within 180 days of the date of the accrual of such claim for statute
of limitations purposes. If such notice is not given within this time period,
the claim shall be deemed waived.
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<PAGE>
(b) Prior to initiating arbitration, an Employee shall attempt in good
faith to resolve a Covered Claim through means of conciliation with Employer. An
Employee asserting a Covered Claim ordinarily must attempt to conciliate the
matter first in accordance with Employer's Conflict Resolution Policy.
(c) If Employer's conciliation process does not produce a satisfactory
resolution, within 30 days thereafter the aggrieved party may demand arbitration
of a Covered Claim. The arbitration shall be conducted in accordance with the
then-existing Rules and Procedures of J-A-M-S/ENDISPUTE for Arbitration of
Employment Disputes, except that the mediation and optional appeal procedures of
J-A-M-S/ENDISPUTE shall not be required. The Arbitrator shall not have the power
to commit errors of law or legal reasoning, or to grant relief, which would not
be legally available in a California court.
(d) This Agreement to submit all Covered Claims to binding arbitration
in no way alters Employee's at-will employment with Employer and does not
require Employer to provide Employee with any type of progressive discipline.
14. ATTORNEY'S FEES AND COSTS. Should any legal action (other than binding
arbitration under Section 13 above, in which each party shall bear its, his or
her own fees and costs) be required to resolve any dispute over the meaning or
enforceability of this Agreement or to enforce the terms of this Agreement, the
prevailing party shall be entitled to recover its, his or her reasonable
attorneys' fees and costs incurred in such action, in addition to any other
relief to which that party may be entitled.
15. ACKNOWLEDGMENTS AND REPRESENTATIONS. Employee acknowledges, represents and
agrees that:
(a) Employee has read and understands the terms of this Agreement and
Employee's obligations hereunder, and Employee agrees to abide by the terms of
this Agreement;
(b) Employer has made no promises or representations concerning future
promotions, compensation, or other terms and conditions of employment other than
as expressly stated in this Agreement; and,
(c) By accepting employment under this Agreement, Employee has not
relied upon or been induced to accept employment with Employer on the basis of
any such promises or representations.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement.
EMPLOYEE
- ------------------------------------
Signature
SIMPLE TECHNOLOGY, INC.
By: /s/ Carl Swartz
-----------------
Name: Carl Swartz
Title: Vice President of Strategic Planning
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<PAGE>
SCHEDULE OF SUBSTANTIALLY IDENTICAL AGREEMENTS
The filed agreement is substantially identical in all material respects to
the Company's agreements with the following employees except for the material
details set forth below:
<TABLE>
<CAPTION>
EMPLOYEE POSITION SEMI-MONTHLY SALARY SIGNATURE
- -------- -------- ------------------- ---------
<S> <C> <C> <C>
Manouch Moshayedi CEO and Chairman of the $18,333.33 /s/ Manouch Moshayedi
Board
Mike Moshayedi President $18,333.33 /s/ Mike Moshayedi
Mark Moshayedi Chief Technology Officer, $18,333.33 /s/ Mark Moshayedi
Chief Operating Officer
and Secretary
Dan Moses Chief Financial Officer $6,250.00 /s/ Dan Moses
Michael Hajek Vice President of OEM $10,416.67 /s/ Michael Hajek
Division
Carl Swartz Vice President of $8,333.33 /s/ Carl Swartz
Strategic Planning and
General Counsel
Shane Mortazavi Vice President of $6,666.67 /s/ Mark Moshayedi
Operations
</TABLE>
7
<PAGE>
Exhibit 10.11
EQUIPMENT LEASE
THIS AGREEMENT ("Agreement") is made and entered into as of June 1, 1996, by and
between SIMPLE TECHNOLOGY, INC., a California corporation ("STI"), and MOSHAYEDI
DEVELOPMENT CORPORATION, a California corporation ("MDC").
RECITALS
A. STI is in the business of manufacturing and selling computer memory
products,PCMCIA products, and computer peripheral equipment.
B. MDC owns various capital assets, including certain manufacturing
equipment used in the manufacture of computers and other products.
C. STI desires to lease certain manufacturing equipment from MDC and MDC desires
to lease such manufacturing equipment to STI, in accordance with the terms and
conditions of this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained in this Agreement, and for other good and valuable consideration, STI
and MDC hereby agree as follows:
ARTICLE I
DESCRIPTION OF LEASED EQUIPMENT
1. PROPERTY DESCRIPTION. The property to be leased is described in the
attached Schedule A, which is included herein and made a part hereof.
ARTICLE II
TERM OF LEASE
1. INITIAL TERM. The initial term of the lease for the property leased
hereunder is set forth in Schedule A.
ARTICLE III
PAYMENTS BY STI
1. RENTAL PAYMENTS. The amount of monthly rental payments is set forth in
Schedule A. STI shall make monthly payments at MDC's address as set forth above
or at such other place as designated by MDC or its assignees. All rental
payments shall be due and payable in advance on the first day of each month
during the term of this Agreement. Any rental payments not made by STI within
five (5) days of the due date shall be subject to a late charge of five (5)
percent of the amount due.
2. SECURITY DEPOSIT. As security for the prompt and full payment of rent
and the faithful and timely performance of all provisions of this Agreement, STI
shall deposit
<PAGE>
with MDC the amount set forth in Schedule A ("Security Deposit"). If any default
shall occur in the performance of any covenants in this Agreement by STI, MDC
shall have the right, but shall not be obligated, to apply the Security Deposit
to the curing of the default. On demand, STI shall restore the Security Deposit
to the full amount set forth in Schedule A. On the expiration or earlier
termination of this Agreement, providing STI has paid all of the required rent
and fully performed all of the other provisions of this Agreement, MDC shall
return to STI any remaining balance of the Security Deposit.
ARTICLE IV
OWNERSHIP
1. NO SALE OR SECURITY INTEREST INTENDED. This Agreement constitutes a
lease of the property described herein and not a sale or the creation of a
security interest. STI shall not have, or at any time acquire, any right, title,
or interest in the property except the right to possession and use as provided
in this Agreement. MDC shall at all times be the sole owner of the property.
2. SUBORDINATION. The rights of STI under this Agreement shall be subject
and subordinate to certain security interests in the property held by Lyon
Credit Corporation and its successors.
ARTICLE V
OPERATING EXPENSES
1. STI shall be responsible for all expenses and all other charges in
connection with the operation of the property.
ARTICLE VI
MAINTENANCE AND REPAIRS
1. STI'S RESPONSIBILITY. STI shall assume all obligation and liability
with respect to the possession of the property, and for its use, operation,
condition, and storage during the lease term. STI shall, at STI's own expense,
maintain the property in good mechanical condition and running order, allowing
for reasonable wear and tear. The rent on the property or on any element thereof
shall not be prorated or abated while the property is being serviced or
repaired.
2. ACCESSIONS. All installations, replacements, and substitutions of parts
or accessories with respect to any of the property shall constitute accessions
and shall become part of the property and shall be owned by MDC.
2
<PAGE>
ARTICLE VII
USE OF PROPERTY
1. RIGHTS OF STI. STI shall be entitled to the absolute right to the use,
operation, possession, and control of the property during the term of this
Agreement, providing STI is not in default of any provision of this Agreement.
STI shall employ and have absolute control, supervision, and responsibility over
any operators or users of the property.
2. DUTIES OF STI. STI shall use the property in a careful and proper
manner and shall not permit any of the property to be operated or used in
violation of any applicable federal, state, or local statute, ordinance, rule,
or regulation relating to the possession, use, or maintenance of the property.
STI agrees to reimburse MDC in full for all damage to the property arising from
any misuse or negligent act by STI, its employees, and its agents. STI shall
indemnify and hold MDC harmless from any and all liabilities, fines,
forfeitures, or penalties for violations of any applicable statute, ordinance,
rule, or regulation.
3. COMMERCIAL USE LIMITATION. STI represents and warrants that the
property will be used for commercial or business purposes only.
ARTICLE VIII
MDC'S RIGHT OF INSPECTION AND REPAIR
1. INSPECTION AND REPAIR. MDC, at its discretion during STI's regular
business hours and with one (1) day's prior notice to STI, shall have the right
to enter the premises where the property is located or used for the purpose of
inspection. If any property covered by this Agreement is not being properly
maintained in the opinion of MDC, MDC shall have the right, but not the
obligation, to have it repaired or maintained by an appropriate service facility
at the expense of STI.
ARTICLE IX
ASSIGNMENT OF MDC'S WARRANTIES
1. WARRANTY ASSIGNMENT. MDC shall assign to STI all manufacturer, dealer,
or supplier warranties applicable to the property to enable STI to obtain any
warranty service available for the property. Any enforcement by STI of warranty
rights shall be at the expense of STI and shall in no way render MDC responsible
to STI for the performance of any of the warranties.
ARTICLE X
TAXES AND OTHER CHARGES
1. TAXES. STI shall be liable for and pay on or before the due dates, all
sales taxes, use taxes, personal property taxes, business personal property
taxes, and assessments, or other taxes or government charges imposed on the
property or levied against, or based on,
3
<PAGE>
the amount of rent to be paid under the Agreement or assessed in connection with
the Agreement.
2. OTHER CHARGES. STI shall be liable for any fees for licenses,
registrations, permits, and other certificates as may be required for the lawful
operation of the property. All certificates of title shall initially be applied
for in the State of California and shall be issued and maintained in the name of
MDC, as owner. Such certificates shall be delivered to MDC and STI shall pay all
expenses in relation thereto.
ARTICLE XI
STI INSPECTION
1. INSPECTION BY STI. STI shall inspect the property within fifteen (15)
days after receipt thereof. Unless STI within that time gives written notice to
MDC, specifying any defect in or other proper objection to the property, STI
agrees that it shall be conclusively presumed, as between MDC and STI, that STI
has fully inspected the property and acknowledged that the property is in good
condition and repair, and that STI is satisfied with and has accepted the
property in such good condition and repair.
ARTICLE XII
INSURANCE
1. STI DUTY TO INSURE. STI agrees to maintain in full force and effect, at
its own cost and expense, property damage insurance issued by a company
satisfactory to MDC, insuring the interest of MDC, STI, and their authorized
agents and employees. The policy shall be for primary coverage and shall have a
limit of no less than:
$1,000,000 per person;
$1,000,000 per accident;
$621,949.46 property damage; and
$1,000,000 excess liability umbrella coverage.
For all property covered by this Agreement, STI shall also provide, at its own
cost and expense, comprehensive, fire, theft, and additional combined insurance
coverage naming MDC as an additional insured. Coverage shall be in the form and
amounts as directed by MDC from time to time.
2. INSURANCE CERTIFICATE. STI shall cause the insured to furnish to MDC,
not less than ten (10) days prior to the date on which the property is delivered
to STI and not less than ten (10) days prior to the expiration date of any
existing insurance, a certificate evidencing the required insurance. The policy
shall provide that the insurer shall not cancel or materially modify the
insurance except on thirty (30) days' advanced written notice to MDC. If STI
fails to procure, maintain, or renew the insurance, MDC may, but is not
obligated to, obtain insurance for STI without prejudice to any other rights
that MDC may have.
4
<PAGE>
3. EXCESS LIABILITY INDEMNITY. STI shall indemnify and hold MDC, its
agents, and employees, harmless from and against all loss, liability, and
expense, including reasonable attorneys' fees, in excess of the provided limits
of liability insurance for bodily injury (including death) or property damage
caused by or arising out of the ownership, maintenance, use, or operation of the
leased property.
ARTICLE XIII
INDEMNIFICATION AND LIABILITY
1. ALL LIABILITY ASSUMED BY STI. STI assumes all risk and liability for
the loss of or damage to the equipment, for the death of or injury to any person
or property of another, and for all other risks and liabilities arising from the
use, operation, condition, possession, or storage of the leased property.
Nothing in this Agreement shall authorize STI or any other person to operate any
of the property so as to impose any liability or other obligation on MDC.
2. STI DUTY TO INDEMNIFY. STI shall indemnify, defend, and hold harmless
MDC, its agents, and employees from any and all claims, loss, or damage MDC may
sustain or suffer for any of the following reasons:
i) the loss of or damage to any of the property for any cause;
ii) the injury to or death of any person, including but not limited to
agents, or employees of STI; or,
iii) damage to any property arising from the use, possession, selection,
delivery, return, condition, or operation of any of the property.
3. OBLIGATIONS SURVIVE LEASE TERM. The indemnities and assumptions of
risk, liabilities, and obligations by STI arising under this Agreement during
its term shall continue in effect after the termination of this Agreement,
regardless of the reason for termination.
ARTICLE XIV
ACCIDENT, LOSS OF PROPERTY, OR DAMAGE TO PROPERTY
1. NOTIFICATION TO MDC. If any property covered by this Agreement is
damaged, lost, stolen, or destroyed, or if any person is injured or dies, or if
any property is damaged as a result of its operation, use, maintenance, or
possession, STI shall promptly notify MDC of the occurrence, and shall file all
necessary accident reports, including those required by law and those required
by insurers of the leased property.
2. STIPULATED LOSS VALUE. If any property becomes lost, stolen, destroyed,
or damaged beyond repair, STI shall pay MDC in cash the "Stipulated Loss Value"
as set forth in Schedule A, less any net proceeds of insurance for the property
received by MDC. Upon payment, this Agreement shall terminate with respect to
that item of property and STI shall become entitled to the property on an
"as-is, where-is" basis, without warranty, express or implied, for any matter
whatsoever.
5
<PAGE>
ARTICLE XV
ASSIGNMENT
1. ASSIGNMENT BY MDC. MDC may assign this Agreement or any rights under it
at any time without STI's consent. In the event of any assignment, MDC's
assignee shall have all the rights, powers, privileges, and remedies of MDC as
set forth in this Agreement.
2. ASSIGNMENT OR SUBLETTING BY STI. STI shall not assign this Agreement or
any property described in it, or assign any interest in this Agreement or
property, or sublet any of the leased property without the express written
consent of MDC.
ARTICLE XVI
ACTIONS CONSTITUTING DEFAULT
1. STI IN DEFAULT. MDC, at its option, may by written notice to STI
declare STI in default on the occurrence of any of the following:
i) failure by STI to make payments or perform any of its obligations
under this Agreement;
ii) institution by or against STI of any proceeding in bankruptcy or
insolvency, or the reorganization of STI under any law, or the appointment of a
receiver or trustee for the goods and property of STI, or any assignment by STI
for the benefit of creditors;
iii) expiration or cancellation of any insurance policy to be paid by STI
as provided for under the terms of this Agreement; or
iv) involuntary transfer of STI's interest in this Agreement by operation
of law.
ARTICLE XVII
RIGHTS, REMEDIES, AND OBLIGATIONS ON DEFAULT
1. MDC RIGHTS AND REMEDIES. After default of STI, and on notice from MDC
that STI is in default, MDC shall have the following options:
i) terminate the Agreement and STI's rights under the Agreement;
ii) declare the balance of all unpaid rent and all other charges of any
kind required of STI under the Agreement to be due and payable immediately; and,
iii) repossess the property without legal process free of all rights of
STI in and to the property. STI authorizes MDC or MDC's agent to enter on any
premises where the property is located and repossess it and remove it.
2. STI OBLIGATION FOR MDC COSTS. After default, STI shall reimburse MDC
for all reasonable expenses of repossession and enforcement of MDC's rights and
remedies.
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<PAGE>
3. EFFECT OF FORBEARANCE. No failure on the part of MDC to exercise any
remedy or right and no delay in the exercise of any remedy or right shall
operate as a waiver. Acceptance by MDC of rent or other payments made by STI
after default shall not be deemed a waiver of MDC's rights and remedies arising
from STI's default.
4. FORFEITURE OF STI INTEREST ON DEFAULT. Upon default, for any reason,
STI and STI's successor in interest shall have no right, title, or interest in
the leased property, its possession, or its use. MDC shall retain all rents and
other payments of any kind made by STI under this Agreement.
ARTICLE XVIII
RETURN OF PROPERTY ON EXPIRATION
1. STI RETURN OF PROPERTY. Upon the expiration of this Agreement with
respect to any and all of the property, STI shall return the property to MDC,
together with all accessions, free from all damage and in the same condition and
appearance as when received by STI, allowing for ordinary wear and tear. If STI
fails or refuses to return the equipment to MDC, MDC shall have the right to
take possession of the property and for that purpose to enter any premises where
the property is located without being liable in any suit, action, defense, or
other proceedings to STI.
ARTICLE XIX
LIENS
1. ENCUMBRANCES OR LIENS; NOTICE. STI shall not pledge, encumber, or
create a security interest in, or permit any lien to become effective on any
leased property. If any of these events takes place, STI shall be deemed to be
in default at the option of MDC. STI shall promptly notify MDC of any liens,
charges, or other encumbrances of which STI has knowledge. STI shall promptly
pay or satisfy any obligation from which any lien or encumbrance arises, and
shall otherwise keep the property and all right, title, and interest free and
clear of all liens, charges, and encumbrances. STI shall deliver to MDC
appropriate satisfactions, waivers, or evidence of payment.
ARTICLE XX
NOTICES
1. SERVICE OF NOTICE. Accept as otherwise provided by law, any and all
notices or other communications required or permitted by this Agreement or by
law to be served on or given to either party by the other party shall be in
writing and shall be deemed duly served and given when personally delivered to
any member of the party to whom they are directed, or in lieu of such personal
service when deposited in the United States mail, first class postage pre-paid,
addressed to STI at 3001 Daimler Street, Santa Ana, California, 92705, or to MDC
at 3001 Daimler Street, Santa Ana, California, 92705. Either party may change
its address for the purpose of this paragraph by giving notice of the change to
the other party in the manner provided in this paragraph.
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<PAGE>
ARTICLE XXI
AMENDMENT AND MODIFICATION
1. METHOD OF AMENDMENT OR MODIFICATION. Additional property may from time
to time be added as the subject matter of this Agreement as agreed on by the
parties. Any additional property shall be added to Schedule A in an amendment
describing the property, the monthly rental, the term of the leasing period,
security deposit, and stipulated loss value of additional property. This
Agreement shall be amended, modified or altered only in a writing signed by both
parties.
ARTICLE XXII
ENTIRE AGREEMENT
1. INCORPORATION BY REFERENCE. This Agreement and any attached
schedule(s), which are incorporated by reference and made an integral part of
this Agreement, constitute the entire agreement between the parties. No
agreements, representations, or warranties, other than those specifically set
forth in this Agreement or in the annexed schedule(s), shall be binding on any
of the parties unless set forth in writing and signed by both parties.
ARTICLE XXIII
GOVERNING LAW
1. CHOICE OF LAW. This Agreement shall be governed and construed in all
respects in accordance with the laws of the State of California, USA. Any legal
action or notice shall be entered into in a court of suitable jurisdiction in
the County of Orange, State of California, and STI and MDC each hereby submits
to the jurisdiction of said courts.
ARTICLE XXIV
SEVERABILITY CLAUSE
1. AGREEMENT SURVIVES PARTIAL INVALIDITY. If any provision of this
Agreement is held to be invalid by a court of competent jurisdiction, the
remaining provisions shall nevertheless remain in full force and effect.
ARTICLE XXV
RELATIONSHIP
1. INDEPENDENT CONTRACTOR RELATIONSHIP. It is understood and agreed that
STI and MDC are independent contractors and each is engaged in the operation of
its own business. Nothing in this Agreement shall be construed to constitute the
parties as partners, joint venturers, or co-owners.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date last written below.
Simple Technology, Inc.: MDC:
By: _______________________________ By: _______________________________
Name: _______________________________ Name: _______________________________
Title: _______________________________ Title: _______________________________
Date: _______________________________ Date: _______________________________
9
<PAGE>
SCHEDULE A
DESCRIPTION OF PROPERTY
A. The property to which this Schedule and Agreement applies is as
follows:
QTY. DESCRIPTION SERIAL #
2 Quad QSP-2 High Speed Surface 2846, 2857
Mount Assembly Systems
2 Quad VMP-20B Screen Printers 90116, 90118
RENT
B. As rent for this property, STI shall pay MDC the total sum of
$781,539.20. Except as otherwise provided in this Agreement or in this Schedule,
rent shall be payable in 60 monthly installments of $13,025.65 each, commencing
on the first day of June, 1996, and continuing on the first day of each month
thereafter until the total sum has been paid in full.
LOCATION
C. The above described property shall be located at 3001 or 3009 Daimler
St., Santa Ana, CA 92705, and shall not be removed from that location without
the prior written consent of MDC.
RENEWAL OPTION
D. STI may renew this Agreement of which this Schedule is a part, on a
year-to-year basis, on the expiration of the original term at a total rental of
$13,025.65 per month, and otherwise on the same terms and conditions of this
Agreement. The option may be exercised by STI's written notice to such a fact to
MDC not less than thirty (30) days before the expiration of the term of the
Agreement.
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Exhibit 10.12
EQUIPMENT LEASE
THIS AGREEMENT ("Agreement") is made and entered into as of September 1, 1996,
by and between SIMPLE TECHNOLOGY, INC., a California corporation ("STI"), and
MOSHAYEDI DEVELOPMENT CORPORATION, a California corporation ("MDC").
RECITALS
A. STI is in the business of manufacturing and selling computer memory
products, PCMCIA products, and computer peripheral equipment.
B. MDC owns various capital assets, including certain manufacturing
equipment used in the manufacture of computers and other products.
C. STI desires to lease certain manufacturing equipment from MDC and MDC
desires to lease such manufacturing equipment to STI, in accordance with the
terms and conditions of this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained in this Agreement, and for other good and valuable consideration, STI
and MDC hereby agree as follows:
ARTICLE I
DESCRIPTION OF LEASED EQUIPMENT
1. PROPERTY DESCRIPTION. The property to be leased is described in the
attached Schedule A, which is included herein and made a part hereof.
ARTICLE II
TERM OF LEASE
1. INITIAL TERM. The initial term of the lease for the property leased
hereunder is set forth in Schedule A.
ARTICLE III
PAYMENTS BY STI
1. RENTAL PAYMENTS. The amount of monthly rental payments is set forth in
Schedule A. STI shall make monthly payments at MDC's address as set forth above
or at such other place as designated by MDC or its assignees. All rental
payments shall be due and payable in advance on the first day of each month
during the term of this Agreement. Any rental payments not made by STI within
five (5) days of the due date shall be subject to a late charge of five (5)
percent of the amount due.
2. SECURITY DEPOSIT. As security for the prompt and full payment of rent
and the faithful and timely performance of all provisions of this Agreement, STI
shall deposit
<PAGE>
with MDC the amount set forth in Schedule A ("Security Deposit"). If any default
shall occur in the performance of any covenants in this Agreement by STI, MDC
shall have the right, but shall not be obligated, to apply the Security Deposit
to the curing of the default. On demand, STI shall restore the Security Deposit
to the full amount set forth in Schedule A. On the expiration or earlier
termination of this Agreement, providing STI has paid all of the required rent
and fully performed all of the other provisions of this Agreement, MDC shall
return to STI any remaining balance of the Security Deposit.
ARTICLE IV
OWNERSHIP
1. NO SALE OR SECURITY INTEREST INTENDED. This Agreement constitutes a
lease of the property described herein and not a sale or the creation of a
security interest. STI shall not have, or at any time acquire, any right, title,
or interest in the property except the right to possession and use as provided
in this Agreement. MDC shall at all times be the sole owner of the property.
2. SUBORDINATION. The rights of STI under this Agreement shall be subject
and subordinate to certain security interests in the property held by Lyon
Credit Corporation and its successors.
ARTICLE V
OPERATING EXPENSES
1. STI shall be responsible for all expenses and all other charges in
connection with the operation of the property.
ARTICLE VI
MAINTENANCE AND REPAIRS
1. STI'S RESPONSIBILITY. STI shall assume all obligation and liability
with respect to the possession of the property, and for its use, operation,
condition, and storage during the lease term. STI shall, at STI's own expense,
maintain the property in good mechanical condition and running order, allowing
for reasonable wear and tear. The rent on the property or on any element thereof
shall not be prorated or abated while the property is being serviced or
repaired.
2. ACCESSIONS. All installations, replacements, and substitutions of parts
or accessories with respect to any of the property shall constitute accessions
and shall become part of the property and shall be owned by MDC.
2
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ARTICLE VII
USE OF PROPERTY
1. RIGHTS OF STI. STI shall be entitled to the absolute right to the use,
operation, possession, and control of the property during the term of this
Agreement, providing STI is not in default of any provision of this Agreement.
STI shall employ and have absolute control, supervision, and responsibility over
any operators or users of the property.
2. DUTIES OF STI. STI shall use the property in a careful and proper
manner and shall not permit any of the property to be operated or used in
violation of any applicable federal, state, or local statute, ordinance, rule,
or regulation relating to the possession, use, or maintenance of the property.
STI agrees to reimburse MDC in full for all damage to the property arising from
any misuse or negligent act by STI, its employees, and its agents. STI shall
indemnify and hold MDC harmless from any and all liabilities, fines,
forfeitures, or penalties for violations of any applicable statute, ordinance,
rule, or regulation.
3. COMMERCIAL USE LIMITATION. STI represents and warrants that the
property will be used for commercial or business purposes only.
ARTICLE VIII
MDC'S RIGHT OF INSPECTION AND REPAIR
1. INSPECTION AND REPAIR. MDC, at its discretion during STI's regular
business hours and with one (1) day's prior notice to STI, shall have the right
to enter the premises where the property is located or used for the purpose of
inspection. If any property covered by this Agreement is not being properly
maintained in the opinion of MDC, MDC shall have the right, but not the
obligation, to have it repaired or maintained by an appropriate service facility
at the expense of STI.
ARTICLE IX
ASSIGNMENT OF MDC'S WARRANTIES
1. WARRANTY ASSIGNMENT. MDC shall assign to STI all manufacturer, dealer,
or supplier warranties applicable to the property to enable STI to obtain any
warranty service available for the property. Any enforcement by STI of warranty
rights shall be at the expense of STI and shall in no way render MDC responsible
to STI for the performance of any of the warranties.
ARTICLE X
TAXES AND OTHER CHARGES
1. TAXES. STI shall be liable for and pay on or before the due dates, all
sales taxes, use taxes, personal property taxes, business personal property
taxes, and assessments, or other taxes or government charges imposed on the
property or levied against, or based on,
3
<PAGE>
the amount of rent to be paid under the Agreement or assessed in connection with
the Agreement.
2. OTHER CHARGES. STI shall be liable for any fees for licenses,
registrations, permits, and other certificates as may be required for the lawful
operation of the property. All certificates of title shall initially be applied
for in the State of California and shall be issued and maintained in the name of
MDC, as owner. Such certificates shall be delivered to MDC and STI shall pay all
expenses in relation thereto.
ARTICLE XI
STI INSPECTION
1. INSPECTION BY STI. STI shall inspect the property within fifteen (15)
days after receipt thereof. Unless STI within that time gives written notice to
MDC, specifying any defect in or other proper objection to the property, STI
agrees that it shall be conclusively presumed, as between MDC and STI, that STI
has fully inspected the property and acknowledged that the property is in good
condition and repair, and that STI is satisfied with and has accepted the
property in such good condition and repair.
ARTICLE XII
INSURANCE
1. STI DUTY TO INSURE. STI agrees to maintain in full force and effect, at
its own cost and expense, property damage insurance issued by a company
satisfactory to MDC, insuring the interest of MDC, STI, and their authorized
agents and employees. The policy shall be for primary coverage and shall have a
limit of no less than:
$1,000,000 per person;
$1,000,000 per accident;
$311,152.80 property damage; and
$1,000,000 excess liability umbrella coverage.
For all property covered by this Agreement, STI shall also provide, at its own
cost and expense, comprehensive, fire, theft, and additional combined insurance
coverage naming MDC as an additional insured. Coverage shall be in the form and
amounts as directed by MDC from time to time.
2. INSURANCE CERTIFICATE. STI shall cause the insured to furnish to MDC,
not less than ten (10) days prior to the date on which the property is delivered
to STI and not less than ten (10) days prior to the expiration date of any
existing insurance, a certificate evidencing the required insurance. The policy
shall provide that the insurer shall not cancel or materially modify the
insurance except on thirty (30) days' advanced written notice to MDC. If STI
fails to procure, maintain, or renew the insurance, MDC may, but is not
obligated to, obtain insurance for STI without prejudice to any other rights
that MDC may have.
4
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3. EXCESS LIABILITY INDEMNITY. STI shall indemnify and hold MDC, its
agents, and employees, harmless from and against all loss, liability, and
expense, including reasonable attorneys' fees, in excess of the provided limits
of liability insurance for bodily injury (including death) or property damage
caused by or arising out of the ownership, maintenance, use, or operation of the
leased property.
ARTICLE XIII
INDEMNIFICATION AND LIABILITY
1. ALL LIABILITY ASSUMED BY STI. STI assumes all risk and liability for
the loss of or damage to the equipment, for the death of or injury to any person
or property of another, and for all other risks and liabilities arising from the
use, operation, condition, possession, or storage of the leased property.
Nothing in this Agreement shall authorize STI or any other person to operate any
of the property so as to impose any liability or other obligation on MDC.
2. STI DUTY TO INDEMNIFY. STI shall indemnify, defend, and hold harmless
MDC, its agents, and employees from any and all claims, loss, or damage MDC may
sustain or suffer for any of the following reasons:
i) the loss of or damage to any of the property for any cause;
ii) the injury to or death of any person, including but not limited to
agents, or employees of STI; or,
iii) damage to any property arising from the use, possession, selection,
delivery, return, condition, or operation of any of the property.
3. OBLIGATIONS SURVIVE LEASE TERM. The indemnities and assumptions of
risk, liabilities, and obligations by STI arising under this Agreement during
its term shall continue in effect after the termination of this Agreement,
regardless of the reason for termination.
ARTICLE XIV
ACCIDENT, LOSS OF PROPERTY, OR DAMAGE TO PROPERTY
1. NOTIFICATION TO MDC. If any property covered by this Agreement is
damaged, lost, stolen, or destroyed, or if any person is injured or dies, or if
any property is damaged as a result of its operation, use, maintenance, or
possession, STI shall promptly notify MDC of the occurrence, and shall file all
necessary accident reports, including those required by law and those required
by insurers of the leased property.
2. STIPULATED LOSS VALUE. If any property becomes lost, stolen, destroyed,
or damaged beyond repair, STI shall pay MDC in cash the "Stipulated Loss Value"
as set forth in Schedule A, less any net proceeds of insurance for the property
received by MDC. Upon payment, this Agreement shall terminate with respect to
that item of property and STI shall become entitled to the property on an
"as-is, where-is" basis, without warranty, express or implied, for any matter
whatsoever.
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<PAGE>
ARTICLE XV
ASSIGNMENT
1. ASSIGNMENT BY MDC. MDC may assign this Agreement or any rights under it
at any time without STI's consent. In the event of any assignment, MDC's
assignee shall have all the rights, powers, privileges, and remedies of MDC as
set forth in this Agreement.
2. ASSIGNMENT OR SUBLETTING BY STI. STI shall not assign this Agreement or
any property described in it, or assign any interest in this Agreement or
property, or sublet any of the leased property without the express written
consent of MDC.
ARTICLE XVI
ACTIONS CONSTITUTING DEFAULT
1. STI IN DEFAULT. MDC, at its option, may by written notice to STI
declare STI in default on the occurrence of any of the following:
i) failure by STI to make payments or perform any of its obligations
under this Agreement;
ii) institution by or against STI of any proceeding in bankruptcy or
insolvency, or the reorganization of STI under any law, or the appointment of a
receiver or trustee for the goods and property of STI, or any assignment by STI
for the benefit of creditors;
iii) expiration or cancellation of any insurance policy to be paid by STI
as provided for under the terms of this Agreement; or
iv) involuntary transfer of STI's interest in this Agreement by operation
of law.
ARTICLE XVII
RIGHTS, REMEDIES, AND OBLIGATIONS ON DEFAULT
1. MDC RIGHTS AND REMEDIES. After default of STI, and on notice from MDC
that STI is in default, MDC shall have the following options:
i) terminate the Agreement and STI's rights under the Agreement;
ii) declare the balance of all unpaid rent and all other charges of any
kind required of STI under the Agreement to be due and payable immediately; and,
iii) repossess the property without legal process free of all rights of
STI in and to the property. STI authorizes MDC or MDC's agent to enter on any
premises where the property is located and repossess it and remove it.
2. STI OBLIGATION FOR MDC COSTS. After default, STI shall reimburse MDC
for all reasonable expenses of repossession and enforcement of MDC's rights and
remedies.
6
<PAGE>
3. EFFECT OF FORBEARANCE. No failure on the part of MDC to exercise any
remedy or right and no delay in the exercise of any remedy or right shall
operate as a waiver. Acceptance by MDC of rent or other payments made by STI
after default shall not be deemed a waiver of MDC's rights and remedies arising
from STI's default.
4. FORFEITURE OF STI INTEREST ON DEFAULT. Upon default, for any reason,
STI and STI's successor in interest shall have no right, title, or interest in
the leased property, its possession, or its use. MDC shall retain all rents and
other payments of any kind made by STI under this Agreement.
ARTICLE XVIII
RETURN OF PROPERTY ON EXPIRATION
1. STI RETURN OF PROPERTY. Upon the expiration of this Agreement with
respect to any and all of the property, STI shall return the property to MDC,
together with all accessions, free from all damage and in the same condition and
appearance as when received by STI, allowing for ordinary wear and tear. If STI
fails or refuses to return the equipment to MDC, MDC shall have the right to
take possession of the property and for that purpose to enter any premises where
the property is located without being liable in any suit, action, defense, or
other proceedings to STI.
ARTICLE XIX
LIENS
1. ENCUMBRANCES OR LIENS; NOTICE. STI shall not pledge, encumber, or
create a security interest in, or permit any lien to become effective on any
leased property. If any of these events takes place, STI shall be deemed to be
in default at the option of MDC. STI shall promptly notify MDC of any liens,
charges, or other encumbrances of which STI has knowledge. STI shall promptly
pay or satisfy any obligation from which any lien or encumbrance arises, and
shall otherwise keep the property and all right, title, and interest free and
clear of all liens, charges, and encumbrances. STI shall deliver to MDC
appropriate satisfactions, waivers, or evidence of payment.
ARTICLE XX
NOTICES
1. SERVICE OF NOTICE. Accept as otherwise provided by law, any and all
notices or other communications required or permitted by this Agreement or by
law to be served on or given to either party by the other party shall be in
writing and shall be deemed duly served and given when personally delivered to
any member of the party to whom they are directed, or in lieu of such personal
service when deposited in the United States mail, first class postage pre-paid,
addressed to STI at 3001 Daimler Street, Santa Ana, California, 92705, or to MDC
at 3001 Daimler Street, Santa Ana, California, 92705. Either party may change
its address for the purpose of this paragraph by giving notice of the change to
the other party in the manner provided in this paragraph.
7
<PAGE>
ARTICLE XXI
AMENDMENT AND MODIFICATION
1. METHOD OF AMENDMENT OR MODIFICATION. Additional property may from time
to time be added as the subject matter of this Agreement as agreed on by the
parties. Any additional property shall be added to Schedule A in an amendment
describing the property, the monthly rental, the term of the leasing period,
security deposit, and stipulated loss value of additional property. This
Agreement shall be amended, modified or altered only in a writing signed by both
parties.
ARTICLE XXII
ENTIRE AGREEMENT
1. INCORPORATION BY REFERENCE. This Agreement and any attached
schedule(s), which are incorporated by reference and made an integral part of
this Agreement, constitute the entire agreement between the parties. No
agreements, representations, or warranties, other than those specifically set
forth in this Agreement or in the annexed schedule(s), shall be binding on any
of the parties unless set forth in writing and signed by both parties.
ARTICLE XXIII
GOVERNING LAW
1. CHOICE OF LAW. This Agreement shall be governed and construed in all
respects in accordance with the laws of the State of California, USA. Any legal
action or notice shall be entered into in a court of suitable jurisdiction in
the County of Orange, State of California, and STI and MDC each hereby submits
to the jurisdiction of said courts.
ARTICLE XXIV
SEVERABILITY CLAUSE
1. AGREEMENT SURVIVES PARTIAL INVALIDITY. If any provision of this
Agreement is held to be invalid by a court of competent jurisdiction, the
remaining provisions shall nevertheless remain in full force and effect.
ARTICLE XXV
RELATIONSHIP
1. INDEPENDENT CONTRACTOR RELATIONSHIP. It is understood and agreed that
STI and MDC are independent contractors and each is engaged in the operation of
its own business. Nothing in this Agreement shall be construed to constitute the
parties as partners, joint venturers, or co-owners.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date last written below.
Simple Technology, Inc.: MDC:
By: _______________________________ By: _______________________________
Name: _______________________________ Name: _______________________________
Title: _______________________________ Title: _______________________________
Date: _______________________________ Date: _______________________________
9
<PAGE>
SCHEDULE A
DESCRIPTION OF PROPERTY
A. The property to which this Schedule and Agreement applies is as
follows:
QTY. DESCRIPTION SERIAL #
1 Quad QSP-2 High Speed Surface 2875
Mount Assembly Systems
1 Quad VMP-20B Screen Printers 90133
RENT
B. As rent for this property, STI shall pay MDC the total sum of
$392,908.90. Except as otherwise provided in this Agreement or in this Schedule,
rent shall be payable in 60 monthly installments of $6,584.48 each, commencing
on the first day of September, 1996, and continuing on the first day of each
month thereafter until the total sum has been paid in full.
LOCATION
C. The above described property shall be located at 3001 or 3009 Daimler
St., Santa Ana, CA 92705, and shall not be removed from that location without
the prior written consent of MDC.
RENEWAL OPTION
D. STI may renew this Agreement of which this Schedule is a part, on a
year-to-year basis, on the expiration of the original term at a total rental of
$6,548.48 per month, and otherwise on the same terms and conditions of this
Agreement. The option may be exercised by STI's written notice to such a fact to
MDC not less than thirty (30) days before the expiration of the term of the
Agreement.
10
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Exhibit 10.13
EQUIPMENT LEASE
THIS AGREEMENT ("Agreement") is made and entered into as of October 1, 1996,
by and between SIMPLE TECHNOLOGY, INC., a California corporation ("STI"), and
MOSHAYEDI DEVELOPMENT CORPORATION, a California corporation ("MDC").
RECITALS
A. STI is in the business of manufacturing and selling computer memory
products,PCMCIA products, and computer peripheral equipment.
B. MDC owns various capital assets, including certain manufacturing
equipment used in the manufacture of computers and other products.
C. STI desires to lease certain manufacturing equipment from MDC and MDC
desires to lease such manufacturing equipment to STI, in accordance with the
terms and conditions of this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained in this Agreement, and for other good and valuable consideration, STI
and MDC hereby agree as follows:
ARTICLE I
DESCRIPTION OF LEASED EQUIPMENT
1. PROPERTY DESCRIPTION. The property to be leased is described in the
attached Schedule A, which is included herein and made a part hereof.
ARTICLE II
TERM OF LEASE
1. INITIAL TERM. The initial term of the lease for the property leased
hereunder is set forth in Schedule A.
ARTICLE III
PAYMENTS BY STI
1. RENTAL PAYMENTS. The amount of monthly rental payments is set forth in
Schedule A. STI shall make monthly payments at MDC's address as set forth above
or at such other place as designated by MDC or its assignees. All rental
payments shall be due and payable in advance on the first day of each month
during the term of this Agreement. Any rental payments not made by STI within
five (5) days of the due date shall be subject to a late charge of five (5)
percent of the amount due.
2. SECURITY DEPOSIT. As security for the prompt and full payment of rent
and the faithful and timely performance of all provisions of this Agreement, STI
shall deposit
<PAGE>
with MDC the amount set forth in Schedule A ("Security Deposit"). If any default
shall occur in the performance of any covenants in this Agreement by STI, MDC
shall have the right, but shall not be obligated, to apply the Security Deposit
to the curing of the default. On demand, STI shall restore the Security Deposit
to the full amount set forth in Schedule A. On the expiration or earlier
termination of this Agreement, providing STI has paid all of the required rent
and fully performed all of the other provisions of this Agreement, MDC shall
return to STI any remaining balance of the Security Deposit.
ARTICLE IV
OWNERSHIP
1. NO SALE OR SECURITY INTEREST INTENDED. This Agreement constitutes a
lease of the property described herein and not a sale or the creation of a
security interest. STI shall not have, or at any time acquire, any right, title,
or interest in the property except the right to possession and use as provided
in this Agreement. MDC shall at all times be the sole owner of the property.
2. SUBORDINATION. The rights of STI under this Agreement shall be subject
and subordinate to certain security interests in the property held by Lyon
Credit Corporation and its successors.
ARTICLE V
OPERATING EXPENSES
1. STI shall be responsible for all expenses and all other charges in
connection with the operation of the property.
ARTICLE VI
MAINTENANCE AND REPAIRS
1. STI'S RESPONSIBILITY. STI shall assume all obligation and liability
with respect to the possession of the property, and for its use, operation,
condition, and storage during the lease term. STI shall, at STI's own expense,
maintain the property in good mechanical condition and running order, allowing
for reasonable wear and tear. The rent on the property or on any element thereof
shall not be prorated or abated while the property is being serviced or
repaired.
2. ACCESSIONS. All installations, replacements, and substitutions of parts
or accessories with respect to any of the property shall constitute accessions
and shall become part of the property and shall be owned by MDC.
2
<PAGE>
ARTICLE VII
USE OF PROPERTY
1. RIGHTS OF STI. STI shall be entitled to the absolute right to the use,
operation, possession, and control of the property during the term of this
Agreement, providing STI is not in default of any provision of this Agreement.
STI shall employ and have absolute control, supervision, and responsibility over
any operators or users of the property.
2. DUTIES OF STI. STI shall use the property in a careful and proper
manner and shall not permit any of the property to be operated or used in
violation of any applicable federal, state, or local statute, ordinance, rule,
or regulation relating to the possession, use, or maintenance of the property.
STI agrees to reimburse MDC in full for all damage to the property arising from
any misuse or negligent act by STI, its employees, and its agents. STI shall
indemnify and hold MDC harmless from any and all liabilities, fines,
forfeitures, or penalties for violations of any applicable statute, ordinance,
rule, or regulation.
3. COMMERCIAL USE LIMITATION. STI represents and warrants that the
property will be used for commercial or business purposes only.
ARTICLE VIII
MDC'S RIGHT OF INSPECTION AND REPAIR
1. INSPECTION AND REPAIR. MDC, at its discretion during STI's regular
business hours and with one (1) day's prior notice to STI, shall have the right
to enter the premises where the property is located or used for the purpose of
inspection. If any property covered by this Agreement is not being properly
maintained in the opinion of MDC, MDC shall have the right, but not the
obligation, to have it repaired or maintained by an appropriate service facility
at the expense of STI.
ARTICLE IX
ASSIGNMENT OF MDC'S WARRANTIES
1. WARRANTY ASSIGNMENT. MDC shall assign to STI all manufacturer, dealer,
or supplier warranties applicable to the property to enable STI to obtain any
warranty service available for the property. Any enforcement by STI of warranty
rights shall be at the expense of STI and shall in no way render MDC responsible
to STI for the performance of any of the warranties.
ARTICLE X
TAXES AND OTHER CHARGES
1. TAXES. STI shall be liable for and pay on or before the due dates, all
sales taxes, use taxes, personal property taxes, business personal property
taxes, and assessments, or other taxes or government charges imposed on the
property or levied against, or based on,
3
<PAGE>
the amount of rent to be paid under the Agreement or assessed in connection with
the Agreement.
2. OTHER CHARGES. STI shall be liable for any fees for licenses,
registrations, permits, and other certificates as may be required for the lawful
operation of the property. All certificates of title shall initially be applied
for in the State of California and shall be issued and maintained in the name of
MDC, as owner. Such certificates shall be delivered to MDC and STI shall pay all
expenses in relation thereto.
ARTICLE XI
STI INSPECTION
1. INSPECTION BY STI. STI shall inspect the property within fifteen (15)
days after receipt thereof. Unless STI within that time gives written notice to
MDC, specifying any defect in or other proper objection to the property, STI
agrees that it shall be conclusively presumed, as between MDC and STI, that STI
has fully inspected the property and acknowledged that the property is in good
condition and repair, and that STI is satisfied with and has accepted the
property in such good condition and repair.
ARTICLE XII
INSURANCE
1. STI DUTY TO INSURE. STI agrees to maintain in full force and effect, at
its own cost and expense, property damage insurance issued by a company
satisfactory to MDC, insuring the interest of MDC, STI, and their authorized
agents and employees. The policy shall be for primary coverage and shall have a
limit of no less than:
$1,000,000 per person;
$1,000,000 per accident;
$310,789.41 property damage; and
$1,000,000 excess liability umbrella coverage.
For all property covered by this Agreement, STI shall also provide, at its own
cost and expense, comprehensive, fire, theft, and additional combined insurance
coverage naming MDC as an additional insured. Coverage shall be in the form and
amounts as directed by MDC from time to time.
2. INSURANCE CERTIFICATE. STI shall cause the insured to furnish to MDC,
not less than ten (10) days prior to the date on which the property is delivered
to STI and not less than ten (10) days prior to the expiration date of any
existing insurance, a certificate evidencing the required insurance. The policy
shall provide that the insurer shall not cancel or materially modify the
insurance except on thirty (30) days' advanced written notice to MDC. If STI
fails to procure, maintain, or renew the insurance, MDC may, but is not
obligated to, obtain insurance for STI without prejudice to any other rights
that MDC may have.
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3. EXCESS LIABILITY INDEMNITY. STI shall indemnify and hold MDC, its
agents, and employees, harmless from and against all loss, liability, and
expense, including reasonable attorneys' fees, in excess of the provided limits
of liability insurance for bodily injury (including death) or property damage
caused by or arising out of the ownership, maintenance, use, or operation of the
leased property.
ARTICLE XIII
INDEMNIFICATION AND LIABILITY
1. ALL LIABILITY ASSUMED BY STI. STI assumes all risk and liability for
the loss of or damage to the equipment, for the death of or injury to any person
or property of another, and for all other risks and liabilities arising from the
use, operation, condition, possession, or storage of the leased property.
Nothing in this Agreement shall authorize STI or any other person to operate any
of the property so as to impose any liability or other obligation on MDC.
2. STI DUTY TO INDEMNIFY. STI shall indemnify, defend, and hold harmless
MDC, its agents, and employees from any and all claims, loss, or damage MDC may
sustain or suffer for any of the following reasons:
i) the loss of or damage to any of the property for any cause;
ii) the injury to or death of any person, including but not limited to
agents, or employees of STI; or,
iii) damage to any property arising from the use, possession, selection,
delivery, return, condition, or operation of any of the property.
3. OBLIGATIONS SURVIVE LEASE TERM. The indemnities and assumptions of
risk, liabilities, and obligations by STI arising under this Agreement during
its term shall continue in effect after the termination of this Agreement,
regardless of the reason for termination.
ARTICLE XIV
ACCIDENT, LOSS OF PROPERTY, OR DAMAGE TO PROPERTY
1. NOTIFICATION TO MDC. If any property covered by this Agreement is
damaged, lost, stolen, or destroyed, or if any person is injured or dies, or if
any property is damaged as a result of its operation, use, maintenance, or
possession, STI shall promptly notify MDC of the occurrence, and shall file all
necessary accident reports, including those required by law and those required
by insurers of the leased property.
2. STIPULATED LOSS VALUE. If any property becomes lost, stolen, destroyed,
or damaged beyond repair, STI shall pay MDC in cash the "Stipulated Loss Value"
as set forth in Schedule A, less any net proceeds of insurance for the property
received by MDC. Upon payment, this Agreement shall terminate with respect to
that item of property and STI shall become entitled to the property on an
"as-is, where-is" basis, without warranty, express or implied, for any matter
whatsoever.
5
<PAGE>
ARTICLE XV
ASSIGNMENT
1. ASSIGNMENT BY MDC. MDC may assign this Agreement or any rights under it
at any time without STI's consent. In the event of any assignment, MDC's
assignee shall have all the rights, powers, privileges, and remedies of MDC as
set forth in this Agreement.
2. ASSIGNMENT OR SUBLETTING BY STI. STI shall not assign this Agreement or
any property described in it, or assign any interest in this Agreement or
property, or sublet any of the leased property without the express written
consent of MDC.
ARTICLE XVI
ACTIONS CONSTITUTING DEFAULT
1. STI IN DEFAULT. MDC, at its option, may by written notice to STI
declare STI in default on the occurrence of any of the following:
i) failure by STI to make payments or perform any of its obligations
under this Agreement;
ii) institution by or against STI of any proceeding in bankruptcy or
insolvency, or the reorganization of STI under any law, or the appointment of a
receiver or trustee for the goods and property of STI, or any assignment by STI
for the benefit of creditors;
iii) expiration or cancellation of any insurance policy to be paid by STI
as provided for under the terms of this Agreement; or
iv) involuntary transfer of STI's interest in this Agreement by operation
of law.
ARTICLE XVII
RIGHTS, REMEDIES, AND OBLIGATIONS ON DEFAULT
1. MDC RIGHTS AND REMEDIES. After default of STI, and on notice from MDC
that STI is in default, MDC shall have the following options:
i) terminate the Agreement and STI's rights under the Agreement;
ii) declare the balance of all unpaid rent and all other charges of any
kind required of STI under the Agreement to be due and payable immediately; and,
iii) repossess the property without legal process free of all rights of
STI in and to the property. STI authorizes MDC or MDC's agent to enter on any
premises where the property is located and repossess it and remove it.
2. STI OBLIGATION FOR MDC COSTS. After default, STI shall reimburse MDC
for all reasonable expenses of repossession and enforcement of MDC's rights and
remedies.
6
<PAGE>
3. EFFECT OF FORBEARANCE. No failure on the part of MDC to exercise any
remedy or right and no delay in the exercise of any remedy or right shall
operate as a waiver. Acceptance by MDC of rent or other payments made by STI
after default shall not be deemed a waiver of MDC's rights and remedies arising
from STI's default.
4. FORFEITURE OF STI INTEREST ON DEFAULT. Upon default, for any reason,
STI and STI's successor in interest shall have no right, title, or interest in
the leased property, its possession, or its use. MDC shall retain all rents and
other payments of any kind made by STI under this Agreement.
ARTICLE XVIII
RETURN OF PROPERTY ON EXPIRATION
1. STI RETURN OF PROPERTY. Upon the expiration of this Agreement with
respect to any and all of the property, STI shall return the property to MDC,
together with all accessions, free from all damage and in the same condition and
appearance as when received by STI, allowing for ordinary wear and tear. If STI
fails or refuses to return the equipment to MDC, MDC shall have the right to
take possession of the property and for that purpose to enter any premises where
the property is located without being liable in any suit, action, defense, or
other proceedings to STI.
ARTICLE XIX
LIENS
1. ENCUMBRANCES OR LIENS; NOTICE. STI shall not pledge, encumber, or
create a security interest in, or permit any lien to become effective on any
leased property. If any of these events takes place, STI shall be deemed to be
in default at the option of MDC. STI shall promptly notify MDC of any liens,
charges, or other encumbrances of which STI has knowledge. STI shall promptly
pay or satisfy any obligation from which any lien or encumbrance arises, and
shall otherwise keep the property and all right, title, and interest free and
clear of all liens, charges, and encumbrances. STI shall deliver to MDC
appropriate satisfactions, waivers, or evidence of payment.
ARTICLE XX
NOTICES
1. SERVICE OF NOTICE. Accept as otherwise provided by law, any and all
notices or other communications required or permitted by this Agreement or by
law to be served on or given to either party by the other party shall be in
writing and shall be deemed duly served and given when personally delivered to
any member of the party to whom they are directed, or in lieu of such personal
service when deposited in the United States mail, first class postage pre-paid,
addressed to STI at 3001 Daimler Street, Santa Ana, California, 92705, or to MDC
at 3001 Daimler Street, Santa Ana, California, 92705. Either party may change
its address for the purpose of this paragraph by giving notice of the change to
the other party in the manner provided in this paragraph.
7
<PAGE>
ARTICLE XXI
AMENDMENT AND MODIFICATION
1. METHOD OF AMENDMENT OR MODIFICATION. Additional property may from time
to time be added as the subject matter of this Agreement as agreed on by the
parties. Any additional property shall be added to Schedule A in an amendment
describing the property, the monthly rental, the term of the leasing period,
security deposit, and stipulated loss value of additional property. This
Agreement shall be amended, modified or altered only in a writing signed by both
parties.
ARTICLE XXII
ENTIRE AGREEMENT
1. INCORPORATION BY REFERENCE. This Agreement and any attached
schedule(s), which are incorporated by reference and made an integral part of
this Agreement, constitute the entire agreement between the parties. No
agreements, representations, or warranties, other than those specifically set
forth in this Agreement or in the annexed schedule(s), shall be binding on any
of the parties unless set forth in writing and signed by both parties.
ARTICLE XXIII
GOVERNING LAW
1. CHOICE OF LAW. This Agreement shall be governed and construed in all
respects in accordance with the laws of the State of California, USA. Any legal
action or notice shall be entered into in a court of suitable jurisdiction in
the County of Orange, State of California, and STI and MDC each hereby submits
to the jurisdiction of said courts.
ARTICLE XXIV
SEVERABILITY CLAUSE
1. AGREEMENT SURVIVES PARTIAL INVALIDITY. If any provision of this
Agreement is held to be invalid by a court of competent jurisdiction, the
remaining provisions shall nevertheless remain in full force and effect.
ARTICLE XXV
RELATIONSHIP
1. INDEPENDENT CONTRACTOR RELATIONSHIP. It is understood and agreed that
STI and MDC are independent contractors and each is engaged in the operation of
its own business. Nothing in this Agreement shall be construed to constitute the
parties as partners, joint venturers, or co-owners.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date last written below.
Simple Technology, Inc.: MDC:
By: _______________________________ By: _______________________________
Name: _______________________________ Name: _______________________________
Title: _______________________________ Title: _______________________________
Date: _______________________________ Date: _______________________________
9
<PAGE>
SCHEDULE A
DESCRIPTION OF PROPERTY
A. The property to which this Schedule and Agreement applies is as
follows:
QTY. DESCRIPTION SERIAL #
1 Quad QSP-2 High Speed Surface 2960
Mount Assembly Systems
1 Quad VMP-20B Screen Printers 90158
RENT
B. As rent for this property, STI shall pay MDC the total sum of
$385,551.90. Except as otherwise provided in this Agreement or in this Schedule,
rent shall be payable in 60 monthly installments of $6,425.87 each, commencing
on the first day of October, 1996, and continuing on the first day of each month
thereafter until the total sum has been paid in full.
LOCATION
C. The above described property shall be located at 3001 or 3009 Daimler
St., Santa Ana, CA 92705, and shall not be removed from that location without
the prior written consent of MDC.
RENEWAL OPTION
D. STI may renew this Agreement of which this Schedule is a part, on a
year-to-year basis, on the expiration of the original term at a total rental of
$6,425.87 per month, and otherwise on the same terms and conditions of this
Agreement. The option may be exercised by STI's written notice to such a fact to
MDC not less than thirty (30) days before the expiration of the term of the
Agreement.
10
<PAGE>
EXHIBIT 10.14
EQUIPMENT LEASE
THIS AGREEMENT ("Agreement") is made and entered into as of January 1, 1997, by
and between SIMPLE TECHNOLOGY, INC., a California corporation ("STI"), and
MOSHAYEDI DEVELOPMENT CORPORATION, a California corporation ("MDC").
RECITALS
A. STI is in the business of manufacturing and selling computer memory
products, PCMCIA products, and computer peripheral equipment.
B. MDC owns various capital assets, including certain manufacturing equipment
used in the manufacture of computers and other products.
C. STI desires to lease certain manufacturing equipment from MDC and MDC
desires to lease such manufacturing equipment to STI, in accordance with the
terms and conditions of this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained in this Agreement, and for other good and valuable consideration, STI
and MDC hereby agree as follows:
ARTICLE I
DESCRIPTION OF LEASED EQUIPMENT
1. PROPERTY DESCRIPTION. The property to be leased is described in the
attached Schedule A, which is included herein and made a part hereof.
ARTICLE II
TERM OF LEASE
1. INITIAL TERM. The initial term of the lease for the property leased
hereunder is set forth in Schedule A.
ARTICLE III
PAYMENTS BY STI
1. RENTAL PAYMENTS. The amount of monthly rental payments is set forth in
Schedule A. STI shall make monthly payments at MDC's address as set forth above
or at such other place as designated by MDC or its assignees. All rental
payments shall be due and payable in advance on the first day of each month
during the term of this Agreement. Any rental payments not made by STI within
five (5) days of the due date shall be subject to a late charge of five (5)
percent of the amount due.
2. SECURITY DEPOSIT. As security for the prompt and full payment of rent and
the faithful and timely performance of all provisions of this Agreement, STI
shall deposit
<PAGE>
with MDC the amount set forth in Schedule A ("Security Deposit"). If any default
shall occur in the performance of any covenants in this Agreement by STI, MDC
shall have the right, but shall not be obligated, to apply the Security Deposit
to the curing of the default. On demand, STI shall restore the Security Deposit
to the full amount set forth in Schedule A. On the expiration or earlier
termination of this Agreement, providing STI has paid all of the required rent
and fully performed all of the other provisions of this Agreement, MDC shall
return to STI any remaining balance of the Security Deposit.
ARTICLE IV
OWNERSHIP
1. NO SALE OR SECURITY INTEREST INTENDED. This Agreement constitutes a lease
of the property described herein and not a sale or the creation of a security
interest. STI shall not have, or at any time acquire, any right, title, or
interest in the property except the right to possession and use as provided in
this Agreement. MDC shall at all times be the sole owner of the property.
2. SUBORDINATION. The rights of STI under this Agreement shall be subject and
subordinate to certain security interests in the property held by Lyon Credit
Corporation and its successors.
ARTICLE V
OPERATING EXPENSES
1. STI shall be responsible for all expenses and all other charges in
connection with the operation of the property.
ARTICLE VI
MAINTENANCE AND REPAIRS
1. STI'S RESPONSIBILITY. STI shall assume all obligation and liability with
respect to the possession of the property, and for its use, operation,
condition, and storage during the lease term. STI shall, at STI's own expense,
maintain the property in good mechanical condition and running order, allowing
for reasonable wear and tear. The rent on the property or on any element thereof
shall not be prorated or abated while the property is being serviced or
repaired.
2. ACCESSIONS. All installations, replacements, and substitutions of parts or
accessories with respect to any of the property shall constitute accessions and
shall become part of the property and shall be owned by MDC.
2
<PAGE>
ARTICLE VII
USE OF PROPERTY
1. RIGHTS OF STI. STI shall be entitled to the absolute right to the use,
operation, possession, and control of the property during the term of this
Agreement, providing STI is not in default of any provision of this Agreement.
STI shall employ and have absolute control, supervision, and responsibility over
any operators or users of the property.
2. DUTIES OF STI. STI shall use the property in a careful and proper manner
and shall not permit any of the property to be operated or used in violation of
any applicable federal, state, or local statute, ordinance, rule, or regulation
relating to the possession, use, or maintenance of the property. STI agrees to
reimburse MDC in full for all damage to the property arising from any misuse or
negligent act by STI, its employees, and its agents. STI shall indemnify and
hold MDC harmless from any and all liabilities, fines, forfeitures, or penalties
for violations of any applicable statute, ordinance, rule, or regulation.
3. COMMERCIAL USE LIMITATION. STI represents and warrants that the property
will be used for commercial or business purposes only.
ARTICLE VIII
MDC'S RIGHT OF INSPECTION AND REPAIR
1. INSPECTION AND REPAIR. MDC, at its discretion during STI's regular business
hours and with one (1) day's prior notice to STI, shall have the right to enter
the premises where the property is located or used for the purpose of
inspection. If any property covered by this Agreement is not being properly
maintained in the opinion of MDC, MDC shall have the right, but not the
obligation, to have it repaired or maintained by an appropriate service facility
at the expense of STI.
ARTICLE IX
ASSIGNMENT OF MDC'S WARRANTIES
1. WARRANTY ASSIGNMENT. MDC shall assign to STI all manufacturer, dealer, or
supplier warranties applicable to the property to enable STI to obtain any
warranty service available for the property. Any enforcement by STI of warranty
rights shall be at the expense of STI and shall in no way render MDC responsible
to STI for the performance of any of the warranties.
ARTICLE X
TAXES AND OTHER CHARGES
1. TAXES. STI shall be liable for and pay on or before the due dates, all
sales taxes, use taxes, personal property taxes, business personal property
taxes, and assessments, or other taxes or government charges imposed on the
property or levied against, or based on,
3
<PAGE>
the amount of rent to be paid under the Agreement or assessed in connection with
the Agreement.
2. OTHER CHARGES. STI shall be liable for any fees for licenses,
registrations, permits, and other certificates as may be required for the lawful
operation of the property. All certificates of title shall initially be applied
for in the State of California and shall be issued and maintained in the name of
MDC, as owner. Such certificates shall be delivered to MDC and STI shall pay all
expenses in relation thereto.
ARTICLE XI
STI INSPECTION
1. INSPECTION BY STI. STI shall inspect the property within fifteen (15) days
after receipt thereof. Unless STI within that time gives written notice to MDC,
specifying any defect in or other proper objection to the property, STI agrees
that it shall be conclusively presumed, as between MDC and STI, that STI has
fully inspected the property and acknowledged that the property is in good
condition and repair, and that STI is satisfied with and has accepted the
property in such good condition and repair.
ARTICLE XII
INSURANCE
1. STI DUTY TO INSURE. STI agrees to maintain in full force and effect, at its
own cost and expense, property damage insurance issued by a company satisfactory
to MDC, insuring the interest of MDC, STI, and their authorized agents and
employees. The policy shall be for primary coverage and shall have a limit of no
less than:
$1,000,000 per person;
$1,000,000 per accident;
$778,943.68 property damage; and
$1,000,000 excess liability umbrella coverage.
For all property covered by this Agreement, STI shall also provide, at its own
cost and expense, comprehensive, fire, theft, and additional combined insurance
coverage naming MDC as an additional insured. Coverage shall be in the form and
amounts as directed by MDC from time to time.
2. INSURANCE CERTIFICATE. STI shall cause the insured to furnish to MDC, not
less than ten (10) days prior to the date on which the property is delivered to
STI and not less than ten (10) days prior to the expiration date of any existing
insurance, a certificate evidencing the required insurance. The policy shall
provide that the insurer shall not cancel or materially modify the insurance
except on thirty (30) days' advanced written notice to MDC. If STI fails to
procure, maintain, or renew the insurance, MDC may, but is not obligated to,
obtain insurance for STI without prejudice to any other rights that MDC may
have.
4
<PAGE>
3. EXCESS LIABILITY INDEMNITY. STI shall indemnify and hold MDC, its agents,
and employees, harmless from and against all loss, liability, and expense,
including reasonable attorneys' fees, in excess of the provided limits of
liability insurance for bodily injury (including death) or property damage
caused by or arising out of the ownership, maintenance, use, or operation of the
leased property.
ARTICLE XIII
INDEMNIFICATION AND LIABILITY
1. ALL LIABILITY ASSUMED BY STI. STI assumes all risk and liability for the
loss of or damage to the equipment, for the death of or injury to any person or
property of another, and for all other risks and liabilities arising from the
use, operation, condition, possession, or storage of the leased property.
Nothing in this Agreement shall authorize STI or any other person to operate any
of the property so as to impose any liability or other obligation on MDC.
2. STI DUTY TO INDEMNIFY. STI shall indemnify, defend, and hold harmless MDC,
its agents, and employees from any and all claims, loss, or damage MDC may
sustain or suffer for any of the following reasons:
i) the loss of or damage to any of the property for any cause;
ii) the injury to or death of any person, including but not limited to
agents, or employees of STI; or,
iii) damage to any property arising from the use, possession, selection,
delivery, return, condition, or operation of any of the property.
3. OBLIGATIONS SURVIVE LEASE TERM. The indemnities and assumptions of risk,
liabilities, and obligations by STI arising under this Agreement during its term
shall continue in effect after the termination of this Agreement, regardless of
the reason for termination.
ARTICLE XIV
ACCIDENT, LOSS OF PROPERTY, OR DAMAGE TO PROPERTY
1. NOTIFICATION TO MDC. If any property covered by this Agreement is damaged,
lost, stolen, or destroyed, or if any person is injured or dies, or if any
property is damaged as a result of its operation, use, maintenance, or
possession, STI shall promptly notify MDC of the occurrence, and shall file all
necessary accident reports, including those required by law and those required
by insurers of the leased property.
2. STIPULATED LOSS VALUE. If any property becomes lost, stolen, destroyed, or
damaged beyond repair, STI shall pay MDC in cash the "Stipulated Loss Value" as
set forth in Schedule A, less any net proceeds of insurance for the property
received by MDC. Upon payment, this Agreement shall terminate with respect to
that item of property and STI shall become entitled to the property on an
"as-is, where-is" basis, without warranty, express or implied, for any matter
whatsoever.
5
<PAGE>
ARTICLE XV
ASSIGNMENT
1. ASSIGNMENT BY MDC. MDC may assign this Agreement or any rights under it at
any time without STI's consent. In the event of any assignment, MDC's assignee
shall have all the rights, powers, privileges, and remedies of MDC as set forth
in this Agreement.
2. ASSIGNMENT OR SUBLETTING BY STI. STI shall not assign this Agreement or any
property described in it, or assign any interest in this Agreement or property,
or sublet any of the leased property without the express written consent of MDC.
ARTICLE XVI
ACTIONS CONSTITUTING DEFAULT
1. STI IN DEFAULT. MDC, at its option, may by written notice to STI declare
STI in default on the occurrence of any of the following:
i) failure by STI to make payments or perform any of its obligations
under this Agreement;
ii) institution by or against STI of any proceeding in bankruptcy or
insolvency, or the reorganization of STI under any law, or the appointment of a
receiver or trustee for the goods and property of STI, or any assignment by STI
for the benefit of creditors;
iii) expiration or cancellation of any insurance policy to be paid by
STI as provided for under the terms of this Agreement; or
iv) involuntary transfer of STI's interest in this Agreement by
operation of law.
ARTICLE XVII
RIGHTS, REMEDIES, AND OBLIGATIONS ON DEFAULT
1. MDC RIGHTS AND REMEDIES. After default of STI, and on notice from MDC that
STI is in default, MDC shall have the following options:
i) terminate the Agreement and STI's rights under the Agreement;
ii) declare the balance of all unpaid rent and all other charges of any
kind required of STI under the Agreement to be due and payable immediately; and,
iii) repossess the property without legal process free of all rights of
STI in and to the property. STI authorizes MDC or MDC's agent to enter on any
premises where the property is located and repossess it and remove it.
2. STI OBLIGATION FOR MDC COSTS. After default, STI shall reimburse MDC for
all reasonable expenses of repossession and enforcement of MDC's rights and
remedies.
6
<PAGE>
3. EFFECT OF FORBEARANCE. No failure on the part of MDC to exercise any remedy
or right and no delay in the exercise of any remedy or right shall operate as a
waiver. Acceptance by MDC of rent or other payments made by STI after default
shall not be deemed a waiver of MDC's rights and remedies arising from STI's
default.
4. FORFEITURE OF STI INTEREST ON DEFAULT. Upon default, for any reason, STI
and STI's successor in interest shall have no right, title, or interest in the
leased property, its possession, or its use. MDC shall retain all rents and
other payments of any kind made by STI under this Agreement.
ARTICLE XVIII
RETURN OF PROPERTY ON EXPIRATION
1. STI RETURN OF PROPERTY. Upon the expiration of this Agreement with respect
to any and all of the property, STI shall return the property to MDC, together
with all accessions, free from all damage and in the same condition and
appearance as when received by STI, allowing for ordinary wear and tear. If STI
fails or refuses to return the equipment to MDC, MDC shall have the right to
take possession of the property and for that purpose to enter any premises where
the property is located without being liable in any suit, action, defense, or
other proceedings to STI.
ARTICLE XIX
LIENS
1. ENCUMBRANCES OR LIENS; NOTICE. STI shall not pledge, encumber, or create a
security interest in, or permit any lien to become effective on any leased
property. If any of these events takes place, STI shall be deemed to be in
default at the option of MDC. STI shall promptly notify MDC of any liens,
charges, or other encumbrances of which STI has knowledge. STI shall promptly
pay or satisfy any obligation from which any lien or encumbrance arises, and
shall otherwise keep the property and all right, title, and interest free and
clear of all liens, charges, and encumbrances. STI shall deliver to MDC
appropriate satisfactions, waivers, or evidence of payment.
ARTICLE XX
NOTICES
1. SERVICE OF NOTICE. Accept as otherwise provided by law, any and all notices
or other communications required or permitted by this Agreement or by law to be
served on or given to either party by the other party shall be in writing and
shall be deemed duly served and given when personally delivered to any member of
the party to whom they are directed, or in lieu of such personal service when
deposited in the United States mail, first class postage pre-paid, addressed to
STI at 3001 Daimler Street, Santa Ana, California, 92705, or to MDC at 3001
Daimler Street, Santa Ana, California, 92705. Either party may change its
address for the purpose of this paragraph by giving notice of the change to the
other party in the manner provided in this paragraph.
7
<PAGE>
ARTICLE XXI
AMENDMENT AND MODIFICATION
1. METHOD OF AMENDMENT OR MODIFICATION. Additional property may from time to
time be added as the subject matter of this Agreement as agreed on by the
parties. Any additional property shall be added to Schedule A in an amendment
describing the property, the monthly rental, the term of the leasing period,
security deposit, and stipulated loss value of additional property. This
Agreement shall be amended, modified or altered only in a writing signed by both
parties.
ARTICLE XXII
ENTIRE AGREEMENT
1. INCORPORATION BY REFERENCE. This Agreement and any attached schedule(s),
which are incorporated by reference and made an integral part of this Agreement,
constitute the entire agreement between the parties. No agreements,
representations, or warranties, other than those specifically set forth in this
Agreement or in the annexed schedule(s), shall be binding on any of the parties
unless set forth in writing and signed by both parties.
ARTICLE XXIII
GOVERNING LAW
1. CHOICE OF LAW. This Agreement shall be governed and construed in all
respects in accordance with the laws of the State of California, USA. Any legal
action or notice shall be entered into in a court of suitable jurisdiction in
the County of Orange, State of California, and STI and MDC each hereby submits
to the jurisdiction of said courts.
ARTICLE XXIV
SEVERABILITY CLAUSE
1. AGREEMENT SURVIVES PARTIAL INVALIDITY. If any provision of this Agreement
is held to be invalid by a court of competent jurisdiction, the remaining
provisions shall nevertheless remain in full force and effect.
ARTICLE XXV
RELATIONSHIP
1. INDEPENDENT CONTRACTOR RELATIONSHIP. It is understood and agreed that STI
and MDC are independent contractors and each is engaged in the operation of its
own business. Nothing in this Agreement shall be construed to constitute the
parties as partners, joint venturers, or co-owners.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date last written below.
Simple Technology, Inc.: MDC:
By: By:
-------------------------- --------------------------
Name: Name:
------------------------ ------------------------
Title: Title:
----------------------- -----------------------
Date: Date:
------------------------ ------------------------
9
<PAGE>
SCHEDULE A
DESCRIPTION OF PROPERTY
A. The property to which this Schedule and Agreement applies is as follows:
<TABLE>
<CAPTION>
QTY. DESCRIPTION SERIAL #
---- ----------- --------
<S> <C> <C>
1 Hewlett Packard HP83000 Tester S0024*3654D
</TABLE>
RENT
B. As rent for this property, STI shall pay MDC the total sum of
$960,000.00. Except as otherwise provided in this Agreement or in this Schedule,
rent shall be payable in 60 monthly installments of $16,000.00 each, commencing
on the first day of January, 1997, and continuing on the first day of each month
thereafter until the total sum has been paid in full.
LOCATION
C. The above described property shall be located at 3001 or 3009 Daimler
St., Santa Ana, CA 92705, and shall not be removed from that location without
the prior written consent of MDC.
RENEWAL OPTION
D. STI may renew this Agreement of which this Schedule is a part, on a
year-to-year basis, on the expiration of the original term at a total rental of
$16,000.00 per month, and otherwise on the same terms and conditions of this
Agreement. The option may be exercised by STI's written notice to such a fact to
MDC not less than thirty (30) days before the expiration of the term of the
Agreement.
10
<PAGE>
EXHIBIT 10.15
EQUIPMENT LEASE
THIS AGREEMENT ("Agreement") is made and entered into as of February 1, 1997, by
and between SIMPLE TECHNOLOGY, INC., a California corporation ("STI"), and
MOSHAYEDI DEVELOPMENT CORPORATION, a California corporation ("MDC").
RECITALS
A. STI is in the business of manufacturing and selling computer memory
products, PCMCIA products, and computer peripheral equipment.
B. MDC owns various capital assets, including certain manufacturing equipment
used in the manufacture of computers and other products.
C. STI desires to lease certain manufacturing equipment from MDC and MDC
desires to lease such manufacturing equipment to STI, in accordance with the
terms and conditions of this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained in this Agreement, and for other good and valuable consideration, STI
and MDC hereby agree as follows:
ARTICLE I
DESCRIPTION OF LEASED EQUIPMENT
1. PROPERTY DESCRIPTION. The property to be leased is described in the
attached Schedule A, which is included herein and made a part hereof.
ARTICLE II
TERM OF LEASE
1. INITIAL TERM. The initial term of the lease for the property leased
hereunder is set forth in Schedule A.
ARTICLE III
PAYMENTS BY STI
1. RENTAL PAYMENTS. The amount of monthly rental payments is set forth in
Schedule A. STI shall make monthly payments at MDC's address as set forth above
or at such other place as designated by MDC or its assignees. All rental
payments shall be due and payable in advance on the first day of each month
during the term of this Agreement. Any rental payments not made by STI within
five (5) days of the due date shall be subject to a late charge of five (5)
percent of the amount due.
2. SECURITY DEPOSIT. As security for the prompt and full payment of rent and
the faithful and timely performance of all provisions of this Agreement, STI
shall deposit
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with MDC the amount set forth in Schedule A ("Security Deposit"). If any default
shall occur in the performance of any covenants in this Agreement by STI, MDC
shall have the right, but shall not be obligated, to apply the Security Deposit
to the curing of the default. On demand, STI shall restore the Security Deposit
to the full amount set forth in Schedule A. On the expiration or earlier
termination of this Agreement, providing STI has paid all of the required rent
and fully performed all of the other provisions of this Agreement, MDC shall
return to STI any remaining balance of the Security Deposit.
ARTICLE IV
OWNERSHIP
1. NO SALE OR SECURITY INTEREST INTENDED. This Agreement constitutes a lease
of the property described herein and not a sale or the creation of a security
interest. STI shall not have, or at any time acquire, any right, title, or
interest in the property except the right to possession and use as provided in
this Agreement. MDC shall at all times be the sole owner of the property.
2. SUBORDINATION. The rights of STI under this Agreement shall be subject and
subordinate to certain security interests in the property held by Lyon Credit
Corporation and its successors.
ARTICLE V
OPERATING EXPENSES
1. STI shall be responsible for all expenses and all other charges in
connection with the operation of the property.
ARTICLE VI
MAINTENANCE AND REPAIRS
1. STI'S RESPONSIBILITY. STI shall assume all obligation and liability with
respect to the possession of the property, and for its use, operation,
condition, and storage during the lease term. STI shall, at STI's own expense,
maintain the property in good mechanical condition and running order, allowing
for reasonable wear and tear. The rent on the property or on any element thereof
shall not be prorated or abated while the property is being serviced or
repaired.
2. ACCESSIONS. All installations, replacements, and substitutions of parts or
accessories with respect to any of the property shall constitute accessions and
shall become part of the property and shall be owned by MDC.
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ARTICLE VII
USE OF PROPERTY
1. RIGHTS OF STI. STI shall be entitled to the absolute right to the use,
operation, possession, and control of the property during the term of this
Agreement, providing STI is not in default of any provision of this Agreement.
STI shall employ and have absolute control, supervision, and responsibility over
any operators or users of the property.
2. DUTIES OF STI. STI shall use the property in a careful and proper manner
and shall not permit any of the property to be operated or used in violation of
any applicable federal, state, or local statute, ordinance, rule, or regulation
relating to the possession, use, or maintenance of the property. STI agrees to
reimburse MDC in full for all damage to the property arising from any misuse or
negligent act by STI, its employees, and its agents. STI shall indemnify and
hold MDC harmless from any and all liabilities, fines, forfeitures, or penalties
for violations of any applicable statute, ordinance, rule, or regulation.
3. COMMERCIAL USE LIMITATION. STI represents and warrants that the property
will be used for commercial or business purposes only.
ARTICLE VIII
MDC'S RIGHT OF INSPECTION AND REPAIR
1. INSPECTION AND REPAIR. MDC, at its discretion during STI's regular business
hours and with one (1) day's prior notice to STI, shall have the right to enter
the premises where the property is located or used for the purpose of
inspection. If any property covered by this Agreement is not being properly
maintained in the opinion of MDC, MDC shall have the right, but not the
obligation, to have it repaired or maintained by an appropriate service facility
at the expense of STI.
ARTICLE IX
ASSIGNMENT OF MDC'S WARRANTIES
1. WARRANTY ASSIGNMENT. MDC shall assign to STI all manufacturer, dealer, or
supplier warranties applicable to the property to enable STI to obtain any
warranty service available for the property. Any enforcement by STI of warranty
rights shall be at the expense of STI and shall in no way render MDC responsible
to STI for the performance of any of the warranties.
ARTICLE X
TAXES AND OTHER CHARGES
1. TAXES. STI shall be liable for and pay on or before the due dates, all
sales taxes, use taxes, personal property taxes, business personal property
taxes, and assessments, or other taxes or government charges imposed on the
property or levied against, or based on,
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the amount of rent to be paid under the Agreement or assessed in connection with
the Agreement.
2. OTHER CHARGES. STI shall be liable for any fees for licenses,
registrations, permits, and other certificates as may be required for the lawful
operation of the property. All certificates of title shall initially be applied
for in the State of California and shall be issued and maintained in the name of
MDC, as owner. Such certificates shall be delivered to MDC and STI shall pay all
expenses in relation thereto.
ARTICLE XI
STI INSPECTION
1. INSPECTION BY STI. STI shall inspect the property within fifteen (15) days
after receipt thereof. Unless STI within that time gives written notice to MDC,
specifying any defect in or other proper objection to the property, STI agrees
that it shall be conclusively presumed, as between MDC and STI, that STI has
fully inspected the property and acknowledged that the property is in good
condition and repair, and that STI is satisfied with and has accepted the
property in such good condition and repair.
ARTICLE XII
INSURANCE
1. STI DUTY TO INSURE. STI agrees to maintain in full force and effect, at its
own cost and expense, property damage insurance issued by a company satisfactory
to MDC, insuring the interest of MDC, STI, and their authorized agents and
employees. The policy shall be for primary coverage and shall have a limit of no
less than:
$1,000,000 per person;
$1,000,000 per accident;
$146,671.06 property damage; and
$1,000,000 excess liability umbrella coverage.
For all property covered by this Agreement, STI shall also provide, at its own
cost and expense, comprehensive, fire, theft, and additional combined insurance
coverage naming MDC as an additional insured. Coverage shall be in the form and
amounts as directed by MDC from time to time.
2. INSURANCE CERTIFICATE. STI shall cause the insured to furnish to MDC, not
less than ten (10) days prior to the date on which the property is delivered to
STI and not less than ten (10) days prior to the expiration date of any existing
insurance, a certificate evidencing the required insurance. The policy shall
provide that the insurer shall not cancel or materially modify the insurance
except on thirty (30) days' advanced written notice to MDC. If STI fails to
procure, maintain, or renew the insurance, MDC may, but is not obligated to,
obtain insurance for STI without prejudice to any other rights that MDC may
have.
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3. EXCESS LIABILITY INDEMNITY. STI shall indemnify and hold MDC, its agents,
and employees, harmless from and against all loss, liability, and expense,
including reasonable attorneys' fees, in excess of the provided limits of
liability insurance for bodily injury (including death) or property damage
caused by or arising out of the ownership, maintenance, use, or operation of the
leased property.
ARTICLE XIII
INDEMNIFICATION AND LIABILITY
1. ALL LIABILITY ASSUMED BY STI. STI assumes all risk and liability for the
loss of or damage to the equipment, for the death of or injury to any person or
property of another, and for all other risks and liabilities arising from the
use, operation, condition, possession, or storage of the leased property.
Nothing in this Agreement shall authorize STI or any other person to operate any
of the property so as to impose any liability or other obligation on MDC.
2. STI DUTY TO INDEMNIFY. STI shall indemnify, defend, and hold harmless MDC,
its agents, and employees from any and all claims, loss, or damage MDC may
sustain or suffer for any of the following reasons:
i) the loss of or damage to any of the property for any cause;
ii) the injury to or death of any person, including but not limited to
agents, or employees of STI; or,
iii) damage to any property arising from the use, possession, selection,
delivery, return, condition, or operation of any of the property.
3. OBLIGATIONS SURVIVE LEASE TERM. The indemnities and assumptions of risk,
liabilities, and obligations by STI arising under this Agreement during its term
shall continue in effect after the termination of this Agreement, regardless of
the reason for termination.
ARTICLE XIV
ACCIDENT, LOSS OF PROPERTY, OR DAMAGE TO PROPERTY
1. NOTIFICATION TO MDC. If any property covered by this Agreement is damaged,
lost, stolen, or destroyed, or if any person is injured or dies, or if any
property is damaged as a result of its operation, use, maintenance, or
possession, STI shall promptly notify MDC of the occurrence, and shall file all
necessary accident reports, including those required by law and those required
by insurers of the leased property.
2. STIPULATED LOSS VALUE. If any property becomes lost, stolen, destroyed, or
damaged beyond repair, STI shall pay MDC in cash the "Stipulated Loss Value" as
set forth in Schedule A, less any net proceeds of insurance for the property
received by MDC. Upon payment, this Agreement shall terminate with respect to
that item of property and STI shall become entitled to the property on an
"as-is, where-is" basis, without warranty, express or implied, for any matter
whatsoever.
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ARTICLE XV
ASSIGNMENT
1. ASSIGNMENT BY MDC. MDC may assign this Agreement or any rights under it at
any time without STI's consent. In the event of any assignment, MDC's assignee
shall have all the rights, powers, privileges, and remedies of MDC as set forth
in this Agreement.
2. ASSIGNMENT OR SUBLETTING BY STI. STI shall not assign this Agreement or any
property described in it, or assign any interest in this Agreement or property,
or sublet any of the leased property without the express written consent of MDC.
ARTICLE XVI
ACTIONS CONSTITUTING DEFAULT
1. STI IN DEFAULT. MDC, at its option, may by written notice to STI declare
STI in default on the occurrence of any of the following:
i) failure by STI to make payments or perform any of its obligations
under this Agreement;
ii) institution by or against STI of any proceeding in bankruptcy or
insolvency, or the reorganization of STI under any law, or the appointment of a
receiver or trustee for the goods and property of STI, or any assignment by STI
for the benefit of creditors;
iii) expiration or cancellation of any insurance policy to be paid by STI
as provided for under the terms of this Agreement; or
iv) involuntary transfer of STI's interest in this Agreement by
operation of law.
ARTICLE XVII
RIGHTS, REMEDIES, AND OBLIGATIONS ON DEFAULT
1. MDC RIGHTS AND REMEDIES. After default of STI, and on notice from MDC that
STI is in default, MDC shall have the following options:
i) terminate the Agreement and STI's rights under the Agreement;
ii) declare the balance of all unpaid rent and all other charges of any
kind required of STI under the Agreement to be due and payable immediately; and,
iii) repossess the property without legal process free of all rights of
STI in and to the property. STI authorizes MDC or MDC's agent to enter on any
premises where the property is located and repossess it and remove it.
2. STI OBLIGATION FOR MDC COSTS. After default, STI shall reimburse MDC for
all reasonable expenses of repossession and enforcement of MDC's rights and
remedies.
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3. EFFECT OF FORBEARANCE. No failure on the part of MDC to exercise any remedy
or right and no delay in the exercise of any remedy or right shall operate as a
waiver. Acceptance by MDC of rent or other payments made by STI after default
shall not be deemed a waiver of MDC's rights and remedies arising from STI's
default.
4. FORFEITURE OF STI INTEREST ON DEFAULT. Upon default, for any reason, STI
and STI's successor in interest shall have no right, title, or interest in the
leased property, its possession, or its use. MDC shall retain all rents and
other payments of any kind made by STI under this Agreement.
ARTICLE XVIII
RETURN OF PROPERTY ON EXPIRATION
1. STI RETURN OF PROPERTY. Upon the expiration of this Agreement with respect
to any and all of the property, STI shall return the property to MDC, together
with all accessions, free from all damage and in the same condition and
appearance as when received by STI, allowing for ordinary wear and tear. If STI
fails or refuses to return the equipment to MDC, MDC shall have the right to
take possession of the property and for that purpose to enter any premises where
the property is located without being liable in any suit, action, defense, or
other proceedings to STI.
ARTICLE XIX
LIENS
1. ENCUMBRANCES OR LIENS; NOTICE. STI shall not pledge, encumber, or create a
security interest in, or permit any lien to become effective on any leased
property. If any of these events takes place, STI shall be deemed to be in
default at the option of MDC. STI shall promptly notify MDC of any liens,
charges, or other encumbrances of which STI has knowledge. STI shall promptly
pay or satisfy any obligation from which any lien or encumbrance arises, and
shall otherwise keep the property and all right, title, and interest free and
clear of all liens, charges, and encumbrances. STI shall deliver to MDC
appropriate satisfactions, waivers, or evidence of payment.
ARTICLE XX
NOTICES
1. SERVICE OF NOTICE. Accept as otherwise provided by law, any and all notices
or other communications required or permitted by this Agreement or by law to be
served on or given to either party by the other party shall be in writing and
shall be deemed duly served and given when personally delivered to any member of
the party to whom they are directed, or in lieu of such personal service when
deposited in the United States mail, first class postage pre-paid, addressed to
STI at 3001 Daimler Street, Santa Ana, California, 92705, or to MDC at 3001
Daimler Street, Santa Ana, California, 92705. Either party may change its
address for the purpose of this paragraph by giving notice of the change to the
other party in the manner provided in this paragraph.
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ARTICLE XXI
AMENDMENT AND MODIFICATION
1. METHOD OF AMENDMENT OR MODIFICATION. Additional property may from time to
time be added as the subject matter of this Agreement as agreed on by the
parties. Any additional property shall be added to Schedule A in an amendment
describing the property, the monthly rental, the term of the leasing period,
security deposit, and stipulated loss value of additional property. This
Agreement shall be amended, modified or altered only in a writing signed by both
parties.
ARTICLE XXII
ENTIRE AGREEMENT
1. INCORPORATION BY REFERENCE. This Agreement and any attached schedule(s),
which are incorporated by reference and made an integral part of this Agreement,
constitute the entire agreement between the parties. No agreements,
representations, or warranties, other than those specifically set forth in this
Agreement or in the annexed schedule(s), shall be binding on any of the parties
unless set forth in writing and signed by both parties.
ARTICLE XXIII
GOVERNING LAW
1. CHOICE OF LAW. This Agreement shall be governed and construed in all
respects in accordance with the laws of the State of California, USA. Any legal
action or notice shall be entered into in a court of suitable jurisdiction in
the County of Orange, State of California, and STI and MDC each hereby submits
to the jurisdiction of said courts.
ARTICLE XXIV
SEVERABILITY CLAUSE
1. AGREEMENT SURVIVES PARTIAL INVALIDITY. If any provision of this Agreement
is held to be invalid by a court of competent jurisdiction, the remaining
provisions shall nevertheless remain in full force and effect.
ARTICLE XXV
RELATIONSHIP
1. INDEPENDENT CONTRACTOR RELATIONSHIP. It is understood and agreed that STI
and MDC are independent contractors and each is engaged in the operation of its
own business. Nothing in this Agreement shall be construed to constitute the
parties as partners, joint venturers, or co-owners.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date last written below.
Simple Technology, Inc.: MDC:
By: By:
------------------------------ ------------------------------
Name: Name:
---------------------------- ----------------------------
Title: Title:
--------------------------- ---------------------------
Date: Date:
------------------------------ ----------------------------
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SCHEDULE A
DESCRIPTION OF PROPERTY
A. The property to which this Schedule and Agreement applies is as follows:
<TABLE>
<CAPTION>
QTY. DESCRIPTION SERIAL #
---- ----------- --------
<S> <C> <C>
1 ATI Model 101 M Router/Drill FF4101022
</TABLE>
RENT
B. As rent for this property, STI shall pay MDC the total sum of
$180,000.00. Except as otherwise provided in this Agreement or in this Schedule,
rent shall be payable in 60 monthly installments of $3,000.00 each, commencing
on the first day of February, 1997, and continuing on the first day of each
month thereafter until the total sum has been paid in full.
LOCATION
C. The above described property shall be located at 3001 or 3009
Daimler St., Santa Ana, CA 92705, and shall not be removed from that location
without the prior written consent of MDC.
RENEWAL OPTION
D. STI may renew this Agreement of which this Schedule is a part, on a
year-to-year basis, on the expiration of the original term at a total rental of
$3,000.00 per month, and otherwise on the same terms and conditions of this
Agreement. The option may be exercised by STI's written notice to such a fact to
MDC not less than thirty (30) days before the expiration of the term of the
Agreement.
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EXHIBIT 10.16
EQUIPMENT LEASE
THIS AGREEMENT ("Agreement") is made and entered into as of April 1, 1997, by
and between SIMPLE TECHNOLOGY, INC., a California corporation ("STI"), and
MOSHAYEDI DEVELOPMENT CORPORATION, a California corporation ("MDC").
RECITALS
A. STI is in the business of manufacturing and selling computer memory
products, PCMCIA products, and computer peripheral equipment.
B. MDC owns various capital assets, including certain manufacturing equipment
used in the manufacture of computers and other products.
C. STI desires to lease certain manufacturing equipment from MDC and MDC
desires to lease such manufacturing equipment to STI, in accordance with the
terms and conditions of this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained in this Agreement, and for other good and valuable consideration, STI
and MDC hereby agree as follows:
ARTICLE I
DESCRIPTION OF LEASED EQUIPMENT
1. PROPERTY DESCRIPTION. The property to be leased is described in the
attached Schedule A, which is included herein and made a part hereof.
ARTICLE II
TERM OF LEASE
1. INITIAL TERM. The initial term of the lease for the property leased
hereunder is set forth in Schedule A.
ARTICLE III
PAYMENTS BY STI
1. RENTAL PAYMENTS. The amount of monthly rental payments is set forth in
Schedule A. STI shall make monthly payments at MDC's address as set forth above
or at such other place as designated by MDC or its assignees. All rental
payments shall be due and payable in advance on the first day of each month
during the term of this Agreement. Any rental payments not made by STI within
five (5) days of the due date shall be subject to a late charge of five (5)
percent of the amount due.
2. SECURITY DEPOSIT. As security for the prompt and full payment of rent and
the faithful and timely performance of all provisions of this Agreement, STI
shall deposit
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with MDC the amount set forth in Schedule A ("Security Deposit"). If any default
shall occur in the performance of any covenants in this Agreement by STI, MDC
shall have the right, but shall not be obligated, to apply the Security Deposit
to the curing of the default. On demand, STI shall restore the Security Deposit
to the full amount set forth in Schedule A. On the expiration or earlier
termination of this Agreement, providing STI has paid all of the required rent
and fully performed all of the other provisions of this Agreement, MDC shall
return to STI any remaining balance of the Security Deposit.
ARTICLE IV
OWNERSHIP
1. NO SALE OR SECURITY INTEREST INTENDED. This Agreement constitutes a lease
of the property described herein and not a sale or the creation of a security
interest. STI shall not have, or at any time acquire, any right, title, or
interest in the property except the right to possession and use as provided in
this Agreement. MDC shall at all times be the sole owner of the property.
2. SUBORDINATION. The rights of STI under this Agreement shall be subject and
subordinate to certain security interests in the property held by Lyon Credit
Corporation and its successors.
ARTICLE V
OPERATING EXPENSES
1. STI shall be responsible for all expenses and all other charges in
connection with the operation of the property.
ARTICLE VI
MAINTENANCE AND REPAIRS
1. STI'S RESPONSIBILITY. STI shall assume all obligation and liability with
respect to the possession of the property, and for its use, operation,
condition, and storage during the lease term. STI shall, at STI's own expense,
maintain the property in good mechanical condition and running order, allowing
for reasonable wear and tear. The rent on the property or on any element thereof
shall not be prorated or abated while the property is being serviced or
repaired.
2. ACCESSIONS. All installations, replacements, and substitutions of parts or
accessories with respect to any of the property shall constitute accessions and
shall become part of the property and shall be owned by MDC.
2
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ARTICLE VII
USE OF PROPERTY
1. RIGHTS OF STI. STI shall be entitled to the absolute right to the use,
operation, possession, and control of the property during the term of this
Agreement, providing STI is not in default of any provision of this Agreement.
STI shall employ and have absolute control, supervision, and responsibility over
any operators or users of the property.
2. DUTIES OF STI. STI shall use the property in a careful and proper manner
and shall not permit any of the property to be operated or used in violation of
any applicable federal, state, or local statute, ordinance, rule, or regulation
relating to the possession, use, or maintenance of the property. STI agrees to
reimburse MDC in full for all damage to the property arising from any misuse or
negligent act by STI, its employees, and its agents. STI shall indemnify and
hold MDC harmless from any and all liabilities, fines, forfeitures, or penalties
for violations of any applicable statute, ordinance, rule, or regulation.
3. COMMERCIAL USE LIMITATION. STI represents and warrants that the property
will be used for commercial or business purposes only.
ARTICLE VIII
MDC'S RIGHT OF INSPECTION AND REPAIR
1. INSPECTION AND REPAIR. MDC, at its discretion during STI's regular business
hours and with one (1) day's prior notice to STI, shall have the right to enter
the premises where the property is located or used for the purpose of
inspection. If any property covered by this Agreement is not being properly
maintained in the opinion of MDC, MDC shall have the right, but not the
obligation, to have it repaired or maintained by an appropriate service facility
at the expense of STI.
ARTICLE IX
ASSIGNMENT OF MDC'S WARRANTIES
1. WARRANTY ASSIGNMENT. MDC shall assign to STI all manufacturer, dealer, or
supplier warranties applicable to the property to enable STI to obtain any
warranty service available for the property. Any enforcement by STI of warranty
rights shall be at the expense of STI and shall in no way render MDC responsible
to STI for the performance of any of the warranties.
ARTICLE X
TAXES AND OTHER CHARGES
1. TAXES. STI shall be liable for and pay on or before the due dates, all
sales taxes, use taxes, personal property taxes, business personal property
taxes, and assessments, or other taxes or government charges imposed on the
property or levied against, or based on,
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the amount of rent to be paid under the Agreement or assessed in connection with
the Agreement.
2. OTHER CHARGES. STI shall be liable for any fees for licenses,
registrations, permits, and other certificates as may be required for the lawful
operation of the property. All certificates of title shall initially be applied
for in the State of California and shall be issued and maintained in the name of
MDC, as owner. Such certificates shall be delivered to MDC and STI shall pay all
expenses in relation thereto.
ARTICLE XI
STI INSPECTION
1. INSPECTION BY STI. STI shall inspect the property within fifteen (15) days
after receipt thereof. Unless STI within that time gives written notice to MDC,
specifying any defect in or other proper objection to the property, STI agrees
that it shall be conclusively presumed, as between MDC and STI, that STI has
fully inspected the property and acknowledged that the property is in good
condition and repair, and that STI is satisfied with and has accepted the
property in such good condition and repair.
ARTICLE XII
INSURANCE
1. STI DUTY TO INSURE. STI agrees to maintain in full force and effect, at its
own cost and expense, property damage insurance issued by a company satisfactory
to MDC, insuring the interest of MDC, STI, and their authorized agents and
employees. The policy shall be for primary coverage and shall have a limit of no
less than:
$1,000,000 per person;
$1,000,000 per accident;
$134,476.35 property damage; and
$1,000,000 excess liability umbrella coverage.
For all property covered by this Agreement, STI shall also provide, at its own
cost and expense, comprehensive, fire, theft, and additional combined insurance
coverage naming MDC as an additional insured. Coverage shall be in the form and
amounts as directed by MDC from time to time.
2. INSURANCE CERTIFICATE. STI shall cause the insured to furnish to MDC, not
less than ten (10) days prior to the date on which the property is delivered to
STI and not less than ten (10) days prior to the expiration date of any existing
insurance, a certificate evidencing the required insurance. The policy shall
provide that the insurer shall not cancel or materially modify the insurance
except on thirty (30) days' advanced written notice to MDC. If STI fails to
procure, maintain, or renew the insurance, MDC may, but is not obligated to,
obtain insurance for STI without prejudice to any other rights that MDC may
have.
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3. EXCESS LIABILITY INDEMNITY. STI shall indemnify and hold MDC, its agents,
and employees, harmless from and against all loss, liability, and expense,
including reasonable attorneys' fees, in excess of the provided limits of
liability insurance for bodily injury (including death) or property damage
caused by or arising out of the ownership, maintenance, use, or operation of the
leased property.
ARTICLE XIII
INDEMNIFICATION AND LIABILITY
1. ALL LIABILITY ASSUMED BY STI. STI assumes all risk and liability for the
loss of or damage to the equipment, for the death of or injury to any person or
property of another, and for all other risks and liabilities arising from the
use, operation, condition, possession, or storage of the leased property.
Nothing in this Agreement shall authorize STI or any other person to operate any
of the property so as to impose any liability or other obligation on MDC.
2. STI DUTY TO INDEMNIFY. STI shall indemnify, defend, and hold harmless MDC,
its agents, and employees from any and all claims, loss, or damage MDC may
sustain or suffer for any of the following reasons:
i) the loss of or damage to any of the property for any cause;
ii) the injury to or death of any person, including but not limited to
agents, or employees of STI; or,
iii) damage to any property arising from the use, possession, selection,
delivery, return, condition, or operation of any of the property.
3. OBLIGATIONS SURVIVE LEASE TERM. The indemnities and assumptions of risk,
liabilities, and obligations by STI arising under this Agreement during its term
shall continue in effect after the termination of this Agreement, regardless of
the reason for termination.
ARTICLE XIV
ACCIDENT, LOSS OF PROPERTY, OR DAMAGE TO PROPERTY
1. NOTIFICATION TO MDC. If any property covered by this Agreement is damaged,
lost, stolen, or destroyed, or if any person is injured or dies, or if any
property is damaged as a result of its operation, use, maintenance, or
possession, STI shall promptly notify MDC of the occurrence, and shall file all
necessary accident reports, including those required by law and those required
by insurers of the leased property.
2. STIPULATED LOSS VALUE. If any property becomes lost, stolen, destroyed, or
damaged beyond repair, STI shall pay MDC in cash the "Stipulated Loss Value" as
set forth in Schedule A, less any net proceeds of insurance for the property
received by MDC. Upon payment, this Agreement shall terminate with respect to
that item of property and STI shall become entitled to the property on an
"as-is, where-is" basis, without warranty, express or implied, for any matter
whatsoever.
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ARTICLE XV
ASSIGNMENT
1. ASSIGNMENT BY MDC. MDC may assign this Agreement or any rights under it at
any time without STI's consent. In the event of any assignment, MDC's assignee
shall have all the rights, powers, privileges, and remedies of MDC as set forth
in this Agreement.
2. ASSIGNMENT OR SUBLETTING BY STI. STI shall not assign this Agreement or any
property described in it, or assign any interest in this Agreement or property,
or sublet any of the leased property without the express written consent of MDC.
ARTICLE XVI
ACTIONS CONSTITUTING DEFAULT
1. STI IN DEFAULT. MDC, at its option, may by written notice to STI declare
STI in default on the occurrence of any of the following:
i) failure by STI to make payments or perform any of its obligations
under this Agreement;
ii) institution by or against STI of any proceeding in bankruptcy or
insolvency, or the reorganization of STI under any law, or the appointment of a
receiver or trustee for the goods and property of STI, or any assignment by STI
for the benefit of creditors;
iii) expiration or cancellation of any insurance policy to be paid by STI
as provided for under the terms of this Agreement; or
iv) involuntary transfer of STI's interest in this Agreement by operation
of law.
ARTICLE XVII
RIGHTS, REMEDIES, AND OBLIGATIONS ON DEFAULT
1. MDC RIGHTS AND REMEDIES. After default of STI, and on notice from MDC that
STI is in default, MDC shall have the following options:
i) terminate the Agreement and STI's rights under the Agreement;
ii) declare the balance of all unpaid rent and all other charges of any
kind required of STI under the Agreement to be due and payable immediately; and,
iii) repossess the property without legal process free of all rights of
STI in and to the property. STI authorizes MDC or MDC's agent to enter on any
premises where the property is located and repossess it and remove it.
2. STI OBLIGATION FOR MDC COSTS. After default, STI shall reimburse MDC for
all reasonable expenses of repossession and enforcement of MDC's rights and
remedies.
6
<PAGE>
3. EFFECT OF FORBEARANCE. No failure on the part of MDC to exercise any remedy
or right and no delay in the exercise of any remedy or right shall operate as a
waiver. Acceptance by MDC of rent or other payments made by STI after default
shall not be deemed a waiver of MDC's rights and remedies arising from STI's
default.
4. FORFEITURE OF STI INTEREST ON DEFAULT. Upon default, for any reason, STI
and STI's successor in interest shall have no right, title, or interest in the
leased property, its possession, or its use. MDC shall retain all rents and
other payments of any kind made by STI under this Agreement.
ARTICLE XVIII
RETURN OF PROPERTY ON EXPIRATION
1. STI RETURN OF PROPERTY. Upon the expiration of this Agreement with respect
to any and all of the property, STI shall return the property to MDC, together
with all accessions, free from all damage and in the same condition and
appearance as when received by STI, allowing for ordinary wear and tear. If STI
fails or refuses to return the equipment to MDC, MDC shall have the right to
take possession of the property and for that purpose to enter any premises where
the property is located without being liable in any suit, action, defense, or
other proceedings to STI.
ARTICLE XIX
LIENS
1. ENCUMBRANCES OR LIENS; NOTICE. STI shall not pledge, encumber, or create a
security interest in, or permit any lien to become effective on any leased
property. If any of these events takes place, STI shall be deemed to be in
default at the option of MDC. STI shall promptly notify MDC of any liens,
charges, or other encumbrances of which STI has knowledge. STI shall promptly
pay or satisfy any obligation from which any lien or encumbrance arises, and
shall otherwise keep the property and all right, title, and interest free and
clear of all liens, charges, and encumbrances. STI shall deliver to MDC
appropriate satisfactions, waivers, or evidence of payment.
ARTICLE XX
NOTICES
1. SERVICE OF NOTICE. Accept as otherwise provided by law, any and all notices
or other communications required or permitted by this Agreement or by law to be
served on or given to either party by the other party shall be in writing and
shall be deemed duly served and given when personally delivered to any member of
the party to whom they are directed, or in lieu of such personal service when
deposited in the United States mail, first class postage pre-paid, addressed to
STI at 3001 Daimler Street, Santa Ana, California, 92705, or to MDC at 3001
Daimler Street, Santa Ana, California, 92705. Either party may change its
address for the purpose of this paragraph by giving notice of the change to the
other party in the manner provided in this paragraph.
7
<PAGE>
ARTICLE XXI
AMENDMENT AND MODIFICATION
1. METHOD OF AMENDMENT OR MODIFICATION. Additional property may from time to
time be added as the subject matter of this Agreement as agreed on by the
parties. Any additional property shall be added to Schedule A in an amendment
describing the property, the monthly rental, the term of the leasing period,
security deposit, and stipulated loss value of additional property. This
Agreement shall be amended, modified or altered only in a writing signed by both
parties.
ARTICLE XXII
ENTIRE AGREEMENT
1. INCORPORATION BY REFERENCE. This Agreement and any attached schedule(s),
which are incorporated by reference and made an integral part of this Agreement,
constitute the entire agreement between the parties. No agreements,
representations, or warranties, other than those specifically set forth in this
Agreement or in the annexed schedule(s), shall be binding on any of the parties
unless set forth in writing and signed by both parties.
ARTICLE XXIII
GOVERNING LAW
1. CHOICE OF LAW. This Agreement shall be governed and construed in all
respects in accordance with the laws of the State of California, USA. Any legal
action or notice shall be entered into in a court of suitable jurisdiction in
the County of Orange, State of California, and STI and MDC each hereby submits
to the jurisdiction of said courts.
ARTICLE XXIV
SEVERABILITY CLAUSE
1. AGREEMENT SURVIVES PARTIAL INVALIDITY. If any provision of this Agreement
is held to be invalid by a court of competent jurisdiction, the remaining
provisions shall nevertheless remain in full force and effect.
ARTICLE XXV
RELATIONSHIP
1. INDEPENDENT CONTRACTOR RELATIONSHIP. It is understood and agreed that STI
and MDC are independent contractors and each is engaged in the operation of its
own business. Nothing in this Agreement shall be construed to constitute the
parties as partners, joint venturers, or co-owners.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date last written below.
Simple Technology, Inc.: MDC:
By: By:
------------------------------- -------------------------------
Name: Name:
----------------------------- -----------------------------
Title: Title:
---------------------------- ----------------------------
Date: Date:
----------------------------- -----------------------------
9
<PAGE>
SCHEDULE A
DESCRIPTION OF PROPERTY
A. The property to which this Schedule and Agreement applies is as follows:
<TABLE>
<CAPTION>
QTY. DESCRIPTION
---- -----------
<S> <C>
7 Darkhorse Sigma Testers
8 Adapter Module, Flex head
7 Adapter PWA, DB 30-72
3 168 pin DIMM Docking Boards
3 144 pin SO DIMM Docking Boards
4 T400 610 Docking Boards
2 80 pin Flash Docking Boards
1 Triton Cache Docking Assembly
1 604 Power PC Flex Cache Assembly
</TABLE>
RENT
B. As rent for this property, STI shall pay MDC the total sum of
$168,000.00. Except as otherwise provided in this Agreement or in this Schedule,
rent shall be payable in 60 monthly installments of $2,800.00 each, commencing
on the first day of April, 1997, and continuing on the first day of each month
thereafter until the total sum has been paid in full.
LOCATION
C. The above described property shall be located at 3001 or 3009
Daimler St., Santa Ana, CA 92705, and shall not be removed from that location
without the prior written consent of MDC.
RENEWAL OPTION
D. STI may renew this Agreement of which this Schedule is a part, on a
year-to-year basis, on the expiration of the original term at a total rental of
$2,800.00 per month, and otherwise on the same terms and conditions of this
Agreement. The option may be exercised by STI's written notice to such a fact to
MDC not less than thirty (30) days before the expiration of the term of the
Agreement.
10
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated February 25, 2000, relating to the consolidated financial
statements and financial statement schedule of Simple Technology, Inc., which
appear in such Registration Statement. We also consent to the references to us
under the heading "Experts" and "Selected Consolidated Financial Data" in such
Registrant Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Costa Mesa, CA
March 14, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOUND ON PAGES F-1 THROUGH F-8 OF
ITS REGISTRATION STATEMENT ON FORM S-1, DATED MARCH 13, 2000 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,778,612
<SECURITIES> 0
<RECEIVABLES> 24,476,254
<ALLOWANCES> (771,806)
<INVENTORY> 18,276,441
<CURRENT-ASSETS> 46,525,057
<PP&E> 14,841,166
<DEPRECIATION> (6,872,907)
<TOTAL-ASSETS> 55,130,733
<CURRENT-LIABILITIES> 23,670,340
<BONDS> 15,680,586
0
0
<COMMON> 30,000
<OTHER-SE> 15,749,807
<TOTAL-LIABILITY-AND-EQUITY> 55,130,733
<SALES> 192,593,273
<TOTAL-REVENUES> 192,593,273
<CGS> 152,972,826
<TOTAL-COSTS> 25,713,085
<OTHER-EXPENSES> 325,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,621,430
<INCOME-PRETAX> 11,984,836
<INCOME-TAX> (517,968)
<INCOME-CONTINUING> 13,907,362
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,502,804
<EPS-BASIC> 2.07
<EPS-DILUTED> 1.94
</TABLE>
