-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pxz6V7+hMEE1l9Li53cwjK4Y2pNP7cUz5wYfJXHQFL6wievwnsNgJvOqmQ4oHcJr bCPLfQVKWaYmnYgiSTRwwQ== 0000891618-99-004163.txt : 19990915 0000891618-99-004163.hdr.sgml : 19990915 ACCESSION NUMBER: 0000891618-99-004163 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMART MODULAR TECHNOLOGIES INC CENTRAL INDEX KEY: 0001001840 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770200166 STATE OF INCORPORATION: CA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26942 FILM NUMBER: 99711434 BUSINESS ADDRESS: STREET 1: 4305 CUSHING PARKWAY CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5106231231 MAIL ADDRESS: STREET 1: 4305 CUSHING PARKWAY CITY: FREMONT STATE: CA ZIP: 94538 10-Q 1 FORM 10-Q 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q ---------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended July 31, 1999, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to . Commission file number: 0-26942 ---------------- SMART MODULAR TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) California 77-0200166 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
4305 Cushing Parkway Fremont, California 94538 (Address of principal executive offices) Registrant's telephone number, including area code: (510) 623-1231 ---------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At August 31, 1999, there were 45,319,394 shares of the Registrant's common stock, no par value, outstanding. ================================================================================ 2 SMART MODULAR TECHNOLOGIES, INC. FORM 10-Q TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
Page ---- Item 1. Financial Statements Consolidated Condensed Balance Sheets -- As of July 31, 1999 and October 31, 1998........................ 3 Consolidated Condensed Statements of Income-- For the Three and Nine Months Ended July 31, 1999 and 1998...... 4 Consolidated Condensed Statements of Cash Flows-- For the Nine Months Ended July 31, 1999 and 1998................ 5 Notes to Consolidated Condensed Financial Statements............ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 21 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................. 22 Item 2. Changes in Securities............................................. 22 Item 3. Defaults upon Senior Securities................................... 22 Item 4. Submission of Matters to a Vote of Security Holders............... 22 Item 5. Other Information................................................. 22 Item 6. Exhibits and Reports on Form 8-K.................................. 22 Signatures................................................................ 23
2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands, except share data)
July 31, October 31, 1999 1998 --------- --------- ASSETS Current Assets: Cash and cash equivalents..................................... $ 121,152 $ 75,478 Short term investments........................................ 73,822 99,822 Accounts receivable, net...................................... 92,022 89,203 Inventories................................................... 64,318 40,138 Deferred income taxes......................................... 5,080 5,080 Prepaid expenses and other.................................... 6,905 10,262 --------- --------- Total current assets.................................. 363,299 319,983 Property and equipment, net..................................... 48,465 47,920 Other........................................................... 1,471 1,089 --------- --------- Total assets.......................................... $ 413,235 $ 368,992 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable.............................................. $ 67,408 $ 64,335 Accrued bonuses............................................... 1,668 4,545 Other accrued expenses........................................ 8,253 8,255 Income taxes payable.......................................... 13,886 11,557 --------- --------- Total current liabilities............................. 91,215 88,692 Long-term Liabilities: Deferred income taxes and other............................... 699 679 --------- --------- Total liabilities..................................... 91,914 89,371 --------- --------- Shareholders' Equity: Common stock, no par value Authorized -- 200,000,000 shares Outstanding -- 45,284,461 and 44,714,589 shares, respectively............................................ 135,413 132,941 Retained earnings............................................... 185,908 146,680 --------- --------- Total shareholders' equity............................ 321,321 279,621 --------- --------- Total liabilities and shareholders' equity............ $ 413,235 $ 368,992 ========= =========
See the accompanying notes to these consolidated condensed financial statements. 3 4 SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (In thousands, except per share data)
Three Months Ended Nine Months Ended July 31, July 31, --------------------- --------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Net sales...................................... $223,599 $150,406 $745,539 $534,668 Cost of sales.................................. 190,123 126,027 649,883 444,099 -------- -------- -------- -------- Gross profit................................... 33,476 24,379 95,656 90,569 -------- -------- -------- -------- Operating Expenses: Research and development..................... 2,730 2,235 7,910 6,676 Sales, general and administrative............ 11,187 10,485 34,824 31,074 -------- -------- -------- -------- Total operating expenses............. 13,917 12,720 42,734 37,750 -------- -------- -------- -------- Income from operations......................... 19,559 11,659 52,922 52,819 Other income, net.............................. 1,474 1,777 4,756 5,292 -------- -------- -------- -------- Income before provision for income taxes....... 21,033 13,436 57,678 58,111 Provision for income taxes..................... 6,735 4,305 18,450 18,596 -------- -------- -------- -------- Net income..................................... $ 14,298 $ 9,131 $ 39,228 $ 39,515 ======== ======== ======== ======== Diluted net income per share................... $ 0.31 $ 0.20 $ 0.84 $ 0.84 ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding............... 46,639 46,566 46,729 46,995 ======== ======== ======== ======== Basic net income per share..................... $ 0.32 $ 0.21 $ 0.87 $ 0.92 ======== ======== ======== ======== Weighted average common shares outstanding..... 45,154 43,828 45,082 43,064 ======== ======== ======== ========
See the accompanying notes to these consolidated condensed financial statements. 4 5 SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS For the Nine Months Ended July 31, (In thousands)
1999 1998 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES........................ $ 30,927 $ 67,163 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments available-for-sale.................... (127,561) (74,297) Maturities of investments available-for-sale................... 153,561 25,873 Purchases of property and equipment............................ (11,177) (24,286) Proceeds from sale of property and equipment................... 361 36 --------- --------- Net cash provided by (used in) investing activities......... 15,184 (72,674) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit................................... 31,850 5,000 Payments on line of credit..................................... (31,850) (5,000) Payments of capital lease obligations.......................... (176) (829) Proceeds from sale of common stock............................. 6,890 3,940 Purchases of common stock...................................... (7,151) (7,242) ---------- ---------- Net cash used in financing activities....................... (437) (4,131) ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. 45,674 (9,642) CASH AND CASH EQUIVALENTS, beginning of period................... 75,478 111,331 --------- --------- CASH AND CASH EQUIVALENTS, end of period......................... $ 121,152 $ 101,689 ========= =========
See the accompanying notes to these consolidated condensed financial statements. 5 6 SMART MODULAR TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation The Interim Consolidated Condensed Financial Statements of SMART Modular Technologies, Inc., a California corporation, and subsidiaries (the "Company") have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. These Interim Consolidated Condensed Financial Statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's fiscal 1998 Report on Form 10-K as filed with the Securities and Exchange Commission on January 29, 1999. The Interim Consolidated Condensed Financial Statements for the third quarter of fiscal 1999 reflect, in the opinion of management, all adjustments (which include only the normal recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for such period. The Interim Consolidated Condensed Financial Statements for fiscal 1998 are provided for information purposes only. The results of operations for the three and nine month periods ended July 31, 1999 are not necessarily indicative of the results that may be expected for the entire fiscal year ending October 31, 1999, or any other future periods. Revenue Recognition Revenue is recognized upon shipment to the customer. The Company provides for estimated future returns for inventory rebalancing, stock rotation, established price protection arrangements and the estimated costs of warranty at the time of sale. Net Income Per Share The Company computes net income per share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 requires companies to compute net income per share under two different methods, basic and diluted, and present per share data for all periods in which a statement of operations is presented. Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents consist of stock options (using the treasury stock method) and are excluded from the computation of diluted net income per share if their effect is anti-dilutive. The following table reconciles the amounts used in the computation of basic and diluted net income per share (in thousands, except per share data):
3 Months Ended July 31, 9 Months Ended July 31, ----------------------- ----------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Net income available to common shareholders................ $ 14,298 $ 9,131 $ 39,228 $ 39,515 ======== ======== ======== ======== Diluted net income per share: Weighted average common shares outstanding............. 45,154 43,828 45,082 43,064 Weighted average common stock options outstanding...... 1,485 2,738 1,647 3,931 -------- -------- -------- -------- Total weighted average common and common equivalents outstanding.......................... 46,639 46,566 46,729 46,995 ======== ======== ======== ======== Diluted net income per share........................ $ 0.31 $ 0.20 $ 0.84 $ 0.84 ======== ======== ======== ======== Basic net income per share: Weighted average common shares outstanding............. 45,154 43,828 45,082 43,064 -------- -------- -------- -------- Total weighted average common shares outstanding...................................... 45,154 43,828 45,082 43,064 ======== ======== ======== ======== Basic net income per share.......................... $ 0.32 $ 0.21 $ 0.87 $ 0.92 ======== ======== ======== ========
6 7 Comprehensive Income In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its individual components. The statement requires the disclosure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners ("comprehensive income"). Effective November 1, 1998, the Company adopted the provisions of SFAS No. 130. For the three and nine months ended July 31, 1999 and 1998, the Company had no material differences between net income and comprehensive income. Accordingly, comprehensive income is the same as net income for all periods presented. Effect of Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas of operations and major customers. The Company is required to adopt the provisions of SFAS No. 131 beginning with its annual report on Form 10-K for the fiscal year ended October 31, 1999 and for all subsequent interim periods. The Company does not expect the adoption of SFAS No. 131 to have a material effect on the Company's consolidated financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Investments and Hedging Activities." The statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. The Company does not expect the adoption of SFAS No. 133 to have a material effect on the Company's consolidated financial statements. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and manufacturing costs. Inventories consist of the following (in thousands):
July 31, October 31, 1999 1998 -------- -------- Raw materials................................... $ 42,538 $ 24,210 Work-in-process................................. 10,278 7,379 Finished goods.................................. 11,502 8,549 -------- -------- Total................................. $ 64,318 $ 40,138 ======== ========
2. LINE OF CREDIT: In June 1997, the Company entered into an unsecured revolving bank line of credit agreement that expired in May 1999. Borrowings under this agreement were limited to $20.0 million and bore interest at either the bank's prime rate or a spread over LIBOR , at the Company's option. The Company was required to maintain specified levels of tangible net worth and comply with certain other covenants. As of October 31, 1998, no borrowings were outstanding under this agreement and the Company was in compliance with all covenants related to the line of credit. In May 1999, the Company entered into an unsecured revolving bank line of credit agreement that expires in May 2000. Borrowings under this agreement are limited to $30.0 million and bear interest at either one percent below the bank's prime rate (8.0% at July 31, 1999) or a spread over LIBOR (5.3% at July 31, 1999), at the Company's option. The Company is required to maintain specified levels of tangible net worth and comply with certain other covenants related to this line of credit. 7 8 3. STOCK REPURCHASE: On May 25, 1998, the Company's Board of Directors authorized the repurchase from time to time of up to 4,000,000 shares of the Company's Common Stock through open market purchases. During the fiscal year ended October 31, 1998, the Company repurchased 620,000 shares of its Common Stock in the open market at an average purchase price of $14.80 per share and a total cost of approximately $9.2 million. During the first two quarters of fiscal 1999, the Company repurchased 445,000 shares of its Common Stock in the open market at an average purchase price of $16.07 per share and a total cost of approximately $7.2 million. During the third quarter of fiscal 1999, the Company did not repurchase any shares of its Common Stock. As of July 31, 1999, 1,014,117 of the shares reacquired by the Company since May 25, 1998 had been reissued pursuant to the Company's stock plans. 4. LITIGATION: The Company and certain of its officers and directors have been named as defendants in six securities class action lawsuits filed in the United States District Court for the Northern District of California, Boren v. SMART Modular Technologies, Inc., et al., No. C 98 20692 JW (PVT) (filed July 1, 1998), Woszczak v. SMART Modular Technologies, Inc., et al., No. C 98 2617 JL (filed July 2, 1998), Bisson v. SMART Modular Technologies, Inc., et al., No. C 98 20714 JF (filed July 8, 1998), D'Amato v. SMART Modular Technologies, Inc., et al., No. C 98 2804 PJH (filed July 16, 1998), Cha v. SMART Modular Technologies, Inc., et al., No. C 98 2833 BZ (filed July 17, 1998) and Chang v. SMART Modular Technologies, Inc., et al., No. C 98 3151 SI (filed August 13, 1998) (collectively, the "Federal Actions"). The plaintiffs in the Federal Actions allege that defendants made material misrepresentations and omissions during the period from July 1, 1997 through May 21, 1998 in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Federal Actions were consolidated on October 9, 1998, and a consolidated complaint was filed on November 30, 1998 (the "Federal Complaint"). On October 22, 1998, a putative securities class action lawsuit, captioned Reagan v. SMART Modular Technologies, Inc., et al., Case No. H204162-5 (the "State Complaint"), was filed against the Company and certain of its officers and directors in the Superior Court of the State of California, County of Alameda (the "Superior Court"). The State Complaint alleges violations of Sections 25400 and 25500 of the California Corporations Code and seeks unspecified damages on behalf of a purported class of purchasers of SMART common stock during the period from July 1, 1997 through May 21, 1998. The factual allegations of the State Complaint are nearly identical to the factual allegations contained within the Federal Complaint. On February 22, 1999, the Superior Court granted the Company's motion to stay the state action pending the resolution of the federal action. The Company believes that all claims related to the state and federal securities actions are without merit and intends to defend itself vigorously against these actions. Currently, the Company is unable to estimate the financial impact of the state and federal securities actions. 5. SUBSEQUENT EVENTS: On September 13, 1999, the Company announced the completion of a definitive merger agreement with Solectron Corporation ("Solectron") whereby Solectron agreed to acquire all of the outstanding stock of the Company. Under the terms of the agreement, shareholders of the Company would receive 0.51 shares of Solectron stock for each share of the Company's stock. Solectron also agreed to assume all stock options held by the Company's employees. The transaction is intended to be accounted for under the pooling of interests method and treated as a tax-free reorganization. The closing of the merger is subject to standard closing conditions, including regulatory approvals and the approval of the Company's shareholders. While the companies have executed a definitive merger agreement, there is no assurance that the transaction will be completed or that it will be accounted for under the pooling of interests method or treated as a tax-free reorganization. In the event that the companies do not receive the necessary government or shareholder approvals or fail to satisfy conditions for closing, the merger agreement will terminate and the transaction will not be completed. On August 20, 1999, the Company paid $16.2 million to acquire Compaq Computer Corporation's ("Compaq") Embedded and Real-time product line and business. The acquisition will be accounted for as a purchase. Pursuant to the terms of the agreement, the Company acquired certain assets with a fair value totaling $1.2 million. The allocation of the remaining purchase price to goodwill and other intangibles has yet to be determined by the Company. In addition, pursuant to the terms of the agreement, the Company may be required to pay an earn-out payment to Compaq in an amount not to exceed $5 million provided certain milestones are met during the twelve-month period from September 1, 1999 to August 31, 2000. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to other areas of this Management's Discussion and Analysis of Financial Condition and Results of Operations, the second, fifth and seventh paragraphs of the Overview Section, the Gross Profit Section, the Research and Development Section, the Sales, General and Administrative Section, the Provision for Income Taxes Section and the first and fourth paragraphs of the Liquidity and Capital Resources Section contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements as a result of the factors set forth in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors that May Affect Future Results." In particular, note the factors entitled "Significant Customer Concentration," "Product Concentration; Dependence on Memory Market," "Dependence on Semiconductor, Computer, Telecommunications and Networking Industries," "Intense Competition," "Fluctuations in Operating Results," "Dependence on Sole or Limited Sources of Supply," "Rapid Technological Change" and "International Sales." The discussion of those factors is incorporated herein by this reference as if said discussion was fully set forth at this point. OVERVIEW The Company commenced operations in 1989 and initially focused on the design and manufacture of standard memory modules for OEMs and semiconductor manufacturers. Standard memory modules implement industry standard specifications, primarily utilize DRAM and are designed to be incorporated into a wide variety of electronic equipment. In 1991, the Company expanded its design, manufacturing and marketing efforts to offer specialty memory modules and PC card memory products. The Company expanded its PC card communication product line through the acquisition of Apex Data, Inc. ("Apex") in July 1995. The Company further expanded its product line to include embedded computer modules through the acquisition of RISQ Modular Systems, Inc. ("RISQ") in July 1996. In August 1999, the Company broadened its embedded computer product offerings through the acquisition of Compaq Computer Corporation's embedded and real-time product line and business (see Note 5. of Notes to Consolidated Condensed Financial Statements). On September 13, 1999, the Company announced the completion of a definitive merger agreement with Solectron Corporation ("Solectron") whereby Solectron agreed to acquire all of the outstanding stock of the Company. Under the terms of the agreement, shareholders of the Company would receive 0.51 shares of Solectron stock for each share of the Company's stock. Solectron also agreed to assume all stock options held by the Company's employees. The transaction is intended to be accounted for under the pooling of interests method and treated as a tax-free reorganization. The closing of the merger is subject to standard closing conditions, including regulatory approvals and the approval of the Company's shareholders. While the companies have executed a definitive merger agreement, there is no assurance that the transaction will be completed or that it will be accounted for under the pooling of interests method or treated as a tax-free reorganization. In the event that the companies do not receive the necessary government or shareholder approvals or fail to satisfy conditions for closing, the merger agreement will terminate and the transaction will not be completed. Over the last eight fiscal quarters, SMART's gross margin has ranged from 11.4% to 17.3%. One of the primary factors affecting gross margin has been the proportion of the Company's memory products manufactured on either a turnkey or consignment basis. Products manufactured on a turnkey basis are designed and manufactured by the Company with purchased memory devices. Products manufactured on a consignment basis are generally designed and manufactured by the Company with memory devices which are owned and supplied by the customer. While products manufactured on a turnkey basis typically have lower gross margin than products manufactured on a consignment basis, products manufactured on a turnkey basis generally contribute greater net sales and higher gross profit per unit than products manufactured on a consignment basis. Currently, a substantial majority of the Company's net sales is derived from sales of products manufactured on a turnkey basis. The other primary factors affecting the Company's gross margin have been the mix between sales of specialty memory modules, standard memory modules, communication card products and embedded computer modules as well as changes in average memory densities used in the Company's memory products. Currently, a significant majority of the Company's net sales are derived from the sales of standard memory modules which typically have lower gross margin than the Company's specialty memory modules. The Company's embedded computer modules have historically generated the Company's highest gross margin, followed by the Company's PC card communication products. Both of these product lines currently contribute a relatively small portion of the Company's net sales. The Company expects that its net sales and gross margin will continue to vary significantly based on these and other factors, including the mix of products sold and the manufacturing services provided, the channels through which the Company's products are 9 10 sold, changes in product selling prices and component costs, the level of manufacturing efficiencies achieved and pricing by competitors. The selling prices of the Company's products have declined in the past and the Company expects that prices could continue to decline in the future. In particular, during fiscal 1998, the selling prices of the Company's products declined due to significant declines in DRAM semiconductor prices and declines in SRAM and Flash semiconductor prices. Moreover, since the beginning of calendar 1999, declines in the selling prices of certain of the Company's existing products have continued due to declines in DRAM semiconductor prices. Because a substantial portion of the Company's net sales are attributable to the resale of semiconductor memory devices, declines in the prices of these components would have a material adverse effect on the Company's net sales and could have a material adverse effect on the Company's business, financial condition and results of operations. Accordingly, the Company's ability to maintain or increase net sales will be highly dependent upon its ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities sufficient to compensate for the anticipated declines in selling prices. Declining product selling prices may also materially and adversely affect the Company's gross margin unless the Company is able to reduce its cost per unit to offset declines in product selling prices. There can be no assurance that the Company will be able to increase unit sales volumes, introduce and sell new products or reduce its cost per unit. In addition, the Company's business has in the past been subject to seasonality, although the Company believes such seasonality has been masked by its growth. The Company expects that its business will experience more significant seasonality to the extent it continues to sell a material portion of its products in Europe and to the extent its exposure to the personal computer market remains significant. The Company primarily sells its products to OEMs and semiconductor manufacturers in the computer, networking and telecommunications industries. A relatively small number of customers have accounted for a significant percentage of the Company's net sales. For fiscal 1998, fiscal 1997 and fiscal 1996, the Company's ten largest customers accounted for 87%, 86% and 71% of net sales, respectively. For fiscal 1998, the Company's largest customer was Compaq Computer Corporation ("Compaq"), which accounted for 62% of net sales. For fiscal 1997, the Company's three largest customers were Compaq, Cisco Systems, Inc. ("Cisco") and Hewlett-Packard Company ("Hewlett-Packard"), which accounted for 53%, 12% and 11% of net sales, respectively. In fiscal 1996, the Company's three largest customers were Cisco, Hewlett-Packard and IBM Corporation ("IBM"), which accounted for 19%, 15% and 12% of net sales, respectively. During these periods, no other customers accounted for more than 10% of net sales. The Company expects that sales to relatively few customers will continue to account for a significant percentage of its net sales in the foreseeable future. However, there can be no assurance that any of these customers or any of the Company's other customers will continue to utilize the Company's products at current levels, if at all. The Company is the sole source provider of certain products to some of its customers. Recently, certain of these customers have begun to increase the number of sources for these products. The emergence of additional sources has caused and in the future may cause the Company's customers to reduce orders to the Company. The Company has experienced significant changes in the composition of its major customer base and expects that this variability will continue in the future. For example, sales to Compaq, which represented less than 10% of net sales in fiscal 1996, represented 62% and 53% of the Company's net sales in fiscal 1998 and fiscal 1997, respectively. The loss of any major customer or any reduction in orders by any such customer would have a material adverse effect on the Company's business, financial condition and results of operations. RESULTS OF OPERATIONS: The following table sets forth certain consolidated condensed statements of income data of the Company expressed as a percentage of net sales:
Three Months Ended Nine Months Ended July 31, July 31, ------------------ ----------------- 1999 1998 1999 1998 ----- ----- ----- ----- Net sales...................................... 100.0% 100.0% 100.0% 100.0% Cost of sales.................................. 85.0 83.8 87.2 83.1 ----- ----- ----- ----- Gross profit................................... 15.0 16.2 12.8 16.9 Operating expenses: Research and development..................... 1.2 1.5 1.0 1.2 Selling, general and administrative.......... 5.0 7.0 4.7 5.8 ----- ----- ----- ----- Total operating expenses............. 6.2 8.5 5.7 7.1 ----- ----- ----- ----- Income from operations......................... 8.7 7.8 7.1 9.9 Other income, net.............................. 0.7 1.2 0.6 1.0 ----- ----- ----- ----- Income before provision for income taxes....... 9.4 8.9 7.7 10.9 Provision for income taxes..................... 3.0 2.9 2.5 3.5 ----- ----- ----- ----- Net income..................................... 6.4% 6.1% 5.3% 7.4% ===== ===== ===== =====
10 11 Net Sales Net sales consist of sales of specialty and standard memory products, PC cards, embedded computer modules and communication card products, less returns and discounts. Net sales for the third quarter of fiscal 1999 increased 48.7% to $223.6 million from $150.4 million for the same period of fiscal 1998. Net sales for the nine months ended July 31, 1999 increased 39.4% to $745.5 million from $534.7 million for the same period of fiscal 1998. The increase in net sales for the three and nine month periods ended July 31, 1999 was primarily due to an increase in the average memory densities incorporated into the Company's standard memory products as compared to the same periods of fiscal 1998. In addition, an increase in net sales of embedded computer and communication card products further contributed to the increase in net sales as compared to the same periods of fiscal 1998. These increases were partially offset by a decrease in net sales of specialty memory products as compared to the same periods of fiscal 1998. Gross Profit Cost of sales includes the costs of semiconductor devices and other components and materials purchased by the Company for its products, as well as the direct labor and overhead costs associated with manufacturing. Gross profit increased 37.3% to $33.5 million for the third quarter of fiscal 1999 from $24.4 million for the same period of fiscal 1998. Gross margin decreased to 15.0% for the third quarter of fiscal 1999 from 16.2% for the comparable period of fiscal 1998. Gross profit for the first nine months of fiscal 1999 increased 5.6% to $95.7 million from $90.6 million for the same period of fiscal 1998. Gross margin decreased to 12.8% for the first nine months of fiscal 1999 from 16.9% for the comparable period of fiscal 1998. The decrease in gross margin for the three and nine month periods ended July 31, 1999 was principally due to an increase in the proportion of the Company's net sales derived from its higher density standard memory products as compared to the same periods of fiscal 1998. Gross margin also decreased due to an increase in the proportion of the Company's products manufactured on a turnkey basis versus those manufactured on a consignment basis as compared to the same periods of fiscal 1998. The Company expects gross margin to continue to be affected in future periods by, among other things, changes in the cost of memory devices used in the production of the Company's products, changes in the sales mix of the Company's products, the average memory densities incorporated into the Company's memory products and changes in the proportion of products manufactured on a turnkey basis versus those manufactured on a consignment basis. Research and Development Research and development expenses consist primarily of the costs associated with the design and testing of new products. These costs relate primarily to compensation of personnel involved with development efforts, materials and outside design and testing services. Research and development expenses increased 22.1% to $2.7 million for the third quarter of fiscal 1999 from $2.2 million during the same period of fiscal 1998 and totaled 1.2% and 1.5% of net sales for the third quarter of fiscal 1999 and fiscal 1998, respectively. For the first nine months of fiscal 1999, research and development expenses increased 18.5% to $7.9 million from $6.7 million during the same period of fiscal 1998 and totaled 1.1% and 1.2% of net sales for the first nine months of fiscal 1999 and fiscal 1998, respectively. The Company expects that its research and development expenses will increase in absolute dollars in future periods to the extent that the Company expands its research and development efforts. Sales, General and Administrative Sales, general and administrative expenses consist primarily of personnel costs (including salaries, performance-based bonuses, commissions and employee benefits), facilities and equipment costs, costs related to advertising and marketing and other support costs including utilities, insurance and professional fees. Sales, general and administrative expenses incurred during the third quarter of fiscal 1999 totaled $11.2 million, representing an increase of 6.7% from $10.5 million for the same period of fiscal 1998. Sales, general and administrative expenses totaled 5.0% and 7.0% of net sales for the third quarter of fiscal 1999 and fiscal 1998, respectively. For the first nine months of fiscal 1999, sales, general and administrative expenses totaled $34.8 million, representing an increase of 12.1% from $31.1 million incurred during the same period of fiscal 1998. Sales, general and administrative expenses totaled 4.7% and 5.8% of net sales for the first nine months of fiscal 1999 and fiscal 1998, respectively. The increases in sales, general and administrative expenses in absolute dollars for the three and nine month periods ended July 31, 1999 were due in part to growth in the Company's staffing and infrastructure, particularly in its international operations. The Company expects that its sales, general and administrative expenses will increase in absolute dollars in future periods to the extent that the Company expands its staffing, information systems and other systems and personnel in connection with the expansion of the Company's infrastructure. 11 12 Other Income, Net Other income, net consists primarily of interest income, less interest expense. Interest expense is attributable to the Company's utilization of its line of credit and interest paid on certain capital lease obligations. Interest income results from investment of cash balances. As compared to the same periods of fiscal 1998, interest income earned during the three and nine months ended July 31, 1999 decreased due to a reduction in cash available for investment resulting from an increase in the proportion of the Company's working capital being used to finance higher net sales as compared to the same period of fiscal 1998. Provision for Income Taxes Provisions for income taxes were $6.7 million and $4.3 million for the third quarter of fiscal 1999 and fiscal 1998, respectively, resulting in an effective tax rate of 32.0% in both periods. For the first nine months of fiscal 1999 and fiscal 1998, the Company provided $18.5 million and $18.6 million for income taxes, respectively, resulting in an effective tax rate of 32.0% in both periods. The Company expects its effective tax rate in future periods to be affected by, among other things, changes in the proportion of income contributed to the Company by its foreign operations. Liquidity and Capital Resources Since inception, SMART has used funds generated primarily from operations, certain borrowings, capital leases and equity financings to support its operations, acquire capital equipment and finance inventory and accounts receivable. For the first nine months of fiscal 1999, the Company generated cash from operating activities totaling approximately $30.9 million. The cash provided by operating activities during the first nine months of fiscal 1999 primarily resulted from net income generated during the period, decreases in certain prepaid expenses, increases in accounts payable and income taxes payable and depreciation on capital equipment. The cash provided by operations was partially offset by increases in accounts receivable and inventories and decreases in accrued bonuses. For the first nine months of fiscal 1998, the Company generated cash from operating activities totaling $67.2 million. At July 31, 1999, the Company had $195.0 million in cash, cash equivalents and short-term investments, and $272.1 million in working capital. At October 31, 1998, the Company had $175.3 million in cash, cash equivalents and short-term investments and $231.3 million in working capital. The Company primarily funds its liquidity requirements from utilization of existing cash balances and amounts borrowed under its existing line of credit. The Company expects to fund any future liquidity requirements from a combination of available cash balances and certain short-term borrowings under its line of credit. The Company currently anticipates that its working capital requirements will continue to increase in future periods to the extent that the Company's operations continue to expand. In May 1999, the Company entered into an unsecured revolving bank line of credit agreement that expires in May 2000. Borrowings under this agreement are limited to $30.0 million and bear interest at either one percent above the bank's prime rate or a spread over LIBOR, at the Company's option. The Company is required to maintain specified levels of tangible net worth and comply with certain other covenants related to this line of credit. As of July 31, 1999, no borrowings were outstanding under this agreement and the Company was in compliance with all covenants related to the line of credit. During fiscal 1998, the Company had an unsecured revolving bank line of credit agreement with a term expiring in May 1999. Borrowings under this agreement were limited to $20.0 million and bore interest at either the bank's prime rate or a spread over LIBOR, at the Company's option. The Company was required to maintain specified levels of tangible net worth and comply with certain other covenants. As of October 31, 1998, no borrowings were outstanding under this agreement and the Company was in compliance with all covenants related to the line of credit. Capital expenditures totaled $11.2 million for the first nine months of fiscal 1999 and $33.3 million for the fiscal year ended October 31, 1998. These expenditures were primarily for manufacturing and test equipment and the expansion of the Company's existing manufacturing operations. SMART anticipates spending between $15.0 million and $20.0 million on capital expenditures during all of fiscal 1999 related to the continued expansion of the Company's manufacturing operations and related equipment. SMART has entered into certain capital lease arrangements. During the third quarter of fiscal 1999, the Company repaid all outstanding principal balances related to these obligations. On October 31, 1998, the outstanding principal on these obligations was approximately $176,000. 12 13 On May 25, 1998, the Company's Board of Directors authorized the repurchase from time to time of up to 4,000,000 shares of the Company's Common Stock through open market purchases. During the fiscal year ended October 31, 1998, the Company repurchased 620,000 shares of its Common Stock in the open market at an average purchase price of $14.80 per share and a total cost of approximately $9.2 million. During the first two quarters of fiscal 1999, the Company repurchased 445,000 shares of its Common Stock in the open market at an average purchase price of $16.07 per share and a total cost of approximately $7.2 million. During the third quarter of fiscal 1999, the Company did not repurchase any shares of its Common Stock. As of July 31, 1999, 1,014,117 of the shares reacquired by the Company since May 25, 1998 had been reissued pursuant to the Company's stock plans. On August 20, 1999, the Company paid $16.2 million to acquire Compaq Computer Corporation's ("Compaq") Embedded and Real-time product line and business. The acquisition will be accounted for as a purchase. Pursuant to the terms of the agreement, the Company acquired certain assets with a fair value totaling $1.2 million. The allocation of the remaining purchase price to goodwill and other intangibles has yet to be determined by the Company. In addition, pursuant to the terms of the agreement, the Company may be required to pay an earn-out payment to Compaq in an amount not to exceed $5 million provided certain milestones are met during the twelve-month period from September 1, 1999 to August 31, 2000. Year 2000 Readiness Disclosure; Information Technology Transition Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. Beginning with 21st century dates, these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and software used by many companies may need to be upgraded to comply with such Year 2000 requirements. Significant uncertainty exists concerning the potential effects associated with such compliance. The Company has licensed a new management information system that is Year 2000 compliant. Between February and May 1999, the Company replaced its existing management information system with the new management information system at its facilities in Fremont, California, East Kilbride, Scotland and Aguada, Puerto Rico. By fall 1999, the Company intends to replace its existing management information system with the new information system at its facility in Penang, Malaysia. The implementation of the new system has impacted and will continue to impact almost all phases of the Company's operations (e.g., planning, manufacturing, finance and accounting). Implementation of the new system and transition from the existing system to the new system will require substantial financial resources, time and personnel. There can be no assurance that the new system will be completely implemented in time to avoid any Year 2000 compliance problems, or that the Company will not experience problems, delays or unanticipated additional costs in implementing the new management information system that could have a material adverse effect on the Company's business, financial condition and results of operations, particularly during the periods in which the new system is brought online. The new system will be centrally operated from one location for all of the Company's facilities worldwide. Each of the Company's facilities will remotely access the new system via a wide area network. There can be no assurance that the Company will not experience interruption of use of the new system due to telecommunications problems or otherwise that could have a material adverse effect on the Company's business, financial condition and results of operations. During the second quarter of fiscal 1998, the Company began a Year 2000 assessment of its management information system, other information technology systems, non-information technology systems, products and key suppliers. Items identified and under review include manufacturing and test equipment, telecommunications systems and equipment and computer systems and equipment. In addition, the Company is assessing the Year 2000 compliance of its products. The Company intends to have its Year 2000 assessment, testing, remediation efforts and development of necessary contingency plans complete by the year 2000, the total cost of which has not yet been determined. To date, however, costs incurred to address Year 2000 compliance issues have not been material. Costs related to Year 2000 compliance issues continue to be funded through operating cash flows. There can be no assurance that the Company will be able to complete its Year 2000 assessment, testing, remediation efforts and development of necessary contingency plans by the year 2000. Any failure to complete the Year 2000 assessment, testing, remediation efforts and development of necessary contingency plans prior to the year 2000 could have a material adverse effect on the Company's business, financial condition and results of operations. During the third quarter of fiscal 1998, the Company initiated formal communications with its key suppliers of raw materials and services. Although a number of respondents indicated that their products are or will be Year 2000 compliant prior to the year 2000 and that they expect their operations and services will continue uninterrupted, there can be no assurance that the Company's key suppliers have, or will have information technology systems, non-information technology systems and products that are Year 2000 compliant. Similarly, there can be no assurance that the Company's customers have or will have information technology systems, non-information technology systems and products that are Year 2000 compliant. Any Year 2000 compliance problem facing the Company, its customers or suppliers could have a material adverse effect on the Company's business, financial condition and results of operations. 13 14 Factors That May Affect Future Results The Company's business, financial condition and results of operations could be impacted by a number of factors including without limitation the following factors. Significant Customer Concentration A relatively small number of customers have accounted for a significant percentage of the Company's net sales. For fiscal 1998, fiscal 1997 and fiscal 1996, the Company's ten largest customers accounted for 87%, 86% and 71% of net sales, respectively. For fiscal 1998, the Company's largest customer was Compaq, which accounted for 62% of net sales. In fiscal 1997, the Company's three largest customers were Compaq, Cisco and Hewlett-Packard, which accounted for 53%, 12% and 11% of net sales, respectively. In fiscal 1996, the Company's three largest customers were Cisco, Hewlett-Packard and IBM, which accounted for 19%, 15% and 12% of net sales, respectively. During these periods, no other customers accounted for more than 10% of net sales. The Company expects that sales to relatively few customers will continue to account for a significant percentage of its net sales in the foreseeable future. However, there can be no assurance that any of these customers or any of the Company's other customers will continue to utilize the Company's products at current levels, if at all. The Company is the sole source provider of certain products to some of its customers. Recently, certain of these customers have begun to increase the number of sources for these products. The emergence of additional sources has caused and in the future may cause the Company's customers to reduce orders to the Company. The Company has experienced significant changes in the composition of its major customer base and expects that this variability will continue in the future. For example, sales to Compaq, which represented less than 10% of net sales in fiscal 1996, represented 62% and 53% of the Company's net sales in fiscal 1998 and fiscal 1997, respectively. The loss of any major customer or any reduction in orders by any such customer would have a material adverse effect on the Company's business, financial condition and results of operations. The Company has no firm long-term volume commitments from any of its major customers and generally enters into individual purchase orders with its customers, in certain cases under master agreements governing the terms and conditions of the relationship. The Company has experienced cancellations of orders and fluctuations in order levels from period to period and expects it will continue to experience such cancellations and fluctuations in the future. Customer purchase orders may be canceled and order volume levels can be changed, canceled or delayed with limited or no penalties. The replacement of canceled, delayed or reduced purchase orders with new business cannot be assured. Moreover, the Company's business, financial condition and results of operations will depend in significant part on its ability to obtain orders from new customers, as well as on the financial condition and success of its customers. Therefore, any adverse factors affecting any of the Company's customers or their customers could have a material adverse effect on the Company's business, financial condition and results of operations. Product Concentration; Dependence on Memory Market A substantial majority of the Company's net sales is derived from memory products. The market for memory products is characterized by frequent transitions in which products rapidly incorporate new features and performance standards. A failure to develop products with required feature sets or performance standards or a delay as short as a few months in bringing a new product to market could significantly reduce the Company's net sales for a substantial period, which would have a material adverse effect on the Company's business, financial condition and results of operations. The market for semiconductor memory devices has been cyclical. The industry has experienced significant economic downturns at various times, characterized by diminished product demand, accelerated erosion of average selling prices and production overcapacity. During fiscal 1998, there were significant declines in DRAM semiconductor prices and declines in SRAM and Flash semiconductor prices. Since the beginning of calendar 1999, there have been declines in DRAM semiconductor prices. Because a substantial portion of the Company's net sales are attributable to the resale of semiconductor memory devices, declines in the prices of these components would have a material adverse effect on the Company's net sales and could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Semiconductor, Computer, Telecommunications and Networking Industries The Company may experience substantial period-to-period fluctuations in future operating results due to factors affecting the semiconductor, computer, telecommunications and networking industries. From time to time, each of these industries has experienced downturns, often in connection with, or in anticipation of, declines in general economic conditions. A decline or significant shortfall in growth in any one of these industries could have a material adverse impact on the demand for the Company's products and therefore a material adverse effect on the Company's business, financial condition and results of operations. Moreover, changes in end user demand for the products sold by any individual OEM customer can have a rapid and exaggerated effect on demand for the Company's 14 15 products from that customer in any given period, particularly in the event that the OEM customer has accumulated excess inventories of products purchased from the Company. There can be no assurance that the Company's net sales and results of operations will not be materially and adversely affected in the future due to changes in demand from individual customers or cyclical changes in the semiconductor, computer, telecommunications, networking or other industries utilizing the Company's products. Intense Competition The memory module, communication card and embedded computer subsystem industries are intensely competitive. Each of these markets includes a large number of competitive companies, several of which have achieved a substantial market share. Certain of the Company's competitors in each of these markets have substantially greater financial, marketing, technical, distribution and other resources, greater name recognition, lower cost structures and larger customer bases than the Company. In the memory module market, the Company competes against semiconductor manufacturers that maintain captive memory module production capabilities, including Samsung. The Company also competes with independent memory module manufacturers, including Celestica Inc., MCMS, Inc., PNY Electronics, Inc. and Simple Technology Incorporated. In the computer systems reseller market for memory modules, the Company primarily competes with companies such as Kingston Technology, Inc., Viking Technology, Inc. and Vision Tek, Inc. In the communication card market, the Company competes with GVC, TDK and U.S. Robotics, Inc. (a subsidiary of 3Com Corporation), among others. In the embedded computer subsystem market, the Company competes with Force Computers Inc. (a subsidiary of Solectron Corporation), Motorola and Radisys Corporation, among others. The Company faces competition from current and prospective customers that evaluate the Company's capabilities against the merits of manufacturing products internally. In addition, certain of the Company's competitors, such as Samsung, are significant suppliers to the Company. These suppliers have the ability to manufacture competitive products at lower costs than the Company as a result of their higher levels of integration and therefore have the ability to sell competitive products at lower prices than the Company's products. The Company also faces competition from new and emerging companies that have recently entered or may in the future enter the markets in which the Company participates. The Company expects its competitors to continue to improve the performance of their current products, to reduce their current product sales prices and to introduce new products that may offer greater performance and improved pricing, any of which could cause a decline in sales or loss of market acceptance of the Company's products. There can be no assurance that enhancements to or future generations of competitive products will not be developed that offer better prices or technical performance features than the Company's products. To remain competitive, the Company must continue to provide technologically advanced products and manufacturing services, maintain quality levels, offer flexible delivery schedules, deliver finished products on a reliable basis, reduce manufacturing and testing costs and compete favorably on the basis of price. In addition, increased competitive pressure has led in the past and may continue to lead to intensified price competition, resulting in lower prices and gross margin, which could materially adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to compete successfully in the future. Fluctuations in Operating Results The Company's results of operations and gross margin have fluctuated significantly from period to period in the past and may in the future continue to fluctuate significantly from period to period. The primary factors that have affected and may in the future affect the Company's results of operations include adverse changes in the mix of products sold, the inability to procure required components, and the partial or complete loss of a principal customer or the reduction in orders from a customer due to, among other things, excess product inventory accumulation by such customer. Other factors that have affected and may in the future affect the Company's results of operations include fluctuating market demand for and declines in the selling prices of the Company's products, decreases or increases in the costs of the components of the Company's products, market acceptance of new products and enhanced versions of the Company's products, the Company's competitors selling products that compete with the Company's products at lower prices or on better terms than the Company's products, delays in the introduction of new products and enhancements to existing products, manufacturing inefficiencies associated with the start up of new product introductions, and the Company's semiconductor customers manufacturing memory modules, internally or with other third parties, outside of the United States due to concerns about United States antidumping investigations and laws. The Company's operating results may also be affected by the timing of new product announcements and releases by the Company or its competitors, the timing of significant orders, the ability to produce products in volume, delays, cancellations or reschedulings of orders due to customer financial difficulties or other events, inventory obsolescence, including the reduction in value of the Company's inventories due to price declines, unexpected product returns, the timing of expenditures in anticipation of increased sales, cyclicality in the Company's targeted markets, and expenses associated with acquisitions. In particular, declines in DRAM, SRAM and Flash semiconductor prices could affect the valuation of the Company's inventory which could result in adverse changes in the Company's 15 16 business, financial condition and results of operations. The concentration of the Company's assets in its Fremont, California facility could make the Company's exposure to business disruptions greater than if the Company's assets were more geographically dispersed. The Company's net sales and gross margin have varied and will continue to vary significantly based on a variety of factors, including the mix of products sold, the manufacturing services provided, the average memory densities incorporated into the Company's memory products, the channels through which the Company's products are sold, changes in product selling prices and component costs, the level of manufacturing efficiencies achieved and pricing by competitors. The selling prices of the Company's products have declined in the past and the Company expects that prices could continue to decline in the future. In particular, during fiscal 1998, the selling prices of the Company's products declined due to significant declines in DRAM semiconductor prices and declines in SRAM and Flash semiconductor prices. Moreover, since the beginning of calendar 1999, declines in the selling prices of certain of the Company's existing products have continued due to declines in DRAM semiconductor prices. Because a substantial portion of the Company's net sales are attributable to the resale of semiconductor memory devices, declines in the prices of these components would have a material adverse effect on the Company's net sales and could have a material adverse effect on the Company's business, financial condition and results of operations. Accordingly, the Company's ability to maintain or increase net sales will be highly dependent upon its ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities sufficient to compensate for the anticipated declines in selling prices. Declining product selling prices may also materially and adversely affect the Company's gross margin unless the Company is able to reduce its cost per unit to offset declines in product selling prices. There can be no assurance that the Company will be able to increase unit sales volumes, introduce and sell new products or reduce its cost per unit. In addition, the Company's business has in the past been subject to seasonality, although the Company believes such seasonality has been masked by its growth. The Company expects that its business will experience more significant seasonality to the extent it continues to sell a material portion of its products in Europe and to the extent its exposure to the personal computer market remains significant. Sales of the Company's individual products and product lines toward the end of a product's life cycle are typically characterized by steep declines in sales, pricing and gross margin, the precise timing of which may be difficult to predict. The Company has experienced and could continue to experience unexpected reductions in sales of products as customers anticipate new product purchases. In addition, to the extent that the Company manufactures products in anticipation of future demand that does not materialize, or in the event a customer cancels outstanding orders during a period of either declining product selling prices or decreasing demand, the Company could experience an unanticipated decrease in sales of products. These factors could give rise to charges for obsolete or excess inventory, returns of products by distributors, or substantial price protection charges or discounts. In the past, the Company has had to write-down and write-off excess or obsolete inventory. To the extent that the Company is unsuccessful in managing product transitions, its business, financial condition and results of operations could be materially and adversely affected. The need for continued significant expenditures for capital equipment purchases, research and development and ongoing customer service and support, among other factors, will make it difficult for the Company to reduce its operating expenses in any particular period if the Company's expectations for net sales for that period are not met. The Company has significantly increased its expense levels to support its recent growth, and there can be no assurance that the Company will maintain its current level of net sales or rate of growth for any period in the future. Accordingly, there can be no assurance that the Company will be able to continue to be profitable. The Company believes that period-to-period comparisons of the Company's financial results are not necessarily meaningful and should not be relied upon as indications of future performance. Due to the foregoing factors, it is likely that in some future period the Company's operating results will be below the expectations of public market analysts or investors. In such event, the market price of the Company's securities would be materially and adversely affected. Dependence on Sole or Limited Sources of Supply The Company is dependent on certain suppliers, including limited and sole source suppliers, to provide key components used in the Company's products. In particular, the Company is dependent in significant part upon certain limited or sole source suppliers for critical components in the Company's memory module, communication card and embedded computer products. The Company also depends on sole source third party manufacturers to produce certain of the Company's embedded computer products. The electronics industry has experienced in the past, and may experience in the future, shortages in semiconductor devices, including DRAM, SRAM and Flash memory. The Company has experienced and may continue to experience delays in component deliveries and quality problems with respect to certain component deliveries which have caused and could in the future cause delays in product shipments and have required and could in the future require the redesign of certain products. The Company generally has no written agreements with its suppliers. There can be no assurance that the Company will receive adequate component supplies on a timely basis in the future. The inability to continue to obtain sufficient supplies of components as required, or to develop alternative sources if required, could cause delays, disruptions or reductions in product shipments or require product redesigns which could damage relationships with 16 17 current or prospective customers, could increase costs and/or prices and could have a material adverse effect on the Company's business, financial condition and results of operations. Management of Growth; Expansion of Operations The Company has significantly expanded its operations over the last several years. This growth has resulted in a significant increase in responsibility for existing management which has placed, and may continue to place, a significant strain on the Company's limited personnel and management, manufacturing and other resources. The Company's ability to manage the recent and any possible future growth will require an expansion of its manufacturing capacity, accounting and other internal management systems and the implementation of a variety of procedures and controls. There can be no assurance that significant problems in these areas will not occur. Any failure to expand these systems and implement such procedures and controls in an efficient manner and at a pace consistent with the Company's business could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has licensed a new management information system that is Year 2000 compliant. Between February and May 1999, the Company replaced its existing management information system with the new management information system at its facilities in Fremont, California, East Kilbride, Scotland and Aguada, Puerto Rico. By fall 1999, the Company intends to replace its existing management information system with the new information system at its facility in Penang, Malaysia. The implementation of the new system has impacted and will continue to impact almost all phases of the Company's operations (e.g., planning, manufacturing, finance and accounting). Implementation of the new system and transition from the existing system to the new system will require substantial financial resources, time and personnel. There can be no assurance that the new system will be completely implemented in time to avoid any Year 2000 compliance problems, or that the Company will not experience problems, delays or unanticipated additional costs in implementing the new management information system that could have a material adverse effect on the Company's business, financial condition and results of operations, particularly during the periods in which the new system is brought online. The new system will be centrally operated from one location for all of the Company's facilities worldwide. Each of the Company's facilities will remotely access the new system via a wide area network. There can be no assurance that the Company will not experience interruption of use of the new system due to telecommunications problems or otherwise that could have a material adverse effect on the Company's business, financial condition and results of operations. In connection with the Company's growth over the last several years, the Company's operating expenses have increased significantly, and the Company anticipates that operating expenses will continue to increase in absolute dollars in the future. In particular, in order to continue to provide quality products and customer service and to meet any anticipated demand of its customers, the Company will be required to continue to increase staffing and other expenses, including expenditures on capital equipment, sales and marketing. Should the Company increase its expenditures in anticipation of a future level of sales that does not materialize, the Company's business, financial condition and results of operations would be materially and adversely affected. Certain customers have required and may continue to require rapid increases in production and accelerated delivery schedules which have placed and may continue to place a significant burden on the Company's resources. In order to achieve anticipated sales levels and profitability, the Company will continue to be required to manage its assets and operations efficiently. In addition, should the Company continue to expand geographically, it may experience certain inefficiencies from the management of geographically dispersed facilities. Year 2000 Readiness Disclosure; Information Technology Transition Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. Beginning with 21st century dates, these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and software used by many companies may need to be upgraded to comply with such Year 2000 requirements. Significant uncertainty exists concerning the potential effects associated with such compliance. The Company has licensed a new management information system that is Year 2000 compliant. Between February and May 1999, the Company replaced its existing management information system with the new management information system at its facilities in Fremont, California, East Kilbride, Scotland and Aguada, Puerto Rico. By fall 1999, the Company intends to replace its existing management information system with the new information system at its facility in Penang, Malaysia. The implementation of the new system has impacted and will continue to impact almost all phases of the Company's operations (e.g., planning, manufacturing, finance and accounting). Implementation of the new system and transition from the existing system to the new system will require substantial financial resources, time and personnel. There can be no assurance that the new system will be completely implemented in time to avoid any Year 2000 compliance problems, or that the Company will not experience problems, delays or unanticipated additional costs in implementing the new management information system that could have a material adverse effect on the Company's business, financial condition and results of operations, particularly during the periods in which the new system is brought online. The 17 18 new system will be centrally operated from one location for all of the Company's facilities worldwide. Each of the Company's facilities will remotely access the new system via a wide area network. There can be no assurance that the Company will not experience interruption of use of the new system due to telecommunications problems or otherwise that could have a material adverse effect on the Company's business, financial condition and results of operations. During the second quarter of fiscal 1998, the Company began a Year 2000 assessment of its management information system, other information technology systems, non-information technology systems, products and key suppliers. Items identified and under review include manufacturing and test equipment, telecommunications systems and equipment and computer systems and equipment. In addition, the Company is assessing the Year 2000 compliance of its products. The Company intends to have its Year 2000 assessment, testing, remediation efforts and development of necessary contingency plans complete by the year 2000, the total cost of which has not yet been determined. To date, however, costs incurred to address Year 2000 compliance issues have not been material. Costs related to Year 2000 compliance issues continue to be funded through operating cash flows. There can be no assurance that the Company will be able to complete its Year 2000 assessment, testing, remediation efforts and development of necessary contingency plans by the year 2000. Any failure to complete the Year 2000 assessment, testing, remediation efforts and development of necessary contingency plans prior to the year 2000 could have a material adverse effect on the Company's business, financial condition and results of operations. During the third quarter of fiscal 1998, the Company initiated formal communications with its key suppliers of raw materials and services. Although a number of respondents indicated that their products are or will be Year 2000 compliant prior to the year 2000 and that they expect their operations and services will continue uninterrupted, there can be no assurance that the Company's key suppliers have, or will have information technology systems, non-information technology systems and products that are Year 2000 compliant. Similarly, there can be no assurance that the Company's customers have or will have information technology systems, non-information technology systems and products that are Year 2000 compliant. Any Year 2000 compliance problem facing the Company, its customers or suppliers could have a material adverse effect on the Company's business, financial condition and results of operations. Rapid Technological Change The semiconductor, computer, telecommunications and networking industries are subject to rapid technological change, short product life cycles, frequent new product introductions and enhancements, changes in end user requirements and evolving industry standards. The Company's ability to be competitive in these markets will depend in significant part upon its ability to invest significant amounts of resources for research and development efforts, to successfully develop, introduce and sell new products and enhancements on a timely and cost-effective basis and to respond to changing customer requirements that meet evolving industry standards. For example, the semiconductor memory market is expected to transition from SDRAM to Direct RDRAM. The Company is currently focusing its research and development resources on the development of RDRAM, DDR, SDRAM, Flash and SRAM products, 56 kbps asynchronous modem products and various embedded computer products. The success of the Company in developing new and enhanced products will depend upon a variety of factors, including integration of various elements of complex technology, timely and efficient completion of product design, timely and efficient implementation of manufacturing and assembly processes, availability of production capacity, achievement of acceptable manufacturing yields and product performance, quality and reliability. The Company has experienced, and may in the future experience, delays from time to time in the development and introduction of new products. Moreover, there can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new products or enhancements. There can be no assurance that defects or errors will not be found in the Company's products after commencement of commercial shipments, which could result in the delay in market acceptance of such products. The inability of the Company to introduce new products or enhancements that contribute to net sales could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Key Personnel The Company's future operating results depend in significant part upon the continued contributions of its key technical and senior management personnel, many of whom would be difficult to replace. Other than the Company's President, none of such persons has an employment agreement with the Company. The Company's future operating results also depend in significant part upon its ability to attract, train and retain qualified management, manufacturing and quality assurance, engineering, marketing, sales and support personnel. The Company is actively recruiting such personnel. However, competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting, training or retaining such personnel now or in the future. There may be only a limited number of persons with the requisite skills to serve in these positions and it may be increasingly difficult for the Company to hire such persons over time. The loss of any key employee, the failure of any key employee to perform in his or her current position, the Company's inability to attract, train and retain skilled employees as needed or the inability of the officers and key 18 19 employees of the Company to expand, train and manage the Company's employee base could materially and adversely affect the Company's business, financial condition and results of operations. International Sales International sales accounted for 30%, 18% and 8% of net sales in fiscal 1998, fiscal 1997 and fiscal 1996, respectively. The Company anticipates that international sales will continue to be material in future periods. As a result, a material portion of the Company's sales may be subject to certain risks, including changes in regulatory requirements, tariffs and other barriers, timing and availability of export licenses, political and economic instability, difficulties in accounts receivable collections, natural disasters, difficulties in staffing and managing foreign subsidiary and branch operations, difficulties in managing distributors, difficulties in obtaining governmental approvals for telecommunications and other products, foreign currency exchange fluctuations, the burden of complying with a wide variety of complex foreign laws and treaties, potentially adverse tax consequences and uncertainties relative to regional, political and economic circumstances. In particular, recent instability in certain Asian economies and financial markets could have an adverse effect on the Company's business, financial condition and results of operations in future quarters. In fiscal 1998, the Company's net sales to customers in Asia accounted for less than one percent of all net sales. In addition to net sales to customers in Asia, the Company maintains strategic supply relationships with companies located in Asia. Moreover and as a result of currency changes and other factors, certain of the Company's competitors may have the ability to manufacture competitive products in Asia at lower costs than the Company. There can be no assurance that current economic instability in Asia will not have a material adverse effect on the Company's net sales, its ability to compete or its ability to receive raw materials for its products. The Company is also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. The Company cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of the Company's products will be implemented by the United States or other countries. Because sales of the Company's products have been denominated to date primarily in United States dollars, increases in the value of the United States dollar could increase the price of the Company's products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to United States dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in the Company's results of operations. Some of the Company's customer's purchase orders and agreements are governed by foreign laws, which may differ significantly from United States laws. Therefore, the Company may be limited in its ability to enforce its rights under such agreements and to collect damages, if awarded. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. Uncertainty Regarding Protection of Proprietary Rights In the semiconductor, computer, telecommunications and networking industries, it is typical for companies to receive notices from time to time alleging infringement of patents, copyrights or other intellectual property rights of others. The Company is currently being sued by a party who alleges that certain of the Company's communication card products have infringed and continue to infringe upon the party's intellectual property rights. The Company is also currently being sued by a party who alleges that the Company's manufacturing operations and processes have infringed and continue to infringe upon the party's intellectual property rights. Moreover, the Company has been and may from time to time continue to be notified of claims that it may be infringing patents, copyrights or other intellectual property rights owned by other third parties. There can be no assurance that these or other companies will not in the future pursue claims against the Company with respect to the alleged infringement of patents, copyrights or other intellectual property rights. In addition, litigation may be necessary to protect the Company's intellectual property rights and trade secrets, to determine the validity of and scope of the proprietary rights of others or to defend against third party claims of invalidity. The current litigation or any other litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that additional infringement, invalidity, right to use or ownership claims by third parties or claims for indemnification resulting from infringement claims will not be asserted in the future. The Company has entered into license agreements in the past regarding certain alleged infringement claims asserted by third parties. In response to the current litigation or if any other claims or actions are asserted against the Company, the Company may again seek to obtain a license under a third party's intellectual property rights. There can be no assurance, however, that a license will be available under reasonable terms or at all. The failure to obtain a license under a patent or intellectual property right from a third party for technology used by the Company could cause the Company to incur substantial liabilities and to suspend the manufacture of products. In addition, should the Company decide to litigate the current claims or such other claims, such litigation could be extremely expensive and time consuming and could 19 20 materially and adversely affect the Company's business, financial condition and results of operations, regardless of the outcome of the litigation. The Company attempts to protect its intellectual property rights through a variety of measures including non-disclosure agreements, trademarks, trade secrets and to a lesser extent, patents. There can be no assurance, however, that such measures will provide adequate protection for the Company's trade secrets or other proprietary information, that disputes with respect to the ownership of its intellectual property rights will not arise, that the Company's trade secrets or proprietary technology will not otherwise become known or be independently developed by competitors or that the Company can otherwise meaningfully protect its intellectual property rights. Risks Associated with Acquisitions In August 1999, the Company acquired certain assets of Compaq's embedded computer product line ("Compaq's Embedded Computer Business"). There can be no assurance that the operations of Compaq's Embedded Computer Business or the operations of the Company will be profitable after the acquisition. The acquisition of Compaq's Embedded Computer Business has involved and likely will continue to involve numerous risks, including among others, difficulty of assimilating the operations, information systems and personnel of the acquired business, the potential disruption of the Company's ongoing business, the inability of management to maximize the financial and strategic position of the Company through the successful incorporation of acquired employees and customers, the maintenance of uniform standards, controls, procedures and policies and the impairment of relationships with employees and customers as a result of the integration of the acquired business or otherwise. In particular, the Company must transition manufacturing for Compaq's Embedded Computer Business from Compaq facilities to the Company's facilities. There can be no assurance that the anticipated benefits of the acquisition of Compaq's Embedded Computer Business will be realized or that the acquisition will not have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, as part of its business strategy, the Company expects to continue to acquire or make significant investments in businesses that offer complementary products and technologies. Any such future acquisitions or investments would expose the Company to the risks commonly encountered in acquisitions of businesses. There can be no assurance that any potential acquisition will be consummated or, if consummated, that it will not have a material adverse effect on the Company's business, financial condition and results of operations. Volatility of Stock Prices There has been a history of significant volatility in the market prices of the common stock of technology companies, including the Common Stock of the Company, and it is likely that the market price of the Company's Common Stock will continue to be subject to significant fluctuations. Factors such as the timing and market acceptance of new product introductions by the Company, demand for products of the Company's customers, the introduction of new products by the Company's competitors, variations in quarterly operating results, changes in securities analysts' recommendations regarding the Company's Common Stock, developments in the technology industry and general economic conditions may have a significant impact on the market price of the Company's Common Stock. In addition, the equity markets in recent years have experienced significant price and volume fluctuations that have affected the market prices of technology companies and that have often been unrelated to the operating performance of such companies. 20 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Company's exposure to market risk for changes in interest rates relate primarily to the Company's investment portfolio. Currently, the Company does not use derivative financial instruments in its investment portfolio. The Company invests in high-credit quality issuers and, by policy, limits the amount of principal exposure to any one issuer. As stated in the Company's policy, the Company seeks to ensure the safety and preservation of its invested principal funds by limiting default and market risk. The Company seeks to mitigate default risk by investing in high-credit quality securities and by positioning its investment portfolio to respond to a significant reduction in a credit rating of any investment issuer, guarantor or depository. The Company seeks to mitigate market risk by limiting the principal and investment term of funds held with any one issuer and by investing funds in marketable securities with active secondary or resale markets. The table below presents principal amounts and related weighted average interest rates by year of maturity for the Company's investment portfolio as of October 31, 1998 (in thousands):
1999 2000 2001 2002 2003 Thereafter Total --------- -------- ---- ---- ---- ---------- --------- Cash equivalents and short-term investments: Fixed-rate investments.................... $ 113,061 $ 20,885 $ -- $ -- $ -- $ -- $ 133,946 Average interest rate..................... 3.93% 4.19% -- -- -- -- 3.97%
As of July 31, 1999, there were no changes in the Company's investment portfolio that would materially impact the Company's exposure to interest rate risk. Foreign Currency Exchange Risk The Company transacts business in various foreign countries. The Company's primary foreign currency cash flows are in certain European countries. As of July 31, 1999 and October 31, 1998, the Company did not employ a foreign currency hedge program with respect to transactions and expenditures originating in these or any other foreign countries. The Company believes that its foreign currency exchange risk is currently immaterial. 21 22 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company and certain of its officers and directors have been named as defendants in six securities class action lawsuits filed in the United States District Court for the Northern District of California, Boren v. SMART Modular Technologies, Inc., et al., No. C 98 20692 JW (PVT) (filed July 1, 1998), Woszczak v. SMART Modular Technologies, Inc., et al., No. C 98 2617 JL (filed July 2, 1998), Bisson v. SMART Modular Technologies, Inc., et al., No. C 98 20714 JF (filed July 8, 1998), D'Amato v. SMART Modular Technologies, Inc., et al., No. C 98 2804 PJH (filed July 16, 1998), Cha v. SMART Modular Technologies, Inc., et al., No. C 98 2833 BZ (filed July 17, 1998) and Chang v. SMART Modular Technologies, Inc., et al., No. C 98 3151 SI (filed August 13, 1998) (collectively, the "Federal Actions"). The plaintiffs in the Federal Actions allege that defendants made material misrepresentations and omissions during the period from July 1, 1997 through May 21, 1998 in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Federal Actions were consolidated on October 9, 1998, and a consolidated complaint was filed on November 30, 1998 (the "Federal Complaint"). On October 22, 1998, a putative securities class action lawsuit, captioned Reagan v. SMART Modular Technologies, Inc., et al., Case No. H204162-5 (the "State Complaint"), was filed against the Company and certain of its officers and directors in the Superior Court of the State of California, County of Alameda (the "Superior Court"). The State Complaint alleges violations of Sections 25400 and 25500 of the California Corporations Code and seeks unspecified damages on behalf of a purported class of purchasers of SMART common stock during the period from July 1, 1997 through May 21, 1998. The factual allegations of the State Complaint are nearly identical to the factual allegations contained within the Federal Complaint. On February 22, 1999, the Superior Court granted the Company's motion to stay the state action pending the resolution of the federal action. The Company believes that all claims related to the state and federal securities actions are without merit and intends to defend itself vigorously against these actions. Currently, the Company is unable to estimate the financial impact of the state and federal securities actions. ITEM 2. CHANGES IN SECURITIES Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: For a list of exhibits to this Form 10-Q see the exhibit index located on pages 24 -- 26. (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the three months ended July 31, 1999. 22 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SMART MODULAR TECHNOLOGIES, INC. By: /s/ DAVID B. MULLIN ----------------------------- David B. Mullin Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: September 14, 1999 23 24 INDEX TO EXHIBITS
Exhibit Number Exhibits - ------- -------- 2.1(1) Agreements and Plan of Reorganization among the Registrant, Apex Data, Inc. and SMART Acquisition Inc. dated April 24, 1995 3.1(7) Registrant's Amended and Restated Articles of Incorporation 3.2(1) Registrant's Amended Bylaws 4.1(1) Registration Rights Agreement dated July 26, 1995 4.2(1) Registrant's specimen stock certificate 4.3(3) Termination to the Registration Rights Agreement dated July 26, 1995 10.1(1) 1989 Incentive Stock Plan, as amended, and forms of agreements attached thereto 10.2(1) 1995 Employee Stock Purchase Plan, and forms of agreements attached thereto 10.3(1) 1995 Director Option Plan, and forms of agreements attached thereto 10.4(1) 1995 Stock Plan, and forms of agreements attached thereto 10.5(1) Form of Indemnification Agreement between the Registrant and its officers, directors and certain significant employees 10.6(1) Standard Triple Net Industrial Lease between the Registrant and Pactel Properties dated November 18, 1991 10.7(1) First Amendment to Lease between the Registrant and Pactel Properties dated July 19, 1993 10.8(1) Second Amendment to Lease between the Registrant and Riggs National Bank of Washington, D.C. as Trustee of the Multi-Employer Property Trust Northport Business Park, a National Banking Association dated May 31, 1994 10.9(1) Third Amendment to Lease between the Registrant and Riggs National Bank of Washington, D.C. as Trustee of the Multi-Employer Property Trust Northport Business Park, a National Banking Association dated November 1994 10.10(1) Standard Triple Net Industrial Lease between the Registrant and Riggs National Bank of Washington, D.C., as Trustee of the Multi-Employer Property Trust, dated June 18, 1995 10.11(1) Lease Contract between the Registrant and The Puerto Rico Industrial Development Company dated April 24, 1995 10.12(1) Note, Loan and Security Agreement between the Registrant and Merrill Lynch Business Financial Services Inc. dated May 19, 1993 10.13(1) Letter Agreement between the Registrant and Merrill Lynch Business Financial Services Inc. dated December 28, 1994 10.14(1) Letter Agreement between the Registrant and Merrill Lynch Business Financial Services Inc. dated June 27, 1995 10.15(1) Intercreditor Agreement among the Registrant, Merrill Lynch Business Financial Services Inc. and Imperial Bank dated June 27, 1995 10.16(1) Security and Loan Agreement between the Registrant and Imperial Bank dated July 19, 1995 *10.17(1) License and Supply Agreement between the Registrant and Krypton Isolation, Inc. dated July 22, 1994 10.18(1) Warrant Purchase Agreement between the Registrant and Krypton Isolation, Inc. dated July 27, 1994 10.19(1) Holders' Agreement dated July 27, 1994 by and among Krypton Isolation, Inc. and certain individuals and entities identified on Exhibit A attached thereto 10.20(1) Common Stock Purchase Agreement dated July 27, 1994 by and among Krypton Isolation, Inc. and the individuals identified on Exhibit A attached thereto 10.21(1) First Amendment to the Krypton Isolation, Inc. Warrant to Purchase 2,000,000 Shares of Series A Preferred Stock between the Registrant and Krypton Isolation, Inc. dated October 24, 1995 10.22(1) Letter of Intent dated as of October 24, 1995 by and among Krypton Isolation, Inc., the Registrant and certain individuals identified on the signature pages thereto **10.23(2) License and Supply Agreement between the Registrant and Krypton Isolation, Inc. dated January 29, 1996 10.24(2) Warrant Purchase Agreement between the Registrant and Krypton Isolation, Inc. dated January 29, 1996
24 25
Exhibit Number Exhibits - ------- -------- 10.25(2) First Amended and Restated Holders' Agreement dated January 29, 1996 by and among Krypton Isolation, Inc. and certain individuals and entities identified on Exhibit A attached thereto 10.26(2) Common Stock Agreement dated January 29, 1996 by and among Krypton Isolation, Inc. and the entities identified on Exhibit A attached thereto 10.27(2) First Amendment to the License and Supply Agreement between the Registrant and Krypton Isolation, Inc. dated January 29, 1996 10.28(3) 1989 Incentive Stock Plan, as amended, dated March 25, 1996 10.29(4) Fourth Amendment to Lease between the Registrant and Riggs Bank N.A. dated September 27, 1996 10.30(5) Revolving Line of Credit Note between the Registrant and Wells Fargo Bank, National Association dated May 29, 1997 10.31(5) Credit Agreement between the Registrant and Wells Fargo Bank, National Association dated May 29, 1997 10.32(5) Subfeature Note between the Registrant and Wells Fargo Bank, National Association dated May 29, 1997 10.33(6) Lease Contract between the Registrant and The Puerto Rico Industrial Development Company dated October 9, 1997 10.34(6) Second Amendment to the Krypton Isolation, Inc. Warrant to Purchase 2,000,000 Shares of Series A Preferred Stock between the Registrant and Krypton Isolation, Inc. dated January 21, 1998 10.35(7) Revolving Line of Credit Note between the Registrant and Wells Fargo Bank, National Association dated May 1, 1998 10.36(7) Credit Agreement between the Registrant and Wells Fargo Bank, National Association dated May 1, 1998 10.37(7) Subfeature Note between the Registrant and Wells Fargo Bank, National Association dated May 1, 1998 10.38(8) Sublease Contract between the Registrant and Philips Consumer Communications, L.P. dated June 30, 1998 10.39(9) First Amendment to the License and Supply Agreement between the Registrant and Krypton Isolation, Inc. dated June 22, 1998 10.40(9) Second Amendment to the License and Supply Agreement between the Registrant and Krypton Isolation, Inc. dated June 22, 1998 10.41(10) First Amendment to the Credit Agreement between the Registrant and Wells Fargo Bank, National Association dated May 1, 1998 10.42(10) Second Amendment to the Credit Agreement between the Registrant and Wells Fargo Bank, National Association dated May 1, 1998 10.43(10) Revolving Line of Credit Note between the Registrant and Wells Fargo Bank, National Association dated April 28, 1999 10.44(10) Subfeature Note between the Registrant and Wells Fargo Bank, National Association dated April 28, 1999 10.45(10) Employment Letter between the Registrant and Keith McDonald dated February 17, 1999 16.1(1) Letter Regarding Change in Certifying Accountant 16.2(1) Letter Regarding Change in Certifying Accountant 16.3(1) Letter Regarding Change in Certifying Accountant 16.4(1) Letter Regarding Change in Certifying Accountant 27.1 Financial Data Schedule for the Quarter Ended July 31, 1999 99.1 Press Release announcing the completion of a definitive merger agreement between the Registrant and Solectron Corporation dated September 13, 1999
- ------------ (1) Incorporated by reference to exhibit filed with the Registrant's Registration Statement on Form S-1 (No. 33-97748) filed October 4, 1995, Amendment No. 1 thereto filed October 24, 1995, Amendment No. 2 thereto filed November 6, 1995, Amendment No. 3 thereto filed November 14, 1995 and Amendment No. 4 thereto filed November 16, 1995, which Registration Statement became effective November 16, 1995. 25 26 (2) Incorporated by reference to exhibit filed with the Registrant's Report on Form 10-Q filed March 16, 1996. (3) Incorporated by reference to exhibit filed with the Registrant's Report on Form 10-Q filed June 14, 1996. (4) Incorporated by reference to exhibit filed with the Registrant's Report on Form 10-Q filed June 16, 1997. (5) Incorporated by reference to exhibit filed with the Registrant's Report on Form 10-Q filed August 28, 1997. (6) Incorporated by reference to exhibit filed with the Registrant's Report on Form 10-K filed January 29, 1998. (7) Incorporated by reference to exhibit filed with the Registrant's Report on Form 10-Q filed June 15, 1998. (8) Incorporated by reference to exhibit filed with the Registrant's Report on Form 10-Q filed September 11, 1998. (9) Incorporated by reference to exhibit filed with the Registrant's Report on Form 10-K filed January 29, 1999. (10) Incorporated by reference to exhibit filed with the Registrant's Report on Form 10-Q filed June 14, 1999. * Pursuant to Rule 406(b) under the Securities Act of 1933, confidential treatment has been granted to certain portions of this exhibit, which portions have been deleted and filed separately with the Securities and Exchange Commission. ** Pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, confidential treatment has been granted to certain portions of this exhibit, which portions have been deleted and filed separately with the Securities and Exchange Commission. 25 EX-27.1 2 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-Q FOR THE THIRD QUARTER ENDED JULY 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 1,000 3-MOS 9-MOS YEAR OCT-31-1999 OCT-31-1999 OCT-31-1999 MAY-01-1999 NOV-01-1998 NOV-01-1997 JUL-31-1999 JUL-31-1999 OCT-31-1998 0 121,152 75,478 0 73,822 99,822 0 99,022 89,203 0 0 0 0 64,318 40,138 0 363,299 319,983 0 48,465 47,920 0 0 0 0 413,235 368,992 0 91,215 88,692 0 0 0 0 0 0 0 0 0 0 135,413 133,013 0 185,908 146,680 0 413,235 368,992 223,599 745,539 0 223,599 745,539 0 190,123 649,883 0 190,123 649,883 0 0 0 0 0 0 0 0 0 0 21,033 57,678 0 6,735 18,450 0 0 0 0 0 0 0 0 0 0 0 0 0 14,298 39,228 0 0.32 0.87 0 0.31 0.84 0
EX-99.1 3 PRESS RELEASE 1 [SOLECTRON/SMART MODULAR TECHNOLOGIES LETTERHEAD] NEWS RELEASE Media Contacts: Michael E. Donner, Solectron Corporation, Corporate Director, Communications +1 (408) 956 6688 (U.S.) Charles Welch, SMART Modular Technologies, Inc., VP Business Development +1 (510) 624 8212 (U.S.) Analysts Contacts: Susan S. Wang, Solectron Corporation, SVP/Chief Financial Officer +1 (408) 956 6571 (U.S.) David Mullin, SMART Modular Technologies, Inc., VP/Chief Financial Officer +1 (510) 624 8229 (U.S.) Solectron to Acquire SMART Modular Technologies, Inc. for US$2 Billion - Company Continues Transformation to Supply-Chain Facilitator Model - - Company to Appoint Ajay Shah President and CEO of its Newly Formed Technology Solutions Business Unit - For Immediate Release: September 13, 1999 MILPITAS and FREMONT, California -- Solectron Corporation (NYSE: SLR), the world's largest provider of customized electronics manufacturing solutions to original equipment manufacturers (OEMs), and SMART Modular Technologies, Inc. (NASDAQ: SMOD), a leading designer and manufacturer of memory modules and memory cards, embedded computers and I/O products, today announced the completion of a definitive merger agreement. The acquisition is another step in enabling Solectron to expand its service capabilities and infrastructure as it continues to transform itself into a global supply-chain facilitator. The transaction is the largest in the electronics manufacturing services (EMS) industry, valued at approximately US$2 billion based on the September 10, 1999, closing price of Solectron common stock. Under the terms of the transaction, shareholders of SMART will receive .51 shares of Solectron stock for each share of SMART stock. Solectron will - more - 2 - 2 - issue approximately 23.1 million shares of Solectron common stock and assume all stock options held by SMART employees. The transaction will be accounted for under the pooling of interests method and is structured as a tax-free reorganization. Under the terms of the agreement, SMART will operate as part of Solectron's newly formed technology solutions business unit. The agreement is subject to customary closing conditions, including shareholder approval. Ajay Shah, Lata Krishnan and Mukesh Patel who collectively own approximately 35 percent of SMART's outstanding shares have agreed to vote their shares in favor of the merger. The transaction is expected to be accretive by approximately US$0.09 in fiscal 2000 to Solectron before the transaction charges. "A global supply-chain facilitator is structured to efficiently satisfy the demands of the global market, which is made up of customers, suppliers and Solectron," said Dr. Ko Nishimura, Solectron's chairman, president and CEO. "Solectron's global supply-chain facilitator model is made up of business-unit enterprises, consisting of highly efficient and cost effective technology, materials, manufacturing and operations, and global services. All of these units are integrated with effective supply-chain processes and systems to provide real-time information internally between business units, and to the global market. This will enable Solectron to respond with the most effective and efficient supply-chain solutions from technology, through fulfillment and global services for the time-dependent marketplace, where technology innovations continue to shorten product life cycles." "Over our 11-year history, we have been able to create strong product offerings and a differentiated outsourcing value proposition for our OEM customers in each of our technology focus areas," said Ajay Shah, chairman, CEO and co-founder of SMART Modular Technologies, Inc. "We are continuing to see increased customer demands for complex manufacturing process capability for our new product offerings within memory, - more - 3 - 3 - data communications, and embedded boards and systems. By joining forces with Solectron, it will allow us to focus on our products and technology offerings while accelerating our growth by utilizing Solectron's advanced manufacturing process strengths, operations capability and global footprint. At the same time, we will be able to utilize our technical, sales, marketing and design strengths to create an effective supply-chain process for our customers." "The acquisition will significantly enhance Solectron's current technology capabilities," said Dr. Saeed Zohouri, Solectron's senior vice president and chief operating officer. "Solectron intends to integrate SMART into its current solutions offering by creating a technology solutions business unit that offers unparalleled products and services for the world's leading electronics OEMs. This business unit will be made up of Force Computers, SMART Modular Technologies, Inc. and other design groups within Solectron." With the addition of SMART, Solectron's newly formed technology solutions business unit will provide a full range of value-added solutions across the entire product life cycle. This includes building block technologies such as memory modules; embedded board and systems solutions for telecommunications, networking, industrial control and consumer applications; communications solutions such as I/O, networking and wireless devices; and PC/server solutions for servers, desktops and notebook applications. Solectron's global manufacturing and operations business unit will continue to provide a full range of custom design solutions including ASIC designs, re-designs, "one-off's" and a full range of New Product Introduction (NPI) services. Solectron's global network of NPI centers, located close to its customers' design teams, will also continue to provide a full range of pre-manufacturing services including component and concurrent engineering, test development, prototypes, procurement and assembly. - more - 4 - 4 - At the completion of the transaction, Solectron will appoint Ajay Shah, 39, as president and CEO of the newly formed technology solutions business unit, reporting to Nishimura. Shah has more than 15 years of technology, marketing and senior executive experience in the high-tech and electronics industry. Prior to SMART, Shah held strategic marketing and management positions at Samsung Semiconductor, Inc. and Advanced Micro Devices. Shah holds a bachelor's of science degree in engineering, with a major in mechanical engineering from the University of Baroda, India, and a master's of science degree in engineering management from Stanford University. Solectron will be adding approximately 1,900 associates and 290,000 square feet (26,941 square meters) of manufacturing capacity as a result of the transaction. Solectron will be gaining a manufacturing presence in Aguada, Puerto Rico, and additional manufacturing capacity through SMART's facilities in Fremont, California; East Kilbride, Scotland; and Penang, Malaysia. In addition, Solectron will gain design centers in Fremont, California; Bangalore, India; Boston, Massachusetts; and Ayr, Scotland. Merrill Lynch acted as financial advisor to Solectron. Morgan Stanley and Warburg Dillon Reed acted as financial advisors to SMART. This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21B of the Securities Exchange Act of 1934, as amended, based on current expectations that involve a number of risks and uncertainties. In particular, while the companies have executed a definitive merger agreement, there is no assurance that the parties will complete the transaction. In the event that the companies do not receive the necessary government or shareholder approvals or fail to satisfy conditions for closing, the transaction will terminate. Other potential risks that could cause actual events to differ materially are included in Securities and Exchange Commission filings, including Form 10-Ks and Form 10-Qs for Solectron Corporation and SMART Modular Technologies, Inc., respectively. - more - 5 - 5 - ABOUT SMART SMART Modular Technologies, Inc. is a leading independent manufacturer of specialty and standard memory modules, Flash memory cards, high performance embedded computer modules as well as I/O product solutions. SMART offers more than 500 products to leading OEMs in the computer, networking and telecommunications industries. SMART has manufacturing facilities in California, Puerto Rico, Malaysia and Scotland; design centers in California, India, Massachusetts and Scotland and sales offices worldwide. More information on SMART can be obtained on the Internet at www.smartmodulartech.com. ABOUT SOLECTRON Founded in 1977, Solectron Corporation (www.solectron.com) provides integrated solutions that span the entire product life cycle -- from pre-production planning and design, to manufacturing, distribution, and end-of-life product service and support -- for the world's leading electronics OEMs. Solectron offers its customers competitive outsourcing advantages such as access to advanced manufacturing technologies, shortened product time-to-market, reduced cost of production and more effective asset utilization. The company has received more than 210 quality and service awards from its customers in addition to the 1997 and 1991 Malcolm Baldrige National Quality Awards. Solectron is the first company to win the Baldrige Award for Manufacturing twice in the 11-year history of the national program. The company has more than 37,000 associates in 23 manufacturing facilities worldwide with more than 7 million square feet of capacity. Revenues for fiscal 1999, ended August 31, were US$8.4 billion. ### -----END PRIVACY-ENHANCED MESSAGE-----