UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED August 28, 2009
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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 000-51771
SMART MODULAR TECHNOLOGIES (WWH), INC.
(Exact Name of Registrant as Specified in Its Charter)
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Cayman Islands
(State or Other Jurisdiction of
Incorporation or Organization)
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39870 Eureka Drive
Newark, CA 94560
(Address of Principal Executive Offices)
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20-2509518
(I.R.S. Employer
Identification Number) |
(510) 623-1231
(Registrants telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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Ordinary Shares, $0.00016667 par value
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NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Annual
Report on Form 10-K or any amendment to this Annual Report on Form 10 K-A. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of accelerated
filer, and large accelerated filer and smaller reporting company in Rule 12b(2) of the
Exchange Act. (Check one).
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Large accelerated filer o |
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b 2 of
the Exchange Act). Yes o No þ
The aggregate market value of the registrants ordinary stock held by non-affiliates of the
registrant at February 27, 2009, based on the closing price of such stock on the NASDAQ Global
Select Market on such date, was approximately $23,698,629. The number of shares of the registrants
ordinary shares, $0.00016667 par value, outstanding on October 23, 2009, was 62,029,508.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement relating to the registrants 2010 Annual Meeting
of Shareholders to be held on or about January 26, 2010 are incorporated by reference into Part III
of this Annual Report on Form 10-K (Annual Report).
SMART MODULAR TECHNOLOGIES (WWH), INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED AUGUST 28, 2009
TABLE OF CONTENTS
This Annual Report is for the fiscal year ended August 28, 2009. This Annual Report modifies
and supersedes documents filed prior to this Annual Report. The United States Securities and
Exchange Commission (SEC) allows us to incorporate by reference information that we file with
them, which means that we can disclose important information to you by referring you directly to
those documents. Information incorporated by reference is considered to be part of this Annual
Report. In addition, information that we file with the SEC in the future will automatically update
and supersede information contained in this Annual Report. In this report, SMART, the Company,
we, us or our refer to SMART Modular Technologies (WWH), Inc. and its subsidiaries, except
where the context makes clear that the reference is only to SMART Modular Technologies (WWH), Inc.
itself and is not inclusive of its subsidiaries.
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PART I
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements. Forward-looking statements give our
current expectations or forecasts of future events. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as may, will, expect, intend,
estimate, anticipate, believe, project or continue or the negative thereof or other
similar words. From time to time, we also may provide oral or written forward-looking statements in
other materials we release to the public. Any or all of our forward-looking statements in this
report may turn out to be incorrect, possibly to a material degree, due to many factors including
but not limited to a loss of, or a reduction in sales to any of our key customers, our dependence
on certain components in our products which we obtain from a limited number of suppliers, the
impact of any acquisitions and post-closing integration issues relating thereto, restructuring we
may undertake, changes in political, social and economic conditions and local regulations
particularly outside of the United States, design, production or manufacturing difficulties,
competitive factors, new products and technological changes, fluctuations in product prices and raw
material costs, fluctuations in customer demand, changes in industry standards or release
plans, and our ability to satisfy our debt service obligations and comply with the
covenants contained in the agreements related thereto, among many others. Such statements can be
affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties.
Consequently, no forward-looking statement can be guaranteed. The Company operates in a continually
changing business environment and new factors emerge from time to time. We cannot predict such
factors, nor can we assess the impact, if any, from such factors on the Company or its results.
Accordingly, forward-looking statements should not be relied upon as a prediction of actual
results. Actual results may vary materially. Investors are cautioned not to place undue reliance on
any forward-looking statements. In evaluating those statements, you should specifically consider
various factors, including the risks and uncertainties listed in Risk Factors under Item 1A of
this Annual Report. We undertake no obligation to update any forward-looking statements.
Overview
We are a leading independent designer, manufacturer and supplier of value added subsystems
primarily to Original Equipment Manufacturers (OEMs). Our subsystem products include memory
modules, solid state storage products such as embedded flash and Solid State Drives (SSDs),
embedded computing products, and display products such as Thin Film Transistor Liquid Crystal
Display (TFT-LCD) products. We offer these products to customers worldwide. We also offer custom
supply chain services including procurement, logistics, inventory management, temporary
warehousing, kitting and packaging services. Our products and services are used for a variety of
applications in the computing, networking, communications, printer, storage, defense and industrial
markets worldwide. Products that incorporate our subsystems include servers, routers, switches,
storage systems, workstations, personal computers (PCs), notebooks, printers and gaming machines.
Generally, increases in overall demand by end users for, and increases in memory content in,
products that incorporate our subsystems should have a positive effect on our business, financial
condition and results of operations. Conversely, decreases in product demand and memory content can
have a negative effect on our business, financial condition and results of operations. We offer
more than 500 standard and custom products to leading OEMs, including Cisco Systems, Dell and
Hewlett-Packard. We maintain a large global footprint with manufacturing capabilities in the United
States, Malaysia and Brazil. Our global operations enable us to reduce costs and rapidly respond to
our customers requirements worldwide.
Our business was originally founded in 1988 as SMART Modular Technologies, Inc. (SMART
Modular) and SMART Modular became a publicly traded company in 1995. Subsequently, SMART Modular
was acquired by Solectron Corporation (Solectron) in 1999, where it operated as a subsidiary of
Solectron. In April 2004, a group of investors led by TPG Capital, L.P., or TPG, Francisco Partners
and Shah Capital Partners acquired our business from Solectron (the Acquisition), and we began to
operate as an independent company under the name SMART Modular Technologies (WWH), Inc. (SMART or
the Company) under the laws of the Cayman Islands.
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Since the Acquisition, we repositioned portions of our business by focusing on delivery of
certain higher value added products, diversifying our end markets, extending into new vertical
markets, creating more technically engineered products and solutions, migrating manufacturing to
low cost regions and controlling expenses. For example, in fiscal 2006 we completed a new
manufacturing facility in Atibaia, Brazil where we import finished wafers and package them into
memory integrated circuits and build memory modules. In fiscal 2008 we acquired Adtron Corporation
(Adtron), a leading designer and global supplier of high performance and high capacity SSDs for
the defense, aerospace and industrial markets which we recently renamed to SMART Modular
Technologies (AZ), Inc.
Our Products and Services
Since fiscal 2008, we have categorized our products and services into the following two
reporting segments: the design, manufacture and distribution of memory modules, embedded computing
subsystems, and display products (Memory, Display & Embedded Segment) and the design, manufacture
and distribution of industrial data storage products such as high capacity SSDs (Adtron Segment).
In fiscal years prior to 2008, we operated under one segment. Since the acquisition of Adtron on
March 3, 2008, SMARTs CEO and chief operating decision maker has separately evaluated Adtrons
performance and the allocation of resources to Adtron.
Memory, Display & Embedded Segment
Memory Products
DRAM Modules. We offer a comprehensive lineup of Dynamic Random Access Memory (DRAM) modules
utilizing a wide range of DRAM technologies from legacy Fast Page/Extended-Data-Out (FP/EDO) and
Synchronous DRAM (SDRAM) to double-data-rate (DDR) SDRAM and leading-edge high performance DDR3
SDRAM devices. These modules encompass a broad range of form factors and functions including the
older single in-line memory modules (SIMMs) and more current dual in-line memory modules (DIMMs),
fully-buffered DIMMS (FB DIMMS), small outline dual in-line memory modules (SO-DIMMs), and very low
profile (VLP) DIMMs and mini-DIMMs for space-constrained blade servers, or 1.75 inch thin computing
servers and networking applications. These memory modules come in configurations of up to 244 pins
and densities of up to 16GB. We utilize advanced PCB and device packaging/stacking technologies to
achieve cost-effective high-density solutions. We also develop custom memory module designs based
on specific OEM requirements. We employ extensive software based electrical and thermal simulations
in the design of DDR, DDR2, and DDR3 DIMMs and test those designs on high-end functional testers
utilizing comprehensive test suites. These products meet the quality requirements of enterprise
class systems pursuant to stringent specifications of various high speed applications.
Flash Memory Cards and Modules. We design and manufacture flash memory products in a variety
of form factors and capacities. Our wide range of flash memory products come in CompactFlash, PC
Card, Key Drives, Embedded USB (EUSB), iSATA Drives, uSTATA Drives, SCDD, Mini IDE Drives, PCIe
Drives and module form factors that utilize ATA, Linear, IDE, and USB technologies for data and
code storage applications. We also manufacture a wide variety of custom flash products such as
Embedded Firewire SSDs. Our flash modules are predominantly used in telecommunications equipment,
printers, embedded controller applications, servers, switches and routers. Our relationships with
numerous suppliers of flash and controller application specific integrated circuits allow us to
offer a wide range of cost-effective products to our customers.
SRAM. We provide SRAM based SIMMs, DIMMs and SO-DIMMs for industrial and other applications.
Our SRAM modules are used in communication systems, point of sale terminals, electronic
verification equipment, industrial instrumentation, medical instruments, disk drives, servers,
graphics products and workstations. We manufacture and market SRAM modules in a variety of form
factors and capacities. Some of our SRAM modules include batteries and associated power monitoring
or charging circuitry for non-volatile operation.
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eFlashTools and FlashTools. We have engineered our software development tools, eFlashTools and
FlashTools, to offer a user-friendly environment in which to update or program linear flash cards
in the field or in-house. These programs allow users to upgrade their cards from a local desktop
with a program sent from the manufacturer, in the case of FlashTools, or downloaded from a web
site in the case of eFlashTools. These tools offer significant time savings over legacy support
techniques. Our current implementations of these software solutions provide our OEM
customers with freedom and flexibility while maintaining the protection of our customers
intellectual property. Users can license FlashTools and receive data for programming directly from
the OEM. This flexible solution allows the OEM to control its intellectual property. In other
cases, users can license eFlashTools from our e-commerce enabled web site.
Embedded Computing Products
We offer complex, diversified, and high quality products designed for embedded computing and
communication applications to OEMs. We produce products that are designed for continuous operation
and long life systems. Our embedded products are Restriction of Hazardous Substances, or RoHS,
compliant and may be supported for extended production lifetimes. To develop these products, we
rely on a small number of highly skilled employees and third parties located worldwide to which we
outsource a portion of our product development efforts. We leverage our vertical integration,
worldwide manufacturing, and logistics footprint to provide customers with a cost effective
solution to their embedded computing needs.
We have developed the XceedPC family, a product line of embedded, long life systems that are
PC compatible and use either Linux or Microsoft Windows XP operating systems. This product family
is focused on kiosk, point of service, point of sale and digital signage applications enabling more
efficient, self-initiated, self-service transactions and queries.
Display Products
We develop leading edge display subsystems using TFT-LCDs, touch panels, and controller
products targeted at gaming, kiosk, ATM, point-of-service, digital signage and industrial control
systems. We develop and manufacture display interface boards implementing VGA, DVI, and TV
interfaces. Our display products are configured standalone and integrated with TFT-LCD panels and
touch screens sourced from leading manufacturers to produce display subsystems optimized for a
customers specific needs.
We support display products from the United States, Korea and Malaysia, allowing us to quickly
and cost-effectively deliver TFT-LCD touch screen solutions to customers worldwide. In addition to
providing engineering and manufacturing expertise, we also provide an extensive logistics and
global supply organization to support this product line.
Product-Related Logistics and Services
Our logistics and services offerings are tailored to meet the specific needs of our customers.
As a complement to our product sales, we offer custom supply chain services including procurement,
logistics, inventory management, temporary warehousing, kitting and packaging services. Our global
footprint allows us to provide these services to our customers in many regions of the world. For
example, we supply upgrade memory modules to over 600 end users worldwide for one of our OEM
customers. Our global inventory management capabilities allow us to manage a vast array of customer
and supplier part numbers across our manufacturing and logistics hubs worldwide to help our
customers minimize inventory levels while maintaining reliable delivery and availability of supply.
For example, we currently manage the supply chain of most of the memory semiconductors and modules
around the world for a leading networking OEM. In fiscal 2009, 2008 and 2007, our logistics and
service offerings from our Memory, Display & Embedded Segment accounted for approximately 8%, 6%
and 6% of total net sales, respectively.
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Adtron Segment
We provide a comprehensive line of SSD products to multiple markets including defense,
aerospace, industrial automation, medical, transportation and enterprise. The Xceed family of
products are industrial grade storage products which bring the performance, reliability and
ruggedness of solid state technology to our customers through easy-to-integrate, industry-standard
interfaces. Our SSD products, ranging in capacity from 4GB to 400GB, are targeted at application
segments with specific added value that differentiates them from the competition:
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XceedLite low power requirement appropriate for mobile applications |
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XceedUltra, XceedUltraX and Xceed IOPs high sequential performance appropriate
for streaming data applications found in medical, transportation, industrial
automation, server, aerospace and various storage applications |
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XceedSecure unique data security technology appropriate for defense and aerospace
applications |
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XceedSCSI appropriate for interfacing with certain discontinued hard disk drive
products targeted at the legacy Small Computer System Interface (SCSI) market |
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Xcel-10 high IOPs performance and industrial temperate range (iTemp) appropriate
for performance and temperature sensitive applications. |
Design, Manufacturing and Test
Design
By working closely with our customers we are able to deliver technically advanced products
designed to meet their specific needs. We have design centers in Newark (California), Gunpo (South
Korea), Irvine (California), Phoenix (Arizona), Tewksbury (Massachusetts), Penang (Malaysia) and
Atibaia (Brazil). Our engineers focus on schematic design, component selection and qualification,
PCB layout, firmware and software driver development, and applications integration. The layouts for
memory modules and advanced flash storage solutions are complex due to their high component and
trace densities and the complexities increase as the speed of memory semiconductors increases. Our
advanced engineering and design capabilities allow us to address our customers increasingly
complex needs. We work closely with our customers and suppliers to design competitive solutions to
satisfy our customers memory requirements, shorten their time-to-market and enhance the
performance of our customers applications.
Manufacturing
We believe that the efficiency of our manufacturing operations has benefited from our many
years of design experience and our existing library of proven designs which stress high
manufacturability and quality. We offer localized, cost-efficient ISO 9001 certified manufacturing
services from consignment to turnkey manufacturing, all backed by test services using advanced
testing equipment. Our manufacturing facilities are currently located in Newark (California),
Penang (Malaysia), Atibaia (Brazil), and Aguada (Puerto Rico). Over 20 years of manufacturing
experience enables us to quickly move from manufacturing initiation to full production volumes of a
new product which is key to helping our customers achieve rapid time-to-market for their new
product introductions. Our manufacturing processes rely on a high level of automation and involve
the use of fine pitch surface mount equipment. Our surface mount manufacturing lines for memory
modules have been optimized to support the placement and configuration of a high number of
semiconductors on each board. As a result of our design efficiencies, high level of automation and
general manufacturing expertise, we believe we consistently achieve high manufacturing yields and
reduced direct labor costs, and offer our customers quick turnaround of both small and large
production orders.
Test
Product testing is an important aspect of our manufacturing operations. We test our products
for full functionality. We have a track record of achieving stringent quality targets across a
broad spectrum of system applications. We believe that we have established substantial technical
expertise in the testing of products for high-end applications. We have a group of experienced test
engineers who have developed proprietary testing routines and parameters which, combined with our
advanced test equipment, enable us to diagnose problems in system design or components,
characterize the performance of new products and provide high quality products in volume.
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Suppliers
To address the needs of our customers, we have developed and maintained relationships with
leading semiconductor suppliers located in Asia, Europe and the Americas. Our semiconductor
suppliers include many of the worlds largest memory manufacturers, such as Hynix, Micron, NEC and
Samsung. We frequently work jointly
with them in bidding for customers design-in opportunities. We work closely with our primary
suppliers to better ensure that materials are available and delivered on time at competitive
prices. Our long-standing relationships with leading semiconductor suppliers put us in a favorable
position to procure sufficient quantities of materials during periods of industry shortages. Our
flexible and responsive global manufacturing capabilities, inventory management systems and global
IT system allow us to cost-effectively move materials from one site to another and often employ
what might otherwise be excess inventory among other products and OEM customers.
Customers
Our principal customers include major OEMs which compete in the computing, networking,
communications, printer, storage and industrial markets. Overall, we served more than 400 customers
in fiscal 2009. For fiscal 2009, 2008 and 2007, our ten largest OEM customers accounted for 64%,
71% and 77% of net sales, respectively. In fiscal 2009, 2008 and 2007, Hewlett-Packard accounted
for 28%, 39% and 47% of our net sales, respectively, and Cisco Systems accounted for 13%, 12% and
13% of our net sales, respectively. During these periods, no other customers in either segment
accounted for more than 10% of our total net sales. Our long-standing relationships with Cisco
Systems and Hewlett-Packard, which span more than 10 years, are multi-dimensional and exist within
individual business units and engineering organizations at these customers.
Sales, Support and Marketing
We primarily sell our products directly to major OEMs. Our sales organization also utilizes a
network of independent sales representatives located throughout North America, Europe and Asia. Our
direct sales and marketing efforts are conducted in an integrated process incorporating these
independent sales representatives together with our own customer service representatives and our
senior executives. Larger OEM customers are supported by dedicated sales and support teams. Our
advanced memory solutions group provides on-site field application engineering support to our
customers. Our field application engineers work closely with our OEM customers in the product
design process. We have sales offices in North America, Latin America, Europe and Asia. At the end
of fiscal 2009, we had 84 sales and marketing personnel worldwide.
In addition, through our channel sales organization, we sell to value added resellers
(VARs), value added dealers (VADs), distributors and smaller OEMs. Additionally, our channel
sales organization utilizes a limited number of independent sales representatives. We also utilize
an on-line memory configuration application which allows quick and easy access to detailed memory
upgrade information and helps meet the special needs of system builders, solution integrators,
VARs, VADs and end-users.
We provide our customers with comprehensive customer service and technical support. We have
service and support personnel across North America as well as in Latin America, Europe and Asia. We
have also developed a number of on-line tools, some customized for single customers, to assist our
customers.
Our marketing activities include active memberships in industry organizations such as Joint
Electron Device Engineering Council (JEDEC), Personal Computer Memory Card International
Association (PCMCIA), USB Implementers Forum, SD Card Association and CompactFlash Association.
We advertise in technical journals, publish articles in leading industry periodicals and utilize
direct mail solicitation. We also participate in many industry trade shows worldwide.
Research and Development
The timely development of new products is essential to maintaining our competitive position.
Our research and development activities are focused primarily on new high-speed memory modules and
cards, SSDs, embedded flash memory subassemblies, TFT-LCD analog to digital controller boards and
open frame display solutions, ongoing improvement in manufacturing processes and technologies and
continual improvement in test routines and software. We plan to continue to devote research and
development efforts to the design of new products which address the requirements of our customers,
especially to our SSD products as we meet the needs of this nascent and emerging end market.
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Our engineering staff continually explores practical applications of new technologies, works
closely with our OEM customers and provides services throughout the product life cycle, including
architecture definition, component selection, schematic design, layout, and manufacturing and test
engineering. We design our products to be compatible with existing industry standards and, where
appropriate, develop and promote new standards or provide custom solutions to meet customers
unique requirements. An important aspect of our research and development effort is the
understanding of the challenges presented by our customers requirements and addressing them by
utilizing our industry knowledge, proprietary technologies and technical expertise.
We spent $19.8 million, $20.2 million and $16.4 million, on research and development during
fiscal 2009, 2008 and 2007, respectively. At the end of fiscal 2009, we had 109 research and
development personnel worldwide.
Intellectual Property
We
have 12 issued patents which expire between October 2014
and September 2027, and 20 patent
applications pending in the United States. We also have two patent applications pending with the
European Patent Office which relate to inventions for which patents are pending in the United
States. We expect to file new patent applications where appropriate to protect our proprietary
technologies. We believe however that our continued success depends primarily on trade secrets,
know-how, and the technological skills and innovation of our personnel rather than on patent
protection.
Backlog
Sales of our products are generally made pursuant to customer purchase orders. We include in
backlog only those customer orders for which we have accepted purchase orders and to which we
expect to ship within the next twelve months. Orders constituting our current backlog are subject
to changes in delivery schedules or cancellation with only limited or no penalties. Additionally,
as our customers are aware that in many instances we are able to fulfill purchase orders in less
than five business days, a substantial amount of our net sales is turns business that is booked and
shipped in the same month. For these reasons, we believe that the amount of our backlog is not
necessarily an accurate indication of our future net sales.
Competition
We conduct business in industries characterized by intense competition, rapid technological
change, constant price pressures and evolving industry standards. Our competitors include many
large domestic and international companies that have substantially greater financial, technical,
marketing, distribution and other resources, greater name recognition, broader product lines, lower
cost structures, and longer-standing relationships with customers and suppliers than we do.
In the memory module industry we compete against semiconductor suppliers that maintain captive
memory module and card production capabilities including Hynix, Micron, Samsung, SanDisk and
Western Digital. Other primary competitors in the memory module and card industry include NetList,
STEC, Viking InterWorks, a Sanmina-SCI company, Unigen and Wintec. Our primary competitors in the
embedded computing market are Artesyn, an Emerson company, Kontron and Radisys, and in the display
market are ELO Technologies, Kortek, Tovis and Wells Gardner.
The SSD market has attracted numerous competitors, both large and small, from around the
world. Entrants generally target specific segments within the SSD market. Large manufacturers of
SSDs such as Intel, Samsung and SanDisk have targeted the client/consumer laptop, PC and enterprise
markets, while smaller vendors such as Apacer, PQI and Transcend have selected smaller niche
markets. Intel has also targeted the high-end commercial (enterprise OTLP) market. Our primary
competitors in the defense, aerospace, industrial, medical, transportation, and industrial
automation markets are BiTMICRO, Mtron, Transcend and STEC. In the enterprise market, our primary
competitors for embedded flash are STEC, SSI (Western Digital), Viking InterWorks, a Sanmina-SCI company, Fusion-io,
Pliant and SanDisk. As we enter the market for enterprise SSDs, we will be competing with Intel,
Samsung, Hitachi, Seagate, STEC, Micron, Toshiba, Fusion-io and BiTMICRO.
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We face competition from current and prospective customers that evaluate our capabilities
against the merits of manufacturing products internally. In addition, certain of our competitors,
such as Hynix, Micron and Samsung, are also our significant suppliers, many of whom have the
ability to manufacture competitive products at lower costs than we can as a result of their higher
levels of product integration. In addition to existing competitors, we expect to face competition
from new and emerging companies that may enter our existing or future markets.
To remain competitive we must continue to provide technologically advanced products and
manufacturing services, maintain high 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 in
the future lead to intensified price competition resulting in lower net sales, lower gross profit
and lower gross margins.
Employees
At the end of fiscal 2009, we had 1,119 permanent employees of whom 783 were in manufacturing
(including test, quality assurance and materials work), 109 were in research and development, 84
were in sales and marketing, and 143 were in finance, IT and administration. At that date, we also
employed an additional 210 temporary employees, primarily in manufacturing. Our employees are not
represented by any collective bargaining agreements and we have never experienced a work stoppage.
Environmental Matters
Our operations and properties are subject to a variety of U.S. and international environmental
laws and regulations governing, among other things, air emissions, wastewater discharges,
management and disposal of hazardous and non-hazardous materials and wastes, and remediation of
releases of hazardous materials. We cannot be certain that identification of presently unidentified
environmental conditions, more vigorous enforcement by regulatory agencies, enactment of more
stringent laws and regulations, or other unanticipated events will not arise in the future and
cause additional material liabilities which could have a material adverse effect on our business,
financial condition, and results of operations.
Financial Information About Geographic Area
We conduct business worldwide. Net sales are attributed to geographic areas based on the
location of customers. A summary of net sales and property and equipment by geographic area is
contained in Note 12 of Notes to Consolidated Financial Statements.
Available Information
We maintain a website at www.smartm.com. Our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and related amendments are available free of charge
through our website as soon as reasonably practicable after such reports are electronically filed
with or furnished to the SEC. Our website and the information contained in it and connected to it
shall not be deemed incorporated by reference into this Form 10-K. You may inspect and copy our
reports, proxy statements and other information filed with the SEC at the offices of the SECs
Public Reference Room located at 100 F Street, NE, Washington D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of Public Reference Rooms. The SEC also
maintains an Internet website at www.sec.gov.
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Described below and throughout this report are certain risks that the Companys management
believes are applicable to the Companys business and the industry in which it operates. If any of
the described events occur, the
Companys business, results of operations, financial condition, liquidity, or access to the
capital markets could be materially adversely affected. When stated below that a risk may have a
material, negative or adverse effect on the Companys business, it means that such risk may have
one or more of these effects.
Investing in our common stock involves a high degree of risk. Before purchasing our common
stock, you should carefully consider the risks described below in addition to the other information
in this report. The risks described below are not the only ones we face. Additional risks we are
not presently aware of or that we currently believe are immaterial may also impair our business
operations. The trading price of our common stock could decline due to any of these risks, and you
could lose all or part of your investment. In assessing these risks, you should also refer to the
other information contained or incorporated by reference in this report, including our consolidated
financial statements and related notes.
Risks Related to Our Business
We are subject to the cyclical nature of the markets in which we compete and downturns adversely
affect our business, results of operations and financial condition.
The markets in which we compete are highly cyclical and characterized by constant and rapid
technological change, rapid product obsolescence, price erosion, evolving standards, short product
life cycles and wide fluctuations in product supply and demand. These markets have experienced
significant downturns often connected with, or in anticipation of, maturing product cycles of both
component suppliers and electronic equipment manufacturers, and declines in general economic
conditions. These downturns have been characterized by diminished product demand, production
overcapacity, high inventory levels and accelerated erosion of selling prices. Our industry depends
on the continued growth of the electronics industry and on end-user demand for our customers
products. Economic downturns have often had an adverse effect upon manufacturers and end-users of
electronic products. The timing of new product developments, the life-cycle of existing electronic
products, and the level of acceptance and growth of new products can also affect demand for our
products. Downturns in the markets we serve could have a material adverse effect on the demand for
our products. Additionally, due to changing conditions, our customers have experienced and may in
the future experience periods of inventory corrections which could have a significant adverse
impact on our results. During an industry downturn, there is also a higher risk that some of our
trade receivables would be uncollectible.
We cannot predict the timing or the severity of the cycles within our industry. In
particular, it is difficult to predict how long and to what levels any industry upturn or downturn
and/or general economic weakness will last or be exacerbated by other factors. The current
worldwide economic downturn has adversely affected sales of products in end markets served by our
customers which have adversely affected demand for our products. While there has been slight
improvement in industry conditions since the fourth quarter of fiscal 2009, we had experienced
significant declines in demand for our products during the last preceding several quarters. There
can be no assurance as to when and if, or to what extent, the demand for our products will
increase.
Reduced demand for our products due to any of the forgoing matters can have a material adverse
effect on our business, our results of operations and our financial condition. Our historical
operating results have been subject to substantial fluctuations and we may experience substantial
period-to-period fluctuations in future operating results. Moreover, changes in end-user demand
for the products sold by any individual OEM customer can have a rapid and disproportionate effect
on demand for our products from that customer in any given period, particularly if the OEM customer
has accumulated excess inventories of products purchased from us.
There can be no assurance that our 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 industries utilizing our products. As a result, our results of operations for any
particular period may not be indicative of our future results.
We have experienced quarterly losses in the past and a loss for this fiscal year, and may
experience periodic losses in the future.
We have experienced quarterly losses in the past. As we continue to expend substantial funds
for engineering, research and development projects, enhancements to sales and marketing efforts and
to otherwise operate our business, there can be no assurance that we will be profitable on a
quarterly basis in the future.
9
Declines in memory component prices and our average selling prices may result in declines in our
net sales and gross profit.
Our industry is highly competitive and characterized by historical declines in average selling
prices. Our average selling prices may decline due to several factors including general declines in
demand for our products, and excess supply of DRAM and Flash memory components as a result of
overcapacity caused by increased manufacturing efficiencies, new manufacturing processes and
manufacturing capacity expansions by component suppliers. In the past, transitions to smaller
design geometries and other factors causing overcapacity in memory markets have led to significant
increases in the worldwide supply of memory components. If not accompanied by increases in demand,
these supply increases usually result in significant declines in component prices which in turn
lead to declines in the average selling prices of our products. During periods of overcapacity, our
net sales may decline if we do not increase sales of existing products or fail to introduce and
sell new products in quantities sufficient to offset declines in selling prices. Our efforts to
increase sales or to introduce new products to offset the impact of declines in average selling
prices may not be successful. Furthermore, our competitors and customers also impose significant
pricing pressures on us. These declines in average selling prices have in the past and may again in
the future, have a material adverse effect on our business, our results of operations and our
financial condition. Declines in prices could also affect the valuation of our inventory which
could harm our business, our results of operations and our financial condition. Declines in
average selling prices might also enable OEMs to pre-install higher capacity based memory into new
systems at existing price points thereby reducing the demand for future memory upgrades. In
addition, our net sales and gross profit may be negatively affected by shifts in our product mix
during periods of declining average selling prices.
Sales to a limited number of customers represent a significant portion of our net sales, and the
loss of any key customer or key program would materially harm our business.
Because of our dependence on a limited number of key customers, the loss of a major customer
(or loss of a key program with a major customer), or any significant reduction in orders by a major
customer would materially reduce our net sales and gross profit and adversely affect our business,
our results of operations and our financial condition. We expect that sales to relatively few
customers will continue to account for a significant percentage of our net sales for the
foreseeable future, however there can be no assurance that any of these customers or any of our
other customers will continue to utilize our products or our services at current levels. A
substantial portion of our business is not associated with firm long-term volume commitments and we
generally only enter into individual purchase orders with our customers. Although we have master
agreements with one or more key customers, these agreements govern the terms and conditions of the
relationship and may not contain requirements to purchase minimum volumes.
Since a large percentage of our sales are to a small number of customers that are primarily
large OEMs, these customers have exerted, and we expect they will continue to exert, pressure on us
to make price concessions which concessions can adversely affect our business, our results of
operations and our financial condition.
Our principal customers include major OEMs which compete in the computing, networking,
communications, printer, storage and industrial markets. For fiscal 2009, 2008 and 2007, our ten
largest OEM customers accounted for 64%, 71% and 77% of net sales, respectively. This decline is
mostly attributable to declines in our net sales to our largest customer, Hewlett-Packard. In
fiscal 2009, 2008 and 2007, Hewlett-Packard accounted for 28%, 39% and 47% of our net sales,
respectively. During this time period, our sales to Hewlett-Packard have declined both in absolute
dollars and as a percentage of our net sales and we expect that net sales to Hewlett-Packard will
continue to decline in the future. In fiscal 2009, 2008 and 2007, Cisco Systems accounted for 13%,
12% and 13% of our net sales, respectively. Hewlett-Packard and Cisco Systems are the major
customers of our Memory, Display & Embedded Segment. During these periods, no other customers in
either segment accounted for more than 10% of our total net sales.
10
Our customers are primarily in the computing, networking, communications, printer, storage and
industrial markets, and the current and future fluctuations in demand in these markets are and may
continue to adversely affect sales of our products.
Sales of our products are dependent upon demand in the markets served by our customers. We
may experience substantial period-to-period fluctuations in future operating results due to factors
affecting these markets. From time to time, each of these markets has experienced downturns, often
in connection with, or in anticipation of, declines in general economic conditions. A continual
decline or significant shortfall in demand in any one of these markets could have a material
adverse effect on the demand for our products and therefore a material adverse effect on our
business, results of operations and financial condition.
Customer demand is difficult to accurately forecast and, as a result, we may be unable to optimally
match purchasing and production to meet customer demand which in turn can have an adverse impact on
our business, our results of operations and our financial condition.
The Company in most cases does not obtain long-term purchase orders or commitments from its
customers but instead works with its customers to develop nonbinding estimates or forecasts of
future requirements. Utilizing these nonbinding estimates or forecasts, we make significant
decisions based on our estimates of customer requirements including determining the levels of
business that we will seek and accept, production scheduling, component purchasing and procurement
commitments, personnel and production facility needs and other resource requirements. A variety of
conditions, both specific to each individual customer and generally affecting each customers
industry, will frequently cause customers to cancel, reduce or delay orders that were either
previously made or anticipated. Generally, customers may cancel, reduce or delay purchase orders
and commitments without penalty. The short-term and flexible nature of commitments by many of our
customers and the possibility of unexpected changes in demand for their products reduces our
ability to accurately estimate future customer requirements. On occasion, customers may require
rapid increases in production which can challenge our resources and can reduce profit margins. We
may not have sufficient capacity at any given time to meet our customers demands. Downturns in
the markets in which our customers compete can, and have, caused our customers to significantly
reduce the amount of products ordered from us or to cancel existing orders leading to lower
utilization of our facilities. This in turn can cause us to have more inventory than we need and
can result in inventory write-downs or write-offs which could have a negative effect on our gross
profit, our results of operations and our financial condition. Additionally, as many of our costs
and operating expenses are relatively fixed, reduction in customer demand would have an adverse
effect on our net sales, results of operations and financial condition.
Worldwide economic conditions and other factors may adversely affect our operations, cause
fluctuations in demand for our products and have an adverse impact on our business, our results of
operations and our financial condition.
Uncertainty in global economic conditions poses a risk to the overall economy, as consumers
and businesses have deferred and may continue to defer purchases in response to tighter credit and
less discretionary spending. In the past, economic slowdowns in the United States and worldwide
have adversely affected sales of products in end markets served by our customers which, in turn,
adversely affects demand for our products. Declines in the worldwide semiconductor market or a
future decline in economic conditions or consumer confidence would likely decrease the overall
demand for our products which could have a material adverse effect on our business. More generally,
various events could cause consumer confidence and spending to decrease or result in increased
volatility to the U.S. and the worldwide economies. Any such occurrences could have a material
adverse effect on our business, financial condition and results of operations.
11
If demand for our products fluctuates as a result of economic conditions or for other reasons,
our revenue and gross margin could be adversely affected. Other factors that could cause demand for
our products to fluctuate include:
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a downturn in the server and computing industries, networking and telecommunications
industries; |
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changes in consumer confidence caused by changes in market conditions, including changes
in the credit market, expectations for inflation, and energy prices; |
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changes in the level of customers components inventory; |
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competitive pressures, including pricing pressures, from companies that have competing
products, architectures, manufacturing technologies, and marketing programs; |
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changes in customer product needs; |
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strategic actions taken by our competitors; and |
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market acceptance of our products. |
If product demand decreases, our manufacturing or assembly and test capacity could be
under-utilized, and we may be required to record an impairment on our long-lived assets, including
facilities and equipment, as well as intangible assets, which would increase our expenses. In
addition, if product demand decreases or we fail to forecast demand accurately, we could be
required to write-off inventory or record under-utilization charges, which would have a negative
impact on our gross margin and/or our profitability. In the long term, if product demand increases,
we may not be able to add manufacturing or assembly and test capacity fast enough to meet market
demand. These changes in demand for our products, and changes in our customers product needs,
could have a variety of negative effects on our competitive position and our financial results,
and, in certain cases, may reduce our revenue, increase our costs, lower our gross margin
percentage, or require us to recognize impairments of our assets.
The recent financial crisis
could negatively affect our business, results of operations and
financial condition.
The recent financial crisis affecting the banking system and financial markets and the going
concern threats to financial institutions have resulted in a tightening in the credit markets, a
low level of liquidity in many financial markets, and extreme volatility in credit, fixed income,
and equity markets. These conditions have caused consumers and businesses to defer purchases in
response to tighter credit and less discretionary spending, have adversely affected consumer
confidence and sales of products in end markets served by our customers and have adversely affected
demand for our products. There could be a number of follow-on effects from the credit crisis on our
business, including insolvency of key suppliers resulting in product delays; inability of customers
to obtain credit to finance purchases of our products resulting in lower net sales, customer
insolvencies and increased risk in collecting customer receivables; and increased expense of or
inability to obtain short-term financing of our operations. Furthermore, in the United States and
abroad, financial markets are experiencing significant volatility, and global economic measures are
being undertaken by political and financial leaders. While these measures appear to be having a
positive impact at this time, the long term effects of these measures are uncertain. All of these
factors could have a negative effect on our business, our results of operations and our financial
condition.
Order cancellations or reductions, product returns, selling price decreases and product
obsolescence could result in lower net sales and substantial inventory write-downs.
We have experienced cancellations of orders and fluctuations in order levels from period to
period and expect that we will continue to experience such cancellations and fluctuations in the
future. Certain customer purchase orders may be cancelled and order volume levels can be changed,
cancelled or delayed with limited or no notice or penalties. The replacement of such purchase
orders with new orders cannot be assured. To the extent we manufacture products or make purchases
in anticipation of future demand that does not materialize, or in the event a customer cancels or
reduces outstanding orders, we could experience an unanticipated increase in our inventory. We
have had in the past and expect to continue to have inventory write-downs and/or write-offs due to
obsolescence, excess quantities and declines in market value below our costs. These occurrences
have a negative impact on our results of operations and our financial condition.
12
Our logistics business requires us to make inventory purchases based on customer forecasts which
can be unpredictable and which can in turn cause us to have significant increases in inventory from
time to time resulting in a negative impact on our cash flow and possibly resulting in inventory
write-downs which would have a negative impact on our results of operations and our financial
condition.
Our logistics business requires us to make significant inventory purchases based on customer
forecasts and/or customer purchase orders. In most instances, purchase orders can be rescheduled at
the customers option, often
times without penalty. When actual consumption does not meet the forecast or the customers
purchase orders, it will result in unanticipated and sometimes significant increases in our
inventory. Additionally, some of our logistics transactions contemplate extended periods of
inventory management. We believe that our programs generally obligate customers to purchase all of
the logistics inventory with minimal exposure to price reductions, and typically include periodic
carrying charges to be paid by the customers. There can be no assurance, however, that the
customers will comply with these obligations. If a large customer of our logistics business fails
to consume the inventory that we purchase for them, this could result in significant inventory
write-downs and would have a material, negative impact on our cash flow, our results of operations
and our financial condition.
New product development, particularly our solid state storage products, requires significant
investment and if we fail to develop new or enhanced products and introduce them in a timely
manner, this could have a negative impact on our competitiveness, our business and our results of
operations.
The markets in which we compete are subject to rapid technological change, product
obsolescence, frequent new product introductions and feature enhancements, changes in end-user
requirements and evolving industry standards. Our ability to successfully compete in these markets
and to continue to grow our business depends in significant part upon our ability to develop,
introduce and sell new and enhanced products on a timely and cost-effective basis, and to
anticipate and respond to changing customer requirements. We have experienced, and may experience
in the future, delays in the development and introduction of new products. 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 our net sales which would have a
material adverse effect on our business, results of operations and financial condition.
Delays in the development, introduction and qualification of new products could provide a
competitor a first-to-market opportunity and allow a competitor to achieve greater market share or
permit a customer to cancel time-sensitive orders without penalty. Defects or errors found in our
products after commencement of commercial shipment could result in delays in market acceptance of
these products. Lack of market acceptance for our new products would jeopardize our ability to
recoup research and development expenditures, hurt our reputation and negatively impact our
business, our results of operations and our financial condition. Accordingly, there can be no
assurance that our future product development efforts will be successful or result in products that
gain market acceptance. We have supported in the past and expect in the future to support new
technologies and emerging markets. If these new technologies and emerging markets fail to be
accepted or grow, our business, our results of operations and our financial condition could be
negatively impacted.
In particular, we have made and will continue to make in the future, significant investments
in SSDs and other solid state storage products through research and development and other
expenditures. While we believe that our investments in solid state storage will enable us to
participate in several important growth markets, there is significant competition for these markets
and there can be no assurance that the products we develop and introduce will be timely, will gain
any market acceptance or will result in any significant increase to our net sales. If these
investments fail to provide the expected returns this would have a material negative impact on our
business, our results of operations and our financial condition.
Transitions to newer technologies can result in inventory write-offs, product shortages and can
cause our manufacturing equipment to become obsolete in a shorter period of time than the initially
estimated useful life causing us to incur impairment charges, all of which can have a negative
impact on our results of operations and financial condition.
Our industry is highly competitive and characterized by constant and rapid technological
change, rapid product obsolescence, evolving standards and often short product life cycles. If the
life cycle of a product is driven to a shorter end as a result of the introduction of a new
technology, we may be forced to transition our manufacturing capabilities to a new configuration
quicker than originally planned. This can result in increased capital and other expenditures. This
can also cause decreases in demand for the older technology products and our manufacturing or
assembly and test capacity becoming under-utilized. As a result we may be required to record an
impairment on our long-lived assets, including facilities and equipment, as well as intangible
assets, which would increase our expenses. In addition, if product demand decreases or we fail to
forecast demand accurately, we could be required to write-off inventory or record under-utilization
charges, which would have a negative impact on our gross margin
and/or our profitability. When new technologies are introduced, the capacity to manufacture
the new products often cannot meet the demand and product shortages can arise. If our suppliers
over commit to us and to our competitors as to how much product demand they can support, we may not
be able to fill customer orders or participate in new markets as they begin. These factors can all
have an adverse effect on our business, our results of operations and our financial condition.
13
Our dependence on a small number of sole or limited source suppliers subjects us to certain risks
and our results of operations would be adversely affected if we are unable to obtain adequate
supplies in a timely manner.
We are dependent upon a small number of sole or limited source suppliers for certain
materials, including critical components, we use in manufacturing our products. We purchase almost
all of our materials from our suppliers on a purchase order basis and generally do not have
long-term contracts with suppliers. There is no assurance that our suppliers will agree to supply
the quantities of components we may need to meet our production goals. Our major suppliers include
Hynix, Micron, NEC and Samsung. The markets in which we operate have experienced, and may
experience in the future, shortages in components. These shortages cause some suppliers to place
their customers, including us, on component allocation. Our suppliers are not required to supply
us with any minimum quantities and there can be no assurance that we will receive adequate
quantities of components on a timely basis in the future. As a result, we may not be able to
obtain the components that we need to fill customer orders. If any of our suppliers experience
quality control or infringement problems, our products that utilize that suppliers components may
be disqualified by one or more of our customers and we would not be able to fill customer orders.
The inability to fill customer orders could cause delays, customer cancellations, disruptions or
reductions in product shipments or require product redesigns and/or re-qualifications which could,
in turn, damage relationships with current or prospective customers, increase costs or prices and
have a material adverse effect on our business, results of operations and financial condition.
A disruption in or termination of our supply relationship with any of our significant
suppliers or our inability to develop relationships with new suppliers, if required, would cause
delays, disruptions or reductions in product shipments or require product redesigns which could
damage relationships with our customers, increase our costs or the prices of our products and
adversely affect our business, results of operations and financial condition.
An increasing number of our OEM customers may design standard modules into their products which
could reduce demand for our higher-priced customized memory solutions.
In an effort to reduce costs and assure supply of their memory module requirements, an
increasing number of our OEM customers have been designing JEDEC standard modules into their
products. Although we also manufacture JEDEC modules, this trend could further reduce the demand
for our higher priced customized memory solutions which in turn would have a negative impact on our
business, results of operations and financial condition. In addition, customers deploying custom
memory solutions today may in the future choose to adopt a JEDEC standard, and the adoption of a
JEDEC standard module instead of a custom module might allow new competitors to participate in a
share of our customers memory module business that the customers currently purchase from us.
The flash memory market is constantly evolving and increasingly competitive, and we may not have
rights to manufacture and sell certain types of products utilizing emerging flash formats, or we
may be required to pay a royalty to sell products utilizing these formats.
The flash-based storage market is constantly undergoing rapid technological change and
evolving industry standards. Many consumer devices, such as digital cameras, PDAs and smartphones,
have already transitioned to certain flash memory formats, such as the Memory Stick, Commercial
Grade SD, Micro SD and xD Picture Card formats which we do not currently manufacture and do not
have rights to manufacture. Although we do not currently serve the consumer flash market, it is
possible that certain OEM customers of ours may choose to adopt these formats. If we decide to
manufacture flash memory products utilizing these formats, we will be required to secure licenses
to give us the right to manufacture such products and/or enter into arrangements to have licensed
subcontract assembly facilities produce these products, which may not be available to us on
reasonable terms or at all. If we are unable to supply certain flash memory products at
competitive prices or at all, our net sales could be adversely impacted and our customers might
cancel orders or seek other suppliers to replace us.
14
In addition to the memory market, we also compete in the highly competitive embedded computing and
display markets.
The embedded computing and display markets are also highly competitive. Certain of our
competitors are more diversified than us and may be able to sustain lower operating margins in
their embedded computing and display business based on the profitability of their other businesses.
We expect to continue to experience significant competition in these markets as existing
competitors introduce new products and process technologies, new competitors enter the market,
industry-wide production capacity increases and competitors aggressively price products. Our net
sales in these markets have been negatively impacted by component shortages during fiscal 2009 in
the product areas that we have targeted and these conditions may continue in the future.
Our growth initiatives require significant capital investments and we cannot be assured that we
will realize a positive return on these investments.
Our ongoing business initiatives require capital investment. For example, during fiscal 2008
we made capital expenditures to expand production, test and packaging capacity in our Atibaia,
Brazil facility and we plan on additional capital investment in the near future in Brazil, Malaysia
and elsewhere. During fiscal 2007 we expanded our facility in Brazil by adding an additional
23,000 square feet. If our expected returns on these investments are not achieved, it could have a
negative effect on our results of operations and our financial condition.
Industry consolidation and company failures could adversely affect our business by reducing the
number of potential customers, increasing our reliance on our existing key customers and reducing
the competitiveness of our supplier base.
Some participants in the industries which we serve have merged and/or been acquired and this
trend may continue. In addition, there have been company failures among both our customer and
supplier base. Industry consolidation and company failures will likely decrease the number of
potential significant customers for our products and services. The decrease in the number of
significant customers will increase our reliance on key customers and, due to the increased size of
these companies, may negatively impact our bargaining position and thus our profit margins.
Consolidation and company failures in some of our customers industries may result in the loss of
customers. The loss of, or a reduced role with, key customers due to industry consolidation and
company failures could negatively impact our business, our results of operations and our financial
condition. Additionally, consolidation and company failures in our supplier base could reduce our
purchasing alternatives and reduce the competition for our business resulting in higher cost of
goods and less availability of components which would have a negative impact on our business, our
results of operations and our financial condition.
We may make acquisitions which involve numerous risks. If we are not successful in integrating the
technologies, operations and personnel of acquired businesses or fail to realize the anticipated
benefits of an acquisition, our operations and financial results may be adversely affected.
As part of our business and growth strategy, we may acquire or make significant investments in
businesses, products or technologies that allow us to complement our existing product offering,
expand our market coverage, increase our engineering workforce or enhance our technological
capabilities. For example, in March 2008 we acquired Adtron Corporation, a designer and supplier
of SSDs. Any acquisitions or investments would expose us to the risks commonly encountered in
acquisitions of businesses. Such risks include, among others:
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problems integrating the purchased operations, technologies or products; |
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unanticipated costs or expenses associated with an acquisition or investment including
write-offs of goodwill or other intangible assets; |
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negative effects on profitability resulting from an acquisition or investment; |
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adverse effects on existing business relationships with suppliers and customers; |
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risks associated with entering markets in which we have no or limited prior experience
and government markets with complex regulations; |
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loss of key employees of the acquired business; and |
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litigation arising from an acquired companys operations. |
15
Problems encountered in connection with an acquisition could divert the attention of
management, utilize scarce corporate resources, and otherwise harm our business. If we make any
future acquisitions, we could issue stock that would dilute our shareholders percentage ownership,
incur substantial debt, expend cash and reduce our cash reserves, or assume additional liabilities.
Furthermore, acquisitions may require material charges and could result in adverse tax
consequences, substantial depreciation, deferred compensation charges, liabilities under earnout
provisions, the amortization of amounts related to deferred compensation and identifiable purchased
intangible assets or impairment of goodwill, any of which could negatively impact our results of
operations. We are unable to predict whether or when any prospective acquisition candidate will
become available or the likelihood that any acquisition will be completed. Even if we do find
suitable acquisition opportunities, we may not be able to consummate the acquisitions on
commercially acceptable terms or realize the anticipated benefits of any acquisitions we do
undertake.
We may not be able to maintain or improve our competitive position because of the intense
competition in the markets we serve.
We conduct business in markets characterized by intense competition, rapid technological
change, unpredictable supply and demand cycles, constant price pressures and evolving industry
standards. Our competitors include many large domestic and international companies that have
substantially greater financial, technical, marketing, distribution and other resources, greater
name recognition, broader product lines, lower cost structures, and longer-standing relationships
with customers and suppliers than we do. As a result, our competitors may be able to respond
better to new or emerging technologies or standards and to changes in customer requirements.
Further, some of our competitors are in a better financial and marketing position from which to
influence industry acceptance of a particular product standard or competing technology than we are.
Our competitors may also be able to devote greater resources to the development, promotion and sale
of products, and may be able to deliver competitive products at a lower price than we can.
We compete against semiconductor suppliers that maintain captive memory module and card
production capabilities, including Hynix, Micron, Samsung, SanDisk and Western Digital. Other
primary competitors in the memory module and card industry include NetList, STEC, Viking
InterWorks, a Sanmina-SCI company, Unigen and Wintec. Our primary competitors in the embedded
computing market are Artesyn, an Emerson company, Kontron and Radisys, and in the display market
are ELO Technologies, Kortek, Tovis and Wells Gardner.
The rapid growth projections for the solid state storage market (including SSD) have attracted
numerous competitors, both large and small, from around the world. Entrants often target specific
segments within the solid state storage market. Large manufacturers of SSDs such as Intel, Samsung
and SanDisk have targeted the client/consumer laptop, PC and enterprise markets, while smaller
vendors such as Apacer, PQI, and Transcend have selected smaller niche markets. Intel has also
targeted the high-end commercial (enterprise OTLP) market. Our primary competitors in the defense,
aerospace, industrial, medical, transportation, and industrial automation markets are BiTMICRO,
Mtron, Transcend and STEC. In the enterprise market, our primary
competitors for embedded flash are STEC, SSI (Western
Digital), Viking InterWorks, a Sanmina-SCI company, Fusion-io, Pliant and SanDisk. As we enter the
market for enterprise SSDs, we will be competing with Intel, Samsung, Hitachi, Seagate, STEC,
Micron, Toshiba, Fusion-io and BiTMICRO.
We face competition from existing competitors and expect to face new and emerging companies
that may enter our existing or future markets with similar or alternative products, which may be
less costly or provide additional features. We also face competition from current and prospective
customers that evaluate our capabilities against the merits of manufacturing products internally.
Competition may also arise due to the development of cooperative relationships among our current
and potential competitors or third parties to increase the ability of their products to address the
needs of our prospective customers. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
16
We expect that our competitors will continue to improve the performance of their current
products, reduce their prices, and introduce new products that may offer greater performance and
improved pricing, any of which could cause a decline in sales or market acceptance of our products.
In addition, our competitors may develop enhancements to, or future generations of, competitive
products that may render our technology or products obsolete or uncompetitive. To remain
competitive, we must continue to provide technologically advanced products and manufacturing
services, maintain high 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. Our inability to meet any of these requirements could have a material adverse
effect on our net sales, gross margins, results of operations and our financial condition. In
addition, increased competitive pressure has led in the past and may continue to lead to
intensified price competition resulting in lower net sales and gross margins which could negatively
impact our financial performance.
Our success is dependent on achieving design wins into commercially successful OEM systems and the
failure to achieve design wins or the failure of OEM customers to incorporate our products into
their systems could adversely affect our operating results and prospects.
Our products are often incorporated into our OEM customers systems at the design stage. As a
result, we rely on OEMs to select our product designs, which we refer to as design wins. We often
incur significant expenditures in the development of a new product without any assurance that an
OEM will select our product for design into its system. Additionally, in some instances, we are
dependent on third parties to obtain or provide information that we need to achieve a design win.
Some of these third parties may not supply this information to us on a timely basis, if at all.
Furthermore, even if an OEM designs one of our products into its system, we cannot be assured that
they will use our product in production, that the OEMs product will be commercially successful or
that we will receive significant orders as a result of that design win. Our OEM customers are
typically not obligated to purchase our products even if we get a design win. If we are unable to
achieve design wins or if our OEM customers systems incorporating our products are not
commercially successful, our net sales would be impacted.
Our business is dependent upon our OEM customers continuing to outsource the design and
manufacturing of value added subsystems.
Historically, OEMs designed and manufactured subsystems in-house. Many OEMs now outsource the
design and manufacturing of subsystems. Portions of our business are dependent upon our OEM
customers continuing to outsource the design and manufacturing of these subsystems. Our OEM
customers have the requisite capabilities and capital resources to bring the design and
manufacturing of these subsystems in-house and their doing so would adversely impact our net sales,
our results of operations and our financial condition.
Our future success is dependent on our ability to retain key personnel, including our executive
officers, and to attract qualified personnel. If we lose the services of these individuals or are
unable to attract new talent, our business may be adversely affected.
Our future operating results depend in significant part upon the continued contributions of
our key technical and senior management personnel, many of whom would be difficult to replace. We
are particularly dependent on the continued service of Iain MacKenzie, our chief executive officer
and president, and Barry Zwarenstein, our senior vice president and chief financial officer. Our
future operating results also depend in significant part upon our ability to attract, train and
retain qualified management, manufacturing and quality assurance, engineering, finance, marketing,
sales and support personnel. We are continually recruiting such personnel in various parts of the
world. However, competition for such personnel can be strong, and there is no assurance that we
will be successful in attracting or retaining such personnel now or in the future. In addition,
particularly in the high-technology industry, the value of stock options, restricted stock unit
grants or other stock-based compensation is an important element in the retention of employees.
The decline in the value of our stock could adversely affect our ability to retain employees, and
as we did with our recent employee stock option exchange, we may have to take additional steps to
make the equity component of our compensation packages more attractive in order to attract and
retain employees. The loss of any key employee, the failure of any key employee to perform in his
or her current position, our inability to attract, train and retain skilled employees as needed or
the inability of our key employees to expand, train and manage our employee base as needed could
adversely affect our business, our results of operations and our financial condition.
17
We rely on third-party sales representatives to assist in selling our products, and the failure of
these representatives to perform as expected could reduce our future sales.
Sales of our products to some of our OEM customers are accomplished through the efforts of
third-party sales representatives. We are unable to predict the extent to which our third-party
sales representatives will be successful in marketing and selling our products. Moreover, many of
our third-party sales representatives also market and sell competing products and they may more
aggressively pursue sales of our competitors products. Our third-party sales representatives may
terminate their relationships with us at any time on short notice. Our future performance may also
depend, in part, on our ability to attract additional third-party sales representatives that will
be able to market and support our products effectively, especially in markets in which we have not
previously sold our products. If we cannot retain our current third-party sales representatives or
recruit additional or replacement third-party sales representatives, our net sales, our results of
operations and our financial condition could be negatively impacted.
Disruption of our operations at our manufacturing facilities would substantially harm our business.
A disruption of our manufacturing operations, resulting from sustained process abnormalities,
human error, government intervention or natural disasters, including earthquakes, power failures,
fires or floods, could cause us to cease or limit our manufacturing operations and consequently
adversely impact our business, our results of operations and our financial condition. A disruption
of our manufacturing operations resulting from ramp-up related challenges such as obtaining
sufficient raw materials, hiring of qualified factory personnel, installation and efficient
operation of new equipment, and management and coordination of our logistics networks within our
global operations could cause us to cease, delay, or limit our manufacturing operations and
consequently adversely impact our business, our results of operations and our financial condition.
As a result of our acquisition of Adtron, certain of our sales are dependent on defense-related
companies and changes in military spending levels and patterns could negatively affect us.
Our current orders from defense-related companies depend on factors that are outside of our
control. Reductions or changes in military spending could have an adverse effect on our sales and
profit. For instance, government contracts are conditioned upon the continuing availability of
Congressional appropriations. Congress typically appropriates funds for a given program on a
fiscal-year basis even though contract performance may take more than one year. As a result, at the
beginning of a major program, a contract is typically only partially funded, and additional monies
are normally committed to the contract by the procuring agency only as Congress makes
appropriations available for future fiscal years. As political representatives change, a difference
in philosophy and a changing economic climate could reduce or change appropriations. We believe
that because of the unexpected length and cost of the wars in Iraq and Afghanistan, and as part of
a broad overhaul of U.S. priorities, funds for weapons and equipment may be reallocated away from
high technology programs to areas that we do not supply, such as personnel and infrastructure. In
addition, the U.S. defense industry is moving toward the purchase of commercial off-the-shelf
products rather than those designed and manufactured to higher military specifications. To the
extent that our products are replaced or materially offset by commercial off-the-shelf products,
our operations would suffer. Even if military spending continues to increase, these shifts in
military spending could negatively affect business, our results of operations and our financial
condition.
The competitive bid process for, and the terms and conditions of, government contracts may
negatively affect us.
We have in the past and will likely in the future attempt to obtain U.S. government contracts
and subcontracts through the process of competitive bidding. The competitive bid process typically
requires us to estimate costs and the timing for completion of projects. If we do not accurately
estimate the costs associated with a given project our profitability may be negatively affected or
we could potentially even lose money. If we do not accurately estimate the timing required to
complete a project we may be penalized monetarily or our reputation may be impaired. In addition,
the competitive bid process often requires substantial and focused allocation of resources,
including managements time, with no guarantee of success or award of the contract. Ultimately, our
sales and profits connected to competitive bidding on U.S. government contracts and subcontracts
are unpredictable and are subject to many factors that are beyond our control, as well as trends
and events that are difficult to predict. U.S. government contracts and subcontracts also have
significantly demanding provisions which can be difficult to
comply with and include audit provisions which can result in unanticipated expenses,
distractions and utilization of resources. All of these factors can have a negative impact on our
business, our results of operations and our financial condition.
18
If we fail to maintain an effective system of internal controls or discover material weaknesses in
our internal controls over financial reporting, we may not be able to report our financial results
accurately or detect fraud, which could harm our business, our results of operations and our
financial condition and the trading price of our ordinary shares.
Effective internal controls are necessary for us to prepare financial statements that are
presented in accordance with U.S. generally accepted accounting principles and are important in our
effort to detect and prevent financial fraud. Under Section 404 of the Sarbanes-Oxley Act of 2002
we are required to periodically evaluate the design and operating effectiveness of our internal
controls. As our business evolves, these evaluations may result in the conclusion that
enhancements, modifications or changes to our internal controls are necessary or desirable. While
management evaluates the effectiveness of our internal controls on a regular basis, and our
independent registered public accounting firm has opined that we have maintained in all material
respects, effective internal controls over financial reporting as of the filing of this report and
for fiscal 2009, all internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation or the detection or
prevention of fraud and we cannot assure you that we or our independent registered public
accounting firm will not identify a material weakness in our internal controls in the future. If
it is determined that we have a material weakness in our internal controls or we fail to produce
reliable financial reports or prevent fraud, this could negatively impact our business, our results
of operations and our financial condition and could result in the loss of investor confidence
and/or a decline in our share price.
Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and other regulations and
requirements, including corporate governance and public disclosure, is costly and may result in
additional expenses.
Changing laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, SEC regulations and NASDAQ rules, have
required most public companies, including us, to devote additional internal and external resources
to various governance and compliance matters. As a result, we have in the past and will in the
future, incur significant costs which may be disproportionate to our size, on additional staff and
outside professionals to assist us with these efforts. These costs have included increased auditing
and accounting fees associated with preparing the attestation report on our internal controls over
financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002. In addition,
new and changing laws, regulations and standards are subject to varying interpretations, as well as
modifications by the various regulating bodies. The way in which they are applied and implemented
may change over time, which could result in even higher costs to address and implement revisions to
compliance, disclosure and governance practices. We intend to invest the necessary resources to
comply with evolving laws, regulations and standards. If we were to identify any issues in
complying with any requirements, such as the discovery by management or our independent public
accounting firm of a material weakness in our internal controls, we could incur additional costs
and expend significant management attention rectifying such issues. If our efforts to comply with
new or changed laws, regulations and standards differ from the activities intended by regulatory or
governing bodies due to ambiguities related to practice, our reputation may be harmed and we may be
required to incur additional expenses. If we are not able to maintain compliance with the
requirements of Section 404 or other requirements in a timely manner, we might be subject to
sanctions or investigation by regulatory authorities, such as the SEC or the NASDAQ. Any such
action could adversely affect our results of operations, our financial condition or the market
price of our ordinary shares.
19
Changes in, or interpretations of, tax regulations or rates or changes in the geographic dispersion
of our revenues may adversely affect our effective tax rates.
Our future effective tax rates could be unfavorably affected by the resolution of issues
arising from tax audits with various tax authorities in the United States and abroad; adjustments
to income taxes upon finalization of various tax returns; increases in expenses not deductible for
tax purposes, including write-offs of acquired in-process research and development and impairments
of goodwill in connection with acquisitions; changes in available tax credits; changes in tax laws
or regulations or tax rates; changes in the interpretation of tax laws; changes in generally
accepted accounting principles; changes in tax regulations or rates, increases or decreases in
the amount of revenue or earnings in countries with particularly high or low statutory tax rates,
or by changes in the valuation of our deferred tax assets and liabilities. We are subject to tax
examination in the United States and in foreign jurisdictions. We regularly assess the likelihood
of outcomes resulting from these examinations to determine the adequacy of our provision for income
taxes and have reserved for potential adjustments that may result from current examinations. We
believe such estimates to be reasonable, however there can be no assurance that the final
determination of any examinations will be in the amounts of our estimates. Any significant variance
in the results of an examination as compared to our estimates, or any increase in our future
effective tax rates due to any of the factors set forth above or otherwise, could reduce net income
for future periods and have an adverse effect on our results of operations, our cash flow and our
financial condition.
During the fourth quarter of fiscal 2008, the Sao Paulo, Brazil, State Tax Inspector informed
us that certain tax credits, for state value added taxes, transferred during 2004 between two
Brazilian entities may not have represented an authorized transfer. These transfers occurred prior
to the acquisition in April 2004 of SMART from Solectron and the full amount of any related tax
assessment against SMART should be subject to indemnification by Solectron to SMART pursuant to the
Transaction Agreement dated February 11, 2004. A notice was received from the Sao Paulo, Brazil
Tax Authorities by SMART on October 3, 2008 providing an assessment of approximately $3.5 million
(or 6.5 million BRL), including interest and penalties, related to the transfer of these
credits. We have notified Solectron and its parent company, Flextronics International Ltd., of
this assessment and under the terms of the indemnity agreement Flextronics has elected to assume
responsibility for the appeals process of this case on SMARTs behalf. On October 23, 2009, there
was a hearing before the Brazilian Tax Court with jurisdiction over this case, but no decision was
issued. We believe but have no assurance that the likelihood of any material net liability arising
from these matters is not probable, and as such, not likely to have a material adverse effect on
the consolidated financial position, results of operations or cash flows for any periods impacted.
We receive certain beneficial tax treatment as a result of being a Cayman Islands company. Changes
in that treatment could have a material adverse effect on our net income, our cash flow and our
financial condition.
We are a Cayman Islands company and operate through subsidiaries in a number of countries
throughout the world, including the United States. Consequently, we are subject to changes in tax
laws, treaties or regulations or the interpretation or enforcement thereof in the U.S., the Cayman
Islands and jurisdictions in which we or any of our subsidiaries operate or are resident. Recently
legislation has been introduced in the Congress of the United States that is intended to reform the
U.S. tax laws as they apply to certain non-U.S. entities and operations. If legislation is passed
that ultimately changes our U.S. tax position, it could have a material adverse effect on our net
income, our cash flow and our financial condition.
If our goodwill or intangible assets become impaired, we may be required to record a significant
charge to earnings.
Under accounting principles generally accepted in the U.S., we review our long-lived
intangible and tangible assets for impairment when events or changes in circumstances indicate the
carrying value may not be recoverable. Goodwill is required to be tested for impairment at least
annually. Factors that may be considered a change in circumstances indicating that the carrying
value of our goodwill or other intangible assets may not be recoverable include declines in our
stock price and market capitalization or future cash flows projections. We may be required to
record a significant charge to earnings in our financial statements during the period in which any
impairment of our goodwill or other intangible assets is determined. For example, in the fourth
quarter of fiscal 2008 we recorded a charge of $3.2 million for goodwill impairment related to our
Memory, Display & Embedded Segment, and in the first two quarters of fiscal 2009, we recorded an
aggregate charge of $10.4 million for goodwill impairment in our Adtron Segment. Such charges have
an adverse effect on our results of operations and our financial condition.
20
Our indemnification obligations to our customers and suppliers for product defects could require us
to pay substantial damages.
A number of our product sales and product purchase agreements provide that we will defend,
indemnify and hold harmless our customers and suppliers from damages and costs which may arise from
product warranty claims or claims for injury or damage resulting from defects in our products.
Indemnification obligations could require us
to expend significant amounts of money to defend claims and/or to pay damages or settlement
amounts. We maintain insurance to protect against certain claims associated with the use of our
products, but our insurance coverage may not be adequate to cover all or any part of a claim
asserted against us. A claim brought against us that is in excess of, or excluded from, our
insurance coverage could adversely impact our business, our results of operations and our financial
condition.
Our operations in foreign countries subject us to political and economic risks, which could have a
material adverse effect on our operating results.
Sales outside of the United States accounted for approximately 57%, 45%, and 38% of net sales
in fiscal 2009, 2008 and 2007, respectively. We anticipate that these international sales will
continue to constitute a meaningful percentage of our total net sales in future periods. In
addition, a significant portion of our product design and manufacturing is currently performed at
our facilities in Brazil, Malaysia and South Korea. As a result, our operations may be subject to
certain risks relating to operations in foreign countries, including changes in and compliance with
regulatory requirements, tariffs and other barriers, increased price pressure, timing and
availability of export and import licenses, difficulties in accounts receivable collections,
difficulties resulting from longer payment cycles, difficulties in protecting our intellectual
property, difficulties and costs of staffing and managing international operations, difficulties
resulting from different employment regulations, necessity of obtaining government approvals; trade
restrictions; work stoppages or other changes in labor conditions; difficulties in managing
distributors and sales representatives, seasonal reductions in business activity in some parts of
the world, difficulties in obtaining governmental approvals for products that may require
certification, challenges in price competitiveness due to local content requirements, difficulties
relating to political or economic instability, restrictions on transfers of funds and other assets
of our subsidiaries between jurisdictions, foreign currency exchange fluctuations, the burden of
complying with a wide variety of complex international laws and treaties, potentially adverse tax
consequences and uncertainties relative to regional, political and economic circumstances.
We are also subject to the risks associated with the imposition of, and compliance with,
legislation and regulations relating to the import or export of high technology products and
components of such products. We cannot predict whether quotas, duties, taxes or other charges or
restrictions upon the importation or exportation of our products or components of such
products will be amended or enacted by the U.S. or other countries. Some of our customers purchase
orders and agreements are governed by international laws which often differ significantly from U.S.
laws. Therefore, we may be limited in our ability to enforce our rights under such agreements.
These factors may have a material adverse effect on our business, our results of operations
and our financial condition.
Our operations in foreign countries are more difficult to manage which may expose us to additional
risks that may not exist in the United States, which in turn could have a negative impact on our
business, our results of operations and our financial condition.
A significant portion of our manufacturing operations are performed outside of the U.S. at our
foreign facilities. Additionally, international sales account for a significant portion of our
overall sales. In some of the countries in which we operate or sell our products, it is difficult
to recruit, employ and retain qualified personnel to manage and oversee our local manufacturing
operations, sales and other activities. Further, given our executive officers lack of physical
proximity to some of the local activities and the inherent limitations of cross-border information
flow, our executive officers may at times face extra challenges in their ability to effectively
oversee the day-to-day management of our international operations. The inability of management to
effectively recruit, employ and retain qualified personnel and to otherwise effectively manage our
international operations could have a negative impact on our business, our results of operations
and our financial condition.
Worldwide political conditions may adversely affect our operations and demand for our products.
The occurrence or threat of terrorist attacks may in the future adversely affect demand for
our products. In addition, such attacks may negatively affect our operations directly or
indirectly and such attacks or other armed conflicts may directly impact our physical facilities or
those of our suppliers or customers. Such attacks may make
travel and the transportation of our products more difficult and more expensive, ultimately
having a negative effect on our business.
21
Also, any armed conflicts around the world could have an impact on our sales, our supply chain
and our ability to deliver products to our customers. Political and economic instability in some
regions of the world could negatively impact our business.
More generally, various events could cause consumer confidence and spending to decrease or
result in increased volatility to the U.S. and the worldwide economies. Any such occurrences could
have a material adverse effect on our business, financial condition and results of operations.
Unfavorable currency exchange rate fluctuations could result in our products becoming relatively
more expensive to our overseas customers or increase our manufacturing costs, each of which could
adversely affect our business and our profitability.
We are subject to inherent risks attributed to operating in a global economy. Our
international sales and our operations in foreign countries make us subject to certain risks
associated with fluctuating currency values and exchange rates. Because sales of our products are
denominated primarily in U.S. dollars, increases in the value of the U.S. dollar could increase the
price of our products so that they become relatively more expensive to customers in a particular
country, possibly leading to a reduction in sales and profitability in that country. Some of the
sales of our products are denominated in foreign currencies. Gains and losses on the conversion to
U.S. dollars of accounts receivable arising from such sales, and of other associated monetary
assets and liabilities, may contribute to fluctuations in our results of operations. We also have
costs that are denominated in foreign currencies, and decreases in the value of the U.S. dollar
could result in increases in such costs that could have a material adverse effect on our results of
operations. In addition, fluctuating values between the U.S. dollar and other currencies can
result in currency gains which are used in the computation of foreign taxes and which can increase
foreign taxable income. We do not presently purchase financial instruments to hedge foreign
exchange risk, but we may do so as circumstances warrant.
Our worldwide operations could be subject to natural disasters and other business disruptions,
which could materially adversely affect our business and increase our costs and expenses.
Our worldwide operations could be subject to natural disasters and other business disruptions
which could harm our business, our results of operations and our financial condition. For example,
our corporate headquarters in Newark, California is located near major earthquake fault lines. In
addition, our manufacturing facility in Aguada, Puerto Rico, is located in a hurricane-prone area.
Our manufacturing facility in Penang, Malaysia is also prone to natural disasters. In the event of
a major earthquake or hurricane, or other natural or manmade disaster, we could experience business
interruptions, destruction of facilities and/or loss of life, any of which could materially
adversely affect our business our results of operations and our financial condition.
Our ability to compete successfully and achieve future growth will depend, in part, on our ability
to protect our intellectual property, as well as our ability to operate without infringing upon the
intellectual property of others.
We attempt to protect our intellectual property rights through a variety of measures,
including trade secret laws, non-disclosure agreements, confidentiality procedures and employee
non-disclosure and invention assignment agreements, patents, trademarks and copyrights. It is
possible that our efforts to protect our intellectual property rights may not:
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prevent our competitors from independently developing similar products, duplicating our
products or designing around the patents owned by us; |
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prevent third-party patents from having an adverse effect on our ability to do business; |
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provide adequate protection for our intellectual property rights; |
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prevent disputes with third parties regarding ownership of our intellectual property
rights; |
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prevent disclosure of our trade secrets and know-how to third parties or into the public
domain; |
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prevent the challenge, invalidation or circumvention of our existing patents; |
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result in patents that lead to commercially viable products or provide competitive
advantages for our products; or |
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result in issued patents or registered trademarks from any of our pending applications. |
If any of our issued patents are found to be invalid or if any of our patent applications are
rejected, our ability to exclude competitors from making, using or selling the same or similar
products as us could be compromised. We have occasionally applied for and may in the future apply
for patent protection in foreign countries. The laws of foreign countries, however, may not
adequately protect our intellectual property rights. Many U.S. companies have encountered
substantial infringement problems in foreign countries. Because we conduct a substantial portion of
our operations and sell some of our products outside the United States, we have exposure to foreign
intellectual property risks.
The markets in which we compete are characterized by frequent claims alleging infringement of
patents, trademarks, copyrights or other intellectual property rights of others. From time to
time, third parties may assert against us or our customers alleged patent, copyright, trademark, or
other intellectual property rights to technologies that are important to our business. There can be
no assurance that third parties will not in the future pursue claims against us or our customers
with respect to the alleged infringement of intellectual property rights. In addition, litigation
may be necessary to protect our intellectual property rights, to determine the validity and scope
of the proprietary rights of others or to defend against third party claims of infringement and/or
invalidity. Litigation could result in substantial costs and diversion of resources and management
attention and could have a material adverse effect on our business, our results of operations and
our financial condition.
For example, on December 7, 2007, Tessera, Inc. filed a complaint in the U.S. International
Trade Commission and the Eastern District of Texas against us alleging that we have infringed
certain of Tesseras patents. Tessera has sought to enjoin such alleged infringements, to recover
an unspecified amount of damages, and to bar our importation and sale of allegedly infringing
products. See Item 3 Legal Proceedings in Part I of this Annual Report. As we expand our product
offerings in the SSD market in which larger companies with large patent portfolios compete, the
possibility of other intellectual property claims against us grows. Such litigation, whether as
plaintiff or defendant, could result in significant expense to us and divert the efforts of our
technical and management personnel, whether or not such litigation is ultimately determined in our
favor. In the event of an adverse result in, or a settlement of, such litigation, we could be
required to pay substantial damages or settlement amounts; cease the manufacture, use, import, and
sale of certain products or product components; expend significant resources to develop or acquire
non-infringing technology; discontinue the use of certain processes or obtain licenses and pay
one-time fees and/or on-going royalties to use the infringing or allegedly infringing technology.
The occurrence of any of the foregoing could result in unexpected expenses or require us to
recognize an impairment of our assets, which would reduce the value of our assets and increase
expenses. In addition, if we re-design or discontinue our production of affected products, our
revenue could be adversely affected. Alternate technology development or license negotiations would
likely result in significant expenses and divert the efforts of our technical and management
personnel. We cannot assure you that we would be successful in such development or negotiations or
that such licenses would be available on reasonable terms, or at all.
Our indemnification obligations for the infringement by our products of the intellectual property
rights of others could require us to pay substantial damages.
We currently have in effect a number of agreements in which we agree to defend, indemnify and
hold harmless our customers and suppliers from damages and costs which may arise from the
infringement by our products of third-party patents, trademarks or other proprietary rights. We
periodically have to respond to claims and litigate indemnification obligations. Indemnification
obligations could require us to expend significant amounts of money to defend claims and/or to pay
damages or settlement amounts which could have a material adverse effect on our business, our
results of operations and our financial condition. Our insurance does not cover intellectual
property infringement.
23
We could incur substantial costs or liabilities as a result of violations of environmental laws.
Our operations and properties are subject to a variety of U.S., foreign government and
international environmental laws and regulations governing, among other things, air emissions,
wastewater discharges, management and disposal of hazardous and non-hazardous materials and wastes,
and remediation of releases of hazardous materials. Our failure to comply with present and future
requirements, or the identification of contamination, could cause us to incur substantial costs,
including cleanup costs, fines and penalties, investments to upgrade our facilities or change our
processes, or curtailment of operations. The identification of presently unidentified environmental
conditions, more vigorous enforcement by regulatory agencies, enactment of more stringent laws and
regulations, or other unanticipated events may arise in the future and give rise to material
environmental liabilities and related costs. The occurrence of any of the foregoing could have a
material adverse effect on our business, our results of operations and our financial condition.
We are subject to a variety of federal, state and international laws and regulatory regimes.
Failure to comply with governmental laws and regulations could subject us to, among other things,
mandatory product recalls, penalties and investigation and legal expenses which could have an
adverse effect on our business.
Our business is subject to regulation by various U.S. federal and state governmental agencies.
Such regulation includes, without limitation, the radio frequency emission regulatory activities of
the Federal Communications Commission, the anti-trust regulatory activities of the Federal Trade
Commission (FTC), and the Department of Justice, the consumer protection laws of the FTC, the
import/export regulatory activities of the Department of Commerce, the product safety regulatory
activities of the Consumer Products Safety Commission, the regulatory activities of the
Occupational Safety and Health Administration, the environmental regulatory activities of the
Environmental Protection Agency, the labor regulatory activities of the Equal Employment
Opportunity Commission and tax and other regulations by a variety of regulatory authorities in each
of the areas in which we conduct business. We are also subject to regulation in other countries
where we conduct business, including import and export laws and foreign currency control. In
certain jurisdictions, such regulatory requirements may be more stringent and complex than in the
U.S. We are also subject to a variety of U.S. federal and state employment and labor laws and
regulations, including, without limitation, the Americans with Disabilities Act, the Federal Fair
Labor Standards Act, the Worker Adjustment and Restructuring Notification Act (WARN Act) which
requires employers to give affected employees at least 60 days notice of a plant closing or a mass
layoff, and other regulations related to working conditions, wage-hour pay, overtime pay, employee
benefits, antidiscrimination and termination of employment.
Like other companies operating or selling internationally, we are subject to the Foreign
Corrupt Practices Act (FCPA) and other laws which generally prohibit improper payments or offers
of payments to foreign governments and their officials and political parties by U.S. companies and
their intermediaries for the purpose of obtaining or retaining business or otherwise obtaining
favorable treatment. We make sales and operate in countries known to experience corruption. Our
business activities in such countries create the risk of unauthorized conduct by one or more of our
employees, consultants, sales agents or distributors that could be in violation of various laws
including the FCPA. In addition, we may be held liable for actions taken by such parties even
though such parties are not subject to the FCPA or similar laws. Any determination that we have
violated the FCPA or similar laws may result in severe criminal or civil sanctions, and we may be
subject to other liabilities that could have a material adverse effect on our business, financial
condition and results of operations.
Noncompliance with applicable regulations or requirements could subject us to investigations,
sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages,
civil and criminal penalties, or injunctions which could harm our business, financial condition and
results of operations. In addition, from time to time we have received, and may receive in the
future, correspondence from former employees and parties with whom we have done business with,
threatening to bring claims against us alleging that we have violated one or more regulations
related to customs, labor and employment, or foreign currency control. An adverse outcome in any
litigation related to such matters could require us to pay damages, attorneys fees and/or other
costs.
If any governmental sanctions were to be imposed, or if we were to not prevail in any civil
action or criminal proceeding, our business, financial condition and results of operations could be
materially adversely affected. In
addition, responding to any litigation or action would likely result in a significant
diversion of managements attention and resources and an increase in professional fees.
24
We are currently contemplating additional restructuring plans, we may not be able to effectively
implement prior or future restructuring plans, and our restructuring plans may not result in the
expected benefits, any of which would negatively impact our future results of operations.
During fiscal 2009 and 2008, we initiated restructuring plans to reduce our work force and
cost structure to address challenging business conditions. As a result of current circumstances
and conditions, and to take advantage of opportunities to reduce costs, we may implement additional
restructuring plans.
These restructuring plans, if implemented, would be intended to decrease certain ongoing
expenses and improve cash flow. However they could also result in significant charges which could
negatively impact our cash flow and our financial condition. There can be no assurance that we will
be able to successfully complete and realize the expected benefits of these restructuring plans.
Past and future restructuring plans may involve higher costs, fewer benefits, longer timetables,
and/or additional restructuring activity in other locations and affect more employees than we
anticipate and could negatively impact our cash flow, our business, our results of operations and
our financial condition. In addition, our past and future restructuring plans and other
cost-saving measures, such as salary reductions in the U.S., shortened work weeks internationally,
and a suspension of our 401(k) matching program, may have other consequences, such as attrition
beyond our planned reduction in workforce or a negative impact on employee morale, any of which
could have a negative impact on our future performance, our results of operations and our financial
condition.
Risks Related to Our Debt
Restrictive covenants contained in our senior secured revolving line of credit facility (the WF
Credit Facility) and the indenture relating to our senior secured floating rate notes (the
Notes) may restrict our current and future operations, particularly our ability to respond to
changes or to take some actions, and our failure to comply with such covenants, whether due to
events beyond our control or otherwise, could result in an event of default which could materially
and adversely affect our operating results and our financial condition.
The indenture relating to the Notes contains various covenants that limit our ability to
engage in certain transactions. A breach of any of these covenants could result in a default under
the indenture and an acceleration of the Notes. In addition, the WF Credit Facility contains other
and more restrictive covenants and prohibits us from voluntarily prepaying certain of our other
indebtedness. A breach of any of these covenants would result in a default under the WF Credit
Facility and, in the event that there is an acceleration of more than $10 million under the WF
Credit Facility, a breach of these covenants could result in an acceleration of our Notes.
The WF Credit Facility also requires us to maintain specified financial ratios and satisfy
other financial condition tests. On August 14, 2009, the WF Credit Facility was amended such that
we are no longer required to comply with certain financial covenants unless there are borrowings
outstanding. We have not borrowed under the WF Credit Facility since November 2007 and we had no
borrowings outstanding as of August 28, 2009. We may not meet
the financial covenants required to borrow funds under the WF Credit
Facility during all periods before it expires on
April 30, 2010 and therefore may not be able to borrow funds if and when we need the funds in the
future.
If there were an uncured event of default under any of our debt instruments, the holders of
the defaulted debt could cause all amounts outstanding with respect to that debt to become due and
payable immediately and the holder could proceed against the collateral securing that indebtedness.
We cannot be certain that our assets or cash flow would be sufficient to fully repay borrowings
under our outstanding debt instruments, either upon maturity or acceleration upon an uncured event
of default or, if we were required to repurchase the Notes upon a change of control, that we would
be able to refinance or restructure the payments on such debt. Further, if we are unable to repay,
refinance or restructure any future outstanding indebtedness under the WF Credit Facility, the
lender could proceed against the collateral securing that indebtedness, our Notes and certain other
indebtedness. In addition, any
event of default or declaration of acceleration under one debt instrument could also result in
an event of default under one or more of our other debt instruments.
25
Disruption in the financial markets may adversely impact the availability and cost of credit and
cause other disruptions.
Refinancing our existing debt or securing new debt or equity financing is likely to be
extremely difficult, expensive or impossible in the foreseeable future given the current condition
of the financial markets and the recent performance of our Company. Instability in the financial
markets may also have an adverse effect on the U.S. and/or world economy which could adversely
impact our business.
Our indebtedness could impair our financial condition and harm our ability to operate our business.
We have certain debt service obligations. At October 23, 2009 and August 28, 2009, our total
outstanding debt was $55.1 million and $81.3 million, respectively. We may incur additional debt
in the future, subject to certain limitations contained in our debt instruments.
The degree to which we are leveraged could have important consequences including, but not
limited to, the following:
|
|
|
it may limit our ability to service all of our debt obligations; |
|
|
|
it may impair our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes or other purposes; |
|
|
|
a significant portion of our cash flow from operations must be dedicated to the payment
of interest and principal on our debt which would reduce the funds available to us for our
operations; |
|
|
|
some of our debt is and will continue to be at variable rates of interest, which would
result in higher interest expense in the event of increases in those interest rates; |
|
|
|
our debt agreements contain, and any agreements to refinance or amend the terms of our
debt likely will contain, financial and restrictive covenants, and our failure to comply
with them may result in an event of default which, if not cured or waived, could have a
material adverse effect on our business and our financial condition; |
|
|
|
it may increase our vulnerability to general economic downturns and adverse industry
conditions; and |
|
|
|
it may limit our flexibility in planning for, or reacting to, changes in our business
and our industry. |
To service our debt, we will require a significant amount of cash and we may not be able to
generate sufficient cash flow from operations to satisfy these obligations or to refinance these
obligations on acceptable terms, or at all.
Our ability to make payments on our debt and to fund working capital requirements, capital
expenditures and research and development efforts will depend on our ability to generate cash in
the future. Our historical financial results have been, and we expect our future financial results
will be, subject to substantial fluctuation based upon a wide variety of factors, many of which are
not within our control, including among others, those described in the Risk Factors section.
If we are unable to generate sufficient cash flow from operations to satisfy our debt
obligations, we may have to undertake alternative plans, such as refinancing or restructuring our
debt, selling assets, reducing or delaying capital investments or seeking to raise additional
capital. Certain of these actions would require the consent of our lender and/or note holders. The
terms of our credit facility and indenture contain limitations on our ability to incur additional
debt. We cannot be assured that any assets could be sold, or, if sold, the timing of the sales and
the amount of proceeds realized from those sales, or that additional financing could be obtained on
acceptable terms, if at all, or would be permitted under the terms of our debt instruments then in
effect. Refinancing of our existing debt
or securing new debt or equity financing is likely to be extremely difficult or impossible in
the foreseeable future given the current conditions of the financial markets and the recent
performance of our Company. Our inability to generate sufficient cash flow to satisfy our debt
obligations or to refinance our obligations on commercially reasonable terms would have an adverse
effect on our business, financial condition and results of operations. As we have elected to
repurchase and redeem a portion of the debt under the Notes, we may not have the cash to support
our working capital needs if business returns at a pace faster than currently anticipated. If that
were to occur and we were not able to obtain alternative financing, this could prevent us from
achieving sales and profit growth that would otherwise be available.
26
Our existing debt is subject to floating interest rates, which may cause our interest expense to
increase and decrease cash available for operations and other purposes.
We are subject to interest rate risk in connection with our long-term debt, including the
remaining $55.1 million of the Notes outstanding as of October 23, 2009. In addition, our credit
facility provides for borrowings of up to $35.0 million that would also bear interest at variable
rates. Assuming we could satisfy financial covenants required to borrow, which currently appears
unlikely during certain periods, and the credit facility is fully drawn and holding other variables
constant and excluding the impact of any hedging arrangements, each 1.0% increase in interest rates
on our variable rate borrowings would result in an increase in interest expense and a decrease in
our cash flows and income before taxes of $0.9 million per year. We currently have an interest rate
swap arrangement for the purpose of fixing the interest rate on a portion of our long-term debt for
the specified interest rate swap period. The current interest rate swap is for a notional amount of
$40.0 million bearing a 9.97% fixed annual interest rate which is currently higher than the
effective interest rate under the Notes. The interest rate swap remains outstanding through April
28, 2010.
Risks Related to Our Ordinary Shares
The price of our ordinary shares may be volatile and subject to wide fluctuations.
The market price of the securities of technology companies can be especially volatile. Broad
market and industry factors may adversely affect the market price of our ordinary shares regardless
of our actual operating performance. Factors that could cause fluctuations in our stock price may
include, among other things:
|
|
|
actual or anticipated variations in quarterly operating results; |
|
|
|
changes in financial estimates by us or by any securities analysts, or our failure to
meet the estimates made by securities analysts; |
|
|
|
changes in the market valuations of other companies operating in our industry; |
|
|
|
announcements by us or our competitors of significant technology changes, acquisitions,
strategic partnerships, divestitures, or restructuring initiatives, or other events that
affect us or companies in our industry; |
|
|
|
loss of a key customer or significant business of a major customer; |
|
|
|
additions or departures of key personnel; and |
|
|
|
a general downturn or uptick in the stock market. |
Some companies experiencing past volatility in the market price of their stock have been the
subject of securities class action litigation. If we were to become the subject of securities
class action litigation, it could result in substantial costs and a diversion of managements
attention and resources and could have a material adverse effect on our business, our results of
operations and our financial condition.
27
We may experience significant period-to-period, quarterly and annual fluctuations in our net sales
and operating results, which may result in volatility in our share price.
We may experience significant period-to-period fluctuations in our net sales and operating
results. For example, in fiscal 2009 net sales declined 34% from fiscal 2008. Significant
fluctuations may occur again in the future due to a number of possible factors and any such
fluctuations may cause our share price to fluctuate. Our share price could also drop significantly
if we were to report future operating results, or provide guidance, below the expectations of
securities analysts or investors.
A number of factors, in addition to those cited in other risk factors applicable to our
business, may contribute to fluctuations in our sales and operating results, including:
|
|
|
the timing and volume of orders from our customers; |
|
|
|
the rate of acceptance of our products by our customers, including the rate of design
wins; |
|
|
|
the demand for and life cycles of customer products incorporating our products; |
|
|
|
the rate of adoption of our products in the end markets we target; |
|
|
|
cancellations or deferrals of customer orders or commitments in anticipation of lower
pricing, new products or product enhancements from us or our competitors or other
providers; |
|
|
|
changes in product mix; |
|
|
|
the rate at which new markets emerge for products we are currently developing or for
which our design expertise can be utilized to develop products for new markets; |
|
|
|
production levels of our suppliers or other factors impacting our ability to procure the
components we need to manufacture our products; |
|
|
|
changes in the cost or availability of components; |
|
|
|
significant volatility in prices of DRAMs and other components; |
|
|
|
the timing and acceptance of our new or enhanced products, our competitors and/or our
suppliers; |
|
|
|
changes in the average selling prices of our products; |
|
|
|
fluctuations in demand for our products; |
|
|
|
changes in supply and demand conditions; |
|
|
|
order cancellations, product returns, inventory buildups by customers and inventory
write-downs; |
|
|
|
manufacturing inefficiencies associated with the start-up of new products and low volume
production; |
|
|
|
expenses associated with strategic transactions, including acquisitions, joint ventures
and capital investments; and |
|
|
|
increases in research and development and sales and marketing expenses in connection
with new product initiatives. |
Due to the above and other factors, revenues and results of operations are difficult to
forecast, and period-to-period comparisons of our operating results may not be predictive of future
performance. In one or more future periods, our results of operations may fall below the
expectations of securities analysts and investors. In that event, the trading price of our common
stock would likely decline. In addition, the trading price of our common stock may fluctuate or
decline regardless of our operating performance.
28
Although we are no longer a controlled company within the meaning of the rules of the NASDAQ,
some of our principal investors continue to exert substantial influence over us.
TPG and Shah Capital Partners collectively hold approximately 19% of our outstanding ordinary
shares as of October 23, 2009. Although these investors own less than a majority of our outstanding
ordinary shares, they still continue to have significant influence over matters submitted to our
shareholders and our business policies and affairs. TPG and Shah Capital Partners each have a
representative that serves on our board of directors. Shah Capital Partners representative is the
chairman of our board and also serves as a member of our Strategy Committee.
Such influence could have the effect of delaying, deterring or preventing a change of control,
business combination or other transaction that might otherwise be beneficial to our shareholders.
Subject only to insider trading limitations, there is nothing to prohibit the remaining principal
investors from selling a substantial interest in the Company to a third party or a participant in
our industry which could have an adverse effect on the business or the interests of our other
shareholders.
Our articles of association do not provide for shareholder proposals other than nominations to our
board of directors and do not explicitly provide for periodic elections of our directors, each of
which could negatively affect the ability of shareholders to exercise control over us.
Other than nominations to our board of directors, our articles of association do not provide
for a means by which shareholders can propose resolutions for consideration by the other
shareholders, including for example, amendments to our articles of association. Further, our
articles of association do not explicitly provide for periodic elections of our directors.
Although shareholders may nominate directors in connection with our annual shareholders meeting,
unless we receive such nominations, each of our directors will continue to serve until his death,
disability, retirement, resignation or removal (with or without cause) by the other directors or by
the vote of shareholders who hold a majority of our shares in favor of a resolution proposed by our
board of directors. These provisions could negatively affect the ability of shareholders to
exercise control over us. Notwithstanding the absence of specific provisions for periodic election
of directors by shareholders, eight of our current directors stood
for re-election at our 2009
Annual Meeting of Shareholders. However, there is no guarantee that any director elected will
stand for re-election at any time in the future or that subsequent vacancies on the board will not
be filled by appointment by other directors.
Our principal investors and the persons whom they nominate to our board of directors may have
interests that conflict with our interests and the interests of our other shareholders.
TPG and Shah Capital Partners and the persons whom they nominate as directors to our board of
directors may have interests that conflict with, or are divergent from, our own and those of our
other shareholders. TPG and Shah Capital Partners are the holders of an aggregate of approximately
19% of our outstanding ordinary shares as of October 23, 2009. They have invested in or acquired
other businesses that are involved in the semiconductor industry and may invest in or acquire
others in the future. Conflicts of interest between our principal investors and us or our other
shareholders may arise. Our memorandum and articles of association do not contain any provisions
designed to facilitate resolution of actual or potential conflicts of interest, or to ensure that
potential business opportunities that may become available to both our principal investors and us
will be reserved for, or made available to, us. If an actual or potential conflict of interest
develops involving one of our directors, our corporate governance guidelines provide that the
director must report the matter immediately to our board of directors and nominating and corporate
governance committee for evaluation and appropriate resolution. Further, such director must recuse
himself or herself from participation in the related discussion and abstain from voting on the
matter. Nonetheless, conflicts of interest may not be resolved in a manner favorable to us or our
other shareholders. In addition, our principal investors substantial share ownership may
adversely affect the trading price of our ordinary shares because investors often perceive
disadvantages in owning shares in companies with shareholders who control a significant percentage
of outstanding shares.
29
Future sales of shares or issuances of shares in connection with acquisitions could depress our
share price.
If our existing shareholders were to sell substantial amounts of our ordinary shares in the
public market, the market price of our ordinary shares could decline. If our principal investors
sell substantial amounts of our ordinary shares, the market price of our ordinary shares could
decline as these sales might be viewed by the public as an indication of an upcoming or recently
occurring shortfall in the financial performance of the Company. Moreover, the perception in the
public market that these investors might sell shares could depress the market price of our ordinary
shares. Additionally, we may sell or issue additional shares of stock in public offerings or in
connection with acquisitions which would result in additional dilution and could adversely affect
market prices for our ordinary shares.
Anti-takeover provisions in our organizational documents may discourage our acquisition by a third
party, which could limit your opportunity to sell your shares at a premium.
Our memorandum and articles of association include provisions that could limit the ability of
others to acquire control of us, modify our structure or cause us to engage in change of control
transactions, including, among other things, provisions that restrict the ability of our
shareholders to call meetings, make shareholder proposals and provisions that authorize our board
of directors, without action by our shareholders, to issue preferred shares and to issue additional
ordinary shares. These provisions could deter, delay or prevent a third party from acquiring
control of us in a tender offer or similar transactions, even if such transaction would benefit our
shareholders.
We are a Cayman Islands company and, because the rights of shareholders under Cayman Islands law
differ from those under U.S. law, shareholders may have difficulty protecting their shareholder
rights.
We are a company incorporated under the laws of the Cayman Islands. Our corporate affairs are
governed by our memorandum and articles of association, the Cayman Islands Companies Law and the
ordinary law of the Cayman Islands. The rights of shareholders to take action against the
directors, actions by minority shareholders and the fiduciary responsibilities of our directors to
us under Cayman Islands law are to a large extent governed by the ordinary law of the Cayman
Islands. The ordinary law of the Cayman Islands is derived in part from comparatively limited
judicial precedent in the Cayman Islands as well as from English ordinary law, which has
persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our
shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not
as clearly established as they would be under statutes or judicial precedent in some jurisdictions
in the United States. In particular, the Cayman Islands has a less developed body of securities
laws as compared to the United States, and some states, such as Delaware, have more fully developed
and judicially interpreted bodies of corporate law. In addition, Cayman Islands companies may not
have standing to initiate a shareholder derivative action in a federal court of the United States.
The Cayman Islands courts are also unlikely:
|
|
|
to recognize or enforce against us judgments of courts of the United States based on
certain civil liability provisions of U.S. securities laws; or |
|
|
|
to impose liabilities against us, in original actions brought in the Cayman Islands,
based on certain civil liability provisions of U.S. securities laws that are penal in
nature. |
There is no statutory recognition in the Cayman Islands of judgments obtained in the United
States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal
judgment of a foreign court of competent jurisdiction without retrial on the merits.
As a result of all of the above, public shareholders may have more difficulty in protecting
their interests in the face of actions taken by management, members of the board of directors or
controlling shareholders than they would as public shareholders of a U.S. company.
|
|
|
Item 1B. |
|
Unresolved Staff Comments |
None.
30
Our corporate headquarters are located in a 79,500 square foot facility in Newark, California.
The lease on this facility expires in April 2016, unless our option to extend the lease for a
five-year period is exercised. We design, manufacture and sell our products at the following
facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Building Size |
|
|
Leased or |
|
|
|
|
|
|
|
Location |
|
(Sq. Feet) |
|
|
Owned |
|
|
Expiration |
|
|
Capabilities |
|
Newark, California |
|
|
79,500 |
|
|
Leased |
|
April 2016 |
|
Manufacturing,
Design & Sales |
|
Penang, Malaysia |
|
|
90,000 |
|
|
Owned |
|
|
N/A |
|
|
Manufacturing & Sales |
|
Atibaia, Brazil |
|
|
72,000 |
|
|
Leased |
|
September 2012 |
|
Manufacturing & Sales |
|
Aguada, Puerto Rico |
|
|
51,000 |
|
|
Leased |
|
June 2013 |
|
Manufacturing & Sales |
|
Phoenix, Arizona |
|
|
20,600 |
|
|
Leased |
|
May 2011 |
|
Design & Sales |
|
Tewksbury, Massachusetts |
|
|
10,700 |
|
|
Leased |
|
March 2011 |
|
Design & Sales |
|
Gunpo, South Korea |
|
|
8,500 |
|
|
Owned |
|
|
N/A |
|
|
Design & Sales |
|
Gunpo, South Korea |
|
|
7,000 |
|
|
Leased |
|
May July 2010 |
|
Manufacturing |
|
Irvine, California |
|
|
4,400 |
|
|
Leased |
|
August 2012 |
|
Design & Sales |
|
Our
Penang facility is located on land leased on a long-term basis. The
initial terms of these leases will expire in 2054 and 2057. We also lease a number of small sales offices throughout the world.
|
|
|
Item 3. |
|
Legal Proceedings |
We are from time to time involved in legal matters that arise in the normal course of
business. Litigation in general and intellectual property and employment litigation in particular,
can be expensive and disruptive to normal business operations. Moreover, the results of complex
legal proceedings are difficult to predict. We believe that we have defenses to the cases pending,
including those set forth below. We are not currently able to estimate, with reasonable certainty,
the possible loss, or range of loss, if any, from the cases listed below, and accordingly no
provision for any potential loss which may result from the resolution of these matters has been
recorded in the accompanying consolidated financial statements. In our opinion, the estimated
resolution of these disputes and litigation is not expected to have a material impact on our
consolidated financial position, results of operations or cash flow.
During its third quarter of fiscal 2007, the Company identified certain discrepancies in the
invoicing of certain products that it sold in the Brazilian market in fiscal 2006. Some of the
Companys imported products were invoiced in a manner that may have left customers with the
impression that they were manufactured in Brazil, rather than imported, and therefore potentially
impacted the customers eligibility for tax incentives. The Company assessed the impact arising
from these discrepancies and noted that the customers had access to other information to determine
the origin of the products and may not have relied on the information contained in the invoices for
computing their tax liability. Also, the revenues related to these invoices were not material to
the Companys operations. Therefore, the Company believes that the likelihood of any liability
arising from these discrepancies in the invoices is remote and as such, is not likely to have a
material adverse effect on its consolidated financial position, results of operations or cash flows
for any periods impacted.
31
On December 7, 2007, Tessera, Inc. filed a complaint under section 337 of the Tariff Act of
1930 (Tariff Act), 19 U.S.C. § 1337, in the U.S. International Trade Commission (ITC) against
the Company, as well as A-DATA Technology Co., Ltd., A-DATA Technology (U.S.A.) Co., Ltd., Acer
America Corp., Acer Inc., Centon Electronics, Inc., Elpida Memory, Inc., Elpida Memory (USA) Inc.,
International Products Sourcing Group, Inc., Kingston Technology Co., Nanya Technology Corp., Nanya
Technology Corp. U.S.A., Peripheral Devices & Products Systems, Inc. d/b/a Patriot Memory,
Powerchip Semiconductor Corp., ProMOS Technologies Inc., Ramaxel Technology Ltd., TwinMOS
Technologies Inc., and Twin MOS Technologies USA Inc. (each a
Respondent and collectively, Respondents). Tessera claims that small-format Ball Grid
Array (BGA) semiconductor packages and products containing such semiconductor packages,
including memory module products sold by the Company, infringe certain claims of United States
Patent Nos. 5,697,977, 6,133,627, 5,663,106 and 6,458,681 (the Asserted Patents). Tesseras
Complaint requested that the ITC institute an investigation into the matter. Tessera also
requested the following relief from the ITC:
a permanent general exclusion order pursuant to section 337(d)(2) of the Tariff Act, as
amended, excluding from entry into the U.S. all small-format BGA semiconductor packaged DRAM chips
(BGA chips) and products containing the same that are manufactured, imported or sold for
importation by or on behalf of unlicensed entities and that infringe any claim of the Asserted
Patents, and all products (e.g., personal computers or PCs) that contain such infringing
small-format BGA chips;
a permanent exclusion order pursuant to section 337(d)(1) of the Tariff Act, as amended,
excluding from entry into the U.S. all semiconductor chips with small-format BGA semiconductor
packaging which are manufactured, imported or sold for importation by or on behalf of Respondents
and which infringe any claim of the Asserted Patents, and all products (e.g., PCs) that contain
such infringing BGA chips; and
permanent cease and desist orders, one per Respondent, pursuant to section 337(f) of the
Tariff Act, as amended, directing each Respondent having domestic inventories to cease and desist
from importing, marketing, advertising, demonstrating, sampling, warehousing inventory for
distribution, offering for sale, selling, distributing, licensing, or using any semiconductor chips
with small-format BGA semiconductor packaging and/or products containing such semiconductor chips,
that infringe any claim of the Asserted Patents.
On January 3, 2008, the ITC instituted an investigation pursuant to 19 U.S.C. § 1337,
entitled, In the Matter of Certain Semiconductor Chips with Minimized Chip Package Size and
Products Containing Same (III), Inv. No. 337-TA-630. In May 2008, Tessera withdrew one of the
four Asserted Patents (U.S. Patent No. 6,458,681) from the ITC investigation in an effort to
streamline the case. On May 29, 2008, the administrative law judge set trial for September 22,
2008, which trial has been completed, and ordered that an Initial Determination shall be due on
January 14, 2009, and that the target date for completing the investigation shall be April 24,
2009. On August 28, 2009, after several extensions of the deadline, the Administrative Law Judge
(ALJ) issued his Initial Determination. Among other conclusions reached, the ALJ concluded that,
although Tesseras patents were found to be valid, no infringement by SMART or the other
Respondents was found. Tesseras appeal of the Initial Determination remains pending. The target
date for completing the investigation has been extended to December 29, 2009, which is also the
date by which the ITC must issue a Final Determination. We continue to believe that we have
meritorious defenses against Tesseras claims, including the fact that over 95% of the packaged
DRAMs that SMART uses in its memory module products are purchased (directly or indirectly) from
DRAM manufacturers that Tessera acknowledges are licensed under the Asserted Patents. With respect
to one Respondent, the ALJ concluded in his Initial Determination that the doctrine of patent
exhaustion applied to DRAM packaged by Tessera licensed entities.
Tessera also filed a parallel patent infringement claim in the Eastern District of Texas,
alleging infringement of the same patents at issue in the ITC action. The district court action
seeks an unspecified amount of damages and injunctive relief. The district court action has been
stayed pending the completion of the ITC action.
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Security Holders |
At our Special Meeting of Shareholders held on August 25, 2009, the following action was
taken:
1. Vote to approve the option exchange program for employees (excluding named
executive officers and directors).
|
|
|
|
|
Votes For |
|
Votes Against |
|
Abstain |
50,188,458
|
|
2,805,953
|
|
1,717,394 |
32
PART II
|
|
|
Item 5. |
|
Market for the Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |
Unregistered Sales of Equity Securities
The following table provides the specified information about the repurchase of shares under
the Companys share repurchase program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
Total number |
|
|
approximate |
|
|
|
|
|
|
|
|
|
|
|
of shares |
|
|
dollar value of |
|
|
|
|
|
|
|
Average |
|
|
purchased as |
|
|
shares that may |
|
|
|
Total number |
|
|
Price paid |
|
|
part of publicly |
|
|
yet be purchased |
|
|
|
of shares |
|
|
per |
|
|
announced plans or |
|
|
under the plans |
|
|
|
purchased |
|
|
share |
|
|
programs |
|
|
or programs |
|
April 2009 |
|
|
45,250 |
|
|
$ |
1.82 |
|
|
|
45,250 |
|
|
$ |
9,916,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
45,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2009, the Board of Directors authorized a share repurchase program to purchase up to
$10 million of the Companys ordinary shares in the open market or negotiated transactions. During
fiscal 2009, the Company repurchased approximately forty-five thousand of their ordinary shares
through open market repurchases at an average price of $1.82 per share for a total of approximately
$0.1 million. As of August 28, 2009, the remaining balance available for future repurchases was
$9.9 million under the Companys share repurchase program.
Market for Our Common Stock and Related Shareholder Matters
Our ordinary shares haves traded on the NASDAQ Global Select Market under the symbol SMOD
since February 3, 2006. The following table summarizes the high and low bid quotations for our
ordinary shares as reported by the NASDAQ Global Select Market, for each quarter of the fiscal
years ended August 28, 2009 and August 29, 2008.
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
Low |
|
Fiscal Year 2009: |
|
|
|
|
|
|
|
|
First quarter |
|
$ |
3.36 |
|
|
$ |
0.76 |
|
Second quarter |
|
$ |
2.65 |
|
|
$ |
0.76 |
|
Third quarter |
|
$ |
2.99 |
|
|
$ |
1.04 |
|
Fourth quarter |
|
$ |
4.20 |
|
|
$ |
2.10 |
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2008: |
|
|
|
|
|
|
|
|
First quarter |
|
$ |
10.62 |
|
|
$ |
6.86 |
|
Second quarter |
|
$ |
10.94 |
|
|
$ |
6.63 |
|
Third quarter |
|
$ |
6.81 |
|
|
$ |
4.90 |
|
Fourth quarter |
|
$ |
5.42 |
|
|
$ |
3.10 |
|
As
of October 23, 2009, we had approximately 3,200 holders of our ordinary shares.
Dividend Policy
We have never declared or paid cash dividends on our ordinary shares. We currently intend to
retain earnings to finance future growth and therefore do not expect to pay cash dividends on our
ordinary stock in the foreseeable future. Also, our senior secured credit facility and senior
secured floating rate exchange notes prohibit us from paying cash dividends on our equity
securities, except in limited circumstances.
For equity plan compensation information, please refer to Item 12 in Part III of this Annual
Report.
33
Stock Performance Graph
The following graph compares the cumulative total return to shareholders on our ordinary
shares with the cumulative total return of the NASDAQ Composite Index and Standard & Poors (S&P)
Semiconductors Index. The graph assumes that $100 was invested on February 3, 2006 (the first day
we traded on the NASDAQ) in our ordinary shares and in each of the foregoing indices, and covers
the period to August 28, 2009. No dividends have been declared or paid on our ordinary shares.
Shareholder returns over the period indicated are based on historical data and should not be
considered indicative of future shareholder returns.
Cumulative Total Return*
|
|
|
* |
|
Assumes reinvestment of dividends, if any |
|
|
|
Item 6. |
|
Selected Financial Data |
The following table sets forth data for the last five fiscal years and should be read in
conjunction with the Managements Discussion and Analysis of Financial Condition and Results of
Operations and the Exhibits and Financial Statement Schedules included in Items 7 and 15,
respectively, of this Annual Report on Form 10-K.
We have derived the statement of operations data for the years ended August 28, 2009, August
29, 2008, and August 31, 2007, and the balance sheet data as of August 28, 2009 and August 29, 2008
from our audited financial statements which have been audited by KPMG LLP and are included
elsewhere in this report. KPMG LLPs report on the consolidated financial statements refers to the
adoption of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 at the beginning of
fiscal 2008. Historical results are not necessarily indicative of results to be expected for
future periods.
34
We use a 52- to 53-week fiscal year ending on the last Friday in August.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
August 28, |
|
|
August 29, |
|
|
August 31, |
|
|
August 25, |
|
|
August 26, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands, except per share amounts) |
|
Statement
of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
441,317 |
|
|
$ |
670,151 |
|
|
$ |
844,627 |
|
|
$ |
727,206 |
|
|
$ |
607,299 |
|
Cost of sales |
|
|
351,478 |
|
|
|
550,420 |
|
|
|
695,054 |
|
|
|
600,632 |
|
|
|
505,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
89,839 |
|
|
|
119,731 |
|
|
|
149,573 |
|
|
|
126,574 |
|
|
|
101,838 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
19,811 |
|
|
|
20,164 |
|
|
|
16,383 |
|
|
|
15,545 |
|
|
|
9,697 |
|
Selling, general and administrative |
|
|
55,505 |
|
|
|
59,849 |
|
|
|
59,552 |
|
|
|
54,917 |
|
|
|
46,636 |
|
Goodwill impairment |
|
|
10,416 |
|
|
|
3,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges |
|
|
2,810 |
|
|
|
1,938 |
|
|
|
|
|
|
|
|
|
|
|
880 |
|
In-process research and development
charge |
|
|
|
|
|
|
4,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory service agreements fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,303 |
|
|
|
2,588 |
|
Total operating expenses |
|
|
88,542 |
|
|
|
89,538 |
|
|
|
75,935 |
|
|
|
80,765 |
|
|
|
59,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
1,297 |
|
|
|
30,193 |
|
|
|
73,638 |
|
|
|
45,809 |
|
|
|
42,037 |
|
Interest expense, net |
|
|
(6,609 |
) |
|
|
(5,355 |
) |
|
|
(7,381 |
) |
|
|
(15,153 |
) |
|
|
(6,998 |
) |
Other income (expense), net |
|
|
(520 |
) |
|
|
2,557 |
|
|
|
934 |
|
|
|
2,567 |
|
|
|
481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(7,129 |
) |
|
|
(2,798 |
) |
|
|
(6,447 |
) |
|
|
(12,586 |
) |
|
|
(6,517 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for
income taxes |
|
|
(5,832 |
) |
|
|
27,395 |
|
|
|
67,191 |
|
|
|
33,223 |
|
|
|
35,520 |
|
Provision for income taxes |
|
|
5,571 |
|
|
|
18,421 |
|
|
|
9,458 |
|
|
|
914 |
|
|
|
8,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(11,403 |
) |
|
$ |
8,974 |
|
|
$ |
57,733 |
|
|
$ |
32,309 |
|
|
$ |
26,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per ordinary share,
basic |
|
$ |
(0.18 |
) |
|
$ |
0.15 |
|
|
$ |
0.97 |
|
|
$ |
0.60 |
|
|
$ |
0.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per ordinary share,
diluted |
|
$ |
(0.18 |
) |
|
$ |
0.14 |
|
|
$ |
0.91 |
|
|
$ |
0.55 |
|
|
$ |
0.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net income
(loss) per ordinary share, basic |
|
|
61,699 |
|
|
|
60,985 |
|
|
|
59,636 |
|
|
|
54,265 |
|
|
|
48,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net income
(loss) per ordinary share, diluted |
|
|
61,699 |
|
|
|
63,555 |
|
|
|
63,782 |
|
|
|
59,189 |
|
|
|
53,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 28, |
|
|
August 29, |
|
|
August 31, |
|
|
August 25, |
|
|
August 26, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
147,658 |
|
|
$ |
115,994 |
|
|
$ |
144,147 |
|
|
$ |
85,620 |
|
|
$ |
75,970 |
|
Working capital |
|
|
268,811 |
|
|
|
269,709 |
|
|
|
251,459 |
|
|
|
184,799 |
|
|
|
135,930 |
|
Total assets |
|
|
403,738 |
|
|
|
447,148 |
|
|
|
453,077 |
|
|
|
426,456 |
|
|
|
321,061 |
|
Total long-term debt |
|
|
81,250 |
|
|
|
81,250 |
|
|
|
81,250 |
|
|
|
81,250 |
|
|
|
125,000 |
|
Total shareholders equity |
|
|
234,825 |
|
|
|
246,906 |
|
|
|
221,426 |
|
|
|
150,663 |
|
|
|
42,648 |
|
35
|
|
|
Item 7. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with the audited financial statements
and related notes and other financial information, which appear elsewhere in this Annual Report.
The following discussion contains forward-looking statements that involve risks and uncertainties.
See the disclosure regarding Forward-Looking Statements in Item 1 of this Annual Report. Our
actual results could differ materially from the results contemplated by these forward-looking
statements due to certain factors, including those factors discussed below and elsewhere in this
Annual Report including in the Risk Factors section in Item 1A of this Annual Report.
We use a 52- to 53-week fiscal year ending on the last Friday in August. Financial information
for one of our subsidiaries, SMART Modular Technologies Indústria de Componentes Eletrônicos Ltda.,
is included in our consolidated financial statements on a one month lag. The effects of the one
month lag for the operations of SMART Modular Technologies Indústria de Componentes Eletrônicos
Ltda. is not material to our financial position and results of operations. Certain prior period
amounts have been reclassified to conform to the current year presentation.
Overview
We are a leading independent designer, manufacturer and supplier of value added subsystems
sold primarily to OEMs. Our subsystem products include memory modules, solid state storage products
such as embedded flash and SSDs, embedded computing products and display products. We offer these
products to customers worldwide. We also offer custom supply chain services including procurement,
logistics, inventory management, temporary warehousing, kitting and packaging services. Our
products and services are used for a variety of applications in the computing, networking,
communications, printer, storage, defense and industrial markets worldwide. Products that
incorporate our subsystems include servers, routers, switches, storage systems, workstations, PCs,
notebooks, printers and gaming machines. Generally, increases in overall demand by end users for,
and increases in memory content in, products that incorporate our subsystems should have a positive
effect on our business, financial condition and results of operations. Conversely, decreases in
product demand and memory content can have a negative effect on our business, financial condition
and results of operations. We offer more than 500 standard and custom products to leading OEMs,
including Cisco Systems, Dell and Hewlett-Packard. We maintain a large global footprint with
manufacturing capabilities in the United States, Malaysia and Brazil. Our global operations enable
us to reduce costs and rapidly respond to our customers requirements worldwide.
In April 2004, a group of investors led by TPG, Francisco Partners and Shah Capital Partners
acquired SMART Modular from Solectron, at which time we began to operate our business as an
independent company incorporated under the laws of the Cayman Islands. Since the acquisition, we
repositioned portions of our business by focusing on delivery of certain higher value added
products, diversifying our end markets, extending into new vertical markets, creating more
technically engineered products and solutions, migrating manufacturing to low cost regions and
controlling expenses. For example, in fiscal 2006 we completed a new manufacturing facility in
Atibaia, Brazil where we import finished wafers and package them into memory integrated circuits
and build memory modules. In fiscal 2008 we acquired Adtron Corporation (Adtron), a leading
designer and global supplier of high performance and high capacity SSDs for the defense, aerospace
and industrial markets which we recently renamed to SMART Modular Technologies (AZ), Inc.
In March 2009, we entered into a seven year operating lease with Newark Eureka Industrial
Capital LLC to lease approximately 79,500 square feet of office, manufacturing, engineering,
research and development, warehouse and distribution space to serve as our new corporate
headquarters starting in the third quarter of fiscal 2009. Our principal executive office is now
located at 39870 Eureka Drive, Newark, California 94560.
In March 2009, our Board of Directors authorized the repurchase of up to $10.0 million of our
ordinary shares. In April 2009, we entered into a Rule 10b5-1 trading plan with a broker to
repurchase ordinary shares based on pre-defined terms and conditions. Under the repurchase
program, depending on price, regulatory requirements, market conditions and other factors, shares
may be purchased on the open market or in privately negotiated transactions. Purchases under this
program may be commenced, suspended or terminated at any time without prior notice. During the
third quarter of fiscal 2009, we repurchased approximately forty-five thousand of our ordinary
shares through open market repurchases at an average price of $1.82 per share for a total of
approximately $0.1 million. As of August 28, 2009, the remaining balance available for future
share repurchases was $9.9 million under our share repurchase program.
36
Key Business Metrics
The following is a brief description of the major components of the key line items in our
financial statements.
Net Sales
We generate our product revenues from sales of our subsystems, including memory modules and
flash memory cards, solid state storage devices, embedded computing boards and display products,
principally to leading computing, networking, communications, printer, storage, defense and
industrial OEMs. Sales of our products are generally made pursuant to purchase orders rather than
long-term commitments. We generate service revenue from a limited number of customers by providing
procurement, logistics, inventory management, temporary warehousing, kitting and packaging
services. Our net sales are dependent upon demand in the end markets that we serve and fluctuations
in end-user demand can have a rapid and material effect on our net sales. Furthermore, sales to
relatively few customers have accounted, and we expect will continue to account for, a significant
percentage of our net sales in the foreseeable future.
Cost of Sales
The most significant components of cost of sales are materials, fixed manufacturing costs,
labor and depreciation. Increases in capital expenditures may increase our future cost of sales due
to higher levels of depreciation expense. Cost of sales also includes any inventory write-downs.
We may write-down inventory for a variety of reasons, including obsolescence, excess quantities and
declines in market value below our cost.
Research and Development Expenses
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. Our customers
typically do not separately compensate us for design and engineering work involved in the
development of custom products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel costs, including
commissions and benefits, facilities and non-manufacturing equipment costs, allowances for bad
debt, costs related to advertising and marketing and other support costs including utilities,
insurance and professional fees.
Critical Accounting Policies
Managements Discussion and Analysis of Financial Condition and Results of Operations is based
on our financial statements which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements requires us
to make certain estimates that affect the reported amounts in our financial statements. We evaluate
our estimates on an ongoing basis, including those related to our net sales, inventories, asset
impairments, restructuring charges, income taxes, stock-based compensation and commitments and
contingencies. We base our estimates on historical experience and on various other assumptions that
we believe to be reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies are the most significant to the
presentation of our financial statements and they at times require the most difficult, subjective
and complex estimates.
37
Revenue Recognition
Our product revenues are derived from the sale of value added subsystems, including memory
modules and flash memory cards, solid state storage devices, embedded computing boards and display
products, which we design and manufacture. We recognize revenue primarily upon shipment, following
receipt of written purchase orders, when the price is fixed or determinable, title has transferred,
product acceptance has occurred, and collection of the resulting accounts receivable is reasonably
assured. Amounts billed to customers related to shipping and handling are classified as sales,
while costs incurred by us for shipping and handling are classified as cost of sales. Taxes,
including value added taxes, assessed by a government authority that are both imposed on and
concurrent with a specific revenue producing transaction are excluded from revenue.
Our service revenues are derived from procurement and logistics, inventory management,
temporary warehousing, kitting and packaging services. The terms of our contracts vary, but we
generally recognize service revenue upon the completion of the contracted services. Our service
revenue is accounted for on an agency basis in accordance with Emerging Issues Task Force (EITF)
Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. Service revenue for
these arrangements is typically based on material procurement costs plus a fee for any services
provided. We determine whether to report revenue on a net or gross basis depending on a number of
factors, including whether we are the primary obligor in the arrangement, have general inventory
risk, have the ability to set the price, have the ability to determine who the suppliers are, can
physically change the product, or have credit risk. Under some
service arrangements, we may retain
inventory risk. All inventory held under service arrangements is included in the inventory reported
on the consolidated balance sheet.
The following is a summary of our net sales and gross billings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
August 28, |
|
|
August 29, |
|
|
August 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product net sales |
|
$ |
404,474 |
|
|
$ |
628,791 |
|
|
$ |
794,397 |
|
Service revenue |
|
|
36,843 |
|
|
|
41,360 |
|
|
|
50,230 |
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
441,317 |
|
|
|
670,151 |
|
|
|
844,627 |
|
Plus: Cost of sales (1) |
|
|
625,635 |
|
|
|
875,839 |
|
|
|
1,085,715 |
|
|
|
|
|
|
|
|
|
|
|
Gross billings to customers |
|
$ |
1,066,952 |
|
|
$ |
1,545,990 |
|
|
$ |
1,930,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents cost of sales associated with service revenue reported on a net basis. |
Accounts Receivable
We evaluate the collectability of accounts receivable based on several factors. When we are
aware of circumstances that may impair a specific customers ability to meet its financial
obligations, we record a specific allowance against amounts due, and thereby reduce the net
recognized receivable to the amount we reasonably believe will be collected. Increases to the
allowance for bad debt are recorded as a component of general and administrative expenses. For all
other customer accounts receivable, we record an allowance for doubtful accounts based on a
combination of factors including the length of time the receivables are outstanding, industry and
geographic concentrations, the current business environment, and historical experience.
As a result of the current macroeconomic environment and associated credit market conditions,
both liquidity and access to capital have impacted some of our customers. We have continued to
closely monitor our credit exposure with our customers to anticipate exposures and minimize our
risk.
38
Inventory Valuation
At each balance sheet date, we evaluate our ending inventories for excess quantities and
obsolescence. This evaluation includes analysis of sales levels by product family. Among other
factors, we consider historical demand and forecasted demand in relation to the inventory on hand,
competitiveness of product offerings, market conditions and product life cycles when determining
obsolescence and net realizable value. We adjust remaining balances to approximate the lower of our
manufacturing cost or net realizable value. Inventory cost is determined on a specific
identification basis and includes material, labor and manufacturing overhead. From time to time,
our customers may request that we purchase and maintain significant inventory of raw materials for
specific programs. Such inventory purchases are evaluated for excess quantities and potential
obsolescence and could result in a provision at the time of purchase or subsequent to purchase.
Inventory levels may fluctuate based on inventory held under service arrangements. Our provisions
for excess and obsolete inventory are also impacted by our arrangements with our customers and/or
suppliers, including our ability or inability to re-sell such inventory to them. If actual market
conditions or our customers product demands are less favorable than those projected or if our
customers or suppliers are unwilling or unable to comply with any arrangements related to their
purchase or sale of inventory, additional provisions may be required and would have a negative
impact on our gross margins in that period. We have had to write-down inventory in the past for
reasons such as obsolescence, excess quantities and declines in market value below our costs, and
we may be required to do so from time to time in the future.
Restructuring Charges
We record and account for our restructuring activities following formally approved plans that
identify the actions and timelines over which the restructuring activities will occur.
Restructuring charges include estimates pertaining to such items as employee severance and fringe
benefit costs, facility exit costs, subleasing assumptions, and other assumptions. Adjustments to
these estimates are made when changes in facts and circumstances suggest actual amounts will differ
from original estimates. These changes in estimates may result in increases or decreases to our
results of operations in future periods and would be presented on the restructuring charge line of
our consolidated statements of operations.
Income Taxes
We use the asset and liability method of accounting for income taxes. Deferred tax assets and
liabilities are recognized for the future consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and net operating loss and credit carry-forwards. When necessary, a valuation allowance is
recorded or reduced to value tax assets to amounts expected to be realized. The effect of changes
in tax rates is recognized in the period in which the rate change occurs. U.S. income and foreign
withholding taxes are not provided on that portion of unremitted earnings of foreign subsidiaries
that are expected to be reinvested indefinitely.
After excluding ordinary losses in a tax jurisdiction for which no tax benefit can be
recognized, we estimate our annual effective tax rate and apply such rate to year-to-date income,
adjusting for unusual or infrequent items that are treated as discrete events in the period. We
also evaluate our valuation allowance to determine if a change in circumstances causes a change in
judgment regarding realization of deferred tax assets in future years. If the valuation allowance
is adjusted as a result of a change in judgment regarding future years, that adjustment is recorded
in the period of such change affecting our tax expense in that period.
The calculation of our tax liabilities involves accounting for uncertainties in the
application of complex tax rules, regulations and practices. As a result of the implementation of
FIN No. 48, we recognize benefits for uncertain tax positions based on a two-step process. The
first step is to evaluate the tax position for recognition of a benefit (or the absence of a
liability) by determining if the weight of available evidence indicates that it is more likely than
not that the position taken will be sustained upon audit, including resolution of related appeals
or litigation processes, if any. If it is not, in our judgment, more likely than not that the
position will be sustained, then we do not recognize any benefit for the position. If it is more
likely than not that the position will be sustained, a second step in the process is required to
estimate how much of the benefit we will ultimately receive. This second step requires that we
estimate and measure the tax benefit as the largest amount that is more than 50 percent likely of
being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such
amounts. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is
based on a number of factors including, but not limited to, changes in facts or circumstances,
changes in tax law, new facts, correspondence with tax authorities during the course of an audit,
effective settlement of audit issues, and commencement of new audit activity. Such a change in
recognition or measurement could result in the recognition of a tax benefit or an additional charge
to the tax provision in the period.
39
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
We review our long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed are reported at the lower of the
carrying amount or fair value, less cost to sell.
Impairment of Goodwill
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), we perform
a goodwill impairment test of our two reporting units (Memory, Display & Embedded and Adtron)
annually during the fourth quarter of our fiscal year and more frequently if an event or
circumstance indicates that an impairment may have occurred. Such events or circumstances may
include significant adverse changes in the general business climate, among others. The test is
performed by determining the fair value of the reporting unit based on estimated discounted future
cash flows, considering the market price of our ordinary shares, and comparing the fair value to
the carrying value of the reporting unit, including goodwill.
If the carrying value of each reporting unit is less than its fair value, we then allocate the
fair value of the unit to all the assets and liabilities of the unit (including any unrecognized
intangible assets) as if the reporting units fair value was the purchase price to acquire the
reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its
assets and liabilities is the implied fair value of the goodwill. If the carrying amount of the
reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess.
Stock-Based Compensation
Effective August 27, 2005, we adopted SFAS No. 123R, Share-Based Payment, using the
prospective method. The key assumptions used in applying the provisions of SFAS No. 123R and the
impact of adoption are described in Note 1(p) to the Consolidated Financial Statements.
40
Results of Operations
The following is a summary of our results of operations for fiscal years 2009, 2008 and 2007
(in millions).
|
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|
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|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
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|
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August 28, |
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% of |
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August 29, |
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% of |
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August 31, |
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% of |
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2009 |
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|
sales |
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2008 |
|
|
sales |
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2007 |
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|
sales |
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Net sales |
|
$ |
441.3 |
|
|
|
100 |
% |
|
$ |
670.2 |
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|
|
100 |
% |
|
$ |
844.6 |
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|
|
100 |
% |
Cost of sales |
|
|
351.5 |
|
|
|
80 |
% |
|
|
550.4 |
|
|
|
82 |
% |
|
|
695.1 |
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|
|
82 |
% |
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Gross profit (1) |
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|
89.8 |
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|
|
20 |
% |
|
|
119.7 |
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|
18 |
% |
|
|
149.6 |
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|
18 |
% |
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|
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Research and development |
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19.8 |
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|
4 |
% |
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|
20.2 |
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3 |
% |
|
|
16.4 |
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|
|
2 |
% |
Selling, general, and administrative |
|
|
55.5 |
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|
|
13 |
% |
|
|
59.8 |
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|
|
9 |
% |
|
|
59.6 |
|
|
|
7 |
% |
Goodwill impairment |
|
|
10.4 |
|
|
|
2 |
% |
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges |
|
|
2.8 |
|
|
|
1 |
% |
|
|
1.9 |
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|
|
|
|
|
|
|
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|
|
In process research and development charge |
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|
|
|
|
|
|
|
|
|
4.4 |
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|
|
1 |
% |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total operating expenses |
|
|
88.5 |
|
|
|
20 |
% |
|
|
89.5 |
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|
|
13 |
% |
|
|
76.0 |
|
|
|
9 |
% |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Income from operations |
|
|
1.3 |
|
|
|
|
|
|
|
30.2 |
|
|
|
5 |
% |
|
|
73.4 |
|
|
|
9 |
% |
Interest expense, net |
|
|
(6.6 |
) |
|
|
-2 |
% |
|
|
(5.4 |
) |
|
|
-1 |
% |
|
|
(7.4 |
) |
|
|
-1 |
% |
Other income (expense), net |
|
|
(0.5 |
) |
|
|
|
|
|
|
2.6 |
|
|
|
|
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) (1) |
|
|
(7.1 |
) |
|
|
-2 |
% |
|
|
(2.8 |
) |
|
|
|
|
|
|
(6.4 |
) |
|
|
-1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes |
|
|
(5.8 |
) |
|
|
-1 |
% |
|
|
27.4 |
|
|
|
4 |
% |
|
|
67.0 |
|
|
|
8 |
% |
Provision for income taxes |
|
|
5.6 |
|
|
|
1 |
% |
|
|
18.4 |
|
|
|
3 |
% |
|
|
9.5 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (1) |
|
$ |
(11.4 |
) |
|
|
-3 |
% |
|
$ |
9.0 |
|
|
|
1 |
% |
|
$ |
57.5 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Summations may not compute precisely due to rounding. |
Fiscal Year Ended August 28, 2009 Compared to Fiscal Year Ended August 29, 2008
Net Sales. Net sales for fiscal 2009 were $441.3 million, a 34% decrease from $670.2 million
for fiscal 2008. This includes a $206.0 million decrease in net sales of our memory products and a
$30.4 million decrease in net sales in the balance of our Memory, Embedded & Display Segment. The
decline in sales of memory products primarily resulted from falling prices during fiscal 2009 and a
decrease in overall demand for memory products. These declines in pricing and demand resulted for
the most part from the negative impact that the worldwide economic downturn had on sales of
products in end markets served by our customers. Demand for our memory products was also impacted
by our loss of market share to certain semiconductor manufacturers that offer memory modules as
more of our customers transitioned from custom products that have been our strength, to more
standard products available at lower prices from semiconductor manufacturers. The decline in net
sales for the balance of our Memory, Embedded & Display Segment primarily resulted from one of our embedded
programs transitioning to be manufactured in-house by the OEM. The decline in total net sales was
partially offset by an increase of $7.5 million in net sales of our Adtron Segment due to the fact
that this segment included a full year of sales in fiscal 2009 while fiscal 2008 only included six
months of sales.
Cost of Sales. Cost of sales for fiscal 2009 was $351.5 million, a 36% decrease from $550.4
million for fiscal 2008. Cost of sales as a percentage of net sales decreased to 80% in fiscal
2009, compared to 82% in fiscal 2008. The $198.9 million decrease in cost of sales included a
$160.9 million decline in the cost of materials for our memory products and a $25.1 million decline
in the cost of materials for the balance of our Memory, Embedded & Display Segment. These declines
were partially offset by an increase of $2.5 million in the cost of materials in our Adtron
Segment. These decreases in cost of materials were primarily due to the significant decreases in
net sales discussed above. In addition, our factory overhead and other components of cost of sales
decreased by $15.4 million, primarily due a $9.8 million decrease in payroll and other
employee-related expenses resulting from a 26% headcount reduction in cost of sales, reduced
manufacturing activities, decreased subcontractor services and a pay reduction implemented during
fiscal 2009.
41
Gross Profit. Gross profit for fiscal 2009 was $89.8 million, a 25% decrease from $119.7
million for fiscal 2008. Gross margin percentage increased to 20% in fiscal 2009, as compared to
18% in fiscal 2008. The decrease in gross profit dollars was primarily due to the decline in net
sales of our memory, embedded and display products in fiscal 2009. The increase in gross margin
percentage was primarily due to the inclusion of higher margin products from the Adtron Segment for
the full year in fiscal 2009, as well as a favorable shift in mix towards our memory products and
away from display products.
Research and Development Expenses and Write-off of Acquired In-process Research and
Development. Research and development, or R&D expenses, for fiscal 2009 were $19.8 million, a 2%
decrease from $20.2 million for fiscal 2008. This decrease was primarily due to a $3.1 million
decrease in payroll and other employee-related expenses resulting from a 23% headcount reduction in
R&D, as well as reductions in salaries and bonuses implemented during fiscal 2009. This decrease
was offset by a $2.7 million increase in R&D expenses for the Adtron segment. During fiscal 2008,
we also wrote off $4.4 million of in-process R&D related to the acquisition of Adtron.
Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A,
expenses for fiscal 2009 were $55.5 million, representing a $4.3 million decrease from $59.8
million in fiscal 2008. This decrease was primarily due to a $5.2 million decrease in payroll and
other employee-related expenses resulting from a 16% headcount reduction in SG&A and other
cost-cutting initiatives implemented during fiscal 2009, an $0.8 million decrease in facility
expenses, and a $0.6 million decrease in computer-related costs. These decreases were partially
offset by an $0.8 million increase in stock-based compensation expense, a $0.7 million increase in
our bad debt expense and a $0.4 million increase in professional services. The $0.8 million
increase in stock-based compensation expense in fiscal 2009 includes a $1.1 million impact to SG&A
due to an out of period adjustment recorded in the fourth quarter of fiscal 2009. See Note 1(u) of
Notes to the Consolidated Financial Statements.
Restructuring Charges. During fiscal 2009, we initiated a restructuring plan (the FY09
Plan) to reduce further our global workforce in order to improve our cost structure in the
continued uncertain economic environment. During fiscal 2008, we initiated a restructuring plan
(the FY08 Plan) to reduce operating expenses and improve cash flow by consolidating certain
operations in Asia, Puerto Rico and the Dominican Republic. All exit costs related to the FY08
Plan and the vast majority of the FY09 Plan have been paid as of August 28, 2009.
During fiscal 2009, we recognized restructuring costs of $2.2 million for severance and
employee benefit costs, $0.2 million for facility and assets write-offs and $0.4 million for other
exit-related costs. During fiscal 2008, we recognized restructuring costs of $0.7 million for
severance and employee benefit costs, $0.9 million for facility and assets write-offs and
approximately $0.3 million for other exit-related costs. The restructuring costs of $2.8 million
and $1.9 million in fiscal 2009 and 2008, respectively, were a result of reducing operations in our
California and Puerto Rico facilities and ceasing operations in the Dominican Republic, China and
India. We have paid almost all restructuring costs related to the FY09 and FY08 Plans. As of August
28, 2009, we have ten thousand dollars accrued for restructuring costs.
As a result of current circumstances and conditions, and to take advantage of opportunities to
reduce costs, we may implement additional restructuring plans.
Goodwill Impairment. As a result of deteriorating macroeconomic conditions, our business
outlook and significant erosion of our market capitalization during fiscal 2009 and 2008, we
conducted an interim impairment test of goodwill during fiscal 2009, pursuant to SFAS 142, to
determine whether and to what extent goodwill may have been impaired. Based on this analysis, we
determined that the implied fair value of goodwill recorded on the balance sheet of our Adtron
reporting unit was below the carrying value, resulting in a goodwill impairment charge of $7.2
million and $3.2 million in the first and second quarters of fiscal 2009, respectively.
Interest Expense, Net. Net interest expense for fiscal 2009 was $6.6 million, a $1.2 million
increase from $5.4 million for fiscal 2008. This increase was principally due to approximately $2.0
million of less interest income earned because of lower interest rates on bank deposits. The
decline of interest income was partially offset by a decrease in interest expense of $0.8 million
primarily due to a decline in interest rates during fiscal 2009.
42
Other Income (Expense), Net. Fiscal 2009 decreased to a net expense of $0.5 million from
income of $2.6 million in fiscal 2008. The decrease of $3.1 million mainly resulted from losses on
foreign currency transactions in our Brazil operations.
Provision for Income Taxes. The effective tax rates for 2009 and 2008 were approximately 96%
and 67%, respectively. During the third quarter of the fiscal year ended August 29, 2008, we
recorded $9.6 million deferred tax expense to increase the valuation allowance on U.S. deferred tax
assets. The U.S. net deferred tax assets generated during the fiscal year ended August 28, 2009
and August 29, 2008 also have a full valuation allowance. The effective tax rate changed due to a
consolidated pre-tax loss, with losses in certain tax jurisdictions, principally in the U.S., that
generate no tax benefit.
Out of Period Adjustment. Due to an out of period adjustment related to the implementation
of a third-party stock option accounting software upgrade, we
discovered a computational error in stock-based compensation expense.
As a result, we recorded a one-time cumulative charge
of $1.7 million in the fourth quarter of fiscal 2009, of which $0.5 million, $0.4 million and $0.8
million related to understated stock compensation expense in fiscal 2007, fiscal 2008 and the nine
months ended May 29, 2009, respectively. See Note 1(u) of Notes to the Consolidated Financial
Statements.
Fiscal Year Ended August 29, 2008 Compared to Fiscal Year Ended August 31, 2007
Net Sales. Net sales for fiscal 2008 were $670.2 million, a 21% decrease from $844.6 million
from fiscal 2007. This decrease includes a $189.6 million decrease in net sales of our memory
products which was partially offset by increases of $9.9 million in net sales of our display
products and $5.2 million in net sales of our embedded products. The decline in net sales of our
memory products primarily resulted from falling prices during fiscal 2008 and a decrease in overall
demand for memory products. These declines in pricing and demand resulted for the most part from
the negative impact that the worldwide economic downturn had on sales of products in end markets
served by our customers. Demand for our memory products was also impacted by our loss of market
share to certain semiconductor manufacturers that offer memory modules.
Cost of Sales. Cost of sales for fiscal 2008 was $550.4 million, a 21% decrease from $695.1
million for fiscal 2007. Cost of sales as a percentage of net sales remained unchanged at 82% year
over year as these costs decreased commensurately with the decrease in net sales. The $144.6
million decrease in cost of sales included a $164.8 million decline in our memory product cost of
sales, partially offset by increases in net cost of sales of $8.9 million in our display products
and $5.3 million in our embedded products, respectively. The decrease in cost of sales was
primarily due to the significant decrease in net sales of memory products discussed above. In
addition, inventory write-downs increased by $0.7 million and our factory overhead and other costs
increased by $5.4 million.
Gross Profit. Gross profit for fiscal 2008 was $119.7 million, a 20% decrease from $149.6
million for fiscal 2007. Gross margin percentage remained unchanged at 18% year over year. The
decrease in gross profit was primarily due to lower net sales in fiscal 2008.
Research and Development Expenses and Write-off of Acquired In-process Research and
Development. R&D expenses for fiscal 2008 were $20.2 million, a 23% increase from $16.4 million for
fiscal 2007. This increase was primarily due to approximately $2.3 million in R&D expenses for the
new Adtron Segment and approximately $0.6 million increase in stock-based compensation expense
incurred during fiscal 2008 compared to fiscal 2007. During fiscal 2008, we wrote off an additional
$4.4 million of in-process R&D related to the acquisition of Adtron.
Selling, General and Administrative Expenses. SG&A expenses for fiscal 2008 were $59.8
million, an increase of $0.2 million from $59.6 million for the same period of fiscal 2007. Sales
and marketing expense increased $0.1 million primarily due to $0.8 million of increases in
personnel related costs and $0.2 million of increases in amortization of intangible assets due to
the Adtron acquisition during the year, partially offset by a decrease of $0.6 million in bonus
expense, a decrease of $0.2 million in commission expense, and a decrease of $0.1 million in other
support costs. G&A expense increased $0.1 million primarily due to increases of $1.9 million in
personnel related costs and $1.7 million in stock-based compensation expense, partially offset by a
reduction of $1.9 million in bonus expense, a reduction of $0.6 million in SOX related expenses, a
reduction in $0.2 million in support costs and the fact that the prior year included $0.8 million
in fees incurred in relation to our secondary share offering.
43
Restructuring and Goodwill Impairment Charges. Restructuring costs for fiscal 2008 consist
of $0.7 million for severance and employee benefit costs, approximately $0.9 million for facility
and assets write-off and approximately $0.3 million in other exit costs. The total $1.9 million of
restructuring charge incurred in fiscal 2008 was primarily from the consolidation of certain
operations. In particular, we ceased operations in China and India and started the closure of our
Dominican Republic facility. Goodwill impairment charges in fiscal 2008 were $3.2 million related
to our Memory, Display & Embedded Segment. We did not incur any restructuring or goodwill
impairment charges during fiscal 2007.
Interest Expense, Net. Net interest expense for fiscal 2008 was $5.4 million, a $2.0 million
decrease from $7.4 million for fiscal 2007. This decrease was principally due to a $0.9 million
increase in interest income in fiscal 2008 as a result of increased cash balances and a decrease in
interest expense of $1.1 million in fiscal 2008 primarily due to the decrease in the interest rate
on our long-term debt.
Other Income, Net. Net other income for fiscal 2008 increased to $2.6 million, from $0.9
million in fiscal 2007. The increase of $1.7 million was primarily driven by foreign currency
transactions gains.
Provision for Income Taxes. The effective tax rates for fiscal 2008 and fiscal 2007 were
approximately 67% and 14%, respectively. During the third quarter of fiscal 2008, we recorded a
$9.6 million deferred tax expense to increase the valuation allowance on U.S. deferred tax assets.
The U.S. net deferred tax assets generated during fiscal 2008 also have a full valuation allowance.
The effective tax rate increased primarily due to the $9.6 million tax expense to establish a full
valuation allowance on U.S. net deferred tax assets.
Excluding the impact of the $9.6 million increase in the valuation allowance and the
non-deductible in-process research and development expenses of $4.4 million in fiscal 2008 and
excluding the impact of the $2.4 million decrease in the valuation allowance in fiscal 2007, the
effective tax rates for fiscal 2008 and fiscal 2007 would have been approximately 27% and 18%,
respectively. This increase was primarily due to reductions in pre-tax profits in fiscal 2008 as
compared to fiscal 2007 in low tax rate countries which did not significantly reduce consolidated
tax expense.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flow from operations and borrowings under our
senior secured floating rate notes. Our principal uses of cash and capital resources are debt
service requirements as described below, capital expenditures, potential acquisitions, research and
development expenditures, shares repurchase program and working capital requirements. From time
to time, surplus cash may be used to pay down long-term debt to reduce interest expense. Cash and
cash equivalents consist of funds held in general checking and money market accounts. We do not
have investments in variable rate demand notes, auction rate securities and other asset backed
securities.
Debt Service
As of August 28, 2009, we had total long-term indebtedness of $81.3 million, which represents
the aggregate principal amount of our senior secured floating rate notes outstanding.
Senior Secured Floating Rate Exchange Notes Due April 2012 (the Notes). The Notes bear
interest at a rate equal to LIBOR plus 5.50% per annum, and are guaranteed by most of our
subsidiaries. The guarantees are secured by the capital stock of most of our subsidiaries. Interest
on the Notes is payable quarterly in cash. The Notes contain customary covenants and events of
default, including covenants that limit our ability to incur debt, pay dividends and make
investments. We were in compliance with such covenants as of August 28, 2009.
44
Senior Secured Revolving Line of Credit Facility. On August 14, 2009, the Second Amendment to
Second Amended and Restated Loan and Security Agreement (the Second Amendment) was entered into
by and among SMART Modular Technologies, Inc., SMART Modular Technologies (Europe) Limited, and
SMART Modular Technologies (Puerto Rico) Inc., as borrowers, and Wells Fargo Bank, National
Association, as lender, arranger, administrative agent and security trustee. As a result of the
Second Amendment, we are no longer required to comply with certain financial covenants under the Second Amended and Restated Loan and
Security Agreement dated April 30, 2007 (as amended, the WF Credit Facility) unless there are
borrowings outstanding. If we do not meet the financial covenants or financial condition test, then
we will be unable to borrow under the WF Credit Facility. We have not borrowed under the WF Credit
Facility since November 2007 and we had no borrowings outstanding as of August 28, 2009. While we
expect to be able to satisfy the financial covenants required to borrow funds under the WF Credit
Facility at certain times during its remaining term, we may not meet the financial covenants during
all periods before it expires on April 30, 2010 and therefore may not be able to borrow funds if
and when we need the funds in the future.
Capital Expenditures
Future capital expenditures focus on test and manufacturing equipment upgrades and/or
acquisitions, IT infrastructure and software upgrades. The WF Credit Facility contains restrictions
on our ability to make capital expenditures. Based on current estimates, we believe that the amount
of capital expenditures permitted to be made under the WF Credit Facility will be adequate to
implement our current plans.
Sources and Uses of Funds
As of August 28, 2009, we had $147.7 million in unrestricted cash. We have generated
operating cash flow each fiscal year since our acquisition from Solectron in 2004, including $52.5
million for the fiscal year ended August 28, 2009. Our capital expenditures are relatively modest,
at 3% or less of net sales since 2004. The $81.3 million Notes, which, as of October 23, 2009,
have a balance of $55.1 million, are not due until April 2012. Given the foregoing, we anticipate
that we will meet our working capital needs, and be able to fund our R&D and capital expenditures
and service requirements on our debt obligations for at least the next 12 months. Our ability to
make scheduled payments of principal, to pay interest on or to refinance our indebtedness and to
satisfy our other debt obligations beyond the next 12 months will depend upon our future operating
performance, which will be affected by general economic, financial, competitive, business and other
factors beyond our control.
On October 13, 2009, the Board of Directors approved up to $25.0 million to repurchase and/or
redeem debt outstanding under the Notes, excluding unpaid accrued interest. On October 22, 2009,
using available cash the Company repurchased and retired $26.2 million of the principal amount of
the Notes for $25.0 million or 95.5% of the principal or face amount. As of October 23, 2009, the
aggregate principal amount outstanding under the Notes was $55.1 million.
From time to time we may explore additional financing and other means to lower our cost of
capital which could include additional share issuance or debt financing and the application of the
proceeds there from to repay bank debt or other indebtedness. In addition, in connection with any
future acquisitions or internal growth, we may require additional funding in the form of additional
debt or equity financing or a combination thereof. There can be no assurance that additional
funding will be available to us on acceptable terms.
Historical Trends
Historically, our financing requirements have been funded primarily through cash generated by
operating activities. As of August 28, 2009, our cash and cash equivalents were $147.7 million.
Cash Flows from Operating Activities. Net cash provided by operating activities was $52.5
million, $4.6 million, and $69.7 million for fiscal years 2009, 2008 and 2007, respectively.
Net cash provided by operating activities of $52.5 million for fiscal 2009 was primarily
comprised of $22.2 million of net income, net of non-cash related expenses and a $59.9 million
decrease in accounts receivable, partially offset by a $27.5 million decrease in accounts payable,
accrued expenses and other liabilities, and a $2.1 million net increase in inventories, prepaid
expenses and other assets.
45
Net cash provided by operating activities of $4.6 million for fiscal 2008 was primarily
comprised of $46.7 million of net income, net of non-cash related expenses, partially offset by a
$36.1 million decrease in accounts payable, accrued expenses and other liabilities, a $4.2 million
increase in accounts receivable and a $1.7 million net increase in inventories, prepaid expenses and other assets.
Net cash provided by operating activities of $69.7 million for fiscal 2007 was primarily
comprised of $72.4 million of net income, net of non-cash related expenses, an $18.6 million
decrease in accounts receivable and a $16.1 million decrease in inventories, prepaid expenses and
other assets, partially offset by a $37.4 million decrease in accounts payable, accrued expenses
and other liabilities.
Cash Flows from Investing Activities. Net cash used in investing activities was $21.1
million, $33.8 million, and $14.4 million for fiscal years 2009, 2008 and 2007, respectively. Net
cash used in investing activities of $21.1 million for fiscal 2009 was principally as a result of
purchases of $14.6 million in property and equipment and $6.6 million of contingent consideration
payments related to the Adtron earnout. Net cash used in investing activities of $33.8 million for
fiscal 2008 was principally as a result of the Adtron acquisition for $20.3 million, net of cash
acquired and purchases of $13.3 million in property and equipment. Net cash used in investing
activities of $14.4 million for fiscal 2007 was principally as a result of purchases of $14.1
million of property and equipment and a cash deposit of $0.4 million on equipment.
Cash Flows from Financing Activities. Net cash provided by financing activities was $0.6
million, $18 thousand, and $2.2 million for fiscal years 2009, 2008 and 2007, respectively. Net
cash provided by financing activities of $0.6 million for fiscal 2009 was primarily due to $0.7
million provided by ordinary share issuances through option exercises, partially offset by $0.1
million used to buyback approximately 45,000 of our ordinary shares under our share repurchase
program. Net cash provided by financing activities of $18 thousand for fiscal 2008 was immaterial.
Net cash provided by financing activities of $2.2 million for fiscal 2007 was primarily due to $1.9
million provided by ordinary share issuances through option exercises.
Share Repurchase Program
In March 2009, our Board of Directors authorized a share repurchase program of up to $10.0
million of our ordinary shares. In April 2009, we entered into a Rule 10b5-1 trading plan with a
broker to repurchase ordinary shares based on pre-defined terms and conditions. Under the
repurchase program, depending on price, regulatory requirements, market conditions and other
factors, shares may be purchased on the open market or in privately negotiated transactions.
Purchases under this program may be commenced, suspended, or terminated at any time without prior
notice. During the third quarter of fiscal 2009, we repurchased approximately forty-five thousand
of our ordinary shares through open market repurchases at an average price of $1.82 per share for a
total of approximately $0.1 million. As of August 28, 2009, the remaining balance available for
future share repurchases was $9.9 million under our share repurchase program.
Contractual Obligations
Our contractual obligations as of August 28, 2009 are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 |
|
|
|
|
|
|
1 Year |
|
|
23 Years |
|
|
45 Years |
|
|
Years |
|
|
Total |
|
|
|
(In millions) |
|
|
|
|
|
Total debt |
|
$ |
|
|
|
$ |
81.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
81.3 |
|
Interest expense in connection with
long-term debt and related interest rate
swap |
|
|
6.4 |
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
16.6 |
|
Operating leases |
|
|
1.6 |
|
|
|
3.1 |
|
|
|
1.2 |
|
|
|
1.0 |
|
|
|
6.9 |
|
Non-cancellable product purchase commitments |
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
10.1 |
|
|
$ |
94.6 |
|
|
$ |
1.2 |
|
|
$ |
1.0 |
|
|
$ |
106.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
In addition to what is included in the table above, as discussed in Note 5 of the Notes to the
Consolidated Financial Statements, we have adopted the provisions of FIN No. 48. As of August 28,
2009, we had an accrued liability for unrecognized tax benefits and related interest totaling $0.3
million. We are unable to estimate when any cash settlement with a taxing authority might occur.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such
as entities often referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we do not have any undisclosed borrowings or
debt, and we have not entered into any synthetic leases. We are, therefore, not materially exposed
to any financing, liquidity, market or credit risk that could arise if we had engaged in such
relationships.
We do not have any significant off-balance sheet arrangements that are reasonably likely to
have a current or future effect on our financial condition, results of operations, liquidity,
capital expenditures or capital resources.
Inflation
We do not believe that inflation has had a material effect on our business, financial
condition or results of operations. If our costs were to become subject to significant inflationary
pressures, we may not be able to fully offset such higher costs through price increases. Our
inability or failure to do so could adversely affect our business, financial condition and results
of operations.
Recent Accounting Pronouncements
See Note 1(v) of our Notes to Consolidated Financial Statements for information regarding the
effect of recent accounting pronouncements on our financial statements.
|
|
|
Item 7A. |
|
Quantitative and Qualitative Disclosures About Market Risk |
Our exposure to market rate risk includes risk of foreign currency exchange rate fluctuations
and changes in interest rates.
Foreign Exchange Risks
We are subject to inherent risks attributed to operating in a global economy. Our
international sales and our operations in foreign countries make us subject to risks associated
with fluctuating currency values and exchange rates. Because sales of our products are denominated
primarily in United States dollars, increases in the value of the United States dollar could
increase the price of our products so that they become relatively more expensive to customers in a
particular country, possibly leading to a reduction in sales and profitability in that country.
Some of the sales of our products are denominated in foreign currencies. Gains and losses on the
conversion to U.S. dollars of accounts receivable arising from such sales, and of other associated
monetary assets and liabilities, may contribute to fluctuations in our results of operations. In
addition, we have certain costs that are denominated in foreign currencies, and decreases in the
value of the U.S. dollar could result in increases in such costs that could have a material adverse
effect on our results of operations. We do not currently purchase financial instruments to hedge
foreign exchange risk, but may do so as circumstances warrant.
Interest Rate Risk
We are subject to interest rate risk in connection with our long-term debt, including the
$55.1 million of the Notes outstanding as of October 23, 2009, down from the $81.3 million that was
outstanding as of August 28, 2009. In addition, our WF Credit Facility provides for borrowings of
up to $35.0 million that will also bear interest at variable rates. Assuming that we could satisfy
the financial covenants required to borrow, which currently appears unlikely during certain periods
until it expires on April 30, 2010, and that the WF Credit Facility is fully drawn and holding
other variables constant and excluding the impact of any hedging arrangements, each 1.0% increase
in interest rates on our variable rate borrowings would result in an increase in annual interest
expense and a decrease in our cash flow and income before taxes of $0.9 million per year. We have
entered into an interest rate swap arrangement for the purpose of
fixing the interest rate on a portion of our long-term debt for the specified respective interest rate swap period. The
interest rate swap is for a notional amount of $40.0 million, bearing 9.97% fixed annual interest
rate, and is outstanding through April 28, 2010. There can be no assurance that the outstanding
interest rate swap or any other interest rate swaps that we implement will be effective.
47
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data |
Please refer to Item 15 Exhibits and Financial Statement Schedules.
|
|
|
Item 9. |
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
|
|
|
Item 9A. |
|
Controls and Procedures |
The management of the Company is responsible for establishing and maintaining adequate
internal control over financial reporting. SMARTs internal control system was designed to provide
reasonable assurance to the Companys management and Board of Directors regarding the preparation
and fair presentation of published financial statements in accordance with U.S. generally accepted
accounting principles. All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.
Management maintains a comprehensive system of controls intended to ensure that transactions
are executed in accordance with managements authorization, assets are safeguarded, and financial
records are reliable, and Management monitors the performance of the Companys internal control
procedures.
SMART management assessed the effectiveness of the Companys internal control over financial
reporting as of August 28, 2009 based on the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on
this assessment, management believes that, as of August 28, 2009, the Companys internal control
over financial reporting is effective.
Effectiveness of the Companys internal control over financial reporting as of August 28, 2009
has been audited by KPMG LLP, the Companys independent registered public accounting firm, as
stated in its report appearing on page 52, which expresses an unqualified opinion on the
effectiveness of the Companys internal control over financial reporting as of August 28, 2009.
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this report, SMARTs
Principal Executive Officer and Principal Financial Officer have concluded that SMARTs disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are
effective to ensure that information required to be disclosed by SMART in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
48
Changes in Internal Control Over Financial Reporting
There were no changes in SMARTs internal control over financial reporting during the last
quarter of fiscal 2009 that has materially affected or are reasonably likely to materially affect
our internal control over financial reporting.
|
|
|
Item 9B. |
|
Other Information |
None.
PART III
|
|
|
Item 10. |
|
Directors, Executive Officers and Corporate Governance |
The information required by this item with respect to directors and executive officers is
incorporated by reference to our Proxy Statement for our 2010 Annual Meeting of Shareholders, which
we expect to file on or before December 15, 2009.
We have adopted a code of business conduct and ethics applicable to our directors, officers
(including our principal executive officer and principal financial officer) and employees. The
Code of Business Conduct and Ethics is available on our website at www.smartm.com under Corporate
Governance.
|
|
|
Item 11. |
|
Executive Compensation |
The information required by this item will be set forth under Executive Compensation and
Related Information in our Proxy Statement for our 2010 Annual Meeting of Shareholders, and is
incorporated herein by reference.
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters |
The information required by this item will be set forth under Security Ownership of Certain
Beneficial Owners and Management and Equity Compensation Information for Plans or Individual
Arrangements with Employees and Non-Employees in our Proxy Statement for our 2010 Annual Meeting
of Shareholders, and is incorporated herein by reference.
|
|
|
Item 13. |
|
Certain Relationships and Related Transactions and Director Independence |
The information required by this item will be set forth under Compensation Committee
Interlocks and Insider Participation and Certain Transactions in our Proxy Statement for our
2010 Annual Meeting of Shareholders, and is incorporated herein by reference.
|
|
|
Item 14. |
|
Principal Accountant Fees and Services |
The information required by this item will be set forth under the caption Principal
Accountant Fees and Services in our Proxy Statement for our 2010 Annual Meeting of Shareholders,
and is incorporated herein by reference.
49
PART IV
|
|
|
Item 15. |
|
Exhibits and Financial Statement Schedules. |
(a)(1) Financial Statements
The following financial statements are filed as part of this report:
|
|
|
|
|
|
|
Page |
|
Audited Financial Statements: |
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
53 |
|
|
|
|
|
54 |
|
|
|
|
|
55 |
|
|
|
|
|
56 |
|
|
|
|
|
57 |
|
(a)(2) Financial Statement Schedules
The following financial statement schedule is filed as part of this report:
Schedules:
(a)(3) Exhibits
Please see the Exhibit Index at the end of this Report.
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
SMART Modular Technologies (WWH), Inc.:
We have audited the accompanying consolidated balance sheets of SMART Modular Technologies
(WWH), Inc. and subsidiaries (the Company) as of August 28, 2009 and August 29, 2008, and the
related consolidated statements of operations, shareholders equity and other comprehensive income
(loss), and cash flows for each of the years in the three-year period ended August 28, 2009. In
connection with our audits of the consolidated financial statements, we also have audited the
accompanying financial statement schedule II. These consolidated financial statements and financial
statement schedule II are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements and financial statement schedule II
based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of SMART Modular Technologies (WWH), Inc. and
subsidiaries as of August 28, 2009 and August 29, 2008, and the results of their operations and
their cash flows for each of the years in the three-year period ended August 28, 2009, in
conformity with U.S. generally accepted accounting principles. Also in our opinion, the related
financial statement schedule II, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in note 5 to the consolidated financial statements, the Company adopted the
provisions of Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109, at the beginning of
fiscal year 2008.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal control over financial
reporting as of August 28, 2009 based on criteria established in Internal Control Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated November 6, 2009, expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
/s/ KPMG LLP
Mountain View, California
November 6, 2009
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
SMART Modular Technologies (WWH), Inc.:
We have audited SMART Modular Technologies (WWH), Inc. and subsidiaries (the Company)
internal control over financial reporting as of August 28, 2009, based on criteria established in
Internal Control Integrated Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Companys management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying managements annual report on
internal control over financial reporting appearing in Item 9A. Our responsibility is to express an
opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, SMART Modular Technologies (WWH), Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of August 28, 2009, based
on criteria established in Internal Control Integrated
Framework, issued by the COSO.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company as of August 28,
2009 and August 29, 2008, and the related consolidated statements of operations, shareholders
equity and other comprehensive income (loss), and cash flows for each of the years in the
three-year period ended August 28, 2009 and the related financial statement schedule II, and our
report dated November 6, 2009 expressed an unqualified opinion on those consolidated financial
statements and financial statement schedule II.
/s/ KPMG LLP
Mountain View, California
November 6, 2009
52
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
August 28, |
|
|
August 29, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, |
|
|
|
except share data) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
147,658 |
|
|
$ |
115,994 |
|
Accounts receivable, net of allowances
of $1,591 and $1,517 as of August 28,
2009 and August 29, 2008, respectively |
|
|
130,953 |
|
|
|
193,736 |
|
Inventories |
|
|
63,115 |
|
|
|
62,430 |
|
Prepaid expenses and other current assets |
|
|
12,628 |
|
|
|
14,973 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
354,354 |
|
|
|
387,133 |
|
Property and equipment, net |
|
|
36,263 |
|
|
|
39,317 |
|
Goodwill |
|
|
1,061 |
|
|
|
7,210 |
|
Other intangible assets, net |
|
|
7,475 |
|
|
|
8,545 |
|
Other non-current assets |
|
|
4,585 |
|
|
|
4,943 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
403,738 |
|
|
$ |
447,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
68,928 |
|
|
$ |
93,482 |
|
Accrued expenses |
|
|
16,615 |
|
|
|
23,942 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
85,543 |
|
|
|
117,424 |
|
Long-term debt |
|
|
81,250 |
|
|
|
81,250 |
|
Other long-term liabilities |
|
|
2,120 |
|
|
|
1,568 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
168,913 |
|
|
|
200,242 |
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Ordinary shares, $0.00016667 par value; 600,000,000 shares
authorized; 61,904,788 and 61,361,137 shares issued and outstanding
as of August 28, 2009 and August 29, 2008, respectively |
|
|
10 |
|
|
|
10 |
|
Additional paid-in capital |
|
|
109,264 |
|
|
|
100,234 |
|
Deferred stock-based compensation |
|
|
|
|
|
|
(91 |
) |
Accumulated other comprehensive income |
|
|
4,333 |
|
|
|
14,132 |
|
Retained earnings |
|
|
121,218 |
|
|
|
132,621 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
234,825 |
|
|
|
246,906 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
403,738 |
|
|
$ |
447,148 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
53
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
August 28,
2009 |
|
|
August 29,
2008 |
|
|
August 31,
2007 |
|
|
|
(In thousands, except per share data) |
|
|
Net sales |
|
$ |
441,317 |
|
|
$ |
670,151 |
|
|
$ |
844,627 |
|
Cost of sales (1) |
|
|
351,478 |
|
|
|
550,420 |
|
|
|
695,054 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
89,839 |
|
|
|
119,731 |
|
|
|
149,573 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development (1) |
|
|
19,811 |
|
|
|
20,164 |
|
|
|
16,383 |
|
Selling, general, and administrative (1) |
|
|
55,505 |
|
|
|
59,849 |
|
|
|
59,552 |
|
Goodwill impairment |
|
|
10,416 |
|
|
|
3,187 |
|
|
|
|
|
Restructuring charges |
|
|
2,810 |
|
|
|
1,938 |
|
|
|
|
|
In-process research and development charge |
|
|
|
|
|
|
4,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
88,542 |
|
|
|
89,538 |
|
|
|
75,935 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
1,297 |
|
|
|
30,193 |
|
|
|
73,638 |
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(6,609 |
) |
|
|
(5,355 |
) |
|
|
(7,381 |
) |
Other income (expense), net |
|
|
(520 |
) |
|
|
2,557 |
|
|
|
934 |
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(7,129 |
) |
|
|
(2,798 |
) |
|
|
(6,447 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes |
|
|
(5,832 |
) |
|
|
27,395 |
|
|
|
67,191 |
|
Provision for income taxes |
|
|
5,571 |
|
|
|
18,421 |
|
|
|
9,458 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(11,403 |
) |
|
$ |
8,974 |
|
|
$ |
57,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic |
|
$ |
(0.18 |
) |
|
$ |
0.15 |
|
|
$ |
0.97 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, diluted |
|
$ |
(0.18 |
) |
|
$ |
0.14 |
|
|
$ |
0.91 |
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income
(loss) per share |
|
|
61,699 |
|
|
|
60,985 |
|
|
|
59,636 |
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income (loss)
per share |
|
|
61,699 |
|
|
|
63,555 |
|
|
|
63,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock-based compensation by category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
868 |
|
|
$ |
809 |
|
|
$ |
521 |
|
Research and development |
|
|
2,095 |
|
|
|
1,746 |
|
|
|
1,156 |
|
Selling, general and administrative |
|
|
5,512 |
|
|
|
4,716 |
|
|
|
3,014 |
|
See accompanying notes to consolidated financial statements.
54
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
AND OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Deferred |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares |
|
|
Paid-In |
|
|
Stock-Based |
|
|
Comprehensive |
|
|
Retained |
|
|
Shareholders |
|
|
Comprehensive |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Compensation |
|
|
Income (Loss) |
|
|
Earnings |
|
|
Equity |
|
|
Income (Loss) |
|
Balances as of August 25, 2006 |
|
|
58,430,803 |
|
|
$ |
10 |
|
|
$ |
85,251 |
|
|
$ |
(555 |
) |
|
$ |
272 |
|
|
$ |
65,685 |
|
|
$ |
150,663 |
|
|
$ |
31,681 |
|
Stock option exercises |
|
|
2,233,660 |
|
|
|
|
|
|
|
1,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,926 |
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
4,471 |
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
4,691 |
|
|
|
|
|
Net changes in unrealized loss on
derivative instruments accounted for
as cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,812 |
|
|
|
|
|
|
|
5,812 |
|
|
|
5,812 |
|
Tax benefit for stock option exercises |
|
|
|
|
|
|
|
|
|
|
602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
602 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,733 |
|
|
|
57,733 |
|
|
|
57,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of August 31, 2007 |
|
|
60,664,463 |
|
|
|
10 |
|
|
|
92,250 |
|
|
|
(335 |
) |
|
|
6,083 |
|
|
|
123,418 |
|
|
|
221,426 |
|
|
|
63,544 |
|
FIN 48 initial adoption adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229 |
|
|
|
229 |
|
|
|
|
|
Stock option exercises |
|
|
696,674 |
|
|
|
|
|
|
|
934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
934 |
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
7,027 |
|
|
|
244 |
|
|
|
|
|
|
|
|
|
|
|
7,271 |
|
|
|
|
|
Net changes in unrealized loss on
derivative instruments accounted for
as cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(666 |
) |
|
|
|
|
|
|
(666 |
) |
|
|
(666 |
) |
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,715 |
|
|
|
|
|
|
|
8,715 |
|
|
|
8,715 |
|
Tax benefit for stock option exercises |
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,974 |
|
|
|
8,974 |
|
|
|
8,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of August 29, 2008 |
|
|
61,361,137 |
|
|
|
10 |
|
|
|
100,234 |
|
|
|
(91 |
) |
|
|
14,132 |
|
|
|
132,621 |
|
|
|
246.906 |
|
|
|
17,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
of ordinary shares |
|
|
(45,250 |
) |
|
|
|
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84 |
) |
|
|
|
|
Stock option exercises |
|
|
588,901 |
|
|
|
|
|
|
|
729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
729 |
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
8,384 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
8,475 |
|
|
|
|
|
Net changes in unrealized gain on
derivative instruments accounted for
as cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222 |
|
|
|
|
|
|
|
222 |
|
|
|
222 |
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,021 |
) |
|
|
|
|
|
|
(10,021 |
) |
|
|
(10,021 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,403 |
) |
|
|
(11,403 |
) |
|
|
(11,403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of August 28, 2009 |
|
|
61,904,788 |
|
|
$ |
10 |
|
|
$ |
109,264 |
|
|
$ |
|
|
|
$ |
4,333 |
|
|
$ |
121,218 |
|
|
$ |
234,825 |
|
|
$ |
(21,202 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
55
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
August 28, |
|
|
August 29, |
|
|
August 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(11,403 |
) |
|
$ |
8,974 |
|
|
$ |
57,733 |
|
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
13,077 |
|
|
|
12,700 |
|
|
|
9,031 |
|
Stock-based compensation |
|
|
8,475 |
|
|
|
7,271 |
|
|
|
4,691 |
|
Changes in allowances for accounts receivable and sales return |
|
|
74 |
|
|
|
(1,000 |
) |
|
|
(75 |
) |
Amortization of debt issuance costs |
|
|
973 |
|
|
|
800 |
|
|
|
741 |
|
Loss on sale of assets |
|
|
635 |
|
|
|
27 |
|
|
|
|
|
Write-off of acquired in-process technology |
|
|
|
|
|
|
4,400 |
|
|
|
|
|
Goodwill impairment |
|
|
10,416 |
|
|
|
3,187 |
|
|
|
|
|
Non-cash restructuring expense |
|
|
(7 |
) |
|
|
967 |
|
|
|
|
|
Deferred income tax provision |
|
|
(47 |
) |
|
|
9,343 |
|
|
|
270 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
59,942 |
|
|
|
(4,238 |
) |
|
|
18,649 |
|
Inventories |
|
|
(3,479 |
) |
|
|
5,845 |
|
|
|
3,907 |
|
Prepaid expenses and other assets |
|
|
1,381 |
|
|
|
(7,587 |
) |
|
|
12,222 |
|
Accounts payable |
|
|
(23,746 |
) |
|
|
(36,665 |
) |
|
|
(35,525 |
) |
Accrued expenses and other liabilities |
|
|
(3,773 |
) |
|
|
526 |
|
|
|
(1,908 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
52,518 |
|
|
|
4,550 |
|
|
|
69,736 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisition of business, net of cash acquired |
|
|
|
|
|
|
(20,284 |
) |
|
|
|
|
Capital expenditures |
|
|
(14,609 |
) |
|
|
(13,313 |
) |
|
|
(14,059 |
) |
Cash deposits on equipment |
|
|
(362 |
) |
|
|
(533 |
) |
|
|
(391 |
) |
Proceeds from sale of property and equipment |
|
|
459 |
|
|
|
311 |
|
|
|
|
|
Payment of contingent consideration |
|
|
(6,562 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(21,074 |
) |
|
|
(33,819 |
) |
|
|
(14,447 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax benefits from share-based compensation |
|
|
|
|
|
|
24 |
|
|
|
602 |
|
Repayment of acquired line of credit |
|
|
|
|
|
|
(940 |
) |
|
|
|
|
Borrowings under revolving line of credit |
|
|
|
|
|
|
|
|
|
|
110,953 |
|
Repayments on revolving line of credit |
|
|
|
|
|
|
|
|
|
|
(111,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of ordinary shares from stock option exercises |
|
|
729 |
|
|
|
934 |
|
|
|
1,926 |
|
Payments for share repurchase |
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
645 |
|
|
|
18 |
|
|
|
2,210 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(425 |
) |
|
|
1,098 |
|
|
|
1,028 |
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
31,664 |
|
|
|
(28,153 |
) |
|
|
58,527 |
|
Cash and cash equivalents at beginning of period |
|
|
115,994 |
|
|
|
144,147 |
|
|
|
85,620 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
147,658 |
|
|
$ |
115,994 |
|
|
$ |
144,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
7,264 |
|
|
$ |
8,350 |
|
|
$ |
9,376 |
|
Taxes |
|
|
6,267 |
|
|
|
9,405 |
|
|
|
9,999 |
|
Non-cash activities information: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative instruments |
|
$ |
342 |
|
|
$ |
933 |
|
|
$ |
963 |
|
Accrued earn-out payments for acquisition of business |
|
|
|
|
|
|
1,500 |
|
|
|
|
|
See accompanying notes to consolidated financial statements.
56
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 28, 2009, August 29, 2008 and August 31, 2007
(1) Summary of Significant Accounting Policies
(a) Organization and Operations of the Company
SMART Modular Technologies (WWH), Inc. (SMART or the Company) is an independent designer,
manufacturer and supplier of value added subsystems to original equipment manufacturers (OEMs). The
Companys subsystem products include memory modules, solid state drives (SSDs), embedded
computing and thin film transistor-liquid crystal display (TFT-LCD) products which it offers to
customers worldwide. The Company also provides its customers with comprehensive design,
manufacturing, testing and inventory management and logistics services.
SMART is headquartered in Newark, California, and has operations in Phoenix, Arizona; Newark,
California; Irvine, California; Tewksbury, Massachusetts; South Korea; Scotland; Puerto Rico;
Malaysia; and Brazil.
(b) Basis of Presentation
The accompanying consolidated financial statements as of August 28, 2009 and August 29, 2008
and for the years ended August 28, 2009, August 29, 2008 and August 31, 2007 are comprised of SMART
and its subsidiaries. Intercompany transactions have been eliminated in the consolidated financial
statements. All financial information for one of the Companys subsidiaries, SMART Modular
Technologies Indústria de Componentes Eletrônicos Ltda., is included in the Companys consolidated
financial statements on a one month lag. The effects of the one month lag for the operations of
SMART Modular Technologies Indústria de Componentes Eletrônicos Ltda. are not significant to the
Companys financial position and results of operations. Certain prior period amounts have been
reclassified to conform to the current year presentation.
(c) Acquisition of Business
On March 3, 2008, the Company acquired Adtron Corporation, recently renamed to Smart Modular
Technologies (AZ), Inc. The acquisition was an all-cash transaction of approximately $20.3 million
plus earn-out payments of up to $15 million to Adtrons equity holders based on the achievement in
calendar year 2008 of certain financial and operational milestones. The preliminary allocation of
the purchase price was recorded as $5.7 million of goodwill, $13.5 million of identifiable
intangible assets and $1.1 million of net assets. In connection with this acquisition, the Company
recorded an expense of $4.4 million during fiscal 2008 for the write-off of acquired in-process
research and development (IPR&D) projects. The purchase price allocated to acquired IPR&D was
determined through established valuation techniques and was immediately expensed because
technological feasibility had not been established and no further alternative use existed. During
fiscal 2009, the Company paid $6.6 million additional purchase price to recognize the achievement
of a portion of the earn-out. The total value of the goodwill recorded in connection with this
acquisition, including the $6.6 million earn-out is approximately $11.5 million, of which $10.4
million was impaired in fiscal 2009. The results of operations and the estimated fair value of the
assets acquired and liabilities assumed have been included in the Companys Consolidated Financial
Statements from the date of the acquisition.
(d) Year-End
The Company uses a 52 to 53 week fiscal year ending on the last Friday in August. Fiscal 2009,
2008 and 2007 ended on August 28, 2009, August 29, 2008, and August 31, 2007, respectively, and
included 52, 52 and 53 weeks, respectively.
57
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(e) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the U.S. requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting
periods presented. Actual results could differ from the estimates made by management.
(f) Revenue Recognition
The Company recognizes revenue in accordance with the SEC Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition. Under SAB 104, product revenue is recognized when there is persuasive
evidence of an arrangement, product delivery has occurred, the sales price is fixed or
determinable, and collectibility is reasonably assured. Product revenue typically is recognized at
the time of shipment or when the customer takes title of the goods. All amounts billed to a
customer related to shipping and handling are classified as revenue, while all costs incurred by
the Company for shipping and handling are classified as cost of sales. Taxes, including value
added taxes, assessed by a government authority that are both imposed on and concurrent with a
specific revenue producing transaction are excluded from revenue.
In addition, the Company has certain service revenue with select customers that is accounted
for on an agency basis (that is, the Company recognizes the fees associated with serving as an
agent with no associated direct cost of sales) in accordance with Emerging Issues Task Force (EITF)
Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. The Company
provides procurement, logistics, inventory management, kitting or packaging services for these
customers. Under some service arrangements, the Company may retain inventory risk. All inventory held
under service arrangements is included in the inventory reported on the consolidated balance sheet.
Revenue from these arrangements is recognized as service revenue and is based on material
procurement costs plus a fee for services provided net of the direct costs incurred. The Company
recognizes service revenue upon the completion of the services, typically upon shipment of the
product. There are no post-shipment obligations subsequent to shipment of the product. Gross
amounts billed to customers for service transactions totaled approximately $662 million, $917
million and $1,136 million for the years ended August 28, 2009, August 29, 2008 and August 31,
2007, respectively.
The following is a summary of our net sales and gross billings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
August 28, |
|
|
August 29, |
|
|
August 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product net sales |
|
$ |
404,474 |
|
|
$ |
628,791 |
|
|
$ |
794,397 |
|
Service revenue |
|
|
36,843 |
|
|
|
41,360 |
|
|
|
50,230 |
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
441,317 |
|
|
|
670,151 |
|
|
|
844,627 |
|
Plus: Cost of sales (1) |
|
|
625,635 |
|
|
|
875,839 |
|
|
|
1,085,715 |
|
|
|
|
|
|
|
|
|
|
|
Gross billings to customers |
|
$ |
1,066,952 |
|
|
$ |
1,545,990 |
|
|
$ |
1,930,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents cost of sales associated with service revenue reported on a net basis. |
58
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(g) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and deposits with banks. The Company does not
have investments in variable rate demand notes, auction rate securities and other asset backed
securities.
(h) Allowance for Doubtful Accounts
The Company evaluates the collectability of accounts receivable based on a combination of
factors. In cases where the Company is aware of circumstances that may impair a specific customers
ability to meet its financial obligations, the Company records a specific allowance against amounts
due and, thereby, reduces the net recognized receivable to the amount management reasonably
believes will be collected. For all other customers, the Company recognizes allowances for doubtful
accounts based on a combination of factors including the length of time the receivables are
outstanding, industry and geographic concentrations, the current business environment, and
historical experience.
(i) Inventories
Inventories are valued at the lower of cost or market value. Inventory value is determined on
a specific identification basis and includes material, labor, and manufacturing overhead. At each
balance sheet date the Company evaluates the ending inventories for excess quantities and
obsolescence. This evaluation includes an analysis of sales levels by product family and considers
historical demand and forecasted demand in relation to the inventory on hand, competitiveness of
product offerings, market conditions and product life cycles. The Company adjusts remaining
balances to the lower of its cost or market value.
(j) Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are computed based
on the shorter of the estimated useful lives or the related lease terms, using the straight-line
method. Estimated useful lives are presented below:
|
|
|
|
|
Asset |
|
Period |
|
Buildings |
|
|
20 to 50 years |
|
Manufacturing equipment |
|
|
3 to 5 years |
|
Office furniture, software, computers, and equipment |
|
|
2 to 5 years |
|
Leasehold improvements |
|
|
2 to 52 years |
|
(k) Goodwill
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), the
Company performs a goodwill impairment test of its two reporting units (Memory, Display & Embedded
reporting unit and Adtron reporting unit) annually during the fourth quarter of its fiscal year and
more frequently if an event or circumstance indicates that impairment may have occurred.
Based on the deteriorating macroeconomic conditions, the Companys business outlook and
significant erosion of its market capitalization during fiscal 2009 and 2008, the Company conducted
interim impairment test of goodwill during fiscal 2009, pursuant to SFAS 142, to determine whether
and to what extent goodwill may have been impaired. The initial step of this analysis was to
determine the estimated fair value of the Company, which was calculated based on the observable
market capitalization with a range of estimated control premiums and an estimated range of
discounted future estimated cash flows. The resulting estimated fair value of the Company was less
than stockholders equity at the end of the first and second quarter of fiscal 2009. This result
necessitated an analysis to determine whether the carrying amount of goodwill on the balance sheets
of the Adtron reporting unit exceeded the implied fair value of goodwill. The implied fair value of
goodwill was determined in the same manner as goodwill recognized in a business combination. That
is, the estimated fair value of the Adtron reporting unit was allocated to its assets and
liabilities, including any unrecognized identifiable intangible assets, as if this reporting unit
had been acquired in a business combination with the estimated fair value of the Adtron reporting
unit representing the price paid to acquire it. The allocation process performed on the test date
was only for purposes of determining the implied
fair value of goodwill and no assets or liabilities were written up or down, nor were any
additional unrecognized identifiable intangible assets recorded as part of this process.
59
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Based on the analysis, management determined that the implied fair value of goodwill recorded
on the balance sheet of its Adtron reporting unit was below the carrying value, resulting in a
goodwill impairment charge of $7.2 million and $3.2 million in the first and second quarters of
fiscal 2009, respectively. Goodwill of $1.1 million was recorded in the third quarter of fiscal
2009 due to payments of contingent consideration; this was found not to be impaired as of August
28, 2009.
Presented below are the changes in the Companys goodwill by reporting unit (in thousands),
for the year ended August 28, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 29, |
|
|
|
|
|
|
|
|
|
|
August 28, |
|
|
|
2008 |
|
|
Addition |
|
|
Impairment |
|
|
2009 |
|
Reporting unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memory, Display
& Embedded |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Adtron |
|
|
7,210 |
|
|
|
4,267 |
|
|
|
(10,416 |
) |
|
|
1,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Goodwill |
|
$ |
7,210 |
|
|
$ |
4,267 |
|
|
$ |
(10,416 |
) |
|
$ |
1,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(l) Other Intangible Assets, net
The following table summarizes the gross amounts and accumulated amortization of other
intangible assets from the Adtron acquisition by type as of August 28, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Value at |
|
|
|
|
|
Carrying Value |
|
|
|
Avg. Life |
|
|
Date of |
|
|
Accumulated |
|
|
at August 28, |
|
|
|
(years) |
|
|
Acquisition |
|
|
Amortization |
|
|
2009 |
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
10 |
|
|
$ |
3,700 |
|
|
$ |
555 |
|
|
$ |
3,145 |
|
Technology |
|
|
7 |
|
|
|
2,800 |
|
|
|
600 |
|
|
|
2,200 |
|
Company trade name |
|
|
20 |
|
|
|
2,040 |
|
|
|
153 |
|
|
|
1,887 |
|
Leasehold interest |
|
|
3 |
|
|
|
260 |
|
|
|
122 |
|
|
|
138 |
|
Non-compete agreement |
|
|
2 |
|
|
|
220 |
|
|
|
165 |
|
|
|
55 |
|
Product names |
|
|
9 |
|
|
|
60 |
|
|
|
10 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11 |
|
|
$ |
9,080 |
|
|
$ |
1,605 |
|
|
$ |
7,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to identifiable intangible assets totaled approximately $1.1
million, $0.5 million, and $0.0 million for fiscal years 2009, 2008, and 2007, respectively.
Acquired intangibles with definite lives are amortized on a straight-line basis over the remaining
estimated economic life of the underlying intangible assets.
Estimated amortization expenses of these intangible assets for the next five fiscal years and
all years thereafter are as follows (in thousands):
|
|
|
|
|
Estimated Amortization Expense: |
|
|
Amount |
|
2010 |
|
$ |
1,015 |
|
2011 |
|
|
936 |
|
2012 |
|
|
879 |
|
2013 |
|
|
879 |
|
2014 |
|
|
879 |
|
Thereafter |
|
|
2,887 |
|
|
|
|
|
Total |
|
$ |
7,475 |
|
|
|
|
|
60
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(m) Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Under SFAS No. 144, long-lived
assets, excluding goodwill, are
reviewed for impairment whenever events or circumstances indicate that the carrying amount of
an asset group may not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset group to future net cash flows expected to be
generated by the asset group. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or
the fair value, less cost of disposal. Based on the deteriorating macroeconomic conditions, the
Companys business outlook and significant erosion of its market capitalization during fiscal 2009,
the Company conducted an impairment test of its intangible and other long-lived assets as of August
28, 2009 in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, and found no impairment of intangible and other long-lived assets.
(n) Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred tax
assets and liabilities are recognized for the future consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and net operating loss and credit carry-forwards. When necessary, a valuation
allowance is recorded to reduce tax assets to amounts expected to be realized. The effect of
changes in tax rates is recognized in the period in which the rate change occurs. U.S. income and
foreign withholding taxes are not provided on that portion of unremitted earnings of foreign
subsidiaries which are expected to be reinvested indefinitely.
(o) Foreign Currency Translation
For foreign subsidiaries using the local currency as their functional currency, assets and
liabilities are translated at exchange rates in effect at the balance sheet date and income and
expenses are translated at average exchange rates during the period. The effect of this translation
is reported in other comprehensive income (loss). Exchange gains and losses arising from
transactions denominated in a currency other than the functional currency of the respective foreign
subsidiaries are included in results of operations.
For foreign subsidiaries using the U.S. dollar as their functional currency, the financial
statements of these foreign subsidiaries are re-measured into U.S. dollars using the historical
exchange rate for property and equipment and certain other non-monetary assets and liabilities and
related depreciation and amortization on these assets and liabilities. The Company uses the
exchange rate at the balance sheet date for the remaining assets and liabilities, including
deferred taxes. A weighted average exchange rate is used for each period for revenues and expenses.
All foreign subsidiaries except Brazil and Korea use the U.S. dollar as their functional currency.
The gains or losses resulting from the re-measurement process are recorded in other expense in the
statements of operations.
In fiscal years 2009 and 2008, the Company recorded ($0.9) million and $2.4 million,
respectively, of transaction gains (losses) primarily related to its Brazil operating subsidiary.
In fiscal year 2007, the effects of such re-measurement adjustments on the Companys results of
operations were not material.
(p) Stock-Based Compensation
The Companys stock option plan provides for grants of options to employees and independent
directors of the Company to purchase the Companys ordinary shares at the fair value of such shares
on the grant date. The options generally vest over a four-year period beginning on the grant date
and have a 10-year term. As of August 28, 2009,
there were 10,903,927 ordinary shares reserved for issuance under this plan, of which
2,039,372 ordinary shares represents the number of shares available for grant.
61
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On August 27, 2005 (effective date), the Company adopted the FASBs SFAS No. 123R, Share-Based
Payment, applying the prospective method, in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments
granted or modified after the effective date and (b) based on the requirements of the intrinsic
value method as prescribed in APB 25, and related interpretations, for all awards granted to
employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date.
Stock-based compensation expense amounted to approximately $8.5 million, $7.3 million, and
$4.7 million for fiscal 2009, 2008, and 2007, respectively.
Summary of Assumptions and Activity
Under SFAS No. 123R, the fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model applying the assumptions noted in the following table.
Expected volatility is an average of the Companys historical common stock volatility together with
the historical volatilities of the common stock of comparable publicly traded companies. The
expected term of options granted represents the weighted average period of time that options
granted are expected to be outstanding giving consideration to vesting schedules and our historical
exercise patterns. The risk-free rate for the expected term of the option is based on the average
U.S. Treasury yield curve at the date of grant. The following assumptions were used to value stock
options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
August 28,
2009 |
|
|
August 29,
2008 |
|
|
August 31,
2007 |
|
Stock options: |
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (years) |
|
|
5.2 |
|
|
|
5.1 |
|
|
|
6.25 |
|
Expected volatility |
|
|
69 |
% |
|
|
51 |
% |
|
|
68 |
% |
Risk-free interest rate |
|
|
2.26 |
% |
|
|
3.56 |
% |
|
|
4.61 |
% |
Expected dividends |
|
|
|
|
|
|
|
|
|
|
|
|
A summary of option activity as of and for years ended August 28, 2009, August 29, 2008, and
August 31, 2007 is presented below (dollars and shares in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Term |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
(Years) |
|
|
Value |
|
|
|
Options outstanding at August 25, 2006 |
|
|
6,791 |
|
|
$ |
1.68 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
2,036 |
|
|
|
10.80 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(2,234 |
) |
|
|
0.86 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(234 |
) |
|
|
5.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at August 31, 2007 |
|
|
6,359 |
|
|
$ |
4.75 |
|
|
|
7.9 |
|
|
$ |
40,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at August 31, 2007 |
|
|
2,565 |
|
|
$ |
2.42 |
|
|
|
7.4 |
|
|
$ |
21,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at August 31, 2007 |
|
|
6,138 |
|
|
$ |
4.63 |
|
|
|
7.9 |
|
|
$ |
39,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at August 31, 2007 |
|
|
6,359 |
|
|
$ |
4.75 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
3,490 |
|
|
|
7.01 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(697 |
) |
|
|
1.34 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(694 |
) |
|
|
7.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at August 29, 2008 |
|
|
8,458 |
|
|
$ |
5.72 |
|
|
|
7.8 |
|
|
$ |
6,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at August 29, 2008 |
|
|
4,131 |
|
|
$ |
3.80 |
|
|
|
3.4 |
|
|
$ |
6,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at August 29, 2008 |
|
|
8,064 |
|
|
$ |
5.62 |
|
|
|
7.8 |
|
|
$ |
6,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at August 29, 2008 |
|
|
8,458 |
|
|
$ |
5.72 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
2,361 |
|
|
|
2.84 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(589 |
) |
|
|
1.24 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(1,434 |
) |
|
|
7.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at August 28, 2009 |
|
|
8,796 |
|
|
$ |
4.99 |
|
|
|
7.3 |
|
|
$ |
9,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at August 28, 2009 |
|
|
5,058 |
|
|
$ |
4.68 |
|
|
|
6.4 |
|
|
$ |
7,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at August 28, 2009 |
|
|
8,507 |
|
|
$ |
5.01 |
|
|
|
7.2 |
|
|
$ |
9,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Black-Scholes weighted average fair value of options granted during the fiscal years ended
August 28, 2009, August 29, 2008 and August 31, 2007 were $1.42, $3.39, and $7.46 per option,
respectively. The total intrinsic value of employee stock options exercised during the fiscal years
ended August 28, 2009, August 29, 2008 and August 31, 2007 were approximately $0.6 million, $4.3
million, and $25.6 million, respectively. Upon the exercise of options, the Company issues new
ordinary shares from its authorized shares.
Total stock-based compensation expense recognized for fiscal years ended August 28, 2009,
August 29, 2008 and August 31, 2007 were approximately $8.5 million, $7.3 million, and $4.7
million, respectively. Included in the $8.5 million total expense for fiscal 2009 is a one-time
cumulative adjustment of $1.7 million recorded in the fourth quarter of fiscal 2009 relating to an
upgrade of our third-party stock plan administration software which resulted in a change in the
computation of our stock compensation expense. Specifically, we discovered a computational error
in the timing of forfeiture adjustments, which resulted in our stock compensation expense being
understated for the past three years. See Note 1(u).
A summary of the status of the Companys non-vested stock options as of August 28, 2009, and
changes during the fiscal year ended August 28, 2009, is presented below (dollars and shares in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Shares |
|
|
Value Per Share |
|
Non-vested stock options at August 29, 2008 |
|
|
4,327 |
|
|
$ |
4.38 |
|
Non-vested stock options granted |
|
|
2,361 |
|
|
$ |
1.49 |
|
Vested stock options |
|
|
(1,516 |
) |
|
$ |
3.44 |
|
Forfeited stock options |
|
|
(1,434 |
) |
|
$ |
4.32 |
|
|
|
|
|
|
|
|
|
Non-vested stock options at August 28, 2009 |
|
|
3,738 |
|
|
$ |
2.87 |
|
|
|
|
|
|
|
|
|
As of August 28, 2009, there was approximately $12.2 million of total unrecognized
compensation costs related to employee and independent director stock options. Such cost is
expected to be recognized over the weighted average period of 2.6 years. The total fair value of
shares vested during the year ended August 28, 2009 was approximately $5.3 million.
Restricted Stock Units (RSUs)
The Companys equity incentive plan also provides for grants of RSUs, and, beginning with the
first quarter of fiscal 2009, the Company began issuing performance-based and timed-based RSUs.
Performance-based RSUs are granted upon the Companys achievement of certain predetermined
financial goals and satisfaction of the one year service period. The Company assesses the
likelihood of such performance goals being achieved and recognizes related stock-based compensation
cost for each reporting period. The amount of stock-based compensation expense recognized in any
one period can vary based on the achievement or anticipated achievement of the performance
goals. If such performance goals are not met or are not expected to be met, then no compensation
cost is recognized and any previously recognized compensation expense is reversed. As of August
28, 2009, since performance goals are not expected to be met, there was no stock-based compensation
expense related to the performance-based RSUs for the fiscal year ended August 28, 2009.
63
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Depending on the terms of each RSU agreement, generally, time-based RSUs vest over a one year
period and are subject to the employees continuing service to the Company, the cost of each RSU is
determined using the fair value of the Companys ordinary shares on the date of grant. The weighted
average grant date fair value of the 5,000 time-based RSUs granted during the three months ended
November 28, 2008 was $2.84 per RSU, and the weighted average grant date fair value of the 63,560
time-based RSUs granted during the three months ended August 28, 2009 was $2.95 per RSU. As of
August 28, 2009, there were 68,560 non-vested time-based RSUs outstanding and the associated
stock-based compensation expense for the fiscal year ended August 28, 2009 amounted to
approximately $29 thousand. There was no stock-based compensation expense related to time-based
RSUs in fiscal 2008.
(q) Loss Contingencies
The Company is subject to the possibility of various loss contingencies arising in the
ordinary course of business. The Company considers the likelihood of a loss and the ability to
reasonably estimate the amount of loss in determining the necessity for and amount of any loss
contingencies. Estimated loss contingencies are accrued when it is probable that a liability has
been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates
the most current information available to determine whether any such accruals should be recorded or
adjusted.
(r) Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting
shareholders equity that, under U.S. generally accepted accounting principles are excluded from
net income (loss). For the Company, comprehensive income (loss) generally consists of foreign
currency translation adjustments, and changes in unrealized gains or losses on derivative financial
instruments accounted for as cash flow hedges.
(s) Concentration of Credit Risk
The Companys concentration of credit risk consists principally of cash and cash equivalents
and accounts receivable. The Companys revenues and related accounts receivable reflect a
concentration of activity with two customers (see note 13). The Company does not require collateral
or other security to support accounts receivables. The Company performs periodic credit evaluations
of its customers to minimize collection risk on accounts receivable and maintains allowances for
potentially uncollectible accounts.
(t) Net Income (Loss) Per Share
Basic net income (loss) per ordinary share is calculated by dividing net income (loss) by the
weighted average number of ordinary shares outstanding during the period. Diluted net income (loss)
per ordinary share is calculated by dividing net income (loss) by the weighted average number of
ordinary shares and dilutive potential ordinary shares
outstanding during the period. Dilutive potential ordinary shares consist of dilutive shares
issuable upon the exercise of outstanding stock options computed using the treasury stock method.
64
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth for all periods presented the computation of basic and diluted
net income per ordinary share, including the reconciliation of the numerator and denominator used
in the calculation of basic and diluted net income per share (dollars and shares in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
August 28,
2009 |
|
|
August 29,
2008 |
|
|
August 31,
2007 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(11,403 |
) |
|
$ |
8,974 |
|
|
$ |
57,733 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares |
|
|
61,699 |
|
|
|
60,985 |
|
|
|
59,636 |
|
Effect of dilutive ordinary shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
2,570 |
|
|
|
4,146 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares, diluted |
|
|
61,699 |
|
|
|
63,555 |
|
|
|
63,782 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per ordinary share, basic |
|
$ |
(0.18 |
) |
|
$ |
0.15 |
|
|
$ |
0.97 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per ordinary share, diluted |
|
$ |
(0.18 |
) |
|
$ |
0.14 |
|
|
$ |
0.91 |
|
|
|
|
|
|
|
|
|
|
|
The Company
excluded 7,446,435, 4,687,062, and 1,975,615 weighted shares from
stock options and RSUs from the computation of
diluted net income (loss) per ordinary share for the years ended August 28, 2009, August 29, 2008,
and August 31, 2007 respectively, as the effect of their inclusion would have been anti-dilutive.
(u) Correction of an Out of Period Error
In connection with an upgrade of the third party software used for stock option accounting
implemented during the fourth quarter of fiscal 2009, the Company discovered a computational error
in stock-based compensation expense. Specifically, the prior version of this software had
calculated stock-based compensation expense by inappropriately applying forfeiture rates over the
vesting periods of the stock option awards. This error affected the timing of forfeiture
adjustments in the determination of stock compensation expense, resulting in the recognition of
lower stock compensation expense over the vesting period of an award. As a result of this error,
for the reporting period from fiscal 2007 through the third quarter of fiscal 2009, the Companys
stock compensation expense was understated by a cumulative total of $1.7 million. Management has
reviewed the impact of this error and concluded that its impact on the Companys consolidated
financial statements of current and prior reporting periods is immaterial. To correct the error,
the Company recorded a one-time cumulative charge of $1.7 million in the fourth quarter of fiscal
2009, of which $0.5 million, $0.4 million and $0.8 million related to understated expense in fiscal
2007, fiscal 2008 and the nine months ended May 29, 2009, respectively, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Nine Months |
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
August 31, |
|
|
August 29, |
|
|
May 29, |
|
|
|
|
Additional stock compensation expense |
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
25,450 |
|
|
$ |
52,295 |
|
|
$ |
91,504 |
|
|
$ |
169,249 |
|
Research and development |
|
|
136,001 |
|
|
|
97,366 |
|
|
|
199,899 |
|
|
|
433,266 |
|
Selling, general and administrative |
|
|
296,282 |
|
|
|
305,370 |
|
|
|
531,611 |
|
|
|
1,133,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge |
|
$ |
457,733 |
|
|
$ |
455,031 |
|
|
$ |
823,014 |
|
|
$ |
1,735,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(w) New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair
Value Measurement. SFAS No. 157 defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles, and expands disclosures about fair value
measurements. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. However, in February 2008, the FASB issued FASB Staff Positions (FSP) 157-1 and
157-2. FSP 157-1 amends SFAS No. 157 to exclude SFAS No. 13, Accounting for Leases, and its related
interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays
the effective date of the application of SFAS No. 157 to fiscal years beginning after November 15,
2008 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually).
The Company adopted SFAS No. 157 as of August 30, 2008, with the exception of the application
of the statement to non-recurring nonfinancial assets and nonfinancial liabilities. The Company
elected the one-year deferral option and thus will not apply the provisions of SFAS No. 157 to
nonfinancial assets and nonfinancial liabilities that are recognized at fair value in the financial
statements on a non-recurring basis until the fiscal year beginning August 29, 2009. Non-recurring
nonfinancial assets and nonfinancial liabilities for which the Company has not applied the
provisions of SFAS No. 157 include those measured at fair value in goodwill impairment testing,
intangible assets measured at fair value for impairment, and those initially measured at fair value
in a business combination.
SFAS No. 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used
to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows.
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market based inputs or unobservable inputs that are corroborated by
market data
Level 3: Unobservable inputs that are not corroborated by market data
The adoption of SFAS No. 157 did not have a material impact on our consolidated results of
operations and financial condition.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 permits companies to choose to measure certain
financial instruments and certain other items at fair value. SFAS 159 requires that unrealized
gains and losses on items for which the fair value option has been elected be reported in
earnings. SFAS 159 also establishes presentation and disclosure requirements designed to draw
comparisons between the different measurement attributes the Company elects for similar types of
assets and liabilities. The provisions of SFAS 159 are effective for financial statements issued
for fiscal years beginning after November 15, 2007. SFAS 159 became effective for the Company
beginning in the first quarter of fiscal 2009. The Company has elected the option not to measure
eligible financial instruments at fair value allowable under SFAS 159. This election did not have a
material impact on its financial position or results of operations.
In June 2007, the FASB ratified EITF Issue No. 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and Development Activities. EITF
07-3 requires non-refundable advance payments to acquire goods or pay for services that will be
consumed or performed in a future period in conducting R&D activities should be recorded as an
asset and recognized as an expense when the R&D activities are performed. EITF 07-3 has been
applied prospectively to new contractual arrangements entered into beginning in fiscal 2009. The
adoption of EITF 07-3 did not have a material impact on the Companys consolidated results of
operations and financial condition.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141R). SFAS 141R establishes principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree. SFAS 141R also provides
guidance for recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. The provisions of SFAS 141R are
effective for financial statements issued for fiscal years beginning on or after December 15,
2008. SFAS 141R will be applied to business combinations occurring after the effective date and
the Company will apply SFAS 141R as of that time. Early adoption is not permitted.
66
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an amendment of Accounting Research Bulletin No. 51 (SFAS 160). SFAS 160
will change the accounting and reporting of minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity. The provisions of SFAS 160 are
effective for financial statements issued for fiscal years beginning after December 15, 2008. SFAS
160 is effective for the Company beginning in the first quarter of fiscal 2010. Early adoption is
not permitted. The adoption of SFAS 160 is not expected to have a significant effect on the
Companys financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosure about Derivative Instruments and
Hedging Activities (SFAS 161). SFAS 161 requires additional disclosures related to the use of
derivative instruments, the accounting for derivatives and how derivatives impact financial
statements. The provisions of SFAS 161 are effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. SFAS 161 is effective for the Company
beginning the first fiscal quarter of fiscal 2010 and the Company will apply SFAS 161 as of that
time.
In April 2008 the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible
Assets, or FSP 142-3, which amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under
SFAS 142. This pronouncement requires enhanced disclosures concerning a companys treatment of
costs incurred to renew or extend the term of a recognized intangible asset. FSP 142-3 is effective
for financial statements issued for fiscal years beginning after December 15, 2008. The Company is
currently evaluating the impact of FSP 142-3, and does not expect the adoption to have a material
impact on its consolidated results of operations and financial condition.
In November 2008, the FASB issued EITF No. 08-01, Revenue Arrangements with Multiple
Deliverables. EITF 08-01 replaces EITF 00-21, Revenue Arrangements with Multiple Deliverables
and enhances the disclosure requirements for separating disclosing information related to
individually significant arrangements and disclosing the qualitative and quantitative information
on an aggregate basis. This new guidance applies prospectively to revenue arrangements entered into
or materially modified in fiscal years beginning on or after December 15, 2009. The Company is
currently evaluating the requirements of EITF No. 08-01 and does not expect the adoption to have a
material impact on its consolidated results of operations and financial condition.
In April 2009, the FASB issued three related FSP: (i) FSP FAS No. 115-2 and FAS No. 124-2,
Recognition of Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2),
(ii) FSP FAS No. 107-1 and Accounting Principles Board Opinion (APB) No. 28-1, Interim
Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1), and (iii)
FSP FAS No. 157-4, Determining the Fair Value When the Volume and Level of Activity for the Asset
or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP
FAS 157-4), which are effective for interim and annual reporting periods ending after June 15, 2009
and will be effective for us beginning in the fourth quarter of fiscal 2009. FSP FAS 115-2 and FAS
124-2 amend the other-than-temporary impairment guidance in U.S. GAAP for debt securities to modify
the requirement for recognizing other-than-temporary impairments, change the existing impairment
model, and modify the presentation and frequency of related disclosures. FSP FAS 107-1 and APB 28-1
require disclosures about fair value of financial instruments for interim reporting periods as well
as in annual financial statements. FSP FAS 157-4
provides additional guidance for estimating fair value in accordance with SFAS No. 157, Fair
Value Measurements. The Company is currently evaluating the impact of adopting these Staff
Positions, but does not expect the adoption to have a material impact on its consolidated results
of operations and financial condition.
67
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued. SFAS 165 will be effective in our
fourth quarter of fiscal 2009. The Company does not expect the adoption of SFAS 165 to have a
material impact on its consolidated results of operations and financial condition.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162. SFAS
No. 168 establishes the FASB Accounting Standards Codification as the source of authoritative
accounting principles and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. This SFAS is effective for the Companys
interim reporting period ending on September 30, 2009. The Company expects to adopt SFAS No. 168
for the first quarter of fiscal year of 2010, and does not expect its adoption will have a material
impact on its consolidated results of operations and financial condition.
In September 2009, the EITF reached final consensus on a new revenue recognition standard,
Issue No. 09-3, Applicability of AICPA Statement of Position 97-2 to Certain Arrangements That
Contain Software Elements (EITF 09-3). EITF 09-03 amends the scope of AICPA Statement of Position
97-2, Software Revenue Recognition to exclude tangible products that include software and non-
software components that function together to deliver the products essential functionality. This
Issue shall be applied on a prospective basis for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Earlier application is permitted as
of the beginning of a companys fiscal year provided the company has not previously issued
financial statements for any period within that year. An entity shall not elect early application
of this Issue unless it also elects early application of Issue 08-1. The Company is currently
evaluating the potential impact of EITF 09-3 on its consolidated financial statements, but does not
expect the adoption to have a material impact on its consolidated results of operations and
financial condition.
(2) Related Party Information
In April 2004, the Company entered into advisory service agreements with entities affiliated
with each of TPG, Francisco Partners, and Shah Capital Partners (members of Modular, L.L.C., the
Companys then majority shareholder) pursuant to which each advisor may provide financial advisory
and consulting services to the Company. The Company did not incur any fees under these advisory
service agreements in fiscal 2009, 2008 or 2007.
In January 2007, the Company closed a secondary public offering of its ordinary shares,
whereby its selling shareholders sold 14,800,000 ordinary shares at $12.50 per share. The Company
did not receive any proceeds from this offering, as all 14,800,000 ordinary shares were sold by
existing shareholders, and incurred approximately $0.8 million in offering expenses in connection
with this offering. These offering expenses were recorded in selling, general and administrative
expenses in the Companys consolidated statement of operations for the year ended August 31, 2007.
During fiscal years 2009, 2008 and 2007, some of the Companys manufacturing vendors were
affiliated with a former officer of the Company. Total payments to such vendors were $6.3 million,
$10.9 million and $6.0 million for fiscal 2009, 2008 and 2007, respectively. As of August 28, 2009
and August 29, 2008, amounts due to these vendors were $0.1 million and $0.6 million, respectively.
68
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 28,
2009 |
|
|
August 29,
2008 |
|
Raw materials |
|
$ |
20,207 |
|
|
$ |
28,122 |
|
Work in process |
|
|
4,716 |
|
|
|
4,899 |
|
Finished goods |
|
|
38,192 |
|
|
|
29,409 |
|
|
|
|
|
|
|
|
|
|
$ |
63,115 |
|
|
$ |
62,430 |
|
|
|
|
|
|
|
|
(4) Net Property and Equipment
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 28,
2009 |
|
|
August 29,
2008 |
|
Buildings |
|
$ |
539 |
|
|
$ |
622 |
|
Office furniture, software, computers, and equipment |
|
|
5,409 |
|
|
|
5,156 |
|
Manufacturing equipment |
|
|
56,926 |
|
|
|
55,727 |
|
Leasehold improvements |
|
|
16,893 |
|
|
|
13,410 |
|
|
|
|
|
|
|
|
|
|
|
79,767 |
|
|
|
74,915 |
|
Less accumulated depreciation and amortization |
|
|
43,504 |
|
|
|
35,598 |
|
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
36,263 |
|
|
$ |
39,317 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense was approximately $12.0 million, $12.2 million and $9.0
million for the years ended August 28, 2009, August 29, 2008 and August 31, 2007, respectively.
(5) Income Taxes
Consolidated income (loss) before taxes for all periods presented consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
August 28,
2009 |
|
|
August 29,
2008 |
|
|
August 31,
2007 |
|
U.S. |
|
$ |
(28,915 |
) |
|
$ |
(19,017 |
) |
|
$ |
6,830 |
|
Non-U.S. |
|
|
23,083 |
|
|
|
46,412 |
|
|
|
60,361 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(5,832 |
) |
|
$ |
27,395 |
|
|
$ |
67,191 |
|
|
|
|
|
|
|
|
|
|
|
69
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of income tax expense (benefit) for the years ended August 28, 2009, August 29,
2008, and August 31, 2007, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
August 28,
2009 |
|
|
August 29,
2008 |
|
|
August 31, 2007 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(21 |
) |
|
$ |
(102 |
) |
|
$ |
(340 |
) |
State |
|
|
93 |
|
|
|
56 |
|
|
|
293 |
|
Foreign |
|
|
5,546 |
|
|
|
9,124 |
|
|
|
9,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,618 |
|
|
|
9,078 |
|
|
|
9,188 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal and state |
|
|
|
|
|
|
9,630 |
|
|
|
699 |
|
Foreign |
|
|
(47 |
) |
|
|
(287 |
) |
|
|
(429 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(47 |
) |
|
|
9,343 |
|
|
|
270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,571 |
|
|
$ |
18,421 |
|
|
$ |
9,458 |
|
|
|
|
|
|
|
|
|
|
|
The effective income tax rate (expressed as a percentage of income before income taxes) varied
from the U.S. statutory income tax rate for the years ended August 28, 2009, August 29, 2008, and
August 31, 2007, as a result of the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
August 28,
2009 |
|
|
August 29,
2008 |
|
|
August 31,
2007 |
|
Statutory tax rate |
|
|
(35.0 |
%) |
|
|
35.0 |
% |
|
|
35.0 |
% |
Foreign income taxes at different rates |
|
|
4.9 |
|
|
|
(17.2 |
) |
|
|
(12.1 |
) |
State income tax, net of federal tax benefit |
|
|
1.6 |
|
|
|
|
|
|
|
0.8 |
|
Tax holiday Malaysia |
|
|
(45.1 |
) |
|
|
(10.7 |
) |
|
|
(5.6 |
) |
Change in valuation allowance |
|
|
168.4 |
|
|
|
54.2 |
|
|
|
(3.6 |
) |
Non-deductible in process research and
development |
|
|
|
|
|
|
5.6 |
|
|
|
|
|
Other, net |
|
|
0.8 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95.6 |
% |
|
|
67.2 |
% |
|
|
14.5 |
% |
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that gave rise to significant portions of deferred
tax assets and liabilities as of August 28, 2009 and August 29, 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accruals and allowances |
|
$ |
2,663 |
|
|
$ |
3,407 |
|
Stock-based compensation |
|
|
6,337 |
|
|
|
4,269 |
|
Credits carryover |
|
|
2,237 |
|
|
|
1,434 |
|
Property and equipment |
|
|
115 |
|
|
|
|
|
Net operating loss carryover |
|
|
20,572 |
|
|
|
20,305 |
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
31,924 |
|
|
|
29,415 |
|
Valuation allowance |
|
|
(28,358 |
) |
|
|
(25,221 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
3,566 |
|
|
|
4,194 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Property and equipment |
|
|
|
|
|
|
(165 |
) |
Purchase accounting intangibles |
|
|
(2,915 |
) |
|
|
(3,333 |
) |
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
(2,915 |
) |
|
|
(3,498 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
651 |
|
|
$ |
696 |
|
|
|
|
|
|
|
|
70
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of August 28, 2009, the Company classified approximately $0.2 million of current deferred
tax assets in other current assets and $0.5 million of non-current deferred tax assets in other
non-current assets, respectively, on the accompanying consolidated balance sheets.
As of August 28, 2009, the Company had U.S. (Federal) and California (State) net operating
loss carryforwards of approximately $68.6 million and $43.8 million, respectively. The federal net
operating loss carryovers will expire in 2011 through 2029 and the California net operating loss
carryovers will expire in 2015 through 2022, in varying amounts, if not utilized. Some of these
carryforwards are subject to annual limitations, including Section 382 of the Internal Revenue Code
of 1986, for U.S. and California tax purposes.
For the year ended August 28, 2009, the Company recorded no tax benefit to additional paid in
capital for excess tax deductions attributable to share-based payments that reduce taxes payable.
Pursuant to footnote 82 of SFAS No. 123R, Share-Based Payment, the additional tax benefit from
excess tax deductions attributable to share based payments resulted in $24.1 million of federal net
operating loss carryovers and $15.7 million of California net operating loss carryovers that will
not be recognized as a credit to additional paid in capital until such deductions reduce taxes
payable. The Company follows the ordering rules, which assume that stock option deductions are the
last item to be considered in calculating taxes.
As of August 28, 2009, the Company has consolidated net deferred tax assets of approximately
$0.7 million. The valuation allowance on deferred tax assets increased $3.1 million from $25.3
million as of August 29, 2008 to $28.4 million as of August 28, 2009. The valuation allowance as
of August 28, 2009 and August 29, 2008 primarily relates to U.S. deferred tax assets. At May 31,
2008 and at August 29, 2008, the Companys management did not believe that the deferred tax assets
from U.S. operations were realizable by considering future taxable income based on cumulative U.S.
losses for the most recent three years of the Company. Accordingly, during the third quarter of
the fiscal year ending August 29, 2008, the Company recorded approximately $9.6 million deferred
tax expense to increase the valuation allowance to a full valuation allowance on U.S. deferred tax
assets. As of August 28, 2009 and August 29, 2008, the Company continues to record a full
valuation allowance on U.S. net deferred tax assets.
Provision has been made for deferred income taxes on undistributed earnings of foreign
subsidiaries to the extent that dividend payments by such foreign subsidiaries are expected to
result in additional tax liability. The Company has not provided deferred income taxes on
approximately $115.2 million of undistributed earnings from certain foreign operations as of
August 28, 2009 because such earnings are intended to be reinvested indefinitely. Of the $115.2
million of undistributed earnings, approximately $12.1 million would be included in U.S. taxable
income of the Company, which would be offset, in whole or in part, by foreign tax credits. The
remainder of undistributed earnings of approximately $103.1 million would not be includable in U.S.
taxable income, but would incur an insignificant amount of foreign country withholding taxes.
The tax holiday (Pioneer Status) for the Companys Malaysian operations has been renewed
through May 31, 2014. The Company was also granted a tax holiday (International Procurement
Company) for its Malaysian operations, effective for 10 years beginning April 30, 2004, subject to
certain conditions. In addition, the Company was granted a continuing tax holiday for certain
manufacturing operations in Puerto Rico, subject to certain conditions. The net impact of these
tax holidays in Malaysia and Puerto Rico was to decrease income tax expense by approximately $3.1
million in fiscal 2009, approximately $8.6 million in fiscal 2008, and approximately $11.5 million
in fiscal 2007.
71
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
While the holiday is for a ten year period, the Company must comply with certain conditions
during the initial five years. On May 29, 2009, the Company submitted an application with
supporting documentation as required under the terms of the holiday. Subsequent to the filing, the
Company started discussions on its compliance with the conditions and is currently in discussion on
the specific requirements of one condition. The Company has concluded that it is a widely known
administrative practice with the Ministry of Finance and Ministry of Trade and Industry to resolve
such matters and expects the Malaysian government to continue the holiday thru May 31, 2014 as
originally granted.
As of September 1, 2007, the Company adopted FIN 48, which clarifies the accounting for
uncertainty in income tax positions recognized in accordance with SFAS No. 109. The adoption of
FIN 48 had no material effect on the financial statements. The Company recognized a $0.2 million
net decrease in the liabilities for unrecognized tax benefits, which was accounted for as an
increase to the September 1, 2007 balance of retained earnings. This adjustment was the cumulative
effect of applying an enhanced measurement standard in accounting for uncertainty in income taxes
under FIN 48 and was reported as an adjustment to the opening balance of retained earnings in the
Consolidated Balance Sheet for fiscal 2008.
The total liability for gross unrecognized tax benefits included in the Companys Consolidated
Balance Sheet as of August 30, 2008 was approximately $0.3 million. There was no net change in the
liability for gross unrecognized tax benefits during the current year. A reconciliation of the
beginning and ending balance of unrecognized tax benefits is summarized as follows (in millions):
|
|
|
|
|
|
|
Amount |
|
Balance as of August 30, 2008 |
|
$ |
0.3 |
|
Increase in unrecognized tax benefits related to prior year tax positions |
|
|
|
|
Decreases in unrecognized tax benefits related to prior year tax positions |
|
|
|
|
Increase in unrecognized tax benefits related to current year tax positions |
|
|
0.2 |
|
Decrease in unrecognized tax benefits related to settlements with tax authorities |
|
|
|
|
Reductions in unrecognized tax benefits due to lapse of applicable statue of limitations |
|
|
(0.2 |
) |
|
|
|
|
Balance as of August 28, 2009 |
|
$ |
0.3 |
|
|
|
|
|
As of August 28, 2009, the total amount of unrecognized tax benefits, included in other
long-term liabilities on the accompanying consolidated balance sheet, was approximately $0.3
million, which would impact the effective tax rate if recognized. The Company records interest
and penalties on unrecognized tax benefits as income tax expense. As of August 28, 2009, the
Company expects no significant changes in the total unrecognized tax benefits within the next 12
months.
The Companys U.S. subsidiaries file Federal and state income/franchise tax returns in the
U.S. The tax periods ended August 2006 through August 2009 remain open to U.S. federal income tax
examination. In addition, any prior year that generated a net operating loss (NOL) carry forward
available for use in taxable periods ending on or after August 2006 remains open to U.S. Federal
income tax examination. Generally, in the major state jurisdictions, the tax periods ended August
2005 through August 2009 remain open to state income tax examination.
The Companys international subsidiaries file income tax returns in various non-U.S.
jurisdictions, including Malaysia, Brazil, Puerto Rico, Korea, and the United Kingdom. The years
that are open for examination by tax authorities of the international subsidiaries vary by country.
The earliest year open for examination of any international subsidiary is the year ended August
2003 for the subsidiary in Malaysia.
72
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) Accrued Expenses
Accrued expenses consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 28,
2009 |
|
|
August 29,
2008 |
|
Accrued employee compensation |
|
$ |
6,158 |
|
|
$ |
8,251 |
|
Income taxes payable |
|
|
87 |
|
|
|
824 |
|
Accrued warranty |
|
|
694 |
|
|
|
765 |
|
Other accrued liabilities |
|
|
9,676 |
|
|
|
14,102 |
|
|
|
|
|
|
|
|
Total |
|
$ |
16,615 |
|
|
$ |
23,942 |
|
|
|
|
|
|
|
|
(7) Long Term Debt
Senior Secured Floating Rate Notes
On March 28, 2005 the Company issued $125.0 million in senior secured floating rate notes due
on April 1, 2012 (the 144A Notes) in an offering exempted from registration (the Offering). The
144A Notes were jointly and severally guaranteed on a senior basis by all of our restricted
subsidiaries, subject to limited exceptions. In addition, the 144A Notes and the guarantees were
secured on a second-priority basis by the capital stock of, or equity interests in, most of our
subsidiaries and substantially all of the Companys and most of its subsidiaries assets. The 144A
Notes accrued interest at the three-month London Inter Bank Offering Rate, or LIBOR, plus 5.50% per
annum, payable quarterly in arrears, and were redeemable under certain conditions and limitations.
The 144A Notes were then registered and exchanged for the senior secured floating rate exchange
notes (the Notes) on October 27, 2005. The terms of the Notes are identical in all material
respects to the terms of the 144A Notes, except that the transfer restrictions and registration
rights related to the 144A Notes do not apply to the Notes. On August 13, 2008, the Company
de-registered the Notes with the Securities and Exchange Commission to suspend the Companys
remaining reporting obligations to file reports under Sections 13 and 15(d) with respect to the
Notes. The indenture relating to the Notes contains various covenants including limitations on our
ability to engage in certain transactions and limitations on our ability to incur debt, pay
dividends and make investments.
The Company incurred approximately $4.9 million in related debt issuance costs, which are
included in other non-current assets in the accompanying consolidated balance sheets. Debt issuance
costs related to the Notes are being amortized to interest expense on a straight-line basis, which
approximates the effective interest rate method, over the life of the Notes.
As of August 28, 2009, the aggregate principal amount outstanding under the Notes was $81.3
million. See Note 16 regarding the repurchase and retirement of $26.2 million of the Notes.
Senior Secured Revolving Line of Credit
The Company had a revolving loan and security agreement (the Loan and Security Agreement)
with Wells Fargo Foothill, Inc. (WFF), and other lenders that allowed the Company to borrow up to
$100 million. Contemporaneous with the closing of the Offering of the 144A Notes, the Company
amended and restated the Loan and Security Agreement with its lenders, providing for a new senior
secured credit facility in the amount of $35 million with the Company and other parties named
therein as obligors, and SMART Modular Technologies, Inc., Smart Modular Technologies (Europe)
Limited, and Smart Modular Technologies (Puerto Rico) Inc. as borrowers, (the Foothill Credit
Facility). On April 30, 2007, the Foothill Credit Facility was further amended (as amended, the
First WF Credit Facility) to (i) increase the amount available for borrowing by $15 million, from
$35 million to $50 million ($30 million of which may be in the form of letters of credit), (ii)
reduce the number of, and makes less restrictive, certain financial covenants, (iii) extend the
maturity date to April 30, 2010, from March 28, 2009, and (iv) establish Wells Fargo Bank, National
Association, as successor to WFF. The First WF Credit Facility contains customary covenants and
events of default usual for commercial lending credit facilities, which did not change materially
as a result of the amendment.
73
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In connection with the First WF Credit Facility, the Company incurred approximately $0.5
million in debt issuance costs, which are included in other non-current assets in the accompanying
consolidated balance sheets. Debt issuance costs related to the First WF Credit Facility, together
with the unamortized debt issuance costs related to the Foothill Credit Facility of approximately
$0.5 million, are being amortized to interest expense on a straight-line basis, which approximates
the effective interest rate method, over three years, which represents the term of the First WF
Credit Facility.
On November 26, 2008, the First WF Credit Facility was amended to, among other things, (i)
decrease the amount available for borrowing by $15 million, from $50 million to $35 million (of
which $10 million instead of $30 million may be in the form of letters of credit), (ii) modify the
calculation and levels of certain financial covenants, (iii) modify the fees payable, (iv) modify
the calculation of, and increase, the interest rates applicable to loans and other amounts
outstanding, (v) further limit Restricted Payments as defined therein, and (vi) limit voluntary
repayment and/or retirement of subordinated debt issued by the Company. The amended financial
covenants required that the borrowers maintain, as of the end of each fiscal quarter, an Adjusted
Quick Ratio equal to or greater than 1.45, and, depending on the applicable fiscal quarter and
based on the preceding four fiscal quarters then ended, (i) an Adjusted EBITDA equal to or greater
than $30 to $45 million, and (ii) a Funded Debt to Adjusted EBITDA Ratio equal to or less than 2.25
to 3.00. The Base Rate Margin and LIBOR Rate Margin, as defined in the First WF Credit Facility,
were increased to 2% and 3%, respectively.
On August 14, 2009, the First WF Credit Facility was again amended by the Second Amendment to
Second Amended and Restated Loan and Security Agreement (the Second Amendment: the First WF
Credit Facility as amended by the Second Amended and Restated Loan and Security Agreement and the
Second Amendment, is referred to as the WF Credit Facility.). As a result of the Second
Amendment, the borrowers are no longer required to comply with certain financial covenants unless
there are borrowings outstanding. The Company has not borrowed under the WF Credit Facility since
November 2007 and had no borrowings outstanding as of August 28, 2009. While the Company expects
to be able to satisfy the financial covenants required to borrow funds under the WF Credit Facility
at certain times during its remaining term, they may not meet the financial covenants during all
periods before it expires on April 30, 2010 and therefore may not be able to borrow funds if and
when they need the funds in the future.
(8) Financial Instruments
Fair Value of Financial Instruments
The fair value of the Companys cash, cash equivalents, accounts receivable, accounts payable
and Wells Fargo credit facility approximates the carrying amount due to the relatively short
maturity of these items. Cash and cash equivalents consist of funds held in general checking
accounts, money market accounts, certificates of deposits and investments in securities with an
original maturity on the date of purchase of three months or less. The Company does not have
investments in variable rate demand notes or auction rate securities.
74
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In accordance with SFAS 157, the following table represents the Companys fair value hierarchy
for our assets and liabilities measured on a recurring basis (in millions) as of August 28, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Observable/ |
|
|
|
|
|
|
Active Markets |
|
|
Unobservable |
|
|
|
|
|
|
for Identical |
|
|
Inputs |
|
|
|
|
|
|
Assets or |
|
|
Corroborated by |
|
|
|
|
|
|
Liabilities |
|
|
Market Data |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
Assets: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (2) |
|
$ |
79.2 |
|
|
$ |
|
|
|
$ |
79.2 |
|
Certificates of deposit (2) |
|
|
24.0 |
|
|
|
|
|
|
|
24.0 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-current variable-to-fixed interest rate swap |
|
|
|
|
|
|
(1.3 |
) |
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
Total (3) |
|
$ |
103.2 |
|
|
$ |
(1.3 |
) |
|
$ |
101.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
There were no assets or liabilities measured under Level 3 that had unobservable inputs. |
|
(2) |
|
Included in cash and cash equivalents on the Companys Consolidated Balance Sheet. |
|
(3) |
|
The total in Level 1 does not include $44.5 million of cash balances from checking and savings accounts. |
Derivative Instruments
The Company has previously entered into two interest swap agreements (the Swaps), one of which
has expired and one of which is outstanding on August 28, 2009. The expired Swap, which expired on
April 1, 2008, was for a $41.3 million notional amount. Under its terms, the Company paid a fixed
interest rate of 9.78%. The outstanding Swap is for a $40.0 million notional amount, and has an
expiration date of April 28, 2010. Under its terms, the Company pays a fixed rate of 9.97%. The
Company entered into the Swaps in order to hedge a portion of its future cash flows against
interest rate exposure resulting from the Notes. In exchange, the Company receives interest income
at a variable interest rate equal to the 3-month LIBOR rate plus 5.50%. The Swaps essentially
replaced the variable interest rate on $81.3 million of the Notes with fixed interest rates through
the respective expiration dates. The remaining swap is accounted for
as a cash flow hedge under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.
The total fair value of the outstanding derivative instrument referred to above was a
liability of approximately $1.3 million and $1.0 million as of August 28, 2009 and August 29, 2008,
respectively.
For all derivative transactions, the Company is exposed to counterparty credit risk. To manage
such risk, the Company limits its derivative transaction counterparties to major financial
institutions. The Company does not expect to experience any material adverse financial consequences
as a result of default by the Companys counterparties.
(9) Employee Benefit Plans
(a) Stock Option Plan
The Companys stock option plan provides for grants of options to employees and independent
directors of the Company to purchase the Companys ordinary shares at the fair market value, as
determined by the closing market price of such shares on the grant date once we traded publicly on
the NASDAQ (and as determined by management and the board of directors prior to such time). The
options generally vest over a 4-year period beginning generally on the grant date and have a
10-year term.
75
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes options outstanding as of August 28, 2009 (shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Vested |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
Range of Exercise |
|
Options |
|
|
Contractual Life |
|
|
Average Exercise |
|
|
|
|
|
|
Average Exercise |
|
Prices |
|
Outstanding |
|
|
(Years) |
|
|
Price |
|
|
Shares Vested |
|
|
Price |
|
$0.17 |
|
|
1,624 |
|
|
|
4.82 |
|
|
$ |
0.17 |
|
|
|
1,624 |
|
|
$ |
0.17 |
|
$0.93 $2.72 |
|
|
563 |
|
|
|
6.87 |
|
|
$ |
1.60 |
|
|
|
389 |
|
|
$ |
1.50 |
|
$2.84 |
|
|
1,592 |
|
|
|
9.03 |
|
|
$ |
2.84 |
|
|
|
369 |
|
|
$ |
2.84 |
|
$2.95 $4.92 |
|
|
924 |
|
|
|
7.82 |
|
|
$ |
4.11 |
|
|
|
459 |
|
|
$ |
4.69 |
|
$5.85 $7.28 |
|
|
989 |
|
|
|
7.33 |
|
|
$ |
6.52 |
|
|
|
330 |
|
|
$ |
6,63 |
|
$7.5 |
|
|
1,336 |
|
|
|
8.08 |
|
|
$ |
7.50 |
|
|
|
613 |
|
|
$ |
7.50 |
|
$7.84 $9.39 |
|
|
417 |
|
|
|
6.64 |
|
|
$ |
8.64 |
|
|
|
316 |
|
|
$ |
8.60 |
|
$9.97 |
|
|
1,036 |
|
|
|
7.07 |
|
|
$ |
9.97 |
|
|
|
748 |
|
|
$ |
9.97 |
|
$11.35 $14.96 |
|
|
306 |
|
|
|
7.57 |
|
|
$ |
12.60 |
|
|
|
203 |
|
|
$ |
12.76 |
|
$15.01 |
|
|
8 |
|
|
|
7.80 |
|
|
$ |
15.01 |
|
|
|
4 |
|
|
$ |
15.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.17 15.01 |
|
|
8,796 |
|
|
|
7.26 |
|
|
$ |
4.99 |
|
|
|
5,058 |
|
|
$ |
4.68 |
|
(b) Savings and Retirement Program
The Company offers a 401(k) Plan which provides for tax deferred salary deductions for
eligible employees. Employees may contribute up to 60% of their annual eligible compensation to
this plan, limited by an annual maximum amount determined by the U.S. Internal Revenue Service. The
Company may also make discretionary matching contributions, which vest immediately, as periodically
determined by management. The matching contributions made by the Company during the years ended
August 28, 2009, August 29, 2008, and August 31, 2007 were approximately $0.7 million, $1.0
million, and $0.9 million respectively. As part of a cost-cutting initiative in fiscal 2009, the
Company suspended the matching contributions in April 2009.
(10) Commitments and Contingencies
(a) Commitments
In March 2009, the Company entered into a seven year operating lease with Newark Eureka
Industrial Capital LLC to lease approximately 79,500 square feet of office, manufacturing,
engineering, research and development, warehouse and distribution space to serve as its new
corporate headquarters.
Rent expense for the years ended August 28, 2009, August 29, 2008 and August 31, 2007 was
approximately $2.5 million, $2.9 million and $2.3 million, respectively. As of August 28, 2009, the
Company also has commitments under operating leases for other facilities and equipment.
76
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future minimum lease payments under all leases are as follows (in thousands):
|
|
|
|
|
|
|
Year Ending
August |
|
2010 |
|
$ |
1,614 |
|
2011 |
|
|
1,670 |
|
2012 |
|
|
1,398 |
|
2013 |
|
|
660 |
|
2014 |
|
|
525 |
|
2015 and thereafter |
|
|
1,049 |
|
|
|
|
|
|
|
$ |
6,916 |
|
|
|
|
|
(b) Product Warranties
Product warranty reserves are established in the same period that revenue from the sale of the
related products is recognized, or in the period that a specific issue arises as to the performance
of a Companys product. The amounts of the reserves are based on established terms and the
Companys best estimate of the amounts necessary to settle future and existing claims on products
sold as of the balance sheet date.
The following table reconciles the changes in the Companys accrued warranty (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
August 28,
2009 |
|
|
August 29,
2008 |
|
|
August 31,
2007 |
|
Beginning accrued warranty reserve |
|
$ |
765 |
|
|
$ |
722 |
|
|
$ |
505 |
|
Warranty claims |
|
|
(1,046 |
) |
|
|
(1,208 |
) |
|
|
(1,361 |
) |
Provision for product warranties |
|
|
975 |
|
|
|
1,251 |
|
|
|
1,578 |
|
|
|
|
|
|
|
|
|
|
|
Ending accrued warranty reserve |
|
$ |
694 |
|
|
$ |
765 |
|
|
$ |
722 |
|
|
|
|
|
|
|
|
|
|
|
Product warranty reserves are recorded in accrued expenses and other current liabilities in
the accompanying consolidated balance sheets.
The Company currently has in effect a number of agreements in which it has agreed to defend,
indemnify and hold harmless its customers and suppliers from damages and costs which may arise from
the infringement by its products of third-party patents, trademarks or other proprietary rights.
The Company believes its internal development processes and other policies and practices limit its
exposure related to such indemnities. Maximum potential future payments cannot be estimated because
many of these agreements do not have a maximum stated liability. However, to date, the Company has
not had to reimburse any of its customers or suppliers for any losses related to these indemnities.
The Company has not recorded any liability in its financial statements for such indemnities.
(c) Legal Matters
From time to time the Company has been involved in disputes and legal actions arising in the
ordinary course of business. In the Companys opinion, the estimated resolution of these disputes
and litigation is not expected to have a material impact on its consolidated financial position,
results of operation or cash flows.
77
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(d) Commitments
Adtron Earn-Out Consideration
As part of the purchase of Adtron Corporation on March 3, 2008, the Company agreed to pay
earn-out consideration of up to $15.0 million to the sellers if the Adtron segment achieved two
financial goals and one
operational goal by December 31, 2008. In December 2008, the Company paid $1.5 million for an
operational goal that was achieved. In the second quarter of fiscal 2009, the Company provided to
the sellers a good faith calculation of the remaining earn-out consideration that would be
potentially payable. Based on such calculation, we recorded $4.0 million in the second quarter of
fiscal 2009. Of the $4.0 million accrued, the effect of which increased the purchase price, the
Company recorded $3.2 million of goodwill which was found to be impaired and the remaining $0.8
million to general and administrative expenses in the consolidated statement of operations for the
nine months ended May 29, 2009. In the third quarter of fiscal 2009, the Company reached an
agreement with the sellers to resolve the remaining earn-out consideration for an additional $1.1
million which the Company recorded as goodwill and paid the sellers a total of $5.1 million in May
2009. No additional earn-out contingent consideration remains in connection with the Adtron
acquisition.
(e) Contingencies
During its third quarter of fiscal 2007, the Company identified certain discrepancies in the
invoicing of certain products that it sold in the Brazilian market in fiscal 2006. Some of the
Companys imported products were invoiced in a manner that may have left customers with the
impression that they were manufactured in Brazil, rather than imported, and therefore potentially
impacted the customers eligibility for tax incentives. The Company assessed the impact arising
from these discrepancies and noted that the customers had access to other information to determine
the origin of the products and may not have relied on the information contained in the invoices for
computing their tax liability. Also, the revenues related to these invoices were not material to
the Companys operations. Therefore, the Company believes that the likelihood of any liability
arising from these discrepancies in the invoices is remote and as such, is not likely to have a
material adverse effect on its consolidated financial position, results of operations or cash flows
for any periods impacted.
During the fourth quarter of fiscal 2008, the Sao Paulo, Brazil, State Tax Inspector informed
the Company that certain tax credits, for state value added taxes, transferred during 2004 between
two Brazilian entities may not have represented an authorized transfer. These transfers occurred
prior to the acquisition in April 2004 of SMART from Solectron Corporation (Solectron) and the full
amount of any related tax assessment against SMART would be subject to indemnification by Solectron
to SMART pursuant to the Transaction Agreement dated February 11, 2004. A notice was received
from the Sao Paulo, Brazil Tax Authorities (Delegacia Tributaria de Julgamento) by SMART on October
3, 2008 providing an assessment for interest and penalties, related to the transfer of these
credits. SMART has notified Solectron and its parent company, Flextronics International Ltd.
(Flextronics) of this assessment, and under the terms of the Transaction Agreement, Flextronics has
elected to assume responsibility for the appeals process for this case on SMARTs behalf. The San
Paolo, Brazil Tax Authorities rejected the appeal prepared by Flextronics legal counsel, and the
latter filed an appeal to the Tax Administrative Court (Tribunal de Impostos e Taxas), which appeal
is still pending judgment. On October 23, 2009, there was a hearing before the Brazilian Tax Court
with jurisdiction over this case, but no decision was issued. As of August 28, 2009 the Company
carries both a tax liability and a corresponding indemnity receivable for approximately $3.5
million (or 6.5 million BRL). The Company believes that the likelihood of any material loss
arising from this matter is not probable, and as such, not likely to have a material adverse effect
on its consolidated financial position, results of operations or cash flows for any periods
impacted.
(11) Restructuring
Impairment of owned facilities and equipment in connection with restructuring activities
initiated beginning in fiscal 2003 were recorded in accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. For owned facilities and equipment, the impairment
loss recognized was based on the estimated fair value less costs to sell with fair value estimated
based on existing market prices for similar assets. Severance and benefit costs associated with
restructuring activities initiated on or after January 1, 2003 are recorded in accordance with
SFAS No. 112, Employers Accounting for Postemployment Benefits, as SMART concluded that it had a
substantive severance plan based on the similarity of the benefits offered by this restructuring
activity with previous severance activities. Other costs associated with restructuring activities
initiated on or after January 1, 2003 are
recorded in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. For leased facilities and equipment that will be abandoned and subleased, the
estimated lease loss accrued represents future lease payments subsequent to abandonment less any
estimated sublease income.
78
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the fourth quarter of fiscal 2008, the Company initiated a restructuring plan (the
FY08 Plan) to reduce operating expenses and improve cash flows by consolidating certain operations
in Asia and the Caribbean. The intent of the plan was to decrease the Companys cost structure
through workforce reductions and facility and resource consolidation. Costs resulting from the
restructuring plan include severance payments, severance-related benefits, lease costs associated
with the closure of our Dominican Republic facility, charges for assets written off and other
costs. These costs relate to the Memory, Display & Embedded segment. All other exit costs related
to the FY08 Plan have been paid as of August 28, 2009.
During the second quarter of fiscal 2009, the Company initiated another restructuring plan
(the FY09 Plan) to reduce further its global workforce in order to improve the Companys cost
structure in the continued uncertain economic environment. In an effort to reduce cost in the
third quarter of fiscal 2009, the Company initiated a third restructuring plan to reduce its global
workforce, which plan is now included in the FY09 Plan. The FY09 Plan includes charges consisting
primarily of severance payments and other employee-related payments. All severance payments and
severance-related benefits related to the FY09 Plan accrued as of August 28, 2009 are expected to
be paid by the first quarter of fiscal 2010. Total restructuring costs accrued as of August 28,
2009 were approximately $10 thousand and are recorded in accrued expenses in the consolidated
balance sheets.
The following table summarizes the restructuring accrual activity for the years ended
August 28, 2009 and August 29, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and |
|
|
Assets/Facility |
|
|
|
|
|
|
|
|
|
Benefits |
|
|
Related |
|
|
Other |
|
|
Total |
|
Provision |
|
$ |
712 |
|
|
$ |
966 |
|
|
$ |
260 |
|
|
$ |
1,938 |
|
Non-cash charges |
|
|
|
|
|
|
(966 |
) |
|
|
|
|
|
|
(966 |
) |
Cash payment |
|
|
(140 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
(142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual as of August 28, 2008 |
|
|
572 |
|
|
|
|
|
|
|
258 |
|
|
|
830 |
|
Provision |
|
|
2,260 |
|
|
|
179 |
|
|
|
371 |
|
|
|
2,810 |
|
Non-cash charges |
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
(7 |
) |
Cash payment |
|
|
(2,822 |
) |
|
|
(179 |
) |
|
|
(622 |
) |
|
|
(3,623 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual as of August 28, 2009 |
|
$ |
10 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring costs accrued as of August 28, 2009 and August 29, 2008 were approximately
$10 thousand and $0.8 million, respectively, and are recorded in accrued expenses in the
consolidated balance sheets. There were no restructuring activities in fiscal 2007.
(12) Segment Information and Geographic Information
With the acquisition of Adtron in fiscal 2008, based on information regularly reviewed by the
chief operating decision maker to evaluate Adtrons performance and to allocate resources to
Adtron, the Company revised its segment reporting to include Adtron as a separate segment. Since
the acquisition, the Company operates in two business segments, the Memory, Display & Embedded
Segment and the Adtron Segment. The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies.
79
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present summarized information by segment or geographic area:
Property and equipment, net, and certain results of operations by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
August 28,
2009 |
|
|
August 29,
2008 |
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
Memory, Display & Embedded |
|
$ |
35,752 |
|
|
$ |
38,772 |
|
Adtron |
|
|
511 |
|
|
|
545 |
|
|
|
|
|
|
|
|
Total property and equipment, net |
|
$ |
36,263 |
|
|
$ |
39,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memory, |
|
|
|
|
|
|
|
|
|
Display & |
|
|
|
|
|
|
|
|
|
Embedded |
|
|
Adtron(1) |
|
|
Total |
|
Year
Ended August 28, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
426,445 |
|
|
$ |
14,872 |
|
|
$ |
441,317 |
|
Gross profit |
|
|
82,540 |
|
|
|
7,299 |
|
|
|
89,839 |
|
Depreciation and amortization |
|
|
11,896 |
|
|
|
1,181 |
|
|
|
13,077 |
|
Income (loss) from operations |
|
|
14,682 |
|
|
|
(13,385 |
) |
|
|
1,297 |
|
Year
Ended August 29, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
662,781 |
|
|
$ |
7,370 |
|
|
$ |
670,151 |
|
Gross profit |
|
|
116,589 |
|
|
|
3,142 |
|
|
|
119,731 |
|
Depreciation and amortization |
|
|
12,113 |
|
|
|
587 |
|
|
|
12,700 |
|
Income (loss) from operations |
|
|
36,365 |
|
|
|
(6,172 |
) |
|
|
30,193 |
|
Year
Ended August 31, 2007 (2): |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
844,627 |
|
|
$ |
|
|
|
$ |
844,627 |
|
Gross profit |
|
|
149,573 |
|
|
|
|
|
|
|
149,573 |
|
Depreciation and amortization |
|
|
9,031 |
|
|
|
|
|
|
|
9,031 |
|
Income from operations |
|
|
73,638 |
|
|
|
|
|
|
|
73,638 |
|
|
|
|
(1) |
|
Adtron was acquired in March 2008. The results of Adtron are for periods post
acquisition. In fiscal 2009, loss from operations includes goodwill impairment charges of
$10.4 million. In fiscal 2008, loss from operations includes In-process research and
development charge of $4.4 million. |
|
(2) |
|
In fiscal year 2007, we had one segment. |
Net sales and property and equipment, net, by geographic area (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
August 28,
2009 |
|
|
August 29,
2008 |
|
|
August 31,
2007 |
|
Geographic net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S.A. |
|
$ |
190,306 |
|
|
$ |
367,502 |
|
|
$ |
521,961 |
|
Other North and Latin America |
|
|
125,803 |
|
|
|
134,955 |
|
|
|
153,617 |
|
Europe |
|
|
42,693 |
|
|
|
67,266 |
|
|
|
56,090 |
|
Asia |
|
|
82,515 |
|
|
|
100,428 |
|
|
|
112,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
441,317 |
|
|
$ |
670,151 |
|
|
$ |
844,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 28,
2009 |
|
|
August 29,
2008 |
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
U.S.A. |
|
$ |
7,724 |
|
|
$ |
6,679 |
|
Other North and Latin America |
|
|
22,654 |
|
|
|
28,492 |
|
Europe |
|
|
40 |
|
|
|
59 |
|
Asia |
|
|
5,845 |
|
|
|
4,087 |
|
|
|
|
|
|
|
|
|
|
$ |
36,263 |
|
|
$ |
39,317 |
|
|
|
|
|
|
|
|
80
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(13) Major Customers
A majority of the Companys net sales are attributable to customers operating in the
information technology industry. Net sales from SMARTs major customers, defined as net sales in
excess of 10% of total net sales or those who have outstanding customer accounts receivable balance
at the end of the fiscal period of 10% or more of our total net accounts receivables, are as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
August 28,
2009 |
|
|
August 29,
2008 |
|
|
August 31,
2007 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Customer A |
|
$ |
122,665 |
|
|
|
28 |
% |
|
$ |
259,639 |
|
|
|
39 |
% |
|
$ |
394,202 |
|
|
|
47 |
% |
Customer B |
|
$ |
59,258 |
|
|
|
13 |
% |
|
$ |
83,710 |
|
|
|
12 |
% |
|
$ |
107,739 |
|
|
|
13 |
% |
Customer C |
|
$ |
41,571 |
|
|
|
9 |
% |
|
$ |
39,067 |
|
|
|
6 |
% |
|
$ |
48,954 |
|
|
|
6 |
% |
As of August 28, 2009, approximately 27%, 27% and 26% of accounts receivable were concentrated
with Customer A, B and C, respectively. As of August 29, 2008, approximately 32%, 19% and 28% of
accounts receivable were concentrated with Customer A, B and C, respectively. The loss of a major
customer or a significant reduction in revenue from a major customer could have a material adverse
effect on the Companys business, financial condition and results of operations.
(14) Other Income (Loss), Net
The following table provides the detail of other income (loss), net as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
August 28,
2009 |
|
|
August 29,
2008 |
|
|
August 31,
2007 |
|
Foreign currency gains (losses) |
|
$ |
(868 |
) |
|
$ |
2,415 |
|
|
$ |
922 |
|
Other |
|
|
348 |
|
|
|
142 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(520 |
) |
|
$ |
2,557 |
|
|
$ |
934 |
|
|
|
|
|
|
|
|
|
|
|
(15) Subsidiary Guarantors
The Company has not presented separate financial statements of subsidiary guarantors in the
Notes, as (1) each of the subsidiary guarantors is wholly-owned by the Company, the issuer of the
Notes, (2) the guarantees are full and unconditional, (3) the guarantees are joint and several, and
(4) the Company has no independent assets and operations and all subsidiaries of the Company other
than the subsidiary guarantors are insignificant.
(16) Subsequent Events
On August 25, 2009, the Companys shareholders approved a stock option exchange program to
permit eligible employees (excluding named executive officers and directors) to exchange
outstanding stock options with exercise prices equal to or greater than $4.20 per share for new
options to be granted under the Companys Amended and Restated Stock Incentive Plan. On September
25, 2009, of the 3,446,561 eligible options, 2,449,645 options were tendered in exchange for
1,864,301 new options with a strike price of $5.38 per share.
81
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On October 13, 2009, the Board of Directors approved up to $25.0 million to repurchase and/or
redeem debt outstanding under the Notes, excluding unpaid accrued interest. On October 22, 2009,
using available cash the Company repurchased
and retired $26.2 million of the principal amount of the Notes for $25.0
million, or 95.5% of the principal or face amount, resulting in a
gain of $0.8 million in the first
quarter of fiscal 2010. As of October 23, 2009, the remaining aggregate principal amount
outstanding under the Notes was $55.1 million.
(17) Selected Quarterly Financial Data (Unaudited)
The following table sets forth our selected unaudited quarterly consolidated statements of
operations data for the eight most recent quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
Nov. 30, |
|
|
Feb. 29, |
|
|
May 30, |
|
|
Aug. 29, |
|
|
Nov. 28, |
|
|
Feb. 27, |
|
|
May 29, |
|
|
Aug. 28, |
|
|
|
2007 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
|
(In thousands, except for per share data) |
|
Statement of
Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
177,373 |
|
|
$ |
164,497 |
|
|
$ |
167,615 |
|
|
$ |
160,666 |
|
|
$ |
140,775 |
|
|
$ |
109,089 |
|
|
$ |
91,645 |
|
|
$ |
99,808 |
|
Cost of sales |
|
|
143,279 |
|
|
|
131,609 |
|
|
|
139,803 |
|
|
|
135,729 |
|
|
|
114,959 |
|
|
|
85,022 |
|
|
|
73,008 |
|
|
|
78,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
34,094 |
|
|
|
32,888 |
|
|
|
27,812 |
|
|
|
24,937 |
|
|
|
25,816 |
|
|
|
24,067 |
|
|
|
18,637 |
|
|
|
21,319 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development |
|
|
4,685 |
|
|
|
4,624 |
|
|
|
5,418 |
|
|
|
5,437 |
|
|
|
5,436 |
|
|
|
5,142 |
|
|
|
4,478 |
|
|
|
4,755 |
|
Selling, general and
administrative |
|
|
15,061 |
|
|
|
14,331 |
|
|
|
15,393 |
|
|
|
15,064 |
|
|
|
14,467 |
|
|
|
13,782 |
|
|
|
13,585 |
|
|
|
13,671 |
|
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,187 |
|
|
|
7,210 |
|
|
|
3,206 |
|
|
|
|
|
|
|
|
|
Restructuring charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,938 |
|
|
|
886 |
|
|
|
935 |
|
|
|
989 |
|
|
|
|
|
In process R&D charge |
|
|
|
|
|
|
|
|
|
|
4,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses |
|
|
19,746 |
|
|
|
18,955 |
|
|
|
25,211 |
|
|
|
25,626 |
|
|
|
27,999 |
|
|
|
23,065 |
|
|
|
19,052 |
|
|
|
18,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations |
|
|
14,348 |
|
|
|
13,933 |
|
|
|
2,601 |
|
|
|
(689 |
) |
|
|
(2,183 |
) |
|
|
1,002 |
|
|
|
(415 |
) |
|
|
2,893 |
|
Interest expense, net |
|
|
(1,024 |
) |
|
|
(1,327 |
) |
|
|
(1,468 |
) |
|
|
(1,536 |
) |
|
|
(1,752 |
) |
|
|
(1,698 |
) |
|
|
(1,629 |
) |
|
|
(1,530 |
) |
Other income (expense),
net |
|
|
1,422 |
|
|
|
373 |
|
|
|
255 |
|
|
|
507 |
|
|
|
(766 |
) |
|
|
109 |
|
|
|
26 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
(expense) |
|
|
398 |
|
|
|
(954 |
) |
|
|
(1,213 |
) |
|
|
(1,029 |
) |
|
|
(2,518 |
) |
|
|
(1,589 |
) |
|
|
(1,603 |
) |
|
|
(1,419 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
provision for income
taxes |
|
|
14,746 |
|
|
|
12,979 |
|
|
|
1,388 |
|
|
|
(1,718 |
) |
|
|
(4,701 |
) |
|
|
(587 |
) |
|
|
(2,018 |
) |
|
|
1,474 |
|
Provision for income
taxes |
|
|
2,681 |
|
|
|
1,539 |
|
|
|
12,391 |
|
|
|
1,810 |
|
|
|
2,177 |
|
|
|
1,263 |
|
|
|
368 |
|
|
|
1,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
12,065 |
|
|
$ |
11,440 |
|
|
$ |
(11,003 |
) |
|
$ |
(3,528 |
) |
|
$ |
(6,878 |
) |
|
$ |
(1,850 |
) |
|
$ |
(2,386 |
) |
|
$ |
(289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
ordinary share, basic |
|
$ |
0.20 |
|
|
$ |
0.19 |
|
|
$ |
(0.18 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
ordinary share, diluted |
|
$ |
0.19 |
|
|
$ |
0.18 |
|
|
$ |
(0.18 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in
computing basic net
income (loss) per
ordinary share |
|
|
60,695 |
|
|
|
60,869 |
|
|
|
61,027 |
|
|
|
61,348 |
|
|
|
61,507 |
|
|
|
61,673 |
|
|
|
61,738 |
|
|
|
61,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in
computing diluted
income (loss) per
ordinary share |
|
|
63,656 |
|
|
|
63,713 |
|
|
|
61,027 |
|
|
|
61,348 |
|
|
|
61,507 |
|
|
|
61,673 |
|
|
|
61,738 |
|
|
|
61,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the third quarter of fiscal 2008, the Company recorded an income tax increase of $9.6
million related to the increase in the valuation allowance of its deferred tax assets as the
Company concluded that it is not more likely than not that its U.S. operations will generate
sufficient earning to recover the deferred tax assets. Also, during the fourth quarter of fiscal
2008, the Company recorded a restructuring charge of $1.9 million related to severance, facility
and other exit costs incurred primarily from the consolidation of certain operations in Asia and
the Caribbean and a goodwill impairment charge of $3.2 million in the Companys Memory, Display &
Embedded Segment.
The Company
recorded restructuring charges of $0.9 million, $0.9 million, and $0.9 million in
the first, second and third quarter of fiscal 2009, respectively, related to severance, facility
and other exit costs incurred primarily from its global workforce reduction. Also, the Company recorded goodwill impairment
charges of $7.2 million and $3.2 million in the first and second quarter of fiscal 2009,
respectively, in the Companys Adtron Segment. The Company recorded a cumulative charge of $1.7
million for an out of period adjustment in the fourth quarter of fiscal 2009.
83
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
The consolidated financial statement Schedule II VALUATION AND QUALIFYING ACCOUNTS is filed
as part of this Annual Report on Form 10-K.
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
|
beginning of |
|
|
Charged to |
|
|
|
|
|
|
Balance at |
|
Description |
|
Year |
|
|
Operations |
|
|
(Deductions) |
|
|
End of Year |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended August 28, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
receivable, credits and returns |
|
$ |
1,517 |
|
|
$ |
1,801 |
|
|
$ |
(1,727 |
) |
|
$ |
1,591 |
|
Year ended August 29, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
receivable, credits and returns |
|
$ |
2,517 |
|
|
$ |
1,160 |
|
|
$ |
(2,160 |
) |
|
$ |
1,517 |
|
Year ended August 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
receivable, credits and returns |
|
$ |
2,592 |
|
|
$ |
2,550 |
|
|
$ |
(2,625 |
) |
|
$ |
2,517 |
|
84
SMART MODULAR TECHNOLOGIES (WWH), INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
SMART Modular Technologies (WWH), Inc. has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
|
|
|
|
|
|
SMART MODULAR TECHNOLOGIES (WWH), INC.
|
|
|
By: |
/s/ IAIN MACKENZIE
|
|
|
|
Name: |
Iain MacKenzie |
|
|
|
Title: |
President and Chief Executive Officer |
|
Date:
November 9, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report
has been signed below by the following persons on behalf of the Registrant in the capacities and on
the dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ IAIN MacKENZIE
Iain MacKenzie
|
|
President, Chief Executive
Officer and Director
(Principal Executive Officer)
|
|
November 9, 2009 |
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
/s/ BARRY ZWARENSTEIN
Barry Zwarenstein
|
|
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
|
|
November 9, 2009 |
(Principal Accounting Officer) |
|
|
|
|
|
|
|
|
|
|
|
Chairman of the Board of
Directors
|
|
November 9, 2009 |
Ajay Shah |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
November 9, 2009 |
Eugene Frantz |
|
|
|
|
|
|
|
|
|
/s/ HARRY W. (WEBB) McKINNEY
|
|
Director
|
|
November 9, 2009 |
Harry W. (Webb) McKinney |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
November 9, 2009 |
Chong Sup Park |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
November 9, 2009 |
Mukesh Patel |
|
|
|
|
|
|
|
|
|
/s/ CLIFTON THOMAS WEATHERFORD
|
|
Director
|
|
November 9, 2009 |
Clifton Thomas Weatherford |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
November 9, 2009 |
Dennis McKenna |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
November 9, 2009 |
Kimberly E. Alexy |
|
|
|
|
85
|
|
|
|
Exhibit No. |
|
Document |
2.1
|
* |
|
Transaction Agreement, dated February 11, 2004, by and among Solectron Corporation,
Solectron Global Holdings L.P., Solectron Serviços E Manufactura Do Brasil Ltda., SMART
Modular Technologies, Inc., Modular, Inc., Modular Merger Corporation and Modular
(Cayman) Inc. |
3.1
|
*(1) |
|
Form of Amended and Restated Memorandum of Association of the Company |
3.2
|
*(1) |
|
Form of Amended and Restated Articles of Association of the Company |
4.1
|
*(2) |
|
Indenture, dated as of March 28, 2005, among the Company, the guarantors party thereto
and U.S. Bank National Association, as trustee |
4.2
|
*(2) |
|
Registration Rights Agreement dated as of March 28, 2005 between the Company, the
guarantors party thereto, Citigroup Global Markets Inc. and Lehman Brothers, Inc. |
4.3
|
*(2) |
|
Form of Note (included in Exhibit 4.1) |
4.4
|
*(2) |
|
Form of Exchange Note (included in Exhibit 4.1) |
4.5
|
*(2) |
|
Security Agreement, dated as of March 28, 2005, among the Company, the guarantors party
thereto and U.S. Bank National Association, as trustee |
4.6
|
*(2) |
|
Intercreditor Agreement, dated as of March 28, 2005, among Wells Fargo Foothill, Inc.,
as Credit Agent, U.S. Bank National Association, as trustee, and the Company |
4.7
|
*(2) |
|
Intercompany Subordination Agreement, dated as of March 28, 2005, among U.S. Bank
National Association, as trustee, the Company and the other obligors party thereto |
4.8
|
*(1) |
|
Form of Shareholders Agreement among the Company and certain other parties named therein |
4.9
|
|
|
[Reserved] |
4.10
|
(2) |
|
Amended and Restated Loan and Security Agreement, dated as of March 28, 2005, by and
among the Company, SMART Modular Technologies (Europe) Limited, SMART Modular
Technologies (Puerto Rico) Inc., Wells Fargo Foothill, Inc., as Arranger and
Administrative Agent, and certain other persons named therein |
4.11 |
(2)
|
|
Amended and Restated Intercompany Subordination Agreement, dated as of March 28, 2005,
by and among the Company, SMART Modular Technologies, Inc., SMART Modular Technologies
(Europe) Limited, SMART Modular Technologies (Puerto Rico), Inc., Wells Fargo Foothill,
Inc., as Agent, and certain other persons named therein |
4.12 |
*(2)
|
|
First Amendment to Guaranty, dated April 20, 2005, among Wells Fargo Foothill, Inc., as
Agent, and certain other persons named therein |
10.1
|
(2) |
|
Form of Indemnification Agreement |
10.2
|
*(1) |
|
Form of Amended and Restated Stock Incentive Plan |
10.3
|
*(1) |
|
Form of Stock Option Agreement |
10.4
|
*(2) |
|
Offer Letter, dated February 11, 2004, from Modular, L.L.C. to Iain MacKenzie |
10.5
|
*(2) |
|
Offer Letter, dated April 13, 2004, from Modular, L.L.C. to Alan Marten |
10.6
|
*(2) |
|
Offer Letter, dated April 13, 2004, from Modular, L.L.C. to Wayne Eisenberg |
10.7
|
*(2) |
|
Offer Letter, dated April 13, 2004, from Modular, L.L.C. to Michael Rubino |
10.8
|
*(2) |
|
Offer Letter, dated February 12, 2004, from Modular, L.L.C. to Jack A. Pacheco |
10.9
|
*(2) |
|
USD $40,000,000 Interest Rate Swap Transaction, dated April 26, 2005, between the
Company and Wells Fargo Foothill, Inc. |
10.10
|
*(2) |
|
USD $41,250,000 Interest Rate Swap Transaction, dated April 26, 2005, between the
Company and Wells Fargo Foothill, Inc. |
86
|
|
|
|
|
Exhibit No. |
|
Document |
|
10.11 |
*(2) |
|
ISDA Master Agreement, dated as of April 20, 2005, between Wells Fargo
Foothill, Inc. and SMART Modular Technologies (WWH), Inc. |
|
10.12 |
*(2) |
|
Lease Agreement, dated April 16, 2004, by and between Solectron USA,
Inc. and SMART Modular Technologies, Inc., as amended (relating to the
property at 4211 Starboard Drive, Fremont, California) |
|
10.13 |
*(3) |
|
Corporate Purchase Agreement, dated as of May 1, 2001, by Compaq
Computer Corporation and by SMART Modular Technologies, Inc. |
|
10.14 |
*(4) |
|
Amendment to Corporate Purchase Agreement, dated September 1, 2004,
between SMART Modular Technologies, Inc. and Hewlett-Packard Company |
|
10.15 |
*(4) |
|
Amendment Number 2 to Corporate Purchase Agreement, dated January 20,
2005, between SMART Modular Technologies, Inc. and Hewlett-Packard
Company |
|
10.16 |
*(2) |
|
Advisory Agreement, dated April 16, 2004, between SCP Management
Company, L.L.C. and SMART Modular Technologies, Inc. |
|
10.17 |
*(2) |
|
Letter Amendment, dated June 17, 2005, to Advisory Agreement dated
April 16, 2004, between SCP Management Company, L.L.C. and SMART
Modular Technologies, Inc. |
|
10.18 |
*(2) |
|
Advisory Agreement, dated April 16, 2004, among SMART Modular
Technologies, Inc., T3 GenPar II, L.P., TPG GenPar III, L.P., and TPG
GenPar IV, L.P. |
|
10.19 |
*(2) |
|
Advisory Agreement, dated April 16, 2004, between SMART Modular
Technologies, Inc. and Francisco Partners, L.P. |
|
10.20 |
*(1) |
|
Form of Amendment No. 2 to the Advisory Agreement filed as Exhibit 10.16 |
|
10.21 |
*(1) |
|
Form of Amendment No. 1 to the Advisory Agreement filed as Exhibit 10.18 |
|
10.22 |
*(1) |
|
Form of Amendment No. 1 to the Advisory Agreement filed as Exhibit 10.19 |
|
10.23 |
*(1) |
|
Form of Amended and Restated Indemnification Agreement |
|
10.23 |
*(5) |
|
Employment Agreement of Iain MacKenzie, dated December 18, 2007 |
|
10.24 |
*(6) |
|
Agreement and Plan of Merger, dated February 12, 2008, by and among
Adtron Corporation, SMART Modular Technologies, Inc., and Armor
Acquisition Corporation (Merger Sub) and Alan Fitzgerald (Equity
Holders Representative) |
|
10.25 |
*(7) |
|
Consulting Agreement, effective as of April 30, 2008, between SMART
Modular Technologies (WWH), Inc. and FLG Partners, LLC |
|
10.26 |
*(8) |
|
Employment Agreement of Barry Zwarenstein, dated July 19, 2008 |
|
10.27 |
*(9) |
|
SMART Modular Technologies, Inc. 2009 RSU Time-based Agreement |
|
10.28 |
*(9) |
|
SMART Modular Technologies, Inc. 2009 Performance-based Agreement |
|
10.29 |
*(10) |
|
First Amendment to Second Amended and Restated Loan and Security
Agreement dated November 26, 2008 |
|
10.30 |
*(11) |
|
Lease Agreement, dated March 18, 2009, by and between Newark Eureka
Industrial Capital LLC and Smart Modular Technologies, Inc. |
|
10.31 |
*(12) |
|
Second Amendment to Second Amended and Restated Loan and Security
Agreement, dated August 14, 2009. |
|
10.32 |
*(13) |
|
Termination Agreement dated September 11, 2009, by and among Smart
Modular Technologies (WWH), Inc. and certain Shareholders named
therein. |
|
14.1 |
*(14) |
|
SMART Modular Technologies Code of Ethics for Officers and Directors |
|
21.1 |
|
|
Subsidiaries of the Company |
|
23.1 |
|
|
Consent of Independent Registered Public Accounting Firm |
|
31.1 |
|
|
Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
|
31.2 |
|
|
Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
|
32 |
|
|
Certification of Principal Executive Officer and Principal Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
Incorporated by reference to the Exhibits filed with Amendment No.
1 to the Companys Registration Statement on Form S-1, filed on
November 30, 2005 (File No. 333-129134). |
|
*(1) |
|
Incorporated by reference to the Exhibits filed with Amendment No.
3 to the Companys Registration Statement on Form S-1, filed on
January 10, 2006 (File No. 333-129134). |
87
|
|
|
*(2) |
|
Incorporated by reference to the Exhibits filled with the
Companys Registration Statement on Form S-4, filed on August 11,
2005 (File No. 333-127442). |
|
*(3) |
|
Incorporated by reference to the Exhibits filed with Amendment No.
2 to the Companys Registration Statement on Form S-1, filed on
December 20, 2005 (File No. 333-129134). |
|
*(4) |
|
Incorporated by reference to the Exhibits filed with the Companys
Registration Statement on Form S-1, filed on October 19, 2005
(File No. 333-129134). |
|
*(5) |
|
Incorporated by reference to the Exhibit filed with the Companys
Quarterly Report on Form 10-Q, filed on January 4, 2008 (File No.
000-51771) |
|
*(6) |
|
Incorporated by reference to the Exhibit filed with the Companys
Quarterly Report on Form 10-Q, filed on April 4, 2008 (File No.
000-51771) |
|
*(7) |
|
Incorporated by reference to the Exhibit filed with the Companys
Current Report on Form 8-K, filed on April 30 2008 (File No.
000-51771) |
|
*(8) |
|
Incorporated by reference to the Exhibit filed with the Companys
Current Report on Form 8-K, filed on September 10 2008 (File No.
000-51771) |
|
*(9) |
|
Incorporated by reference to
the Exhibit filed with the Companys Annual Report on Form 10-K,
filed on November 12, 2008 (File No.
000-51771) |
|
*(10) |
|
Incorporated by reference to the Exhibit filed with the Companys
Current Report on Form 8-K, filed on December 3, 2008 (File No.
000-51771) |
|
*(11) |
|
Incorporated by reference to the Exhibit filed with the Companys
Quarterly Report on Form 10-Q, filed on April 7, 2009 (File No.
000-51771) |
|
*(12) |
|
Incorporated by reference to the Exhibit filed with the Companys
Quarterly Report on Form 10-Q, filed on August 18, 2009 (File No.
000-51771) |
|
*(13) |
|
Incorporated by reference to the Exhibit filed with the Companys
Current Report on Form 8-K, filed on September 16, 2009 (File No.
000-51771) |
|
*(14) |
|
Incorporated by reference to
the Exhibit filed with the Companys Annual Report on Form 10-K,
filed on November 13, 2007 (File No.
000-51771) |
88