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
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For the fiscal year ended
August 27,
2010
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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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)
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(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
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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 o
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 the definitions of
large accelerated filer, 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 þ
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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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 26, 2010, based on the closing price of such stock
on the NASDAQ Global Select Market on such date, was
approximately $209,371,802. The number of shares of the
registrants ordinary shares, $0.00016667 par value,
outstanding on October 26, 2010, was 63,004,296.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement relating to
the registrants 2011 Annual Meeting of Shareholders to be
held on or about January 7, 2011 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 27, 2010
TABLE OF CONTENTS
This Annual Report is for the fiscal year ended August 27,
2010. This Annual Report on
Form 10-K
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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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
materials used to make components or components used in our
products both of 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.
PART I
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 and solid state storage products such as embedded
flash and Solid State Drives (SSDs). Since our
display business divestiture in the third quarter of fiscal
2010, we only have residual sales of inventory of display
products such as Thin Film Transistor Liquid Crystal
Display (TFT-LCD) products. We offer our 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 or storage 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 or storage
content should 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 of our products 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. In 1999, SMART Modular
was acquired by Solectron Corporation (Solectron),
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
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Modular Technologies (WWH), Inc. (SMART or the
Company) under the laws of the Cayman Islands. In
February 2006, SMART again became a publicly traded company.
Since the Acquisition from Solectron, we have repositioned our
business by focusing on delivery of certain higher value added
products, diversifying our end markets and our capabilities,
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, 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 have renamed to SMART
Modular Technologies (AZ), Inc. In fiscal 2010, we expanded our
development of SSD products and expect to continue to do so in
fiscal 2011 to address the significant growth opportunities in
the enterprise market. Also in fiscal 2010, we invested in our
Brazilian operations to launch flash production in fiscal 2011.
Our
Products and Services
We currently operate in one reportable segment: the design,
manufacture, and sale of electronic subsystem products and
services to various sectors of the electronics industry. The
Companys chief operating decision-maker, the President and
CEO, evaluates financial performance on a company-wide basis.
During fiscal 2008 and 2009, we had 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 had operated under one segment.
From the acquisition of Adtron on March 3, 2008, until the
end of fiscal 2009, SMARTs CEO and chief operating
decision maker had separately evaluated Adtrons
performance and the allocation of resources to Adtron.
Memory
Products and Services
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), DDR2,
and leading-edge high performance DDR3 DRAM 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 32GB. We are currently
developing extensions to these products to include load reducing
DIMMs (LRDIMM) and densities up to 64GB. 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.
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.
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
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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
global memory supply chain for a leading networking OEM. In
fiscal 2010, 2009 and 2008, our logistics and service offerings
accounted for approximately 6%, 8% and 6% of total net sales,
respectively.
Solid
State Storage Products
Solid State Drives. We design and manufacture
solid state drives (or SSDs) for two focus markets,
enterprise and defense/industrial. Within the enterprise market,
we address enterprise storage, high performance computing, blade
servers, network attached storage and direct attached storage.
Within the defense/industrial markets we address defense ground,
aerospace, industrial automation, medical and transportation.
Our 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 solid state drives come in a
wide range of interfaces (SCSI, SATA, SAS, IDE) and the
following form factors: 1.8, 2.5 and 3.5. Our
products include a combination of our core IP as well as third
party technology. We have strong partnership with multiple
controller and NAND flash manufacturers to offer a broad product
portfolio to our customers. Our SSD products range in capacity
from 4 to 400GB and are targeted at application segments with
specific added value that differentiates them from the
competition:
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XceedIOPS high performance, high reliability and
high endurance meet the requirements for read/write intensive
applications in the enterprise storage and server market;
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XceedSecure unique data security technology
appropriate for defense and aerospace applications;
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Xcel high performance and industrial temperature
range (I-temp) appropriate for performance and environmentally
sensitive applications in the industrial market;
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XceedSCSI appropriate for interfacing with certain
discontinued hard disk drive products targeted at the legacy
Small Computer Systems Interface (SCSI) market; and
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XceedLite optimized power consumption to enable
mobile computing platforms.
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We also have considerable investments underway to develop a more
comprehensive offering of SSD products specifically targeting
the enterprise market with various interfaces and form factors.
Embedded Storage Products 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, uSATA Drives,
SCDD, Mini IDE Drives, PCIe Drives and module form factors that
utilize ATA, Linear, IDE, SATA 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. We have recently made investments in Brazil to expand
our capabilities to design and manufacture flash memory cards
and other flash-based products which we expect to have in
production in the first half of fiscal 2011.
Embedded
Computing Products
Until the end of the third quarter of fiscal 2010, we offered
complex, diversified, and high quality products designed for
embedded computing and communication applications to OEMs. We no
longer offer these products in order to focus our resources on
our core products.
Display
Products
Prior to our display business divestiture in the third quarter
of fiscal 2010, we developed 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 developed and
manufactured display interface boards implementing
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VGA, DVI, and TV interfaces. Other than the sale of residual
inventory, we no longer offer these products in order to focus
our resources on our core products.
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 and Irvine, California;
Seoul, South Korea; 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. We also conduct design verification
testing of hardware and firmware, system integration and
reliability testing. Furthermore, we integrate any customization
that our customers require in terms of operational
functionality. 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 and storage requirements, shorten their
time-to-market
and enhance the performance of our customers applications.
We have considerable activities underway to develop an extensive
offering of SSDs targeted at the enterprise market. To
accomplish this, we have increased our engineering resources
significantly. In an effort to accelerate our design
capabilities specifically for SSD products, we have developed
technology partnerships with several companies to design and
test various components, interfaces and form factors for our
solid state drive solutions.
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 paramount in 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.
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, Elpida and Samsung. We
frequently work jointly with them in bidding for customers
design-in opportunities. We work closely with our primary
suppliers to
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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 700 customers
in fiscal 2010. For fiscal 2010, 2009 and 2008, our ten largest
OEM customers accounted for 69%, 64% and 71% of net sales,
respectively. In fiscal 2010, 2009 and 2008, Hewlett-Packard
accounted for 22%, 28% and 39% of our net sales, respectively;
Cisco Systems accounted for 16%, 13% and 12% of our net sales,
respectively; and Dell accounted for 14%, 9% and 6% of our net
sales, respectively. During these periods, no other customers
accounted for more than 10% of our total net sales. Our
long-standing relationships with Hewlett-Packard, Cisco Systems
and Dell, 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, Latin 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 may also be 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
2010, we had 56 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. 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, SSD products, embedded flash memory
subassemblies, 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 for SSD products as we
meet the needs of this emerging market. We have considerable
activities underway to develop an extensive offering of SSD
products targeted at the enterprise market. To accomplish this,
we have increased our engineering resources significantly. In an
effort to accelerate our development of SSD products, we have
engaged in technology partnerships with several companies to
design and test various components, interfaces and form factors
for our SSD solutions.
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,
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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 $25.1 million, $19.8 million and
$20.2 million on research and development during fiscal
2010, 2009 and 2008, respectively. At the end of fiscal 2010, we
had 134 research and development personnel worldwide.
Recently we announced our intention to create a corporate
research and development (R&D) center in Brazil
to further advance our development of memory, storage and
packaging technologies.
Intellectual
Property
We have 16 issued patents which expire between October 2014 and
June 2028, and 18 patent applications 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 and flash card industry, we compete against
semiconductor suppliers that maintain captive memory module and
flash card production capabilities including Hynix, Micron,
Samsung, Elpida, and Nanya. Other primary competitors in the
memory module and flash card industry include NetList, STEC,
Viking InterWorks (a Sanmina-SCI company), SanDisk, Western
Digital, Unigen and Wintec. In Brazil, we face some of the same
competitors as we do elsewhere through imports of DRAM modules.
We also face competition from several local DRAM module
manufacturers in Brazil. We are not aware of any current
competitors for our packaging business in Brazil. Import duties
and local content requirements in Brazil give us an advantage
over companies that import DRAM modules or import DRAM
components to build modules. As the local market grows,
competition is likely to increase and may have a negative impact
on our results of operations in Brazil.
The non-volatile memory, or flash market, has attracted numerous
competitors, both large and small, from around the world.
Entrants generally target specific segments within the flash or
solid state storage markets. Large manufacturers of solid state
storage products such as Intel, Micron, Samsung and SanDisk have
targeted the client/consumer laptop and PC markets, while
smaller vendors such as Apacer, PQI and Transcend have selected
similar markets but on a smaller scale. As we enter the market
for enterprise SSDs, we are and will be competing with Intel,
Samsung, Hitachi, Seagate, STEC, Micron, Toshiba, Western
Digital, Pliant and Fusion-io. As we enter the markets for flash
cards, SD Cards and MicroSD Cards in Brazil, we will be facing
competition from SanDisk, Viking InterWorks (a Sanmina-SCI
company), Kingston and several other established manufacturers
whose products are imported, however, we are not aware of any
current competitors manufacturing these products in Brazil. We
expect
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that import duties and local content requirements in Brazil will
give us an advantage over companies that import these card
products. Our primary competitors in the defense, aerospace,
industrial, medical, transportation, and industrial automation
markets are BiTMICRO, SuperTalent and STEC. In the industrial
and telecom markets, our primary competitors for embedded flash
are STEC, Western Digital and Viking InterWorks (a Sanmina-SCI
company).
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, Elpida 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 2010, we had 1,223 full-time employees
of whom 888 were in manufacturing (including test, quality
assurance and materials work), 134 were in research and
development, 56 were in sales and marketing, and 145 were in
general and administrative. At that date, we also employed an
additional 219 temporary employees, primarily in manufacturing.
Our employees are not represented by any collective bargaining
agreements and we have never experienced a work stoppage. We
consider our employee relations to be good.
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 10 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 a website at www.sec.gov.
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
8
Companys business, results of operations, financial
condition, liquidity, or access to capital could be materially
adversely affected.
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. Historically, 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/or
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 lifecycle
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 excess inventory which could
have a significant adverse impact on our sales. During an
industry downturn, there is also a higher risk that some of our
trade receivables would be uncollectible and that our inventory
would decrease in value.
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 adversely
affected sales of products in end markets served by our
customers which adversely affected demand for our products.
While there has been improvement in industry conditions since
the fourth quarter of fiscal 2009, we had experienced
significant declines in demand for our products during several
quarters immediately preceding the fourth quarter of fiscal
2009. While demand increased during fiscal 2010, there can be no
assurance as to when and if, or to what extent, the demand for
our products will increase or decrease in future periods.
Reduced demand for our products 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.
We
have experienced quarterly losses in the past and may experience
periodic losses in the future. Our results of operations for any
particular period may not be indicative of our future
results.
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. 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 and could
have a material adverse affect on our business, our results of
operations and our financial condition.
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 result in inventory write-downs and 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 density memory modules 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, our results of
operations and our financial condition.
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. 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 are
able to exert, 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 2010, 2009 and 2008, our ten
largest OEM customers accounted for 69%, 64% and 71% of net
sales, respectively. In fiscal 2010, 2009 and 2008,
Hewlett-Packard accounted for 22%, 28% and 39% of our net sales,
respectively. From fiscal 2008 to 2009, we experienced a
significant decrease in our overall sales to Hewlett-Packard as
a result of a decline in overall economic conditions combined
with the customer utilizing more standard products in their
high-end server business as replacements for the specialty
memory products we sell to them. We anticipate that this
specialty memory business will continue to decline further in
the foreseeable future, as it did in fiscal 2010. We expect to
continue to offset these declines with increased sales into
Hewlett-Packards Brazil PC business. In fiscal 2010, 2009
and 2008, Cisco Systems accounted for 16%, 13% and 12% of our
net sales, respectively. In fiscal 2010, 2009 and 2008, Dell
accounted for 14%, 9% and 6% of our net sales, respectively.
During these periods, no other customers 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 may
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.
In most cases we do not obtain long-term purchase orders or
commitments from our customers but instead we work with our
customers to develop non-binding estimates or forecasts of
future requirements. Utilizing these non-binding 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, gross profit, 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 a material 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.
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, PC and computing, networking, storage
and/or
communications industries;
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changes in consumer confidence caused by changes in market
conditions, including changes in the credit market, expectations
for employment and inflation, and energy prices;
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11
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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.
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In response to strengthening market conditions at the end of
fiscal 2009 and during fiscal 2010, we have recently made
significant investments and expect to continue to invest to
increase capacity. 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.
A
recurrence of the recent financial crisis or a deterioration of
recently-improved financial conditions 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 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 caused consumers and businesses to defer purchases in
response to tighter credit and less discretionary spending,
adversely affected consumer confidence and sales of products in
end markets served by our customers and adversely affected
demand for our products. While there has been improvement in the
credit markets, these markets could tighten up again in the
future. Additionally, 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 continue to experience significant volatility.
Remedial fiscal and monetary measures are being undertaken by
governments and central banks across the world. The short and
long term effects of these measures are uncertain. 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 or write-offs which
in turn can have a material adverse impact on our business, our
results of operations and our financial condition.
In the past, we have experienced cancellations of orders and
fluctuations in order levels from period to period and expect
that we could 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. While we
have not had material inventory write-downs or write-offs in
recent years, we have had in the past and expect we could again
in the future, have inventory write-downs
and/or
write-offs due to obsolescence, excess quantities and declines
in market value below our costs. These occurrences would 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 or
write-offs
which could have a material adverse 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
customers 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 it, this
could result in significant inventory write-downs or write-offs
and would have a material, adverse impact on our cash flow, our
results of operations and our financial condition. At the end of
the last four fiscal quarters, logistics inventory (including
inventory specifically requested by customers) ranged between
36% and 42% of total inventory.
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 material adverse impact on our
competitiveness, our results of operations and our financial
condition.
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. More specifically, the solid
state storage industry is an emerging industry with several
different technology platforms each of which has significant
costs of entry. We are a new entrant into the solid state
storage industry and have limited experience in this market. We
have experienced, and may experience in the future, delays and
unanticipated expenses 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, our results of operations and
our 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 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 for any reason would jeopardize our ability to recoup
substantial research and development expenditures, hurt our
reputation and have a material adverse effect on 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
gain acceptance or grow, this would have a material adverse
effect on our business, our results of operations and our
financial condition.
In particular, we have made and expect to 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 in
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 in our net
sales. If these investments fail to provide the expected returns
this would have a material adverse effect on our business, our
results of operations and our financial condition.
13
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 or
accelerate depreciation rates, all of which can have a material
adverse effect 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 lifecycles. If the
lifecycle 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. For
example, the accelerated switch from DDR2 to DDR3 in Brazil
caused a shorter useful life for DDR2 equipment which resulted
in additional depreciation expense of $1.2 million in
fiscal 2010. 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 emerge. Each of
these factors can have an adverse effect on our business, our
results of operations and our financial condition.
Our
dependence on a small number of sole or limited source suppliers
subjects us to certain risks and our results of operations would
be materially 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 commitments from suppliers. Our
suppliers are not required to supply us with any minimum
quantities and there is no assurance that our suppliers will
supply the quantities of components we may need to meet our
production goals. Our major suppliers include Hynix, Micron,
Elpida 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. 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 intellectual property infringement problems, we may
not be able to fill customer orders. Furthermore, our products
that utilize that suppliers components may be disqualified
by one or more of our customers and we may not be able to fill
their 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 manufacturing and
shipments or require product redesigns which could damage
relationships with our customers, increase our costs or the
prices of our products and materially 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
14
condition. In addition, when customers utilizing custom memory
solutions choose to adopt a JEDEC standard instead of a custom
module, that 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
particular products utilizing certain 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 in
the United States and do not have rights to manufacture in the
United States. Although we do not currently support the consumer
flash market, it is possible that certain OEM customers of ours
may choose to adopt these formats. Additionally, we plan to
support the consumer flash market in Brazil beginning in fiscal
2011. If we manufacture flash memory products utilizing these
formats, we may 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 and results of operations could be adversely
impacted and our customers might cancel orders or seek other
suppliers to replace us. While we do not believe that we need
any licenses that we do not currently have, it is possible that
third parties may claim that we do, which claims could result in
additional expenses which could have an adverse effect on our
results of operations.
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 2010, 2009 and 2008, we made significant
capital expenditures to expand production, test and packaging
capacity in our Atibaia, Brazil facility and we plan to continue
to invest in Brazil and elsewhere. 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 of companies and/or technologies 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
business, our results of operations and our financial condition
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
15
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 or
technologies. 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 little
or no prior experience and markets with complex government
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.
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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 earn-out 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 at all, or may
not 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 flash card production capabilities, including
Hynix, Micron, Samsung, Elpida and Nanya. Other primary
competitors in the memory module and flash card industry include
NetList, STEC, Viking InterWorks (a Sanmina-SCI company),
SanDisk, Western Digital, Unigen and Wintec. In Brazil, we face
some of the same competitors as we do elsewhere through imports
of DRAM modules. We also face competition from several local
DRAM module manufacturers in Brazil. We are not aware of any
current competitors for our packaging business in Brazil. Import
duties and local content requirements in Brazil give us an
advantage over companies that import DRAM modules, or import
DRAM components to build modules. As the local market grows,
competition is likely to increase and may have a negative impact
on our results of operations in Brazil.
The non-volatile memory, or flash market has attracted numerous
competitors, both large and small, from around the world.
Entrants generally target specific segments within the flash or
solid state storage markets. Large manufacturers of solid state
storage products such as Intel, Micron, Samsung and SanDisk have
targeted the client/
16
consumer laptop and PC markets, while smaller vendors such as
Apacer, PQI, and Transcend have selected similar markets but on
a smaller scale. As we enter the market for enterprise SSDs, we
are and will be competing with Intel, Samsung, Hitachi, Seagate,
STEC, Micron, Toshiba, Western Digital, Pliant and Fusion-io. As
we enter the markets for flash cards, SD Cards and MicroSD Cards
in Brazil, we will be facing competition from SanDisk, Viking
InterWorks (a Sanmina-SCI company), Kingston and several other
established manufacturers whose products are imported, however,
we are not aware of any current competitors manufacturing these
products in Brazil. We expect that import duties and local
content requirements in Brazil give us an advantage over
companies that import these card products. Our primary
competitors in the defense, aerospace, industrial, medical,
transportation, and industrial automation markets are BiTMICRO,
SuperTalent and STEC. In the industrial and telecom markets, our
primary competitors for embedded flash are STEC, Western Digital
and Viking InterWorks (a Sanmina-SCI company).
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
and/or
suppliers 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
and/or
suppliers may emerge and rapidly acquire significant market
share.
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
net sales are impacted by achieving design wins and
qualifications of our products into commercially successful OEM
systems and the failure to achieve design wins and
qualifications 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,
and then to qualify our products for production buys. 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. 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
qualify or 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 or
qualification. 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, this could have an adverse effect on our net sales,
our results of operations and our financial condition.
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
17
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 president and chief executive officer,
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. Declines in the value of our stock could
adversely affect our ability to retain employees and we may have
to take additional steps, as we did with our employee stock
option exchange in the first quarter of fiscal 2010 and the
granting of restricted stock units in fiscal 2009 and 2010, 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.
We
rely, in part, 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
these third-party sales representatives will be successful in
marketing and selling our products. Moreover, many of these
third-party sales representatives also market and sell competing
products and 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 and retain 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, power failures, fires, or other such
circumstances, could cause us to cease or limit our
manufacturing operations and consequently adversely impact our
business. Since a large percentage of our production is done in
a small number of facilities, a disruption to operations could
have a material adverse impact on 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, a small portion 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,
18
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 business would suffer. Even if military spending
continues to increase, delays
and/or
shifts in military spending could negatively affect our
business, our results of operations and our financial condition.
The
competitive bid process for, and the terms and conditions of,
government contracts may have a negative effect on our business
and our results of operations.
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.
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 for the filing period
covered by this report including fiscal 2010, 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 have a material negative
impact on 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.
19
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, the Dodd-Frank Wall Street Reform and Consumer
Protection Act, SEC regulations and NASDAQ rules, have required
most public companies, including us, to devote additional
internal and external resources to various governance,
compliance and disclosure 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 or
otherwise, 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 have a material
adverse effect on our results of operations, our financial
condition or the market price of our ordinary shares.
Changes
in, or interpretations of, tax regulations or rates, or changes
in the geographic dispersion of our revenues, or changes in
other tax benefits, may adversely affect our income, value-added
and other taxes, which may in turn have a material adverse
effect on our cash flow and financial condition.
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 or application 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. While we enjoy and
expect to continue to enjoy beneficial tax treatment in certain
of our foreign locations, most notably Brazil, Malaysia and
Puerto Rico, we are subject to meeting specific conditions in
order to receive the beneficial treatment. Additionally, the
beneficial treatments need to be renewed periodically and are
subject to change. 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 failure to
renew or continue to receive any beneficial tax treatment in any
of our foreign locations, or any increase in our future
effective tax rates due to any of the factors set forth above or
otherwise, could reduce net income and could have a material
adverse effect on our results of operations, our cash flow and
our financial condition.
On October 3, 2008, our subsidiary in Brazil (SMART
Brazil) received a notice from the Sao Paulo State
Treasury Office providing an assessment for the collection of
State Value-Added Tax (ICMS) as well as interest and
penalties (collectively the Assessment) related to
the transfer of ICMS credits during 2004 between two Brazilian
entities. These transfers occurred prior to the acquisition in
April 2004 of SMART from Solectron
20
Corporation (Solectron). Solectron was subsequently
acquired by Flextronics International Ltd.
(Flextronics). We believe that the Assessment is
subject to indemnification by Solectron to SMART pursuant to the
Transaction Agreement dated February 11, 2004 dealing with
the acquisition of SMART from Solectron. We notified Solectron
and Flextronics of the Assessment, and under the terms of the
Transaction Agreement, Flextronics elected to assume
responsibility to contest the Assessment on SMART Brazils
behalf. We have been advised that the efforts to contest the
Assessment in the administrative level have been unsuccessful
and on June 16, 2010, we were notified that the last
administrative appeal was not admitted, thereby exhausting all
administrative appeals. We have also been advised by tax counsel
that additional appeals can only be made in a judicial
proceeding. As of August 27, 2010, our Consolidated Balance
Sheet reflects both a liability for the Assessment and a
corresponding indemnity receivable for approximately
$4.1 million (or 7.2 million Brazilian Real or
BRL). While we believe that the Assessment would be
subject to the indemnity obligations of Solectron
and/or
Flextronics, there can be no absolute assurance that Solectron
and/or
Flextronics will comply with their contractual indemnity
obligations in this regard.
Since 2004, the Sao Paulo State tax authorities have granted
SMART Brazil a tax benefit to defer and eventually eliminate the
payment of ICMS levied on certain imports from independent
suppliers. This benefit, known as an ICMS Special Ruling, is
subject to renewal every two years and expired on March 31,
2010. SMART Brazil applied for a renewal of this benefit, but
the renewal was not granted until August 4, 2010. On
June 22, 2010, the Sao Paulo authorities published a
regulation allowing companies that applied for a timely renewal
of an ICMS Special Ruling, such as SMART Brazil, to continue
utilizing the benefit until a final conclusion on the renewal
request was rendered. As a result of this publication, SMART
Brazil was temporarily allowed to utilize the benefit while it
waited for its renewal. From April 1, 2010, when the ICMS
benefit lapsed, through June 22, 2010 when the regulation
referred to above was published, SMART Brazil was required to
pay the ICMS taxes upon imports. The payment of ICMS generates
tax credits that may be used to offset ICMS obligations
generated from sales by SMART Brazil of its products, however,
the vast majority of SMART Brazils sales in Sao Paulo are
either subject to a lower ICMS rate or are made to customers
that are entitled to other ICMS benefits that enable them to
eliminate the ICMS levied on their purchases of products from
SMART Brazil. As a result, from April 1, 2010 through
June 22, 2010, SMART Brazil did not have sufficient ICMS
collections against which to apply the credits accrued upon
payment of the ICMS on SMART Brazils imports. Although the
renewal has been granted, there is no refund of ICMS tax credits
that accumulated during the period we were waiting for the
renewal.
As of August 27, 2010 the total amount of accumulated ICMS
tax credits reported on our Consolidated Balance Sheet was
$17.6 million (or 31.0 million BRL), with
$11.3 million (or 19.8 million BRL) under other
current assets and $6.3 million (or 11.2 million BRL)
under other non-current assets. It is expected that
$11.3 million of the excess ICMS credits will be recovered
during fiscal 2011, with the remainder of $6.3 million
being recovered in fiscal 2012. These expectations are based on
various estimates including the mix of products and regions
where our sales will occur. If these estimates or the mix of
products or regions vary, it could take longer than expected to
fully utilize the excess ICMS credits accumulated to date. The
accumulation of the excess credits had an adverse impact on our
cash flow and there can be no absolute assurance that we will be
able to fully utilize all of our excess credits.
Our
plans to establish a corporate research and development center
in Brazil may not achieve the results we anticipate which would
have an adverse impact on our business, our cash flow, our net
income and our financial condition.
As part of our plan to increase research and development
(R&D) activities, we expect to establish a
corporate R&D center in Brazil to develop technology to
enhance our semiconductor packaging and module manufacturing
capabilities, to design and develop new DRAM ICs, memory modules
and MicroSD products, and to design and develop our solid state
storage products for different interfaces and in different form
factors. We expect to leverage our infrastructure in Brazil to
utilize certain government incentives to enhance the returns on
our investments. Establishing this new corporate R&D center
will involve substantial management resources and significant
spending and capital investment with no assurance of a
satisfactory return.
In connection with these R&D activities, we intend to
utilize two government investment incentive programs that we
expect will increase our competitiveness and enhance our return
on investment. The first program, known as PADIS
(Programa de Apoio do Desenvolvimento Tecnológico da
Industria de Semicondutores), is specifically
21
designed to promote the development of a local semiconductor
industry. We have applied for and expect to be one of the first
companies in Brazil to obtain a designation making us eligible
for certain beneficial tax treatment under this new legislation,
although there can be no assurance that we will obtain the
expected benefits. In order to receive the intended benefits, we
will be required to make significant investments in R&D
activities which investment amounts are related to our sales
volume. Since this is new legislation, its interpretation has
not been established and there is a risk that it may be
interpreted differently by the Brazilian tax authorities than we
anticipate. If we do not make the required investments, or if
the Brazilian tax authorities do not agree with our
classification of certain expenses as constituting R&D, we
may lose the anticipated benefit and be penalized for failing to
collect the applicable taxes and as a result, our investment in
R&D will not provide the anticipated return.
The second program, known as IT Law PPB
(Lei da Informática Processo Produtivo
Básico, or Basic Production Process), is a widely utilized
and more well established program. PPB is intended to promote
local content by allowing qualified PPB companies to sell
certain IT products with a reduced rate of the federal value
added tax (namely, the IPI) as compared to the rate that is
required to be collected by non-PPB suppliers. This treatment
provides an incentive for certain customers to purchase from us
because they will not be required to pay the regular level of
IPI on their purchases. In order to receive the intended
treatment, we are again required to make certain investments in
R&D activities, which investment amounts are related to our
sales volume. If we do not make the required investments, or if
the Brazilian tax authorities do not agree with our
classification of certain expenses as constituting R&D, we
may lose the anticipated beneficial treatment and could be
penalized for failing to collect the required IPI from our
customers, and as a result, our investment in R&D will not
provide the anticipated return.
If we make the planed investments and do not receive the
intended tax treatments, this could cause a material increase in
our expected tax liability and expected effective tax rate, and
could have a material adverse impact on our cash flow, our net
income and our financial condition.
We
receive certain beneficial tax treatment as a result of being a
Cayman Islands company.
We are a Cayman Islands company and operate through subsidiaries
in a number of countries throughout the world, including the
United States. As a result, income generated in certain
non-U.S. subsidiaries
is not subject to taxation in the United States. We are subject
to changes in tax laws, treaties and regulations or the
interpretation or enforcement thereof in the United States, the
Cayman Islands and jurisdictions in which we or any of our
subsidiaries operate or are resident. Legislative proposals were
introduced in the U.S. that, if enacted into law, could
result in us being considered a U.S. company for tax
purposes. This could have the effect of subjecting a larger
portion of our worldwide income to U.S. taxation than is
currently required. While no such laws have been enacted to
date, there can be no assurance that they will not be enacted in
the future. The impact on our cash flows, results of operations
and financial condition will depend upon the specifics of any
such law, if it were to be enacted, but is likely not to be
material.
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 flow 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, and in the
first two quarters of fiscal 2009, we recorded an aggregate
charge of $10.4 million for goodwill impairment. Impairment
charges have an adverse effect on our results of operations and
our financial condition.
22
Our
indemnification obligations to our customers and suppliers for
product defects and other matters 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 various matters including, without limitation, 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 does not cover all types of
claims and 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 results of operations and our financial
condition.
Sales outside of the United States accounted for approximately
70%, 57% and 45% of net sales in fiscal 2010, 2009 and 2008,
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 and Malaysia. 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
and/or taxes
on transfers of funds and other assets of our subsidiaries
between jurisdictions; difficulties with the repatriation of
funds from foreign 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 military related
and/or 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, or the rights we have under such
agreements may be substantially different from the rights we are
afforded under the laws of the United States.
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 operations are 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 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
23
at times face extra challenges in their ability to effectively
oversee the
day-to-day
management of our international operations. The challenges
facing management to effectively recruit, employ and retain
qualified personnel and to otherwise effectively manage our
international operations could result in compliance, control or
other issues that would have a negative impact on our business,
our results of operations and our financial condition.
Worldwide
political conditions and threats of terrorist attacks 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.
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 also have a negative 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, our results of operations and our financial condition.
Unfavorable
currency exchange rate fluctuations could cause currency
exchange losses, could result in our products becoming
relatively more expensive to our overseas customers and could
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 expose us to certain risks associated with
fluctuating currency values and exchange rates. Because some of
our sales are denominated 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
and expenses 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 in the future.
Our
worldwide operations could be subject to natural disasters and
other business disruptions, which could have a material adverse
effect on our business, our results of operation and our
financial condition.
Our worldwide operations could be subject to natural disasters,
including earthquakes, monsoons and floods. For example, our
corporate headquarters in Newark, California is located near
major earthquake fault lines. Our manufacturing facility in
Penang, Malaysia is also prone to natural disasters such as
monsoons and floods. In addition, our manufacturing facility in
Aguada, Puerto Rico, is located in a hurricane-prone area. 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. Since a large percentage of our production is done in
a small number of facilitates, a disruption to operations could
have a material adverse impact on our business, our results of
operations and our financial condition.
24
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. Activities in the area
of intellectual property rights, including litigation and
various patent processes can cause us to incur substantial
expenses that can have an adverse impact on our results of
operations.
We attempt to protect our intellectual property rights through a
variety of measures, including trade secret laws, non-disclosure
agreements, confidentiality procedures, 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.
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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 or other legal and technical
processes 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 and other legal and technical processes
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. On December 11, 2009, Ring
Technology Enterprises of Texas, LLC (Ring
Technology) filed a complaint in the Eastern District of
Texas alleging that we infringed certain patents and seeks an
unspecified amount of damages and injunctive relief. 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. Litigation and other patent processes, whether
as plaintiff, defendant or otherwise, could result in
significant expense to us and divert the efforts of our
technical and management personnel, whether or not such
litigation or other processes are ultimately determined in our
favor. In the event of an adverse result in, or a settlement of,
a litigation matter, we could be
25
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 our 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 or alleged infringement by our products of
third-party patents, trademarks or other intellectual property
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 in most instances.
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, the export control regulatory
activities of the Department of State, the Department of Defense
and the Bureau of Industry and Security, 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)
26
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,
disbarment from government projects, 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.
If we
undertake additional restructuring measures in the future as we
have done in the past, we may not be able to effectively
implement such future restructuring measures, and such
restructuring measures 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 measures in the
future.
These additional restructuring measures, 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 measures. Past and future restructuring measures
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 measures 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.
27
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
April 30, 2010, the WF Credit Facility was amended to
extend the term through April 30, 2012. We have not
borrowed under the WF Credit Facility since November 2007 and we
had no borrowings outstanding as of August 27, 2010. We may
not meet the financial covenants required to borrow funds under
the WF Credit Facility during all periods before it expires 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.
Disruption
in the financial markets may adversely impact the availability
and cost of credit and cause other disruptions and additional
costs at a time when we may need capital to refinance our debt
or to fund growth.
Refinancing our existing debt or securing new debt or equity
financing may be difficult, expensive, dilutive or impossible.
As in the past, future 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. If we
are not able to obtain the capital required to refinance our
existing debt or to fund future growth or if we are required to
incur significant expenses
and/or
dilution to do so, this could have a material adverse effect on
our business, our results of operations and our financial
condition and may require us to undertake alternative plans,
such as selling assets, reducing or delaying capital investments
or downsizing our business.
Our
indebtedness could impair our financial condition and harm our
ability to operate our business.
We have certain debt service obligations. At August 27,
2010, our total outstanding debt was $55.1 million. 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:
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it may limit our ability to service all of our debt obligations;
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it may impair our ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes;
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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;
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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;
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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;
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it may increase our vulnerability to general economic downturns
and adverse industry conditions; and
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it may limit our flexibility in planning for, or reacting to,
changes in our business and our industry.
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To
service our debt and grow our business, 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 this 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 under
these conditions is likely to be difficult, expensive, dilutive
or impossible. Our inability to generate sufficient cash flow to
satisfy our debt obligations or to refinance our obligations on
commercially reasonable terms could have a material adverse
effect on our business, financial condition and results of
operations. If we were not able to obtain required financing, it
could also prevent us from achieving sales and profit growth
that would otherwise be available which, in turn could have a
material adverse effect on our business, our results of
operations and our financial condition and may require us to
undertake alternative plans, such as selling assets, reducing or
delaying capital investments or downsizing our business.
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 of $55.1 million as of August 27, 2010.
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, and the credit facility is fully drawn and holding other
variables constant, 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.
29
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:
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actual or anticipated variations in quarterly operating results;
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changes in financial estimates by us or by any securities
analysts, or our failure to meet the estimates made by us or by
securities analysts;
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changes in the market valuations of other companies operating in
our industry;
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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;
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loss of a major customer or of significant business at a major
customer;
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additions or departures of key personnel;
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a general downturn or uptick in the stock market; and
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developments in existing litigation or the filing of new
litigation against us.
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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.
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 2010 net sales increased 59% from fiscal
2009, and 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:
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the timing and volume of orders from our customers;
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the rate of acceptance of our products by our customers,
including the rate of design wins;
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the demand for and life cycles of customer products
incorporating our products;
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the rate of adoption of our products in the end markets we
target;
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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;
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changes in product mix;
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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;
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production levels of our suppliers or other factors impacting
our ability to procure the components we need to manufacture our
products;
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changes in the cost or availability of components;
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significant volatility in prices of wafers, DRAMs, flash and
other components;
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the timing and acceptance of our new or enhanced products, or
products introduced by our competitors
and/or our
suppliers;
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changes in the average selling prices of our products;
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fluctuations in demand for our products;
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changes in supply and demand conditions;
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order cancellations, product returns and inventory buildups by
customers, and inventory write-downs;
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manufacturing inefficiencies associated with the
start-up of
new products and low volume production;
|
|
|
|
expenses associated with strategic transactions, including
acquisitions, joint ventures, joint development 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 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.
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, our articles of association provide that each of
our directors may 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 then current
directors stood for re-election at our 2010 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. In July 2010, one of the
re-elected independent members of our board of directors
resigned and the board elected not to replace that director.
Future
sales of shares or issuances of shares, options or warrants in
connection with acquisitions or financings 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 our
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, options or warrants in public or private
offerings to raise capital or in connection with acquisitions
which would result in additional dilution and could adversely
affect market prices for our ordinary shares.
31
Anti-takeover
provisions in our organizational documents may discourage our
acquisition by a third party, which could limit
shareholders opportunity to sell their 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.
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.
32
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
|
|
|
73,200
|
|
|
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
|
Tewksbury, Massachusetts
|
|
|
10,600
|
|
|
Leased
|
|
November 2010
|
|
Design & Sales
|
Irvine, California
|
|
|
4,400
|
|
|
Leased
|
|
August 2012
|
|
Design & Sales
|
Sung Nam City, Korea
|
|
|
1,900
|
|
|
Leased
|
|
July 2012
|
|
Design & Sales
|
Our Penang facility is situated on leased land, with a term
expiring in 2070.
In September 2010, we entered into a lease in Westford,
Massachusetts for 28,500 square feet, effective November
2010 and expiring in March 2018, to relocate our Tewksbury
facilities.
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
currently 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.
Tessera
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 a subsidiary of the Company, as well as several other
respondents. Tessera alleged 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:
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|
|
|
|
a permanent general exclusion order excluding from entry into
the U.S. all small-format BGA semiconductor packaged DRAM
chips (BGA chips) and products containing the same
that infringe any claim of the Asserted Patents, and all
products (e.g., personal computers or PCs) that
contain such infringing BGA chips;
|
|
|
|
a permanent exclusion order excluding from entry into the
U.S. all semiconductor chips with small-format BGA
semiconductor packaging which are manufactured, imported or sold
for importation 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 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
|
33
|
|
|
|
|
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
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. On August 28, 2009, the Administrative Law
Judge (ALJ) issued an Initial Determination. Among
other conclusions, the ALJ determined that while Tesseras
patents were valid, no infringement by the Companys
subsidiary was found. In addition, with respect to one
respondent, the ALJ concluded that the doctrine of patent
exhaustion applied to DRAM packaged by Tessera licensed
entities. Tessera requested a review of the Initial
Determination, and on December 29, 2009, the ITC issued a
Final Determination stating that there has been no violation of
§ 337 of the Tariff Act, and that it had terminated
the investigation. Furthermore, in the Final Determination, the
ITC found no infringement by the Companys subsidiary.
Tessera has appealed the Final Determination, and its appeal
remains pending in the Federal Circuit Court of Appeals. We
continue to believe that we have meritorious defenses against
Tesseras allegations.
Tessera also filed a parallel patent infringement claim in the
Eastern District of Texas, Case
No. 2:07-cv-534,
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.
Ring
Technology
On December 11, 2009, Ring Technology Enterprises of Texas,
LLC (Ring Technology) filed a complaint in the
Eastern District of Texas alleging infringement of United States
Patent No. 6,879,526 entitled Methods and Apparatus
for Improved Memory Access (the 526
patent) by two subsidiaries of the Company as well as by
several other respondents. Ring Technology alleges that the
Companys two subsidiaries have been and now are
infringing, jointly infringing
and/or
contributing to the infringement of the 526 patent, by
making, using, importing, offering for sale,
and/or
selling one or more devices having a memory device and a set of
shift registers interconnected in series that shift data from
the memory device from one shift register to the next in the set
according to a shift frequency received from a clock signal,
e.g., a random access memory device employing an Advanced Memory
Buffer covered by one or more claims of the 526 patent.
Ring Technology claims liability for infringement of the
526 patent pursuant to 35 U.S.C. § 271 and
seeks an unspecified amount of damages and injunctive relief. In
February 2010, the Companys subsidiaries answered the Ring
Technology complaint and denied the allegations of infringement.
Brazil
ICMS Assessment
On October 3, 2008, our subsidiary in Brazil (SMART
Brazil) received a notice from the Sao Paulo State
Treasury Office providing an assessment for the collection of
State Value-Added Tax (ICMS) as well as interest and
penalties (collectively the Assessment) related to
the transfer of ICMS credits during 2004 between two Brazilian
entities. These transfers occurred prior to the acquisition in
April 2004 of SMART from Solectron Corporation
(Solectron). Solectron was subsequently acquired by
Flextronics International Ltd. (Flextronics). We
believe that the Assessment is subject to indemnification by
Solectron to SMART pursuant to the Transaction Agreement dated
February 11, 2004 dealing with the acquisition of SMART
from Solectron. We notified Solectron and Flextronics of the
Assessment, and under the terms of the Transaction Agreement,
Flextronics elected to assume responsibility to contest the
Assessment on SMART Brazils behalf. We have been advised
that the efforts to contest the Assessment in the administrative
level have been unsuccessful and on June 16, 2010, we were
notified that the last administrative appeal was not admitted,
thereby exhausting all administrative appeals. We have also been
advised by tax counsel that additional appeals can only be made
in a judicial proceeding. As of August 27, 2010, our
Consolidated Balance Sheet reflects both a liability for the
Assessment and a corresponding indemnity receivable for
approximately $4.1 million (or 7.2 million BRL). While
we believe that the Assessment would be subject to the indemnity
obligations of Solectron
and/or
Flextronics, there can be no absolute assurance that Solectron
and/or
Flextronics will comply with their contractual indemnity
obligations in this regard.
34
Since 2004, the Sao Paulo State tax authorities have granted
SMART Brazil a tax benefit to defer and eventually eliminate the
payment of ICMS levied on certain imports from independent
suppliers. This benefit, known as ICMS Special Ruling, is
subject to renewal every two years and expired on March 31,
2010. SMART Brazil applied for a renewal of this benefit, but
the renewal was not granted until August 4, 2010. We were
originally advised by tax counsel that the renewal of the
benefit would be denied if SMART Brazil did not post a deposit
against the Assessment for the benefit of the tax authorities in
the event that the tax authorities prevail on any contests
against the Assessment. In order to post the deposit SMART
Brazil instituted a judicial proceeding requesting an injunction
which was granted on June 16, 2010. In connection with this
injunction, on June 17, 2010, SMART Brazil made a judicial
deposit in the amount of the Assessment which totaled
$4.1 million (or 7.2 million BRL). This deposit had an
adverse impact on our cash flow.
On June 22, 2010, the Sao Paulo authorities published a
regulation allowing companies that applied for a timely renewal
of an ICMS Special Ruling, such as SMART Brazil, to continue
utilizing the benefit until a final conclusion on the renewal
request was rendered. As a result of this publication, SMART
Brazil was temporarily allowed to utilize the benefit while it
waited for its renewal. From April 1, 2010, when the ICMS
benefit lapsed, through June 22, 2010 when the regulation
referred to above was published, SMART Brazil was required to
pay the ICMS taxes upon imports. The payment of ICMS generates
tax credits that may be used to offset ICMS generated from sales
by SMART Brazil of its products, however, the vast majority of
SMART Brazils sales in Sao Paulo are either subject to a
lower ICMS rate or are made to customers that are entitled to
other ICMS benefits that enable them to eliminate the ICMS
levied on their purchases of products from SMART Brazil. As a
result, from April 1, 2010 through June 22, 2010,
SMART Brazil did not have sufficient ICMS collections against
which to apply the credits accrued upon payment of the ICMS on
SMART Brazils imports. Although the renewal has been
granted, there is no refund of ICMS tax credits that accumulated
during the period we were waiting for the renewal.
As of August 27, 2010 the total amount of accumulated ICMS
tax credits reported on our Consolidated Balance Sheet was
$17.6 million (or 31.0 million BRL), with
$11.3 million (or 19.8 million BRL) under other
current assets and $6.3 million (or 11.2 million BRL)
under other non-current assets. It is expected that
$11.3 million of the excess ICMS credits will be recovered
during fiscal 2011, with the remainder of $6.3 million
being recovered in fiscal 2012. These expectations are based on
various estimates including the mix of products and regions
where our sales will occur. If these estimates or the mix of
products or regions vary, it could take longer than expected to
fully utilize the excess ICMS credits accumulated to date. The
accumulation of the excess credits had an adverse impact on our
cash flow and there can be no absolute assurance that the excess
credits will be fully utilized. While we have notified Solectron
and Flextronics that losses, including interest and foreign
exchange, related to the delay in receiving the renewal of the
ICMS benefit, are also subject to their indemnity obligations,
Flextronics has repudiated our claim and there can be no
absolute assurance that Solectron
and/or
Flextronics will comply with their contractual indemnity
obligations in this regard.
|
|
Item 4.
|
(Removed
and Reserved)
|
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities
|
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
None.
In March 2009, the Board of Directors authorized a share
repurchase program to purchase up to $10 million of the
Companys ordinary shares. In April 2009, the Company
entered into a
Rule 10b5-1
trading plan with a broker to repurchase ordinary shares based
on pre-defined terms and conditions. During the fourth quarter
and fiscal year ended August 27, 2010, the Company did not
repurchase any shares under this program. As of August 27,
2010, the remaining balance available for future repurchases was
$9.9 million under the Companys share repurchase
program. The 10b5-1 trading plan adopted by the Company expired
under its own terms on August 27, 2010 and the Company
currently does not have any plans to repurchase shares.
35
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 27, 2010 and August 28, 2009.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal Year 2010:
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
5.62
|
|
|
$
|
3.42
|
|
Second quarter
|
|
$
|
7.79
|
|
|
$
|
4.22
|
|
Third quarter
|
|
$
|
8.75
|
|
|
$
|
5.04
|
|
Fourth quarter
|
|
$
|
7.22
|
|
|
$
|
4.31
|
|
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
|
|
As of October 26, 2010, we had approximately three
(3) registered holders of record of our ordinary shares. A
substantially greater number of holders of our outstanding
common stock are street name or beneficial holders,
whose shares are held of record by banks, brokers, and other
financial institutions.
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.
36
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 27,
2010. 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.
COMPARISON
OF CUMULATIVE TOTAL RETURN*
ASSUMES $100 INVESTED ON FEB. 03, 2006
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING AUG. 27, 2010
* Assumes reinvestment of dividends, if any.
For equity plan compensation information, please refer to
Item 12 in Part III of this Annual Report.
|
|
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 27, 2010, August 28, 2009, and
August 29, 2008, and the balance sheet data as of
August 27, 2010 and August 28, 2009 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.
37
We use a 52- to 53-week fiscal year ending on the last Friday in
August. Fiscal 2010, 2009, 2008 and 2006 all included
52 weeks, while fiscal 2007 included 53 weeks.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
August 29,
|
|
|
August 31,
|
|
|
August 25,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
703,090
|
|
|
$
|
441,317
|
|
|
$
|
670,151
|
|
|
$
|
844,627
|
|
|
$
|
727,206
|
|
Cost of sales
|
|
|
537,034
|
|
|
|
351,478
|
|
|
|
550,420
|
|
|
|
695,054
|
|
|
|
600,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
166,056
|
|
|
|
89,839
|
|
|
|
119,731
|
|
|
|
149,573
|
|
|
|
126,574
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
25,102
|
|
|
|
19,811
|
|
|
|
20,164
|
|
|
|
16,383
|
|
|
|
15,545
|
|
Selling, general and administrative
|
|
|
60,120
|
|
|
|
55,505
|
|
|
|
59,849
|
|
|
|
59,552
|
|
|
|
54,917
|
|
Goodwill impairment
|
|
|
|
|
|
|
10,416
|
|
|
|
3,187
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
2,810
|
|
|
|
1,938
|
|
|
|
|
|
|
|
|
|
In-process research and development charge
|
|
|
|
|
|
|
|
|
|
|
4,400
|
|
|
|
|
|
|
|
|
|
Advisory service agreements fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
85,222
|
|
|
|
88,542
|
|
|
|
89,538
|
|
|
|
75,935
|
|
|
|
80,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
80,834
|
|
|
|
1,297
|
|
|
|
30,193
|
|
|
|
73,638
|
|
|
|
45,809
|
|
Interest expense, net
|
|
|
(4,410
|
)
|
|
|
(6,609
|
)
|
|
|
(5,355
|
)
|
|
|
(7,381
|
)
|
|
|
(15,153
|
)
|
Other income (expense), net
|
|
|
5,085
|
|
|
|
(520
|
)
|
|
|
2,557
|
|
|
|
934
|
|
|
|
2,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
675
|
|
|
|
(7,129
|
)
|
|
|
(2,798
|
)
|
|
|
(6,447
|
)
|
|
|
(12,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
81,509
|
|
|
|
(5,832
|
)
|
|
|
27,395
|
|
|
|
67,191
|
|
|
|
33,223
|
|
Provision for income taxes
|
|
|
28,938
|
|
|
|
5,571
|
|
|
|
18,421
|
|
|
|
9,458
|
|
|
|
914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
52,571
|
|
|
$
|
(11,403
|
)
|
|
$
|
8,974
|
|
|
$
|
57,733
|
|
|
$
|
32,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per ordinary share, basic
|
|
$
|
0.84
|
|
|
$
|
(0.18
|
)
|
|
$
|
0.15
|
|
|
$
|
0.97
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per ordinary share, diluted
|
|
$
|
0.81
|
|
|
$
|
(0.18
|
)
|
|
$
|
0.14
|
|
|
$
|
0.91
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net income (loss) per ordinary share,
basic
|
|
|
62,344
|
|
|
|
61,699
|
|
|
|
60,985
|
|
|
|
59,636
|
|
|
|
54,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net income (loss) per ordinary share,
diluted
|
|
|
64,942
|
|
|
|
61,699
|
|
|
|
63,555
|
|
|
|
63,782
|
|
|
|
59,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
August 29,
|
|
|
August 31,
|
|
|
August 25,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
115,474
|
|
|
$
|
147,658
|
|
|
$
|
115,994
|
|
|
$
|
144,147
|
|
|
$
|
85,620
|
|
Working capital
|
|
|
288,239
|
|
|
|
268,811
|
|
|
|
269,709
|
|
|
|
251,459
|
|
|
|
184,799
|
|
Total assets
|
|
|
544,401
|
|
|
|
403,738
|
|
|
|
447,148
|
|
|
|
453,077
|
|
|
|
426,456
|
|
Total long-term debt
|
|
|
55,072
|
|
|
|
81,250
|
|
|
|
81,250
|
|
|
|
81,250
|
|
|
|
81,250
|
|
Total shareholders equity
|
|
|
303,580
|
|
|
|
234,825
|
|
|
|
246,906
|
|
|
|
221,426
|
|
|
|
150,663
|
|
38
|
|
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 on
Form 10-K.
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.
Overview
We are a leading independent designer, manufacturer and supplier
of value added subsystems sold primarily to Original Equipment
Manufacturers (OEMs). Our subsystem products include
memory modules, flash memory cards and other solid state storage
products such as embedded flash and solid state drives or SSDs.
We offer our 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, aerospace, 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 or storage 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 or storage
content should have a negative effect on our business, financial
condition and results of operations. Increases in DRAM pricing
improve our margins in our operations in Brazil due to on-hand
inventory and conversely, declines in DRAM pricing have the
opposite effect. In our specialty memory business outside of
Brazil, we are somewhat insulated from volatility in DRAM
pricing because a substantial portion of our business involves
legacy DRAM which is less volatile. In addition, the specialty
modules that we sell to our customers incorporate integrated
circuits acquired at market prices and include substantial
value-added features such as custom or semi-custom design,
thermal analysis, unique testing, application integration,
single integrity analysis, different form factors and high
density packaging.
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 and operated as a subsidiary of
Solectron. 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. In February 2006, SMART again became a
publicly traded company.
Since the acquisition, we have repositioned our business by
focusing on delivery of certain higher value added products,
diversifying our end markets and our capabilities, 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, 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 renamed to SMART
Modular Technologies (AZ), Inc. In fiscal 2010, we expanded our
development of SSD products and
39
expect to continue to do so in fiscal 2011 to address the
significant growth opportunities in the enterprise market. Also
in fiscal 2010, we invested in our Brazilian operations to
launch flash production in the course of fiscal 2011.
In March 2009, we entered into a seven year operating lease for
approximately 79,500 square feet of office, manufacturing,
engineering, research and development, warehouse and
distribution space to serve as our corporate headquarters
starting in the third quarter of fiscal 2009. Our principal
executive office is now located at 39870 Eureka Drive, Newark,
California 94560.
We currently operate in one reportable segment: the design,
manufacture, and sale of electronic subsystem products and
services to various sectors of the electronics industry. The
Companys chief operating decision-maker, the President and
CEO, evaluates financial performance on a company-wide basis. In
fiscal 2008 and 2009, we had categorized our products and
services into the following two business segments, the Memory,
Display & Embedded Segment and the Adtron Segment.
However, with the completion of the integration of Adtron into
SMART, we have been operating in one segment since the beginning
of fiscal 2010. In April 2010, we sold our display business for
net proceeds of $2.2 million and incurred a loss of
$0.5 million in the third quarter of fiscal 2010.
Managements decision to exit display and embedded products
was based on a determination that the market for these products
was not scalable to significant revenue growth by the Company.
These non-core product lines accounted for only three percent or
less of net sales for each of the past five fiscal quarters and
therefore we do not believe that exiting these product lines had
a material impact on our sales, operating results or our
financial condition. We concluded the display business to be a
business component that does not require separate reporting of
its activities under discontinued operations.
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 product revenues predominantly from sales of our
value added subsystems, including memory modules, flash memory
cards and other solid state storage products, principally to
leading computing, networking, communications, printer, storage,
aerospace, 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, depreciation, freight, and
customs charges. 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 to
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.
40
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.
Revenue
Recognition
Our product revenues are predominantly derived from the sale of
value added subsystems, including memory modules, flash memory
cards and solid state storage products, which we design and
manufacture. We recognize revenue when persuasive evidence of an
arrangement exists, product delivery has occurred, the sales
price is fixed or determinable, and collectability is reasonably
assured. Product revenue typically is recognized at the time of
shipment or when the customer takes title of the goods. 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, 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. Service revenue for these arrangements is
typically based on material procurement costs plus a fee for the
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 retain inventory risk. All inventories held
under service arrangements are included in the inventories
reported on the consolidated balance sheet.
41
The following is a summary of our gross billings to customers
and net sales for services and products (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
August 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Service revenue
|
|
$
|
40,212
|
|
|
$
|
36,843
|
|
|
$
|
41,360
|
|
Cost of sales service(1)
|
|
|
881,416
|
|
|
|
625,635
|
|
|
|
875,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross billings for services
|
|
|
921,628
|
|
|
|
662,478
|
|
|
|
917,199
|
|
Plus: Product net sales
|
|
|
662,878
|
|
|
|
404,474
|
|
|
|
628,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross billings to customers
|
|
$
|
1,584,506
|
|
|
$
|
1,066,952
|
|
|
$
|
1,545,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product net sales
|
|
$
|
662,878
|
|
|
$
|
404,474
|
|
|
$
|
628,791
|
|
Service revenue
|
|
|
40,212
|
|
|
|
36,843
|
|
|
|
41,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
703,090
|
|
|
$
|
441,317
|
|
|
$
|
670,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 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 manage our risk.
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 the carrying
values 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 material inventory write-downs 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.
42
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 related 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 under restructuring charges on
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 basis 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. 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.
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.
Stock-Based
Compensation
We account for stock-based compensation under ASC 718,
Compensation Stock Compensation, which
requires us to recognize expenses in our statement of operations
related to all share-based payments, including grants of stock
options and RSUs, based on the grant date fair value of such
share-based awards. The key
43
assumptions used in valuing share-based awards are described in
Note 1(q) to the Consolidated Financial Statements.
Results
of Operations
The following is a summary of our results of operations for
fiscal years 2010, 2009 and 2008 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
August 27,
|
|
|
% of
|
|
|
August 28,
|
|
|
% of
|
|
|
August 29,
|
|
|
% of
|
|
|
|
2010(1)
|
|
|
Sales
|
|
|
2009(1)
|
|
|
Sales
|
|
|
2008(1)
|
|
|
Sales
|
|
|
Net sales
|
|
$
|
703.1
|
|
|
|
100
|
%
|
|
$
|
441.3
|
|
|
|
100
|
%
|
|
$
|
670.2
|
|
|
|
100
|
%
|
Cost of sales
|
|
|
537.0
|
|
|
|
76
|
%
|
|
|
351.5
|
|
|
|
80
|
%
|
|
|
550.4
|
|
|
|
82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
166.1
|
|
|
|
24
|
%
|
|
|
89.8
|
|
|
|
20
|
%
|
|
|
119.7
|
|
|
|
18
|
%
|
Research and development
|
|
|
25.1
|
|
|
|
4
|
%
|
|
|
19.8
|
|
|
|
4
|
%
|
|
|
20.2
|
|
|
|
3
|
%
|
Selling, general, and administrative
|
|
|
60.1
|
|
|
|
9
|
%
|
|
|
55.5
|
|
|
|
13
|
%
|
|
|
59.8
|
|
|
|
9
|
%
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
10.4
|
|
|
|
2
|
%
|
|
|
3.2
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
2.8
|
|
|
|
|
|
|
|
1.9
|
|
|
|
|
|
In process research and development charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.4
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
85.2
|
|
|
|
12
|
%
|
|
|
88.5
|
|
|
|
20
|
%
|
|
|
89.5
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
80.8
|
|
|
|
11
|
%
|
|
|
1.3
|
|
|
|
|
|
|
|
30.2
|
|
|
|
5
|
%
|
Interest expense, net
|
|
|
(4.4
|
)
|
|
|
(1
|
)%
|
|
|
(6.6
|
)
|
|
|
(1
|
)%
|
|
|
(5.4
|
)
|
|
|
(1
|
)%
|
Other income (expense), net
|
|
|
5.1
|
|
|
|
1
|
%
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
0.7
|
|
|
|
|
|
|
|
(7.1
|
)
|
|
|
(2
|
)%
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
81.5
|
|
|
|
12
|
%
|
|
|
(5.8
|
)
|
|
|
(1
|
)%
|
|
|
27.4
|
|
|
|
4
|
%
|
Provision for income taxes
|
|
|
28.9
|
|
|
|
4
|
%
|
|
|
5.6
|
|
|
|
1
|
%
|
|
|
18.4
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
52.6
|
|
|
|
7
|
%
|
|
$
|
(11.4
|
)
|
|
|
(3
|
)%
|
|
$
|
9.0
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Summations may not compute precisely due to rounding. |
Fiscal
Year Ended August 27, 2010 Compared to Fiscal Year Ended
August 28, 2009
Net Sales. Net sales for fiscal 2010 were
$703.1 million, a 59% increase from $441.3 million for
fiscal 2009. The increase in net sales was primarily due to
considerable strength in PC and notebook end-user demand in
Brazil, strong demand for our specialty DRAM modules, and
increased demand for our defense and embedded flash drive
products. Strategic investments in increased capacity enabled us
to meet strong end-user demand. Our specialty DRAM module
business benefited from strength in the global networking and
telecom end markets. Our solid state storage business also grew
significantly this year due to increased demand for our embedded
flash drives and defense products. The increase in net sales was
partially offset by decreased net sales from display and
embedded computing products, which we exited from in the third
quarter of fiscal 2010.
Cost of Sales. Cost of sales for fiscal 2010
was $537.0 million, a 53% increase from $351.5 million
for fiscal 2009. The increase in cost of sales was primarily due
to a $169.0 million, or 58%, increase in the cost of
products resulting from the increase in net sales as discussed
above. In addition, our factory overhead and other component
cost of sales increased by $16.6 million, primarily due to
increased bonus expenses, increased manufacturing activities and
customs charges, as well as higher payroll and other
employee-related expenses due to a 13% increase in our
production headcount and the restoration of salaries to
U.S. employees in January 2010 that were temporarily
reduced during fiscal 2009. In addition to cost of sales
increases resulting from the net sales growth, we had increased
depreciation expense of $3.7 million due to our continued
capital investment to expand capacity primarily in Brazil.
44
Cost of sales as a percentage of net sales decreased to 76% in
fiscal 2010, compared to 80% in fiscal 2009. This decrease
reflects increases in pricing for our specialty DRAM memory
modules and improved manufacturing utilization for fiscal 2010
compared to fiscal 2009.
Gross Profit. Gross profit for fiscal 2010 was
$166.1 million, an 85% increase from $89.8 million for
fiscal 2009. The increase in gross profit was primarily due to
the higher net sales and lower cost of sales as a percentage of
sales as explained above. Gross margin percentage increased to
24% in fiscal 2010, as compared to 20% in fiscal 2009. The
increase in gross margin percentage was primarily due to
favorable change in the mix of products sold during the period
with sales of higher margin products comprising a larger
percentage of net sales during the year, as well as improved
manufacturing utilization.
Research and Development Expenses. Research
and development, or R&D expenses, for fiscal 2010 were
$25.1 million, a 27% increase from $19.8 million for
fiscal 2009. This increase was primarily due to increased bonus
expenses and increased spending in enterprise SSDs which
included higher payroll and other employee-related expenses due
to a 23% increase in R&D headcount and the restoration of
salaries to U.S. employees in January 2010 that were
temporarily reduced during fiscal 2009. In fiscal 2011, we
expect to further increase R&D spending on enterprise SSDs
and to initiate spending on our recently announced corporate
R&D center in Brazil. In the first half of fiscal 2011, we
also anticipate an in-process research and development charge of
approximately $7.5 million to accelerate our development of
enterprise SSDs.
Selling, General and Administrative
Expenses. Selling, general and administrative, or
SG&A, expenses for fiscal 2010 were $60.1 million, an
8% increase from $55.5 million in fiscal 2009. Sales and
marketing expenses increased $0.5 million when compared to
fiscal 2009 due mainly to increased sales expenses. General and
administrative expenses increased $4.1 million primarily
due to a $4.5 million increase in bonus expenses and a
$1.1 million increase in payroll and other employee-related
expenses resulting from the restoration of salaries to
U.S. employees (including named executive officers) in
January 2010 that were temporarily reduced during fiscal 2009,
partially offset by decreased subcontractor services and less
bad debt expense, as well as the absence of headquarter moving
expenses in the current fiscal year which were included in
general and administrative expenses in fiscal 2009.
Goodwill Impairment. We did not incur any
goodwill impairment charges in fiscal 2010. Due to deteriorating
macroeconomic conditions, our business outlook and significant
erosion of our market capitalization during fiscal 2009, we had
conducted an interim impairment test of goodwill during fiscal
2009, pursuant to ASC 350 to determine whether and to what
extent goodwill may have been impaired. Based on this analysis,
we had determined that the implied fair value of goodwill
recorded for our Adtron reporting unit was below the carrying
value, resulting in a goodwill impairment charges of
$10.4 million in fiscal 2009.
Restructuring Charges. We did not incur any
restructuring charges in fiscal 2010. During fiscal 2009, we had
initiated a restructuring plan to reduce further our global
workforce in order to improve our cost structure in the
uncertain economic environment. We had 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, all primarily
from the consolidation of certain operations in Asia and the
Caribbean.
As a result of current circumstances and conditions, and to take
advantage of opportunities to reduce costs, we may implement
additional restructuring plans in the future.
Interest Expense, Net. Net interest expense
for fiscal 2010 was $4.4 million, a $2.2 million
decrease from $6.6 million for fiscal 2009. This decrease
was primarily due to a $2.8 million decrease in interest
expense resulting from lower outstanding long-term debt which
includes a $0.4 million write-off of loan fees associated
with the repurchase of a portion of the Notes in the first
quarter of fiscal 2010, partially offset by a $0.6 million
decrease in interest income due to lower amounts on deposit and
lower interest rates on bank deposit accounts.
Other Income (Expense), Net. Other income
(expense) for fiscal 2010 increased to income of
$5.1 million from a net expense of $0.5 million in
fiscal 2009. This increase was primarily due to receipt of a
$3.0 million legal settlement, a $1.2 million gain on
the partial repurchase of a portion of our long-term debt and a
$1.0 million foreign currency transaction gain, mainly from
our operations in Brazil.
45
Provision for Income Taxes. The effective tax
rates for 2010 and 2009 were approximately 36% and 96%,
respectively. The U.S. net deferred tax assets generated
during the fiscal year ended August 27, 2010 and
August 28, 2009 have a full valuation allowance. The
effective tax rate was higher in fiscal 2009 due to losses in
certain tax jurisdictions, principally in the U.S., that
generate no tax benefits. The U.S. pre-tax loss declined
from $28.9 million in fiscal 2009 to $15.1 million in
fiscal 2010. We expect the effective tax rate to start
decreasing in fiscal 2011 as a result of research and
development driven tax initiatives in Brazil.
Fiscal
Year Ended August 28, 2009 Compared to Fiscal Year Ended
August 29, 2008
Note: In fiscal 2008 and 2009, we had
categorized our products and services into the following two
business segments: the Memory, Display & Embedded
Segment and the Adtron Segment. However, with the completion of
the integration of Adtron into SMART, we have been operating in
one segment since the beginning of fiscal 2010.
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 embedded and display
products. 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 balance in
the decline in net sales 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 Adtron products
due to the fact that we had a full year of sales of Adtron
products 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 our embedded and display products. These declines
were partially offset by an increase of $2.5 million in the
cost of materials in our Adtron products. 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.
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, a
46
$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(v) 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.
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 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.
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 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(v) of Notes to
the Consolidated Financial Statements.
Liquidity
and Capital Resources
Our principal sources of liquidity are cash flow from operations
and borrowings under our senior secured floating rate notes that
remain outstanding and if necessary, our currently unutilized
line of credit. Our principal uses of cash and capital resources
are debt service requirements as described below, capital
expenditures, potential acquisitions, research and development
expenditures 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 demand deposit accounts and money market funds.
47
Debt
Service
As of August 27, 2010, we had total long-term indebtedness
of $55.1 million, which represents the aggregate principal
amount of our senior secured floating rate notes that remain
outstanding.
Senior Secured Floating Rate Exchange Notes Due April 2012
(the Notes). As of August 27,
2010, the Notes bear an interest rate of 6.03%, which is equal
to LIBOR plus 5.50% per annum, and are guaranteed by most of our
subsidiaries. The interest rate is reset quarterly. The
guarantees are secured on a second-priority basis by the capital
stock of, or equity interests in, most of our subsidiaries and
substantially all of our and most of our subsidiaries
assets. 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 27, 2010.
Senior Secured Revolving Line of Credit
Facility. On April 30, 2010, the Third
Amendment to Second Amended and Restated Loan and Security
Agreement (the Third 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 (the Borrowers),
and Wells Fargo Bank, National Association, as arranger,
administrative agent and security trustee for the Lenders named
therein. The Second Amended and Restated Loan and Security
Agreement dated April 30, 2007, as amended by the First
Amendment dated November 26, 2008, the Second Amendment
dated August 14, 2009 and the Third Amendment dated
April 30, 2010, is referred to as the WF Credit
Facility. As a result of the Third Amendment, the Maturity
Date, as defined in the WF Credit Facility, was extended to
April 30, 2012, and the Company is again required to comply
with certain financial covenants as modified and as set forth in
the WF Credit Facility. The Base Rate Margin and LIBOR Rate
Margin, as defined in the WF Credit Facility, were changed to
1.25% and 2.25%, respectively. While the Company was in
compliance with the financial covenants required to borrow funds
under the WF Credit Facility as of August 27, 2010 and
expects to be able to satisfy such financial covenants in the
future, we may not meet the financial covenants during all
periods. If we do not meet the financial covenants or financial
condition test, we will be in default of the WF Credit Facility
and, among other things, we will be unable to borrow under the
WF Credit Facility if and when we need the funds in the future.
We have not borrowed under the WF Credit Facility since November
2007 and we had no borrowings outstanding as of August 27,
2010.
Capital
Expenditures
We expect that future capital expenditures will focus on
expanding capacity of our Brazil operations, establishing our
corporate research and development center, 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
On October 13, 2009, the Board of Directors approved up to
$25.0 million, excluding unpaid accrued interest, to
repurchase
and/or
redeem a portion of the outstanding Notes. On October 22,
2009, using available cash, we repurchased and retired
$26.2 million of aggregate principal amount of Notes for
$25.0 million; at 95.5% of the principal or face amount. As
of August 27, 2010, the aggregate principal amount under
the Notes that remain outstanding was $55.1 million. The
$55.1 million aggregate balance under the Notes that
remains outstanding is due April 2012. We may, however,
repurchase additional Notes prior to this maturity.
In Brazil, an ICMS Special Ruling tax benefit received from the
Sao Paulo State tax authorities expired on March 31, 2010.
Even though we filed a timely application for renewal with the
appropriate authorities on January 27, 2010, the renewal
was not received until August 4, 2010. As a result,
starting on April 1, 2010, we began accruing excess ICMS
credits. On June 22, 2010, the Sao Paulo tax authorities
published a regulation allowing companies that applied for a
timely renewal of an ICMS Special Ruling, such as SMART Brazil,
to continue utilizing the benefit until a final conclusion on
the renewal request was rendered. For the period April 1,
2010 through June 22, 2012, SMART Brazil was required to
pay ICMS taxes on imports. As of August 27, 2010, we had
incurred and paid $17.6 million (or 31.0 million BRL)
of ICMS taxes to the Sao Paulo State tax authorities which
48
are available as tax credits and will be recovered over a period
of time. It is expected that $11.3 million (or
19.8 million BRL) of the ICMS credits will be recovered
during fiscal 2011, with the remainder of $6.3 million (or
11.2 million BRL) being recovered in fiscal 2012. On
June 17, 2010, we also made a judicial deposit in the
amount of $4.1 million (or 7.2 million BRL) related to
an ICMS assessment in Brazil. Please refer to Contingencies
under Note 8(d) of our Notes to Consolidated Financial
Statements for more details.
We anticipate that our existing cash and anticipated cash
generated from operations will be sufficient to meet our working
capital needs, fund our R&D and capital expenditures, and
service the requirements on our debt obligations for at least
the next 12 months. Our ability to fund our cash
requirements or to refinance our indebtedness 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.
From fiscal 2004 through fiscal 2009, our annual capital
expenditures have been 3% or less of net sales. In fiscal 2010,
our capital expenditures were 4% of net sales due to capacity
expansion and the initiation of flash packaging for the consumer
market in Brazil. In fiscal 2011, we expect our capital
expenditures to be approximately 4% of net sales due to
continued capacity expansion of our Brazil operations and
establishing our corporate research and development center.
From time to time we may explore additional financing and other
means to lower our cost of capital which could include
additional share issuances
and/or debt
financing and the application of the proceeds therefrom to repay
existing 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 or at all.
Historical
Trends
Historically, our financing requirements have been funded
primarily through cash generated by operating activities. As of
August 27, 2010, our cash and cash equivalents were
$115.5 million.
Cash Flows from Operating Activities. Net cash
provided by operating activities was $15.6 million,
$52.5 million, and $4.6 million for fiscal years 2010,
2009 and 2008, respectively.
Net cash provided by operating activities of $15.6 million
for fiscal 2010 was primarily comprised of $52.6 million of
net income and $23.8 million of non-cash related expenses,
offset by $60.8 million change in our net operating assets
and liabilities. The $60.8 million change in operating
assets and liabilities includes an increase in accounts
receivable of $75.9 million, an inventory increase of
$48.4 million and an increase in prepaid expenses and other
assets of $33.5 million. The increase in accounts
receivable was primarily due to increased gross sales. The
increase in inventory was mainly due to increased gross sales
and our positioning in a shortage market, as well as to prepare
for increases in demand for our logistics business. The increase
in prepaid expenses and other assets was primarily due to the
expiration of a Brazil tax benefit on import duties resulting in
$17.6 million of excess ICMS tax credits, $4.1 million
for the judicial deposit related to the ICMS assessment,
$4.1 million for the indemnity receivable and
$3.6 million receivable due from a contractor (see
Contingencies under Note 8(d) of our Notes to Consolidated
Financial Statements for more details). Cash used in the period
was partially offset by cash generated from increases in
accounts payable of $81.3 million and an increase in
accrued expenses and other liabilities of $15.7 million.
Net cash provided by operating activities of $52.5 million
for fiscal 2009 was primarily comprised of $33.6 million of
non-cash related expenses and a $30.3 million change in our
net operating assets and liabilities, offset by an
$11.4 million net loss. The $30.3 million change in
operating assets and liabilities is comprised of cash generated
from a decrease in accounts receivable of $59.9 million and
a decrease in prepaid expenses and other assets of
$1.4 million, partially offset by an increase in inventory
of $3.5 million, a decrease in accounts payable of
$23.7 million and a decrease in accrued expenses and other
liabilities of $3.8 million.
Net cash provided by operating activities of $4.6 million
for fiscal 2008 was primarily comprised of $9.0 million of
net income and $37.7 million of non-cash related expenses,
offset by $42.1 million change in our net operating assets
and liabilities. The $42.1 million change in operating
assets and liabilities includes an increase in accounts
receivable of $4.2 million, an increase in prepaid expenses
and other assets of $7.6 million and
49
a decrease in accounts payable of $36.7 million. Cash used
in the period was partially offset by cash generated from a
decrease in inventory of $5.8 million and an increase in
accrued expenses and other liabilities of $0.5 million.
Cash Flows from Investing Activities. Net cash
used in investing activities was $25.5 million,
$21.1 million, and $33.8 million for fiscal years
2010, 2009 and 2008, respectively. Net cash used in investing
activities of $25.5 million for fiscal 2010 was primarily
due to purchases of $24.8 million in property and equipment
and cash deposits of $3.1 million, partially offset by net
proceeds from the display business divestiture of
$2.2 million and proceeds from sales of property and
equipment of $0.3 million. 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 earn-out. 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.
Cash Flows from Financing Activities. Net cash
(used in) or provided by financing activities was
($23.4) million, $0.6 million, and $18 thousand for
fiscal years 2010, 2009 and 2008, respectively. Net cash used in
financing activities of $23.4 million for fiscal 2010 was
primarily due to $25.0 million used for the repurchase of a
portion of the Notes (as described above), partially offset by
$1.6 million provided by ordinary share issuances through
option exercises. 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.
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. During fiscal 2010, we did not repurchase any
shares under this program. As of August 27, 2010, the
remaining balance available for future share repurchases was
$9.9 million under our share repurchase program. Our 10b5-1
trading plan expired under its own terms on August 27, 2010
and we currently do not have any plans to repurchase shares.
Contractual
Obligations
Our contractual obligations as of August 27, 2010 are set
forth below:
Payments
Due by Period
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After 5
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1 Year
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2-3 Years
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4-5 Years
|
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Years
|
|
|
Total
|
|
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|
(In millions)
|
|
|
Total debt
|
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$
|
|
|
|
$
|
55.1
|
|
|
$
|
|
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|
$
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|
|
$
|
55.1
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|
Interest expense in connection with long-term debt
|
|
|
3.3
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|
2.0
|
|
|
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|
|
|
|
|
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|
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5.3
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|
Operating leases*
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1.8
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|
2.2
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|
1.2
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|
0.4
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5.6
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Non-cancellable product purchase commitments
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5.0
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5.0
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|
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|
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Total contractual obligations
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$
|
10.1
|
|
|
$
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59.3
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|
|
$
|
1.2
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|
$
|
0.4
|
|
|
$
|
71.0
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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* |
|
Does not include rent expense related to a new lease for our
Westford, Massachusetts facility, effective November 2010
through March 2018. The cumulative lease obligation totals
$3.6 million of which $0.3 million and
$0.9 million relate to Years 1 and Years 2-3, respectively. |
50
In addition to what is included in the table above, we had an
accrued liability for unrecognized tax benefits and related
interest totaling $0.2 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 off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our
financial condition, changes in financial conditions, revenues
or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
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(w) 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 subject us to risks associated with
fluctuating currency values and exchange rates. Because sales of
our products are denominated mainly 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 in the future.
Interest
Rate Risk
We are subject to interest rate risk in connection with our
long-term debt, including the $55.1 million aggregate
balance under the Notes that remain outstanding as of
August 27, 2010. Although we did not have any balances
outstanding as of August 27, 2010, our WF Credit Facility
provides for borrowings of up to $35.0 million that would
also bear interest at variable rates. Assuming that we will
satisfy the financial covenants required to borrow and that the
WF Credit Facility is fully drawn, other variables are held
constant and the impact of any hedging arrangements is excluded,
each 1.0% increase in interest rates on our variable rate
borrowings would result in an increase in
51
annual interest expense and a decrease in our cash flow and
income before taxes of $0.9 million per year. Previously,
we had entered into an interest rate swap agreement for
$40.0 million notional amount which expired on
April 28, 2010 and has not been replaced.
|
|
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
|
Managements
Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting (as defined in
Rule 13a-15(f)
or
Rule 15(d)-15(f)
under the Exchange Act). 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 27, 2010 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 concluded that, as of
August 27, 2010, the Companys internal control over
financial reporting was effective.
Effectiveness of the Companys internal control over
financial reporting as of August 27, 2010 has been audited
by KPMG LLP, the Companys independent registered public
accounting firm, as stated in its report appearing on
page 55, which expresses an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting as of August 27, 2010.
Evaluation
of Disclosure Controls and Procedures
SMARTs Principal Executive Officer and Principal Financial
Officer have concluded that SMARTs disclosure controls and
procedures (as defined in
Rule 13a-15(e)
or
Rule 15d-15(e)
under the Exchange Act) are effective as of the end of the
period covered by this report, based on the evaluation of these
controls and procedures required by paragraph (b) of
Rule 13a-15
or
Rule 15d-15
under the Exchange Act.
Changes
in Internal Control Over Financial Reporting
There were no changes in SMARTs internal control over
financial reporting identified in connection with the evaluation
required by paragraph (d) of
Rule 13a-15
or
Rule 15d-15
under the Exchange Act that occurred during the last quarter of
fiscal 2010 that has materially affected or are reasonably
likely to materially affect our internal control over financial
reporting.
|
|
Item 9B.
|
Other
Information
|
None.
52
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 2011 Annual Meeting of Shareholders, which we
expect to file on or about December 1, 2010.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item will be set forth under
Compensation Discussion and Analysis and
Compensation Committee Interlocks and Insider
Participation in our Proxy Statement for our 2011 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 Plan
Information in our Proxy Statement for our 2011 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
Certain Relationships and Related Party Transactions
in our Proxy Statement for our 2011 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 2011 Annual Meeting of
Shareholders, and is incorporated herein by reference.
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:
|
|
|
|
|
|
|
|
54
|
|
|
|
|
56
|
|
|
|
|
57
|
|
|
|
|
58
|
|
|
|
|
59
|
|
|
|
|
60
|
|
(a)(2) Financial Statement Schedules
The following financial statement schedule is filed as part of
this report:
(a)(3) Exhibits
Please see the Exhibit Index at the end of this Report.
53
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 27, 2010 and August 28, 2009,
and the related consolidated statements of operations,
shareholders equity and comprehensive income (loss), and
cash flows for each of the years in the three-year period ended
August 27, 2010. 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 27, 2010 and August 28,
2009, and the results of their operations and their cash flows
for each of the years in the three-year period ended
August 27, 2010, 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 4 to the consolidated financial
statements, the Company changed its method of accounting for
uncertainty in income taxes 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
Companys internal control over financial reporting as of
August 27, 2010, 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 3, 2010,
expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
Mountain View, California
November 3, 2010
54
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 27, 2010, 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 Report on Internal Control Over Financial
Reporting appearing under 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 27,
2010, 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 27,
2010 and August 28, 2009, and the related consolidated
statements of operations, shareholders equity and
comprehensive income (loss), and cash flows for each of the
years in the three-year period ended August 27, 2010 and
the related financial statement schedule II, and our report
dated November 3, 2010 expressed an unqualified opinion on
those consolidated financial statements and financial statement
schedule II.
Mountain View, California
November 3, 2010
55
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
115,474
|
|
|
$
|
147,658
|
|
Accounts receivable, net of allowances of $1,660 and $1,591 as
of August 27, 2010 and August 28, 2009, respectively
|
|
|
208,377
|
|
|
|
130,953
|
|
Inventories
|
|
|
112,103
|
|
|
|
63,115
|
|
Prepaid expenses and other current assets
|
|
|
33,488
|
|
|
|
12,628
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
469,442
|
|
|
|
354,354
|
|
Property and equipment, net
|
|
|
46,221
|
|
|
|
36,263
|
|
Other non-current assets
|
|
|
21,217
|
|
|
|
4,585
|
|
Other intangible assets, net
|
|
|
6,460
|
|
|
|
7,475
|
|
Goodwill
|
|
|
1,061
|
|
|
|
1,061
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
544,401
|
|
|
$
|
403,738
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
151,885
|
|
|
$
|
68,928
|
|
Accrued liabilities
|
|
|
29,318
|
|
|
|
16,615
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
181,203
|
|
|
|
85,543
|
|
Long-term debt
|
|
|
55,072
|
|
|
|
81,250
|
|
Other long-term liabilities
|
|
|
4,546
|
|
|
|
2,120
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
240,821
|
|
|
|
168,913
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Ordinary shares, $0.00016667 par value;
600,000,000 shares authorized; 62,740,650 and
61,904,788 shares issued and outstanding as of
August 27, 2010 and August 28, 2009, respectively
|
|
|
10
|
|
|
|
10
|
|
Additional paid-in capital
|
|
|
118,123
|
|
|
|
109,264
|
|
Accumulated other comprehensive income
|
|
|
11,658
|
|
|
|
4,333
|
|
Retained earnings
|
|
|
173,789
|
|
|
|
121,218
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
303,580
|
|
|
|
234,825
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
544,401
|
|
|
$
|
403,738
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
56
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
August 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
703,090
|
|
|
$
|
441,317
|
|
|
$
|
670,151
|
|
Cost of sales(1)
|
|
|
537,034
|
|
|
|
351,478
|
|
|
|
550,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
166,056
|
|
|
|
89,839
|
|
|
|
119,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)
|
|
|
25,102
|
|
|
|
19,811
|
|
|
|
20,164
|
|
Selling, general, and administrative(1)
|
|
|
60,120
|
|
|
|
55,505
|
|
|
|
59,849
|
|
Goodwill impairment
|
|
|
|
|
|
|
10,416
|
|
|
|
3,187
|
|
Restructuring charges
|
|
|
|
|
|
|
2,810
|
|
|
|
1,938
|
|
In-process research and development charge
|
|
|
|
|
|
|
|
|
|
|
4,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
85,222
|
|
|
|
88,542
|
|
|
|
89,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
80,834
|
|
|
|
1,297
|
|
|
|
30,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(4,410
|
)
|
|
|
(6,609
|
)
|
|
|
(5,355
|
)
|
Other income (expense), net
|
|
|
5,085
|
|
|
|
(520
|
)
|
|
|
2,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
675
|
|
|
|
(7,129
|
)
|
|
|
(2,798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
81,509
|
|
|
|
(5,832
|
)
|
|
|
27,395
|
|
Provision for income taxes
|
|
|
28,938
|
|
|
|
5,571
|
|
|
|
18,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
52,571
|
|
|
$
|
(11,403
|
)
|
|
$
|
8,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic
|
|
$
|
0.84
|
|
|
$
|
(0.18
|
)
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, diluted
|
|
$
|
0.81
|
|
|
$
|
(0.18
|
)
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income (loss) per share
|
|
|
62,344
|
|
|
|
61,699
|
|
|
|
60,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income (loss) per share
|
|
|
64,942
|
|
|
|
61,699
|
|
|
|
63,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Stock-based compensation by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
703
|
|
|
$
|
868
|
|
|
$
|
809
|
|
Research and development
|
|
|
1,315
|
|
|
|
2,095
|
|
|
|
1,746
|
|
Selling, general and administrative
|
|
|
5,202
|
|
|
|
5,512
|
|
|
|
4,716
|
|
See accompanying notes to consolidated financial statements.
57
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
AND
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
Ordinary Shares
|
|
|
Paid-In
|
|
|
Stock-Based
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Shareholders
|
|
|
Income
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income
|
|
|
Earnings
|
|
|
Equity
|
|
|
(Loss)
|
|
|
|
(Dollars in thousands)
|
|
|
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
|
)
|
Stock option exercises
|
|
|
835,862
|
|
|
|
|
|
|
|
1,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,621
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
7,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,220
|
|
|
|
|
|
Net changes in unrealized gain on derivative instruments
accounted for as cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,149
|
|
|
|
|
|
|
|
1,149
|
|
|
|
1,149
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,176
|
|
|
|
|
|
|
|
6,176
|
|
|
|
6,176
|
|
Tax benefit for stock option exercises
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,571
|
|
|
|
52,571
|
|
|
|
52,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of August 27, 2010
|
|
|
62,740,650
|
|
|
$
|
10
|
|
|
$
|
118,123
|
|
|
$
|
|
|
|
$
|
11,658
|
|
|
$
|
173,789
|
|
|
$
|
303,580
|
|
|
$
|
59,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
58
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
August 27, 2010
|
|
|
August 28, 2009
|
|
|
August 29, 2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
52,571
|
|
|
$
|
(11,403
|
)
|
|
$
|
8,974
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
17,001
|
|
|
|
13,077
|
|
|
|
12,700
|
|
Stock-based compensation
|
|
|
7,220
|
|
|
|
8,475
|
|
|
|
7,271
|
|
Changes in allowances for accounts receivable and sales returns
|
|
|
69
|
|
|
|
74
|
|
|
|
(1,000
|
)
|
Amortization of debt issuance costs
|
|
|
961
|
|
|
|
973
|
|
|
|
800
|
|
Loss on sale of assets
|
|
|
413
|
|
|
|
635
|
|
|
|
27
|
|
Gain on early repayment of long-term debt
|
|
|
(1,178
|
)
|
|
|
|
|
|
|
|
|
Loss on display business divestiture
|
|
|
486
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(1,191
|
)
|
|
|
(47
|
)
|
|
|
9,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities before changes in
working capital
|
|
|
76,352
|
|
|
|
22,193
|
|
|
|
46,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(75,942
|
)
|
|
|
59,942
|
|
|
|
(4,238
|
)
|
Inventories
|
|
|
(48,358
|
)
|
|
|
(3,479
|
)
|
|
|
5,845
|
|
Prepaid expenses and other assets
|
|
|
(33,510
|
)
|
|
|
1,381
|
|
|
|
(7,587
|
)
|
Accounts payable
|
|
|
81,318
|
|
|
|
(23,746
|
)
|
|
|
(36,665
|
)
|
Accrued expenses and other liabilities
|
|
|
15,715
|
|
|
|
(3,773
|
)
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net changes in operating assets and liabilities:
|
|
|
(60,777
|
)
|
|
|
30,325
|
|
|
|
(42,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
15,575
|
|
|
|
52,518
|
|
|
|
4,550
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisition of business, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(20,284
|
)
|
Capital expenditures
|
|
|
(24,839
|
)
|
|
|
(14,609
|
)
|
|
|
(13,313
|
)
|
Cash deposits on equipment
|
|
|
(3,137
|
)
|
|
|
(362
|
)
|
|
|
(533
|
)
|
Net proceeds from display business divestiture
|
|
|
2,181
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of assets
|
|
|
326
|
|
|
|
459
|
|
|
|
311
|
|
Payment of contingent consideration
|
|
|
|
|
|
|
(6,562
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(25,469
|
)
|
|
|
(21,074
|
)
|
|
|
(33,819
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of ordinary shares from stock option
exercises
|
|
|
1,633
|
|
|
|
729
|
|
|
|
934
|
|
Excess tax benefits from share-based compensation
|
|
|
18
|
|
|
|
|
|
|
|
24
|
|
Repayment of acquired line of credit
|
|
|
|
|
|
|
|
|
|
|
(940
|
)
|
Payments for share repurchase
|
|
|
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(23,349
|
)
|
|
|
645
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1,059
|
|
|
|
(425
|
)
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(32,184
|
)
|
|
|
31,664
|
|
|
|
(28,153
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
147,658
|
|
|
|
115,994
|
|
|
|
144,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
115,474
|
|
|
$
|
147,658
|
|
|
$
|
115,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
5,019
|
|
|
$
|
7,264
|
|
|
$
|
8,350
|
|
Taxes
|
|
|
28,489
|
|
|
|
6,267
|
|
|
|
9,405
|
|
Non-cash activities information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative instruments
|
|
$
|
76
|
|
|
$
|
342
|
|
|
$
|
933
|
|
Accrued earn-out payments for acquisition of business
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
See accompanying notes to consolidated financial statements.
59
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
August 27, 2010, August 28, 2009 and
August 29, 2008
|
|
(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 primarily to original equipment manufacturers
(OEMs). The Companys subsystem products include memory
modules and solid state products such as embedded flash and
solid state drives (SSDs). Until the end of the third quarter of
fiscal 2010, the Companys products also included embedded
computing products and display products such as thin film
transistor-liquid crystal display (TFT-LCD) products. The
Company sold its display products business in April 2010 (see
Note 15). The Company offers these products to customers
worldwide. The Company also offers custom supply chain services
including procurement, logistics, inventory management,
temporary warehousing, kitting and packaging services.
SMART is headquartered in Newark, California, and has operations
in the United States; South Korea; Scotland; Puerto Rico;
Malaysia; and Brazil.
|
|
(b)
|
Basis
of Presentation
|
The accompanying consolidated financial statements as of
August 27, 2010 and August 28, 2009 and for the years
ended August 27, 2010, August 28, 2009 and
August 29, 2008 are comprised of SMART and its wholly-owned
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. (SMART Brazil) is included in the
Companys consolidated financial statements on a one month
lag.
|
|
(c)
|
Acquisition
of Business
|
On March 3, 2008, the Company acquired Adtron Corporation,
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.
The Company uses a 52 to 53 week fiscal year ending on the
last Friday in August. Fiscal 2010, 2009 and 2008 ended on
August 27, 2010, August 28, 2009, and August 29,
2008, respectively, and each year included 52 weeks.
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
60
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amounts of revenues and expenses during the reporting periods
presented. Actual results could differ from the estimates made
by management.
The Company recognizes revenue in accordance with ASC 605,
Revenue Recognition. Product revenue is recognized when
there is persuasive evidence of an arrangement, product delivery
has occurred, the sales price is fixed or determinable, and
collectability 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.
In addition, the Company has classes of transactions with
customers that are accounted for on an agency basis (that is,
the Company recognizes as revenue the net profit associated with
serving as an agent with immaterial or no associated cost of
sales). The Company provides procurement, logistics, inventory
management, temporary warehousing, kitting and packaging
services for these customers. Revenue from these arrangements is
recognized as service revenue and is determined by a fee for
services based on material procurement costs. 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
under the agency arrangements.
The following is a summary of our gross billings to customers
and net sales for services and products (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
August 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Service revenue
|
|
$
|
40,212
|
|
|
$
|
36,843
|
|
|
$
|
41,360
|
|
Cost of sales service(1)
|
|
|
881,416
|
|
|
|
625,635
|
|
|
|
875,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross billings for services
|
|
|
921,628
|
|
|
|
662,478
|
|
|
|
917,199
|
|
Plus: Product net sales
|
|
|
662,878
|
|
|
|
404,474
|
|
|
|
628,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross billings to customers
|
|
$
|
1,584,506
|
|
|
$
|
1,066,952
|
|
|
$
|
1,545,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product net sales
|
|
$
|
662,878
|
|
|
$
|
404,474
|
|
|
$
|
628,791
|
|
Service revenue
|
|
|
40,212
|
|
|
|
36,843
|
|
|
|
41,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
703,090
|
|
|
$
|
441,317
|
|
|
$
|
670,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents cost of sales associated with service revenue
reported on a net basis. |
|
|
(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
61
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
receivables are outstanding, industry and geographic
concentrations, the current business environment, and historical
experience.
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 carrying value to the lower of its cost or
market value. Inventory write-downs are not reversed and create
a new historical cost basis.
|
|
(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 70 years
|
|
|
|
|
* |
|
Includes our Penang facility which is situated on leased land,
with a term expiring in 2070. |
In accordance with ASC 350, Intangibles
Goodwill and Other, the Company performs a goodwill
impairment test annually during the fourth quarter of its fiscal
year and more frequently if events or circumstances indicate
that impairment may have occurred. Such events or circumstances
may include significant adverse changes in the general business
climate, among others. There were no events or circumstances in
the fiscal quarter or year ended August 27, 2010 indicating
that impairment may have occurred. As of August 27, 2010,
the carrying value of goodwill on the Companys condensed
consolidated balance sheet was $1.1 million.
Currently, the Company operates in one reporting unit, one
operating and reportable segment: the design, manufacture, and
sale of electronic subsystem products and services to various
segments of the electronics industry. In fiscal 2008 and 2009,
the Company had categorized its products and services into the
following two reporting units and two operating and reportable
segments: the Memory, Embedded, & Display Segment and the
Adtron Segment. However, with the completion of the integration
of Adtron into SMART, the Company now operates in one operating
and reportable segment.
Based on the deteriorating macroeconomic conditions, the
Companys business outlook and significant erosion of its
market capitalization during fiscal 2009 and 2008, the Company
had conducted interim impairment test of goodwill during fiscal
2009 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
62
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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 and August 27, 2010.
Presented below are the changes in the Companys goodwill
by reporting unit (in thousands), for the years ended
August 28, 2009 and August 27, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 29,
|
|
|
Fiscal 2009 Activity
|
|
|
August 28,
|
|
|
August 27,
|
|
|
|
2008
|
|
|
Additions
|
|
|
Impairment
|
|
|
2009
|
|
|
2010*
|
|
|
Reporting unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memory, Display & Embedded
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Adtron
|
|
|
7,210
|
|
|
|
4,267
|
|
|
|
(10,416
|
)
|
|
|
1,061
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Goodwill
|
|
$
|
7,210
|
|
|
$
|
4,267
|
|
|
$
|
(10,416
|
)
|
|
$
|
1,061
|
|
|
$
|
1,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
In fiscal 2010, with the change to one operating and reportable
segment, the goodwill balance of $1.1 million applied to a
single company-wide reporting unit. |
|
|
(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 27, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
Value at Date of
|
|
|
Accumulated
|
|
|
Carrying Value at
|
|
|
|
Life (Years)
|
|
|
Acquisition
|
|
|
Amortization
|
|
|
August 27, 2010
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
7
|
|
|
$
|
3,700
|
|
|
$
|
925
|
|
|
$
|
2,775
|
|
Technology
|
|
|
4
|
|
|
|
2,800
|
|
|
|
1,000
|
|
|
|
1,800
|
|
Company trade name
|
|
|
17
|
|
|
|
2,040
|
|
|
|
255
|
|
|
|
1,785
|
|
Leasehold interest
|
|
|
1
|
|
|
|
260
|
|
|
|
203
|
|
|
|
57
|
|
Product names
|
|
|
6
|
|
|
|
60
|
|
|
|
17
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11
|
|
|
$
|
8,860
|
|
|
$
|
2,400
|
|
|
$
|
6,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to identifiable intangible assets
totaled approximately $1.0 million, $1.1 million, and
$0.5 million for fiscal years 2010, 2009, and 2008,
respectively. Acquired intangibles with definite lives are
amortized on a straight-line basis over the remaining estimated
economic life of the underlying intangible assets.
63
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
|
|
|
2011
|
|
$
|
936
|
|
2012
|
|
|
879
|
|
2013
|
|
|
879
|
|
2014
|
|
|
878
|
|
2015
|
|
|
678
|
|
Thereafter
|
|
|
2,210
|
|
|
|
|
|
|
Total
|
|
$
|
6,460
|
|
|
|
|
|
|
|
|
(m)
|
Impairment
of Long-Lived Assets
|
The Company reviews its long-lived assets for impairment in
accordance with ASC 360, Property, Plant and
Equipment. Under ASC 360, long-lived assets, excluding
goodwill, are reviewed for impairment whenever events or changes
in 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 the future undiscounted cash flows expected
to be generated by the asset group. 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.
|
|
(n)
|
Research
and Development Expense
|
Research and development expenditures are expensed in the period
incurred.
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.
|
|
(p)
|
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
64
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 2010, 2009 and 2008, the Company recorded
$0.1 million, ($0.9) million and $2.4 million,
respectively, of transaction gains (losses) primarily related to
its Brazil operating subsidiary.
|
|
(q)
|
Stock-Based
Compensation
|
The Company accounts for stock-based compensation under
ASC 718, Compensation Stock
Compensation, which requires companies to recognize in their
statement of operations all share-based payments, including
grants of stock options and other types of equity awards, based
on the grant date fair value of such share-based awards.
Total stock-based compensation expense for both options and
awards recognized was approximately $7.2 million,
$8.5 million, and $7.3 million for fiscal 2010, 2009,
and 2008, respectively.
Stock
Options
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 27, 2010, there were 11,590,502 ordinary
shares reserved for issuance under this plan, of which 2,002,869
ordinary shares represents the number of shares available for
grant.
For stock options excluding awards, the stock-based compensation
expense recognized was approximately $5.3 million,
$8.4 million and $7.3 million for fiscal 2010, 2009
and 2008, respectively.
Option
Exchange
During the fourth quarter of fiscal 2009, the Companys
shareholders approved an employee stock option exchange program
(Option Exchange) 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.
During the first quarter of fiscal 2010, the Company completed
the employee stock option exchange program. On
September 25, 2009, 2,449,645 of the 3,446,561 eligible
options were tendered in exchange for 1,864,301 new options with
a strike price of $5.38 per share. The new stock options issued
are subject to a two year vesting period.
The exchange of options in this Option Exchange was treated as a
modification of the existing stock options for accounting
purposes. Accordingly, unrecognized compensation expenses from
the surrendered stock options are being recognized over the new
service period of the new granted options. There was no material
incremental cost resulting from the Option Exchange.
Summary
of Assumptions and Activity
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model that uses the
assumptions noted in the following table. Expected volatility
for fiscal 2010 is a weighted average of the Companys
historical common stock volatility (80% weighting) together with
the historical volatilities of the common stock of comparable
publicly traded companies (20% weighting). 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 interest
65
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
rate for the expected term of the option is based on the average
U.S. Treasury yield curve at the end of the quarter. The
following assumptions were used to value stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
August 27,
|
|
August 28,
|
|
August 29,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (years)
|
|
|
4.7
|
|
|
|
5.2
|
|
|
|
5.1
|
|
Expected volatility
|
|
|
78
|
%
|
|
|
69
|
%
|
|
|
51
|
%
|
Risk-free interest rate
|
|
|
1.49
|
%
|
|
|
2.26
|
%
|
|
|
3.56
|
%
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of option activity as of and for fiscal years ended
August 27, 2010, August 28, 2009, and August 29,
2008 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 31, 2007
|
|
|
6,359
|
|
|
$
|
4.75
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
3,490
|
|
|
|
7.01
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(697
|
)
|
|
|
1.34
|
|
|
|
|
|
|
|
|
|
Options forfeited and cancelled
|
|
|
(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 and cancelled
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at August 28, 2009
|
|
|
8,796
|
|
|
$
|
4.99
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
3,323
|
*
|
|
|
5.53
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(770
|
)
|
|
|
2.12
|
|
|
|
|
|
|
|
|
|
Options forfeited and cancelled
|
|
|
(2,915
|
)**
|
|
|
8.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at August 27, 2010
|
|
|
8,434
|
|
|
$
|
4.39
|
|
|
|
6.96
|
|
|
$
|
11,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at August 27, 2010
|
|
|
4,695
|
|
|
$
|
3.95
|
|
|
|
6.00
|
|
|
$
|
8,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at August 27, 2010
|
|
|
8,144
|
|
|
$
|
4.36
|
|
|
|
6.90
|
|
|
$
|
11,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes new options granted (1,864) in connection with the
Option Exchange. |
|
** |
|
Includes options cancelled (2,450) in connection with the Option
Exchange. |
66
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 27, 2010,
August 28, 2009 and August 29, 2008 were $2.85, $1.42,
and $3.39 per option, respectively. The total intrinsic value of
employee stock options exercised during the fiscal years ended
August 27, 2010, August 28, 2009 and August 29,
2008 were approximately $3.5 million, $0.6 million,
and $4.3 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 27, 2010, August 28, 2009 and
August 29, 2008 were approximately $7.2 million,
$8.5 million, and $7.3 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 the
Companys third-party stock plan administration software
which resulted in a change in the computation of its stock
compensation expense. Specifically, the Company discovered a
computational error in the timing of forfeiture adjustments,
which resulted in its stock compensation expense being
understated from fiscal 2007 through the third quarter of fiscal
2009. See Note 1(v).
A summary of the status of the Companys non-vested stock
options as of August 27, 2010, and changes during the
fiscal year ended August 27, 2010, 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 28, 2009
|
|
|
3,738
|
|
|
$
|
2.87
|
|
Non-vested stock options granted
|
|
|
3,323
|
*
|
|
$
|
2.85
|
|
Vested stock options
|
|
|
(1,816
|
)
|
|
$
|
2.47
|
|
Forfeited stock options
|
|
|
(1,507
|
)**
|
|
$
|
4.11
|
|
|
|
|
|
|
|
|
|
|
Non-vested stock options at August 27, 2010
|
|
|
3,739
|
|
|
$
|
2.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes new options granted (1,864) in connection with the
Option Exchange. |
|
** |
|
Includes options cancelled (2,450) in connection with the Option
Exchange, offset by cancelled vested and non-exercised options. |
As of August 27, 2010, there was approximately
$9.6 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 2.2 years. The total fair value of shares vested
during the year ended August 27, 2010 was approximately
$4.5 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.
The time-based RSUs vest over a period ranging from one year to
four years and their fair value is determined by the closing
price of the Companys ordinary shares on the date of grant.
The Company has issued two types of performance-based RSUs,
based on an internal metric and external metric.
The performance-based RSUs containing an internal metric which
were issued in fiscal 2009 would have vested in fiscal 2011 if
the Company achieved its fiscal 2009 adjusted EBIT target as
approved by the Board of Directors. In the first quarter of
fiscal 2010, these performance-based RSUs were not awarded
because the target was not met.
67
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In the first and second quarters of fiscal 2010, the Company
issued performance-based RSUs that contained an external stock
market index as a benchmark for performance (market-based
RSUs). The number of market-based RSUs awarded will depend
upon the Companys stock performance compared to an
external stock market index on a date three days before the date
set for vesting. The ultimate number of market-based RSUs
awarded vest three years after the grant date. The fair value of
market-based RSUs is determined by using a Monte Carlo valuation
model, using the following assumptions:
|
|
|
|
|
Year Ended
|
|
|
August 27, 2010
|
|
Market-based RSUs:
|
|
|
Expected term (years)
|
|
2.73 3.04
|
Expected volatility
|
|
70.1%
|
Risk-free interest rate
|
|
1.26% to 1.48%
|
Expected dividends
|
|
|
A summary of the changes in RSUs outstanding under the
Companys equity incentive plan during the fiscal year
ended August 27, 2010 is presented below (in thousands,
except for weighted average grant date fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Grant Date
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Value
|
|
|
Awards outstanding at August 28, 2009
|
|
|
69
|
|
|
$
|
2.95
|
|
|
|
|
|
Awards granted
|
|
|
1,176
|
|
|
|
5.25
|
|
|
|
|
|
Awards vested
|
|
|
(69
|
)
|
|
|
2.93
|
|
|
|
|
|
Awards forfeited and cancelled
|
|
|
(23
|
)
|
|
|
5.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards outstanding at August 27, 2010
|
|
|
1,153
|
|
|
$
|
5.25
|
|
|
$
|
5,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The stock-based compensation expense related to RSUs for fiscal
2010 and 2009 was approximately $1.8 million and $26
thousand, respectively.
As of August 27, 2010, the Company had approximately
$3.7 million of unrecognized compensation expense related
to RSUs, net of estimated forfeitures and cancellations, which
will be recognized over a weighted average estimated remaining
life of 1.97 years.
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.
|
|
(s)
|
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.
68
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(t)
|
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 three
customers (see Note 11). 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.
|
|
(u)
|
Net
Income (Loss) Per Share
|
Basic net income (loss) per ordinary share is calculated by
dividing net income (loss) by the weighted average of ordinary
shares outstanding during the period. Diluted net income (loss)
per ordinary share is calculated by dividing the net income
(loss) by the weighted average 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 and
vesting of RSUs computed using the treasury stock method.
The following table sets forth for all periods presented the
computation of basic and diluted net income (loss) per ordinary
share, including the reconciliation of the numerator and
denominator used in the calculation of basic and diluted net
income (loss) per share (dollars and shares in thousands, except
per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
August 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
52,571
|
|
|
$
|
(11,403
|
)
|
|
$
|
8,974
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares
|
|
|
62,344
|
|
|
|
61,699
|
|
|
|
60,985
|
|
Effect of dilutive ordinary shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,598
|
|
|
|
|
|
|
|
2,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares, diluted
|
|
|
64,942
|
|
|
|
61,699
|
|
|
|
63,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per ordinary share, basic
|
|
$
|
0.84
|
|
|
$
|
(0.18
|
)
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per ordinary share, diluted
|
|
$
|
0.81
|
|
|
$
|
(0.18
|
)
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company excluded 4,676,825, 7,446,435, and 4,687,062
weighted shares from stock options and RSUs from the computation
of diluted net income (loss) per ordinary share for the years
ended August 27, 2010, August 28, 2009, and
August 29, 2008 respectively, as the effect of their
inclusion would have been anti-dilutive.
69
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(v)
|
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. 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. The Company recorded a one-time cumulative
charge in the fourth quarter of fiscal 2009 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended Fiscal Year
|
|
|
|
|
|
|
May 29,
|
|
|
August 31,
|
|
|
August 29,
|
|
|
|
|
|
|
2009
|
|
|
2007
|
|
|
2008
|
|
|
Total
|
|
|
Cost of sales
|
|
$
|
91,504
|
|
|
$
|
52,295
|
|
|
$
|
25,450
|
|
|
$
|
169,249
|
|
Research and development
|
|
|
199,899
|
|
|
|
97,366
|
|
|
|
136,001
|
|
|
|
433,266
|
|
Selling, general and administrative
|
|
|
531,611
|
|
|
|
305,370
|
|
|
|
296,282
|
|
|
|
1,133,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional stock-compensation expense
|
|
$
|
823,014
|
|
|
$
|
455,031
|
|
|
$
|
457,733
|
|
|
$
|
1,735,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(w)
|
New
Accounting Pronouncements
|
In April 2009, the FASB issued authoritative fair value
disclosure guidance included in ASC 825, Financial
Instruments, for financial instruments. The guidance
requires disclosures for interim reporting periods of publicly
traded companies as well as in annual financial statements. The
guidance also requires those disclosures in summarized financial
information at interim reporting periods. The Company adopted
the guidance for the fiscal quarter ended November 27,
2009. The adoption of the guidance did not have a material
impact on its consolidated results of operations and financial
condition.
In December 2007, the FASB issued an update to ASC 805,
Business Combinations (ASC 805). This update
significantly changes the financial accounting and reporting of
business combination transactions. The update also establishes
principles for how an acquirer recognizes and measures the
identifiable assets acquired, liabilities assumed, and any
noncontrolling interest in the acquiree; recognizes and measures
the goodwill acquired in the business combination or a gain from
a bargain purchase; 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
update to ASC 805 is effective for acquisitions on or after the
beginning of an entitys first fiscal year that begins
after December 15, 2008. The Company adopted this update to
ASC 805 in fiscal 2010 and it did not have a material
impact on the Companys consolidated financial statements.
In February 2010, the FASB amended its authoritative guidance
related to subsequent events to alleviate potential conflicts
with current SEC guidance. Effective upon issuance, these
amendments removed the requirement that an SEC filer disclose
the date through which it has evaluated subsequent events. The
adoption of this new guidance did not have a material impact on
our consolidated results of operations and financial condition.
In January 2010, the FASB issued ASU
2009-16,
Accounting for Transfers of Financial Assets (FASB
Statement No. 166, Accounting for Transfers of Financial
Assets), or ASU
2009-16,
which eliminates the concept of a qualifying
special-purpose entity (QSPE), revises conditions for
reporting a transfer of a portion of a financial asset as a sale
(e.g., loan participations), clarifies the derecognition
criteria, eliminates special guidance for guaranteed mortgage
securitizations, and changes the initial measurement of a
transferors interest in transferred financial assets. ASU
2009-16 is
effective for financial statements issued for fiscal years, and
interim periods within those fiscal years, beginning after
November 15, 2009. The Company will adopt the provisions of
this ASU in fiscal 2011 and does not expect this adoption to
have a material impact on its consolidated results of operations
and financial condition.
In January 2010, the FASB issued ASU
2009-17,
Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities (FASB Statement
No. 167, Amendments to FASB Interpretation No. 46
(R)),
70
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
which revises analysis for identifying the primary beneficiary
of a variable interest entity, or VIE, by replacing the previous
quantitative-based analysis with a framework that is based more
on qualitative judgments. The new guidance requires the primary
beneficiary of a VIE to be identified as the party that both
(i) has the power to direct the activities of a VIE that
most significantly impact its economic performance and
(ii) has an obligation to absorb losses or a right to
receive benefits that could potentially be significant to the
VIE. ASU
2009-17 is
effective for financial statements issued for fiscal years, and
interim periods within those fiscal years, beginning after
November 15, 2009. The Company will adopt the provisions of
this ASU in fiscal 2011 and does not expect this adoption to
have a material impact on its consolidated results of operations
and financial condition.
In October 2009, the FASB issued Accounting Standards Update
(ASU)
2009-13,
Revenue Recognition (Topic 605)
Multiple-Deliverable Revenue Arrangements. This guidance
modifies the fair value requirements of FASB ASC subtopic
605-25,
Revenue Recognition-Multiple Element Arrangements, by
allowing the use of the best estimate of selling
price in addition to vendor specific objective evidence
and third-party evidence for determining the selling price of a
deliverable. This guidance establishes a selling price hierarchy
for determining the selling price of a deliverable, which is
based on: (a) vendor-specific objective evidence,
(b) third-party evidence, or (c) estimates. In
addition, the residual method of allocating arrangement
consideration is no longer permitted. ASU
2009-13 is
effective for fiscal years beginning on or after June 15,
2010. The Company will adopt ASU
2009-13 in
fiscal 2011 and does not expect this adoption to have a material
impact on its consolidated results of operations and financial
condition.
In October 2009, the FASB issued ASU
2009-14,
Software (Topic 985) Certain Revenue
Arrangements that Include Software Elements. This guidance
modifies the scope of FASB ASC subtopic
965-605,
Software-Revenue Recognition, to exclude from its
requirements non-software components of tangible products and
software components of tangible products that are sold,
licensed, or leased with tangible products when the software
components and non-software components of the tangible product
function together to deliver the tangible products
essential functionality. ASU
2009-14 is
effective for fiscal years beginning on or after June 15,
2010. The Company will adopt ASU
2009-14 in
fiscal 2011 and does not expect this adoption to have a material
impact on its consolidated results of operations and financial
condition.
|
|
(2)
|
Related
Party Information
|
During fiscal 2010, 2009 and 2008, some of the Companys
manufacturing vendors were affiliated with a former officer of
the Company. Total payments to such vendors were
$0.2 million, $6.3 million and $10.9 million for
fiscal 2010, 2009 and 2008, respectively. As of August 27,
2010 and August 28, 2009, amounts due to these vendors were
$0 and $0.1 million, respectively.
During fiscal 2010, the Company entered into a logistics
arrangement with a design company which is affiliated with the
chairman of our board of directors. For fiscal 2010, gross
billings and net sales to this company were $1.3 million
and $35 thousand, respectively, and as of August 27, 2010,
amounts due from this company were $0.5 million.
|
|
(3)
|
Balance
Sheet Details
|
Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
Raw materials
|
|
$
|
44,180
|
|
|
$
|
20,207
|
|
Work in process
|
|
|
13,309
|
|
|
|
4,716
|
|
Finished goods
|
|
|
54,614
|
|
|
|
38,192
|
|
|
|
|
|
|
|
|
|
|
Total inventories*
|
|
$
|
112,103
|
|
|
$
|
63,115
|
|
|
|
|
|
|
|
|
|
|
71
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
* |
|
As of August 27, 2010 and August 28, 2009, 41% and
47%, respectively, of total inventories represented inventory
held under service arrangements. |
Prepaid
Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
Prepaid ICMS Taxes in Brazil*
|
|
$
|
11,277
|
|
|
$
|
|
|
Brazil ICMS assessment*
|
|
|
4,115
|
|
|
|
3,508
|
|
Prepayment on fixed asset taxes
|
|
|
2,122
|
|
|
|
1,209
|
|
Unbilled receivables
|
|
|
6,182
|
|
|
|
4,579
|
|
Receivable from subcontractor
|
|
|
3,594
|
|
|
|
|
|
Deferred and other income taxes
|
|
|
1,197
|
|
|
|
235
|
|
Other prepaid expense and other current assets
|
|
|
5,001
|
|
|
|
3,097
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets
|
|
$
|
33,488
|
|
|
$
|
12,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
See Note 8(d) Contingencies. |
Property
and Equipment, Net
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
Buildings
|
|
$
|
|
|
|
$
|
539
|
|
Office furniture, software, computers, and equipment
|
|
|
5,751
|
|
|
|
5,409
|
|
Manufacturing equipment
|
|
|
78,901
|
*
|
|
|
56,926
|
|
Leasehold improvements**
|
|
|
18,317
|
|
|
|
16,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,969
|
|
|
|
79,767
|
|
Less accumulated depreciation and amortization
|
|
|
56,748
|
*
|
|
|
43,504
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
46,221
|
|
|
$
|
36,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The Company reduced the useful life of certain manufacturing
equipment with net book value of $2.4 million as of
May 28, 2010 to reflect its updated estimate of the
remaining useful life which resulted in additional depreciation
expense of $1.2 million in fiscal 2010. |
|
** |
|
Includes our Penang facility which is situated on leased land. |
Depreciation and amortization expense was approximately
$17.0 million, $13.1 million and $12.7 million
for the years ended August 27, 2010, August 28, 2009
and August 29, 2008, respectively.
Net assets disposed of were $0.8 million, $1.1 million
and $0.3 million during fiscal year 2010, 2009 and 2008,
respectively. The losses on sale associated with the disposal of
assets were $0.4 million, $0.6 million and $27
thousand for fiscal 2010, 2009 and 2008, respectively.
72
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Non-Current Assets
Other non-current assets consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
Prepaid Brazil ICMS Taxes*
|
|
$
|
6,358
|
|
|
$
|
|
|
Judicial deposit related to Brazil ICMS assessment*
|
|
|
4,115
|
|
|
|
|
|
Prepayment on property and equipment taxes
|
|
|
4,114
|
|
|
|
1,902
|
|
Deposit on property and equipment
|
|
|
3,076
|
|
|
|
|
|
Capitalized loan costs
|
|
|
637
|
|
|
|
1,295
|
|
Other
|
|
|
2,917
|
|
|
|
1,388
|
|
|
|
|
|
|
|
|
|
|
Total other non-current assets
|
|
$
|
21,217
|
|
|
$
|
4,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
See Note 8(d) Contingencies. |
Accrued
Liabilities
Accrued liabilities consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
Accrued employee compensation
|
|
$
|
15,406
|
|
|
$
|
6,158
|
|
VAT and other transaction taxes payable
|
|
|
5,966
|
|
|
|
1,758
|
|
Income taxes payable
|
|
|
3,145
|
|
|
|
87
|
|
Accrued warranty reserve
|
|
|
732
|
|
|
|
694
|
|
Other accrued liabilities
|
|
|
4,069
|
|
|
|
7,918
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
29,318
|
|
|
$
|
16,615
|
|
|
|
|
|
|
|
|
|
|
Consolidated income (loss) before taxes for all periods
presented consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
August 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
U.S.
|
|
$
|
(15,058
|
)
|
|
$
|
(28,915
|
)
|
|
$
|
(19,017
|
)
|
Non-U.S.
|
|
|
96,567
|
|
|
|
23,083
|
|
|
|
46,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
81,509
|
|
|
$
|
(5,832
|
)
|
|
$
|
27,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
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 27, 2010, August 28, 2009 and
August 29, 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
August 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(144
|
)
|
|
$
|
(21
|
)
|
|
$
|
(102
|
)
|
State
|
|
|
143
|
|
|
|
93
|
|
|
|
56
|
|
Foreign
|
|
|
30,130
|
|
|
|
5,546
|
|
|
|
9,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,129
|
|
|
|
5,618
|
|
|
|
9,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal and state
|
|
|
|
|
|
|
|
|
|
|
9,630
|
|
Foreign
|
|
|
(1,191
|
)
|
|
|
(47
|
)
|
|
|
(287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,191
|
)
|
|
|
(47
|
)
|
|
|
9,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,938
|
|
|
$
|
5,571
|
|
|
$
|
18,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 27, 2010,
August 28, 2009 and August 29, 2008, as a result of
the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
August 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Statutory tax rate
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
Foreign income taxes at different rates
|
|
|
(1.5
|
)
|
|
|
4.9
|
|
|
|
(17.2
|
)
|
State income tax, net of federal tax benefit
|
|
|
(0.8
|
)
|
|
|
1.6
|
|
|
|
|
|
Tax holiday Malaysia
|
|
|
(4.3
|
)
|
|
|
(45.1
|
)
|
|
|
(10.7
|
)
|
Change in valuation allowance
|
|
|
7.3
|
|
|
|
168.4
|
|
|
|
54.2
|
|
Non-deductible in process research and development
|
|
|
|
|
|
|
|
|
|
|
5.6
|
|
Other, net
|
|
|
(0.2
|
)
|
|
|
0.8
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35.5
|
%
|
|
|
95.6
|
%
|
|
|
67.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of temporary differences that gave rise to
significant portions of deferred tax assets and liabilities as
of August 27, 2010 and August 28, 2009 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accruals and allowances
|
|
$
|
2,971
|
|
|
$
|
2,663
|
|
Stock-based compensation
|
|
|
9,133
|
|
|
|
6,337
|
|
Research and other tax credits carryforwards
|
|
|
2,798
|
|
|
|
2,237
|
|
Property and equipment
|
|
|
254
|
|
|
|
115
|
|
Net operating loss carryover
|
|
|
20,410
|
|
|
|
20,572
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
35,566
|
|
|
|
31,924
|
|
Valuation allowance
|
|
|
(31,188
|
)
|
|
|
(28,358
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
4,378
|
|
|
|
3,566
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Purchase accounting intangibles
|
|
|
(2,536
|
)
|
|
|
(2,915
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(2,536
|
)
|
|
|
(2,915
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
1,842
|
|
|
$
|
651
|
|
|
|
|
|
|
|
|
|
|
As of August 27, 2010, the Company classified approximately
$1.2 million of current deferred tax assets in other
current assets and $0.6 million of non-current deferred tax
assets in other non-current assets, respectively, on the
accompanying consolidated balance sheets.
As of August 27, 2010, the Company had U.S. (Federal)
and California (State) net operating loss carryforwards of
approximately $79.0 million and $55.8 million,
respectively. The federal net operating loss carryovers will
expire in 2011 through 2030 and the California net operating
loss carryforwards will expire in 2015 through 2023, in varying
amounts, if not utilized. Some of these carryforwards are
subject to annual limitations, under the provisions of
Section 382 of the Internal Revenue Code of 1986, for
U.S. and California tax purposes.
The Company recorded $18 thousand, $0 and $23 thousand for
fiscal 2010, 2009 and 2008, respectively, as a tax benefit to
additional paid in capital for excess tax deductions
attributable to share-based payments that reduce taxes payable.
Pursuant to ASC 718, Share-Based Payment, the
additional tax benefit from excess tax deductions attributable
to share based payments resulted in $25.9 million of
federal net operating loss carryovers and $16.7 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 27, 2010, the Company has consolidated net
deferred tax assets of approximately $1.8 million. The
valuation allowance on deferred tax assets increased
$2.8 million from $28.4 million as of August 28,
2009 to $31.2 million as of August 27, 2010. The
valuation allowance as of August 27, 2010 and
August 28, 2009 primarily relates to U.S. deferred tax
assets. For the year ended 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 27, 2010 and August 28, 2009, the Company
continues to record a full valuation allowance on U.S. net
deferred tax assets.
75
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
$196.5 million of undistributed earnings from certain
foreign operations as of August 27, 2010 because such
earnings are intended to be reinvested indefinitely. Of the
$196.5 million of undistributed earnings, approximately
$16.8 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. At August 27, 2010, the Company
determined that the undistributed earnings of its Puerto Rico
subsidiary are no longer intended to be reinvested indefinitely.
As a result, the Company recorded Puerto Rico withholding taxes
of $0.4 million. The remainder of undistributed earnings of
approximately $179.7 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, as compared to the
U.S. statutory tax rate, was to decrease income tax expense
by approximately $3.5 million in fiscal 2010, approximately
$3.1 million in fiscal 2009 and approximately
$8.6 million in fiscal 2008.
As of September 1, 2007, the Company adopted ASU
2009-06,
which clarifies the accounting for uncertainty in income tax
positions recognized in accordance with ASC 740. The
adoption of ASU
2009-06 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 27, 2010 was approximately $0.2 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 28, 2009
|
|
$
|
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
|
|
|
0.1
|
|
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 27, 2010
|
|
$
|
0.2
|
|
|
|
|
|
|
As of August 27, 2010, the total amount of unrecognized tax
benefits, included in other long-term liabilities on the
accompanying consolidated balance sheet, was approximately
$0.2 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 27, 2010, 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 2007 through August 2010 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
76
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
August 2006 remains open to U.S. Federal income tax
examination. Generally, in the major state jurisdictions, the
tax periods ended August 2006 through August 2010 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 2004 for the subsidiary in
Malaysia.
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 under the Securities Act of 1933, as amended (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 accrue
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 SEC to
suspend on-going 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, the remaining portion of which is included
in other non-current assets in the accompanying condensed
consolidated balance sheets. Except for the portion written off
in connection with the repurchase discussed below, 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.
On October 13, 2009, the Board of Directors approved up to
$25.0 million to repurchase
and/or
redeem a portion of the outstanding Notes, excluding unpaid
accrued interest. On October 22, 2009, using available
cash, the Company repurchased and retired a portion of the Notes
representing $26.2 million of aggregate principal for
$25.0 million; at 95.5% of the principal or face amount. In
connection with the repurchase, a gain of $1.2 million was
recognized in other income (expense) in fiscal 2010, offset by a
$0.4 million write-off of debt issuance costs. As of
August 27, 2010, the aggregate principal amount of Notes
that remain outstanding was $55.1 million.
On August 28, 2009, the Company adopted ASC 825,
Financial Instruments, which requires disclosures about
the fair value of financial instruments for interim reporting
periods of publicly traded companies. As of August 27,
2010, the fair value of the Notes that remain outstanding was
estimated to be approximately $55.2 million.
Senior
Secured Revolving Line of Credit
Prior to closing the Offering of the 144A Notes, 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, as of March 28, 2005,
the Loan and Security Agreement was amended and restated
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
Borrowers; the amended and restated loan and
security
77
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
agreement being referred to as the Amended and Restated
Credit Facility). On April 30, 2007, the Amended and
Restated Credit Facility was amended and restated (as amended
and restated, the Second Amended and Restated 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 make
less restrictive, certain financial covenants, (iii) extend
the maturity date from March 28, 2009 to April 30,
2010, and (iv) establish Wells Fargo Bank, National
Association, as successor to WFF. The Second Amended and
Restated 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 and
restatement.
In connection with the Second Amended and Restated 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 Second Amended and Restated Credit
Facility, together with the unamortized debt issuance costs
related to the Amended and Restated 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 Second Amended and Restated Credit
Facility.
On November 26, 2008, the Second Amended and Restated
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 Second Amended and Restated Credit Facility, were increased
to 2% and 3%, respectively.
On August 14, 2009, the Second Amended and Restated Credit
Facility was again amended by the Second Amendment to Second
Amended and Restated Loan and Security Agreement (the
Second Amendment). As a result of the Second
Amendment, the Borrowers were no longer required to comply with
certain financial covenants unless there were borrowings
outstanding. As of April 30, 2010, the Borrowers entered
into the Third Amendment to Second Amended and Restated Loan and
Security Agreement (the Third Amendment), with the
lenders identified therein (the Lenders) and Wells
Fargo Bank, National Association, as the arranger,
administrative agent and security trustee for the Lenders. The
Second Amended and Restated Loan and Security Agreement dated
April 30, 2007, as amended by the First Amendment dated
November 26, 2008, the Second Amendment dated
August 14, 2009 and the Third Amendment dated
April 30, 2010, is referred to as the WF Credit
Facility. The WF Credit Facility is jointly and severally
guaranteed on a senior basis by all of our subsidiaries, subject
to limited exceptions. In addition, the WF Credit Facility and
the guarantees were secured by the capital stock of, or equity
interests in, most of the Companys subsidiaries and
substantially all of the Companys and most of its
subsidiaries assets. As a result of the Third Amendment,
the Maturity Date, as defined in the WF Credit Facility, was
extended to April 30, 2012, and the Company is again
required to comply with certain financial covenants as modified
and as set forth in the WF Credit Facility. The Base Rate Margin
and LIBOR Rate Margin, as defined in the WF Credit Facility,
were changed to 1.25% and 2.25%, respectively. The Company has
not borrowed under the WF Credit Facility since November 2007
and had no borrowings outstanding as of August 27, 2010.
While the Company was in compliance with the financial covenants
required to borrow funds under the WF Credit Facility as of
August 27, 2010 and expects to be able to satisfy the
financial covenants or financial condition test in the future,
it may not meet the financial covenants during all periods
before it expires on April 30, 2012 and therefore may not
be able to borrow funds if and when it needs funds in the future.
78
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(6)
|
Financial
Instruments
|
Fair
Value of Financial Instruments
In the first quarter of fiscal 2009, the Company adopted
ASC 820, Fair Value Measurements and Disclosures,
for all financial assets and financial liabilities and for
non-financial assets and non-financial liabilities recognized or
disclosed at fair value in the financial statements on a
recurring basis, at least annually. The guidance provided a one
year deferral of the effective date of ASC 820 for other
non-financial assets and non-financial liabilities. Effective in
the first quarter of fiscal 2010, the Company adopted the
provisions of ASC 820 for all non-financial assets and
non-financial liabilities.
The fair value of the Companys cash, cash equivalents,
accounts receivable, accounts payable and WF 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 and savings accounts, money
market accounts and certificates of deposit 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.
The FASB guidance establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets to identical assets
or liabilities (level 1 measurements) and the lowest
priority to unobservable inputs (level 3 measurements). The
three levels of the fair value hierarchy are described below:
|
|
|
|
|
Level 1. Valuations based on quoted
prices in active markets for identical assets or liabilities
that an entity has the ability to access. The Companys
Level 1 assets include money market funds and certificates
of deposit that are classified as cash equivalents.
|
|
|
|
Level 2. Valuations based on quoted
prices for similar assets or liabilities, quoted prices for
identical assets or liabilities in markets that are not active,
or other inputs that are observable or can be corroborated by
observable data for substantially the full term of the assets
and liabilities. The Companys Level 2 liabilities as
of August 28, 2009 included its
variable-to-fixed
interest rate swap which expired in April 2010. Thus, the
Company had no Level 2 liabilities as of August 27,
2010.
|
|
|
|
Level 3. Valuations based on inputs that
are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. The
Company does not have any assets or liabilities measured under
Level 3.
|
79
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assets and liabilities measured at fair value on a recurring
basis include the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Observable/
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Unobservable
|
|
|
|
|
|
|
|
|
|
for Identical
|
|
|
Inputs
|
|
|
Significant
|
|
|
|
|
|
|
Assets or
|
|
|
Corroborated by
|
|
|
Unobservable
|
|
|
|
|
|
|
Liabilities
|
|
|
Market Data
|
|
|
Inputs
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Balances as of August 27, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash from checking and savings accounts
|
|
$
|
45.7
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
45.7
|
|
Money market funds
|
|
|
69.8
|
|
|
|
|
|
|
|
|
|
|
|
69.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value(1)
|
|
$
|
115.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
115.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of August 28, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash from checking and savings accounts
|
|
$
|
44.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
44.5
|
|
Money market funds
|
|
|
79.2
|
|
|
|
|
|
|
|
|
|
|
|
79.2
|
|
Certificates of deposit
|
|
|
24.0
|
|
|
|
|
|
|
|
|
|
|
|
24.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value(1)
|
|
$
|
147.7
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
147.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
variable-to-fixed
interest rate swap
|
|
$
|
|
|
|
$
|
(1.3
|
)
|
|
$
|
|
|
|
$
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
|
|
|
$
|
(1.3
|
)
|
|
$
|
|
|
|
$
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in cash and cash equivalents on the Companys
consolidated balance sheet. |
Derivative
Instruments
The Company had previously entered into two interest swap
agreements (the Swaps), both of which have expired
as of August 27, 2010 and one of which was outstanding on
August 28, 2009. The first Swap expired on April 1,
2008 and was for a $41.3 million notional amount. Under its
terms, the Company paid a fixed interest rate of 9.78%. The
second Swap expired on April 28, 2010 and was for a
$40.0 million notional amount. Under its terms, the Company
paid a fixed rate of 9.97%. The Company had 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 received interest income at a variable
interest rate equal to the
3-month
LIBOR rate plus 5.50%. The Swap essentially replaced the
variable interest rate on a portion of the Notes with a fixed
interest rate through the expiration date. The Swaps were
accounted for as a cash flow hedge under ASC 815,
Derivatives and Hedging, which requires the Company to
recognize all derivatives on the balance sheet at fair value.
The fair value of the outstanding derivative instrument referred
to above was a liability of $1.3 million as of
August 28, 2009. The Company has no derivative instruments
such as interest rate swaps or currency hedges as of
August 27, 2010.
|
|
(7)
|
Employee
Benefit Plans
|
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.
80
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes options outstanding as of
August 27, 2010 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Vested
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Options
|
|
|
Contractual Life
|
|
|
Average Exercise
|
|
|
|
|
|
Average Exercise
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
(Years)
|
|
|
Price
|
|
|
Shares Vested
|
|
|
Price
|
|
|
$0.17
|
|
|
1,348
|
|
|
|
3.81
|
|
|
$
|
0.17
|
|
|
|
1,348
|
|
|
$
|
0.17
|
|
$0.93 $2.72
|
|
|
384
|
|
|
|
6.36
|
|
|
$
|
1.59
|
|
|
|
279
|
|
|
$
|
1.49
|
|
$2.84
|
|
|
1,402
|
|
|
|
8.05
|
|
|
$
|
2.84
|
|
|
|
620
|
|
|
$
|
2.84
|
|
$2.95 $4.74
|
|
|
907
|
|
|
|
7.30
|
|
|
$
|
4.09
|
|
|
|
495
|
|
|
$
|
4.24
|
|
$4.78 $5.20
|
|
|
757
|
|
|
|
8.87
|
|
|
$
|
5.15
|
|
|
|
199
|
|
|
$
|
5.11
|
|
$5.38
|
|
|
1,627
|
|
|
|
6.88
|
|
|
$
|
5.38
|
|
|
|
652
|
|
|
$
|
5.38
|
|
$5.69 $7.50
|
|
|
1,403
|
|
|
|
8.20
|
|
|
$
|
6.87
|
|
|
|
568
|
|
|
$
|
7.04
|
|
$7.51 $12.36
|
|
|
517
|
|
|
|
6.32
|
|
|
$
|
9.48
|
|
|
|
453
|
|
|
$
|
9.62
|
|
$13.34
|
|
|
50
|
|
|
|
6.67
|
|
|
$
|
13.34
|
|
|
|
42
|
|
|
$
|
13.34
|
|
$14.96
|
|
|
40
|
|
|
|
5.17
|
|
|
$
|
14.96
|
|
|
|
40
|
|
|
$
|
14.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.17 $14.96
|
|
|
8,434
|
|
|
|
6.96
|
|
|
$
|
4.39
|
|
|
|
4,695
|
|
|
$
|
3.95
|
|
|
|
(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 27, 2010, August 28, 2009, and August 29,
2008 were approximately $0.4 million, $0.7 million,
and $1.0 million respectively. As part of a cost-cutting
initiative in fiscal 2009, the Company had suspended the
matching contributions in April 2009 and then re-instated the
full matching in April 2010.
|
|
(8)
|
Commitments
and Contingencies
|
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 27, 2010,
August 28, 2009 and August 29, 2008 was approximately
$2.5 million, $2.5 million and $2.9 million,
respectively. As of August 28, 2009, the Company also has
commitments under operating leases for other facilities and
equipment.
81
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*
|
|
|
2011
|
|
$
|
1,845
|
|
2012
|
|
|
1,494
|
|
2013
|
|
|
727
|
|
2014
|
|
|
525
|
|
2015
|
|
|
617
|
|
2016 and thereafter
|
|
|
432
|
|
|
|
|
|
|
|
|
$
|
5,640
|
|
|
|
|
|
|
|
|
|
* |
|
The future minimum lease payments listed above do not include
the new lease entered in Westford, Massachusetts, effective
November 2010. |
|
|
(b)
|
Product
Warranty and Indemnities
|
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 functionality 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 27,
|
|
|
August 28,
|
|
|
August 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Beginning accrued warranty reserve
|
|
$
|
694
|
|
|
$
|
765
|
|
|
$
|
722
|
|
Warranty claims
|
|
|
(1,088
|
)
|
|
|
(1,046
|
)
|
|
|
(1,208
|
)
|
Provision for product warranties
|
|
|
1,126
|
|
|
|
975
|
|
|
|
1,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending accrued warranty reserve
|
|
$
|
732
|
|
|
$
|
694
|
|
|
$
|
765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product warranty reserves are recorded in accrued expenses in
the accompanying consolidated balance sheets.
In addition to potential liability for warranties related to
defective products, 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 product defects as well as from the
infringement by its products on third-party patents, trademarks
or other intellectual property 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.
From time to time the Company is involved in disputes and legal
matters that arise in the normal 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.
82
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On October 3, 2008, the Companys subsidiary in Brazil
(SMART Brazil) received a notice from the Sao Paulo
State Treasury Office providing an assessment for the collection
of State Value-Added Tax (ICMS) as well as interest
and penalties (collectively the Assessment) related
to the transfer of ICMS credits during 2004 between two
Brazilian entities. These transfers occurred prior to the
acquisition in April 2004 of SMART from Solectron Corporation
(Solectron). Solectron was subsequently acquired by
Flextronics International Ltd. (Flextronics). The
Company believes that the Assessment is subject to
indemnification by Solectron to SMART pursuant to the
Transaction Agreement dated February 11, 2004 dealing with
the acquisition of SMART from Solectron. The Company notified
Solectron and Flextronics of the Assessment, and under the terms
of the Transaction Agreement, Flextronics elected to assume
responsibility to contest the Assessment on SMART Brazils
behalf. The Company has been advised that the efforts to contest
the Assessment in the administrative level have been
unsuccessful and on June 16, 2010, they were notified that
the last administrative appeal was not admitted, thereby
exhausting all administrative appeals. The Company has also been
advised by tax counsel that additional appeals can only be made
in a judicial proceeding. As of August 27, 2010, the
Companys Consolidated Balance Sheet reflects both a
liability for the Assessment and a corresponding indemnity
receivable for approximately $4.1 million (or
7.2 million BRL). While the Company believes that the
Assessment would be subject to the indemnity obligations of
Solectron
and/or
Flextronics, there can be no absolute assurance that Solectron
and/or
Flextronics will comply with their contractual indemnity
obligations in this regard.
Since 2004, the Sao Paulo State tax authorities have granted
SMART Brazil a tax benefit to defer and eventually eliminate the
payment of ICMS levied on certain imports from independent
suppliers. This benefit, known as ICMS Special Ruling, is
subject to renewal every two years and expired on March 31,
2010. SMART Brazil applied for a renewal of this benefit, but
the renewal was not granted until August 4, 2010. The
Company was originally advised by tax counsel that the renewal
of the benefit would be denied if SMART Brazil did not post a
deposit against the Assessment for the benefit of the tax
authorities in the event that the tax authorities prevail on any
contests against the Assessment. In order to post the deposit
SMART Brazil instituted a judicial proceeding requesting an
injunction which was granted on June 16, 2010. In
connection with this injunction, on June 17, 2010, SMART
Brazil made a judicial deposit in the amount of the Assessment
which totaled $4.1 million (or 7.2 million BRL). This
deposit had an adverse impact on the Companys cash flow.
On June 22, 2010, the Sao Paulo authorities published a
regulation allowing companies that applied for a timely renewal
of an ICMS Special Ruling, such as SMART Brazil, to continue
utilizing the benefit until a final conclusion on the renewal
request was rendered. As a result of this publication, SMART
Brazil was temporarily allowed to utilize the benefit while it
waited for its renewal. From April 1, 2010, when the ICMS
benefit lapsed, through June 22, 2010 when the regulation
referred to above was published, SMART Brazil was required to
pay the ICMS taxes upon imports. The payment of ICMS generates
tax credits that may be used to offset ICMS obligations
generated from sales by SMART Brazil of its products, however,
the vast majority of SMART Brazils sales in Sao Paulo are
either subject to a lower ICMS rate or are made to customers
that are entitled to other ICMS benefits that enable them to
eliminate the ICMS levied on their purchases of products from
SMART Brazil. As a result, from April 1, 2010 through
June 22, 2010, SMART Brazil did not have sufficient ICMS
collections against which to apply the credits accrued upon
payment of the ICMS on SMART Brazils imports. Although the
renewal has been granted, there is no refund of ICMS tax credits
that accumulated during the period the Company was waiting for
the renewal.
As of August 27, 2010 the total amount of accumulated ICMS
tax credits reported on the Companys Consolidated Balance
Sheet was $17.6 million (or 31.0 million BRL),
including $11.3 million (or 19.8 million BRL) under
other current assets and $6.3 million (or 11.2 million
BRL) under other non-current assets. It is expected that
$11.3 million of the excess ICMS credits will be recovered
during fiscal 2011, with the remainder of $6.3 million
being recovered in fiscal 2012. These expectations are based on
various estimates including the mix of products and regions
where the Companys sales will occur. If these estimates or
the mix of products or regions vary,
83
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
it could take longer than expected to fully utilize the excess
ICMS credits accumulated to date. The accumulation of excess
ICMS credits had an adverse impact on the Companys cash
flow and there can be no absolute assurance that the excess
credits will be fully utilized. While the Company has notified
Solectron and Flextronics that losses, including interest and
foreign exchange, related to the delay in receiving the renewal
of the ICMS benefit, are also subject to their indemnity
obligations, Flextronics has repudiated the Companys claim
and there can be no absolute assurance that Solectron
and/or
Flextronics will comply with their contractual indemnity
obligations in this regard.
During the second quarter of fiscal 2009, the Company initiated
a restructuring plan (the FY09 Plan) to reduce its
global workforce in order to improve the Companys cost
structure in the uncertain economic environment. In an effort to
reduce cost in the third quarter of fiscal 2009, the Company
initiated another restructuring plan to reduce its global
workforce, which plan was included in the FY09 Plan. The FY09
Plan includes charges consisting primarily of severance payments
and other employee-related payments. All severance payments and
employee-related expenses in connection with the FY09 Plan have
been paid as of August 27, 2010.
The following table summarizes the restructuring accrual
activity for the years ended August 27, 2010 and
August 28, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and
|
|
|
Assets/Facility
|
|
|
|
|
|
|
|
|
|
Benefits
|
|
|
Related
|
|
|
Other
|
|
|
Total
|
|
|
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
|
|
Release
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
Accrual as of August 27, 2010
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no restructuring activities in fiscal 2010. Total
restructuring costs accrued as of August 27, 2010 and
August 28, 2009 were approximately $0 and $10 thousand,
respectively, and were recorded in accrued expenses in the
consolidated balance sheets.
|
|
(10)
|
Segment
Information and Geographic Information
|
The Company currently operates in one operating segment: the
design, manufacture, and sale of electronic subsystem products
and services to the electronics industry. The Companys
chief operating decision-maker, the President and CEO, evaluates
financial performance on a company-wide basis. In fiscal 2008
and 2009, the Company had categorized its products and services
into the following two operating segments, the Memory,
Display & Embedded Segment and the Adtron Segment.
However, with the completion of the integration of Adtron into
SMART, the Company now operates in one segment.
84
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the Companys net sales and property and
equipment, net, by geographic area, as well as net sales by type
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
August 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Geographic net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
209,699
|
|
|
$
|
190,306
|
|
|
$
|
367,502
|
|
Brazil
|
|
|
305,667
|
|
|
|
114,973
|
|
|
|
119,151
|
|
Other Americas
|
|
|
18,739
|
|
|
|
10,830
|
|
|
|
15,804
|
|
Asia
|
|
|
133,248
|
|
|
|
82,515
|
|
|
|
100,428
|
|
Europe
|
|
|
35,737
|
|
|
|
42,693
|
|
|
|
67,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
703,090
|
|
|
$
|
441,317
|
|
|
$
|
670,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
6,298
|
|
|
$
|
7,724
|
|
Brazil
|
|
|
32,175
|
|
|
|
22,654
|
|
Asia
|
|
|
7,705
|
|
|
|
5,845
|
|
Europe
|
|
|
43
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,221
|
|
|
$
|
36,263
|
|
|
|
|
|
|
|
|
|
|
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 total net accounts receivable, are as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
August 27, 2010
|
|
August 28, 2009
|
|
August 29, 2008
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Customer A
|
|
$
|
151,943
|
|
|
|
22
|
%
|
|
$
|
122,665
|
|
|
|
28
|
%
|
|
$
|
259,639
|
|
|
|
39
|
%
|
Customer B
|
|
$
|
111,088
|
|
|
|
16
|
%
|
|
$
|
59,258
|
|
|
|
13
|
%
|
|
$
|
83,710
|
|
|
|
12
|
%
|
Customer C
|
|
$
|
99,063
|
|
|
|
14
|
%
|
|
$
|
41,571
|
|
|
|
9
|
%
|
|
$
|
39,067
|
|
|
|
6
|
%
|
As of August 27, 2010, Customers A, B and C accounted for
approximately 38%, 26% and 9% of accounts receivable,
respectively. As of August 28, 2009, approximately 27%, 27%
and 26% of accounts receivable were concentrated with Customers
A, B and C, respectively. The loss of a major customer or a
significant reduction in net sales from a major customer could
have a material adverse effect on the Companys business,
financial condition and results of operations.
85
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(12)
|
Other
Income (Expense), Net
|
The following table provides the detail of other income
(expense), net as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
August 27,
|
|
|
August 28,
|
|
|
August 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Foreign currency gains (losses)
|
|
$
|
108
|
|
|
$
|
(868
|
)
|
|
$
|
2,415
|
|
Gain on legal settlement*
|
|
|
3,044
|
|
|
|
|
|
|
|
|
|
Gain on early repayment of long-term debt
|
|
|
1,178
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
755
|
|
|
|
348
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
$
|
5,085
|
|
|
$
|
(520
|
)
|
|
$
|
2,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
In December 2009, the Company received this settlement as a
non-active participant class member in a class action against
certain component suppliers initiated in 2002. |
|
|
(13)
|
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.
On September 27, 2010, the Company entered into a lease in
Westford, Massachusetts for 28,500 square feet, effective
November 2010 and expiring in March 2018, to relocate two of the
Companys Tewksbury facilities. The total rent payable over
the lease period is $3.6 million.
On September 30, 20010, the Company filed a registration
statement on
Form S-8
to register an additional 3,406,943 shares of the
Registrants ordinary shares, par value $0.00016667 per
share, issuable under the Companys Amended and Restated
Stock Incentive Plan as a result of the annual evergreen
increase under the terms of this plan.
86
SMART
MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(15)
|
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. 28,
|
|
|
Feb. 27,
|
|
|
May 29,
|
|
|
Aug. 28,
|
|
|
Nov. 27,
|
|
|
Feb. 26,
|
|
|
May 28,
|
|
|
Aug. 27,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
(In thousands, except for per share data)
|
|
|
|
|
|
|
|
|
Statement of Operations Data :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
140,775
|
|
|
$
|
109,089
|
|
|
$
|
91,645
|
|
|
$
|
99,808
|
|
|
$
|
123,093
|
|
|
$
|
160,110
|
|
|
$
|
201,235
|
|
|
$
|
218,652
|
|
Cost of sales
|
|
|
114,959
|
|
|
|
85,022
|
|
|
|
73,008
|
|
|
|
78,489
|
|
|
|
94,327
|
|
|
|
118,097
|
|
|
|
155,738
|
|
|
|
168,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
25,816
|
|
|
|
24,067
|
|
|
|
18,637
|
|
|
|
21,319
|
|
|
|
28,766
|
|
|
|
42,013
|
|
|
|
45,497
|
|
|
|
49,780
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
5,436
|
|
|
|
5,142
|
|
|
|
4,478
|
|
|
|
4,755
|
|
|
|
5,730
|
|
|
|
5,219
|
|
|
|
6,657
|
|
|
|
7,496
|
|
Selling, general and administrative
|
|
|
14,467
|
|
|
|
13,782
|
|
|
|
13,585
|
|
|
|
13,671
|
|
|
|
13,366
|
|
|
|
14,331
|
|
|
|
16,340
|
|
|
|
16,083
|
|
Goodwill impairment
|
|
|
7,210
|
|
|
|
3,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
886
|
|
|
|
935
|
|
|
|
989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
27,999
|
|
|
|
23,065
|
|
|
|
19,052
|
|
|
|
18,426
|
|
|
|
19,096
|
|
|
|
19,550
|
|
|
|
22,997
|
|
|
|
23,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(2,183
|
)
|
|
|
1,002
|
|
|
|
(415
|
)
|
|
|
2,893
|
|
|
|
9,670
|
|
|
|
22,463
|
|
|
|
22,500
|
|
|
|
26,201
|
|
Interest expense, net
|
|
|
(1,752
|
)
|
|
|
(1,698
|
)
|
|
|
(1,629
|
)
|
|
|
(1,530
|
)
|
|
|
(1,663
|
)
|
|
|
(1,163
|
)
|
|
|
(837
|
)
|
|
|
(747
|
)
|
Other income (expense), net
|
|
|
(766
|
)
|
|
|
109
|
|
|
|
26
|
|
|
|
111
|
|
|
|
1,292
|
|
|
|
3,225
|
|
|
|
608
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(2,518
|
)
|
|
|
(1,589
|
)
|
|
|
(1,603
|
)
|
|
|
(1,419
|
)
|
|
|
(371
|
)
|
|
|
2,062
|
|
|
|
(229
|
)
|
|
|
(787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
(4,701
|
)
|
|
|
(587
|
)
|
|
|
(2,018
|
)
|
|
|
1,474
|
|
|
|
9,299
|
|
|
|
24,525
|
|
|
|
22,271
|
|
|
|
25,414
|
|
Provision for income taxes
|
|
|
2,177
|
|
|
|
1,263
|
|
|
|
368
|
|
|
|
1,763
|
|
|
|
4,717
|
|
|
|
8,433
|
|
|
|
7,354
|
|
|
|
8,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(6,878
|
)
|
|
$
|
(1,850
|
)
|
|
$
|
(2,386
|
)
|
|
$
|
(289
|
)
|
|
$
|
4,582
|
|
|
$
|
16,092
|
|
|
$
|
14,917
|
|
|
$
|
16,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per ordinary share, basic
|
|
$
|
(0.11
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
0.07
|
|
|
$
|
0.26
|
|
|
$
|
0.24
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per ordinary share, diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
0.07
|
|
|
$
|
0.25
|
|
|
$
|
0.23
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income (loss) per ordinary
share
|
|
|
61,507
|
|
|
|
61,673
|
|
|
|
61,738
|
|
|
|
61,863
|
|
|
|
61,974
|
|
|
|
62,211
|
|
|
|
62,463
|
|
|
|
62,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted income (loss) per ordinary share
|
|
|
61,507
|
|
|
|
61,673
|
|
|
|
61,738
|
|
|
|
61,863
|
|
|
|
64,016
|
|
|
|
65,010
|
|
|
|
65,502
|
|
|
|
65,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded restructuring charges of $0.9 million,
$0.9 million, and $1.0 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. The Company recorded a cumulative charge of
$1.7 million for an out of period adjustment to correct
stock-based compensation in the fourth quarter of fiscal 2009.
The Company recorded a gain on the early retirement of long-term
debt of $1.2 million in the first quarter of fiscal 2010
and a gain on a legal settlement of $3.0 million in the
second quarter of fiscal 2010; both of these were recorded in
other income (expense), net. In the third quarter of fiscal
2010, the Company sold its display products business for net
proceeds of $2.2 million and incurred a loss of
$0.5 million recorded under selling, general &
administrative expenses.
87
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Balance
|
|
|
beginning
|
|
Charged to
|
|
|
|
at End
|
Description
|
|
of Year
|
|
Operations
|
|
(Deductions)
|
|
of Year
|
|
|
(In thousands)
|
|
Year ended August 27, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts receivable, credits and returns
|
|
$
|
1,591
|
|
|
$
|
1,314
|
|
|
$
|
(1,245
|
)
|
|
$
|
1,660
|
|
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
|
|
88
SMART
MODULAR TECHNOLOGIES (WWH), INC.
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.
Name: Iain MacKenzie
|
|
|
|
Title:
|
President and Chief Executive Officer
|
(Principal Executive Officer)
Date: November 3, 2010
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
(Principal Executive Officer)
|
|
President, Chief Executive
Officer and Director
(Principal Executive Officer)
|
|
November 3, 2010
|
|
|
|
|
|
/s/ BARRY
ZWARENSTEIN
Barry
Zwarenstein
(Principal Accounting Officer)
|
|
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
November 3, 2010
|
|
|
|
|
|
/s/ AJAY
SHAH
Ajay
Shah
|
|
Chairman of the Board of Directors
|
|
November 3, 2010
|
|
|
|
|
|
/s/ HARRY
W. (WEBB) McKINNEY
Harry
W. (Webb) McKinney
|
|
Director
|
|
November 3, 2010
|
|
|
|
|
|
/s/ MUKESH
PATEL
Mukesh
Patel
|
|
Director
|
|
November 3, 2010
|
|
|
|
|
|
/s/ CLIFTON
THOMAS WEATHERFORD
Clifton
Thomas Weatherford
|
|
Director
|
|
November 3, 2010
|
|
|
|
|
|
/s/ DENNIS
McKENNA
Dennis
McKenna
|
|
Director
|
|
November 3, 2010
|
|
|
|
|
|
/s/ KIMBERLY
E. ALEXY
Kimberly
E. Alexy
|
|
Director
|
|
November 3, 2010
|
89
|
|
|
|
|
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
|
|
[Reserved]
|
|
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
|
|
[Reserved]
|
|
4
|
.9
|
|
[Reserved]
|
|
4
|
.10*(17)
|
|
Amended and Restated Loan and Security Agreement, dated as of
April 30, 2007, by and among the Company, SMART Modular
Technologies (Europe) Limited, SMART Modular Technologies
(Puerto Rico) Inc., Wells Fargo Bank, National Association, as
Arranger and Administrative Agent, and certain other persons
named therein
|
|
4
|
.11*(17)
|
|
Amended and Restated Intercompany Subordination Agreement, dated
as of April 30, 2007, 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*(17)
|
|
Form of Amended and Restated Guaranty
|
|
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
|
|
[Reserved]
|
|
10
|
.9
|
|
[Reserved]
|
|
10
|
.10
|
|
[Reserved]
|
|
|
|
|
|
|
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.
|
90
|
|
|
|
|
Exhibit No.
|
|
Document
|
|
|
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
|
|
[Reserved]
|
|
10
|
.33*(14)
|
|
Form of Second Amended and Restated Indemnification Agreement
|
|
10
|
.34*(14)
|
|
Form of Time-based RSU Agreement (for Employees)
|
|
10
|
.35*(14)
|
|
Form of Time-based RSU Agreement (for Directors)
|
|
10
|
.36*(14)
|
|
Form of Performance-based RSU Agreement (for Employees)
|
|
10
|
.37*(15)
|
|
Third Amendment to Second Amended and Restated Loan and Security
Agreement, dated April 30, 2010
|
|
14
|
.1*(16)
|
|
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
|
91
|
|
|
* |
|
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). |
|
*(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 Quarterly Report on
Form 10-Q,
filed on January 6, 2010 (File No. 000-51771) |
|
*(15) |
|
Incorporated by reference to the Exhibit filed with the
Companys Current Report on
Form 8-K,
filed on June 14, 2010 (File No. 000-51771) |
|
*(16) |
|
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) |
|
*(17) |
|
Incorporated by reference to the Exhibits filed with the
Companys Current Report on
Form 8-K,
filed on May 2, 2007 (File No.
000-51771) |
92