ITEM 1. BUSINESS
Overview
SimpleTech is
a technology solutions provider offering products based on dynamic random
access memory, or DRAM, static random access memory, or SRAM, and Flash memory
technologies. We design, manufacture and market a comprehensive line of over
2,500 memory and storage products, as well as connectivity products that
connect memory cards and hard drive upgrade kits to PCs. These products are
used in high-performance computing, networking and communications, consumer
electronics and industrial applications. Examples of these applications include
desktop and notebook computers, servers, routers, switches, digital cameras,
digital video recorders, MP3 digital audio players, personal digital
assistants, or PDAs, embedded controls and medical instruments. Our patented IC
Tower stacking technology allows multiple memory chips to be stacked together
to increase the capabilities of memory modules without increasing the product
footprint. This technology allows our customers to design memory intensive
systems on a more competitive basis. Our CompactFlash cards provide portable
digital devices, such as digital cameras and MP3 digital audio players, with
increased storage capabilities in a smaller size product. We believe our
design, manufacturing, testing and logistics expertise, along with our
proprietary technologies, enable us to respond to our customers’ rapidly
changing product and service requirements. We provide our customers with timely
access to higher speed and higher density memory products, increasing their
ability to bring products to market quickly and decreasing their capital
requirements and production and inventory costs.
We offer
memory solutions through our Industrial and Commercial Divisions. Commercial Division channels include value
added resellers, or VARs, mail order customers, commercial and industrial
distributors, and retailers. We believe our comprehensive line of products
allows our customers to efficiently manage their inventory purchases by
consolidating their sources for memory, storage and connectivity products. Our
Industrial Division sells primarily custom memory products for newly
manufactured systems, with most sales based on a coordinated design effort
between us and our Industrial Division customers. Our principal Industrial Division customers, including sales
through their fulfillment partners, were Adtron, Alcatel Italia SPA, Cisco
Systems, Lucent Technologies and Unisys in 2001 and Cisco Systems, Lucent
Technologies, Motorola, Silicon Graphics and Unisys in 2000. Our Commercial
Division designs and manufactures industry accepted memory storage and
connectivity products used as upgrades in or enhancements to computing systems
and consumer electronics. Our principal Commercial Division customers included
CDW Computer Centers, Costco Wholesale, Ingram Micro, Insight Direct and Sam’s
Club in 2001 and CDW Computer Centers, Costco Wholesale, Ingram Micro, Insight
Direct and PC Connection in 2000.
Unisys and CDW Computer Centers accounted for more than 10.0% of our
total
revenues in 2001, and Cisco
Systems and CDW Computer Centers accounted for more than 10.0% of our total
revenues in 2000. No other customer accounted for more than 10.0% of our total
revenues in 2001 and 2000.
Industry
Background
The
development of high-performance PCs and servers and the evolution of the
Internet infrastructure have increased the demand for greater capabilities in
the storage, manipulation, transfer and management of digital data. Digital
computing and processing have extended beyond traditional computer systems,
such as PCs and servers, to include a wide array of networking and
communications, consumer electronics and industrial applications, including
routers, switches, digital cameras, digital video recorders, MP3 digital audio
players, PDAs, embedded controls and medical instruments. The increased
functionality and decreased size of many of these products have led to a
greater demand for higher density memory products with smaller size, lower
power consumption and higher speeds at a lower cost.
The memory
market can be divided into several types of integrated circuit, or IC, devices
that are designed to perform specific functions within computer and other
electronic systems. Three significant types of memory IC devices are DRAM, SRAM
and Flash. DRAM and SRAM are considered volatile memory since they require a
constant power supply to retain data. Since Flash is able to retain data
without a power source, it is considered non-volatile memory. Within each of
these categories, manufacturers are offering an increasing variety of memory
products that are designed for different applications and performance
requirements. This increasing variety has placed greater demands on
manufacturers of computer and other electronic systems to maintain engineering
expertise.
DRAM is a
high-density, low cost per bit, random access memory component which stores
digital information in the form of bits and provides high speed storage and
retrieval of data. SRAM performs memory functions similar to DRAM, but is much
faster and does not require the memory modules to be electronically refreshed.
Flash memory is a solid-state, non-volatile technology that can be used as an
alternative to rotating disk drives. Flash is noiseless, considerably lighter,
more rugged and consumes substantially less power than a rotating disk drive.
The
SimpleTech Solution
SimpleTech
designs, manufactures and markets a comprehensive line of memory, storage and
connectivity products used in high-performance computing, networking and
communications, consumer electronics and industrial applications.
Our products
offer the following features:
· High density. Our patented IC Tower
stacking technology allows us to design and manufacture CompactFlash cards and
DRAM memory modules in which multiple memory chips are stacked together to increase
the capabilities of memory modules without increasing the product footprint.
This technology allows our customers to design memory intensive systems on a
more competitive basis. As the component chips increase in capacity, our
ability to increase density in the same footprint also increases.
· Small footprint. We are able to
manufacture high-density DRAM and Flash memory products with some of the
smallest footprints on the market.
· High performance and reliability. Our
memory products utilize sophisticated error detection and correction processes
to provide high data reliability and integrity. In
addition, our
memory products are designed to withstand high levels of shock and vibration as
well as extreme temperature fluctuations typically associated with mobile
computing and industrial applications.
· Low power consumption. During read and
write operations, our Flash memory products use less power than most rotating
disk drives. At all other times during system operation, our Flash memory
products require no power. This low-power consumption translates into longer
battery life for many mobile computing and consumer electronic devices.
We offer our
Industrial Division customers a comprehensive technology solution from concept
to design to the creation of prototypes through high volume production and
testing. We believe our quick-turn design capabilities and automated
manufacturing and test processes allow our Industrial Division customers to
quickly and cost-effectively bring products to market. This outsourcing also
allows our Industrial Division customers to focus their resources on activities
and technologies in which they add the greatest value, such as system design,
sales, marketing and distribution. We believe our technical capabilities and
volume manufacturing strengths allow our Industrial Division customers to
cost-effectively design and implement customized, advanced memory chip
technology in high volume product applications.
Our Commercial
Division customers include VARs, mail order customers, commercial and
industrial distributors, and retailers. We believe our comprehensive line of
products allows our Commercial Division customers to efficiently manage their
inventory purchases by consolidating their sources for memory, storage and
connectivity products. We are able to strengthen our relationships with these
Commercial Division customers and develop the SimpleTech brand name through
various marketing programs. We also provide ongoing customer support, including
on-line pricing and navigation tools, toll-free technical support and account
manager training programs. For further details regarding our various marketing
programs, see “Business-Sales and Marketing.”
Design,
Manufacturing and Test Engineering
Design and production. The typical production cycle consists of a
design stage followed by a prototype stage and ends with full production of the
final product. The length of the design stage has been reduced due to rapid
improvements in technology. In recent years customers have demanded shorter
design and production cycles. In response, we have developed quick-turn design
and manufacturing services. By working with our Industrial Division customers
early in the design and prototype stages, we are able to resolve critical
design issues effectively and efficiently, thus shortening the time from
prototype design to volume manufacturing. In addition, working closely with our
Industrial Division customers throughout the design and production stages
allows us to gain important insights into their future product requirements. We
believe our quick-turn design and manufacturing services also allow us to
introduce upgrade products to the aftermarket on a timely basis to coincide
with new product releases by these customers.
Manufacturing. Our
manufacturing processes are highly automated and involve the use of specialized
equipment for the production of memory products. Our manufacturing systems have
been optimized to support the placement of a large number of IC devices on each
memory board. We believe we are able to achieve a high manufacturing yield and
minimize direct labor costs as a result of our design efficiencies, high level
of automation and general manufacturing expertise. Because our manufacturing
systems can be easily configured for different memory products, we have the
ability to offer our customers short manufacturing and test cycles on small and
large projects. We also have developed an automated method of manufacturing our
IC Tower stacking products which we believe results in further manufacturing
efficiencies. Our manufacturing process is ISO 9001 certified.
Test engineering. An important aspect of our
manufacturing operations is our focus on test engineering. We test 100% of our
memory products upon completion of manufacturing, which results in
lower returns due to product
defects. We believe our test engineering expertise will continue to grow in
importance as the speed and complexity of memory products increase. Our test
engineering group develops proprietary processes which, together with our
continued investment in advanced testing equipment, enable us to consistently
produce high-quality products.
Research
and Development
Our research
and development efforts are focused on developing reliable, high-performance
and cost-effective memory products to address the needs of traditional and
emerging memory applications. We believe the timely development of new products
is essential to maintaining our competitive position. Our engineering staff
works closely with our Industrial Division customers and provides services
throughout the production cycle, including component selection, schematic
design, layout, manufacturing and test engineering expertise. We design our
products to be compatible with existing industry standards and, where
appropriate, develop and promote new standards. An important aspect of our
engineering operations is to understand the challenges presented by our Industrial
Division customers’ custom design requirements and satisfy them by utilizing
our proprietary technologies and our technical expertise. In the course of
meeting our customers’ challenges, we are often required to develop new
technologies and processes which are later added to our design library for use
by our other customers. Our design library consists of over 1,000 designs that
are available for a wide variety of custom and industry-accepted product
configurations. We focus primarily on new high speed memory modules,
improvements in manufacturing processes and technologies, and improvements in
test routines and related software. We plan to continue to direct our research
and development efforts toward the design of new memory products which address
the requirements of our Industrial and Commercial Division customers.
In the Flash
market, our research and development is directed toward the design and
introduction of new Flash products that provide improved storage capacities,
higher speed read and write capabilities, smaller sizes and new interfaces.
These products are intended for networking and communications, consumer
electronics and industrial applications.
Our IC Tower
stacking technology enables us to produce high-density DRAM and Flash products
by manufacturing products in a three-dimensional form. These products offer
higher density capabilities in the same footprint than the traditional
two-dimensional designs. We stack unmodified memory devices to produce higher
density and smaller form factor DRAM modules and Flash cards. This capability
enables us to shorten our customers’ design cycles for high-density products to
lead times normally associated with non-stacked memory solutions.
In January 2002, we completed a $2.3 million
acquisition of the assets, including intellectual property, of Irvine Networks,
LLC, and hired their engineering staff. Irvine Networks has been developing
innovative content processing technology for Web-based server platforms. As a
result of our acquisition of Irvine Networks, we expect our research and
development expenses to increase significantly in 2002 to approximately $8 to
$9 million.
Products
We design,
manufacture and market a comprehensive line of more than 2,500 memory, storage
and connectivity products using our proprietary design and manufacturing
technologies. Substantially all of our DRAM, SRAM and Flash memory products
comply with industry standards and are based on a variety of industry
architectures. Sales of memory products accounted for 90.2%
of our revenues in 2001, 91.0% of our revenues in 2000 and 89.8% of our revenues in 1999.
DRAM Products
We offer DRAM
products including a wide range of single in-line memory modules, or SIMMs,
dual in-line memory modules, or DIMMs, and small outline dual in-line memory
modules, or SO DIMMs. Our standard DRAM products are available in various
configurations of up to 184 pins and densities of up to 512 megabytes. We also
offer many of these products in 3.3 volt or 5.0 volt configurations utilizing
different DRAM architectures such as DDR, SDRAM, RDRAM, EDO and FPM.
The following
table describes certain of our non-stacking DRAM products as of March 1,
2002:
DRAM
Product Family
Density
Architecture
Speed
(MHz)
Applications
184-pin DIMM
64-512MB
DDR
200-266
Servers and
workstations
Rambus DIMM
64-512MB
RDRAM
600-800
Desktop PCs,
embedded controls and workstations
168-pin and
184 -pin Registered DIMM
64-512MB
DDR, SDRAM
66-133
Desktop PCs,
embedded controls, networking and communications equipment, printers,
routers, servers and workstations
168-pin and
184 -pin DIMM
16-512MB
DDR, SDRAM,
EDO, FPM
10-133
Desktop PCs,
embedded controls, networking and communications equipment, printers,
routers, servers and workstations
144-pin SO
DIMM
16-256MB
SDRAM, EDO,
FPM
10-133
Embedded
controls, networking and communications equipment, notebook PCs, printers and
routers
100-pin DIMM
16-64MB
SDRAM, EDO,
FPM
33-133
Networking
and communications equipment, printers and terminals
72-pin SO
DIMM
16-64MB
EDO, FPM
10-33
Networking
and communications equipment, and notebook PCs
72-pin SIMM
16-128MB
EDO, FPM
10-33
Desktop PCs,
embedded controls, networking and communications equipment, printers, routers
and servers
Flash Products
We manufacture
three types of Flash products: Flash modules, Linear Flash PC Cards and data
storage Flash products. Flash modules and Linear Flash PC Cards are commonly
used in program and code storage applications such as networking and
communications and embedded applications. Data storage Flash products are
commonly used where data storage is the primary function, such as in digital
cameras, MP3 digital audio players, certain networking and communications and
embedded applications, and ruggedized computers built to withstand shock and
vibration.
Flash modules. We
offer standard, custom and application-specific Flash modules, including
168-pin Asynchronous DIMMs, 144-pin SO DIMM, 80-pin Asynchronous SIMMs and
72-pin
DRAM/Flash combination
SIMMs. Our Flash modules are available in densities of up to 256
megabytes. We offer additional options such as on-board active reset control
and system reset. Many of these products are available in 3.3 volt or 5.0 volt
configurations.
The following
table describes certain of our Flash modules as of March 1, 2002:
Flash Module Product Family
Density
Architecture
Applications
168-pin DIMM
4-16MB
3.3 volt or
5.0 volt
Networking
and communications equipment, printers and switches
144-pin SO
DIMM
32-256MB
3.3 volt
Networking
80-pin SIMM
2-256MB
12.0
volt/5.0 volt programming, 5.0 volt only, 3.3 volt only, reset options
Networking
and communications equipment, printers and switches
72-pin
DRAM/Flash SIMM
8MB Flash
56MB DRAM
Plugs into
the DRAM socket; reads and writes like DRAM
Networking
and communications equipment
Linear Flash PC Cards. We
offer standard, custom and application-specific Linear Flash PC Cards, with
densities ranging from 512 kilobytes to 64 megabytes.
The following
table describes certain of our Linear Flash PC Cards as of March 1, 2002:
Linear Flash PC Card Product Family
Density
Features
Applications
68-pin PC
Card
512KB-64MB
Plug and
play, compatible to Intel based series 1, 2, 2+ and Value Series 100 and 200
PC Cards
Medical
equipment, networking and communications equipment, notebook PCs, PDAs and
test equipment
68-pin PC
Card
1MB-64MB
Plug and
play, compatible to series C and D AMD cards
Medical
equipment, networking and communications equipment, PDAs and test equipment
Data storage Flash products. We
offer a broad line of data storage Flash products in various capacities, sizes
and operating voltages and temperatures. Our current product families include
CompactFlash, ATA Flash PC Cards, solid-state Flash drives and Flash Disk
Modules. Our data storage Flash products are compatible with a majority of
today’s industry-standard computing and communications systems.
CompactFlash. Our CompactFlash products provide full PC
Card ATA functionality but are only one-fourth the size of a standard PC Card.
CompactFlash’s small size, durability, low-
power
consumption and ability to operate at either 3.3 volts or 5.0 volts make it
well-suited for a range of current and next-generation, small size consumer
applications such as audio recorders, digital cameras, MP3 digital audio
players and PDAs. CompactFlash products provide interoperability with systems
based on the PC Card ATA standard by using a low-cost passive adapter.
ATA Flash PC Cards. Our
ATA Flash PC Cards are used in storage, data backup and data logging
applications. Our products are available in PC Card Type I, II and III form
factors.
Solid-state Flash drives. Our
solid-state Flash drives are available in 2.5 inch and 3.5 inch hard disk form
factors and are targeted at applications that require embedded data storage
devices. Our solid-state Flash drives offer rugged, portable, low-power data
storage and are compatible replacements for rotating hard drives, making them
ideal for notebook computers, communication devices, and networking and
communications applications requiring embedded storage.
Flash Disk Modules. Our
Flash Disk Module products offer a transparent design, replacing or augmenting
conventional IDE hard disk drives by leveraging from a miniature module footprint
that allows these products to be used as components in embedded systems.
Specifically, the product line is available in a 40-pin configuration which
addresses similar functionality to a 2.5 inch hard disk drive, a 44-pin
configuration which addresses similar functionality to 3.5 inch hard disk
drive, and a standard 144-pin SO DIMM configuration.
The following table describes
certain of our data storage Flash products as of March 1, 2002:
Data Storage Flash Product Family
Density
Form Factor
CompactFlash
8-640MB
Type I
(36.4mm x 42.8mm x 3.3mm)
ATA Flash PC
Card
8MB-2GB
Type I
(54.0mm x 85.6mm x 3.3mm)
Type II
(54.0mm x 85.6mm x 5.0mm)
Type III
(54.0mm x 85.6mm x 10.0mm)
Solid-state
Flash drives
8MB-3GB
2.5 inch and
3.5 inch
Flash Disk
Modules-40-pin
32-256MB
40-pin
vertical & horizontal
Flash Disk
Modules- 44-pin
32-160MB
44-pin
vertical & horizontal
Flash Disk
Modules-144-pin
32-1GB
144-pin SO
DIMM
Stacking DRAM and
Flash Card Products
DRAM modules and Flash card products. We
offer custom and application-specific stacking DRAM modules including a wide
range of DIMMs and SO DIMMs. Our stacking DRAM modules are available
in various configurations of up to 200-pins and densities of up to 1 gigabyte.
We also offer many of these modules in both 3.3 volt and 5.0 volt
configurations utilizing different DRAM architectures such as DDR, SDRAM, EDO
and FPM. Our IC Tower stacking technology has enabled us to offer a 1 gigabyte,
Type II CompactFlash card, which is one of the highest capacity CompactFlash
cards currently available.
The following
table describes certain of our stacking DRAM and Flash card products as of
March 1, 2002:
Stacking DRAM Product Family
Density
Architecture
Speed (MHz)
Applications
200-pin
Registered DIMM
512MB-1GB
SDRAM
66-133
Servers
168-pin and
184-pin Registered DIMM
256MB-1GB
DDR, SDRAM
66-133
Desktop PCs,
embedded controls, networking and communications equipment, printers, routers,
servers and workstations
168-pin DIMM
256MB-1GB
SDRAM, EDO,
FPM
10-133
Desktop PCs,
embedded controls, networking and communications equipment, printers,
routers, servers and workstations
144-pin SO
DIMM
128MB-1GB
SDRAM
66-133
Embedded
controls, networking and communications equipment, notebook PCs and routers
Stacking Flash Card Product Family
Density
Form Factor
CompactFlash
1GB
Type II
(36.4mm × 42.8mm × 5.0mm)
IC Tower stacking components. Our
patented IC Tower stacking technology is a high-density memory design
architecture that uses standard DRAM IC devices to create high-capacity
components. We offer a wide selection of stacked components to be used on
memory modules and on our customers’ specific applications. This technology is
used in complex, high-capacity module designs and systems and offers chip
densities that are less expensive than non-stacked components on a per megabit
basis.
The following
table describes certain of our IC Tower stacking components as of March 1,
2002:
IC Tower Stacking Product Family
Density
Architecture
Speed (MHz)
Applications
DDR
128-512MB
2 High
(64-256MB)
200-266
Standard and
application-specific memory modules and systems
SDRAM
128-512MB
2 High (64-256MB)
66-133
Standard and
application-specific memory modules and systems
EDO/FPM
128MB
2 High
(64MB)
10-33
Standard and
application-specific memory modules and systems
SRAM Products
We offer a
comprehensive line of standard, custom and application-specific SRAM modules
and PC Cards, including synchronous, asynchronous and battery backup low-power
SRAM devices. Our SRAM products are available in densities of up to 8
megabytes. Many of these products are available in 3.3 volt or 5.0 volt
configurations.
The following
table describes certain of our SRAM products as of March 1, 2002:
SRAM Product Family
Density
Speed (MHz)
Applications
Custom ZBT
4-8MB
133-200
Networking
and communications equipment
PC Card
512KB-6MB
6.6-10
Embedded
systems, industrial control test equipment and networking and communications
equipment
72-pin SIMM
2-8MB
66-100
Networking
and communications equipment
64-pin SIMM
1MB
66-83
Networking
and communications equipment
Other Products
Hard drive
upgrade kits. We offer hard drive upgrade kits for many major brands
of notebook PCs. Our products range from 6 to 40 gigabytes. The primary use of
these products is to enhance the storage capacity of notebook PCs. We also
offer USB data transfer/backup kits for desktop and notebook PCs.
Connectivity
products. We offer connectivity products that connect PC Cards,
CompactFlash cards and hard drive upgrade kits to a PC’s parallel port or USB
port. These products allow the user to move information from their PC Card,
CompactFlash card or hard drive to their desktop or notebook PC.
Customers
We sell our products through our Industrial
and Commercial Divisions. Our
Industrial Division was created in late 1998 to enhance the marketing of our
products to original equipment manufacturers, or OEMs. Our Commercial Division sells our products
through the following five channels:
value added reseller, or VAR, mail order, commercial and industrial
distribution, and retail.
Industrial Division
In 2001, our
Industrial Division sold to over 150 customers, including sales through
industrial distributors and contract manufacturers who incorporate our products
into systems they assemble for our Industrial Division customers. We define our
Industrial Division customers as OEMs who have purchased our products directly
or ordered our products from industrial distributors and contract
manufacturers. Our Industrial Division
customers make the purchasing decisions on substantially all of the products we
sell through industrial distributors and contract manufacturers. In 2001, Unisys accounted for 37.6% of our
Industrial Division revenues or 11.0% of our total revenues. In 2000, Cisco
Systems accounted for 31.8% of our Industrial Division revenues or 14.6% of our
total revenues. No other Industrial Division customer accounted for more than
10.0% of our total revenues in 2001 or 2000.
The following table
lists our top five Industrial Division customers based on revenues in 2001,
including sales to their industrial distributors and contract
manufacturers. We have no long-term
contracts with these customers.
Commercial Division
In 2001, our
Commercial Division sold to over 1,000 customers through a variety of
distribution channels including VAR, mail order, commercial and industrial
distribution, and retail. CDW Computer Centers was our largest Commercial
Division customer for both 2001 and 2000. CDW Computer Centers accounted for
27.9% of our Commercial Division revenues or 19.7% of our total revenues in
2001, and 31.2% of our Commercial Division revenues or 16.8% of our total
revenues in 2000. No other Commercial Division customer accounted for more than
10.0% of our total revenues in 2001 and 2000.
The following
table lists our top five Commercial Division customers in 2001. We have no
long-term contracts with these customers.
In addition,
through our commercial distribution arrangements, we supply certain of our
products to e-commerce companies, including Amazon.com and Buy.com, for their
sale of these products on the Internet.
We expect that
sales of our products to a small number of customers will continue to
contribute materially to our revenues for the foreseeable future and believe
that our financial results will depend in significant part upon the success of
our customers’ business. We have also
experienced changes in the composition of our major customer base from quarter
to quarter as the market demand for our customers’ products changes and we
expect this variability will continue in the future.
Although we
began tracking revenues and gross margins on a divisional basis in 1999, we
have not tracked, and do not intend to track, operating expenses on a
divisional basis. For further financial
information regarding our Industrial and Commercial Divisions, including
financial information about our international sales, see Note 11 to our
consolidated financial statements.
Sales
and Marketing
Industrial Division
Our Industrial
Division uses an internal direct sales force complemented by an external sales
force of manufacturers’ representatives and industrial distributors for sales
to Industrial Division customers in the United States and internationally. We
pursue our customer base on both a geographic and account-specific basis. We
believe these combined sales forces have the local presence, market knowledge
and strategic
insight to allow us to more
effectively market our products to a larger number of industrial customers. In
addition, as part of our sales and marketing efforts, our experienced
applications engineers work closely with our Industrial Division customers in
designing our products into their systems.
Commercial Division
We ship
SimpleTech brand-name products directly to VARs, mail order customers,
commercial and industrial distributors, and retailers. As of March 1, 2002, our
products were available in more than 3,000 stores. In addition to in-house
sales representatives, our sales efforts in the commercial channel are supported
by manufacturers’ representatives. For the mail order and retail channels, we
advertise in magazines and newspapers as a way of bringing end-users to our
customers’ locations. Some of our Commercial Division customers also feature
our products in their advertisements in exchange for a fee. We offer certain
VARs volume rebates and work with their customers to qualify our products for
their information system departments. Volume rebates are used to incentivize
certain resellers, rewarding them with a rebate for our products sold. For
commercial distributors, we purchase corporate image advertising, offer volume
rebates and joint marketing programs, and generate leads at electronics
tradeshows and refer those potential customers to our distributors. Through joint
marketing programs, we work together with resellers to incorporate the
SimpleTech brand in the resellers’ existing marketing plans, such as catalogs
and web banner ads. Lead generation comes from end users who visit our website,
fill out our product registration cards, visit our booths at trade shows, and
call us in response to advertisements and direct mail. In addition, we have
developed direct advertising programs with certain of our commercial
distributors’ e-commerce customers in which we market our products on their
websites. We also offer account manager incentives which include sales contests
and reward programs designed to sustain reseller loyalty while also creating
excitement for increased sales activity.
Customer
Service and Support
We provide our
customers with comprehensive product service and support. We work closely with
our Industrial Division customers to monitor the performance of their product
designs and to provide application design and support. This also provides us
with insight into defining their subsequent generations of products. Our
standard Industrial Division customer support package is generally offered with
all product sales and includes full technical documentation and application
design assistance. During our Industrial Division customers’ production phase,
we provide extensive support which includes training, system-level design,
implementation and integration support. We believe that tailoring our technical
support to our Industrial Division customers’ needs is essential for the
success of our product introductions and customer satisfaction. Our Commercial
Division customers receive technical support on an unlimited, toll-free basis
and are assigned a dedicated technician familiar with their account. We also
train the account managers of certain Commercial Division customers to keep
them informed about changes in our product lines. In addition, we offer
Commercial Division customers on-line pricing and navigation tools, and a
personalized web page available through our extranet which features
personalized information such as promotions, new products and contact
information.
Competition
We conduct
business in an industry characterized by intense competition, rapid
technological change, evolving industry standards, declining average sales
prices and rapid product obsolescence. Our competitors include many large
domestic and international companies that have substantially greater financial,
technical, marketing, distribution and other resources, broader product lines,
lower cost structures, greater brand recognition and longer-standing
relationships with customers and suppliers.
Our primary
competitors include:
We expect to
face competition from existing competitors and new and emerging companies that
may enter our existing or future markets that have similar or alternative
products, which may be less costly or provide additional features. In addition,
some of our significant suppliers, including Micron Semiconductor Electronics
and Samsung Semiconductor, are also our competitors. These suppliers have the
ability to manufacture competitive products at lower costs as a result of their
higher levels of integration. We also face competition from current and
prospective customers that evaluate our capabilities against the merits of
manufacturing products internally. Competition also may arise due to the
development of cooperative relationships among our current and potential
competitors or third parties to increase the ability of their products to
address the needs of our prospective customers. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
We compete in
our target markets based primarily on quality and price, design and
manufacturing technology, and responsiveness to our customers’ needs. We expect
our competitors will continue to improve the performance of their current
products, reduce their current product sales prices and introduce new products
that may offer greater performance and improved pricing, any of which could
cause a decline in sales or loss of market acceptance of our products.
To remain
competitive, we must, among other things:
• Provide best-of-class
design, manufacturing and test engineering services;
• Maintain quality levels;
• Provide technologically
advanced products;
• Compete favorably on the
basis of price;
• Offer flexible delivery
schedules;
• Deliver finished products on
a timely basis in sufficient volume to satisfy our customers’ requirements;
• Successfully protect our
intellectual property rights; and
• Accurately anticipate and
prepare for new technological trends and standards in the industry.
The Flash
memory market is in the early stage of development. There is currently an
absence of a single Flash memory standard. It is possible that Flash memory standards
other than those to which our products conform will emerge as the industry
standard. If we are unable to anticipate and adequately allocate our resources
in a timely and efficient manner toward the production and development of
industry-standard Flash memory products, we may experience significant delays
in releasing new and commercially viable products. In addition, if a competing
technology replaces or takes significant market share from the Flash memory
market, we would not be able to sell our Flash products.
Suppliers
IC devices
represent approximately 95.0% of our component costs. We purchase these IC
devices from a small number of suppliers. In 2001, our significant suppliers of
IC devices included:
DRAM IC Device Suppliers
Flash IC Device Suppliers
• Elpida Memory
• Hitachi Semiconductor
• Micron
Semiconductor Electronics
• Samsung Semiconductor
• Samsung Semiconductor
Hitachi Semiconductor and Samsung
Semiconductor supply substantially all of the IC devices used in our Flash
memory products. In addition, Elpida Memory, Micron Semiconductor Electronics
and Samsung Semiconductor currently supply a majority of the DRAM IC devices
used in our DRAM memory products. In the second half of 2001, we executed IC
device consignment inventory agreements with our major DRAM and Flash memory
suppliers. The agreements were executed
with Hitachi Semiconductor, Micron Semiconductor Electronics and Samsung
Semiconductor. As a result of the agreements,
our inventory risk has decreased significantly as we are not financially
obligated for the inventory until it enters the production process.
Although we have a supply contract for Flash
IC devices with Hitachi Semiconductor, we have no long-term DRAM IC device
supply contracts. A disruption in or termination of our supply relationship
with any of these significant suppliers would, among other things, cause
delays, disruptions or reductions in product shipments or increase costs and/or
prices and would harm our business. We
are continuing to identify and establish additional sources of supply where we
have supplier concentrations, although there can be no assurance that these
efforts will be successful. In the future, if the demand for our products
exceeds our suppliers’ ability to deliver needed components, we may be placed
on supplier allocation and we may be unable to meet customer demand.
Backlog
Sales of our
memory products are made under short-term cancelable purchase orders. We
include in our backlog only those customer orders for which we have accepted
purchase orders and to which we have assigned shipment dates within the
upcoming six months. Since orders constituting our backlog are subject to
change due to, among other things, customer cancellations and reschedulings,
and our ability to procure necessary components, backlog is not necessarily an
indication of future revenues. In addition, there can be no assurance that
current backlog will necessarily lead to revenues in any future period. Our
combined backlog was $4.5 million as of December 31, 2001 compared to $22.4
million as of December 31, 2000. Our Industrial Division backlog was $3.8
million as of December 31, 2001 compared to $21.4 million as of December 31,
2000. Our Commercial Division backlog
was $721,000 as of December 31, 2001 compared to $1.0 million as of December
31, 2000. Commercial Division backlog is typically nominal since substantially
all commercial orders are filled on a same-day or next-day basis. Our ability
to predict future sales is limited because a majority of our quarterly product
revenues come from orders that are received and fulfilled in the same quarter.
Intellectual
Property Rights
We regard our
patents, trademarks, trade secrets and other intellectual property as critical
to our success. We rely on a combination of patents, trademarks, copyrights and
trade secret laws, confidentiality procedures, and employee disclosure and
invention assignment agreements to protect our intellectual property rights.
As of March 1,
2002, we owned nine U.S. patents, including U.S. Patent No. Re. 36,916 related
to our IC Tower stacking products, and 12 additional patent applications were
pending. We have two
agreements to license our
technology to two different third parties. One of the licenses is perpetual,
although we believe that the licensee is currently not using this
technology. The other license provides
for the licensee’s exclusive use of our stacking technology for a one-year term
and is automatically renewable unless either party declines not to renew. In late 2001, we entered into a license
agreement with Acticon Technologies to make, have made, use and sell certain PCMCIA-based
telephone modems and PCMCIA-based Ethernet networking connectors and cards with
respect to certain Acticon patents. In
August 2000, we entered into a license agreement with Micron Electronics for
the use, sale and importation into the United States of certain memory modules
incorporating Micron’s proprietary technology. The license agreement was
entered into in connection with our August 22, 2000, settlement of a lawsuit
originally filed by Micron on April 6, 2000, against 18 computer memory
manufacturers, including us, for our alleged infringement of certain of
Micron’s patents. A Notice of Entry of Order was approved on August 28, 2000,
by the court which dismissed the Micron lawsuit with prejudice. The impact of
the license for all periods presented in the financial statements would have
been immaterial.
The following
table describes our patents and their expiration dates:
U.S. Patent No.
Expiration Date
Description
Re. 36,916
May 6, 2013
Apparatus
for stacking semiconductor chips
5,555,209
September 9,
Circuit for
latching data signals from DRAM memory
5,562,504
October 7,
Communications
card with integral transmission media line adaptor
5,596,757
January 20,
System and
method for selectively providing termination power to a SCSI bus terminator
from a host device
5,660,568
August 25,
Communications
card with integral transmission media line adaptor
5,673,419
September
29, 2014
Parity bit
emulator with write parity bit checking
5,826,174
January 22, 2016
Method and
apparatus for improving data transmission over a wireless system by optical
spectrum positioning
6,154,778
April 21,
Multi-function
module incorporating flash memory having additional controller adapted to
configure the data from the memory that is to be provided to the external
source
D405,764
February 16,
Adaptor for
a media line connector
Although we consider the patents currently
held by us to be critical to our success, there can be no assurance that any patents
currently held by us or any patents which may be granted to us in the future
will not be challenged, invalidated or circumvented, or that rights granted
thereunder will provide meaningful protection or other commercial advantage to
us. There can be no assurance that third parties will not develop similar
products, duplicate our products or design around the patents currently owned
by us or which may be granted to us in the future. Because we view intellectual
property rights as critical to our success, we intend to pursue future patents
and other intellectual property rights in the U.S. There can be no assurance
that we will be successful in these endeavors. In addition there can be no
assurance that our trade secrets and know-how may not become known to third
parties, or become part of the public domain, which in either case would harm
our financial performance and business operations.
We have on at least one occasion 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 some foreign
countries. Because we sell some of our
products overseas, we have exposure to foreign intellectual property risks.
The semiconductor industry is characterized
by vigorous protection and pursuit of intellectual property rights. We believe
that it may be necessary, from time to time, to initiate litigation against one
or more third parties to preserve our intellectual property rights. In
addition, from time to time, third parties may bring suits against us. For
details regarding our pending intellectual property lawsuits, see “Legal
Proceedings” and see “Business-Risk Factors-We are involved from time to time
in litigation over intellectual property rights, which may adversely affect our
ability to manufacture and sell our products.”
In the event of an adverse result in any such
litigation, we could be required to pay substantial damages, cease the
manufacture, use and sale of certain products, expend significant resources to
develop non-infringing technology, discontinue the use of certain processes or
obtain licenses to use infringed technology. Any litigation, whether as
plaintiff or as defendant, would likely result in significant expense to us and
divert the efforts of our technical and management personnel, whether or not
such litigation is ultimately determined in our favor. In addition, the results
of any litigation are inherently uncertain .
In the event we desire to incorporate
third-party technology into our products or our products are found to infringe
on others’ patents or intellectual property rights, we may be required to
license such patents or intellectual property rights. If we obtain licenses
from third parties, we may be required to pay license fees or make royalty
payments, which could reduce our gross margins. If we are unable to obtain a
license from a third party for technology, we could incur substantial
liabilities or be required to expend substantial resources redesigning our
products to eliminate the infringement. There can be no assurance that we would
be successful in redesigning our products or that we could obtain licenses on
commercially reasonable terms, if at all. In addition, any development or
license negotiations could require substantial expenditures of time and other
resources by us.
As is common in the industry, we currently have
in effect a number of agreements in which we have agreed to defend, indemnify
and hold harmless certain of our suppliers and customers from damages and costs
which may arise from the infringement by our products of third-party patents,
trademarks or other proprietary rights. The scope of such indemnity varies, but
may, in some instances, include indemnification for damages and expenses,
including attorneys’ fees. We may from time to time be engaged in litigation as
a result of such indemnification obligations. In addition, our insurance does
not cover intellectual property infringement.
In our efforts to maintain the
confidentiality and ownership of trade secrets and other confidential
information, all of our employees are required to sign employee non-disclosure
and invention assignment agreements. This agreement requires our employees to
disclose, document and assign their interest in all inventions, patents and
copyrights developed while employed with us. Our employees further agree to
preserve all of our confidential information including trade secrets, customer
information, know-how and other business information. There can be no assurance
that these agreements will provide meaningful protection of our trade secrets
or other confidential information in the event of unauthorized use or
disclosure of such information. See “Risk Factors-Our proprietary technology
and intellectual property may not be adequately protected, which could harm our
competitive position.”
Employees
As of December 31, 2001, we had 349 full-time
employees, consisting of 178 in manufacturing (including test, quality
assurance and material management), 83 in sales and marketing, 48 in
finance and administration and
40 in design and product development.
Our employees are not represented by any collective bargaining
agreements and we have never experienced a work stoppage. Management believes that relations with our
employees are good.
RISK
FACTORS
You should carefully consider the following
risks before you decide to buy shares of our common stock. The risks and
uncertainties described below are not the only ones facing us. Additional risks
and uncertainties, including those risks set forth in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” below, may also
adversely impact and impair our business. If any of the following risks
actually occur, our business, results of operations or financial condition
would likely suffer. In such case, the trading price of our common stock could
decline, and you may lose all or part of the money you paid to buy our stock.
This Report contains forward-looking
statements based on the current expectations, assumptions, estimates and
projections about us and our industry. These forward-looking statements involve
risks and uncertainties. Our actual results could differ materially from those
discussed in these forward-looking statements as a result of certain factors,
as more fully described in this section and elsewhere in this Report. We do not
undertake to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
Declines
in our average sales prices may result in declines in our revenues and gross
margins.
In the fourth
quarter of 2000 and in the entire year 2001, overcapacity in the memory product
market resulted in significant declines in component prices, which negatively
impacted our average selling prices.
Declines in semiconductor prices could also affect the valuation of our
inventory, which could harm our business. During periods of overcapacity, our
ability to maintain or increase revenues will depend upon our ability to
increase unit sales volumes of existing products and to introduce and sell new
products in quantities sufficient to offset declines in sales prices. Our
efforts to reduce costs and develop new products to offset the impact of
further declines in average sales prices may not be successful. Declines in average
sales prices also would result in more memory being built into products by
original equipment manufacturers, which would favor our largest competitors and
reduce the demand for our commercial memory products.
Because
we depend on a small number of suppliers for IC devices, any disruption in our
supply relationships could harm our ability to fulfill orders.
We have no
long-term IC device supply contracts and are dependent on a small number of
suppliers to supply IC devices, which represent approximately 95% of our
component costs. Our dependence on a small number of suppliers and our limited
number of long-term supply contracts expose us to several risks, including the
inability to obtain an adequate supply of components, price increases, late
deliveries and poor component quality. Hitachi Semiconductor supplies
substantially all of the IC devices used in our Flash memory products. In
addition, Elpida Memory, Micron Semiconductor Electronics and Samsung
Semiconductor currently supply a majority of the DRAM IC devices used in our
DRAM memory products. A disruption in or termination of our supply relationship
with any of these significant suppliers by natural disaster or otherwise, or
our inability to develop relationships with new suppliers, if required, would
cause delays, disruptions or reductions in product shipments or require product
redesigns which could damage relationships with our customers, and would
increase our costs and/or prices. In particular, if our supply relationship
with Hitachi Semiconductor is
disrupted or terminated, our
ability to manufacture and sell our Flash products would be limited and our
Flash business would be adversely affected.
We
are subject to the cyclical nature of the semiconductor industry and changes
from the current point in the cycle could adversely affect our business.
The
semiconductor industry, including the memory markets in which we compete, is
highly cyclical and is characterized by constant and rapid technological
change, rapid product obsolescence and price erosion, evolving standards, short
product life cycles and wide fluctuations in product supply and demand. The
industry has experienced significant downturns, often connected with, or in
anticipation of, maturing product cycles of both semiconductor companies’ and
their customers’ products and declines in general economic conditions. These
downturns have been characterized by diminished product demand, production
overcapacity, high inventory levels and accelerated erosion of average selling
prices. Any future downturns could have a material adverse effect on our
business and operating results. In the fourth quarter of 2000 and in 2001, a
semiconductor downturn negatively impacted our average selling prices, revenues
and earnings. Furthermore, any upturn in the semiconductor industry could
result in increased demand for, and possible shortages of, components we use to
manufacture and assemble our ICs. Such
shortages could have a material adverse effect on our business and operating
results.
We
may be unable to maintain a steady supply of components.
The
electronics industry has experienced in the past, and may experience in the
future, shortages in IC devices, including DRAM, SRAM and Flash memory. We have
experienced and may continue to experience delays in component deliveries and
quality problems which have caused and could in the future cause delays in
product shipments. In addition, we have required and could in the future
require the redesign of some of our products. In addition, industry capacity
has, from time to time, become constrained such that some vendors which supply
components for our products have placed their customers, ourselves included, on
allocation. This means that while we may have customer orders, we may not be
able to obtain the materials that we need to fill those orders in a timely
manner.
Sales
to a small number of customers represent a significant portion of our revenues
and the loss of any key customer would materially reduce our sales.
Our dependence
on a small number of customers means that the loss of a major customer or any
reduction in orders by a major customer would materially reduce our revenues.
Historically, a relatively small number of customers have accounted for a
significant percentage of our revenues. Our ten largest Industrial Division
customers accounted for an aggregate of 71.0% of our Industrial Division
revenues or 20.8% of our total revenues in 2001 and 81.3% of our Industrial
Division revenues or 37.4% of our total revenues in 2000. In
2001, Unisys accounted for
37.6% of our Industrial Division revenues, or 11.0% of
our total revenues. In 2000, Cisco Systems accounted for 31.8% of our Industrial
Division revenues or 14.6% of our total revenues. No other Industrial Division customer accounted for more
than 10.0% of our total revenues in 2001 or 2000.
Our ten
largest Commercial Division customers accounted for an aggregate of 61.6% of
our Commercial Division revenues
or 43.6% of our total revenues in 2001, and 50.5% of our
Commercial Division revenues or 27.3% of our total revenues in 2000. CDW Computer Centers was our largest Commercial Division customer for
both 2001 and 2000. CDW Computer Centers accounted for 27.9% of our Commercial Division
revenues or 19.7% of our total revenues in 2001, and 31.2% of our Commercial Division revenues or 16.8% of
our total revenues in 2000. No other Commercial Division customer accounted for more
than 10.0% of our total revenues in 2001 and 2000.
Consolidation
in some of our customers’ industries may result in increased customer
concentration and the potential loss of customers as a result of acquisitions.
In addition, the composition of our major customer base changes from quarter to
quarter as the market demand for our customers’ products changes and we expect
this variability will continue in the future. We expect that sales of our
products to a small number of customers will continue to contribute materially
to our revenues in the foreseeable future and believe that our financial
results will depend insignificant part upon the success of our customers’
business.
Three
of our beneficial shareholders have substantial influence over our operations
and can significantly influence matters requiring shareholder approval.
Manouch
Moshayedi, Mike Moshayedi and Mark Moshayedi, each of whom is an executive
officer and director of SimpleTech, are brothers and beneficially own
approximately 80.2% of our common stock. As a result, they have the ability to
control all matters requiring approval by our shareholders, including the
election and removal of directors, approval of significant corporate
transactions and the ability to control the decision of whether a change in
control will occur.
We
are involved from time to time in claims and litigation over intellectual
property rights, which may adversely affect our ability to manufacture and sell
our products.
The
semiconductor industry is characterized by vigorous protection and pursuit of
intellectual property rights. We believe that it may be necessary, from time to
time, to initiate litigation against one or more third parties to preserve our
intellectual property rights. In addition, from time to time, we have received,
and may continue to receive in the future, notices that claim we have infringed
upon, misappropriated or misused other parties’ proprietary rights, which
claims could result in litigation. Such litigation would likely result in
significant expense to us and divert the efforts of our technical and
management personnel. In the event of an adverse result in such litigation, we
could be required to pay substantial damages, cease the manufacture, use and
sale of certain products, expend significant resources to develop
non-infringing technology, discontinue the use of certain processes or obtain
licenses to use the infringed technology. Such a license may not be available
on commercially reasonable terms, if at all. Our failure to obtain a license or
our failure to obtain a license on commercially reasonable terms could cause us
to incur substantial costs and suspend manufacturing products using the
infringed technology. If we obtain a license, we would likely be required to
make royalty payments for sales under the license. Such payments would increase
our costs of revenues and reduce our gross profit.
We are
currently a party to two lawsuits regarding intellectual property as further
described under “Legal Proceedings.” The outcome of litigation is inherently
uncertain and we cannot predict the outcome of these lawsuits with certainty.
These lawsuits have diverted, and are expected to continue to divert, the
efforts and attention of our key management and technical personnel. In
addition, we have incurred, and expect to continue to incur, substantial legal
fees and expenses in connection with these lawsuits. As a result, our defense
of these lawsuits, regardless of their eventual outcomes, has been, and will
continue to be, costly and time consuming. In addition, if our IC Tower
stacking patent is found to be invalid, our ability to exclude competitors from
making, using or selling the same or similar products to our IC Tower stacking
products would cease. In addition, if we are found to infringe valid patents of
others, we may be excluded from using the infringed technology without a
license, which may not be available on commercially reasonable terms, if at
all.
If
industry sales of products using Flash memory do not grow, our revenues, gross
margins and profitability would be harmed.
The market for
consumer electronics incorporating Flash memory is relatively new and emerging.
The success of our Flash business will depend largely on the level of consumer
interest in consumer
electronics utilizing Flash
memory, such as digital cameras, MP3 digital audio players and personal digital
assistants, or PDAs, many of which have only recently been introduced to the
market. If sales of products using Flash memory do not increase, we will be
unable to grow our Flash business. In addition, if we are unable to anticipate
and fulfill customer demand for our products, we may lose sales to our
competitors.
Demand
for our products would decline if the market for Flash memory does not develop,
or if a competing technology displaces Flash memory.
There is
currently an absence of a single Flash memory standard. It is possible that
Flash memory standards other than those to which our products conform will
emerge as the industry standard. If we are unable to anticipate and adequately
allocate our resources in a timely and efficient manner toward the production
and development of industry-standard Flash memory products, we may experience
significant delays in releasing new and commercially viable products. These
delays would provide a competitor a first-to-market opportunity and allow a
competitor to achieve greater market share. Some of our competitors are in a
better financial and marketing position from which to influence industry acceptance
of a particular Flash memory standard or competing technology than we are. In
particular, a primary source of competition may come from companies that offer
alternative technologies such as ferroelectric random access memory products.
If a competing technology replaces or takes significant market share from the
Flash memory market, we would not be able to sell our Flash products.
The
execution of our growth strategy depends on our ability to retain key
personnel, including our executive officers, and to attract qualified
personnel.
Competition
for employees in our industry is intense. We have had and may continue to have
difficulty hiring the necessary engineering, sales and marketing and management
personnel to support our growth. The successful implementation of our business
model and growth strategy depends on the continued contributions of our senior
management and other key research and development, sales and marketing and
operations personnel, including Manouch Moshayedi, our Chief Executive Officer,
Mike Moshayedi, our President, and Mark Moshayedi, our Chief Operating Officer,
Chief Technical Officer and Secretary. The loss of any key employee, the
failure of any key employee to perform in his or her current position, or the
inability of our officers and key employees to expand, train and manage our
employee base would prevent us from executing our growth strategy.
Our
proprietary technology and intellectual property may not be adequately
protected, which could harm our competitive position.
Our
proprietary technology and other intellectual property are critical to our
success. We protect our intellectual property rights through patents,
trademarks, copyrights and trade secret laws, confidentiality procedures and
employee disclosure and invention assignment agreements. It is possible that
our efforts to protect our intellectual property rights may not:
• prevent
the challenge, invalidation or circumvention of our existing patents;
• result
in patents that lead to commercially viable products or provide competitive
advantages for our products;
• prevent
our competitors from independently developing similar products, duplicating our
products or designing around the patents owned by us;
• prevent
third-party patents from having an adverse effect on our ability to do
business;
• provide
adequate protection for our intellectual property rights;
• prevent
disputes with third parties regarding ownership of our intellectual property
rights;
• prevent
disclosure of our trade secrets and know-how to third parties or into the
public domain; and
• result
in patents from any of our pending applications.
As part of our confidentiality procedures, we
enter into non-disclosure and invention assignment agreements with all of our
employees and attempt to control access to and distribution of our technology,
documentation and other proprietary information. However, if such agreements
are found to be unenforceable, we may be unable to adequately protect our
intellectual property rights. In addition, despite these procedures, third
parties could copy or otherwise obtain and make unauthorized use of our
technologies or independently develop similar technologies.
We have not applied and do not expect to apply
for patent protection in foreign countries. In addition, the laws of foreign
countries may not adequately protect our intellectual property rights. Many
U.S. companies have encountered substantial infringement problems in some
foreign countries. Because we sell some of our products overseas, we have
exposure to foreign intellectual property risks.
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 have agreed to
defend, indemnify and hold harmless certain of our customers and suppliers from
damages and costs which may arise from the infringement by our products of
third-party patents, trademarks or other proprietary rights. We may
periodically have to respond to claims and litigate these types of
indemnification obligations. Any such indemnification claims could require us
to pay substantial damages. Our insurance does not cover intellectual property
infringement.
Our
indemnification obligations to our customers and suppliers for product defects
could require us to pay substantial damages.
A
number of our product sales and product purchase agreements provide that we
will defend, indemnify and hold harmless our customers and suppliers from
damages and costs which may arise from product warranty claims or claims for
injury or damage resulting from defects in our products. We maintain insurance
to protect against certain claims associated with the use of our products, but
our insurance coverage may not be adequate to cover all or any part of the
claims asserted against us. A successful claim brought against us that is in
excess of, or excluded from, our insurance coverage could substantially harm
our business, financial condition and results of operations.
Our
limited experience in acquiring other businesses, product lines and
technologies may make it difficult for us to overcome problems encountered in
connection with any acquisitions we may undertake.
We
intend to pursue selective acquisitions to complement our internal growth. If
we make any future acquisitions, we could issue stock that would dilute our
shareholders’ percentage ownership, incur substantial debt, reduce our cash
reserves or assume contingent liabilities. Although we
completed the acquisition of assets of Irvine Networks, LLC, a leading-edge
engineering company, in January 2002, our experience
in acquiring other businesses, product lines and technologies is limited. In addition,
the attention of our small management team may be diverted from our core
business if we undertake an acquisition. Potential acquisitions also involve
numerous risks, including, among others:
• Problems
assimilating the purchased operations, technologies or products;
• Costs
associated with the acquisition;
• Adverse
effects on existing business relationships with suppliers and customers;
• Risks
associated with entering markets in which we have no or limited prior
experience;
• Potential
loss of key employees of purchased organizations; and
• Potential
litigation arising from the acquired company’s operations before the
acquisition.
Our inability to overcome problems
encountered in connection with such acquisitions could divert the attention of
management, utilize scarce corporate resources and harm our business. In
addition, we are unable to predict whether or when any prospective acquisition
candidate will become available or the likelihood that any acquisition will be
completed.
Product
returns, price protection and order cancellations could reduce our revenues.
To the extent
we manufacture products in anticipation of future demand that does not
materialize, or in the event a customer cancels outstanding orders, we could
experience an unanticipated increase in our inventory. A lack of consumer
demand for our products may also cause increased product returns. A majority of
our sales through commercial channels include limited rights to return unsold
inventory. In addition, while we may not be contractually obligated to accept
returned products, we may determine that it is in our best interest to accept
returns in order to maintain good relations with our customers. Product returns
would increase our inventory and reduce our revenues. We have had to write-down inventory in the past for reasons such
as obsolescence, excess quantities and declines in market value below our
costs. These inventory write-downs were approximately $759,000 in 2001 compared
to $2.9 million in 2000. In addition, we offer some of our Commercial Division
customers limited price protection rights for inventories of our products held
by them. If we reduce the list price of our products, these customers may
receive credits from us. We incurred price protection charges of approximately
$1.8 million in 2001 compared to $557,000 in 2000.
We are also
subject to repurchase agreements with various financial institutions in
connection with wholesale inventory financing. Under these agreements, we may
be required to repurchase inventory upon customer default with a financing
institution and then resell the inventory through normal distribution channels.
As of December 31, 2001, we have not been required to repurchase inventory in
connection with the customer default agreements noted above. However, it may be
possible that we will be required to repurchase inventory, upon customer
default, in the future. Sales under such agreements were approximately $1.1
million in 2001 compared to $2.7 million in 2000.
We have no
long-term volume commitments from our customers. Sales of our products are made
through individual purchase orders and, in certain cases, are made under master
agreements governing the terms and conditions of the relationships. Customers
may change, cancel or delay orders with limited or no penalties. We have
experienced cancellations of orders and fluctuations in order levels from
period-to-period and we expect to continue to experience similar cancellations
and fluctuations in the future which could result in fluctuations in our
revenues.
We
may not be able to maintain or improve our competitive position because of the
intense competition in the memory industry.
We conduct
business in an industry characterized by intense competition, rapid
technological change, evolving industry standards, declining average sales
prices and rapid product obsolescence. Our
competitors include many large
domestic and international companies that have substantially greater financial,
technical, marketing, distribution and other resources, broader product lines,
lower cost structures, greater brand recognition and longer-standing
relationships with customers and suppliers. As a result, our competitors may be
able to respond better to new or emerging technologies or standards and to
changes in customer requirements. Our competitors may also be able to devote
greater resources to the development, promotion and sale of products, and may
be able to deliver competitive products at a lower price.
We expect to
face competition from existing competitors and new and emerging companies that
may enter our existing or future markets with similar or alternative products
which may be less costly or provide additional features. In addition, some of
our significant suppliers are also our competitors, many of whom have the
ability to manufacture competitive products at lower costs as a result of their
higher levels of integration. We also face competition from current and
prospective customers that evaluate our capabilities against the merits of
manufacturing products internally. Competition may arise due to the development
of cooperative relationships among our current and potential competitors or
third parties to increase the ability of their products to address the needs of
our prospective customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share.
We expect our
competitors will continue to improve the performance of their current products,
reduce their prices and introduce new products that may offer greater
performance and improved pricing, any of which could cause a decline in sales
or loss of market acceptance of our products. In addition, our competitors may
develop enhancements to or future generations of competitive products that may
render our technology or products obsolete or uncompetitive.
Recent
terrorist activities and the continued threat of terrorism could adversely
affect our business.
Recent
terrorist attacks in the United States, as well as continued threats of
terrorism within the United States and abroad and current and future military
responses to them, have resulted in delayed and canceled orders and created
many economic and political uncertainties that make it extremely difficult for
us, our customers and our suppliers to accurately forecast and plan future
business activities. This reduced predictability challenges our ability
to grow our business. In particular, it is difficult to develop and
implement strategies, efficient operations, and effectively manage capacity and
supply-chain relationships. In addition, the continued threats of
terrorism and the heightened security measures in response to such threats have
and may continue to cause significant disruption to commerce throughout the
world. Disruption in air transportation in response to these threats or
future attacks may result in transportation and supply-chain disruptions, increase
our costs for both receipt of inventory and shipment of products to our
customers, and cause customers to defer their purchasing decisions.
Disruptions in commerce could also cause consumer confidence and spending to
decrease or result in increased volatility in the United States and worldwide
financial markets and economy. They could also result in economic
recession in the United States or abroad. Any of these occurrences could
have a significant impact on our operating results, revenues and costs and may
result in the volatility of the market price of our common stock and on the
future price of our common stock.
We
may lose our competitive position if we fail to develop new and enhanced
products and introduce them in a timely manner.
The
high-performance computing, networking and communications, consumer electronics
and industrial markets are subject to rapid technological change, product
obsolescence, frequent new product introductions and enhancements, changes in
end-user requirements and evolving industry standards. Our ability to compete
in these markets will depend in significant part upon our ability to
successfully
develop, introduce and sell new
and enhanced products on a timely and cost-effective basis, and to respond to
changing customer requirements.
We have
experienced, and may in the future experience, delays in the development and
introduction of new products. Our product development is inherently risky
because it is difficult to foresee developments in technology, coordinate our
technical personnel, and identify and eliminate design flaws. Defects or errors
found in our products after commencement of commercial shipments could result
in delays in market acceptance of these products. Delays in developing,
manufacturing or marketing new or enhanced products could give our competitors
an advantage, hurt our reputation and harm our business, financial condition
and results of operations. Such products, even if introduced, may not gain market
acceptance. In addition, we may not be able to respond effectively to new
technological changes or new product announcements by others.
Obtaining
additional capital to fund our operations and finance our growth could impair
the value of your investment.
If we expand
more rapidly than currently anticipated or if our working capital needs exceed
our current expectations, we may need to raise additional capital through
public or private equity offerings or debt financings. Our future capital
requirements depend on many factors including our research, development, sales
and marketing activities. We do not know whether additional financing will be
available if needed, or will be available on terms favorable to us. If we
cannot raise needed funds on acceptable terms, we may not be able to develop or
enhance our products, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements. To the extent we raise
additional capital by issuing equity securities, our shareholders may
experience substantial dilution and the new equity securities may have greater
rights, preferences or privileges than our existing common stock.
We
face risks associated with doing business in foreign countries, including
foreign currency fluctuations and trade barriers, that could lead to a decrease
in demand for our products or an increase in the cost of the components used in
our products.
The volatility
of general economic conditions and fluctuations in currency exchange rates
affect the prices of our products and the prices of the components used in our
products. International sales of our products accounted for 16.0% and 13.4% of
our revenues in 2001 and 2000, respectively.
No single foreign country accounted for more than 10.0% of our revenues
in 2001 or 2000. For 2001 and 2000,
more than 95.0% of our international sales were denominated in U.S. dollars.
However, if there is a significant devaluation of the currency in a specific
country, the prices of our products will increase relative to that country’s
currency and our products maybe less competitive in that country. In addition,
we cannot be sure that our international customers will continue to be willing
to place orders denominated in U.S. dollars. If they do not, our revenues and
results of operations will be subject to foreign exchange fluctuations which
could harm our business. We do not hedge against foreign currency exchange rate
risks.
In addition,
we purchase substantially all of the IC devices used in our products from local
distributors of foreign suppliers. Although our purchases of IC devices are
currently denominated in U.S. dollars, devaluation of the U.S. dollar relative
to the currency of a foreign supplier would likely result in an increase in our
cost of IC devices.
Our international
sales also are subject to certain other risks, including regulatory risks,
tariffs and other trade barriers, timing and availability of export licenses,
political and economic instability, difficulties in accounts receivable
collections, difficulties in managing distributors, lack of a local sales
presence, difficulties in obtaining governmental approvals, compliance with a
wide variety of complex
foreign laws and treaties and
potentially adverse tax consequences. In addition, the United States or foreign
countries may implement quotas, duties, taxes or other charges or restrictions
upon the importation or exportation of our products, leading to a reduction in
sales and profitability in that country.
Disruption
of our operations in our Santa Ana, California, manufacturing facility would
substantially harm our business.
All of our
manufacturing operations are located in our facility in Santa Ana, California.
Due to this geographic concentration, a disruption of our manufacturing
operations, resulting from sustained process abnormalities, human error,
government intervention or natural disasters such as earthquakes, fires or
floods could cause us to cease or limit our manufacturing operations and
consequently harm our business, financial condition and results of operations.
Compliance
with environmental laws and regulations could harm operating results.
We are subject
to a variety of environmental laws and regulations governing, among other things,
air emissions, waste water discharge, waste storage, treatment and disposal,
and remediation of releases of hazardous materials. Our failure to comply with
present and future requirements could harm our ability to continue
manufacturing our products. Such requirements could require us to acquire
costly equipment or to incur other significant expenses to comply with
environmental regulations. The imposition of additional or more stringent
environmental requirements, the results of future testing at our facilities, or
a determination that we are potentially responsible for remediation at other
sites where problems are not presently known to us, could result in expenses in
excess of amounts currently estimated to be required for such matters.
Our
stock price is likely to be volatile and could drop unexpectedly.
Our common
stock has been publicly traded only since September 29, 2000. The market price
of our common stock has been subject to significant fluctuations since the date
of our initial public offering. The
stock market has from time to time experienced significant price and volume
fluctuations that have affected the market prices of securities, particularly
securities of technology companies. As a result, the market price of our common
stock may materially decline, regardless of our operating performance. In the
past, following periods of volatility in the market price of a particular
company’s securities, securities class action litigation has often been brought
against that company. We may become involved in this type of litigation in the
future. Litigation of this type is often expensive and diverts management’s
attention and resources.
ITEM 2.
ITEM 2. PROPERTIES
We occupy two
leased facilities of approximately 24,500 and 48,600 square feet in Santa Ana,
California, in which our executive offices, manufacturing, engineering,
research and development and testing operations are located. We lease the
24,500 square foot facility from MDC Land LLC, a limited liability company
owned by Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi, each of whom is
an executive officer, director and major shareholder of SimpleTech. This lease
expires in March 2005 and the base rent is approximately $17,000 per month. We
also lease the 48,600 square foot facility from MDC Land LLC. This lease
expires in May 2005, and the base rent is approximately $33,000 per month. In
addition, we lease a 12,000 square foot research and development facility in
Irvine, California. This lease expires in July 2005 and the base rent is approximately
$18,000 per month. We also lease
various small facilities for our sales offices and storage. We believe that our
existing leased space is adequate for our current operations and that suitable
replacement and additional spaces will be available in the future on
commercially reasonable terms.
ITEM 3.
ITEM 3. LEGAL
PROCEEDINGS
DPAC Technologies, Inc.-Patent
Infringement
On September 23, 1998, we filed a lawsuit against DPAC
Technologies, Inc., formerly Dense-Pac Microsystems, Inc. ("DPAC"),
in the United States District Court for the Central District of California for
infringement of our IC Tower stacking patent, U.S. Patent No. 5,514,907.
We sought damages, including prejudgment interest, an injunction against
further infringement of our patent by DPAC, treble damages and attorneys’ fees.
DPAC filed an answer to our complaint denying our claim of infringement,
asserted a defense of patent invalidity against our IC Tower stacking patent
and asserted a counterclaim against us alleging infringement of its stacking
patent, U.S. Patent No. 4,956,694. On March 29, 2001, the court entered final
judgement finding DPAC did not infringe our patent and that we did not infringe
DPAC’s patent. We appealed the ruling against us, and that ruling was affirmed
March 7, 2002. We anticipate that the affirmance will have no material
impact on our on-going business. DPAC did not appeal the ruling in our favor,
and that ruling is now final.
On October 17, 2000, we received a reissue patent of the ‘907 patent
from the U.S. Patent and Trademark Office. The reissue patent is U.S. Patent
No. Re. 36,916.
On February 21, 2001, we filed a new lawsuit against DPAC in the
United States District Court for the Central District of California for
infringement of our IC Tower stacking reissue patent, U.S. Patent No. Re.
36,916. We are seeking damages and an injunction against infringement of our
patent by DPAC. On March 13, 2001, DPAC filed an answer to our complaint
denying our claim of infringement, and asserted a defense of patent invalidity
against our IC Tower stacking reissue patent. In addition, DPAC counterclaimed
alleging misappropriation of unspecified technology and the sale of products by
us incorporating such technology alleged to have been misappropriated. The
court stayed action in the litigation pending the outcome of appeal in the
above-referenced litigation.
Lemelson Medical, Education & Research
Foundation, LLP - Patent Infringement
We received notice on November 26, 2001, that the Lemelson Medical,
Education & Research Foundation, LLP (“Lemelson Foundation”) filed a
complaint on November 13, 2001, against us and other defendants. The
complaint was filed in the District Court of Arizona and alleges that our manufacturing
processes infringe several patents that the Lemelson Foundation allegedly
owns. The complaint also states that these allegedly infringed patents
relate to machine vision technology and bar coding technology. On March
7, 2002, we were served with the Lemelson Foundation complaint.
Additionally, the judge in this case has indicated that he intends to stay this
case as to any defendant whose alleged infringement concerns only those patents
relating to machine vision technology and bar coding
technology, pending resolution of the Symbol
Technologies v. Lemelson case, which involves the same patents. Because of the preliminary stage of this
case, an estimate of potential damages, if any, would be premature and
speculative, and we have not made any such estimate at this time.
We are not currently involved in any other material legal proceedings,
nor have we been involved in any such proceedings that has had or may have a
significant effect on our company. We are not aware of any other material legal
proceedings threatened or pending against us.
ITEM 4.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5.
ITEM 5. MARKET
FOR THE REGISTRANT’S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Market
Information
Our common stock has traded on The Nasdaq National Market under the
symbol “STEC.” Our initial public
offering of stock occurred on September 29, 2000. Prior to that time, there was no public market for our common
stock. The following table sets forth the range of high and low intra-day sales
prices reported on The Nasdaq National Market for our common stock for the
periods indicated.
Recent
Share Prices
The following
table sets forth the closing sales prices per share of our common stock on The
Nasdaq National Market on (i) December 28, 2001, and (ii) March 14, 2002. Because the market price of our common stock
is subject to fluctuation, the market value of the shares of our common stock
may increase or decrease.
Holders
As of March
14, 2002, there were 63 holders of record of our common stock.
Dividend
Policy
Prior to our
conversion from an S corporation to a C corporation in September 2000, we paid
distributions to our S corporation shareholders in amounts generally consistent
with their tax liabilities arising from their allocable share of S corporation
earnings. We also made distributions of
notes to our shareholders of record as of September 20, 2000, in an aggregate
amount equal to our total earnings from the date of our formation through
September 26, 2000.
Since becoming
a C corporation, we have not declared or paid any cash dividends on our common
stock and do not expect to do so in the foreseeable future. We currently intend
to retain all available funds for use in the operation and expansion of our
business. Any future determination to pay dividends will be at the discretion
of our board of directors and will depend principally upon our results of
operations, financial conditions, capital requirements, contractual and legal
restrictions and other factors the board deems relevant.
Under the
terms of our line of credit with Comerica Bank, we have agreed to not declare
or pay any cash dividends or make any other cash distributions with respect to
shares of our capital stock without the prior written consent of Comerica
Bank. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources” and “Note 6 of the notes to our consolidated financial statements.”
Recent
Sales of Unregistered Securities
None
Use
of Proceeds from Sales of Registered Securities
On October 4,
2000, we completed the initial public offering of our common stock pursuant to
our Registration Statement on Form S-1 (File No. 333-32478) that was declared
effective by the Securities and Exchange Commission on September 28, 2000.
There has been no material change with respect to our use of proceeds from our
initial public offering to the information discussed in our Quarterly Report on
Form 10-Q for the nine months ended September 30, 2000.
ITEM 6.
ITEM 6. SELECTED
FINANCIAL DATA
You should
read the following selected consolidated financial data in conjunction with our
consolidated financial statements and related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
appearing elsewhere in this Report. The consolidated statement of operations
data for the years ended December 31, 1999 through 2001 and the consolidated
balance sheet data at December 31, 2000 and 2001 were derived from our
consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere
in this Report. The consolidated statement of operations data for the years
ended December 31, 1997 and 1998 and the consolidated balance sheet data at
December 31, 1997 through 1999 were derived from our audited consolidated
financial statements and are not included in this Report.
(1) From our formation in March
1990 to September 26, 2000, we elected for federal and state income tax
purposes to be treated as an S corporation under Subchapter S of the Internal
Revenue Code of 1986 and comparable state tax laws and filed our federal and
state income tax returns on that basis. Accordingly, no provision has been made
for federal or certain state income taxes. Pro forma net income (loss) has been
computed using an effective tax rate of 38% to reflect the estimated income tax
expense (benefit) as if we had been fully subject to federal and state income
taxes as a C corporation for all periods presented. Subsequent to the
termination of our S corporation status on September 26, 2000, we have paid
federal and state corporate-level income taxes as a C corporation.
(2) Reflects a 5.07 for 1 stock
split of our common stock in September 2000.
All share and per share amounts have been adjusted to give retroactive
effect to the stock split.
ITEM
7.
ITEM
7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial
condition and results of operations should be read in conjunction with our
financial statements and the related notes to such financial statements
included elsewhere in this Report beginning on page. The following discussion contains
forward-looking statements that involve risks and uncertainties. The statements are based on current
expectations and actual results could differ materially from those discussed
herein. Factors that could cause or
contribute to the differences are discussed in “Business - Risk Factors” and
elsewhere in this Report.
Overview
Simple
Technology, Inc., incorporated in 1990 and renamed SimpleTech, Inc. in May
2001, is a technology solutions provider offering products based on DRAM, SRAM
and Flash memory technologies. Headquartered in Santa Ana, California, the
company is a leader in the design, development, manufacturing and marketing of
memory solutions. In addition, we offer a line of high-density memory products
using our three-dimensional IC Tower stacking technology that allows multiple
memory chips to be stacked together to increase the capabilities of memory
modules without increasing the product footprint. Our products are used in high-performance computing, networking
and communications, consumer electronics and industrial applications.
As a result of
increased demand for consumer electronics and high-density memory products used
in Internet infrastructure and embedded applications, the percentage of our
revenues derived from the sale of Flash memory and IC Tower stacking products
increased from 13.0% in 1998 to 20.8% in 1999 and 40.2% in
2000. However, due to the softening
macro-economic conditions and excess inventory levels at our Industrial
Division customers in 2001, the percentage of our revenue derived from the sale
of Flash memory and IC tower stacking products decreased to 34.1% in 2001.
In 2001, our highest profit margin products were our IC Tower stacking
products.
We sell our
products through our Industrial and Commercial Divisions. Our Industrial Division was created in late
1998 to enhance the marketing of our products to original equipment
manufacturers, or OEMs. Our Commercial
Division sells our products through the following five channels: value added reseller, or VAR, mail order,
commercial and industrial distribution, and retail. For further details on our
major customers, see “Business-Customers.”
After experiencing year-over-year total revenue growth of 57.5% from
1998 to 1999 and 60.1% from 1999 to 2000, both our Industrial and Commercial
Division revenues were negatively impacted in 2001 due to softening
macro-economic conditions and severe declines in the price of DRAM and Flash
components, which resulted in significantly lower average selling prices. In addition, our Industrial Division
revenues were further impacted by a build-up of inventory by our communications
and networking customers in 2000. We do
not expect Industrial Division customer inventory levels to return to normal
levels until at least the second half of 2002.
In 2001, our Industrial Division revenues declined 66.7% and our
Commercial Division revenues declined 29.2%.
Our total revenues and earnings bottomed in the third quarter of 2001
with total revenues growing 7.2% sequentially in the fourth quarter of 2001. In 2001, our Commercial Division
significantly expanded our retail presence through the addition of new
customers, including Sam’s Club and Circuit City. Commercial Division units shipped increased 42.7% from 2000 to
2001. In 2000 and 2001, our highest profit margin division was our Industrial
Division. Although we began tracking revenues and gross margins on a divisional
basis in 1999, we have not tracked, and do not intend to track, operating
expenses on a divisional basis.
DRAM prices
have more than quadrupled from November 2001 to March 2002 and appear to have
temporarily stabilized. Constraint
measures enacted by suppliers during the second half of 2001, including the
closing of fab lines and consolidation among major DRAM manufacturers, have
contributed to rising DRAM prices and signs of recovery. We believe these events will translate into
increased average selling prices, revenues and gross profit dollars.
Historically,
a relatively small number of customers have accounted for a significant
percentage of our revenues. Our ten largest customers accounted for an aggregate
of 56.3% of our total revenues in 2001, 55.8% of our total revenues in 2000,
and 44.3% of our total revenues in 1999. Our ten largest Industrial Division
customers accounted for an aggregate of 71.0% of our Industrial Division
revenues or 20.8% of our total revenues in 2001, 81.3% of our Industrial
Division revenues or 37.4% of our total revenues in 2000, and 75.4% of our
Industrial
revenues or 19.4% of our total
revenues in 1999. In 2001, Unisys accounted for 37.6% of
our Industrial Division revenues or 11.0% of our total revenues. In 2000, Cisco
Systems accounted for 31.8% of our Industrial Division revenues or 14.6% of our
total revenues. Our ten largest
Commercial Division customers accounted for an aggregate of 61.6% of our
Commercial Division revenues or 43.6% of our total revenues in 2001, 50.5% of
our Commercial Division revenues or 27.3% of our total revenues in 2000, and
47.6% of our Commercial Division revenues or 35.3% of our total revenues in
1999. Our largest Commercial Division customer between 1999 and 2001, CDW
Computer Centers accounted for 27.9% of our Commercial Division revenues or
19.7% of our total revenues in 2001, 31.2% of our Commercial Division revenues
or 16.8% of our total revenues in 2000 and 26.1% of our Commercial Division
revenues or 19.4% of our total revenues in 1999. Other than Unisys and CDW
Computer Centers in 2001, Cisco Systems and CDW Computer Centers in 2000 and
CDW Computer Centers in 1999, no customer accounted for more than 10.0% of our
total revenues in 2001, 2000 or 1999. The composition of our major customer
base changes from quarter to quarter as the market demand for our customers’
products changes and we expect this variability will continue in the future. We
expect that sales of our products to a small number of customers will continue
to contribute materially to our revenues in the foreseeable future and believe
that our financial results will depend in significant part upon the success of
our customers’ products.
International
sales of our products constituted 16.0% of our revenues in 2001, 13.4% of our
revenues in 2000 and 15.0% of our revenues in 1999. No single foreign country
accounted for more than 10.0% of our revenues in 2001, 2000 or 1999. We focus
our international sales efforts on Industrial and Commercial Division
customers, with sales to VARs constituting substantially all of our
international commercial sales. In 2001, 2000 and 1999, over 95.0% of our
international sales were denominated in U.S. dollars. Consequently, if the
value of the U.S. dollar increases relative to a particular foreign currency,
our products could become relatively more expensive, which could result in a
reduction of sales in a particular country. In addition, we purchase
substantially all of the IC devices used in our products from local
distributors of Japanese, Korean and Taiwanese suppliers. Although our
purchases of IC devices are currently denominated in U.S. dollars, devaluation
of the U.S. dollar relative to the currency of a foreign supplier would likely
result in an increase in our cost of IC devices. Our international sales also
could be adversely affected by risks including regulatory risks, tariffs and
other trade barriers.
In the past we
have been impacted by seasonal purchasing patterns resulting in higher sales in
the third and fourth quarters of each year. Our ability to adjust our
short-term operating expenses in response to fluctuations in revenues is
limited. As a result, if revenues are lower than expected in any given period,
our results of operations could be harmed.
Revenues are
recognized at the time of shipment. A majority of our sales through commercial
channels include limited rights to return unsold inventory. In addition, while
we may not be contractually obligated to accept returned products, we may
determine that it is in our best interest to accept returns in order to
maintain good relations with our customers. Product returns would increase our
inventory and reduce our revenues. We have had to write-down inventory in the
past for reasons such as obsolescence, excess quantities and declines in market
value below our costs. These inventory write-downs were approximately $759,000
in 2001, $2.9 million in 2000 and $1.2 million in 1999. Increased inventory
write-downs in 2000 were primarily attributable to sharp declines in component
prices during the fourth quarter. We also have price protection agreements with
a number of our Commercial Division customers in which we retain limited liability
for price declines related to unsold inventory. If we reduce the list price of
our products, these customers may receive credits from us. We incurred price
protection charges of approximately $1.8 million in 2001, $557,000 in 2000 and
$367,000 in 1999. Price protection charges increased in 2001 due to increased
component price volatility.
From our
formation in March 1990 through September 26, 2000, we elected for federal and
state income tax purposes to be treated as an S corporation under Subchapter S
of the Internal Revenue Code of 1986 and comparable state tax laws and filed
our federal and state income tax returns during that period on that basis.
Subsequent to our S corporation termination on September 26, 2000, we have paid
federal and state corporate-level income taxes as a C corporation.
Results
of Operations
The following
table sets forth, for the periods indicated, certain consolidated statement of
operations data reflected as a percentage of revenues.
[1] Pro forma in 1999 and 2000.
Comparison
of the years ended December 31, 2001, 2000 and 1999
Net Revenues. Our revenues were $164.2 million in 2001,
$308.3 million in 2000 and $192.6 million in 1999. Sales of memory products accounted for 90.2% of our revenues in
2001, 91.0 % of our revenues in 2000 and 89.8% of our revenues in 1999. Revenues decreased 46.7% from 2000 to 2001
primarily due to a 54.4% decrease in our average sales price from $125 in 2000
to $57 in 2001, offset partially by a 16.0% increase in units shipped from 2.5
million units in 2000 to 2.9 million units in 2001. The decrease in our average sales price resulted from significant
declines in DRAM and Flash component prices from October 2000 through November
2001. The increase in unit volume
resulted from increases of 37.7% for standard memory products and 29.7% for
Flash products, partially offset by unit volume decreases of 68.4% for IC Tower
stacking products and 41.2% for non-DRAM, non-Flash products such as SRAM, hard
drive upgrade kits and connectivity products.
Increases in Flash and standard memory units shipped resulted primarily
from market share gains achieved during 2001 in the retail channel, including
shipments to new retail customers such as Circuit City and Sam’s Club. Decreases in IC Tower
stacking units shipped resulted
from excess Industrial Division customer inventory levels throughout 2001. The
mix of products sold varies from quarter to quarter and may vary in the future,
affecting our overall average sales prices and gross margins.
Revenues
increased 60.1% from 1999 to 2000 due to a 54.3% increase in our average sales
price from $81 in 1999 to $125 in 2000 and a 4.2% increase in unit volume from
2.4 million units in 1999 to 2.5 million units in 2000. The increase in our
average sales price resulted from a shift in product mix to higher capacity
DRAM, Flash and IC Tower stacking products. The increase in unit volume
resulted from unit volume increases of 386.4% for IC Tower stacking products
and 63.8% for Flash products, partially offset by unit volume decreases of 2.7%
for standard memory products and 45.5% for non-DRAM, non-Flash products such as
products manufactured on a consignment basis, SRAM, hard drive upgrade kits and
connectivity products. The decrease in unit volume for non-DRAM, non-Flash
products resulted from a substantial decline in the unit volume of products
manufactured on a consignment basis from 1999 to 2000.
Our Industrial
Division revenues were $48.0 million in 2001, $144.2 million in 2000 and $49.6
million in 1999, compared to our Commercial Division revenues of $116.2 million in 2001, $164.1 million in
2000 and $143.0 million in 1999. Both our Industrial and Commercial Division
revenues were negatively impacted in 2001 due to softening macro-economic
conditions and severe declines in the price of DRAM and Flash components, which
resulted in significantly lower average selling prices. Our Industrial Division revenues were
further impacted by a build-up of inventory by our communications and
networking customers in 2001. We do not
expect Industrial Division customer inventory levels to return to normal levels
until at least the second half of 2002.
Our combined backlog was $4.5 million as of December 31, 2001, $22.4
million as of December 31, 2000 and $13.2 million as of December 31, 1999. Our
Industrial Division backlog was $3.8 million as of December 31, 2001, $21.4
million as of December 31, 2000 and $12.7 million as of December 31, 1999,
compared to our Commercial Division backlog of $721,000 as of December 31, 2001,
$1.0 million as of December 31, 2000 and $485,000 as of December 31, 1999. From
2000 to 2001, the decrease in Industrial Division backlog resulted from a
build-up of inventory by our Industrial Division customers, which led to a
significant reduction of orders. From 1999 to 2000, the increase in Industrial
Division backlog was primarily due to increasing Industrial Division orders and
the lengthening of time between our receipt of an Industrial Division order and
the required ship date of the order. Commercial Division backlog is typically
nominal since substantially all commercial orders are filled on a same-day or
next-day basis.
Gross Profit. Our gross profit was $36.6 million in 2001,
$68.4 million in 2000 and $39.9 million
in 1999. Gross profit as a percentage of revenues was 22.3% in 2001, 22.2% in
2000 and 20.7% in 1999. Gross profit as
a percentage of revenues remained relatively flat from 2000
to 2001. Gross profit as a percentage of revenues expanded from 1999 to
2000 primarily due to a shift in product mix to a greater concentration of
higher margin, higher capacity Flash memory and IC Tower stacking
products. Gross profit as a percentage
of revenues for our Industrial Division was 29.6% in 2001, 26.7% in 2000 and
29.4% in 1999, compared to our Commercial Division gross profit as a percentage
of revenues of 19.2% in 2001, 18.2% in 2000 and 17.7% in 1999. Gross margins
for our Industrial Division were greater than for our Commercial Division
primarily due to the fact that our Industrial Division sold a larger percentage
of higher margin, higher capacity DRAM, Flash memory and IC Tower stacking
products.
Sales and Marketing. Sales and marketing expenses are comprised
primarily of personnel costs and travel expenses for our domestic and
international sales and marketing employees, commissions paid to internal
salespersons and independent manufacturers’ representatives, shipping costs and
marketing programs. Sales and marketing
expenses were $18.1 million in 2001, $21.6 million in 2000 and $14.2 million in
1999. Sales and marketing expenses
decreased from 2000 to 2001 primarily due to reduced commissions and channel
marketing expenses related to lower revenues.
Sales and marketing expenses increased from 1999 to 2000 primarily due
to increases in personnel costs related to the addition of internal
salespersons and increased commissions and channel marketing expenses related
to higher revenues. Sales and marketing
expenses as a percentage of revenues were 11.0% in 2001, 7.0% in 2000 and 7.3%
in 1999. As a percentage of revenues, sales and marketing expenses increased
from 2000 to 2001 primarily due to reduced revenues and were relatively flat in
1999 and 2000.
General and Administrative. General and administrative expenses are
comprised primarily of personnel costs for our executive and administrative
employees, professional fees and facilities overhead. General and
administrative expenses were $11.6 million in 2001, $11.9 million in 2000 and $9.8
million in 1999. General and
administrative expenses were relatively flat between 2000 and 2001. General and
administrative expenses increased from 1999 to 2000 primarily due to increased
staffing and $1.4 million in additional legal costs. General and administrative
expenses as a percentage of revenues were 7.0% in 2001, 3.8% in 2000 and 5.1%
in 1999. As a percentage of revenues, general and administrative expenses
increased from 2000 to 2001 primarily due to reduced revenues. As a percentage
of revenues, general and administrative expenses decreased from 1999 to 2000
primarily due to increased revenues, partially offset by increased legal costs
and expanded staffing.
Research and Development. Research and development expenses are
comprised primarily of personnel costs for our engineering and design staff and
the cost of prototype supplies. Research and development expenses were $4.4
million in 2001, $3.7 million in 2000 and $1.8 million in 1999. Research and
development expenses as a percentage of revenues were 2.7% in 2001, 1.2% in
2000 and 1.0% in 1999. Research and development expenses increased
year-over-year from 1999 to 2001 primarily due to a significant expansion of
our research and development staff to serve our growing Industrial Division customer
base and to develop new product lines. In January 2002, we completed a $2.3
million acquisition of the assets, including intellectual property, of Irvine
Networks, LLC, and hired their engineering staff. Irvine Networks has been
developing innovative content processing technology for Web-based server
platforms. As a result of our acquisition of Irvine Networks, we expect our
research and development expenses to increase significantly in 2002 to
approximately $8 to $9 million.
Non-Recurring Expenses. We did not have
non-recurring expenses in 2001 and in 1999.
Non-recurring expenses were $1.8
million in 2000 and were comprised of expenses related
to a litigation settlement with Interactive Flight Technologies, Inc. The settlement payment was made in January
2001.
Interest and Other Expense (Income),
Net. Interest and other expense
(income), net is comprised of interest expense related to our line of credit
and equipment financing, interest income from our cash and cash equivalents and
other expenses or income resulting from non-operating transactions . Interest and other expense (income), net was
($1.4) million in 2001, $1.2 million in 2000 and $2.1 million in 1999. Interest expense was $200,000 in 2001, $1.6
million in 2000 and $1.8 million in 1999.
In October 2000, we paid down our line of credit balance to zero. Interest income was $1.6 million in 2001,
$407,000 in 2000 and $24,000 in 1999.
Interest income increased in 2000 and 2001 due to a higher average cash
balance resulting primarily from initial public offering proceeds received in
October 2000 and positive cash flow from operations in each quarter from the
fourth quarter of 2000 through the fourth quarter of 2001. In 1999, we contributed land with a cost
basis of $325,000 to charity resulting in other expense.
Net Income. Net income was $2.3 million in 2001. Assuming the termination of our S
corporation status, pro forma net income would have been $17.3 million in 2000
and $7.4 million in 1999.
Liquidity
and Capital Resources
As of December
31, 2001, we had working capital of $64.5 million, including $51.8 million of
cash and cash equivalents, compared to working capital of $64.3 million,
including $33.7 million of cash and cash equivalents, as of December 31, 2000.
We had no outstanding principal balance under our $27.5 million line of credit
with Comerica Bank at December 31, 2001 and 2000. There is no unused line fee
under our line of credit agreement with Comerica Bank. Following our initial
public offering, Comerica Bank has the option to reduce our availability under
the line of credit to an amount between $15.0 million and $20.0 million as
determined by their sole and absolute discretion. To date, availability under our line of credit has remained at
$27.5 million.
Current assets were 5.5 times current liabilities at the end of 2001,
compared to 3.0 times current liabilities at the end of 2000.
Net cash
provided by operating activities was $24.2 million in 2001. Net cash provided
by operating activities in 2001 resulted primarily from net income of $2.3
million, a decrease in net accounts receivable of $16.0 million and a decrease
in net inventory of $21.2 million, partially offset by a decrease in accounts
payable of $15.6 million. Inventory and
accounts payable decreased primarily due to the implementation of consignment
inventory programs with our three largest component suppliers during 2001 and a
sharp decline in DRAM and Flash pricing during the year. Accounts receivable decreased due to the
decline in overall revenues. Net cash
provided by operating activities was $18.1 million in 2000. Net cash provided
by operating activities in 2000 resulted primarily from net income of $25.4
million, increases in accounts payable and accrued and other liabilities of
$8.4 million, and depreciation and amortization of $3.4 million, partially
offset by increases in net inventory of $12.8 million, net accounts receivable
of $4.4 million and deferred income taxes of $1.6 million. Inventory increased to support increased
Industrial Division customer orders and lengthened time between our receipt of
such orders and their required ship date. Accounts receivable increased due to
increased overall revenues.
Net cash used
in investing activities was $5.4 million in 2001 and $2.4 million in 2000,
attributable primarily to purchases of furniture, fixtures and equipment.
Although we had no material capital expense commitments as of December 31,
2001, we expect to spend approximately $6.0 to $8.0 million during the next 24
months, primarily for manufacturing, testing and engineering equipment.
Net cash used
in financing activities totaled $674,000 in 2001. Net cash used in financing
activities in 2001 resulted primarily from the repayment of borrowings from a
bank and capital lease obligations of $1.6 million, partially offset by the
issuance of common stock of $1.1 million related to our employee stock purchase
plan and stock option exercises. In 2001, we also repurchased a total of 72,500
shares of our common stock under our authorized stock repurchase program at an
average price of approximately $1.25 per share, resulting in a total cash
payment of approximately $92,000. Net
cash provided by financing activities totaled $14.3 million in 2000. Net cash
provided by financing activities in 2000 resulted primarily from the receipt of
$65.1 million in connection with our initial public offering in September 2000,
partially offset by distributions of $35.0 million to S Corporation
shareholders and line of credit repayments of $12.5 million.
In prior
years, we entered into several capital leases and loans to finance
manufacturing and testing equipment. Our obligations under capital leases were
$554,000 on December 31, 2001 and $1.4 million on December 31, 2000, with
interest rates ranging from 8.1% to 9.6% per annum. Our equipment financing loan balances were $1.0 million on
December 31, 2001 and $1.8 million on December 31, 2000, with interest rates
ranging from
7.5% to 9.1% per annum. One of
the equipment note payable agreements contains various nonfinancial covenants
that, among other things, limit distributions and dividends to our shareholders
without the prior written consent of the lender, and requires the equipment to
remain unencumbered by other liens. As of December 31 2001, we were in
compliance with all covenants under the equipment note payable agreements.
We have made
cash distributions of a portion of our S Corporation earnings to our
shareholders of record as of September 20, 2000, for reasons including payment
of their overall personal income taxes. On September 26, 2000, we distributed
to our shareholders of record as of September 20, 2000, in proportion to their
ownership of our shares, notes in an aggregate principal amount of $25.1
million, equal to our undistributed earnings from the date of our formation
through September 26, 2000. We used a portion of the net proceeds from our
initial public offering to payoff the principal amount of these undistributed
earnings notes on October 6, 2000 and November 3, 2000.
We believe the
net proceeds from our initial public offering, together with our existing
assets, availability under our line of credit and expected cash flow from
operations will be sufficient to fund our operations for the next 12 months.
Thereafter, we may require additional sources of funds to continue to support
our business. Such funds, if needed, may not be available or may not be
available on terms acceptable to us.
Inflation
Inflation was
not a material factor in either revenue or operating expenses during the past
three fiscal years ended December 31, 2001, 2000 and 1999.
Subsequent
Events
In January
2002, we completed a $2.3 million acquisition of the assets, including
intellectual property, of Irvine Networks, LLC, and hired their engineering
staff. The on-going operation has
become our Xiran Division. For the past
two-and-a-half years, Irvine Networks has been developing innovative content
processing technology for Web-based server platforms. The effort is in the final stages of developing a working
prototype. The completed products,
incorporating our patented memory stacking technology, will be inserted into
Web-based servers to enable the faster transmission of files.
Recently
Issued Accounting Standards
In August 2001, the FASB
issued Statement of Financial Accounting Standards ("SFAS") No. 144
“Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 develops one accounting model for long-lived
assets to be disposed of by sale, requires that long-lived assets to be
disposed by sale be measured at the lower of book value or fair value less cost
to sell and expands the scope of discontinued operations to include all
components of an entity with operations that (a) can be distinguished from the
rest of the entity and (b) will be eliminated from the ongoing operations of
the entity in a disposal transaction. SFAS No. 144 is effective for all fiscal
years beginning after December 15, 2001 and is therefore effective for us
beginning with our fiscal quarter ending March 31, 2002. We are currently
evaluating the impact of the adoption of SFAS No. 144 on our consolidated
financial statements.
Critical Accounting Policies and Estimates
Our discussion and analysis
of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amount of revenues and expenses for each period. The following represents a summary of our
critical accounting policies, defined as those policies that we believe are:
(a) the most important to the portrayal of our financial condition and results
of operations, and (b) that require management’s most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the effects
of matters that are inherently uncertain.
• Reserves for inventory excess, obsolescence and lower of market values
over costs-We generally purchase raw materials in quantities that we
anticipate will be fully used in the near term. Changes in operating strategy
and customer demand, and the somewhat unpredictable fluctuations in market
values for such materials, however, can limit our ability to effectively
utilize all of the raw materials purchased and sold through resulting finished
goods to customers for a profit. We
regularly monitor potential inventory excess, obsolescence and lower market
values compared to costs and, when necessary, reduce the carrying amount of our
inventory to its market value.
• Allowances for doubtful accounts and price protection-We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. Additionally, we maintain allowances for
limited price protection rights for inventories of our products held by our
customers as a result of recent sales transactions to them. If we reduce the list price of our products,
these customers may receive a credit from us.
We estimate the impact of such pricing changes on a regular basis and
adjust our allowances accordingly.
• Product returns-We offer a majority of our customers that
purchase product through our commercial channels limited rights to return
unsold inventory. In addition, while we
may not be contractually obligated to accept returned products, we may
determine that it is in our best interest to accept returns in order to
maintain good relationships with our customers. We provide for estimated future
returns of inventory at the time of sale based on historical experience and
actual results have been within our expectations.
• Income taxes-As part of the process of preparing our
consolidated financial statements, we are required to estimate our income taxes
in each of the jurisdictions in which we operate. The process incorporates an
assessment of the current tax exposure together with temporary differences
resulting from different treatment of transactions for tax and financial
statement purposes. Such differences result in deferred tax assets and
liabilities, which are included within the consolidated balance sheet. The recovery of deferred tax assets from
future taxable income must be assessed and, to the extent that recovery is not
likely, we establish a valuation allowance. Increases in valuation allowances result
in the recording of additional tax expense. Further, if our ultimate tax
liability differs from the periodic tax provision reflected in the consolidated
statements of operations, additional tax expense maybe recorded.
• Litigation and other contingencies-Management regularly
evaluates our exposure to threatened or pending litigation and other business
contingencies. Because of the uncertainties related to the amount of loss from
litigation and other business contingencies, the recording of losses relating
to such exposures requires significant judgment about the potential range of
outcomes. As additional information about current or future litigation or other
contingencies becomes available, our management will assess whether such
information warrants the recording of additional expense relating to our
contingencies. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable. The results of these
estimates form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
• Valuation of long-lived assets-We assess the potential
impairment of long-lived tangible and intangible assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Changes in our operating strategy can significantly reduce the
estimated useful life of such assets.
(See Note 2 to the notes to our consolidated financial statements
regarding recently issued accounting standards).
ITEM
7A.
ITEM
7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
At any time, fluctuations in interest rates could affect interest
earnings on our cash and cash equivalents and interest expense on our existing
variable rate debt. We believe that the effect, if any, of reasonably
possible near term changes in interest rates on our financial position, results
of operations, and cash flows would not be material. Currently, we do not hedge these interest rate exposures.
The primary objective of our investment activities is to preserve capital. We
have not used derivative financial instruments in our investment portfolio.
At December
31, 2001, our cash and cash equivalents were $51.8 million and our variable
rate debt, consisting of term loan borrowing, was $1.0 million. We have
not utilized our floating rate debt under the revolving credit facility since
October 2000. At December 31, 2001, our
cash and cash equivalents included $50.8 million invested in money market and
other interest bearing accounts and $1.0
million
invested in marketable securities, which represents investments in United
States treasury notes and treasury bonds.
At December
31, 2001, our investment in marketable securities had a weighted-average time
to maturity of approximately 52 days. Marketable securities represent United
States treasury notes and treasury bonds with a maturity of greater than three
months. These securities are classified as held to maturity because we have the
intention and ability to hold the securities to maturity. Gross unrealized
gains and losses on held-to-maturity marketable securities have historically
not been material. Maturities on held-to-maturity marketable debt securities
range from three months to two years.
If interest
rates were to decrease 1%, the result would be an annual decrease in our
interest income related to our cash and cash equivalents of approximately
$518,000. Conversely, if interest rates were to increase 1%, the result
would be an annual increase in our interest expense related to our variable
rate debt of approximately $10,000. However, due to the uncertainty of
the actions that would be taken and their possible effects, this analysis
assumes no such action. Further, this analysis does not consider the
effect of the change in the level of overall economic activity that could exist
in such an environment.
More than
95.0% of our international sales are denominated in U.S. dollars. Consequently, if the value of the U.S.
dollar increases relative to a particular foreign currency, our products could
become relatively more expensive. In
addition, we purchase substantially all of our IC devices from local distributors
of Japanese, Korean and Taiwanese suppliers.
Fluctuations in the currencies of Japan, Korea or Taiwan could have an
adverse impact on the cost of our raw materials. To date, we have not entered any derivative instruments to manage
risks related to interest rate or foreign currency exchange rates.
ITEM
8.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
SimpleTech,
Inc., consolidated financial statements, schedule and supplementary data, as
listed under Item 14, appear in a separate section of this Report beginning on
page.
ITEM
9
ITEM
9 CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III.
ITEM 10.
ITEM 10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information
required by this Item is included in the Proposal One: Elections of Directors,
Management, and Section 16(a) Beneficial Ownership Reporting Compliance
sections of our Proxy Statement to be filed in connection with our 2002 Annual
Meeting of Shareholders and is incorporated herein by reference.
ITEM
11.
ITEM
11. EXECUTIVE
COMPENSATION
The
information required by this Item is included in the Executive Compensation and
Related Information sections of the our Proxy Statement to be filed in
connection with our 2002 Annual Meeting of Shareholders and is incorporated
herein by reference.
ITEM 12.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
information required by this Item is included in the Security Ownership of
Certain Beneficial Owners and Management section of our Proxy Statement to be
filed in connection with the our 2002 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The
information required by this Item is included in the Compensation Committee
Interlocks and Insider Participation and Certain Transactions sections of our
Proxy Statement to be filed in connection with the our 2002 Annual Meeting of
Shareholders and is incorporated herein by reference.
PART
IV.
ITEM
14.
ITEM
14. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents
filed as part of this Report:
1. Financial Statements. The
following financial statements of SimpleTech, Inc. are included in a
separate section of this Annual Report on Form 10-K commencing on the
pages referenced below:
Page
SimpleTech, Inc., Consolidated Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets at December 31,
2001 and 2000
Consolidated Statements of Operations for
each of the three years in the period ended December 31, 2001
Consolidated Statements of Shareholders’
Equity for each of the three years in the period ended December 31, 2001
Consolidated Statements of Cash Flows for
each of the three years in the period ended December 31, 2001
Note to Consolidated Financial Statements
2. Financial Statement Schedule. The
following financial statement schedule is included in a separate section of
this Annual Report on Form 10-K commencing on the pages referenced below.
All other schedules have been omitted because they are not applicable, not
required, or the information is included in the consolidated financial statements
or notes thereto.
Page
Report of
Independent Accountants on Financial Statement Schedule
S-1
Schedule II
- Consolidated Valuation and Qualifying Accounts and Reserves
S-2
3. Exhibits. The Exhibits
filed as part of this Annual Report are listed in Item 14(c) of this Annual
Report on Form 10-K.
(b) Reports on Form 8-K:
A Current
Report on Form 8-K was filed by SimpleTech with the Securities and Exchange
Commission on October 3, 2001, to report under Item 5 the press release issued
to the public on September 27, 2001, announcing a stock repurchase program.
(c) Exhibits
The following
exhibits are filed as part of, or are incorporated by reference in, this
Report:
Number
Description
3.1*
Amended and
Restated Articles of Incorporation
3.1.1*
Certificate
of Amendment to the Amended and Restated Articles of Incorporation, dated
August 31, 2000
3.1.2
Certificate
of Amendment to the Amended and Restated Articles of Incorporation, dated May
1, 2001.
3.2*
Amended and
Restated Bylaws
4.1*
See Exhibits
3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws for
SimpleTech, Inc. defining the rights of holders of common stock of
SimpleTech, Inc.
4.2*
Specimen
Stock Certificate
10.1*
Amended and
Restated Lease, dated April 1, 2000, by and between MDC Land LLC and
SimpleTech, Inc.
10.2*
Amended and
Restated Real Estate Lease, dated June 1, 2000, by and between MDC Land LLC
and SimpleTech, Inc.
10.3*
Credit
Agreement, dated August 3, 1999, between SimpleTech, Inc. and Comerica Bank
10.4*
Security
Agreement, dated August 3, 1999, by SimpleTech, Inc. and Comerica Bank
10.5*
First
Amendment to Credit Agreement, dated as of December 29, 1999, by and between
Comerica Bank and SimpleTech, Inc.
10.6*
Second
Amendment to Credit Agreement, dated as of May 19, 2000, by and between
Comerica Bank and SimpleTech, Inc.
10.7*
Third
Amendment to Credit Agreement, dated as of May 19, 2000, by and between
Comerica Bank and SimpleTech, Inc.
10.8*
Fourth
Amendment to Credit Agreement, dated as of June 27, 2000, by and between
Comerica Bank and SimpleTech, Inc.
10.9*
Fifth
Amendment to Credit Agreement, dated as of June 27, 2000, by and between
Comerica Bank and SimpleTech, Inc.
10.10**
2000 Stock
Incentive Plan (as amended and restated)
10.11**
Employee Stock Purchase Plan (as amended and restated)
10.12*
Form of
Indemnification Agreement between SimpleTech, Inc. and each of its directors
and officers
10.13*
Form of
Employment Agreement for Executive Officers of SimpleTech, Inc. (including a
schedule of substantially identical agreements)
10.14*
Distribution
and Tax Indemnity Agreement, dated September 26, 2000, by and between
SimpleTech, Inc. and each of the shareholders of SimpleTech, Inc.
10.15*
Equipment
Lease, dated June 1, 1996, by and between MDC Land Corporation and
SimpleTech, Inc.
10.16*
Equipment
Lease, dated September 1, 1996, by and between MDC Land Corporation and
SimpleTech, Inc.
10.17*
Equipment
Lease, dated October 1, 1996, by and between MDC Land Corporation and
SimpleTech, Inc.
10.18*
Equipment
Lease, dated January 1, 1997, by and between MDC Land Corporation and
SimpleTech, Inc.
10.19*
Equipment
Lease, dated February 1, 1997, by and between MDC Land Corporation and
SimpleTech, Inc.
10.20*
Equipment
Lease, dated April 1, 1997, by and between MDC Land Corporation and
SimpleTech, Inc.
10.21*
License
Agreement, dated August 22, 2000, by and between Micron Electronics and
SimpleTech, Inc.
21.1
List of
Subsidiaries of SimpleTech, Inc.
23.1
Consent of
PricewaterhouseCoopers LLP
* This exhibit was previously filed
as an exhibit to the Company’s Registration Statement on Form S-1 declared
effective September 28, 2000 (File No. 333-32478), and is
incorporated by reference herein.
 This exhibit was previously filed
as an exhibit to the Company’s Quarterly Report on Form 10-Q for the Quarterly
Period Ended March 31, 2001, with the Securities and Exchange Commission on May
14, 2001, and is incorporated by reference herein.
** This exhibit was previously filed as
an exhibit to the Company’s Registration Statement on Form S-8 with the
Securities and Exchange Commission on February 9, 2001, and is
incorporated by reference herein.
 Indicates a management contract or
compensatory arrangement.
(d) Financial Statement
Schedule:
The financial
statement schedule for SimpleTech, Inc. is included elsewhere in this Part IV
of this Report.
SIMPLETECH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
SimpleTech, Inc., Consolidated Financial Statements
Report of
Independent Accountants
Consolidated
Balance Sheets at December 31, 2001 and 2000
Consolidated
Statements of Operations for each of the three years in the period ended
December 31, 2001
Consolidated
Statements of Shareholders’ Equity for each of the three years in the period
ended December 31, 2001
Consolidated
Statements of Cash Flows for each of the three years in the period ended
December 31, 2001
Notes to
Consolidated Financial Statements
Report of Independent Accountants
The
Shareholders and Board of Directors
SimpleTech,
Inc.
In
our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders’ equity and cash flows
present fairly, in all material respects, the financial position of SimpleTech,
Inc. and its subsidiaries (the “Company”) at December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. These financial statements are the
responsibility of the Company’s management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United States
of America, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers
LLP
Orange
County, California
January
31, 2002
SimpleTech, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share
amounts)
The accompanying notes are an
integral part of these consolidated financial statements.
SimpleTech, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share
amounts)
(a) Pro forma (Note 2).
The accompanying notes are an
integral part of these consolidated financial statements.
SimpleTech, Inc.
Consolidated Statements of Shareholders’
Equity
(in thousands, except share amounts)
The accompanying notes are an
integral part of these consolidated financial statements.
SimpleTech, Inc.
Consolidated Statements of Cash Flows
(in thousands)
The accompanying notes are an
integral part of these consolidated financial statements.
SimpleTech, Inc.
Notes to Consolidated Financial Statements
1. Company Organization:
Simple
Technology, Inc., incorporated in 1990 and renamed SimpleTech, Inc. in May
2001, designs, manufactures and markets a comprehensive line of memory and
storage products, as well as connectivity products that connect memory cards
and hard drive upgrade kits to PCs. The Company’s memory and storage products
are based on dynamic random access memory, or DRAM, static random access
memory, or SRAM, and Flash memory technologies. In addition, the Company offers
a line of high-density memory products using three-dimensional IC Tower
stacking technology that allows multiple memory chips to be stacked together to
increase the capabilities of memory modules without increasing the product
footprint. These products are used in high-performance computing, networking
and communications, consumer electronics and industrial applications.
2. Summary of Significant Accounting
Policies:
Basis of Consolidation:
The
accompanying consolidated financial statements include the accounts of
SimpleTech, Inc. and its subsidiaries in California, Canada and Scotland
(collectively, the “Company”). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents:
Cash and cash
equivalents consist primarily of cash in banks and money market funds. All
highly liquid investments with a maturity date of three months or less when
acquired are considered to be cash equivalents. Cash and cash equivalents are
carried at cost, which approximates market.
Inventory:
Inventory is
stated at the lower of cost or market, with cost being determined on the
first-in, first-out (“FIFO”) method of accounting.
Furniture, Fixtures and Equipment:
Furniture,
fixtures and equipment are stated at cost and depreciated using the
straight-line method. The Company’s estimated useful lives of the assets, other
than leasehold improvements, range from four to five years for equipment and
seven years for furniture and fixtures. Leasehold improvements and assets under
capital leases are amortized using the straight-line method over the shorter of
the lease term or the estimated useful life of the assets.
Expenditures
for major renewals and betterments are capitalized, while minor replacements,
maintenance and repairs, which do not extend the asset lives, are charged to
operations as incurred. Upon sale or disposition, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
included in operations.
The Company
continually monitors events and changes in circumstances that could indicate
that the carrying balances of its furniture, fixtures and equipment may not be
recoverable in accordance with the provisions of Statement of Financial
Accounting Standards (“SFAS”)
No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.”
When such events or changes in circumstances are present, the Company assesses
the recoverability of long-lived assets by determining whether the carrying
value of such assets will be recovered through undiscounted expected future cash
flows. If the total of the future cash flows is less than the carrying amount
of those assets, the Company recognizes an impairment loss based on the excess
of the carrying amount over the fair value of the assets.
Land Held for Investment:
Land held for
investment was recorded at the shareholders’ contributed historical cost, which
was less than or approximated fair market value. Such land, with a cost of
$325,000, was contributed to charity in 1999 and was reflected in other
expense.
Long-Term Debt:
The fair
values of the Company’s long-term debt have been estimated based on current
rates offered to the Company for debt of the same remaining maturities. The
carrying amounts of the Company’s loans approximate their fair values.
Revenue Recognition:
Product sales
and related cost of sales are recognized upon the shipment of product to
customers provided the Company has received a purchase order, the price is
fixed or determinable, collectibility of the resulting receivable is reasonably
assured, returns are reasonably estimable and there are no remaining
obligations. The terms of substantially all product sales are FOB shipping
point. A substantial portion of the Company’s sales through its Commerical
Division includes limited rights to return unsold inventory. In addition, some
customers have limited price protection rights for inventories of the Company’s
products held by them. If the Company reduces the list price of their products,
these customers may be entitled to receive credits from the Company. The
Company provides for estimated future returns of inventory, limited price
protection arrangements and the estimated costs of warranty at the time of sale
based on historical experience. Actual results have been within management’s
expectations.
Shipping and Handling Costs:
Shipping and
handling costs incurred in a sales transaction to ship products to a customer
are included in sales and marketing. For the years ended December 31, 2001,
2000 and 1999, shipping and handling costs were approximately $2,400,000,
$2,100,000 and $1,700,000, respectively.
Advertising Costs:
Advertising
costs, which relate primarily to various print media expenditures, are expensed
as incurred. For the years ended December 31, 2001, 2000 and 1999, advertising
costs were approximately $2,914,000, $3,599,000 and $2,858,000, respectively.
Income Taxes:
Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when
necessary, to reduce deferred
income tax assets to the amount expected to be realized. The provision for
income taxes represents the tax payable for the year and the change during the
year in deferred income tax assets and liabilities.
Stock-Based Compensation:
SFAS No. 123,
“Accounting for Stock-Based Compensation,” encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the estimated market price
of the Company’s underlying stock at the date of grant over the exercise price
of the option, amortized over the vesting period. The Company has adopted the
disclosure-only provisions of SFAS No. 123.
Per Share Information:
In 1997, the
Financial Accounting Standards Board (“FASB”) issued SFAS No. 128,
“Earnings Per Share,” which established standards for the computation,
presentation and disclosure requirements for basic and diluted earnings per
share for entities with publicly held common shares and potential common
shares. Basic earnings per share is computed by dividing net income by the
weighted average number of shares outstanding. In computing diluted earnings
per share, the weighted average number of shares outstanding is adjusted to
additionally reflect the effect of potentially dilutive securities.
For the years
ended December 31, 2001, 2000 and 1999, potentially dilutive securities
consisted solely of options and resulted in potential common shares of
1,308,818, 2,200,460 and 2,056,966, respectively.
In
September 2000, the Company effected a 5.07 for 1.0 stock split of all
outstanding common stock and common stock options. All share and per share
amounts have been adjusted to give retroactive effect to the stock split for
all periods presented.
Pro Forma Net Income (unaudited):
Pro forma net
income is computed using an effective tax rate of 38% to reflect the estimated
income tax expense of the Company as if it had been subject to C corporation federal
and state income taxes for the period, instead of S corporation income taxes.
Segment Reporting:
In 1997, the
FASB issued SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information,” which supercedes substantially all the reporting
requirements previously required under SFAS No. 14, “Financial Reporting
for Business Segments of an Enterprise,” and establishes standards for the way
the Company reports information about operating segments. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. Under SFAS No. 131, the determination of segments to
be reported in the financial statements is to be consistent with the manner in
which management organizes and evaluates the internal organization to make
operating decisions and assess performance. The adoption of this statement did
not have an impact upon the Company’s operating results or financial position
as this statement’s provisions affect only the disclosure of certain segment
information in the notes to the consolidated financial statements.
Risks and Uncertainties:
Financial
instruments, which potentially subject the Company to a concentration of credit
risk, principally consist of cash and cash equivalents and accounts receivable.
As of December 31, 2001 and 2000, approximately 37% and 40%, respectively,
of accounts receivable were concentrated with three customers. For the years
ended December 31, 2001, 2000 and 1999, sales to CDW Computer Centers
comprised 20%, 17% and 19%, respectively, of the Company’s revenues. For the
year ended December 31, 2001, sales to Unisys accounted for 11% of the
Company’s revenues. For the year ended December 31, 2000, sales to Cisco
Systems accounted for 15% of the Company’s revenues. No other single customer
accounted for more than 10% of accounts receivable or revenues at
December 31, 2001 and 2000, or for each of the three years in the period
ended December 31, 2001. The Company generally does not require collateral
on accounts receivable as the majority of the Company’s customers are large,
well-established companies. Historically, bad debt provisions have been
consistent with management’s expectations.
At
December 31, 2001 and 2000, the Company had amounts on deposit with
financial institutions that were in excess of the federally insured limit of
$100,000.
The
manufacturing operations of the Company are concentrated in a facility located
in Santa Ana, California. As a result of this geographic concentration, a
disruption in the manufacturing process resulting from a natural disaster or
other unforeseen event could have a material adverse effect on the Company’s
financial position and results of operations.
Certain of the
Company’s products utilize components that are purchased from a small number of
sources with whom the Company has no long-term contracts. An inability to
obtain such components in the amounts needed on a timely basis or at
commercially reasonable prices could result in delays in product introductions,
interruptions in product shipments or increases in product costs, which could
have a material adverse effect on the Company’s financial position and results
of operations.
Management Estimates:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Recently issued accounting standards:
In August 2001, the FASB
issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived
Assets.” SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 develops one
accounting model for long-lived assets that are to be disposed of by sale,
requires that long-lived assets that are to be disposed by sale be measured at
the lower of book value or fair value less cost to sell and expands the scope
of discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and (2)
will be eliminated from the on-going operations of the entity in a disposal
transaction. SFAS No. 144 is effective for all fiscal years beginning after
December 15, 2001 and is therefore effective for the Company beginning with its
fiscal quarter ending March 31, 2002. The Company is currently evaluating the
impact of the adoption of SFAS No. 144 on its consolidated financial
statements.
Reclassifications:
Certain
amounts in the prior year consolidated financial statements have been
reclassified to conform to the current year presentation.
3. Related Party Transactions:
The Company
occupies two leased facilities of approximately 24,500 and 48,600 square feet
in Santa Ana, California, in which its executive offices, manufacturing,
engineering, research and development and testing operations are located. The
Company leases both facilities from MDC Land LLC (“MDC”), a limited liability
company owned by Manouch Moshayedi, Mike
Moshayedi and Mark Moshayedi,
each of whom is an executive officer, director and major shareholder of
SimpleTech. MDC has no operations other than leasing transactions with the
Company. An operating lease with MDC for the 24,500 square foot facility was
signed in April 2000. The lease term was decreased from 26 years to
5 years, expiring in March 2005, and the monthly base rent was
changed from approximately $19,000 to approximately $17,000. An operating lease
with MDC for the 48,600 square foot facility was signed in June 2000. The
48,600 square foot facility lease expires in May 2005, and the base rent
is approximately $33,000 per month. Building rent expense for the years ended
December 31, 2001, 2000 and 1999, amounted to $603,000, $446,000 and
$228,000, respectively.
In 1996 and
1997, the Company entered into equipment leases with MDC Land Corporation, a
corporation owned by Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi. Each
lease has a term of five years and is accounted for as a capital lease.
Equipment lease payments amounted to $385,000 in 2001, $574,000 in 2000, and
$574,000 in 1999. In December 2001, the Company exercised its purchase option
under the capital leases by purchasing all of the related equipment for
approximately $21,000.
During 1999,
the Company made non-interest bearing advances to a development stage company
in Houston, Texas owned by Manouch Moshayedi, Mike Moshayedi and Mark
Moshayedi, totaling $20,000 to fund working capital needs, at which time the
aggregate amount due from the this entity totaled $502,000. Subsequently in
1999, $314,000 was repaid by this development stage company and the remaining
amount of these advances, $188,000, was repaid in conjunction with shareholder
distributions in December 1999.
During 1999,
the Company made non-interest bearing advances totaling $898,000 to a
development stage company in Irvine, California owned by Manouch Moshayedi,
Mike Moshayedi and Mark Moshayedi, to finance the development and fund the
working capital needs of this development stage company. In December 1999,
these advances were repaid in full in conjunction with shareholder
distributions.
4. Inventory:
Inventory consists of the
following:
5. Furniture, Fixtures and Equipment:
Furniture, fixtures and
equipment consist of the following:
For the years
ended December 31, 2001, 2000 and 1999, the Company recorded depreciation
and amortization expense of approximately $3,152,000, $3,406,000 and
$3,581,000, respectively.
At
December 31, 2001 and 2000, furniture, fixtures and equipment included
approximately $1,978,000 and $6,946,000, respectively, of assets under capital
leases with associated accumulated amortization of approximately $1,486,000 and
$5,446,000, respectively. As discussed in Note 3, such amounts in 2000
include approximately $2,304,000 of assets under capital leases with a related
party with associated accumulated amortization of approximately $1,981,000. In
December 2001, the Company exercised its purchase option under the capital
leases with a related party by purchasing all of the related equipment for
approximately $21,000.
6. Line of Credit:
Effective
August 3, 1999, the Company entered into a line of credit agreement, as
amended. Amounts borrowed thereunder are collateralized by substantially all of
the Company’s assets. Terms of the agreement include a maximum borrowing amount
of $27,500,000, subject to eligible accounts receivable and inventory balances,
bearing interest at the prime rate and expiring in August 2002, unless
renewed. There were no borrowings on this line of credit at December 31,
2001 and 2000.
The provisions
of the line of credit agreement contain various nonfinancial and financial
covenants that, among other things, require the Company to maintain a minimum
tangible net worth amount and a maximum debt to tangible net worth ratio. The
covenants also limit capital expenditures, distributions and dividends that can
be made by the Company. As of December 31, 2001, the Company was in
compliance with all such covenants.
7. Long-Term Debt:
Long-term debt
consists of the following:
The equipment
notes payable agreements contain various nonfinancial covenants that, among
other things, limit distributions and dividends to shareholders and require the
equipment to remain unencumbered by other liens.
Scheduled
principal payments during each of the years ending December 31 are as
follows:
8. Income Taxes:
From formation
in March 1990 to September 26, 2000, the Company had elected for U.S.
federal income tax purposes to be treated as an S corporation under
Subchapter S of the Internal Revenue Code. Under this election, the Company’s
shareholders, rather than the Company, were subject to federal income taxes on
their respective share of the Company’s taxable income. The Company had also
elected similar treatment for California franchise tax purposes which, in
addition, requires a state income tax at the Company-level of 1.5%. On
September 26, 2000, the Company terminated its Subchapter S election.
Subsequent to the termination, the Company has
paid federal and state corporate-level income taxes. In 1999 and 2000,
pro forma net income has been computed as if the Company had been fully subject
to federal and state income taxes as a C corporation for all periods
presented.
The provision
(benefit) for income taxes consists of the following:
For 2001, the
difference between the effective rate and the expected U.S. federal tax rate is
due primarily to state taxes and other permanent differences between tax and
financial reporting income. For 2000,
the difference between the effective tax rate and the expected U.S. federal tax
rate is due primarily to an increase in deferred tax assets as a result of
terminating the Company’s S corporation status and income taxed at the
shareholder level. For 1999, the
difference between the
effective tax rate and the expected California tax rate is due primarily to
state tax credits and decreases in the valuation allowance.
The provision
(benefit) for income taxes differs from the amount that would result from
applying the federal statutory rate as follows:
The components of deferred tax
assets and (liabilities) are as follows:
For income tax
purposes, the Company’s foreign subsidiary, Simple Technology Limited, is
treated as a separate entity and, therefore, is not subject to U.S. taxation.
The Company’s
foreign subsidiary, SimpleTech Europe, is treated as a branch partnership for
income tax purposes and, therefore, is subject to U.S. taxation. At
December 31, 2001 and 2000, this entity had U.K. net operating loss
carryforwards of $2,300,000 and $3,000,000, respectively. The losses carry over
indefinitely, unless certain changes in business operations, as defined, occur
during the carryover period. The Company has established a valuation allowance
against these deferred tax assets since it cannot be established that this
foreign subsidiary’s U.K. net operating loss carryforwards will be fully
utilized.
9. Commitments and Contingencies:
DPAC
Technologies, Inc.-Patent Infringement
On
September 23, 1998, the Company filed a lawsuit against DPAC Technologies,
Inc., formerly Dense-Pac Microsystems, Inc. (“DPAC”), in the United States
District Court for the Central District of California for infringement of the
Company’s IC Tower stacking patent, U.S. Patent No. 5,514,907. The Company is
seeking damages, including prejudgment interest, an injunction against further
infringement of the Company’s patent by DPAC, treble damages and attorneys’
fees. DPAC filed an answer to the Company’s complaint denying the Company’s
claim of infringement, asserted a defense of patent invalidity against the Company’s
IC Tower stacking patent and asserted a counterclaim against the Company
alleging infringement of its stacking patent, U.S. Patent No. 4,956,694. On
March 29, 2001, the court entered final judgement finding DPAC did not infringe
the Company’s patent and that the Company did not infringe DPAC’s patent. The Company anticipates that the affirmance
will have no material impact on its on-going business. DPAC did not appeal the
ruling in the Company's favor, and that ruling is now final.
Unaudited update: The
Company appealed the ruling in DPAC's favor, and that ruling was affirmed March
7, 2002.
On
October 17, 2000, the Company received a reissue patent of the ‘907 patent
from the U.S. Patent and Trademark Office. The reissue patent is U.S. Patent
No. Re. 36,916.
On
February 21, 2001, the Company filed a new lawsuit against DPAC in the
United States District Court for the Central District of California for
infringement of the Company’s IC Tower stacking reissue patent, U.S. Patent No.
Re. 36,916. The Company is seeking damages and an injunction against
infringement of the Company’s patent by DPAC. On March 13, 2001, DPAC
filed an answer to the Company’s complaint denying the Company’s claim of
infringement, and asserted a defense of patent invalidity against the Company’s
IC Tower stacking reissue patent. In addition, DPAC counterclaimed alleging
misappropriation of unspecified technology and the sale of products by the
Company incorporating such technology alleged to have been misappropriated. The
Court stayed action in the litigation pending the outcome of appeal in the
above-referenced litigation.
Lemelson
Medical, Education & Research Foundation, LLP - Patent Infringement
The Company
received notice on November 26, 2001, that the Lemelson Medical, Education
& Research Foundation, LLP (“Lemelson Foundation”) filed a complaint on
November 13, 2001, against the Company and other defendants. The
complaint was filed in the District Court of Arizona and alleges that the
Company’s manufacturing processes infringe several patents that the Lemelson
Foundation allegedly owns. The complaint also states that these allegedly
infringed patents relate to machine vision technology and bar coding
technology.
Unaudited update: On
March 7, 2002, the Company was served with the Lemelson Foundation
complaint. Additionally, the judge in this case has indicated that he
intends to stay this case as to any defendant whose alleged infringement
concerns only those patents relating to machine vision technology and bar coding
technology, pending resolution of the Symbol Technologies v. Lemelson
case, which involves the same patents. Because of the preliminary stage of this
case, an estimate of potential damages, if any, would be premature and
speculative, and the Company has not made any such estimate at this time.
Interactive
Flight Technologies, Inc.
On
June 8, 1998, Interactive Flight Technologies, Inc. filed a lawsuit
against Avnet, Inc. in the Superior Court of Maricopa County, Arizona
seeking an award for direct and consequential damages arising from the
Company’s sale of allegedly defective hard disk drives to Avnet for inclusion
in an in-flight entertainment system manufactured by Interactive Flight. The
Company purchased the hard disk drives from Integral Peripherals, Inc.,
the manufacturer, through its distributor, Bell Microsystems, Inc.
Integral has since declared bankruptcy and was not a party to this lawsuit. On
June 8, 1999, Avnet filed a cross claim against the Company seeking
indemnification.
All parties
entered into a settlement agreement that settled all claims between them. Under
the terms of the settlement, the Company made a total payment of $1,810,000 to
Interactive Flight and the other parties. On January 23, 2001, the court
entered its Order of Dismissal dismissing all remaining claims between the
parties.
Other
Legal Proceedings
The Company is
currently not a party to any other material legal proceedings. However, the
Company is involved in other suits and claims in the ordinary course of
business, and the Company may from time to time become a party to other legal
proceedings arising in the ordinary course of business.
As is common
in the industry, the Company currently has in effect a number of agreements in
which the Company has agreed to defend, indemnify and hold harmless certain of
its suppliers and customers from damages and costs which may arise from the
infringement by the Company’s products of third-party patents, trademarks or
other proprietary rights. The scope of such indemnity varies, but may, in some
instances, include indemnification for damages and expenses, including
attorneys’ fees. The Company’s insurance does not cover intellectual property
infringement.
Lease
Commitments
As discussed
in Note 3, the Company leases its corporate office facilities from
affiliates of Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi, each of
whom is an executive officer, director and major shareholder of the Company. In
addition, the Company leases from unaffiliated third parties under capital
leases, manufacturing equipment with initial noncancellable lease terms ranging
from 4 to 5 years. Future scheduled minimum annual lease payments for the
years ending December 31 are as follows:
Rent expense for the years
ended December 31, 2001, 2000 and 1999 was approximately $783,000,
$772,000 and $802,000, respectively, inclusive of related party balances.
Repurchase
Agreements
The Company is
contingently liable at December 31, 2001, to various financial
institutions on repurchase agreements in connection with wholesale inventory
financing. In general, inventory would be repurchased by the Company upon
customer default with a financing institution and then resold through normal
distribution channels. The amount of potential product returns is estimated and
provided for in the period of the sale for financial reporting purposes. As of
December 31, 2001, the Company has never been required to repurchase
inventory in connection with the customer default agreements noted above. However,
there can be no assurance that the Company will not be required to repurchase
inventory, upon customer default, in the future. Sales under such agreements
were approximately $1,100,000, $2,700,000 and $2,000,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
401(k)
Plan
The Company
has a 401(k) profit sharing plan covering employees with at least six months of
service. Employees may make voluntary contributions of up to 20% of their
annual pre-tax compensation to the plan, subject to the maximum limit allowed
by the IRS guidelines. The Company makes matching contributions equal to
one-half of each participating employee’s matchable contributions to the plan
which cannot exceed 10% of their salary. The Company’s matching contributions
to the plan are subject to vesting at the rate of 20% per year beginning after
the employee’s second year of employment. For the years ended December 31,
2001, 2000 and 1999, the Company made matching contributions of approximately
$424,000, $369,000 and $339,000, respectively.
Company
Stock Buy Back
In September
2001, the Company’s Board of Directors authorized a stock repurchase program
under which the Company could repurchase up to 1,800,000 shares of the
Company’s common stock over an 18-month period. The shares may be purchased
from time to time, at prevailing market prices, through open market or
unsolicited negotiated transactions, depending on market conditions and other
considerations, until March 31, 2003.
During fiscal 2001, the Company repurchased 72,500 shares of its common
stock for a total of $92,000 under this program. Shares of common stock
repurchased have been returned to the status of authorized but unissued shares
of common stock and may be issued by the Company in the future.
10. Stock Option Plan:
The 2000 Stock
Incentive Plan (the “Plan”) is intended to serve as the successor equity
incentive program to the 1996 Stock Option Plan (the “Predecessor Plan”). The
Plan was adopted by the Company’s board of directors and approved by its
shareholders in June 2000. In September 2000, the Plan became
effective, and all outstanding options under the Predecessor Plan were
transferred into the Plan. No further option grants will be made under the
Predecessor Plan. The transferred options will continue to be governed by their
existing terms, unless the compensation committee of the Board of Directors
elects to extend one or more features of the Plan to those options.
The Plan
provides for the direct sale of shares and the grant of options to purchase
shares of the Company’s common stock to officers and other employees,
non-employee board members and consultants. Under the Plan, eligible
participants may be granted options to purchase shares of common stock at an
exercise price not less than 100% of the fair market value of those shares on
the grant date. The compensation committee of the Board of Directors has the
authority to determine the time or times at which options become exercisable
under the Plan. Options expire within a period of not more than ten years from
the date of grant.
On October 29,
2002, the compensation committe of the Board of Directors authorized the
Company to implement an option exchange program pursuant to which the Company's
current employees, including executive officers, were given the opportunity to
exchange their outstanding options to purchase shares of the Company's common
stock for new stock options for the same number of shares to be granted to them
at a later date. At the conclusion of the option exchange program on December
20, 2001, the Company accepted for exchange and cancelled options to purchase
an aggregate of 2,309,500 shares of the Company's common stock. As a result,
the Company expects to issue new replacement options under the Plan for 2,309,500
shares of common stock on or after June 21, 2002 in exchange for those
cancelled options. The exercise price of each replacement option will be equal
to the closing price per share of the Company's common stock on the new grant
date.
At
December 31, 2001, the Plan provided for the issuance of up to 8,535,911
shares of common stock, including 2,777,471 shares subject to options
transferred from the Predecessor Plan. The number of shares of common stock
reserved for issuance under the Plan will automatically increase on the first
trading day in January in each calendar year by an amount equal to 4% of the
total number of shares of common stock outstanding on the last trading day in
December of the prior calendar year, but in no event will exceed 2,500,000
shares.
A summary of
the option activity under the Plan is as follows:
At December
31, 2001, 5,041,981 options were available for grant under the Plans.
No
compensation expense was recorded as a result of stock options granted to
employees through December 31, 1998 or in the years ended
December 31, 2001 and 2000 as the fair market value approximated the per
share exercise price of the respective options granted. With respect to options
granted to employees in 1999, there were 446,459 shares under options granted
in January 1999 with an estimated fair market value of $1.58 per share,
65,910 granted in April 1999 and 6,591 granted in May 1999 with an
estimated fair market value of $2.37 per share, all of which were granted at an
exercise price of $1.18 per share. The difference between the exercise price
and the fair market value at the date of grant of $262,000 is accounted for as
unearned compensation and is being amortized to expense over the related
service period. The Company recorded a total of approximately $47,000, $79,000
and $120,000 as compensation expense for the years ended December 31,
2001, 2000 and 1999, respectively, related to options granted to employees.
Pursuant to
SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company has
elected to continue the intrinsic value method of accounting for stock options
granted to employees and directors in accordance with APB Opinion No. 25
and related interpretations in accounting for stock option plans. Accordingly,
no compensation cost has been recognized for its Plan other than that described
above. Had compensation cost been determined based on the fair value at the grant
dates for stock options under the Plan consistent with the method promulgated
by SFAS No. 123, the Company’s net income for the years ended
December 31, 2001, 2000 and 1999 would have resulted in the pro forma
amounts below:
(a) Pro forma (Note 2).
The fair value
of each option grant under the Predecessor Plan was estimated on the date of
the grant using the minimum value method as the Company was a nonpublic entity
while this plan was in effect. This value was the current stock price less the
present value of the exercise price for a stock that does not pay dividends.
The assumptions used for the period from January 1, 2000 through the date
of the Company’s initial public offering on September 28, 2000 and for the
years ended December 31, 1999 and 1998 were as follows: the risk-free
interest rate ranged from 4.39% to 6.41%; generally the exercise price was
equal to the fair market value of the underlying common stock at the grant date
after consideration of any related unearned compensation recorded in the consolidated
financial statements; the expected life of the option is 5 years; the
forfeiture rate is estimated at 8.0%; and the common stock is not expected to
pay dividends.
The fair value
of each option grant under the 2000 Stock Incentive Plan and subsequent to the
Company’s 2000 initial public offering was estimated on the date of the grant
using the Black-Scholes option-pricing model. The assumptions used for the
period from September 28, 2000 through December 31, 2001, were as
follows: the risk-free interest rate ranged from 5.73% to 5.92%; generally the
exercise price was equal to the fair market value of the underlying common
stock at the grant date; the expected life of the option is 5 years; the
forfeiture rate is estimated at 8.0%; expected volatility is estimated to be
65% and the common stock is not expected to pay dividends.
The weighted
average grant date fair value per share of shares under option was $1.47, $5.32
and $3.27 for the years ended December 31, 2001, 2000 and 1999,
respectively.
11. Segment Information:
The Company
designs, manufactures and markets a comprehensive line of memory, storage and
connectivity products used in high-performance computing, networking and
communications, consumer electronics and industrial applications. The Company
provides memory solutions for two reportable operating segments, Industrial and
Commercial, based on dynamic random access memory, static random access memory
and Flash memory technologies. The accounting policies for each of the
reportable operating segments are the same as those described in Note 2.
The Company
uses net sales and gross profit as the basis for evaluating the performance of
its operating segments. The Company does not allocate operating expenses,
interest or income taxes to operating segments. Due to the similarity of
products manufactured for customers within each operating segment, the Company
does not maintain separate records to identify assets by operating segment.
Summarized financial information regarding
the Company’s reportable segments is shown in the following table:
For the years
ended December 31, 2001, 2000 and 1999, international sales comprised 16%,
13% and 15% of the Company’s revenues, respectively. During these periods, no single foreign country accounted for
more than 10% of total revenues. Substantially all of the Company’s
international sales are export sales, which are shipped domestically to the
Company’s foreign customers.
12. Selected Quarterly Financial Data
(unaudited):
13. Subsequent Events (unaudited):
Acquisition of Irvine Networks
In January
2002, the Company completed a $2.3 million acquisition of the assets, including
intellectual property, of Irvine Networks and hired their engineering
staff. The on-
going operation has become the
Xiran Division of the Company. For the
past two-and-a-half years, Irvine Networks has been developing innovative
content processing technology for Web-based server platforms. The effort is in the final stages of
developing a working prototype. The
completed products, incorporating the Company’s patented memory stacking
technology, is expected to be inserted into Web-based servers to enable the
faster transmission of files.
REPORT OF INDEPENDENT ACCOUNTANTS ON
CONSOLIDATED
FINANCIAL STATEMENT SCHEDULE
The Shareholders and Board of
Directors
SimpleTech, Inc.
Our audits of
the consolidated financial statements of SimpleTech, Inc. referred to in
our report dated January 31, 2002 appearing in this Annual Report on Form
10-K also included an audit of the consolidated financial statement schedule
listed in Item 14(a)2 of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
Orange County, California
January 31, 2002
S-1
SimpleTech, Inc.
Schedule II-Consolidated Valuation and
Qualifying Accounts and Reserves
For the Years Ended December 31, 1999,
2000 and 2001
S-2
SIGNATURES
Pursuant to
the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this Annual Report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Santa
Ana, State of California, on the 12th day of March, 2002.
POWER OF ATTORNEY
KNOW ALL MEN
BY THESE PRESENTS, the undersigned hereby constitute and appoint Manouch
Moshayedi and Dan Moses, and each of them, as his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to this report on Form 10-K, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite or
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to
the requirements of the Securities Exchange Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Manouch
Moshayedi
Chief
Executive Officer and and Chairman of the Board of Directors
March
12, 2002
Manouch
Moshayedi
/s/ Mike
Moshayedi
President
and Director
March
12, 2002
Mike
Moshayedi
/s/ Mark
Moshayedi
Chief
Operating Officer, Chief Technical Officer, Secretary and Director
March
12, 2002
Mark Moshayedi
/s/ Dan
Moses
Chief
Financial Officer (Principal Financial and Accounting Officer) and Director
March
12, 2002
Dan Moses
/s/ F.
Michael Ball
Director
March
12, 2002
F. Michael
Ball
/s/ Thomas
A. Beaver
Director
March
12, 2002
Thomas A.
Beaver
/s/ Mark R.
Hollinger
Director
March
12, 2002
Mark R.
Hollinger
EXHIBIT INDEX
Number
Description
3.1*
Amended and
Restated Articles of Incorporation
3.1.1*
Certificate
of Amendment to the Amended and Restated Articles of Incorporation, dated
August 31, 2000
3.1.2
Certificate
of Amendment to the Amended and Restated Articles of Incorporation, dated May
1, 2001.
3.2*
Amended and
Restated Bylaws
4.1*
See Exhibits
3.1 and 3.2, for provisions of the Articles of Incorporation and Bylaws for
SimpleTech, Inc. defining the rights of holders of common stock of
SimpleTech, Inc.
4.2*
Specimen
Stock Certificate
10.1*
Amended and
Restated Lease, dated April 1, 2000, by and between MDC Land LLC and SimpleTech,
Inc.
10.2*
Amended and
Restated Real Estate Lease, dated June 1, 2000, by and between MDC Land LLC
and SimpleTech, Inc.
10.3*
Credit
Agreement, dated August 3, 1999, between SimpleTech, Inc. and Comerica Bank
10.4*
Security
Agreement, dated August 3, 1999, by SimpleTech, Inc. and Comerica Bank
10.5*
First
Amendment to Credit Agreement, dated as of December 29, 1999, by and between
Comerica Bank and SimpleTech, Inc.
10.6*
Second
Amendment to Credit Agreement, dated as of May 19, 2000, by and between
Comerica Bank and SimpleTech, Inc.
10.7*
Third
Amendment to Credit Agreement, dated as of May 19, 2000, by and between
Comerica Bank and SimpleTech, Inc.
10.8*
Fourth
Amendment to Credit Agreement, dated as of June 27, 2000, by and between
Comerica Bank and SimpleTech, Inc.
10.9*
Fifth
Amendment to Credit Agreement, dated as of June 27, 2000, by and between
Comerica Bank and SimpleTech, Inc.
10.10**
2000 Stock
Incentive Plan (as amended and restated)
10.11**
Employee Stock Purchase Plan (as amended and restated)
10.12*
Form of
Indemnification Agreement between SimpleTech, Inc. and each of its directors
and officers
10.13*
Form of
Employment Agreement for Executive Officers of SimpleTech, Inc. (including a
schedule of substantially identical agreements)
10.14*
Distribution
and Tax Indemnity Agreement, dated September 26, 2000, by and between
SimpleTech, Inc. and each of the shareholders of SimpleTech, Inc.
10.15*
Equipment
Lease, dated June 1, 1996, by and between MDC Land Corporation and
SimpleTech, Inc.
10.16*
Equipment
Lease, dated September 1, 1996, by and between MDC Land Corporation and
SimpleTech, Inc.
10.17*
Equipment
Lease, dated October 1, 1996, by and between MDC Land Corporation and
SimpleTech, Inc.
10.18*
Equipment
Lease, dated January 1, 1997, by and between MDC Land Corporation and
SimpleTech, Inc.
10.19*
Equipment
Lease, dated February 1, 1997, by and between MDC Land Corporation and
SimpleTech, Inc.
10.20*
Equipment
Lease, dated April 1, 1997, by and between MDC Land Corporation and
SimpleTech, Inc.
10.21*
License
Agreement, dated August 22, 2000, by and between Micron Electronics and
SimpleTech, Inc.
21.1
List of
Subsidiaries of SimpleTech, Inc.
23.1
Consent of
PricewaterhouseCoopers LLP
* This exhibit was previously filed
as an exhibit to the Company’s Registration Statement on Form S-1 declared
effective September 28, 2000 (File No. 333-32478), and is
incorporated by reference herein.
 This exhibit was
previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q
for the Quarterly Period Ended March 31, 2001, with the Securities and Exchange
Commission on May 14, 2001, and is incorporated by reference herein.
** This exhibit was previously filed as
an exhibit to the Company’s Registration Statement on Form S-8 with the
Securities and Exchange Commission on February 9, 2001, and is
incorporated by reference herein.
 Indicates a management contract or
compensatory arrangement.