UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2004
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number 0-19027
SIMTEK CORPORATION
(Exact name of registrant as specified in its charter)
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Colorado 84-1057605
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4250 Buckingham Drive, Suite 100,
Colorado Springs, Colorado 80907
(Address of principal executive offices) (Zip Code)
(719)531-9444
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock $.01 Par Value OTC Bulletin Board
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this form 10-KSB. [ ]
The registrant's revenues for its most recent fiscal year were $14,902,193.
The aggregate market value of the 58,243,682 shares of voting stock held by
non-affiliates of the registrant was approximately $38,440,830, based upon the
closing sale price of the Common Stock on March 2, 2005 of $0.66 per share as
reported by the OTC Electronic Bulletin Board. The calculation of such market
value should not be construed as an admission or conclusion by the registrant
that any person is in fact an affiliate of the registrant.
The total number of shares of Common Stock issued and outstanding as of March 2,
2005 was 62,995,479.
Transitional Small Business Disclosure Format: Yes No X
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TABLE OF CONTENTS
PART I
Item 1: Business..................................................... 3
Item 2: Properties................................................... 18
Item 3: Legal Proceedings............................................ 18
Item 4: Matters Submitted to a Vote of Security Holders.............. 18
PART II
Item 5: Market for Registrant's Common Stock and Related
Security Holder Matters.................................... 19
Item 6: Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 22
Item 7: Financial Statements and Supplementary Data.................. 37
Item 8: Changes in and Disagreements with Accountants on
Accounting Financial Disclosure............................ 55
PART III
Item 9: Directors, Executive Officers, Promoters and Control
Person; Compliance with Section 16(a) of the
Exchange Act............................................... 56
Item 10: Executive Compensation....................................... 62
Item 11: Security Ownership of Certain Beneficial Owners
and Management............................................. 66
Item 12: Certain Relationships and Related Transactions............... 70
PART IV
Item 13: Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 71
Item 14: Principal Accountant Fees and Services....................... 74
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PART I
ITEM 1: BUSINESS
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GENERAL
We provide integrated circuits to the electronics market for use in a
variety of systems, such as computers, copiers, factory controllers, electric
meters and military systems. We design, market and sell our products, but we
subcontract the majority of our manufacturing requirements. We have designed and
developed nonvolatile static random access memory products since we began
business operations in May 1987 as a Colorado corporation. We have concentrated
on the design and development of the 4, 16, 64, 256-kilobit and 1-megabit
nonvolatile static random access memory product families and technologies,
distribution channels, and sources of supply, including production at
subcontractors. Kilobits are a measure of the amount of data that can be stored;
more kilobits imply more storage. Megabits are also a measure of the amount of
data that can be stored; there are 1,000 kilobits in one megabit. During 2000,
we added the capability to design, develop and produce programmed semiconductor
logic products. During 2003, due to adverse market conditions, we determined to
no longer offer our programmed semiconductor logic products after December 31,
2003.
In March 2001, we acquired Q-DOT Group, Inc. Q-DOT Group specializes in
advanced technology research and development for data acquisition, signal
processing, imaging and data communications. Their projects are supported by
"conventional" government and commercial contracts in addition to government
contracts sponsored by the Small Business Innovation Research program. We
operate Q-DOT Group's government contract research and development operations as
our wholly owned subsidiary. This acquisition was intended to enable us to enter
the high speed data communications market, addressing both wired and wireless
applications, based on advanced "silicon germanium" process technology.
As of December 31, 2004, our backlog for released purchase orders was
approximately $1,971,000, all of which is expected to ship by June 30, 2005.
Orders are cancelable without penalty at the option of the purchaser prior to 30
days before scheduled shipment and, therefore, are not necessarily a measure of
future product revenue.
We are in production of our family of memory products. During 2004, we
transferred the production of our 0.8-micron family of nonvolatile static random
access memory products from Chartered Semiconductor Manufacturing Plc., or
Chartered, of Singapore facility #1 to Chartered's facility #2. During the third
and fourth quarter of 2004, we qualified our 0.8-micron family of nonvolatile
static random access memory products built from wafers received from Chartered's
facility #2 for sales into commercial and industrial markets. During 2003, we
designed and began sampling our 1-megabit nonvolatile static random access
memory product for sale into commercial and industrial markets. We are currently
shipping production-tested 1-megabit products under a provisional qualification.
We anticipate that this qualification will be complete in mid-2005. Our
nonvolatile static random access memory products are physically smaller and
require less maintenance than static random access memory devices that achieve
nonvolatility through the use of internal batteries and are more convenient to
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use than static random access memory devices that achieve nonvolatility by being
combined with additional chips. We have merged our logic design engineers into
our memory design group in order to incorporate unique features into our next
generation memory products currently under development.
We reduce capital requirements by subcontracting the majority of the
manufacturing process. Chartered began providing silicon wafers, produced from
its facility #1, for our nonvolatile static random access memory products in
September 1993 and continues to provide wafers based on our product technology
from its facility #2. We began receiving our memory wafers manufactured in
Chartered's Facility #2 in late second quarter of 2004 and through the third
quarter of 2004. However, with this process being transferred to an alternative
manufacturing facility, we have seen lower than average production yields, which
in turn has lowered our gross margins. We are continuing to work with Chartered
to improve our production yields and we have begun to see improved yields.
We entered into a Process Transfer Agreement with X-FAB Texas, Inc., of
Texas, or X-FAB, to install our silicon-nitride-oxide-semiconductor technology
into its wafer fabrication facility to provide an additional manufacturing
source to material supplied by Chartered. Due to a lack of Simtek and X-FAB
resources required to install our nonvolatile semiconductor memory process into
X-FAB and the marginal anticipated return-on-investment, we ceased the
installation of our nonvolatile semiconductor memory process into X-FAB's wafer
fabrication facility in August 2004.
DongbuAnam Semiconductor provides silicon wafers for our 0.25-micron
process to support our 1-megabit product family.
United Microelectronics and Chartered provided silicon wafers for our
programmed semiconductor logic products based on 0.5-micron and 0.35-micron
process technology, respectively. In February 2003, we received notification
from United Microelectronics that it will be unable to supply us with logic
wafers after August 2003. We supported customers with 0.5-micron logic wafers
manufactured at United Microelectronics through December 2003 by offering
opportunities to purchase their lifetime requirements for these products with
deliveries at the end of 2003. We do not plan to support further sales of logic
products to the market in the foreseeable future.
Amkor Technology and Amkor Test Services provide assembly and final test
services, respectively, for our nonvolatile static random access memory products
built from the wafers purchased from Chartered. Advanced Semiconductor
Engineering Inc. provided assembly services for our programmed semiconductor
logic products. Testing of our programmed semiconductor logic products was done
either internally or by Advanced Interconnect Technologies.
During 2004, all of the wafers used to produce our 0.8-micron nonvolatile
static random access memories were purchased from Chartered. Sales of these
products accounted for approximately 86% of our revenue for 2004. Wafers were
purchased from DongbuAnam in 2004 to support our 0.25-micron 1-megabit products.
Sales of these products accounted for approximately 2% of our revenue for 2004.
The remaining 12% of our revenue was from research and development contracts.
We currently have five sales and marketing offices. They are located in
Colorado, Georgia and California for the North American markets, while our
international offices are located in Windsor, England for the European market
and in Hong Kong for the Far East. We have engaged over 20 independent
representative organizations with over 30 sales offices in North America, Europe
and Asia and distributor organizations with over 100 sales offices worldwide.
These organizations have multiple sales offices and technical sales personnel
covering specific geographic territories. Through these organizations and their
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sales offices we believe that we are capable of serving a significant portion of
the worldwide market for our products with our full line of products.
MEMORY INDUSTRY AND PRODUCT BACKGROUND
The semiconductor memory market is large and highly differentiated. This
market covers a wide range of product densities, speeds, features and prices. We
believe that the ideal memory product would have:
o high bit density per chip to minimize the number of chips required in
a system;
o fast data read and write speeds to allow a system's microprocessor to
access data without having to wait;
o the ability to read and modify data an unlimited number of times;
o the ability to retain its data indefinitely when power is interrupted
(i.e. nonvolatility);
o availability in a variety of package types for modern assembly
techniques; and
o the ability to be tested completely by the manufacturer to ensure the
highest quality and reliability.
Although customers would like to have memory components with all of these
attributes it currently is not technically feasible. Therefore, the memory
market is segmented with different products combining different mixes of these
attributes.
Semiconductor memories can be divided into two main categories, volatile
and nonvolatile. Volatile memories generally offer high densities and fast data
access and programming speeds, but lose data when electrical power is
interrupted. Nonvolatile memories retain data in the absence of electrical
power, but typically have been subject to speed and testing limitations. They
also wear out if they are modified too many times. There are a number of common
volatile and nonvolatile product types, as set forth below. The list of products
under "Combinations" is limited to single packages and does not include
combinations of the listed memories in separate packages, such as static random
access memories in combination with Electrically Erasable Programmable Read Only
Memories and Erasable Programmable Read Only Memories.
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Volatile Nonvolatile Combinations
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Static Random Access Memories Electrically Erasable Programmable Nonvolatile Static Random Access
Read Only Memory Memory
Dynamic Random Access Memory Flash Memory Nonvolatile Random Access Memory
Erasable Programmable Read Only Static Random Access Memory plus
Memory lithium battery
Programmable Read Only Memory
Read Only Memory
Volatile Memories. Rewritable semiconductor memories store varying amounts
of electronic charge within individual memory cells to perform the memory
function. In a Dynamic Random Access Memory the charge must be electrically
refreshed many times per second or data are lost even when power is continuously
applied. In a static random access memory the charge need not be refreshed, but
data can be retained only if power is not interrupted.
Nonvolatile Memories. A Read Only Memory is programmed, or written, once in
the later stages of the manufacturing process and cannot be reprogrammed by the
user. Programmable Read Only Memory can be programmed once by the user, while
Erasable Programmable Read Only Memory may be reprogrammed by the user a limited
number of times if the Erasable Programmable Read Only Memory is removed from
the circuit board in the equipment. Both Flash Memory and Electrically Erasable
Programmable Read Only Memory may be reprogrammed electrically by the user
without removing the memory from the equipment. However, the reprogramming time
on both Electrically Erasable Programmable Read Only Memory and Flash Memory is
excessively long compared to the read time such that in most systems the
microprocessor must stop for a relatively long time to rewrite the memory.
Combinations. Many customers use a combination of volatile and nonvolatile
memory functions to achieve the desired performance for their electronic
systems. By using static random access memories in combination with Erasable
Programmable Read Only Memory and Electrically Erasable Programmable Read Only
Memory chips, customers can achieve nonvolatility in their systems and still
retain the high data read and write speeds associated with static random access
memory. This approach, however, is not desirable in many applications because of
the size and cost disadvantages associated with using two or more chips to
provide a single memory function. Also, it may take up to several seconds to
transfer the data from the static random access memory to the Electrically
Erasable Programmable Read Only Memory; an excessive time at power loss. As a
result, attempts have been made to combine nonvolatile and volatile memory
features in a single package or silicon chip. One approach combines a static
random access memory with lithium batteries in a single package.
Nonvolatile random access memories combine volatile and nonvolatile memory
cells on a single chip and do not require a battery. We believe our nonvolatile
static random access memory represents a significant advance over existing
products that combine volatility and nonvolatility on a single silicon chip. We
combine a static random access memory cell with an Electrically Erasable
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Programmable Read Only Memory cell to create a small nonvolatile static random
access memory cell. Our unique and patented memory cell design enables the
nonvolatile static random access memory to be produced at densities higher than
existing nonvolatile random access memories and at a lower cost per bit. In
addition to high density and nonvolatility, the nonvolatile static random access
memory has fast data access and program speeds and the static random access
memory portion of the memory can be modified an unlimited number of times
without wearing out.
We use an advanced implementation of silicon-nitride-oxide-semiconductor
technology. Silicon-nitride-oxide-semiconductor technology stores electrical
charge within an insulator, silicon nitride, and uses a thin tunnel oxide layer
to separate the silicon nitride layer from the underlying silicon substrate.
Silicon-nitride-oxide-semiconductor technology prevents tunnel oxide rupture in
the memory cell from causing an immediate loss of data. Oxide rupture has been a
major cause of failures in Flash and Electrically Erasable Programmable Read
Only Memories using floating gate technology, where charge is stored on a
polysilicon conductor surrounded by insulators. To protect against these
failures, many floating gate Electrically Erasable Programmable Read Only
Memories have required error correction circuitry and redundant memory cells.
This increases product cost by requiring more silicon area. Error correction and
redundancy are not required for our products to protect against tunnel oxide
rupture. In addition, our product designs incorporate a special test feature
that can predict data retention time for every individual memory cell based on
measuring the rate of charge loss out of the silicon nitride. Our latest
0.25-micron technology adds an additional oxide layer, forming a
silicon-oxide-nitride-oxide-semiconductor stack, to support finer geometry
electrical performance.
The silicon-nitride-oxide-semiconductor technology coupled with our
nonvolatile static random access memory cell allows high performance nonvolatile
static random access memory to be manufactured using complementary metal oxide
semiconductor technology. The Silicon-nitride-oxide-semiconductor technology
that we use has proven to be highly reliable, as demonstrated by our product
qualification results to date.
OUR MEMORY PRODUCTS
Nonvolatile Static Random Access Memories. Our nonvolatile static random
access memory product family consists of nonvolatile memories that combine fast
static random access memory and nonvolatile elements within each memory cell on
a single chip of silicon. The static random access memory portion of the
nonvolatile static random access memories is operated in the same manner as most
existing static random access memory products. The static random access memory
can be written to and read from an unlimited number of times. The nonvolatile
elements can be programmed, depending upon device type, by user control or
automatically by transferring the static random access memory contents into the
nonvolatile element memory. The data stored in the nonvolatile elements can be
transferred back into the static random access memory by user control or the
data can be transferred automatically.
Our nonvolatile static random access memories have fast data access speeds
of 25, 35 and 45 nanoseconds. These data access speeds correspond to those of
fast static random access memory and, we believe, meet the requirements of much
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of the fast static random access memory market. The high-speed characteristics
of our nonvolatile static random access memories allow them to be used in
applications with various high performance microprocessors and digital signal
processors such as those manufactured by Intel Corp., Texas Instruments and
Freescale. Our nonvolatile static random access memories can be used to replace
static random access memories with lithium batteries and multiple chip solutions
such as static random access memory plus Electrically Erasable Programmable Read
Only Memory or Flash Memory.
The various combinations of density and speed allow our nonvolatile static
random access memory products to meet the design and performance requirements of
many different types of systems.
Our newest nonvolatile static random access memory architecture, currently
implemented in our 0.25-micron product family, adds an eight-bit
micro-controller, approximately 20,000 gates of metal-programmable logic and
programmable input-output devices. We refer to this architecture as
Value-Added-Memory . It is designed to allow variations of the base-line
1-megabit nonvolatile static random access memory design to be quickly developed
for emerging market applications.
We finalized commercial and industrial qualification of two versions of our
initial 64-kilobit nonvolatile static random access memory product offering in
September 1991 and April 1992, respectively. We completed military qualification
of our initial nonvolatile static random access memories in May 1992. We began
sales into the commercial market of our initial 16-kilobit nonvolatile static
random access memory product family in 1992. The nonvolatile static random
access memory product family also includes the 4-kilobit version. We completed
the development and product qualification of the 64-kilobit AutoStoreTM
nonvolatile static random access memory in 1993. The AutoStoreTM version
automatically detects power loss and transfers the data from the static random
access memory cells into the Electrically Erasable Programmable Read Only Memory
cells. This device does not require instructions or intervention from the system
microprocessor to notify it of the power loss. Commercial and industrial
qualification of our 256-kilobit nonvolatile static random access memory
occurred in 1997 and military qualification of our 256-kilobit nonvolatile
static random access memory was completed in the second quarter of 1998. In
2002, we qualified our 3-volt 256-kilobit nonvolatile static random access
memory for use in commercial and industrial applications. During 2003, we
designed and began sampling our 1-megabit nonvolatile static random access
memory product for sale into commercial and industrial markets. We are currently
shipping production-tested 1-megabit products under a provisional qualification.
We anticipate this qualification to be complete in mid-2005. During the second
and third quarter of 2004, we qualified our 0.8-micron family of nonvolatile
static random access memory products, produced on wafers received from
Chartered's facility #2, for use in commercial and industrial applications.
PROGRAMMABLE LOGIC DEVICE INDUSTRY
The electronics industry uses logic integrated circuits to route electrical
signals to perform tasks unique to that system. These unique operations
differentiate one system capability from another. Field Programmable Gate Arrays
and Complex Programmable Logic Devices have become popular for this purpose, and
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are supplied by a number of major suppliers, such as Xilinx and Altera. These
products provide high performance, flexible solutions, but the technology
required to allow these products to be programmable is expensive when compared
to non-programmable, fixed function, application specific products.
OUR PROGRAMMED SEMICONDUCTOR LOGIC PRODUCTS
Before we discontinued our programmed semiconductor logic products on
December 31, 2003, such products were built to order based on customer designs
that were electronically transferred to our design workstations. Our engineers
verified the design and implemented it in the appropriate technology to provide
a cost effective solution for the customer.
Our customers often asked that we provide them with programmed
semiconductor logic products at a lower price than their existing logic products
without sacrificing the products' functionality. Our software conversion tools
translated our clients' design files of their logic products generally allowing
us to provide our clients with a logic product that has the same functionality
but at a lower cost than their existing logic products. We also developed a
testability feature that allowed us to test our programmed semiconductor logic
products without dedicating a portion of the chip area to such testing.
We subcontracted the production of our semiconductor logic products to
various fabrication facilities. We provided the fabrication facilities with the
design of our programmed semiconductor logic products and these facilities
installed our designs on the chips through standard wafer processing. Through
August 2003, we contracted with United Microelectronics for 0.5-micron
technology and with Chartered for 0.35-micron technology, in each case through
purchase orders on a case-by-case basis. In February 2003, we received
notification from United Microelectronics that it would be unable to supply us
with logic wafers after August 2003. We supported customers with 0.5-micron
logic wafers manufactured at United Microelectronics through December 2003 by
offering opportunities to purchase their lifetime requirements for these
products with deliveries that were scheduled by the end of 2003. We do not plan
to support sales of logic products to the market in the future.
PRODUCT WARRANTIES
We presently provide a one-year limited warranty on our products.
RESEARCH AND DEVELOPMENT
Our research and development activities are centered around developing new
products and reducing the cost of our nonvolatile static random access memory
products. We continually work to improve yield on the 0.8-micron technology in
order to reduce costs. In order to further reduce costs, since late 1997 we have
used outside experts for testing our products. We have a test floor used for
evaluation of our technologies, product designs and product quality. The test
floor is also used for production testing of silicon wafers.
During 2002, we developed and qualified a 3-volt version of our 256-kilobit
nonvolatile static random access memory product, built on the 0.8-micron
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technology from Chartered. The 3-volt version of our 256-kilobit nonvolatile
static random access memory product is qualified for use in commercial and
industrial applications.
In October 2001, we entered into an agreement with Amkor Technology to
cooperate in developing a semiconductor process module that combines our
nonvolatile technology with Amkor's advanced 0.25-micron digital complementary
metal-oxide semiconductor, or CMOS, fabrication line. CMOS is the semiconductor
technology used in the transistors that are manufactured for most of today's
computer microchips. The module incorporates silicon-oxide-nitride-oxide-silicon
technology, which is used to manufacture both high-density
silicon-oxide-nitride-oxide-silicon flash and nonvolatile static random access
memories, for stand alone and embedded products. During 2002 and 2003, our
research and development team along with Amkor's research and development team
worked aggressively on the co-development program. Our 1-megabit 3-volt
nonvolatile static random access memory was the primary development vehicle. In
February 2003, when Amkor Technology sold a controlling interest of its wafer
fabrication facility to DongbuAnam Semiconductor, all contractual obligations
were transferred to Anam U.S.A., a wholly owned subsidiary of DongbuAnam
Semiconductor. Our co-development program has not been affected by the change in
ownership and we do not expect any material changes in the support required to
complete the program. In August 2003, we received the first complete processed
silicon from this development, which yielded working samples of our new
1-megabit 3-volt nonvolatile semiconductor memory product. We began shipping
samples of our new 1-megabit 3-volt nonvolatile semiconductor memory product in
September 2003. We are currently shipping 1-megabit products tested to
production requirements on a provisional qualification and plan to have
qualification complete in mid-2005. We cannot assure you that we will not
discover technical problems or manufacturing concerns with this new product,
that demand will develop for the new product or that we will be able to sell
this new product at a profit.
During the third and fourth quarter of 2004, we qualified our 0.8-micron
family of nonvolatile static random access memory products, produced on wafers
received from Chartered's facility #2, for use in commercial and industrial
applications. If production yields or wafer availability from Chartered's
facility #2 do not meet our production requirements, this may have a material
negative impact on our future revenues, earnings and stock price.
We entered into a Process Transfer Agreement with X-FAB to install our
silicon-nitride-oxide-semiconductor technology into its wafer fabrication
facility to provide an additional manufacturing source to material supplied by
Chartered. Due to a lack of Simtek and X-FAB resources required to install our
nonvolatile semiconductor memory process into X-FAB and the marginal anticipated
return-on-investment, we have ceased the installation of our nonvolatile
semiconductor memory process into X-FAB's wafer fabrication facility in August
2004.
We anticipate that our acquisition of Q-DOT Group will enable us to enter
the high speed data communications market, addressing both wired and wireless
applications, based on advanced silicon germanium process technology. Silicon
germanium is rapidly becoming the technology of choice for many analog, mixed
signal and high speed digital circuits. During 2004 and 2003, we spent
approximately $411,000 and $47,000, respectively, on marketing and engineering
efforts to determine which applications our integrated circuits, built on the
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silicon germanium process technology, would best fit into. In the first half of
2005 we shall evaluate the current market opportunities for products in data
communications to determine our best strategy for continued investment.
Our research and development expenditures for the years ended December 31,
2004 and 2003 were $5,308,469 and $4,518,528, respectively. We intend to
continue expenditures on research and development; however, the percentage of
research and development expenditures is expected to decrease relative to
expenditures relating to the commercial production of our existing products.
MANUFACTURING AND QUALITY CONTROL
Our manufacturing strategy is to use subcontractors whose production
capabilities meet the requirements of our product designs and technologies.
In 1992, we entered into our manufacturing agreement with Chartered to
provide us with silicon wafers for our products. Under the manufacturing
agreement with this subcontractor, it has installed a manufacturing process for
versions of our current and future memory products.
DongbuAnam Semiconductor provides silicon wafers for our 0.25-micron
process to support our 1-megabit product family. Our agreement with Amkor
Technology, providing for such supply of wafers, was assigned to DongbuAnam
Semiconductor in 2003.
Through August 2003, we contracted with United Microelectronics for
0.5-micron technology and with Chartered for 0.35-micron technology, in each
case through purchase orders on a case-by-case basis. In February 2003, we
received notification from United Microelectronics that they would be unable to
supply us with logic wafers after August 2003. We supported customers with
0.5-micron logic wafers manufactured at United Microelectronics through December
2003 by offering opportunities to purchase their lifetime requirements for these
products with deliveries scheduled by the end of 2003.
Device packaging of our nonvolatile static random access memory products
continued at the Amkor facilities in the Philippines and South Korea. Final test
for our nonvolatile static random access memory products continued with Amkor
Test Services, in Wichita, Kansas. Device packaging of our programmed
semiconductor logic products continued at Advanced Semiconductor Eng., Inc. in
Taiwan. Final test of our programmed semiconductor logic products was completed
in our Colorado Springs facility and at Advanced Interconnect Technologies in
San Jose, California.
Our subcontractors provide quality control for the manufacture of our
products. We maintain our own quality assurance personnel and testing capability
to assist the subcontractors with their quality programs and to perform periodic
audits of the subcontractors' facilities and finished products to ensure product
integrity.
We secured certification to the ISO9001:2000 Quality Management System for
our internal operations in Colorado Springs in November of 2004. This completes
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our ISO certification coverage which includes similar certifications held by all
of our manufacturing subcontractors, and meets the quality system requirements
of the vast majority of our customers. We continue to support our Mil-Prf-38535
Appendix A quality system in support of our SMD and military grade products.
Our quality and reliability programs were audited by several commercial and
military customers during 2004 as part of routine supplier certification
procedures. All such audits were completed satisfactorily. We continue to expand
our Green Program to cover the European Union RoHS directives. All of our
products are now available in an "RoHS Compliant" version using matte tin
plating in lieu of the Tin/Lead plating. We will continue to offer both plating
types until demand for the Sn/Pb plating falls significantly.
MARKETS
Our memory products are targeted at fast nonvolatile static random access
memory markets, static random access memory plus Electrically Erasable
Programmable Read Only Memory markets and other nonvolatile memory products
broadly used in commercial, industrial and military electronic systems.
Our products are typically used to store critical data when power is
removed from the system. Often this data must be captured very quickly and we
believe that the fast write time of our nonvolatile static random access memory
products is a significant benefit over nonvolatile memory alternatives. Also,
our products are used in systems that are "write intensive" such as data
collection, event recording and others where we believe that the unlimited write
endurance of our nonvolatile static random access memory is superior to
alternative nonvolatile memory solutions.
Until now our markets have been limited by the density at which we could
cost effectively produce products. We believe that the introduction of our
1-megabit nonvolatile static random access memory products in 2003 manufactured
on 0.25-micron technology and the introduction of our Value Added Memory (VAM)
solutions that we expect will be introduced in 2005 will greatly increase the
market segments we serve.
TARGET APPLICATIONS FOR SIMTEK PRODUCTS
Airborne Computers Lighting Control Systems
Automotive Control & Monitoring Systems Medical Instruments
Automated Teller Machines Currency Changers
Data Monitoring and Recording Equipment Printers
Process Control Equipment Facsimile Machines
Down Hole Drilling Systems Radar and Sonar Systems
Gaming Machines Telecommunications Systems
GPS Navigational Systems POS Terminals
Guidance and Targeting Systems Automated Test Equipment
High Performance Workstations Utility Meters
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Laser Printers Routers
Weapon Control Systems Security Systems
Copiers Broadcast Equipment
Cable TV and Satellite Set Top Converter Boxes Studio Recording Equipment
Multi- Function Printers Servers
RAID Controllers Factory Automation Systems
Robotics Mass Storage Systems
LCD Projectors Irrigation Systems Controllers
Power Grid Management Systems Fluid Flow Meters
Postal Systems Motor Controllers
Automated Parking Systems Train Control Systems
Our new 1-megabit and Value-Added-Memory products have opened new
applications into which our products are being designed. These include
electronic vending machines, automotive data logging and a variety of data
communications applications.
We are increasing marketing and sales emphasis on office automation
products such as copiers and mass storage systems as well as increasing sales
efforts in data communications, automotive applications and consumer
electronics.
SALES AND DISTRIBUTION
Our strategy is to generate sales through the use of independent sales
representative agencies and distributors. We believe this strategy provides the
fastest and most cost effective way to assemble a large and professional sales
force.
We currently have five sales and marketing offices, located in Colorado,
Georgia and California for the North American markets and in Windsor, England
for the European market and in Hong Kong for the Far East. We have engaged over
20 independent representative organizations with over 30 sales offices in North
America, Europe and Asia and distributor organizations with over 100 sales
offices worldwide. These organizations have multiple sales offices and technical
sales personnel covering specific geographic territories. Through these
organizations and their sales offices we believe that we are capable of serving
a significant portion of the worldwide market for our products with our full
line of products.
Independent sales representatives typically sell a limited number of
non-competing products to semiconductor users in particular geographic assigned
territories. Distributors inventory and sell products from a larger number of
product lines to a broader customer base. These sales channels are generally
complementary, as representatives and distributors often work together to
consummate a sale, with the representative receiving a commission from us and
the distributor earning a markup on the sale of products. We supply sales
materials to the sales representatives and distributors.
For our marketing activities, we evaluate external marketing surveys and
forecasts and perform internal studies based, in part, on inputs from our
independent sales representative agencies. Marketing decisions are also based on
forecasts and inputs from our current and prospective customers. We prepare
13
brochures, data sheets, application notes, product collateral and product
advertising with our internal marketing resources and contracted outside
services.
CUSTOMERS AND BACKLOG
We have shipped qualified nonvolatile static random access memory products
to customers directly and through distributors since the September 1991
commercial product qualification. The majority of our sales are to Fortune 500
companies. Approximately 29% of our net product sales during 2004 were to
customers in the United States, approximately 48% were to customers in the
Pacific Rim, and approximately 23% were to customers in Europe and other parts
of the world.
As of December 31, 2004, we had a backlog of unshipped customer orders of
approximately $1,971,000, which we expect to fill by June 30, 2005. Orders are
cancelable without penalty at the option of the purchaser prior to 30 days
before scheduled shipment and therefore are not necessarily a measure of future
product revenue.
LICENSES
Zentrum Mikroelektronik Dresden. In June of 1994, we signed a joint
development agreement with Zentrum Mikroelektronik Dresden to install the
1.2-micron products for manufacture at Zentrum Mikroelektronik Dresden and to
jointly develop the 0.8-micron technology at Chartered. The agreement was
modified in August of 1994 by a Letter of Intent between us to bypass the
installation of our nonvolatile static random access memory products based on a
1.2-micron process technology at Zentrum Mikroelektronik Dresden and instead
modify the 0.8-micron technology to run in the Zentrum Mikroelektronik Dresden
factory. Zentrum Mikroelektronik Dresden has paid us all the monetary
requirements under this agreement including any royalties we may receive from
sales of these jointly developed products.
Future License Sales. We intend to sell product and technology licenses on
a selective basis. We will continue to seek licensing partners who can
contribute to the development of the nonvolatile static random access memory
market and provide a meaningful level of revenue to us while not posing an undue
threat in the marketplace.
COMPETITION
Our products compete on the basis of several factors, including data access
and programming speeds, density, data retention, reliability, testability, space
savings, manufacturability, ease of use and price.
Products that compete with our family of nonvolatile static random access
memories fall into three categories. The first category of products that compete
with our nonvolatile static random access memories are volatile and nonvolatile
14
chips used in combination, such as fast static random access memories used with
Erasable Programmable Read Only Memories, Electrically Erasable Programmable
Read Only Memories, or Flash memory. We believe that we have advantages over
these products because the nonvolatile static random access memory allows data
to be stored in milliseconds as compared to seconds for chips used in pairs. Our
single chip solution provides a space savings and easier manufacturing. Our
single chip solution generally provides increased reliability versus multiple
chips. Competitors in the multiple chip category include Cypress Semiconductor
Corp., Integrated Technology, Inc., Toshiba, Fujitsu, Advanced Micro Devices,
Inc., Atmel and National Semiconductor Corp. We currently hold less than 1%
market share in this market category.
The second category of products that compete with our nonvolatile static
random access memories is products that combine static random access memories
with lithium batteries in specially adapted packages. These products generally
are slower in access speeds than our nonvolatile static random access memories
due in part to limitations caused by life of the lithium battery when coupled
with a faster static random access memory. Our nonvolatile static random access
memories are offered in standard, smaller, less expensive packages, and do not
have the limitation on lifetime imposed on the static random access
memory/battery solutions by the lithium battery. Our nonvolatile static random
access memories can also be used for wave soldered automatic insertion circuit
board assembly since they do not have the temperature limitations of lithium
batteries. However, lithium battery-backed static random access memory products
are available in densities of 4-megabit and greater per package. Companies
currently supplying products with lithium batteries include Maxim, ST
Microelectronics and Texas Instruments. We currently hold approximately 10% of
this market category.
The third category consists of nonvolatile random access memories that
combine static random access memory cells and Electrically Erasable Programmable
Read Only Memory cells on a monolithic chip of silicon. Our current product
offerings are of higher density, faster access times and we believe can be
manufactured at lower costs per bit than competitor's nonvolatile random access
memories. We believe that traditional manufacturers of nonvolatile random access
memories have discontinued manufacturing their products.
Zentrum Mikroelektronik Dresden, through its license agreement with us, has
the worldwide right to sell under the Zentrum Mikroelektronik Dresden label
nonvolatile static random access memories developed jointly by Zentrum
Mikroelektronik Dresden and us. With volume production established at Zentrum
Mikroelektronik Dresden, Zentrum Mikroelektronik Dresden is selling such
nonvolatile static random access memories. This has had a positive impact for us
by creating a second source, which is required by many larger companies, for our
nonvolatile static random access memory products. However, we have been required
to reduce prices to specific markets due to the increased competition from
Zentrum Mikroelektronik Dresden. We believe that the competition from Zentrum
Mikroelektronik Dresden has increased the number of companies using nonvolatile
static random access memories, but may have put downward pressure on average
selling prices.
We are aware of other semiconductor technologies for nonvolatile memory
products. These technologies include ferroelectric memory and thin film magnetic
memory. Each of these requires a newly developed process technology, which has
15
processing risk, but may deliver performance characteristics superior to our
technology if perfected. Each of these processes integrates materials into the
silicon processing steps that are not commonly used for semiconductor memory
products today. If successful, these products could perform the same functions
in a system that our products currently perform, but may be manufactured in
higher density or lower cost products. Ramtron, Raytheon, Symetrix, and others
are developing ferroelectric products. IBM, Freescale and Cypress Semiconductor
are developing magnetic film products.
PATENTS AND INTELLECTUAL PROPERTY
We undertake to protect our product designs and technologies under the
relevant intellectual property laws as well as by utilizing internal disclosure
safeguards. Under our licensing programs, we exercise control over the use of
our protected intellectual property and have not permitted our licensees to
sublicense our nonvolatile static random access memory products or technology.
It is common in the semiconductor industry for companies to obtain
copyright, trademark, trade secret and patent protection of their intellectual
property. We believe that patents are significant in our industry, and we are
seeking to build a patent portfolio. We expect to enter into patent license and
cross-license agreements with other companies. We have been issued 30 patents in
the United States on our nonvolatile static random access memory cell and other
circuit designs. These patents relate to circuit implementations used to design
our nonvolatile memory products. The use of these patents allows us to design
circuits with lower power consumption and faster store timing than would be
possible otherwise giving us a competitive advantage over other technologies.
These patents have terms that expire through 2006 to 2018. We have also taken
steps to obtain European patents in the large European countries, including
Germany, France, the United Kingdom and Sweden on the nonvolatile memory patents
that would have potential value in international markets. We have four
applications that have been allowed and intend to prepare patent applications on
additional circuit designs we have developed. However, as with many companies in
the semiconductor industry, it may become necessary or desirable in the future
for us to obtain licenses from others relating to our products.
Many of our product designs are not protected by patents. We have one
patent on our logic product technology but protect most of our logic product
technology as trade secrets. Our logic products accounted for approximately 7%
of our sales for the year ended December 31, 2003 and for none of our sales for
the year ended December 31, 2004. We also protect aspects of our technology that
relate to our semiconductor memory products as trade secrets. There are
disadvantages to protecting intellectual property as trade secrets rather than
patents. Unlike patents, trade secrets must remain confidential in order to
retain protection as proprietary intellectual property. We cannot assure you
that our trade secrets will remain confidential. If we lose trade secret
protection, our business could suffer.
We have received federal registration of the term "Novcel" a term we use to
describe our technology. We have not sought federal registration of any other
trademarks, including "Simtek" and "QuantumTrapTM" or our logo.
16
Late in 2002 and in 2003, we were contacted by Syndia Corporation regarding
possible infringement on certain patents. Syndia Corporation informed us that it
had acquired a portfolio patents issued to Jerome Lemelson. This patent
portfolio was not included in the portfolio owned by Lemelson Foundation
Partnership, an entity with which we reached a licensing agreement in 1999. We
are currently reviewing any potential infringements. If there are any
infringements, we believe that we can reach a reasonable licensing agreement
with Syndia Corporation.
EMPLOYEES
As of the date of this Form 10-KSB, we had 58 full-time employees.
17
ITEM 2. PROPERTIES
------------------
We lease approximately 16,000 square feet of space in Colorado Springs,
Colorado. This space includes a product engineering test floor of approximately
3,000 square feet. The lease was scheduled to expire on February 28, 2008. On
January 27, 2004, we renegotiated the terms of the lease and it is now scheduled
to expire on February 28, 2013. Through May 31, 2004, we leased approximately
17,000 square feet of space in Colorado Springs that is occupied by Q-DOT Group,
our wholly-owned subsidiary. On June 1, 2004, we renegotiated the terms of the
lease to approximately 13,000 square feet of rental space and extended the
expiration date from April 30, 2005 to April 30, 2007. This space includes a
research and development laboratory facility of approximately 2,500 square feet.
We do not own any real property. We do not have a policy:
1. limiting the percentage of assets which may be invested in any one
investment or type of investment,
2. regarding whether we acquire assets primarily for possible capital gain
or primarily for income, or
3. with respect to investments in real estate, interests in real estate,
real estate mortgages, or securities of or interests in persons primarily
engaged in real estate activities.
ITEM 3. LEGAL PROCEEDINGS
-------------------------
We are not a party to any legal proceeding (including where our property is
the subject of the proceeding), and we are not aware of any proceeding that a
government authority is contemplating as of the date of this report.
ITEM 4. MATTERS SUBMITTED TO A VOTE OF SECURITY HOLDERS
-------------------------------------------------------
None.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
--------------------------------------------------------------------------------
Our common stock is listed on the OTC Electronic Bulletin Board under the
symbol "SRAM." Securities not included in the Nasdaq Small-CAP Market are
covered by the Securities and Exchange Commission rule that imposes additional
sales practice requirements on broker-dealers who sell such securities to
persons other than established customers and accredited investors (generally
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse). For transactions covered by the rule, the broker-dealer must
make a special suitability determination for the purchaser and receive the
purchaser's written agreement to the transaction prior to the sale.
Consequently, the rule may affect the ability of broker-dealers to sell our
securities, which will have an adverse effect on the ability of our security
holders to sell their securities and our ability to raise additional capital.
Shown below is the closing high bid and the closing low offer for our
common stock as reported by the OTC Electronic Bulletin Board on the last day of
the quarter.
Common Stock
------------
High Bid Low Bid
-------- -------
2003
First Quarter...................................... .16 .14
Second Quarter..................................... .43 .36
Third Quarter...................................... .80 .78
Fourth Quarter..................................... 1.26 1.20
2004
First Quarter...................................... 1.64 1.56
Second Quarter..................................... .72 .68
Third Quarter...................................... .62 .60
Fourth Quarter..................................... .61 .55
The quotations listed above reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
As of December 31, 2004, we had 458 shareholders of record. This number
does not reflect shareholders who beneficially own common stock held in nominee
or "street name".
We have not paid any dividends on our common stock since inception and we
do not intend to pay any dividends on our common stock in the foreseeable
future.
Pursuant to a Convertible Loan Agreement, dated as of June 28, 2002, we
issued convertible debentures to Renaissance Capital Growth and Income Fund III,
Inc., Renaissance US Growth & Investment Trust PLC and BFSUS Special
19
Opportunities Trust PLC. We received $3,000,000 in funding. The convertible
debentures have 7-year terms at a 7.5% per annum interest rate; each of the
funds invested $1,000,000. The holder of the debentures has the right, at any
time, to convert all, or in multiples of $100,000, any part of the debenture
into fully paid and nonassessable shares of our common stock. The debentures are
convertible into our common stock at $0.312 per share, which was in excess of
market price on the closing date. There is no public trading market for the
debentures. We have agreed to register for resale all of the common stock
issuable upon conversion of the debentures. RENN Capital Group is agent for the
three investment funds with respect to the Convertible Loan Agreement and the
debentures issued thereby. One of our directors holds the position of Senior
Vice President of RENN Capital Group. The private transaction did not involve
any advertising or general solicitation. We relied on Section 4(2) of the
Securities Act as an exemption from registration.
On November 7, 2003, we closed our $1,500,000 equity financing with
Renaissance Capital Growth and Income Fund III, Inc., Renaissance US Growth &
Investment Trust PLC and BFSUS Special Opportunities Trust PLC. RENN Capital
Group is the agent for the three investment funds. One of our directors holds
the position of Senior Vice President of RENN Capital Group. In exchange for the
$1,500,000, we issued 550,661 shares of our common stock to each of the three
RENN investment funds. The purchase price was $0.908 per share and was based on
the average closing price of our common stock as reported on the
Over-the-Counter Bulletin Board over the five trading days before closing. In
addition to the shares of common stock, each of the three RENN investment funds
received warrants to acquire 250,000 shares of our common stock. The warrants
have a 5-year term with an exercise price of $1.25 per share for 125,000 shares
and $1.50 per share for 125,000 shares. The private transaction did not involve
any advertising or general solicitation and we relied on Rule 506 of Regulation
D as an exemption from registration. Following the transaction, we filed a Form
D with the SEC as required by Regulation D.
On October 12, 2004, we closed a $2,500,000 equity financing with SF
Capital Partners Ltd., Bluegrass Growth Fund LP and Bluegrass Growth Fund LTD.
In exchange for the $2,500,000, we issued 4,127,967 shares of our common stock
to SF Capital Partners Ltd., 515,996 shares of our common stock to Bluegrass
Growth Fund LP and 515,996 shares of our common stock to Bluegrass Growth Fund
LTD. The purchase price was based on a 15% discount to the closing price of our
common stock as reported on the Over-the-Counter Bulletin Board on October 11,
2004, resulting in a price of $0.4845 per share. In addition to the shares of
common stock, SF Capital Partners Ltd., Bluegrass Growth Fund LP, and Bluegrass
Growth Fund LTD received warrants to acquire 2,063,984, 257,998, and 257,998
shares of our common stock, respectively. The warrants have a 5-year term with
an exercise price of $0.627 per share. Merriman Curhan Ford & Co., the placement
agent for the $2,500,000 equity financing, received a cash payment of $187,500
and warrants to acquire 386,997 shares of our common stock. The warrants have a
5-year term with an exercise price of $0.627 per share. In addition, Merriman
Curhan Ford & Co. is entitled to receive another cash payment equal to 7.5% of
the capital received by us upon the exercise of the warrants issued to SF
Capital Partners Ltd., Bluegrass Growth Fund LP and Bluegrass Growth Fund LTD
pursuant to the $2,500,000 equity financing (provided such exercise is within an
applicable tail period). The private transaction did not involve any advertising
20
or general solicitation and we relied on Rule 506 of Regulation D as an
exemption from registration. Following the transaction, we filed a Form D with
the SEC as required by Regulation D.
The following table sets forth information with respect to our equity
compensation plans as of December 31, 2004. This table does not include options
to purchase 83,049 shares of our common stock which options were assumed by us
as a result of the acquisition of Q-DOT Group in 2001.
Equity Compensation Plan Information
Number of securities
remaining available for
Number of securities to be future issuance under
issued upon exercise of Weighted-average exercise equity compensation plans
outstanding options price of outstanding (excluding securities
Plan Category warrants and rights options warrants and rights reflected in column (a))
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans (a) (b) (c)
approved by security holders
125,000 $0.37 --
Equity compensation plans not
approved by security holders
5,865,085 $0.64 2,195,730
--------- ----- ---------
Total 5,990,085 $0.64 2,195,730
Please see Note 5, "Stock Option Plans," to our Financial Statements included
herewith.
21
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------------------------------------------------------------------------------
OF OPERATIONS
-------------
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS STATEMENTS WHICH CONSTITUTE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). DISCUSSION CONTAINING
SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE MATERIAL SET FORTH BELOW AND
UNDER "BUSINESS," AS WELL AS WITHIN THE ANNUAL REPORT GENERALLY. IN ADDITION,
WHEN USED IN THIS ANNUAL REPORT, THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS,"
"PLANS," "INTENDS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS AND STATEMENTS OF
EXPECTATIONS, PLANS AND INTENT ARE SUBJECT TO A NUMBER OF RISKS AND
UNCERTAINTIES. ACTUAL RESULTS IN THE FUTURE COULD DIFFER MATERIALLY FROM THOSE
DESCRIBED IN THE FORWARD-LOOKING STATEMENTS, AS A RESULT, AMONG OTHER THINGS, OF
CHANGES IN TECHNOLOGY, CUSTOMER REQUIREMENTS AND NEEDS, AMONG OTHER FACTORS. WE
UNDERTAKE NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO
THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS
OR CIRCUMSTANCES.
OVERVIEW OF RECENT DEBT AND EQUITY TRANSACTIONS
As described in "Item 5. Market for Registrant's Common Stock and Related
Security Holder Matters", on October 12, 2004, we closed a $2,500,000 equity
financing with SF Capital Partners Ltd., Bluegrass Growth Fund LP and Bluegrass
Growth Fund LTD and on November 7, 2003, we closed our $1,500,000 equity
financing with Renaissance Capital Growth and Income Fund III, Inc., Renaissance
US Growth & Investment Trust PLC and BFSUS Special Opportunities Trust PLC.
RESULTS OF OPERATIONS
General. We have designed and developed nonvolatile static random access
products since we commenced business operations in May 1987. We have
concentrated on the design and development of our nonvolatile static random
access memory product families and technologies, marketing, distribution
channels, and sources of supply, including production at subcontractors. During
2000, we added the capability to design, develop and produce gate array
integrated circuits, or our logic products but ceased supporting this product as
of December 31, 2003.
In 1991, we qualified and began shipping our first product built on a
1.2-micron process technology, a 64-kilobit nonvolatile static random access
memory. When we say we "qualify" a product, we mean that our internal quality
organization confirms the product's performance to the product's data sheet and
accepted industry standards. Commercial products operate from 0 degrees to 70
degrees Centigrade, industrial products from -40 degrees to 85 degrees
Centigrade and military products from -55 degrees to 125 degrees Centigrade. A
1-micron process technology is manufactured with spacing between design elements
of approximately one millionth of one meter. Generally speaking, the smaller the
spacing between design elements, the less expensive the production cost of our
memory products. Accordingly, we generally try to design with lower micron
technology. Kilobits are a measure of the amount of data that can be stored.
More kilobits imply more storage.
22
Through 1995, we expanded on the 64-kilobit nonvolatile static random
access memory product family by creating a 4-kilobit, 16-kilobit product. We
also achieved qualification and sale of these products for commercial,
industrial and military markets. In 1995, market demand required a nonvolatile
static random access memory product that could store more information. In order
to meet this demand, we began the development of a 256-kilobit nonvolatile
static random access memory product. We required a smaller density process
technology in order to achieve competitive costs. We worked with Zentrum
Mikroelektronik Dresden to design and install our 4-kilobit, 16-kilobit,
64-kilobit and 256-kilobit nonvolatile static random access memory products into
their 0.8-micron process wafer fabrication facility. Qualification of these
products occurred in 1997. In 1997, we transferred the process of our 4-kilobit,
16-kilobit, 64-kilobit and 256-kilobit nonvolatile static random access memory
products to Chartered's silicon wafer fabrication facility #1. Qualification of
these products for use in the commercial, industrial and military markets was
completed in 1998. In 2002, we developed and qualified for sale, into the
commercial and industrial markets, a 3 volt version of our 256-kilobit
nonvolatile static random access memory product built on 0.8-micron process
technology in Chartered's silicon wafer fabrication facility #1.
In 2003, we received notification from Chartered that they would be closing
their silicon wafer fabrication facility #1 in March 2004 and that they would
transfer our 0.8-micron process technology to their silicon wafer fabrication
facility #2. Through late 2003 and into 2004, we began working with Chartered to
transfer the production of our 4-kilobit, 16-kilobit, 64-kilobit, 5 volt
256-kilobit and 3 volt 256-kilobit product from their facility #1 to their
facility #2. During the third and fourth quarters of 2004 we completed the
transfer and qualification of these products. The transfer from Chartered's
facility #1 to Chartered's facility #2 accounted for lower production yields
through the first three quarters of 2004 as compared to the production yields we
achieved in 2003. During the fourth quarter 2004, we began seeing production
yields return to historic levels. Sales of our products manufactured from the
silicon wafers we received from both of Chartered's facilities accounted for
approximately 86% and 78% of our total revenue for the twelve months ended
December 31, 2004 and December 31, 2003, respectively.
In order to avoid an interruption of product availability, we entered into
a Process Transfer Agreement with X-FAB to install our
silicon-nitride-oxide-semiconductor technology into its wafer fabrication
facility to provide an additional manufacturing source to material supplied by
Chartered. Through the middle of the third quarter of 2004, we were engaged with
X-FAB to install our nonvolatile semiconductor memory process. Due to a lack of
Simtek and X-FAB resources required to install our nonvolatile semiconductor
memory process into X-FAB and the marginal anticipated return-on-investment, we
ceased the installation of our nonvolatile semiconductor memory process into
X-FAB's wafer fabrication facility in August 2004.
In October 2001, we entered into an agreement with Amkor Technology, who
later sold controlling interest in its wafer fabrication facility to DongbuAnam
Semiconductor. The agreement we entered into includes the development of a
module which incorporates silicon-oxide-nitride-oxide- silicon technology, that
will be used to manufacture both high density silicon oxide nitride oxide
silicon flash and non volatile static random access memories for stand alone
embedded products. The primary development product is our 1-megabit 3-volt
nonvolatile static random access memory. In September 2003, we began shipping
samples of the 1-megabit 3-volt nonvolatile static random access memory. We are
23
currently shipping 1-megabit products tested to production requirements on a
provisional qualification and plan to have qualification complete in mid-2005.
During the third quarter of 2004, we began receiving initial production orders.
Sales of our 1-megabit 3-volt products accounted for approximately 2% of our
total revenue for the twelve months ended December 31, 2004.
We have not had a manufacturing contract with Chartered since 1998.
However, we have maintained a good relationship with Chartered for the pricing
and delivery of our wafers. Due to our not having a contract with Chartered and
the volatility of the semiconductor market, we may have no control over the
pricing and availability of the wafers we require in order to build our
products. The risk of us not receiving the products and pricing we need from
Chartered is dependent upon market conditions and Chartered's internal
objectives, so we continually evaluate alternative sources of supply. If we are
unable to obtain the products and pricing we need, our business could suffer.
Our programmed semiconductor logic products were supported with silicon
wafers, built on 0.5-micron process technology, purchased from United
Microelectronics and silicon wafers purchased from Chartered built on a
0.35-micron process technology. Products manufactured with smaller spacing
generally support lower product costs by reducing the amount of raw material
required for the product. In February 2003, we received notification from United
Microelectronics that it would be unable to supply us with logic wafers after
August 2003. We supported customers with 0.5-micron logic wafers manufactured at
United Microelectronics through December 2003 by offering opportunities to
purchase their lifetime requirements for these products with deliveries
scheduled by the end of 2003. We do not plan to support sales logic products to
the market in the foreseeable future. Revenue generated from our logic products
accounted for approximately 7% of our total revenue for the twelve months ended
December 31, 2003 and none of our revenue in 2004.
REVIEW OF 2004 OPERATIONS - SEMICONDUCTOR DEVICES
Total product sales of our semiconductor devices for 2004 were
approximately $13,100,000. We have seen an increase in units shipments of our
commercial products in 2004. The majority of this increase was for large
production orders, with competitive bidding. Average selling prices were
essentially the same in 2004 when compared to 2003. Revenues from our 4-kilobit,
16-kilobit, 64-kilobit, 256-kilobit and 1-megabit commercial products saw a
total increase of approximately 8% in 2004 as compared to 2003. The majority of
the increase was for large production orders. Revenues from our high-end
industrial and military products saw an approximate increase of approximately
58% in 2004 as compared to 2003. The increase was primarily due to completing
shipments of our nonvolatile semiconductor memory products against on-going
military contracts.
REVIEW OF 2004 OPERATIONS - GOVERNMENT CONTRACTS
Total revenue received from our research and development contracts for 2004
was approximately $1,800,000 down from the $2,200,000 in 2003. This was equal to
approximately 12% of our total revenue in 2004. The decrease of revenue for the
24
twelve month period was the result of a decrease in billable labor and a
decrease in materials billed against certain government contracts and an
increase in research and development expenditures committed to internal product
developments.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 2004 AND 2003
REVENUES - SEMICONDUCTOR DEVICES
The following table sets forth our net revenues for semiconductor devices
by product markets for the twelve months ended December 31, 2004 and 2003 (in
thousands):
2004 2003 Variance
---- ---- --------
Commercial $10,314 $ 9,548 $ 766
High-end industrial and
Military $ 2,778 $ 1,759 $1,019
Logic Products $ - $ 956 $ (956)
------- ------- -------
Total Semiconductor Revenue $13,092 $12,263 $ 829
Commercial product revenues increased by $766,000 for the twelve month
period ending December 31, 2004 as compared to the same period in 2003. The
increase was due to an increase in unit demand of our commercial nonvolatile
semiconductor memory products and the addition of our new 1-megabit nonvolatile
semiconductor memory products.
High-end industrial and military product revenues accounted for an increase
of $1,019,000 for the twelve month period ending December 31, 2004 as compared
with the same period in 2003. The increase was primarily due to completing
shipments of our nonvolatile semiconductor memory products against on-going
military contracts.
Revenues from our logic products decreased by $956,000 for the twelve month
period ending December 31, 2004 as compared to the same period in 2003. The
decrease was due to our decision to eliminate this product line effective
December 31, 2003.
Three distributors accounted for approximately 35% of our semiconductor
device product sales for the twelve months ended December 31, 2004. Products
sold to distributors are sold without significant recourse. Distributor
contracts allow distributors to return up to 5% in value of product inventory in
each six month period. This allows them to keep inventory current to market
demand. Distributors resell our products to various end customers. If one of
these distributors was to terminate its relationship with us, we believe that
there would not be a material impact on our semiconductor device product sales.
COST OF SALES AND GROSS MARGINS - SEMICONDUCTOR DEVICES
We recorded costs of sales for semiconductor devices of $9,140,000 and
$8,528,000 for the twelve months ended December 31, 2004 and December 31, 2003,
25
respectively. These costs reflect an equivalent gross margin percentage for the
twelve months ended December 31, 2004 as compared to the twelve months ended
December 31, 2003. Actual gross margin percentages were 30% for the twelve
months ended December 31, 2004 and 2003.
Chartered closed its wafer fabrication facility #1 in March 2004 and we
completed the transfer of the manufacturing of our silicon wafers into
Chartered's facility #2 in the third and fourth quarter of 2004. The transfer
from Chartered's facility #1 to Chartered's facility #2 accounted for lower
production yields through the first three quarters of 2004 as compared to the
production yields we achieved in 2003. During the fourth quarter 2004, we began
seeing production yields return to historic levels.
RESEARCH AND DEVELOPMENT - SEMICONDUCTOR DEVICES
We believe that continued investments in new product development are
required for us to remain competitive in the markets we serve. Beginning in the
fourth quarter 2001, our research and development department has been focusing
its efforts on the installation of our process at Amkor Technology for the
development of a 1-megabit 3-volt nonvolatile static random access memory.
Development of the 1-megabit 3-volt nonvolatile static random access memory is
continuing and we began shipping samples in September 2003. We are currently
shipping 1-megabit products tested to production requirements on a provisional
qualification and plan to have qualification complete in mid-2005.
Total research and development expenses related to the semiconductor
portion of our business were $4,942,000 and $3,987,000 for the twelve months
ended December 31, 2004 and December 31, 2003, respectively.
The $955,000 increase for the twelve month period was related to increases
in payroll and payroll overhead costs of $199,000, new product development costs
of $732,000, equipment leases, maintenance agreements for software and
depreciation of $20,000 and other expenses of $4,000. The primary increase in
payroll costs is related to an increase in employee headcount. Increased
headcount and contract engineering services are required in order to develop our
products in time to meet production schedules of our new products. The primary
increase in product development costs was due to an increase in engineering
materials and services such as, silicon wafer purchases, reticles, assembly and
testing of our 1-megabit products from DongbuAnam Semiconductor and the
development of our 64-kilobit and 256-kilobit products from X-FAB and 64-kilobit
and 256-kilobit products from Chartered's wafer fabrication facility #2 and an
increase in costs related to the commercial development of datacomm products
performed by our Q-DOT subsidiary. The increase in product development costs
included a one-time write off of capital purchases, of approximately $61,000,
related to the development at X-FAB that ended in August 2004. Equipment leases,
maintenance agreements for software and depreciation are related primarily to
software licenses and hardware required to design our new products.
26
SALES AND MARKETING - SEMICONDUCTOR DEVICES
Total marketing expenses related to the semiconductor portion of our
business were $1,608,000 and $1,213,000 for the twelve months ended December 31,
2004 and December 31, 2003, respectively.
The $395,000 increase for the twelve month period was related to an
increase in payroll and payroll related costs of $240,000, advertising of
$51,000, travel expenses of $36,000, sales commissions of $54,000 and other
expenses of $14,000. The increase in payroll and payroll related costs and
travel was a direct result of increased headcount, the increase in advertising
expenses were due to increased advertising for our new 1-megabit product. The
increase in sales commissions is a direct result of increased revenue.
ADMINISTRATION - SEMICONDUCTOR DEVICES
Total administration expenses related to the semiconductor portion of our
business were $917,000 and $706,000 for the twelve months ended December 31,
2004 and December 31, 2003, respectively.
The $211,000 increase was due primarily to increases in accounting and
legal fees of $52,000, professional fees of $47,000, costs associated with our
annual meeting of shareholders of $47,000, payroll and payroll overhead costs of
$35,000, and other miscellaneous expenses including travel of $30,000. The
increase in legal fees was primarily related to costs incurred in relation to
our annual meeting of shareholders and increased legal fees related to our
registration statements on Form SB-2 that we are contractually obligated to file
with the Securities and Exchange Commission. The increase in professional
services was primarily due to an increase in fees paid to our Board of Directors
and fees paid for financial consulting. The increase in accounting fees was due
to increased audit fees related to our registration statements on Form SB-2. The
increase in payroll and payroll overhead costs were primarily due to increased
overhead costs.
TOTAL OTHER INCOME (EXPENSE) - SEMICONDUCTOR DEVICES
The $2,000 decrease in total other income (expense) for the twelve month
period ending December 31, 2004 as compared to the twelve month period ending
December 31, 2003 was primarily related to a decrease in interest income which
was a direct result of a decreased cash balance.
NET LOSS - SEMICONDUCTOR DEVICES
We recorded a net loss of $3,730,000 and $2,389,000 for the twelve months
ended December 31, 2004 and December 31, 2003, respectively. The increase of
$1,341,000 in net loss for the twelve-month period was due primarily to an
increase in operating expenses.
27
REVENUES - GOVERNMENT CONTRACTS
The following table sets forth our net revenues from the government
contracts portion of our business for the twelve months ended December 31, 2004
and December 31, 2003 (in thousands):
2004 2003 Variance
---- ---- --------
Government Contracts $1,810 $2,241 $431
The decrease of revenue for the twelve month period ending December 31,
2004 as compared to the same period in 2003 was the result of a decrease in
billable labor and a decrease in materials billed against certain government
contracts and an increase in research and development expenditures committed to
internal product developments.
COST OF SALES AND GROSS MARGIN - GOVERNMENT CONTRACTS
We recorded cost of sales for government contracts of $899,000 and
$1,093,000 for the twelve months ended December 31, 2004 and December 31, 2003,
respectively. These costs reflect an equivalent gross margin percentages for the
twelve months ended December 31, 2004 as compared to the twelve months ended
December 31, 2003. Actual gross margin percentages for the twelve months ending
December 31, 2004 and December 31, 2003 were 51%.
RESEARCH AND DEVELOPMENT - GOVERNMENT CONTRACTS
Total research and development expenses related to the government contracts
portion of our business were $366,000 and $531,000 for the twelve months ended
December 31, 2004 and December 31, 2003, respectively.
The $165,000 decrease for the twelve-month period ending December 31, 2004
as compared to the same period in 2003 was related to decreases of $14,000 in
employment related expenses, $2,000 in software maintenance contracts and
equipment leases, and $149,000 of overhead costs that were transferred to the
semiconductor portion of the business. The overhead costs that were transferred
to the semiconductor portion of the business were related to the labor
associated with the commercial development of datacomm products.
MARKETING - GOVERNMENT CONTRACTS
Total marketing expenses related to the government contracts portion of our
business were $335,000 and $334,000 for the twelve months ended December 31,
2004 and December 31, 2003, respectively.
28
ADMINISTRATION - GOVERNMENT CONTRACTS
Total administration expenses related to the government contracts portion
of our business were $144,000 and $142,000 for the twelve month period ended
December 31, 2004 and December 31, 2003, respectively.
The $2,000 increase in administration expenses for the twelve month period
was due to an increase in legal expenses of $20,000 which were offset by a
decrease of $18,000 in overhead costs that were transferred to the semiconductor
portion of the business. The overhead costs that were transferred to the
semiconductor portion of the business were related to the labor associated with
the commercial development of datacomm products.
TOTAL OTHER INCOME (EXPENSE) - GOVERNMENT CONTRACTS
The $19,000 decrease in other expense for the twelve-month period ending
December 31, 2004 as compared to the twelve-month period ending December 31,
2003 was primarily related to overhead rates, which in 2003 and prior years were
charged to other expense, being instead charged in 2004 to marketing expense.
NET INCOME (LOSS) - GOVERNMENT CONTRACTS
We recorded a net income of $60,000 and $116,000 for the twelve month
periods ended December 31, 2004 and December 31, 2003, respectively. The
decrease in net income was primarily due to decreased revenue.
FUTURE RESULTS OF OPERATIONS
Our ability to be profitable will depend primarily on our ability to
continue reducing manufacturing costs and increasing net product sales by
increasing the availability of existing products, by the introduction of new
products and by expanding our customer base. We are also dependent on the
overall state of the semiconductor industry and the demand for semiconductor
products by equipment manufacturers and our ability to raise additional working
capital.
We are continuing our co-development program with DongbuAnam Semiconductor
to develop a semiconductor process module that combines our nonvolatile
technology with Anam's advanced 0.25-micron digital CMOS fabrication line. CMOS
is the semiconductor technology used in the transistors that are manufactured
into most of today's computer microchips. The module incorporates silicon oxide
nitride oxide silicon or SONOS technology, which will be used to manufacture
both high density SONOS flash and nonvolatile static random access memories, for
stand alone and embedded products. During 2002 and through December 31, 2004,
our research and development team along with the research and development team
of Amkor Technology, the predecessor of Anam, worked aggressively on the
co-development program. Our 1-megabit 3-volt nonvolatile static random access
memory was the primary development vehicle. In February 2003, Amkor Technology
sold controlling interest of its wafer fabrication facility to DongbuAnam
Semiconductor. All contractual obligations were transferred to Anam U.S.A., a
wholly owned subsidiary of DongbuAnam Semiconductor. Our co-development program
has not been affected by the change in ownership and we do not expect any
material changes in the support required to complete the program. In August
2003, we received the first complete processed silicon from this development,
which yielded working samples of our new 1-megabit 3-volt nonvolatile
semiconductor memory product. We began shipping samples of our new 1-megabit
3-volt nonvolatile semiconductor memory product in September 2003. During the
third quarter of 2004, we began receiving initial production orders. We are
29
currently shipping 1-megabit products tested to production requirements on a
provisional qualification and plan to have qualification complete early in
mid-2005. We cannot assure you that we will not discover technical problems or
manufacturing concerns with this new product, that demand will develop for the
new product or that we will be able to sell this new product at a profit.
As of December 31, 2004, we had a backlog of unshipped customer orders of
approximately $1,971,000 we expect to fill by June 30, 2005. Orders are
cancelable without penalty at the option of the purchaser prior to 30 days
before scheduled shipment and therefore are not necessarily a measure of future
product revenue.
Chartered closed its wafer fabrication facility #1 in March 2004. We have
purchased silicon wafers, the raw materials used to produce our nonvolatile
semiconductor memory products, from fabrication facility #1. We have been
working with Chartered to transfer the manufacturing process of our memory
wafers to Chartered's facility #2. Chartered's facility #2 is newer and more
modern than its facility #1, processing 8 inch wafers rather than the older 6
inch wafers that were processed in facility #1. In the third and fourth quarter
of 2004, we qualified and began shipping our 4-kilobit, 16-kilobit, 64-kilobit,
5-volt 256-kilobit and 3-volt 256-kilobit nonvolatile semiconductor memory
product built on silicon wafers received from Chartered's facility #2.
We cannot assure you that the growth in demand, or demand for our products,
will increase in the future. Through 2004, we were dependent on our 0.8-micron
products for revenue, for which customer demand has remained substantially flat
over the past twelve months. We continue to explore alternatives to further
reduce our cost to manufacture our existing products built on 0.8-micron
technology. We do anticipate that once the transfer is complete and our customer
demand transitions to the 0.25-micron product family from DongbuAnam, it will
have a positive affect on our gross margins. We are currently reviewing
additional cost reduction measures that may have the potential to improve our
earnings.
During the years ended December 31, 2004 and 2003, we purchased all of our
silicon wafers to produce our 0.8-micron nonvolatile static random access memory
products from a single supplier, Chartered. Approximately 98% and 92% of our
semiconductor device sales for 2004 and 2003, respectively, were from finished
units produced from these silicon wafers. We had an agreement with Chartered to
provide wafers through September 1998. Although Chartered continues to provide
us wafers under the terms defined in this contract we do not have a current
signed agreement. DongbuAnam Semiconductor provides silicon wafers for our
0.25-micron process to support our 1-megabit product family. Approximately 2% of
our semiconductor product sales for the twelve months ended December 31, 2004
were from finished units produced from these silicon wafers.
We entered into a Process Transfer Agreement with X-FAB to install our
silicon-nitride-oxide-semiconductor technology into its wafer fabrication
facility to provide an additional manufacturing source to material supplied by
Chartered. Due to a lack of Simtek and X-FAB resources required to install our
nonvolatile semiconductor memory process into X-FAB and the marginal anticipated
return-on-investment, we ceased the installation of our nonvolatile
semiconductor memory process into X-FAB's wafer fabrication facility in August
2004.
30
Zentrum Mikroelektronik Dresden has established production and sales of
nonvolatile static random access memory products. We believe that this second
source for nonvolatile static random access memory products, may have a positive
impact on our business because many large manufacturers require two sources from
which to purchase product. We will not be receiving any further license payments
from our contract with Zentrum Mikroelektronik Dresden. We also, however, expect
increased competition from Zentrum Mikroelektronik Dresden with respect to
nonvolatile static random access memory products.
We intend to continue designing, developing and subcontracting the
production of our memory products. We also propose to continue to sell to
existing and new customers through our normal sales and marketing efforts. We
will also begin development of high performance data communications products
based on silicon germanium process expertise gained through our acquisition of
Q-DOT Group. We believe that the addition of data communication products will
allow us to expand our product offering into new applications and additional
customers. We anticipate that this will reduce our dependence on any single
product line and provide additional potential sources of revenue.
Our ability to achieve profitability will depend primarily on our ability
to continue reducing our manufacturing costs and increasing net product sales by
improving the availability of existing products, by the introduction of new
products and by expanding our customer base. With the positive feedback we have
received from the customers who we have sampled our new 1-megabit product with,
we expect to ramp production of this product early in 2005. In order to achieve
these goals, we are dependent on the overall state of the semiconductor industry
and the demand for semiconductor products by equipment manufacturers.
LIQUIDITY AND CAPITAL RESOURCES
As described in "Item 5. Market for Registrant's Common Stock and Related
Security Holder Matters", on October 12, 2004, we closed a $2,500,000 equity
financing with SF Capital Partners Ltd., Bluegrass Growth Fund LP and Bluegrass
Growth Fund LTD and on November 7, 2003, we closed our $1,500,000 equity
financing with Renaissance Capital Growth and Income Fund III, Inc., Renaissance
US Growth & Investment Trust PLC and BFSUS Special Opportunities Trust PLC.
Also, on July 1, 2002, we received $3,000,000 in a financing
transaction with Renaissance Capital Growth and Income Fund III, Inc.,
Renaissance US Growth & Investment Trust PLC and BFSUS Special Opportunities
Trust PLC. RENN Capital Group, Inc. is the agent for the RENN investment funds.
One of our directors holds the position of Senior Vice President of RENN Capital
Group. The $3,000,000 funding consists of convertible debentures with a 7-year
term at a 7.5% per annum interest rate; each of the RENN investment funds
invested $1,000,000. The holder of the debentures has the right, at any time, to
convert all, or in multiples of $100,000, any part of the debenture into fully
paid and nonassessable shares of our common stock. The debentures are
convertible into our common stock at $0.312 per share, which was in excess of
the market price per share on July 1, 2002. Based on the conversion rate of
$0.312 per share, it would entitle each RENN investment fund to 3,205,128
shares, totaling approximately 21% post-conversion for the three RENN investment
31
funds, of our outstanding common stock, assuming no other options or warrants
are exercised. During the first nine months of 2003 and the twelve months ended
December 31, 2004, we were not in compliance with two of the covenants set forth
in the loan agreement. Through December 31, 2004, we were not in compliance with
two of the covenants set forth in the loan agreement. These covenants relate to
the interest coverage ratio and debt to equity ratio. On March 16, 2005, we
received a waiver for the two covenants through January 1, 2006. However,
significant variances in future actual operations from our current estimates
could result in the reclassification of this note to current liabilities.
The change in cash flows for the twelve months ended December 31, 2004 used
in operating activities was primarily a result of a net loss of $3,670,354,
which is offset by $479,825 in depreciation and amortization. The changes in
cash flow used in operating activities also reflected increases in allowance
accounts, loss on disposal of assets, accounts receivable, inventory, prepaid
expenses and other, accounts payable, and accrued expenses of $122,691, $75,110,
$938,732, $684,954, $1,545, $1,084,289, and $207,939, respectively. The increase
of $938,732 in accounts receivable was directly related to the increase in
revenue for the fourth quarter of 2004. The $684,954 increase in inventory and
$1,084,289 increase in accounts payable was due to the receipt of raw materials
at the end of December 2004 required to support first quarter 2005 shipments.
The $75,100 loss on disposal of assets, was primarily related to writing off the
capital expenditures purchased for the installation of our process at X-FAB. The
change in cash flows used in investing activities of $610,875 was primarily due
to the purchase of equipment required to test our nonvolatile semiconductor
memory products and reticles required to produce our wafers. The change in cash
flows provided by financing activities of $2,335,121 was primarily due to the
equity financing of $2,248,851 (after expenses) we received in October 2004,
payments on a line of credit of $150,000, payments on capital leases of $124,472
and $360,742 received from the exercise of stock options by certain employees.
The change in cash flows for the year ended December 31, 2003 used in
operating activities was primarily a result of a net loss of $2,272,641, which
is offset by $497,701 in depreciation and amortization, decreases in allowance
accounts, accounts receivable, inventory, prepaid expenses, accounts payable and
deferred revenue of $16,376, $402,361, $411,358, $114,542, $49,314 and $40,500,
respectively and increases in accrued expenses of $64,626. The decrease of
$402,361 in accounts receivable was directly related to certain customers paying
invoices within our payment terms. The decrease in inventory was primarily due
to an increase in finished goods shipments at the end of 2003. The decrease in
prepaid expenses of $114,542 was due primarily to the renegotiation of certain
software licenses. The decrease in accounts payable of $49,314 was primarily due
to the timing of payments for standard operating expenses. The increase in
accrued expenses was due primarily to increased vacation payable. The increase
in vacation payable has occurred due to certain employees not using as much
vacation time. The change in cash flows used in investing activities of $501,244
was primarily due to the purchase of equipment required to test our nonvolatile
semiconductor memory products and software acquired for research and development
activities. The cash flows provided by financing activities of $1,640,296 was
due to $1,475,515 (after expenses) received from the November 2003 equity
financing transaction we did with the selling security holders, net borrowings
32
on a line of credit of $150,000, proceeds of $183,131 for the exercise of stock
options by certain employees less payments on a capital lease obligation of
$168,350.
Short-term liquidity.
Our cash balance at December 31, 2004 was $2,146,790.
Our future liquidity will depend on our revenue growth and our ability to
sell our products at positive gross margins and control of our operating
expenses. Over the coming twelve months, we expect to spend approximately
$8,000,000 for operating expenses assuming revenue growth and no significant
change in marketing or product development strategies. We expect to meet these
capital needs from sales revenues and, to the extent we do not have sufficient
revenues, from our existing cash reserves. If we are unable to meet our capital
needs, through these means, it may be necessary for us to raise more capital.
Long-term liquidity.
We continue to evaluate our long-term liquidity. Our growth plans may
require additional funding from outside sources. We are in ongoing discussions
with investment banking organizations and potential lenders to ensure access to
funds as required.
CRITICAL ACCOUNTING POLICES AND ESTIMATES
Simtek's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America,
which require us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and the related
disclosures. A summary of these significant accounting policies can be found in
Simtek's Notes to Consolidated Financial Statements included in this Form
10-KSB. The estimates used by management are based upon Simtek's historical
experiences combined with managements understanding of current facts and
circumstances. Certain of our accounting polices are considered critical as they
are both important to the portrayal of our financial condition and the results
of our operations and require significant or complex judgments on our part. We
believe that the following represent the critical accounting policies of Simtek
as described in Financial Reporting Release No. 60, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, which was issued by the
Securities and Exchange Commission: inventories; deferred income taxes;
allowance for doubtful accounts; and, allowance for sales returns.
The valuation of inventories involves complex judgments on our part. Excess
finished goods inventories are a natural component of market demand of
semiconductor devices. We continually evaluate and balance the levels of
inventories based on sales projections, current orders scheduled for future
delivery and historical product demand. While certain finished goods items will
sell out, quantities of other finished goods items will remain. These finished
goods are reserved as excess inventory. We believe we have adequate controls
with respect to the amount of finished goods inventories that are anticipated to
33
become excess. While we believe this process produces a fair valuation of
inventories, changes in general economic conditions of the semiconductor
industry could materially affect valuation of our inventories.
The allowance for doubtful accounts reflects a reserve that reduces
customer accounts receivable to the net amount estimated to be collectible.
Estimating the credit worthiness of customers and the recoverability of customer
accounts requires management to exercise considerable judgment. In estimating
uncollectible amounts, we consider factors such as industry specific economic
conditions, historical customer performance and anticipated customer
performance. While we believe our processes to be adequate to effectively
quantify our exposure to doubtful accounts, changes in industry or specific
customer conditions may require us to adjust our allowance for doubtful
accounts.
We record an allowance for sales returns as a net adjustment to customer
accounts receivable. The allowance for sales returns consists of two separate
segments, distributor stock rotation and distributor price reductions. When we
record the allowance, the net method reduces customer accounts receivables and
gross sales. Generally, we calculate the stock rotation portion of the allowance
based upon distributor inventory levels. The contracts we have with our
distributors allow them to return to us a 5% percent of their inventory in
exchange for inventory that better meets their demands. At times, we are
required to allow our distributors to lower the selling price of a specific
device in order to meet competition. When this occurs, we record an allowance
for potential credit that our distributors will be requesting. This allowance is
based on approved pricing changes, inventory affected and historical data. We
believe that our processes to adequately predict our allowance for sales returns
are effective in quantifying our exposures due to industry or specific customer
conditions.
We record an allowance that directly relates to the warranty of our
products for one year. The allowance for warranty return reduces our gross
sales. This allowance is calculated by looking at annual revenues and historical
rates of our products returned due to warranty issues. While we believe this
process adequately predicts our allowance for warranty returns, changes in the
manufacturing or design of our product could materially affect valuation of our
warranties.
We have various government contracts that are subject to audit by the
United States Government. However, audits for the periods ending December 31,
2002 and December 31, 2003 have not been completed. In addition, certain of
these contracts are based on our estimate as to their percentage of completion
as of the balance sheet date. Our historical experience has not resulted in a
material adjustment to prior recorded revenue amounts.
We have recorded a valuation allowance on deferred tax assets. Future
operations may change our estimate in connection with potential utilization of
these assets.
ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123(R) is effective for public companies for interim or annual periods
34
beginning after June 15, 2005, supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows.
SFAS No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. Pro-forma disclosure is no longer an alternative. The new
standard will be effective for us beginning July 1, 2005. We have not yet
completed our evaluation but expect the adoption to have an effect on the
financial statements similar to the pro-forma effects reported above.
In November 2004, the FASB issued SFAS 151, Inventory Costs, which revised
ARB 43, relating to inventory costs. This revision is to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage). This Statement requires that these items be
recognized as a current period charge regardless of whether they meet the
criterion specified in ARB 43. In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be based on
normal capacity of the production facilities. SFAS 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. We
do not believe the adoption of SFAS 151 will have a material impact on our
financial statements.
The FASB issued SFAS 153, Exchanges of Nonmonetary Assets, which changes
the guidance in APB Opinion 29, Accounting for Nonmonetary Transactions. This
Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
153 is effective during fiscal years beginning after June 15, 2005. We do not
believe the adoption of SFAS 153 will have a material impact on our financial
statements.
INFLATION
The impact of inflation on our business has not been material.
OFF BALANCE-SHEET ARRANGEMENTS
We are party to a lease agreement with Baja Properties, LLC as landlord
pursuant to which we lease approximately 16,000 square feet of space in Colorado
Springs, Colorado. The lease is scheduled to expire on February 28, 2013. Our
monthly rental payment obligation is approximately $16,000.
DESCRIPTION OF PROPERTY
We do not own any property. We do not have a policy:
1. limiting thepercentage of assets which may be invested in any one
investment or type of investment
35
2. regarding whether we acquire assets primarily for possible capital
gain or primarily for income, or
3. with respect to investments in real estate, interests in real estate,
real estate mortgages, or securities of or interests in persons
primarily engaged in real estate activities.
36
SIMTEK CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report .............................................. 38
Consolidated Balance Sheet - December 31, 2004............................. 39
Consolidated Statements of Operations - For the Years Ended
December 31, 2004 and 2003............................................ 40
Consolidated Statements of Changes in Shareholders' Equity -
For the Years Ended December 31, 2004 and 2003........................ 41
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 2004 and 2003............................................ 42
Notes to Consolidated Financial Statements - For the Years
Ended December 31, 2004 and 2003...................................... 43
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Simtek Corporation
Colorado Springs, Colorado
We have audited the consolidated balance sheet of Simtek Corporation and
subsidiaries as of December 31, 2004, and the related consolidated statements of
operations, consolidated statements of changes in shareholders' equity and
consolidated statements of cash flows for each of the two years in the period
ended December 31, 2004. 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 in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provided a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Simtek Corporation
and subsidiaries as of December 31, 2004, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles.
Denver, Colorado
January 18, 2005
38
SIMTEK CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,146,790
Accounts receivable - trade, net of allowance for
doubtful accounts and return
allowances of approximately $262,000 2,777,164
Inventory, net 1,869,842
Prepaid expenses and other current assets 131,099
------------
Total currents assets 6,924,895
EQUIPMENT AND FURNITURE, net 942,790
DEFERRED FINANCING COSTS 74,684
OTHER ASSETS 33,450
------------
TOTAL ASSETS $ 7,975,819
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,122,923
Accrued expenses 582,615
Accrued vacation payable 189,815
Accrued wages 31,205
Obligation under capital leases 47,310
------------
Total current liabilities 2,973,868
DEBENTURES 3,000,000
OBLIGATIONS UNDER CAPITAL LEASES, NET OF CURRENT PORTION 13,024
------------
Total liabilities 5,986,892
COMMITMENTS AND CONTINGENCIES (Notes 4 and 6)
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 2,000,000 shares
authorized, none issued -
Common stock, $.01 par value; 300,000,000 shares
authorized, 62,881,679 shares issued and
62,871,679 shares outstanding 628,817
Additional paid-in capital 41,778,120
Treasury stock, at cost; 10,000 shares (12,504)
Accumulated deficit (40,405,506)
------------
Total shareholders' equity 1,988,927
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,975,819
============
See accompanying notes to these consolidated financial statements.
39
SIMTEK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------------
2004 2003
---- ----
NET SALES $ 14,902,193 $ 14,503,771
Cost of sales 10,038,353 9,621,249
------------ ------------
GROSS MARGIN 4,863,840 4,882,522
OPERATING EXPENSES:
Research and development costs 5,308,469 4,518,528
Sales and marketing 1,943,091 1,546,774
General and administrative 1,061,121 847,503
------------ ------------
Total operating expenses 8,312,681 6,912,805
------------ ------------
LOSS FROM OPERATIONS (3,448,841) (2,030,283)
OTHER INCOME (EXPENSE):
Interest income 26,484 30,116
Interest expense (241,254) (254,144)
Other expense (6,743) (18,330)
------------ ------------
Total other income (expense) (221,513) (242,358)
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES $ (3,670,354) $ (2,272,641)
------------ ------------
Provision for income taxes -- --
------------ ------------
NET LOSS $ (3,670,354) $ (2,272,641)
============ ============
NET LOSS PER COMMON SHARE:
Basic and diluted EPS $ (.06) $ (.04)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 58,586,411 54,889,008
============ ============
See accompanying notes to these consolidated financial statements.
40
SIMTEK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
COMMON STOCK ADDITIONAL TOTAL
------------------------- PAID-IN TREASURY ACCUMULATED SHAREDHOLDERS'
SHARES AMOUNT CAPITAL STOCK DEFICIT EQUITY
---------- -------- ----------- --------- ------------- --------------
BALANCES, January 1, 2003 54,382,273 $543,823 $37,594,875 $(12,504) $(34,462,511) $ 3,663,683
Exercise of stock options 679,097 6,791 176,340 - - 183,131
Equity financing November 7,
2003, net of $24,485 in
costs 1,651,982 16,520 1,458,995 - - 1,475,515
Net loss - - - - (2,272,641) (2,272,641)
---------- -------- ----------- -------- ------------- -------------
BALANCES, December 31, 2003 56,713,352 567,134 39,230,210 (12,504) (36,735,152) 3,049,688
Exercise of stock options 1,008,368 10,083 350,659 - - 360,742
Equity financing October 12,
2004, net of $251,150 in
costs 5,159,959 51,600 2,197,251 - - 2,248,851
Net loss - - - - (3,670,354) (3,670,354)
---------- -------- ----------- -------- ------------- -------------
BALANCES, December 31, 2004 62,881,679 $628,817 $41,778,120 $(12,504) $(40,405,506) $ 1,988,927
========== ======== =========== ======== ============ ===========
See accompanying notes to these consolidated financial statements.
41
SIMTEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,670,354) $(2,272,641)
Adjustments to reconcile net loss to net cash used in operating
Activities:
Depreciation and amortization 479,825 497,701
Loss on disposal of assets 75,110 36,542
Net change in allowance accounts 122,691 (16,376)
Deferred financing fees 16,596 16,596
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (938,732) 402,361
Inventory (684,954) 411,358
Prepaid expenses and other (1,545) 114,542
Increase (decrease) in:
Accounts payable 1,084,289 (49,314)
Accrued expenses 207,939 64,626
Deferred revenue -- (40,500)
----------- -----------
Net cash used in operating activities (3,309,135) (835,105)
CASH FLOWS FROM INVESTING ACTIVITIES:
Release of restricted cash 300,000 --
Purchase of equipment and furniture, net (610,875) (501,244)
----------- -----------
Net cash used in investing activities (310,875) (501,244)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from line-of credit and the issuance of a note -- 250,000
Payments on notes payable and line of credit (150,000) (100,000)
Payments on capital lease obligation (124,472) (168,350)
Equity financing October 2004 and November 2003, net 2,248,851 1,475,515
Exercise of stock options 360,742 183,131
----------- -----------
Net cash provided by financing activities 2,335,121 1,640,296
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,284,889) 303,947
CASH AND CASH EQUIVALENTS, beginning of year 3,431,679 3,127,732
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 2,146,790 $ 3,431,679
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Purchase of equipment through payables and capital leases $ -- $ 144,160
=========== ===========
Cash paid for interest $ 242,180 $ 253,219
=========== ===========
See accompanying notes to these consolidated financial statements.
42
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------------------
Nature of Business Operations - Simtek Corporation (the "Company") designs,
develops, markets and subcontracts the production of high performance
nonvolatile semiconductor memories and programmed semiconductor logic
products. The Company's operations have concentrated on the design and
development of the 1-megabit, 256-kilobit, 64-kilobit, and 16-kilobit
nonvolatile semiconductor memory product families and associated products
and technologies as well as the development of sources of supply and
distribution channels. The Company also provides electronics engineering
research and development contracts.
Consolidation Policy - The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary Q-DOT.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
Liquidity - During 2004, the Company incurred a net loss of approximately
$3,670,000 and has accumulated deficits of $40,406,000 as of December 31,
2004. The Company was also not in compliance with its debentures throughout
2004, but was successful in obtaining waivers from the debenture holders.
Also during the fourth quarter of 2004, the Company raised equity capital
of $2,248,000 and has working capital of $3,951,000 as of December 31,
2004.
The Company operates in a volatile industry, whereby its average selling
prices and product costs are influenced by competitive factors.
Furthermore, the Company continues to incur significant research and
development costs for product development. These factors create pressures
on sales, costs, earnings and cash flows, which will impact liquidity. The
Company, however, has been successful in the past in raising capital and
has no short-term financings as of December 31, 2004.
If the Company is unable to achieve profitable operations in 2005 it may
result in increased liquidity pressure on the Company, whereby it might be
required to enter into debt or equity arrangements that may not be as
otherwise favorable to the Company.
Revenue Recognition, Semiconductor Products - Product sales revenue is
recognized when a valid purchase order has been received and the products
are shipped to customers, including distributors. Customers receive a
one-year product warranty and sales to distributors are subject to a
limited product exchange program and product pricing protection in the
event of changes in the Company's product price. The Company provides a
reserve for possible product returns, price changes and warranty costs at
the time the sale is recognized.
Revenue Recognition, Government Contracts - Revenues from cost-plus-fee
contracts are recognized on the basis of costs incurred during the period
plus the fee earned. Revenues from fixed-price contracts are recognized on
the percentage-of-completion method. The percentage-of-completion is
measured by the total costs incurred to date to estimated total costs for
each contract. This method is used because management considers costs
incurred to be the best available measure of progress on these contracts.
Because of inherent uncertainties in estimating costs, it is reasonably
possible that the estimates used will change within the near term.
Contract Revenues and Related Costs - Substantially all of Q-DOT revenues
result from contract services performed for the various agencies of United
States Government (the "Government") under a variety of contracts and
subcontracts, some of which provide for reimbursement of costs-plus-fees,
43
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and others which are fixed-price. The majority of the contracts are for
services performed in Colorado. For some services rendered on Government
contracts, the time between providing the services and the final cash
realization from the sale of such services may extend two or more years.
Costs on contracts with the government (including allocable indirect costs)
are subject to audit and adjustment by negotiations between the Company and
Government representatives. Costs submitted for reimbursement are subject
to Government audits for compliance with government cost accounting
standards, federal acquisitions regulations and other contract terms.
Negotiations for all of the years through December 31, 2002 have been
completed without any material adjustments. Management does not believe the
results of the December 31, 2003 and December 31, 2004 government audits
and subsequent negotiations will have a material effect on the accompanying
financial statements.
Fair Value of Financial instruments - The Company's short-term financial
instruments consist of cash, accounts receivable, and accounts payable and
accrued expenses. The carrying amounts of these financial instruments
approximate fair value because of their short-term maturities. Financial
instruments that potentially subject the Company to a concentration of
credit risk principally of cash and accounts receivable.
The Company does not hold or issue financial instruments for trading
purposes nor does it hold or issue interest rate or leveraged derivate
financial instruments.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. As of December 31, 2004, substantially all of the Company's
cash and cash equivalents were held by a single bank, of which
approximately $1,969,298 was in excess of Federally insured amounts.
Receivables and Credit Policies - Trade receivables consist of
uncollateralized customer obligations due under normal trade terms
requiring payment within 30 days of the invoice date. In most cases, trade
receivables are applied to a specific identified invoice. Management
reviews trade receivables periodically and reduces the carrying amount by a
valuation allowance that reflects management's best estimate of the amount
that may not be collectible.
Inventory - The Company records inventory using the lower of cost
(first-in, first-out) or market. Inventory at December 31, 2004 included:
Raw materials $ 68,955
Work in progress 1,765,044
Finished goods 204,423
----------
2,038,422
Less reserves for excess inventory (168,580)
----------
$1,869,842
==========
Depreciation & Amortization - Equipment and furniture are recorded at cost.
Depreciation is provided over the assets' estimated useful lives of three
to seven years using the straight-line and accelerated methods. The cost
and accumulated depreciation of furniture and equipment sold or otherwise
disposed of are removed from the accounts and the resulting gain or loss is
included in operations. Maintenance and repairs are charged to operations
as incurred and betterments are capitalized. The Company has patents and
trademarks valued at $125,000 which were capitalized and recorded as
intangible assets. The Company is currently amortizing the patents and
trademarks over a five year life.
44
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Research and Development Costs - Research and development costs are charged
to operations in the period incurred. Total research and development costs
for the twelve months ending December 31, 2004 and December 31, 2003 were
$5,308,469 and $4,518,528, respectively.
Advertising - The Company incurs advertising expense in connection with the
marketing of its product. Advertising costs are expensed as advertising
takes place. Advertising expense was $82,505 and $39,660 in 2004 and 2003,
respectively.
Loss Per Share - Basic Earnings Per Share ("EPS") is calculated by dividing
the income or loss available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. As the
Company incurred losses in 2003 and 2004, all common stock equivalents
would be considered anti-dilutive. For purposes of calculating diluted EPS,
5,990,085 and 5,794,081 options for 2004 and 2003, respectively, were
excluded from diluted EPS as they had an anti-dilutive effect.
Accounting 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 amounts reported in the financial statements and the
accompanying notes. The actual results could differ from those estimates.
The Company's financial statements are based upon a number of significant
estimates, including the allowance for doubtful accounts, technological
obsolescence of inventories, the estimated useful lives selected for
property and equipment, sales returns, warranty reserve, percentage of
completion on projects in process at year-end, potential adjustments for
government contracts and the valuation allowance on the deferred tax
assets.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to significant concentration of credit risk consist
primarily of accounts receivable. The Company has no significant
off-balance sheet concentrations of credit risk. Accounts receivable are
typically unsecured and are derived from transactions with and from
customers located worldwide.
Impairment of Long-Lived Assets - In the event that facts and circumstances
indicate that the cost of assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to
market value or discounted cash flow value is required.
Stock-Based Compensation - As permitted under the SFAS No. 123, Accounting
for Stock-Based Compensation, the Company accounts for its stock-based
compensation in accordance with the provisions of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. As
such, compensation expense is recorded on the date of grant if the current
market price of the underlying stock exceeds the exercise price. Certain
pro forma net loss and EPS disclosures for employee stock option grants are
included below as if the fair value method as defined in SFAS No. 123 had
been applied. Transactions in equity instruments with non-employees for
goods or services are accounted for by the fair value method. Had
45
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
compensation cost been determined based on the fair value at the grant
dates for awards under those plans consistent with the fair value method,
the Company's net loss and EPS would have been increased to the pro forma
amounts indicated below.
Years Ended December 31,
2004 2003
---- ----
Net loss as reported $(3,670,354) $(2,272,641)
Add: Stock based compensation included
in reported Net loss - -
Deduct: Fair value of stock based
compensation (830,529) (520,073)
----------- -----------
Proforma net loss $(4,500,883) $(2,792,714)
=========== ===========
Net loss as reported - basic and diluted $ (.06) $ (.04)
Deduct: Fair value of loss per share (.01) (.01)
---------- -----------
Proforma net loss - basic and diluted $ (.07) $ (.05)
========== ===========
The fair value of each option granted in 2004 and 2003 was estimated on the
date of grant using the Black-Scholes option-pricing model with the
following:
Options Granted During
2004 2003
---- ----
Expected volatility 108.26% 122.2%
Risk-free interest rate 2.40% 2.0%
Expected dividends - -
Expected terms (in years) 4.0 4.0
Income Taxes - The Company accounts for income taxes under the liability
method, whereby current and deferred tax assets and liabilities are
determined based on tax rates and laws enacted as of the balance sheet
date. Deferred tax expense represents the change in the deferred tax
asset/liability balance. Valuation allowances are recorded for deferred tax
assets that are not expected to be realized.
Business Segments - The Company has adopted Statement of Accounting
Standards No. 131, Disclosures About Segments of an Enterprise and Related
Information ("SFAS 131"), which established standards for the way companies
report information about their operating segments. Prior period amounts
have been restated to conform to the requirements of this statement.
Recently Issued Accounting Pronouncements - In December 2004, the FASB
issued SFAS No. 123(R), "Share-Based Payment," which is a revision of SFAS
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) is
effective for public companies for interim or annual periods beginning
after June 15, 2006, supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows.
SFAS No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement
based on their fair values. Proforma disclosure is no longer an
alternative. The new standard will be effective for the company, beginning
46
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 1, 2005. The company has not yet completed their evaluation but
expects the adoption to have an effect on the financial statements similar
to the proforma effects reported above.
In November 2004, the FASB issued SFAS 151, Inventory Costs, which revised
ARB 43, relating to inventory costs. This revision is to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage). This Statement requires that these
items be recognized as a current period charge regardless of whether they
meet the criterion specified in ARB 43. In addition, this Statement
requires the allocation of fixed production overheads to the costs of
conversion be based on normal capacity of the production facilities. SFAS
151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The Company does not believe the adoption of SFAS 151
will have a material impact on the Company's financial statements.
The FASB issued SFAS 153, Exchanges of Nonmonetary Assets, which changes
the guidance in APB Opinion 29, Accounting for Nonmonetary Transactions.
This Statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS 153 is effective during fiscal years beginning after
June 15, 2005. The Company does not believe the adoption of SFAS 153 will
have a material impact on the Company's financial statements.
2. EQUIPMENT AND FURNITURE:
------------------------
Equipment and furniture at December 31, 2004 consisted of the following:
Leased equipment under capital leases $ 147,660
Research and development equipment 1,993,829
Computer equipment and software 2,091,595
Office furniture 236,360
Other equipment 204,632
-----------
4,674,076
Less accumulated depreciation and amortization (3,731,286)
------------
$ 942,790
===========
The cost of equipment and furniture acquired for research and development
activities that has alternative future use is capitalized and depreciated
over its estimated useful life.
Depreciation and amortization expense of $479,825 and $497,701 was charged
to operations for the years ended December 31, 2004 and 2003, respectively.
Included in the amortization expense for 2004 and 2003 was $100,804 and
$112,921, respectively of amortization of software and research and
development equipment under capital leases. At December 31, 2004 and
December 31, 2003, accumulated amortization for software under capital
leases was $421,754 and $320,952, respectively.
3. CONVERTIBLE DEBENTURES:
-----------------------
On July 1, 2002, the Company received funding of $3,000,000 in a financing
transaction with Renaissance Capital Growth and Income Fund III, Inc.,
47
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Renaissance US Growth & Investment Trust PLC and BFSUS Special Opportunities
Trust PLC. RENN Capital Group, Inc. is the agent for the RENN investment funds.
One of the Company's directors holds the position of Senior Vice President of
RENN Capital Group. The $3,000,000 funding consists of convertible debentures
with a 7-year term at a 7.5% per annum interest rate. Each fund equally invested
$1,000,000. The holder of the debenture shall have the right, at any time, to
convert all, or in multiples of $100,000, any part of the Debenture into fully
paid and nonassessable shares of Simtek Corporation common stock. The debentures
are convertible into Simtek common stock at $0.312 per share, which was in
excess of the market price per share on July 1, 2002. Based on the conversion
rate of $0.312 per share, it would entitle each fund to 3,205,128 shares of
Simtek common stock. During the first nine months of 2003 and the twelve months
ended December 31, 2004, the Company was not in compliance with two of the
covenants set forth in the loan agreement. Through December 31, 2004, the
Company was not in compliance with two of the covenants set forth in the loan
agreement. These covenants relate to the interest coverage ratio and debt to
equity ratio. On March 16, 2005, the Company received a waiver for the two
covenants through January 1, 2006. However, significant variances in future
actual operations from the Company's current estimates could result in the
reclassification of this note to current liabilities.
4. COMMITMENTS:
------------
Offices Leases - The Company leases office space under a lease, which
expires on February 28, 2013. Monthly lease payments are approximately
$16,000.
Through the acquisition of Q-DOT, the Company has non-cancelable long-term
lease agreements for office space, office furnishings and equipment that
expire at various dates through April 2007.
The Company leases furniture, equipment, and its office under operating
leases, which expire over the next nine years.
Future minimum lease payments under the equipment, furniture and office
leases described above are as follows:
Years Ending
December 31,
------------
2005 $ 916,027
2006 515,846
2007 371,122
2008 211,069
2009 & After 1,056,780
----------
$3,070,844
==========
Office rent and equipment lease expense totaled $930,076 and $769,870 for
the years ended December 31, 2004 and 2003, respectively.
In addition, the Company leases research and development software under
four capital leases, which will expire over the next two years. At December
31, 2004, future minimum lease payments under the lease described above is
as follows:
48
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ending
December 31,
------------
2005 $ 52,620
2006 8,770
--------
Total net minimum lease payments 61,390
Less interest and taxes (1,056)
--------
Present value of net minimum lease payments 60,334
Less current portion of capital leases (47,310)
--------
$ 13,024
========
Employment Agreements - Mr. Mitchell is employed as President and Chief
Executive Officer pursuant to an employment agreement with the Company.
Under the terms of the employment agreement, Mr. Mitchell receives an
annual salary of $175,000 and such additional benefits that are generally
provided other employees. Mr. Mitchell's employment agreement expired June
1, 2001 but was, and is, automatically renewed for successive one-year
terms unless the Company or Mr. Mitchell elects not to renew. If the
Company terminates the employment of Mr. Mitchell without cause, Mr.
Mitchell is entitled to continuation of his base salary and benefits,
mitigated by income Mr. Mitchell may earn, for the remainder of the term of
the agreement. Mr. Mitchell is subject to a noncompetition covenant for a
period of one year from the date of termination.
5. SHAREHOLDERS' EQUITY:
---------------------
On October 12, 2004, the Company closed a $2,500,000 equity financing with
three separate investment funds, SF Capital Partners, Ltd., Bluegrass
Growth Fund LP and Bluegrass Growth Fund LTD. In exchange for the
$2,500,000, the Company issued 4,127,967 shares of its common stock to SF
Capital Partners, Ltd, 515,996 shares of its common stock to Bluegrass
Growth Fund LP and 515,996 shares of its common stock to Bluegrass Growth
Fund LTD. The purchase price was based on a 15% discount to the closing
price of the Company's common stock as reported on the Over-the-Counter
Bulletin Board on October 11, 2004, resulting in a price of $0.4845 per
share. In addition to the shares of common stock, SF Capital Partners Ltd.,
Bluegrass Growth Fund LP, and Bluegrass Growth Fund LTD received warrants
to acquire 2,063,984, 257,998, and 257,998 shares of the Company's common
stock, respectively. The warrants have a 5-year term with an exercise price
of $0.627 per share. Merriman Curhan Ford & Co., the placement agent for
the $2,500,000 equity financing received a cash payment of $187,500 and
warrants to acquire 386,997 shares of the Company's common stock
On November 7, 2003, the Company closed a $1,500,000 equity financing with
the RENN investment funds. One of the Company's directors holds the
position of Senior Vice President of RENN Capital Group. In exchange for
the $1,500,000, the Company issued 550,661 shares of our common stock to
each of the three RENN investment funds, Renaissance Capital Growth and
Income Fund III, Inc., Renaissance US Growth & Investment Trust PLC and
BFSUS Special Opportunities Trust PLC. The purchase price was based on the
average closing price of the Company's common stock as reported on the
Over-the-Counter Bulletin Board over the five trading days before closing,
which average closing price was $0.908 per share. In addition to the shares
of common stock, each fund received warrants to acquire 250,000 shares of
the Company's common stock. The warrants have a 5-year term with 125,000
shares being exercisable at $1.25 per share and 125,000 shares being
exercisable at $1.50 per share.
49
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants - A summary of the warrants outstanding as of December 31, 2004,
is as follows:
Per
# of Warrant Extended
Warrants Expiration Exercise Value of
Warrant Holder Description Issue Date Outstanding Date Price Warrants
-------------- ------------ ------------ ------------ ------------ ------------ ----------
BFSUS Special Opportunities
Trust Plc. Warrants 11/7/2003 125,000 11/7/2008 $ 1.25 $ 156,250
BFSUS Special Opportunities
Trust Plc. Warrants 11/7/2003 125,000 11/7/2008 $ 1.50 $ 187,500
Renaissance US Growth &
Investment Trust Plc. Warrants 11/7/2003 125,000 11/7/2008 $ 1.25 $ 156,250
Renaissance US Growth &
Investment Trust Plc. Warrants 11/7/2003 125,000 11/7/2008 $ 1.50 $ 187,500
Renaissance Capital Growth &
Income Fund III Warrants 11/7/2003 125,000 11/7/2008 $ 1.25 $ 156,250
Renaissance Capital Growth &
Income Fund III Warrants 11/7/2003 125,000 11/7/2008 $ 1.50 $ 187,500
SF Capital Partners Ltd. Warrants 10/12/2004 2,063,984 10/12/2009 $ 0.627 $ 1,294,118
Bluegrass Growth Fund Ltd Warrants 10/12/2004 257,998 10/12/2009 $ 0.627 $ 161,765
Bluegrass Growth Fund Lp Warrants 10/12/2004 257,998 10/12/2009 $ 0.627 $ 161,765
Merriman Curhan Ford & Co. Warrants 10/12/2004 386,997 10/12/2009 $ 0.627 $ 242,647
--------- -----------
Total Warrants 3,716,977 $ 2,891,545
========= ===========
Stock Option Plans - The Company has approved two stock option plans that
authorize 600,000 incentive stock options and 9,900,000 non-qualified stock
options that may be granted to directors, employees, and consultants. On
September 26, 2001, the Incentive Stock Option Plan terminated. All options
outstanding at the time of the plan termination may be exercised in
accordance with their terms. The Non-Qualified Stock Option Plan which was
adopted in 1994 remains in effect. The plans permitted the issuance of
incentive and non-statutory options and provide for a minimum exercise
price equal to 100% of the fair market value of the Company's common stock
on the date of grant. The maximum term of options granted under the plans
are 10 years and options granted to employees expire three months after the
termination of employment. In 2004, the Non-Qualified Stock Option Plan was
extended for 10 more years. None of the options may be exercised during the
first six months of the option term.
Following is a summary of activity under these stock option plans for the
years ended December 31, 2004 and 2003:
50
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 2003
------------------------- ----------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
------------ --------- ---------- --------
Outstanding, beginning of year 5,794,081 $ .45 5,539,386 $ .47
Granted 1,439,334 .78 1,224,500 .21
Expired - - (45,000) (.13)
Exercised (1,001,231) (.36) (679,097) (.27)
Cancelled (242,099) (1.15) (245,708) (.39)
---------- ---------
Outstanding, end of year 5,990,085 $ .64 5,794,081 $ .45
========== =========
All options granted during 2004 and 2003, were at the current market price
and the weighted average fair value was $0.78 and $0.17, respectively. At
December 31, 2004, options for 4,776,078 shares were exercisable and of the
remaining options of 1,214,007; 758,354, 406,285 and 49,368 shares will
become exercisable in 2005, 2006, and 2007, respectively.
The following information summarizes stock options outstanding at December
31, 2004:
Outstanding Exercisable
------------------------------------------------------------------------------------ -----------------------------------
Weighted Average
---------------------------------------------------------
Remaining Weighted Weighted
Exercise Number Contractual Average Number Average
Price Outstanding Life in Months Exercise Price Exercisable Exercise Price
-------- ----------- -------------- -------------- ----------- --------------
$0.14-$0.18 1,123,632 55 $0.16 721,681 $0.17
$0.25-$0.41 2,329,119 45 $0.35 2,274,598 $0.35
$0.60-$0.90 823,000 52 $0.68 756,333 $0.66
$1.13-$1.44 1,439,334 55 $1.23 913,049 $1.25
$1.50-$1.90 275,000 59 $1.73 110,417 $1.66
--------- -------
5,990,085 4,776,078
========= =========
Incentive Stock Option Plan - At the time of the acquisition of Q-DOT,
Q-DOT had an Incentive Stock Option Plan for the benefit of its employees.
At December 31, 2000, Q-DOT had outstanding options to purchase 5,356
shares of its stock. At the time of closing, these options converted into
94,601 options to purchase Simtek Common Stock. No further options will be
issued under this plan and all options outstanding will continue to vest
per their original vesting schedule. These options have not been included
in the above tables. As of December 31, 2004 there were 83,049 options to
purchase Simtek Common Stock outstanding.
51
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other - Preferred Stock may be issued in such series and preferences as
determined by the Board of Directors.
6. SIGNIFICANT CONCENTRATION OF CREDIT RISK, MAJOR CUSTOMERS, AND OTHER RISKS
--------------------------------------------------------------------------
AND UNCERTAINTIES:
------------------
Sales by location for the years ended December 31, 2004 and 2003 were as
follows (as a percentage of sales):
2004 2003
---- ----
United States 38% 46%
Europe 10% 11%
Far East 42% 38%
Other 10% 5%
---- -----
Total 100% 100%
Sales from Government contracts accounted for approximately 12% and 15% of
total sales for the years ended December 31, 2004 and 2003, respectively.
Sales from the Company's military products accounted for approximately 18%
and 12% of total sales for the years ended December 31, 2004 and 2003,
respectively.
Sales to unaffiliated customers which represent 10% or more of the
Company's sales for the years ended December 31, 2004 and 2003 were as
follows (as a percentage of sales) :
Customer 2004 2003
-------- ---- ----
A 11% 16%
B 11% 5%
C 13% 6%
All customers identified above are from the semiconductor segment of the
Company's business.
At December 31, 2004, the Company had gross trade receivables totaling
$1,285,393 due from the above three customers.
In 2004 and 2003, the Company purchased all of its memory wafers, based on
0.8 micron technology from a single supplier Chartered Semiconductor
Manufacturing. Approximately 86% and 78% of the Company's net revenue for
2004 and 2003, respectively, were from finished units produced from these
wafers. The Company had an agreement with Chartered Semiconductor
Manufacturing to provide wafers, which expired in September 1998. This
agreement has not been extended or terminated, however, this supplier still
provides wafers to the Company. However, the Company has maintained a good
relationship with Chartered for the pricing and delivery of the Company's
wafers. Due to not having a contract with Chartered Semiconductor
Manufacturing and the volatility of the semiconductor market, the Company
may not have control over the pricing and availability of the wafers the
Company requires in order to build the Company's products. The risk of the
Company not receiving the products and pricing the Company needs from
Chartered Semiconductor Manufacturing has escalated. If the Company is
unable to obtain the products and pricing it needs, the Company's business
could suffer.
52
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company purchased all of its logic wafers from two
suppliers located in Singapore and Taiwan. Approximately 7% of its net
revenue for 2003 were from finished units produced from these wafers. In
February 2003, the Company received notification from United
Microelectronics that it will be unable to supply us with logic wafers
after August 2003. The Company supported customers with 0.5 micron logic
wafers manufactured at United Microelectronics through December 2003 by
offering opportunities to purchase their life-time requirements for these
products with deliveries scheduled by the end of the year. As of December
31, 2003, the Company is not supporting sales of logic products to the
market.
7. TAXES:
Deferred taxes result from temporary differences between the financial
statement carrying amounts and the tax bases of assets and liabilities. The
components of deferred taxes are as follows:
Deferred Tax
Assets (Liability)
------------------
Current:
Allowance for doubtful accounts $ 5,000
Reserves 203,000
Accrued expenses 102,000
------------
Net current deferred tax before valuation allowance 310,000
Valuation allowance (310,000)
------------
Total current deferred tax $ -
============
Non-Current:
Net operating losses $ 13,303,000
Property and equipment 5,000
Intangibles 1,054,000
------------
Net non-current deferred tax asset before
valuation allowance 14,362,000
Valuation allowance (14,362,000)
------------
Total non-current deferred tax asset $ -
============
The net current and non-current deferred tax assets have a 100% valuation
allowance resulting from the inability to predict sufficient future taxable
income to utilize the assets. The valuation allowance for 2004 increased
$1,720,000 and decreased $525,000 in 2003.
At December 31, 2004, the Company has approximately $36,000,000 available
in net operating loss carryforwards which begins to expire from 2005 to
2016. As a result of certain non-qualified stock options which have been
exercised, approximately $4,236,000 of the net operating loss carryforward
will be charged to "paid-in capital," when, and if, the losses are
utilized. Also, a substantial portion of the net operating loss may be
subject to Internal Revenue Code Section 382 limitations.
Total income tax expense for 2004 and 2003 differed from the amounts
computed by applying the U.S. Federal statutory tax rates to the pre-tax
loss as follows:
53
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 2003
---- ----
Statutory rate (34.0)% (34.0)%
State income taxes, net of Federal income tax benefit (3.3)% (3.3)%
Increase (reduction) in valuation allowance related to
net operating loss carryforwards and change in
temporary differences 37.3% 37.3%
------- -------
$ - $ -
======= =======
8. BUSINESS SEGMENTS:
------------------
The Company has two reportable segments. One segment designs and produces
semiconductor devices for sale into the semiconductor market. The second
segment specializes in advanced technology research and development for
data acquisition, signal processing, imaging and data communications that
is supported by government and commercial contracts. Although both segments
are managed as part of an integrated enterprise, they are reported herein
in a manner consistent with the internal reports prepared for management.
Transactions between reportable segments are recorded at cost.
Substantially all operating expenses are identified per each segment.
Substantially all of the Company's assets are located in the United States
of America.
Semiconductor Government
Description Years Devices Contracts Total
Net sales 2004 $13,092,441 $1,809,752 $14,902,193
2003 12,262,820 2,240,951 14,503,771
Net income (loss) 2004 $(3,730,610) $ 60,256 $(3,670,354)
2003 (2,388,730) 116,089 (2,272,641)
Interest income 2004 $ 26,436 $ 48 $ 26,484
2003 30,116 - 30,116
Interest expense 2004 $ (241,254) $ - $ (241,254)
2003 (254,144) - (254,144)
Depreciation and
amortization 2004 $ 442,084 $ 37,741 $ 479,825
2003 469,498 28,203 497,701
Total assets 2004 $ 7,063,513 $ 912,306 $ 7,975,819
2003 7,302,829 694,958 7,997,787
54
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None in 2004.
ITEM 8A: CONTROLS AND PROCEDURES
--------------------------------
(a) Evaluation of disclosure controls and procedures.
Douglas Mitchell, who serves as the Company's chief executive officer and chief
financial officer (acting), after evaluating the effectiveness of the Company's
disclosure controls and procedures as of the filing date of this annual report
(the "Evaluation Date") concluded that as of the Evaluation Date, the Company's
disclosure controls and procedures were adequate and effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
as specified in the SEC's rules and forms.
(b) Changes in internal control over financial reporting.
There were no changes in the Company's internal control over financial reporting
during the three months ended December 31, 2004, that have materially affected,
or are reasonably likely to materially affect, internal control over financial
reporting.
55
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE
--------------------------------------------------------------------------------
WITH SECTION 16(A) OF THE EXCHANGE ACT
--------------------------------------
Our directors and executive officers are as follows:
Name Age Position
---- --- --------
Douglas M. Mitchell............... 55 Director, Chief Executive Officer, President and Chief Financial
Officer (acting) and Chairman of the Board of Q-DOT Group, Inc.
Thomas Linnenbrink................ 61 Director, President, Chief Executive Officer, and Technical
Director of Q-DOT subsidiary
Donald G. Carrigan................ 57 Vice President of Sales and Marketing, Corporate Secretary
David W. Still.................... 49 Vice President of Engineering
Harold Blomquist.................. 52 Chairman of the Board
Alfred Stein...................... 72 Director
Robert H. Keeley.................. 64 Director
Ronald Sartore.................... 55 Director
Robert C. Pearson................. 69 Director
DOUGLAS M. MITCHELL served as our Chief Operating Officer from July 1, 1997
until January 1, 1998 at which time he became Chief Executive Officer, President
and a director. Mr. Mitchell's current term of office as a director expires in
2007. Mr. Mitchell is also the Chairman of the Board of our subsidiary, Q-DOT
Group. Mr. Mitchell has over 20 years of experience in the semiconductor and
electronics systems industry holding various marketing and sales management
positions. Prior to joining us, he was President and Chief Executive Officer of
a wireless communications company, Momentum Microsystems. Previously, Mr.
Mitchell was Vice President of Marketing and Sales for Array Microsystems, a
digital signal processing integrated circuit company specializing in video image
processing. Prior to this Mr. Mitchell was Vice President of Marketing with
SGS-Thomson Microelectronics, responsible for marketing and applications
engineering of Digital Signal Processing, transputer, microcontroller and
graphics products in North America. SGS-Thomson had acquired Inmos Corporation
where Mr. Mitchell had been Manager, US Marketing and Sales. Mr. Mitchell has
56
held management positions at Texas Instruments and Motorola and has been
responsible for various product definition and product development. Mr. Mitchell
holds a Bachelors degree in electrical engineering from the University of Texas
and a Masters of Business Administration degree from National University.
THOMAS E. LINNENBRINK, has served as President, Chief Executive Officer,
Technical Director and a director of Q-DOT, Inc. since he co-founded it in 1977.
Mr. Linnenbrink also founded Q-DOT Group, in 1990 and served as its President,
Chief Executive Officer, and a director until Simtek acquired it in March 2001.
Mr. Linnenbrink has served in various technical management and marketing
positions for more than 35 years while advancing the state-of-the-art in data
acquisition and signal processing. He pioneered high-speed charge-coupled device
(CCD) and silicon germanium (SiGe) technology and applications. Mr. Linnenbrink
has published numerous technical papers and holds more than a dozen patents. He
currently chairs IEEE Technical Committee 10, which writes and promotes
standards for ADCs, DACs, digital waveform recorders, and pulse technology. Mr.
Linnenbrink holds a Bachelors degree in electrical engineering from the Illinois
Institute of Technology and a Masters of Science degree in engineering science
with emphasis on automatic control from Rensselaer Polytechnic Institute.
DONALD G. CARRIGAN has served as Vice President of Sales and Marketing and
Corporate Secretary since joining Simtek in September of 2001. Mr. Carrigan has
over 31 years experience in the semiconductor industry. Prior to joining Simtek
he was vice president of sales for Ramtron International Corporation and an
executive officer of Ramtron. During his 12 years at Ramtron, Mr. Carrigan held
various marketing and sales positions as well as General Manager of the
ferroelectric product business unit. Prior to joining Ramtron, Mr. Carrigan was
with Inmos Corporation for 8 years where he held various positions in
engineering and marketing management including the Director of Marketing
position. Mr. Carrigan also held positions in engineering management and R & D
with NCR Microelectronics and Texas Instruments. Mr. Carrigan holds nine
semiconductor patents in circuit design, architecture and process technology.
Mr. Carrigan holds a Bachelors degree in Electrical Engineering from the
University of Tennessee, Knoxville, Tennessee and a Masters degree in Electrical
Engineering from Southern Methodist University, Dallas, Texas.
DAVID W. STILL has served as the Vice President of Engineering at Simtek
since December of 2001. Mr. Still has over 26 years experience in various
corporate, management, and technical positions within the semiconductor
industry, where he has successfully managed engineering teams developing
products in CMOS, bipolar, and GaAs processes, as well as associated CAD
software. Prior to his work at Simtek, he served as Vice President of IC
engineering for Comsilica, developing SOC WLAN products for 802.11a and b
wireless networks. Previously, he served as manager of the Colorado Design
Center for Lattice Semiconductor (formerly Minc), an FGPA / CPLD CAD software
company. Mr. Still was also a Vice President of Engineering at Array
Microsystems, a digital video product company, where he managed the CMOS IC
design and software development groups. He has also held engineering management
positions with Prisma and Honeywell. At Honeywell, he received two technical
excellence awards for his contributions to PLA designs. Mr. Still has published
over 18 technical papers and has received 2 patents. Mr. Still holds a Masters
Degree in Electrical Engineering from Arizona State University and a Bachelors
Degree in Electrical Engineering from the University of Nebraska.
57
HAROLD A. BLOMQUIST was originally appointed as a director in May 1998,
resigned from the Board in July 2001 to avoid a potential conflict of interest
with his employer and was re-appointed in January 2002. Mr. Blomquist's current
term of office as a director expires in 2005. In October 2003, Mr. Blomquist was
elected to the position of Chairman of the Board of Directors. He has served as
a Director on the Board of Microsemi, Inc. since February 2003 and as a
consultant to venture investors and early stage technology companies in the
semiconductor and electronic components areas. In the past, he was employed as
President and Chief Executive Officer of Morpho Technologies, Inc., Chief
Executive Officer of Tower Semiconductor, USA, Inc. Mr. Blomquist served as a
member of the Board of Directors of AMIS Holding Co. and Sr. Vice President of
AMI Semiconductors. Prior to joining AMI in April 1990, Mr. Blomquist held
positions in engineering, sales, and marketing for several semiconductor firms,
including Texas Instruments, Inmos Corporation and General Semiconductor. Mr.
Blomquist was granted a BSEE degree from the University of Utah and also
attended the University of Houston, where he pursued a joint Juris Doctor/MBA
course of study.
ALFRED J. STEIN has served as a director since March 2004, which term
expires in 2006. He is currently a Consultant and Advisor to startup companies
in the high technology industry. He previously served at VLSI Technology, Inc.
as Chairman of the Board and Chief Executive Officer from 1982 until its
acquisition by Philips Electronics in 1999. During his tenure, VLSI grew from a
venture capital funded start-up to a publicly traded company with revenues in
excess of $600 million and over 2,200 employees in more than 25 locations around
the world. For more that 40 years, Mr. Stein has played a significant role in
the high tech industry, including senior management assignments at both Texas
Instruments and Motorola. Mr. Stein was with Texas Instruments for 18 years from
1958 through 1976; his last position was Vice President and General Manager for
the Electronics Devices Division. Mr. Stein was with Motorola for 5 years where
he was Vice President and Assistant General Manager of Motorola's Semiconductor
Sector. He joined VLSI Technology from Arrow Electronics where he had been that
company's Chief Executive Officer. Mr. Stein is on the Board of Directors of
three publicly traded companies: Advanced Power Technology, ESS Technology,
Electronics Boutique and several private startup companies. He also has served
on the board of directors at Applied Materials, Radio Shack Corporation and was
Chairman of the Board for the Semiconductor Industry Association (SIA). He
served on the Board of Trustees for St. Mary's University of Texas.
ROBERT H. KEELEY has served as a director since May 1993. Dr. Keeley's
current term of office as a director expires in 2007. He retired in August 2004
from the University of Colorado - Colorado Springs where he was the El Pomar
Professor of Business Finance. He currently is Professor Emeritus at the
University. From 1986 until he joined the faculty at the University of Colorado
at Colorado Springs in 1992, Dr. Keeley was a professor in the Department of
Industrial Engineering and Engineering Management at Stanford University. Prior
to joining Stanford, he was a general partner of Hill and Carmen (formerly Hill,
Keeley and Kirby), a venture capital firm. Dr. Keeley holds a Bachelors degree
in electrical engineering from Stanford University, an M.B.A. from Harvard
58
University and a Ph.D. in business administration from Stanford University. Dr.
Keeley is also a director of three private companies and is the president of one
of them.
RONALD SARTORE has served as a director since March 2004, which term
expires in 2006. Mr. Sartore has over 30 years experience in the computer and
semiconductor fields and is currently the Vice President of High speed Serial
Interfaces (HSSI) Business Unit for Cypress Semiconductor's Consumer and
Computation Division. Mr. Sartore joined Cypress after Cypress's May 1999
accretive acquisition of Anchor Chips, where he was its CEO, and President. Mr.
Sartore founded Anchor chips in 1995 and secured $9.5 million in funding from
its majority owner; South Korea's LG Semicon. Prior to that, Mr. Sartore worked
as a systems architect for San Diego based AMCC. Previous to AMCC, Mr. Sartore
was a technical consultant for Array Microsystems, and an employee of Maximum
Storage, both in Colorado Springs. In 1985, Mr. Sartore co-founded Cheetah
International, a manufacturer of personal computers and peripherals until its
acquisition by Northgate Computers in 1990. Cheetah's products, designed by
Sartore, have received acclaim for their high performance and were the subject
of articles in numerous trade magazines. Prior to Cheetah, Mr. Sartore has held
technical design positions in the following companies: Inmos, in Colorado
Springs, Colorado; Synercom Technology, in Sugarland, Texas; Texas Instruments,
in Stafford, Texas; NCR, in Millsboro, Delaware; and Sperry Univac, in Blue
Bell, Pennsylvania. Mr. Sartore currently holds 12 US patents and obtained a BS
degree in Electrical Engineering from Purdue University.
ROBERT C. PEARSON has served as a director since July 2002. Mr. Pearson's
current term of office as a director expires in 2005. He joined RENN Capital
Group in April 1997 and is Senior Vice President-Investments. From May 1994 to
May 1997, Mr. Pearson was an independent financial management consultant
primarily engaged by RENN Capital Group. From May 1990 to May 1994, he served as
Chief Financial Officer and Executive Vice President of Thomas Group, Inc., a
management consulting firm, where he was instrumental in moving a small
privately held company from a start-up to a public company with over $40 million
in revenues. Prior to 1990, Mr. Pearson spent 25 years at Texas Instruments
Incorporated where he served in several positions including Vice
President-Controller and later as Vice President-Finance. Mr. Pearson holds a BS
in Business from the University of Maryland and was a W.A. Paton Scholar with an
MBA from the University of Michigan. He is currently a Director of Poore
Brothers, Inc., CaminoSoft, Inc., Advanced Power Technology, Inc., and Simtek,
all publicly held. He is also a Director of eOriginal, Inc., a privately held
company.
Our amended and restated articles of incorporation and bylaws provide that
if the Board consists of six or more persons, then the members of the Board
shall be divided into three classes, each class to be as nearly equal in number
as possible. The Board is currently divided into three classes, each class
consisting of two directors, with each class having a three-year term. Vacancies
on the Board may be filled only by persons elected by a majority of the
remaining directors. A director elected by the Board to fill a vacancy
(including a vacancy created by an increase in the Board) will serve for the
remainder of the full term of the class of directors in which the vacancy
occurred and until the director's successor is elected and qualified. There are
two Class 1 Directors, Messrs. Douglas Mitchell and Robert Keeley, whose terms
of office will expire at the 2007 annual meeting, two Class 2 Directors, Messrs.
59
Blomquist and Pearson, whose terms of office will expire at the 2005 annual
meeting, and two Class 3 Directors, Messrs. Sartore and Stein, whose terms of
office will expire at the 2006 annual meeting.
In 1994, we entered into a Product License Development and Support
Agreement, with Zentrum Mikroelektronik Dresden. This agreement, modified later
in 1994 and again in 1995, provides Zentrum Mikroelektronik Dresden the right to
appoint two members to our board of directors which members must be acceptable
to, and approved by, our board of directors. Although this agreement and its
modifications do not have a set termination date, Zentrum Mikroelektronik
Dresden's two nominees to our board of directors resigned in April 1998 and
Zentrum Mikroelektronik Dresden has not attempted to nominate anyone to our
board since then. Zentrum Mikroelektronik Dresden currently holds a competitive
position to us in the marketplace. Furthermore, Zentrum Mikroelektronik
Dresden's right to appoint two members to our board of directors was subject to
Zentrum Mikroelektronik Dresden's compliance with the terms of the Product
License Development and Support Agreement and its amendments. We cannot assure
you that Zentrum Mikroelektronik Dresden will not claim that it has the right to
appoint two members to our board of directors in the future, again acceptable to
and approved by our board of directors, or that Zentrum Mikroelektronik Dresden
will not succeed in securing such appointment.
Special Provisions in Our Amended and Restated Articles of Incorporation and
Bylaws
Our amended and restated articles of incorporation contain a provision
limiting the liability of directors to the fullest extent permitted under the
Colorado Business Corporation Act. The Colorado Business Corporation Act allows
a corporation to limit the personal liability of a director to the corporation
or its shareholders for monetary damages for breaches of fiduciary duty as a
director except:
o breaches of the director's duty of loyalty to the corporation or to
its shareholders;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
o other acts specified in the Colorado Business Corporation Act, such as
acts involving voting for or assenting to a distribution made in
violation of the Colorado Business Corporation Act or our amended and
restated articles of incorporation;
o transactions from which the director derived an improper personal
benefit.
The provisions of the Colorado Business Corporation Act will not impair our
ability to seek injunctive relief for breaches of fiduciary duty. Such relief,
however, may not always be available as a practical matter.
Our amended and restated articles of incorporation also contain a provision
that requires us to indemnify, to the fullest extent permitted under law,
directors and officers against all costs and expenses reasonably incurred in
connection with the defense of any claim, action, suit or proceeding, whether
civil, criminal, administrative, investigative or other, in which such person
may be involved by virtue of being or having been a director, officer or
employee.
60
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of Simtek pursuant to the foregoing provisions, or otherwise, Simtek has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933, as amended, and is, therefore, unenforceable.
Our amended and restated articles of incorporation and bylaws provide for a
classified board of directors when we have six or more directors. This may have
the effect of delaying or preventing changes in control of our management, which
could adversely affect the market price of our common stock by discouraging or
preventing takeover attempts that might result in the payment of a premium price
to our shareholders.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To our knowledge, based solely upon a review of reports furnished to us
and written representations that no other reports were required, during the
fiscal year ended December 31, 2004, all filing requirements applicable to
officers, directors and greater than 10% beneficial owners of our common shares
under Section 16(a) of the Exchange Act were complied with, except as noted
below:
Mr. Alfred Stein filed one Form 4 on July 7, 2004 with respect to a
transaction occurring on June 29, 2004.
AUDIT COMMITTEE AND FINANCIAL EXPERT
Our board of directors has established an audit committee comprised of
Messrs. Keeley, Blomquist and Stein. Our board has determined that Mr. Keeley
has the requisite education, background or experience to be considered an "audit
committee financial expert" as that term is defined by the SEC. All members of
our Audit Committee are independent according to Nasdaq's listing standards.
61
ITEM 10: EXECUTIVE COMPENSATION
-------------------------------
Summary Compensation Table
The following table sets forth information for each of our last three
fiscal years with respect to the annual and long-term compensation of the only
individual acting as the Chief Executive Officer during the fiscal year ended
December 31, 2004 and each other executive officer of the Company who served
during any part of 2004 whose annual salary and bonus for the fiscal year ended
December 31, 2004 exceeded $100,000.
Summary Compensation Table
Long Term Compensation
----------------------
Annual Compensation Awards
----------------------------------------- ----------------------
Name Other
and Annual Securities
Principal Compen- Underlying
Position Year Salary($) Bonus($) sation($) Options
--------- ---- --------- -------- --------- ----------
Douglas M. Mitchell(1) 2004 $175,000 -- -- --
Chief Executive Officer, 2003 $175,000 -- -- 200,000
Chief Financial Officer 2002 $175,000 -- -- --
(acting) and President
Thomas Linnenbrink 2004 $145,435 -- -- 30,000
Chief Executive Officer, 2003 $141,200 -- -- 30,000
President and Technical 2002 $135,408 -- -- 30,000
Director of Q-DOT
Subsidiary
Donald G. Carrigan(2) 2004 $136,475 $44,569(3) -- 30,000
Vice President of Sales 2003 $132,500 $29,268(3) -- 30,000
and Marketing 2002 $ 40,625 $42,228(3) -- --
David W. Still(4) 2004 $138,020 -- -- 50,000
Vice President of 2003 $134,000 -- -- 50,000
Engineering 2002 $130,000 -- -- --
(1) Mr. Mitchell became our Chief Executive Officer and President on January 1,
1998.
(2) Mr. Carrigan became our Vice President of Sales and Marketing on August 31,
2001.
(3) Mr. Carrigan is on a bonus plan that is directly related to net revenue and
department spending.
(4) Mr. Still became our Vice President of Engineering on December 3, 2001.
OPTION GRANT TABLE
The following table sets forth certain information with respect to options
granted by us during the fiscal year ended December 31, 2004 to the individuals
named in the summary compensation table above.
Shares Potential
subject to Market Realizable Value
Shares Options Price at Assumed
Subject to Granted to Exercise per Annual Rate of
Options Employees Price Share on Stock Price
Granted in in Fiscal Year Per Date of Expiration Appreciation for
Name Fiscal Year % of Total Share Grant Date Option Term
-------------------- ----------- -------------- --------- -------- ---------- --------------------
5% 10%
--------------------
Thomas Linnenbrink 30,000(1) 3.02% $ 1.17 $1.17 01/09/2011 $14,289 $33,300
Donald Carrigan 30,000(2) 3.02% $ 1.17 $1.17 01/09/2011 $14,289 $33,300
David Still 50,000(3) 5.04% $ 1.17 $1.17 01/09/2011 $23,815 $55,500
(1) 30,000 options were granted to Mr. Linnenbrink in his capacity as Chief
Executive Officer, President and Technical Director of our Q-DOT Group
subsidiary; these options vest at 1/36th per month over 3 years.
(2) 30,000 options were granted to Mr. Carrigan in his capacity as Vice
President of Sales and Marketing, these options vest at 1/36th per month
over 3 years.
(3) 50,000 options were granted to Mr. Still in his capacity as Vice President
of Engineering, these options vest at 1/36th per month over 3 years.
YEAR-END OPTION TABLE
The following table sets forth, as of December 31, 2004, the number of
shares subject to unexercised options held by the individuals named in the
summary compensation table above. 1,485,278 exercisable options had an exercise
price less than the last sale price of our common stock underlying the options
as reported by the OTC Electronic Bulletin Board on the last trading day of the
fiscal year ended December 31, 2004.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
Value of Unexercised
Number of Unexercised in-the-money
Options at Fiscal Options
Year-End at Fiscal Year-End
Shares Value
Acquired on Realized Exercisable Unexercisable Exercisable Unexercisable
Name Exercise (#) ($) (#) (#) ($) ($)
------------------ ------------- -------- ----------- ------------- ----------- -------------
Douglas Mitchell 300,000 $129,845 736,667 83,333 $196,267 $38,333
Thomas Linnenbrink -- -- 206,667 33,333 $ 13,608 $ 5,292
Donald Carrigan -- -- 278,334 31,666 $ 93,242 $ 4,658
David Still -- -- 297,222 52,778 $ 88,736 $ 7,764
EMPLOYMENT AGREEMENTS
Mr. Mitchell is employed as President and Chief Executive Officer pursuant
to an employment agreement with us. Under the terms of the employment agreement,
Mr. Mitchell receives an annual salary of $175,000 and such additional benefits
that are generally provided other employees. Mr. Mitchell's employment agreement
expired June 1, 2001 but was, and is, automatically renewed for successive
one-year terms unless we or Mr. Mitchell elects not to renew. If we terminate
the employment of Mr. Mitchell without cause, Mr. Mitchell is entitled to
63
continuation of his base salary and benefits, mitigated by income Mr. Mitchell
may earn, for the remainder of the term of the agreement. Mr. Mitchell is
subject to a noncompetition covenant for a period of one year from the date of
termination.
CONFIDENTIALITY AND NONDISCLOSURE AGREEMENTS
We generally require our employees to execute confidentiality and
nondisclosure agreements upon the commencement of employment with us. The
agreements generally provide that all inventions or discoveries by the employee
related to our business and all confidential information developed or made known
to the employee during the term of employment shall be the exclusive property of
us and shall not be disclosed to third parties without the prior approval of us.
DIRECTORS' COMPENSATION
In January and February 2004, each director who was not also an employee
received $1,000 for each meeting of the Board, attended in person, and $500 for
each meeting of a committee of the Board. The Chairman of the Board received
$4,000 per calendar quarter, $1,000 for each meeting of the Board, attended in
person, and $500 for each meeting of a committee of the Board. Directors were
also reimbursed for their reasonable out-of-pocket expenses incurred in
connection with their duties to us.
In March 2004, the board of directors approved a new compensation plan for
its directors. Each director who is not also an employee receives $1,500 for
attending each meeting of the board of directors, attended in person, and $500
for each meeting of a committee of the board of directors. Each director shall
receive a $10,000 annual stipend, which started January 1, 2005; the stipend
will be paid quarterly. Until the time as we have two consecutive quarters of
net profit, the stipend will be paid in restricted common stock. The cost per
common share will be calculated based on the average closing price of our common
stock during the 20 trading days prior to issuance. Commencing the first quarter
after we have shown two consecutive quarters of audited net profit, the stipend
will be paid in cash. Upon initial appointment or election to the board of
directors, each newly appointed or elected member shall receive options to
purchase 100,000 shares of our common stock. Each member of the board of
directors shall receive, within the first month of each calendar year, while
serving as a member of the board of directors, a grant of options to purchase
35,000 shares of our common stock. Along with the above compensation, the
Chairman of the Board also receives $4,000 per calendar quarter. Directors are
also reimbursed for their reasonable out-of-pocket expenses incurred in
connection with their duties to us.
During the fiscal year ended December 31, 2004: 100,000 stock options were
granted to Mr. Ronald Sartore at $1.34 per share, the market price on the date
of grant; 29,167 stock options were granted to Mr. Alfred Stein at $1.16 per
share, the market price on the date of grant; 26,250 stock options were granted
each of Mr. Harold Blomquist, Dr. Robert Keeley and Mr. Robert Pearson at $1.16
per share, the market price on the date of grant.
64
We have adopted a code of business conduct and ethics that applies to our
Chief Executive Officer, the Chief Financial Officer, and the Controller, as
well as to our directors and employees. The code of business conduct and ethics
can be found at our Internet website at www.simtek.com.
65
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------------------------------------
The first table below sets forth information regarding ownership of our
common stock as of February 28, 2005, by each person who is known by us to
beneficially own more than five percent of our common stock, by each director,
by each executive officer named in the summary compensation table and by all
directors and executive officers as a group. Shares issuable within sixty days
after February 28, 2005 upon the exercise of options and are deemed outstanding
for the purpose of computing the percentage ownership of persons beneficially
owning such options or holding such notes but are not deemed outstanding for the
purpose of computing the percentage ownership of any other person. Shares
issuable upon the conversion of the debentures have been included for the
purpose of computing the percentage ownership. To the best of our knowledge, the
persons listed below have sole voting and investment power with respect to the
shares indicated as owned by them subject to community property laws where
applicable and the information contained in the notes to the table.
Amount and Nature
Name and Address of Beneficial Percent of
of Beneficial Owner Ownership Class
------------------- ---------------- ----------
Douglas M. Mitchell 927,275 (1) 1.45%
205 Ridge Dr.
Woodland Park, CO 80863
Robert H. Keeley 111,250 (2) *
P. O. Box 240
Hillside, CO 81232
Thomas E. Linnenbrink 1,108,295 (3) 1.75%
1457 Smoochers Circle
Colorado Springs, CO 80904
Harold A. Blomquist 102,050 (4) *
13625 Antelope Station
Poway, CA 92064
Donald G. Carrigan 285,500 (5) *
425 Scrub Oak Circle
Monument, CO 80132
David W. Still 308,333 (6) *
4250 Buckingham Dr., Suite 100
Colorado Springs, CO 80907
Robert Pearson 41,250 (7) *
8080 N. Central Expressway, Suite 210-LB59
Dallas, TX 75203
66
Ronald Sartore 129,167 (8) *
14445 Cypress Point
Poway, CA 92064
Alfred Stein 130,167 (9) *
410 Old Oak Court
Los Altos, CA 94022
Renaissance Capital Growth & Income Fund III, Inc. 5,005,789 (10) 7.53%
c/o RENN Capital Group
8080 N. Central Expressway, Suite 210-LB59
Dallas, TX 75203
Renaissance US Growth & Investment Trust PLC 5,005,789 (11) 7.53%
c/o RENN Capital Group
8080 N. Central Expressway, Suite 210-LB59
Dallas, TX 75203
BFSUS Special Opportunities Trust PLC. 4,005,789 (12) 6.03%
c/o RENN Capital Group
8080 N. Central Expressway, Suite 210-LB59
Dallas, TX 75203
SF Capital Partners, Ltd 6,191,951 (13) 9.52%
3600 South Lake Drive
St. Francis, WI 53235
All officers and directors as a group 3,143,287 (14) 4.83%
(9 persons)
---------------------------
* Less than one percent.
(1) Represents 44,386 shares of our common stock that Mr. Mitchell acquired
through our acquisition of Q-DOT Group, 20,000 shares of our common stock
that Mr. Mitchell personally owns, 104,000 shares of our common stock Mr.
Mitchell acquired upon the exercise of 104,000 options and includes 758,889
shares issuable upon exercise of options.
(2) Includes 86,250 shares issuable upon exercise of options. Includes 15,000
shares of our common stock that Mr. Keeley acquired upon the exercise of
15,000 options and includes 10,000 shares of our common stock held by Mr.
Keeley's wife, Sandra D. Keeley. Mr. Keeley disclaims beneficial ownership
of these shares.
67
(3) Represents 894,128 shares of our common stock that Mr. Linnenbrink acquired
through our acquisition of Q-DOT Group and includes 214,167 shares issuable
upon exercise of options.
(4) Represents 800 shares of our common stock that Mr. Blomquist's son
personally owns and includes 101,250 shares issuable upon exercise of
options.
(5) Represents 500 shares of our common stock that Mr. Carrigan personally owns
and includes 285,000 shares issuable upon exercise of options.
(6) Includes 308,333 shares issuable upon exercise of options.
(7) Includes 41,250 shares issuable upon exercise of options.
(8) Includes 129,167 shares issuable upon exercise of options
(9) Represents 1,000 shares of our common stock that Mr. Stein owns and
includes 129,167 shares issuable upon exercise of options.
(10) Assumes conversion, at a conversion price of $0.312 per share, of
debentures issued to Renaissance Capital Growth & Income Fund III, Inc. for
3,205,128 shares of our common stock. Assumes exercise of warrants held by
Renaissance Capital Growth & Income Fund III, Inc. for 250,000 shares of
our common stock. Also represents 550,661 shares of our common stock that
Renaissance Capital Growth & Income Fund III, Inc. acquired pursuant to its
investment on November 7, 2003. Also includes 1,000,000 shares held by
Renaissance Capital Growth & Income Fund III, Inc. that were issued in 2000
upon the conversion of debentures originally issued on June 12, 1998.
(11) Assumes conversion, at a conversion price of $0.312 per share, of
debentures issued to Renaissance US Growth & Investment Trust PLC for
3,205,128 shares of our common stock. Assumes exercise of warrants held by
Renaissance US Growth & Investment Trust PLC for 250,000 shares of our
common stock. Also represents 550,661 shares of our common stock that
Renaissance US Growth & Investment Trust PLC acquired pursuant to its
investment on November 7, 2003. Also includes 1,000,000 shares held by
Renaissance US Growth & Investment Trust PLC that were issued in 2000 upon
the conversion of debentures originally issued on June 12, 1998.
(12) Assumes conversion, at a conversion price of $0.312 per share, of
debentures issued to BFSUS Special Opportunities Trust PLC for 3,205,128
shares of our common stock. Assumes exercise of warrants held by BFSUS
Special Opportunities Trust PLC for 250,000 shares of our common stock.
Also represents 550,661 shares of our common stock that BFSUS Special
Opportunities Trust PLC acquired pursuant to its investment on November 7,
2003.
68
(13) Represents 4,127,967 shares of our common stock that SF Capital Partners
Ltd. acquired pursuant to its equity investment in us on October 12, 2004.
Assumes exercise of warrants held by SF Capital Partners Ltd. for 2,063,984
shares of our common stock.
(14) Includes 2,053,473 shares issuable upon exercise of options. Does not
include the 14,017,367 shares beneficially owned by Renaissance Capital
Growth & Income Fund III, Inc., Renaissance US Growth & Investment Trust
PLC and BFSUS Special Opportunities Trust PLC. RENN Capital Group is agent
for the three investment funds. Mr. Robert Pearson is a Senior Vice
President of RENN Capital Group. Mr. Pearson also holds the position of a
director on Simtek's board of directors.
69
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
On November 7, 2003, we closed a $1,500,000 equity financing with
Renaissance Capital Growth and Income Fund III, Inc., Renaissance US Growth &
Investment Trust PLC and BFSUS Special Opportunities Trust PLC., which are
managed by RENN Capital Group. RENN Capital Group is the agent for these three
investment funds. One of our directors, Mr. Robert Pearson, holds the position
of Senior Vice President of RENN Capital Group.
70
PART IV
ITEM 13: EXHIBITS
-----------------
3.1 Amended and Restated Articles of Incorporation.(2)
3.2 Amended and Restated Articles of Incorporation November 1997.(7)
3.3 Bylaws.(2)
3.4 Amended and Restated Articles of Incorporation May 2004 (23)
4.1 1987-I Employee Restricted Stock Plan.(1)
4.2 Form of Restricted Stock Agreement between the Company and
Participating Employees.(1)
4.3 Form of Common Stock Certificate.(3)
4.4 Simtek Corporation 1991 Stock Option Plan.(4)
4.5 Form of Incentive Stock Option Agreement between the Company and
Eligible Employees.(4)
4.6 1994 Non-Qualified Stock Option Plan.(5 )
4.7 Amendment to the 1994 Non-Qualified Stock Option Plan.(6)
4.8 Q-DOT Group, Inc. Incentive Stock Option Plan of March 1994 adopted by
Simtek (15)
4.9 Form of Q-DOT Group, Inc. Incentive Stock Option Agreement between the
Company and Eligible Employees.(15)
4.10 Amendment to the 1994 Non-Qualified Stock Option Plan.(15)
4.11 Amendment to the 1994 Non-Qualified Stock Option Plan (24)
10.1 Form of Non-Competition and Non-Solicitation Agreement between the
Company and certain of its employees.(1)
10.2 Form of Employee Invention and Patent Agreement between the Company
and certain of its employees.(1)
10.3 Product License Development and Support Agreement between Simtek
Corporation and Zentrum Mikroelektronik Dresden GmbH dated June 1,
1994(5)
10.4 Cooperation Agreement between Simtek Corporation and Zentrum
Mikroelektronik Dresden GmbH dated September 14, 1995(6)
10.5 Manufacturing Agreement between Chartered Semiconductor Manufacturing,
PTE, LTD. and Simtek Corporation dated September 16, 1992(6)
10.6 Employment agreement between the Simtek Corporation and Douglas M.
Mitchell(8)
10.7 Share Exchange Agreement dated May 9, 2000 between Simtek Corporation
and Hugh N. Chapman (9)
10.8 Share Exchange Agreement dated June 16, 2000 between Simtek
Corporation and WebGear Inc. (9)
10.9 Share Exchange Agreement dated July 31, 2000 between Simtek
Corporation and Jaskarn Johal and Kashmira S. Johal (10)
10.10 Asset Purchase Agreement between Simtek Corporation and WebGear, Inc.
(11)
10.11 Amendment to Asset Purchase Agreement between Simtek Corporation and
WebGear, Inc. (12)
10.12 Agreement and Plan of Merger among Simtek Corporation, Q-DOT Group,
Inc. and Q-DOT, Inc. (13)
10.13 Employment Agreement between Simtek Corporation and Hugh N. Chapman
(14)
10.14 Technology Development, License and Product Agreement between Amkor
Technology and Simtek (16)
10.15 Manufacturing Services Agreement between Amkor Technology, Inc. and
Simtek Corp (16)
10.16 Convertible Loan Agreement between Simtek Corporation as borrower and
Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US
Growth and Income Trust, PLC and BFSUS Special Opportunities Trust,
PLC as lenders (17)
10.17 7.5% $1,000,000 Convertible Debenture between Simtek Corporation and
BSFSUS Special Opportunities Trust, PLC (17)
10.18 7.5% $1,000,000 Convertible Debenture between Simtek Corporation and
Renaissance Capital Growth & Income Fund III, Inc. (17)
10.19 7.5% $1,000,000 Convertible Debenture between Simtek Corporation and
Renaissance Capital US Growth & Income Trust, PLC (17)
10.20 Borrowers Security Agreement between Simtek Corporation as borrower
and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance
US Growth and Income Trust, PLC and BFSUS Special Opportunities Trust,
PLC as lenders (17)
71
10.21 Pledge Agreement between Simtek Corporation as borrower and
Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US
Growth and Income Trust, PLC and BFSUS Special Opportunities Trust,
PLC as lenders (17)
10.22 Technology Development, License and Product Agreement between Amkor
Technology and Simtek - Amended September 2002 (18)
10.23 Assignment, dated February 21, 2003, of the Agreement(s) between
Simtek Corporation and Amkor Technology, Inc.(19)
10.24 Securities Purchase Agreement between Simtek Corporation and
Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US
Growth and Investment Trust, PLC and BFSUS Special Opportunities
Trust, PLC(20)
10.25 Form of $1.25 Stock Purchase Warrant(20)
10.26 Form of $1.50 Stock Purchase Warrant(20)
10.27 Amendment dated January 27, 2004 between Simtek Corporation and Baja
Properties, LLC (Landlord) (together with amendment dated June 7, 2000
and underlying lease dated July 26, 2000) (21)
10.28 Securities Purchase Agreement, dated October 12, 2004, by and among
the Company, SF Capital Partners Ltd., Bluegrass Growth Fund LP and
Bluegrass Growth Fund LTD (22)
10.29 Form of Warrant (attached as Exhibit A to Securities Purchase
Agreement, dated October 12, 2004, by and among the Company, SF
Capital Partners Ltd., Bluegrass Growth Fund LP and Bluegrass Growth
Fund LTD) (22)
10.30 Form of Registration Rights Agreement (attached as Exhibit B to
Securities Purchase Agreement, dated October 12, 2004, by and among
the Company, SF Capital Partners Ltd., Bluegrass Growth Fund LP and
Bluegrass Growth Fund LTD) (22)
14.1 Code of Business Conduct and Ethics (21)
21.1 Subsidiary of the Registrant
23.1 Consent of Independent Registered Public Accounting Firm
31 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
-------------------
(1) Incorporated by reference to the Company's Form S-1 Registration Statement
(Reg. No. 33-37874) filed with the Commission on November 19, 1990.
(2) Incorporated by reference to the Company's Amendment No.1 to Form S-1
Registration Statement (Reg. No. 33-37874) filed with the Commission on
February 4, 1991.
(3) Incorporated by reference to the Company's Amendment No.2 to Form S-1
Registration Statement (Reg. No. 33-37874) filed with the Commission on
March 4, 1991.
(4) Incorporated by reference to the Company's Form S-1 Registration Statement
(Reg. No. 33-46225) filed with the Commission on March 6, 1992.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K filed
with the Commission on March 25, 1995
(6) Incorporated by reference to the Company's Annual Report on Form 10-K filed
with the Commission on March 27, 1996
(7) Incorporated by reference to the Company's Annual Report on Form 10-K filed
with the Commission on March 24, 1998(8)
(8) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the Commission on March 12, 1999
(9) Incorporated by reference to the Form SB-2 Registration Statement (Reg. No.
333-40988) filed with the Commission on July 7, 2000
(10) Incorporated by reference to the Form 8-K filed with the Commission on
August 14, 2000
(11) Incorporated by reference to the Form 8-K filed with the Commission on
October 13, 2000
(12) Incorporated by reference to the Company's Amendment No. 2 to From SB-2
Registration Statement (Reg. No. 333-40988)
(13) Incorporated by reference to the Company's Form 8-K filed with the March
23, 2001
(14) Incorporated by reference to the Form SB-2 Registration Statement Amendment
#3 (Reg. No. 333-60492) filed with the Commission on September 4, 2001
(15) Incorporated by reference to the Company's Form S-8 Registration Statement
(Reg. No. 333-73794) filed with the Commission on November 20, 2001
72
(16) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the Commission on March 27, 2002
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
filed with the Commission on August 13, 2002
(18) Incorporated be reference to the Company's Quarterly Report on Form 10-QSB
filed with the Commission on November 8, 2002
(19) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the Commission on March 27, 2003
(20) Incorporated by reference from the Current Report on Form 8-K filed by the
Company with the SEC on November 12, 2003
(21) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the Commission on March 4, 2004
(22) Incorporated by reference from the Current Report on Form 8-K filed by the
Company with the Commission on October 12, 2004
(23) Incorporated by reference from the Current Report on Form 8-K filed by the
Company with the Commission on June 2, 2004
(24) Incorporated by reference to the Company's Form S-8 Registration Statement
(Reg. No. 333-121005) filed with the Commission on December 6, 2004
73
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
-----------------------------------------------
Hein & Associates LLP served as the Company's principal accountants for the
fiscal year ended December 31, 2004, and the board has selected Hein &
Associates LLP as Simtek's principal accountants for the 2005 fiscal year.
AUDIT FEES
Simtek was billed an aggregate of $86,173 and approximately $55,000 in
fees for professional services rendered during the fiscal years ended December
31, 2004 and December 31, 2003, respectively in connection with the audit of
Simtek's consolidated financial statements for such fiscal years and the reviews
of the financial statements included in Simtek's Forms 10-QSB for such fiscal
years and statutory and regulatory filings or engagements for such years.
AUDIT-RELATED FEES
Simtek was billed $4,500 and $0 for assurance and related services by Hein
& Associates LLP during the fiscal years ended December 31, 2004 and December
31, 2003, respectively.
ALL OTHER FEES
Hein & Associates LLP did not bill the Company for any other services
rendered to Simtek for the fiscal years ended December 31, 2004 and December 31,
2003.
TAX FEES
Simtek was billed an aggregate of $15,200 and $14,000 in fees for
professional services rendered during the fiscal year ended December 31, 2004
and December 31, 2003, respectively, for tax compliance, tax advice and tax
planning. The nature of the tax services comprising such fees was in connection
with tax compliance (including U.S. federal and state returns) and tax
consulting.
PRE-APPROVAL POLICIES AND PROCEDURES
Pre-approval of the independent auditor's services was not required
under applicable rules and regulations prior to 2003. In 2003, audit and
audit-related services, tax services and other services were required to be
pre-approved by the audit committee of our board of directors. The audit
committee's pre-approval policy provides for pre-approval of all audit,
audit-related, tax and all other services provided by Hein & Associates LLP. The
audit committee concluded that such services by Hein & Associates LLP were
compatible with the maintenance of that firm's independence in the conduct of
its auditing functions.
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Colorado
Springs, State of Colorado, United States of America, on March 17,2005
SIMTEK CORPORATION
By: /s/Douglas M. Mitchell
------------------------------------
Douglas M. Mitchell
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on March 17, 2005 by the following persons on behalf of the
Registrant and in the capacities indicated.
SIGNATURE TITLE
/s/Douglas M. Mitchell
--------------------------------
Douglas M. Mitchell Chief Executive Officer and President
/s/Douglas M. Mitchell
--------------------------------
Douglas M. Mitchell Chief Financial Officer (acting)
/s/Douglas M. Mitchell
--------------------------------
Douglas M. Mitchell Director
/s/Harold Blomquist
--------------------------------
Harold Blomquist Chairman of the Board
/s/Robert H. Keeley
--------------------------------
Robert H. Keeley Director
/s/Alfred Stein
--------------------------------
Alfred Stein Director
75
EXHIBIT INDEX TO FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
3.1 Amended and Restated Articles of Incorporation.(2)
3.2 Amended and Restated Articles of Incorporation November 1997.(7)
3.3 Bylaws.(2)
3.4 Amended and Restated Articles of Incorporation May 2004 (23)
4.1 1987-I Employee Restricted Stock Plan.(1)
4.2 Form of Restricted Stock Agreement between the Company and
Participating Employees.(1)
4.3 Form of Common Stock Certificate.(3)
4.4 Simtek Corporation 1991 Stock Option Plan.(4)
4.5 Form of Incentive Stock Option Agreement between the Company and
Eligible Employees.(4)
4.6 1994 Non-Qualified Stock Option Plan.(5 )
4.7 Amendment to the 1994 Non-Qualified Stock Option Plan.(6)
4.8 Q-DOT Group, Inc. Incentive Stock Option Plan of March 1994 adopted by
Simtek (15)
4.9 Form of Q-DOT Group, Inc. Incentive Stock Option Agreement between the
Company and Eligible Employees.(15)
4.10 Amendment to the 1994 Non-Qualified Stock Option Plan.(15)
4.11 Amendment to the 1994 Non-Qualified Stock Option Plan (24)
10.1 Form of Non-Competition and Non-Solicitation Agreement between the
Company and certain of its employees.(1)
10.2 Form of Employee Invention and Patent Agreement between the Company
and certain of its employees.(1)
10.3 Product License Development and Support Agreement between Simtek
Corporation and Zentrum Mikroelektronik Dresden GmbH dated June 1,
1994(5)
10.4 Cooperation Agreement between Simtek Corporation and Zentrum
Mikroelektronik Dresden GmbH dated September 14, 1995(6)
10.5 Manufacturing Agreement between Chartered Semiconductor Manufacturing,
PTE, LTD. and Simtek Corporation dated September 16, 1992(6)
10.6 Employment agreement between the Simtek Corporation and Douglas M.
Mitchell(8)
10.7 Share Exchange Agreement dated May 9, 2000 between Simtek Corporation
and Hugh N. Chapman (9)
10.8 Share Exchange Agreement dated June 16, 2000 between Simtek
Corporation and WebGear Inc. (9)
10.9 Share Exchange Agreement dated July 31, 2000 between Simtek
Corporation and Jaskarn Johal and Kashmira S. Johal (10)
10.10 Asset Purchase Agreement between Simtek Corporation and WebGear, Inc.
(11)
10.11 Amendment to Asset Purchase Agreement between Simtek Corporation and
WebGear, Inc. (12)
10.12 Agreement and Plan of Merger among Simtek Corporation, Q-DOT Group,
Inc. and Q-DOT, Inc. (13)
10.13 Employment Agreement between Simtek Corporation and Hugh N. Chapman
(14)
10.14 Technology Development, License and Product Agreement between Amkor
Technology and Simtek (16)
10.15 Manufacturing Services Agreement between Amkor Technology, Inc. and
Simtek Corp (16)
10.16 Convertible Loan Agreement between Simtek Corporation as borrower and
Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US
Growth and Income Trust, PLC and BFSUS Special Opportunities Trust,
PLC as lenders (17)
10.17 7.5% $1,000,000 Convertible Debenture between Simtek Corporation and
BSFSUS Special Opportunities Trust, PLC (17)
10.18 7.5% $1,000,000 Convertible Debenture between Simtek Corporation and
Renaissance Capital Growth & Income Fund III, Inc. (17)
10.19 7.5% $1,000,000 Convertible Debenture between Simtek Corporation and
Renaissance Capital US Growth & Income Trust, PLC (17)
10.20 Borrowers Security Agreement between Simtek Corporation as borrower
and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance
US Growth and Income Trust, PLC and BFSUS Special Opportunities Trust,
PLC as lenders (17)
10.21 Pledge Agreement between Simtek Corporation as borrower and
Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US
Growth and Income Trust, PLC and BFSUS Special Opportunities Trust,
PLC as lenders (17)
76
10.22 Technology Development, License and Product Agreement between Amkor
Technology and Simtek - Amended September 2002 (18)
10.23 Assignment, dated February 21, 2003, of the Agreement(s) between
Simtek Corporation and Amkor Technology, Inc.(19)
10.24 Securities Purchase Agreement between Simtek Corporation and
Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US
Growth and Investment Trust, PLC and BFSUS Special Opportunities
Trust, PLC(20)
10.25 Form of $1.25 Stock Purchase Warrant(20)
10.26 Form of $1.50 Stock Purchase Warrant(20)
10.27 Amendment dated January 27, 2004 between Simtek Corporation and Baja
Properties, LLC (Landlord) (together with amendment dated June 7, 2000
and underlying lease dated July 26, 2000) (21)
10.28 Securities Purchase Agreement, dated October 12, 2004, by and among
the Company, SF Capital Partners Ltd., Bluegrass Growth Fund LP and
Bluegrass Growth Fund LTD (22)
10.29 Form of Warrant (attached as Exhibit A to Securities Purchase
Agreement, dated October 12, 2004, by and among the Company, SF
Capital Partners Ltd., Bluegrass Growth Fund LP and Bluegrass Growth
Fund LTD) (22)
10.30 Form of Registration Rights Agreement (attached as Exhibit B to
Securities Purchase Agreement, dated October 12, 2004, by and among
the Company, SF Capital Partners Ltd., Bluegrass Growth Fund LP and
Bluegrass Growth Fund LTD) (22)
14.1 Code of Business Conduct and Ethics (21)
21.1 Subsidiary of the Registrant
23.1 Consent of Independent Registered Public Accounting Firm
31 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
-------------------
(1) Incorporated by reference to the Company's Form S-1 Registration Statement
(Reg. No. 33-37874) filed with the Commission on November 19, 1990.
(2) Incorporated by reference to the Company's Amendment No.1 to Form S-1
Registration Statement (Reg. No. 33-37874) filed with the Commission on
February 4, 1991.
(3) Incorporated by reference to the Company's Amendment No.2 to Form S-1
Registration Statement (Reg. No. 33-37874) filed with the Commission on
March 4, 1991.
(4) Incorporated by reference to the Company's Form S-1 Registration Statement
(Reg. No. 33-46225) filed with the Commission on March 6, 1992.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K filed
with the Commission on March 25, 1995
(6) Incorporated by reference to the Company's Annual Report on Form 10-K filed
with the Commission on March 27, 1996
(7) Incorporated by reference to the Company's Annual Report on Form 10-K filed
with the Commission on March 24, 1998(8)
(8) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the Commission on March 12, 1999
(9) Incorporated by reference to the Form SB-2 Registration Statement (Reg. No.
333-40988) filed with the Commission on July 7, 2000
(10) Incorporated by reference to the Form 8-K filed with the Commission on
August 14, 2000
(11) Incorporated by reference to the Form 8-K filed with the Commission on
October 13, 2000
(12) Incorporated by reference to the Company's Amendment No. 2 to From SB-2
Registration Statement (Reg. No. 333-40988)
(13) Incorporated by reference to the Company's Form 8-K filed with the March
23, 2001
(14) Incorporated by reference to the Form SB-2 Registration Statement Amendment
#3 (Reg. No. 333-60492) filed with the Commission on September 4, 2001
(15) Incorporated by reference to the Company's Form S-8 Registration Statement
(Reg. No. 333-73794) filed with the Commission on November 20, 2001
(16) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the Commission on March 27, 2002
77
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
filed with the Commission on August 13, 2002
(18) Incorporated be reference to the Company's Quarterly Report on Form 10-QSB
filed with the Commission on November 8, 2002
(19) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the Commission on March 27, 2003
(20) Incorporated by reference from the Current Report on Form 8-K filed by the
Company with the SEC on November 12, 2003
(21) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the Commission on March 4, 2004
(22) Incorporated by reference from the Current Report on Form 8-K filed by the
Company with the Commission on October 12, 2004
(23) Incorporated by reference from the Current Report on Form 8-K filed by the
Company with the Commission on June 2, 2004
(24) Incorporated by reference to the Company's Form S-8 Registration Statement
(Reg. No. 333-121005) filed with the Commission on December 6, 2004
78