Filed Pursuant to Rule 424(b)(3)
Registration No. 333-132180
Prospectus Supplement No. 2 dated December 11, 2006
(to Prospectus dated October 5, 2006)
This Prospectus Supplement No. 2 supplements and amends the Prospectus
dated October 5, 2006, as supplemented and amended by Prospectus Supplement No.
1 dated November 20, 2006 (the "Prospectus"), relating to the resale of
12,106,586 shares of common stock, par value $0.0001 per share, of Simtek
Corporation ("Simtek"). You should read this Prospectus Supplement No. 2 in
conjunction with the Prospectus. Prospectus Supplement No. 2 is not complete
without, and may not be delivered or utilized except in connection with, the
Prospectus, including any amendments or supplements thereto.
Attached hereto and incorporated by reference herein is Simtek's: (a)
Current Report on Form 8-K filed with the Securities and Exchange Commission
("SEC") on December 1, 2006; (b) Current Report on Form 8-K filed with the SEC
on December 7, 2006; (c) Annual Report on Form 10-K/A for the year ended
December 31, 2005 filed with the SEC on December 11, 2006; (d) Quarterly Report
on Form 10-Q/A for the quarter ended March 31, 2006 filed with the SEC on
December 11, 2006; (e) Quarterly Report on Form 10-Q/A for the quarter ended
June 30, 2006 filed with the SEC on December 11, 2006; and (f) Quarterly Report
on Form 10-Q/A for the quarter ended September 30, 2006 filed with the SEC on
December 11, 2006. This Prospectus Supplement No. 2 should be read in
conjunction with, and delivered with, the Prospectus and is qualified by
reference to the Prospectus except to the extent that the information in this
Prospectus Supplement No. 2 supersedes the information contained in the
Prospectus.
The Prospectus, together with this Prospectus Supplement No. 2, constitutes
the prospectus required to be delivered by Section 5(b) of the Securities Act of
1933, as amended, with respect to the offers and sales of the Simtek common
stock offered hereby.
See the section of the Prospectus titled "Risk Factors", beginning on page
4 thereof, for certain factors relating to an investment in the shares of Simtek
common stock offered hereby.
Neither the SEC nor any other state securities commission has approved or
disapproved of the Simtek common stock offered hereby or passed upon the
adequacy or accuracy of the Prospectus or this Prospectus Supplement No. 2. Any
representation to the contrary is a criminal offense.
The date of this Prospectus Supplement No. 2 is December 11, 2006.
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: November 30, 2006
Simtek Corporation
(Exact Name of Registrant as Specified in Charter)
Delaware 0-19027 84-1057605
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification #)
4250 Buckingham Dr. #100, Colorado Springs, CO 80907
(Address of Principal Executive Office)
(719) 531-9444
(Registrant's telephone number, including area code)
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
================================================================================
Item 8.01: Other Events
On November 29, 2006, Simtek Corporation (the "Company") issued a press
release announcing to investors that it is reaffirming its fourth quarter
guidance. A copy of the press release is included herewith as Exhibit 99.1
Item 9.01: Financial Statements and Exhibits
(d) Exhibits
Exhibit Number Description
-------------- -----------
99.1 Press release of the Company dated November 29,
2006, titled "Simtek Reaffrims Fourth Quarter
Guidance"
2
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SIMTEK CORPORATION
By: /s/Brian Alleman
--------------------------------------
Brian Alleman, Chief Financial Officer
November 30, 2006
3
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
99.1 Press release of the Company dated November 29, 2006,
titled "Simtek Reaffirms Fourth Quarter Guidance".
4
Exhibit 99.1
SIMTEK REAFFIRMS FOURTH QUARTER GUIDANCE
Company Reaffirms Q4 Revenue Guidance Range of $9.0 Million to $9.3 Million
New Orders on Pace for Record Bookings in Q4
COLORADO SPRINGS, CO., November 29, 2006, - Simtek Corporation (OTCBB: SMTE),
the inventor, pioneer, and world's leading supplier of nonvolatile static random
access memory (nvSRAM) integrated circuits, announced today that it is on track
to achieve revenue for Q406 in the previously guided range of $9.0 to $9.3
million. Currently new orders for the quarter stand at more than $6 million and
are projected to set a new quarterly booking record in excess of the $11.03
million record set in Q306.
Additionally, Simtek announced that its Real-Time Clock (RTC) products are now
in full volume production, ramping rapidly to meet pent-up demand. Simtek's RTC
integrated with nvSRAM allows for time stamping and storing critical data in the
event of a power loss. The Simtek RTC family of products is unique in the
industry due to the ability to operate up to 6 months without a battery even in
a power outage condition.
Harold Blomquist, Simtek President and CEO, commented, "We are pleased with the
growth we've been able to sustain and are looking forward to achieving our
previously stated Q406 revenue range as bookings for the fourth quarter continue
at a record pace. Our success to date is further evidence that we are executing
on our business plan and continuing to strengthen our position in the
marketplace. We are also excited to announce that our Real-Time Clock family is
now in full volume production and that we are already shipping to customers who
were early adopters of these innovative devices. Initial customer demand for the
RTC is strong and we look forward to capitalizing on this highly innovative, and
long-awaited product offering."
About Simtek Corporation
Simtek Corporation designs and markets high-speed, re-programmable, nonvolatile
semiconductor memory products, for use in a variety of systems including RAID
servers, storage arrays, GPS navigational systems, industrial controllers,
robotics, copiers, avionics, metering, consumer, UPS, and networking and
broadcast equipment. Information on Simtek products can be obtained from its web
site: www.simtek.com; email: information@simtek.com. The company is
headquartered in Colorado Springs, Colorado.
Forward-Looking Statements
This press release contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements predicting
Simtek's future growth. These forward-looking statements are inherently
difficult to predict and involve risks and uncertainties that could cause actual
results to differ materially, including, but not limited to, projections of
future performance including predictions of future profitability and
expectations of the business environment in which Simtek operates. For a
detailed discussion of these and other risk factors, please refer to Simtek's
filings with the Securities and Exchange Commission (SEC), including its Annual
Report on Form 10-K and subsequent Form 10-Q and Form 8-K filings.
For further information, please contact:
Simtek Corp. MKR Group, Inc.
Brian Alleman, CFO Todd Kehrli or Marie Dagresto
information@simtek.com 323-468-2300
---------------------- smte@mkr-group.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: December 4, 2006
Simtek Corporation
(Exact Name of Registrant as Specified in Charter)
Delaware 0-19027 84-1057605
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification #)
4250 Buckingham Dr. #100, Colorado Springs, CO 80907
(Address of Principal Executive Office)
(719) 531-9444
(Registrant's telephone number, including area code)
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
================================================================================
Item 8.01: Other Events
As more fully described in Note 5 to the Consolidated Financial Statements
included in Simtek Corporation's Annual Report on Form 10-K filed on April 7,
2006 and Form 10-K/A filed on April 28, 2006 for fiscal year ended December 31,
2005, the Company sold 68,750,000 shares, pre-reverse split (6,875,000
post-reverse split) of its common stock, subject to certain registration rights
set forth in the registration rights agreement dated December 30, 2005.
Management initially concluded that the net proceeds of $10,332,000 ($8,459,000
received on December 30, 2005 and $1,873,000 received on January 3, 2006) should
be recorded as Temporary Equity due to the potential penalties associated with
the registration rights agreement and the application of certain accounting
rules in light of such penalties. In addition, on September 21, 2006 the Company
sold an additional 11,531,711 shares of common stock, pre-reverse split
(1,153,171 post-reverse split), subject to certain registration rights set forth
in the registration rights agreement dated September 21, 2006, for net proceeds
of $4,515,000. Management initially concluded that the net proceeds of
$4,515,000 should also be recorded as Temporary Equity due to the potential
penalties associated with the registration rights agreement and the application
of certain accounting rules in light of such penalties. Management has
subsequently determined that both of the transactions should have been recorded
in Shareholders' Equity.
The following tables reflect the amounts as previously reported and as restated
for each respective balance sheet date:
December 31, 2005 As
Reported Restated
(Amounts in thousands)
Consolidated Balance Sheet:
Temporary Equity $ 8,459 $ -
Common Stock $ 782 $ 1,470
Additional paid-in capital $ 48,282 $ 56,053
Total shareholders' equity $ 2,860 $ 11,319
March 31, 2006 As
Reported Restated
(Amounts in thousands)
Consolidated Balance Sheet:
Temporary Equity $ 10,332 $ -
Common Stock $ 782 $ 1,470
Additional paid-in capital $ 49,366 $ 59,010
Total shareholders' equity $ 3,043 $ 13,375
June 30, 2006 As
Reported Restated
(Amounts in thousands)
Consolidated Balance Sheet:
Temporary Equity $ 10,332 $ -
Common Stock $ 786 $ 1,474
Additional paid-in capital $ 50,187 $ 59,831
Total shareholders' equity $ 2,490 $ 12,822
2
September 30, 2006 As
Reported Restated
(Amounts in thousands)
Consolidated Balance Sheet:
Temporary Equity $ 14,847 $ -
Common Stock $ 1 $ 2
Additional paid-in capital $ 51,430 $ 66,276
Total shareholders' equity $ 2,715 $ 17,562
Simtek intends to amend its Form 10-K for the year ended December 31, 2005 and
its Forms 10-Q for each of the three months ended March 31, 2006, June 30, 2006
and September 30, 2006. Despite these amendments, management has determined that
the financial statements contained in such filings may continue to be relied
upon. Indeed, management does not consider the changes underlying these
amendments to be material.
3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SIMTEK CORPORATION
By: /s/ Brian Alleman
---------------------------------------
Brian Alleman, Chief Financial Officer
December 7, 2006
4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment #2 to Form 10-K
-------------------------------
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2005
[ ] 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)
Delaware 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 $.0001 Par Value OTC Bulletin Board
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in rule 405 of Securities Act.
Yes No X
--- ---
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes No X
--- ---
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non- accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer Accelerated Filer Non-accelerated filer X
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) Yes No X
--- ---
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2006, based upon the closing
price of the common stock as reported by the OTC Electronic Bulletin Board on
such date was approximately $34,403,258. The total number of shares of Common
Stock issued and outstanding as of December 5, 2006 was 16,147,746, after giving
effect to the one for ten reverse stock split completed on October 5, 2006.
EXPLANATORY NOTE
This Form 10-K/A amends Part II Items 6 Selected Financial Data and 8
Financial Statements and Supplementary Data to reflect the reclassification of
$8,458,926 from Temporary Equity to Shareholders' Equity. Simtek Corporation
originally concluded that the net proceeds from the sale of 68,750,000 shares of
its common stock on December 30, 2005 should be recorded as Temporary Equity
because of certain provisions in the Registration Rights Agreement entered into
as part of the December 30, 2005 transaction described in Note 6 to the
Consolidated Financial Statements. However, upon further review, management has
determined that the transaction should be recorded in Shareholders' Equity.
Except as set forth in this Explanatory Note, this Form 10-K/A does not amend or
update any other information set forth in the Form 10-K/A originally filed by
Simtek Corporation on April 28, 2006 or Form 10-K originally filed on April 7,
2006.
2
TABLE OF CONTENTS
PART I
Item 1: Business...................................................... 4
Item 1A: Risk Factors.................................................. 16
Item 1B: Unresolved Staff Comments..................................... 25
Item 2: Properties.................................................... 25
Item 3: Legal Proceedings............................................. 25
Item 4: Submission of Matters to a Vote of Security Holders........... 25
PART II
Item 5: Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchase of Equity............. 27
Securities.................................................... 27
Item 6: Selected Financial Data....................................... 29
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operation............................ 30
Item 7A: Quantitative and Qualitative Disclosures About Market Risk.... 46
Item 8: Financial Statements and Supplementary Data................... 47
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................... 72
Item 9A: Controls and Procedures....................................... 72
Item 9B: Other Information............................................. 72
PART III
Item 10: Directors and Executive Officers of the Registrant............ 73
Item 11: Executive Compensation........................................ 76
Item 12: Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................... 79
Item 13: Certain Relationships and Related Transactions................ 82
Item 14: Principal Accountant Fees and Services........................ 84
PART IV
Item 15: Exhibits and Financial Statement Schedules.................... 86
Signatures.................................................... 89
3
This annual report on Form 10-K/A 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, including, but not limited to, those factors discussed under
"Risk Factors" under Item 1A below. 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,
our ability to access capital markets, wafer supplies and pricing, 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.
PART I
Item 1: Business
----------------
General
Simtek Corporation ("Simtek" or the "Company") provides integrated circuits
to the electronics market for use in a variety of systems, such as data storage
systems, computers, copiers, factory controllers, electric meters and military
systems. We design, market and sell our products. We subcontract the majority of
our manufacturing requirements. We have designed and developed nonvolatile
static random access memory or "nvSRAM" products since we began business
operations in May 1987 as a Colorado corporation. We have concentrated on the
design and development of the 16, 64, 256-kilobit and 1-megabit nvSRAM 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. However, during 2003, due to adverse
market conditions, we decided to no longer offer our programmed semiconductor
logic products after December 31, 2003.
On December 30, 2005, we acquired from Zentrum Mikroelektronik Dresden AG
("ZMD") certain assets related to ZMD's nvSRAM product line (the "ZMD Asset
Acquisition"). On that same date and in connection with the ZMD Asset
Acquisition, which is described in more detail below, we entered into a number
of agreements including a License Agreement (the "New License Agreement") with
ZMD. Pursuant to the New License Agreement, ZMD assigned its rights in certain
patents devoted to nvSRAM to us and we licensed to ZMD the right to use our
silicon-oxide-nitride-oxide-silicon (SONOS)-based nvSRAM technology for embedded
functions in ZMD's non-competing mixed signal and analog Application Specific
Integrated Circuit (ASIC), System on Chip (SoC) and Application Specific
Standard Product (ASSP) products. The licenses granted pursuant to the New
License Agreement are perpetual, non-exclusive, royalty-free and unlimited. No
fees or payments are due to either party under the New License Agreement. The
New License Agreement shall remain in effect on a country-by-country basis until
4
all patents, trade secrets, and any other proprietary and legal rights subject
thereto have expired or ended, unless terminated earlier by either party
following a breach by the other party that remains uncured after 30 days'
written notice.
On the same date, we executed a Non-Competition and Non-Solicitation
Agreement with ZMD whereby, for a period of five years from the closing, ZMD is
prohibited from competing with certain of our products and from hiring our
employees in certain situations. The parties also executed a Registration Rights
Agreement whereby we agreed to register under the Securities Act of 1933, as
amended (the "Securities Act"), for resale, subject to certain limitations, the
shares issued to ZMD pursuant to the ZMD Asset Acquisition. We have been party
to various product license arrangements and cooperation agreements for over the
last 11 years with ZMD. The new agreements replace all previous agreements.
In January 2006, we formed Simtek GMBH in Dresden Germany, as our
wholly-owned subsidiary. As of March 31, 2006, Simtek GMBH had 9 employees,
including 4 engineers, a sales manager, a customer service person, and 3
administrative employees. This new subsidiary will be our new sales and
marketing center for European customers. The engineers in Dresden will work as
an integral part of our company-wide design and support engineering team.
In May of 2005, we entered into a Production and Development Agreement with
Cypress Semiconductor Corporation ("Cypress") to cooperate in developing a
semiconductor process module that combines our nonvolatile technology with
Cypress' advanced 0.13-micron complementary metal-oxide semiconductor, or CMOS,
fabrication line. The module incorporates SONOS technology, which is used to
manufacture both high-density SONOS flash and SONOS nvSRAM products, for stand
alone and embedded products. During 2005, our research and development team
along with Cypress' research and development team worked aggressively on the
co-development program.
In 2005 we determined that Q-DOT, our wholly owned subsidiary that
specialized in advanced technology research and development for data
acquisition, signal processing, imaging and data communications, no longer fit
with our core non-volatile memory business. We had acquired Q-DOT in March 2001
in an effort to enter the high speed data communications market, addressing both
wired and wireless applications, based on advanced "silicon germanium" process
technology. On August 30, 2005, we along with Q-DOT, entered into an Asset
Purchase Agreement with Hittite Microwave Corporation ("Hittite") and a
wholly-owned subsidiary of Hittite, HMC Acquisition Corporation ("HMC
Acquisition"), whereby substantially all of the assets of Q-DOT were sold to HMC
Acquisition in exchange for a cash payment of approximately $2.2 million. The
Company realized a net gain of approximately $1,687,000. In addition, Hittite
assumed certain future obligations of Q-DOT, including obligations related to
Q-DOT's real estate lease and certain software license agreements. Incident to
the Asset Purchase Agreement, the parties also entered an Escrow Agreement,
whereby $200,000 of the purchase price was placed in escrow for one year to
secure certain indemnification obligations of Simtek and Q-DOT. In addition, the
parties entered into a Confidentiality, Non-Disclosure and Restrictive Covenant
Agreement, whereby, among other things, Simtek and Q-DOT agreed not to compete
against Hittite and HMC Acquisition for a period of four years with respect to
certain businesses relating to Q-DOT's operations.
5
As of December 31, 2005, our backlog for released purchase orders was
approximately $2,559,000, all of which is expected to ship by June 30, 2006.
Comparatively, our backlog for released purchase orders was approximately
$1,971,000 as of December 31, 2004. Orders are generally 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 nvSRAM products from
Chartered Semiconductor Manufacturing Plc. of Singapore, or ("Chartered"),
facility #1 to Chartered's facility #2. We qualified our 0.8-micron family of
nvSRAM products built from wafers received from Chartered's facility #2 for
sales into commercial, industrial and military markets during late 2004 and
early 2005. We refer to these products as our legacy products. During 2003, we
designed and began sampling our 1-megabit nvSRAM product for sale into
commercial and industrial markets. In September 2005, we qualified our 1-megabit
nvSRAM products built on 0.25-micron silicon wafers we receive from DongbuAnam
Semiconductor or "DongbuAnam". We have expanded our product family of nvSRAM
products built on silicon wafers received from DongbuAnam to include a 1-megabit
nvSRAM with real time clock, a 256-kilobit nvSRAM and a 256-kilobit nvSRAM with
real time clock. We anticipate qualification of these three products to occur in
the second quarter of 2006. We refer to the product family built on silicon
wafers we receive from DonguAnam as 0.25-micron products. Our nvSRAM 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 use than static random access memory devices that
achieve nonvolatility by being combined with additional chips.
We reduce our capital requirements by subcontracting the majority of the
manufacturing process to third parties. Chartered began providing silicon
wafers, produced from its facility #1, for our nvSRAM 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 saw lower than average production yields during 2004,
which in turn lowered our gross margins. During 2005, our average production
yields returned to or above historic levels.
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 canceled the project
with X-FAB in August 2004.
6
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 was 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. These products have been discontinued and are no
longer offered to customers.
Amkor Technology, located in the Philippines, provides assembly services
and Integra Technologies Advanced Semiconductor Engineering Inc., located in
Kansas, provides final test services, for our nvSRAM products. In 2006, we plan
to move the final testing of our high volume products to more cost effective
local sub-contract manufacturing partners located in Asia.
During 2005, all of the wafers used to produce our 0.8-micron nvSRAM's were
purchased from Chartered. Sales of these products accounted for approximately
86% of our revenue for 2005. Wafers were purchased from DongbuAnam in 2005 to
support our 0.25-micron products. Sales of these products accounted for
approximately 13% of our revenue for 2005. The remaining sales for the year were
from miscellaneous 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 low power consumption;
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.
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
7
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.
Volatile Nonvolatile Combinations
-------- ----------- ------------
Static Random Access Memories Electrically Erasable Programmable Nonvolatile Static Random Access
(SRAM) Read Only Memory (EEPROM) Memory (nvSRAM)
Dynamic Random Access Memory Flash Memory (FLASH) Nonvolatile Random Access Memory
(DRAM) (nvRAM)
Erasable Programmable Read Only Static Random Access Memory plus
Memory (EEPROM) lithium battery (BatRAM)
Programmable Read Only Memory
Read Only Memory (PROM or ROM)
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, which is called
battery-backed SRAM.
8
Nonvolatile random access memories combine volatile and nonvolatile memory
cells on a single chip and do not require a battery. We believe our nvSRAM
products represent 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 Programmable Read Only
Memory cell to create a small nvSRAM cell. Our unique and patented memory cell
design enables the nvSRAM product 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 nvSRAM product 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 SONOS technology. SONOS 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
patented nvSRAM cell allows high performance nvSRAM's 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 ("nvSRAM"). Our nvSRAM 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 nvSRAM product is
operated in the same manner as most standard 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 nvSRAM products 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 of the fast static
random access memory market. The high-speed characteristics of our nvSRAM
products 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 nvSRAM products 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.
9
The various combinations of density and speed allow our nvSRAM products to
meet the design and performance requirements of many different types of systems.
Our newest nvSRAM 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 nvSRAM design to be quickly developed for emerging
market applications.
We finalized commercial and industrial qualification of two versions of our
initial 64-kilobit nvSRAM product offering in September 1991 and April 1992,
respectively. We completed military qualification of our initial nvSRAM's in May
1992. We began sales into the commercial market of our initial 16-kilobit nvSRAM
product family in 1992. We completed the development and product qualification
of the 64-kilobit AutoStoreTM nvSRAM 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 nvSRAM occurred in 1997 and military
qualification of our 256-kilobit nvSRAM was completed in the second quarter of
1998. In 2002, we qualified our 3-volt 256-kilobit nvSRAM for use in commercial
and industrial applications. During 2003, we designed and began sampling our
1-megabit nvSRAM product for sale into commercial and industrial markets.
Qualification of our 1-megabit nvSRAM product occurred in September 2005. We
qualified our 0.8-micron family of nvSRAM products built from wafers received
from Chartered's facility #2 for sales into commercial, industrial and military
markets during late 2004 and early 2005.
Product Warranties
We presently provide a one-year limited warranty on our products.
Research and Development
Our research and development activities are centered on developing new
nvSRAM products. We also continually work to improve yields and reduce costs on
all of our qualified products. In order to reduce costs, since late 1997 we have
used outside experts for testing our products. In addition, we have a test floor
which is used for evaluation of our technologies, product designs and product
quality.
10
In October 2001, we entered into an agreement with what is now DongbuAnam
Semiconductors to develop a semiconductor process module that combines our
nonvolatile technology with DongbuAnam's advanced 0.25-micron 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 SONOS technology, which is used to
manufacture both high-density SONOS flash and SONOS nvSRAM's, for stand alone
and embedded products. During 2002 and 2003, our research and development team
along with DongbuAnam's research and development team worked on the
co-development program. Our 1-megabit 3-volt nvSRAM was the primary development
vehicle. 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. In
September 2005, we completed the full qualification of our 1-megabit 3-volt
nonvolatile semiconductor memory product for use in the commercial and
industrial market.
In May of 2005, we entered into a Production and Development Agreement with
Cypress to cooperate in developing a semiconductor process module that combines
our nonvolatile technology with Cypress' advanced 0.13-micron digital
complementary metal-oxide semiconductor, or CMOS, fabrication line. The module
incorporates SONOS technology, which is used to manufacture both high-density
SONOS flash and SONOS nvSRAM's, for stand alone and embedded products. During
2005, our research and development team along with Cypress' research and
development team worked on the co-development program.
Our research and development expenditures for the years ended December 31,
2005, 2004 and 2003 were $6,369,109, $4,942,391 and $3,987,054, respectively. We
expect to continue expenditures on research and development, as we expand our
products to include 4 megabit and greater memory densities.
Manufacturing and Quality Control
Our manufacturing strategy is to use subcontractors whose production
capabilities meet the requirements of our product designs and technologies.
Since 1993, Chartered has provided us with silicon wafers for our legacy
products.
DongbuAnam provides silicon wafers for our 0.25-micron process to support
our 1-megabit product family.
Device packaging of our nvSRAM products continues at the Amkor facilities
in the Philippines and Advanced Semiconductor Eng. Inc., in Taiwan. Final test
for our nvSRAM products continues with Integra Technologies, formerly Amkor Test
Services, in Wichita, Kansas, although as previously stated, we plan to move
this function to more cost effective locations in Asia in 2006.
11
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 maintained our certification to the ISO9001:2000 Quality Management
System for our internal operations in Colorado Springs through 2005 through
successful maintenance audits. Our major subcontractors also support ISO-14001
Environmental Control certifications. 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 major
commercial customers and also by Defense Supply Center Columbus or "DSCC" during
2005 as part of routine supplier certification procedures. All such audits were
completed satisfactorily. We have established a RoHS compliance program and are
able to offer fully compliant versions of our products meeting our customers'
deadline of July 1, 2006. We plan to continue to offer both complaint and
non-compliant plating types until demand for the tin/lead plating falls
significantly. RoHS stands for Reduction of Hazardous Substances, which
principally requires the elimination of lead used in products.
Markets
Our memory products are targeted at fast nvSRAM 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 nvSRAM products is a significant benefit
over nonvolatile memory alternatives. 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 nvSRAM is superior to
alternative nonvolatile memory solutions.
We expect to see increasing revenue due to three major factors. The revenue
contribution of 1-megabit nvSRAM products is increasing as Simtek enters 2006.
Overall corporate average selling prices are expected to increase, as customers
migrate from lower density products to higher priced, higher density 1-megabit
nvSRAMs. Finally, we are seeing increased volume of our legacy products, as
targeted end applications continue to experience additional nvSRAM product
adoption and end market growth.
TARGET APPLICATIONS FOR SIMTEK PRODUCTS
Airborne Computers Lighting Control Systems
Automotive Control & Monitoring Systems Medical Instruments
Automated Teller Machines Currency Changers
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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
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 1-megabit nvSRAM is opening new applications into which our products
are being designed. These include designs into an entirely new generation of
integrated Redundant Array of Independent Disks or "RAID" controllers, power
metering, airborne communications, and data communications.
We believe that for 2006, our marketing and sales focus will be to better
penetrate new markets for Simtek such as external RAID arrays and mass storage
subsystems, while further penetrating emerging data communications and new
automotive applications.
Sales and Distribution
Our strategy is to generate sales through the use of independent sales
representative agencies and distributors supported by Simtek sales and technical
personnel. We believe this strategy provides the fastest and most cost effective
way to assemble a large and professional sales force.
We currently have four sales and marketing offices. They are located in
Colorado, Georgia and California for the North American and Asian markets, and
in Dresden Germany for the European market. We have engaged approximately 20
sales independent representative organizations and approximately 30 distributor
organizations with 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 assigned geographic
territories. Distributors inventory and sell products from a larger number of
13
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
support and 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
brochures, data sheets, application notes, product collateral and product
advertising with our internal marketing resources and contracted outside
services. Much of this information can be found on the Simtek website at
www.simtek.com.
Customers and Backlog
We have shipped qualified nvSRAM products to customers directly and through
distributors since our initial commercial product qualification in September
1991. The majority of our sales are to Fortune 500 companies. Sales by
geographic area for the years ended December 31, 2005, 2004, and 2003 were as
follows (as a percentage of sales):
2005 2004 2003
---- ---- ----
United States 26% 29% 37%
Europe 18% 11% 12%
Far East:
China 5% 0% 0%
Japan 11% 12% 20%
Singapore 15% 11% 20%
Taiwan 11% 17% 3%
Thailand 2% 6% 0%
Far East Other 2% 2% 3%
Other 10% 12% 5%
Total 100% 100% 100%
As of December 31, 2005, we had a backlog of unshipped customer orders of
approximately $2,559,000, which we expect to ship by June 30, 2006.
Comparatively, our backlog for unshipped customer orders was approximately
$1,971,000 as of December 31, 2004. 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.
Competition
Our products compete on the basis of several factors, including data access
speeds, programming speeds, density, data retention, reliability, programming
endurance, space savings, manufacturability, ease of use and price.
14
Simtek's products fall into a memory category commonly referred to as nvRAM
(nonvolatile Random Access Memory). nvRAM products that compete with our family
of nvSRAM products fall into two categories.
The first category of products that compete with our nvSRAM products is
products that combine static random access memories, power management devices
with lithium batteries in specially adapted packages. These products generally
are slower in access speeds than our nvSRAM products due in part to limitations
caused by the life of the lithium battery when coupled with a faster static
random access memory. Our nvSRAM products 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 nvSRAM
products eliminate common problems associated with batteries such as corrosion,
premature wear-out, shelf-life maintenance, inventory management and leaded
content. Our nvSRAM's 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 16-megabit and greater per package.
Companies currently supplying products with lithium batteries include Maxim, ST
Microelectronics and Texas Instruments.
The second category consists of ferroelectric random access memory or
commonly referred to as FRAM. FRAM memories use a capacitor with a ferroelectric
dielectric as a storage element and a specialized transistor as a selection
element. The use of ferroelectric materials for nvRAM has been researched for
more than three decades but only few companies have been able to commercialized
the technology. The major reason appears to be the very challenging
manufacturing process. Typically capacities of FRAM are small. FRAM is
considered a solution in applications that require low densities and low power
where it has a competitive advantage over our nvSRAMs. FRAM's major disadvantage
is limited memory endurance due to the destructive nature of the read out cycle.
The major sources for FRAM stand alone memory components are Ramtron, OKI and
Fujitsu. While other companies such as TI have licensed the FRAM technology from
Ramtron, it is expected that TI will embed the FRAM memory into a more complex
ASSP.
Based on market research data from Web Feet Research, we estimate the Simtek
nvSRAM market share to be approximately 7% of the total nvRAM market. However,
with increasing revenues, this market share is expected to increase in 2006.
We are aware of other semiconductor technologies for nonvolatile memory
products. Each of these requires a newly developed process technology, which has
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. Freescale is believed to be developing
such magnetic film products.
15
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 nvSRAM 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 17 patents in
the United States on our nvSRAM cell and other circuit designs. These patents
relate to circuit implementations used to design our 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 from 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.
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.
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 the Form 10-K filed on April 7, 2006, we had 52 full-time
employees.
16
Item 1A. Risk Factors
---------------------
LIMITED OPERATING CAPITAL AND ABILITY TO RAISE ADDITIONAL MONEY MAY HARM OUR
ABILITY TO DEVELOP AND MARKET PRODUCTS
We require significant capital for product development, subcontracted
production, and marketing. We have funded these needs from the sale of products,
the sale of product and technology licenses, from royalties, as well as from the
sale of our convertible debt and equity securities.
We have not seen any significant increase in product sales in the past year
and gross margins are less than anticipated. Our cash requirements have been
difficult to meet. We cannot guarantee that we will be able to achieve an
increase in product sales and gross margins. We may need more capital in the
future to develop new products. We are not sure that we will be able to raise
more capital on reasonable terms, if at all. If we cannot, then we may not be
able to develop and market new products. The development, subcontracted
production and marketing of existing products may also suffer, causing our
financial position and stock price to deteriorate.
WE MAY EXPERIENCE OPERATING LOSSES IN THE NEXT SEVERAL YEARS
We began business in 1987. Through December 31, 2005, we had accumulated
losses of approximately $46.0 million. We realized net income for the first time
for the year ended December 31, 1997 and continued to realize net income through
June 30, 2000. Subsequent to June 30, 2000 and through December 31, 2005, we
realized net losses primarily as a result of accounting charges, from the
purchase of incomplete research and development in September 2000, decreased
revenue, decreased gross margins, increased competitive pressures and increased
research and development costs related to new product development. We may
continue to experience net operating losses in the future. Continuing net
operating losses could materially harm our results of operations, increase our
need for additional capital in the future, and hurt our stock price.
WE MIGHT NOT BE ABLE TO RE-GAIN COMPLIANCE WITH CERTAIN COVENANTS SET FORTH IN
OUR LOAN AGREEMENT WITH THE RENN CAPITAL GROUP; IF WE ARE UNABLE TO DO SO, THE
RENN CAPITAL GROUP COULD ACCELERATE THE $3 MILLION LOAN AND FORECLOSE ON THE
COLLATERAL THAT WE GRANTED TO IT
Our loan agreement with Renaissance Capital Growth and Income Fund III,
Inc., Renaissance US Growth Investment Trust PLC and BFSUS Special Opportunities
Trust PLC, or the RENN Capital Group, formerly Renaissance Capital Group, Inc.,
contains various financial covenants. As of December 31, 2005, we were not in
compliance with two of the covenants set forth in the loan agreement, which
covenants relate to the interest coverage ratio and debt to equity ratio. On
March 21, 2006, we received a waiver for the two covenants through January 1,
2007. However, significant variances in future actual operations from our
current estimates could result in the reclassification of this note to a current
liability. If the note becomes due and we cannot pay it, RENN Capital Group may
foreclose on the assets that we pledged as security for the note. This would
significantly harm our business.
17
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE THE ASSETS ACQUIRED FROM ZMD ON
DECEMBER 30, 2005
On December 30, 2005, we closed our acquisition from ZMD of certain
intellectual property and assets related to ZMD's nvSRAM product line. We may be
unable to integrate successfully into our operations the assets acquired from
ZMD, including:
o by a failure to gain customer agreement to purchase products from us
or to qualify our designs or processes;
o by a failure to coordinate international operations, relationships and
facilities, which may be subject to additional constraints imposed by
geographic distance, local laws and regulations; and
o by a failure to implement and maintain uniform standards, internal
controls, business processes, procedures, policies and information
systems.
Our failure to meet any of these challenges could cause us to fail to
realize any accretive benefits of the acquisition of the assets from ZMD and
could seriously harm our results of operations.
WE MAY BE UNABLE TO RETAIN AN EFFECTIVE FOCUS IN OUR INDUSTRY OR RETAIN
CUSTOMERS FOLLOWING THE ACQUISITION OF ASSETS FROM ZMD
The challenges to us as a result of the acquisition of certain intellectual
property and assets from ZMD on December 30, 2005 include:
o communicating a strategic vision to the market regarding us and
executing on that strategic vision;
o implementing sales and marketing efforts to effectively communicate to
customers our capabilities;
o overcoming possible concerns of certain customers about not having two
sources of supply for the products they previously purchased from both
ZMD and us;
18
o gaining acceptance from former ZMD customers for our designs, products
or processes; and
o overcoming any perceived adverse changes in business focus, including
demonstrating to customers that the acquisition of certain assets from
ZMD will not result in an adverse change in customer service standards
or business focus and helping customers conduct business easily with
us going forward.
The failure to meet any of these challenges could seriously hinder our
plans for product development as well as business and market expansion following
the acquisition of certain intellectual property and assets from ZMD.
IF WE CANNOT RECEIVE SILICON WAFERS WE REQUIRE TO MANUFACTURE OUR PRODUCTS FROM
OUR SILICON WAFER MANUFACTURERS AT THE VOLUMES OR THE PRICES WE REQUIRE, OUR
REVENUES, EARNINGS AND STOCK PRICE COULD SUFFER
We currently purchase the silicon wafers we require to build our
non-volatile memory products from three vendors, Chartered Semiconductor
Manufacturing Plc. of Singapore, DongbuAnam Semiconductors in Korea and ZFoundry
in Germany. Due to the volatility of the semiconductor market, we have limited
control over the pricing and availability of the wafers we require in order to
build our products. The risk of not receiving the products and pricing we need
to achieve our revenue objectives has escalated. If we are unable to obtain the
products and pricing we need from these vendors, our business could suffer.
THE UNCERTAINTY INVOLVED IN MANUFACTURING SEMICONDUCTORS MAY INCREASE THE COSTS
AND DECREASE THE PRODUCTION OF OUR PRODUCTS
In order for us to become profitable, we must drive our manufacturing costs
down and secure the production of sufficient product. Semiconductor
manufacturing depends on many factors that are complex and beyond our control
and often beyond the control of our subcontractors. These factors include
contaminants in the manufacturing environment, impurities in the raw materials
used and equipment malfunctions. Under our arrangements with our subcontractors,
our subcontractors pass on to us substantially all of their costs that are
unique to the manufacture of our products. Accordingly, these factors could
increase the cost of manufacturing our products and decrease our profits. These
factors could also reduce the number of semiconductor memories that our
subcontractors are able to make in a production run. If our subcontractors
produce fewer of our products, our revenues may decline.
DELAYS IN MANUFACTURING MAY NEGATIVELY IMPACT OUR REVENUE AND NET INCOME
It takes approximately three months for our subcontractors to manufacture
our semiconductor memories. Any delays in receiving silicon wafers or completed
products from our subcontractors will delay our ability to deliver our products
to customers. This would delay sales revenue and could cause our customers to
cancel existing orders or not place future orders. These delays could occur at
any time and would affect our net income.
19
WE DEPEND ON INDEPENDENT SALES REPRESENTATIVES AND DISTRIBUTORS TO SELL OUR
PRODUCTS AND THE TERMINATION OF ANY OF THESE RELATIONSHIPS MAY HARM OUR REVENUE
We use independent sales representatives and distributors to sell the
majority of our products. The agreements with these sales representatives and
distributors can be terminated without cause by either party with 30 to 90 days
written notice. If one or more of our sales representatives or distributors
terminates our relationship, we may not be able to find replacement sales
representatives and distributors on acceptable terms or at all. This could
affect our profitability. In addition, during 2005, 2004 and 2003 approximately
51%, 50% and 42% of our product sales were to four distributors. We cannot be
certain that we will be able to maintain our relationship with these
distributors.
DELAYS IN OR FAILURE OF PRODUCT QUALIFICATION MAY HARM OUR BUSINESS
Prior to selling a product, we must establish that it meets expected
performance and reliability standards. As part of this testing process, known as
product qualification, we subject representative samples of products to a
variety of tests to ensure that performance in accordance with commercial,
industrial and military specifications, as applicable. If we are unable to
successfully accomplish product qualification for our future products, we will
be unable to sell these future products. Even with successful initial product
qualifications, we cannot be assured that we will be able to maintain product
qualification or achieve sufficient sales to meet our operating requirements.
OUR SUCCESS DEPENDS ON OUR ABILITY TO INTRODUCE NEW PRODUCTS
The semiconductor industry is characterized by rapid changes in technology
and product obsolescence. Our success in the semiconductor industry depends in
part upon our ability to expand our existing product families and to develop and
market new products. The technology we currently use may be made obsolete by
other competing or newly developed memory or other technologies. The development
of new semiconductor designs and technologies typically requires substantial
costs for research and development. Even if we are able to develop new products,
the success of each new product depends on several factors including whether we
selected the proper product and our ability to introduce it at the right time,
whether the product is able to achieve acceptable production yields and whether
the market accepts the new product. We cannot guarantee that we will be
successful in developing new products or whether any products that we do develop
will satisfy the above factors. In September 2003, we began shipping samples of
our 1 megabit 3 volt nonvolatile semiconductor memory product. While we achieved
production qualification on this product in September 2005, we cannot assure you
that we will not discover technical problems or manufacturing concerns with this
new product, that demand will continue to develop for the new product or that we
will be able to continue to sell this new product at a profit.
THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY MAY PREVENT US FROM MAINTAINING A
CONSISTENT REVENUE STREAM AND MAY HARM OUR STOCK PRICE
The semiconductor industry has historically experienced significant peaks
and valleys in sales volumes resulting in large variations of revenues and
20
resulting profits or losses. We do not have direct influence on the nature of
the broad semiconductor market. Variations in the revenues and profits within
the semiconductor industry may cause us to incur significant losses in the
future. If the stock prices of many other semiconductor companies decrease, our
stock price may also suffer.
IF WE FAIL TO SUCCESSFULLY IMPLEMENT PRODUCTS WITH CYPRESS SEMICONDUCTOR, OUR
LIQUIDITY AND FUTURE REVENUES MAY SUFFER
On May 5, 2005, we closed a production and development agreement with
Cypress Semiconductor Corporation to jointly develop an "S8" 0.13-micron SONOS
nonvolatile memory production process. The production and development agreement
also calls for Cypress to produce one or more Simtek products, as designated by
Simtek, using the S8 process. We cannot assure you that we will be able to
successfully develop and bring to qualified volume production products based on
the S8 process or that Cypress will be able to develop embedded products
contemplated to be developed using Simtek's intellectual property. If the
development of the S8 process is delayed or fails, or if Cypress is unable to
meet our production requirements, we might not be able to meet potential future
orders planned to be received from our customers. This could significantly harm
our revenue and future growth potential. We also entered into an escrow
agreement pursuant to which we deposited $3 million into an escrow account in
order to support and make certain payments for the S8 process and product
developments. If we fail to complete the development and production agreement,
we might forfeit our rights to the escrow amount. This could harm our liquidity
position.
OUR AGREEMENT WITH CYPRESS SEMICONDUCTOR CORPORATION MAY CONSUME OUR LIMITED
RESOURCES OF ENGINEERS AND CONSUME A SIGNIFICANT AMOUNT OF OUR WORKING CAPITAL
PREVENTING US FROM COMPLETING OTHER TASKS
Our production and development agreement with Cypress may consume a
considerable amount of our engineering resources, which may limit the resources
available to maintain or improve our production yields on our existing products
and develop other new and derivative products. In addition to these indirect
expenses related to our engineering resources, our obligations under the
production and development agreement will consume a significant amount of our
working capital until December 31, 2006. This may harm our business and stock
price.
THE DECEMBER 30, 2005 SECURITIES PURCHASE AGREEMENT AND RELATED DOCUMENTS
PROVIDE FOR CASH PENALTIES IF WE FAIL TO FOLLOW CERTAIN PROCEDURES OR MAINTAIN
AN EFFECTIVE REGISTRATION RELATED TO THE SHARES PURCHASED BY SUCH INVESTORS
The Registration Rights Agreement entered into as part of the December 30,
2005 Securities Purchase Agreement amounting to $11,000,000 contained a cash
penalty provision if certain procedures are not followed or an effective
Registration Statement is not maintained for the 68,750,000 shares purchased by
investors. The cash penalties are 2% of the proceeds for each month that a
breach occurs. We cannot assure you that we will be able to follow the required
procedures or obtain or maintain such effective Registration Statement.
21
INTENSE COMPETITION IN THE SEMICONDUCTOR INDUSTRY MAY CAUSE US TO LOSE SALES
REVENUE TO OTHER SUPPLIERS
There is intense competition in the semiconductor industry. We experience
competition from a number of domestic and foreign companies, most of which have
significantly greater financial, technical, manufacturing and marketing
resources than we have. Our competitors include major corporations with
worldwide silicon wafer fabrication facilities and circuit production facilities
and diverse, established product lines. We also compete with companies, such as
Ramtron International Corporation, attempting to obtain a share of the market
for our product families. If any of our new products achieve market acceptance,
other companies may sell competitive products at prices below ours. This would
have an adverse effect on our operating results.
THE LOSS OF KEY EMPLOYEES COULD MATERIALLY AFFECT OUR FINANCIAL RESULTS
Our success depends in large part on our ability to attract and retain
qualified technical and management personnel. There are limited personnel
trained in the semiconductor industry resulting in intense competition for these
personnel. If we lose any of our key personnel, this could have a material
adverse affect on our ability to conduct our business and on our financial
results.
OUR PATENTS MAY NOT PROVIDE US EFFECTIVE INTELLECTUAL PROPERTY PROTECTION; THIS
COULD HARM OUR BUSINESS
We have been issued 17 U.S. patents (and assigned one other U.S. patent and
three German patents) relating to specific aspects of our current products. We
have also applied outside the United States for patents on our technology. We
are not sure that any of the patents for which we have applied will be issued
or, even if they are issued, will provide us with meaningful protection from
competition. We may also not have the money required to maintain or enforce our
patent rights. Notwithstanding our patents, other companies may obtain patents
similar or relating to our patents.
We seek to protect a significant portion of our 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.
IF OUR PRODUCTS AND TECHNOLOGY INFRINGE ON THIRD PARTY PATENTS, OUR PRODUCT
SALES OR GROSS MARGINS MAY SUFFER
We have not determined whether our products are free from infringement of
others' patents. If patent infringement claims are asserted against us and are
upheld, we will try to modify our products so that they are non-infringing. If
we are unable to do so, we will have to obtain a license to sell those products
or stop selling the products for which the claims are asserted. We may not be
able to obtain the required licenses. Any successful infringement claim against
us, our failure to obtain any required license or requirement for us to stop
selling any of our products, may force us to discontinue production and shipment
of these products. This may result in reduced product sales and harm our
revenues.
In 1998, we received notice of a claim for an unspecified amount from a
foundation that owns approximately 180 patents and 70 pending applications. The
foundation claimed that some of the machines and processes used in the building
22
of our semiconductor devices infringe on the foundation's patents. In April
1999, we reached an agreement with the foundation for us to purchase a
nonexclusive license of the foundation's patents, based on our product offerings
and sales forecast at that time. If our products or actual sales revenue vary
significantly from the time of the agreement, we may be subject to additional
payments.
In late 2002, we received notice of possible patent infringement from a
corporation that has acquired a portfolio of patents. We have reviewed the claim
and believe there are no potential infringements. We have received no further
notification from this corporation. While there can be no assurances, if there
are any infringements, we believe we will be able to enter into a licensing
agreement with such company without any material impact on us.
FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS MAY INCREASE OUR COSTS, LOWER OUR
REVENUES AND CAUSE LOSS OF CUSTOMERS TO OUR COMPETITORS
We purchase materials, including silicon wafers, from outside the United
States. Sales to customers located outside of the United States for the years
ended December 31, 2005, 2004 and 2003 were 74%, 71% and 63%, respectively. We
operate using United States dollars as the functional currency. Changes in
foreign currency exchange rates can reduce our revenues and increase our costs.
For example, our subcontractors may increase the prices they charge us, on a per
purchase order basis, for silicon wafers if the United States dollar weakens.
Any large exchange rate fluctuation could affect our ability to compete with
manufacturers who operate using foreign currencies. We do not try to reduce our
exposure to these exchange rate risks by using hedging transactions. Although we
have not had any material losses due to exchange rate fluctuations over the last
three years, we cannot assure you that we will not incur significant losses in
the future.
BECAUSE OUR COMMON STOCK IS LISTED ONLY ON THE OTC ELECTRONIC BULLETIN BOARD, IT
WILL BE MORE DIFFICULT TO SELL OUR COMMON STOCK
Our common stock is listed on the OTC Electronic Bulletin Board under the
symbol "SMTE." Our common stock was listed on the NASDAQ Small-Cap Market until
July 18, 1995, but, because we no longer met NASDAQ's listing requirements, our
common stock transferred to the OTC Electronic Bulletin Board as mandated by
NASDAQ rules. We may not be able to meet the requirements for relisting our
common stock on NASDAQ or listing on any other exchange in the near future or in
the longer term.
Securities that are not listed on the NASDAQ Small-Cap Market or other
exchange are subject to a Securities and Exchange Commission rule that imposes
special requirements on broker-dealers who sell those securities to persons
other than their established customers and accredited investors. The
broker-dealer must determine that the security is suitable for the purchaser and
must obtain the purchaser's written consent prior to the sale. These
requirements may make it more difficult for our security holders to sell their
securities and may affect our ability to raise more capital. It may also make it
harder for you to sell our stock than the stock of some other companies.
23
IF WE ISSUE SECURITIES AT LOW PRICES IN THE FUTURE, SOME OF OUR SECURITY HOLDERS
MAY BE ENTITLED TO ACQUIRE MORE OF OUR SECURITIES, WHICH MAY DILUTE AND HARM THE
HOLDERS OF OUR COMMON STOCK
We may be obligated under agreements with certain of our security holders
to issue to them additional securities in exchange for little or no
consideration if we sell our securities in the future at or below certain
prices. The issuance of such securities could dilute and harm the holders of our
common stock.
BECAUSE WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE, YOUR
INVESTMENT RETURN MAY BE LIMITED
We have never paid cash dividends on our common stock. We do not expect to
pay dividends in the foreseeable future. We intend to use any earnings to
finance growth. You should not expect to receive dividends on your shares of
common stock.
IF OUR BOARD OF DIRECTORS AUTHORIZES THE ISSUANCE OF PREFERRED STOCK, HOLDERS OF
OUR COMMON STOCK COULD BE DILUTED AND HARMED
Our board of directors has the authority to issue up to 2,000,000 shares of
preferred stock in one or more series and to establish the preferred stock's
voting powers, preferences and other rights and qualifications without any
further vote or action by the shareholders. The issuance of preferred stock by
our board of directors could dilute and harm the rights of the holders of our
common stock. It could potentially be used to discourage attempts by others to
obtain control of us through merger, tender offer, proxy contest or otherwise by
making such attempts more difficult to achieve or more costly. Given our present
capital requirements, it is possible that we may need to raise capital through
the sale of preferred stock in the future.
STANDARDS FOR COMPLIANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 ARE
UNCERTAIN, AND IF WE FAIL TO COMPLY IN A TIMELY MANNER, OUR BUSINESS COULD BE
HARMED AND OUR STOCK PRICE WOULD DECLINE.
Rules adopted by the Securities and Exchange Commission pursuant to Section
404 of the Sarbanes-Oxley Act require annual assessment of our internal control
over financial reporting, and attestation of our assessment by our independent
auditors. This requirement may apply to our Annual Report on Form 10-K for the
fiscal year ending December 31, 2007, or based on certain qualifying 2006
standards, for the fiscal year ending December 31, 2006. The standards that must
be met for management to assess the internal control over financial reporting as
effective are new and complex, and require significant documentation, testing
and possible remediation to meet the detailed standards. We may encounter
problems or delays in completing activities necessary to make an assessment of
our internal control over financial reporting. In addition, the attestation
process by our independent auditors is new and we may encounter problems or
delays in completing the implementation of any requested improvements or
remediation and receiving an attestation of our assessment by our independent
auditors. We can provide no assurance as to our, or our independent auditors',
conclusions at December 31, 2006 (or 2007 as required by regulations), with
respect to the effectiveness of our internal control over financial reporting.
The above factors creates a risk that we, or our independent auditors, will not
be able to conclude at December 31, 2006 (or 2007 as required by regulations)
24
that our internal controls over financial reporting are effective as required by
the Sarbanes-Oxley Act. If we cannot assess our internal control over financial
reporting as effective, or if our independent auditors are unable to provide an
unqualified attestation report on such assessment, investors could lose
confidence in our reported financial information and the trading price of our
stock could drop.
Item 1B: Unresolved Staff Comments
----------------------------------
None.
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 is scheduled to expire on February 28, 2013. In
February 2006, we entered into a lease agreement for our facility in Dresden,
Germany, we lease approximately 2,800 square feet. The lease is schedule to
expire on February 28, 2009.
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. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
On October 27, 2005, we held an annual meeting of our shareholders for
purposes of considering and voting upon a proposal to elect two directors to our
board of directors each to serve for a three year term and considering and
voting upon a proposal to ratify the selection of Hein & Associates LLP,
independent auditors, as auditors of Simtek for the year ending December 31,
2005. As of the record date, September 12, 2005, we had 70,540,604 shares of
common stock outstanding and the count of shares represented by proxy at the
meeting was 62,165,595, a sufficient number of voting shares to constitute a
quorum. Final results of the voting for each proposal is as follows:
25
1. Election of Directors For Withheld
--------------------- --- --------
Harold Blomquist 60,607,733 1,589,112
Robert Pearson 60,837,477 1,351,368
2. Ratification of Selection of Auditors
-------------------------------------
For Against Abstain
--- ------- -------
61,011,707 366,492 818,646
26
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
----------------------------------------------------------------------
Issuer Purchases of Equity Securities
-------------------------------------
Our common stock is listed on the OTC Electronic Bulletin Board under the
symbol "SMTE." 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 are 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
-------- -------
2004
First Quarter................................... 1.64 1.56
Second Quarter.................................. .72 .68
Third Quarter................................... .62 .60
Fourth Quarter.................................. .61 .59
2005
First Quarter................................... .57 .56
Second Quarter.................................. .375 .335
Third Quarter................................... .38 .34
Fourth Quarter.................................. .29 .26
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, 2005, we had 469 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.
Harold Blomquist, our current President and Chief Executive Officer,
purchased 200,000 shares of our common stock for $108,400 on May 19, 2005, and
27
275,000 shares of our common stock for $81,950 on November 9, 2005, in each case
pursuant to Mr. Blomquist's employment agreement with us. We issued 150,000
shares of our common stock to Douglas Mitchell, our former President, Chief
Executive Officer and Chief Financial Officer (acting), on June 15, 2005, and
50,000 shares of our common stock on November 25, 2005, in each case pursuant to
the terms of his separation agreement with us. With respect to the issuances to
Mr. Blomquist and Mr. Mitchell, we issued such securities in reliance upon Rule
506 promulgated under, and Section 4(2) of, the Securities Act, as each is or
was an officer and director of Simtek, each is a sophisticated investor, each
had access to material information of Simtek and there was no general
solicitation.
On June 28, 2005, we issued warrants to purchase 200,000 shares of our
common stock to the RENN Capital Group in exchange for a waiver of certain
provisions relating to the 7.5% convertible debentures issued to the RENN
Capital Group in 2002. These warrants have 5-year terms with an exercise price
of $0.50 per share. With respect to our June 28, 2005 transaction, we issued
such securities in reliance upon Rule 506 promulgated under, and Section 4(2)
of, the Securities Act, as the RENN Capital Group are sophisticated, accredited
investors, there was no general solicitation and the RENN Capital Group had
access to material information of Simtek.
In connection with an offering of $11,000,000 of our common stock on
December 30, 2005, we issued a warrant to purchase 1,062,500 shares of our
common stock to C. E. Unterberg, Towbin, the investment banking firm that
advised us in the December 30, 2005 offering, as partial payment for such
services. This warrant has a five-year term and an exercise price of $0.28 per
share. With respect to our issuance to C. E. Unterberg, Towbin, we issued such
securities in reliance upon Rule 506 promulgated under, and Section 4(2) of, the
Securities Act, as such holder is sophisticated, an accredited investor, there
was no general solicitation and such holder had access to material information
of Simtek.
The following table sets forth information with respect to our equity
compensation plans as of December 31, 2005.
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 not
approved by security holders
7,969,363 $0.62 1,630,306
------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 7,969,363 $0.62 1,630,306
------------------------------- ---------------------------- ---------------------------- ----------------------------
Please see Note 6, "Stock Option Plans," to our Financial Statements included
herewith.
28
Item 6: Selected Financial Data
-------------------------------
The following selected financial data should be read in conjunction with,
and are qualified in their entirety by, the consolidated financial statements
and related notes thereto contained in "Item 8. Financial Statements and
Supplementary Data" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" included herein.
Years Ended December 31,
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(As Restated)
-------------
(in thousands, except per share data)
Revenue $ 10,385 $ 13,092 $ 12,263 $12,422 $ 15,450
Gross margin 2,794 3,953 3,735 4,844 4,992
Loss from continuing
Operations (7,490) (3,731) (2,389) (1,028) (925)
Income (loss) from
Discontinued operation 1,704 60 116 65 (195)
Net loss $ (5,785) $ (3,670) $ (2,273) $ (963) (1,120)
Loss per share from
Continuing operations:
Basic and diluted $ (.11) $ (.06) $ (.04) $ (.02) $ (.02)
Income per share from
Discontinued operations:
Basic and diluted $ .03 $ .00 $ .00 $ .00 $ .00
Total loss per share
Basic and diluted $ (.08) $ (.06) $ (.04) $ (.02) $ (.02)
Working capital 3,591 4,122 1,610 5,473 3,489
Total assets 18,758 7,976 7,303 7,932 6,587
Total long term debt 2,760 3,000 3,000 3,000 -
Shareholders' equity 11,319 1,989 2,523 3,253 4,230
Cash dividends per common
Share (1) - - - - -
(1) We have not declared any cash dividends on our common stock and do not
expect to pay such dividends in the foreseeable future.
29
Item 7: Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
Overview of Recent Debt and Equity Transactions
As described in "Item 5. Market for Registrant's Common Stock, Related
Security Holder Matters and Issuer Purchases of Equity Securities", on May 5,
2005, we closed a share purchase agreement for a $4,000,000 private placement of
6,740,816 shares of our common stock and warrants to acquire 5,055,612 shares of
our common stock with Cypress Semiconductor Corporation, as well as a production
and development agreement with Cypress to jointly develop an "S8" 0.13-micron
SONOS nonvolatile memory production process. The production and development
ag reement also calls for Cypress to produce one or more Simtek products, as
designated by Simtek, using the S8 process. The warrants have a 10-year term
with an exercise price of $0.7772.
On June 28, 2005, we issued warrants to purchase 200,000 shares of our
common stock to the RENN Capital Group in exchange for a waiver of certain
provisions relating to the 7.5% convertible debentures issued to the RENN
Capital Group in 2002. These warrants have 5-year terms with an exercise price
of $0.50 per share.
On December 30, 2005, we issued to ZMD 6,260,713 shares of our common stock
as partial payment for the assets we acquired from ZMD pursuant to the Asset
Purchase Agreement, dated December 7, 2005, between us and ZMD.
On December 30, 2005, we issued, for an aggregate price of $11,000,000, the
amounts of shares indicated to the following investors: Crestview Capital Master
LLC (24,687,500 shares); Straus Partners, LP (781,250 shares); Straus GEPT
Partners, LP (781,250 shares); Big Bend XXVII Investments, L.P. (14,375,000
shares); Toibb Investment LLC (11,875,000 shares); Michael Seedman (625,000
shares); RENN Capital Group (9,375,000 shares); and SF Capital Partners Ltd.
(6,250,000 shares). In addition, on December 30, 2005, we issued a warrant to
purchase 1,062,500 shares of our common stock to C. E. Unterberg, Towbin, the
investment banking firm that advised us in the December 30, 2005 offering, as
partial payment for such services. This warrant has a five-year term and an
exercise price of $0.28 per share. We used the majority of the $11,000,000
proceeds of the December 30, 2005 offering to fund the acquisition of assets
from ZMD pursuant to the Asset Purchase Agreement, dated December 7, 2005,
between us and ZMD.
In connection with the sale of $11,000,000 of our common stock on December
30, 2005, instead of lowering the conversion price of the 7.5% convertible
debentures issued to the RENN Capital Group in 2002, as required by the terms of
the 2002 convertible debentures, from $0.312 per share to $0.16 per share as a
result of the December 30, 2005 offering at $0.16 per share, we agreed with the
RENN Capital Group that the conversion price would only be lowered to $0.22 per
share as a result of the December 30, 2005 offering. As a result, instead of
just 9,615,384 shares issuable upon conversion of the 2002 debentures (which
would be the case were the conversion price still $0.312 per share), there are
30
currently a total of 13,636,364 shares of common stock that are issuable to the
RENN Capital Group upon conversion of the debentures as a result of the
reduction of the conversion price to $0.22 per share.
Also in connection with the sale of $11,000,000 of our common stock on
December 30, 2005, we agreed with Bluegrass Growth Fund LP, Bluegrass Growth
Fund LTD and SF Capital Partners Ltd. that in exchange for their waiver of
certain participation rights held by them in connection with the December 30,
2005 offering, the exercise price of their warrants to acquire 2,579,980 shares
of our common stock would be lowered from $0.627 per share to $0.265 per share.
Results of Operations
General. We have designed and developed nvSRAM random access products since
we commenced business operations in May 1987. We have concentrated on the design
and development of our nvSRAM 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 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 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 and first quarter of 2005, 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%, 97% and 94% of our total revenue for the years ended December
31, 2005, December 31, 2004 and for December 31, 2003, respectively.
We have also been working with DongbuAnam on 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 nvSRAM's for stand alone embedded products. The primary development product
is our 1-megabit 3-volt nvSRAM. In September 2003, we began shipping samples of
the 1-megabit 3-volt nvSRAM. In September 2005, we qualified our 1-megabit
products for use in the commercial and industrial markets. During the third
quarter of 2004, we began receiving initial production orders. Sales of our
1-megabit 3-volt products accounted for approximately 13% and 3% of our total
revenue for the years ended December 31, 2005 and December 31, 2004,
respectively.
As discussed previously, on December 30, 2005, we closed on the acquisition
of certain assets related to ZMD's nvSRAM product line. This acquisition had no
31
effect on the operating results for fiscal year 2005, as there were no operating
activities related to those assets, until January 2006.
Our programmed semiconductor logic products accounted for approximately 7%
of our total revenue for the years ended December 31, 2003 and 0% of our revenue
in 2004 or 2005. These products were discontinued in 2003.
Review of 2005 Operations
Total revenue for 2005 was approximately $10,385,000. We saw a decrease in
unit shipments and average selling prices of our commercial and industrial
products. In 2005, management focused on realigning customer inventory and
ordering patterns to more closely follow end user consumption patterns. This
resulted in decreased revenue in 2005. Management believes that aligning
customer unit consumption and ordering trends will ultimately allow both Simtek
and its customers to better forecast production and inventory requirements.
Revenue and unit volumes were lowest in the second quarter 2005 and showed
steady improvement in the third and fourth quarters of 2005.
Review of 2004 Operations
Total product revenue for 2004 was approximately $13,100,000. We saw an
increase in unit 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 commercial nvSRAM products saw a total increase of approximately 8% in
2004 as compared to 2003. Revenues from our high-end industrial and military
products saw an approximate increase of 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.
Results of Operations
Revenues
The following table sets forth our net revenues for semiconductor devices
by product markets for the years ended December 31, 2005, 2004 and 2003 (in
thousands):
2005 2004 2003
---- ---- ----
Commercial $ 8,669 $ 10,314 $ 9,548
High-end industrial and
Military $ 1,617 $ 2,778 $ 1,759
Logic Products $ 99 $ - $ 956
Total Revenue $ 10,385 $ 13,092 $ 12,263
32
Revenues for the year ended December 31, 2005 as compared to 2004
Commercial revenues include revenue generated from our legacy products and
from our 0.25 micron products. Commercial revenues decreased by $1,645,000 for
the year ending December 31, 2005 as compared to the same period in 2004. The
decrease was due: (i) lower average selling prices of our high volume legacy
products due to competitive pricing; (ii) reduced unit volume with our key RAID
customers due to competition; and, (iii) reduced unit volume due to a concerted
effort to realign customer inventory and ordering patterns to more closely match
actual consumption. The decrease in legacy unit shipments was partially offset
by an increase in unit shipments of our 0.25 micron product family.
High-end industrial and military product revenues accounted for a decrease
of $1,161,000 for the year ending December 31, 2005 as compared to the same
period in 2004. We saw an approximate 47% decrease in unit shipments and an
approximate 42% decrease in average selling prices. The decreases in unit volume
reflect our efforts to align customer inventory levels to their actual
consumption of the products.
The $99,000 increase in logic revenues was due to a last time buy of one
our discontinued logic products, which were discontinued in 2003.
Four distributors account for approximately 51% of our revenue for the year
ended December 31, 2005 as compared to 49% for the same period in 2004. Products
sold to distributors are sold without material recourse. Distributor contracts
typically allow distributors to return up to 5% in value of product inventory in
each six month period in exchange for a replacement order of equal value. This
allows them to keep inventory current to market demand. Distributors sell our
products to various end customers. If one of these distributors were to
terminate its relationship with us, we believe that there would not be a
material impact on our product sales, as other distributors would likely take
their place.
We expect that revenue will increase in the next several quarters, as
shipments of our 0.25 micron product family ramp up. Customer acceptance of our
flagship 0.25 micron products has increased significantly in 2005. In addition,
we expect that sales of our high-end industrial and military products will
increase as customer inventory levels and consumption demand are realigned.
Revenues for the year ended December 31, 2004 as compared to 2003
Commercial product revenues increased by $766,000 for the year ending
December 31, 2004 as compared to the same period in 2003. The increase was due
to an increase in unit volume 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 year 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.
33
Revenues from our logic products decreased by $956,000 for the year 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.
Four distributors accounted for approximately 49% of our product revenue
for the year ended December 31, 2004 as compared to 42% for the year ended
December 31, 2003. Products sold to distributors are sold without significant
recourse.
Cost of Sales and Gross Margins for the year ended December 31, 2005 as
compared to 2004
We recorded cost of sales of $7,591,000 and $9,140,000 for the years ended
December 31, 2005 and December 31, 2004, respectively. These costs reflect an
approximate 3% decrease in gross margin percentage points for the year ended
December 31, 2005 as compared to the same period in 2004. Actual gross margin
percentages were 27% and 30% for the years ended December 31, 2005 and 2004,
respectively. The decreases in gross margin percentages for the year ended
December 31, 2005 were due primarily to decreased average selling prices and
lower unit volume shipments of our high-end industrial and military products,
which typically carry high gross margins.
During the year ended December 31, 2005, we purchased all of our silicon
wafers to produce our 0.8 micron nvSRAM legacy products from a single supplier,
Chartered, to support sales of our nonvolatile semiconductor memory legacy
products. Sales of products built on these wafers accounted for approximately
86% of our revenue for the year ended December 31, 2005. We purchased silicon
wafers to produce our family of 0.25 micron products, the 1-megabit and certain
256-kilobit nvSRAM products built on 0.25 micron technology from DongbuAnam.
Sales of our semiconductor products built on 0.25 micron technology accounted
for approximately 13% of our revenue for the year ended December 31, 2005. The
remaining sales for the year were for a one-time sale of our discontinued logic
products.
We expect gross margins on both our legacy and 0.25 micron products to
improve during 2006. The net yields on the silicon wafers received from
Chartered during the fourth quarter of 2005 and first two months of 2006 have
resulted in yields significantly better and more stable than in earlier
production received during the transition from Chartered's wafer fabrication
facility # 1 to Chartered's wafer fabrication facility # 2. The yields are
better than the historical yields from Chartered's wafer fabrication facility #
1. In addition, in 2006, we plan to move the final testing of our higher volume
products to Asia, which will result in lower costs. On the .25-micron products,
we achieved full production qualification on the 1-megabit products in September
2005. Based on that qualification, we have reduced the amount of back-end
testing, which reduced total unit cost. We expect that we will continue to
reduce the unit costs of the .25- micron product family in 2006, as yields
improve and additional testing is eliminated.
34
Cost of Sales and Gross Margins for the year ended December 31, 2004 as
compared to 2003
We recorded costs of sales of $9,140,000 and $8,528,000 for the years ended
December 31, 2004 and December 31, 2003, respectively. These costs reflect an
equivalent gross margin percentage for the year ended December 31, 2004 as
compared to the year ended December 31, 2003. Actual gross margin percentages
were 30% for the year 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 for the year ended December 31, 2005 as compared
to 2004
We believe that continued investments in new product development are
required for us to remain competitive in the markets we serve. In 2005, our
research and development department continued its efforts on the final
development, testing and qualification of our 1-megabit 3-volt nvSRAM with
DongbuAnam. In September 2005, we qualified our 1-megabit products for use in
the commercial and industrial markets. Development of the smaller 256-kilobit
and 256-kilobit with real time clock built on the 0.25-micron base continued in
2005. We expect to achieve full production qualification for these products in
the first half of 2006.
In addition, during the second half of 2005 we began development of our
next generation nvSRAM product, in conjunction with Cypress Semiconductor,
pursuant to the terms of the May 5, 2005 development agreement. This new product
will be based on Cypress' .13-micron process and will include memory density of
4-megabits. We hope to provide customers with initial product samples in the
fourth quarter of 2006.
Total research and development expenses were $6,369,000 for the year ended
December 31, 2005 as compared to $4,942,000 for the year ended December 31,
2004.
The $1,427,000 increase for the year was primarily due to a one-time charge
of $1,222,000 related to the final development of our 0.25-micron product. The
one-time charge related to our 0.25 micron product was due to abnormally low
yields and high scrap due to design and process issues with the silicon wafers.
We have implemented a significant new revision for the silicon wafers being
produced at DongbuAnam and preliminary testing shows a significant improvement
in both the initial silicon wafer probe yield as well as the final assembly and
test yield. The improved yields resulted in a more cost effective product. This
charge was partially offset by decreases in payroll and payroll overhead costs
of $159,000, consulting services of $312,000, product development costs of
$293,000 and equipment related costs of $13,000 which were in turn partially
offset by increases in qualification costs of $60,000, and costs related to the
joint development with Cypress of $919,000. The $159,000 decrease in payroll and
payroll overhead costs was a direct result of reduced headcount. The $312,000
decrease in consulting services was due to a decrease in engineering work
performed by our wholly-owned subsidiary, Q-DOT, for the development of our
data-communication products. As reported elsewhere in this Form 10-K, we sold
substantially all the assets of Q-DOT in August 2005. The $293,000 decrease in
product development costs was related to wind down of development activities
35
related to the 0.25 micron product. As discussed above, the one-time charge
related to our 0.25 micron product was due to abnormally low yields and high
scrap due to design and process issues with the silicon wafers. These issues
have been resolved and yields from the revised silicon wafers are significantly
better and now result in a cost effective product. In September 2005, we
achieved full production qualification of the 1-megabit product family.
Research and Development for the year ended December 31, 2004 as compared
to 2003
Total research and development expenses were $4,942,000 and $3,987,000 for
the years ended December 31, 2004 and December 31, 2003, respectively.
The $955,000 increase for the year was related to increases in payroll and
payroll related 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 were required in order to develop our products in time to
meet production schedules for the 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 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.
Sales and Marketing for the year ended December 31, 2005 as compared to
2004
Total sales and marketing expenses were $1,493,000 for the year ended
December 31, 2005 as compared to $1,608,000 for the year ended December 31,
2004.
The $115,000 decrease was primarily due to decreases in advertising of
$15,000, sales commissions of $285,000 and other miscellaneous expenses of
$11,000; these decreases were partially offset by an increase in payroll and
overhead costs of $196,000. The $285,000 decrease in sales commission is a
direct result of reduced revenue. The $196,000 increase in payroll and overhead
costs was the result of personnel changes.
Sales and Marketing for the year ended December 31, 2004 as compared to
2003
Total sales and marketing expenses were $1,608,000 and $1,213,000 for the
year ended December 31, 2004 and December 31, 2003, respectively.
36
The $395,000 increase for the year 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 for the year ended December 31, 2005 as compared to 2004
Total administration expenses were $2,275,000 for the year ended December
31, 2005 as compared to $917,000 for the year ended December 31, 2004.
The $1,358,000 increase for the year was due to increases in accounting and
legal expenses of $123,000, $343,000 increase in payroll and payroll overhead
costs, $713,000 in expenses related to separation and employment agreements and
a $179,000 increase in board of director costs and contract services. The
increases in payroll and payroll related costs and contract services were
related to increases in headcount and increases in administrative services
provided by our subsidiary Q-DOT. The increases in accounting and legal expenses
were related to increased activity related to agreements with personnel and
increased securities work. The $713,000 in expenses was related to costs
associated with the terms of the employment agreement for our current Chief
Executive Officer and the costs associated with the separation agreement entered
into with our previous Chief Executive Officer.
Administration for the year ended December 31, 2004 as compared to 2003
Total administration expenses were $917,000 and $706,000 for the years
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 related 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 were required 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) for the year ended December 31, 2005 as
compared to 2004
The $69,000 decrease in other income (expense) for the year ended December
31, 2005 as compared to the year ended December 31, 2004 was primarily due to an
increase in interest income received from our restricted investments.
37
Total Other Income (Expense) for the year ended December 31, 2004 as
compared to 2003
The $2,000 decrease in total other income (expense) for the year ended
December 31, 2004 as compared to the year ended December 31, 2003 was primarily
related to a decrease in interest income which was a direct result of a
decreased cash balance.
Loss from Continuing Operations for the year ended December 31, 2005 as
compared to 2004
We recorded a loss from continuing operations of $7,490,000 for the year
ended December 31, 2005 as compared to a loss from continuing operations of
$3,731,000 for the year ended December 31, 2004. The increase of $3,759,000 in
net loss for the year was due primarily to an increase in operating expenses and
decreased revenue discussed above.
Loss from Continuing Operations for the year ended December 31, 2004 as
compared to 2003
We recorded a loss of $3,731,000 and $2,389,000 for the years ended
December 31, 2004 and December 31, 2003, respectively. The increase of
$1,342,000 in the loss from continuing operations for the year was due primarily
to an increase in operating expenses discussed above.
Future Results of Operations
Our ability to be profitable will depend primarily on our ability to
continue reducing manufacturing costs and increasing revenue 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.
On December 30, 2005, we purchased from ZMD certain assets related to ZMD's
nvSRAM product line. We believe that this purchase will position us to be the
number one supplier of nvSRAM products and will give us access to additional
Tier 1 customers especially in Europe. Through this purchase we have regained
sole ownership of our patents and technical information used by ZMD on
SONOS-based standard product memory architectures previously licensed by us to
ZMD and we have gained a license to other ZMD patens and technical information
pertaining to SONOS-based nvSRAM. ZMD has entered into a 5-year non-compete
agreement with us. In January 2006, we established a European design, customer
service and support center in Dresden, Germany. We plan to use the new design
team to accelerate product development and introduction of innovative new
products designed for the 0.25 micron process at DongbuAnam and also targeted to
the 0.13 micron process with Cypress.
In May of 2005, we entered into a Production and Development Agreement with
Cypress to cooperate in developing a semiconductor process module that combines
our nonvolatile technology with Cypress' advanced 0.13-micron digital
complementary metal-oxide semiconductor, or CMOS, fabrication line. The module
38
incorporates SONOS technology, which is used to manufacture both high-density
SONOS flash and SONOS nvSRAM's, for stand alone and embedded products.
As of December 31, 2005, we had a backlog of unshipped customer orders of
approximately $2,559,000, all of which we expect to ship by June 30, 2006.
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 cannot assure you that the growth in demand, or demand for our products,
will increase in the future. Through 2005, we were principally dependent on our
legacy products for revenue, for which customer orders have declined over the
past year. However, customer orders in the first quarter of 2006 have continued
to increase consistent with the trend seen in the second half of 2005. We
continue to explore alternatives to further reduce the cost to manufacture our
existing products built on 0.8-micron and 0.25 micron technologies. We are
currently reviewing additional cost reduction measures that may have the
potential to improve our earnings.
During the years ended December 31, 2005, 2004 and 2003, we purchased all
of our silicon wafers to produce our legacy nvSRAM products from a single
supplier, Chartered. Approximately 86%, 97% and 94% of our semiconductor device
sales for 2005, 2004 and 2003, respectively, were from finished units produced
from these silicon wafers. We believe that we maintain a very good relationship
and that Chartered will continue to supply our wafer requirements for our legacy
products. In addition, we may purchase additional 0.8-micron wafers from
ZFoundry, a subsidiary of ZMD, as required to fill customer demand. DongbuAnam
provides silicon wafers for our 0.25-micron products. Approximately 13% and 3%
of our semiconductor product sales for the years ended December 31, 2005 and
2004 were from finished units produced from these silicon wafers.
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 channels.
Our ability to achieve profitability will depend primarily on our ability
to continue reducing our manufacturing costs and increasing revenue 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 have sampled and purchased products from our new 0.25 micron
product family, we expect to continue ramping production of this product through
2006. 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, Related
Security Holder Matters and Issuer Purchases of Equity Securities", on May 5,
2005, we closed a share purchase agreement for a $4,000,000 private placement of
6,740,816 shares of our common stock and warrants to acquire 5,055,612 shares of
39
our common stock with Cypress Semiconductor Corporation, as well as a production
and development agreement with Cypress to jointly develop an "S8" 0.13-micron
SONOS nonvolatile memory production process. The production and development
agreement also calls for Cypress to produce one or more Simtek products, as
designated by Simtek, using the S8 process. The warrants have a 10-year term
with an exercise price of $0.7772.
On June 28, 2005, we issued warrants to purchase 200,000 shares of our
common stock to the RENN Capital Group in exchange for a waiver of certain
provisions relating to the 7.5% convertible debentures issued to the RENN
Capital Group in 2002. These warrants have 5-year terms with an exercise price
of $0.50 per share.
On December 30, 2005, we issued to ZMD 6,260,713 shares of our common stock
as partial payment for the assets we acquired from ZMD pursuant to the Asset
Purchase Agreement, dated December 7, 2005, between us and ZMD.
On December 30, 2005, we issued, for an aggregate price of $11,000,000, the
amounts of shares indicated to the following investors: Crestview Capital Master
LLC (24,687,500 shares); Straus Partners, LP (781,250 shares); Straus GEPT
Partners, LP (781,250 shares); Big Bend XXVII Investments, L.P. (14,375,000
shares); Toibb Investment LLC (11,875,000 shares); Michael Seedman (625,000
shares); RENN Capital Group (9,375,000 shares); and SF Capital Partners Ltd.
(6,250,000 shares). In addition, on December 30, 2005, we issued a warrant to
purchase 1,062,500 shares of our common stock to C. E. Unterberg, Towbin, the
investment banking firm that advised us in the December 30, 2005 offering, as
partial payment for such services. This warrant has a five-year term and an
exercise price of $0.28 per share. We used the majority of the $11,000,000
proceeds of the December 30, 2005 offering to fund the acquisition of assets
from ZMD pursuant to the Asset Purchase Agreement, dated December 7, 2005,
between us and ZMD.
In connection with the sale of $11,000,000 of our common stock on December
30, 2005, instead of lowering the conversion price of the 7.5% convertible
debentures issued to the RENN Capital Group in 2002, as required by the terms of
the 2002 convertible debentures, from $0.312 per share to $0.16 per share as a
result of the December 30, 2005 offering at $0.16 per share, we agreed with the
RENN Capital Group that the conversion price would only be lowered to $0.22 per
share as a result of the December 30, 2005 offering. As a result, instead of
just 9,615,384 shares issuable upon conversion of the 2002 debentures (which
would be the case were the conversion price still $0.312 per share), there are
currently a total of 13,636,364 shares of common stock that are issuable to the
RENN Capital Group upon conversion of the debentures as a result of the
reduction of the conversion price to $0.22 per share.
Also in connection with the sale of $11,000,000 of our common stock on December
30, 2005, we agreed with Bluegrass Growth Fund LP, Bluegrass Growth Fund LTD and
SF Capital Partners Ltd. that in exchange for their waiver of certain
participation rights held by them in connection with the December 30, 2005
offering, the exercise price of their warrants to acquire 2,579,980 shares of
our common stock would be lowered from $0.627 per share to $0.265 per share.
40
The change in cash flows for the year ended December 31, 2005 used in
operating activities by continuing operations was primarily a result of a net
loss of $5,785,315, which was partially offset by $433,181 in depreciation and
amortization and a gain from discontinued operations of $1,687,403. The changes
in cash flow used in operating activities also reflected increases in allowance
accounts, loss on disposal of assets, prepaid expenses and other, accounts
payable and accrued expenses of $22,650, $129,307, $622,004, $767,512, and
$1,005,426 respectively. The increases were offset by decreases in accounts
receivable of $1,011,028, inventory of $491,611 and customer deposits of
$47,464. The increase of $622,004 in prepaid expenses and other was primarily
due to a deposit put in place with a supplier. The $129,307 loss on disposal of
assets, was primarily related to the write off of test development software. The
increase of $1,005,426 in accrued expenses was primarily related to costs
incurred with the December 30, 2005 stock transaction and expenses related to
certain employment and separation agreements that had not been paid as of
December 31, 2005. The $491,611 decrease in inventory was primarily due to
timing of inventory purchases. The change in cash flows provided by investing
activities by continuing operations of $1,526,233 was primarily due to the
purchases of equipment required to test our nonvolatile semiconductor memory
products and reticles required to produce our wafers, offset by the net proceeds
of $1,868,593 received from the sale of the assets of Q-DOT. The change in cash
flows provided by financing activities by continuing operations of $2,887,168
was primarily due to the equity financings, net of transaction related costs of
$3,944,403 and $8,458,926 which we completed in May and December 2005,
respectively. The proceeds of the equity financings were offset by the transfer
of $3,200,000 to escrow accounts for the Cypress and Q-DOT transactions and the
cash portion of the purchase of certain assets from ZMD of $7,685,416.
Additional proceeds provided by financing activities included $190,350 received
from the sale of our common stock per employment agreements and $310,501
received from the exercise of stock options by certain employees.
The change in cash flows for the year ended December 31, 2004 used in
operating activities by continuing operations was primarily a result of a net
loss of $3,670,354, which was partially offset by $442,245 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, accounts payable, and accrued expenses of $122,691,
$75,110, $1,060,206, $684,955, $1,053,165, and $81,972, respectively. The
increase of $1,060,206 in accounts receivable was directly related to the
increase in revenue for the fourth quarter of 2004. The $684,955 increase in
inventory and $1,053,165 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 $75,110 loss on disposal of assets, was primarily related to
writing off the capital expenditures purchased for the installation of our
process at X-FAB, terminated in August 2004. The change in cash flows used in
investing activities by continuing operations of $134,886 was primarily due to
the purchase of equipment required to test our nonvolatile semiconductor memory
products and reticles required to produce our wafers, offset by a $300,000
release of restricted cash. The change in cash flows provided by financing
activities by continuing operations of $2,335,121 was primarily due to the
equity financing of $2,248,851 (net of transaction related costs) 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.
41
The change in cash flows for the year ended December 31, 2003 used in
operating activities by continuing operations was primarily a result of a net
loss of $2,272,641, which was partially offset by $469,538 in depreciation and
amortization, decreases in allowance accounts, accounts receivable, inventory,
and deferred revenue of $16,376, $496,530, $411,358, and $40,500, respectively.
The decrease of $496,530 in accounts receivable was related to timing of
customer payments. The decrease in inventory was primarily due to an increase in
finished goods shipments at the end of 2003. The change in cash flows used in
investing activities by continuing operations of $490,220 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 by continuing operations of $1,640,296
was due to $1,475,515 (net of transaction related costs) received from the
November 2003 equity financing transaction, net borrowings on a line of credit
of $150,000, proceeds of $183,131 for the exercise of stock options by certain
employees partially offset by payments on a capital lease obligation of
$168,350.
Short-term liquidity.
Our cash balance at December 31, 2005 was $1,765,774.
Our future liquidity will depend on our revenue growth, our ability to sell
our products at positive gross margins and control of our operating expenses.
Over the coming year, we expect to spend approximately $11,500,000 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. In addition, we are evaluating possible credit
agreements, such as accounts receivable financing, although we have not reached
any final agreement with any lender. 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. While we have no firm plans, we
are in ongoing discussions with investment banking organizations and potential
investors and 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-K.
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
42
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
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 actual reported distributor inventory levels. The contracts we have
with our distributors generally allow them to return to us a 5% percent of their
inventory every 6 months, in exchange for inventory that better meets their
demands. At times, our distributors reduce the selling price of a specific
device in order to meet competition related to a specific end customer program,
which we support through a credit back to the distributor for that specific
program. 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
43
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 assess the impairment of long-lived assets when events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable. Factors that we consider in deciding when to perform an impairment
review include significant under-performance of the business in relation to
expectations, significant negative industry or economic trends, and significant
changes or planned changes in our use of the assets. Recoverability of assets
that will continue to be used in our operations is measured by comparing the
carrying amount of the assets to our estimate of the related future net cash
flows. If the asset's carrying amount is not recoverable through the related
cash flows, the asset is considered to be impaired. The impairment is measured
by the difference between the asset's carrying amount and its fair value, based
on the best information available, including market prices or discounted cash
flows.
Goodwill represents the excess of the purchase price over the fair value of
identifiable net tangible and intangible assets acquired in the acquisition of
the nvSRAM assets from ZMD. Goodwill is required to be tested for impairment. We
performed goodwill impairment testing as of December 31, 2005, and determined
that no impairment existed at that date. This assessment requires estimates of
future revenue, operating results and cash flows, as well as estimates of
critical valuation inputs such as discount rates, terminal values and similar
data. We will continue to perform periodic and annual impairment analyses of
goodwill. As a result of such impairment analyses, impairment charges may be
recorded and may have a material adverse impact on our financial position and
operating results. Additionally, we may make strategic business decisions in
future periods which impact the fair value of goodwill, which could result in
significant impairment charges. There can be no assurance that future goodwill
impairments will not occur
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 May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3
("Statement 154"). SFAS 154 requires retrospective application to prior periods'
financial statements for changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived, non-financial assets be
accounted for as a change in accounting estimate effected by a change in
accounting principle. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The implementation of FAS 154 is not expected to have a material impact on the
Company's condensed consolidated results of operations, financial position or
cash flows.
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 annual periods 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 January 1, 2006. 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 in Note 1 to our
Financial Statements included herewith.
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
44
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 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.
Contractual Obligations
The following table summarizes our significant contractual obligations at
December 31, 2005, which are expected to have an effect on our liquidity and
cash flows in future periods:
Payments Due by Period
---------------------------------------------------------------
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
----- ---------- --------- --------- ----------
(in thousands)
--------------
Operating lease obligations $1,808 $ 376 $ 763 $ 669 $ -
Capital purchase obligations 13 13 - - -
Other purchase obligations and
Commitments - $1,532 - - -
Long-term debt obligations 3,000 240 2,760 - -
------ ------ ------ ------ ------
Total $4,821 $2,161 $3,523 $ 669 $ -
====== ====== ====== ====== ======
44
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and rates. We are exposed to market risk
in the areas of changes in United States interest rates and changes in foreign
currency exchange rates as measured against the United States dollar. These
exposures are directly related to our normal operating activities. We currently
have no derivative financial instruments.
Interest payable on our convertible debentures is fixed at 7.5% over the
term of the debentures. As such, changes in interest rates will not affect
future expenses or cash flows.
We manage interest income by investing our excess cash in cash equivalents
bearing variable interest rates, which are tied to various market indices. We do
not believe that near-term changes in interest rates will result in a material
effect on future earnings, fair values or cash flows.
We do not speculate in the foreign exchange market and do not manage
exposures that arise in the normal course of business related to fluctuations in
foreign currency exchange rates by entering into offsetting positions through
the use of foreign exchange forward contracts.
Average selling prices of our products have not increased significantly as
a result of inflation during the past several years, primarily due to intense
competition within the semiconductor industry. The effect of inflation on our
costs of production has been minimized through improvements in production
efficiencies. We anticipate that these factors will continue to minimize the
effects of any foreseeable inflation and other price pressures within the
industry and markets in which we participate.
46
Item 8. Financial Statements and Supplementary Data
---------------------------------------------------
SIMTEK CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting Firm.................... 48
Consolidated Balance Sheets - December 31, 2005 and 2004................... 49
Consolidated Statements of Operations - For the Years
Ended December 31, 2005, 2004 and 2003................................ 50
Consolidated Statements of Changes in Shareholders' Equity -
For the Years Ended December 31, 2005, 2004 and 2003.................. 51
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 2005, 2004 and 2003...................................... 52
Notes to Consolidated Financial Statements - For the Years
Ended December 31, 2005, 2004 and 2003................................ 54
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Simtek Corporation
Colorado Springs, CO
We have audited the consolidated balance sheets of Simtek Corporation and
subsidiaries as of December 31, 2005 and 2004, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2005. 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, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
/s/Hein & Associates LLP
HEIN & ASSOCIATES LLP
Denver, Colorado
March 23, 2006 except for Note 2 which is dated December 8, 2006
48
SIMTEK CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
------
December 31, 2005 December 31, 2004
----------------- -----------------
(As Restated)
CURRENT ASSETS:
Cash and cash equivalents $ 1,765,774 $ 2,146,791
Restricted investments 2,281,400 --
Accounts receivable - trade, net of allowance for doubtful
accounts and return allowances of approximately $282,000
and $262,000 1,456,139 2,439,135
Inventory, net 2,067,666 1,869,842
Prepaid expenses and other current assets 98,779 85,221
Deposits 600,000 --
Assets from discontinued operations -- 554,996
------------ ------------
Total current assets 8,269,758 7,095,985
EQUIPMENT AND FURNITURE, net 570,522 771,901
DEFERRED FINANCING COSTS AND DEBT ISSUANCE COSTS 111,187 74,684
GOODWILL 876,466 --
NON-COMPETITION AGREEMENT 8,910,416 --
OTHER ASSETS 20,000 33,250
------------ ------------
TOTAL ASSETS $ 18,758,349 $ 7,975,820
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,821,849 $ 2,054,337
Accrued expenses 1,419,703 357,033
Accrued vacation payable 145,020 159,690
Accrued wages 39,789 29,975
Obligation under capital leases 13,024 47,310
Liabilities of discontinued operations -- 325,524
Debentures, current 239,940 --
------------ ------------
Total current liabilities 4,679,325 2,973,869
DEBENTURES, NET OF CURRENT 2,760,060 3,000,000
OBLIGATIONS UNDER CAPITAL LEASES, NET OF CURRENT PORTION -- 13,024
------------ ------------
Total liabilities 7,439,385 5,986,893
COMMITMENTS AND CONTINGENCIES
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,
146,920,823 and 146,910,823 shares issued and outstanding
at December 31, 2005 and 62,881,679 and 62,871,679 shares
issued and outstanding at December 31, 2004 1,469,208 628,817
Additional paid-in capital 56,053,081 41,778,120
Treasury stock, at cost; 10,000 shares (12,504) (12,504)
Accumulated deficit (46,190,821) (40,405,506)
------------ ------------
Total shareholders' equity 11,318,964 1,988,927
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,758,349 $ 7,975,820
============ ============
See accompanying notes to these consolidated financial statements.
49
SIMTEK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------------------------------
2005 2004 2003
---- ---- ----
NET SALES $ 10,385,131 $ 13,092,441 $ 12,262,820
Cost of sales 7,590,866 9,139,617 8,527,810
------------ ------------ ------------
GROSS MARGIN 2,794,265 3,952,824 3,735,010
Operating expenses:
Research and development costs 6,369,109 4,942,391 3,987,054
Sales and marketing 1,492,838 1,608,441 1,212,561
General and administrative 2,274,525 916,660 705,968
------------ ------------ ------------
Total operating expenses 10,136,472 7,467,492 5,905,583
------------ ------------ ------------
LOSS FROM OPERATIONS (7,342,207) (3,514,668) (2,170,573)
OTHER INCOME (EXPENSE):
Interest income 91,659 26,436 30,116
Interest expense (238,208) (241,254) (254,144)
Other expense (810) (1,124) 5,871
------------ ------------ ------------
Total other income (expense) (147,359) (215,942) (218,157)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES (7,489,566) (3,730,610) (2,388,730)
Provision for income taxes -- -- --
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (7,489,566) (3,730,610) (2,388,730)
INCOME FROM DISCONTINUED OPEARTIONS
(including gain on disposal of $1,687,403
in 2005) 1,704,251 60,256 116,089
------------ ------------ ------------
NET LOSS $ (5,785,315) $ (3,670,354) $ (2,272,641)
============ ============ ============
NET LOSS PER COMMON SHARE:
Basic and diluted
Loss from continuing operations $ (.11) $ (.06) $ (.04)
Income from discontinued operations $ .03 $ .00 $ .00
------------ ------------ ------------
Total $ (.08) $ (.06) $ (.04)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic and diluted 68,613,090 58,586,411 54,889,008
============ ============ ============
See accompanying notes to these consolidated financial statements.
50
SIMTEK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (As Restated)
COMMON STOCK ADDITIONAL TOTAL
-------------------------- PAID-IN TREASURY ACCUMULATED SHAREHOLDERS'
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
Exercise of stock options 1,137,615 11,375 299,126 -- -- 310,501
Equity financing May 5,
2005, net of $55,597 6,740,816 67,409 3,876,995 -- -- 3,944,404
Issuance of stock related to
Employment/separation
agreements 1,150,000 11,500 445,950 -- -- 457,450
Issuance of stock related to
December 30, 2005 equity
financing, net of $641,074 68,750,000 687,500 7,771,426 -- -- 8,458,926
Asset purchase, December 30, 2005 6,260,713 62,607 1,819,299 -- -- 1,881,906
Interest expense related to
issuance of warrants -- -- 62,165 -- -- 62,165
Net loss -- -- -- -- (5,785,315) (5,785,315)
----------- ------------ ------------ ------------ ------------ ------------
BALANCES, December 31, 2005 146,920,823 $ 1,469,208 $ 56,053,081 $ (12,504) $(46,190,821) $ 11,318,964
=========== ============ ============ ============ ============ ============
See accompanying notes to these consolidated financial statements.
51
SIMTEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------------------
2005 2004 2003
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,785,315) $(3,670,354) $(2,272,641)
Income from discontinued operations (16,848) (60,256) (116,089)
Adjustments to reconcile net loss to net cash used in operating
Activities:
Depreciation and amortization 433,181 442,245 469,538
Loss on disposal of assets 129,307 75,110 36,542
Issuance of common stock per separation and employment
agreements 267,100 -- --
Expense related to issuance of warrants 9,065 -- --
Gain from discontinued operations (1,687,403) -- --
Net change in allowance accounts 22,650 122,691 (16,376)
Deferred financing fees 16,596 16,596 16,596
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,011,028 (1,060,206) 496,530
Inventory 491,611 (684,955) 411,358
Prepaid expenses and other (622,004) 21,459 (8,236)
Increase (decrease) in:
Accounts payable 767,512 1,053,165 11,950
Accrued expenses 1,005,426 81,973 (289)
Deferred revenue -- -- (40,500)
Customer deposits (47,464) -- --
----------- ----------- -----------
Net cash used in operating activities of continuing operations (4,005,558) (3,662,532) (1,011,617)
Net cash provided by operating activities of discontinued
operations 104,022 353,398 176,512
----------- ----------- -----------
Net cash used in operating activities (3,901,536) (3,309,134) (835,105)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture, net (342,360) (434,886) (490,220)
Release of restricted cash -- 300,000 --
Proceeds from discontinued operations, net 1,868,593 -- --
Purchase of certain assets from ZMD (8,542,355) -- --
----------- ----------- -----------
Net cash used in investing activities of
continuing operations (7,016,122) (134,886) (490,220)
Net cash used in investing activities of discontinued operations (35,944) (175,989) (11,024)
----------- ----------- -----------
Net cash used in investing activities (7,052,066) (310,875) (501,244)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from line of credit and notes payable -- -- 250,000
Payments on notes payable and line of credit (150,000) (100,000)
Payments on capital lease obligation (50,196) (124,472) (168,350)
Equity financing, net 3,944,404 2,248,851 1,475,515
Transfers to restricted investment (3,200,000) -- --
Payments from restricted investment 918,600 -- --
Proceeds from sale of common stock 190,350 -- --
See accompanying notes to these consolidated financial statements.
52
SIMTEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------------------
2005 2004 2003
---- ---- ----
Exercise of stock options 310,501 360,742 183,131
Equity financing, December 2005, net 8,458,926 -- --
------------ ------------ ------------
Net cash provided by financing activities 10,572,585 2,335,121 1,640,296
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (381,017) (1,284,888) 303,947
CASH AND CASH EQUIVALENTS, beginning of period 2,146,791 3,431,679 3,127,732
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,765,774 $ 2,146,791 $ 3,431,679
============ ============ ============
Cash paid for interest $ 242,180 $ 229,143 $ 253,219
============ ============ ============
Stock issued for purchase of certain assets from ZMD $ 1,881,906 $ -- $ --
============ ============ ============
Purchase of equipment through payables and capital leases $ -- $ -- $ 144,160
============ ============ ============
Warrants issued for debt issuance cost $ 62,165 $ -- $ --
============ ============ ============
See accompanying notes to these consolidated financial statements.
53
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
Liquidity - During 2005, the Company incurred a loss from continuing
operations of $7,490,000 and a net loss of $5,785,000 and has accumulated
deficits of $46,191,000 as of December 31, 2005. The Company was also not
in compliance with its debentures throughout 2005, but was successful in
obtaining waivers from the debenture holders. Also during the fourth
quarter of 2005, the Company raised equity capital of $11,000,000 of which
$8,000,000 was paid as part of the acquisition of the nvSRAM assets
discussed in Note 10 below. At December 31, 2005, the Company had working
capital of $1,310,000, excluding $2,281,000 of restricted investments which
are principally restricted to make payments under the Production and
Development Agreement with Cypress Semiconductor Corporation.
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.
If the Company is unable to achieve profitable operations in 2006 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 - 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.
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.
54
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2005, substantially all of the Company's
cash and cash equivalents were held by three banks, of which approximately
$1,670,820 was in excess of Federally insured amounts.
Receivables and Credit Policies - Trade receivables consist of
uncollateralized customer obligations due under normal trade terms,
typically requiring payment within 30 days of the invoice date. 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. Inventories consist of:
December 31,
------------
2005 2004
---- ----
Raw materials $ 33,043 $ 68,955
Work in progress 1,095,728 1,765,044
Finished goods 1,055,419 204,423
---------- ----------
2,184,190 2,038,422
Less reserves for excess inventory (116,524) (168,580)
---------- ----------
$2,067,666 $1,869,842
========== ==========
Non-competition Agreement - The $8,910,416 for the non-competition
agreement between the Company and ZMD, entered into as part of the December
30, 2005 acquisition discussed in Note 10 below. The value assigned to the
non-competition agreement is being amortized on a straight line basis over
its five year life.
Goodwill - Goodwill represents the excess of the total amount paid to ZMD
for the nvSRAM assets acquired on December 30, 2005 and the fair value
assigned to specific assets. This amount will not be amortized, but will be
reviewed for impairment on a periodic basis. As of December 31, 2005, no
impairment of value has been recorded.
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 amortized the patents and trademarks over a
five year life. As of December 31, 2005, the patents and trademarks were
completely amortized.
Research and Development Costs - Research and development costs are charged
to operations in the period incurred. Total research and development costs
for the years ending December 31, 2005, December 31, 2004 and December 31,
2003 were $6,369,000, $4,942,000 and $3,987,000, 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 $66,000, $83,000 and $40,000 in 2005,
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
55
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
issue common stock were exercised or converted into common stock. As the
Company incurred losses in 2005, 2004 and 2003, all common stock
equivalents would be considered anti-dilutive. For purposes of calculating
diluted EPS, 18,004,452, 9,707,062 and 6,544,081 options and warrants for
2005, 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, the valuation
allowance on the deferred tax assets and possible impairment of goodwill.
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
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.
December 31,
------------
2005 2004 2003
---- ---- ----
Net loss as reported $(5,785,000) $(3,670,000) $(2,273,000)
Add: Stock based compensation
included in reported
Net loss - - -
Deduct: Fair value of stock based
compensation (1,294,000) (831,000) (520,000)
----------- ----------- -----------
Pro forma net loss $(7,079,000) $(4,501,000) $(2,793,000)
=========== =========== ===========
Net loss as reported - basic and
diluted $ (.08) $ (.06) $ (.04)
Pro forma net loss - basic and
diluted $ (.10) $ (.08) $ (.05)
56
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option granted in 2005, 2004 and 2003 was estimated
on the date of grant using the Black-Scholes option-pricing model with the
following:
December 31,
------------
2005 2004 2003
---- ---- ----
Expected volatility 84.30% 108.26% 122.2%
Risk-free interest rate 3.80% 2.40% 2.0%
Expected dividends - - -
Expected terms (in years) 4.0 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.
Recently Issued Accounting Pronouncements - In May 2005, the FASB issued
SFAS No. 154, Accounting Changes and Error Corrections--a replacement of
APB Opinion No. 20 and FASB Statement No. 3 ("Statement 154"). SFAS 154
requires retrospective application to prior periods' financial statements
for changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of
the change. SFAS 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived, non-financial assets be
accounted for as a change in accounting estimate effected by a change in
accounting principle. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15,
2005. The implementation of FAS 154 is not expected to have a material
impact on the Company's condensed consolidated results of operations,
financial position or cash flows.
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 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
January 1, 2006. 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
57
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. CORRECTION OF PREVIOUSLY REPORTED AMOUNTS
-----------------------------------------
As more fully described below, on December 30, 2005, the Company sold
68,750,000 shares of its common stock, subject to certain registration
rights. Management initially concluded that the net proceeds of $8,459,000
should be recorded as Temporary Equity due to the potential penalties
associated with the registration rights agreement. Management has
subsequently determined that the transaction should have been recorded in
Shareholders' Equity.
The following table reflects the amounts as previously reported and as
restated:
As
Reported Restated
(Amounts in thousands)
Consolidated Balance Sheet:
Temporary Equity $ 8,459 $ -
Common Stock $ 782 $ 1,470
Additional paid-in capital $ 48,282 $ 56,053
Total shareholders' equity $ 2,860 $ 11,319
3. EQUIPMENT AND FURNITURE:
-----------------------
Equipment and furniture at December 31, 2005 and 2004 consisted of the
following:
December 31,
------------
2005 2004
---- ----
Leased equipment under capital leases $ 148,000 $ 148,000
Research and development equipment 1,937,000 1,707,000
Computer equipment and software 1,672,000 1,705,000
Office furniture 33,000 33,000
Other equipment 205,000 205,000
----------- -----------
3,995,000 3,798,000
Less accumulated depreciation
and amortization (3,425,000) (3,026,000)
----------- -----------
$ 570,000 $ 772,000
=========== ===========
58
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $433,000, $442,000 and $470,000
was charged to operations for the years ended December 31, 2005, 2004 and
2003, respectively. Included in the amortization expense for 2005, 2004,
and 2003 was $91,000, $142,000 and $144,000, respectively of amortization
of software and research and development equipment under capital leases. At
December 31, 2005, December 31, 2004 and December 31, 2003, accumulated
amortization for software under capital leases was $0, $368,000 and
$296,000, respectively.
4. 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.,
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
were originally convertible into Simtek common stock at $0.312 per share,
which was in excess of the market price per share on July 1, 2002. Through
December 31, 2005, 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 21, 2006, the
Company received a waiver for the two covenants through January 1, 2007.
However, significant variances in future actual operations from the
Company's current estimates could result in the reclassification of this
note to current liabilities. The Convertible Debentures allows for an
adjustment in the conversion price, if the Company issues Common Stock in
connection with an equity financing, where the sale price is less than the
conversion price of $0.312. This occurred in December 2005 in connection
with the common stock sale of $11,000,000 at a price of $0.16 per share.
Pursuant to the terms of the 2002 convertible debentures, the Company
agreed with the RENN Capital Group that the conversion price would be
reduced to $0.22 per share. Based on the conversion rate of $0.22 per
share, each RENN investment fund is entitled to 4,545,455 shares upon
conversion. On June 28, 2005, the Company negotiated an extension of the
commencement date of principal payments, see Note 6 Shareholders' Equity
for additional information.
5. COMMITMENTS:
-----------
Offices Leases - The Company leases office space under a lease, which
expires on February 28, 2013. Monthly lease payments are approximately
$16,000.
The Company leases furniture, equipment, and its office under operating
leases, which expire over the next nine years.
Future minimum lease payments under the noncancellable equipment, furniture
and office leases described above are as follows:
59
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ending
December 31,
------------
2006 $ 375,000
2007 335,000
2008 217,000
2009 212,000
2010 & After 669,000
-----------
$ 1,808,000
===========
Office rent and equipment lease expense totaled $732,000, $625,000 and
$540,000 for the years ended December 31, 2005, 2004 and 2003,
respectively.
In addition, the Company leases research and development equipment under a
capital lease, which will expire in 2006. At December 31, 2005, future
minimum lease payments under the lease described above is as follows:
Years Ending
December 31,
------------
2006 $ 14,000
--------
Less interest and taxes (1,000)
--------
Present value of net minimum lease payments $ 13,000
Employment Agreements - Mr. Blomquist is employed as President and Chief
Executive Officer pursuant to an employment agreement with the Company.
Under the terms of the employment agreement, Mr. Blomquist receives an
annual salary of $325,000 and such additional benefits that are generally
provided other employees. Mr. Blomquist will be eligible to receive a
yearly cash bonus, based on performance, of up to 100% of his salary. In
addition, Mr. Blomquist will receive a yearly bonus of options to purchase
between 100,000 and 400,000 shares of the Company's common stock; the exact
amount will be based on performance. Upon beginning employment, Mr.
Blomquist received options to purchase 2.5 million shares of the Company's
common stock and a $50,000 bonus. Within four months of beginning
employment, Mr. Blomquist was required to purchase 200,000 shares of common
stock from the Company. For each share of common stock Mr. Blomquist
purchased from the Company within six months of beginning employment,
including the 200,000 shares he is required to purchase, the Company
granted him an additional share. Mr. Blomquist purchased a total of 475,000
shares and the Company granted him 475,000 matching shares. The Company
recorded a total expense of $190,350 for the matching shares, the expense
has been included in general and administrative expenses. Upon termination,
Mr. Blomquist will be restricted from competing against the Company for a
period of 18 months. If Mr. Blomquist is terminated by the Company without
cause, all of Mr. Blomquist's unvested stock options will immediately vest
and he will continue to receive his base salary, benefits, and cash and
stock bonuses for 18 months. If Mr. Blomquist terminates employment due to
good cause or as a result of constructive termination relating to a change
of control of the Company, all of Mr. Blomquist's unvested stock options
will immediately vest and he will continue to receive his base salary,
benefits and cash and stock bonuses for 18 months. Mr. Blomquist's
employment agreement expires May 9, 2006 but is, automatically renewed for
successive one-year terms unless the Company or Mr. Blomquist elects not to
renew.
6. SHAREHOLDERS' EQUITY:
--------------------
On December 30, 2005, the Company closed the sale of 68,750,000 shares of
its common stock for an aggregate purchase price of $11,000,000, pursuant
to the terms of the Securities Purchase Agreement dated as of December 30,
2005, among Simtek and Crestview Capital Master LLC, as lead investor,
Renaissance Capital Growth & Income Fund III, Inc., Renaissance US Growth
Investment Trust PLC, BFSUS Special Opportunities Trust PLC, SF Capital
Partners Ltd., Straus Partners, LP, Straus GEPT Partners, LP and various
other individual and institutional investors. The Company used the majority
of the proceeds of this offering to fund the ZMD Asset Acquisition. We also
60
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
executed a registration rights agreement with the Purchasers, pursuant to
which we have agreed to register under the Securities Act the resale by the
Purchasers of the shares issued to them. The registration rights agreements
contain cash penalties equal to 2% per month beginning in May 2006 in the
event the Company fails to maintain an effective registration statement
with the Securities and Exchange Commission. At December 31, 2005 there was
an outstanding subscription in the amount of $1,900,000 related to the
transaction. This amount plus $641,000 of transaction related costs have
been deducted from the total amount of the transaction. The $1,900,000 was
received by the Company on January 3, 2006.
On December 30, 2005, the Company issued 6,260,713 shares of its common
stock to ZMD, valued at $2 million, based on the volume weighted average
price of the common stock for the 60 trading days prior to the execution
date of the Asset Purchase Agreement on December 7, 2005. For accounting
and financial reporting purposes, the shares issued to ZMD have been valued
at $0.30 per share, pursuant to Emerging Issues Task Force 99-12
"Determination of the Measurement Date for the Market Price of Acquirer
Securities Issued in a Purchase Business Combination", resulting in an
accounting value of $1,882,000. 4,695,534 shares were delivered to ZMD on
December 30, 2005 and 1,565,179 shares were placed in an Escrow account to
protect Simtek against potential losses as defined in the Asset Purchase
Agreement. The shares will be held in escrow until June 30, 2006. The
Company also executed a registration rights agreement with ZMD, pursuant to
which it has agreed to register under the Securities Act the resale by ZMD
of the shares issued to them.
On May 5, 2005, the Company closed a Share Purchase Agreement for a $4
million private placement of 6,740,816 shares of our common stock with
Cypress and a Development and Production Agreement with Cypress to jointly
develop a 0.13-micron Silicon-Oxide-Nitride-Oxide-Silicon (SONOS)
nonvolatile memory process. The Company and Cypress entered into an Escrow
Agreement with Cypress pursuant to which the Company deposited $3 million
into an escrow account in order to support and make certain payments for
the 0.13-micron process and product developments. Cypress also received a
warrant to purchase 5,055,612 shares of our common stock at $0.7772 per
share with a term of 10 years. We have granted to Cypress certain
registration rights with respect to the shares issued under the Share
Purchase Agreement and the shares issuable upon exercise of the warrant.
On June 28, 2005, the Company received a waiver from the debenture holders
extending until July 1, 2006 the commencement date for principal payments
of the $3 million aggregate principal amount 7.5% convertible debentures
issued by the Company in 2002. The original terms of the debentures
required the Company to make monthly principal payments of $10 per $1,000
of the then remaining principal amount, beginning on June 28, 2005. The
Company will still be required to make interest payments. Under the terms
of the waiver, monthly principal payments of $13.33 per $1,000 of the then
remaining outstanding principal amount will commence on July 1, 2006. The
final maturity date remains as June 28, 2009. As consideration for the
extension, the Company has issued to the debenture holders warrants to
purchase 200,000 shares of Simtek common stock at $0.50 per share, a
premium to the market price on the date of the waiver. The Company
estimated the value of the warrants at the time of grant, using the Black
Scholes option-pricing model, to be approximately $62,000. The Company
recognized $9,000 as additional interest expense for the period ending
December 31, 2005.
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. The terms
of the $2,500,000 equity financing allows for participation rights in any
61
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
future equity financings that we may do. In conjunction with the December
2005 $11,000,000 PIPE transaction, Bluegrass Growth Fund LP, Bluegrass
Growth Fund LTD and SF Capital Partners Ltd., agreed to waive certain
participation rights held by them in connection with the $11,000,000 common
stock transaction in exchange for the Company agreeing to reprice the
2,579,980 warrants that they received in October 2004 from an exercise
price of $0.627 to an exercise price of $0.265 per share.
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.
Warrants - A summary of the warrants outstanding as of January 31, 2006, 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 $ 0.265 $ 546,956
Bluegrass Growth Fund Ltd Warrants 10/12/2004 257,998 10/12/2009 $ 0.265 $ 68,369
Bluegrass Growth Fund Lp Warrants 10/12/2004 257,998 10/12/2009 $ 0.265 $ 68,369
Merriman Curhan Ford & Co. Warrants 10/12/2004 386,997 10/12/2009 $ 0.627 $ 242,647
Cypress Semiconductor Warrants 5/5/2005 5,055,612 5/5/2015 $ 0.7772 $ 3,929,222
62
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BFSUS Special Opportunities
Trust Plc. Warrants 6/28/2005 66,667 6/28/2010 $ 0.50 $ 33,334
Renaissance US Growth & Investment
Trust Plc. Warrants 6/28/2005 66,667 6/28/2010 $ 0.50 $ 33,334
Renaissance Capital Growth & Income
Fund III Warrants 6/28/2005 66,666 6/28/2010 $ 0.50 $ 33,333
C. E. Unterberg Towbin Warrants 12/30/05 1,062,500 12/30/2010 $ 0.28 $ 297,500
---------- -----------
Total Warrants 10,035,089 $ 6,284,314
========== ===========
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, 2005, 2004 and 2003:
Weighted Average
Exercise Number of
Price Per Share Shares
--------------- ------
Outstanding at
December 31, 2002 $ 0.47 5,539,386
Granted $ 0.21 1,224,500
Expired $ (0.13) (45,000)
Exercised $ (0.27) (679,097)
Cancelled $ (0.39) (245,708)
--------- ----------
Outstanding at
December 31, 2003 $ 0.45 5,794,081
Granted $ 0.78 1,439,334
Expired - -
Exercised $ (0.36) (1,001,231)
Cancelled $ (1.15) (242,099)
--------- ----------
Outstanding at
December 31, 2004 $ 0.64 5,990,085
Granted $ 0.56 4,800,500
Expired - -
Exercised $ (0.28) (1,086,146)
Cancelled $ (0.74) (1,735,076)
--------- ----------
Outstanding at
December 31, 2005 $ 0.62 7,969,363
========= ==========
63
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All options granted during 2005, 2004 and 2003, were at the current market
price at the date of grant and the weighted average fair value was $0.56,
$0.78 and $0.21, respectively. At December 31, 2005, options for 4,953,551
shares were exercisable and the remaining options of 3,015,812 will become
exercisable as follows: 1,309,145 in 2006; 1,123,334 in 2007 and 583,333 in
2008.
In May 2005, the Company accelerated vesting of certain unvested and
out-of-the-money stock options previously awarded to employees and
officers. Because the price of the Company's common stock was $0.57 on the
day of acceleration, the options, which are exercisable at $0.62 and above,
had no economic value on the date of acceleration. As a result of the
acceleration, options to purchase approximately 1.7 million shares of
Simtek common stock are now exercisable. Options held by non-employee
directors were excluded from the vesting acceleration.
The following information summarizes stock options outstanding at December
31, 2005:
Outstanding Exercisable
--------------------------------------------------------------------------- ------------------------------------
Weighted Average
------------------------------------------------------
Remaining Weighted
Number Contractual Life Average Number Weighted Average
Exercise Price Outstanding in Months Exercise Price Exercisable Exercise Price
------------------- ------------------ ------------------ ----------------- ------------------ ------------------
$0.14-$0.30 1,130,188 29 $ 0.20 1,098,265 $ 0.20
$0.35-$0.54 3,232,716 60 $ 0.46 1,131,817 $ 0.44
$0.60-$0.797 2,274,125 50 $ 0.65 1,391,135 $ 0.64
$0.83-$0.90 155,000 62 $ 0.87 155,000 $ 0.87
$1.125-$1.50 952,334 40 $ 1.25 952,334 $ 1.25
$1.50-$1.90 225,000 62 $ 1.78 225,000 $ 1.78
--------- ---------
7,969,363 4,953,551
========= =========
Other - Preferred Stock may be issued in such series and preferences as
determined by the Board of Directors.
7. SIGNIFICANT CONCENTRATION OF CREDIT RISK, MAJOR CUSTOMERS, AND OTHER RISKS
--------------------------------------------------------------------------
AND UNCERTAINTIES:
-----------------
Sales by location for the years ended December 31, 2005, 2004 and 2003 were
as follows (as a percentage of sales):
64
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2005 2004 2003
---- ---- ----
United States 26% 29% 37%
Europe 18% 11% 12%
Far East 46% 48% 46%
Other 10% 12% 5%
---- ---- ----
Total 100% 100% 100%
Sales from the Company's military products accounted for approximately 15%,
21% and 14% of total sales for the years ended December 31, 2005, 2004 and
2003, respectively.
Sales to unaffiliated customers which represent 10% or more of the
Company's sales for the years ended December 31, 2005, 2004 and 2003 were
as follows (as a percentage of sales) :
Customer 2005 2004 2003
-------- ---- ---- ----
A 11% 12% 20%
B 11% 10% 10%
C 12% 12% 6%
D 17% 15% 7%
At December 31, 2005, the Company had gross trade receivables totaling
$759,000 due from the above four customers.
In 2005, 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%, 97% and 94% of the
Company's net revenue for 2005, 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 formally extended or
terminated, however, this supplier still provides wafers to the Company.
The Company has maintained a good relationship with Chartered for the
pricing and delivery of the Company's wafers. Due to not having a formal
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. If the Company is unable to obtain the products and
pricing it needs, the Company's business could suffer.
In 2005 and 2004, the Company purchased all of its memory wafers, based on
0.25 micron technology from a single supplier, DongbuAnam. Approximately
13% and 3% of the Company's net revenue for 2005 and 2004, respectively,
were from finished units produced from these wafers.
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
65
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
products with deliveries scheduled by the end of the year. Subsequent to
December 31, 2003, the Company is no longer supporting sales of logic
products to the market.
8. TAXES:
-----
Deferred taxes result from temporary differences between the financial
statement carrying amounts and the tax basis of assets and liabilities. The
components of deferred taxes are as follows:
Deferred Tax
Assets (Liability)
------------------
2005 2004
---- ----
Current:
Allowance for doubtful accounts $ 3,000 $ 5,000
Reserves 231,000 203,000
Accrued expenses 104,000 102,000
------------- -------------
Net current deferred tax before valuation allowance 338,000 310,000
Valuation allowance (338,000) (310,000)
------------- -------------
Total current deferred tax $ - -
============= =============
Non-Current:
Net operating losses $ 15,369,000 $ 13,303,000
Property and equipment 41,000 5,000
Tax credit 11,000 -
Intangibles 956,000 1,054,000
------------- -------------
Net non-current deferred tax asset before valuation allowance 16,377,000 14,362,000
Valuation allowance (16,377,000) (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 2005 increased by
$2,043,000 and increased by $1,496,000 in 2004.
At December 31, 2005, the Company has approximately $41,000,000 available
in net operating loss carryforwards which begins to expire from 2006 to
2025. As a result of certain non-qualified stock options which have been
exercised, approximately $4,432,000 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 2005 and 2004 differed from the amounts
computed by applying the U.S. Federal statutory tax rates to the pre-tax
loss as follows:
66
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2005 2004 2003
---- ---- ----
Statutory rate (34.0)% (34.0)% (34.0)%
State income taxes, net of Federal income
tax benefit (3.3)% (3.3)% (3.3)%
Increase (reduction) in valuation allowance
related to net operating loss carryforwards
and change in temporary differences 37.3% 37.3% 37.3%
-------- -------- --------
$ - $ - $ -
======== ======== ========
9. DISCONTINUED OPERATION:
----------------------
On August 30, 2005, the Company, along with the Company's wholly-owned
subsidiary, Q-DOT, Inc. ("Q-DOT"), entered into an Asset Purchase Agreement
with Hittite Microwave Corporation ("Hittite") and a wholly-owned
subsidiary of Hittite, HMC Acquisition Corporation ("HMC Acquisition"),
whereby substantially all of the assets of Q-DOT were sold to HMC
Acquisition in exchange for a cash payment of approximately $2.2 million.
The Company realized a net gain of approximately $1,687,000. In addition,
Hittite assumed certain future obligations of Q-DOT, including obligations
related to Q-DOT's real estate lease and certain software license
agreements. Incident to the Asset Purchase Agreement, the parties also
entered an Escrow Agreement, whereby $200,000 of the purchase price was
placed in escrow for one year to secure certain indemnification obligations
of Simtek and Q-DOT. In addition, the parties entered into a
Confidentiality, Non-Disclosure and Restrictive Covenant Agreement,
whereby, among other things, Simtek and Q-DOT agreed not to compete against
Hittite and HMC Acquisition for a period of four years with respect to
certain businesses relating to Q-DOT's operations.
In accordance with SFAS No. 144, the consolidated financial statements of
the Company have been recast to present this business as a discontinued
operation. Accordingly, the revenues, the costs and expenses and assets and
liabilities of the discontinued operation have been excluded from the
respective captions in the accompanying Consolidated Statements of
Operations and Consolidated Balance Sheets and have been reported in the
various statements under the caption, "Assets from discontinued
operations", Liabilities of discontinued operations", and "Income from
discontinued operations" for all periods presented. In addition, certain of
the Notes to the Consolidated Financial Statements have been recast for all
periods to reflect the discontinuance of this operation.
Summary results for the discontinued operation are as follows (in
thousands):
Description Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
Operating Results:
Revenue $1,398 $1,810 $2,241
Costs and expenses 1,381 1,750 2,125
------ ------ ------
Income from discontinued
Operation $ 17 $ 60 $ 116
====== ====== ======
67
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts included in the December 31, 2005 and December 31, 2004
Consolidated Balance Sheets for the discontinued operations are as follows
(in thousands):
December 31,
------------
2005 2004
---- ----
Assets from discontinued operations $ - $ 555
Liabilities of discontinued operations $ - $ 326
10. ACQUISITION OF CERTAIN ASSETS FROM ZMD
--------------------------------------
On December 30, 2005, the Company purchased from Zentrum Mikroelektronik
Dresden AG ("ZMD") certain assets related to ZMD's nvSRAM product line (the
"ZMD Asset Acquisition"). ZMD represented Simtek's primary competitor in
the sale of nvSRAM products. Under the terms of various agreements between
Simtek and ZMD beginning in 1994, ZMD used Simtek's proprietary technology
to manufacture and sell products that directly competed with Simtek's
products. Management believes that the ZMD Asset Acquisition provided
several benefits, including consolidation of nvSRAM products in the
marketplace, increased sales volume, and control of its proprietary
technology. On that same date and in connection with the ZMD Asset
Acquisition, which is described in more detail below, Simtek and ZMD
entered into a number of agreements including a License Agreement (the "New
License Agreement"). Pursuant to the New License Agreement, ZMD assigned
its rights in certain patents devoted to nvSRAM to Simtek and Simtek
licensed to ZMD the right to use Simtek's silicon-oxide-nitride-oxide-
silicon (SONOS)-based nvSRAM technology for embedded functions in ZMD's
non-competing products. The licenses granted pursuant to the New License
Agreement are perpetual, non-exclusive, royalty-free and unlimited. No fees
or payments are due to either party under the New License Agreement. The
New License Agreement shall remain in effect on a country-by-country basis
until all patents, trade secrets, and any other proprietary and legal
rights subject thereto have expired or ended, unless terminated earlier by
either party following a breach by the other party that remains uncured
after 30 days' written notice. In addition, Simtek and ZMD executed a
Non-Competition and Non-Solicitation Agreement (the "NC Agreement")
whereby, for a period of five years from the closing, ZMD is prohibited
from competing with certain of Simtek's products and from hiring employees
of Simtek in certain situations.
In 1994, the Company licensed certain intellectual property to ZMD, which
permitted ZMD to produce nvSRAM products that directly competed with the
products sold by the Company. During the past several years, the two
companies have competed for market share with key customers, resulting in
significant reductions in average unit selling prices. The Company believed
that acquiring the assets from ZMD would result in more price stability in
the marketplace and provide additional revenue to Simtek.
The transaction with ZMD was completed on December 30, 2005. As such, the
assets acquired are included in the accompanying Consolidated Balance Sheet
as of December 31, 2005. However, there are no results of operations
related to the assets acquired included in the Consolidated Statement of
Operations for the Year Ended December 31, 2005 as there were no operating
activities until January 2006.
The purchase price consisted of $8 million of cash paid to ZMD, and
6,260,713 shares of Simtek common stock issued to ZMD, valued at $2
million, per the terms of the agreement based on the volume weighted
average price of the common stock for the 60 trading days prior to the
execution date of the Asset Purchase Agreement on December 7, 2005. For
accounting and financial reporting purposes, the shares issued to ZMD have
been valued at $0.30 per share, pursuant to Emerging Issues Task Force
99-12 "Determination of the Measurement Date for the Market Price of
Acquirer Securities Issued in a Purchase Business Combination", resulting
in an accounting value of $1,882,000. The total purchase price including
transaction related costs, amounted to $10,425,000. The transaction
related costs include $272,000 investment banking costs, $240,000 legal
fees, and $31,000 other.
68
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Finished goods inventory $ 638
Non-competition agreement 8,910
Goodwill 877
---------
Total $ 10,425
=========
Management determined the value assigned to each of the assets identified
above based on several factors, including among other things, unit cost of
products to be purchased from ZMD in the future, Simtek's relationship with
former ZMD customers, Simtek's knowledge of the design and technology of
ZMD's products, and an independent valuation of the non-competition
agreement (which will be amortized over the five year term of the
agreement). No value was assigned to the New License Agreement, because in
management's opinion, the intellectual property subject to that license is
derived from the Company's base technology and does not significantly
enhance or change such technology. While we believe the purchase accounting
associated with this transaction to essentially be complete, there is
always the possibility that it may be subject to modification in the
future. Any such modification is not expected to be significant.
The following table sets forth certain information related to unaudited pro
forma results of operations, as if the transaction were completed at the
beginning of each period presented (in thousands):
2005 2004 2003
---- ---- ----
Revenue $18,136 $20,338 $ 18,986
Loss from continuing operations (9,664) (5,627) (3,732)
Earnings per share $ (0.07) $ (.04) $ (0.03)
11. SUBSEQUENT EVENT (UNAUDITED)
----------------------------
On March 24, 2006, the Company entered into a License and Development
Agreement with Cypress pursuant to which, among other things, Cypress
agreed to license certain intellectual property from the Company to develop
and manufacture standard, custom and embedded nvSRAM products, Cypress and
the Company agreed to co-develop certain nvSRAM products and Cypress has
agreed to pay to the Company $4,000,000 in prepaid royalties. Under the
License and Development Agreement, the Company has issued (or will issue
upon certain payments by Cypress at June 30, 2006 and December 31, 2006)
three separate warrants to Cypress granting Cypress the right to purchase a
total of 20 million shares of the Company's common stock, at an exercise
price per share of $0.75 with a term of 10 years each.
69
SIMTEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplementary Financial Data (UNAUDITED)
Following is unaudited quarterly selected financial data for the past eight
quarters:
Quarters Ended
-------------------------------------------------------------
3/31/05 6/30/05 9/30/05 12/31/05
------- ------- ------- --------
Revenue $ 2,976 $ 2,204 $ 2,412 $ 2,794
Gross margin 968 529 605 692
Loss from continuing
Operations (986) (2,936) (1,718) (1,849)
Income (loss) from
discontinued operations (26) (36) 1,768 (2)
Net Loss (1,012) (2,972) 50 (1,851)
Net Loss per Common Share:
Basic and diluted:
Loss from continuing
Operations $ (.02) $ (.05) $ (.02) $ (.03)
Income (loss) from
Discontinued operations $ .00 $ .00 $ .00 $ .00
Total $ (.02) $ (.05) $ (.02) $ (.03)
Quarters Ended
-------------------------------------------------------------
3/31/04 6/30/04 9/30/04 12/31/04
------- ------- ------- --------
Revenue $ 2,936 $ 3,686 $ 2,446 $ 4,025
Gross margin 822 1,308 496 1,327
Loss from continuing
Operations (1,067) (845) (1,513) (306)
Income (loss) from
discontinued operations 30 (86) 101 15
Net Loss (1,037) (930) (1,412) (291)
Net Loss per Common Share:
Basic and diluted:
Loss from continuing
Operations $ (.02) $ (.01) $ (.03) $ (.01)
Income (loss) from
Discontinued operations $ .00 $ (.01) $ .01 $ .00
Total $ (.02) $ (.02) $ (.02) $ (.01)
70
Item 9: Changes in and Disagreements with Accountants on Accounting and
-----------------------------------------------------------------------
Financial Disclosure
--------------------
None in 2005.
Item 9A: Controls and Procedures
--------------------------------
(a) Evaluation of disclosure controls and procedures.
Harold Blomquist and Brian Alleman, serve as the Company's chief executive
officer and chief financial officer, respectively, after evaluating the
effectiveness of the Company's disclosure controls and procedures as of the end
of the period covered by this annual report (the "Evaluation Date") concluded
that as of the Evaluation Date, the Company's disclosure controls and procedures
were 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 and
to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is accumulated and communicated
to our management to allow timely decisions regarding required disclosure. As
noted in the Explanatory Note at the beginning of this Form 10-K/A and as noted
in Note 2 to the Consolidated Financial Statements contained in this Form
10-K/A, the Company has reclassified $8,459,000 from Temporary Equity to
Shareholders Equity. In light of the reclassification described above, the
Company's chief executive officer and chief financial officer have reevaluated
the Company's disclosure controls and procedures as of the Evaluation Date to
determine whether the reclassification changes their conclusion. Based on this
reevaluation, the Company's chief executive officer and chief financial officer
have determined that the reclassification does not change their conclusion.
(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, 2005, that have materially affected,
or are reasonably likely to materially affect, internal control over financial
reporting.
Item 9B: Other Information
--------------------------
None in 2005.
71
PART III
Item 10: Directors and Executive Officers of the Registrant
-----------------------------------------------------------
Directors and Executive Officers
Our directors and executive officers are as follows:
Name Age Position
---- --- --------
Harold Blomquist....... 53 Chairman of the Board, Chief Executive Officer and President
Brian Alleman.......... 49 Vice President and Chief Financial Officer, Corporate Secretary
Alfred Stein........... 72 Director
Robert H. Keeley....... 64 Director
Ronald Sartore......... 56 Director
Robert Pearson......... 70 Director
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 at the 2008 annual meeting. In October
2003, Mr. Blomquist was elected to the position of Chairman of the Board of
Directors. Mr. Blomquist has served as Chief Executive Officer and President of
the Company since May 2005. He served as a Director on the Board of Microsemi,
Inc. from February 2003 to February 2006, 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., and 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.
ROBERT C. PEARSON has served as a director since July 2002. Mr. Pearson's
current term of office as a director expires at the 2008 annual meeting. He
72
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.,
and Advanced Power Technology, Inc., all publicly held. He is also a Director of
eOriginal, Inc., a privately held company.
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 the System
Architecture Group for Cypress Semiconductor Corporation's Consumer and
Computation Division. Mr. Sartore joined Cypress Semiconductor Corporation, or
"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 13 US patents and obtained a BS degree in Electrical Engineering from
Purdue University.
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 45 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 five 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 two publicly traded companies, Advanced Power Technology and ESS
Technology, as well as several private startup companies. He also has served on
the board of directors at Applied Materials, Radio Shack Corporation and was
73
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. Mr. Keeley's
current term of office as a director expires at the 2007 annual meeting. He is
currently Professor (Emeritus) at the University of Colorado at Colorado Springs
where he served as the El Pomar Professor of Business Finance from 1992 until
2004. From 1986 to 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 Bachelor's degree
in electrical engineering from Stanford University, an M.B.A. from Harvard
University, where he was a Baker Scholar, and a Ph.D. in business administration
from Stanford University. Dr. Keeley is a director and president of a private
company in the wind energy business, and a director of two other private
companies.
BRIAN ALLEMAN has served as Vice President and Chief Financial Officer at
the Company since June of 2005. Mr. Alleman is a partner in the Denver office of
Tatum LLC, a national firm of experienced executives serving as full-time,
part-time, interim, project, or on-staff professionals to provide executive
solutions to companies undertaking significant change. Mr. Alleman has over 25
years of experience in financial management, with 10 years of experience in
leading international accounting firms. For nine years prior to joining Tatum,
Mr. Alleman served as Vice President and Chief Financial Officer with Centuri
Corporation in Penrose, Colorado. Mr. Alleman will remain a partner in Tatum,
which will allow Simtek access to a variety of professional resources provided
by Tatum to its clients. Mr. Alleman holds a Bachelors Degree in Accounting from
Seton Hall University and became a Certified Public Accountant in the State of
New Jersey in 1980.
Audit Committee
The Board has established an Audit Committee as one of the three standing
committees of the Board. The Audit Committee consists of Robert Keeley as the
chairperson, and Alfred Stein. The Audit Committee assists the Board in its
oversight of the integrity of the Company's accounting, auditing, and reporting
practices. Our Board has determined that Dr. Keeley has the requisite education,
background or experience to be considered an "audit committee financial expert"
as that term is defined by applicable SEC rules. All members of the Audit
Committee are "independent" under current Nasdaq Stock Market, Inc. listing
standards.
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, 2005, all filing requirements applicable to officers,
directors and greater than 10% beneficial owners of our common shares under
Section 16(a) of the Securities Exchange Act of 1934, as amended, were complied
74
with except as noted below. Mr. Blomquist filed one amendment to Form 4 on
October 25, 2005 (which amended a Form 4 previously filed on July 1, 2005, with
respect to a transaction occurring on May 9, 2005 and May 17, 2005).
Code of Business Conduct and Ethics
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. In the event that we
make changes in, or provide waivers of, the provisions of the Code of Business
Conduct and Ethics that the SEC requires us to disclose, we intend to disclose
these events on our website. A copy of our Code of Business Conduct and Ethics
is available for any person, without charge, upon request, by addressing your
request to: Simtek Corporation, 4250 Buckingham Dr. #100, Colorado Springs, CO
80907, Attention: Investor Relations.
Item 11: Executive Compensation
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
individuals acting as the Chief Executive Officer during the fiscal year ended
December 31, 2005. There were no other executive officers of the Company who
served during any part of 2005 whose annual salary and bonus for the fiscal year
ended December 31, 2005 exceeded $100,000.
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
------------------------------------------------------- -------------
Securities
Other Annual Underlying
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Options
--------------------------- ---- ---------- --------- ---------------- ----------
Harold A. Blomquist(1) 2005 $ 209,375 50,000 150,490 2,535,000
Chief Executive Officer, 2004 $ -- -- -- --
President and Chairman of 2003 $ -- -- -- --
the Board
Douglas M. Mitchell(2) 2005 $ 174,922 -- 118,027 --
Chief Executive Officer, Chief 2004 $ 175,000 -- -- --
Financial Officer (acting) and 2003 $ 175,000 -- -- 200,000
President
(1) Mr. Blomquist became Chief Executive Officer and President on May 9, 2005.
(2) Mr. Mitchell resigned as Chief Executive Officer, Chief Financial Officer
(acting) and President on May 9, 2005.
75
Option Grant Table
The following table sets forth certain information with respect to options
granted by us during the fiscal year ended December 31, 2005 to the individuals
named in the summary compensation table above.
Shares
subject to
Options Potential Realizable
Shares Granted to Market Value at Assumed
Subject to Employees Price per Annual Rate of Stock
Options in Fiscal Exercise Share on Price Appreciation
Granted in Year % of Price Per Date of Expiration for Option Term
Name Fiscal Year Total Share Grant Date 5% 10%
- ---- ----------- ---------- --------- --------- ----------- --------- ---------
Harold A. Blomquist(1) 35,000 2.29% $0.62 $0.62 2/15/2012 $8,834 $20,587
Harold A. Blomquist 1,096,125 71.86% $0.66 $0.66 5/9/2012 $294,514 $686,337
Harold A. Blomquist 1,403,875 92.03% $0.54 $0.54 5/17/2012 $308,620 $719,210
(1) Mr. Blomquist became Chief Executive Officer and President on May 9, 2005.
Year-End Option Table
The following table sets forth, as of December 31, 2005, the number of
shares subject to unexercised options held by the individuals named in the
summary compensation table above. 2,030,556 exercisable options had an exercise
price less than the last sale price of our common stock underlying the options
as reported by the OTC Electronic Bulletin Board on the last trading day of the
fiscal year ended December 31, 2005.
Value of Unexercised
Number of Unexercised Options in-the-money Options at
Shares at Fiscal Year-End Fiscal Year-End
-------------- ------------------------------- -------------------------------
Acquired on Value Exercisable Unexercisable Exercisable Unexercisable
Name Exercise (#) Realized ($) (#) (#) ($) ($)
- ------------------------ -------------- -------------- --------------- --------------- --------------- ---------------
Harold A. Blomquist(1) 0 $ 0 622,361 2,013,889 $ 0 $ 0
Douglas M. Mitchell(2) 250,000 $ 9,866 553,333 16,667 $ 32,700 $ 2,500
(1) Mr. Blomquist became Chief Executive Officer and President on May 9, 2005.
(2) Mr. Mitchell resigned as Chief Executive Officer, Chief Financial Officer
(acting) and President on May 9, 2005.
Director Compensation Overview
Beginning March 2004, each director who was not an employee received $1,500
for each meeting of the Board, attended in person, and $500 for each meeting of
a committee of the Board. Beginning January 1, 2005, each director of the Board
76
also received a $10,000 annual stipend; the stipend is paid quarterly. Until the
Company has two consecutive quarters of net profit, the stipend is paid in
restricted common stock. The cost per common share is calculated based on the
average closing price of the Company's common stock during the 20 trading days
prior to last day of each quarter. Commencing the first quarter after the
Company has shown two consecutive quarters of audited net profit, the stipend
will be paid in cash. Upon initial appointment or election to the Board, each
newly appointed or elected member receives options to purchase 100,000 shares of
the Company's common stock. Each member of the Board receives, within the first
month of each calendar year, while serving as a member of the Board, a grant of
options to purchase 35,000 shares of the Company's common stock. Along with the
above compensation, the Chairman of the Board receives $4,000 per calendar
quarter, as long as the Chairman is not an employee. Directors are also
reimbursed for their reasonable out-of-pocket expenses incurred in connection
with their duties to us.
Employment Contracts and Termination of Employment Arrangements
The material terms of Harold Blomquist's employment with the Company are as
set forth below, as previously disclosed in Item 5.02(c) of the Current Report
on Form 8-K filed on May 12, 2005. Mr. Blomquist will be employed for one year
with automatic extensions for additional one-year periods unless otherwise
terminated. Mr. Blomquist's base salary will be $325,000 per year and he will be
eligible to receive a yearly cash bonus, based on performance, of up to 100% of
his salary. In addition, Mr. Blomquist will receive a yearly bonus of options to
purchase between 100,000 and 400,000 shares of the Company's common stock; the
exact amount will be based on performance. Upon beginning employment, Mr.
Blomquist received options to purchase 2.5 million shares of the Company's
common stock and a $50,000 bonus. Within four months of beginning employment,
Mr. Blomquist was required to purchase 200,000 shares of common stock from the
Company, which Mr. Blomquist did on May 19, 2005. The agreement provided that
for each share of common stock Mr. Blomquist purchased from the Company within
six months of beginning employment, including the 200,000 shares he was required
to purchase, the Company would grant him an additional share, up to a maximum of
500,000 matching shares. In addition to the 200,000 shares he purchased on May
19, 2005, Mr. Blomquist purchased 275,000 shares on November 9, 2005; in each
case, the purchase price was determined by calculating the average close price
for the five trading days prior to the purchase date. We issued an additional
475,000 shares of our common stock to Mr. Blomquist for no additional
consideration to match these previous stock purchases. Upon termination, Mr.
Blomquist will be restricted from competing against the Company for a period of
18 months. If Mr. Blomquist is terminated by the Company without cause, all of
Mr. Blomquist's unvested stock options will immediately vest and he will
continue to receive his base salary, benefits, and cash and stock bonuses for 18
months. If Mr. Blomquist terminates employment due to good cause or as a result
of constructive termination relating to a change of control of the Company, all
of Mr. Blomquist's unvested stock options will immediately vest and he will
continue to receive his base salary, benefits and cash and stock bonuses for 18
months.
Incident to Douglas Mitchell's resignation as director, Chief Executive
Officer, President and Chief Financial Officer (acting) of Simtek, and as
Chairman of the Board of Simtek's subsidiary, Q-DOT, Inc., Simtek entered into a
77
Separation Agreement, dated May 9, 2005 (the "Separation Agreement") with Mr.
Mitchell. The Separation Agreement provides that for six months following the
date of the Separation Agreement, Mr. Mitchell would receive a base salary
(prorated from an annualized base salary of $225,000), and for an additional 12
months following the six months mentioned above, he will receive $1,875 per
month in exchange for providing consulting services to Simtek. Mr. Mitchell's
stock options will continue to vest and his vested stock options will remain
exercisable during the period that he continues to receive his base salary and
during the period that he provides consulting services to Simtek. Per the terms
of the Separation Agreement, the Company granted to Mr. Mitchell 150,000 shares
of common stock on June 15, 2005 and 50,000 shares of common stock on November
25, 2005. The Separation Agreement also contains a mutual release.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee, during fiscal year 2005, consisted of Ronald
Sartore, Robert Pearson, Douglas Mitchell (until May 2005) and Harold Blomquist
(beginning May 2005). Mr. Mitchell was our Chief Executive Officer, President
and Chief Financial Officer (acting), as well as the Chairman of our subsidiary,
Q-DOT, Inc., until he resigned from such positions on May 9, 2005. Mr. Blomquist
has been the Chairman of our Board of Directors since October 2003, and has been
our Chief Executive Officer and President since May 9, 2005. On June 28, 2005,
we issued to 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, warrants to purchase 200,000 shares of our
common stock at $0.50 per share with an exercise period of 5 years. These
warrants were issued in exchange for an agreement to delay making principal
redemption installments under the 7.50% Convertible Debentures issued by Simtek
in 2002 in the aggregate principal amount of $3,000,000. In connection with the
sale of $11,000,000 of our common stock on December 30, 2005, instead of
lowering the conversion price of the Convertible Debentures, as required by the
terms of the Convertible Debentures, from $0.312 per share to $0.16 per share as
a result of the December 30, 2005 offering at $0.16 per share, we agreed with
the RENN Capital Group that the conversion price would only be lowered to $0.22
per share as a result of the December 30, 2005 offering. As a result, instead of
just 9,615,384 shares issuable upon conversion of the Convertible Debentures
(which would be the case were the conversion price still $0.312 per share),
there are currently a total of 13,636,364 shares of common stock that are
issuable upon conversion of the debentures as a result of the reduction of the
conversion price to $0.22 per share. Also on December 30, 2005, we issued a
total of 9,375,000 shares of common stock to Renaissance Capital Growth and
Income Fund III, Inc., Renaissance US Growth Investment Trust PLC and BFSUS
Special Opportunities Trust PLC in exchange for a total of $1,500,000. 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.
78
Item 12: Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------
Securities Authorized For Issuance Under Equity Compensation Plans
The information concerting securities authorized for issuance under equity
compensation plans is included in Item 5 "Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities" of this
Form 10-K under the caption "Equity Compensation Plan Information".
Security Ownership of Certain Beneficial Owners and Management
The table below sets forth information regarding ownership of our common
stock as of April 25, 2006 by each person who is known by us to beneficially own
more than five percent of our common stock, by each director, by each current or
former executive officer named in the summary compensation table, and by all
directors and current executive officers as a group. Shares issuable within
sixty days after April 25, 2006 upon the exercise of options, warrants or
debentures are deemed outstanding for the purpose of computing the percentage
ownership of persons beneficially owning such options, warrants or debentures
but are not deemed outstanding for the purpose of computing the percentage
ownership of any other person. Percentage of beneficial ownership of common
stock prior to and after the offering is based on 146,920,823 shares of common
stock outstanding as of March 31, 2006.
Amount and Nature
Name and Address of Beneficial Percent of
of Beneficial Owner Ownership Class
------------------- ------------------ ----------
Robert H. Keeley 180,007 (1) *
P. O. Box 240
Hillside, CO 81232
Harold A. Blomquist 1,993,534 (2) 1.35%
3935 Serenity Place
Colorado Springs, CO 80908
Robert Pearson 110,007 (3) *
8080 N. Central Expressway,
Suite 210-LB59
Dallas, TX 75203
Ronald Sartore 257,924 (4) *
14445 Cypress Point
Poway, CA 92064
Alfred Stein 198,924 (5) *
410 Old Oak Court
Los Altos, CA 94022
Brian Alleman 27,778 (6) *
12861 Serenity Park
Colorado Springs, CO 80907
Douglas Mitchell 839,386 (7) *
1775 Sunshine Circle
Woodland Park, CO 80863
79
Renaissance Capital Growth &
Income Fund III, Inc. 9,537,782 (8) 6.28%
c/o RENN Capital Group
8080 N. Central Expressway,
Suite 210-LB59
Dallas, TX 75203
Renaissance US Growth Investment
Trust PLC 9,537,783 (9) 6.28%
c/o RENN Capital Group
8080 N. Central Expressway,
Suite 210-LB59
Dallas, TX 75203
BFSUS Special Opportunities Trust PLC. 8,537,783 (10) 5.62%
c/o RENN Capital Group
8080 N. Central Expressway,
Suite 210-LB59
Dallas, TX 75203
SF Capital Partners, Ltd 10,107,367 6.88%
3600 South Lake Drive
St. Francis, WI 53235
Cypress Semiconductor Corporation 21,796,428 (11) 13.46%
3901 N. First Street
San Jose, CA 95134
Crestview Capital Master LLC 24,687,500 16.80%
95 Revere Drive, Suite A
Northbrook, IL 60062
Big Bend XXVII Investments, L.P. 14,375,000 9.78%
3401 Armstrong Avenue
Dallas, TX 75205-4100
Toibb Investment LLC 11,875,000 8.08%
6355 Topanga Canyon Blvd., Suite 335
Los Angeles, CA 91367
All current executive officers and
directors as a group 2,768,174 (12) 1.86%
(6 persons)
----------------------
* Less than one percent.
(1) 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. Includes 121,250 shares issuable upon exercise of options. Includes
33,757 shares of restricted common stock that are due, but have not been
issued to Mr. Keeley as part of his directors' compensation for the period
January 1, 2005 through March 31, 2006.
(2) Includes 800 shares of our common stock that Mr. Blomquist's son personally
owns and includes 1,039,028 shares issuable upon exercise of options.
Includes 3,706 shares of restricted common stock that are due, but have not
been issued to Mr. Blomquist as part of his directors' compensation for the
period January 1, 2005 through March 31, 2005, the end of the last quarter
before the date he became our chief executive officer.
(3) Includes 76,250 shares issuable upon exercise of options. Includes 33,757
shares of restricted common stock that are due, but have not been issued to
Mr. Pearson as part of his directors' compensation for the period January
1, 2005 through March 31, 2006.
80
(4) Includes 164,167 shares issuable upon exercise of options. Includes 33,757
shares of restricted common stock that are due, but have not been issued to
Mr. Sartore as part of his directors' compensation for the period January
1, 2005 through March 31, 2006.
(5) Includes 164,167 shares issuable upon exercise of options. Includes 33,757
shares of restricted common stock that are due, but have not been issued to
Mr. Stein as part of his directors' compensation for the period January 1,
2005 through March 31, 2006.
(6) Includes 27,778 shares issuable upon exercise of options.
(7) Includes 470,000 shares issuable upon exercise of options. Mr. Mitchell
resigned as an officer and director of Simtek and Q-DOT, Inc. on May 9,
2005.
(8) Assumes conversion, at a conversion price of $0.22 per share, of debentures
issued to Renaissance Capital Growth & Income Fund III, Inc. for 4,545,455
shares of our common stock. Assumes exercise of warrants held by
Renaissance Capital Growth & Income Fund III, Inc. for 316,666 shares of
our common stock. Includes 66,666
(9) Assumes conversion, at a conversion price of $0.22 per share, of debentures
issued to Renaissance US Growth & Investment Trust PLC for 4,545,455 shares
of our common stock. Assumes exercise of warrants held by Renaissance US
Growth Investment Trust PLC for 316,667 shares of our common stock.
(10) Assumes conversion, at a conversion price of $0.22 per share, of debentures
issued to BFSUS Special Opportunities Trust PLC for 4,545,455 shares of our
common stock. Assumes exercise of warrants held by BFSUS Special
Opportunities Trust PLC for 316,667 shares of our common stock.
(11) Assumes exercise of warrants held by Cypress for 15,055,612 shares of our
common stock.
(12) Includes 1,592,640 shares issuable upon exercise of options. Includes
138,734 shares of restricted stock required to be issued for director
compensation. Includes 10,000 shares of our common stock held by Mr.
Keeley's wife, Sandra D. Keeley, with respect to which Mr. Keeley disclaims
beneficial ownership. Includes 800 shares of our common stock that Mr.
Blomquist's son personally owns. Does not include the 27,613,348 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 these 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.
Item 13: Certain Relationships and Related Transactions
--------------------------------------------------------
On July 1, 2002, we received a total of $3,000,000 from Renaissance Capital
Growth and Income Fund III, Inc., Renaissance US Growth Investment Trust PLC and
BFSUS Special Opportunities Trust PLC (collectively, the "RENN Entities") in
return for issuing 7.5% convertible debentures with an aggregate principal
amount of $3,000,000. The convertible debentures have a maturity date of June
28, 2009 and originally had a conversion rate of $0.312, which would have
resulted in 9,615,384 shares being issued upon conversion. In connection with
the sale of $11,000,000 of our common stock on December 30, 2005, instead of
lowering the conversion price of the 2002 convertible debentures, as required by
the terms of the 2002 convertible debentures, from $0.312 per share to $0.16 per
share as a result of the December 30, 2005 offering at $0.16 per share, we
agreed with the RENN Entities that the conversion price would only be lowered to
$0.22 per share as a result of the December 30, 2005 offering. As a result,
instead of just 9,615,384 shares issuable upon conversion of the 2002 debentures
81
(which would be the case were the conversion price still $0.312 per share),
there are currently a total of 13,636,364 shares of common stock that are
issuable to the RENN Entities upon conversion of the debentures as a result of
the reduction of the conversion price to $0.22 per share. Also on December 30,
2005, we issued 9,375,000 shares of common stock to the RENN Entities in
exchange for $1,500,000. On June 28, 2005, we issued warrants to purchase
200,000 shares of our common stock to the RENN Entities in exchange for a waiver
of certain provisions relating to the 7.5% debentures. These warrants have
5-year terms with an exercise price of $0.50 per share. RENN Capital Group, Inc.
is the agent for the RENN Entities. One of our directors, Mr. Robert Pearson,
holds the position of Senior Vice President of RENN Capital Group, Inc.
On October 12, 2004, we issued in a private placement to SF Capital
Partners Ltd. 3,857,367 shares of our common stock and a warrant to acquire
2,063,984 shares of our common stock. The warrant has a 5-year term and
originally had an exercise price of $0.627 per share. In connection with the
sale of $11,000,000 of our common stock on December 30, 2005, we agreed with SF
Capital Partners Ltd. that in exchange for their waiver of certain participation
rights held by them in connection with the December 30, 2005 offering, the
exercise price of their warrant to acquire 2,063,984 shares of our common stock
would be lowered from $0.627 per share to $0.265 per share. Also on December 30,
2005, we issued 6,250,000 shares to SF Capital Partners Ltd. in exchange for
$1,000,000. As of the date of this report, SF Capital Partners Ltd. owns
10,107,367 shares as a result of the October 12, 2004 and December 30, 2005
transactions, and has a warrant to purchase 2,063,984 shares with an exercise
price of $0.265 per share as a result of the October 12, 2004 transaction. By
its terms, the warrant issued to SF Capital Partners Ltd. may not be exercised
if the exercise would cause SF Capital Partners Ltd. to be a 5% or more holder
of all of our outstanding common stock; however, SF Capital Partners Ltd. may
waive such restriction on 61 days notice to us. Given the number of shares of
our common stock that SF Capital Partners Ltd. holds as of the date of this
report, SF Capital Partners Ltd. cannot exercise such warrant unless it waives
the restriction and gives us 61 days notice of the waiver; as such, the
2,063,984 shares issuable under the warrant are not included in SF Capital
Partner Ltd.'s entry in the "Security Ownership of Certain Beneficial Owners and
Management" table above under the column entitled "Amount and Nature of
Beneficial Ownership."
On May 4, 2005, we received $4,000,000 from Cypress in return for issuing
6,740,816 shares of our common stock and warrants to acquire 5,055,612 shares of
our common stock. The warrants have a 10-year term with an exercise price of
$0.7772. On March 24, 2006, we entered into a License and Development Agreement
with Cypress pursuant to which, among other things, Cypress agreed to license
certain intellectual property from us to develop and manufacture standard,
custom and embedded nvSRAM products, we agreed with Cypress to co-develop
certain nvSRAM products and Cypress agreed to pay us $4 million in pre-paid
royalties paid in certain installments. Under the License and Development
Agreement, we issued on March 24, 2006 a warrant granting Cypress the right to
purchase 10 million shares of our common stock. We also agreed to issue, upon
payment by Cypress of an installment of pre-paid royalties on June 30, 2006. a
warrant granting Cypress the right to purchase 5 million shares of our common
stock and we agreed to issue, upon payment by Cypress of an installment of
pre-paid royalties on December 31, 2006, a warrant granting Cypress the right to
purchase 5 million shares of our common stock. Each of these warrants has, or
will have when issued, an exercise price per share of $0.75 with a term of 10
years from the date of issuance.
82
On May 19, 2005 and pursuant to his employment agreement with us, Mr.
Harold Blomquist, our President and Chief Executive Officer, purchased 200,000
shares of our common stock directly from us at a purchase price of $0.542 per
share. On November 9, 2005 and pursuant to his employment agreement with us, Mr.
Blomquist purchased 275,000 shares of our common stock directly from us at a
purchase price of $0.298 per share. In each case, the purchase price was
determined by calculating the average close price for the five trading days
prior to the purchase date. On January 20, 2006 and also pursuant to his
employment agreement with us, we issued an additional 475,000 shares of our
common stock to Mr. Blomquist for no additional consideration to match his
previous stock purchases.
On December 30, 2005, as part of our sale of $11,000,000 of our common
stock, we issued (in addition to the shares issued to SF Capital Partners Ltd.
and the RENN Entities on such date, as described above, as well as certain other
individual and institutional investors): Crestview Capital Master LLC 24,687,500
shares in exchange for $3,950,000; Big Bend XXVII Investments, L.P. 14,375,000
shares for $2,300,000; and Toibb Investment LLC 11,875,000 shares for
$1,900,000.
Item 14. Principal Accounting Fees and Services
-----------------------------------------------
Hein & Associates LLP served as the Company's principal accountants for the
fiscal year ended December 31, 2005, and the board has selected Hein &
Associates LLP as Simtek's principal accountants for the 2006 fiscal year.
Audit Fees
Simtek was billed an aggregate of approximately $101,014 and approximately
$86,173 in fees for professional services rendered during the fiscal years ended
December 31, 2005 and December 31, 2004, 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-Q and
10-QSB for such fiscal years and statutory and regulatory filings or engagements
for such years.
Audit-Related Fees
Simtek was billed $11,846 and $4,500 for assurance and related services by
Hein & Associates LLP during the fiscal years ended December 31, 2005 and
December 31, 2004, respectively.
83
Tax Fees
Simtek was billed an aggregate of $12,100 and $15,200 in fees for
professional services rendered during the fiscal year ended December 31, 2005
and December 31, 2004, respectively, for tax compliance and tax advice. 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.
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, 2005 and December 31,
2004.
Pre-Approval Policies and Procedures
All audit and audit-related services, tax services and other services were
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.
85
PART IV
Item 15: Exhibits
-----------------
3.1 Amended and Restated Articles of Incorporation.(19)
3.2 Bylaws.(2)
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 (9)
4.9 Form of Q-DOT Group, Inc. Incentive Stock Option Agreement between the
Company and Eligible Employees.(9)
4.10 Amendment to the 1994 Non-Qualified Stock Option Plan.(9)
4.11 Amendment to the 1994 Non-Qualified Stock Option Plan (17)
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 Manufacturing Agreement between Chartered Semiconductor Manufacturing,
PTE, LTD. and Simtek Corporation dated September 16, 1992(6)
10.4 Separation Agreement, dated May 9, 2005, between Simtek Corporation
and Douglas M. Mitchell(8)
10.5 Technology Development, License and Product Agreement between Amkor
Technology and Simtek (10)
10.6 Manufacturing Services Agreement between Amkor Technology, Inc. and
Simtek Corp (10)
10.7 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 (11)
10.8 7.5% $1,000,000 Convertible Debenture between Simtek Corporation and
BSFSUS Special Opportunities Trust, PLC (11)
10.9 7.5% $1,000,000 Convertible Debenture between Simtek Corporation and
Renaissance Capital Growth & Income Fund III, Inc. (11)
10.10 7.5% $1,000,000 Convertible Debenture between Simtek Corporation and
Renaissance Capital US Growth & Income Trust, PLC (11)
10.11 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 (11)
10.12 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 (11)
10.13 Technology Development, License and Product Agreement between Amkor
Technology and Simtek - Amended September 2002 (12)
10.14 Assignment, dated February 21, 2003, of the Agreement(s) between
Simtek Corporation and Amkor Technology, Inc.(13)
10.15 Securities Purchase Agreement between Simtek Corporation and
Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US
Growth Investment Trust, PLC and BFSUS Special Opportunities Trust,
PLC(14)
10.16 Form of $1.25 Stock Purchase Warrant(14)
10.17 Form of $1.50 Stock Purchase Warrant(14)
10.18 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) (15)
86
10.19 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 (16)
10.20 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) (16)
10.21 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) (16)
10.22 Share Purchase Agreement, dated May 4, 2005, by and between the
Company and Cypress Semiconductor Corporation (20)
10.23 Development and Production Agreement, dated May 4, 2005, by and
between the Company and Cypress Semiconductor Corporation (20)
10.24 Escrow Agreement, dated May 4, 2005, by and among the Company, Cypress
Semiconductor Corporation and U.S. Bank, National Association (20)
10.26 Employment agreement by and between the Company and Harold Blomquist
(8)
10.27 Waiver letter agreement, dated June 28, 2005, by and between the
Company, Q-DOT, Inc., Renaissance Capital Growth & Income Fund III,
Inc., Renaissance US Growth Investment Trust PLC and BFS US Special
Opportunities Trust PLC (21)
10.28 Asset Purchase Agreement, dated August 30, 2005, by and among Hittite
Microwave Corporation, HMC Acquisition Corporation, the Company and
Q-DOT, Inc. (22)
10.29 Escrow Agreement, dated August 30, 2005, by and among the Company,
Q-DOT, Inc., Hittite Microwave Corporation, HMC Acquisition
Corporation, and U.S. Bank, National Association (22)
10.30 Confidentiality, Non-Disclosure and Restrictive Covenant Agreement,
dated August 30, 2005, by and among Hittite Microwave Corporation, HMC
Acquisition Corporation, the Company and Q-DOT, Inc. (22)
10.31 Asset Purchase Agreement, dated December 7, 2005, by and between the
Company and Zentrum Mikroelektronik Dresden AG (23)
10.32 Form of License Agreement, dated December 30, 2005, by and between the
Company and Zentrum Mikroelektronik Dresden AG (23)
10.33 Form of Non-Competition and Non-Solicitation Agreement, dated December
30, 2005, by and between the Company and Zentrum Mikroelektronik
Dresden AG (23)
10.34 Form of Registration Rights Agreement, dated December 30, 2005, by and
between the Company and Zentrum Mikroelektronik Dresden AG (23)
10.35 Form of Securities Purchase Agreement, dated December 30, 2005, by and
among the Company various purchasers (24)
10.36 Form of Registration Rights Agreement, dated December 30, 2005, by and
among the Company and various purchasers (24)
10.36 Form of Registration Rights Agreement, dated December 30, 2005, by and
among the Company and various purchasers (24)
10.37 License and Development Agreement, dated March 24, 2006, by and
between the Company and Cypress Semiconductor Corporation (25)
10.38 Amended and Restated Registration Rights Agreement, by and between the
Company and Cypress Semiconductor Corporation (25)
14.1 Code of Business Conduct and Ethics (26)
23.1 Consent of Independent Registered Public Accounting Firm
31.1 Certification pursuant to Section 302 of the Sarbanes-Act of 2002 of
Principal Executive Officer
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of Principal Financial Officer
32.1 Certification pursuant to Section 906 of the Sarbanes-Act of 2002 of
Principal Executive Officer
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 of Principal Financial Officer
----------------
(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.
87
(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) Incorporated by reference to the Form 8-K filed with the Commission on May
12, 2005
(9) Incorporated by reference to the Company's Form S-8 Registration Statement
(Reg. No. 333-73794) filed with the Commission on November 20, 2001
(10) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the Commission on March 27, 2002
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
filed with the Commission on August 13, 2002
(12) Incorporated be reference to the Company's Quarterly Report on Form 10-QSB
filed with the Commission on November 8, 2002
(13) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the Commission on March 27, 2003
(14) Incorporated by reference from the Current Report on Form 8-K filed by the
Company with the SEC on November 12, 2003
(15) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the Commission on March 4, 2004
(16) Incorporated by reference from the Current Report on Form 8-K filed by the
Company with the Commission on October 12, 2004
(17) Incorporated by reference to the Company's Form S-8 Registration Statement
(Reg. No. 333-1210005) filed with the Commission on December 7, 2004
(18) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the Commission on March 17, 2005 as amended by the Company's
Amended Annual Report on Form 10-KSB filed with the Commission on May 11,
2005
(19) Incorporated by reference to the Company's Form S-2 Registration Statement
(Reg. No. 333-123639) filed with the Commission on March 29, 2005
(20) Incorporated by reference to the Company's Current Report on Form 8-K filed
by the Company with the SEC on May 10, 2005
(21) Incorporated by reference to the Company's Current Report on Form 8-K filed
by the Company with the SEC on July 5, 2005
(22) Incorporated by reference to the Company's Current Report on Form 8-K filed
by the Company with the SEC on September 6, 2005
(23) Incorporated by reference to the Company's Current Report on Form 8-K filed
by the Company with the SEC on December 13, 2005
(24) Incorporated by reference to the Company's Current Report on Form 8-K filed
by the Company with the SEC on January 3, 2006
(25) Incorporated by reference to the Company's Current Report on Form 8-K filed
by the Company with the SEC on March 30, 2006
(26) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed by the Company on March 4, 2004
88
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 December 11, 2006.
SIMTEK CORPORATION
By: /s/ Harold Blomquist
-----------------------------------
Harold Blomquist
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on December 11, 2006 by the following persons on behalf of the
Registrant and in the capacities indicated.
SIGNATURE TITLE
/s/ Harold Blomquist
-------------------------------------
Harold Blomquist Chief Executive Officer and President
/s/ Brian Alleman
-------------------------------------
Brian Alleman Chief Financial Officer
/s/ Harold Blomquist
-------------------------------------
Harold Blomquist Chairman of the Board
/s/ Robert H. Keeley
-------------------------------------
Robert H. Keeley Director
/s/ Alfred Stein
-------------------------------------
Alfred Stein Director
89
Exhibit 31.1
CERTIFICATIONS
I, Harold Blomquist, certify that:
1. I have reviewed this Annual Report on Form 10-K/A of Simtek Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrants' board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: December 11, 2006
/s/Harold Blomquist
Harold Blomquist
------------------------------
Chief Executive Officer and
resident
Exhibit 31.2
CERTIFICATIONS
I, Brian Alleman, certify that:
1. I have reviewed this Annual Report on Form 10-K/A of Simtek Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrants' board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: December 11, 2006
/s/Brian Alleman
--------------------------------------
Brian Alleman
Chief Financial Officer
(Principal Accounting Officer and Duly
Authorized Officer of the Registrant)
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
PRESIDENT PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Harold Blomquist, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Annual Report of Simtek Corporation on Form 10-K/A for the annual period ended
December 31, 2005 fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 and that information contained in such
Form 10-K/A fairly presents in all material respects the financial condition and
results of operations of Simtek Corporation.
/s/Harold Blomquist
-------------------------------------
Harold Blomquist
Chief Executive Officer and President
December 11, 2006
Exhibit 32.2
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
PRESIDENT PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Brian Alleman, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of Simtek Corporation on Form 10-K/A for the annual period ended December
31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Form
10-K/A fairly presents in all material respects the financial condition and
results of operations of Simtek Corporation.
/s/Brian Alleman
------------------------------------------
Brian Alleman
Chief Financial Officer
(Principal Accounting Officer and
Duly Authorized Officer of the Registrant)
December 11, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment #2 to Form 10-Q
----------------------------------
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter ended March 31, 2006
OR
[ ] 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)
-------------------------------------------------
Delaware 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
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
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-accelerated Filer [X]
The total number of shares of Common Stock issued and outstanding as of December
5, 2006, 2006 was 16,147,746, after giving effect to the one for ten reverse
stock split completed on October 5, 2006.
Explanatory Note
We are filing this Amendment No. 2 on Form 10-Q/A to Simtek Corporation's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006,
which was originally filed with the Securities and Exchange Commission (the
"SEC") on May 15, 2006 (the "Original Form 10-Q") and amended by Amendment No. 1
filed with the SEC on Form 10-Q/A on August 4, 2006 to reflect the
reclassification of $10,332,000 from Temporary Equity to Shareholders' Equity.
Simtek Corporation originally concluded that the net proceeds from the sale of
68,750,000 shares of its common stock on December 30, 2005 should be recorded as
Temporary Equity because of certain provisions in the Registration Rights
Agreement entered into as part of the December 30, 2005 transaction. However,
upon further review, management has determined that the transaction should be
recorded in Shareholders' Equity. Except as set forth in this Explanatory Note,
this Form 10-Q/A does not amend or update any other information set forth in the
Form 10-Q/A originally filed by Simtek Corporation on August 4, 2006 or Form
10-Q originally filed on May 15, 2006, and other disclosures necessary to
reflect subsequent events, have been addressed, in accordance with applicable
disclosure requirements, in our Form 8-Ks filed after March 31, 2006 will be
addressed, in accordance with applicable disclosure requirements, in our Form
10-Q for the three months ended June 30, 2006 or our periodic filings filed
after March 31, 2006.
Part I of this Form 10-Q/A contains more information about this restatement in
"Note 2. Correction of Previously Reported Amounts," which Note accompanies the
condensed consolidated financial statements in Item 1 of Part I.
2
SIMTEK CORPORATION
INDEX
For the Quarter Ended March 31, 2006
PART 1. FINANCIAL INFORMATION
ITEM 1 Page
----
Condensed Consolidated Balance Sheets as of March 31, 2006
and December 31, 2005 4
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2006 and 2005 5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2006 and 2005 6
Notes to Condensed Consolidated Financial Statements 7-15
ITEM 2
Managements Discussion and Analysis of Financial Condition
and Results of Operations 16
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk 22
ITEM 4
Controls and Procedures 23
PART 2. OTHER INFORMATION
ITEM 1 Legal Proceedings 24
ITEM 2 Unregistered Sales of Equity Securities and Use
of Proceeds 24
ITEM 3 Defaults Upon Senior Securities 24
ITEM 4 Submission of Matters to a Vote of Security Holders 24
ITEM 5 Other Information 24
ITEM 6 Exhibits and Reports on Form 8-K 24
SIGNATURES 25
3
SIMTEK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value and share amounts)
ASSETS
------
March 31, 2006 December 31, 2005
-------------- -----------------
(As Restated) (As Restated)
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,814 $ 1,766
Restricted investments 2,281 2,281
Accounts receivable - trade, net 2,854 1,456
Inventory, net 2,572 2,068
Prepaid expenses and other current assets 115 99
Deposits -- 600
-------- --------
Total current assets 10,636 8,270
EQUIPMENT AND FURNITURE, net 621 571
DEFERRED FINANCING COSTS AND DEBT ISSUANCE COSTS 103 111
GOODWILL 914 876
NON-COMPETITION AGREEMENT 8,459 8,910
OTHER ASSETS 37 20
-------- --------
TOTAL ASSETS $ 20,770 $ 18,758
======== ========
LIABILITES AND SHAREHOLDERS' EQUITY
-----------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,049 $ 2,822
Accrued expenses 1,022 1,419
Accrued vacation payable 172 145
Accrued wages 152 40
Obligation under capital leases -- 13
Debentures, current 360 240
-------- --------
Total current liabilities 4,755 4,679
DEBENTURES, NET OF CURRENT 2,640 2,760
-------- --------
Total liabilities 7,395 7,439
COMMITMENTS AND CONTINGENCIES
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,
146,920,823 and 146,910,823 shares issued and outstanding
at March 31, 2006 and December 31, 2005 1,470 1,470
Additional paid-in capital 59,010 56,053
Treasury stock, at cost; 10,000 shares (13) (13)
Accumulated deficit (47,092) (46,191)
Accumulated other comprehensive income:
Cumulative translation adjustment -- --
-------- --------
Total shareholders' equity 13,375 11,319
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 20,770 $ 18,758
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SIMTEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except share and per share amounts)
For the three months ended March 31,
------------------------------------
2006 2005
---- ----
(As Restated)
REVENUE
Product sales, net $ 4,743 $ 2,976
Royalty revenue 1,035 --
------------- -------------
Total Revenue 5,778 2,976
Cost of sales 3,470 2,071
------------- -------------
GROSS PROFIT 2,308 905
OPERATING EXPENSES:
Research and development costs 1,545 1,145
Sales and marketing 944 401
General and administrative 699 293
------------- -------------
Total operating expenses 3,188 1,839
------------- -------------
LOSS FROM OPERATIONS (880) (934)
OTHER INCOME (EXPENSE):
Interest income 40 5
Interest expense (60) (57)
Other expense (1) (1)
------------- -------------
Total other expense (21) (53)
------------- -------------
LOSS FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES (901) (987)
Provision for income taxes -- --
------------- -------------
LOSS FROM CONTINUING OPERATIONS (901) (987)
LOSS FROM DISCONTINUED OPERATIONS -- (26)
------------- -------------
NET LOSS $ (901) $ (1,013)
============= =============
NET LOSS PER COMMON SHARE:
Basic and diluted
Loss from continuing operations $ (.01) $ (.02)
Loss from discontinued operations $ -- $ --
------------- -------------
Total $ (.01) $ (.02)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 146,920,823 62,934,158
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SIMTEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Amounts in thousands)
Three Months Ended March 31,
----------------------------
2006 2005
---- ----
(As Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (901) $(1,013)
Loss from discontinued operations -- 26
Adjustments to reconcile net loss to net cash used in operating
Activities:
Depreciation and amortization 107 111
Expense related to stock options 119 --
Amortization of non-competition agreement 451 --
Net change in allowance accounts 353 49
Deferred financing fees 8 4
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,387) 981
Inventory (943) (500)
Prepaid expenses and other 567 44
Increase (decrease) in:
Accounts payable 224 (255)
Accrued expenses (178) 22
------- -------
Net cash used in operating activities of continuing operations (1,580) (531)
Net cash provided by operating activities of discontinued
operations -- 4
------- -------
Net cash used in operating activities (1,580) (527)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture, net (157) (186)
Purchase of certain assets from ZMD (38) --
------- -------
Net cash used in investing activities of continuing operations (195) (186)
Net cash used in investing activities of discontinued operations -- (23)
------- -------
Net cash used in investing activities (195) (209)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation (13) (13)
Funds receiving from December 2005 equity financing, net 1,874 --
Warrants issued for license rights 965 --
Exercise of stock options -- 58
------- -------
Net cash provided by financing activities 2,826 45
------- -------
Effect of exchange rate changes on cash (3) --
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,048 (691)
CASH AND CASH EQUIVALENTS, beginning of period 1,766 2,147
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 2,814 $ 1,456
======= =======
Cash paid for interest $ 56 $ 57
======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements include the accounts of Simtek and
its wholly owned subsidiaries. Intercompany accounts and transactions have been
eliminated. The financial statements included herein are presented in accordance
with the requirements of Form 10-Q and consequently do not include all of the
disclosures normally made in the registrant's annual Form 10-K filing. These
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Annual Report and Form
10-K, Annual Report and Amendment #1 to Form 10-K and Annual Report and
Amendment #2 to Form 10-K for Simtek Corporation ("Simtek" or the "Company")
filed on April 7, 2006, April 28, 2006, and December 11, 2006, respectively for
fiscal year 2005.
In the opinion of management, the unaudited financial statements reflect
all adjustments of a normal recurring nature necessary to present a fair
statement of the results of operations for the respective interim periods. The
year-end balance sheet data was derived from audited financial statements, but
does not include all disclosures required by accounting principles generally
accepted in the United States of America. Results of operations for the interim
periods are not necessarily indicative of the results of operations for the full
fiscal year.
Stock-Based Compensation
------------------------
Adoption of SFAS 123(R)
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standard 123(R) "Share-Based
Payment" ("SFAS 123(R)") using the modified prospective transition method. In
addition, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 "Share-Based Payment" ("SAB 107") in March, 2005, which
provides supplemental SFAS 123(R) application guidance based on the views of the
SEC. Under the modified prospective transition method, compensation cost
recognized in the quarterly period ended March 31, 2006 includes: (a)
compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123, and (b) compensation
cost for all share-based payments granted beginning January 1, 2006, based on
the grant date fair value estimated in accordance with the provisions of SFAS
123(R). In accordance with the modified prospective transition method, results
for prior periods have not been restated.
The adoption of SFAS 123(R) resulted in stock compensation expense for
the quarterly period ended March 31, 2006 of $119,000 to loss from continuing
operations and loss before income taxes. The Company did not recognize a tax
benefit from the stock compensation expense because the Company considers it is
more likely than not that the related deferred tax assets, which have been
reduced by a full valuation allowance, will not be realized. The following table
summarizes the effects of the share-based compensation resulting from the
application of SFAS No. 123(R) to options granted under the Company's stock
option plan.
Three Months
Ended
March 31, 2006
--------------
(In thousands except per share amounts)
- ---------------------------------------
Research and development $ 39
Sales and marketing 16
General and administrative 64
---------
Share-based compensation effect on loss from continuing
operations before provision for income taxes $ 119
Provision for income taxes -
---------
Net share-based compensation effects on net loss $ 119
=========
Share-based compensation effects on basic and diluted loss
per common share $ -
=========
Share-based compensation effects on cash flow from operations $ 119
=========
7
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Black-Scholes option-pricing model was used to estimate the option fair
values. The option-pricing model requires a number of assumptions, of which the
most significant are, expected stock price volatility and the expected option
term (the amount of time from the grant date until the options are exercised or
expire). Expected volatility was calculated based upon actual historical stock
price movements over the most recent periods ending March 31, 2006 equal to the
expected option term. In accordance with SFAS No. 123(R), the Company adjusts
share-based compensation on a quarterly basis for changes to the estimate of
expected forfeitures based on actual forfeiture experience. The effect of
adjusting the forfeiture rate for all expense amortization after January 1, 2006
is recognized in the period the forfeiture estimate is changed. The effect of
forfeiture adjustments in the first quarter of 2006 was insignificant. The
expected option term was calculated using the "simplified" method permitted by
SAB 107.
SFAS 123(R) requires tax benefits resulting from tax deductions in excess
of the compensation cost recognized for those options ("excess tax benefits") to
be classified and reported as both an operating cash outflow and a financing
cash inflow upon adoption of SFAS 123(R). As discussed in Note 8 - Taxes from
the Company's report on Form 10-K, Amendment #1 to Form 10-K and Amendment #2 to
Form 10-K for the period ending December 31, 2005, as a result of the Company's
net operating losses, the excess tax benefits that would otherwise be available
to reduce income taxes payable have the effect of increasing the Company's net
operating loss carry forwards. Accordingly, because the Company is not able to
realize these excess tax benefits, such benefits have not been recognized in the
condensed statement of cash flow for the quarterly period ended March 31, 2006.
Pro-Forma Stock Compensation Expense for the Quarterly Period Ended March 31,
2005
Prior to January 1, 2006, as permitted under the SFAS No. 123, Accounting
for Stock-Based Compensation, the Company accounted 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 was 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 compensation cost been determined
based on the fair value at the grant dates for awards under employee stock based
compensation plans consistent with the fair value method for the quarter ending
March 31, 2005, the Company's net loss and EPS would have been increased to the
pro forma amounts indicated below.
Three Months
------------
Ended March 31,
---------------
2005
----
(In thousands except per share amounts)
Net loss as reported $ (1,013)
Add: Stock based compensation included in reported
Net loss -
Deduct: Fair value of stock based compensation (141)
--------
Proforma net loss $ (1,154)
========
Net loss as reported - basic and diluted $ (.02)
Proforma net loss - basic and diluted $ (.02)
8
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the modified prospective transition method of SFAS
123(R), the prior comparative quarterly results have not been restated.
Stock Options as of the Quarterly Period Ended March 31, 2006
The Company adopted a Non-Qualified Stock Option Plan in 1994, as amended,
that authorizes 18,600,000 non-qualified stock options that may be granted to
directors, employees, and consultants. The plan permits the issuance of
non-statutory options and provides 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.
The following table summarizes stock options outstanding and changes
during the quarterly period ended March 31, 2006:
Outstanding Options
-------------------------------------------------------------
Weighted
Average
Remaining
Weighted Contractual Aggregate
Number of Average Term Intrinsic
Shares Exercise Price (in years) Value
--------- -------------- ----------- ----------
Options outstanding at January 1, 2006............. 7,969,363 $0.62
Granted.......................................... 640,000 0.27
Exercised........................................ - - -
Cancelled or forfeited........................... (120,000) (1.25)
---------
Options outstanding at March 31, 2006.............. 8,489,363 $0.56 3.63
========= ===== ==== =========
Options exercisable at March 31, 2006.............. 5,193,252 $0.65 3.63
========= ===== ==== =========
There were no options exercised in the period ended March 31, 2006. Shares
available for grant under the Plan as of March 31, 2006 were 5,665,017.
9
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Stock options outstanding and currently exercisable at March 31, 2006 are as
follows:
Outstanding Exercisable
--------------------------------------------------------------------------- ------------------------------------
Weighted Average
------------------------------------------------------
Remaining Weighted
Number Contractual Life Average Number Weighted Average
Exercise Price Outstanding in Months Exercise Price Exercisable Exercise Price
------------------- ------------------ ------------------ ----------------- ------------------ ------------------
$0.14-$0.35 1,780,188 34 $ 0.23 1,140,188 $ 0.20
$0.365-$0.60 3,267,716 53 $ 0.46 1,403,251 $ 0.45
$0.62-$0.90 2,364,125 59 $ 0.66 1,572,479 $ 0.66
$1.125-$1.53 927,334 37 $ 1.26 927,334 $ 1.26
$1.90 150,000 59 $ 1.90 150,000 $ 1.90
------- -------
8,489,363 5,193,252
========= =========
Total estimated unrecognized compensation cost from unvested stock options
as of March 31, 2006 was approximately $1 million, which is expected to be
recognized over the next three years.
The weighted average per share fair value of stock options granted
during the quarterly periods ending March 31, 2006 and 2005 was $0.1727 and
$0.3856, respectively. The fair value was estimated as of the grant date using
the Black-Scholes option pricing model with the following assumptions:
Three Months Ended March 31,
----------------------------
2006 2005
------------- ------------
Volatility 85% 83%
Expected option term 4 years 4 years
Risk-free interest rate 4.59% 3.54%
Expected dividend yield 0% 0%
Modifications of Stock Options Granted
In May 2005, the Company accelerated vesting of certain unvested and
out-of-the-money stock options previously awarded to employees and officers.
Because the price of the Company's common stock was $0.57 on the day of
acceleration, the options, which are exercisable at $0.62 and above, had no
economic value on the date of acceleration. As a result of the acceleration,
options to purchase approximately 1.7 million shares of Simtek common stock are
now exercisable. Options held by non-employee directors were excluded from the
vesting acceleration.
10
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Non-competition Agreement
-------------------------
In December 2005, the Company entered into a non-competition agreement with
Zentrum Mikroelektronik Dresden AG ("ZMD") as part of the acquisition of ZMD's
nvSRAM product line. The Company assigned a value of $8,910,000 to the
non-competition agreement in December 2005. The value assigned to the
non-competition agreement is being amortized on a straight-line basis over its
five-year life. The Company recorded an expense, for the amortization, of
approximately $451,000 to sales and marketing for the three months ended March
31, 2006.
Goodwill
--------
Goodwill represents the excess of the total amount paid to ZMD for the
nvSRAM assets acquired on December 30, 2005 and the fair value assigned to
specific assets. This amount will not be amortized, but will be reviewed for
impairment on a periodic basis. As of March 31, 2006 no impairment of value has
been recorded.
Accumulated other comprehensive income (loss)
---------------------------------------------
The functional currency for Simtek GmbH is the local currency, the Euro.
Assets and Liabilities for this foreign operation are translated at the exchange
rate in effect at the balance sheet date, and income and expenses are translated
at average exchange rates prevailing during the period. Translation gains or
losses are included within shareholders' equity as part of accumulated other
comprehensive income (loss).
2. Correction of Previously Reported Amounts
As more fully described in Notes 2 and 6 to the Consolidated Financial
Statements included in Simtek Corporation's Amendment No. 2 on Form 10-K/A filed
on December 11, 2006 for fiscal year 2005, on December 30, 2005, the Company
sold 68,750,000 shares of its common stock, subject to certain registration
rights. Management initially concluded that the net proceeds of $10,332,000
($8,459,000 received on December 30, 2006 and $1,873,000 received on January 3,
2006) should be recorded as Temporary Equity due to the potential penalties
associated with the registration rights agreement. Management has subsequently
determined that the transaction should have been recorded in Shareholders'
Equity.
The following table reflects the amounts as previously reported and as
restated:
March 31, 2006 December 31, 2005
As As
Reported Restated Reported Restated
(Amounts in thousands)
Consolidated Balance Sheet:
Temporary Equity $ 10,332 $ - $ 8,459 $ -
Common Stock $ 782 $ 1,470 $ 782 $ 1,470
Additional paid-in capital $ 49,366 $ 59,010 $ 48,282 $ 56,053
Total shareholders' equity $ 3,043 $ 13,375 $ 2,860 $ 11,319
11
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Change in Accounting Principle
The Company originally recorded the receipt of the non-refundable prepaid
royalties received from Cypress on March 24, 2006 as a liability to be
recognized as revenue in the future based upon shipments of products by Cypress
to its customers (See Note 8 below). However, the Company subsequently
determined that the non-refundable prepaid royalties are more appropriately
accounted for as minimum royalty payments as described in Staff Accounting
Bulletin 101 "Revenue Recognition in Financial Statements." All of the revenue
recognition criteria contained in Statement of Financial Accounting Concepts No.
5 "Recognition and Measurement in Financial Statements of Business Enterprises"
have been met. Under the previous method of accounting, if Cypress does not
actually sell product, Simtek would never recognize the revenue. Since Simtek
fulfilled all of its obligations prior to receipt of the payment, the
non-refundable payments are more properly accounted for as minimum royalty
payments and recorded as revenue when received.
The following table reflects the amounts as previously reported in Simtek's
Form 10-Q filed on May 15, 2006 and as restated in its Form 10-Q/A filed on
August 4, 2006 with the Securities and Exchange Commission:
As Reported As Restated As Restated
on May 14, on August 4, on
2006 2006 December 11, 2006
(Amounts in thousands)
Consolidated Balance Sheet:
Prepaid royalties $ 1,035 $ -- $
Total liabilities $ 8,430 $ 7,395 $ 7,395
Accumulated deficit $ (48,127) $ (47,092) $ (47,092)
Total shareholders' equity $ 2,008 $ 3,043 $ 13,375
Consolidated Statement of Operations:
Royalty revenue $ -- $ 1,035 $ 1,035
Total revenue $ 4,743 $ 5,778 $ 5,778
Gross profit $ 1,273 $ 2,308 $ 2,308
Loss from operations $ (1,915) $ (880) $ (880)
Net loss $ (1,936) $ (901) $ (901)
12
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Liquidity
During the three months ended March 31, 2006 and the twelve months ended
December 31, 2005, the Company incurred a net loss of approximately $1,936,000
and $5,785,000, respectively and has an accumulated deficit of $48,127,000 as of
March 31, 2006. The Company was also not in compliance with its debentures
throughout 2005 and the first three months of 2006, but was successful in
obtaining waivers through April 1, 2007 from the debenture holders. The Company
will issue the debenture holders a total of 50,000 warrants for receipt of the
waiver. The Company has working capital of approximately $4,846,000 as of March
31, 2006.
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.
If the Company is unable to achieve profitable operations in 2006 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.
5. Revenue Recognition
Revenue Recognition - Product sales revenue is recognized when a valid
purchase order has been received with a fixed price and the products are shipped
to customers FOB origin (Colorado Springs, Colorado or Dresden, Germany),
including distributors. Based on historic business with the majority of the
Company's customers and, in the case of new customers, the Company is reasonably
assured that collectibility on our shipments will occur. Customers receive a
one-year product warranty and sales to distributors are subject to a limited
product exchange program and a price protection in the event of changes in the
Company's product price. The Company provides a reserve for possible product
returns, product price protection and warranty costs at the time the sale is
recognized. The Company has a detailed procedure to ensure that its estimates
for reserves are reasonable and reliable. The reserve for product returns is
based on the actual inventory value of the Company's semiconductor products held
by its distributors. The Company's distributors are permitted to rotate up to 5%
of their stock every six months with the stipulation that they must submit a
replacement order of equal dollar value to the stock that they are returning.
The reserve for price protection is used when the Company authorizes special
pricing to one of its distributors for a specific customer. To date, the
estimates have not been materially different from the credits we have issued
under these reserves.
Revenue from royalties related to non-refundable prepaid royalty payments
is recognized upon receipt. Revenue from royalties related to sales of products
by license partners is recognized upon the notification to us of shipment of
product from the Company's technology license partners to direct customers.
6. Inventories
The Company records inventory using the lower of cost (first-in, first-out)
or market. Inventory at March 31, 2006 and December 31, 2005 included:
March 31, 2006 December 31, 2005
(In Thousands)
Raw Materials $ 67 $ 33
Work in progress 1,476 1,096
Finished Goods 1,588 1,056
------- -------
3,131 2,185
Less reserves for excess inventory (559) (117)
------- -------
$ 2,572 $ 2,068
======= =======
13
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. 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.,
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
were originally convertible into Simtek common stock at $0.312 per share, which
was in excess of the market price per share on July 1, 2002. Through March 31,
2006, 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 May 10, 2006, the Company received a waiver for the two
covenants through April 1, 2007. The Company will issue the debenture holders a
total of 50,000 warrants for receipt of the waiver. However, significant
variances in future actual operations from the Company's current estimates could
result in the reclassification of this note to current liabilities. The
Convertible Debentures allows for an adjustment in the conversion price, if the
Company issues Common Stock in connection with an equity financing, where the
sale price is less than the conversion price of $0.312. This occurred in
December 2005 in connection with the common stock sale of $11,000,000 at a price
of $0.16 per share. Pursuant to the terms of the 2002 convertible debentures,
the Company agreed with the RENN Capital Group that the conversion price would
be reduced to $0.22 per share. Based on the conversion rate of $0.22 per share,
each RENN investment fund is entitled to 4,545,455 shares upon conversion.
On June 28, 2005, the Company received a waiver from the debenture holders
extending until July 1, 2006 the commencement date for principal payments of the
$3 million aggregate principal amount 7.5% convertible debentures issued by the
Company in 2002. The original terms of the debentures required the Company to
make monthly principal payments of $10 per $1,000 of the then remaining
principal amount, beginning on June 28, 2005. The Company will still be required
to make interest payments. Under the terms of the waiver, monthly principal
payments of $13.33 per $1,000 of the then remaining outstanding principal amount
will commence on July 1, 2006. The final maturity date remains as June 28, 2009.
As consideration for the extension, the Company has issued to the debenture
holders warrants to purchase 200,000 shares of Simtek common stock at $0.50 per
share, a premium to the market price on the date of the waiver. The Company
estimated the value of the warrants at the time of grant, using the Black
Scholes option-pricing model, to be approximately $62,000. The Company
recognized $4,000 as additional interest expense for the three months ending
March 31, 2006.
8. Non-Refundable Prepaid Royalties
On March 24, 2006, the Company entered into a Development and License
Agreement with Cypress pursuant to which, among other things, Cypress agreed to
license certain intellectual property from the Company to develop and
manufacture standard, custom and embedded nvSRAM products and Cypress has agreed
to pay to the Company $4,000,000 in non-refundable pre-paid royalties of which
$2 million was paid upon signing of the agreement and $1 million is payable on
each of June 30, 2006 and December 31, 2006. In addition, the Company licensed
rights to use certain intellectual property from Cypress for use in its
products. As part of the Development and License Agreement, the Company agreed
to issue to Cypress warrants to purchase 20 million shares of the Company's
common stock for $0.75 per share. The warrants have a ten year life. The
warrants will be issued upon receipt of each of the prepaid royalty amounts. As
of March 31, 2006, the Company received $2,000,000 from Cypress in pre-paid
royalties. In addition, the Company has issued warrants to purchase 10 million
shares of common stock. The value of the warrants issued of $965,000 was
determined by an independent valuation firm and has been recorded as an increase
in additional paid in capital. The net balance of the non-refundable prepaid
royalties of $1,035,000 was recognized as revenue at the time the payment was
received.
14
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Geographic Concentration
Sales of the Company's semiconductor products by location for the three
months ended March 31, 2006 and 2005 were as follows:
Three Months Ended
March 31,
----------------------
2006 2005
---- ----
United States 19% 28%
Europe 28% 17%
Far East 44% 44%
All Others 9% 11%
---- ----
100% 100%
==== ====
10. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) net of tax is as follows:
Foreign Currency
Translation Adjustment
Balance at January 1, 2006 $ -
Current period change -
---------
Balance March 31, 2006 $ -
11. Discontinued Operation
On August 30, 2005, the Company, along with the Company's wholly-owned
subsidiary, Q-DOT, Inc. ("Q-DOT"), entered into an Asset Purchase Agreement with
Hittite Microwave Corporation ("Hittite") and a wholly-owned subsidiary of
Hittite, HMC Acquisition Corporation ("HMC Acquisition"), whereby substantially
all of the assets of Q-DOT were sold to HMC Acquisition in exchange for a cash
payment of approximately $2.2 million. The Company realized a net gain of
approximately $1,687,000. In addition, Hittite assumed certain future
obligations of Q-DOT, including obligations related to Q-DOT's real estate lease
and certain software license agreements. Incident to the Asset Purchase
Agreement, the parties also entered an Escrow Agreement, whereby $200,000 of the
purchase price was placed in escrow for one year to secure certain
indemnification obligations of Simtek and Q-DOT. In addition, the parties
entered into a Confidentiality, Non-Disclosure and Restrictive Covenant
Agreement, whereby, among other things, Simtek and Q-DOT agreed not to compete
against Hittite and HMC Acquisition for a period of four years with respect to
certain businesses relating to Q-DOT's operations.
In accordance with SFAS No. 144, the consolidated financial statements of
the Company have been recast to present this business as a discontinued
operation. Accordingly, the revenues, the costs and expenses and assets and
liabilities of the discontinued operation have been excluded from the respective
captions in the accompanying Consolidated Statements of Operations and
Consolidated Balance Sheets. In addition, certain of the Notes to the
Consolidated Financial Statements have been recast for all periods to reflect
the discontinuance of this operation.
15
SIMTEK CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis in this quarterly report on Form
10-Q/A is intended to provide greater details of the results of operations and
financial condition of our Company. The following discussion should be read in
conjunction with our condensed consolidated financial statements and notes
thereto and other financial data included elsewhere herein. Certain statements
under this caption constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The reader should not place undue reliance on these forward looking
statements for many reasons including those risks discussed in this document. In
addition, when used in this quarterly 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. 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our 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. Our
accounting policies are discussed in Note 1 of the Notes to Consolidated
Financial Statements included in our 2005 Form 10-K as amended on Form 10-K/A
filed with the Securities and Exchange Commission on December 11, 2006. The
estimates used by us are based upon our historical experiences combined with our
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
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.
16
SIMTEK CORPORATION
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 actual reported distributor inventory levels. The contracts we have
with certain of our distributors generally allow them to return to us a 5%
percent of their inventory every 6 months, in exchange for inventory that better
meets their demands. At times, our distributors reduce the selling price of a
specific device in order to meet competition related to a specific end customer
program, which we support through a credit back to the distributor for that
specific program. 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 assess the impairment of long-lived assets when events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable. Factors that we consider in deciding when to perform an impairment
review include significant under-performance of the business in relation to
expectations, significant negative industry or economic trends, and significant
changes or planned changes in our use of the assets. Recoverability of assets
that will continue to be used in our operations is measured by comparing the
carrying amount of the assets to our estimate of the related future net cash
flows. If the asset's carrying amount is not recoverable through the related
cash flows, the asset is considered to be impaired. The impairment is measured
by the difference between the asset's carrying amount and its fair value, based
on the best information available, including market prices or discounted cash
flows.
Goodwill represents the excess of the purchase price over the fair value of
identifiable net tangible and intangible assets acquired in the acquisition of
the nvSRAM assets from ZMD. Goodwill is required to be tested for impairment. We
performed goodwill impairment testing as of March 31, 2006, and determined that
no impairment existed at that date. This assessment requires estimates of future
revenue, operating results and cash flows, as well as estimates of critical
valuation inputs such as discount rates, terminal values and similar data. We
will continue to perform periodic and annual impairment analyses of goodwill. As
a result of such impairment analyses, impairment charges may be recorded and may
have a material adverse impact on our financial position and operating results.
Additionally, we may make strategic business decisions in future periods which
impact the fair value of goodwill, which could result in significant impairment
charges. There can be no assurance that future goodwill impairments will not
occur.
We have recorded a valuation allowance on deferred tax assets. Future
operations may change our estimate in connection with potential utilization of
these assets.
Overview
Total revenue for the three months ended March 31, 2006 was $5.8 million,
including $1.0 million of royalty revenue. Total unit shipments of our
semiconductor memory products increased for the three months ended March 31,
2006 as compared to the three months ended March 31, 2005. Our net product
17
SIMTEK CORPORATION
revenue was $4,743,000 for the three months ended March 31, 2006 up from the
$2,976,000 for the comparable period of 2005, an approximate 59% increase. This
increase was due primarily to increased product demand and the addition of
revenue from customers previously serviced by ZMD prior to the acquisition of
the nvSRAM product line from ZMD in December 2005.
An approximate decrease of 3% in product gross margin percentage and
increased operating expenses had an impact on our profitability for the three
months ended March 31, 2006 compared to the three months ended March 31, 2005.
The increase in operating expenses includes non-cash charges of $448,000 for
amortization of the non-compete agreement with ZMD and $119,000 for expenses
related to employee stock options, plus first-time operating expenses of
$225,000 for our European subsidiary, Simtek GmbH.
Consolidated revenue, from our product sales, for the first quarter of 2006
of $4,745,000 compared to $2,794,000 in the fourth quarter of 2005, an increase
of 70 percent, reflecting the effects of adding the nvSRAM business that was
acquired from ZMD, as well as increasing customer demand. During the first
quarter of 2006, we recorded royalty revenue of $1,035,000 received from
Cypress. Net loss for the first quarter of 2006 was $901,000, or $0.01 per
share, compared to a net loss of $1,851,000, or $0.02 per share, in the fourth
quarter of 2005. Net loss in the first quarter includes non-cash charges of
$448,000 for amortization of the non-compete agreement with ZMD, and $119,000
for expenses related to employee stock options, plus "first-time" operating
expenses of approximately $225,000 for Simtek GmbH. There were no comparable
charges in the fourth quarter of 2005 for these three first-quarter 2006
charges.
Results of Operations:
Revenues
The following table sets forth our net revenues for semiconductor devices
by product markets for the three months ended March 31, 2006 and 2005 (in
thousands):
Three Months Ended
March 31,
---------------------------------------
2006 2005 Variance
---- ---- --------
Commercial $ 3,951 $ 2,407 $ 1,544
High-end industrial and military 792 569 $ 223
-------- --------- --------
Total Semiconductor Revenue $ 4,743 $ 2,976 $ 1,767
======== ========= ========
Commercial revenues include revenue generated from our 0.8-micron products
built from silicon wafers received from Chartered Semiconductor or purchased as
finished units from ZMD, and from our 0.25-micron products built from silicon
wafers received from Dongbu Electronics (DBE). Commercial revenues increased by
$1,544,000 for the three months ended March 31, 2006 as compared to the three
months ended March 31, 2005. As stated previously, this increase was due
primarily to increased product demand and the addition of revenue from customers
previously serviced by ZMD prior to the acquisition of the nvSRAM product line
from ZMD in December 2005. Other factors affecting the increase were an increase
in unit shipments partially offset by a slight decrease in average selling
prices, which was primarily due to increased price competition at our largest,
high-volume customers and their subcontractors. Unit shipments increased due to
increased product demand and the addition of the product line purchased at the
end of 2005.
High-end industrial and military product revenues accounted for an increase
of approximately $223,000 for the three months ended March 31, 2006 as compared
to the same period in 2005. The increase was due to the addition of new customer
demand for our products and increased pricing to certain of our customers for
industrial and military products.
18
SIMTEK CORPORATION
One distributor and one direct customer together accounted for
approximately 23% of our revenue for the quarter ended March 31, 2006. Products
sold to distributors are sold without material recourse. Distributors sell 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 product sales, as we believe that we would be able to service these
various end customers through other distributors.
Cost of Sales and Gross Profit
We recorded cost of sales of $3,470,000 and $2,071,000 for the three months
ended March 31, 2006 and 2005, respectively. These costs reflect an approximate
3% decrease in gross margin percentages for our semiconductor products, for the
three months ended March 31, 2006 as compared to the same period in 2005. Actual
product gross margin percentages for the three months ended March 31, 2006 and
March 31, 2005 were 27% and 30% respectively. This decrease reflects the lower
average selling prices described above, partially offset by reduced costs of the
1 megabit device.
Research and Development
We believe that continued investments in new product development are
required for us to remain competitive in the markets we serve. In 2005, our
research and development department continued its efforts on the development,
testing and qualification of our 1-megabit 3-volt nvSRAM with DBE. In September
2005, we qualified our 1-megabit products for use in the commercial and
industrial markets. Final qualification of the smaller 256-kilobit and
256-kilobit with real time clock, and the 1-megabit version with real time
clock, built on the 0.25-micron process at DBE is expected in the second quarter
of 2006.
During the first quarter of 2006, we continued the development of our next
generation nvSRAM product family, in conjunction with Cypress, pursuant to the
terms of the May 5, 2005 development agreement. This new product family will be
based on Cypress' 0.13-micron "S8" process and we expect it will include memory
densities up to and beyond 4-megabits. In the first quarter of 2006 we achieved
our third major milestone under the development agreement, as scheduled. There
were no similar expenses in the first quarter of 2005.
As part of our strategic product development activities, on March 24,
2006, Simtek entered into a License and Development Agreement with Cypress which
expands the agreement the two companies signed in May 2005. Under the terms of
the new agreement:
o Cypress will retain the right to include nvSRAM functionality on future
programmable system-on-chip (PSoC(TM)) and customized integrated circuits
originally granted in the May 2005 agreement, and now with clearly defined
royalty payments to Simtek for the use of its SONOS-based nvSRAM
intellectual property;
o Simtek is granted the right to use certain intellectual property of Cypress
in developing future generation nvSRAM products, including the jointly
developed 0.13u SONOS-based CMOS process, advanced SRAM IP, design-related
IP, design-for-manufacturability know-how; and other IP related to Cypress'
advanced CMOS manufacturing processes and procedures;
o Simtek and Cypress agree to broad manufacturing support terms that will
provide Simtek with a range of industry-leading manufacturing skills and
know-how to enable cost-effective manufacturing of leading-edge SONOS
nvSRAMs;
o Simtek and Cypress will extend the deployment of Simtek's proprietary
nvSRAM technology, and work to establish SONOS as the preferred technology
for high reliability, high endurance, and scaleable non-volatile products
at 65nm and below;
o Simtek and Cypress will jointly develop and market a family of products
utilizing Simtek's patented SONOS-based non-volatile technology for
production using Cypress's advanced manufacturing processes.
19
SIMTEK CORPORATION
Upon signing the agreement, Simtek received $2 million from Cypress, and
will receive additional payments of $1 million on June 30, 2006 and December 31,
2006. The agreement also calls for Simtek to issue warrants to Cypress to
purchase a total of 20 million shares of its common stock, 10 million of which
were already issued upon the execution of the agreement, 5 million of which are
expected to be issued on June 30, 2006 upon the payment by Cypress of certain
royalties and 5 million of which are expected to be issued on December 31, 2006
upon the payment by Cypress of certain royalties. The warrants have, or will
have, an exercise price of $0.75 per share. Simtek believes that this new
agreement will accelerate the timing of expanding nvSRAM adoption in new markets
and shorten future product development cycle time. Please read Note 8 to the
Condensed Consolidated Financial Statements for a discussion of the accounting
treatment for the transactions related to this agreement.
Total research and development expenses were $1,545,000 for the three
months ended March 31, 2006 as compared to $1,145,000 for the same period in
2005.The $400,000 increase for the three month period was primarily related to
an increase of $315,000 related to the co-development with Cypress and $80,000
related to final development of the 256-kilobit nvSRAM products built at DBE.
Administration
Total administration expenses were $699,000 for the three months ended
March 31, 2006 as compared to $293,000 for the same period in 2005.
The $406,000 increase was due primarily to increases in payroll and payroll
related costs of $162,000, accounting and legal fees of $88,000, travel of
$41,000, contract services of $38,000, expense related to employee and director
stock options of $64,000 and miscellaneous expenses of $13,000. The increase in
payroll and payroll overhead costs were due to additional headcount and the
management restructure that began in May 2005. The increase in professional
services was primarily due to increased legal and accounting fees, which were
related to increased activity related to agreements with personnel and increased
securities work. The increase of $64,000 in employee and director stock option
expense was due to the requirement of expensing costs related to stock option
grants under FAS 123. See Note 1 to the Notes to the Condensed Consolidated
Financial Statements above.
Sales and Marketing
Total sales and marketing expenses were $944,000 for the three months ended
March 31, 2006 as compared to $401,000 for the same period in 2005.
The $543,000 increase was due primarily to amortization of the non-compete
agreement with ZMD of $448,000, an increase in payroll and payroll overhead
costs of $67,000, expense related to employee stock options of $16,000 and
miscellaneous other expenses. The increase in payroll and payroll overhead costs
were due to changes in sales and marketing personnel.
Net Loss from Continuing Operations
We recorded a loss from continuing operations of $901,000 and $987,000 for
the three months ended March 31, 2006 and 2005, respectively. The decrease of
$86,000 for the three-month period reflects the revenue and expense items
discussed above.
Liquidity and Capital Resources
As of March 31, 2006, we had a net working capital of $5,881,000 as
compared to a net working capital of $3,591,000 as of December 31, 2005.
As discussed previously, on March 24, 2006, we entered into a Development
and License Agreement with Cypress pursuant to which, among other things,
Cypress has agreed to license certain intellectual property from us to develop
and manufacture standard, custom, and embedded nvSRAM products. Cypress will pay
to Simtek royalties across all products they develop and sell which include
intellectual property licensed from Simtek. We agreed to license from Cypress
certain of their intellectual property for use in our design efforts. We agreed
with Cypress to co-develop certain nvSRAM products and Cypress has agreed to pay
us $4 million in pre-paid royalties, $2 million of which was received at the
20
SIMTEK CORPORATION
time the contract was executed. The remaining $2 million will be paid in $1
million payments the first of which is scheduled for June 30, 2006, and the
final one scheduled for December 31, 2006. In addition, we agreed with Cypress
to work together to develop new products and processes. Please read Note 8 to
the Condensed Consolidated Financial Statements for a discussion of the
accounting treatment for the transactions related to this agreement.
Cash flows used in operating activities for the three months ended March
31, 2006 were $1,580,000 compared to $531,000 in the same period in 2005, an
increase of $1,049,000 as compared to the same period in 2005. The net change is
due to the decreased net loss, the increase in accounts receivable (compared to
a decrease in the 2005 period), a larger increase in inventory, which were
partially offset by the non-cash charges in 2006. The increase in inventory for
the three months ended March 31, 2006 was due primarily to higher volume of
silicon wafers and units in process, which will support future revenue.
Cash flows used in investing activities decreased for the three months
ended March 31, 2006 by approximately $14,000 as compared to the same period in
2005.
The increase of $2,781,000 in cash flows provided by financing activities
was primarily due to the receipt of funds related to the sale of common stock
completed on December 30, 2005, for which some funds were received on January 3,
2006 and the value of the warrants issued to Cypress for the Development and
License Agreement.
Short-term liquidity.
Our cash balance at March 31, 2006 was $2,814,000.
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. Through December 31, 2006, we expect to spend approximately
$9,000,000, for operating expenses assuming revenue growth. We expect to meet
these capital needs from sales revenues, the funds still due to us from Cypress
under the Joint Development and License Agreement and, to the extent we do not
have sufficient revenues, from our existing cash reserves.
Long-term liquidity.
Based on current revenue, cost and profitability projections, current
working capital, plus the additional prepaid royalties due from Cypress, the
Company believes that it has adequate capital to sustain its operations for the
foreseeable future. However, the Company is also negotiating with a bank to
provide an accounts receivable based credit facility to provide additional
capital if needed.
21
SIMTEK CORPORATION
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and rates. We are exposed to market risk
in the areas of changes in United States interest rates and changes in foreign
currency exchange rates as measured against the United States dollar. These
exposures are directly related to our normal operating activities. We currently
have no derivative financial instruments.
Interest payable on our convertible debentures is fixed at 7.5% over the
term of the debentures. As such, changes in interest rates will not affect
future expenses or cash flows.
We manage interest income by investing our excess cash in cash equivalents
bearing variable interest rates, which are tied to various market indices. We do
not believe that near-term changes in interest rates will result in a material
effect on future earnings, fair values or cash flows.
We do not speculate in the foreign exchange market and do not manage
exposures that arise in the normal course of business related to fluctuations in
foreign currency exchange rates by entering into offsetting positions through
the use of foreign exchange forward contracts.
Average selling prices of our products have not increased significantly as
a result of inflation during the past several years, primarily due to intense
competition within the semiconductor industry. The effect of inflation on our
costs of production has been minimized through improvements in production
efficiencies. We anticipate that these factors will continue to minimize the
effects of any foreseeable inflation and other price pressures within the
industry and markets in which we participate.
22
SIMTEK CORPORATION
ITEM 4 CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Harold Blomquist, who serves as the Company's chief executive officer, and Brian
Alleman, who serves as the Company's chief financial officer, after evaluating
the effectiveness of the Company's disclosure controls and procedures as of the
end of the period covered by this quarterly report (the "Evaluation Date")
concluded that as of the Evaluation Date, the Company's disclosure controls and
procedures were 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 and to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is accumulated and
communicated to our management to allow timely decisions regarding required
disclosure. As noted in the Explanatory Note at the beginning of this Form
10-Q/A and as noted in Note 2 to the Condensed Consolidated Financial Statements
contained in this Form 10-Q/A, the Company has reclassified $10,332,000 from
Temporary Equity to Shareholders Equity. In light of the reclassification
described above, the Company's chief executive officer and chief financial
officer have reevaluated the Company's disclosure controls and procedures as of
the Evaluation Date to determine whether the reclassification changes their
conclusion. Based on this reevaluation, the Company's chief executive officer
and chief financial officer have determined that the reclassification does not
change their conclusion.
(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 March 31, 2006, that have materially affected, or
are reasonably likely to materially affect, internal control over financial
reporting.
23
SIMTEK CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 1A. Risk Factors - None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information. The following information was not required to be
disclosed on Form 8-K during the quarter ended March 31, 2006, but rather is
included in this Quarterly Report on Form 10-Q pursuant to Exchange Act Rule
14a-5(f). The Company expects to hold its annual meeting of shareholders on
June 29, 2006, subject to the discretion of our Board of Directors to change
such date based on changed circumstances. As a consequence of having advanced
the date of the annual meeting of shareholders by more than 30 days from the
date of the previous annual meeting, the deadline for the Company's receipt of
stockholder proposals for inclusion in the proxy statement is a reasonable time
before we begin to print and mail the proxy solicitation materials, as disclosed
in the proxy statement for the 2005 annual meeting. Also as disclosed in the
proxy statement for the 2005 annual meeting, a shareholder proposal or
nomination for director for consideration at the 2006 annual meeting but not
included in the proxy statement and proxy must be received by the Company no
later than 30 days prior to the first anniversary of the initial notice of the
2005 annual meeting, provided that such proposal need not be given more than 50
days prior to the first anniversary of the initial notice of the 2005 annual
meeting.
Item 6. Exhibits
10.1 License and Development Agreement, dated March 24, 2006, by
and between the Company and Cypress Semiconductor
Corporation, incorporated by reference to the Company's
Current Report on Form 8-K filed by the Company with the SEC
on March 30, 2006
10.2 Amended and Restated Registration Rights Agreement, dated
March 24, 2006, by and between the Company and Cypress
Semiconductor Corporation, incorporated by reference to the
Company's Current Report on Form 8-K filed by the Company
with the SEC on March 30, 2006
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of Principal Executive Officer
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of Principal Financial Officer
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of Principal Executive Officer
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of Principal Financial Officer
24
SIMTEK CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIMTEK CORPORATION
(Registrant)
December 11, 2006 By: /s/ Harold Blomquist
-------------------------------------
HAROLD BLOMQUIST
Chief Executive Officer and President
December 11, 2006 By: /s/ Brian Alleman
-------------------------------------
BRIAN ALLEMAN
Chief Financial Officer
25
Exhibit 31.1
CERTIFICATIONS
I, Harold Blomquist, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q/A of Simtek Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: December 11, 2006
/s/Harold Blomquist
--------------------------------------
Harold Blomquist
Chief Executive Officer and President
Exhibit 31.2
CERTIFICATIONS
I, Brian Alleman, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q/A of Simtek Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: December 11, 2006
/s/Brian Alleman
----------------------------------
Brian Alleman
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND PRESIDENT
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Harold Blomquist, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Quarterly Report of Simtek Corporation on Form 10-Q/A for the quarterly period
ended March 31, 2006 fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 and that information contained in
such Form 10-Q/A fairly presents, in all material respects, the financial
condition and results of operations of Simtek Corporation.
/s/Harold Blomquist
-------------------------------------
Harold Blomquist
Chief Executive Officer and President
December 11, 2006
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Brian Alleman, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly
Report of Simtek Corporation on Form 10-Q/A for the quarterly period ended
March 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such Form
10-Q/A fairly presents, in all material respects, the financial condition and
results of operations of Simtek Corporation.
/s/Brian Alleman
-----------------------
Brian Alleman
Chief Financial Officer
December 11, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
----------------------------------
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarter ended June 30, 2006
OR
[ ] 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)
-------------------------------------------------
Delaware 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
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
----- -----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated
Filer [ ] Accelerated Filer [ ] Non-accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
----- -----
The total number of shares of Common Stock issued and outstanding as of December
5, 2006 was 16,147,746, after giving effect to the one for ten reverse stock
split completed on October 5, 2006.
Explanatory Note
We are filing this Amendment No. 1 on Form 10-Q/A to Simtek Corporation's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006,
which was originally filed with the Securities and Exchange Commission (the
"SEC") on August 11, 2006 (the "Original Form 10-Q") to reflect the
reclassification of $10,332,000 from Temporary Equity to Shareholders' Equity.
Simtek Corporation originally concluded that the net proceeds from the sale of
68,750,000 shares of its common stock on December 30, 2005 should be recorded as
Temporary Equity because of certain provisions in the Registration Rights
Agreement entered into as part of the December 30, 2005 transaction. However,
upon further review, management has determined that the transaction should be
recorded in Shareholders' Equity.
Part I of this Form 10-Q/A contains more information about this restatement in
"Note 2 Correction of Previously Reported Amounts", which note accompanies the
condensed consolidated financial statements in Item 1 of Part I.
This Form 10-Q/A speaks as of June 30, 2006, and except as noted herein, we have
not materially modified or updated the disclosures herein for events that
occurred at a later date. Events occurring after the date of the Original Form
10-Q, and other disclosures necessary to reflect subsequent events, have been
addressed, in accordance with applicable disclosure requirements, in our Form
8-Ks filed after June 30, 2006 will be addressed, in accordance with applicable
disclosure requirements, in our Form 10-Q for the three months ended September
30, 2006 of our periodic filings filed after June 30, 2006.
2
SIMTEK CORPORATION
INDEX
Form 10-Q For the Quarter Ended June 30, 2006
PART 1. FINANCIAL INFORMATION
ITEM 1 Page
----
Condensed Consolidated Balance Sheets as of June 30, 2006
and December 31, 2005 4
Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 2006 and 2005 5
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2006 and 2005 6
Notes to Condensed Consolidated Financial Statements 7-14
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk 23
ITEM 4
Controls and Procedures 24
PART 2. OTHER INFORMATION
ITEM 1 Legal Proceedings 25
ITEM 1A Risk Factors 25
ITEM 2 Unregistered Sales of Equity Securities
and Use of Proceeds 25
ITEM 3 Defaults Upon Senior Securities 25
ITEM 4 Submission of Matters to a Vote of Security Holders 25
ITEM 5 Other Information 25
ITEM 6 Exhibits 25
SIGNATURES 26
3
SIMTEK CORPORATION
CONSDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value and share amounts)
ASSETS
June 30, 2006 December 31, 2005
------------- -----------------
(As Restated) (As Restated)
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,265 $ 1,766
Restricted investments 1,975 2,281
Accounts receivable - trade, net 3,955 1,456
Inventory, net 3,979 2,068
Prepaid expenses and other current assets 387 99
Deposits -- 600
-------- --------
Total current assets 12,561 8,270
EQUIPMENT AND FURNITURE, net 803 571
DEFERRED FINANCING COSTS AND DEBT ISSUANCE COSTS 143 111
GOODWILL 992 876
NON-COMPETITION AGREEMENT 8,016 8,910
OTHER ASSETS 43 20
-------- --------
TOTAL ASSETS $ 22,558 $ 18,758
======== ========
LIABILITES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,539 $ 2,822
Accrued expenses 1,157 1,419
Accrued vacation payable 200 145
Accrued wages 282 40
Obligation under capital leases -- 13
Notes payable 558 --
Debentures, current 480 240
-------- --------
Total current liabilities 7,216 4,679
DEBENTURES, NET OF CURRENT 2,520 2,760
-------- --------
Total liabilities 9,736 7,439
COMMITMENTS AND CONTINGENCIES
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,
147,331,577 and 147,321,577 shares issued and outstanding at June 30,
2006 and 146,920,823 and 146,910,823 shares issued and outstanding at
December 31, 2005 1,474 1,470
Additional paid-in capital 59,831 56,053
Treasury stock, at cost; 10,000 shares (13) (13)
Accumulated deficit (48,545) (46,191)
Accumulated other comprehensive income:
Cumulative translation adjustment 75 --
-------- --------
Total shareholders' equity 12,822 11,319
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 22,558 $ 18,758
======== ========
The accompanying notes are an integral part of these financial statements.
4
SIMTEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except share and per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- ----------------------------------
2006 2005 2006 2005
---- ---- ---- ----
REVENUE:
Product sales, net $ 6,443 $ 2,204 $ 11,186 $ 5,180
Royalty revenue 483 -- 1,518 --
------------- ------------- ------------- -------------
Total revenue 6,926 2,204 12,704 5,180
Cost of sales 4,567 1,675 8,037 3,683
------------- ------------- ------------- -------------
GROSS PROFIT 2,359 529 4,667 1,497
OPERATING EXPENSES:
Research and development costs 1,682 1,917 3,227 3,126
Sales and marketing 1,038 444 1,983 844
General and administrative 1,059 987 1,757 1,274
------------- ------------- ------------- -------------
Total operating expenses 3,779 3,348 6,967 5,244
------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS (1,420) (2,819) (2,300) (3,747)
OTHER INCOME (EXPENSE):
Interest income 36 7 76 12
Interest expense (74) (57) (134) (114)
Other expense 5 -- 4 (1)
------------- ------------- ------------- -------------
Total other expense (33) (50) (54) (103)
------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES (1,453) (2,869) (2,354) (3,850)
Provision for income taxes -- -- -- --
------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS (1,453) (2,869) (2,354) (3,850)
LOSS FROM DISCONTINUED OPERATIONS -- (36) -- (68)
------------- ------------- ------------- -------------
NET LOSS $ (1,453) $ (2,905) $ (2,354) $ (3,918)
============= ============= ============= =============
NET LOSS PER COMMON SHARE:
Basic and diluted
Loss from continuing operations $ (.01) $ (.05) $ (.02) $ (.06)
Loss from discontinued operations (.00) (.00) (.00) (.00)
------------- ------------- ------------- -------------
Total $ (.01) $ (.05) $ (.02) $ (.06)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic and diluted 147,044,131 63,226,984 147,044,131 65,299,377
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
5
SIMTEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Amounts in thousands)
Six Months Ended June 30,
-------------------------
2006 2005
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,354) $(3,918)
Income from discontinued operations -- 68
Adjustments to reconcile net loss to net cash used in operating
Activities:
Depreciation and amortization 219 216
Expense related to stock options 278 --
Issuance of common stock per compensation
agreements 53 139
Amortization of non-competition agreement 894 --
Net change in allowance accounts 428 170
Deferred financing fees 21 10
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (2,530) 1,439
Inventory (2,345) 388
Prepaid expenses and other 294 257
Increase (decrease) in:
Accounts payable 1,704 (509)
Accrued expenses 658 573
------- -------
Net cash used in operating activities of continuing operations (2,680) (1,167)
Net cash used in operating activities of discontinued operations -- (234)
------- -------
Net cash used in operating activities (2,680) (1,401)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture, net (448) (201)
Purchase of certain assets from ZMD (116) --
------- -------
Net cash used in investing activities of continuing operations (564) (201)
Net cash used in investing activities of discontinued operations -- (35)
------- -------
Net cash used in investing activities (564) (236)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation (13) (25)
Funds received from December 2005 equity financing, net 1,874 --
Warrants issued for license rights 1,478 --
Equity financing, net -- 3,945
Transfer to restricted investment -- (3,000)
Proceeds from sale of common stock -- 108
Payments from restricted investment 306 --
Exercise of stock options 47 183
------- -------
Net cash provided by financing activities 3,692 1,211
------- -------
Effect of exchange rate changes on cash 51 --
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 499 (426)
CASH AND CASH EQUIVALENTS, beginning of period 1,766 2,147
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 2,265 $ 1,721
======= =======
Cash Paid for interest $ 121 $ 114
======= =======
Warrants issued for debt issuance cost $ 53 $ --
======= =======
The accompanying notes are an integral part of these financial statements.
6
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements include the accounts of Simtek and
its wholly owned subsidiaries. Intercompany accounts and transactions have been
eliminated. The financial statements included herein are presented in accordance
with the requirements of Form 10-Q and consequently do not include all of the
disclosures normally made in the registrant's annual Form 10-K filing. These
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Annual Report and Form
10-K, Annual Report and Amendment #1 to Form 10-K and Annual Report and
Amendment #2 to Form 10-K for Simtek Corporation ("Simtek" or the "Company")
filed on April 7, 2006, April 28, 2006, and December 11, 2006, respectively for
fiscal year 2005.
In the opinion of management, the unaudited financial statements reflect
all adjustments of a normal recurring nature necessary to present a fair
statement of the results of operations for the respective interim periods. The
year-end balance sheet data was derived from audited financial statements, but
does not include all disclosures required by accounting principles generally
accepted in the United States of America. Results of operations for the interim
periods are not necessarily indicative of the results of operations for the full
fiscal year.
Stock-Based Compensation
------------------------
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standard 123(R) "Share-Based
Payment" ("SFAS 123(R)") using the modified prospective transition method. In
addition, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 "Share-Based Payment" ("SAB 107") in March, 2005, which
provides supplemental SFAS 123(R) application guidance based on the views of the
SEC. Under the modified prospective transition method, compensation cost
recognized in the three and six month periods ending June 30, 2006 includes: (a)
compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123, and (b) compensation
cost for all share-based payments granted beginning January 1, 2006, based on
the grant date fair value estimated in accordance with the provisions of SFAS
123(R). In accordance with the modified prospective transition method, results
for prior periods have not been restated.
The adoption of SFAS 123(R) resulted in stock compensation expense for the
three months and six months ended June 30, 2006 of $159,000 and $278,000,
respectively to loss from continuing operations and loss before income taxes.
The Company did not recognize a tax benefit from the stock compensation expense
because the Company considers it is more likely than not that the related
deferred tax assets, which have been reduced by a full valuation allowance, will
not be realized. The following table summarizes the effects of the share-based
compensation resulting from the application of SFAS No. 123(R) to options
granted under the Company's stock option plan.
Three Months Six Months
Ended Ended
June 30, 2006 June 30, 2006
------------- -------------
(In thousands except per share amounts)
Research and development $ 47 $ 86
Sales and marketing 23 39
General and administrative 89 153
--------- ---------
Share-based compensation effect on loss from continuing
operations before provision for income taxes $ 159 $ 278
Provision for income taxes - -
--------- ---------
Net share-based compensation effects on net loss $ 159 $ 278
========= =========
Share-based compensation effects on basic and diluted loss
per common share $ - $ .01
========= =========
Share-based compensation effects on cash flow from
operations $ 159 $ 278
========= =========
7
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Black-Scholes option-pricing model was used to estimate the option fair
values. The option-pricing model requires a number of assumptions, of which the
most significant are expected stock price volatility and the expected option
term (the amount of time from the grant date until the options are exercised or
expire). Expected volatility was calculated based upon actual historical stock
price movements over the most recent periods ending June 30, 2006 equal to the
expected option term. In accordance with SFAS No. 123(R), the Company adjusts
share-based compensation on a quarterly basis for changes to the estimate of
expected forfeitures based on actual forfeiture experience. The effect of
adjusting the forfeiture rate for all expense amortization after January 1, 2006
is recognized in the period the forfeiture estimate is changed. The effect of
forfeiture adjustments in the three and six months ended June 30, 2006 was
insignificant. The expected option term was calculated using the "simplified"
method permitted by SAB 107.
SFAS 123(R) requires tax benefits resulting from tax deductions in
excess of the compensation cost recognized for those options ("excess tax
benefits") to be classified and reported as both an operating cash outflow and a
financing cash inflow upon adoption of SFAS 123(R). As discussed in Note 8 -
Taxes from the Company's report on Form 10-K, Amendment #1 to Form 10-K and
Amendment #2 to Form 10-K for the period ending December 31, 2005, as a result
of the Company's net operating losses, the excess tax benefits that would
otherwise be available to reduce income taxes payable have the effect of
increasing the Company's net operating loss carry forwards. Accordingly, because
the Company is not able to realize these excess tax benefits, such benefits have
not been recognized in the condensed statement of cash flow for the six months
ended June 30, 2006.
Pro-Forma Stock Compensation Expense for the three and six months Ended June 30,
2005
Prior to January 1, 2006, as permitted under the SFAS No. 123, Accounting
for Stock-Based Compensation, the Company accounted 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 was recorded on the date of grant if the current market
price of the underlying stock exceeded 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 compensation cost been determined
based on the fair value at the grant dates for awards under employee stock based
compensation plans consistent with the fair value method for the three and six
months ending June 30, 2005, the Company's net loss and EPS would have been
increased to the pro forma amounts indicated below.
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2005 2005
---- ----
(In thousands except per share amounts)
Net loss as reported $(2,905) $(3,918)
Add: Stock based compensation included in reported
Net loss -- --
Deduct: Fair value of stock based compensation (373) (746)
------- -------
Proforma net loss $(3,278) $(4,664)
======= =======
Net loss as reported - basic and diluted $ (.05) $ (.06)
Proforma net loss - basic and diluted $ (.06) $ (.07)
8
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the modified prospective transition method of SFAS
123(R), the prior comparative quarterly results have not been restated.
Stock Options as of the three and six month periods ended June 30, 2006
The Company adopted a Non-Qualified Stock Option Plan in 1994, as amended,
that authorizes 20,600,000 non-qualified stock options that may be granted to
directors, employees, and consultants. The plan permits the issuance of
non-statutory options and provides 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.
The following table summarizes stock options outstanding and changes during
the six months ended June 30, 2006:
Outstanding Options
-----------------------------------------------------------
Weighted
Average
Remaining
Weighted Contractual Aggregate
Number Average Term Intrinsic
of Shares Exercise Price (in years) Value(1)
--------- -------------- ------------ ----------
Options outstanding at January 1, 2006........................ 7,969,363 $0.62
Granted..................................................... 3,560,850 0.32
Exercised................................................... (272,020) (0.17) $ 45
Cancelled or forfeited...................................... (311,779) (0.96)
---------- -----
Options outstanding at June 30, 2006.......................... 10,946,414 $0.52 3.869
========== ===== =====
Options exercisable at June 30, 2006.......................... 5,204,992 $0.65 3.869
========== ===== =====
(1) Represents the difference between the exercise price and the value of
Simtek stock at the time of exercise.
Stock options outstanding and currently exercisable at June30, 2006 are as
follows:
Outstanding Exercisable
- ------------------------------------------------------------------ ------------------------------
Weighted Average
--------------------------------------------
Remaining Weighted Weighted
Number Contractual Life Average Number Average
Exercise Price Outstanding in Months Exercise Price Exercisable Exercise Price
- -------------- ----------- ---------------- -------------- ----------- ---------------
$0.14-$0.35 3,677,239 45 $ 0.29 907,275 $ 0.22
$0.365-$0.60 3,987,716 53 $ 0.44 1,716,560 $ 0.45
$0.62-$0.90 2,234,125 56 $ 0.66 1,533,823 $ 0.66
$1.125-$1.50 822,334 29 $ 1.24 822,334 $ 1.24
$1.53-$1.90 225,000 57 $ 1.78 225,000 $ 1.78
------- ---------
10,946,414 5,204,992
========== =========
9
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Total estimated unrecognized compensation cost from unvested stock options
as of June 30, 2006 was approximately $1.5 million, which is expected to be
recognized over the next four years.
The weighted average per share fair value of stock options granted during
the three months ending June 30, 2006 and 2005 were $0.34 and $0.59,
respectively. The weighted average per share fair value stock options granted
during the six months ending June 30, 2006 and 2005 were $0.32 and $0.60,
respectively. The fair value was estimated as of the grant date using the
Black-Scholes option pricing model with the following assumptions:
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
------------------- -----------------
Volatility 79.05% 84.70% 80.97% 83.80%
Expected option term 5 years 4 years 4.67 years 4 years
Risk-free interest rate 4.92% 3.70% 4.81% 3.60%
Expected dividend yield 0% 0% 0% 0%
Modifications of Stock Options Granted
--------------------------------------
In May 2005, the Company accelerated vesting of certain unvested and
out-of-the-money stock options previously awarded to employees and officers.
Because the price of the Company's common stock was $0.57 on the day of
acceleration, the options, which are exercisable at $0.62 and above, had no
economic value on the date of acceleration. As a result of the acceleration,
options to purchase approximately 1.7 million shares of Simtek common stock are
now exercisable. Options held by non-employee directors were excluded from the
vesting acceleration.
Non-competition Agreement
-------------------------
In December 2005, the Company entered into a non-competition agreement with
Zentrum Mikroelektronik Dresden AG ("ZMD") as part of the acquisition of ZMD's
nvSRAM product line. The Company assigned a value of $8,910,000 to the
non-competition agreement in December 2005. The value assigned to the
non-competition agreement is being amortized on a straight-line basis over its
five-year life. The Company recorded an expense for the amortization of
approximately $894,000 to sales and marketing for the six months ended June 30,
2006.
Goodwill
--------
Goodwill represents the excess of the total amount paid to ZMD for the
nvSRAM assets acquired on December 30, 2005 and the fair value assigned to
specific assets. This amount will not be amortized, but will be reviewed for
impairment on a periodic basis. As of June 30, 2006 no impairment of value has
been recorded.
Accumulated other comprehensive income (loss)
---------------------------------------------
The functional currency for Simtek GmbH is the local currency, the Euro.
Assets and liabilities for this foreign operation are translated at the exchange
rate in effect at the balance sheet date, and income and expenses are translated
at average exchange rates prevailing during the period. Translation gains or
losses are included within shareholders' equity as part of accumulated other
comprehensive income (loss). As of June 30, 2006, the Company recorded
approximately $75,000 in comprehensive income.
10
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Correction of Previously Reported Amounts
As more fully described in Notes 2 and 6 to the Consolidated Financial
Statements included in Simtek Corporation's Amendment No. 2 on Form 10-K/A filed
on December 11, 2006 for fiscal year 2005, on December 30, 2005, the Company
sold 68,750,000 shares of its common stock, subject to certain registration
rights. Management initially concluded that the net proceeds of $10,332,000
($8,459,000 received on December 30, 2006 and $1,873,000 received on January 3,
2006) should be recorded as Temporary Equity due to the potential penalties
associated with the registration rights agreement. Management has subsequently
determined that the transaction should have been recorded in Shareholders'
Equity.
The following table reflects the amounts as previously reported and as
restated:
June 30, 2006 December 31, 2005
As As
Reported Restated Reported Restated
(Amounts in thousands)
Consolidated Balance Sheet:
Temporary Equity $ 10,332 $ - $ 8,459 $ -
Common Stock $ 786 $ 1,474 $ 782 $ 1,470
Additional paid-in capital $ 50,187 $ 59,831 $ 48,282 $ 56,053
Total shareholders' equity $ 2,490 $ 12,822 $ 2,860 $ 11,319
3. Liquidity
During the three and six months ended June 30, 2006 and the twelve months
ended December 31, 2005, the Company incurred net losses from continuing
operations of approximately $1,453,000, $2,354,000 and $5,785,000, respectively
and has an accumulated deficit of $48,545,000 as of June 30, 2006. The Company
was also not in compliance with its debentures throughout 2005 and the first six
months of 2006, but was successful in obtaining waivers through July 1, 2007
from the debenture holders. The Company has working capital of approximately
$5,345,000 as of June 30, 2006.
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.
If the Company is unable to achieve profitable operations in the near term,
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 favorable
to the Company.
4. Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments ("SFAS 155"), which amends SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities and SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS 155 simplifies the accounting for certain derivatives embedded
in other financial instruments by allowing them to be accounted for as a whole
if the holder elects to account for the whole instrument on a fair value basis.
The statement also clarifies and amends certain other provisions of SFAS No. 133
and SFAS No. 140. SFAS 155 is effective for all financial instruments acquired,
issued, or subject to a remeasurement event occurring in fiscal years beginning
after September 15, 2006. We do not expect the adoption of SFAS 155 to have an
impact on our results of operations or financial condition.
11
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Revenue Recognition
Revenue Recognition - Product sales revenue is recognized when a valid
purchase order has been received with a fixed price and the products are shipped
to customers FOB origin (Colorado Springs, Colorado or Dresden, Germany),
including distributors. Based on historic business with the majority of the
Company's customers and, in the case of new customers, the Company is reasonably
assured that collectibility on our shipments will occur. Customers receive a
one-year product warranty and sales to distributors are subject to a limited
product exchange program and a price protection in the event of changes in the
Company's product price. The Company provides a reserve for possible product
returns, product price protection and warranty costs at the time the sale is
recognized. The Company has a detailed procedure to ensure that its estimates
for reserves are reasonable and reliable. The reserve for product returns is
based on the actual inventory value of the Company's semiconductor products held
by its distributors. The Company's distributors are permitted to rotate up to 5%
of their stock every six months with the stipulation that they must submit a
replacement order of equal dollar value to the stock that they are returning.
The reserve for price protection is used when the Company authorizes special
pricing to one of its distributors for a specific customer. To date, the
estimates have not been materially different from the credits the Company has
issued under these reserves.
Revenue from royalties related to non-refundable prepaid royalty payments
is recognized upon receipt. Revenue from royalties related to sales of products
by license partners is recognized upon the notification to us of shipment of
product from the Company's technology license partners to direct customers.
6. Inventories
The Company records inventory using the lower of cost (first-in, first-out)
or market. Inventory at June 30, 2006 and December 31, 2005 included:
June 30, 2006 December 31, 2005
(In thousands)
Raw Materials $ 57 $ 33
Work in progress 3,012 1,096
Finished Goods 1,473 1,056
-------- ---------
4,542 2,185
Less reserves for excess inventory (563) (117)
-------- ---------
$ 3,979 $ 2,068
======== =========
7. Notes Payable
On June 2, 2006, the Company secured a $3.6 million revolving line of
credit by entering into an Account Purchase Agreement (the "Agreement") with
Wells Fargo Bank, National Association ("Wells Fargo"). Pursuant to the
Agreement, the Company may sell up to $3.6 million of eligible accounts
receivable to Wells Fargo. Advances of the purchase price for the eligible
receivables will be at an agreed upon discount to the face value of the eligible
receivable. The amount actually collected on any receivable by Wells Fargo that
is beyond the advance will be forwarded to the Company, less certain discounts
and fees retained by Wells Fargo (including a minimum fee of $7,500 per month
for the term of the Agreement). To secure the Company's obligations under the
Agreement, the Company granted Wells Fargo a security interest in certain of the
Company's property. The Agreement has a term of two years, but may be terminated
at any time by the Company upon 60 days' written notice. As of June 30, 2006,
the Company had financed receivables with Wells Fargo for approximately
$558,000.
8. 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.,
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
were originally convertible into Simtek common stock at $0.312 per share, which
was in excess of the market price per share on July 1, 2002. At March 31, 2006,
the Company was not in compliance with two of the covenants set forth in the
loan agreement. In order to obtain a waiver for the covenants, the Company
issued the debenture holders a total of 50,000 warrants for receipt of the
waiver. Through June 30, 2006, 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 August 10, 2006, the
Company received a waiver for the two covenants through July 1, 2007. However,
significant variances in future actual operations from the Company's current
estimates could result in the reclassification of this note to current
liabilities. The Convertible Debentures allows for an adjustment in the
conversion price, if the Company issues Common Stock in connection with an
equity financing, where the sale price is less than the conversion price of
$0.312. This occurred in December 2005 in connection with the common stock sale
of $11,000,000 at a price of $0.16 per share. Pursuant to the terms of the 2002
convertible debentures, the Company agreed with the RENN Capital Group that the
conversion price would be reduced to $0.22 per share. Based on the conversion
rate of $0.22 per share, each RENN investment fund is entitled to 4,545,455
shares upon conversion.
12
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On June 28, 2005, the Company received a waiver from the debenture holders
extending until July 1, 2006 the commencement date for principal payments of the
$3 million aggregate principal amount. The original terms of the debentures
required the Company to make monthly principal payments of $10 per $1,000 of the
then remaining principal amount, beginning on June 28, 2005. The Company will
still be required to make interest payments. Under the terms of the waiver,
monthly principal payments of $13.33 per $1,000 of the then remaining
outstanding principal amount were to commence on July 1, 2006. The final
maturity date remains as June 28, 2009. As consideration for the extension, the
Company has issued to the debenture holders warrants to purchase 200,000 shares
of Simtek common stock at $0.50 per share, a premium to the market price on the
date of the waiver. The Company estimated the value of the warrants at the time
of grant, using the Black Scholes option-pricing model, to be approximately
$62,000. The Company recognized $8,000 as additional interest expense for the
six months ending June 30, 2006. On July 24, 2006, each of the debenture holders
converted $100,000 of the amount due into 454,545 shares of the Company's common
stock in lieu of the Company making the principal payment it was required to
make on July 1, 2006.
9. Non-Refundable Prepaid Royalties
On March 24, 2006, the Company entered into a License and Development
Agreement with Cypress pursuant to which, among other things, Cypress agreed to
license certain intellectual property from the Company to develop and
manufacture standard, custom and embedded nvSRAM products and Cypress has agreed
to pay to the Company $4,000,000 in non-refundable pre-paid royalties of which
$2 million was paid upon signing of the agreement and $1 million was paid on
June 30, 2006 and $1 million will be paid on December 31, 2006. In addition, the
Company licensed rights to use certain intellectual property from Cypress for
use in its products. As part of the License and Development Agreement, the
Company agreed to issue Cypress warrants to purchase 20 million shares of the
Company's common stock for $0.75 per share. The warrants have a ten year life.
The warrants will be issued upon receipt of each of the prepaid royalty amounts.
As of June 30, 2006, the Company had received $3,000,000 from Cypress in
pre-paid royalties, in exchange for which the Company has issued warrants to
purchase 15 million shares of common stock. The value of the warrants issued of
$1,482,000 was determined by an independent valuation firm and has been recorded
as an increase in additional paid in capital. The net balance of the
non-refundable prepaid royalties of $1,035,000 for the March 31, 2006 payment
and $483,000 for the June 30, 2006 payment were recognized as revenue at the
time the payments were received.
10. Geographic Concentration
Sales of the Company's semiconductor products by location for the three
month and six month periods ended June 30, 2006 and 2005 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ------------------
2006 2005 2006 2005
---- ---- ---- ----
United States 18% 24% 19% 26%
Europe 29% 21% 29% 19%
Far East 42% 42% 43% 44%
All Others 11% 13% 9% 11%
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
13
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) net of tax is as follows:
Foreign Currency
Translation Adjustment
Balance at January 1, 2006 $ -
Current period change 75
---------
Balance June 30, 2006 $ 75
=========
12. Discontinued Operation
On August 30, 2005, the Company, along with the Company's wholly-owned
subsidiary, Q-DOT, Inc. ("Q-DOT"), entered into an Asset Purchase Agreement with
Hittite Microwave Corporation ("Hittite") and a wholly-owned subsidiary of
Hittite, HMC Acquisition Corporation ("HMC Acquisition"), whereby substantially
all of the assets of Q-DOT were sold to HMC Acquisition in exchange for a cash
payment of approximately $2.2 million. The Company realized a net gain of
approximately $1,687,000. In addition, Hittite assumed certain future
obligations of Q-DOT, including obligations related to Q-DOT's real estate lease
and certain software license agreements. Incident to the Asset Purchase
Agreement, the parties also entered an Escrow Agreement, whereby $200,000 of the
purchase price was placed in escrow for one year to secure certain
indemnification obligations of Simtek and Q-DOT. In addition, the parties
entered into a Confidentiality, Non-Disclosure and Restrictive Covenant
Agreement, whereby, among other things, Simtek and Q-DOT agreed not to compete
against Hittite and HMC Acquisition for a period of four years with respect to
certain businesses relating to Q-DOT's operations.
In accordance with SFAS No. 144, the consolidated financial statements of
the Company have been recast to present this business as a discontinued
operation. Accordingly, the revenues, the costs and expenses and assets and
liabilities of the discontinued operation have been excluded from the respective
captions in the accompanying Consolidated Statements of Operations and
Consolidated Balance Sheets. In addition, certain of the Notes to the
Consolidated Financial Statements have been recast for all periods to reflect
the discontinuance of this operation.
14
SIMTEK CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis in this quarterly report on Form
10-Q/A is intended to provide greater details of the results of operations and
financial condition of our Company. The following discussion should be read in
conjunction with our condensed consolidated financial statements and notes
thereto and other financial data included elsewhere herein. Certain statements
under this caption constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The reader should not place undue reliance on these forward looking
statements for many reasons including those risks discussed in this document. In
addition, when used in this quarterly 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. 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our 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. Our
accounting policies are discussed in Note 1 of the Notes to Consolidated
Financial Statements included in our 2005 Form 10-K as amended on Form 10-K/A
filed with the Securities and Exchange Commission on December 11, 2006. The
estimates used by us are based upon our historical experiences combined with our
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.
Product sales revenue is recognized when a valid purchase order has been
received with a fixed price and the products are shipped to customers FOB origin
(Colorado Springs, Colorado or Dresden, Germany), including distributors. Based
on historic business with the majority of our customers and, in the case of new
customers, we are reasonably assured that collectibility on our shipments will
occur.
Revenue from royalties related to non-refundable prepaid royalty payments
is recognized upon receipt. Revenue from royalties related to sales of products
by license partners is recognized upon the notification to us of shipment of
product from out technology license partners to direct customers.
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.
15
SIMTEK CORPORATION
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 actual reported distributor inventory levels. The contracts we have
with certain of our distributors generally allow them to return to us 5% percent
of their inventory every 6 months, in exchange for inventory that better meets
their demands. At times, our distributors reduce the selling price of a specific
device in order to meet competition related to a specific end customer program,
which we support through a credit back to the distributor for that specific
program. 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.
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
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.
We assess the impairment of long-lived assets when events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable. Factors that we consider in deciding when to perform an impairment
review include significant under-performance of the business in relation to
expectations, significant negative industry or economic trends, and significant
changes or planned changes in our use of the assets. Recoverability of assets
that will continue to be used in our operations is measured by comparing the
carrying amount of the assets to our estimate of the related future net cash
flows. If the asset's carrying amount is not recoverable through the related
cash flows, the asset is considered to be impaired. The impairment is measured
by the difference between the asset's carrying amount and its fair value, based
on the best information available, including market prices or discounted cash
flows.
Goodwill represents the excess of the purchase price over the fair value of
identifiable net tangible and intangible assets acquired in the acquisition of
the nvSRAM assets from ZMD. Goodwill is required to be tested for impairment.
This assessment requires estimates of future revenue, operating results and cash
flows, as well as estimates of critical valuation inputs such as discount rates,
terminal values and similar data. We will continue to perform periodic and
annual impairment analyses of goodwill. As a result of such impairment analyses,
impairment charges may be recorded and may have a material adverse impact on our
financial position and operating results. Additionally, we may make strategic
business decisions in future periods which impact the fair value of goodwill,
which could result in significant impairment charges. There can be no assurance
that future goodwill impairments will not occur.
We have recorded a valuation allowance on deferred tax assets. Future
operations may change our estimate in connection with potential utilization of
these assets.
16
SIMTEK CORPORATION
Overview
Total revenue for the three and six months ended June 30, 2006 was $6.9
million and $12.7 million, respectively, including $.5 million and $1.5 million
of royalty revenue for the three and six months, respectively. Total unit
shipments of our semiconductor memory products increased in both the three and
six month periods compared to the 2005 periods. Our net product revenue was
$6,443,000 and $11,186,000 for the three and six months ended June 30, 2006,
respectively, up from $2,204,000 and $5,180,000 for the comparable periods of
2006, an approximate 192% and 115% increase, respectively. This increase was due
primarily to increased product demand and the addition of revenue from customers
previously serviced by ZMD prior to the acquisition of the nvSRAM product line
from ZMD in December 2005.
Increased operating expenses had an impact on our profitability for the
three and six months ended June 30, 2006 compared to the three and six months
ended June 30, 2005. The increase in operating expenses includes non-cash
charges of $446,000 and $894,000 for amortization of the non-compete agreement
with ZMD and $159,000 and $278,000 for expenses related to employee stock
options, for the three and six months ended June 30, 2006, respectively.
Operating expenses also included first-time operating expenses of $269,000 and
$494,000 for our European subsidiary, Simtek GmbH, for the three and six months
ended June 30, 2006, respectively.
Results of Operations:
Revenues
The following table sets forth our net revenues for semiconductor
devices by product markets for the three and six months ended June 30, 2006 and
2005 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
2006 2005 Variance 2006 2005 Variance
---- ---- -------- ---- ---- --------
Commercial $ 6,032 $ 1,810 $ 4,222 $ 9,983 $ 4,217 $ 5,766
High-end industrial and
military 411 394 $ 17 $ 1,203 $ 963 $ 240
------- ------- ------- ------- ------- -------
Total Semiconductor
Revenue $ 6,443 $ 2,204 $ 4,239 $11,186 $ 5,180 $ 6,006
====== ======= ======= ======= ======= =======
Commercial revenues include revenue generated from our 0.8-micron products
built from silicon wafers received from Chartered Semiconductor or purchased as
finished units from ZMD, and from our 0.25-micron products built from silicon
wafers received from Dongbu Electronics (DBE). Commercial revenues increased by
$4,222,000 and $5,766,000 for the three and six months ended June 30, 2006 as
compared to the three and six months ended June 30, 2005. As stated previously,
this increase was due primarily to increased unit demand and the addition of
revenue from customers previously serviced by ZMD prior to the acquisition of
the nvSRAM product line from ZMD in December 2005.
High-end industrial and military product revenues accounted for an increase
of approximately $17,000 and $240,000 for the three and six months ended June
30, 2006 as compared to the same period in 2005. The increase was due to the
addition of new customer demand for our products and increased pricing to
certain of our customers for industrial and military products.
17
SIMTEK CORPORATION
The following table sets forth the unit volumes for each period in thousands of
units:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
2006 2005 Variance 2006 2005 Variance
---- ---- -------- ---- ---- --------
0.8 micron 256K devices 1,421 337 1,084 2,525 746 1,779
0.25 micron devices 69 17 52 91 35 56
Other devices 441 188 253 718 405 313
------ ----- ------ ------ ------ ------
Total Units 1,931 542 1,389 3,334 1,186 2,148
====== ===== ====== ====== ====== ======
Two distributors accounted for approximately 24% and 26% of our revenue for
the three and six months ended June 30, 2006, respectively. Products sold to
distributors are sold without material recourse. Distributors sell 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 product sales, as we believe that we would be able to service these various
end customers through other distributors.
Cost of Sales and Gross Profit
We recorded cost of sales of $4,567,000 and $8,037,000 for the three and
six months ended June 30, 2006, respectively as compared to $1,675,000 and
$3,683,000 for the comparable periods in 2005. The resulting product gross
margin percentages for the three and six months ended June 30, 2006 were 29% and
28%, respectively and 24% and 29% for the three and six months ended June 30,
2005, respectively. The overall improvement in gross margin percentages is due
to; (i) increased volume; (ii) higher overall average selling prices; and (iii)
cost reductions in the 1 megabit device. We expect to see gross margins increase
in the next several quarters, as average selling prices continue to increase,
unit costs for all 0.25 micron devices continues to be reduced, and the benefits
of moving final test operations offshore to more cost effective locations. In
fact, in June 2006, we successfully transferred final testing of our highest
volume devices to the Philippines and expect to see the cost benefit in the
third quarter of 2006.
Research and Development
In order to maintain our growth, we must continue to invest in new product
development and to increase the percentage of the overall nvRAM market that our
products serve. In July 2006, we completed full qualification of the 1 megabit
device with real time clock and the 0.25 micron 256 kilobit device both with and
without the real time clock feature. Thus all of our 0.25 micron based products
are fully qualified. We anticipate that we will continue to invest in the next
several months in continued cost reductions, yield enhancements, and back end
test efficiencies.
In May 2005, we began joint development of our next generation nvSRAM
product family, in conjunction with Cypress, pursuant to the terms of the May 5,
2005 development agreement. This new product family will be based on Cypress'
0.13-micron "S8" process and we expect it will include memory densities up to
and beyond 4-megabits. In the first half of 2006 we achieved our third major
milestone under the development agreement, as scheduled. For the three months
and six months ended June 30, 2006, we recognized expenses related to the
Cypress development of $328,000 and $642,000, respectively. In 2005, the expense
was $49,000 for both periods.
As part of our strategic product development activities, on March 24,
2006, Simtek entered into a License and Development Agreement with Cypress which
expands the agreement the two companies signed in May 2005. Under the terms of
the new agreement:
18
SIMTEK CORPORATION
o Cypress will retain the right to include nvSRAM functionality on
future programmable system-on-chip (PSoC(TM)) and customized
integrated circuits originally granted in the May 2005 agreement, and
now with clearly defined royalty payments to Simtek for the use of its
SONOS-based nvSRAM intellectual property;
o Simtek is granted the right to use certain intellectual property of
Cypress in developing future generation nvSRAM products, including the
jointly developed 0.13u SONOS-based CMOS process, advanced SRAM
intellectual property, design-related intellectual property,
design-for-manufacturability know-how and other intellectual property
related to Cypress' advanced CMOS manufacturing processes and
procedures;
o Simtek and Cypress agree to broad manufacturing support terms that
will provide Simtek with a range of industry-leading manufacturing
skills and know-how to enable cost-effective manufacturing of
leading-edge SONOS nvSRAMs;
o Simtek and Cypress will extend the deployment of Simtek's proprietary
nvSRAM technology, and work to establish SONOS as the preferred
technology for high reliability, high endurance, and scaleable
non-volatile products at 65nm and below;
o Simtek and Cypress will jointly develop and market a family of
products utilizing Simtek's patented SONOS-based non-volatile
technology for production using Cypress's advanced manufacturing
processes.
Upon signing the agreement, Simtek received $2 million from Cypress. Simtek
also received an additional payment of $1 million on June 30, 2006 and will
receive an additional payment of $1 million on December 31, 2006. The agreement
also calls for Simtek to issue warrants to Cypress to purchase a total of 20
million shares of its common stock, 10 million of which were already issued upon
the execution of the agreement, 5 million of which were issued on June 30, 2006
upon the payment by Cypress of certain royalties and 5 million of which are
expected to be issued on December 31, 2006 upon the payment by Cypress of
certain royalties. The warrants have, or will have, an exercise price of $0.75
per share. Simtek believes that this new agreement will accelerate the timing of
expanding nvSRAM adoption in new markets and shorten future product development
cycle time. Please read Note 9 to the Condensed Consolidated Financial
Statements for a discussion of the accounting treatment for the transactions
related to this agreement.
Total research and development expenses were $1,682,000 and $3,227,000 for
the three and six months ended June 30, 2006, respectively, as compared to
$1,917,000 and $3,126,000 for the three and six months ended June 30, 2005,
respectively.
The $235,000 decrease for the three month period was due to primarily a
decrease in product development costs of $736,000 which was offset by increases
in costs related to the joint development with Cypress discussed previously;
additional payroll related costs of $248,000, including the engineering staff at
Simtek GmbH and expenses related to stock options; and increased travel of
$43,000 for engineers traveling to and from Simtek GmbH. The decrease in product
development costs was due to the one-time charge related to our .25 micron
product that we recorded in the three month period ending June 30, 2005.
The $101,000 increase for the six month period was primarily due to a
decrease of $720,000 for the charges related to the development of our .25
micron product as discussed above and a decrease of $112,000 related to leased
software expense. These decreases were partially offset by increases in payroll
related costs of $319,000, travel of $58,000 and $593,000 in costs related to
the co-development with Cypress.
19
SIMTEK CORPORATION
General and Administration
Total general and administration expenses were $1,059,000 and $1,757,000
for the three and six months ended June 30, 2006, respectively, as compared to
$987,000 and $1,274,000, respectively, for the same periods in 2005.
The $72,000 increase for the three month period was primarily due to
increases in payroll related costs of $327,000, accounting and legal expenses of
$86,000, contract services of $114,000, travel of $32,000 and other
miscellaneous expenses of $41,000. These increases were offset by a decrease in
one-time costs related to separation and employment agreements of $527,000 that
were recorded in the three months ending June 30, 2005. The increases in audit
and legal expenses and contract services were primarily related to costs
incurred for our annual shareholder meeting, and securities work. The increase
in payroll related costs were related to increased headcount in both of our
Colorado Springs and Germany offices and expenses related to stock option
grants.
The $483,000 increase for the six month period was primarily due to
increases of $586,000 in payroll related costs, $174,000 in legal and audit
fees, contract services of $116,000, travel of $76,000, bad debt expense of
$25,000 and other miscellaneous expenses of $24,000. The increases were
partially offset by a decrease of $517,000 in one-time costs related to
separation and employment agreements that were incurred in the first six months
of 2005. The increases in legal and audit fees and contract services were
primarily related to expenses related to our shareholder meeting, securities
work and fees associated with the license agreement entered into with Cypress in
March 2006. The increases in payroll and payroll overhead costs were due to
increased headcount in both of our Colorado Springs and Germany offices and for
the expenses related to stock option grants.
Sales and Marketing
Total sales and marketing expenses were $1,038,000 and $1,983,000 for the
three and six months ended June 30, 2006, respectively, as compared to $444,000
and $844,000, respectively, for the same periods in 2005.
The $594,000 and $1,139,000 increases for the three and six month periods
were due to the amortization of the non-compete agreement discussed in Note 1 to
the Condensed Consolidated Financial Statements, increase in payroll related
costs and an increase in sales commissions. The increase in payroll related
costs were directly related to increased headcount and the increase in sales
commissions was related to the higher revenue.
Loss from Continuing Operations
We recorded a net loss, from continuing operations, of $1,453,000 and
$2,354,000 for the three and six months ended June 30, 2006, respectively, as
compared to $2,869,000 and $3,850,000 for the three and six months ended June
30, 2005, respectively. The decreases of $1,416,000 and $1,496 for the three and
six month periods reflect the revenue and expense items discussed above.
Liquidity and Capital Resources
As of June 30, 2006, we had a net working capital of $5,345,000 as compared
to a net working capital of $3,591,000 as of December 31, 2005.
As discussed previously, on March 24, 2006, we entered into a License and
Development Agreement with Cypress pursuant to which, among other things,
Cypress has agreed to license certain intellectual property from us to develop
and manufacture standard, custom, and embedded nvSRAM products. Cypress agreed
20
SIMTEK CORPORATION
to pay to Simtek royalties across all products they develop and sell which
include intellectual property licensed from Simtek. We agreed to license from
Cypress certain of their intellectual property for use in our design efforts. We
agreed with Cypress to co-develop certain nvSRAM products and Cypress has agreed
to pay us $4 million in nonrefundable prepaid royalties, $2 million of which was
received at the time the contract was executed. On June 30, 2006, we received
the second installment of $1,000,000 and the remaining $1 million is scheduled
to be paid on December 31, 2006. In addition, we agreed with Cypress to work
together to develop new products and processes. Please read Note 9 to the
Condensed Consolidated Financial Statements for a discussion of the accounting
treatment for the transactions related to this agreement.
Cash flows used in operating activities for the six months ended June
30, 2006 were $2,680,000 compared to $1,239,000 in the same period in 2005, an
increase of $1,441,000. The net increase is primarily due to investment in
working capital to support revenue growth. The key components of the cash (uses)
and sources in working capital are as follows, in thousands of dollars:
Six Months Ended June 30,
2006 2005 Change
--------- --------- ----------
Accounts receivable $ (2,530) $ 1,439 $ (3,969)
Inventory $ (2,345) $ 388 $ (2,733)
Accounts payable $ 1,704 $ (509) $ 2,213
The increase in working capital was partially off set by the reduction in net
loss for the 2006 period of $2.4 million from $3.9 million in the 2005 period
and the amortization of the non-compete agreement in 2006 of $0.9 million.
Cash flows used in investing activities increased for the six months ended
June 30, 2006 by approximately $360,000 as compared to the same period in 2005.
The increase was primarily the result of the purchase of equipment and furniture
for our facility in Germany and test equipment for our research and development.
The increase of $3,692,000 in cash flows provided by financing activities
was primarily due to the receipt of funds related to the sale of common stock
completed on December 30, 2005, for which some funds were received on January 3,
2006 and the value assigned to the warrants issued to Cypress under the
License and Development Agreement.
Short-term liquidity.
Our unrestricted cash balance at June 30, 2006 was $2,265,000.
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. Through December 31, 2006, we expect to spend approximately
$9,000,000, for operating expenses assuming revenue growth. We expect to meet
these cash needs from sales revenues, the funds still due to us from Cypress
under the License and Development Agreement and, to the extent we do not have
sufficient revenues, from our existing cash reserves and credit facility with
Wells Fargo.
21
SIMTEK CORPORATION
Long-term liquidity.
The Company has experienced significant revenue growth over the six months
ended June 30, 2006 and expects that growth trend to continue for the
foreseeable future. The time period from when we pay for our silicon wafers to
when we get paid by our customers can be as long as six months. Thus we need to
invest in inventory well in advance of receipt of payment from customers. If
revenue continues to grow at a significant rate, we may need to raise additional
capital to support that growth. While we currently have no specific plans to do
so, such additional capital may include expansion of our credit facility,
additional senior debt, or a private placement or public offering of our equity.
22
SIMTEK CORPORATION
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and rates. We are exposed to market risk
in the areas of changes in United States interest rates and changes in foreign
currency exchange rates as measured against the United States dollar. These
exposures are directly related to our normal operating activities. We currently
have no derivative financial instruments.
Interest payable on our convertible debentures is fixed at 7.5% over the
term of the debentures. As such, changes in interest rates will not affect
future expenses or cash flows.
We manage interest income by investing our excess cash in cash equivalents
bearing variable interest rates, which are tied to various market indices. We do
not believe that near-term changes in interest rates will result in a material
effect on future earnings, fair values or cash flows.
We do not speculate in the foreign exchange market and do not manage
exposures that arise in the normal course of business related to fluctuations in
foreign currency exchange rates by entering into offsetting positions through
the use of foreign exchange forward contracts.
Average selling prices of our products have not increased significantly as
a result of inflation during the past several years, primarily due to intense
competition within the semiconductor industry. The effect of inflation on our
costs of production has been minimized through improvements in production
efficiencies. We anticipate that these factors will continue to minimize the
effects of any foreseeable inflation and other price pressures within the
industry and markets in which we participate.
23
SIMTEK CORPORATION
ITEM 4 CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Harold Blomquist, who serves as the Company's chief executive officer, and Brian
Alleman, who serves as the Company's chief financial officer, after evaluating
the effectiveness of the Company's disclosure controls and procedures as of the
end of the period covered by this quarterly report (the "Evaluation Date")
concluded that as of the Evaluation Date, the Company's disclosure controls and
procedures were 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 and to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is accumulated and
communicated to our management to allow timely decisions regarding required
disclosure. As noted in the Explanatory Note at the beginning of this Form
10-Q/A and as noted in Note 2 to the Condensed Consolidated Financial Statements
contained in this Form 10-Q/A, the Company has reclassified $10,332,000 from
Temporary Equity to Shareholders Equity. In light of the reclassification
described above, the Company's chief executive officer and chief financial
officer have reevaluated the Company's disclosure controls and procedures as of
the Evaluation Date to determine whether the reclassification changes their
conclusion. Based on this reevaluation, the Company's chief executive officer
and chief financial officer have determined that the reclassification does not
change their conclusion.
(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 June 30, 2006, that have materially affected, or
are reasonably likely to materially affect, internal control over financial
reporting.
24
SIMTEK CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings -None
Item 1A. Risk Factors - None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 26, 2006, Simtek issued to the following individuals, who are directors
of Simtek, as compensation for serving as directors of Simtek under Simtek's
standard compensation arrangement for directors, the following amounts of shares
of Simtek common stock: Robert Keeley (33,757); Alfred Stein (33,757); Ronald
Sartore (33,757); Robert Pearson (33,757); and Harold Blomquist (3,706), which
shares, due to the nature of such issuances, were granted to the above-listed
directors in reliance upon the exemption from registration pursuant to Section
4(2) of the Securities Act of 1933, as amended. On May 26, 2006, Simtek issued
to Renaissance Capital Growth and Income Fund III, Inc., Renaissance US Growth
Investment Trust PLC and BFSUS Special Opportunities Trust PLC warrants to
purchase a total of 200,000 shares of Simtek common stock, which warrants were
granted in exchange for the agreement by such funds to subordinate to Wells
Fargo their first priority security interest in Simtek's assets in connection
with the $3.6 million revolving line of credit entered into by Simtek with Wells
Fargo Bank on June 2, 2006. Also on May 26, 2006, Simtek issued to Renaissance
Capital Growth and Income Fund III, Inc., Renaissance US Growth Investment Trust
PLC and BFSUS Special Opportunities Trust PLC warrants to purchase a total of
50,000 shares of Simtek common stock, which warrants were granted in exchange
for the agreement by such funds to waive compliance by Simtek with certain
covenants of the 7.5% convertible debentures. The May 26, 2006 warrants, which
have an exercise price of $0.33 per share and a term of five years, were issued
in reliance upon the exemption from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended, as each of such funds is an accredited
investor, there was no general solicitation and each of such funds had access to
material information of Simtek.
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders.
We held our annual meeting of shareholders on June 29, 2006, the results of
which we reported in a Current Report on Form 8-K filed on July 10, 2006, which
Form 8-K is incorporated by reference herein.
Item 5. Other Information - None
Item 6. Exhibits
10.1 Employment Agreement, dated April 25, 2006, by and between
the Company and Brian P. Alleman, incorporated by reference
to the Company's Current Report on Form 8-K filed by the
Company with the SEC on May 1, 2006.
10.2 Preliminary agreement between the Company and Ronald
Sartore, incorporated by reference to the Company's Current
Report on Form 8-K filed by the Company with the SEC on May
30, 2006.
10.3 Account Purchase Agreement, effective June 2, 2006, by and
between the Company and Wells Fargo Bank, National
Association, acting through its Wells Fargo Business Credit
operating division, incorporated by reference to the
Company's Current Report on Form 8-K filed by the Company
with the SEC on June 8, 2006.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of Principal Executive Officer
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of Principal Financial Officer
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of Principal Executive Officer
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of Principal Financial Officer
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIMTEK CORPORATION
(Registrant)
December 11, 2006 By: /s/Harold Blomquist
-----------------------------------------
HAROLD BLOMQUIST
Chief Executive Officer, President
December 11, 2006 By: /s/Brian Alleman
-----------------------------------------
BRIAN ALLEMAN
Chief Financial Officer
25
Exhibit 31.1
CERTIFICATIONS
I, Harold Blomquist, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q/A of Simtek Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: December 11, 2006
/s/Harold Blomquist
--------------------------------------
Harold Blomquist
Chief Executive Officer and President
Exhibit 31.2
CERTIFICATIONS
I, Brian Alleman, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q/A of Simtek Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: December 11, 2006
/s/Brian Alleman
----------------------------------
Brian Alleman
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND PRESIDENT
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Harold Blomquist, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Quarterly Report of Simtek Corporation on Form 10-Q/A for the quarterly period
ended June 30, 2006 fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 and that information contained in
such Form 10-Q/A fairly presents, in all material respects, the financial
condition and results of operations of Simtek Corporation.
/s/Harold Blomquist
-------------------------------------
Harold Blomquist
Chief Executive Officer and President
December 11, 2006
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Brian Alleman, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly
Report of Simtek Corporation on Form 10-Q/A for the quarterly period ended
June 30, 2006 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such Form
10-Q/A fairly presents, in all material respects, the financial condition and
results of operations of Simtek Corporation.
/s/Brian Alleman
-----------------------
Brian Alleman
Chief Financial Officer
December 11, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
----------------------------------
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarter ended September 30, 2006
OR
[ ] 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)
------------------------------------------------------
Delaware 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
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
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-accelerated Filer [X]
The total number of shares of Common Stock issued and outstanding as of
December 5, 2006 was 16,147,746, after giving effect to the one for ten reverse
stock split completed on October 5, 2006.
Explanatory Note
We are filing this Amendment No. 1 on Form 10-Q/A to Simtek Corporation's
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006,
which was originally filed with the Securities and Exchange Commission (the
"SEC") on November 14, 2006 (the "Original Form 10-Q") to reflect the
reclassification of $14,847,000 from Temporary Equity to Shareholders' Equity.
Simtek Corporation originally concluded that the net proceeds from its December
30, 2005 sale of 68,750,000 (pre-reverse split) shares of its common stock and
its September 21, 2006 sale of 11,531,654 (pre-reverse split) should be recorded
as Temporary Equity because of certain provisions in the Registration Rights
Agreements entered into as part of both financing transactions. However, upon
further review, management has determined that both transactions should be
recorded in Shareholders' Equity.
Part I of this Form 10-Q/A contains more information about this restatement in
"Note 2 Correction of Previously Reported Amounts", Note which accompanies the
condensed consolidated financial statements in Item 1 of Part I.
This Form 10-Q/A speaks as of September 30, 2006, and except as noted herein, we
have not materially modified or updated the disclosures herein for events that
occurred at a later date. Events occurring after the date of the Original Form
10-Q, and other disclosures necessary to reflect subsequent events, have been
addressed, in accordance with applicable disclosure requirements, in our Form
8-Ks filed after September 30, 2006 or will be addressed, in accordance with
applicable disclosure requirements, in our Form 10-K for the twelve months ended
December 31, 2006.
2
SIMTEK CORPORATION
INDEX
For the Quarter Ended September 30, 2006
PART 1. FINANCIAL INFORMATION
ITEM 1 Page
----
Condensed Consolidated Balance Sheets as of September 30,
2006 and December 31, 2005 4
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 2006 and 2005 5
Condensed Consolidated Statements of Cash Flows for the Nine
months ended September 30, 2006 and 2005 6
Notes to Condensed Consolidated Financial Statements 7-16
ITEM 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk 25
ITEM 4
Controls and Procedures 26
PART 2. OTHER INFORMATION
ITEM 1 Legal Proceedings 27
ITEM 1A Risk Factors 27
ITEM 2 Unregistered Sales of Equity Securities and
Use of Proceeds 30
ITEM 3 Defaults Upon Senior Securities 30
ITEM 4 Submission of Matters to a Vote of Security Holders 30
ITEM 5 Other Information 30
ITEM 6 Exhibits 30
SIGNATURES 31
3
SIMTEK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value and share amounts)
ASSETS
------
September 30, 2006 December 31, 2005
------------------ -----------------
(As Restated) (As Restated)
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 3,653 $ 1,766
Restricted investments 1,775 2,281
Accounts receivable - trade, net 5,051 1,456
Inventory, net 5,394 2,068
Prepaid expenses and other current assets 401 99
Deposits - 600
------------- ------------
Total current assets 16,274 8,270
EQUIPMENT AND FURNITURE, net 1,128 571
DEFERRED FINANCING COSTS AND DEBT ISSUANCE COSTS 127 111
GOODWILL 992 876
NON-COMPETITION AGREEMENT 7,571 8,910
OTHER ASSETS 41 20
------------- ------------
TOTAL ASSETS $ 26,133 $ 18,758
============= ============
LIABILITES AND SHAREHOLDERS' EQUITY
-----------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,287 $ 2,822
Accrued expenses 1,237 1,419
Accrued vacation payable 200 145
Accrued wages 230 40
Obligation under capital leases - 13
Line of credit 917 -
Debentures, current 480 240
------------- ------------
Total current liabilities 6,351 4,679
DEBENTURES, NET OF CURRENT 2,220 2,760
------------- ------------
Total liabilities 8,571 7,439
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 200,000 shares authorized,
none issued - -
Common stock, $.0001 par value; 30,000,000 shares authorized,
16,034,073 and 16,035,073 shares issued and outstanding
at September 30, 2006 and 14,692,082 and 14,693,082 shares
issued and outstanding at December 31, 2005 2 2
Additional paid-in capital 66,276 57,509
Treasury stock, at cost; 1,000 shares (1) (1)
Accumulated deficit (48,795) (46,191)
Accumulated other comprehensive income:
Cumulative translation adjustment 80 -
------------- ------------
Total shareholders' equity 17,562 11,319
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 26,133 $ 18,758
============= ============
The accompanying notes are an integral part of these financial statements.
4
SIMTEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except share and per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
REVENUE:
Product sales, net $ 8,251 $ 2,412 $ 19,436 $ 7,591
Royalty revenue -- -- 1,518 --
------------ ------------ ------------ ------------
Total revenue 8,251 2,412 20,954 7,591
Cost of sales 4,979 1,807 13,016 5,490
------------ ------------ ------------ ------------
GROSS PROFIT 3,272 605 7,938 2,101
OPERATING EXPENSES:
Research and development costs 1,351 1,572 4,578 4,697
Sales and marketing 1,250 321 3,233 1,164
General and administrative 838 412 2,595 1,759
------------ ------------ ------------ ------------
Total operating expenses 3,439 2,305 10,406 7,620
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (167) (1,700) (2,468) (5,519)
OTHER INCOME (EXPENSE):
Interest income 36 45 112 56
Interest expense (113) (63) (247) (177)
Exchange rate variance (7) -- (4) --
Other income (expense) 2 -- 2 (1)
------------ ------------ ------------ ------------
Total other expense (82) (18) (137) (122)
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES (249) (1,718) (2,605) (5,641)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (249) (1,718) (2,605) (5,641)
INCOME FROM DISCONTINUED OPERATIONS
(including gain on disposal of $1,689) -- 1,701 -- 1,706
------------ ------------ ------------ ------------
NET LOSS $ (249) $ (17) $ (2,605) $ (3,935)
============ ============ ============ ============
NET LOSS PER COMMON SHARE:
Basic and diluted
Loss from continuing operations $ (.02) $ (.24) $ (.18) $ (.84)
Income (Loss) from discontinued
operations (.00) .24 (.00) .25
------------ ------------ ------------ ------------
Total $ (.02) $ (.00) $ (.18) $ (.59)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic and diluted 14,966,916 7,073,599 14,791,191 6,713,113
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
5
SIMTEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Amounts in thousands)
Nine Months Ended September 30,
-------------------------------
2006 2005
---------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,605) $(3,935)
Income from discontinued operations -- (17)
Adjustments to reconcile net loss to net cash used in operating
Activities:
Depreciation and amortization 361 326
Expense related to stock options 417 --
Issuance of common stock per compensation
agreements 53 139
Expense related to issuance of warrants -- 5
Gain from discontinued operations -- (1,689)
Amortization of non-competition agreement 1,339 --
Net change in allowance accounts 577 64
Deferred financing fees 37 12
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (3,687) 1,447
Inventory (3,799) 575
Prepaid expenses and other 282 (163)
Increase (decrease) in:
Accounts payable 461 (366)
Accrued expenses 996 663
------- -------
Net cash used in operating activities of continuing operations (5,568) (2,939)
Net cash provided by operating activities of discontinued operations -- 104
------- -------
Net cash used in operating activities (5,568) (2,835)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture, net (914) (207)
Proceeds from discontinued operations, net -- 1,867
Purchase of certain assets from ZMD (116) --
------- -------
Net cash provided by (used in) investing activities of
continuing operations (1,030) 1,660
Net cash used in investing activities of discontinued operations -- (36)
------- -------
Net cash provided by (used in) investing activities (1,030) 1,624
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation (13) (37)
Receipts from restricted cash 200 --
Funds received from December 2005 equity financing, net 1,874 --
Warrants issued for license rights 1,478 --
Equity financing, net -- 3,944
Transfer to restricted investment -- (3,200)
Proceeds from sale of common stock -- 108
Payments from restricted investment 306 355
Funds received from September 2006 equity financing, net 4,515 --
Exercise of stock options 78 197
------- -------
Net cash provided by financing activities 8,438 1,367
------- -------
Effect of exchange rate changes on cash 47 --
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,887 156
CASH AND CASH EQUIVALENTS, beginning of period 1,766 2,147
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 3,653 $ 2,303
======= =======
Cash Paid for interest $ 222 $ 172
======= =======
Warrants issued for debt issuance cost $ 53 $ --
======= =======
Conversion of debentures $ 300 $ --
======= =======
The accompanying notes are an integral part of these financial statements.
6
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements include the accounts of Simtek and
its wholly owned subsidiaries. Intercompany accounts and transactions have been
eliminated. The financial statements included herein are presented in accordance
with the requirements of Form 10-Q and consequently do not include all of the
disclosures normally made in the registrant's annual Form 10-K filing. These
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Annual Report and Form
10-K, Annual Report and Amendment #1 to Form 10-K and Annual Report and
Amendment #2 to Form 10-K for Simtek Corporation ("Simtek" or the "Company")
filed on April 7, 2006, April 28, 2006, and December 11, 2006, respectively for
fiscal year 2005.
In the opinion of management, the unaudited financial statements reflect
all adjustments of a normal recurring nature necessary to present a fair
statement of the results of operations for the respective interim periods. The
year-end balance sheet data was derived from audited financial statements, but
does not include all disclosures required by accounting principles generally
accepted in the United States of America. Results of operations for the interim
periods are not necessarily indicative of the results of operations for the full
fiscal year.
On October 5, 2006, Simtek completed a 1 for 10 reverse stock split. All
share and per share amounts have been restated to reflect the effect of the
reverse stock split as if it had occurred as of the balance sheet date or as of
the beginning of each fiscal period presented. In addition, on October 5, 2006,
Simtek converted from a Colorado corporation to a Delaware corporation. This
reincorporation had no effect on the consolidated financial statements.
Stock-Based Compensation
------------------------
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standard 123(R) "Share-Based
Payment" ("SFAS 123(R)") using the modified prospective transition method. In
addition, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 "Share-Based Payment" ("SAB 107") in March, 2005, which
provides supplemental SFAS 123(R) application guidance based on the views of the
SEC. Under the modified prospective transition method, compensation cost
recognized in the three and nine month periods ending September 30, 2006
includes: (a) compensation cost for all share-based payments granted prior to,
but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123, and (b)
compensation cost for all share-based payments granted beginning January 1,
2006, based on the grant date fair value estimated in accordance with the
provisions of SFAS 123(R). In accordance with the modified prospective
transition method, results for prior periods have not been restated.
The adoption of SFAS 123(R) resulted in stock compensation expense for the
three months and nine months ended September 30, 2006 of $139,000 and $417,000,
respectively to loss from continuing operations and loss before income taxes.
The Company did not recognize a tax benefit from the stock compensation expense
because the Company considers it is more likely than not that the related
deferred tax assets, which have been reduced by a full valuation allowance, will
not be realized. The following table summarizes the effects of the share-based
compensation resulting from the application of SFAS No. 123(R) to options
granted under the Company's stock option plan.
7
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Nine Months
Ended Ended
September 30, 2006 September 30, 2006
------------------ ------------------
(In thousands except per share amounts)
Research and development $ 43 $ 129
Sales and marketing 20 60
General and administrative 76 228
--------- ---------
Share-based compensation effect on loss from continuing
operations before provision for income taxes $ 139 $ 417
Provision for income taxes - -
--------- ----------
Net share-based compensation effects on net loss $ 139 $ 417
========= =========
Share-based compensation effects on basic and diluted loss
per common share $ .01 $ .03
========= ==========
Share-based compensation effects on cash flow from
operations $ 139 $ 417
========= =========
The Black-Scholes option-pricing model was used to estimate the option fair
values. The option-pricing model requires a number of assumptions, of which the
most significant are expected stock price volatility and the expected option
term (the amount of time from the grant date until the options are exercised or
expire). Expected volatility was calculated based upon actual historical stock
price movements over the most recent periods ending September 30, 2006 equal to
the expected option term. In accordance with SFAS No. 123(R), the Company
adjusts share-based compensation on a quarterly basis for changes to the
estimate of expected forfeitures based on actual forfeiture experience. The
effect of adjusting the forfeiture rate for all expense amortization after
January 1, 2006 is recognized in the period the forfeiture estimate is changed.
The effect of forfeiture adjustments in the three and nine months ended
September 30, 2006 was insignificant. The expected option term was calculated
using the "simplified" method permitted by SAB 107.
SFAS 123(R) requires tax benefits resulting from tax deductions in excess
of the compensation cost recognized for those options ("excess tax benefits") to
be classified and reported as both an operating cash outflow and a financing
cash inflow upon adoption of SFAS 123(R). As discussed in Note 8 - Taxes from
the Company's report on Form 10-K, Amendment #1 to Form 10-K and Amendment #2 to
Form 10-K for the period ending December 31, 2005, as a result of the Company's
net operating losses, the excess tax benefits that would otherwise be available
to reduce income taxes payable have the effect of increasing the Company's net
operating loss carry forwards. Accordingly, because the Company is not able to
realize these excess tax benefits, such benefits have not been recognized in the
condensed statement of cash flow for the nine months ended September 30, 2006.
Pro-Forma Stock Compensation Expense for the three and nine months Ended
September 30, 2005
Prior to January 1, 2006, as permitted under the SFAS No. 123, Accounting
for Stock-Based Compensation, the Company accounted 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 was recorded on the date of grant if the current market
price of the underlying stock exceeded 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 compensation cost been determined
based on the fair value at the grant dates for awards under employee stock based
compensation plans consistent with the fair value method for the three and nine
months ending September 30, 2005, the Company's net loss and net loss per share
would have been increased to the pro forma amounts indicated below.
8
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2005 2005
---- ----
(In thousands except per share amounts)
Net loss as reported $ (17) $ (3,935)
Add: Stock based compensation included in reported
Net loss - -
Deduct: Fair value of stock based compensation (363) (1,091)
------------ ------------
Proforma net loss $ (380) $ (5,026)
============ ============
Net loss as reported - basic and diluted $ (.00) $ (.06)
Proforma net loss - basic and diluted $ (.01) $ (.07)
In accordance with the modified prospective transition method of SFAS
123(R), the prior comparative quarterly results have not been restated.
Stock Options as of the three and nine month periods ended September 30, 2006
The Company adopted a Non-Qualified Stock Option Plan in 1994, as amended,
that authorizes 2,060,000 non-qualified stock options that may be granted to
directors, employees, and consultants. The plan permits the issuance of
non-statutory options and provides 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 plan 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.
The following table summarizes stock options outstanding and changes during
the nine months ended September 30, 2006:
Outstanding Options
---------------------------------------------------------------
Weighted
Average
Remaining
Weghted Contractual Aggregate
Average Term Intrinsic
Number of Shares Exercise Price (in years) Value(1)
---------------- -------------- ------------ ----------
Options outstanding at January 1, 2006................... 796,937 $6.20
Granted................................................ 428,585 3.46
Exercised.............................................. (40,583) (1.89) $ 68
Cancelled or forfeited................................. (31,678) (9.46)
--------- -----
Options outstanding at September 30, 2006................ 1,153,261 $5.21 4.068
========= ===== ===== ====
Options exercisable at September 30, 2006................ 568,095 $6.34 4.068 $ 68
========= ===== ===== ====
----------------
(1) Represents the difference between the exercise price and the value of
Simtek stock at the time of exercise.
9
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Stock options outstanding and currently exercisable at September 30, 2006 are as
follows:
Outstanding Exercisable
------------------------------------------------------------------ ------------------------------
Weighted Average
------------------------------------------------
Remaining Weighted Weighted
Number Contractual Life Average Number Average
Exercise Price Outstanding in Months Exercise Price Exercsisable Exercise Price
-------------- ----------- ---------------- -------------- ------------ --------------
$1.40-$3.50 369,426 48 $ 2.94 110,197 $ 2.41
$3.65-$6.00 456,189 58 $ 4.48 191,147 $ 4.48
$6.20-$9.00 222,912 54 $ 6.57 162,017 $ 6.56
$11.25-$15.00 82,234 28 $ 12.37 82,234 $ 12.37
$15.30-$19.00 22,500 55 $ 17.77 22,500 $ 17.77
--------- -------
1,153,261 568,095
========= =======
Total estimated unrecognized compensation cost from unvested stock options
as of September 30, 2006 was approximately $1.5 million, which is expected to be
recognized over the next four years.
The weighted average per share fair value of stock options granted during
the three months ending September 30, 2006 and 2005 were $3.00 and $2.30,
respectively. The weighted average per share fair value stock options granted
during the nine months ending September 30, 2006 and 2005 were $2.30 and $3.70,
respectively. The fair value was estimated as of the grant date using the
Black-Scholes option pricing model with the following assumptions:
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
--------------------- -------------------
Volatility 79.38% 85.28% 80.22% 84.32%
Expected option term 5 years 4 years 4.80 years 4 years
Risk-free interest rate 5.33% 4.00% 5.02% 3.75%
Expected dividend yield 0% 0% 0% 0%
Modifications of Stock Options Granted
In May 2005, the Company accelerated vesting of certain unvested and
out-of-the-money stock options previously awarded to employees and officers.
Because the price of the Company's common stock was $5.70 on the day of
acceleration, the options, which are exercisable at $6.20 and above, had no
economic value on the date of acceleration. As a result of the acceleration,
options to purchase approximately 170,000 shares of Simtek common stock are now
exercisable. Options held by non-employee directors were excluded from the
vesting acceleration.
Non-competition Agreement
-------------------------
In December 2005, the Company entered into a non-competition agreement with
Zentrum Mikroelektronik Dresden AG ("ZMD") as part of the acquisition of ZMD's
nvSRAM product line. The Company assigned a value of $8,910,000 to the
non-competition agreement in December 2005. The value assigned to the
10
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
non-competition agreement is being amortized on a straight-line basis over its
five-year life. The Company recorded an expense for the amortization of
approximately $1,339,000 to sales and marketing for the nine months ended
September 30, 2006.
Goodwill
--------
Goodwill represents the excess of the total amount paid to ZMD for the
nvSRAM assets acquired on December 30, 2005 and the fair value assigned to
specific assets. This amount will not be amortized, but will be reviewed for
impairment on a periodic basis. As of September 30, 2006 no impairment of value
has been recorded.
Accumulated other comprehensive income (loss)
---------------------------------------------
The functional currency for Simtek GmbH is the local currency, the Euro.
Assets and liabilities for this foreign subsidiary are translated at the
exchange rate in effect at the balance sheet date, and income and expenses are
translated at average exchange rates prevailing during the period. Translation
gains or losses are included within shareholders' equity as part of accumulated
other comprehensive income (loss). As of September 30, 2006, the Company
recorded approximately $80,000 in comprehensive income.
2. Correction of Previously Reported Amounts
As more fully described in Notes 2 and 6 to the Consolidated Financial
Statements included in Simtek Corporation's Amendment No. 2 on Form 10-K/A filed
on December 11, 2006 for fiscal year 2005, on December 30, 2005, the Company
sold 68,750,000 shares, pre-reverse split (6,875,000 post-reverse split) of its
common stock, subject to certain registration rights. Management initially
concluded that the net proceeds of $10,332,000 ($8,459,000 received on December
30, 2006 and $1,873,000 received on January 3, 2006) should be recorded as
Temporary Equity due to the potential penalties associated with the registration
rights agreement. In addition, on September 21, 2006 the company sold an
additional 11,531,711 shares of common stock, pre-reverse split (1,153,171
post-reverse split) for $4,555,000. Management initially concluded that the net
proceeds of $4,515,000 should be recorded as Temporary Equity due to the
potential penalties associated with the registration rights agreement.
Management has subsequently determined that both of the transactions should have
been recorded in Shareholders' Equity.
The following table reflects the amounts as previously reported and as
restated:
September 30, 2006 December 31, 2005
As As
Reported Restated Reported Restated
(Amounts in thousands)
Consolidated Balance Sheet:
Temporary Equity $ 14,847 $ - $ 8,459 $ -
Common Stock $ 1 $ 2 $ 1 $ 2
Additional paid-in capital $ 51,430 $ 66,276 $ 49,051 $ 57,509
Total shareholders' equity $ 2,715 $ 17,562 $ 2,860 $ 11,319
11
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Liquidity
During the three and nine months ended September 30, 2006 and the twelve
months ended December 31, 2005, the Company incurred net losses from continuing
operations of approximately $249,000, $2,605,000 and $7,490,000, respectively
and has an accumulated deficit of $48,795,000 as of September 30, 2006. The
Company was also not in compliance with its debentures throughout 2005 and the
first nine months of 2006, but was successful in obtaining waivers through
October 1, 2007 from the debenture holders. The Company has working capital of
approximately $9,923,000 as of September 30, 2006.
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.
On September 21, 2006, the Company raised gross proceeds of $4,555,000 in a
private placement. The Company issued 1,153,171 shares of our common stock at a
per share price of $3.95 and 172,981 warrants to purchase common stock. The
warrants have a per share exercise price of $5.40 and a five-year term. The
Company anticipates using the proceeds for general working capital and to
produce silicon wafers to support revenue growth.
4. Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"). The interpretation clarifies the
accounting for uncertainty in income taxes recognized in a company's financial
statements in accordance with Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes. Specifically, the pronouncement prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The interpretation also provides guidance on the related
derecognition, classification, interest and penalties, accounting for interim
periods, disclosure and transition of uncertain tax positions. The
interpretation is effective for fiscal years beginning after December 15, 2006.
The adoption of FIN 48 is expected to have an immaterial impact on the Company's
consolidated financial position, results of operations or cash flows.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" ("FAS 157"). This Statement defines
fair value as used in numerous accounting pronouncements, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosure related to the use of fair value measures in financial
statements. The Statement is to be effective for the Company's financial
statements issued in 2008; however, earlier application is encouraged. The
Company is currently evaluating the timing of adoption and the impact that
adoption might have on its financial position or results of operations.
In September 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 108 ("SAB 108"). Due to diversity in practice
among registrants, SAB 108 expresses SEC staff views regarding the process by
which misstatements in financial statements are evaluated for purposes of
determining whether financial statement restatement is necessary. SAB 108 is
effective for fiscal years ending after November 15, 2006, and early application
is encouraged. The Company does not believe SAB 108 will have a material impact
on its financial position or results from operations.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments ("SFAS 155"), which amends SFAS No. 133, Accounting
12
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for Derivative Instruments and Hedging Activities and SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS 155 simplifies the accounting for certain derivatives embedded
in other financial instruments by allowing them to be accounted for as a whole
if the holder elects to account for the whole instrument on a fair value basis.
The statement also clarifies and amends certain other provisions of SFAS No. 133
and SFAS No. 140. SFAS 155 is effective for all financial instruments acquired,
issued, or subject to a remeasurement event occurring in fiscal years beginning
after September 15, 2006. We do not expect the adoption of SFAS 155 to have an
impact on our results of operations or financial condition.
5. Revenue Recognition
Revenue Recognition - Product sales revenue is recognized when a valid
purchase order has been received with a fixed price and the products are shipped
to customers FOB origin (Colorado Springs, Colorado or Dresden, Germany),
including distributors. Based on historic business with the majority of the
Company's customers and, in the case of new customers, the Company is reasonably
assured that collectibility on our shipments will occur. Customers receive a
one-year product warranty and sales to distributors are subject to a limited
product exchange program and a price protection in the event of changes in the
Company's product price. The Company provides a reserve for possible product
returns, product price protection and warranty costs at the time the sale is
recognized. The Company has a detailed procedure to ensure that its estimates
for reserves are reasonable and reliable. The reserve for product returns is
based on the actual inventory value of the Company's semiconductor products held
by its distributors. The Company's distributors are permitted to rotate up to 5%
of their stock every six months with the stipulation that they must submit a
replacement order of equal dollar value to the stock that they are returning.
The reserve for price protection is used when the Company authorizes special
pricing to one of its distributors for a specific customer. To date, the
estimates have not been materially different from the credits the Company has
issued under these reserves.
Revenue from royalties related to non-refundable prepaid royalty payments
is recognized upon receipt. Revenue from royalties related to sales of products
by license partners is recognized upon the notification to us of shipment of
product from the Company's technology license partners to direct customers.
6. Inventories
The Company records inventory using the lower of cost (first-in, first-out)
or market. Inventory at September 30, 2006 and December 31, 2005 included:
September 30, 2006 December 31, 2005
(In thousands)
Raw Materials $ 51 $ 33
Work in progress 4,011 1,096
Finished Goods 1,932 1,056
--------- ---------
5,994 2,185
Less reserves for excess inventory (600) (117)
--------- ----------
$ 5,394 $ 2,068
========= =========
7. Line of Credit
On June 2, 2006, the Company secured a $3.6 million revolving line of
credit by entering into an Account Purchase Agreement (the "Agreement") with
Wells Fargo Bank, National Association ("Wells Fargo"). Pursuant to the
Agreement, the Company may sell up to $3.6 million of eligible accounts
13
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
receivable to Wells Fargo. Advances are limited to 80% of the eligible
receivables. The amount actually collected on any receivable by Wells Fargo that
is beyond the advance will be forwarded to the Company, less certain discounts
and fees retained by Wells Fargo (including a minimum fee of $7,500 per month
for the term of the Agreement). To secure the Company's obligations under the
Agreement, the Company granted Wells Fargo a security interest in certain of the
Company's property. The Agreement has a term of two years, but may be terminated
at any time by the Company upon 60 days' written notice. As of September 30,
2006, the Company had financed receivables with Wells Fargo for approximately
$917,000.
8. Convertible Debentures
On July 1, 2002, the Company received funding of $3,000,000 in a financing
transaction with Renaissance Capital Growth & Income Fund III, Inc., Renaissance
US Growth Investment Trust PLC and US 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 were
originally convertible into Simtek common stock at $3.12 per share, which was in
excess of the market price per share on July 1, 2002. At March 31, 2006, the
Company was not in compliance with two of the covenants set forth in the loan
agreement. In order to obtain a waiver for the covenants, the Company issued the
debenture holders a total of 5,000 warrants for receipt of the waiver. Through
September 30, 2006, 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 November 10, 2006, the Company received a
waiver for the two covenants through October 1, 2007. However, significant
variances in future actual operations from the Company's current estimates could
result in the reclassification of this note to current liabilities. The
Convertible Debentures allows for an adjustment in the conversion price, if the
Company issues Common Stock in connection with an equity financing, where the
sale price is less than the conversion price of $3.12. This occurred in December
2005 in connection with the common stock sale of $11,000,000 at a price of $1.60
per share. Pursuant to the terms of the 2002 convertible debentures, the Company
agreed with the RENN Capital Group that the conversion price would be reduced to
$2.20 per share. Based on the conversion rate of $2.20 per share, each RENN
investment fund is entitled to 409,091 shares upon conversion.
On June 28, 2005, the Company received a waiver from the debenture holders
extending until July 1, 2006 the commencement date for principal payments of the
$3 million aggregate principal amount. The original terms of the debentures
required the Company to make monthly principal payments of $10 per $1,000 of the
then remaining principal amount, beginning on June 28, 2005. The Company will
still be required to make interest payments. Under the terms of the waiver,
monthly principal payments of $13.33 per $1,000 of the then remaining
outstanding principal amount were to commence on July 1, 2006. The final
maturity date remains as June 28, 2009. As consideration for the extension, the
Company has issued to the debenture holders warrants to purchase 20,000 shares
of Simtek common stock at $5.00 per share, a premium to the market price on the
date of the waiver. The Company estimated the value of the warrants at the time
of grant, using the Black Scholes option-pricing model, to be approximately
$62,000. The Company recognized $12,000 as additional interest expense for the
nine months ending September 30, 2006. On July 24, 2006, each of the debenture
holders converted $100,000 of the amount due into 45,455 shares of the Company's
common stock in lieu of the Company making the principal payment it was required
to make on July 1, 2006.
9. Non-Refundable Prepaid Royalties
On March 24, 2006, the Company entered into a License and Development
Agreement with Cypress pursuant to which, among other things, Cypress agreed to
license certain intellectual property from the Company to develop and
14
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
manufacture standard, custom and embedded nvSRAM products and Cypress has agreed
to pay to the Company $4,000,000 in non-refundable pre-paid royalties of which
$2 million was paid upon signing of the agreement and $1 million was paid on
June 30, 2006 and $1 million will be paid on December 31, 2006. In addition, the
Company licensed rights to use certain intellectual property from Cypress for
use in its products. As part of the License and Development Agreement, the
Company agreed to issue Cypress warrants to purchase 2 million shares of the
Company's common stock for $7.50 per share. The warrants have a ten year life.
The warrants will be issued upon receipt of each of the prepaid royalty amounts.
As of September 30, 2006, the Company had received $3,000,000 from Cypress in
pre-paid royalties, in exchange for which the Company has issued warrants to
purchase 1.5 million shares of common stock. The value of the warrants issued of
$1,482,000 was determined by an independent valuation firm and has been recorded
as an increase in additional paid in capital. The net balance of the
non-refundable prepaid royalties of $1,035,000 for the March 31, 2006 payment
and $483,000 for the June 30, 2006 payment were recognized as revenue at the
time the payments were received.
10. Geographic Concentration
Sales of the Company's semiconductor products by location for the three
month and nine month periods ended September 30, 2006 and 2005 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2006 2005 2006 2005
---- ---- ---- ----
United States 29% 29% 23% 27%
Europe 23% 20% 27% 19%
Far East 41% 43% 42% 44%
All Others 7% 8% 8% 10%
----- ----- ----- -----
100% 100% 100% 100%
===== ===== ===== =====
11. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) net of tax is as follows:
Foreign Currency
Translation Adjustment
Balance at January 1, 2006 $ -
Current period change 80
---------
Balance September 30, 2006 $ 80
=========
12. Discontinued Operation
On August 30, 2005, the Company, along with the Company's wholly-owned
subsidiary, Q-DOT, Inc. ("Q-DOT"), entered into an Asset Purchase Agreement with
Hittite Microwave Corporation ("Hittite") and a wholly-owned subsidiary of
Hittite, HMC Acquisition Corporation ("HMC Acquisition"), whereby substantially
all of the assets of Q-DOT were sold to HMC Acquisition in exchange for a cash
payment of approximately $2.2 million. The Company realized a net gain of
approximately $1,689,000. In addition, Hittite assumed certain future
obligations of Q-DOT, including obligations related to Q-DOT's real estate lease
and certain software license agreements. Incident to the Asset Purchase
Agreement, the parties also entered an Escrow Agreement, whereby $200,000 of the
purchase price was placed in escrow for one year to secure certain
indemnification obligations of Simtek and Q-DOT. In addition, the parties
entered into a Confidentiality, Non-Disclosure and Restrictive Covenant
Agreement, whereby, among other things, Simtek and Q-DOT agreed not to compete
15
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
against Hittite and HMC Acquisition for a period of four years with respect to
certain businesses relating to Q-DOT's operations. On September 1, 2006, the
Company received the $200,000 that was placed in the escrow account.
In accordance with SFAS No. 144, the consolidated financial statements of
the Company have been recast to present this business as a discontinued
operation. Accordingly, the revenues, the costs and expenses and assets and
liabilities of the discontinued operation have been excluded from the respective
captions in the accompanying Consolidated Statements of Operations and
Consolidated Balance Sheets. In addition, certain of the Notes to the
Consolidated Financial Statements have been recast for all periods to reflect
the discontinuance of this operation.
16
SIMTEK CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis in this quarterly report on Form
10-Q/A is intended to provide greater details of the results of operations and
financial condition of our Company. The following discussion should be read in
conjunction with our condensed consolidated financial statements and notes
thereto and other financial data included elsewhere herein. Certain statements
under this caption constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The reader should not place undue reliance on these forward looking
statements for many reasons including those risks discussed in this document. In
addition, when used in this quarterly 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. 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our 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. Our
accounting policies are discussed in Note 1 of the Notes to Consolidated
Financial Statements included in our 2005 Form 10-K as amended on Form 10-K/A
filed with the Securities and Exchange Commission on December 11, 2006. The
estimates used by us are based upon our historical experiences combined with our
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.
Product sales revenue is recognized when a valid purchase order has been
received with a fixed price and the products are shipped to customers FOB origin
(Colorado Springs, Colorado or Dresden, Germany), including distributors. Based
on historic business with the majority of our customers and, in the case of new
customers, we are reasonably assured that collectibility on our shipments will
occur.
Revenue from royalties related to non-refundable prepaid royalty payments
is recognized upon receipt. Revenue from royalties related to sales of products
by license partners is recognized upon the notification to us of shipment of
product from our technology license partners to direct customers and
collectibility is reasonable assured.
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.
17
SIMTEK CORPORATION
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 actual reported distributor inventory levels. The contracts we have
with certain of our distributors generally allow them to return to us 5% percent
of their inventory every 6 months, in exchange for inventory that better meets
their demands. At times, our distributors reduce the selling price of a specific
device in order to meet competition related to a specific end customer program,
which we support through a credit back to the distributor for that specific
program. 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.
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
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.
We assess the impairment of long-lived assets when events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable. Factors that we consider in deciding when to perform an impairment
review include significant under-performance of the business in relation to
expectations, significant negative industry or economic trends, and significant
changes or planned changes in our use of the assets. Recoverability of assets
that will continue to be used in our operations is measured by comparing the
carrying amount of the assets to our estimate of the related future net cash
flows. If the asset's carrying amount is not recoverable through the related
cash flows, the asset is considered to be impaired. The impairment is measured
by the difference between the asset's carrying amount and its fair value, based
on the best information available, including market prices or discounted cash
flows.
Goodwill represents the excess of the purchase price over the fair value of
identifiable net tangible and intangible assets acquired in the acquisition of
the nvSRAM assets from ZMD. Goodwill is required to be tested for impairment.
This assessment requires estimates of future revenue, operating results and cash
flows, as well as estimates of critical valuation inputs such as discount rates,
terminal values and similar data. We will continue to perform periodic and
annual impairment analyses of goodwill. As a result of such impairment analyses,
impairment charges may be recorded and may have a material adverse impact on our
financial position and operating results. Additionally, we may make strategic
business decisions in future periods which impact the fair value of goodwill,
which could result in significant impairment charges. There can be no assurance
that future goodwill impairments will not occur.
We have recorded a valuation allowance on deferred tax assets. Future
operations may change our estimate in connection with potential utilization of
these assets.
18
SIMTEK CORPORATION
Overview
Total revenue for the three and nine months ended September 30, 2006 was
$8.3 million and $21.0 million, respectively, including $1.5 million of royalty
revenue for the nine months ended September 30, 2006. Total unit shipments of
our semiconductor memory products increased in both the three and nine month
periods compared to the 2005 periods. Our net product revenue was $8,251,000 and
$19,436,000 for the three and nine months ended September 30, 2006,
respectively, up from $2,412,000 and $7,591,000 for the comparable periods of
2005, an approximate 242% and 156% increase, respectively. This increase was due
primarily to increased product demand and the addition of revenue from customers
previously serviced by ZMD prior to the acquisition of the nvSRAM product line
from ZMD in December 2005.
Increased operating expenses had an impact on our profitability for the
three and nine months ended September 30, 2006 compared to the three and nine
months ended September 30, 2005. The increase in operating expenses includes
non-cash charges of $446,000 and $1,339,000 for amortization of the non-compete
agreement with ZMD and $139,000 and $417,000 for expenses related to employee
stock options, for the three and nine months ended September 30, 2006,
respectively. Operating expenses also included first-time operating expenses of
$580,000 and $1,074,000 for our European subsidiary, Simtek GmbH, for the three
and nine months ended September 30, 2006, respectively.
Simtek reported a net loss for the three months ended September 30, 2006 of
$249,000. However, excluding the amortization of the non-compete agreement with
ZMD of $446,000 and expense related to stock options of $139,000, Simtek
achieved a net profit of $317,000 for the quarter. This non-GAAP measure of
financial performance is important because it highlights the progress Simtek has
made in improving its operating results. The non-GAAP results are also directly
comparable to the third quarter of 2005 in which Simtek posted a loss from
continuing operations of $1,718,000.
Results of Operations:
Revenues
The following table sets forth our net revenues for semiconductor devices
by product markets for the three and nine months ended September 30, 2006 and
2005 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2006 2005 Variance 2006 2005 Variance
---- ---- -------- ---- ---- --------
Commercial $ 7,754 $ 2,171 $ 5,583 $17,736 $ 6,387 $11,349
High-end industrial and
military 497 241 $ 256 $ 1,700 $ 1,204 $ 496
------- -------- ------- ------- ------- -------
Total Semiconductor
Revenue $ 8,251 $ 2,412 $ 5,839 $19,436 $ 7,591 $11,845
======= ======== ======= ======= ======= =======
Commercial revenues include revenue generated from our 0.8-micron products
built from silicon wafers received from Chartered Semiconductor or purchased as
finished units from ZMD, and from our 0.25-micron products built from silicon
wafers received from Dongbu Electronics (DBE). Commercial revenues increased by
$5,583,000 and $11,349,000 for the three and nine months ended September 30,
2006 as compared to the three and nine months ended September 30, 2005. As
stated previously, this increase was due primarily to increased unit demand and
the addition of revenue from customers previously serviced by ZMD prior to the
acquisition of the nvSRAM product line from ZMD in December 2005.
19
SIMTEK CORPORATION
High-end industrial and military product revenues accounted for an
increase of approximately $256,000 and $496,000 for the three and nine months
ended September 30, 2006 as compared to the same period in 2005. The increase
was due to the addition of new customer demand for our products and increased
pricing to certain of our customers for industrial and military products.
The following table sets forth the unit volumes for each period in thousands of
units:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2006 2005 Variance 2006 2005 Variance
---- ---- -------- ---- ---- --------
0.8 micron 256K devices 1,551 407 1,144 4,076 1,153 2,923
0.25 micron devices 178 37 141 269 73 196
Other devices 469 166 303 1,187 571 616
----- ---- ----- ----- ----- -----
Total Units 2,198 610 1,588 5,532 1,797 3,735
===== ==== ===== ===== ===== =====
One distributor and two direct customers accounted for approximately 36%
and 28% of our revenue for the three and nine months ended September 30, 2006,
respectively. Products sold to distributors are sold without material recourse.
Distributors sell our products to various end customers. If this distributor was
to terminate its relationship with us, we believe that there would not be a
material impact on our product sales, as we believe that we would be able to
service these various end customers through other distributors.
Cost of Sales and Gross Profit
We recorded cost of sales of $4,979,000 and $13,016,000 for the three and
nine months ended September 30, 2006, respectively as compared to $1,807,000 and
$5,490,000 for the comparable periods in 2005. The resulting product gross
margin percentages for the three and nine months ended September 30, 2006 were
40% and 33%, respectively and 25% and 28% for the three and nine months ended
September 30, 2005, respectively. The overall improvement in gross margin
percentages is due to: (i) increased volume; (ii) higher overall average selling
prices; and (iii) continued cost reductions in the 1 megabit device. We expect
to see gross margins increase in the next several quarters, as average selling
prices continue to increase, unit costs for all 0.25 micron devices continues to
be reduced, and the benefits of moving final test operations offshore to more
cost effective locations.
Research and Development
In order to maintain our growth, we must continue to invest in new product
development and to increase the percentage of the overall nvRAM market that our
products serve. In July 2006, we completed full qualification of the 1 megabit
device with real time clock and the 0.25 micron 256 kilobit device both with and
without the real time clock feature. Thus all of our 0.25 micron based products
are fully qualified. We anticipate that we will continue to invest in the next
several months in continued cost reductions, yield enhancements, and back end
test efficiencies.
In May 2005, we began joint development of our next generation nvSRAM
product family, in conjunction with Cypress, pursuant to the terms of the May 5,
2005 development agreement. This new product family will be based on Cypress'
0.13-micron "S8" process and we expect it will include memory densities up to
and beyond 4-megabits. In the first half of 2006 we achieved our third major
20
SIMTEK CORPORATION
milestone under the development agreement, as scheduled. For the three and nine
months ended September 30, 2006, we recognized expenses related to the Cypress
development of $0 and $642,000, respectively. In 2005, the expense was $564,000
and $612,000 for the three and nine month periods, respectively.
As part of our strategic product development activities, on March 24, 2006,
Simtek entered into a License and Development Agreement with Cypress which
expands the agreement the two companies signed in May 2005. Under the terms of
the new agreement:
o Cypress will retain the right to include nvSRAM functionality on
future programmable system-on-chip (PSoC(TM)) and customized
integrated circuits originally granted in the May 2005 agreement, now
with clearly defined royalty payments to Simtek for the use of its
SONOS-based nvSRAM intellectual property;
o Simtek is granted the right to use certain intellectual property of
Cypress in developing future generation nvSRAM products, including the
jointly developed 0.13u SONOS-based CMOS process, advanced SRAM
intellectual property, design-related intellectual property,
design-for-manufacturability know-how and other intellectual property
related to Cypress' advanced CMOS manufacturing processes and
procedures;
o Simtek and Cypress agree to broad manufacturing support terms that
will provide Simtek with a range of industry-leading manufacturing
skills and know-how to enable cost-effective manufacturing of
leading-edge SONOS nvSRAMs;
o Simtek and Cypress will extend the deployment of Simtek's proprietary
nvSRAM technology, and work to establish SONOS as the preferred
technology for high reliability, high endurance, and scaleable
non-volatile products at 65nm and below;
o Simtek and Cypress will jointly develop and market a family of
products utilizing Simtek's patented SONOS-based non-volatile
technology for production using Cypress's advanced manufacturing
processes.
Upon signing the agreement, Simtek received $2 million from Cypress. Simtek
also received an additional payment of $1 million on June 30, 2006 and will
receive an additional payment of $1 million on December 31, 2006. The agreement
also calls for Simtek to issue warrants to Cypress to purchase a total of 2
million shares of its common stock, 1 million of which were already issued upon
the execution of the agreement, 500,000 of which were issued on June 30, 2006
upon the payment by Cypress of certain royalties and 500,000 of which are
expected to be issued on December 31, 2006 upon the payment by Cypress of
certain royalties. The warrants have, or will have, an exercise price of $7.50
per share. Simtek believes that this new agreement will accelerate the timing of
expanding nvSRAM adoption in new markets and shorten future product development
cycle time. Please read Note 9 to the Condensed Consolidated Financial
Statements for a discussion of the accounting treatment for the transactions
related to this agreement.
Total research and development expenses were $1,351,000 and $4,578,000 for
the three and nine months ended September 30, 2006, respectively, as compared to
$1,572,000 and $4,697,000 for the three and nine months ended September 30,
2005, respectively.
The $221,000 decrease for the three month period was primarily due to a
decrease in product development costs of $641,000 which included decreased costs
related to the joint development with Cypress discussed previously. The decrease
was offset by an increase in payroll related costs of $252,000, including the
engineering staff at Simtek GmbH and expenses related to stock options,
equipment related expenses of $148,000 and travel of $17,000 for engineers
traveling to and from Simtek GmbH. The decrease in product development costs was
due to the timing of costs related to the joint development with Cypress
The $119,000 decrease for the nine month period was primarily due to a
decrease of $768,000 for the charges related to the development of our .25
21
SIMTEK CORPORATION
micron product that we incurred in 2005 and a decrease of $61,000 related to
contract services. These decreases were partially offset by increases in payroll
related costs of $571,000, and travel of $72,000.
General and Administration
Total general and administration expenses were $838,000 and $2,595,000 for
the three and nine months ended September 30, 2006, respectively, as compared to
$412,000 and $1,759,000, respectively, for the same periods in 2005.
The $426,000 increase for the three month period was primarily due to
increases in payroll related costs of $80,000, accounting and legal expenses of
$215,000, contract services of $14,000, travel of $28,000 and other
miscellaneous expenses of $89,000. The increases in audit and legal expenses and
contract services were primarily related to costs incurred for our securities
related work. The increase in payroll related costs were related to increased
headcount in both our Colorado Springs and Germany offices and expenses related
to stock option grants.
The $836,000 increase for the nine month period was primarily due to
increases of $498,000 in payroll related costs, $363,000 in legal and audit
fees, contract services of $81,000, travel of $103,000, bad debt expense of
$30,000 and other miscellaneous expenses of $81,000. The increases were
partially offset by a decrease of $320,000 in one-time costs related to
separation and employment agreements that were incurred in the first six months
of 2005. The increases in legal and audit fees and contract services were
primarily related to expenses related to our shareholder meeting, securities
related work and the license agreement entered into with Cypress in March 2006.
The increases in payroll and payroll overhead costs were due to increased
headcount in both our Colorado Springs and Germany offices and for the expenses
related to stock option grants.
Sales and Marketing
Total sales and marketing expenses were $1,250,000 and $3,233,000 for the
three and nine months ended September 30, 2006, respectively, as compared to
$321,000 and $1,164,000, respectively, for the same periods in 2005.
The increases for the three and nine month periods were due to the
amortization of the non-compete agreement discussed in Note 1 to the Condensed
Consolidated Financial Statements of $446,000 and $1,339,000, increase in
payroll related costs of $310,000 and $523,000, respectively, and an increase in
sales commissions of $146,000 and $181,000, respectively. The increase in
payroll related costs were directly related to increased headcount and the
increase in sales commissions was related to the higher revenue.
Loss from Continuing Operations
We recorded a net loss, from continuing operations, of $249,000 and
$2,605,000 for the three and nine months ended September 30, 2006, respectively,
as compared to $1,718,000 and $5,641,000 for the three and nine months ended
September 30, 2005, respectively. The decreases of $1,469,000 and $3,036,000 for
the three and nine month periods reflect the revenue and expense items discussed
above.
Liquidity and Capital Resources
As of September 30, 2006, we had a net working capital of $9,923,000 as
compared to a net working capital of $3,591,000 as of December 31, 2005.
22
SIMTEK CORPORATION
On September 21, 2006, we raised gross proceeds of $4,555,000 in a private
placement. We issued 1,153,171 shares of our common stock at a per share price
of $3.95 and 172,981 warrants to purchase common stock. The warrants have a per
share exercise price of $5.40 and a five-year term. We anticipate using the
proceeds for general working capital and to produce silicon wafers to support
revenue growth.
As discussed previously, on March 24, 2006, we entered into a License and
Development Agreement with Cypress pursuant to which, among other things,
Cypress has agreed to license certain intellectual property from us to develop
and manufacture standard, custom, and embedded nvSRAM products. Cypress agreed
to pay to Simtek royalties across all products they develop and sell which
include intellectual property licensed from Simtek. We agreed to license from
Cypress certain of their intellectual property for use in our design efforts. We
agreed with Cypress to co-develop certain nvSRAM products and Cypress has agreed
to pay us $4 million in nonrefundable prepaid royalties, $2 million of which was
received at the time the contract was executed. On June 30, 2006, we received
the second installment of $1,000,000 and the remaining $1 million is scheduled
to be paid on December 31, 2006. In addition, we agreed with Cypress to work
together to develop new products and processes. Please read Note 9 to the
Condensed Consolidated Financial Statements for a discussion of the accounting
treatment for the transactions related to this agreement.
Cash flows used in operating activities from continuing operations for the
nine months ended September 30, 2006 were $5,568,000 compared to $2,939,000 in
the same period in 2005, an increase of $2,629,000. The net increase is
primarily due to investment in working capital to support revenue growth. The
key components of the cash (uses) and sources in working capital are as follows,
in thousands of dollars:
2006 2005 Change
-------- -------- --------
Accounts receivable $(3,687) $ 1,447 $(5,134)
$
Inventory $(3,799) $ 575 $(4,374)
Accounts payable $ 466 $ (366) $ 832
The increase in working capital was partially off set by the reduction in
net loss for the 2006 period of $2.6 million from $3.9 million in the 2005
period, the amortization of the non-compete agreement in 2006 of $1.3 million
and the $1.7 million gain from discontinued operations in the 2005 period.
Cash flows used in investing activities from continuing operations
increased for the nine months ended September 30, 2006 by approximately
$2,690,000 as compared to the same period in 2005. The increase was primarily
the result of the purchase of equipment and furniture for our facility in
Germany and test equipment for our research and development, which was offset by
proceeds from discontinued operations of $1.9 million recorded in the 2005
period.
The increase of $7,071,000 in cash flows provided by financing activities
from continuing operations was primarily due to the net proceeds from our
September 2006 equity financing of $4.55 million, the value assigned to the
warrants issued to Cypress under the License and Development Agreement and
receipt of funds related to the sale of common stock completed on December 30,
2005, for which some funds were received on January 3, 2006.
23
SIMTEK CORPORATION
Short-term liquidity.
Our unrestricted cash balance at September 30, 2006 was $3,653,000.
Our future liquidity will depend on our revenue growth and our ability to
generate cash flow from operations. Through December 31, 2006, we expect to
spend approximately $4,000,000, for operating expenses and working capital. We
expect to meet these cash needs from cash generated by operations, the funds
still due to us from Cypress under the Joint Development and License Agreement,
and from our existing cash reserves and credit facility with Wells Fargo.
Management believes that the current cash reserves and additional cash generated
from operations will be sufficient to meet the cash flow needs for at least the
next twelve months.
Long-term liquidity.
The Company has experienced significant revenue growth over the nine months
ended September 30, 2006 and expects that growth trend to continue for the
foreseeable future. With the improved financial results and current cash and
credit reserves, management believes that it has sufficient capital to meet its
operating cash requirements. However, should the company identify possible
strategic opportunities, it may need to raise additional capital to exploit such
opportunities. While the Company has no specific plans, management is constantly
looking for new strategic product and technology opportunities that may provide
significant revenue growth in the future.
24
SIMTEK CORPORATION
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and rates. We are exposed to market risk
in the areas of changes in United States interest rates and changes in foreign
currency exchange rates as measured against the United States dollar. These
exposures are directly related to our normal operating activities. We currently
have no derivative financial instruments.
Interest payable on our convertible debentures is fixed at 7.5% over the
term of the debentures. As such, changes in interest rates will not affect
future expenses or cash flows.
We manage interest income by investing our excess cash in cash equivalents
bearing variable interest rates, which are tied to various market indices. We do
not believe that near-term changes in interest rates will result in a material
effect on future earnings, fair values or cash flows.
We do not speculate in the foreign exchange market and do not manage
exposures that arise in the normal course of business related to fluctuations in
foreign currency exchange rates by entering into offsetting positions through
the use of foreign exchange forward contracts.
Average selling prices of our products have not increased significantly as
a result of inflation during the past several years, primarily due to intense
competition within the semiconductor industry. The effect of inflation on our
costs of production has been minimized through improvements in production
efficiencies. We anticipate that these factors will continue to minimize the
effects of any foreseeable inflation and other price pressures within the
industry and markets in which we participate.
25
SIMTEK CORPORATION
ITEM 4 CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Harold Blomquist, who serves as the Company's chief executive officer, and Brian
Alleman, who serves as the Company's chief financial officer, after evaluating
the effectiveness of the Company's disclosure controls and procedures as of the
end of the period covered by this quarterly report (the "Evaluation Date")
concluded that as of the Evaluation Date, the Company's disclosure controls and
procedures were 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 and to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is accumulated and
communicated to our management to allow timely decisions regarding required
disclosure. As noted in the Explanatory Note at the beginning of this Form
10-Q/A and as noted in Note 2 to the Condensed Consolidated Financial Statements
contained in this Form 10-Q/A, the Company has reclassified $14,847,000 from
Temporary Equity to Shareholders Equity. In light of the reclassification
described above, the Company's chief executive officer and chief financial
officer have reevaluated the Company's disclosure controls and procedures as of
the Evaluation Date to determine whether the reclassification changes their
conclusion. Based on this reevaluation, the Company's chief executive officer
and chief financial officer have determined that the reclassification does not
change their conclusion.
(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 September 30, 2006, that have materially affected,
or are reasonably likely to materially affect, internal control over financial
reporting.
26
SIMTEK CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings -None
Item 1A. Risk Factors - The following new risk factors (each of which has
been previously disclosed) represent material changes from the old
risk factors set forth in Simtek's 10-K:
-------------------------------------------------------------- ------------------------------------------------------------
Old Risk Factor New Risk Factor
-------------------------------------------------------------- ------------------------------------------------------------
LIMITED OPERATING CAPITAL AND ABILITY TO RAISE ADDITIONAL OUR LIMITED OPERATING CAPITAL AND OUR ABILITY TO RAISE
MONEY MAY HARM OUR ABILITY TO DEVELOP AND MARKET PRODUCTS ADDITIONAL MONEY MAY HARM OUR ABILITY TO DEVELOP AND MARKET
OUR PRODUCTS AS AS WELL AS SUPPORT FUTURE REVENUE GROWTH
We require significant capital for product development, To date, we have required significant capital for product
subcontracted production, and marketing. We have funded development, subcontracted production and marketing. We have
these needs from the sale of products, the sale of product funded these from the sale of products, the sale of product
and technology licenses, from royalties, as well as and technology licenses and from royalties as well as from
from the sale of our convertible debt and equity the sale of our convertible debt and equity securities.
securities.
In recent months, we have experienced significant
We have not seen any significant increase in product revenue growth. In order to support that growth, we must
sales in the past year and gross margins are less than order more silicon wafers than we have historically. The
anticipated. Our cash requirements have been difficult to cash required for inventory purchases, including silicon
meet. We cannot guarantee that we will be able to achieve an wafers, has been greater than the cash generated from
increase in product sales and gross margins. We may need sales. Therefore, our cash requirements have been
more capital in the future to develop new products. We are difficult to maintain. We may need more capital in the
not sure that we will be able to raise more capital on future to develop new products and support higher revenue.
reasonable terms, if at all. If we cannot, then we may not We cannot guarantee that we will be able to raise more
be able to develop and market new products. The development, capital on reasonable terms, if at all. If we cannot, then
subcontracted production and marketing of existing products we may not be able to purchase adequate amounts of inventory
may also suffer, causing our financial position and stock to support revenue growth or to develop and market new
price to deteriorate. products, causing our financial position and stock price
to deteriorate.
-------------------------------------------------------------- ------------------------------------------------------------
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE THE ASSETS
ACQUIRED FROM ZMD ON DECEMBER 30, 2005 [Intentionally Omitted (i.e., risk factor deleted)]
On December 30, 2005, we closed our acquisition from
ZMD of certain intellectual property and assets related to
ZMD's nvSRAM product line. We may be unable to integrate
successfully into our operations the assets acquired from
ZMD, including:
o by a failure to gain customer agreement to
purchase products from us or to qualify our designs or
processes;
o by a failure to coordinate international operations,
relationships and facilities, which may be subject to
additional constraints imposed by geographic distance,
local laws and regulations; and
o by a failure to implement and maintain uniform
standards, internal controls, business processes, procedures,
policies and information systems.
Our failure to meet any of these challenges could
cause us to fail to realize any accretive benefits of
the acquisition of the assets from ZMD and could seriously
harm our results of operations.
-------------------------------------------------------------- ------------------------------------------------------------
27
SIMTEK CORPORATION
-------------------------------------------------------------- ------------------------------------------------------------
WE MAY BE UNABLE TO RETAIN AN EFFECTIVE FOCUS IN OUR
INDUSTRY OR RETAIN CUSTOMERS FOLLOWING THE ACQUISITION OF [Intentionally Omitted (i.e., risk factor deleted)]
ASSETS FROM ZMD
The challenges to us as a result of the acquisition
of certain intellectual property and assets from ZMD on
December 30, 2005 include:
o communicating a strategic vision to the market
regarding us and executing on that strategic vision;
o implementing sales and marketing efforts to
effectively communicate to customers our capabilities;
o overcoming possible concerns of certain customers
about not having two sources of supply for the products
they previously purchased from both ZMD and us;
o gaining acceptance from former ZMD customers for
our designs, products or processes; and
o overcoming any perceived adverse changes in business
focus, including demonstrating to customers that the
acquisition of certain assets from ZMD will not result in
an adverse change in customer service standards or business
focus and helping customers conduct business easily with us
going forward.
The failure to meet any of these challenges could
seriously hinder our plans for product development as well
as business and market expansion following the acquisition
of certain intellectual property and assets from ZMD.
-------------------------------------------------------------- ------------------------------------------------------------
The Registration Rights Agreement entered into as
[Intentionally Omitted (i.e., risk factor did not exist)] part of the September 21, 2006 Securities Purchase
Agreement amounting to $4,555,000 contained a provision
whereby the investors therein would receive certain
amounts of penalty shares if certain procedures are not
followed or an effective Registration Statement is not
maintained for the shares purchased by, and the shares
issuable under the warrants issued to, the investors. The
penalties are 2% of the shares purchased for each month
that a breach occurs. We cannot assure you that we will be
able to follow the required procedures or obtain or
maintain such effective Registration Statement.
-------------------------------------------------------------- ------------------------------------------------------------
OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW MAY
[Intentionally Omitted (i.e., risk factor did not exist)] OPERATE AS ANTI-TAKEOVER PROTECTIONS AND THUS MAY
DISCOURAGE TAKEOVER ATTEMPTS AND/OR DEPRESS THE MARKET
PRICE OF OUR COMMON STOCK
We have opted to be governed, in our Delaware certificate
of incorporation, by Section 203 of the Delaware General
Corporation Law, which provides for a three-year moratorium on
certain business combination transactions with "interested
stockholders" (generally, persons who beneficially own
-------------------------------------------------------------- ------------------------------------------------------------
28
SIMTEK CORPORATION
-------------------------------------------------------------- ------------------------------------------------------------
15% or more of the corporation's outstanding voting stock).
Although we believe that Section 203 will encourage any
potential acquirer to negotiate with our board of directors,
Section 203 also might have the effect of limiting the
ability of a potential acquirer to make a two-tiered bid
for the company in which all stockholders would not be treated
equally. In addition, Section 203 gives the board the power to
reject a proposed business combination in certain circumstances,
even though a potential acquirer may be offering a substantial
premium for our common stock over the then-current market price.
Section 203 would also discourage certain potential acquirers
who are unwilling to comply with its provisions.
Because a proposed amendment to our certificate of
incorporation may not be submitted to a vote of shareholders
without the approval of the board of directors, amending or
removing any provisions in our certificate of incorporation
that have anti-takeover effects requires the consent of the
board of directors, which in turn may have anti-takeover
effects.
-------------------------------------------------------------- ------------------------------------------------------------
THE REVERSE SPLIT MAY NOT RESULT IN AN INCREASE IN THE
[Intentionally Omitted (i.e., risk factor did not exist)] STOCK PRICE AND MAY NOT LEAD TO ANY OF THE BENEFITS
(INCLUDING QUALIFICATION FOR LISTING ON AMEX OR THE NASDAQ
CAPITAL MARKET) THAT WE INTENDED IN DECIDING TO EFFECT
SUCH REVERSE SPLIT
There can be no assurance that the total market
capitalization of our common stock (the aggregate value of
all our common stock at the then market price) will not drop
back below the total market capitalization before the
reverse split, that the per share market price of our common
stock will not drop back below the per share market price
before the reverse split or that the per share market price
of our common stock will increase to (or once increased to,
remain at) a price that is inversely proportionate to the
one-for-ten reduction in the number of shares of common
stock outstanding before the reverse split.
The per share market price of our common stock may
not be high enough to attract institutional investors or
investment funds or to satisfy the investing guidelines
of such investors and, consequently, the trading liquidity
of our common stock may not improve. In addition, the per
share market price of our common stock may not be high
enough to allow us to comply with the initial listing
requirements of the NASDAQ Capital Market or the American
Stock Exchange. Even if the per share market price of our
common stock is sufficiently high for purposes of the initial
listing requirements, we cannot guarantee you that we will be
able to satisfy the other requirements for listing on the
NASDAQ Capital Market or the American Stock Exchange, which
requirements include, among other things, a minimum number
of shares that must be in the public float and a minimum
number of round lot holders.
-------------------------------------------------------------- ------------------------------------------------------------
29
SIMTEK CORPORATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits
10.1 Securities Purchase Agreement, dated as of September 21,
2006, by and between Simtek Corporation and each purchaser
identified on the signature pages thereto (the
"Purchasers"), incorporated by reference to the Company's
Current Report on Form 8-K filed by the Company with the SEC
on September 25, 2006.
10.2 Securities Purchase Agreement, dated as of September 21,
2006, by and between Simtek Corporation and each Purchaser,
incorporated by reference to the Company's Current Report on
Form 8-K filed by the Company with the SEC on September 25,
2006.
10.3 Form of Stock Purchase Warrant, dated as of September 21,
2006, by and between Simtek Corporation and each Purchaser,
incorporated by reference to the Company's Current Report on
Form 8-K filed by the Company with the SEC on September 25,
2006.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of Principal Executive Officer
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of Principal Financial Officer
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of Principal Executive Officer
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of Principal Financial Officer
30
SIMTEK CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIMTEK CORPORATION
(Registrant)
December 11, 2006 By: /s/Harold Blomquist
----------------------------------
HAROLD BLOMQUIST
Chief Executive Officer, President
December 11, 2006 By: /s/Brian Alleman
----------------------------------
BRIAN ALLEMAN
Chief Financial Officer
31
Exhibit 31.1
CERTIFICATIONS
I, Harold Blomquist, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q/A of Simtek Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: December 11, 2006
/s/Harold Blomquist
--------------------------------------
Harold Blomquist
Chief Executive Officer and President
Exhibit 31.2
CERTIFICATIONS
I, Brian Alleman, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q/A of Simtek Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: December 11, 2006
/s/Brian Alleman
----------------------------------
Brian Alleman
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND PRESIDENT
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Harold Blomquist, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Quarterly Report of Simtek Corporation on Form 10-Q/A for the quarterly period
ended September 30, 2006 fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and that information contained
in such Form 10-Q/A fairly presents, in all material respects, the financial
condition and results of operations of Simtek Corporation.
/s/Harold Blomquist
-------------------------------------
Harold Blomquist
Chief Executive Officer and President
December 11, 2006
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Brian Alleman, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly
Report of Simtek Corporation on Form 10-Q/A for the quarterly period ended
September 30, 2006 fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 and that information contained in
such Form 10-Q/A fairly presents, in all material respects, the financial
condition and results of operations of Simtek Corporation.
/s/Brian Alleman
-----------------------
Brian Alleman
Chief Financial Officer
December 11, 2006