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Article by DailyStocks_admin    (08-13-08 05:41 AM)

Filed with the SEC from July 31 to Aug 6:

Simtek (SMTK)
Cypress Semiconductor (CY) has begun a cash tender offer to purchase all of the outstanding shares of Simtek for $46 million, or $2.60 a share. In April, Simtek rejected a takeover offer from Cypress to acquire the company for $2.20 a share, saying the deal significantly undervalued the company and wouldn't be in shareholders' best interests. The transaction is expected to close in or prior to the fourth calendar quarter of 2008. Cypress currently holds 3,179,644 shares (16.1%), including warrants to purchase about 2.5 million shares.

BUSINESS OVERVIEW

General


Simtek Corporation (“Simtek” or the “Company”) designs and markets high-speed, re-programmable, nonvolatile semiconductor memory products, for use in a variety of systems including RAID servers, industrial automation, GPS navigational systems, robotics, medical instrumentation, and networking and telecommunications equipment. We are a “fabless” semiconductor company, and thus we subcontract the majority of our manufacturing requirements to third parties. This subcontracting also allows us to minimize our capital requirements. We have designed and developed nonvolatile static random access memory or “nvSRAM” products since we began business operations in May 1987.



Our product families include 16, 64, and 256-kilobit and 1-megabit nvSRAM products. Kilobits and megabits are a measure of the amount of data that can be stored; more kilobits or megabits imply more storage. One kilobit is generally interpreted to mean 1,000 bits and. Megabits are also a measure of the amount of data that can be stored; there are 1,000 kilobits in one megabit or 1,000,000 bits of data that can be stored.


Recent Developments


New Products . In 2007, we began development of a new very high density nonvolatile random access memory product. This development is being done through our majority-owned subsidiary, AgigA Tech, Inc., in our facility located in Poway, California. This new product is aimed at customer applications requiring significantly more nonvolatile RAM than our traditional nvSRAM products can provide. Such applications include solid state disk drives, point of sale terminals and gaming applications. The development of this technology is in the early stages and Simtek does not expect any revenue from this technology until 2009. We plan to contribute this technology to Agiga Tech, Inc., a new majority-owned subsidiary formed in February 2008. The employees developing this product are the minority shareholders in this subsidiary.

ZMD Acquisition . 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-oxi de-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) devices. 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 remains 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.

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. For over ten years prior to this transaction, we were party to various product license arrangements and cooperation agreements with ZMD. The December 30, 2005 agreements replaced all of those previous agreements.


In January 2006, we formed Simtek GMBH in Dresden, Germany, as a wholly-owned subsidiary. As of December 31, 2007 Simtek GMBH had 16 employees, including 10 engineers, a sales manager, 2 customer service employees, and 3 administrative employees. This subsidiary serves as our sales, marketing, and technical support center for European customers. The engineers in Dresden work as an integral part of our company-wide design engineering team.


Joint Development with Cypress . In May of 2005, we entered into a Production and Development Agreement with Cypress Semiconductor Corporation, or 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. From May 2005 through December 31, 2007, our research and development team along with Cypress’ research and development team worked aggressively on the co-development program.


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 in exchange for paying us $4,000,000 in non-refundable pre-paid royalties, which was all paid in 2006. In addition, we licensed rights to use certain intellectual property from Cypress for use in our products. As part of the License and Development Agreement, upon receipt of the prepaid royalty amounts, we issued Cypress warrants to purchase 2 million shares of our common stock for $7.50 per share. The warrants have a ten year life. The value of the warrants issued of $1,930,000 has been recorded as an increase in additional paid in capital. The net balance of the non-refundable prepaid royalties of $2,070,000 was recognized as royalty revenue at the time the payments were received.


2006 Reverse Stock Split . On October 5, 2006, Simtek completed a 1 for 10 reverse stock split of all of its common shares. All share and per share amounts throughout this annual report 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.


Q-DOT Sale . In 2005 we sold to Hittite Microwave Corporation (“Hittite”) substantially all of the assets of Q-DOT, our wholly owned subsidiary that specialized in advanced technology research and development for data acquisition, signal processing, imaging and data communications. Q-DOT no longer fit with our core non-volatile memory business. The sales price was approximately $2.2 million, and 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. In addition, the parties entered into a Confidentiality, Non-Disclosure and Restrictive Covenant Agreement, whereby, among other things, Simtek 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.


Subcontracting Arrangement


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. In September 2005, we qualified our 1-megabit nvSRAM products built on 0.25-micron silicon wafers we receive from Dongbu Electronics USA Inc., formerly D ongbuAnam Semiconductor Inc., or (“Dongbu”). We have expanded our product family of nvSRAM products built on silicon wafers received from Dongbu to include a 1-megabit nvSRAM with real time clock, a 256-kilobit nvSRAM and a 256-kilobit nvSRAM with real time clock. These devices with real time clock were given full production qualification status in late 2006. We refer to the product family built on silicon wafers we receive from Dongbu 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. Collectively we call our entire product line of 1 megabit and smaller densities our Core business.

During 2007, all of the wafers used to produce our 0.8-micron nvSRAM’s were purchased from Chartered. Sales of these products accounted for approximately 70% of our product revenue for 2007. Wafers were purchased from Dongbu in 2007 to support our 0.25-micron products. Sales of these products accounted for approximately 21% of our product revenue for 2007. Through September 2007 we shipped finished units from the inventory that we purchased from ZMD in 2006 to support our customers using products previously purchased from ZMD; sales of these products accounted for approximately 9% of our product revenue in 2007.


Amkor Technology (“Amkor”), located in the Philippines, provides assembly services and final test services for our highest volume products. Advanced Semiconductor Engineering Inc., located in Taiwan, provides assembly services for specific legacy products. Amkor also provides final test services for our highest volume products. Integra Technologies, located in Kansas, provides wafer testing and final test services for our remaining nvSRAM 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 integrated memory product would have:




high bit density per chip to minimize the number of chips required in a system;



fast data read and write speeds to allow a system's microprocessor to access data without having to wait;



the ability to read and modify data an unlimited number of times;



low power consumption;



the ability to retain its data indefinitely when power is interrupted (i.e. nonvolatility);



availability in a variety of package types for modern assembly techniques; and



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 and have slow read/write access times. They also wear out if they are modified too many times. There are a number of common volatile and nonvolatile product types, as set forth below. The list of products under “Combinations” is limited to single packages and does not include combinations of the listed memories in separate packages, such as static random access memories in combination with Electrically Erasable Programmable Read Only Memories and Erasable Programmable Read Only Memories.

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, Electrically Erasable Programmable Read Only Memory, or Flash 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 or Flash Memory; an excessive time under power loss conditions. 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 module, which is called battery-backed SRAM, or BatRAM.

Our Memory Technologies


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 alternative 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 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-sem iconductor 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 and 0.13-micron technologies add an additional oxide layer, forming a silicon-oxide-nitride-oxi de-semiconductor stack, to support finer geometry electrical performance.


The silicon-oxide-nitride-oxi de-semiconductor technology coupled with our patented nvSRAM cell allows high performance nvSRAM’s to be manufactured using complementary metal oxide semiconductor technology. The Silicon-oxide-nitride-oxi de-semiconductor technology that we use has proven to be highly reliable, as demonstrated by our product qualification results to date.


Nonvolatile Static Random Access Memories . 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 silicon chip. 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 memory, typically on a power supply disruption. The data stored in the nonvolatile memory can be transferred back into the static random access memory by user control or the data can be transferred automatically, typically once stable power is restored.


Our nvSRAM products have fast data access speeds of 15, 25, 35, 45 and 55 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.


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 newer nvSRAM products, currently implemented in our 0.25-micron and 0.13-micron product families, include, or are expected to soon include, versions that contain a Real Time Clock (RTC) function. The RTC function (with Watchdog timer) is a commonly needed function in many embedded systems that need nvSRAM.


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 AutoStore TM nvSRAM in 1993. The AutoStore TM 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. Our 256-kilobit nvSRAM with RTC function and 1-megabit nvSRAM with RTC function were moved into limited production in early 2006, and reached full production qualification in late 2006. Our 4-Megabit nvSRAM with x8 and x16 data bus widths were sampled to the customers beginning in third quarter of 2007. We expect to achieve full production qualification in 2008.

CEO BACKGROUND

Harold A. Blomquist , age 56, 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. In October 2003, Mr. Blomquist was elected to the position of Chairman of the Board of Directors. Mr. Blomquist has served as our Chief Executive Officer and President since May 2005. In February 2008 he resigned as Chairman of the Board. 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 , age 72, has served as a director since July 2002 and was appointed as our Chairman of the Board in February 2008. He joined RENN Capital Group in April 1997 and is currently its 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 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 CaminoSoft Corporation, Riptide Worldwide, Vertical Branding and AuraSound, Inc., all of which are publicly held. He is also a Director of eOriginal, Inc., a privately held company.


Alfred J. Stein , age 75, has served as a director since March 2004. 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 than 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. In addition to Simtek, Mr. Stein is on the Board of Directors ESS Technology, a publicly-traded company, and is also involved with some private startup companies. He also has served on the board of directors at Applied Materials, Radio Shack Corporation and was Chairman of the Board for the Semiconductor Industry Association (SIA). He was a Lieutenant for two years in the U. S. Army and was on the Board of Trustees for St. Mary’s University of Texas.


John Hillyard , age 51, has served as a director since October 2006, when the Board appointed him to fill a vacant position on the Board of Directors. Mr. Hilllyard has more than 25 years experience as a senior technology finance and operations executive, with significant domestic and international experience at both public and private companies. He is presently the Chief Financial Officer of LeftHand Networks, a pioneer in the open iSCSI SAN market. Prior to joining LeftHand Networks, Hilllyard was Executive Vice President, Finance and Operations and Chief Financial Officer for FrontRange Solutions; Vice President and Chief Financial Officer for daly.commerce, Inc.; Vice President and Chief Financial Officer for InteliData Technologies Corp.; and Senior Vice President and Chief Financial Officer for eFunds Corporation. Mr. Hillyard has been a CFO for companies traded on domestic and international stock exchanges. He studied Business Economics at the University of California at Santa Barbara and earned his CPA while working at PricewaterhouseCoopers.


Philip Black , age 53, has served as a director since August 2007, when the Board appointed him to fill a vacant position on the Board of Directors. Philip Black serves as President, Chief Executive Officer and as a director of Nexsan Corp since September 2004. From January 2002 to July 2004, Mr. Black served as Chief Executive Officer and as a director of LightSand Communications, a storage networking provider. Prior to joining LightSand, Mr. Black was the Chief Executive Officer of Box Hill/Dot Hill, a storage systems manufacturer, and was the founder and Chief Executive Officer of Tekelec, a telecom equipment provider.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview of Recent Debt and Equity Transactions


On March 24, 2006, we entered into a License and Development Agreement with Cypress, whereby, among other things, we received $4,000,000 in non-refundable prepaid royalties and we issued to Cypress 2,000,000 warrants. The warrants have a per share exercise price of $7.50 and have a 10 year term. Please read Note 11 to the Consolidated Financial Statements for a discussion of the accounting treatment for the transactions related to this agreement.


On May 26, 2006, we issued a total of 25,000 warrants to the RENN Capital Group funds. The warrants have a per share exercise price of $3.30 and have a five-year term. 20,000 of the warrants were issued in consideration for the RENN Capital Group funds entering into a subordination agreement with Wells Fargo which was required for us to enter into a $3,600,000 revolving credit agreement with Wells Fargo Business Credit. The remaining 5,000 warrants were issued in consideration for the waiver letter we received from the RENN Capital Group funds for us being out of compliance with the covenants in the loan agreement at March 31, 2006.


On September 21, 2006, we completed a private placement in the amount of $4,555,000. We issued 1,153,171 shares of our common stock and 172,981 warrants to purchase common stock. The warrants have a per share exercise price of $5.40 and a five-year term.


On October 11, 2006 and October 20, 2006, Bluegrass Growth Fund Ltd. and Bluegrass Growth Fund LP each exercised 25,800 warrants to purchase shares of our common stock. On October 20, 2006, C. E. Unterberg Towbin exercised 27,000 warrants to purchase shares of our common stock. We received a total of $212,000 from these warrant exercises.


On May 9, 2007, each of the Renaissance Capital Growth & Income Fund III, Inc., Renaissance Growth Investment Trust PLC and US Special Opportunities Trust, PLC converted $200,000 of the principal amount of the 2002 7.5% convertible debentures into 90,910 shares of our common stock in lieu of us making the principal payment we were required to make beginning on July 1, 2006.


Results of Operations


General . Simtek designs and markets high-speed, re-programmable, nonvolatile semiconductor memory products for use in a variety of systems and applications including RAID servers, industrial automation, GPS navigational systems, robotics, medical instrumentation, and networking and telecommunications equipment. We are a fables semiconductor company, which means we outsource substantially all manufacturing processes. We concentrate on the design and development of our nvSRAM product families and technologies and a new very high density nvRAM technology, marketing, distribution channels, and sources of supply.

We purchase all of the silicon wafers that are used to manufacture our 0.8 micron products from Chartered Semiconductor. Sales of our products manufactured from the silicon wafers we received from Chartered accounted for approximately 70%, 66%, and 86% of our total revenue for the years ended December 31, 2007, December 31, 2006 and for December 31, 2005, respectively.


In addition to Chartered, we purchase silicon wafers from Dongbu that are used to manufacture our 0.25 micron products including the 1 megabit and 256 kilobit devices with and without real time clock. In September 2005, we qualified our 1-megabit products for use in the commercial and industrial markets. Sales of our 0.25 micron products accounted for approximately 21%, 13%, and 13% of our total revenue for the years ended December 31, 2007, December 31, 2006 and December 31, 2005, 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 effect on the operating results for fiscal year 2005, as there were no operating activities related to those assets until January 2006. During 2007 and 2006, approximately 9% and 20%, respectively, of our net revenue was from inventory purchased from ZMD. We have converted the last of our customers from the products produced from ZMD to Simtek products produced on silicon received from Chartered or Dongbu.


Review of 2007 Operations


Total Revenue for 2007 was approximately $33,000,000. Unit shipments for the 2007 period were essentially the same as 2006, as shipments of older lower density parts were replaced by higher density parts. Corporate average selling prices increased as a result of higher unit shipments of 1 megabit devices. An increase in 1 megabit shipments combined with reduced product costs resulted in an increase of 11% in gross margin percentage points from product shipments in 2007 compared to 2006. During the year ended December 31, 2007, we recognized no royalty revenue.


Review of 2006 Operations


Total revenue for 2006 was approximately $30,600,000, consisting of $28,560,000 of product revenue and $2,070,000 of royalty revenue. We saw a significant increase in unit shipments and average selling prices of our commercial and industrial products. In 2006, management focused on integrating the nvSRAM business acquired from ZMD, setting up Simtek GmbH, our wholly-owned subsidiary in Dresden, Germany, and increasing gross margins. Margins were improved as a result of increased selling prices, reduced costs of our 0.25 micron products, transfer of test operations to Asia, and streamlining our product offering.

Results of Operations


Revenues


The following table sets forth our net product revenues for semiconductor devices by product markets for the years ended December 31, 2007, 2006 and 2005

Revenues for the year ended December 31, 2007 as compared to 2006


Commercial revenues include revenue generated from our legacy products and from our 0.25 micron products. Commercial revenues increased by $4,334,000 for the year ending December 31, 2007 as compared to the same period in 2006. The increase was due to: (i) increased shipments for our .25 micron 1 megabit products which have a much higher average selling price than lower density products; and (ii) higher average selling prices of our high volume legacy products.


High-end industrial and military product revenue had an increase of $113,000 for the year ending December 31, 2007 as compared to the same period in 2006. We saw an approximate 26% increase in unit shipments and an approximate 21% decrease in average selling prices in this product market due to a shift in product mix. In particular, shipments of high priced ceramic parts to certain military related customers decreased while shipments of standard industrial grade parts increased.


One distributor and two direct customers together accounted for approximately 44% of our revenue for the year ended December 31, 2007 and two distributors and one direct customer accounted for approximately 36% of our revenue for the year ended December 31, 2006. Our customers often include Contract Manufacturers (“CMs”), principally located in Asia, who contract with Original Equipment Manufacturers (“OEMs”) to implement our products into systems designed by the OEMs. In many cases, we negotiate prices directly with the OEMs, but actually receive orders from, and ship parts to, the CMs. Generally, the CMs contract with multiple OEMs. Thus, sales to any one CM usually represents eventual implementation of our products with multiple OEMs. Products sold to distributors are sold without material recourse. Distributors sell our products to various end customers. If our leading distributor were 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 the various end customers through other distributors.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations:


Revenues


Total revenue for the three months ended March 31, 2008 was $7,315,000 compared to $7,867,000 for the same period in 2007.


The following table sets forth our net product revenues for semiconductor devices by product markets for the three months ended March 31, 2008 and 2007

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 HiTek (DBH). Commercial revenues decreased by $698,000 for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007. The decrease in the 2008 period primarily reflects the impact of final shipments in 2007 of parts formerly purchased from ZMD that are no longer supported by Simtek. These parts were manufactured to automotive industry certifications that Simtek does not have and therefore Simtek could not service that customer demand. It is expected that revenue comparisons for the quarter ending June 30, 2008 will be similarly affected.


High-end industrial and military product revenues accounted for an increase of $146,000 for the three months ended March 31, 2008 as compared to the same period in 2007. The increase reflects a larger demand for these products. Customer demand for these devices is generally not predictable and tends to be volatile from period to period.


Three direct customers together accounted for approximately 47% of our revenue for the year quarter March 31, 2008. Our customers often include Contract Manufacturers (“CMs”), principally located in Asia, who contract with Original Equipment Manufacturers (“OEMs”) to implement our products into systems designed by the OEMs. In many cases, we negotiate prices directly with the OEMs, but actually receive orders from, and ship parts to, the CMs. Generally, the CMs contract with multiple OEMs. Thus, sales to any one CM may represent eventual implementation of our products with multiple OEMs. Products sold to distributors are sold without material recourse. Distributors sell our products to various end customers. If our leading distributor were 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 the various end customers through other distributors Cost of Sales and Gross Profit


We recorded cost of sales of $4,165,000 and $4,435,000 for the three months ended March 31, 2008 and 2007, respectively. Actual product gross margin percentages for the three months ended March 31, 2008 and 2007 were 43% and 44%, respectively. This decrease reflects higher costs related to lower yields on certain silicon wafers used to produce our 1 megabit products. It is expected that this lower yield will continue to adversely impact gross margins in the quarter ending June 30, 2008.


Research and Development


Continued investments in new product development are required for us to remain competitive in the markets we serve and to grow our revenue. In the first quarter of 2008, our research and development department continued its efforts on the final development of our new nvSRAM product family in conjunction with Cypress. This new product family is based on Cypress’ 0.13-micron “S8” process and includes memory densities up to and beyond 4-megabits. In addition, in 2007, we began initial development of a new product initiative to develop very high density nvRAM devices. As part of this new initiative, we opened a design center in Poway, California. Expenses incurred for the high density nvRAM initiave were $611,000 for the quarter ended March 31, 2008 as compared with $86,000 for the quarter ended March 31, 2007.


Total research and development expenses were $2,649,000 for the quarter ended March 31, 2008 as compared to $1,613,000 for the quarter ended March 31, 2007. The increase of $1,036,000 for the quarter ended March 31, 2008 compared to 2007 was due to several items, including (i) an increase of expenses of $611,000 related to the high density nvRAM development initiative (ii) increases in equipment related costs of $36,000, (iii) increases in travel and quality assurance expenses of $45,000, (iv) increases in product development costs of $234,000 principally for silicon wafers used for initial testing of our new 4 megabit product and (v) increases in payroll and related expenses of $110,000. The increase in payroll related costs was due primarily to headcount additions in our Dresden, Germany and Colorado Springs, Colorado offices, professional and consulting fees and an increase of stock compensation expense of $59,000.


Administration


Total administration expenses were $1,375,000 for the three months ended March 31, 2008 as compared to $1,109,000 for the same period in 2007. The $266,000 increase was due primarily to (i) an increase of legal and investment banking fees of approximately $100,000 (ii) an increase of legal fees of $50,000 associated with the establishment of our majority owned subsidiary AgigA and (iii) increases in payroll and payroll related costs of $69,000. The increase in payroll and payroll overhead costs were due to additional headcount.



Sales and Marketing


Total sales and marketing expenses were $1,531,000 for the three months ended March 31, 2008 as compared to $1,152,000 for the same period in 2007. The $379,000 increase was due primarily to an increase in payroll and payroll overhead costs of $134,000, increased expense related to employee stock compensation of $21,000, increased contract services of $107,000, increased advertising costs of $50,000 and other miscellaneous expenses of $67,000. The increase in payroll and payroll overhead costs were due to changes in sales and marketing personnel as well as higher sales incentives.

Net Loss


We recorded a net loss of $2,455,000 and $490,000 for the three months ended March 31, 2008 and 2007, respectively. The increase of $1,965,000 for the three-month period reflects a decrease in revenue and expense items discussed above.


Liquidity and Capital Resources


As of March 31, 2008, we had net working capital of $10,184,000 as compared to net working capital of $11,858,000 as of December 31, 2007.


Cash flows used in operating activities for the three months ended March 31, 2008 were $321,000 compared to $1,574,000 in the same period in 2007.

Excluding the effect of changes in assets and liabilities, cash used in operating activities was $1,845,000 in the period ended March 31, 2008 compared to cash generated by operating activities of $803,000 in the same period in 2007. This increase was primarily due to a net loss in the period ending March 31, 2008. The decrease in accounts receivable for the quarter ending March 31, 2008 and 2007 is due to lower seasonal revenue in the first quarter of each fiscal year compared to the fourth quarter of each previous year.


Cash flows used in investing activities increased for the three months ended March 31, 2008 by approximately $76,000 as compared to the same period in 2007. The increase was primarily due to the purchase of test equipment.


The decrease of $199,000 in cash flows provided by financing activities for the three months ended March 31, 2008 as compared to the same period in 2007 was primarily due to the receipt of funds related to the exercise of warrants that occurred in the quarter ending March 31, 2007, for which there were no comparable items in the same period in 2008.

Short-term liquidity .


Our unrestricted cash balance at March 31, 2008 was $3,737,000.


Our future liquidity will depend on continued revenue growth, continued improvement in gross margins and control of operating expenses. Gross margins are expected to remain steady in 2008 compared to 2007, but may fluctuate depending on the product mix. Investment in research and development is also expected to increase in 2008 as we complete the final design and qualification of the new 4 megabit and other derivative products developed in connection with Cypress. In addition, we expect to invest approximately $3 million in our high density nvRAM initiative at AgigA. We believe that our cash balance plus the available credit under current credit facilities will be sufficient to fund our operations for the foreseeable future. However, if we fail to meet our revenue targets, it may be necessary for us to raise additional capital or incur additional debt.

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.

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